PCTEL Inc (PCTI) 2019 Q4 法說會逐字稿

Welcome to the PCTEL Fourth Quarter 2019 Fiscal Year Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I will now turn the call over to Kevin McGowan, the company's CFO. Please go ahead.

Thank you for joining us on today's conference call to discuss PCTEL's fourth quarter 2019 financial results. With me today is David Neumann, the company's CEO.

Before we begin, let me remind you that this call may contain forward-looking statements. While these forward-looking statements reflect PCTEL's best current judgment, they are subject to risks and uncertainties that could cause actual results to differ materially from these forward-looking projections. Risk factors that could cause PCTEL's actual results to materially differ from its projections are discussed in the earnings press release, which was issued today, and in our most recent annual report on Form 10-K, both of which are available on our website.

Additionally, our commentary will include reference to the following non-GAAP measures: non-GAAP earnings per share and adjusted EBITDA. We believe these non-GAAP measures facilitate comparability of results over different periods. A full reconciliation of these non-GAAP measures to our GAAP measures is included in our quarterly earnings press release that was issued earlier today.

With that, it's now my pleasure to turn the call over to David Neumann.

Thank you, Kevin. Welcome, and thank you for joining us this afternoon. I will cover 3 topics in our call today: our recently reported results for 2019 and the fourth quarter, the risks to our business associated with the coronavirus and recent product updates for the scanning receiver and antenna product lines.

Over the past several years, we have invested heavily in engineering, product development and sales to address 5G and industrial IoT emerging technologies. These investments and the capabilities we developed distinguish PCTEL from our competitors, and our stakeholders are realizing the benefits of these investments.

As you may have seen in our press release issued after market close, our non-GAAP earnings per share increased from a negative $0.04 in 2018 to $0.47 in 2019, and our revenue grew by more than 9% over 2018 to $90.6 million. The product mix with increased sales of higher-margin scanning receivers and the improved gross margins in our antenna products contributed to our strong results.

In the fourth quarter 2019, we achieved a historic high for quarterly revenue generated by our test and measurement product line. Overall, our fourth quarter revenues were $22.9 million, and we achieved $0.16 in non-GAAP earnings per share on gross margins of 50.3%, up 5.2% over the third quarter. Adjusted EBITDA and non-GAAP earnings per share increased both sequentially and compared to last year. As mentioned in our last call, we believe we can maintain favorable margins on both product lines through 2020.

With respect to China, we are thankful our team is healthy. The coronavirus presents 3 risks for PCTEL: First, we have significant employee presence in China. We were proactive from the start of the coronavirus outbreak, and we are happy to report that the team has returned to work on a part-time basis. Our Tianjin factory opened on February 26 with 50% manufacturing capacity, and we received approval this week to return to 100% capacity on March 9.

Second, most of our antenna supply chain originates in China. Supply chain disruptions within China can limit our ability to manufacture certain antenna products. We don't believe there will be a supply chain impact in Q1 for scanning receivers because these products are manufactured in Maryland and have adequate inventory on hand.

Third, a global economic downturn may impact our customers and reduce their demand for our products. Kevin will comment later on the anticipated impact on Q1 revenue.

We continue to execute on our supply chain strategy to mitigate risk, which includes diversification of production inside and outside of China. After careful consideration of costs, logistics capabilities and availability of key components, we are transitioning certain product lines from our Tianjin factory to contract manufacturers in China and Taiwan. The manufacturing transition will continue through 2020.

On the products front, we continue to execute on our strategy to fortress our enterprise wireless business, which includes 5G scanning receivers, public safety and our enterprise WiFi portfolio. We recently received an enterprise WiFi design win for embedded antenna system for a major OEM.

For 5G, operators are in early stages of the rollout, which includes deploying infrastructure to improve coverage and increase capacity in dense user environments. Wireless operators use our scanning receivers globally to confirm 5G coverage, identify interference and troubleshoot RF issues across licensed frequency bands.

For operators that need to test both low and high-frequency bands, PCTEL recently launched an upgrade to our popular HBflex scanning receiver that allows simultaneous testing across all technologies and bands. This feature will make it easier for operators to test multiple bands and to benchmark competing networks.

Enterprise WiFi and 5G are connectivity enablers for industrial IoT. Industrial IoT is all about analytics, predictions and control. Without data from remote wireless sensors, there are no analytics. With our reliable wireless connectivity to sensors, there is no data. Our antenna and radio solutions enable wireless connectivity to ensure that industrial IoT systems have reliable data for analysis and manufacturing, mining, rail and utility applications, to name a few.

Just recently, we won 3 significant smart grid projects, which included our multiband and Yagi antennas for the FirstNet network dedicated to public safety. Our fourth smart grid win included an integrated LTE device and antenna for underground power transmission and monitoring.

Within our intelligent transportation market segment, we anticipate additional project wins at other major cities this year for advanced antenna systems that support monitoring and control of traffic signals at intersections. Our growth in these segments in 2019 plus these wins reinforce our belief that intelligent transportation and industrial IoT market segments will grow significantly over the next several years to address needs in fleet, transit, energy and manufacturing applications.

We also made a significant step towards broadening our industrial IoT offering beyond antennas to include industrial IoT radio products. In Q4, we launched our industrial IoT access point and industrial IoT radio module. These new products will be sold through our existing sales channels and allow us to offer more products to the same customer base. Our access point is designed to support high throughput over wide temperature range and deliver reliable WiFi 802.11ac connectivity for industrial IoT and outdoor applications.

Typically, access points connect to many IoT modules. PCTEL's IoT radio module for WiFi can be installed in a wide variety of products, including robotics for factory and warehouse automation. We will continue to focus on our strengths, specifically enabling wireless connectivity. We are confident that developing products that solve complex wireless challenges across our target markets will lead to sustainable growth.

With that, I'll now turn the call over to Kevin for a closer look at our fourth quarter. Kevin?

Thank you, David. I will address the financial results for the fourth quarter ended December 2019, and I will provide first quarter 2020 guidance. Revenues were $22.9 million in the fourth quarter 2019, 8% higher compared to the fourth quarter 2018 but 3% lower sequentially. Revenues for test and measurement products were higher sequentially and compared to last year, while revenues for antenna products were lower, both sequentially and compared to the fourth quarter last year. With continued strong sales of scanning receivers with 5G technology and for public safety applications, test and measurement product revenues were $7.8 million in the fourth quarter 2019, the highest revenue quarter of the year for this product line and $2.8 million higher than last year's fourth quarter.

Antenna product revenues were $15.1 million in the fourth quarter 2019, 7% lower compared to the fourth quarter of 2018 and 8% lower sequentially. Fourth quarter antenna product revenues were lower with applications related to small cells, enterprise WiFi and for fleet compared to fourth quarter 2018.

Fourth quarter 2019 gross profit margin for GAAP improved by 9.4% to 50.3% due to the favorable product line mix of test and measurement products and higher antenna gross profit margin percentage. The gross profit margin percentage for antenna price was 4.1% higher in the fourth quarter 2019 compared to the prior year due to a more profitable mix.

Adjusted EBITDA was $3.7 million for the fourth quarter 2019 compared to $1.2 million in the fourth quarter 2018. And adjusted EBITDA margin as a percentage of revenue was 16% in the fourth quarter 2019 compared to 6% for the fourth quarter 2018.

Non-GAAP diluted earnings per share was $0.16 in the fourth quarter 2019 compared to $0.03 in the fourth quarter 2018. The fourth quarter 2019 non-GAAP earnings per share was significantly higher compared to last year because of the higher test and measurement product revenues and higher gross profit margins for both product lines.

Cash and investments increased by $1.6 million to $39.7 million at the end of December 2019 as free cash flow was $2.4 million during the fourth quarter 2019.

Last quarter, we announced a $7 million share repurchase program. This share repurchase program affords us the flexibility to be opportunistic in our capital allocation strategy and offers us an opportunity to reiterate to our shareholders our confidence in the strength and future growth potential of PCTEL. The company also continues to actively pursue acquisitions that can help us grow our business going forward.

Now let's turn to first quarter 2020 guidance. We expect first quarter revenues will be between $17.5 million and $18.5 million. The GAAP gross profit margin percentage is projected to be in the range of 46% to 48%, and the non-GAAP earnings per share is projected to be in the range of $0 to $0.03.

Revenues for test and measurement products are projected to be higher compared to the first quarter 2019. However, revenues for antenna products are projected to be lower sequentially and lower compared to the first quarter 2019. The revenue decline with antenna products is due to a large project ending in the fourth quarter of 2019, delays with taking inventory with a few of our larger OEMs and due to disruptions in the demand for our products and in our supply chain as a result of the coronavirus outbreak.

Before we take questions, I would like to turn the call over to David to make a few closing remarks.

Thank you all for joining us. Before we take questions, I'd like to share a few closing thoughts. The investments that we've made in the past few years have positioned PCTEL well for the rollout of 5G and the implementation of wireless industrial IoT applications. We expect the demand for 5G and public safety scanning receivers to remain consistent through the year. Antenna and radio product deliveries are more susceptible to disruptions caused by the coronavirus, but we believe there continues to be a need for quality antenna and radio products that will drive growth and increase shareholder value over the long term.

With that, Kevin and I are available to take questions. Operator?

(Operator Instructions) And we'll take our first question from Jaeson Schmidt with Lake Street.

I just want to start with the Q1 guidance. Obviously, the coronavirus situation is more than fluid. But hoping you can help us understand or maybe quantify the impact from that you're seeing and really the impact on Q1.

Yes, it's difficult, Jaeson, to quantify. We do know that it's a component of the antenna revenue decline, but not the only reason. There has been a meaningful impact with our factory being down for a month. Our CM is being down for several weeks and from a customer demand, but we'll have a better estimate of the impact when we report Q1 in May.

And Jaeson, another important point too is really to understand the makeup of the different revenue streams. And yes, the coronavirus is having some impact. But we have a set of OEMS, larger distributors, that are really long term, high-running customers, and we build and manufacture to their inventory needs. So coming into Q4 -- even somewhat in Q4 and then into Q1, 2 of our larger OEMs had a reduction in need for some specific antennas, which affected us directly. We've talked to both customers. Their outlook for 2020 is as strong as it was before, so we think those are temporary. But that also impacted Q4 and, to some extent, Q1.

A couple of other points on Q1. Historically, Q1 is typically a lighter revenue quarter, looking at it from a seasonal perspective. And in addition, with last year PCTEL being restricted to sell from -- to one of our largest Chinese OEMS, we were able to cover a good portion of that with some project wins towards the end of 2019, but they're significantly lower coming into Q1 this year than they were last year. The scanning receiver business is, I think, more predictable. It's more transactional, short-term and really driven by the rollout of the 5G network. So I don't see any concerns there. But I think that the major component for Q1 is some slowness with some of the OEMs that they expect to recover later in the year.

Okay. That color was very helpful. And then shifting gears to the intelligent traffic control systems. It seems like some early nice traction there. Can you just walk us through why you're seeing such success in that market and why you're winning these projects?

Well, I think part of it is our general approach to some of these projects, and the intelligent transportation traffic signal product specifically had some pretty tough RF requirements and then also mechanical requirements. So it wasn't an antenna that was off-the-shelf that they could use. We spent probably close to a year designing the electronics and then putting it into an enclosure that was pretty much indestructible so that they could put it at the corner of intersections accessible to the general public. So once you put that time in and you get approved by the end customer, it creates some stickiness and barriers to entry for us. We have relatively large deployment. And I think you'll remember that specific project, it was our largest single antenna sale ever at PCTEL. And that was one major city. So we're looking forward to doing trials and additional cities in the U.S., and we think that that could contribute in 2020.

Okay. And the last one for me, and I'll jump back into queue. I know the antenna market can always be pretty competitive from a pricing standpoint. But are you seeing anything out of the ordinary just given the current macro backdrop?

No, we're not. I think it goes back to that most of our antennas are more or less custom-designed for a specific application, and then they become a high runner for general distribution. So as long as you stay away from the commodity antennas, you tend not to have as much price pressure. And not that we ever want to lose an account, but there was quite a bit more pressure on pricing in China. And now that that's a smaller portion of our business, it actually helps the product mix in terms of margins.

And our next question comes from Marc Wiesenberger with B. Riley FBR.

Very nice gross margin expansion, both on a year-over-year and quarter-over-quarter basis in the test and measurement. Could you elaborate, I guess, specifically what primary factors drove the sequential improvement? What changed kind of from 3Q to 4Q? How should we think about it going forward? And then maybe the -- what kind of traction are you seeing with the customers doing software upgrades for the HBflex?

Marc, yes, with the margin expansion for test and measurement in Q4, that was what you alluded to, it's with -- a higher percentage of the revenues were for 5G software upgrades. So these are the upgrades for the scanning receivers used to test the 5G technologies that's been deployed at the lower frequencies, not the millimeter wave. So that was a higher percentage in Q4. Looking forward, again, we can see visibility in Q1. It looks like it's going to be, again, favorable mix-wise with upgrades.

And in terms of upgrades, Marc, it's really driven by the frequency band. So for the scanner installed base that we have in the field for a 4G that's using 6 gigahertz or less, those are predominantly IBflex scanning receivers. And they will support 5G as long as the end customer is using those frequency bands that are the lower frequency bands. For -- 3 of the operators in the U.S. are using millimeter wave. They bought the HBflex. Keep in mind, too, that millimeter wave is popular in the U.S. and a couple other countries. But globally, most of the 5G deployments are at the sub-6 gigahertz range or frequency bands.

So we think there are opportunities to do software upgrades for those units. Also keep in mind, though, that outside the U.S., I think there's still almost 40 countries that have not auctioned spectrum yet for 5G. So there's still some runway, but it's going to take some time for those countries to auction spectrum and then start deployments.

Understood. Could you talk about the uptick in sales and marketing, how we should think about that going forward? And maybe where that was allocated and how that should help the business going forward?

In Q4, Marc, the -- predominantly it was higher commission expenses and some sales meeting costs that's just traditionally a little bit higher in Q4. It should even out or normalize starting in Q1.

Got it. I guess the situation is evolving and you do have some visibility, but how should we think about linearity throughout the course of the year? Are you envisioning the 2020 to be a more back half-weighted story? And maybe some dynamics that we should think about from a quarterly perspective?

Well, looking at 2020, I think more of the wild cards is this coronavirus and what that does eventually to market demand globally. I've seen some reports that are saying, worst case, could be a global recession in 2020, which wouldn't help us at all. From a quarterly perspective, historically, Q2 -- or Q2 is usually a pretty good quarter both for antennas and for test and measurement business. Q3 falls off a bit mostly from the scanner business and vacations in Europe. And then Q4 is typically a strong quarter for us as well. So from a seasonality perspective, I don't see that changing.

If there's going to be additional revenue in the second half, it'll come from our radio products. So we launched the access point and the radio module in November of '19. The radio module will be ready for delivery to end customers in the second half of this year so that could provide some increase in revenue. But from a scanning receiver perspective, I think it's going to follow historical trends. And then the -- as I said, the wild card with the coronavirus and given that we do quite a bit of manufacturing in China, we have a couple of risks there. One is supply chain, which is all over the news. Two is having our staff in the factory. And as we said earlier, we expect next week that we'll be 100% staffed. And then the third component is really the demand for products globally.

So some of the estimates I've seen anticipate this turning around in Q2, with China supply chain ramping up relatively quickly. But the wild card really is where are these hotspots globally and what does that do to demand. Korea is an issue. Italy is an issue. We don't necessarily do a lot of business in those countries today. But until that starts to resolve itself, it's really hard to predict how fast the market is going to recover. The feedback that we get from our customers, and I mentioned with the 2 large OEMS, they're not changing their view. We think we'll catch up there. But this whole virus kind of throws a wild card in there.

Sure, understood. You talked about transitioning to contract manufacturers in China and Taiwan. Has your thinking on that evolved during this kind of outbreak? And maybe if you could give us a breakdown of what percentage you're going to keep in China and maybe what proportion is going to be moved to Taiwan.

I can tell you that -- well, I think you know, too, we've started this process to derisk our China exposure more than a year ago. And we have now moved one or more product lines out of the factory into a CM, which is still in China, but gives us a little bit more flexibility. And then we've also selected a CM in Taiwan. It's going to take us probably through 2020 to finish that migration. And when we initially set this plan, we obviously didn't know this -- we're going to have this issue with the coronavirus, so it's definitely -- we're thinking about that now. But even if we were to take more aggressive action to move out of China, it would be difficult to do any faster than the time line that we have now.

And it's also important to note, too, that some of the products, it makes sense keeping them in a PCTEL factory. They're not necessarily high runners. They're not set up to particularly use CMs well that are -- CMs usually want high-running products that are automated. So I think it's difficult right now to say that we would not have some type of factory in China. But the -- to give you a percentage of what business is going to be in our factory and what business is going to be in CMs, we just can't do. I mean this is even more a fluid situation now that we're monitoring day-to-day, speaking with our customers and our suppliers on a daily basis. We need to get through this issue first, and then we will continue with the plan that we have in place, which will take us probably through 2020.

Sure. That was very helpful. Just 2 quick -- 2 more quick ones for me. You talked about intelligent transportation wins this year. Can you kind of give us a time line on when we might be able to expect hearing about those and when you would get them?

When we will get them. These -- a lot of the intelligent transportation systems and products are -- end up going through municipalities. So it's, I would say, difficult to pick a month or a quarter when they're going to close because some of this is driven by funding at the city level. And then also keep in mind, too, that we're supplying the antenna component of a larger system. So there are larger OEM vendors that are really driving the sale. I don't think we're in a position now to say that we're going to close specific deals on a specific date, but we know that we're the only antenna approved for this type of system.

There's 2 major U.S. operators that are pushing this as far as their IoT initiative to cities across the U.S. So we're comfortable that we're in a good position. But I don't have enough information to give you a date on when we think these will close.

Sure. Okay. And then final one for me. You guys have frequently talked about looking for some small, maybe tuck-in strategic acquisitions. With the volatility and prices coming down in the public, and I imagine private markets, are you seeing anything that you would be interested on acting on in the near term that's changed with the market volatility?

Well, so for the tuck-in acquisitions, these are typically private companies. So the volatility in a market, I don't necessarily think it changes the owners' -- necessarily changes the owners' mindset that they need to sell for a lower price. The biggest challenge, and we've talked about this quite a bit, is working with private companies and getting a fair valuation, doing some type of a purchase agreement with an earnout that really provides some upside for the company that we're buying and then also de-risks going for these smaller companies for PCTEL. So I don't know if we've necessarily seen any changes in valuation.

I can tell you that we've looked at many companies. We have an active program in place. We're looking at specifically in the IoT space and antenna companies preferably in Europe where we could bring their products into the U.S. and build their business and then also provide some of our products through their sales channels in Europe. There are ongoing conversations on a regular basis, but we're not in any position to really go into any more detail. As soon as we know, we will let you know.

(Operator Instructions) And we have a question from Tim O'Connell with Chain of Lakes.

Some of my questions were already answered, but just one kind of a clarification on this Q1 revenue guidance. So it's attributed to OEMs reducing their inventory of your antennas. But did I hear it right in that they're not seeing end demand changes for this year, though, for those products?

I don't know if we necessarily said demand changes. They -- basically, they don't see a difference in the outlook for their year. So we could interpret that to be demand. But yes, they don't see necessarily weakness for the product lines that they're buying from PCTEL. And with the antenna products, it's -- it can be -- there can be some volatility between quarters and quarter-to-quarter, especially with some of the larger OEMS, which they're managing their supply chain as well. So yes, so that was one component. And then a part of it, too, is there is some, I would say, supply chain risk with getting products out of getting the products out of China.

Okay. Regarding the share buyback that was authorized, I assume there hasn't been anything done with it yet. I didn't look at the 10-K to this point. Is that still...

I can let Kevin address this, but we -- the buyback was approved by the Board. It's in place. We did not buy back any shares in Q4.

We'll report on Q1 activity in the next call.

And that does conclude our question-and-answer session for today. So I'll turn it back over to David Neumann for any closing remarks.

Thank you, and thank you for joining us this afternoon. I'd also like to thank the team and our partners for contributions in 2019 and of course, the hard work that they're putting into 2020. We look forward to updating you all on the next call. Have a great afternoon.

Thank you for joining us for today's PCTEL's Fourth Quarter 2019 Earnings Call. You may now disconnect your lines.