PCTEL Inc (PCTI) 2020 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the PCTEL First Quarter 2020 Earnings Release Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I will now turn the floor over to Kevin McGowan, the company's CFO. Sir, the floor is yours.

Thank you for joining us on today's conference call to discuss PCTEL's first 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 in this unprecedented COVID-19 era, 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 first quarter of 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. I would like to start by saying that I'm pleased with our team's response to the COVID-19 crisis, and our ability to continue to address the needs of our customers that provide essential services for critical infrastructure.

My highest priorities are to keep our customers' employees safe, protect corporate assets such as cash and production capabilities, and continue to make investments to meet our customers' needs for our antennas, radio solutions and test and measurement equipment.

In our call today, I will cover 3 topics: our recently reported results for the first quarter 2020, the actions we are taking to mitigate our business risks associated with COVID-19 and our long-term opportunities based on expanded need for our connectivity products in this new global environment. Kevin will then cover our financials in more detail and share our guidance as we navigate through the sustained period of disruption.

The disruption caused by COVID-19 during the second half of the first quarter 2020 presented unprecedented challenges that continue through today. Nevertheless, through the efforts and dedication of our test and measurement team, Q1 2020 set a record for scanning receiver sales, driven by 5G global deployments. Overall, Q1 2020 revenue and earnings results were lower than planned, but I'm encouraged that we finished the quarter within our revenue and earnings guidance, despite the significant disruptions caused by the virus.

As you may have seen in our press release issued after the market close, we achieved $17.5 million in revenue and non-GAAP earnings per share of $0.01. We also achieved gross margin of 47%, up approximately 5% over last year. The most significant risk to our business in the short term are our ability to ensure a safe workplace for our employees and to deal with potential disruptions to supply chains for both product lines while stay-at-home orders are in place. As a supplier to critical infrastructure providers in markets such as 5G, enterprise wireless, public safety, utilities, fleet and rail, we are permitted to remain open as an essential business during these stay-at-home periods. On our last call, I reported that our manufacturing facility in Tianjin, China reopened partially on February 26 and then fully in early March, and it has been operating at full capacity since then.

We continue to diversify manufacturing through the transition of selective product lines from our Tianjin facility to contract manufacturers in China and Taiwan. This diversification will reduce our cost and diminish the impact on production of any future localized COVID-19 recurrences. Beginning in mid-March, our global office staff, including corporate, engineering, finance, marketing, customer support, IT and sales, have been working productively from home. Our U.S. production facilities remained open through March, and we are staffed by employees on a voluntary basis. We implemented protective measures at our facilities, including restricted access, distancing requirements, closing of meeting areas, increased sanitation, use of gloves and masks and other measures recommended by the CDC. Since then, we have made masks mandatory, and we have begun taking temperatures of employees entering the facility.

Since early April, our U.S. production facilities have been operating when possible given the circumstances at each location. At this time, we believe we have enough operational capacity to meet our customers' needs in the second quarter, assuming there are no unforeseen future closures.

Our customer support and sales organizations are doing an excellent job maintaining communications with our customers so that we jointly prioritize projects and product manufacturing. However, the COVID-19-related disruptions experienced by some of our customers have negatively impacted their ordering processes and our timely receipt of their purchase orders, which may ultimately delay our revenue recognition. We are managing supply chains in a similar manner by regularly discussing and prioritizing raw material needs across our facilities with our vendors.

The length and depth of the COVID-19-induced recession will determine the speed of the global recovery, but we believe this crisis has highlighted the importance of reliable connectivity for critical infrastructure and the need for enterprise wireless communications, whether they be WiFi or 4G, 5G networks.

We believe we are in a stronger position than many of our competitors as a result of our solid balance sheet and our ability to provide engineered products to critical infrastructure markets. The markets for our RF hardware products that enable connectivity and test networks remain strong and provide long-term growth opportunities for our business.

In our intelligent transportation and industrial IoT markets, our R&D investments and customer engagements continue to produce design wins. For example, we continue to see momentum in public utilities for antennas and integrated electronic solutions used for smart grid applications. In the first quarter, we won additional business for intelligent transportation for smart cities and have designed a complex multimode antenna system for rail applications. We are also seeing an increase in orders for our industrial IoT antenna solutions that improve communications and asset tracking in the health care industry.

Public safety and fleet continued to be important markets for PCTEL. We recently announced our new multiband antenna for police vehicles that is designed specifically to be installed on a ridged roofline without compromising performance. This antenna integrates our precision tracking with support for FirstNet and intelligent transportation systems using 4G, 5G cellular networks. PCTEL has a long history of selling our precision antennas to the military for radio communications equipment and for guidance systems for aircraft and missiles. Our high-performance navigation antennas incorporate unique high rejection capabilities that are used in military communications where interference mitigation is critical.

With respect to the global rollout of 5G, we see uneven demand based upon the impact of COVID-19 in certain areas with weaker demand in Europe. We believe this is a short-term issue. Given that 5G is still in early deployment stages with limited overall coverage, we expect demand for our scanning receiver products to remain strong over the next 2 to 3 years of deployment.

In the U.S., the merger of T-Mobile and Sprint should increase the demand for 5G test and measurement tools as its third major operator deploys 5G of both millimeter and legacy sub-6 gigahertz frequency bands. To address networks that use frequencies of both bands, we recently launched a significant upgrade to our HBflex scanning receiver that will allow operators to test both 5G millimeter and sub-6 gigahertz bands simultaneously during one test. This saves operators a considerable amount of time and cost during testing.

We are also pleased to announce that our industry-leading public safety scanning receiver solution that test P25 and DMR networks now also supports TETRA. TETRA is deployed globally and will increase our ability to provide our world-class public safety testing and antenna solutions to a broader market.

Looking forward, we expect test and measurement revenue for 5G testing to remain strong through 2020. Enabling connectivity for remote monitoring and controlling critical infrastructure is especially important during these times. Industrial IoT applications will drive antenna and radio revenue growth at a faster rate through the year as these IoT systems are implemented.

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

Thank you, David. I will address the financial results for the first quarter ended March 2020, and I will provide second quarter 2020 guidance. I will also discuss the steps the company is taking to maintain its strong financial position.

Revenues were $17.5 million in the first quarter of 2020, 15% lower compared to the first quarter of 2019. As David mentioned, this was a historically strong first quarter for test and measurement product revenues, driven by an increase in sales of 5G scanning receivers, upgrades to add 5G technology and an increase in sales of public safety applications. Revenues for test and measurement products increased 10% compared to first quarter last year to $6.1 million. However, antenna product revenues declined 24% compared to the first quarter of last year to $11.5 million. Some of our larger antenna customers delayed taking inventory of run rate products. In addition, the timing of customer purchase orders and supply chain disruptions due to the COVID-19 pandemic also impacted first quarter revenues.

The first quarter 2020 gross profit margin on a GAAP basis improved by 4.9% to 46.9% due to favorable product line mix of test and measurement products as well as a higher antenna gross profit margin as compared to the first quarter last year. The gross profit margin percentage for our antenna products was 2% higher in first quarter 2020 compared to the prior year due to a more profitable product line mix and cost reductions in our China operations.

Adjusted EBITDA was approximately $700,000 for the first quarter of 2020 compared to $1.4 million in the first quarter of 2019. Adjusted EBITDA margin as a percentage of revenue was 4% in the first quarter of 2020 compared to 7% for the first quarter 2019. Non-GAAP diluted earnings per share was $0.01 in the first quarter 2020 compared to $0.04 in the first quarter of 2019. The decline in first quarter 2020 non-GAAP earnings per share was primarily due to the lower gross margin contribution from the antenna product line.

Cash and investments declined $1.4 million to $38.3 million at the end of March 2020. In the first quarter of 2020, we generated cash from operations of $4.3 million primarily because accounts receivable declined by $3.4 million. We used cash of $2 million to repurchase approximately 375,000 shares, $1.1 million for withholding taxes for stock-based compensation and $1 million for the quarterly dividend.

PCTEL's balance sheet remains very strong with its significant cash and investments and no debt. We also expect sequential growth in revenues and earnings. However, due to uncertainties as a result of the COVID-19 pandemic and the potential financial impact related to disruptions in our operations, supply chain and customer demand, we are proactively managing our costs and our working capital. At the outset of the second quarter, we took several steps to reduce our expenses and conserve cash. We reduced operating expenses through reductions in salaries, Director fees and discretionary spending, and we terminated our share repurchase program to conserve the $5 million remaining in the program. We also reduced nonessential capital expenditures. We believe that being proactive will protect and strengthen our solid financial position.

As David mentioned, COVID-19 has presented unprecedented challenges that continue through today. These challenges make it difficult to accurately forecast financial results. Nevertheless, we want to give our investors some indication of our expectations for the second quarter based upon current information. Generally, we are forecasting higher revenues and earnings for the quarter. More specifically, we expect our second quarter revenues will be between $19.5 million and $21.5 million. Further, we project our GAAP gross profit margin percentage to be in the range of 45% to 47% and the non-GAAP earnings per share to be in the range of $0.05 to $0.08. The sequential increase in revenue is primarily driven by higher antenna product revenues. Again, we are making these projections based upon current information and circumstances, which could change.

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.

Our top 3 priorities in the short term are driven by the unknown length of the COVID-19 crisis and the potential depth of the crisis-induced recession. First, we have a talented and loyal workforce, and we will continue to take measures to protect them from the virus and do our best to maintain full employment. Second, we're in a strong financial position, we have access to capital, and we have taken additional steps to reduce expenses to alleviate the burden on cash. Third, we are in very competitive markets, and we will continue to make R&D investments as we have done in previous downturns to ensure we have the products our customers want and need.

Protecting our employees, managing our cash position and prioritizing R&D investments benefits all stakeholders. The demand for reliable connectivity solutions for critical infrastructure will continue well past this crisis. Our long-term strategy is to position the company to accelerate growth organically and inorganically when conditions stabilize.

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

(Operator Instructions) And our first question from Mark Weisenberger from RB Riley (sic) [B. Riley].

This is actually Aman jumping in for Mark. First question I wanted to ask, can you talk about what you're seeing from customers in terms of 5G rollouts, both domestically and internationally? Specifically, if you could talk about any changes in trends from the beginning of March relative to April and May?

Well, thanks, Aman, for joining us and asking the question. 5G rollout is still -- I would say still pretty aggressive. The U.S., China, Japan, South Korea, all have robust deployment plans. And even earlier this year, I think Verizon came out and adjusted their CapEx to increase it to address 5G. So in those markets, it's still relatively strong, and there's still a need for the test and measurement equipment, and we're providing the scanning receivers. Now keep in mind, too, that in some of the markets where it's officially deployed, it's typically deployed in areas where there's a need for capacity. It's not ubiquitous. So to get the full coverage even in the markets that are, I would say, a bit ahead of the game, it's going to take a year or 2 to really fully deploy the network. And if you look at historical networks, 3G, 4G, they typically have a life span of anywhere from 7 to 10 years, and we're still very early in 5G. So I would anticipate that the U.S. is going to be relatively strong for the rest of the year. And as I mentioned previously, the merger of T-Mobile and Sprint, I think, will drive that as well. And at some point, DISH will enter the picture, and then they'll need equipment for their 5G network. Asia is going to be strong, and we think there is a bit of a slowdown in Europe now, mostly because they're making additional investments in 4G versus putting in new more expensive 5G. And in general, given some of the work from home and municipality closures, it's just taking a bit longer to get the citing to put in new systems. But in general, we think we're pretty bullish on 5G and the test and measurement equipment, and we think it should be strong for the rest of the year.

Okay. That's helpful. And then shifting gears a little bit. Now that T-Mobile and Sprit have completed the merger, can you talk about some of the spending trends you were seeing from them going to the final phase of the merger? And then how you think that's going to change going forward and implications for PCTEL?

Yes. So for T-Mobile and Sprint, this is really driven mostly by the test and measurement equipment. So early on, even before the merger, T-Mobile was rolling out 5G. They're a relatively large customer of ours for the scanning receiver, and basically upgraded most of their equipment to 5G. In parallel, before the merger, Sprint is also using our test and measurement equipment. Now it's -- what's interesting is Sprint's is typically sub-6 gigahertz spectrum, the legacy 4G spectrum, T-Mobile was deploying a millimeter wave system and they've also gone to sub-6. But in Sprint's case, they had a number of units from PCTI that could be upgraded via software. So we upgraded those to support 5G. And now postmerger, we continue to upgrade tools to support them with the rollout.

Got it. Just last question for me. I wonder if you could talk about some of the potential impacts of COVID-19 on state and local governments in terms of like regulatory time lines for approvals of permitting and site access and all that sort of stuff. How do you think that's going to like impact CapEx time lines for your customers? How are you sort of thinking about that?

Yes. So that's a great question. With COVID-19, number one, there is still many unknowns. So we're making our projections, planning our business on what we know today, but there still could be additional changes. And then along the lines of your points you're making with the governments, and it's not just the government, I would say customers, in general, there's a fairly widespread work-from-home initiative. So it's just the general process of getting orders in, POs processed, it's taking longer. And with the municipalities closed, the area that we see the biggest impact is really with our public safety. The scanning receiver, historically, when we talk about scanning receivers, we're talking about the mobile operators. About 1.5 years ago or so, we developed some new technology to run on the scanners for public buildings to make sure that the public communication systems, P25, DMR systems, are fully functional, so that when first responders go into those buildings, they have confidence that they'll be able to communicate. So that product line for PCTEL has been doing very well. And now with COVID-19, the biggest challenge is the testers can't get access to the buildings. So like PCTEL, we're not allowing any external vendors in just to keep people safe, and that's inhibiting some of the testing of these buildings. And for that it's been -- our scanning receivers for public safety have slowed down a bit. But long-term demand, if anything, with COVID-19 and people working remotely and having the need to monitor things, having the need to control things remotely, I think it plays very well for the IoT market, plays very well for wireless communications, for 4G and 5G and WiFi. And so long term, I think PCTEL is in a very strong position to meet those needs. But with COVID-19, it's -- there's still a lot of unpredictability, and we just have to manage it day-by-day.

(Operator Instructions) And there appear to be no further questions. I'd like to now turn the call back over to David Neumann for any closing remarks.

Thank you, and thank you all for joining us this afternoon. Our team is extraordinary. I want to thank them as well for their contributions, flexibility and patience during these sometimes extremely stressful times. We look forward to updating you on our next call. Have a great afternoon, and thanks again.

Thank you. This does conclude today's conference. We thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.