PCTEL Inc (PCTI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL second quarter 2011 conference call. At this time, all participants are in a listen-only mode. Later, we will open the call for your questions. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the call over to John Schoen, Chief Financial Officer.

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL second quarter 2011 conference call. At this time, all participants are in listen-only mode. As the Operator said, I want to thank you for joining us day, July 28, 2011, for the PCTEL financial results conference call for the second quarter. And on today's call will be Marty Singer, Chairman and CEO, and myself. I'm John Schoen, Chief Financial Officer.

Before we begin, I would like to read our Safe Harbor statement. 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 businesses 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.

Thanks, John, and good afternoon to all of you. For those of you who have not had a chance to read our press release, I'd like to recap some of the non-GAAP highlights from the quarter.

We achieved revenue of $19.1 million, an increase of 7% over the second quarter of 2010. For the first half of the year, we achieved $37.3 million of revenue, an increase of 12% over the same period in 2010. Non-GAAP gross profit margin was 47.5%. Non-GAAP operating margin was 8%. Non-GAAP net income was $1.4 million or $0.08 per diluted share. Cash and investments were $68.2 million.

I'm going to turn the call back now to John Schoen, who will now discuss our financial performance in some detail. Later, I will comment on some of our business development, engineering and marketing efforts over the past quarter, as well as some of our current activities.

John?

Thank you, Marty. 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 non-cash-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 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 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.

My discussion of results will be based on our non-GAAP financial results. Let's turn to revenue. Second quarter 2011 revenue was $19.1 million. This compares to $17.8 million in the second quarter of 2010, an increase of 7%. The growth in Antenna product revenue was largely attributed to the Company's high rejection GPS antennas, with the revenue growth of Scanning Receivers attributed to the Company's recently introduced MX Scanning Receiver line.

With regards to gross margin, non-GAAP gross profit margin for the second quarter was 47.5%, an increase of 1% from the same period last year. Compared to the same period last year, gross profit margin improved in Antenna products, but declined modestly in Scanning products, as the newly introduced MX product line has a slightly higher cost profile than our other Scanning products. The net result of the margin changes resulted in a higher gross profit margin percent.

Now, let's turn to non-GAAP operating expenses, which were $7.6 million in the quarter, an increase of approximately $400,000 from the same period last year. The increase is attributed to $200,000 for the Company's ERP System implementation and a $300,000 investment in PCTEL Secure, offset by a net spending decrease of $100,000 in all other areas.

Non-GAAP operating income in the second quarter was $1.5 million or 8% of revenue compared to $1.1 million or 6% of revenue in the same period in 2010. The increase in dollars and percent of revenue for the quarter is reflective of higher gross margin dollars on higher revenue and improved gross margin percent, partially offset by higher operating costs.

Non-GAAP other income was $60,000 in the second quarter versus $87,000 in the same period last year.

The non-GAAP income tax rate in the quarter and the year was 18%, unchangaed from 2010.

Non-GAAP net income for the second quarter was $0.08 per share, compared to $0.06 per share in the same period last year. The increase in the quarter is attributed to higher operating profit, partially offset by lower interest income.

The cost of the Company's ERP project and its investment in PCTEL Secure, net of minority interest, wwas $0.02 per share in the quarter and $0.03 per share year-to-date.

Now, let's turn to the balance sheet. Cash and investments ended the quarter at approximately $68 million and change, about $100,000 more than last quarter. Approximately $9 million is classified as long-term investment securities.

In the quarter, the Company generated approximately $2 million of cash from operations, as compared to generating $1.8 million in the same period last year.

Capital expenditures were approximately $1.6 million in the quarter as compared to $222,000 in the same pierod last year. The second quarter 2011 cap ex includes approximately $1 million related to the Company's ERP System project.

The Company repurchased approximately 43,000 shares during the quarter for approximately $260,000. There is approximately $2.3 million available under its current share repurchase authorization.

Now, I would like to discuss guidance for the third quarter of 2011. We anticipate revenue in the third quarter to be about the same as the second quarter just ended. This represents a 10% increase over the third quarter 2010. Non-GAAP gross profit margin is expected to be between 46% to 48% or about the same as the quarter just ended.

Non-GAAP operating costs are expected to be about $7.6 million, unchaged from the quarter just ended. Other income is expected to be about $75,000 and the credit for the elimination of non-controlling interest in PCTEL Secure is expected to grow to $175,000. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the quarter is expected to be about 17.8 million shares.

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

Thank you, John. Our results suggest that we are continuing to make progress. In mid-2009, when states and municipaliaties stopped investing in pulic safety antennas, and capital budgets for cellular operators tightened, we were hovering at $13.4 million in revenue per quarter and barely generating profit.

Over the last two quarters, we are averaging close to $18.7 million a quarter, and if we simply repeat the first half performance, we will generate about $0.26 in non-GAAP earnings for the year. Those earnings would be after expenses for our PCTEL Secure joint venture and the additional op ex associated with our ERP implementation. Without those expenses, we could potentially double our non-GAAP earnings from 2010.

John has already reviewed the financial results in some detail. I would like to spend our time discussing a few of the major highlights of the past quarter and a bit about what we see going forward. Operationally, we have made significant progress with respect to manufacturing efficiency. Tony Kobrinetz's team continues to transition key products for our manufacturing facility in Tianjin, China, and to a new set of contract manufacturers that we have developed over the past year.

During the second quarter, as one example, we successfully transitioned our MIMO Antenna from Bloomingdale, illinoise, to Tianjin. We are clearly achieving our gross margin goals for the Antenna product line, which is essential to realizing our overall earnings objectives for the Company.

Related to this transition, our marketing and operaions group succeeded in obtaining key OEM approval to manufacture major product lines in China, both Cisco and GE certified manufactureing of Cisco's next-generation Access Point Antennas and GE's Yagi Antennas at our facilities in China.

Our operations group is expanding our supplier base for sourcing high-quality ancillary products. This will expand our product offerings, complementing our Antenna product line and enhance PCTEL's ability to deliver complete solutions to our customers. For example, we will soon market a PCTEL-branded cable product line. These products will have acceptable gross margins, allow PCTEL to bundle or kit solutions for our customers and enhance the attractiveness of our overall packaging, which now includes high-quality enclosures.

On the development front, we had three new product releases and shipments of note. We announced our SeaGull EX TB-LTE product. This release is crucial to our success in China. China's operators, now the largest in the world, have made a commitment to TD-LTE. That commitment alone justifies the development, release and support of this technology on our platform. We anticipate demand from our major OEM resellers, as well as from our China-based OEMs, such as [Ding Lee].

We also released a new LTE MIMO capability on our EX platform, which will allow wirelss operators to test broadband throughput metrics from MIMO implementations.

Our Antenna Product Group deisnged, manufactured and shipped its first 40dB High Rejection GPS Antenna for timing applications. Our new high rejection GPS Antennas are fundamental to the implementation of service in crowded spectrum adjacent to the GPS bands. Their capabilities have been noted in FCC filings. We anticipate high rejection GPS Antennas to contribute up to 5% of total Company revenue in 2011.

We were pleased with several of our marketing and business development accomplishments during the second quarter. In the past, we discussed the extraordinary complexity and expense of bringing our new SeeGull MX product platform to market. The product appears to have established traction with our OEMs and in several end-user markets. By launching a product that supports all global cellular standards in one unit, and that can operate across eight frequency bands, PCTEL has established a new benchmark in the industry.

We have also isolated key shortfalls in our competitors' products compared to our new platform. For example, one of our major competitors supports multiple frequencies, but does so by only addressing the 1.08 MHz center frequency in all frequency bands. This is inadequate for larger bands of 5, 10, 15 or 20 MHz. Our solution allows operators to sample the entire band; their solution results in missing data from most of the band. As we clarify these important differences, we anticipate even stronger sales for this new product.

Evidence of our traction includes initial sales into Canada, QualComm purchasing the MX and SeeHawk to standardize testing across multiple technologies, sales into Mexico, and standardization on our MX platform by the largest GSM-WCDMA-LTE network operator in the US.

Aside from the strong high rejection GPS timing Antenna shipments in the second quarter, we delivered our WiFi Hospital Cart solution to Kaiser. We see stronger business in the future with Kaiser. We completed the NRE contract for the next generation of WAAS antennas -- that stands for wide area augmentation system -- from ITT and expect contract awards for the product phase of this project later this month. We have also received an early development order from Nokia Siemens for their LTE PICO Cell program.

Our military business expanded and we received our initial order from Union Pacific for a three-year program focused on locomotive communication.

PCTEL Secure continues to progress. We are on track for delivering a prototype of our Prosetta Core solution on an Android platform in the fourth quarter. At this time, we are engaged in business development activities. We have been meeting with large defense systems integrators, the military, and several government agencies.

The type of hacking recently reported in Great Britain illustrates the vulnerability of cellular phones to hacking, spying, and other malicious activities. That commercial phones are widely used in the military and by other government personnel represents a security gap. Our solution, coupled with adequately protected infrastructure, will address this gap.

We have nothing at this time to report on the M&A front. We continue to explore acquisition opportunities, but as I have noted and stated before, we are committed to obtaining assets at fair and reasonable valuations.

I should mention that we have been extremely active at various industry trade shows and conferences and investor meetings. We recently presented at Cisco Live in Las Vegas, at Communicasia in Singapore, Entelec in Houston, the Office of Naval Intelligence show in DC and the US Army's CECOM (Communications Electronics Command) GPS Integration Conference in Maryland. PCTEL Secure and PCTEL attended the Military Wireless conference in DC in June.

In the third quarter, we plan to exhibit at the ION GNSS show in Portland and the Railroad Systems Supplier Inc. show in Minneapolis. We presented both at the Baird and B. Riley Conferences in May and met with over 50 institutional investors during the first half of the year. Rodman and Renshaw initiated coverage of PCTEL and we anticipate participating in their upcoming conference.

In summary, we were pleased with our second quarter results and believe that they are consistent with our presentations at investment conferences and to institutional investors. We have been able to replace much of our public safety antenna business with higher growth, private enterprise opportunities such as fleet management, SCADA, telemetry, smart grid, positive train control, healthcare, and entertainment.

Offloading, remote monitoring, video surveillance, network timing, and other trends favorably impact our Antenna business. Scanning receivers are receiving a boost from the LTE deployment, the adoption of TD-LTE in China and the acceptance of our new MX platform. We believe that we also have an upside related to our PCTEL Secure joint venture.

Finally, we are meeting or exceeding our cost targets in two important areas -- Scanning receiver R&D and Antenna gross margin. We believe that we will make additional progress in both cost and revenue growth in the second half of 2011.

That concludes our prepared remarks. We have set aside 30 minutes for your questions.

Operator?

(Operator Instructions). Your first question is from [Chris Sagawa] with B. Riley.

Hey, thanks a lot. Hey, Marty, you mentioned in your prepared remarks a new -- what will be a new product line for you at Cable Products. I just wanted to see if you could maybe provide a little bit more color and help us frame maybe what that opportunity could look like.

Sure. In the past, our customers sometimes asked us to deliver more than just the antenna. We attached a connector and a cable, and in those cases, with respect to the cable, we have not really focused on having on our cable, and we have procured cable at the most attractive rates we could here in the US. But our organization won out and spec'd cables from an Asian manufacturer that allows us now to have a PCTEL-branded cable, rather than somebody else's cable.

And that cable will have very favorable gross margins and it will expand our ability, just as we have expanded with having enclosures, connectors, mounts and other related products, to deliver more complete solutions to our customers. And that is a general direction for the PCTEL Antenna business, to try to incorporate more elements between the radio and the tip of the antenna in our product offerings.

Okay, great, thanks.

Sure, Chris, and thank you for attending today.

Just a couple more, if you don't mind.

Sure.

Yes, you've pointed out the health vertical in the press release and that seems like a vertical that maybe we haven't talked about a lot in the past. Maybe you can just -- a little bit more color there and what sort of applications you're seeing the antennas being used?

Sure. We did mention some of our activities in the healthcare segment some time ago. We talked about this Kaiser Permanente opportunity and really, there are three distinct opportunities in healthcare. One, you have the same problem in the confined campus area that you do in entertainment venues such as arenas. You have a requirement to offload data onto a WiFi system, rather than using a cellular system.

Secondly, you have a need for antennas associated with valuable assets, such as pharmacy carts and so, you have these pharmacy carts moving around. People need to know where they're at. RFID and GPS are not really suitable technologies -- GPS because this is indoors, RFID because of an unacceptable error rate in tracking items, particularly when there's liquid involved.

And the third is general communication. So we think that this is a terrific vertical for us to focus on, and indeed, a year and a half ago, as we witnessed -- really, two years ago -- as we witnessed erosion of public safety, healthcare was one of the five or six verticals that we focused on. And I think that focus is paying off for us and in addition, it's been extremely helpful that we've been able to utilize the Sparco resources. We acquired Sparco not just to get into the enclosure business -- we could have simply OEM'd an enclosure product line.

We acquired Sparco because of their experience in delivering a bundled, value-added solution into markets that were of high interest to us. And so that's worked our reasonably well for us.

Okay, great. Then if I could just go back to the public safety comment, I guess just for clarification purposes, what sort of revenues do you get in the public safety -- are tied to the public safety networks versus private networks?

Well, let me just comment on something. Public safety networks are private networks in that they're not available to the public as is the cellular networks, but I understand the distinction you're making, but they are just a special-purpose private network. And I think I said before that back in 2008, when we were roughly a $49 million Antenna business, that over half of our revenue at that time was from public safety, and with the recession, we lost over half of that revenue.

So as best we can tell, pure public safety is probably around $12 million for us at this time, way off from where it was. And so in 2010, we were -- in 2009 is when we had that loss. 2010, we recovered largely from that with new vertical markets and now, we're seeing growth. We still think that public safety is somewhere between a zero and 4%, maybe a negative 2% and 4% growth area, and we're just -- although it's important because of its size to us, we simply do not depend on it for our growth in the Antenna Product area.

Okay. Then just curious, there's been some news on possible legislation to unlock the D-Block spectrum to public safety agencies. Wondering if that could be a potential opportunity for you down the road or how you view that?

The more spectrum available to our markets, the better for us. All of it needs antennas. It's hard for us to size that market though, but we are watching that and it's of importance.

Okay, great. I'll hop back in the queue. Thanks a lot.

Okay. Thank you.

Your next question comes from Matt Robison with Wunderlich Securities.

Hey, Marty, it's (inaudible) calling for Matt Robison. I was hoping on a qualitative basis, can you give some color on the mix of Antennas versus Scanners in the second quarter and where you see the trend going in the third and fourth quarters?

Well, we typically, as you know, don't do segment reporting, but as we said, we used to be about a two-to-one business pretty reliably, Antennas to Scanners. Now, Antennas are growing a little faster than Scanning Receivers, so the mix is a little higher than that, (inaudible).

And in that, and it was -- I believe it was in the first quarter call that we did on the fourth quarter, we had said that we had expected -- and you can go back and look in the transcripts -- we had expected our Antenna mix with the recovery we've seen with vertical markets, to begin to move from its traditional two-thirds/one-third. It had been closer to 70% and that's about what we're seeing. We're seeing that 70% roughly of total product mix that we had predicted two quarters ago.

Isn't that surprising that the CFO is much more forthcoming than the CEO?

Great, thank you. And then just on PCTEL Secure, you said you're expecting to see the prototype in the fourth quarter. What would you guys view as the next milestone and when do you think we can start anticipating initial revenues there?

Well, that is a huge milestone. So let me explain what that prototype is. It's a PCTEL-branded Android phone that has on it our Prosetta Core architecture and we'll be able to show potential interest at parties what that phone does in either a secure or non-secure mode when confronted with the type of threats that we've been showing people. So you'll be able to toggle this on or off and you'll be able to see the threat or the no-threat.

We think that that milestone is significant, but we have said consistently that we don't anticipate revenue related to PCTEL Secure into 2012. This is a very long sales cycle, but we're doing -- we're spending a lot of energy now on business development. This means going into different players of the government, different layers of defense systems integrators, different layers of cellular phone providers, and we're really pushing the model of using our prototype for business development, but preferring to license a combination of our software, our SD card and our policy server.

Great, thank you.

(Operator Instructions). Your next question comes from [Christie Papnacoli] with Wunderlich Securities.

Hi, Marty.

Hi, Christie.

How are you today?

Good.

I just wanted to ask on what you are seeing as it pertains to state and local spending and the impact on Antennas? Been hearing that Motorola has seen a bit of an uptick. Are you -- what's your thoughts?

As I said, I think that the public safety growth is somewhere between negative 2% and 5%. I can't speak to Motorola's growth in the public safety area, but you should remember that in [MSI], the same radios and systems and handsets that they would use for public safety also go to people like UPS, Fed Ex and other private entities. And so it's a little difficult to tease apart where their current growth is coming from.

With respect to public safety spending though, I would have to say, Christie, that we remain extremely cautious about growth potential there. Illinois is a terrific example. Until they deal with over $100 billion of unfunded pension obligations and obligations to the university system and so on, they're going to have a lot of difficulty finding discretionary funds to grow their public safety networks.

A really good example of the sluggishness is this. As you may recall, we worked with Northrop Grumman, who was the systems integrator for the New York City Do-It Network. That network is successful; that network accomplishes what it's supposed to do. They had a budget approved for a very extensive buildout of that network and that buildout is not occurring simply because of the lack of funds to execute against their budget. And we unfortunately see this across the states.

Another good example is this -- locally, and at other conferences we've been to, we've learned quite a bit about how the states are saving their public safety budget and one way is to not refresh vehicles. So whereas they may have turned over police cars every two years, they're looking to try to do it every four years. And there will be some pent-up demand and maybe in 2012, we'll see a little bit of bubble, but right now, with the budgetary constraints that we see, any growth that we get out of public safety will be a gift and we are looking at other areas for that growth.

Thank you so much.

Sure.

You have a follow-up: question from Matt Robison with Wunderlich Securities.

Thanks to my colleagues for picking it up. I was on another call. And John, I apologize for jumping on late here, and you might have covered some of this stuff, John, but just for housekeeping, did you talk about your operating cash flow --

Yes.

-- and capital spending?

Yes. Cash flow from ops was $2 million.

Okay.

And cap ex was $1.6, of which $1 million was the ERP project.

Are you pretty -- where are you along -- where are you with the ERP project at this point?

We're probably three-quarters of the way done with it from a cap ex perspective, so if you look at it, cap ex year-to-date is $3.4 million.

Yes.

And in the back half, it'll be about $1.5 million in total for everything. The total is about $4.9 for the year which is what we had talked about at the beginning.

What's the -- Marty, what's the regional influence these days on your test equipment business?

Well, in terms of regional variability, of course, we're seeing the US drive the LTE market and that's been very positive for us and more operators are demanding test equipment to help them in that regard. And then China has become increasingly important because of the size of the networks, the congestion, the rollout of new technologies.

And then it's hard to say where all of the Ascom and Knight and SwissQual business goes because we provide directly to them, and they sell in a variety of locations. It's not always apparent to us, but we do see continued strength there. I will say that we have seen Huawei extremely active in India and Africa and so we're seeing growth in Africa that has been positive and a little bit new.

Okay. Now, normally, we would expect that mix from Antennas would kind of go to -- would increase in the September quarter because your OEMs are -- your European OEMs take a little bit of a break. Did you talk about that and the impact on margins this quarter?

We didn't other than this. I think we're able to report positive guidance in this sense, Matt, that we believe the third quarter is going to look an awful lot like the second quarter and we had a pretty strong backlog in Scanning Receivers going into the third quarter.

And it's always difficult to tell three or four weeks into the quarter where you're going to end up, but we feel very confident that we're going to be able to repeat at or near the levels for Scanning Receivers in the third quarter which, as you point out, is a positive change for us because so much of Europe takes a vacation in the third quarter, and that uniquely impacts our Scanning Receiver business, but we think we're going to hold our own this year.

IS that because you've got some other channels, such as Huawei, that are picking up the slack?

Well, I'll tell you, Huawei is certainly important, but Ascom and Knight and SwissCall are doing quite well and EX has turned out to be a terrific investment. We feel we're starting to take some share. We feel the product has clear competitive advantages and it's driving our business right now. In fact, what we pointed out in the prepared comments, Matt, is that our two largest technology investments over the last year and two years were MX on the Scanning Receiver side and our high rejection GPS Antenna. And we think the high-rejection GPS Antenna could account for as much as 5% of our Antenna -- total revenue, and MX is taking a greater share of total Scanning Receiver sales earlier than what our EX did when we released that.

So it sounds like MX is probably even bigger than these high-performance GPS antennas?

Yes, it should be.

Yes, and would probably double the margin percentage or three times the margin --

Well, we did point out -- oh, yes, it's a higher percentage GPS, but we did point out that the complexity of MX does result in a higher cost profile than the EX which we've had very positive experience curve results in terms of driving down its costs over the last three years. But still, having said that, clearly, any scanning receiver we put out is going to have a higher gross margin profile than our antennas.

So you've talked about the timing for the prototype for PCTEL Secure. Any -- what would be the next milestone after that?

Getting a --

What can you talk -- what do you anticipate being the sales cycle like after you get to that stage?

I'm hoping to land something in the first quarter and definitely by the second quarter of 2012.

And so that's a pretty -- that implies a three-to-six month kind of a sales cycle, which seems reasonably quick there. Are you getting some meaningful leads at this point that give you some confidence in that?

Yes. We've had multiple repeat customer meetings. In other words, there's customer contacts that we've had that have resulted in repeated meetings with different parts of the organizations that is giving us some confidence about our potential.

Okay. And do you get a situation where you eat with hem, you go over the story and they basically tell you to come back when you've got a prototype and go from there? Is that the way it's --

Well, there's really -- first of all, manufacturing the threat and showing what we can do on multiple Android phones has put us in a different class in terms of our knowledge of how to do that. And secondly, we really have something unique in the approach that we have to blocking these threats, detecting, blocking and alerting. And I think we've been able to convince customers of the distinctiveness of our solution.

I think now I've talked to companies that are in the defense industry and I hear stories about not being able to buy laptops that are sourced from companies that are outside the US and things of that nature. How do you -- I think your OEM supplier of these phones is offshore, correct?

Correct, but our goal is not to sell that phone in great volume. Our goal is to use that phone as a business development tool and as a prototype to show to customers and other vendors. Our goal is to sell and license the SD card, the software and the related policy server to defense system integrators, US-based cell phone providers and others.

I will make one comment though about that offshore remark. Think about US providers of cell phones. I think everybody knows that those are manufactured elsewhere and so, there is a -- I think It's pretty difficult for some people to make that distinction.

Yes. And it's interesting because I ran across an example just very recently and I think that those companies have -- probably have to buy PCs that are made in the same place as the vendors are not allowed to buy them from.

Right.

But there's a corporate-level distinction evidently.

Right.

But that's it for me and congrats on the gross margins.

Yes, right.

And it sounds like you're going to be able to sustain it.

I believe so. Good.

Operator, are there any other people in the queue?

At this time, there are no further questions.

Okay. Well, with that, I want to thank everybody for their attendance at our conference call and we look forward to talking to you after our third quarter and seeing you at various marketing events. Thank you again.

Thank you for participating in today's conference. You may now disconnect.