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spk00: Welcome to the PCTEL first quarter 2023 earnings 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. Kevin, over to you.
spk02: Good afternoon, and thank you for joining us on today's conference call to discuss PCTEL's first quarter earnings 2023 Financial Results. With me today is David Newman, the company's CEO. Please note that a webcast replay of the call will be available on our website. Before we begin, let me remind you that this call may contain forward-looking statements and projections based upon current circumstances. While these forward-looking statements and projections reflect PCTEL's best current judgment, they are subject to risks and uncertainties particularly related to global supply chain and logistics challenges, global political and economic circumstances, including inflation and a potential recession, ability to generate sales of our innovative new products, success of our expansion efforts in Europe, and ability to leverage our distribution channels 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 differ materially 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 the 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. With that, I'm now pleased to turn the call over to David Newman.
spk03: Thank you, Kevin, and apologies again for the delayed start. Good afternoon, and thank you for joining us today. On today's call, we'll discuss our first quarter performance and share our outlook for the second quarter of 2023. We'll also speak to our views on the remainder of the year and highlight key progress we've made towards our three-prong growth strategy. I'll begin with a few highlights, and then Kevin will discuss our financials in greater detail. We're pleased to have gotten off to a strong start in 2023 as we delivered first quarter revenue of $23 million, a slight increase year over year and strong gross margins of 50.2%, up 880 basis points from the prior year period. Our success in the quarter was driven by the continued execution of our three-prong growth strategy, which includes launching innovative antenna, device, and tester measurement products, expanding our distribution channels, and increasing our market share by providing more components of the overall systems. These strategies strengthen our global customer relationships and increase PCTel's value for all stakeholders. I'd like to begin by thanking our PCTel team for their continued contributions that are integral to our success. It is with their dedication and commitment that we have continued to mitigate issues in today's challenging operating environment, including ongoing inflationary pressures and supply chain disruptions. We continue to see moderation in these macro trends, particularly in logistics, and we will remain diligent in our commitment to meeting customer demand and providing the utmost quality in customer service. As we expand our global reach, we will remain in close contact with our shippers and suppliers around the world. Our operations team is doing an excellent job, and we exceeded our on-time delivery goal for the quarter, achieving our highest on-time delivery rate to customers since prior to the pandemic. Our three core growth strategies continue to be the backbone of our operating model and success. We continue to make important progress in our innovative product launches and market acquisition and penetration in global customer and distribution expansion, which I will discuss in greater detail later in today's call. I would now like to turn the call over to Kevin for a review of our first quarter 2023 results. Kevin? Thank you, David.
spk02: As David mentioned, total revenues were $23 million at the high end of our guidance range and approximately 2% higher compared to the first quarter of 2022 due to strong revenues for test and measurement products. Test and measurement revenues were $7.4 million for the first quarter of 2023, $1.8 million higher compared to the first quarter of 2022, primarily due to US sales of 5G scanning receivers and sales to global 5G rental market customers. Revenues for antennas and industrial IoT devices were $15.6 million in the period, a decrease of roughly $1.5 million compared to the first quarter of 2022 with lower antenna revenues for enterprise and public safety applications. First quarter 2023 gross profit margin percentage on a non-GAAP basis was 50.4% above our expectations and an 860 basis point increase from the year-ago period. The increase in gross profit margin percentage was primarily due to higher test and measurement sales and stronger gross margins within antennas and IoT devices. Non-GAAP gross profit margin percentage for antennas and industrial IoT devices in the first quarter of 2023 improved by 840 basis points compared to the first quarter of 2022 due to a positive product and customer mix shift coupled with continued improvement in logistical costs due to the proactive efforts David mentioned earlier in today's call. The non-GAAP gross profit margin percentage for test and measurement products was lower by 250 basis points in the first quarter of 2023 compared to the first quarter of 2022 due to higher component costs. Operating expenses on a non-GAAP basis were $9.3 million in the first quarter of 2023 an increase of 0.2 million compared to the first quarter 2022. The year-over-year increase was primarily driven by higher sales and marketing expenses related to commissions, travel, and marketing programs. Within general and administrative expenses reported on a GAAP basis, we also incurred 0.6 million during the first quarter 2023 related to transaction expenses related to exploring strategic alternatives. Other income was $0.2 million in the first quarter of 2023 compared to $11,000 in the prior year period. The year-over-year increase was due to higher average interest rates. Adjusted EBITDA increased by 153% to $2.8 million in the first quarter of 2023 compared to $1.1 million in the year-ago period. Adjusted EBITDA as a percentage of revenue was 12.1% in the first quarter 2023 compared to 4.9% in the first quarter of 2022. And non-GAAP diluted earnings per share was $0.12 in the first quarter of 2023, higher by $0.10 compared to the first quarter of 2022. This increase in adjusted EBITDA can be attributed to improved margins for antennas and the strong test and measurement revenues in the quarter. Cash in investments were $30.3 million at the end of the first quarter of 2023, Compared to the end of the fourth quarter of 2022, our cash and investments increased by approximately 0.3 million because we generated cash from operations and there were no net changes from our balance sheet. We reduced inventories by approximately 1.3 million during the first quarter, primarily due to lower-end tenant inventories, and we will continue to focus on managing the inventory to lower levels for both product lines. Financing activities for the first quarter included payment of our quarterly cash dividend of $1 million. And our healthy cash and investments on hand and cash flow supports our cash capital allocation strategy of paying quarterly dividends and having available funds for M&A activity. Turning to our second quarter outlook, we expect revenues to be in the range of $20 to $21 million. The expected decline both on a sequential and year-over-year basis, is due to lower year-over-year revenues in both product lines. We expect the non-GAAP gross profit margin percentage to be in the range of 47 to 48 percent, and we expect our non-GAAP earnings per share to be in the range of two cents to four cents. While there is uncertainty around the global operating environment in 2023, we are confident in our ability to grow our product offerings and ensure we use the cash generated by the business in a creative and value enhancing ways for our shareholders. With that, I will now turn the call back to David.
spk03: Thank you, Kevin. I would now like to review our progress on executing our growth strategies, which continue to serve as the foundation of our success. As I mentioned earlier, these strategies include launching innovative wireless products, expanding and leveraging distribution channels, and increasing market share by expanding our reach and providing more components of the overall systems. Starting with our first strategy of launching innovative products, we announced two exciting product launches in the quarter, including our new Veristak antenna, as well as our automated uplink drive or walk testing system for public safety radio networks, which is the first of its kind. The demand for multiband ruggedized 5G antennas increases as rail, utilities, and other industries adopt 5G wireless communications. Our VRSTAC antenna is the market's most advanced 5G antenna platform to date for rail and industrial IoT applications. VRSTAC leverages our broadband element technology to provide top of the line RF performance for critical applications. These antenna elements are enclosed in a rugged UV resistant fiberglass housing, making them ideal for harsh environmental conditions. Our automated uplink drive or walk testing system for public safety radio networks is an industry disruptor. The majority of public safety radio coverage issues occur in the uplink, which is a signal from the handset to the radio site. Our solution is the first to incorporate synchronized uplink measurements into a drive or walk testing system. The uplink testing feature was released last month and is available as a software update for existing customers using our Seahawk Touch and Seahawk Monitor systems. Trials remain strong, driven by customers' desire to ensure adequate uplink and downlink signal levels that ultimately help keep first responders safe. We are particularly excited to introduce these new product launches, which we expect to contribute to our success in 2023 and beyond. Our business segments each delivered strength in the quarter. As Kevin previously mentioned, our test and measurement revenue grew 33% versus the year-ago period on notably strong backlog. Additionally, we have enjoyed a significant increase in users on our Seahawk Central platform and strength from our G-Flex scanning receiver. In a quarter, we completed our first system sale of our Seahawk monitor, with the customer noting they anticipate additional needs in the near future. We also are seeing growth in Seahawk Central as the platform appeals to the market markets' interest in cost-effective and easy-to-use cloud-based system to manage testing of public safety networks. GFLEX has gained great momentum in the period, as it is now approved with all major U.S. cellular operators. Additionally, it is poised for both international growth in key markets as well as for U.S. government applications. Lastly, we have executed several large sales from service and rental customers for our scanning receiver products, to conduct 5G optimization and benchmarking services as mobile operators continue to expand their 5G rollouts. Turning to antennas, although we are making progress in expanding our customer reach, further penetrating the EV charging, agriculture, construction, and public safety end markets, revenues declined by 8.7% compared to the year-ago period. As Kevin discussed, the decline in antenna revenue is primarily attributable to our customer supply chain headwinds, which they anticipate will persist through 2023, delaying previously planned projects. That said, we have seen a significant upside in our smart tech product lines. A European EV automotive customer selected multiple smart tech antennas for two of its new vehicle models. We are now manufacturing these antennas and expect to ramp through the remainder of the year. Additionally, a global forklift manufacturer has moved forward with smart tech antennas for their European markets. We also secured a new end market for our antenna products in the quarter as we outfitted a major cruise ship with Wi-Fi antennas and now have an opportunity to supply antennas for one or two additional ships. Moving to our second growth strategy, we continue to gain momentum in our global sales channels across each of our businesses. On the test and measurement side, we enjoyed strong revenue from U.S. sales of 5G scanning receivers and sales to our global 5G rental market customers, particularly in Asia, as the Asian operators prepare to roll out their 5G networks. On the antenna side, as I mentioned earlier, we continue to see growth from European automotive manufacturers and anticipate delivering our smart tech antennas in European markets for a global forklift manufacturer later this year. We are pleased with the progress we have made and look to build upon this through furthering relationships and streamlining our European sales efforts. Lastly, we are refocusing on growing PCTel's brand awareness through leveraging a prominent online distributor. The initial results of our efforts are promising, with strength in our customer count and increasing point-of-sale revenue every quarter since the relationship with this distributor began. We see significant growth opportunities within our intended segment and look forward to continuing to update you on the progress as we move through the year. Concluding with our third core growth strategy of increasing market share with existing customers by providing integrated solutions, we have made significant progress with a leading OEM customer in the construction and agriculture equipment market interested in using our ruggedized access points to improve wireless communications in remote and harsh environments. We remain committed to offering turnkey solutions to our customers that may include industrial IoT sensors, radios and antennas, designed for critical communication applications across a variety of end markets. Our strategic priority for 2023 remains growth as we continue to address supply chain issues, increase inflation, and potential recession headwinds. We remain fiscally disciplined, our talent is unmatched, and our solutions for antennas and test and measurement are recognized as best in class in the market. With this strategic priority of growth in mind, we will continue to invest in our products, people, and global reach as we work through the remainder of the year. As Kevin mentioned, our balance sheet remains strong and provides us with flexibility to invest in the business and also explore inorganic opportunities as appropriate. With that, I'd like to turn it over to the operator for questions. Operator?
spk00: Thank you very much. At this time, we're going to open the floor for questions. If you would like to ask a question, please press star 1 on your phone keypad. A confirmation tone will indicate your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For anyone using speaker equipment, it may be necessary to pick up your handset before you press the keys. One moment whilst we poll for questions. Thank you. Your first question is coming from Jason Schmidt of Lake Street. Jason, your line is live.
spk01: Hey, guys. Thanks for taking my questions and congrats on a really strong start to the year. Just want to start with the antenna business. You noted some planned projects that were delayed due to the supply chain. Do you have dates for those projects resuming or have they just been pushed indefinitely at this point?
spk03: Thanks for the question, Jason, and thanks for joining. Yes, we do have dates. It's not just one project. There's really, I think, two issues on the antenna front. One, some of our customers are still carrying a bit of inventory coming into the year, so it's slower, especially in the public safety. And with the supply chain challenge, it's not necessarily PCTO. We've We've been able to deliver every product that we need to, and our supply chain group's done a great job getting all of our raw materials. But as we're providing an antenna, it's a smaller piece of much larger systems, so we've had two or three of our larger deals get pushed. One is starting towards the end of the year, and actually one was pushed into 2024. So we have dates, we haven't lost those deals, but they need to get radios and other components before they're ready for the antennas.
spk01: Okay, that makes sense. And along those lines, I mean, you've noted some inventory levels that need to be worked down here. Do you think this digestion is over here in Q2 or do you think it bleeds into Q3 as well?
spk03: Yeah, we'd like to have more visibility with some of these customers. One of the customers, this isn't the first time, so they go through cycles of carrying a bit of inventory and then not making some purchases for a while. If anything, I think coming out of the pandemic, it may have increased the challenge a bit because I think everyone's carrying more inventory as well as PCTel. I would think they'll work through it. You really can't make a commitment for probably through the second half of the year. If it's earlier, it'll be a benefit for us.
spk01: Okay. And then you continue to see some really nice momentum in the test and measurement business. Just curious if you think that's largely due to just the continued market growth there in some of the new products, or do you think you're actually also gaining share as well in that space?
spk03: I think most of that is coming from new markets. and actually a new market on 5G for rollout. The U.S. operators, we have really good coverage now. Europe and Asia have been a bit behind in securing spectrum and rolling out their networks. I came across an article not too long ago that the 5G adoption is about 20% globally, so there's still plenty of room for new networks. So I think Up until now, still the majority of the business has been driven by 5G. The public safety solutions, which we talked about during the call, are definitely gaining momentum. We're definitely in a market-leading position. The downlink solution, which we've had for a couple years now, continues to do pretty well. I wouldn't say it's growing rapidly, but we're getting a lot of very constructive feedback from customers and this uplink. testing requirement came because we had equipment in the field. This need was shared with us, and we developed a solution. So I think the public safety going forward will create another growth channel. And I've said this before, I don't know if it'll be as large as the cellular market, but it's an emerging, developing market, and I think we're in a really strong position And then on the government front, our scanning receivers are very applicable for government emergency situations like a FEMA or military applications. We just launched the GFLEX in the last year or so, and it's got the capabilities to serve some of those collection needs. So a little bit longer term, probably starting in 24, I think we'll start to see some scanner business from government and military space. And then on top of all that, with 5G, private 5G I think is an opportunity that's still very early. I think it's encouraging to see private enterprises, including some of our current customers, bidding and winning Spectrum. So they intend to use private 5G for latency needs and throughput and coordinating manufacturing in warehouses. Lots of opportunities, just have to execute.
spk01: Okay, no, that's really great to hear. And the last one for me, and I'll jump back into Q. Obviously, one of the growth initiatives is expanding the distribution channel. Just curious how much business is done through distribution today, and I guess longer term, not this year, not next year, but do you have a target in mind as far as the percentage of the business you'd like to be done through Disties?
spk02: Hi, Jason. Currently, we probably do around 20% to 25% through distribution. It is a gross initiative, and we're in the process of moving some of our smaller customers to distribution. We don't have a target per se, but it's definitely a strategy to move some of our smaller customers to distribution and to leverage those companies and to try to add distribution companies to our customer portfolio. Got it.
spk01: All right, guys. Appreciate the caller. Thank you. Thanks, Jason.
spk00: Thank you very much. Just a reminder, if you do have any questions, please press star 1 on your phone keypad now. Okay, we don't appear to have any further questions. I will now hand back over to management for any closing remarks.
spk03: Thank you. And again, sorry for the delayed start. Thanks for sticking with us. And thanks for joining us on the call this afternoon. Again, I'd like to thank the PCTel team for their dedication to our customers, our business, and our growth. I look forward to continuing to update you on the progress through 2023. I'd like to thank everyone for their support of PCTel and your time here today. Thanks.
spk00: Thank you for joining us today for PCTEL's first quarter 2023 earnings call. You may now disconnect your lines.
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