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Borqs Technologies, Inc. (BRQSF)·Q2 2018 Earnings Summary

Executive Summary

  • Q2 2018 delivered hyper growth with net revenue up 154.6% year over year to $56.339M, driven by Connected Solutions hardware shipments to emerging Asia; net income swung to $2.008M from a $0.965M loss, though gross margin compressed sharply to 13.7% on component shortages and pricing .
  • Segment mix skewed further to hardware: Connected Solutions revenue rose 232.7% YoY to $48.642M while MVNO grew 2.5% to $7.697M; India became the dominant geography (Q2 India revenue $42.738M) .
  • Management guided FY2018 revenue to $195–$215M and net income to $4–$6M, with MVNO gross margin ~30% in 2H; they expect component shortages to ease in 2H18 after securing the official PRC MVNO license in July 2018 .
  • Near-term stock catalysts: resolution of supply constraints and margin recovery; medium-term risks include liquidity and covenant breaches flagged in the 10-Q and ongoing Samsung royalty arbitration, plus dependency on a concentrated hardware customer base .

What Went Well and What Went Wrong

  • What Went Well
    • Revenue inflection: total net revenue rose 154.6% YoY to $56.339M; Connected Solutions up 232.7% to $48.642M on large hardware orders; MVNO steady growth to $7.697M .
    • Profitability turned positive: net income reached $2.008M vs. a $0.965M loss last year; operating income improved to $2.332M from $0.260M .
    • CEO tone confident on 2H: “We anticipate this component shortage will be relieved in the second half… MVNO… around 30%… aggregate revenues 2018… $195M to $215M, and net income… $4M to $6M… continued robust growth in 2019” .
  • What Went Wrong
    • Gross margin compression: total GM fell to 13.7% from 25.7% YoY; Connected Solutions GM dropped to 11.2% (from 20.5%) due to competitive pricing and component shortages; MVNO GM dipped to 29.5% (from 35.8%) on regulatory frictions and lack of “beauty” numbers .
    • Liquidity and covenant risk: cash fell to $1.305M at 6/30; management disclosed substantial doubt about going concern and breached loan covenants, prompting reclassification of $3.032M to current liabilities .
    • Customer concentration and geography risk: top customers contribute the majority of revenue; India concentration surged (Q2 India $42.738M), heightening exposure to single-region demand and pricing dynamics .

Financial Results

MetricQ2 2017Q1 2018Q2 2018
Revenue ($USD Millions)$22.129 $58.256 $56.339
Gross Profit ($USD Millions)$5.688 $8.856 $7.709
Gross Margin (%)25.7% 15.2% 13.7%
Operating Income ($USD Millions)$0.260 $3.189 $2.332
Net Income ($USD Millions)$(0.965) $1.387 $2.008
EPS Basic ($USD)$(0.31) $0.05 $0.07
EPS Diluted ($USD)$(0.31) $0.04 $0.07

Segment net revenue and margins:

SegmentQ2 2017 Revenue ($M)Q1 2018 Revenue ($M)Q2 2018 Revenue ($M)Q2 2017 GM (%)Q2 2018 GM (%)
Connected Solutions$14.621 $50.374 $48.642 20.5% 11.2%
MVNO (incl. other)$7.508 $7.882 $7.697 35.8% 29.5%

KPIs (Non-GAAP):

KPIQ2 2017Q1 2018Q2 2018
EBITDA ($USD Millions)$1.29 $4.98 $3.99
Adjusted EBITDA ($USD Millions)$1.40 $5.00 $3.98

Regional revenue mix (Three months):

RegionQ2 2017 ($M)Q2 2018 ($M)
PRC$14.270 $7.146
United States$1.869 $3.100
India$1.932 $42.738
Rest of world$4.058 $3.355

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Revenue ($USD Millions)FY 2018N/A$195–$215 New
Net Income (after taxes, excl. one-offs) ($USD Millions)FY 2018N/A$4–$6 New
MVNO Gross Margin (%)2H 2018N/A~30% New
Connected Solutions Gross Margin2H 2018N/AImprovement expected as component shortages ease (qualitative) New
MVNO LicenseEffective July 2018N/AOfficial PRC MVNO license obtained (qualitative) New

Earnings Call Themes & Trends

TopicPrevious Mentions (Q4 2017, Q1 2018)Current Period (Q2 2018)Trend
Hardware demand in emerging AsiaQ4: hardware $43.5M; customer in India driving growth Large orders; India $42.738M in Q2 Strengthening concentration in India
Connected Solutions marginsQ1: GM 12.3% on competitive pricing GM 11.2%; component shortages and fixed pricing pressure Down, expected to recover in 2H
MVNO economics and activationQ4: improved activation system; MVNO $9.9M GM 29.5%; security checks and lack of beauty numbers depressed margin Stable revenue, margin modestly lower
Regulatory/license statusQ1: preparing for official MVNO license Official MVNO license awarded July 2018 Positive regulatory milestone
Liquidity and covenantsQ1: going concern risk, covenant issues Continued covenant breaches; reclassification to current liabilities Persistent risk
Product/technology roadmap (IoT, wearables)Snapdragon Wear ecosystem; IoT devices Ongoing IoT device design/manufacturing emphasis Strategic continuity

Management Commentary

  • “We are pleased to report another strong quarter… Gross margins… impacted in part by a sudden component shortage… We anticipate this component shortage will be relieved in the second half… MVNO… around 30%… aggregate revenues for 2018… $195M to $215M, and net income… $4M to $6M… continued robust growth in 2019.” — Pat Chan, Chairman & CEO .
  • “Increases in sales of both business units… Connected Solutions increased 233%… MVNO increased 2.5%… Q2 EBITDA was $3.99M versus $1.29M in Q2 2017.” .
  • MVNO margin drivers: activation/security checks and non-repeat of “beauty numbers” scarcity noted; economies of scale and China Unicom minimum charge removal continued to help .

Q&A Highlights

  • The company held a call on August 15, 2018 (9:00 am ET) but a full transcript is unavailable in our document set; dial-in and replay details were provided in the press release .
  • As a result, analyst Q&A themes and clarifications cannot be assessed from primary transcripts in this review window .

Estimates Context

  • Wall Street consensus (S&P Global) for Q2 2018 EPS and revenue was unavailable due to data access limits; therefore, beats/misses versus consensus cannot be determined in this report. Values retrieved from S&P Global were unavailable due to request limits.

Key Takeaways for Investors

  • Growth is real and concentrated: hardware-led surge pivoted revenue mix toward India; monitor sustainability and customer concentration risks .
  • Margin recovery is the swing factor: Connected Solutions GM fell on fixed-price contracts amid component shortages; management expects relief in 2H — watch supplier dynamics and pricing discipline .
  • MVNO steady with regulatory de-risking: official license secured; margins ~30% expected in 2H; track wholesale rate renewals with China Unicom and activation policies .
  • Liquidity and covenant risks elevate downside: low cash, covenant breaches, and potential acceleration risk; capital raise plans are critical execution milestones .
  • Legal overhang: Samsung royalty arbitration outcome could affect cash and P&L; stay alert for rulings and potential settlements .
  • FY2018 guide implies strong back half: $195–$215M revenue and $4–$6M net income; near-term stock could respond to evidence of margin normalization and backlog conversion .
  • Strategic IoT positioning intact with ecosystem partners; watch for incremental design wins and diversification beyond single-market hardware exposure .