Earnings Transcript for WTT - Q1 Fiscal Year 2021

Operator: Good day, ladies and gentlemen and welcome to the Q1 2021 Quarterly Earnings Call. At this time all participants have been placed on a listen-only mode. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Mike Kandell. Sir, the floor is yours.

Mike Kandell: Thank you, Paul. Good morning, everyone and thank you for joining us on today’s conference call to discuss Wireless Telecom Group’s first quarter 2021 financial results. With me today is Tim Whelan, the company’s CEO. Before we begin, I would like to remind everyone on the call that our remarks today could 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 2020 Annual Report on Form 10-K. 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 relating to certain non-GAAP measures. We believe representing these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of non-GAAP measures to 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.

Tim Whelan: Thank you, Mike. Good morning, everyone. 2021 is expected to be a very exciting year for Wireless Telecom Group after exiting 2020 with strong Q4 bookings and a higher backlog. And Q1 did not disappoint coming in stronger than we initially expected. Our first quarter results showed strong performance across a number of metrics, continuing our momentum of successful new customer wins, improving bookings and increasing gross margins. On a consolidated basis during the quarter, our revenues increased 20% compared to last year. We realized higher gross margins at 52.5%. We improved our EBITDA results at almost 6% of revenue and we generated a second consecutive quarter of strong consolidated bookings at nearly $13 million, which led to another quarter of higher backlog. We are continuing to execute on our strategy of driving double-digit top-line growth in operating leverage to drive increased profitability in cash flow. Turning to the highlights on our three product groups. In RF components, our revenues in Q1 were consistent with Q4 and as expected decreased when compared to Q1 of last year. This reflects the continuing negative impact of the pandemic on Q1 of this year with slowed investments in building out network infrastructure in empty office buildings, empty stadiums and other large venues targeted by carriers, power companies, and neutral host providers to densify the networks. Recall that the negative effect of the pandemic had more of an impact on the second half of 2020 than on the first half of 2020 for comparison purposes. We believe bookings in RF components have now started to rebound. In Q1 2021, we realized the positive book-to-bill ratio and Q1 bookings were sequentially higher than Q4 2020 bookings. Further, the bookings for the month of April were also the best month of bookings in over 10 months. The relative improving strength of new business within RF components is a good early sign and supports our belief that we will see a steady recovery of demand for the critical components supplied by Microlab throughout the year as carrier investment ramps. The drivers to our assumptions for increasing demand includes pent up demand from projects, put on hold last year, due to vacant building, stadiums and other large venues, which are now expected to see returning occupancy in coming months. In addition, the carriers invested heavily in the mid-band spectrum auctions, which were completed in February of this year. And they have subsequently announced higher CapEx spend to deploy the spectrum. It is important to note that the design to build timeline can be lengthy and we have not yet seen many large projects returned to the funnel, so some of these large projects could extend into 2022 and beyond. In our test and measurement product portfolio, our Q1 results reflect the full quarter of ownership of the Holzworth business, which has continued to perform well. We are realizing top-line synergies from an expanded product portfolio in our sales channels, and we are working to continue to leverage deep customer relationships in our existing brands. Our legacy smart noise sources and design-in initiatives also benefited from increased sales in the first quarter. Overall, we believe the alignment of our product set away from just the legacy bench-top instruments to our expanded focus on new products and solutions, which are designed into larger, more complex devices is showing dividends. We remained focused on bringing new products to market, which compete with larger suppliers by offering a superior price performance ratio. And last within our radio, baseband and software business, we had another strong quarter of bookings and continued our momentum of signing new customers for our 5G software solutions. Specifically within this product group, we signed over four million of business in the quarter, a second consecutive quarter of RBS bookings in excess of four million. We signed two new customers in Q1 for our software solutions, both of which are 5G solutions. And one of the two new contracts signed in Q1 includes participation in the U.S. Department of Defense 5G trials, while the second is for a specialized 5G small cell solution. The first purchase orders received for these two new software customers and included in Q1 bookings totaled approximately $800,000. However, the potential total contract value of the contract signed could exceed $4 million of potential value over several fiscal years. We expect our performance and delivery of the projects milestones laid out in the contracts are expected to yield continued purchase orders for additional milestones. And as noted in our last earnings call, we also received additional purchase orders in the first quarter for our hardware cards used in LTE test systems from our longstanding customer who is realizing increased demand for base station test systems. Looking ahead into RBS, we expect to see continued interest in our 5G software solutions and R&D roadmap. We also expect to continue our pace of signing new customers in the quarters ahead. And I’m pleased to report that in the month of May, we have already signed one new customer to our 5G software solution with a contract value just under $1 million. To summarize, the first quarter 2021 results are a significant improvement over the first quarter of last year, while certain parts of our business such as RF components are still showing the negative effects of the COVID-19 pandemic. We are optimistic the worst is over. We are seeing early signs of recovery and expect steady improvements throughout the year. At the same time, T&M continues to realize the benefits of a successful Holzworth acquisition, as well as traction with our smart noise sources, and our RBS business continues to demonstrate significant quarterly sequential improvement and growth of new customers for our LTE and 5G software and services. With that, I’m going to turn the call back over to Mike, to walk us through the financials.

Mike Kandell: Thank you, Tim. Good morning again, everyone. I’m going to walk through the results for the first quarter of 2021, and then comment on our balance sheet as of March 31, 2021. All P&L comparisons are on a year-over-year basis unless otherwise noted and balance sheet comments are March 31, 2021 compared to year end December 31, 2020. Consolidated revenues for the first quarter 2021 increased $1.9 million or 20% from the prior year period. At a product group level RBS revenue increased $1.4 million or 103% on higher software and services revenues, as well as higher sales of digital signal processing hardware cards. T&M revenue increased $1.6 million or 42% as we realized the full quarter of Holzworth sales and had a net overall increase in revenue in our legacy T&M brands. These increases were partially offset by a decrease in RF component revenues of $1.1 million, as we continue to see the negative impact of the COVID-19 pandemic and reduced carrier spending in this product group. Although below our – below prior year results, Q1 2021 revenue for RF components was in line with our expectations. Consolidated gross profit increased $1.5 million on higher revenues. Consolidated gross profit margin increased from 47% to 52.5% due to the contribution of higher margin software and services revenue at our RBS product group, and higher margin T&M product sales. This was only partially offset by a lower gross profit margin at the RF components product group due to lower volumes and lower absorption of fixed manufacturing costs. Turning to operating expenses. Consolidated R&D expenses decreased approximately $200,000 or 12% from the prior year as a result of lower third-party material and consulting expenses due to the timing of projects. Consolidated sales and marketing expenses were flat as increased commission expense was offset by lower salaries and benefits due to lower head count. Consolidated general and administrative expenses increased $375,000 or approximately 15% from the prior year due primarily to legal expenses associated with the debt amendments and the Holzworth stock purchase amendment executed in February. Other expense decreased $215,000 from the prior year due to lower foreign exchange gains and interest expense increased $72,000 primarily related to our term debt. Our net loss for the quarter improved by approximately $900,000 due primarily to higher gross profit on higher revenues offset only partially by higher operating expenses and lower foreign exchange gains. Non-GAAP adjusted EBITDA was $671,000 for the first quarter, which was approximately a $1 million higher than the prior year period due primarily to our higher revenues and gross profit. Turning to the balance sheet. Consolidated cash, as of March 31, 2021 was $3.9 million or approximately $1 million lower than December 31, 2020 due to an increase in working capital. The March pay down of our term debt of $428,000 and the payment of $200,000 to the Holzworth founders in accordance with the stock purchase agreement. Availability under our asset-based revolver was $6.3 million and gross debt was $9.9 million, which includes $2 million related to our PPP loan. As reported at year end, the PPP loan funds were spent in fiscal 2020 on qualified expenses, primarily payroll, and our forgiveness application has been submitted to the small business association although there’s no guarantee that the loan will be forgiven. Also noted at year end, we’ve restructured the payment terms of the Holzworth deferred purchase price and earn-out, which are $750,000 and $3.4 million respectively. Included in accruals and other current liabilities at March 31, 2021, are $750,000 related to the Holzworth deferred purchase price. And $1.4 million related to the short-term portion of the Holzworth earn-out. Included in other long-term liabilities at March 31, 2021 is $2 million related to the long-term portion of the Holzworth earn-out. I’ll now turn the call back over to Tim for some closing remarks.

Tim Whelan: Thank you, Mike. I’m pleased and encouraged with our execution over the last two quarters and the positive signs of future growth we are seeing in the business, including strong bookings, new customers for our software solutions, improving RF component bookings and continued Holzworth performance. At the same time, we are closely monitoring the progress of our customer funnel for our software solutions, which require much longer and more complex negotiations with our customers and have longer delivery timelines and complexity of revenue recognition. Also, while we are seeing increased funnel and order flow related to stadiums, amusement parks and other public venues, the size of these opportunities are not yet inclusive of the very large projects, which will help drive revenue growth back to levels before the pandemic hit. Before I conclude my remarks, in addition to a strong quarter of operational execution, we also continue to add talent and expertise to our Board of Directors to help drive our next stage of growth. Since December, 2020, we have added two new, incredibly skilled and experienced board members, Jennifer Fritzsche and Scott Gibson. Jennifer brings over 25 years of experience as an award-winning telecom and equity market analyst. And Scott brings over 35 years of experience as a seasoned semiconductor technology executive, as well as deep technology board experience. Their extensive understanding of our markets, technology, trends and market participants is expected to add immediate value. We would also like to thank the parting board members, Joe Garrity, and Joe Manko for their invaluable service and invaluable contributions to the company, the executive team and the rest of the Board of Directors. Their thoughtful counsel, insightful advice, inquisitive questions in their support and contributions to our strategy and vision has been deeply appreciated and valued. We wish every bit of success and best of luck on their next endeavors and look forward to their continued engagement as shareholders. Thank you. And Paul, if you could please open the lines for questions.

Operator: Certainly. [Operator Instructions] And the first question is coming from Josh Nichols [B. Riley]. Josh your line is live. Please announce your affiliation and post your question.

Josh Nichols: Thanks guys. And good to see the execution on the quarter here, I think you hit on a little bit, on the call, but if you could elaborate a little bit more about the RF Group nice to see that some initial rebound there, one, what areas of strength are you seeing particularly, and then how long do you think it may take until that group is able to get back to kind of like pre-pandemic levels? Is that late this year or more like 2022, do you think?

Tim Whelan: Sure. Thank you, Josh. Good morning. Thank you for joining us. So, as I noted, the April bookings were the best we’ve had in 10 months, had some encouraging sign and that the Q1 was quench we’d better than Q4. So, I think the way we think about this is it’s going to take a few quarters for these projects to get through the system, the largest size projects to get through the system. We are certainly seeing the run rate business pick up and that’s how we think about the order flow. There’s the smaller run rate business that comes in quickly smaller in size. It has an immediate timing to it. The larger size projects take design work and take time to go through RFPs in quoting. So the run rate is picked up. We’re seeing some stadiums and other large venues show up and actually come through an order flow, but they’re not large sized. So that’s just some color on the order flow. The way we think about the year is there’ll be a sequential improvement. Each quarter should be better than the last. And the way we think about the full year is that the first half of 2021 should look similar to the second half of 2020. And the second half of 2021 should look like the first half of 2020. And so we expect it’ll take a few quarters to get back up to where we thought, the full run rate of RF component potential could be.

Josh Nichols: Yes, thanks for adding the detail on that. That’s helpful. And then just, if you could kind of elaborate a little bit, I know most of the businesses obviously coming from North America, but any differences or things you’re seeing in order flow in the U.S. versus like Europe, which may be a little bit further behind U.S. in some regards or like APAC and what are the thoughts there?

Mike Kandell: Yes, it Josh its Mike. Yes. So, as Tim mentioned, we’re starting to see some demand for our signal processing hardware cards again, at RBS, and that comes from EMEA. So, we’re starting to see that pick up again, and then in terms of APAC when – relative to last year, that’s where we started to feel the impact of the pandemic first with some of our international orders specifically in our T&M product group. So, we’re expecting to see some of that pickup in APAC as well this year.

Josh Nichols: And then last question from me, then let someone else take a chance here. If you could kind of talk a little bit more about the software sales, like, what do you think is kind of the big driver that you’re seeing for the strength there, then the expectations for what type of improvement you could see as we kind of move through 2021 and then 2022?

Tim Whelan: Yes, I think the improvement there it’s really been a sequence in a series of milestones that we’ve had to accomplish to get to where we’re at today. Keep in mind that Release 15 was a critical release for 5G software that happened in the fourth quarter of 2019 following that was the NXP partnership in the first quarter of 2020. And then following those two critical milestones in each of the three remaining quarters of 2020, we began to sign new customers and that momentum has continued through both Q1 of 2021, as well as the signing I announced in May. So, we’re encouraged and excited to see that traction. And I believe that is really just the advancement of the adoption of 5G technology in the marketplace and the applications in terms of what can come of that. And I think it’s an exciting, it’s going to be an exciting and long-term cycle of investment that we’re at the front end of. So in terms of expectations going forward, again, I keep stating how complex these are negotiations around the emerging technology. Customers are requiring more proof points, more milestones, more acceptances. So it takes time to work through that, both from the contract to get the signature as well as for the delivery. So, we’re working hard to ensure that we can continue ramping our success. We’re on a streak of signing two new customers for each of the four sequential quarters ending Q1. It’s difficult to predict based upon the opportunities in the funnel, the ability to sustain or increase that, but we’re working to do that. And we’re encouraged with the opportunities that are in the funnel. As we think longer term a number of these opportunities also have royalty components to them. And so the success of our customers should provide us with royalty license opportunities as well. But those are beyond 2021 and are likely late 2022 or even 2023.

Josh Nichols: Thanks guys. I’ll hop back in the queue.

Tim Whelan: Great. Thank you, Josh.

Operator: Thank you. [Operator Instructions] And the next question is coming from Michael Potter [Monarch Capital Group]. Michael, your line is live. Please announce your affiliation and pose your question.

Michael Potter: Hey, Tim, congratulations on a very strong quarter and continuing progress of moving the company forward. Just a quick question on the contract you mentioned with, I guess the DoD and the opportunity for this contract to grow if you hit certain milestones, can you give us a little bit more color on what the trials entail and perhaps what this can be used for and, what exactly is the DoD looking to do?

Tim Whelan: Sure. So thank you Michael, good morning. Thank you for joining us. The DoD is announced 12 trials, 5G trials at various military bases each with different applications. Some include just a 5G private network type of application for naval bases. Other includes air to ground spectrum shifting applications for Air force bases. So, we’re involved in a project that involves some of that spectrum shifting and their air to ground application. The contract value on that is about half of the four million [ph], I called out each of the two contracts we signed have approximate total contract value of approximately a $2 million each. But they’re partitioned into committed spend in milestones. And so from a bookings perspective, we take the position of bookings are what the committed purchase orders are that we received, but we would expect when those milestones are received. The next milestones will free up and those will be the bookings in future periods. So, I hope that helps give a little bit of color on that.

Michael Potter: Yes, absolutely. So, I guess for the second contract that you signed, that is in similar, the contract is actually much larger is in the initial booking?

Tim Whelan: Correct. Yes. And again, based upon the 5G technology, they’re looking to ensure that as we and NXP work together, deliver milestones with functionality, that they very carefully evaluate and accept that before they free up the next milestone.

Michael Potter: Okay. All right. Terrific. And then this is well I guess, that topic in regards to the very large legacy customer on the 4G hardware side, they continue to be active once again, which is certainly a good sign. Do we have any more visibility into their plans for 2021?

Tim Whelan: I believe given the supply chain constraints delays and challenges with transportation, they have been thoughtful about their placing of orders for the future. So it’s difficult to predict given the volatility of their demand and how it was steady state throughout 2019, and then fell off precipitously for 2020. So, I think now they’ve received some additional orders through getting ahead of them. They’ve ordered for future quarters. They have not indicated future demand to us. We believe we’ll get a little bit more, but they have not committed or promised that to us, but I don’t believe that in each of the next three quarters we’ll replicate those large POs, but I do believe we’ll get some POs that fill in.

Michael Potter: Okay, terrific. I’ll get back in the queue. Thanks guys.

Tim Whelan: Thank you, Mike.

Operator: Thank you. And the next question is coming from Robert Marcin. Robert your line is live. Please announce your affiliation and pose your question.

Robert Marcin: Robert Marcin, Penn Capital. Hi guys. Congratulations on another good quarter.

Tim Whelan: Good morning, Robert. Thank you.

Robert Marcin: You’re very welcome. Can you just expand them on the funnel for the software business? Is there a growing number of prospects in the funnel as we proceed quarter-to-quarter, because we were definitely up in the range of a couple new customers every quarter, but at some point the funnel needs to get larger in order for that to double or triple as we proceed over the next year or so, are you perceiving that happening or are we sort of plateaued in a level of customers in the funnel as we convert or they reject the process?

Tim Whelan: Yes, thank you, Robert. I’m very encouraged with the health of the funnel. The funnel is a very, very dynamic metric changing week-to-week. We have multiple measurements in our funnel customers that are early leads, prospects, advanced stage and near final, right? So, you have different confidence level as well as different stages of negotiations. Overall, we’re very pleased with the development of the funnel. As we think about both, this year and next, and as we think about both large complex contracts, as well as those that are less complex and more near term. To call out any kind of funnel quantitative funnel, it just changes every week, but overall, Robert I’m very encouraged with the health and direction of our funnel.

Robert Marcin: Right. Are you, happy with the relationship between the partnership between you and NXP? Has there been any feedback preliminary from the field as to how the products are working together?

Tim Whelan: We are very, very pleased with our relationship and the partnership with NXP. Its close, it remains productive and constructive for both sides. They continue to develop their layer skateboard, which is where our software resides. They have milestones to market to continue advancing that as do we. I think the only caution that we all think about is the impact of COVID on – in the world and the impact of COVID in India and how that impacts, support and resources for certain software that’s being developed, and it’s just on the watch list, but otherwise we’re, very, very encouraged with what we’ve been able to do together and where we’re heading.

Robert Marcin: All right. In the tested measurement business, are you going to give the breakdowns by the individual brands?

Tim Whelan: No, it’s getting more difficult to do that? Because we see customers ordering through one brand for other products, we’re collaborating and bringing products to market that combined technologies on brands. So, that’s not something that I think is going to be a helpful metric. I think we’re trying to be informative as the impact of Holzworth as we have comparative periods, especially given Q1 of last year was not a full period of ownership. I think that’s why we’re calling that out to make sure that we provide some color there. But going forward, we think of it more as a consolidated test and measurement business especially as teams of people come together and working on different product sets and we’re breaking down silos. So the brands are important for how customers think about a particular function of an instrument, but less so is how we think about the reporting numbers.

Robert Marcin: Yes. I understand all that, Tim, but you still need to differentiate for the earn-out purposes for this year. Is that not correct? And then Holzworth needs to deliver a standalone revenue and EBITDA number I assume. Right?

Tim Whelan: And we have purpose, correct. We have a…

Robert Marcin: Can you give us one more here of Holzworth as it were or not? If you’re choosing not to do that?

Tim Whelan: No, I’m not saying we’re not choosing to do that. I think we’ve tried to be constructive and how we have disclosed the numbers this quarter. And then we will continue to tell you how we’re doing and the impact, and how Holzworth is doing and impact if any, on any future earn-outs.

Robert Marcin: Okay. Well, I understand that, at some point the merger makes delivering Holzworth standalone numbers, impossible, obviously, but I just didn’t realize it was in 2021. All right. Thank you very much.

Tim Whelan: Okay. Great, Robert. Thank you.

Operator: Thank you. [Operator Instructions] And there were no other questions from the lines at this time.

Tim Whelan: Great. Paul, thank you very much. Everyone, thank you for joining us today, we look forward to speaking with all of you again soon. Have a great day.

Operator: Thank you, ladies and gentlemen. This does conclude today’s conference call. You may disconnect your phone lines at this time. Have a wonderful day. Thank you for your participation.