PCTEL Inc (PCTI) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the PC-Tel fourth quarter 2014 conference call. (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.

Okay. Thank you for joining us today for the PC-Tel financial results conference call for the first-quarter 2014.

On today's call will be Marty Singer, Chairman and CEO; Jeff Miller, President of Connected Solutions; and I am John Schoen, the Chief Financial Officer.

Before we begin I'd 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 features, product development, acquisition efforts, 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 intellectual property. 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 to all of you. Let me recap some of the non-GAAP highlights from the quarter.

We achieved revenue of $23.7 million, a 6% decline from the first quarter of 2013. Gross profit margin was 41%. Operating margin from continuing operations was 5%, net income was $914,000 or $0.05 per diluted share. Cash and investments were $56.2 million, a decrease of $1.7 million from the previous quarter, reflecting cash outlays from the annual 2013 accrual of dividends.

Now I'd like to turn the call back over to John 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 presentation of gross profit operating profit and net income excluding expenses for restructuring gain or loss on sale of assets or legal settlements, stock-based compensation, amortization impairment of intangible assets and goodwill, and non-cash related to 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 recording 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 PC-Tel.com under Investor Relations. My discussion of results will be based on our non-GAAP financial results.

So let's turn to revenue. Revenues were $23.7 million, down 6% from $25.1 million in the same quarter last year. While revenue for the quarter was disappointing, we have a strong forecast for the second quarter and the full year which we will discuss later in the call.

I will now speak to the changes from the same period last year by reporting segment. RF Solutions revenue was $7.7 million, an increase of 34% from $5.8 million in the same quarter last year. Revenue was up significantly in both scanning receiver products and network engineering services. The increase in scanner revenue is attributed to continuing carrier spending increasing from 2013 levels. The network engineering service revenue growth is attributed to the rapid growth of in-building wireless network expansion. Connected solutions revenues were $16 million in the quarter, a decrease of 17% from $19.4 million in the same period last year. Most of this decline was in core antennas.

Marty will discuss the decline in his remarks later in the call.

Gross profit margin as a percent of sales was 41% in the quarter, representing a period-over-period improvement of 2% of sales. The increase for the quarter is attributed to the increased contribution of our relatively higher margin RF Solutions segment revenue as a percent of total revenue and gross margin improvement in our acquired site solutions product portfolio.

RF Solutions gross profit as a percent of sales was 58% in the quarter, representing a period-over-period decline of 5% of sales. The decrease is attributed to the increased contribution of our network engineering services revenue with its lower gross profit margin, relative to scanners. As previously discussed, revenue in scanners and network engineering services were both up from last year, but network engineering service revenue was double 213,000 levels in the quarter.

Connected Solutions gross profit as a percent of sales was 32% in the quarter, representing a period-over-period improvement of 1% of sales. While the segment experienced margin pressure from fixed costs spread over lower revenue, it was more than offset by improvements made through our elimination of unprofitable site solution products and customers, consolidating the site solution factory into the Bloomingdale facility and our supply chain improvements.

Now let's turn to non-GAAP operating expenses from continuing operations.

Operating expenses were $8.5 million in the quarter, representing a $250,000 increase over the same period last year. There was a $700,000 increase in R&D, primarily attributed to the IBflex scanning receiver and SeeWave interference detection R&D programs that was partially offset by $450,000 in lower SG&A costs.

Non-GAAP operating margin as a percent of sales was 5% in the quarter compared to 6% in the same period last year. The increase in gross profit percent was more than offset by the increase in operating costs as a percent of revenue due to a lower revenue and scanning receiver -- due to a lower revenue and R&D scanning receiver program last year.

Other income. Non-GAAP other expenses was $23,000 in the current quarter as the amounts are largely interest on our investments and offset by miscellaneous expenses. The number will continue to be minimal going forward.

Non-GAAP income tax rate in the quarter was 18%, unchanged from 2013. Non-GAAP diluted earnings per share from continuing operations were $0.05 in the quarter compared to $0.06 last year, resulting primarily from lower revenue.

Now let's turn to the balance sheet. Cash and investments ended the first quarter at approximately $56.2 million or about $1.7 million lower than the previous quarter. Cash flow from operations was a negative $800,000 reflecting a $2.4 million paydown of annual 2013 accruals.

Capital spending was $620,000. The dividend paid was $739,000 and depreciation was $667,000.

For the quarter, free cash flow was a negative $1.4 million. We expect for the year that free cash flow will be in line with the 8% of revenue experienced in 2013, with operating cash flow at about 10.5%, and capital spending at about 2.5%.

Now I would like to discuss the guidance for the second-quarter 2014. We anticipate second-quarter revenue to be in a range of $27.0 million to $27.5 million, about a 15% sequential and quarterly increase. Within total revenue comparison, we expect sequentially sequential quarterly increase of about 10% for RF Solutions and 15% to 20% for Connected Solutions.

Quarter to date shipments in backlog for the quarter is significantly improved to the same date last quarter, particularly in Connected Solutions. Currently, visibility supports a $2.5 million to $3 million sequential quarterly improvement for Connected Solutions. Additionally, based on the recovery we are seeing in Connected Solutions, revenue combined with the growth of RF Solutions revenue, the Company is comfortable with the high-end of its previous revenue guidance for full-year calendar 2014 of $112 million to $114 million.

Gross profit margin for both segments are expected to be the same as the quarter just ended, yielding total gross profit percent of between 40% and 41%. Operating costs for the quarter are expected to be at $8.5 million, about the same as the quarter just ended. The non-GAAP effective income tax rate is expected to remain unchanged going forward at 18%. The fully diluted share count in the first quarter is expected to be about 18 -- sorry, in the second quarter is expected to be about 18.5 million shares.

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

Thank you, John. Take a drink of water. As John already discussed, our first-quarter revenue fell short of expectations and telesales through distributors were off significantly. Weather delays pushed installations out to the second quarter and a large systems integrator had unanticipated design change issues with mobile towers for a large government agency.

While some have dismissed weather as an excuse for shortfall, its impact was real. Companies lost installation and manufacturing days, completely perishable assets from December to February.

Fortunately, these shortfalls were partially offset by very strong performance in our growing site solutions products, our in-building engineering services and sales of our MX and EX flex product line. We anticipate continued strength in all of these areas and a significant recovery in our core antenna products in the current quarter.

At this point, we project an increase of $3.3 million to $3.8 million in second-quarter sales compared to the first quarter.

Our confidence reflects momentum in both business segments. Connected Solutions received at the end of the first quarter an 18-month blanket order for a 7500 railway wayside antennas which indicates our focus on providing site solutions into this market segment was justified.

Investors will recall the transportation and transit represents one of our key vertical markets. We shipped over 200 advanced wireless service site upgrades in the first quarter and we anticipate a stronger funnel this quarter.

Our success in AWS, advanced wireless spectrum or systems, has resulted in new small cell site opportunities. We recently shipped eight early models for this [kidded] site solution and expect significant sales will occur in the second half of the year.

This area is one reason that we expect $35 million in revenue in the first half and $45 million to $48 million in the second half for Connected Solutions. Connected Solutions has also done well with our traditional in-building antenna programs. We had significant wins with Aruba and Extreme and Terraces. While other OEMs had a lower-than-expected demand for our antennas we began to seek renewed momentum near the end of the quarter that has continued into the current quarter.

Finally, we have seen strength in our growing precision agriculture GPS antenna products. We also had a very strong product introduction quarter. We launched our new 4G in-building antennas for LTE and Wi-Fi and our new multiband mobile antennas. This product portfolio includes dual LTE MIMO antennas, Wi-Fi, and high-bandwidth GPS antennas for fleet applications. All of these were unveiled at the recent IWCB industry conference and exhibit.

We also announced and launched our new access point ceiling enclosure solution for Aruba access points and we began production of our in-building PIM-rated antennas. Over the next three quarters we will build a complete PIM-rated product line and address evolving requirements in gas and small cell applications.

Connected Solutions also includes our mobile power product line. We are pleased to report that we received a significant carry order -- carrier order for Q2 delivery and we have already begun a separate delivery to a government agency that will continue during the second quarter. We now distribute two distinct product lines in various markets.

Some of you have asked about the fit of our mobile tower product line in the Connected Solutions portfolio. The mobile towers we offer are an extension of our site solutions capability. We are equipped with cabinets and antenna mounts that are used as communication platforms for SCADA applications and most notably in oil and gas communications as well as for rapidly deploying communications for disaster recovery.

When equipped with fuel cells, generators and light arrays, another variant is used for wide-area lighting application to support 24-hour construction for open pit mining end-users. In these scenarios we provide the system engineering of solution for appropriate equipment loading of the trailer and model the loading factors of the payload being lifted to confirm that the tower is suitable for the end-user application.

We were delighted with RFS's continued strong performance. Our network engineering services group, which focuses on in-building network design, optimization and commissioning turned in its seventh consecutive quarterly sales record. We anticipate continued strong growth in this area.

As an example of ongoing activity, we provided services for interesting and high-value venues. We did the site surveys, commissioning and acceptance testing for several NASCAR speedways. We did the same for a Super Bowl venue, a Final Four venue, and the U.S. Open.

In parallel our services and product teams jointly authored an article published in a leading in-building engineering magazine titled Gas Testing for Maximizing Quality of Service. Our focus on engineering in-building networks was reinforced by two new product announcements. Our new IBflex and the CW transmitter.

Our engineering service team and operators globally now have an end-to-end RF testing solution. The CW transmitter supports up to four transmissions which can represent different operators at different bands. The transmitted signals are captured during walk tests using the battery-operated IBflex connected to our OEM tools, such as Ascom's Thames Pocket.

Using this RF data integrators and operators can access coverage needs and fine-tune their propagation models. IBflex is also unique in that, with a flick of a switch, it can be used in full speed mode to collect macro data during traditional drive testing. We also released as we discussed last quarter, our handheld interference [funding] tool SeeWave. SeeWave incorporates directional antennas and touchscreen interface and our industry proven scanning receivers to help operators find troublesome interference sources.

The solution is unique in that any customer that currently has a PC-Tel scanning receiver can simply purchase a SeeWave as an upgrade to add interference hunting capabilities. We expect IBflex scanning receiver, the new SeeWave interference director and the SeeGull CW transmitter system to provide important new sources of product revenues in 2014 and 2015.

We continue to explore a variety of expansion opportunities in both product and engineering service arenas, we want to build upon our core teams in in-building verticals, the growth of small cell, the demand for greater bandwidth and regional diversity. We'll keep our shareholders informed about our progress in these areas.

Over the next eight weeks we'll be presenting at the RW Baird and B. Riley conferences. Actually at this point it's over the next four weeks. Investors and analysts have and will have several opportunities to see our products interact with our team at a variety of industry events.

A full list of these shows can be found at the end of the written transcript on our website. We look forward to seeing you at our upcoming investor presentation as well as at our booths at these industry events.

Jeff Miller, the President of Connected Solutions has joined John and me today to answer questions that you might have regarding Connected Solutions and our confidence regarding our 2014 forecast. We have set aside 30 minutes for your questions. Operator?

(Operator Instructions). Matt Robison.

First, how should we think about the timing of the catch-up for the revenue beyond the second quarter?

I think, as we said, we are looking to do about a 50/64 split or a 51/63 split. So, we see having a pretty strong quarter in the second quarter but a very strong second half driven by three factors.

Number one, as we said, we have been successful in shipping about 200 AWS site solution kits but we've just now shipped eight prototypes for the small cell kits. We'll see some of that this quarter, Matt. But the bulk of those sales will be in the third and fourth quarter and they will be reasonably significant. It more than justifies the confidence in the $50 million $64 million split first half second half. And I see Q3 and Q4 as potentially equivalent maybe a little bit more strength in the fourth quarter but I think they will be pretty level.

Jeff, do you want to comment on the Connected Solutions?

Well, like you said I think you hit it on the head there. We are looking for a strong second half driven by small cell deployments. These are fairly high ASP type of kits. So the revenue accumulates pretty quickly with those type of dollar volumes that you pick up on those sales.

Right. And then the second thing I said there were three factors, Matt. The second factor is network engineering services. So, as John indicated, that just continues to grow. The only thing holding us back is hiring. I don't think I broke out the run rate because I don't want to start getting segment-within-segment reporting.

But you know, we are essentially seeing a quintupling of the revenue this year versus the run rate when we bought them. And we're going to have an extremely strong second half in network engineering services. We just added quite a few guys down to the Melbourne operation and added some additional sales and project management strength.

The third reason is that, in addition to our -- you know, primary flagship scanning receiver products, we have just released the IBflex, the continuous wave transmitter system, that we are developing a distributor agreement with one of the really large distributors in the US as well as our direct sales and the SeeWave interference detector. None of these products -- because they weren't released -- contributed anything to first quarter. There will be very little contribution in second quarter. All of the contribution will be in the second half.

So, those three factors -- site solutions from Jeff, the network engineering services down in Melbourne that RFS manages, and the three new products which will all be revenue-generating this year -- will create an imbalance in our first half, second half that we normally don't show to you guys. I think over our last several years we've been pretty reliably 48%, 52%, 47%, 53% at the high side. This is a different type of year.

What -- you mentioned also that the OEMs started to pick up. Now, is that not nearly as significant, I guess -- you didn't kind of include it in your factors there so I presume it's not that significant.

Do you want me to do it?

Yes, sure, Jeff.

So, yes, a number of the OEM projects have started picking up, Marty commented about, in terraces extreme. We are seeing the Wi-Fi access point business starting to recover a bit here in the second quarter already. There's a number of projects that are starting to deliver.

So, the OEMs, even on the GPS timing side of things, were soft in Q1 and they're coming back to life here in the second quarter. We're $1.9 million ahead of where we were same time last year in terms of backlog, current quarter backlog and shipments.

So, it's -- even the distribution has come back pretty strong already here. So it was an across-the-board decline. It looks like we're getting an across-the-board rebound here as well. So that's why we're pretty optimistic about the step-up in the second quarter.

I would say that you're right, Matt, though. The OEM rebound I would put fourth on the list as the reason for the first half/second half difference. I think the OEM rebound is going to really help explain the difference between the first quarter and the second quarter.

Two more and then I'll let somebody else ask a question. So John, anything that's going to keep you from recovering the bottom line that headway that you lost the first quarter?

No. As we just talked about, we are confident in replacing the revenue on the top side. And as we indicated, we think we are actually may run over. I think, you got us in for [112] which was the low end of our guidance. We are more comfortable with the higher end of our guidance.

Yes. And I will mention this since this is a public call and it's not inside and it's soon going to be in our proxy. But we were concerned about that a little bit, Matt, in the sense that some of the site solution revenue that we are going to pick up is a lower gross margin revenue than some of Jeff's core antennas.

And so, what we did is we adjusted the contribution that that kind of revenue makes to any potential attainment of bonus plans and so if you look at our short-term incentive plan, it has two variables -- revenue and earnings -- and we are essentially only giving half weight to lower margin revenues. So we protect against any sort of EPS erosion that bonus payments might make.

And so, I thought that was a good move. John caught that early on in our analysis of how the year was going and I think it was a -- the right thing for us to do.

Appreciate the detail. Then the other one item I wanted you to comment on, Marty, is on the scanning receivers can you give us some flavor for network deployment? What you're seeing from a regional standpoint? There was a lot of excitement over China last year and there hasn't been a heck of a lot of information about it. You guys have talked about it but the industry (multiple speakers)

Well, yes, we are actually -- if I look across the board and I just go quota by quota for my sales guys, the guys run the strongest position right now the sales executives selling into China. And so we are seeing a rollout of our scanning receivers into various provinces. It's not just China mobile but also mobile telecom and we're seeing some nice sales through some of the switching OEMs there. I think it is a little slower than anticipated, not certainly slow with respect to our revenue attainment. But I think you'll see some strength in the third and fourth quarter.

I will make one point, though. To the extent that some of the handset guys are behind, it's not necessarily bad for scanning receivers. Scanning receivers will stand in as a surrogate for the handsets to give visibility of how the network is performing and so I think we'll be reasonable in China.

Other regions, I'll tell you what we are seeing. We are seeing LTE pick up some momentum in Europe. We are seeing a lot of in-building activity in the US. There's a couple of tenders out right now for in-building scanning receiver tools that I think our IBflex came out just in time. I think the fact that it's a little bit of a greener product with less energy consumption, reusable batteries, batteries that can be taken on a plane that you have these two modes, and it allows our customers to use them both for in-building and outdoor is going to be very effective in this in-building market.

I do think, regionally, I have seen a little bit of a lull in Latin America, the big push in Brazil for a lot of telecom buildout, the World Cup, the Olympics. There was huge activity in 2012 and 2013 in terms of test and measurement and so on. That seems to be a little bit slower at least as judged by the guys we sell scanning receivers to. I don't know if that answers your question.

That's great. I appreciate all the color.

I'm surprised you didn't ask about the most important question. We actually put something in the script designed for you, Matt.

I was going to ask you what road courses you might be thinking about.

We were going to ask you if you'd like to do a tour of our installations and engineering work of those NASCAR raceways.

Absolutely. We'll do that probably off-line.

Okay, we will give you the detail. Talk to you later.

(Operator Instructions). Mike Crawford.

B. Riley & Company. Thank you. Marty, in Europe, the LTE pick-up, I presume you're seeing that in Northern Europe and not much activity in the South or is there any difference there?

Northern. That's absolutely correct.

What's your engineering talent in Germantown that builds these game receivers and related products, because in the past you have looked for other things to try to get these guys to do to greater and lesser degrees of success. Meanwhile, you have partners like Lightbridge that are changing the way that they test networks and doing maybe less drive testing and more automated testing.

Is there something you can do there to really increase your addressable market on that side of the business? Or how would you comment?

Yes. I think there is. I mean, more and more we are looking for ways to combine our data with data from what we would call crowd-based cloud-based data where you have applications on handsets that may be a lower caliber of data but still useful in creating an overall profile and pumping that into various post processing tools. So we certainly are examining that.

We are looking at alternative ways of transporting scanning receivers and positioning them so that data can be collected without necessarily the type of extensive drive testing that has been done. But you know, really important in all of this, I think, is lowering the cost of capital in the necessary testing that's done.

You look at in-building. That's not a matter of drive testing. It's a matter of polling data on a regular basis and walking where necessary, and what we believe when you mentioned the engineering talent we have in Germantown, what we believe is by lowering the cost to what we've done with IBflex and allowing people to personalize that product is they need to test different types of constructs like MIMO or different types of spectrum.

We've made this a much more favorable economic proposition for engineering firms like Lightbridge. You know, they make one capital investment in a base platform and then they can pump in the variations that they need over the Internet and we even permit them to rent or lease that capability on a pay per use base.

So, you know, another thing is, coming out with new test tools like continuous wave transmitter for taking all sorts of measurements in a very simple way in in-building.

Finally, you know a lot of performance issues literally are not related to coverage and capacity. They are related to interference. So you know you may have seen the article in the Wall Street Journal with the FCC is intrusively going around and literally knocking on people's doors and saying, you have something in this business or house that's interfering with the cellular network. And it can be ballast from lighting, it can be baby monitors, it can be wireless headsets.

That type of interference is reducing throughput by up to 50% in LTE networks. And, so in coming out with a product like the SeeWave interference detector, this is not an expensive drive test approach to improving performance. This is hunt, detect, and locate in a very efficient way and I'd be surprised if your friends at Lightbridge are not going to be all over that product.

Okay. Thanks, Marty, and then getting back to something you discussed earlier about the wireless access points and maybe that business starting to pick up a little bit. Is that related to Qualcomm's new MIMO mu effort? Or is that just one part of a larger whole?

I'm going to let Jeff answer that.

Are you talking about the MIMO mu? The multiuser MIMO 802.11ac?

Yes.

Yes, so those really haven't hit the streets yet but they are pushing those chipsets into the access points. We're starting to see some design requests on it. Most of what we're seeing is really just raw 802.11 and MIMO type of solutions six-port and four-port. And we're seeing -- there's in Terraces as we noted. Aruba and Cisco are all, I think, vying for the same business along the way. The mu multiuser is a little bit away still at this point. And it's really the traditional MIMO 802.11 and this that's driving the business right now.

Okay. Thanks, Jeff.

(Operator Instructions). And there are no further questions. I would now introduce Mr. Marty Singer for his closing remarks.

Thank you. I appreciate the introduction. And let me just thank all of you for participating in this call. We look forward to updating you at our next quarterly earnings conference call and I look forward to seeing all of you at upcoming industry events and the investor conferences which we will be attending. Thank you very much.

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