Wireless Telecom Group, Inc.

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Good day, ladies and gentlemen, and welcome to the Wireless Telecom Group Q2 Earnings Call. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mike Kandel, Chief Financial Officer. Sir, the floor is yours.

Thank you, operator. Good morning, everyone, and thank you for joining us on today's conference call to discuss Wireless Telecom Group's second quarter 2022 financial results. With me today is Tim Whalen, the company's CEO. Before we begin, I would like to remind everyone on the call that our remarks today include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In some cases, such forward-looking statements may be identified by terms such as believe, expect, seek, may, will, intend, project, anticipate, plan, estimate, or similar words, as well as statements that do not relate strictly to historical or current facts. The company's forward-looking statements are based on management's current expectations and assumptions regarding the company's business and performance the economy, and other future conditions and forecasts of future events, circumstances, and results. Forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties that could materially affect actual results. Important factors that could cause the company's actual results to differ materially from those in its forward-looking statements include those risk factors set forth in the company's 2021 Annual Report on Form 10-K, filed with the SEC on March 17, 2022. The company does not undertake any obligation to update or revise any forward-looking information to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise. Also, we want to point out that in addition to GAAP information, we will provide information related to certain non-GAAP measures. We believe that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors which reflect how management views the business. Detailed reconciliations of GAAP measures to non-GAAP measures are set forth in a reconciliation table in our press release issued earlier today and furnished with the Form 8-K filed today with the SEC. With that, it's now my pleasure to turn the call over to Tim Whelan.

Thank you, Mike, and good morning, everyone. There's been a lot of activity this quarter, and I'll cover three updates today. First, our strategic alternatives process. Second, our Q2 results. And finally, our cash forecast. To start, let me rewind and review where we came from, including what we announced two weeks ago in connection with our annual shareholder meeting. We'll start with the microlab transaction, which was designed to allow us to narrow our strategic focus, pay off our debt, and add cash to the balance sheet. Following this transaction, we reorganized around our two remaining higher growth and higher gross margin segments, test and measurement and radio baseband and software. Following the micro lab transaction, we kicked off a refresh for our strategic plan, which includes considerations of the capital markets, the health of the total addressable markets, competition and partners, and near-term risk and opportunity for growth and increasing profitability. This process, of course, is also designed to understand if the best way to unlock shareholder value is through a sale process or other strategic alternatives. And the board determined that we should be considering outside advice to help us consider a full range of options. This is why we've engaged CDX advisors to assist us with this process, which includes evaluating the cost of being a small public company. We have various scenarios under evaluation, including the sale of the whole company or the sale of one or both segments separately to realize some of the part's valuation, or continually operate the business for growth and profitability, among other things. We are positioning the segments to potentially unlock some of the part's valuation. This includes illustrating the segment profitability test and measurement, including 57% gross margins in five years of gross margin increases. as well as segment contribution margins greater than 24% of revenues. We believe TNN segment analysis valuations compare favorably with other test and measurement companies which typically trade as multiples of EBITDA and in the high single digits to low double digits. Our positioning for RVS includes demonstrating the compelling growth opportunity of 5G private networks and small cell deployment. This includes the growth we experienced in 2021, driven primarily by increasing high gross margin software revenues, as well as illustrating the high growth in markets supported by multiple analysts and third-party consultants, which describe compound growth expectations in these addressable markets above 15%. We believe that the unique and differentiated value of our software stack and services compare favorably to other software technology providers, which traded a multiple of revenue. This comprehensive formal strategic review process is underway. We do not intend to comment further regarding the process unless or until a specific transaction is approved by our board, the formal review process is concluded, or it is otherwise determined that further disclosure is appropriate or required by law, and we can provide no assurance or guarantee of the outcome. The second update today is our second quarter and first half results and I think there are a few headlines here to cover before Mike goes through this in more detail. Our first half revenues were $13.7 million, a decline of about $2.3 million from the first half of the year. When comparing these periods, this was almost entirely driven by the lower hardware card shipments within the RBS segment. Importantly, we were encouraged that first half 2022 TNM revenues were 7% higher than last year's first six month results. As we compare these results to our beginning of the year expectation, we were certainly impacted by a few unexpected Q2 issues. This included canceled backlog and funnel opportunity from customers in Russia, and also included lower PO expectations from China impacted by COVID shutdowns. The second quarter results also demonstrated some general economic concern by our customers as we realized more uncertainty in our funnel with missed dates of commitments and in some cases, lower volumes on purchase orders than originally quoted. And last, the topic we've discussed previously with you is the impact of our supply chain as the near doubling of time for the delivery of certain chip components has delayed shipments for orders in the backlog which we estimate had nearly a $1 million impact, we would have otherwise been able to ship. My last point on Q2 is a reflection on our July contract signatures and bookings, which slightly exceeded $3 million. One particular contract, the $1.5 million five-party ADVA contract for small cell research, was long anticipated and awaited, and we are excited to begin our work here. In addition to a strong month of July, We have verbal wins for another multi-million dollar deal and our expectations for the quarter are consolidated bookings between 8 and 10 million. So with this outlook, we're hopeful that the issues causing a weaker Q2 are beginning to resolve themselves and we have some improved timing and catch up in the third quarter. Long term and in thinking beyond just our second quarter or the next two quarters, We're optimistic for additional growth, and I'll give you some data points that support this. Our consolidated revenue growth for the combined RBS and T&M business was 31% for the years 2021 versus 2020. Further, if you strip out the lumpy hardware sales in RBS, then our growth for T&M and RBS was 18% for the years 2021 versus 2020, and 14% on a compound basis for the periods 2019 to 2021. These data points, along with our new products and our technology roadmap, create excitement for expectations of more bullish, longer-term growth as we address compelling investments in LEO satellite expansion, semiconductor manufacturing, quantum computing expansion, and 5G small cells and private networks. Our gross margins remain strong and we have pricing power in each of our two segments. We have continued to reduce recurring operating costs and we expect higher revenues will drive increasing operating profitability. Overall, we continue to manage our segments for growth and profitability. My third update to you today is our cash balance and forecast. We reported $13.3 million in cash on the balance sheet at June 30. And our forecast is for approximately $9.4 million on our balance sheet at year end December 31. Since the micro lab transaction, our use of cash has primarily been around the following areas. The pay down of debt and elimination of interest expense. The satisfaction and payment of accrued and deferred Holtsworth earn out payments. And the buy back of our shares. We were also expecting some increases in working capital as supply chain dynamics change. including the increase of advance payment demands for certain hard to procure components. With respect to the share buyback program, a few points here. You may recall the Board of Directors authorized a $4 million buyback program and we've utilized approximately $2.6 million so far. We have capacity with the remaining share buyback amount of $1.4 million. Also, we do not currently have any expectations for the use of cash for any acquisitions. To summarize, our second quarter 2022 reflects some greater near-term uncertainty, which we hope will be short-term and contained in Q2. Longer term trends and expectations reflect higher growth rates and opportunities for increased profitability. With our strategic alternatives process, we will be exploring interest in the company and how we unlock shareholder value in the near term. With that, I'm going to turn the call back over to Mike to walk us through the financials.

Thank you, Tim. Before I begin, I want to remind everyone that MicroLabs financial results have been excluded from continuing operations and are presented as discontinued operations net of tax on the statement of operations. Further assets and liabilities of Microlab as of December 31st, 2021 have been reclassified on the balance sheet as assets and liabilities of discontinued operations. The cash flow, however, is presented on a consolidated basis. My discussion of the financial results for the three months ended June 30th, 2022 as compared to June 30th, 2021 will be on a continuing operations unless otherwise noted. Consolidated revenue for Q2 2022 decreased 22% from the prior year, due primarily to lower digital signal processing hardware sales at RBS. Software sales at RBS also declined year over year, but as stated on prior calls, RBS software and services revenue is expected to be lumpy due to the complexity of the projects and revenue recognition patterns associated with those projects. Consolidated gross profit decreased 22% from the prior year, due primarily to lower revenue at RBS, while consolidated gross profit margin was consistent with the prior year as T&M continues to generate strong gross profit margins above 56%. Consolidated operating expenses decreased 1.6% from the prior year period due primarily to lower third-party R&D expenses, lower intangible asset amortization expense, and lower headcount-related expenses, offset somewhat by higher stock compensation expense and non-recurring expenses associated with our divestiture activities and strategic alternatives process. Our gap loss from continuing operations is $1.4 million, which compares to net income of $1.1 million in the prior year period. This is primarily due to lower gross profit in the current year and the recognition of the $2 million gain on forgiveness of the PPP loan in the prior year period. Our non-GAAP-adjusted loss from continuing operations, which excludes non-cash amortization of purchased intangibles, non-cash stock-based compensation expense, gains and losses on the extinguishment of debt, and other non-recurring expenses, was $887,000 for the second quarter 2022, as compared to income of approximately $459,000 for the same period last year. The decrease is due to decline in gross profit year-over-year. Turning to the balance sheet, our cash balance as of June 30, 2022 was $13.3 million as compared to $19.1 million as of March 31, 2022. Our working capital increased since year end and the first quarter due to an increase in accounts receivable because of the timing of shipments in the quarter and to a lesser extent in inventory due to higher stocking levels of hard to procure components. During the second quarter, we also paid approximately $600,000 in Holtsworth earn-out payments, $500,000 in estimated tax payments, and made $2.5 million in share repurchases under the company's share repurchase program. As stated at our annual shareholder meeting on July 29th, we expect to have approximately $9.4 million in cash at the end of the year. I'll now turn the call back over to Tim for some closing remarks.

Thank you, Mike. Again, we're expecting a much stronger Q3 as we think about customer contracts and bookings, and these results will give us much better data for predictability on the full year. With respect to the strategic alternatives process, this is active, but we cannot provide any assurance on the timing or outcome, and we are fully prepared to continue operating the business for growth and profitability if the Board believes we should conclude the strategic review process. Thank you, and operator, if you could please open the lines for questions.

Thank you, and certainly. Ladies and gentlemen, the floor is now open for questions. If you would like to enter the queue to ask a question at this time, please press star 1 on your telephone keypad to enter the queue. We do ask, if listening on speakerphone this morning, that you please pick up your handset while asking your question to provide optimal sound quality. Once again, ladies and gentlemen, please press star 1 on your telephone keypad at this time to enter the queue to ask a question. Please hold a moment while we pull for questions. And the first question this morning is coming from Nick Rapostella from NR Management. Nick, your line is live. Please go ahead.

Hey, good morning, fellas. Good morning, Nick. Hi. All right. Just a few questions here. You know, if we look at the margins for the test and measurement, you know, and compare those to, you know, other companies, some companies, large companies, you know, do you think that asset in the hands of a larger company with greater resources could improve its return profile? That's the first question. Second, are you all done with Holsworth earn out or is there more to come? And, you know, that in the context of are you looking to utilize more cash to finish with Holsworth earn out? And then on software, I know this is a little difficult, but what's a reasonable expectation for software revenue in the next 12 months? Because, you know, I understand, you know, it's a complex selling cycle. It's really not scalable. It's kind of you have to custom fit a solution for each customer. It's not, you may be very excited about it, but the results really don't show maybe what the promise is. So if you could just give us a reasonable expectation a year from now, what the revenue profile could be there And are you still getting a tax credit for Commagility? And, okay, that's it for now. Great.

Well, thank you, Nick. There's a lot to unpack here. We'll start with the margin profile and expectations in a larger company. I really can't comment or speculate on what those margin profile would look like in a larger company. What I do reflect on is over five years we've increased our margins, gross margin profile, and test and measurement. We're quite proud of that. It demonstrates both the pricing power we have and the ability to manage our supply chain effectively and continue to redesign our products, our existing products, and bring new products to market that have pricing power and margin expansion. With respect to the Holtsworth earn out, as our cash forecast noted in the annual shareholder meeting we've noted here, We do have an expectation the second half of the year. There's approximately $2.3 million of that deferred liability that's been on the balance sheet for a period of time. And so we do have an expectation we use some cash to pay that down in the second half of the year. In fact, we forecasted the use of all cash for the second half of the year. In terms of in turning to RBS and your question about software, I'll just reflect that in 2019, the software and services was approximately 1.4 million in 2020 it was over 2 million in 2021 it was over 4 million so just to give you a growth profile on the increase of software and services over the last three years i think we can continue improving on that and continue showing the growth on that $4 million and change of software and services last year. And I think the data point there, Nick, is ADVA, which is really a software and services contract bundled together. So I continue to believe we can grow that at an outsized pace, potentially well above that 15% growth rate that we have set an expectation for for that business segment. The last part of your question is the tax credit. Yes, we do have an expectation that we'll have a tax credit again for the current year. Last year I believe it was approximately $1 million or slightly over $1 million. Mike can correct me on that if I'm clearly off. That's correct. We haven't finished all the filings for the current year, but it'll be in the high six figures. So I think I touched upon the four points of your question, Nick. And again, we're thinking quite enthusiastically about the second half of the year with the contracts we have. We think quite enthusiastically about Q3 across both segments and across all of our brands. Our expectation is we'll have multiple seven-figure opportunities that will close within the quarter. And that will really set us up to understand the predictability on the full year, as well as understanding the supply chain challenges that I think everyone is having and what we can do to set expectations as we think about the full year.

Okay. So just once again, 12 months from now, what is a reasonable expectation for software license revenue?

I think it's going to be above that $4 million, Nick, and we're going to be able to have a better understanding of that as we close out contracts in Q3. But growth well above the $4 million, that's certainly in our expectation.

Okay. And then once again, you referenced in your opening that you made the comment about the cost of being a small public company. And as someone who invests in a lot of microcaps, this is very important. It is very expensive, which I'm sure CDX advisors and everything is looking at. This is why I brought up the question about what a larger company might be able to provide in terms of, you know, with T&M, what they could do with it. And have you ever quantified what exactly the costs are of being public companies? you know, with a company with a 30 million market cap, it's clearly over a million dollars a year, right?

Yeah, that's right. I think we've previously referred to this as a couple million dollars of direct expenses, as you roll up, filing fees, the cost of an independent board, compliance issues, you know, but there's also the cost of the time, the amount of time that we invest in And I think both are the appropriate things to do as we're a small cap or micro cap company. But yeah, that's an opportunity for leverage as we think about a larger enterprise and potentially this business being owned by a larger enterprise or being out of public markets.

Right. Okay. Well, thank you very much. I appreciate it.

Very good. Thank you, Nick.

Thank you. And the next question is coming from David Wright from Henry Investment Trust. David, your line is live. Please go ahead.

Good morning. Thanks for all the various detail you offered in the remarks.

Thank you for joining us, David. Good morning.

Okay. When you think about test and measurement EBITDA, what number do you think about?

Well, the segment footnote will disclose that the contribution margin is approximately 24% of revenue. If you allocate or assign some of the or certain of those corporate costs supportive of the test and measurement segment, you're still above 20% as you think about it and adjusted EBITDA for that standalone segment.

Okay.

I don't have any other questions.

Great. Thank you, David. Thank you. And your next question is coming from Michael Potter from Monarch Capital. Michael, your line is live. Please go ahead.

Good morning, guys. Very good call. Thanks for the additional information you guys are giving us this morning. Tim, can you give us a little more color on, I guess, the second half of the year? It's exciting. You got a verbal win for a multimillion-dollar order. I'm assuming that is RBS. How does our funnel look for the remainder of the year, and do you think the back half of the year will enable us to show growth for the year as a whole.

Yeah, we're optimistic on that, Michael, although the details are yet to fall in place. So I'll just go back and maybe provide just a little bit more clarity. The multimillion-dollar deal that we signed in July is RBS. That's the ADVA contract. I also noted in my remarks that we have verbals on other multimillion-dollar POs those are in the T&M business and those are expected in the quarter. In fact, since most recently we have two verbal commitments for seven figure or more orders from two separate customers in the T&M segment. Ultimately, the details of those purchase orders will give us a much better understanding of expected delivery dates and as well as the ability for us to go into our supply chain and make sure that we understand what we can commit to that customer. So Q3 bookings, again, within the 8 to 10 million range, we're quite confident of that. And the last few weeks have been very promising. We've had some very good order flow. And as those come in, we'll have a much better beat as we receive those POs and work through our own supply chain.

Okay.

Terrific. That's it, everything. You've answered most of my other questions. Thanks. I'll get back in queue.

Good morning. Thank you, Michael. Appreciate you joining.

Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to Timothy Whelan for closing remarks.

Very good. Thank you, everyone, for joining us today, and we look forward to speaking with you again soon.

Thank you, ladies and gentlemen. This does conclude this morning's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.