PCTEL Inc (PCTI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the PCTEL third quarter 2012 conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I will now turn the call over to John Schoen, Chief Financial Officer.

Thank you for joining us today, November 5, 2012, for PCTEL's financial results conference call for the third quarter 2012. On today's call will be Marty Singer, Chairman and CEO; and I am 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 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, John, and good afternoon. 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 $25.9 million, an increase of 33% over third quarter 2011. Gross profit margin was 39%, operating profit was 9%, net income was $2 million or $0.11 per diluted share, and cash and investments were $48 million.

Now I'd like to turn the call back over to John Schoen, who will 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 a 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 notes 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. Third quarter 2012 revenue was $25.9 million, an increase of 33% from the same period last year. The acquisitions of Envision wireless in October 2011, and TelWorx in 2012, account for 25% growth, with the remaining 8% coming from our existing products. Existing antenna and site solution product revenue was higher than the same period last year, across both distribution and OEM channels. Year-over-year scanning receiver and engineering service revenue was lower. This reflects carrier spending delays, and a general downturn in cellular infrastructure spending. While scanning receiver and engineering services revenue was lower than last year for both the current quarter and September year-to-date, the Company saw a 19% sequential revenue increase in the third quarter compared to the second quarter for that product line.

Now let's turn to gross profit. Non-GAAP gross profit margin for the third quarter was 39%, as compared to 48% in the same period last year. The change reflects scanning receiver and engineering service revenue comprising a smaller portion of the revenue mix, with their higher margins relative to antenna and site solution products.

Now let's turn to non-GAAP operating expenses, which were $7.7 million in the quarter, an increase of approximately $200,000 from the same period last year. The increase reflects a $700,000 addition of operating costs for the Envision and TelWorx acquisitions, partially offset by a $500,000 decrease primarily related to the ending of the initial MX scanning receiver R&D investment and lower variable compensation expenses. The Company's variable compensation plan focuses on growth in both revenue and earnings. As a result, variable compensation has been lower.

Non-GAAP operating income in the third quarter was $2.4 million or 9% of revenue, compared to $1.9 million or 10% of revenue in the same period last year; the decline in gross profit margin percent being partially offset by leveraging of operating costs over higher revenue. Non-GAAP other income was $11,000 in the third quarter; as the amounts are largely interest on our investments, the number will continue to be small in the current interest rate environment. The non-GAAP income tax rate in the quarter was 18%, unchanged from prior periods. Non-GAAP net income for the quarter was $0.11 per share, compared to $0.10 per share in the same period last year. The increase is attributed to higher operating profit on higher revenue.

Now let's turn to the balance sheet. Cash and investments ended the quarter at approximately $48 million, about $18 million lower than the previous quarter. Approximately $250,000 is classified as long-term investment securities, with maturities ranging between 13 and 24 months. In the quarter, the Company generated $536,000 of cash from operations. Depreciation was $633,000. During the quarter, non-cash and investment working capital, receivables inventories and liabilities increased working capital approximately $4.8 million. Half of the increase relates to the acquisition of TelWorx in July; the other half reflects the timing of sales. During the third quarter, shipments in the last month of the quarter were higher than historical levels, causing accounts receivable days outstanding to expand. Capital expenditures in the quarter were $967,000 or 3.7% of revenue, which is within our long-term historical spending pattern of 3% to 4% of revenue. During the quarter, the Company used $16.5 million of cash and investments for the acquisition of TelWorx, $800,000 for the purchase of the last 30% of PCTEL Secure that it did not already own, and $552,000 for its regular cash dividend in the quarter of $0.03 per common share.

Now I would like to discuss guidance for the fourth quarter 2012. We anticipate fourth-quarter revenue to be in a range of $26.5 million to $27.5 million. Gross profit is expected to be in a range of 39% to 41%. The change in gross profit percent is consistent with the Company's changing revenue profile. Non-GAAP R&D and SG&A are expected to be about $8.1 million, approximately $400,000 higher than the quarter just ended, due to seasonality. Other income is estimated to be about $25,000 in the quarter.

As a reminder, there is no more elimination of non-controlling interest for PCTEL Secure, as we owned 100% of the entity effective July 2. The Non-GAAP effective income tax rate is expected to remain unchanged going forward, at 18%. The fully diluted share count in the fourth 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.

Thanks, John. We had a very full quarter. Just to recap, we bought out the remaining interest in PCTEL Secure, successfully transitioned to a new enterprise management system, and acquired TelWorx. This new capability expands our portfolio of RF ancillary products, services and kitted solutions. During all of this activity, we turned in our best revenue quarter as a wireless technology company. We also completed the renovation of our Tianjin facility. As John mentioned, our scanning receiver and engineering services product line represents about 20% of our revenue. We finally saw some signs of recovery in scanning receiver sales, despite continued delays in the deployment of LTE in China and Europe. We brought in our largest scanning receiver order of the year, $1.3 million, that we began to deliver in the third quarter, and that will be completed this quarter. We also completed LTE upgrades for over 100 scanning receivers for a major US operator, continuing our dominance in the North American LTE market.

With respect to engineering services, we realized sequential growth, and contracted with General Motors and AT&T for testing in-building wireless networks for factories across the US. With the acquisition of TelWorx, our antenna and site solution products now comprise about 80% of our revenue. When we acquired MAXRAD Antenna Products back in 2004, they were shipping approximately $18 million of antenna product for the entire year. Through internal growth and acquisitions, we have more than quadrupled the size of the product line. The strong quarter reflected significant orders from Qualcomm for OmniTRACS antennas, medical cart MIMO antennas to Kaiser, and strong sales of custom Wi-Fi antennas for Cisco's Jackhammer base station, used for offloading and smart grid applications. Last quarter, we released a unique module for this strand-mounted access point that permits point-to-point microwave backhaul.

In addition to the current business, we developed important new business opportunities. We completed trials with a major railroad for LTE/GPS wayside antennas, and secured enclosure orders related to Disney properties, and continue to work closely with AT&T on large public venue deployments. We released our new GPS/Multiband antenna to a major OEM in the fleet management and refrigerated transport industry, which should result in over 10,000 units shipped annually. Finally, we secured a new OEM customer with a design win for our integrated MIMO antennas. We cannot disclose the customer's name at this time, but this continues our success in this space. As you know, we currently ship to Cisco and BelAir/Ericsson in this important vertical market.

We have made good progress in integrating TelWorx and Tim Scronce's team into PCTEL Connected Solutions. We have executed on our plan to deepen our relationships with customers in key verticals, and our ability to deliver complete solutions. In the past quarter, we won a contract to provide disaster recovery mobile towers, populated with RF components, to a Tier One wireless carrier. We delivered channel banks as part of a broad SCADA solution for Southern Companies, and designed and delivered four new kits for LTE and infrastructure opportunities in the US. We have also leveraged our e-Commerce capabilities that we obtained as part of the acquisition. CLECs, data centers, and private network operators utilize e-Commerce capabilities to get access to internally-developed and procured products from our Connected Solutions division. We have been awarded new virtual warehouse and logistics contracts, and the ProcurDirect e-Commerce channel funneled products directly into our core antenna business for resale to customers as part of a broad solution. I already mentioned the successful transition to our new Oracle ERP system, and upgrades to our Tianjin facility.

With respect to product development, I am pleased to report that we continue to push the envelope with our technology-leading scanning receiver product line. We released FDD LTE MIMO capability on our MX platform, a new and more cost-effective version of Clarify, the NGx, and we expanded the RF bands' different frequencies supported on our LTE EX scanning receiver. With respect to antennas and RF ancillary products, we shipped new prototype panel antennas to one of our largest OEM customers, and we released two ultra-wideband 4.4 GHz to 6 GHz sector antennas that cover a NATO frequency band and other commercial bands for broadband access applications, including cellular offloading. This antenna has been recently approved by a large defense contractor. Our roadmap includes a new 1.4 GHz panel antenna for smart grid applications in Europe. We anticipate success for this product in both utilities and power distribution applications.

Later this month, we will be completing our Beta test of ProsettaCore 2.0. That release improves upon the delivery mechanism for establishing the ProsettaCore kernel on the target smartphones and tablets. We are testing this concept with potential target customers and systems integrators.

I will be traveling to China in a few weeks to obtain market and customer-based information regarding the deployment of TD-LTE, and to meet with both antenna and scanning receiver customers. We will also be meeting with our contract manufacturers and assessing the readiness of our Tianjin factory to take on more of our production. Although we will not host a booth at Mobile World Congress, a few of us will attend the conference and would be happy to meet with any of you who make the trip. That concludes our prepared remarks. We have set aside 30 minutes for the question-and-answer session. Operator?

(Operator Instructions)

Matt Robison, Wunderlich.

John, a couple for you first. I got the back-loaded message, but what was the third quarter linearity like?

We only did about 16% of our revenue in the first month of the quarter, so about $4.2 million, which tees off the quarter. I can report that we are already, in October, $4 million ahead of that pace than we were in July, and I am already $1.5 million in free cash flow ahead of where I was at the same date in the last quarter.

Okay, so something like 40% or 50%, more than 50% in the third month then?

Yes, it was just about 50%, a little over.

Okay, so linearity this quarter, do think it is going to be a little bit more equal-weighted between the three months?

Yes, I've already done 30% in the first month, where I only did 16 points in the first month last quarter. So basically, the way you view it is I am $4 million ahead on billings that I can collect in the quarter, July versus October.

Right.

And I'm already $1.5 million of that ahead, so I think I'm going to get most of that money back, the cash back.

So we could see operating cash flow of something like $3.5 million, $3.7 million, something like that for the --?

Yes, $4 million is not out of the question.

Okay. Now what are we talking -- are we done with the CapEx spend now? Is TelWorx on the ERP system?

I'm sorry, you're talking about the new ERP system? Yes, the CapEx is pretty much done.

He's talking about TelWorx, though.

Yes, it is a two-part question. Is TelWorx on it already, or are you got to spend more --?

Yes, we would plan on putting TelWorx up sometime in 2013, but the CapEx associated with the ERP system has pretty well been digested now through Q3, so I mean a CapEx number in the $700,000 to $800,000 range for Q4 is like right at that 3% number.

So a repeat of the third quarter, then?

Yes, maybe $100,000 or $200,000 less.

Okay, and so that is the way we should look at it going into next year?

Yes, basically it would be about a -- if you budget 3%, you would be -- your model would be okay.

Okay. Marty, I might have missed it, but -- so apologize to make you repeat yourself, but I don't recall hearing much of an update on PCTEL Secure, other than buying out all the --?

I was talking so fast, you can be excused for missing it. So what I said was that we are in fact initiating today an active Beta test of release 2.0 down in Germantown. I am very pleased about this, Matt. What we did is, we see some potential for ProsettaCore not just as a security product, but perhaps as an implementation of some management information on devices, and release 2.0 focuses on these new unlocked and open tablets and phones. And so we have an active Beta test now in Germantown. We expect that Beta test to run for about a month, and during that period we are demonstrating the system to several potential customers. We have a set of meetings this week, as a matter of fact, and the product looks good. So our challenge of course here has never been the technology, it's always been the distribution channel and the path into our target market group.

So this is for the Jelly Bean version of Android, is that right?

Yes, I mean I can't get over the fact that Jelly Bean is the name, but basically we are doing the Beta test with products like the Nexus handset from Samsung, which are unlocked and open, and based on this new Jelly Bean operating system. What it means to us, and what it means to the delivery of the product, is that you can deliver our server and what we call an image generator to an IT department, and that IT department could either be defense- or government-related, or could be enterprise-related, and you can just download the security solution or the management solution directly to that tablet or handset, rather than PCTEL having to have an arrangement with a handset manufacturer of actually getting into the manufacturing process to insert the kernel. So we think that this release is much more robust from a distribution perspective.

Yes, sure, I like it. When you say Beta, that usually implies a customer; do you mean the --?

No, no, this is a Beta-tested product. We are using our own people as the customers on this.

So it's really a late-stage prototype?

I wouldn't call it a prototype. We had the prototype in August, so we have a completed server, a completed kernel, and I think after four to five weeks of this we would be able to license this directly to a customer.

Okay, so ready to listen during the third quarter, and --?

If we are successful in attracting a customer.

Yes. Okay, what is the -- can you provide some commentary on the scanners at this point, and what the industry dynamics are, since we are -- we are many months past some of the past constraints, it seems?

Yes, I think there are three positive forces and one negative force. The three positive forces is that we see TD-LTE opening up in China; we are past this failed merger of AT&T and T-Mobile, and we see LTE rapidly expanding in the US; and finally, we see some new regional markets opening up, like Africa, and South America is becoming more active, particularly in Brazil. So we see all of that as quite positive. On the negative side, there has been consolidation in our customer base. So a Knight acquired its own scanning receiver from Andrew, which is now CommScope, which is now Carlyle; and then Rohde & Schwarz acquired SwissQual. So while those two OEMs are still customers, there is no question that that is a negative dynamic for us. So we have focused more and more of our effort on acquiring additional OEM customers, and increasing our direct sales.

How is that going for you?

I think it is working out reasonably well, as evidenced by the growth in the last quarter. Huawei has emerged as a consistent customer. There is another OEM that we now have a contract with that we cannot tell our shareholders about quite yet, but we will be able to in the first quarter of next year. And we are seeing some additional business with Ding Lei out of China, and then we're doing a pretty good job now of attracting direct demand from some of the major OEM infrastructure suppliers such as Ericsson.

(Operator Instructions)

Mike Crawford, B. Riley and Co.

Can you talk about what you think the target business model is, now that scanning receivers is probably not a growing business, and antennas and enclosures are? Antennas, I guess the margins will be improving there, given the focus on more verticals, but it sounds like we have a higher revenue number and potential growth yet, and higher operating income but lower gross margin; is 40% the level you're shooting for, or are you looking for improvement there?

We are looking for improvement there. Let me just mention a couple of things about the third quarter that were a little bit unusual. We had very strong business with two of our major OEMs, Motorola and Cisco. Those high-volume products, particularly the ones that we manufacture out of Tianjin, are the lowest gross margin products that we have in our entire antenna product portfolio. We believe that we will have continued strength in that area, but we don't think we're going to have that mix in all subsequent quarters. It was an unusual quarter in that respect, Mike. So that was a positive from revenue, but it was definitely -- that product mix was a drag, and we actually do believe there are some ways that we can address gross margin within those product lines; so that is one issue.

The second issue is our acquisition of TelWorx, which is now Connected Solutions, had more of their procurement business in the third quarter than their kitting business. We anticipate a greater percentage of kitting going forward, and we also think that we're going to see some pretty strong tower-related business that has strong margins associated with it. Finally, although scanning receivers definitely did decline, we see some opportunities for growth and a little bit higher quarterly run rate for that area. And then finally, even though -- let me say it this way. NES, our Network Engineering Services, is lower on the gross margin, but its bottom line is quite good, because all of your costs are above the line. So I think that it would be fair to target 40% to 41% in your model, and assume that we would have a little bit better result on gross margin than we had in the third quarter.

Okay, thanks Marty. Then given that the scanning receiver business really hasn't been a growth market for a number of years, not expected to be one, yet does have these high margins, there's been consolidation in the space; is that something you would have considered selling if you got the right price for, or--?

We haven't really had that as an active discussion. For one thing Mike, as you know, it has been a long road to get to being over a $100 million company. We felt for a long time it really does not make sense to be public, unless you have a path to get to $150 million. So we would be reluctant to divest that much revenue. The other aspect of course about the scanning receiver business is that it really permits us to be involved directly with carriers and understand their problems, which open up a variety of opportunities in Connected Solutions, and actually a little bit even in antennas. Finally, we think that there are some potential technology opportunities that could help us grow the scanning receivers, and we are working on some ideas related to our PCTEL Secure business, and specifically utilizing the kernel that we use to monitor the phone for security breaches for the purpose of monitoring other aspects of the phone that would yield some network performance information. So I would say right now, rather than looking at divestiture of that business, we are looking at ways that we could change the growth trajectory.

Okay, thanks. Then final question relates to PCTEL Secure, and I know this will be difficult to answer because of the shared resources in Germantown, but what level of license revenue -- license and/or royalty revenue do you need next year to have that business contribute positive cash flow to PCTEL? And do you expect that to happen, or do you expect 2013 to also be a continued investment year for PCTEL Secure?

I think 2013 is a decision point for us. We will either get $1.5 million in licensing revenues, or perhaps higher, or we will spend -- we will change our spending plan dramatically, so that PCTEL Secure will not be a drag on our earnings.

Okay, thank you.

(Operator Instructions)

We seem to have no further questions. I will now turn the call back over to Marty Singer for closing remarks.

Thank you very much for joining us this afternoon. We hope to see many of you at upcoming conferences, and at Barcelona in the first quarter, and we look forward to updating you on the fourth quarter sometime in early March of 2013. Thank you.

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation. You may all disconnect.