McKesson Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 7 speakers on the call.

Operator

Good afternoon. Thank you for attending GCT Semiconductor Holding Inc. 2nd Quarter 2024 Financial Results Call. All lines will be muted during the presentation portion of the call with an opportunity for question and answers at the end. Joining the call today are John Schlaefer, GCT's Chief Executive Officer and Edmond Chang, CFO, to discuss our 2nd quarter results.

Operator

During this call, certain statements we make will be forward looking. These statements are subject to risks and uncertainties, including those set forth in our Safe harbor provisions for forward looking statements that can be found at the end of our earnings press release and also in our Form 10 Q that will be filed today, which provide further detail about the risks related to our business. Additionally, except as required by law, we undertake no obligation to update any forward looking statements. I will now turn the call over to John Schleifer.

Speaker 1

Thank you, and thanks to everyone for joining us today for our Q2 2024 and inaugural earnings call. In light of the fact that some of you might be new to our story, I want to spend a few minutes to discuss our business operations and history before focusing on our Q2 financial results. Important to note, despite being new to earnings calls, we are not new to the wireless communication technologies. PCT was founded in Silicon Valley in 1998 and is a fabulous semiconductor company that specializes in the design, manufacturing and sale of communication semiconductors, including high speed wireless technology. We have successfully developed and supplied communication chipsets and modules, the leading wireless operators and their suppliers worldwide, specifically to original design manufacturers and original equipment manufacturers, ODMs and OEMs, for portable wireless hotspots, indoor and outdoor fixed wireless modems and industrial machine to machine applications, which includes a very broad set of use cases like security tracking, metering and satellite applications.

Speaker 1

Starting from the 2010 timeframe, we were focused on the 4th generation chipsets or 4 gs LTE that has paved the way for more advanced technology, specifically 5 gs chipsets, which we are now close to finalizing the development of. While most people recognize 5 gs in connection with smartphones, our focus is on the non smartphone sector since the segments of the market we're targeting is not only very large and diverse, but also benefits from several tailwinds like the rise of artificial intelligence, the lack of established alternatives in the West Qualcomm and geopolitical factors. To give you just one example, just last month, Germany followed in the footsteps of the U. S, Britain, Sweden, Japan, Australia, New Zealand and Canada by announcing plans to bar or restrict imports of electronic components from Chinese tech giants, Huawei and ZTE in core parts of its 5 gs networks. TCT is well positioned to benefit from these geopolitical shifts as well as from other economic trends.

Speaker 1

Turning now from macroeconomic aspects to an overview of our Q2 and some of our operational highlights since we last updated in May. As we have guided the capital markets in the past, the industry is currently in the midst of a planned transition from sales of 4 gs chipsets to 5 gs chipsets. During this phase, we have purposely focused on increasing our design and service revenue to 5 gs customers to offset the decrease in 4 gs product sales. And while 2 gs marked an anomaly regarding 4 gs product sales, we expect a positive rebound effect of our 4 gs sales to take place in the future in conjunction with the initial deliveries of our 5 gs chipsets. Even as we focus on launching our 5 gs product and servicing that demand, we anticipate continuous demand from both existing and new 4 gs products.

Speaker 1

As an example, our recently announced multi mode 4 gs chipset, CDM-7243 SL is ideal for industrial utility and satellite applications, including for 4 50 MHz network and has received a lot of positive attention. We expect strong demand for this product even as the market evolves towards 5 gs. With the additional expected initial deliveries of our 5 gs chipsets, chipsets, we are looking forward to offering high demand, high quality products to a large and rapidly growing market, which brings me to our most important topic. Our 5 gs chipset development is progressing as projected and we expect the commencement of initial deliveries to Alpha customers to take place during the Q4 of 2024. Focusing now on some of the exciting announcements that we've made.

Speaker 1

We are pleased to continue the collaboration with our longstanding partner Samsung. We have announced an MoU with Samsung Electronics for collaboration to accelerate the development of 4 gs5 gs chipsets and modules and adoption by device makers. As a chipset and base station maker, GCT and Samsung share interests in many 5 gs related markets and as a result, this collaboration is mutually beneficial to us both. We will work together with Samsung to promote the total Samsung DCT solution and to strengthen the ecosystem of OEM and ODM device makers in order to support wireless operators worldwide, including the Saudi Arabian Oil Group Aramco in the 450 Megahertz and 4 Gigahertz business, mission critical public safety and more. We also recently announced a collaboration with Kyocera to develop a 5 gs reference platform aiming to accelerate TCP's development of 5 gs millimeter wave modems and CTEs for fixed wireless access.

Speaker 1

This collaboration will bring together 1st class millimeter wave antenna technology with superior 5 gs expertise to provide a complete solution for Kyocera's product platform and our 5 gs customers. We firmly believe this will further strengthen our position as a leader in the growing 5 gs millimeter wave CPE market. At the end of July, we made an announcement together with Legado Networks about the commercial availability of band 54 modules, paving the way for nationwide critical infrastructure private network use of the licensed mid band spectrum. Last but not least, at the end of May, we announced the world's 1st highly integrated multimode LTE chipset supporting among other things the 450 megahertz spectrum and utility space. As you can tell, we are not short of exciting partnership, customer and product announcements, a clear testimonial to our progress in transitioning to 5 gs.

Speaker 1

And the announcements we have made over the last few weeks showcase the momentum we are gaining in building the customer foundation for an outsized growth based on our 5 gs chipset sales. I couldn't be more excited about the progress we are making. In addition, we are happy to now be included in the Russell 2,000 Index as well as other Russell Growth and Value Style Indices as part of the yearly Russell 3,000 reconstitution. With that, I'll turn it over to Edmund to discuss our financial results.

Speaker 2

Thank you, John. Turning now to our Q2 financial results, further details on which can be found in the 10 Q that will be on file with the SEC. Our net revenue was $1,500,000 for the 3 months ended June 30, 2024, a decrease of $2,800,000 from €4,300,000 for the 3 months ended June 30, 2023. The decrease was primarily attributable to a decrease of $4,000,000 in product sales, offset by an increase in service revenue. Cost of net revenues decreased by $900,000 to 0 point $5,000,000 for the 3 months ended June 30, 2024, from $1,500,000 for the 3 months ended June 30, 2023.

Speaker 2

Product costs decreased by $800,000 dollars from $1,000,000 for the 3 months ended June 30, 2023 to $200,000 for the 3 months ended June 30, 2024. The decrease was primarily driven by the decrease in direct product costs as we sold fewer units. Service costs remain comparable for the 3 months ended June 30, 2024 and 2023. Our gross margin decreased to 63% for the 3 months ended June 30, 2024 from 66% for the 3 months ended June 30, 2023, primarily due to decreased product sales. Our product costs for the 3 months ended June 30, 2024 were primarily comprised of allocated overhead and inventory after lessons costs.

Speaker 2

I want to remind everyone that these high margins are due to our comparably higher percentage of service revenue and not necessarily reflective of our overall gross margins once we are ramping up a higher percentage of product revenue. Research and development expenses increased by $200,000 or 4 percent from $4,000,000 for the 3 months ended June 30, 2023 to $4,200,000 for the 3 months ended June 30, 2024. This increase was primarily due to a $3,000,000 increase in R and D expenses, mainly related to services provided to designing 5 gs chip products. Sales and marketing expenses increased by $200,000 or 29 percent from CAD 0.8 million for the 3 months ended June 30, 2023 to $1,000,000 for the 3 months ended June 30, 2024. This increase was primarily due to personnel related costs.

Speaker 2

General and administrative expenses increased by $200,000 or 9% from $2,600,000 for the 3 months ended June 30, 2023 to $2,900,000 for the same period last year. The change was primarily due to a $1,200,000 increase in professional expenses related to the public company operations, partially offset by a net reduction of $800,000 in provision for credit losses and $0,200,000 net reduction in other expenses. Before turning back over to John for the closing remarks, I want to spend some time talking about our balance sheet and our liquidity as a simple look on what will be on file for our ending balance for the 2nd quarter, which might not fully mirror the progress as of today. While we closed the Q2 with cash and cash equivalents of RMB 4,000,000, we also had net accounts receivable of RMB 5,200,000. Since the completion of our public offering earlier this year.

Speaker 2

We have succeeded in strengthening the company's capital structure by deleveraging and recapitalizing the company's balance sheet, highlighted by the repayment of $6,300,000 of debt. I am pleased to announce that we have also successfully restructured the terms of some of our outstanding debt, The extended maturities of several term loans are now in line with expected proceeds from our 5 gs chipset sales and our financing cash flows in 2025. Additionally, we have since continued to cautiously make use of our equity line of credit with B. Riley Securities to provide liquidity and funding for our business operations. Under this facility and subject to market conditions, we may raise up to 50,000,000 through at the market offering from time to time.

Speaker 2

I want to stress how balanced and cautious our approach has been. Looking ahead, we will continue to monitor all relevant elements to ensure that we are well capitalized, especially until our 5 gs product sales ramp find its way into our financial statements. With this, I will turn it back over to John.

Speaker 1

Thanks, Edwin. In closing, we are more than ever excited about the growth opportunity ahead of us. We have announced major partnerships and have made significant operational progress that shows the momentum we are gaining in building the customer foundation for substantial growth based on our 5 gs chipset launch. We remain on track to launch initial deliveries of our 5 gs chipset to offer customers during the Q4 of this year. Finally, I would like to thank our employees, partners and our customers for their continued efforts and dedication to the company, which ultimately drives our success as an organization.

Speaker 1

Together, we focused on driving innovation, supporting the global transition to 5 gs solutions and delivering strong profitable growth for our shareholders. We are entering a new phase as we transition toward the commercialization of our 5 gs technology and hope you are with us for the journey. This is truly an exciting time to be part of CCC. I will now turn back over to the operator who will assist us in taking your questions. Thank

Operator

you. Our first question will come from the line of Craig Ellis from B. Riley Securities. Your line is open.

Speaker 3

Yes. Thank you for taking the question guys and congratulations on all the big announcements in the quarter. John, I wanted to start with a clarification. You indicated that you expect 4 gs revenues to rise in the Q3. Can you talk a little bit about what's giving you confidence in the rebound back?

Speaker 3

And then how did the programs that are driving that rebound play out in your mind as we look to the Q4 of this year?

Speaker 4

Yes. So thank you, Craig. Well, in this what we said was that we expected 4 gs product sales to actually rebound in the future. We weren't specific about actually Q3. But what we see right now is a transition with our customers.

Speaker 4

And with our customers their programs are not homogeneous. So they've got 4 gs projects and they've got 5 gs projects. And so there's a tension that's being consumed on the 5 gs projects and some slowdown on the 4 gs projects as you might expect. And then there is also channel inventory that as a result of that as a result of also operators transitioning to 5 gs. So we're looking at that right now to see in the short term how that will transition.

Speaker 4

But we do see that both 4 gs and 5 gs will continue to coexist over time. So we don't have a clear picture for that at the moment.

Speaker 3

Got it. And it sounds like there are some cross currents in play, but for the most part, your 4 gs customer programs remain active. They're just being managed as they also manage the ramp up of 5 gs. Okay. Yes.

Speaker 3

So then moving on to something that maybe a little bit more in the strategic sweet spot as we think about the exit to this year and next year. Can you just provide some more color on 5 gs chipset development for your Alpha customer? And any color on the breadth of engagement as we think about what can drive the volume ramp in the first half of next year with 5 gs? Right.

Speaker 4

So we've got a number of 5 gs engagements. So it's not just 1 alpha customer. There's 4 or more that we have contracts with and we've just added Kyocera to that with our recent announcement. So these customers we're working with right now and they're developing their products and their platforms based around our 5 gs chipset. And so we'll be sampling those in the Q4 and they each have their own schedule for how they would ramp in the 2025 timeframe.

Speaker 4

And then there's the other 4 gs customers that we have now that might not be considered alpha customers for our 5 gs products, but are actually waiting for samples also that would engage with us on 5 gs in the 2025 timeframe.

Speaker 3

Got it. So quite a bit of activity there. And then the last one before I hop back in the queue. You mentioned Kyocera. So can you just provide a little bit more color on what that announcement means for GTC, its ability to commercialize product in different parts of the world?

Speaker 3

And since an extended agreement was announced with Samsung yesterday, can you also provide more detail on what the Samsung agreement does for the company as you pursue the 5 gs chipset product path? Thank you, John.

Speaker 4

Yes. So I'll take the first one first. So on the Kyocera side, so that's focused on a 5 gs millimeter wave platform for FWA. And so it's common for us to provide reference designs to our customers. And so we will continue to do that in the 5 gs arena.

Speaker 4

And one of the challenging aspects of that might be the millimeter wave antenna modules. So actually Kyocera will be providing that part of the platform that will allow us to provide a complete millimeter wave reference design. And also they will have access to that for their own internal use for whatever FWA activity they have in the Japanese market and beyond. So those 2 key focuses. And I'd like to say that our 5 gs chip is specifically designed to not only work with our own internal millimeter wave RF products, but also to work with actually third parties as well.

Speaker 4

And then on the Samsung side, I think we've kind of stated that in the press release, but as we start rolling out the 5 gs products, I mean clearly there's collaboration that happens with the infrastructure partner, with the base station partner and actually a big part of that is just the interoperability testing that happens between those two aspects. So this collaboration will have us working closer together on that as well as certain features that Samsung may want to promote in their base station. We through discussion and through collaboration we can optimize for that.

Speaker 3

Got it. Thank you, John.

Speaker 4

You're welcome.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Matt Ramsay from T. B. Cowen.

Operator

Your line is open.

Speaker 5

Hey, guys. This is actually Sean O'Loughlin on for Matt. Congrats on getting the first call under your belt and as Craig mentioned, the momentum on the customer engagement side. John, I wanted to ask on those customer engagements and some of these MOUs that you've been announcing over the last few months. If you go back 6 months or so to when you did the recapitalization and all of that, how much of this customer engagement was sort of contemplated at that time versus how much of this is increasing momentum and sort of broadening engagement beyond your initial customer and I guess would sort of represent upside to what you were thinking at the time when you did the transaction?

Speaker 4

I think that let me just think about what the split might be. In the announcements that we've had, there's probably maybe only one that is probably additional to that. And these things actually take a long time to develop. So just the fact that we have an MOU we've been talking about these things for a while. And so we're happy to be able to close this sort of chapter with a written document.

Speaker 4

But I think these are things that as part of our 5 gs strategy we've been working on.

Speaker 5

Great. And then maybe just to clarify on some of the commentary regarding the 5 gs revenue timing, I guess, should we expect then that this sort of not the specific dollar figure necessarily, but sort of the depressed relative 4 gs based product revenue should continue at least for the next couple of quarters if we're thinking about 4 gs customers waiting for 5 gs product to sample and then maybe some of the new products in the 4 gs in the 4 gs standard is still in the early stages of ramping and sampling. So should we kind of think about the 4 gs revenue as depressed for a couple of quarters through the rest of the year?

Speaker 4

That's probably a reasonable way to think about it. And our focus and our energies are going on 5 gs as that's the future. And for a number of reasons for volume, technology, ASPs everything. And so to distract that with resources pursuing 4 gs platforms, that's not the right thing for us to do. So it's probably an accurate depiction.

Speaker 4

We definitely want the 4 gs revenue and we want to be shipping product into those applications and we will. But like I said, our resources are focused on 5 gs.

Speaker 5

Yes, totally makes sense. I guess last one for me and I guess this one is probably more for Edmund. But on the balance sheet commentary, I noticed that you mentioned some extension of terms align with the 2025, but I do see still sort of a chunk or the large part of the borrowing still sort of in that current bucket rather than the long term bucket. So is that one is that either a timing thing like maybe some of the restructuring took place after the end of the quarter? Or should I just think about that as very literal, the June 2025 timeframe as some of those extensions as where some of those extensions went out to?

Speaker 6

Hi, Sean. This is Edmund. You are exactly correct from that sense. Majority of those negotiation of the extension of the loan was completed in early July from that perspective. So it didn't meet the cutoff time of June 30.

Speaker 6

So we have actually successfully renegotiated more than close to 21,000,000 of our existing current debt basically from Q3 of 2024 to Q1, Q2 and Q3 of 2025. So that actually aligning the debt to some of the ramp up that we expect from our Q3 launch in 2025.

Speaker 5

Yes, that's super helpful. And then I guess to the extent that you're able to kind of comment on that, Would you then expect to use some of the proceeds from this 5 gs ramp to then pay down that some of that debt? Is that why you're aligning the term structure in that way? Or is it just you expect to have a better capital position at that time and therefore can feel stronger about refinancing?

Speaker 6

Actually, Sean, it's a combination of both. We feel that with the ramping up of our 5 gs chip in terms of revenue, it will also improve on our cash flow situation operationally. In addition to that, we also will be able to gradually improving our capital structure and that will give us much more fund financial standing at that point of time. So it is a journey that we are moving towards to basically adequately recapitalize the company balance sheet so as to encourage I mean support the company's growth plan into 2025.

Speaker 5

Got it. Very clear. That's all for me. Congrats again guys. Thanks.

Speaker 4

Hey Sean, just one second here. One clarification on my 4 gs comment. In our announcement, we do talk about a new 4 gs product, which is a 7243 SL and that is important to us. And we think that's going to have actually long legs to it. But that's not going to help us in Q3 and Q4.

Speaker 4

So just a clarification on that.

Speaker 5

Yes. No, totally understood. Yes, I interpreted you in that way as well. So appreciate the clarification.

Operator

Thank you. One moment for our next question. Our next question will be a follow-up from the line of Craig Ellis from B. Riley. Your line is open.

Speaker 3

Yes. So I'll start just with a follow-up on the recent line of inquiry taking off on some of the questions around the first half's 5 gs ramp, but I'll do it this way. As we think about what can ramp up in the first half of next year, how should we think about how customers intend to use product across the opportunities that they have with either CPE type implementations, mobile router implementations or IoT implementations. What's the appetite you're seeing in those different areas as your customers get started on 5 gs early next year?

Speaker 4

Yes. I see that we've got strong interest across all those categories. So certainly hotspot related, certainly FWA, CPD type of products. And then there's products that actually fall into the other categories of module based applications that are machine to machine type. I'm sorry?

Speaker 3

No, go ahead, John.

Speaker 4

Yes, no. So I would say that we have a full breadth of interest in product categories.

Speaker 3

Okay. That sounds good. And then the second question has a bit of a technical twist to it. So, I think one of the things your product is known for is its multi antenna capability. And since you commented on doing development work with infrastructure companies.

Speaker 3

I'm wondering what might be possible as you partner with somebody like Samsung to develop specific differentiation around that for CPE type devices and what you think that will mean in different markets with respect to your ability to really differentiate your product versus competitors?

Speaker 4

Yes, I think that we'll be looking into that. I mean, however, we can see ways to optimize for the markets that we're in specifically the FWA space. I mean that's where that has the most value. I mean we're going to do that and that can be either be from a hardware perspective or a software perspective. And we see optimization in both those areas that can happen.

Speaker 4

But I think working together closely with a partner like Samsung will help us identify that. Yes.

Speaker 3

And then lastly for me, it was helpful to get some earlier color on the texture within some of the pushes and pulls with potential product revenues over the next couple of quarters. Guys, can you talk a little bit more about what's possible with services revenues as we think about what can happen through the back half of this year and early next year? Thank you.

Speaker 4

Yes. I think that we we're going to do, I mean we've got some engagements that are in the works, and it's possible that we'll be having a few other MOUs that we might announce. And each one of those would have the possibility of additional service revenue. So with service revenues, we recognize that revenue as we make progress on those contracts. So there is some that's already in the pipeline for us from that perspective.

Speaker 4

And then as we close on any new MOUs and or contracts, those would have additional service revenue aspects to it and those would layer on top. So I mean we very much are looking for other opportunities to add to what we're currently doing.

Speaker 3

Yes. And John, anything that's meaningful with a single engagement standpoint that we'd be ramping up in the back half of the year? Because it sounds like there's a number of things that would put an upward bias on services or is there a project or 2 that rolls off that we need to be aware of?

Speaker 4

I would say that what we have in the pipeline now is reasonably flat through Q4 from a service revenue perspective. And so but we have a couple of like I mentioned, we have a couple of other opportunities that we'd like to add.

Speaker 3

Got it. Thanks again for all the help. Good luck.

Speaker 4

Thank you.

Operator

Thank you. I'm not showing any further queue and anybody else in the queue. With this, I'll close the call. And thank you for your participation in today's conference. This does conclude the program.

Operator

You may now disconnect. Everyone, have a great day.

Speaker 2

Thank you.

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