PCTEL Inc (PCTI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the PCTEL third quarter 2009 conference call. At this time all participants are in a listen-only mode. Later we will open the call up for questions. Instructions for queuing up will be provided at that time. (Operator instructions). As a reminder, this conference call is being recorded for replay purposes. I will now turn the call over to Jack Seller, Director of Marketing.

Thank you for joining us today, October 29, 2009, for the PCTEL financial results conference call for the third quarter of 2009. On today's call will be Marty Singer, Chairman and CEO; and John Schoen, Chief Financial Officer.

Today's call will contain forward-looking statements within the meaning of the federal securities laws. Comments concerning our future financial performance, new products and product development and expectations regarding the future growth of our wireless RF business are forward-looking statements within the meaning of the Safe Harbor. Actual results may differ materially from those projected as a result of risks and uncertainties, including the ability to successfully grow our wireless product business, implement new technologies and obtain protection for the related IP. Additional discussion of these and other factors affecting the Company's business and prospects is contained in our periodic SEC filings. These statements are made only as of today, and we disclaim any obligation to update information to reflect subsequent events.

I would now like to turn the conference call over to Marty Singer.

Thank you, Jack, and good afternoon. For those of you who have not had a chance to read our press release, I would like to recap some of the non-GAAP highlights from the quarter on a continuing operations basis. We achieved revenue of $13.7 million, non-GAAP gross profit margin was 47%, non-GAAP operating margin was 3%, non-GAAP net income was $669,000 or $0.04% per diluted share, cash and investments were $78 million.

Economic conditions remain challenging worldwide, but we are pleased that our early actions and our continued attention to costs have enabled us to remain profitable on a non-GAAP basis. In this process we have lowered our non-GAAP breakeven point to $13 million of revenue per quarter.

Now I'd like to turn the call over to John Schoen, our CFO, who will discuss our financial performance in some detail. Later I will comment on our progress over the past quarter and what we see in the future. John?

Thank you, Marty, and good afternoon or evening to everyone. The Company disclosed in its earnings press release that we intend to amend the first and second quarter 2009 filings on Form 10-Q/A to correct misstatements primarily related to business combination goodwill and tax issues of our January 2009 purchase of Wi-Sys Communications. I want to take a minute to discuss the changes that will be filed.

First, let me be clear. The Company's revenue, cash flow and non-GAAP earnings are unaffected. In the first quarter the GAAP goodwill impairment expense should be $222,000 higher than reported, and income tax expense should be $127,000 higher than reported, for a total change of $349,000.

In the second quarter income tax expense should be $274,000 lower than reported. The net effect for year-to-date is $75,000.

To summarize the effect on GAAP net loss, the first-quarter net loss should be $1.9 million instead of the $1.5 million loss reported. The second quarter should be a loss of $1.3 million instead of the $1.6 million reported, and the year-to-date loss would be $3.2 million instead of the $3.1 million reported. The effect on GAAP earnings per share for the period is Q1 earnings should be a net loss of $0.11 instead of $0.09 or a 2% change. And going in the other direction, in Q2 the loss should be $0.07 instead of $0.09 with year-to-date earnings per share unchanged.

The Company expects to amend its filings on Form 10-Q/A for the first and second quarters reflecting these changes as soon as practicable. The Company is still evaluating the level of internal control deficiency that the misstatements represent and expects to report on its conclusions in the third quarter 10-Q and the 10-Q/A for Q1 and Q2.

Our investors will note that the Company presents non-GAAP financial information in its earnings releases. The Company believes that the presentation of gross profit, operating profit and net income excluding restructuring charges and non-cash base expense, including stock and stock option basis compensation, amortization and impairment of intangible assets and goodwill related to the Company's acquisitions, gains or losses on the sale of product lines and related note receivable and non-cash based income tax expense provide meaningful supplemental information to both management and investors. The non-GAAP financial analysis reflects the Company's core results and facilitates comparisons across reporting periods.

For more information on our non-GAAP financial results and a reconciliation to GAAP measures, please refer to our earnings release that has been filed under Form 8-K with the SEC. The release can also be found on our website under investor relations. My discussion results will be based on our non-GAAP financial results.

Just as a reminder, the Company sold its Mobility Solutions Software Group, MSG, to Smith Micro in January '08. The Company's financial statements have been revised to reflect MSG as a discontinued operation. My discussion of financial results will address continuing operations.

Let's turn to revenue. Third quarter 2009 revenue from continuing ops was $13.7 million. This compares to $20.1 million in the third quarter of 2008, a decrease of 32% but an increase from the $13.4 million in revenue reported last quarter. Revenue was lower for both scanning receivers and antenna products on a year-over-year basis, although antenna revenue was up from the second quarter of this year. We believe that reduced scanning receiver revenue reflects several factors. As carriers prepare for the transition from EV-DO to LTE, network engineers are protecting their reduced capital budgets and waiting for new technology rollout before consuming their budgets. And, while test tools enable network engineers to realize greater capacity from existing infrastructure, capital budgets are lower worldwide.

Antenna revenue declined on a year-over-year basis in both the OEM and distribution channels, reflecting particular softness in Land Mobile Radio systems, continued delays in mobile WiMAX rollout and defense-related antenna sales.

Now let's turn to gross profit. Non-GAAP gross profit margin from continuing operations for the third quarter was 47% compared to 48% in the same period last year. The lower gross profit margin reflects the cost of lower overall volume over fixed costs.

Now let's turn to operating expenses, which were $6.1 million in the quarter. Production of SG&A expenses resulted in an overall decline in operating expenses by $0.9 million as compared to the third quarter last year. Our R&D expense was about $100,000 higher. We continue to invest in our future through R&D spending as we align our cost structure with current revenue levels. The reduction in SG&A was achieved through the closure of several unproductive sales offices, the restructuring of our antenna manufacturer's representative sales channel and corporate cost efficiencies.

The Conexant royalty agreement was fully paid in the second quarter 2009 and is therefore zero this quarter. It was $200,000 in the third quarter last year.

Non-GAAP operating income from continuing operations in the third quarter was $440,000 or 3% of revenue compared to $2.9 million or 15% of revenue in the same period last year. The results reflect lower gross profit dollars on lower revenue, partially offset by lower operating costs.

Other income was $375,000. The results include a realized mark-to-market gain of $230,000 on our Columbia fund investment, related to liquidation of about 67% of that balance in the fund during the quarter. The Non-GAAP income tax rate in the quarter was 18%. Non-GAAP net income from continuing operations for the third quarter '09 was $669,000 or $0.04 per diluted share compared to non-GAAP net income of $2.6 million or $0.14 per diluted share in the third quarter of '08.

To summarize the differences, net income from continuing operations was lower from decreased gross profit on lower revenue, partially offset by lower operating costs.

Now let's turn to the balance sheet. Cash and investments ended the quarter at $78 million, $1 million lower than last quarter. Approximately $10 million is classified as long-term investment securities. The Company spent about $935,000 on the repurchase of 153,000 of its common shares during the quarter at an average purchase price of $6.12 per share. Of the roughly $78 million in cash and investments on hand at the end of the third quarter, the Company had approximately $1 million in operating bank accounts, $54 million in US federal government agency securities either directly owned or through AAA money market funds invested exclusively in them, $19 million in tax-exempt pre-refunded municipal notes which are backed by the US Treasury securities held in escrow, $2 million in AAA corporate notes and $2 million in the Columbia strategic cash portfolio fund and enhanced cash money market fund. The Columbia fund is in the process of liquidation. We expect the next liquidation payment from the Columbia fund in December '09 or January '010.

In the quarter cash flow from operations was approximately $400,000 with capital expenditures of $484,000.

Now I would like to discuss guidance for the fourth quarter of 2009. Marty will address limited revenue guidance for 2010 in his remarks. We anticipate revenue for the fourth quarter to be in a range of $14.0 million to $14.4 million. The Company is seeing order booking rates in October that are slightly higher than that experienced in the quarter just ended. Non-GAAP gross profit percent for the fourth quarter is expected to be in a range of 46% to 48%, about the same as the third quarter.

Non-GAAP R&D and SG&A from continuing ops are expected to be about $200,000 higher than the third quarter, evenly split between R&D and sales and marketing. Other income is expected to range between $100,000 and $200,000 in the fourth quarter. We are not expecting any mark-to-market gains or losses in the quarter.

The non-GAAP effective income tax rate is expected to remain unchanged in the fourth quarter at 18%. The diluted share count in the fourth quarter is expected to be about the same as the third quarter at approximately 17.6 million shares before any potential stock buybacks. The diluted share count was slightly higher in the third quarter than the second, due to the effect of higher stock price on our accounting for unvested employee equity.

That concludes the financial review. I would like to turn the call over to Marty for his summary comments.

Thanks, John. It has been an extremely active quarter for us. We have continued to rationalize our overall business operation, we've sharpened our focus on key vertical markets in our high-value antenna group and enhanced our strategic position within the RF scanner group for emerging technologies. Further, we met with new and potential customers at five trade shows around the world that were important to PCTEL's future growth.

In addition, we have bought back 153,000 shares of PCTEL stock, as John mentioned, bringing our three-year total to 5 million shares and our eight-year total to 7.3 million shares. We continued to evaluate assets for potential acquisition in both business areas and ones that are relevant to both businesses.

Given our increase in sequential booking activity for the fourth quarter to date, we think that our operational and business development efforts are beginning to result in additional opportunities in sales. We were pleased to see a sequential quarter increase in antenna revenue and anticipate that it will improve sequentially again in the fourth quarter. We are experiencing modest growth despite a very sharp decline in public safety spending. As you may be aware, the state and local budgets cannot accommodate meaningful spending on the communications networks for police, fire and safety. Even approved projects have not been built out. Jeff Miller, who heads our Antenna Products Group, or APG, as we refer to it, has responded to this slowdown by focusing on important vertical markets that have exciting growth prospects. As we discussed last quarter, these vertical markets include SCADA, or supervisory control and data acquisition; machine-to-machine communication; utilities and smart grid; precision agriculture and defense or military.

In just the last quarter alone, John Deere selected PCTEL to provide three new 400 MHz antennas for precision agriculture. Raytheon awarded us a contract in India for WAAS antennas used in aviation navigation, NEC awarded us a contract for WAAS antennas for similar applications in Japan.

In the Land Mobile Radio Segment of our antenna business, Motorola awarded us the business for three new antennas for their fleet management and communication applications. We have organized around our interest in these vertical markets, and we plan to hire three to four more business development and sales personnel by the end of the year as we increase our investment in a more aggressive marketing approach. We believe that these investments will benefit shareholders as our revenues renew their year-over-year growth in mid-2010.

Operationally, we have extended our lean manufacturing initiative in our Bloomingdale facility and now deliver roughly 70% of our APG revenue from lean work cells. We have realized added benefits lean and reduced order cycle time, delivered quality and reduced floor space. As a final operational note for APG, we successfully completed our ISO 9001 audit and upgraded the registration of our quality system to the latest published revision.

With respect to our RF Scanner Group or RFSG, we continue to demonstrate technology leadership and we remain confident that our OEM and direct sales of our scanning receivers will benefit over the next several quarters from our investment in LTE, TD-SCDMA, a combination of technologies in a single unit and our leading edge form factor. Two important RFSG orders, one direct and one indirect, moved out to the fourth and first quarter, respectively. We anticipate RFSG revenue will be up sequentially in the fourth quarter.

Despite short-term challenges related to decreases in CapEx spending, RFSG continues to strategically position itself to capitalize on market growth that the new LTE standard will drive. PCTEL's new LTE scanning receivers are now in use or selected for use by the main wireless operators and infrastructure providers in the United States. For one such operator we have completed the first phase of development with a comprehensive portfolio of LTE scanning receivers that support the entire range of designated domestic and international frequency bands.

Furthermore, RFSG is now focused on the second development phase that will enable the addition of other key advanced features to the LTE family of scanning receivers. PCTEL's intention is to lead the industry in the delivery of extremely capable and competitively priced LTE scanning receivers, and we believe that we are well on our way.

In spite of the widespread economic downturn, RFSG closed several CLARIFY orders with subsidiaries of the two main operators in the Caribbean and Latin American market, or what we refer to as our CALA region. More broadly, we have sold CLARIFY into Colombia, Chile, Panama and to Telefonica in Argentina and Mexico. As you may recall, CLARIFY is our interference management software product that is overlaid on top of our scanning receivers.

As mentioned earlier in the year, the Asia Pacific region is the only major geographic area in the world that has not experienced a substantial decline in 2009. RFSG has established commercial relationships with two more OEMs in Korea and China and has launched a small number of products specifically targeted for the cost-driven market. We expect more news on our sales channels and OEM partners in China over the next three to six months and look forward to updating you on our success in capturing significant customers in that region.

With respect to our existing core business, we have released a new low-cost PCT series scanning receiver to selected customers, and we formally launched the next-generation scanning receiver platform that achieved several performance breakthroughs. We believe our LTE scanning receivers have now captured 50% share with Verizon, the major US operator deploying that technology, and we are actively involved with AT&T's RFP process. We continued to invest heavily in this product line with respect to both product development and business development.

In RFSG, just as we have in other parts of the Company, our general manager, Luis Rugeles, has worked hard to realize greater efficiencies in his operation. He has continued to drive down cost through a competitive bid process with various contract manufacturers and has consolidated program and product management under a single executive. He also streamlined our development process that enables PCTEL to maintain its effective R&D investment in scanning receivers.

So, in summary, despite the worldwide recession, PCTEL has maintained and increased slightly its revenue and earnings this past quarter. On a non-GAAP basis we have maintained profitability, and we have aggressively funded our new product development. We are pleased with the performance of our recent acquisitions and we believe that we have carefully managed our expenses over the past several quarters.

As we have indicated, we want to be out in front of the overall industry recovery that we believe will occur in mid-2010. Just as we were out in front with our aggressive cost reductions, we have concluded that it is now appropriate to invest more in business development. While this will constrain earnings in the fourth quarter of this year and the first quarter of 2010, we are confident that the investment will accelerate our return to higher revenue levels. In 2010 we anticipate 10% to 15% year-over-year revenue growth beginning with the second or third quarter comparables.

On the acquisition front, we are actively looking at various opportunities that would expand our market prospects in both of our business areas. However, as we have in the past, we will only announce acquisitions as they occur.

We have set aside about 15 minutes for your questions. Operator?

(Operator instructions) Matt Robison.

Glad to hear you're getting the LTE products out in the field. When did you start shipping those products?

Earlier this year. You know that we had a major announcement on the LTE at Barcelona, and soon after that we started to participate in trials.

Okay. Trials, and they became commercial when; at that time?

Well, when we introduced them in trials, they were commercial quality. In terms of reaching commercial quantity, it really depends on the availability of the network, the handsets and so on.

Well, for LTE, that's quite a ways (multiple speakers) into the future; right?

Well, except as those networks are built and there are no handsets, Matt, there is actually a very high demand for scanning receivers that will occur because it's the only mechanism operators will have to look at their networks.

Now, when you look at these, there is a lot of equipment being put to work for infrastructure in Asia Pacific, China, India and so forth. You guys, I think, last year, maybe even late in 2007, you started getting some channel relationships in India and China. When do we start to see the benefit of that? When can that start to drive revenue? (multiple speakers) decline elsewhere already, but --

We actually have had some orders already, Matt. But I think you're going to see the full benefit of that in 2010. Luis has put one of our leading sales executives essentially on a permanent basis over in China. We've established a very good distribution relationship, a business development relationship with somebody over there. And you will start to see reasonable order flow in the first and second quarter of next year.

I realize you haven't been breaking them out separately. But give us a flavor for how severe the decline has been in the scanner business, this year.

Interestingly, Matt, that's easy for us to do because the figure is essentially the same for both businesses. It has been 30% across the board, and I would say that Luis has made up a more severe decline in some regions by getting some new business in China and India. I'll also mention this, that you've heard me say before that 50% of our business in antennas is Land Mobile Radio and 50% of that is public safety. Well, in public safety we've had far greater than a 30% decline because of the situation with state and local budgets and Jeff has actually made that up with some traction in these vertical markets.

But the short answer to your question has been 30% across the board.

And you had sort of -- the scanning receiver is sort of a late-cycle business; it comes in after things are deployed, to some degree and you basically filled the requirements for the US operators, I take it, back in 2008. They're doing some new stuff now, and you have to wait for that to get in before we start to see business over here. In the meantime, you might see some more in India and China. Is that the way we should look at it?

Yes. And the other thing that I think -- I think there's two other factors that impacted RFS. Perhaps because of the economic environment, there has been consolidation in the marketplace. I think you have written about this, that we had Ascom acquire TEMS. And when your major customer gets acquired, although we are very confident of a long-term relationship there and we think in the long term this will not disrupt us at all, there was a quarter or two this year where customers really didn't know exactly what was going to happen. And there's no question that that was a disruption of sales. So that's one issue.

The second thing -- as you look at large operators and they have separate engineering teams, and those separate engineering teams all have their own capital budget, their test and measurement equipment budget and so on. And they are hoarding that budget right now so they can invest in what they need to invest at the end of the year or in early 2010. And so what happens is they are hoarding the budget for LTE, and it actually impacts some purchases for existing technology. So I think that's been happening.

I know you don't want to speak for another company, but when you look at the big guy in the private radio business, at Motorola, and you look at what they've experienced in the public safety radios, can you compare that to what you guys have felt? It seems like your segment of the business maybe has gotten hit a little harder.

Well, I think probably -- it's hard for me to dive into everything that's in Land Mobile Radio, but Land Mobile Radio over at Motorola includes elements such as symbol. So there was an addition to that business a whole smart handset or data entry device. And that's probably on a little bit of a different trajectory.

The other thing with Land Mobile Radio, of course, includes a very high percentage of private networks that are not in public safety. And if their mix is a little bit different than ours, they wouldn't see quite the same decline because some of the vertical markets have actually done quite well. And so I think that Land Mobile Radio in some of these other areas has not been as effective as the public safety.

Remember, when you talk about Motorola and their Land Mobile Radio, that's not just public safety. It's a wide range of business applications.

You're staffing up a little bit more to try to address some recovery opportunities, it sounds like?

Yes, specifically we recently hired a guy in this quarter that has got huge experience selling into defense departments, not only in the US but elsewhere. Right now we are doing about 8% in the military. I'd like to see that number go up. I think this guy can really help us on the business development side.

Last year you will recall we took out our manufacturers reps. It was an enormous expense, and we didn't feel we were getting a good value for that. And so now what we are doing is we are dividing up the US in that way, that the manufacturers reps used to have the US, and we are covering that with inside sales. So we've beefed up our inside sales activity. We've beefed up some of our sales activity outside the United States. So, for example -- I won't give you the number, but it's a great story.

The area in which we operated that included Israel, the UK, India, EEMEA, used to have six people associated with it, and there's only one person there now. And that one person is going to deliver exactly the same revenue as was delivered last year, and we're going to have five fewer people.

Well, he's reached the point of saying ouch. And we are giving him a resource that will help him go after Russia and Eastern Europe. And so we made an investment there.

And we've made some investment in this vertical marketing. We are going after industry-specific shows that are a lot more meaningful to us, quite frankly, then shows like CTIA. So shows that focus on SCADA, focus on utilities, focus on military and so on -- those are the types of investments that we are making in the market development.

(Operator instructions). There are no further questions at this time. Are there any closing remarks?

Yes. I want to thank all of you for joining on this call and webcast. We are planning to attend the TechAmerica AeA Classic in San Diego on November 3. I'll be arriving at night and attending the B. Riley function, and then I'll be presenting all day on the third. I look forward to seeing many of you at that event, and in the coming months at other investor conferences. Thank you.

This concludes today's conference call, you may now disconnect your lines.