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spk00: Greetings and welcome to PCTEL's second quarter earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star and then zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Kevin McGowan. Please go ahead.
spk03: Thank you for joining us on today's conference call to discuss PcTel's second quarter 2023 financial results. With me today is David Newman, the company's CEO. Please note that a webcast replay of this 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. I'm now pleased to turn the call over to David Newman.
spk04: Thank you, Kevin. Good afternoon, all, and thank you for joining us today on our second quarter 2023 conference call.
spk06: Today we will discuss market conditions, review our second quarter performance, and share our outlook for the third quarter 2023. Kevin will then review our financial results in greater detail. Incoming orders improved in the quarter driven in part by a large OEM customer increasing purchases as their higher than normal inventory levels began to decline. We are pleased to report that customer supply chain issues are improving, which also contributed to the increase in orders. At a high level, we delivered second quarter revenues of $20.6 million, a decrease of $4.4 million year-over-year, but we achieved strong non-GAAP gross margins of 49.5% of 3.5% from the prior year period. Top line performance was in line with our expectations and the decline both on a sequential and year over year basis was due to lower revenues in both product lines. Although revenue decreased in our antenna business, incoming orders increased in the quarter, which will contribute to revenue in the second half of the year and into 2024. Scanning receiver incoming orders also increased, and the revenue comparison is to a stronger than expected first quarter, as Kevin will highlight soon. As always, I would like to thank our PCSL team for their continued dedication and contribution to our business and growth. Through their diligence, we have been able to continue to successfully navigate today's challenging operating environment. Our supply chain relationships remain strong, our on-time delivery metrics remain high, and our inventory is in a good position for the remainder of the year. Later in today's call, I will discuss our three core growth strategies in greater detail. We continue to make important progress with our industry-leading product launches, customer and distribution expansion, and work to provide more components for our customer systems, which continue to serve as a foundation of our operational success. I would now like to turn the call over to Kevin for a review of our second quarter 2023 results.
spk04: Kevin?
spk03: Thank you, David. Total revenues were 20.6 million, essentially the midpoint of our guidance range, and 17.6% lower compared to the prior year period. Revenues for antennas and industrial IoT devices were 14.4 million in the period, a decrease of roughly 3.2 million compared to the second quarter of 2022, with lower antenna revenues for enterprise and public safety applications due to customer inventory levels, as well as customer supply chain challenges and other system components. It is worth noting that these issues are starting to abate but still impacted performance during the quarter. Test and measurement revenues were $6.2 million for the second quarter of 2023, $1.2 million lower compared to the second quarter of 2022, primarily due to lower OEM sales, which declined following a particularly strong first quarter. In addition, performance in the second quarter last year was very strong, impacting the comparison to that period. We expect the rest of the year to follow the typical cyclical pattern. Second quarter 2023 gross profit margin percentage on a non-GAAP basis was 49.5% above our expectations and a 3.5% increase from the year-ago period. The increase in gross profit margin percentage was primarily due to a stronger gross profit margin percentage for antennas and industrial IoT devices. Non-GAAP gross profit margin percentage for antennas and industrial IoT devices in the second quarter 2023 improved by 6.5% compared to the second quarter 2022 due to continued improvement in logistical and operating costs relative to last year. coupled with a favorable shift in product and customer mix. The non-GAAP gross profit margin percentage for test and measurement products was lower by 4.2% in the second quarter of 2023 compared to the second quarter of 2022 due to higher component costs. Upgrading expenses on the non-GAAP basis were $9 million in the second quarter of 2023, a decrease of $0.7 million compared to the second quarter of 2022 The year-over-year decrease was primarily due to lower expenses and sales and marketing related to commissions and marketing programs, as well as lower expense accruals for incentive compensation. Other income was $0.3 million in the second quarter of 2023 compared to $0.1 million in the prior year period. The year-over-year increase was primarily due to higher average interest rates. Adjusted EBITDA decreased by approximately 33% to $1.7 million in the second quarter of 2023, compared to $2.6 million in the year-ago period. Adjusted EBITDA as a percentage of revenue was 8.5% in the second quarter of 2023, compared to 10.4% in the second quarter of 2022. And non-GAAP diluted earnings per share was $0.07 in the second quarter of 2023, exceeding our expectations of between 2 cents to 4 cents, but was lowered by 3 cents compared to the second quarter of 2022. The decrease in earnings per share and adjusted EBITDA can be attributed to the lower sales volumes. Cash and investments were $33.6 million at the end of the second quarter of 2023. Compared to the end of the first quarter of 2023, our cash and investments increased by approximately $3.4 million With lower sequential revenues, our receivables contracted by $2.6 million, and we reduced inventories by approximately $1.2 million during the second quarter. We will continue to focus on managing the inventory to lower levels in both product lines. Financing activities for the second quarter include payment of our quarterly dividend of $1 million. Our healthy cash and investments on hand and cash flow support our capital allocation strategy of paying quarterly cash dividends and having available funds for M&A activity. Turning to our third quarter outlook, we expect revenues to be in the range of $20 million to $21 million. We see positive trends in some areas as we expect continued improvement in the inventory and supply chain headwinds that David mentioned previously. Top line performance is expected to be flat on a sequential basis with similar performance as in the second quarter for both product lines. We expect the non-GAAP gross profit margin percentage to be in the range of 48% to 49%, and we expect our non-GAAP earnings per share to be in the range of 6 cents to 7 cents. While there is ongoing uncertainty around the global operating environment in 2023, we're 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.
spk04: With that, I will turn the call back to David. Thank you, Kevin.
spk06: I would now like to discuss our progress towards our three core growth strategies during the quarter and comment more generally on developments in the business. As I mentioned earlier, these 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 customer systems. Beginning with our innovative product launches, we are pleased to announce multiple industry-leading products in quarter, including the addition of 4G and 5G network monitoring capabilities to our Seahawk Monitor product. With this release, Seahawk Monitor can collect and evaluate downlink signals from 4G and 5G network base stations for mission-critical public safety and broadband wireless networks. This system detects and decodes 4G and 5G-based station signals in real time and notifies users of changes in conditions, which may indicate interference that impacts network capacity and quality. Ultimately, this monitoring will support the growth of private broadband networks for hospitals, utilities, stadiums and venues, and other mission-critical applications, such as government emergency services. In July, we announced a ruggedized integrated IoT sensor and an antenna platform, the Edge Sensor. This is a solution designed to operate in harsh environments and provide reliable and improved edge connectivity with industrial IoT sensing. The Edge Sensor is a highly customizable solution that combines two of our top platforms in a single ruggedized housing. Customers have the ability to select from a variety of industrial IoT onboard and external sensors based on their needs for applications in smart utilities, agriculture, mining, and industrial process automation. We view the Edge sensor as an exciting next step in PCTel's evolution and the integration of our antennas with active components, including radios and sensors. These advanced product launches build upon our commitment to innovation and are expected to contribute to driving further growth for years to come. We also saw a number of positive developments for our test and measurement business. 5G rollouts continue globally with more than 25 countries planning to deploy 5G networks in 2023. Additional test and measurement tools will be required for initial deployment and then to address the need for additional capacity as usage and applications increase. In the second quarter, we secured significant public safety orders for in-building network testing systems that will be delivered over the next year. We also see growth in usage of our Seahawk central cloud-based data management and reporting for public safety and building testing. Finally, trials of Seahawk Monitor have begun to convert to sales with several other potential customers working on budget and purchase orders. We believe this product has potential to open up new markets in cellular and government beyond the current public safety use cases. As I mentioned, antenna incoming orders improved as supply chain headwinds began to ease. We are encouraged that we continue to make strides in expanding our customer reach, further penetrating and receiving large orders within electric vehicle, agriculture, construction, and public safety markets. To make it easier for customers to select the appropriate antenna for wireless routers, we launched an online selector tool and expect to have the most comprehensive antenna selector tool in the market by the end of the year, which should increase antenna orders. Additionally, we secured significant design wins that are expected to drive revenue in 2024 and beyond and launched two new omnidirectional antenna platforms that support the latest Wi-Fi 7 and 5G technologies targeting IoT, enterprise, and industrial applications. I would now like to touch on our momentum in our global sales channels across each of our businesses. Within test and measurement, I mentioned that we see ample opportunity within public safety markets, and for 5G rollouts. There are still many markets in Europe, Africa, and Asia that have sizable opportunities ahead as they allocate spectrum and plan 5G deployments. With respect to antennas, we continue to see growth in the number of new customers buying through our larger distributors. For our OEM antenna customers, supply chain constraints are beginning to ease, and inventory issues for one of our major public safety OEMs are beginning to improve. We also started to receive orders from a major material handling customer that have been delayed for more than a year. Lastly, we are pleased to share that we received a large order from a European electric vehicle manufacturer, building backlog from the remainder of this year and into 2024. Our contract manufacturers in Asia continue to perform well as it relates to on-time delivery, quality, and customer satisfaction. We continue to evaluate contract manufacturers outside China and Southeast Asia and North America and are consistently working to optimize our factory efficiency in the U.S. Moving to our third core growth strategy of increasing market share with existing customers by providing integrated solutions, we have enjoyed great success with providing our customers with complementary products that leverage our expertise in antennas. Our Edge sensor, an integrated sensor antenna platform, is in trial with utilities and smart meter customers, and we expect a significant order by the end of the year for a ruggedized access point for heavy vehicle applications. I'd like to provide some overarching comments on the business. As previously noted, customers continue to work through temporary inventory issues, and there is still work to be done, but as I shared, we're starting to see incremental improvements. Incoming orders are increasing and the underlying demand environment remains healthy. Our talent is unmatched and our solutions for antennas and industrial IoT devices and test and measurement solutions are recognized as best in class in the market. With the 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 and into 2024. As Kevin mentioned, our balance sheet remains strong and provides us with the flexibility to invest in the business, and also explore inorganic growth opportunities as appropriate. Finally, we're looking forward to some upcoming investor conferences in the back half of the year. We will be attending the Lake Street Conference in September, as well as the Wolf Conference in December, both in New York, and we look forward to meeting with some of you at these events. I would also like to share that after 26 years of service, Giacomo Marini retired from PCTEL Board of Directors in June. Giacomo's experience and tenure added a great deal of value to PcTel. I'm also pleased to welcome Tony Rossabi to our board of directors. Tony's deep expertise within telecommunications and IT industries will be invaluable to PcTel's future growth, and we are excited to be working alongside him.
spk04: With that, I would like to turn the call over to the operator for questions. Operator?
spk00: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star and then 1 on your telephone keypad. The confirmation tone will indicate your line is in the question queue. You may press star and then 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. The first question we have is from Jason Schmidt of Lake Street. Please go ahead.
spk01: Hey, guys. Thanks for taking my questions, and congrats on the really strong results. Just want to start with the gross margin performance in Q2. It seems to have come in well above.
spk00: Apologies, Jason. Just a moment. Apologies for that. We lost connection with the main speaker line.
spk08: Just a moment. We have been rejoined by the main speakers.
spk00: Jason, please go ahead and pose your question.
spk01: Hey, guys. Thanks for taking my questions, and congrats on the strong results. I want to start with gross margin. Q2 seemed to outperform initial guidance. I know you mentioned mix as well as some logistic costs coming down, but anything else that really kind of drove that outperformance? Hi, Jason.
spk02: No, that's really it. Our freight costs were higher in the first half of last year, so that was a big, big element was continuing reduction there. The mix with the products ended up being lower tariff costs and a good mix on the product side. We also have gotten some efficiencies out of our Bloomingdale facility. We've been able to optimize the headcount and lower the headcount, in fact, to get some lower operating costs from here.
spk01: Okay, that's helpful. And I know you updated us on the EV market in Europe, but curious if you could provide any additional color on what you're seeing on the EV market in the U.S. and sort of any traction there.
spk05: Yeah, so I think most investors know that we initially got into the EV market through the SmartTech acquisition about two years ago. So Smartech had a very strong position with the EV charging stations in the Nordic countries. And it also had a pretty strong relationship with a vehicle, a manufacturer. So we've been able to get some wins on electric vehicles as well. We're in the process now of, I would say, integrating and cross-selling the products. We've developed some antenna equipment. integration kits that we can send to the different EV charging station manufacturers to get the broad range of both PCTel and the SmartTech antennas. So that's in process. We're leveraging some of the same manufacturers that are in Europe or in the U.S., so we think there's some opportunities there. But I would say we're still pursuing accounts. We're not at the same scale as we are in Europe, but it does provide some excellent reference accounts.
spk01: Okay, that's really helpful. Just the last one from me, and I'll jump back into Q. You noted the inventory issues at your major public safety OEM are improving. Do you anticipate those inventory issues to be resolved after Q3, or is this the situation that kind of bleeds into Q4 and doesn't really get corrected until early 2024?
spk05: Yeah, so we don't have a lot of visibility of the level of inventory that the OEM is working through. But we're making that assumption just based on the number of orders that they're placing with PCTel. So we see orders increasing. We're assuming inventory is decreasing. But we don't have a lot of visibility of how much inventory they have. So I think to be safe, we're estimating that this will probably run through the rest of the year as orders increase, and then we'll probably be back at the same level going into 24.
spk08: Okay. That's helpful. That's it for me. Thanks a lot, guys. Thank you, Jason. Jason, if you have any other questions, you may post them now.
spk00: Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to David Newman for closing remarks.
spk05: Thank you, Irene. Thank you for joining us this afternoon. I'd like to once again thank our PCTel team for their continued commitment to our business, to customers, and to growth of the company.
spk04: Thank you all for your support of PCTel and your time here today.
spk08: Ladies and gentlemen, that concludes this conference. Thank you for joining us. You may now disconnect your lines.
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