PCTEL, Inc. (NASDAQ:PCTI) Q4 2018 Earnings Conference Call March 14, 2019 4:30 PM ET
David Neumann – Chief Executive Officer
Kevin McGowan – Chief Financial Officer
Conference Call Participants
Marc Wiesenberger – B. Riley & Co.
Ladies and gentlemen, thank you for standing by. And welcome to the PCTEL’s Fourth Quarter 2018 Conference Call. At this time, all participants are in a listen-only mode. Later, we will open up the call for questions. Instructions for queuing up will be provided at that time. As a reminder, this conference call is being recorded for replay purposes.
I will now turn the call over to David Neumann, Company’s CEO.
Good afternoon. And thank you for joining us on today’s conference call to discuss PCTEL’s fourth quarter and 2018 fiscal year results.
Before we begin, I would like to introduce Kevin McGowan, PCTEL’s CFO. Kevin has been in finance and controller roles for 26 years, including the past 14 years of PCTEL. He managed a finance team at the company as the Vice President of Finance and was promoted to CFO effective December 1, 2018. We're pleased to have Kevin play a larger role as our CFO. Kevin?
Thank you, David. I'm excited to serve as the company’s CFO and to help the company reach its financial goals and meet its challenges.
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 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 quarter 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. I'll come in our fourth quarter in 2018 fiscal year results, provide an update on our tactical and strategic growth initiatives, discuss our business in China and share our outlook for 2019. Kevin will then discuss our financial results in more detail and he'll provide guidance for Q1.
We issued a press release after the market close announcing our results for the fourth quarter ended December 31, 2018 and our fiscal year. I'm pleased with our fourth quarter results and the momentum we have built coming into 2019. For the fourth quarter 2018, our sales are $21.2 million, an increase of 15% on a sequential basis. The cost reduction actions that we took in 2018 along with sales the of higher margin products which creates more profitable product mix contribute to improved non-GAAP earnings per share for the quarter even after severance payments associated with our reorganization. We achieved $0.03 in non-GAAP earnings per share for the quarter and gross margins of 40.9%, up 4.4% over the third quarter.
In late August 2018, we announced a significant reorganization of the company resulting in a single company-wide sales organization and the consolidation of our operations under a Chief Operating Officer. So we function as one entity instead of two separate segments.
Although we will report on our financials as one company, we will continue to report revenue gross margins for the two product lines. We see benefits of the reorganization and optimize deployment of our resources and institution of best practices on a company-wide basis. These changes have produced some encouraging, early financial results. In connection with reorganization, I made significant changes to the management team including a new CFO, COO and Chief Sales Officer and the addition of a Senior Director of Corporate Marketing, with experience in the wireless public safety market. I'm confident that we now have the appropriate corporate structure and management team, necessary to meet current market conditions and grow the business.
Our company continues to provide wireless technology solutions as a leading supplier of antennas and wireless network testing products. Our precision antennas are deployed in small cells, enterprise Wi-Fi access points, fleet management and transit systems, and in equipment and devices for an Industrial Internet of Things.
In our test and measurement product line, we offer tools we use to improve performance of wireless networks globally, focusing specifically on LTE, public safety and early 5G deployments. Our success in these wireless markets positions PCTEL for growth, while increasing value for our shareholders.
PCTEL is known for solving complex RF problems. Our long-term strategy is to leverage our antenna and RF expertise to provide turnkey industrial IoT solutions such as ruggedized access points in remote wireless industrial sensors for utilities, factories, fleet management and logistics markets. By extending our capabilities to provide industrial IoT solutions beyond antennas, we strengthen our relationships with customers who are experts at their specific application, but not necessarily experts in deploying wireless solutions. Expanding our product capabilities to provide complete industrial IoT systems, whether organically or through acquisitions, creates additional revenue potential with attractive selling prices and gross margin.
Government authorities at all levels have increased our focus on public safety and the safety of first responders. Reliable wireless communication is critical for mission control and reducing emergency response times. In Q4 we launched a Covert Bluetooth Wi-Fi antenna that as an example is currently being used in undercover border control vehicles. In addition to providing multi-frequency and multimodal antennas, we also provide scanner solutions to test in-building coverage and ensure first responders can communicate during emergencies.
To approve this capability, we added signal quality measurements for P25 an LTE networks to our popular scanner based in building tools. Our new signal-to-noise ratio, SINR measurement available in the IB flex scanning receiver, allows building owners that – easily verify proper coverage for first responders, and commercial and residential properties. PCTEL’s advanced multimode antennas and scanning test tools, help ensure that emergency personnel are safe.
5G in advanced applications like robotics, autonomous cars, and AI were focal point at the recent Mobile World Congress in Barcelona. Carriers have begun to deploy 5G networks and PCTEL is supporting the 5G rollout in a variety of ways. In addition to adding SINR for the IB flex, we also released signal decoding for the 5G new radio networks. This allows engineers to collect and to code important metrics like site identifier, synchronization channels and beam forming information.
As we previously announced, the 5G upgrade to IB flex is a software upgrade, which protects our customers’ investment in PCTEL tools and provides higher margin revenue for the company. The IB flex supports 5G networks using frequencies up to six gigahertz, while the HB flex scanning receiver, introduced in September, 2018, supports 5G networks in the millimeter wave bands up to 40 gigahertz. With these two solutions, PCTEL is now shipping 5G scanning receivers to the four largest wireless operators in the U.S., as well as international operators in Asia and Europe. The initial demand for 5G test and measurement equipment is strong and we believe it will continue through the year as hand tests become available later in 2019 and then network rollouts accelerate.
4G and 5G technologies will need to support dense indoor and outdoor deployments worldwide. We launched our CBRS omnidirectional and panel antennas at Mobile World Congress and they support 4x4 MIMO for deployments operating in a 3.5 gigahertz spectrum. Small cell infrastructure continues to be the preferred deployment model to increase capacity in dense networks. And we provide small cell antennas to the leading, global network manufacturers.
We continue to evaluate our business in China, any associated risks and costs of maintaining a PCTEL factory to manufacture antenna products. Although recent news is encouraging, we recognize that geopolitical risk and the competitive pricing challenges in price sensitive markets. To address these issues, we are transitioning the manufacturing of some of our antenna products to contract manufacturers in order to be more competitive and to improve our flexibility to match manufacturing capabilities to product type. We intend to keep a scaled out factory in China for highly customized and lower volume manufacturing, but there will be a reduction in our production workforce.
With that, I will now turn the call over to Kevin for a closer look at our fourth quarter and the 2018 fiscal year. Kevin?
Thank you, David. I will address the financial results for the fourth quarter and the fiscal year ended December, 2018. And I will provide Q1 2019 guidance. Revenue was $21.2 million in the fourth quarter and $83 million for the year, down 9% in the quarter and down 9% for the year, compared to the prior year. The 15% sequential revenue increase that David mentioned consisted of $1.5 million for test and measurement products and $1.3 million for antenna products. Test and measurement revenue was down 27% in both the quarter and the full year 2018, compared to 2017.
Lower spending and legacy systems by U.S. carriers in preparation for the capital expenditures required for 5G deployments, negatively impacted the revenues in the quarter and the year, compared to 2017. For the year, lower revenues in the Asia Pacific region accounted for approximately 25% of the year-over-year decline for test and measurement. However, revenues were higher sequentially for test and measurement, driven by initial orders for 5G.
Antenna product was down 2% in the quarter and 3% for the year, compared to 2017. In the fourth quarter, significant revenues for public safety projects and with U.S. carriers for network infrastructure offset lower revenues with enterprise Wi-Fi applications and site solution products, compared to the prior year. For the full year 2018, revenues were higher from enterprise Wi-Fi applications and with operators for network infrastructure, but lower for fleet and transit systems, compared to 2017.
As David mentioned, the fourth quarter gross margin improved to 40.9% as a result of cost reductions in a more profitable product mix. A higher percentage of test and measurement products, as well as a more profitable product mix within the internal product line contributed to the sequential improvement.
The fourth quarter gross profit margin was 3.1% lower compared to the same period last year due to lower volume and mix of test and measurement revenues. And the full year 2018 gross profit margin was 37.5% down 4.9% compared to the prior year. For the year, approximately half of the gross margin percentage decline is due to the lower volume and mix of test and measurement revenues and approximately half is attributed to price erosion in the small cell antenna market.
Adjusted EBITDA and non-GAAP earnings per share improved sequentially but compared to the prior year the declines in revenue and gross margin negatively affected both adjusted EBITDA margin and non-GAAP earnings per share. Adjusted EBITDA margin as a percentage of revenue was 6% in the quarter and 2% for the full year 2018 compared to 10% for the quarter and 9% for the full year 2017, non-GAAP earnings per share was $0.03 in the quarter and then negative $0.04 for the full year 2018.
The loss for the year includes $0.06 per share of restructuring costs related to the company's recent reorganization. In comparison non-GAAP net income was $0.08 in the fourth quarter of 2017 and $0.28 for the full year 2017.
Now let's turn to the first quarter 2019 guidance. We expect first quarter revenue will be between $20.5 million and $21 million, gross margin between 40% and 41%, and non-GAAP earnings per share between the $0.01 and $0.02. Before we take questions, I would like to turn the call over to David to make a few closing remarks.
Thank you, Kevin. The success that we had in Q4 is a result of the investments we made in R&D for new product development, the cost savings in both OpEx and COGS and strong execution by the team.
Wireless infrastructure devices and applications require reliable connections, and the complexity of our communications continues to increase across each of our vertical markets. High performance antennas and testing systems will continue to be important to serve Industrial IoT, public safety, 5G, enterprise Wi-Fi and fleet customers. PCTEL is positioned well to serve and grow with these markets. I would like to note that Kevin and I will be attending B Riley Investor Conference on May 22 in Beverly Hills. We look forward to meeting and discussing PCTEL with investors at the conference. With that, Kevin and I are available to answer questions. Operator?
[Operator Instructions] The first question comes from the line of Marc Wiesenberger, your line is open.
Thank you. Can you talk about some specific examples in which the reorganization has benefited the sales process?
Yes, sure. Marc, that's a good question. And one of the points that we wanted to make clear for some time is we originally did this reorganization, not necessarily as a cost savings initiative, but really to take the resources that we had in the scanning receiver group and in the antenna group and try to leverage the skillsets and the best practices across both groups.
So as an example, we were selling scanning receiver products in the public safety applications and we're also selling antennas in the public safety applications. There's really no reason that if the antenna team in the public safety space, if they were trained properly and had the right support that they can go after scanner deals as well.
So in bringing the two sales teams together, we were able to go after the public safety market and because we had some overlap instead of doing a headcount reduction, we took a group out of that combined team and we created a group that we've never had before and that's focused on business development.
So as a public company, we have quarterly responsibilities, sales team have annual quotas and when you ask a sales individual to go out and look for businesses is going to close in 18 months, you don't always get there their full attention. So by creating the business development team and putting together a different comp package, we now have a group that's looking at business that's going to close in eight months, a year, a year and a half. And we've been able to do that without adding additional headcount.
So in the public safety space, I think it's been a big plus, having the team focusing on business development and probably in the third area, each individual sales group when they were separate were following their own processes to forecast, to manage manufacturing. So we basically combined the best practices of both groups, brought it together and it sounds really encouraging that to see the team, work together to be collaborative and so far, so good.
Great. Thank you. Can you provide some updates on pricing in the small cell space and your kind of expectations throughout the FY19?
Yes. So small cell we have two large network equipment manufacturers that use our small cell antennas, one in China. Customers expect on a bid-to-bid through the bidding process to have price discounts over time. And some customers are more aggressive than others. Some of the antennas are more complicated than others and it's really up to PCTEL to be price competitive. So we need to be price competitive and we still need to maintain margins for the company and for shareholders.
And it's one of the reasons we're taking some actions in China now, we are looking at contract manufacturers because there are some product lines including some of the small cell antennas that could be more efficiently produced by contract manufacturers, leverage the supply chain of the CM to get better raw material costs.
So that’s one way that we're addressing the pricing challenge, but there's other way too, one is to do a better job designing some of the solutions up front. So it's designed for manufacturing so there's fewer components. It's not as complicated to build. That will cut cost and then we can provide discount to the end-customers as well. And then the last piece to really help control price is to have a better performing antenna, better features than the competitors because then it gives us some buffer to maintain price and maintain margins.
Sure, absolutely. Kind of along the China theme, have you seen an increase in, either some of the Connected Solution or antenna customers in China looking to source more from non-U.S. manufacturers as the trade war is kind of being prolonged.
We haven't seen that yet, but of course it's a risk. With most customers, they'll have two to three maybe four vendors of any component. So in some cases when most of the vendors are from the U.S. it makes it more challenging that to switch to another international vendor or to a Chinese vendor. So in some case you have some protection there, but that's another reason that we're looking at the contract manufacturers because it gives us some flexibility in bringing products in and out without having a large factory.
Understood. You previously talked about a shift in small cell deployments from kind of outdoor macro to indoor, has that played out as you expected and kind of what are your expectations around there going forward?
Well I think at least in the U.S. indoor systems are still predominantly DAS networks and I don't think that's going to go away. I think as we move into the new Wi-Fi standard the ac, ax and as we move into 5G more for private application, say in factories you will see more small cells. So let's say a factory that's using 5G to take advantage of the latency and the throughput, they have automated a manufacturing robotics you're going to need dedicated small cells to serve that and I think it'll do a better job than DAS.
But in general, I think small cells have a lot of room to grow for indoor and outdoor, just because you're not going to see a lot of large towers throughout the city. It's more cost effective. It's easier on the eyes to have the small cells on every building or every light pole versus the large towers.
Great. And one more from me and then I'll turn the call – I'll turn it back over. Can you talk about so maybe IoT applications spending and any interesting trends you're seeing that we should be on the lookout for?
So in the IoT space, we participate in a number of areas, so we don't necessarily call it out but even some of our antennas for fleet applications are in some ways an IoT application. So just because you have a GPS receiver and an antenna doesn't mean that you can add LTE and Wi-Fi and connect back to the Internet and have control over, not necessarily over the vehicle, but over the information going to and from the vehicle, say for public safety applications. We're seeing quite a bit of activity in smart cities. So there's IoT applications that control lighting, there's IoT applications that control the traffic signals. So that, I think that's a growing area and going back to 5G, I think with industry you're going to see more and more IoT applications in factories where latency is an issue in robotics.
And not necessarily seeing it too much in the autonomous cars yet, I think we're sometime away from that, but that definitely gets a lot of press.
Great. Thank you very much.
[Operator Instructions] There are no more questions over the phone. Mr. David Neumann you may continue.
Okay. Well thank you for joining the call. I believe we have the right team in place. We're improving execution to support growth for the benefit of all stakeholders, including our shareholders. And it's encouraging to see the results that we had in Q4 and the potential that we have coming in at 2019. I definitely want to thank our staff for improving operations, improving execution and most importantly for improving our results. So with that, so I like to thank everyone for joining and have a great afternoon. Thank you.
This concludes today's conference call. Thank you for calling joining, have a wonderful day. You may all disconnect.