PCTEL Inc (PCTI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the PCTEL first quarter 2010 conference call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session. Instructions for queuing up will be provided at the time. 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, April 22, 2010, for the PCTEL financial results conference call for the first quarter 2010. 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 products 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. I just want to let everybody know that today was a pretty good day for us. We closed over $7 a share. That is the first time we have done so since October 23rd of 2008. 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 $15.6 million. Non-GAAP gross profit margin was 47%. Non-GAAP operating margin was 2%. Non-GAAP net income was $356,000 or $0.02 per diluted share. Cash and investments were $72.5 million after our acquisition of Sparco Technologies.

With that I would like to turn the call over to John Schoen, our CFO, who will discuss our financial performance in some detail. After his remarks 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.

Our investors will note that the Company presents non-GAAP financial information in its earnings releases. The Company believes that presentation of gross profit, operating profit and net income excluding restructuring charges and noncash based expense, including stock and stock option based 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 receivable, and noncash 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 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 at pctel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results.

Let's turn to revenue. First quarter 2010 revenue was $15.6 million. This compares to $14.1 million in the first quarter of 2009, an increase of 10%. The recent acquisition of Ascom's scanning receiver business, distribution rights associated with the wider networks interference management product line, and Sparco Technologies' antenna businesses collectively contributed to the increase in revenue in addition to organic growth.

On the organic growth revenue side, antenna product revenue was higher than the same period last year, from a recovery in the LMR product segment sold through the company's distribution channel. Scanning receiver revenue was lower than the same period last year, but higher than each of the second, third and fourth quarters of 2009.

Now, let's turn to gross profit. Non-GAAP gross profit margin for the first quarter was 47% compared to 48% for the same period last year. Margins for scanning receiver products were comparable to the same period last year, while antenna margins were improved as the Company leveraged fixed costs over greater revenue. However, the higher sales mix of antenna products versus scanning receiver products with their considerable software content caused the overall margin percent to be lower.

Now, let's turn to non-GAAP operating expenses, which were $7 million in the quarter, an increase of $450,000 from the same period last year. R&D increased approximately $400,000, related to investment in scanning receiver development, approximately half of which is related to the acquisition of the Ascom scanning receiver business.

Selling, general and administrative costs was $50,000 higher from an investment in sales resources. The Conexant royalty agreement was fully paid in the second quarter of 2009 and is therefore zero this quarter.

Non-GAAP operating income in the first quarter was $275,000 or 2% of revenue, compared to $386,000 or 3% of revenue in the same period in '09. The results reflect a net increase of $79,000 from higher gross profit dollars, netted with higher operating costs which was offset by a $200,000 decrease in the Conexant royalty.

Other income was $159,000 versus $165,000 in the first quarter of '09. The non-GAAP income tax rate in the quarter was 18%, unchanged from last year. Non-GAAP net income for the quarter was $356,000 or $0.02 per diluted share, compared to non-GAAP net income of $451,000 or $0.03 per diluted share in the first quarter of 2009, the difference coming from the change in operating profit that I just discussed.

Now, let's turn to the balance sheet. Cash and investments ended the quarter at approximately $73 million; $3 million lower than last quarter. Approximately $12 million is classified as long-term investment securities.

The company paid out cash of a little over $2 million for its Sparco Technologies acquisition in the quarter. The company used approximately $1 million in cash and investments from all other activities during the quarter.

Of the roughly $73 million in cash and investments on hand at the end of the first quarter, the company had approximately $1 million in operating bank accounts; $49 million in US federal government agency securities, either directly owned or through AAA money market funds invested exclusively in them; $16 million in tax exempt pre-refunded municipal notes which are backed by US Treasury securities held in escrow; and $7 million in AA or better corporate notes. In the quarter, the Company used approximately $900,000 of cash flow from operations with capital expenditures of $150,000.

Now, I would like to discuss guidance for the second quarter 2010. We anticipate revenue for the second quarter to be in a range of $16.0 million to $16.5 million, as compared to $13.4 million in the second quarter of 2009. The 20-plus percent quarter over quarter revenue increase is attributed to organic revenue growth in both antenna and scanning receiver products, as well as growth related to our recent acquisitions.

Non-GAAP gross profit percent for the second quarter is expected to be in a range of 46% to 47%, slightly lower than the quarter just ended based on the product mix we are seeing going so far in the quarter.

Non-GAAP R&D and SG&A in the second quarter are expected to be about the same as the quarter just ended, or approximately $7 million. Within that, we are anticipating higher R&D expenditures of $100,000 to $200,000, offset by lower SG&A costs related to seasonal trade show and G&A expenses that occur in the first quarter.

Other income is expected to be in a range between $100,000 and $200,000 in the second quarter. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The diluted share count in the second quarter is expected to be about 18 million shares.

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

Thanks, John. We have had an active and productive first quarter, as John has just detailed. Our financial performance continues to improve at a sustainable pace and reflects several factors. They include the performance of recently acquired assets, growth in certain vertical markets, our investment in additional sales capability, and a stabilization of the economy. Earnings, which were somewhat better than expected, reflect our decision last year to invest ahead of the emerging economic recovery.

We had some market success that warrants a brief mention. We continue to open markets for our GPS product family with sales to Trimble for forestry applications and to the US military for asset tracking. We had our first major antenna sale into New Zealand to Tate. Also we are actively engaged in antenna deployments in two Smart Grid trials that we will expand upon over the next two to three quarters.

Again, these vertical market opportunities take time to develop but should prove worthwhile. It also requires investment in our sales channel, an investment that we renewed during the late third quarter of 2009 and that I mentioned in our last earnings call. We had a significant scanning receiver sale in Brazil through one of our key OEMs and anticipate follow-on business in 2010. We had our best direct sales quarter in quite some time for the scanning receiver product line fueled by activity in China and Russia. We anticipate stronger results for scanning receivers as our major OEMs return to pre-2009 levels.

We see several favorable trends in both product areas that should favorably impact our businesses. These include the active deployment of video and public safety in other private networks, the deployment of broadband wireless, broadband in SCADA, that is Supervisory Control and Data Acquisition and other enterprise applications, the accelerating application of GPS capabilities in both military and commercial markets, the deployment of LTE and WiMAX networks and the slow recovery of CapEx spending. Again, we anticipate that our performance in the second half of the year will reflect the impact of these trends.

Let me also comment on our recent reorganization. As we described in an earlier press release, we have had recent changes at the executive level as well as a change in how we operate as a company. Tony Kobrinetz, a seasoned wireless industry veteran, joined our team and has taken on responsibility for all of our technology, development and supply chain activities.

His counterpart, Jeff Miller, is now responsible for global sales, marketing and product management. We no longer support separate products in organizations, and the P&L resides with my executive team. We believe that this is a more efficient management structure and capitalizes on the strengths of both Tony and Jeff.

Since 2008, if not before, we have been committed to aggressive cost management and we look to identify even more cost synergies. In addition to streamlining our executive management team, we are also addressing distribution and technology opportunities across our product lines.

With respect to the assets that we acquired at the end of Q4 and during Q1, we have made significant progress in integrating both the operational and development aspects of these businesses into our existing core business. Our investment in Sparco had a positive impact on our first quarter. In addition to selling through added PCTEL product, we have fully integrated that operation into our business and ERP system. We are now undertaking steps to gain further operational efficiencies.

Our Comarco acquisition is on target to complete a scheduled release of product to meet customer commitments, specifically to Ascom and to Verizon. This development is now fully integrated into our Germantown R&D organization. Lastly we are completing the work to appropriately position the acquired Wider product WIND relative to our legacy interference management product CLARIFY.

We continue to augment our core product line as well. In the first quarter we expanded our LTE offering. In our new release, PCTEL adds support for a variety of frequency bands designated for the deployment of LTE around the world, including 700 upper and lower bands, 900, 1800, 2100, 2100 AWS and 2600 megahertz, as well as 800 upper lower, 1500 and 1510 megahertz for Japan. Furthermore, the augmented range of PCTEL LT scanning receivers includes configurations supporting both downlink and uplink measurements for the frequency band of interests in different regions of the world.

Complementing this new functionality, the SeeGull EX for LTE also offers additional new measurements such as Resource Block, CINR and Multipath Delay Spread. These advances are intended to support our major OEMs, the wireless carriers, and the engineering service vendors who utilize our equipment at different frequency bands.

We plan on further enhancements to the flexibility and capability of our scanning receivers. As always, we released several new antenna models in response to specific customer requirements and as general product releases. We delivered customized Omni antennas to John Deere for precision agricultural applications, theft-proof antennas Northrop Grumman for their public safety network in New York, and several new GPS and MIMO antenna models.

In summary, our results -- not just financial, but the development of new customers and the release of new products -- suggests that we are making progress. Our goal is to accelerate our revenue growth and to exceed the operating performance that we achieved in 2008. With that, we have concluded our formal remarks and we have set aside 30 minutes for your questions. Lisa?

(Operator Instructions). Our first question will come from the line of Mike Crawford with B. Riley & Co.

Thank you. Marty, a couple of questions. First, on the scan receiver side, could you clarify a little bit more as to what you're seeing and what your opportunity is with respect to the China market?

Sure. You know, China is important for several reasons. They are still a very large GSM company -- country. They are implementing new technologies and they have a very rapid rate of growth, much like India in terms of rate of change. And those are the perfect environmental factors for using our scanners in the deployment of new technologies, particularly if you don't have cellular phones available, the scanning receiver steps into the shoes of the phone so that engineers can see the network. For environments where there is rapid growth and change, the engineers have to do frequency planning, optimization of all types; cell planning and the scanning receivers are utilized there.

We have a very reliable distributor set up right now. We have had sales presence now in China for the past like, say, nine to ten months and we are seeing opportunities with major OEMs in China, not our traditional OEMs. Not -- well, let me say this, in addition to our traditional OEMs, Ascom and, of course, Anite and SwissQual but we are selling to OEMs such as Huawei and into ZTE. And so we think the opportunity there is going to be strong for us.

Okay. Thank you. And then as far as the antenna business goes, it sounds like you're starting to finally benefit from some RM money coming through and you are seeing that segment actually growing a little bit faster or recovering, whichever way you want to phrase it, so --

I think what's happened there, Mike, that is a great question. It is pretty hard to sort out exactly what is contributing to the growth that is a little bit stronger than what we had anticipated. I'm not sure we are seeing a lot of ARRA money yet at work. The public safety programs are still pretty slow except for, you know, exceptions such as the New York City public safety program that was budgeted a long time ago. But, you know, as we mentioned over the last several calls we have really adopted a vertical marketing strategy in the antenna space where we essentially recognize that public safety may slow down for a while.

However, you know, broadband is very important, other types of enterprise networks, GPS is very important, WiFi, RFID are all very important. And we attacked the SCADA area in particular and as we mentioned I think at your conference and at others we found niches that are growing at 15% or 20% offsetting the decline in public safety.

So, for example, vertical markets such as Smart Grid, you know, if you have taken a look at the FCC Broadband Plan, Smart Grid is not only a huge opportunity for energy but it is an incredible opportunity for communication systems. Broadband and information technologies, according to the FCC report, can collectively prevent more than a billion metric tons of carbon emissions by 2020. And the FCC is recommending that Congress should modify existing restrictions to enable utilities to use the proposed public safety 700 megahertz wireless broadband network.

And everyone, you know, you see Intel and GE jumping into this -- Cisco jumping into this, I'm sorry, and GE and stating that the promise of a Smart Grid will require the addition of two way communications, sensors, software, communications systems and everything you can imagine. So what I think is happening in this growth is that vertical markets such as Smart Grid are really growing for us quite well, despite the continued sluggishness of the overall public safety market. And that is where we are really seeing the benefit.

Okay. Great, thank you. And then one final question relates to, you know what may or not be on your M&A plate. So you have done a couple of deals, you I think on the last call talked about you still had some potential things in the hopper. What's changed since the last call?

Nothing's really changed. We have benefited from doing a lot but going slowly. I mean if you look at our record over the last year we bought Wi-Sys, we bought Sparco, we acquired the Comarco assets and we acquired the Wider patents and the distribution rights. All four of those are going to work out very well for us. And I can tell you that right now, Wi-Sys and Sparco are terrifically successful for us. We have a ways to go still to integrate the others.

So we are looking at I would say four or five other opportunities. It is not something we can comment now. We are looking at both sides of the business, seeing what we could do to expand our field of play in the scanning receiver area and perhaps to widen what we do in the RF arena from the antenna product perspective.

And then also quite importantly our vertical market strategy really informs our acquisition strategy. You know, we went after Sparco not because of simply their great value added reselling capability, and how they package other RF elements with our antennas, but they have a footprint in a couple of the key segments that we are going after.

Hospitality is one of them. Healthcare is another. So we are looking at acquisitions that have a laser-like focus on markets that we think have really terrific growth potential. But nothing to report right now, just a lot of slow boring work and analyzing these different assets.

Okay. Great, thank you.

You're welcome.

Our next question will come from Will Power with Robert Baird.

Great, thanks. Good afternoon.

Hey, Will, how are you?

Doing well. And you?

Very well.

I just -- a couple of questions. The first one I suppose might be for John. I wondered if we could just get the breakdown between organic growth and the growth from acquisitions in the quarter?

Well, in -- it was a mix between the two, I mean we actually -- we are kind of stepping on information that our competitors would kill for to know exactly how well Sparco and especially how well the Ascom acquisition did. So that is why we declined to break it out.

Yes, and let me comment, Will. We have never done that. For example when we bought Wi-Sys we had an existing GPS product line and we have never broken out, you know, what growth came from Wi-Sys, what growth came from our organic. For one thing, these products can overlap at times. Our distribution channels can overlap and we are just not going to do that. Indeed, you know, this reorganization really gets us away from the type of segment detailed reporting that we were sometimes forced into.

Okay. Fair enough. I guess second question then on LTE, you referred to this a little bit. I mean I guess any characterization as to kind of what you are seeing there and what the time frame looks like might be helpful. And I think the thought has been that perhaps you could start to see a little revenue late this year, probably more 2011 or '12. Is that still the same or has anything else changed out there from your vantage point?

I think things are changing. First, we already have seen LTE revenue with our SeeGull EX but we are seeing a pickup of activity and we are actually seeing demands for enhancements already to our product where, you know, people want to see multiple technologies, wideband technologies in one product. They want to see more than two or three bands that we can use because often in the early stage of a network deployment you have to take the product from one market to another.

So, the one really good characteristic and the leading indicator that there is going to be some more business opportunity this year is that we are getting requests for very specific developments and added features onto our existing scanning receivers. But, you know, I think as I've said, we think we will see 10 to 15 networks by the end of year 2011. That may -- that number may be going up and you may see the filling in of that network, those networks a little bit earlier. But we will certainly have revenue this year from LTE scanners.

Okay. Thank you.

(Operator Instructions). Our next question will come from the line of Ted Moreau with WJB Capital.

Hi, Marty.

Hi, how are you?

Good. Just kind of a general broad based question on -- you may have touched a little bit on some of the stimulus money you might be seeing but I understand that is going to be extended out in a couple of tranches here out to 2011 and possibly 2012 so any comments on that. But the national broadband policy which I know will be laced with political inputs, but there was a fair amount of discussion on the dollars that would be allocated to public safety and it seems to be right in your breadbasket, so just --

There is something like $80 billion allocated to public safety as a recommendation from the FCC. And there is just billions of dollars being proposed that should be spent on Smart Grid, other SCADA-related networks, and rural internet connectivity.

So with respect to ARRA it is really tough to predict how much is actually going into the purchasing of infrastructure. So much of it is going into simple support for payroll for people before you do things like turn over a police car fleet or an ambulance fleet. So it is hard for us to predict exactly the benefit we will see. I think there is certain big projects as we have mentioned like the Northrop Grumman project in New York City that are certainly receiving funding and we are benefiting from that.

You know, with respect to the national broadband plan, though, the real value of that to us is what I was mentioning before -- what it means for investment into the communications overlay for a Smart Grid, it is going to be enormous. It is right up our alley. It is exactly what we have been doing, the exact type of applications we have been discussing. Our products are perfect, perfectly designed for those SCADA applications as you know, Ted. You know, we develop customized antennas to work on different types of sensors, monitors and so on.

We have Yagi antennas for propagating signals over a long distance with lower frequencies and then to the extent that any of these networks are using WiMax or precursors to WiMax, such as Canopy, we support all of those technologies with our antennas. The circulation of the broadband plan and its ultimate implementation are going to be good news stories for us.

Right. One more hopefully brief question, but you talked a little bit about the Smart Grid and maybe even some things in healthcare networks. Are there other vertical markets that, you know, may materialize for you where they could be either leveraging your existing product line, new products or --?

Yes, you know, mentioned several times, Ted. The advantage here is it is a brief question but a long answer. I get to talk a lot. But, you know, I think we have mentioned that we have made a major investment in our distribution channel.

You know, we cut about $5.5 million out of our OpEx, starting in 2008 when we saw some of the cloudy weather appearing on the horizon. But then as we mentioned in our last two earnings calls, we began investing in our distribution channels because we wanted to get out in front of what we saw were some encouraging signs. And I think that was the right decision.

Well, one of those areas was investing into a stronger presence and go-to-market strategy for defense, military and security. We hired a specialist out of the US Air Force, we have worked with some consultants, we spent a lot more time with defense systems integrators. And that part of our business is growing. And you know, there is synergies between that and actually the public safety, a lot of the same players are on both sides of the aisle. But we had almost no business 18 months ago in the area of water monitoring, waste water, water management and now we are a significant antenna supplier into the Rosemount control device division for Emerson.

So there are many vertical markets like that that I think are going to be very important for us. They are going to continue to grow, and what I see that is particularly encouraging is that if we can just get public safety not to drop and to perhaps grow from 1% to 4% at a very modest level and we can extract the type of growth that we think is out there in these niche markets, antennas will have a strong year this year.

Right. Well, it sounds like it is not just a recovery year for you but that looking out that you have got a number of markets that are going to be, you know, opening up, receiving funding, you know, where the demand should be pretty --

I think so.

Great. Thanks.

Thanks, Ted, any other questions?

At this time there are no further questions. Mr. Singer, do you have any closing remarks?

Just a brief closing remark there, Lisa. You know, I particularly want to thank Will and Mike for their questions along with Ted and to mention that we are planning to attend the Baird 2010 Growth Stock Conference in Chicago on May 18th. I will be there personally, and the B. Riley 11th Annual Investor Conference in Santa Monica on May 24th through the 26th. I will be there as well. If any of you can attend that would be great. I would be happy to meet with you and we look forward to seeing many of you at these events in the coming months. If there are no further questions we will adjourn the call. Thank you.

This does conclude today's conference call. You may now disconnect.