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spk01: Welcome to the PCTEL fourth quarter 2021 earnings release conference call. At this time, all participants are in a listen-only mode. At the conclusion of our prepared remarks, we will conduct a question and answer session. As a reminder, this conference is being recorded. I will now turn the call over to Kevin McGowan, the company's CFO.
spk06: Thank you for joining us on today's conference call to discuss PCTEL's fourth quarter 2021 financial results. With me today is David Newman, 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 PZTEL's best current judgment, they are subject to risks and uncertainties, particularly related to the COVID-19 pandemic, the global supply chain and logistics challenges, the expansion of our distribution channels, and the impact of our acquisition of Smart Tech Wireless AB that could cause actual results to differ materially from these forward-looking statements and projections. Risk factors that could cause PCTL's actual results to materially differ from its projections are discussed in the earnings press release, which was issued today, and the company's annual report on Form 10-K. 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 gross margin percentage, non-GAAP operating expense, 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 GAAP is included in our quarterly earnings press release that was issued earlier today. I'm now pleased to turn the call over to David Newman.
spk05: Thank you, Kevin. Good afternoon and thank you for joining us. We're pleased to report revenue growth in 2021 and record setting incoming orders and backlog as we begin 2022. Although disruptions in the supply chain create significant challenges in 2021, we made progress throughout the year and had a strong finish. This gives us optimism about our company's future and our ability to grow consistently in challenging environments. In today's call, I will share a summary of the fourth quarter and annual financial results, and then highlight key growth areas for both our product lines. The global pandemic created disruptions in both supply and demand, particularly in Asia and Europe. Despite these disruptions, in 2021, we successfully acquired and integrated Smartech. We continued our investments in new R&D initiatives, resulting in eight patents being issued in the US. We launched market-leading products, And most importantly, we met the delivery needs of our customers. As you may have seen in our press release issued after the market closed, we achieved 13% growth in annual revenue from $77.5 million in 2020 to $87.8 million in 2021. The product mix, which was more heavily weighted towards antenna sales in 2021, together with increased costs for freight, logistics, raw materials, mainly for components, and increased sales commissions, reduced our non-GAAP earnings per share from $0.31 in 2020 to $0.27 in 2021. We remained profitable throughout the year with consistent quarterly increases for revenue, EBITDA, and non-GAAP earnings per share. I'm pleased to share that fourth quarter revenue and earnings were the strongest of the year and exceeded our guidance. In fact, we set a record for incoming orders and backlog, and we expect most of the backlog to be delivered in the first half of 2022. Orders are strongly leading indicators as we enter the year, and we're driven largely by growth with existing antenna customers, successful expansion of our distribution channels, and the introduction of new products. As shared in our press release in the fourth quarter, we achieved $26 million in revenue, $3.1 million in adjusted EBITDA, and $0.12 in non-GAAP earnings per share, all sequential improvements over the third quarter. We achieved non-GAAP gross margins of 46.6% for the quarter, a slight decrease from the third quarter, and just below the average for the year. Before I discuss our two product lines and growth initiatives for 2022, I want to mention the successful completion in the first quarter of the transition from our company-owned factory in Tianjin, China to contract manufacturers. This manufacturing transition that started in 2019 and was completed in this quarter eliminated significant fixed costs, and has already generated cost savings that have helped us offset increases in commodity prices, unfavorable currency exchange rates, and shipping costs. With the final closure of our factory in the first quarter, we expect net cost savings in 2022. It also reduces our operating risks and allows us to quickly expand our capacity given the ability of contract manufacturers to ramp up production when necessary. as was the case when several of our customers placed large orders this past year. 2022 growth initiatives of our two product lines include evaluating and further developing our distribution channels and launching new products, including 5G tools, industrial IoT radio products, and antenna platforms. From a regional perspective, the business in the U.S. remains strong. Our team in Asia is doing an excellent job winning new customers for existing antenna products and test and measurement tools, and our presence in Europe is growing. Smart Tech, by all measures, has been a successful acquisition, and it has added antenna products for new applications, such as electric vehicle charging stations, cargo tracking, and material handling. The Smart Tech team exceeded their financial goals for the year and have successfully navigated the supply chain and logistics issues to provide a high level of service to customers. There's a talented team, and we're glad they're part of PCTel. Together, we launched four new antenna platforms and secured key design wins in metering, cargo tracking, and rail. Our large OEMs in the utilities, agriculture, industrial, public safety, and Wi-Fi markets had strong growth in 2021, and we anticipate significant opportunities through OEM channels and our antenna products in 2022. PCTel has one of the broadest antenna and device portfolios to serve our target markets, including those just mentioned, plus smart transportation, metering, and rail. Our extensive product portfolio is attractive for distributors, and we added five strategic channel partners in 2021 to expand our market reach. On the test and measurement front, we're very excited about the launch of our new G-Flex scanning receiver for both 5G cellular and broader government applications, such as signal intelligence. This product is the most advanced scanning receiver on the market. The G Flex has functionality and performance in a compact unit that is equivalent to operating four to six of our competitor scanning receivers simultaneously. We announced the product at the end of the third quarter, and within the fourth quarter, we delivered G Flex to the leading operators around the world. The deployment of 5G networks continues with just over 25% of the global operators launching 5G mobile services by the end of 2021. Approximately 70% of the global operators are in an investing stage for 5G deployments, which may include spectrum auctions, trials, and planning for deployment. Despite pandemic-related slowdowns for spectrum auctions and rollouts in Europe and parts of Southeast Asia, 5G deployments continue to grow, driving the demand for high-performance scanning receivers like our G Flex. In addition to our strong antenna sales and public safety markets, We have expanded our market for scanning receiver solutions to address critical communication networks, including public safety. Our public safety scanning receiver solution based on the IBflex product ensures the quality of in-building wireless communications for first responders. We perform well in the public safety market by selling through distributors and across 140 certified engineering service companies in the U.S., which can be found on our website. In the second half of 2021, we launched Seahawk Central, which is our cloud-based test management, storage, and analytics platform for public safety network applications. This subscription-based service allows stakeholders, including engineering service companies, building owners, and government jurisdictions, to easily manage the collection process and access final reports through an online map-based portal. In addition to organic growth, we continue to evaluate acquisitions as an important component of our long-term growth strategy for the company. We believe there will be opportunities to grow PCTel through adding complementary products and markets in new regions. With that, I will now turn the call over to Kevin for a closer look at our fourth quarter and a discussion of the financials. Kevin?
spk06: Thank you, David. I will review the financial results in more detail for the fourth quarter ended December 31, 2021. and I will provide first quarter 2022 guidance. As David mentioned, we reported sequential financial improvement for revenues and earnings in the fourth quarter, and the reported revenue and earnings for the quarter were above our guidance. Total revenues of $26 million were approximately 23% higher in the fourth quarter 2021 compared to the fourth quarter 2020. Revenues for antennas and industrial IoT devices were $19.1 million, an increase of 6.2 million compared to the fourth quarter of 2020. This increase for the fourth quarter of 2021 is due to both the revenue recognized from Smart Tech, which was acquired on April 30, 2021, and an increase in organic revenues related to antennas for fleet and public safety applications. Test and measurement revenues were 7.2 million for the fourth quarter of 2021, our best revenue quarter for the year. Test and measurement revenues were lower by $1.4 million compared to the fourth quarter of 2020, as last year's fourth quarter was a record revenue quarter for the company's test and measurement product line. The fourth quarter of 2021 gross profit margin on a non-GAAP basis was 46.6%, which was 3.8% lower than the fourth quarter of 2020. The decrease in the gross margin percentage in 2021 compared to the prior year was primarily due to a higher mix of antennas and industrial IoT devices. The non-GAAP gross profit margin percentage for test and measurement products was higher by 5.8% in the fourth quarter of 2021 compared to the fourth quarter of 2020 due to product and customer mix. The non-GAAP gross profit margin percentage for antennas and IoT devices was lower by 0.2% in the fourth quarter of 2021 compared to the fourth quarter of 2020 as higher costs for logistics and less favorable product mix offset favorable operating leverage. Operating expenses on a non-GAAP basis were $9.8 million in the fourth quarter of 2021, an increase of $1.6 million compared to the fourth quarter of 2020. The increase results from inclusion of smart tech's operating expenses in addition to higher employee costs, including incentive compensation programs, higher engineering development costs, and higher T&E costs. Operating expenses for the fourth quarter 2020 were lower as a result of reduced employee incentive compensation and measures the company took at the beginning of the pandemic to control costs, including temporary reductions in salaries, travel, and other discretionary spending. Adjusted EBITDA was $3.1 million in the fourth quarter 2021 compared to $3.2 million in the fourth quarter 2020 and increased sequentially by $0.8 million. EBITDA as a percentage of revenue is approximately 12% in the fourth quarter of 2021 compared to approximately 15% in the fourth quarter of 2020. And non-GAAP diluted earnings per share was $0.12 in the fourth quarter of 2021, higher by $0.04 sequentially, and the same as the fourth quarter of 2020. Cash and investments, there were $30.8 million at December 31, 2021. Our cash and investments declined by approximately $1.7 million due to negative free cash flow of $1 million and $0.7 million of cash used on financing activities. Free cash flow was negative in the fourth quarter due to an increase in working capital as accounts receivable increased in relation to higher revenues and inventories increased to ease supply chain constraints. For the full year 2021, revenues increased by approximately 13% to $87.8 million, as revenues for antennas and IoT devices increased by approximately 25% to $63 million, and revenues for test and measurement products decreased by approximately 7% to $25.7 million. The 2021 gross profit margin on a non-GAAP basis was 47%, compared to 49.5% in 2020, due to a higher mix of antennas and industrial IoT devices. The adjusted EBITDA for the full year 2021 was 8.5 million compared to 9.1 million in 2020. Our first quarter is historically our lowest revenue quarter of the year. We anticipate that revenues will be lower sequentially in the first quarter of 2022, but will be higher compared to the first quarter last year. Our revenue guidance for the first quarter is in the range of 21 to 21.5 million and our non-GAAP earnings per share guidance is in the range of negative two cents to break even. We project our non-GAAP gross profit margin percents to be in the range of 43 to 44%. With that, I will now turn the call back to David.
spk05: Thank you all for joining us. Before we take questions, I'd like to share a few closing thoughts. We're in a stronger position entering 2022 than we have been in several years. The investments we made in the past few years to increase our distribution channels develop a world-class scanning receiver, the G Flex, expand our presence in product line in Europe with the acquisition of Smartech, invest in industrial IT devices, and innovate new antenna platforms, all strengthen our position in the market and will continue to contribute meaningful revenue in 2022 and beyond. During the pandemic, we prioritized taking care of our employees, and I'm proud of my team and how we've worked together to support each other and maintain a high level of customer service. I appreciate their dedication, flexibility, and the long hours to support our global business. This time last year, we believed the second half of 2021 would be back to some type of normal. Although challenges persisted through the second half, we focused on our customers, remained profitable, and built a healthy backlog. We need to remain vigilant, evaluate risks, and be prepared to act quickly. I have the confidence in this team and our ability to grow the business. We appreciate our loyal customers and the opportunity to serve attractive and growing markets. We'll continue our mission to broadly distribute industrial IoT devices, antenna solutions, and test and measurement tools to ensure wireless connectivity in an increasingly wireless world. With that, Kevin and I are available to take questions. Operator?
spk01: At this time, we will be conducting a question and answer session. If you have any questions or comments, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions.
spk00: Once again, if there are any questions or comments, please press star one. Your first question for today is coming from Tim McConnell.
spk01: Please announce your affiliation, then pose your question. Hi.
spk02: Yeah, it's Tim O'Connell, Chain of Lakes Investment Fund. Hi, guys. Can you hear me?
spk05: Yes, I can.
spk02: Hi, Tim.
spk05: Yes. How are you? Okay.
spk02: Good. So you mentioned growing backlog. Can you shed any more color on that? I would assume that's on the antenna side of things, but I don't know if you can quantify that at all. You mentioned that a lot of that would be delivered in the first half of the year, and with the Q1 guidance being less than Q4, maybe that would just help understand 2022 as a whole.
spk05: Sure. Yeah, so the scanner business is much more transactional within a quarter just because the lead time to deliver is so much shorter. So you're correct. Almost all the backlog is from the antenna business. And some of the, I would say, global challenges actually helped us secure additional backlogs. Because many of our customers have supply chain challenges as well. So wanted to ensure that they had the antenna products that they would need coming into 2022, which helped backlog coming in. We also had a price increase. So some of our customers wanted to get ahead, a price increase, and they placed additional orders. So most of the orders that will be delivered in the first half of 22 are from the antenna business. Now with respect to Q1, Q1 is typically a light, it's normally our lightest quarter of the year. Part of that is due to the scanner business. Most of the scanners are driven by deployments, which are done by the wireless operators globally. And Q1 is when budgets are discussed and approved. And we typically don't start to receive significant orders for scanners until almost the middle of Q1. And then it's heavily loaded towards the back end of Q1 for scanners. The antenna business is typically a bit lighter in Q1 as well. So yes, our guidance for Q1 is less than Q4. But in just about every year, Q4 is our strongest, and Q1 is probably one of the lighter quarters.
spk02: Any color. Maybe you don't want to give an exact number or quantify the backlog, but any color in terms of maybe the growth of the backlog, you know, percentage-wise or how it compares to other quarters. Yeah. Yeah, that's my question on that.
spk05: Yeah, I don't think we want to share the actual number. Kevin, I don't know if you can give any estimates or anything you might want to share.
spk06: Yeah, just in general, on the antenna side, it's in the magnitude of probably twice what normally we'd end the year at.
spk02: Okay. And then kind of in terms of market share, are you seeing any market share gains in either side of the business? I know you came with the G Flex on the scanner side. Are you taking any market share there? And if so, maybe what parts of the world? And on the antenna side, any kind of design wins or whatnot in terms of just competing better against some of these other companies in your space?
spk05: Sure. Yeah, so the G Flex is definitely going to be an important product for the market. We've always been, I would say, very strong in the U.S. All four operators in the U.S. have standardized on our scanning receivers, and now they're interested in upgrading to the G Flex because it is the only 5G scanner on the market that will collect information across the whole 100 megahertz bandwidth for measurements. It also will do all the technologies in one unit, so it's very attractive for benchmarking applications. So I don't necessarily think we took any additional markets here in the U.S. because we were already very strong. I think what's interesting with the GFLEX, the Tier 1 operators, some of the leading Tier 1 operators that really value performance and quality of their network, bought the G Flex as soon as it was ready and announced at the end of Q3 and Q4. In Asia, I think we're maintaining, maybe slightly increasing our market share. We were always relatively strong in Northeast Asia, so South Korea, Japan, even China, we had some strength. I think longer term, China will reverts to Chinese vendors. So I don't think we'll be there for a long period of time, but the Chinese still value technology and they value PCTel products. And in Europe, 5G is starting to really pick up. So some of the spectrum auctions are occurring. Some of the regions, the UK, for example, is starting to aggressively build out the 5G network. And they're very interested, the operators are very interested in our GFLEX, and our team there is doing a good job. So I think we will capture some more market share in Europe where our main competitor has been relatively strong. So I think that's a big plus. And then on the antenna front, the acquisition we talked during the call about SmartTech, Smartech has some products in areas where PCTel has a capability, but they're just not markets that we concentrated on. A couple of those markets, EV charging stations. Smartech is the leader in the Nordic countries for developing antennas and deploying those systems. They're a leader in Europe for smart metering applications. They're a leader in Europe for tracking environmental cargo. So those are product lines that we think or we know that have applications in the U.S., especially with the EV charging stations. So not only are we excited with their performance this year, but the team has some products that are going to really do well for PCTel globally. It's a very talented team. And with a larger presence in Europe, we believe we can cross-sell some of the antennas that we've been selling in the U.S. into broader Europe.
spk02: Okay, and then kind of my final questions are around this G-Flex. You know, historically, you've been selling to wireless carriers, but this G-Flex, you know, appears to open up a whole new market, government, military. Maybe you can kind of comment on you know, the size of that market and when you think you'll get some real traction there and, you know, what kind of those numbers could look like.
spk05: Yeah. Even, um, before I talked about government and G flex, we, in the past year or so, um, started to break into the public safety market and outside the cellular market for testing, uh, systems for first responders for in building. And that was actually using the IV flex. So we have some experience, uh, addressing markets that are beyond cellular, but your point, Tim, the G flex does open new opportunities. And I would say over the last 10 plus years, uh, we've, um, sold some, uh, scanners and into government and military space. And for the most part, we would get feedback that there were a couple of features that would really make the product more valuable. And with these scanner receivers, it's typically a three-year development cycle from start to finish to the new scanner platform. So with the G Flex from the beginning, we added these two or three features that we were getting feedback from the government, and they're in G Flex. So the next step is to promote these feature sets, promote the capabilities, leverage some of the relationships that we have with our OEMs that also have ties into government space. And this year, the goal is to do some trials, get the equipment out there, get some real field tests, which we have some. We've been invited to attend some sessions where we evaluate different test tools and PCTel will be included. But in terms of a real revenue generation, I think we'll have an opportunity to maybe close a couple evaluation units or a couple smaller deals by the end of the year. But the real revenue will start in 2023. Once we're improved, we're into the budget, we're into the RFPs, we get some design wins, then I think it could be a significant contributor in 2023. If you just look at the size of the TAM that you're asking about markets, I believe the government space could be a comparable size, maybe even a bit larger than the cellular market. So it would give us basically the opportunity to, especially with public safety, it would give us an opportunity to double the size of the market that we're serving now.
spk02: Wow, that's pretty impressive because the scanner business has been kind of cyclical not necessarily a growth business for you guys historically. But, you know, if that market for the G Flex doubles, does that mean that, I mean, what does the competition look like? I mean, you kind of have a large market share in the wireless carrier for scanners. Is the military market, you think you can get the same type of market share?
spk05: It's going to be, and we're not the incumbent, so it's going to be a battle to get that market share. But I think given that we put the three years in to develop this technology, there isn't another scanner on the market that today matches what the G-Flex can do. So in the government military space, there are more competitors in their different niche areas. We will have to take a market share from some of those competitors, but the size of the market is, as I said, I think it's probably about the same size as the cellular market, so there's a real opportunity.
spk02: Okay. All right. Well, thanks for the answers, guys. I'll jump back in the queue. Okay.
spk04: Thanks, Tim.
spk01: Your next question is coming from Jason Smith. Please announce your affiliation, then pose your question.
spk03: Yeah, Jason with Lake Street Capital Markets. Hey, guys, just want to follow up on your comments on smart tech. It's kind of approaching a year since you announced the acquisition. Just curious what end markets you're feeling a bit more bullish on now that you've had that integrated within the broader PCT, PCTel umbrella.
spk05: Yeah, so... Thanks, Jason. Yeah, thanks for the question. I'm actually at our Smart Tech offices in Sweden. So we're holding some integration and strategic planning meetings. And we closed the deal, we're approaching a year. So once we closed on Smart Tech for the first six to eight months, we basically let Smart Tech run on its own with very little interference. Good part of that was we just couldn't travel with COVID. We didn't get to see them in person until December. So the performance in 21 was really driven by the team. I mentioned in the comments during the earnings call that the area of electric vehicle charging stations is a market that we're not in and we'll be able to leverage some of their wins. They're in all the Nordic countries. They're in material handling, forklift systems that we traditionally or historically haven't been in, so there's real opportunities there. Even though PCTel does quite a bit with vehicles, GNSS and multi-mode antennas for a broad base of vehicles from ag to buses, Smart tech is very strong and off-road. Think of like logging systems and off-road systems for their antennas. It's another market for us. So there's some very attractive, I would say, IoT applications. They're very strong and high-end vehicular applications. Bentley is a customer. So it's very complementary to what PCTel has today. So now that we're, I would say, in the second stage of integration, we're really looking to see how we can leverage their base in Europe where we can sell more PCTel antennas, very strong GPS antennas, leverage the team here to get into the public safety space in some of the European markets for the scanning receivers. And then on the flip side, with the infrastructure being built out in the U.S., along electric vehicles to leverage not only the products but the reference accounts that the SmartTIC team has developed in Europe to get into EV charging stations in a bigger way in the U.S.
spk03: Okay. That makes a lot of sense. And then... Obviously, you mentioned some nice opportunities for growth with the cross-selling opportunities, but just curious if the sales infrastructure and sales team you think is fully built out to address the numerous end markets you're now going after.
spk05: I think in the U.S., we're in very good shape. We'll continue to make investments in Europe, so I think there are opportunities for for PCTel to add some talent on the sales front. And we actually have openings for some executive sales positions in Europe. So the products are there. We have our existing sales team. We have a sales team from Smartech. But I think one of the benefits that PCTel brings to Smartech is our scale, the level of cash that we have, no debt. So we're in a very good position to make some investments and help the team here grow faster.
spk03: Okay, that's helpful. And then just the last one from me, and I'll jump back into Q. Just sticking with the antenna business, just curious your thoughts on what you're seeing from an inventory standpoint at distributors.
spk05: Inventory standpoint at distributors... We actually have, I haven't looked at it recently, but we have visibility of inventory actually through our website. So customers can come to the PCTel website, pick on an antenna, and it will bring up all the distributors that have that, carry that antenna, and also the inventory levels that they have. Some of our distributors and partners prefer to carry more inventory. because it's just their strategy. They want to make sure they have product when customers come. Other distributors are more selective in what inventory they carry. But in a general sense, I don't see our distributors carrying excess inventory. I think it's been pretty steady, and it's been encouraging even with the addition of the distributors that we've added this past year, that the distributors, we're very selective in the distributors that we pick because of the strategic market or the strategic reach that we haven't had. And we're also very careful that we're not creating too much competition between the distributors. So I'm pretty comfortable with the inventory that they're carrying, but it does vary distributor by distributor.
spk03: Okay, got it. That's it for me. I really appreciate the color, guys. Thank you. Thank you, Jason.
spk01: Your next question is coming from Michael Wasserman. Please announce your affiliation, then pose your question.
spk04: Yeah, hi. I'm with Moores & Cabot. Hi, David. Hi, Mike. What technology developments over the past couple of years... have thrown you a curveball, if any, have been most unexpected, if any of those exist, in your markets, obviously?
spk05: Wow, that's a great question. Technologies that have thrown us a curveball. Well, given the antenna space and even the scanning receiver space, technology is changing rapidly. It's been... I would say a challenge to keep up with, not necessarily technologies, but some of the components that we use in the systems to support those technologies. So we regularly have to go through redesigns. And this is just part of the product cycle, redesigns when a component goes to an end of life. And if there's been a curveball and it's related to COVID, With the supply chain issues on components, we've really had to be creative. The team's done a really good job of sourcing components. Some of these components, not only the lead time may have increased from four to six weeks to, in some cases, 50-plus weeks, but the cost of those components have gone up quite a bit, too. So if there was a curveballing i think i don't necessarily think it's a technology because we're we try to stand stay on top but i think the curveball is really um supporting those technologies with some supply chain challenges and really have really having to step up to make sure that we we can we can get the components that we need to build product okay thank you thanks mike
spk01: Once again, if there are any questions or comments, please press star one on your phone at this time.
spk00: There are no further questions in queue.
spk01: I would like to turn the floor back over to David for any closing comments.
spk05: Thank you all for joining us this afternoon. In addition to recognizing our employees, I'd also like to thank our customers, suppliers, and distribution partners. We're excited to leverage the accomplishments that we had in 21 to drive growth in 2022. We look forward to updating you on the next call. Have a great afternoon, and thank you.
spk01: Thank you for joining us today for PCTEL's fourth quarter 2021 earnings call. You may now disconnect your lines.
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