Earnings Transcript for WTT - Q2 Fiscal Year 2021

Operator: Good day, ladies and gentlemen and welcome to the Wireless Telecom Group Q2 2021 Quarterly Earnings Call. At this time all participants have been placed on a listen-only mode and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mike Kandell, Chief Financial Officer. Sir, the floor is yours.

Mike Kandell: Thank you, Kate. Good morning, everyone and thank you for joining us on today’s conference call to discuss Wireless Telecom Group’s second 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 that 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 that presenting these non-GAAP or adjusted measures provides additional meaningful information to investors, which reflect how management views the business. Detailed reconciliations of GAAP measures to non-GAAP measures are set forth in a reconciliation table in our press release issued earlier today and furnished with the Form 8-K filed today with the SEC. With that, it’s now my pleasure to turn the call over to Tim Whelan.

Tim Whelan: Thank you, Mike and good morning everyone. We are exceptionally pleased with our second quarter results, which we believe continue to demonstrate the success of our long-term strategic plan, as well as improving market conditions. Our second quarter financial performance improved across several key measurements. And while Mike will go through some further details shortly, I would like to acknowledge some highlights. First, consolidated revenue increased both sequentially, as well as year-over-year. Within this increase are some important qualitative points. These include improving RF component revenues increasing sequentially, which demonstrates an improving income environment of carrier network spend. In addition, our increasing second quarter revenues include a record quarter in test and measurement, reflecting strength across all three T&M brands. The Q2 revenue increase also includes a year-over-year increase in RBS revenues, reflecting improving hardware revenues. Netting it out, the increased revenues reflect broad-based improvements across every product group in the business. Second, gross margins remained strong and represent our fifth consecutive quarter of gross margins above 50%. We believe this reflects the successful execution of our strategic goal aimed at driving margins above 50%. Q2 reflects the increasing mix of revenue from higher test and measurement solutions, while the six months ended June 30, 2021, reflects a mix of both higher test and measurement revenues, as well as higher RBS software revenue. And third, our financial performance included sequential and year-over-year EBITDA improvements, reflecting our focus on operational leverage and higher profitability from increasing revenues. Turning to some additional highlights across our three product groups that contributed to improving bookings and backlog. In RF components, our revenues in Q2 increased to over 4 million, as compared to the last two quarters of revenues, which each were in the low $3 million range. This reflects the return of carrier spend driving larger projects, and an improved run rate of bookings from distribution and smaller [sized orders]. The positive book-to-bill ratio in RFC during the quarter was encouraging. Equally important is the traction underway from an increasing number of projects. This includes orders in the second quarter for stadiums, entertainment parks, and other large venue projects, which was our expectation in our last earnings call. We believe improvements will continue and our bookings in the early part of the current third quarter are encouraging, reflecting the potential for continued sequential increases in RFC revenue. In our test and measurement product portfolio, we realized topline growth supported by strength across a broad-base of customers and applications. We captured wins and purchase orders from the military, semiconductor companies, government labs, large defense contractors, and satellite providers. The applications include semiconductor production test, Navy calibration needs, mil aero programs, and satellite communications to name a few. We also continue to see growth opportunities from our design-in initiatives and smart noise sources. All of our T&M brands participated in this broad-based growth and Holzworth continues to perform exceptionally well. Just as important, in June, we expanded our product portfolio with announcements of new programmable noise generators, our new Holzworth multi channel RF synthesizer, and our new Boonton signal generator. These new offerings reflect the continued returns of our R&D roadmap and the post closing synergies that are leveraging core Holzworth technologies to create new products. Overall, we believe our investments in test and measurement, and expanded focus on new products and solutions designed into larger more complex devices is expanding our addressable markets and paying dividends with increased bookings and revenues. Within our Radio, Baseband and Software business, we are excited about the top line opportunity in this product group. And revenue results would reflect 135% growth for the six months ending June 30, as compared to the same period last year, including increases in both hardware and software revenue. We also continue to see very good success signing new software customers, which is reflected in both our bookings and revenues. And we remain very excited by the momentum in our total bookings. Our year-to-date June bookings in RBS include 6.4 million of new RBS orders, which include 4.4 million in the first quarter, and 2 million in the second quarter. These total bookings include approximately 3.7 million of hardware orders and 2.7 million of software and services orders. Our first half RBS bookings also represent over a 500% improvement compared to the first half of 2020 and is nearly equivalent to last year's 2020 full-year RBS bookings of 6.9 million. As we announced in June, we have signed four new software customers in the first half of the year, representing over 2 million of these new RBS orders. Our RBS software is being used in a variety of 5G technology development projects. Programs include 5G millimeter wave repeaters, 5G base stations and small cells, U.S. Department of Defense 5G research projects, and private network deployment. In each case, we customize the software to the unique requirements of our client’s projects, simplifying their development process, cutting time to market, and reducing risk for our customers. It is also important to note that the total potential lifetime contract value of these four new customers is over 6 million subject to continued successful delivery of contract milestones for which only the first 2 million has been recorded as a booking. And last, certain of our contracts reflect potential royalty revenue from our customers, if certain production volume deployments are reached. Our booking numbers do not reflect such royalty amounts as they are contingent upon our customer’s production deployments. Our best estimate of timing of potential royalty revenue is in 2023. To summarize, the second quarter 2021 reflect a significant continued momentum in the business with improvements to our financial performance and growth in our bookings and backlog, which helps underpin our confidence in the future. Collectively, inclusive of all of our product groups, we achieved record bookings of 14.5 million in the quarter, reflecting health and growth across all our product groups, and a 1.21 positive book-to-bill ratio. This in turn has resulted in a record quarter-end backlog at 12.5 million and is our clearest data point for expected continued improvements to our financial results ahead. With that, I'm going to turn the call 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 second quarter of 2021 and then comment on our balance sheet as of June 30, 2021. All P&L comparisons are on a year-over-year basis unless otherwise noted and balance sheet comments are June 30, 2021, compared to year-end December 31, 2020. Before I get into the details of the financials, as Tim mentioned in his opening remarks, we're very pleased with our consolidated results for the second quarter, which include revenue growth of 8.2% year-over-year consolidated bookings of 14.5 million, greater than 50% consolidated gross margins, positive GAAP operating income of 165,000, and cash flow from operations for the six month period ended June 30 of 394,000. Now, turning to the details for Q2. Consolidated revenues for the second quarter 2021 increased 915,000 or 8.2% from the prior year period. At a product group level, RBS revenue increased 1.5 million or 193% on higher sales of digital signal processing hardware cards. T&M revenue increased a million or 23.5%, primarily related to our legacy product brands, specifically our peak power measurement products, as customer spending started to rebound during the evolving COVID-19 pandemic. These increases were partially offset by a decrease in RF component revenues of 1.6 million as we continue to feel the overhang of the continuing COVID-19 pandemic in this product group. Although below prior year results, Q2 2021 revenue for RF components was above our expectations sequentially increasing 35% from Q1 2021. Consolidated gross profit increased 466,000 on higher revenues. Consolidated gross profit margin was flat with the prior year at 51%. Q2 2021 represents our fifth consecutive quarter of greater than 50% consolidated gross profit margin, lower gross profit margin and RF components and RBS was offset by higher margins at our T&M product group, due to product mix and higher absorption of fixed manufacturing costs. Turning to operating expenses. Consolidated R&D expenses decreased 211,000 or 12.6% from the prior year, because of lower third-party material and consulting expenses, the majority of which was in connection with our third-party 5G collaboration agreement. We expect to continue third-party investments in research and development depending upon project deadlines, new product development opportunities, and longer-term product roadmap dependencies, which in turn may create increases and decreases to research and development expenses as a percentage of revenue. Consolidated sales and marketing expenses were flat as increased commissions and marketing expenses were offset by lower salaries and benefits due to lower headcount. Consolidated general and administrative expenses increased 415,000 or 17.4% from the prior year, due primarily to higher headcount related costs, an increase in bad debt expense, and unfavorable foreign exchange impact. In June, we received notification from the SBA that our PPP loan and all accrued interest there on had been fully forgiven. Accordingly, we recognized the gain on extinguishment of the PPP loan in Q2 and the amount of $2 million. This is shown as a separate line item on our income statement in Q2. Other income and expense decreased 73,000 from the prior year, due primarily to lower gains on sales of assets and higher foreign exchange losses. Interest expense increased 39,000 from the prior year, due to higher interest on our term-loan. Net income was 1.5 million for the quarter, due primarily to higher operating income and the gain on the extinguishment of the PPP loan. Non-GAAP adjusted EBITDA was 864,000 or approximately $70,000 higher than the prior year period, due primarily to higher operating income. Turning to the balance sheet, consolidated cash as of June 30, 2021 was 4.2 million or approximately $700,000 lower than December 31, 2020 due to pay downs of our term debt of 470,000, the payment of 305,000 to the Holzworth founders for the final hold back payment and the first earn-out payment respectively, and capital expenditures of 313,000. Cash flow generated from operations for the six months ended June 30 was 394,000. Availability under asset based revolver was 7.6 million and gross debt was 7.8 million as of June 30, 2021. And as previously noted, our PPP loan was fully forgiven as of June 30, 2021. I'll now turn the call back over to Tim for some closing remarks.

Tim Whelan: Thank you, Mike. The first six months of 2021 have resulted in improvements across the business, including increased revenues, strong bookings, and an increase in backlog. We won new customers for our software solutions, launched new products, and continue to focus on strong Holzworth performance. We saw improvements in RF component solutions, and expect an overall continued improved outlook for in-building RF solutions. On our balance sheet, we were also very pleased with the successful conclusion of the forgiveness of our PPP loan, as Mike has described. You will also note that we launched an ATM transaction, allowing us to be opportunistic and purposeful with equity capital raises. Since our launch, our net proceeds for shares sold was 732,000. We intend to be disciplined and carefully evaluate pricing and volume as we execute on the ATM. We do not intend to be in the market every day. As we noted in our prospectus, it is our intention to use any proceeds raised to pay down higher interest debt on our balance sheet. This is expected to lower our interest expense, which we believe will have a positive impact on net income. Additional capital will also provide the company with greater liquidity and flexibility for the satisfaction of our earn-out obligations. Finally, additional capital will also allow us to consider investments in the business, accelerate our R&D roadmap, and fund opportunities within some of our higher growth markets. With respect to the next two quarters, we feel good about the business environment and we expect continued improving conditions in the second half. Our watch lists for key risks include supply chain uncertainty, and the increasing risk for talent being seen across multiple industries and disciplines, among other items. As a reminder, our software business includes larger, more lumpy contracts, which are complex in nature, and require more rigorous acceptance testing, and revenue recognition. We expect important software milestone deliveries to multiple customers in late September, early October, which currently makes forecasting the next few quarters difficult. But with an improved overall business environment, and with our backlog increases, we anticipate continued revenue and profit growth in the second half. Thank you, and Kate, if you could please open the lines for questions.

Operator: Certainly. [Operator Instructions] Our first question today is coming from Josh Nichols at B. Riley. Your line is live. You may proceed.

Josh Nichols: Yeah, thanks for taking my question, and great to see that all three of the business units appear to be [indiscernible], I was wanting to ask a little bit, you know, pretty big quarter-over-quarter improvement specifically in the RF components business. As much as that related to ramp that you're seeing in 5G spend, and now with the company north of $4 million of revenue for the quarter like the best to happen, you think to kind of get back to the previous highs pre-COVID where the company could be doing, you know, $5 million or so per quarter of revenue in that segment.

Mike Kandell: Good morning, Josh. Thank you for joining us. Yeah, I think we noted it a little bit in the remarks that the – it's really the return of the projects. That's what we had seen come out of the system, the larger size projects during the second half of last year. And we did see a return of that both in the revenue and importantly in the booking. So that really needs to sustain. The carriers right now, are focused primarily on a macro-based deployment of the 5G spectrum. That's been published through other equity research analyst reports and also discussed by the carriers, but they still intend to complete the projects in the small cell is necessary for ultimately the deployment of that 5G spectrum. So, I think the continued projects is really what's going to continue to drive that deployment of that ultra wide-band spectrum and the mid-band spectrum, which keys into our ultra wide-band product portfolio.

Josh Nichols: Great, thanks. And then, if you could provide a little bit more color, I mean, again, the RBS business seems very good growth year-over-year, I know you have some deliverables in – coming between 3Q and 4Q that may think it's a little bit difficult to forecast, but I guess, opportunities, if we think about the second half, relative to the first half for some potential improvements in the RBS business and how quickly that may scale as you start to see some of these software opportunities, kind of materialize and ramp ultimately.

Mike Kandell: Sure. So, you know, we've got some good contracts in the backlog on the delivery of milestones under those contracts [will themselves] lead to additional bookings and revenue opportunity. And I refer to that in terms of the 2 million of our software sales, which represent close to 6 million of total potential contract value. So, we feel good that that's the nearest-term opportunity just to continue delivering on the milestone deliveries because the contract is already in place for the subsequent purchase orders to be placed. That's sort of key point number one. I think in the second half, we feel very good about the revenue opportunity within RBS. As I said, it's difficult with late September delivery and early October delivery, and then coupled with that customer testing before acceptance, and then the rev wreck, it's hard to judge where that revenue will fall in Q3 or Q4, but we feel confident that it's going to be in the second half of the year. The one-item we are keeping our eye out on are the semiconductor chips that are used in some of our RF cards in RBS. And we did see some delays, push-out of Q3 into Q4, that push was reflected in my commentary. We still expect an improving overall environment in the second half. But what's on our watch list about whether that hardware will push out of Q4 and Q1. But we feel good about the software in our backlog and our ability to deliver it. We feel good about new software contracts that we can place under purchase order. And we feel good about where we stand on the hardware cards and we've already taken some precaution how we think about those deliveries.

Josh Nichols: Thanks. You kind of hit on what I was going to ask about some of the potential supply chain headwinds, but it seems like that's mostly focused in the RBS business. Outside of that, just kind of looking at the margin profile, so, you've achieved 50% plus gross margins now for, I think, five sequential quarters, what's the opportunity to, kind of continue to scale that up a little bit as we think about the coming quarters, as far as the product mix, you know, on the hardware side, but also software?

Tim Whelan: Yeah, hey, Josh. I would expect it to be consistent over the next few quarters, as compared to the previous quarters. Because you know, we are going to have a bit of mix of hardware and software. We may have some, you know, depending on deliveries, we have some quarters where we may have more software than hardware, which will scale up a little bit, but overall, I expect it to be pretty consistent with the prior few quarters.

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

Mike Kandell: Great. Thank you, Josh.

Operator: Thank you. [Operator Instructions] Our next question today is coming from Michael Potter at Monarch. Your line is live. You may proceed.

Michael Potter: Hey guys, congratulations on another good quarter.

Mike Kandell : Good morning, Michael. Thank you.

Michael Potter: Good morning. Just a couple of follow-ups. I know on the last release, you put out the relationship with Pivotal and it is an exciting company, we looked them up and their application, is their product currently in commercial use or is this currently in beta?

Mike Kandell: I can't speak clearly exactly as to what stage of their product release is at, Michael. So, I can't tell you whether it's beta or in trials or anything else. What I do know is that most of our customers are on – in early technology development in bringing those solutions to market. And so that crosses, beyond just pivotal that crosses into just development that has not yet been brought to any trials that includes in one instance. I know trials that are currently being conducted. I would say that none of our customers are yet at the point of volume production and deployment. And I made that remark specifically with respect to certain royalty agreements we have in our contracts. So, I think they're advanced. I think they're out of the lab, but I can't say that they're in the field and in trials and testing and betas.

Michael Potter: Okay. So, this is one of the agreements. It sounds like one of the relationships that would lead to royalty payments, if they do commercialize.

Mike Kandell: Correct.

Michael Potter: Got it. Got it. Okay. Another question, just on the OpEx side, we had good topline growth, we were maintaining good margin, but we had a 17.5% increase in G&A, can you talk to that a bit?

Tim Whelan: Yeah. Hey, Michael. So, a couple of key things there. One is, we had some headcount related expenses. Certain things that we cut during, you know, 2020, in the midst of the pandemic that we've reinstituted in 2021. We had some increase in headcount. We did have a bad debt expense, particularly large bad debt expense this quarter, which is unusual for us. And then we also had some impact of just the FX impact with the pound increasing year-over-year. Those are the key components.

Michael Potter: Okay. So, we should – but going forward, it sounds like we're going to be running at around this level. On a quarterly basis, this $2.8 million mark is going to be where we're running.

Mike Kandell: Well, you know, the bad debt expense was a one-time charge. Head count related benefits, yes, I would say, they're going to stay in place for the foreseeable future.

Michael Potter: And the FX is below the line. So, how much was the bad debt expense?

Mike Kandell: Now the FX below the line has gains and losses on our balance sheet items. The impact of the FX is just the, you know, as we have pounds as it converts into U.S. dollars for the income statement, it's at a higher rate. So that [indiscernible] the line items on the P&L.

Tim Whelan: And the headcount Michael keep in mind that includes our investment in our new CRO, right, which of course was zero in the first half of last year and now reflects a full-year of the investment in our CRO. So, we feel very good about that one.

Mike Kandell: Correct.

Michael Potter: All right, guys. Thanks. I’ll get back in queue.

Mike Kandell: Great. Thank you, Michael.

Operator: Thank you. Our next question today is coming from Orin Hirschman at AIGH Partners. Your line is live. You may proceed.

Orin Hirschman: Hi, good morning. How are you?

Mike Kandell: Good morning, Orin.

Orin Hirschman: So, you know, we've had a lot of progress the last few quarters. And I guess, you know, every time we take a step forward, we take a couple steps back and [indiscernible] profitability issue or the timing issue on the revenue, I realized part of it is really totally out of your control in terms of the lumpiness, perhaps on software, etcetera. Is there some point where there's enough business, that if, you know, one thing shift in and another thing shift out there can be more consistency within the overall business? Are we getting close to that?

Mike Kandell: Yeah. Orin, I wouldn't characterize the software as a step back. I characterize it as the opportunity. Keep in mind, what I noted was that, we have multiple deliveries to multiple customers in the second half. That's a very good thing. The exact timing is what's more difficult. So, I wouldn't necessarily characterize that as a step back. We're very encouraged with the software deals we've signed. We're very encouraged with the ability to bring them the revenue in the second half in the year, and we're very encouraged with the ability to book some additional contracts. So, we feel very positive about that.

Orin Hirschman: With the RF business, what's the longer-term prognosis there? So, you have some very strong growing pieces. You know, what do you – how does that fit into the overall picture?

Mike Kandell: Yeah. So RF components, again, I think right now we've pointed to in the past, the fact that the spectrum auctions, which were completed in the first quarter of the current year, that was a point of resistance in the second half of last year, because carriers without understanding what spectrum they own had a harder time executing on the densification design. So, with that being behind as number one, and with the COVID scenario looking to improve, I think there's both pent-up demand for projects to be completed number one. And number two, in increased investment, as we think about carrier deployment of the spectrum they've just acquired. And so, the analysts following the carriers expect a 10% to 20%, I believe, is what was quoted over each of the next three years. So, we feel good about the tailwinds on RF components. We feel that we have addressed the product set to launch our ultra wide-band products that addresses that spectrum very specifically. We feel very good about our design-in initiatives for the new radios being deployed. And we feel very good about the diversification of our product set in the smart coupler solution, which is designed to be a public safety monitoring solution. So, it's an active solution. And we feel that the fire codes are tightening and requiring certain jurisdictions to actively monitor in-building wireless systems and that is a favorable trend that will grow more slowly over time, but we do think it's a growth trend. So, those are the things that I would point to in terms of feeling optimistic about the RF component business.

Orin Hirschman: Okay. And final two quick questions. One is, you mentioned quantum computing in some of your releases, and I think you've mentioned tangentially in the prepared remarks, can you just kind of set the record straight? Where are you in the overall picture of a quantum computer, is it the test of the quantum computer is it some active ongoing aspect?

Mike Kandell: It is part of the overall solution. It's called phase noise coherency, and our solution, specifically, the multi-channel RF synthesis device, applies itself to that phase noise coherency, which is the ability to get those [ATMs] in a stable state necessary for those computations in for that – those designs to be completed. These are massive, I seen pictures, these are massive lab architectures. We are one component of that, but we feel good. We feel good that we have multiple customers and all the brand names that talk about getting into quantum computing, including IBM, Google, and Amazon. So, it's not necessarily I think, going to be a key material driver of growth, but it's a good case study of where our solutions, our specialized solutions fit into high technology specialized needs and how we've accomplished and satisfied those customers demands.

Orin Hirschman: Okay. And just a final comment or question, you know, obviously, we're 5% plus shareholder here. And one of the key things is that the ramp is able to the earnings leverage, you know, the fact that you have the ATM in place and actually pulled on it, even at these level, you know is that indicative that you're not feeling confident of your cash flow, what should we take away from that?

Mike Kandell: No, again…

Orin Hirschman: You had excess cash flow, you know, we assume [indiscernible] you used to pay down that?

Mike Kandell: Sure. So, again, I think our intent is to be both opportunistic and purposeful. As we think about our balance sheet, we think about, it's a good opportunity, at responsible levels of price and volume, to potentially be in a position to raise cash, especially when we see the volume spikes as we seen over specifically late June, early July, that if we raise cash for that vehicle, we can pay down high interest debt, which would translate into interest savings and therefore translate into higher net income. So, as you can tell from the number I've called out, we've raised $730,000 approximately, a little bit more than that. So, we haven't been in the market every day. We don't tend to be in the market every day, but if we see that volume spike and then at certain prices will raise some cash to pay off some high interest debt, and we've mentioned that in the prospectus as well.

Orin Hirschman: Alright, but you realize that that creates a overhang so that people like us are excited about the business, feel like, oh, I'm going to buy stock, and they're going to hit the [ATM]. You know, why should we do that? You know, it's going to continue diluting the company, you have [indiscernible] effect, and is it indicative of the fact that they're not feeling comfortable that they're going to have enough cash flow to pay down that high interest debt?

Mike Kandell: Right. So, yeah, you know, we feel good about the business. We think it's the appropriate action to take to strengthen a balance sheet. The S3 expires in the late September timeframe. I believe it's September 21. So, we'll keep our eye in the market. We’ll do the responsible thing.

Orin Hirschman: Okay. Thank you very much. Please do us a favor and don't renew it. Thanks.

Operator: Thank you. [Operator Instructions] We have no further questions in queue at this time. Do you have any closing comments you'd like to finish with?

Mike Kandell: Great. Thank you, Kate. Thank you everyone, for joining us today. Have a great summer and we look forward to speaking with you again soon.

Operator: Thank you ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.