PCTEL Inc (PCTI) 2020 Q3 法說會逐字稿

Welcome to the PCTEL Third Quarter 2020 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.

Thank you for joining us on today's conference call to discuss PCTEL's third quarter 2020 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 and projections based upon current circumstances. While these forward-looking statements and projections reflect PCTEL's best current judgment, they are subject to risks and uncertainties, particularly related to the COVID-19 pandemic, that could cause actual results to differ materially from these forward-looking statements and 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 the company's most recently filed periodic report on Form 10-K and subsequent filings, including the report on Form 10-Q for the third quarter 2020. The company assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates.

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 GAAP measures to our non-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. On our call today, I'll provide a brief update on the status of our facilities and health of our employees as we continue to successfully manage through the pandemic. I will outline our growth strategies that will enable us to emerge stronger from the recession. And finally, I will share a few examples of significant wins that give us the optimism that market conditions are improving for our products.

The significant investments and additional safety measures within our factories, and our policy changes made to address the pandemic, are keeping our employees safe while allowing us to maintain our high level of service to our customers. I'm proud that our management team has been able to keep all of our production facilities open and virus-free.

PCTEL supply chains continue to operate reasonably well, and we've been able to meet customer delivery schedules. Our employees have adjusted well to our modified operating procedures and work-from-home model. I believe we can continue to operate profitably through the worldwide economic recovery, as gradual as it may be.

For the quarter, our revenue and earnings were within our guidance. Our earnings were driven by improved margins in both product lines and strong demand for our 5G scanning receiver solutions. Our scanning receiver product line produced the highest quarterly revenue since Q4 2019, which is one of our best quarters for scanning receivers.

More importantly, for the future, we experienced a quarter-over-quarter increase in overall incoming orders. We remain profitable. We're generating cash, and our balance sheet is strong.

As you may have seen in our press release issued after the market close, we achieved $18.9 million in revenue, $2.4 million in adjusted EBITDA and non-GAAP earnings per share of $0.08. We achieved gross margins of 51% for the quarter, up 2.6% over the second quarter. The recession has resulted in challenges related to our customers' reduced demand for antennas and slower ordering processes.

As I mentioned in our last call, we believe we are near the bottom of the recession-induced decline in demand, and I'm encouraged to see that our incoming orders increased in the quarter. We expect market conditions to stabilize and gradually recover over time through 2021. We will continue to invest in products and technologies to improve our results in the short-term and accelerate the growth as markets recover.

I would like to highlight 3 areas that will contribute to our growth. First, you may have noticed PCTEL's new website with enhanced user functionality, our increased presence on social media and our popular technology-focused webinars. These efforts advance our global marketing strategy to increase quality leads and reinforce our message that PCTEL is an industrial IoT solutions provider with unique skill sets to solve complex RF challenges.

Second, the majority of our antenna and scanning receiver revenue is generated through OEMs and selected distribution partners. As we mentioned last quarter, we are working to expand our channel partners, and we added a new master distributor in Europe.

In the coming weeks, you will hear of new strategic distributor agreements to sell our antennas and scanning receivers, which will further broaden our reach. Our ability to add and leverage distribution channels is a key growth strategy. Along these lines, we believe that as we release new products targeted to government and military applications, we will significantly grow this revenue stream.

Our third growth strategy is to focus on new product initiatives on market-driven antenna, and tenant component and scanning receiver product needs. Although demand for some of our antenna products remains low due to temporary slowdowns in customer demand, our product development pipeline is robust and producing design wins.

We have several new programs and new customer engagements underway in all 3 of our vertical market segments. Our new product introduction funnel is particularly strong in intelligent transportation and industrial IoT segments, where we are leveraging our multi-band and GNSS and tenant design capabilities.

PCTEL received one of our largest blanket purchase orders of the year for our IoT-integrated antenna solution for utility applications, which has a positive impact on this quarter and for next year. Our industrial IoT access points, interface cards and wireless sensors began shipping last quarter to some of our leading customers in the industrial IoT space for their testing and integration. Several large international companies plan to use these industrial IoT components in their programs. At the beginning of the year, we were optimistic that these programs would contribute to our revenue growth in the second half of this year. We're still confident that these products will contribute to our growth, but we've shifted our expectations for receipt of purchase orders for the first half of next year as our customers recover from this general slowdown.

Citizens Band Radio Systems, or CBRS, and 5G are important for both our antenna and scanning receiver product line. CBRS is a shared frequency band in the U.S. that provides another option for private networks and industrial IoT applications.

In August, we announced the launch of our low-profile 5G antenna for industrial IoT and smart cities. With cable and utility companies having emerged among the top winners of the recent CBRS auctions, we have already started to receive interest in our antennas and scanning receiver products.

Our 5G scanning receiver business continues to perform well, and we expect the product line revenue to be near the level reached in 2019. We recently won one of the largest 5G scanning receiver orders in the company's history, with delivery planned through Q4. Sales to network operators through our valued OEM channels continue to be strong in North America and Northeast Asia, including China, Japan, South Korea and Taiwan.

We discussed the long-term drivers for 5G deployments during our last call, including the planned rollout of additional releases as defined by the 3GPP standards body. PCTEL is in a strong position to address those new releases and expand our 5G markets, given our global installed base of 4G scanning receivers, which can be easily upgraded to 5G.

It should also be noted that new spectrum auctions, like CBRS in the U.S. and millimeter wave allocations globally, along with unique 5G applications deployed in private networks, will increase demand for test and measurement equipment and our antenna solutions. Our antenna expertise complements our 5G scanning receiver capabilities.

In addition to designing 5G omnidirectional millimeter wave antennas for the 5G scanners, our antenna engineering team collaborated with our scanning receiver team to develop the only customized dual-polarized antenna solution available in the market to collect 5G measurements. This led directly to the sale of our 5G scanners and customized antenna solution to a top European network operator.

Although testing of public safety systems within buildings have slowed due to the inability to access buildings, we are on track to match our 2019 public safety revenue, and we're confident this business will grow as building access improves. The number of certified companies who are the primary buyers of PCTEL's public safety equipment increased in the third quarter.

In addition to organic growth strategies, we continue to evaluate and pursue inorganic growth initiatives and take advantage of our solid balance sheet, specifically with respect to complementary product lines for enterprise wireless, intelligent transportation and industrial IoT applications.

With that, I will now turn the call over to Kevin for a closer look at our third quarter and a discussion of our financials. Kevin?

Thank you, David. I will address the financial results for the third quarter ended September 30, 2020, and I will provide fourth quarter 2020 guidance.

As David mentioned, we continue to feel the effects of the COVID-19 pandemic and global recession in the third quarter, primarily impacting the timing of receipt of customer purchase orders and revenues in the quarter for our antenna product line. However, strong gross margins and lower operating expenses offset some of the impact of lower revenues. Revenues were $18.9 million in the third quarter of 2020, a decrease of $0.9 million sequentially, and 20% lower compared to the third quarter 2019.

Looking at the revenue by product line, revenues for test and measurement products were $6.8 million, an increase of $0.7 million sequentially, but 6% lower compared with the third quarter last year. The third quarter 2020 was a very strong quarter for products with 5 G technologies, but the decline in revenues compared to last year is primarily attributable to lower revenues for products with technologies other than 5G.

Antenna product revenues decreased sequentially by $1.6 million to $12.3 million and declined 25% compared to the third quarter last year. Antenna revenues for intelligent transportation and public safety were lower compared to the third quarter 2019.

As compared to the third quarter last year, the third quarter 2020 gross profit margin on a GAAP basis improved by 5.5% to 50.6% due to a higher mix of higher-margin test and measurement products as well as higher gross profit margin percentages for both antenna products and test and measurement products.

Gross margin percentage for antenna products was 0.5% higher in the third quarter of 2020 compared to the prior year due to a more profitable product line mix and cost reductions in our China operations. The gross profit margin percentage for test and measurement products was 8.2% higher in the third quarter of 2020 compared to the prior year as a result of more profitable product mix, lower costs related to inventory reserves, lower employee costs and the absence of amortization expense and cost of sales due to full amortization of intangible assets in the first quarter of this year.

Operating expenses on a non-GAAP basis were $8 million in the third quarter of 2020, higher by $0.6 million compared to the second quarter of 2020, but lower by $0.5 million compared to the third quarter of 2019. Effective July 2020, we restored most employee salaries to their 2019 level. However, lower expenses for our variable compensation plans and other discretionary spending areas contributed to the decrease in operating expenses compared to the prior year.

Net other income and expense was negative $0.1 million in the third quarter of 2020 compared to positive $0.4 million in the third quarter of 2019. The net expense was due to lower interest income and foreign exchange losses in the third quarter of 2020.

Adjusted EBITDA was $2.4 million for the third quarter of 2020 compared to $3.1 million in the third quarter of 2019. Adjusted EBITDA percentage as a percentage of revenue was 12% in the third quarter of 2020 compared to 13% for the third quarter of 2019. Non-GAAP diluted earnings per share was $0.08 in the third quarter of 2020 compared to $0.14 in the third quarter of 2019.

PCTEL's balance sheet remains very strong with its significant cash and investments and no debt. Cash and investments, including long-term investments, increased during the third quarter by $1.7 million to $41.3 million. Free cash flow was $2.6 million as we generated cash from operations of $3.5 million in the quarter. We generated cash flow from working capital because of reductions in accounts receivable and inventories.

On October 22, 2020, we declared a regular quarterly dividend of $0.055 per share on our common stock. This dividend will be paid on November 16, 2020, to shareholders of record at the close of business on November 9, 2020.

Due to uncertainties as a result of the pandemic and the potential financial impact related to disruptions in our operations, supply chain and customer demand, it continues to be difficult to forecast financial results. We would, however, like to provide our investors with insight about our expectations for the fourth quarter.

We are forecasting revenues between $19 million and $20 million for the fourth quarter. We project our GAAP gross profit margin percentage to be in the range of 48% to 49%, and the non-GAAP earnings per share to be in the range of $0.06 to $0.09. We are making these projections based upon current information and circumstances, which could change possibly significantly. We will continue to manage our costs and our working capital to protect and strengthen our solid financial position.

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 would like to share a few closing thoughts. The recession this year has impacted many businesses, including those in the technology sectors. As I mentioned earlier, I'm pleased with how our team responded to the challenges of the pandemic, and our ability to maintain a high level of service to our customers, while managing to keep our employees safe.

We have remained profitable, and I'm confident that we will see improvements in our operating results as we finish 2020 and begin the new year. PCTEL remains in a strong financial position, and we serve attractive markets that will grow over the long term. Testing wireless infrastructure, deploying industrial IoT custom hardware and enabling wireless connectivity will continue to be important as the world increasingly relies on industrial remote access and the ability to work from anywhere.

I would also like to note that for those who'd like to learn more about PCTEL, Kevin and I will be attending the Southwest IDEAS virtual investor conference on November '19. With that, Kevin and I are available to take questions. Operator?

(Operator Instructions) And our first question comes from Marc Wiesenberger from B. Riley.

And this is actually Aman jumping in for Marc. So yes, I guess, my first question, can you talk about your pipeline with regards to antenna products? And how many projects or orders are in the trial or pilot phase?

And how many are ready for commercialization or implementation? And typically, what's the time line for moving from the former to the latter?

Yes. Thanks, Aman. Thanks for joining. Thanks for the question. I'm not necessarily -- we're not going to go into details on product by product, but what I can tell you is that, at any given time, we have about 40 to 50 NPI projects in the pipeline. Some of those are customer-driven NPIs at different levels of complexity.

Some of these projects, as an example, and some of the ag projects we've done in the past, were actually about 18 months or 2-year cycles. And others are modifications to existing platforms that we can develop relatively quickly. But even with those, they're probably 3 to 6 months in development.

And then the other category of new product introductions are those that PCTEL sees an opportunity for in the market. Where we'll see a need that's not met, we'll make a decision that we're going to make some -- make the investments, do the engineering, develop that product and then release it to the general market.

One other comment with the NPIs, we try to maximize as much as possible. And that is, even once we do a customized system or a customized solution, a lot of that technology can be reused for market-type products. So we try to leverage our engineering, take a -- sometimes we refer to it as a LEGO approach, building the detailed subassemblies and then being able to mix and match those as we need to.

Got it. That's helpful. And so my next question, can you talk about the move from 5G stand-alone to 5G nonstand-alone? Sorry, other way around, from 5G nonstand-alone to 5G stand-alone? Does that create any additional opportunity for PCTEL?

Because my understanding is that providers in China all have started moving to 5G stand-alone. Is that sort of consistent with what you're seeing? And do you see that as a potential opportunity for PCTEL?

Yes, I think you're right. China did go right to stand-alone relatively quickly. From our perspective, though, it doesn't matter a lot because -- and the big difference between a nonstand-alone and stand-alone is, with nonstand-alone, you're using the 4G LTE network to set up the initial connection, and then you switch it over to a 5G connection. Stand-alone is doing everything independently.

So for the testing applications, you still have the same issues with the RAN. Our scanning receivers are measuring the signal coming from the tower to the UE. So you want to optimize coverage, you want to look for interference, benchmark the systems. So from an operator testing perspective, the application doesn't change too much.

But what the stand-alone version does do, and I think is -- which is very interesting is, for private networks, you don't necessarily need to have a private "LTE" network in the same facility and then add 5G to it. So stand-alone, I think, will accelerate private 5G applications.

And then, for us, it's good because it's another testing application. We do have software tools that we use with the scanning receivers that allow you to collect in-building. And so the stand-alone, I think, opens up additional applications, which expands the market. But the testing application is pretty consistent across both types of 5G.

Got it. And then can you talk about the potential impact of the recent CBRS auction, the winners, as well as the upcoming C-band auction in December?

Yes. So CBRS and, actually, C-band, in general, any new band is good for test and measurement, whether it's PCTEL or other test and measurement companies. And I think one of the advantages that we have with our tools, our 5G scanning receivers and 4G scanning receivers as well, are all software-defined radios. So that means they support a range of frequencies in the sub-6 gigahertz band from 100 megahertz up to 6.2 meg, I believe, and then also in the millimeter waves as well.

So as long as the new frequency bands that are released for auctions -- release of new frequency bands, as long as those fall in those ranges, then from PCTEL's perspective, it's simply a software upgrade that enables that band in the customers' unit. So it's -- I think it's a huge benefit for our customers because they don't have to buy a new gear. And then it's also a benefit for PCTEL because it's a software upgrade, and it's a relatively high or pure margin.

From a market perspective, the CBRS definitely opens up new applications for shared spectrum needs. And I think a big benefactor of that, again, will be private networks, which is where you want to deploy a system. You don't necessarily want to pay for licensed spectrum, and you're willing to share the spectrum with others, as needed.

Got it. That's very helpful. Just last question for me, if I may. Can you talk about what you're seeing in terms of millimeter wave deployment in outdoor and indoor environments? As we see an acceleration, what impacts will that have on your business? Do those deployments potentially expand your underlying customer base?

So millimeter wave spectrum is really operator-dependent. We're seeing a lot of it, and I think some of the first movers were in the U.S. And we had -- I believe we had the first 5G scanning receiver that supported both millimeter and sub-6 gigahertz. So it's been a good market for us in the U.S. .

So it's really driven by the operators on how much millimeter wave they're going to use and where they're going to use it. Initial deployments were mostly to cover hotspots, where there is a dense user environment, coverage issues. Millimeter wave works extremely well to increase throughput, but it doesn't travel as far.

It's not as friendly around going around buildings. So it's a rather denser footprint, which is exactly why you need a scanning receiver. Because if you have more and more sites that are closer and closer together, there's a possibility that they're going to interfere with each other. You need to make sure they're optimized, and it's really a driver for the scanning receiver technology.

Now globally -- and it's not just millimeter wave, but globally, I mean, there are still quite a few countries that are auctioning or haven't even started to auction their frequency bands for 5G, whether it be sub-6 or millimeter wave. So although we're seeing a great business in the U.S., I would say, a great, excellent business in Northeast Asia with some of the Tier 1 operators that are deploying 5G, 5G is still very early in the technology rollout cycle. And as Europe -- I guess, as the world recovers from the pandemic and some of these frequency auctions are completed, we see quite a bit of growth in Europe and the rest of the world as well.

(Operator Instructions) And there appears to be no further questions at this time.

Okay. Thank you all for joining us this afternoon. I definitely would like to thank our employees for their contributions and taking care of our customers. The challenges in 2020 have made our organization stronger and made us more determined to succeed. So we look forward to market conditions improving and updating you on the next call. Thank you.

Thank you for joining us today for PCTEL's Third Quarter 2020 Earnings Call. This concludes our conference. You may disconnect your lines at this time, and have a great day.