Q2 2020 Earnings Call
Thank you for joining us today to discuss the fiscal 2022nd quarter results of digit international.
The other day scholars run konezny across the C.E.L.
Ronald provide his thoughts in our business and I will fall with the highlights smartfinancial.
Formants following out prepared remarks will take your questions.
You should our earnings really shortly after the market close today, you may obtain a copy through the financial released a section of our industrial relations website <unk> did you dot com.
So the statements and we make during this color considered forward looking at our subject to significant risk and uncertainties.
These statements reflect our expectations about future operating in financial performance and speak only as up today's date.
We undertake no obligation to update publicly or revise these forward.
Looking statements.
Well, we believe the expectations reflected in.
Our forward looking statements are reasonable we give no assurance such expectation.
Things will be met with any any of our forward looking statements were proved to be correct.
For additional information please refer to the forward looking statements section in our earnings released today and the risk factors section in our 2000 in 19 form 10, K. and subsequent <unk> reports on file with the F.C.C.
Finally, certain of the financial information disclosed to on this call includes non gap measures.
Information required to be disclosed to both these measures, including reconciliations to the most comparable gap measures are included in the earnings release.
The hearings release is also an exhibit two or eight k. that can be access to the F.C.C. filing sections of our Investor Relations website.
Now I will turn the call over the wrong.
Thank you, Jamie and welcome to everyone on our call today.
First and foremost I hope, everyone, a safe and healthy as we work together to get through this unprecedented pandemic.
Ideas working tirelessly to protect the safety and health of our team and our company <unk>.
He has been categorized as an essential business by many of our customers.
More important than ever service, our customers replace their trust in us.
Vast majority of the did you team is working from home our team mates had must work from offices are operating and chefs worry mass staying socially distance and we're monitoring their wellbeing.
Our leadership team needs daily to ensure we discuss our rapidly changing environment and they quick decisions.
The results of this hard work are measured in both having no confirmed cases within the.
<unk>.
And our second fiscal quarter resulted ended with with him guidance. Despite the impact of the global economic disruption caused by covert 19.
Did you use core value proposition of enabling automated remote work has never been more relevant.
Whether it be in the form of secure work from home.
Continuity resilient cloud and S. compute machine to machine communications or automated condition.
Monitoring and use importance is increasingly highlighted in these times of limited person mobility and social distancing.
For over 35 years customers have chosen are secure reliable scales on easy to manage solutions with their business and mission critical applications and we were honored to serve them.
As we highlighted at the end of 2019 and with a full quarter of open years result did just business model has improved with top line girl.
Over 50% gross margins and approximately 15% adjusted EBITDA markings. In addition, we strengthen our balance sheet.
And the court.
While the pandemic limits are visibility.
We expect that you will continue to produce profits and cash.
And then move forward.
On the performance of our business segments have also comment on a pandemics impact to date.
Or I'll see products and services business segment has grown and become more profitable open gear drove the increasing revenues.
The year over year, as well as quarter over quarter.
With moderate biomass decline in our other products and services offerings as a pandemic impact that some of our.
Customers during the quarter.
Next to provide some specific updates opening ears core offering of always on secure networking.
Management for critical infrastructure experience steady and growing demand as we are tied in many cases to long term cloud and edge strategic priorities.
We achieved nearly 34 million a new product revenue fiscal years to date, which can pay parenting, sorry, which compares favorably to the $40 million for the entire fiscal 2019.
Exciting new product introductions, we expect to launch and the third fiscal quarter include the kind of core eight invented family Yeah, I X. 20, industrial sell your router and enhanced open gear resiliency products.
We are seeing the results of our strategic sales efforts as we experience strong contributions in the quarter from this customer second.
We continue deployment of our Smart City project.
Those additional business in this segment.
We have more work to improve our customers experience the results of our from R.E.N., the a jogger fee and the attach rate of our did your remote manager offering.
<unk> services has business application and industry vertical diversification.
We have some offerings that of experience higher demand as a result of the pandemic medical device data center and secure work from home or examples.
We have also had some offerings no experience, we can demand or delay deployments retail mass transit and energy.
In addition, some of our customers due to local government policies have been shut down.
Able to receive shipments.
What's that said, we expect I ought to frighten services to both grow and improve its profitability overtime.
<unk> <unk> solutions increased it subscriber base in the quarter well advancing key initiatives, we had to close to 2000 news sites with limited subscribe return during the quarter to end with approximately 68500 subscribers, we're approaching 16 million an annualized recurring revenue.
Smart times four point, all the destination consolidation of the cloud and modal interface make good progress.
We're working with both new and existing customers to experience the new platform.
We introduced enhance gateway and central hardware combined with the field service mobile application to improve installation and training efficiency.
Larger enterprise deals came on or increased scrutiny throughout the corner as our prospects sent customers evaluated their businesses within the context of the pandemic.
Decisions were almost exclusively pushing our projects as supposing as opposed to choosing a competitive offering.
The pandemic as severely impacted the food service hospitality travel and leisure sectors. Most of these businesses are closed for instrument dining and only offering pick up and delivery services. In addition to health care system is under severe strain as elective procedures have unlimited to ensure capacity is available to service those affected by the pandemic.
These industry uses specific events have significantly reduce the market's priority for smart <unk> services. However, we continue to believe and the core value for automated and monitoring services.
Are confident we will grow this subscriber base.
And the corporate level, we continue to progress did use efficiency and effectiveness software services and subscription or differentiating are offering are offerings, including the recent edition of open here and there lighthouse software.
We are further leveraging our singles see around here P. system, adding process automation, improving our sales operations and integrating point of sale data from our distribution channels integrating point of sale data enables us to follow up and opportunities efficiently and quickly.
R.I.T. systems, and prophecies have performed well, even with a much greater burden farmer won't work.
We strengthen our balance sheet with less inventory more cash and lowering our deposition.
This pandemic, a serious and uncertain, while things can change quickly our team supply chain and distribution channels are secure.
Employs returned to work on our facilities, we expect there to be a new normal if she also distancing travel restrictions on safety policies that will evolve over time.
We will continue to prioritize the safety of our team energy I can't tell you how proud of him.
How well the did you team has performed in this highly evolved on stressful time.
Assist us sincere. Thank you two are bored.
So my leadership team into the broader team.
We worked through this pandemic with collaboration cooperation and willingness to change.
I'll turn the call over to Jamie for more detail on our financial performance.
<unk>.
The colder 19 pandemic has created an uncertain economic backdrop that presents a wide range of potential impacts.
Recap some of our key financial highlights of our second fiscal quarter as well as commenting items as it relates to our present financial position and expectations. During this time of uncertainty.
Obviously, the dynamic macro economic circumstances could impact these expectations or by that are positions closely.
Revenue for the corner was 73.4 million when adjusted even know performance of 11.2 million for 15.2% of revenue Baltimore within our quarterly guidance ranges.
The girls margin rate for the fiscal quarter ended at 52.6%.
On a per diluted Sharebased, it's aren't yappy P.S. with seven cents, which was within our according to gods or.
Are adjusted G.P.S. was 28 cents per diluted shared one says below are guided range, primarily driven by the impact of F.X. and vital true up with an acquisition related or no expense.
We generated $9.4 million and operating cash fall and then at the second fiscal quarter with 50 million and cash.
We expect to continue to generate positive operating cash.
Or any our position is 78 million, including acquisition of open gear don't for maybe 1 million and our last fiscal quarter.
We have reviewed the potential risk to the business as it relates to collections returns and other business related items, and then increased slightly our reserves related to returns an additional carrier fees related to certainly international shipments. We will continue to monitor these reserves.
Or inventory increased or decreased to 43 million down from 47 in our last fiscal quarter.
Today's restrictions <unk> not material overstrained, our ability to obtain inventory manufacturer or deliver products or services to our customers.
We have reviewed the potential impacts of the covert 19 pandemic on goodwill and intangible assets and at this time have determined there to be no adjustments, we do not expect there to be a material change to our assets that are balance sheet.
Or any that position as of the second fiscal quarter is approximately 105 million or a net debt position of approximately 48 million.
We have a credit facility in the way of little ball or if that allows us access up to an additional 40 million and cash enabling strong liquidity.
Where in compliance with and expect to remain in compliance with financial covenants of our credit facility.
Beginning of the second fiscal quarter did you implemented a plan to streamline the company's operations to more closely aligned expenses to are projected revenue as well as position. The company for continued operated performance and profitable girls.
We expect the operational restructuring will reduce annualized non gap operating expenses by approximately 10 million compared towards prior forecasts.
We do not expect these actions will result in a material charge to the financials.
At a segment level for the fiscal quarter I.O.T. products and services revenue increase 19.4% euro per year on the second fiscal or 2020 to 69 66.9 million gross margin increased 740 basis points to 53%.
Product mix, driven by our infrastructure management products, including the products acquired through the acquisition of open gear drove the margin increase.
Smart sends out T. solutions revenue decrease 32.6 per se year over year in the second fiscal quarter of 20 26.5 million.
This was primarily due to lower site addition to the second fiscal quarter 2020.
As well as purchases and equipment upgrades from existing customers that did not <unk> second fiscal quarter of 2020.
Gross margins decreased 50 basis points to 48.5% of revenues largely due to approximate product mix as the prior your poor had significant equipment upgrades.
Now what's it relates to forward looking guides ear suspending guidance for the fiscal year 2020, do on certain changes to the economic backdrop created by Coven 19.
Despite her solid performance in our fiscal second quarter 2020, we noted disruptions in the normal business activities in the second fiscal quarter, especially for customers who's businesses are located in restricted geographic areas.
Facilities are operations have been closed or otherwise restricted.
We have implemented measures to reduce expenses, while maintaining company performance.
Unable to reasonably estimate when markets will recover.
The duration of sets recovery and the related financial impact on her business at this time.
That completes are prepared remarks at this time run and I are pleased to take your questions. Cindy could you. Please provide instructions.
<unk> most times I would not seen him on average <unk> in Oregon, <unk>, you will need to pass five one I'm going to kind of town.
Again, but starring fine on Nick hung from keep that.
Okay. First question comes from <unk>, <unk>, I've kinda coin, yeah minus microphone.
Great. Thank you and glad to hear nobody did she has a contract because they didn't hope it stays that way.
Thanks Mikes over the same for you that can accord.
Thank you. We're on another you know very tough environment and you know pulling the guidance makes sense is there.
And he just kind of color you can give maybe on business. So do last maybe one or two weeks versus the last three or four in April or may be yeah touch on again and I know you've covered if that maybe a little more detail you. Some of your end markets and businesses that are performing better than other <unk> just any any help he kind of give us and what you're seeing what would be great.
Yeah, I think on to book and things on the on the positive side over years had really steady demand for their products a lot of their customers have longer or strategic initiatives, whether they be klauder edge and so their businesses performed as we expected I.
And the other end of the equation smart sense has had a more difficult time getting the attention of our customers as they are adjusting processes to deal with.
Pandemic or in some cases unable to service their customers. So they've had a tougher time engaging with their customers were focusing more of our time on health care than on the other segments naturally because of what's going on.
Products and services, it's it's a real next we have some parts of our business.
<unk> number of embedded customers in medical device that businesses as strong as you might imagine with people needing things that confusion Thompson and ventilators and then we have other parts of our business like mass transit, where we actually had success and we continue to have strong bookings, but are not able to be able to implement those projects so that.
That gives you a kind of the spectrum of what we're seeing as we've been heading into this fiscal their quarter.
<unk>.
Update on these large smart city project that help at all during the quarter and is that still moving forward are somewhat delete also given the pandemic and.
And any other colors you can maybe on that project in the pipeline for other <unk> other city projects with your partnership there.
Yeah, we we actually continue to to deploy the smart city projects last quarter and and that should be largely complete from a one time revenue. This current quarter of fiscal Q3, and then there's ongoing revenues that we'll get from maintaining the solution for the next five years, we have had additional wins not to the size or extend.
So that project, but deployments been problematic, we we expect that to loosen up the.
Government supports of of of mass transit systems has been very important. So these projects. We went insured are intact. The deployment are the project is is what what we're now battling us to the timing of of those Frank shipments.
They thinks her last question I'll I'll pass the line on.
Jamie just yeah strong gross margin in the corridor and then you're talking about <unk>, yeah, having the cost kinda match, the <unk>, yeah hard to predict revenue.
Do you expect pretty cash flow positive each of the next quarter's or just for fiscal 20, I just wanted to kind of clarify how you're kicking is about the business and how quickly that 10 million kind of comes out of the model turns out there.
Yeah, Mike I think as we see it today.
I I would expect that we would continue to generate positive cash flow or recorder. So I I don't think it'll trying to show up in one big period, I think we'll continue to.
To see that cash will remain positive in each of the corridors.
It takes <unk>. This more just limiting traveling other other expenses are that can be implemented pretty quickly in terms of that run right.
Change the way you do business separate most which is coming from.
Yeah, there's a lot of items that are that are better than they are my from from travel and T.V. too.
You know other measures that we we've taken so there there's a little bit of a hit list. There that we that we have that as we scrubbed through the business, we'd really kinda proactively managed where the pennies r. and and so it's it's more than just travel, but you know kind of across a lot of our spend areas and off x.
Good luck navigating it's tough times and hopefully we can <unk>.
Yeah.
Yeah I'll take care.
I'm getting next question comes from the line that chasing snapped.
<unk>.
<unk>.
Big I think to take my questions just following up on the previous question around just curious if you could comment on for the linear parody of the ordered pattern to sign a scrolling here in early may.
You know in in April you know, we I think we're living different than maybe some other businesses that are are are seeing some higher variability so that the.
Quarter has been progressing as we expected, we're not seeing dramatic shift up or down as you might see another of businesses. So we're we're pleased with the started a quarter long way to go clearly but.
But the the gradual reopening that's happening in the U.S. you know, we we haven't seen that correlation in our in our financial results per se.
Okay and looking at the smartest solutions business are you seeing any push back from customers. When it comes to pricing just given the current backdrop of what they're going through.
No. It's really it's it's not a pricing issue because they are awash. So compelling it's a priority issue. It's you know if you've got a grocery store that's trying to support.
Hours for you know people that are more for all the votes. The pandemic Oh, you've got additional cleaning and sanitation you need to do you've got a plexiglas, you're putting up the cash registers those things have take a priority over over projects like what smart sense offers we do expect.
It's a game to gain their attention again Ah, but at the moment a lot of operational changes are are taking up there are priority list.
Okay and then just the last one for me just wanted to make sure I heard correctly, you guys are not seeing any sort of supply constraints or <unk>.
No. We've worked very hard and you know there's there's 510 has never perfect you always have spot issues here in there, but real credit to our team to maintain the flow of components and also ensure that our contract manufacturers and our two logistics centres in Minnesota in Utah.
Are running a safely and productively. So so knock on wood and again things can change quickly, but but right now we're doing a good job in that on that front.
That's all thanks, a lot guys.
<unk>.
<unk>.
Married.
Oh, yes, good afternoon.
Oh, Hey, Rick James How're you.
Doing fun <unk>, so concerned here [laughter] working from home.
He's just a a quick question what was open years revenue in the corridor.
What was the contribution.
<unk>, we don't.
He mentioned that our last call we've got open gear.
Fairly well integrated into the business already source such as part of our segment reporting it's embedded inside of the segments of the you don't break that out we stay inside of the segment you ever where we're out with the integration.
Okay.
And then I'm the expense controls just stood a circle back there I'm in love that sounds you know I don't know say discretionary, but it's temporary.
You said you know so my I guess the way you position this.
We'll be able to for the third quarter, good about two and a half a million dollars. So are adjusted affects should drop by two and a half million sequentially.
Yeah, I think it <unk> it just to kind of give you some contacts and maybe Jane fulfill and additional details as well as if if you look at our forecasted.
Op accent are forecasted model, we've taken $10 million out of that model for throughout fiscal 20 some of those.
Savings actually occurred last quarter, and the majority of the savings or occur in the second half or a fiscal year.
And so if you think about where we were forecasted that that's where that numbers coming down versus say coming off of a second fiscal quarter run rate.
Yeah breakage pitch.
<unk>.
Oh.
You know the the original plan. So the way the plan was as we talked about was more of the back of voted plan. This year. So that means that we had planned revenue unplanned operating expenses that.
Line, often so in the actually that we've taken some of those actions are or in fact coming out <unk>. Other actions are planned adjustments that we've made given some of the uncertainties and so it comes out a plan as opposed to run rates. So it's really a mix of two for the.
Active.
Oh, okay. Okay.
And then just stood or I'm, new your solutions business.
Run how you know how does the customer base hold up here I mean did you have you know a higher true rate it all in the corridor.
With the site counts or you know and he you know customer retention does that tend to go off or I mean, how does the how does the base act if their facilities shut down.
Do they again are they are they paying their monthly fee if there.
Facility, you know is shut down.
Yeah. It's it really good question, Rick and and they'll give you some context here are 68500 subscribers.
The biggest single segment is health care and so if you think about pharmacies hospitals clinics labs, those those businesses are up and running their operating in an altered environment in some cases, especially hospitals, but that that sector is healthy and and is fine.
We do have a number of transportation clients and if you think about their largely higher calling refrigerated goods people are still eating people are still consuming medical products that that businesses also holding up fine. It's really the food service segment and in particular restaurants.
If you back out things that convenience stores grocery stores, which are still holding up. So you end up with a pretty small piece of our overall <unk>. That's under the more severe strain that that you described and things like you know restaurants being shut down.
And I would say at this point and it just really started in April we've had really good retention through our second for fiscal core in fact last quarter. We had record retention levels now we do have some food service some restaurant customers in particular that we will work with especially if they plan to reinstate their business within a month or two.
Certainly there's gonna be some businesses.
That are going to have more extended outlook to that but many of our customers more enterprise customers and so so far we've been able to work with those customers when they have a situation in our retention has been very very very good.
<unk>. So so maybe when I look at the site counts and you know you didn't you didn't hit your goal I understand that but is that more if that's not a function of [noise].
Turn.
Literally accomplished a function of.
The customers are close out that sends it that it's really not getting new business right. So we didn't lose.
Many sites and the quarter, it's really we weren't able to gain as many sites an AD as many sites as we were expecting is largely driven by these enterprise opportunities that you know they weren't a position to make this kind of commandment had to focus somewhere operational near term issues.
I see okay, Alright, [laughter] just last question from my standpoint, I mean, the <unk> one number that you you referenced you reference the R.R.
And if I, if I look at the E.R.R. and to run rate. There 16 million. So obviously about you know 4 million of of you know A.R.R.
In the in the corridor, if I, if I pulled at 4 million out of the other the six and a half a million to sales what's the what's the episodic piece about two and a half million and was not the case that was.
<unk>.
Yeah, that's correct, so that would be driven by a combination you cite additions or expansions within existing sites, you know that one time installation and equipment and training.
Okay, Okay and that that was down you know.
50% or.
Yeah. So if you recall we've <unk>.
Yeah, we expect at three to 4000 sites per quarter, and we added under we came close to 2000 side. So we were.
1500 sites off of our the midpoint of our expectations.
Yeah Okay.
Okay I guess.
You you expect to have you know into fiscal two three with the issues that are out there and maybe full full cold it impact here.
Do you expect to be able to grow your sorry count sequentially.
We think we well we think we're gonna grow our subscriber base, we think the growth won't be a strongest where we've had in the past given the things we talked about but we still think between retaining existing customers and adding new customers will continue to grow that September base.
Okay. Okay.
Alright, well good luck up there. Thank you.
I think stay saver.
You go <unk>.
Well.
Again tacit consent, if I need to pass farm on line your telephone keypad.
And <unk> comes from the mine Love caught.
<unk>.
Yeah you'd have.
Good afternoon, Thanks for taking my questions, Ron and Jimmy glad to hear you guys in in your teams in your families are safe and healthy maybe to to jump right in on to open gear. It sounds like that really track expectations I just want to clarify that I know, there's a lot of data center market.
Exposure, there and that has been one of the healthy places in the world. These days. So I just want to kinda clarify that understand the data center exposure and if you expected growth trajectory on the open gear side of the business to continue.
Yeah, I think your your spot on that we we opened gear has like two primary markets. Its data center. If you will cloud based applications, but increasingly and actually the faster growing part of their businesses been edged appointments. So those would go out into either retail or other distributed environments, but.
The data center initiatives have been holding up front actually we do expect that to continue and have seen no signs of it yet now I want to emphasize it is is that low visibility business is not going to kind of business, where you get multi your purse or so the visibility doesn't extend out for corridors, but but all signs are pointing towards continue.
Investments.
I see with you know so much of US now working from home and and leveraging cloud based infrastructure those companies or continue to build out their presents and take advantage. A lot of these customers are are certainly not immune to the pandemic, but they're they're they're highly competent and their ability to to get through this enough continued.
These long term investments that they want to take advantage of right now while everybody on the cloud.
Gotcha very helpful and I think in your opening commentary you indicated that so routers and gateways some of the n. markets and customers on the enterprise front. We're we're reconsidering are slowing down some of the the purchase activity there could yeah.
Delve into that a little bit deeper was were suddenly the routers and gateways, where they actually down in the quarter or maybe what was the linear already in the quarter and.
And help us understand by N. market, what's going on there.
Yeah, the Sony the router market or our our business really really held up pretty well the bookings were actually stronger than the revenues and it was largely because we might get a purchase order, but the customers unable to deploy it because they're not resources to go out and install these or in some cases, let's say mass transit you know ridership is.
<unk> and they're focused on sanitizing mass transit versus I equipping with I.T.. So so as I mentioned, a little bit earlier, we we were very confident in this business in that some of these projects that were signed were delayed not not cancel.
So we we we continue to be enthusiasts took about the site router business.
These are still a pipeline building there then room.
Yes, absolutely.
Okay, and and and just to dig in one more on smart city deployments continued in in the the March quarter. It sounds like the they can do the wrap up this quarter can you give us just kinda sides that opportunity for us and and put that in perspective, you know what would be the potential following her any timings related to that is.
We look out over the course of the counter 2020. Thanks.
Yeah. Thanks got so yeah. We we continue deployment that project last quarter second fiscal quarter, we should be wrapped up with the one time portion of that project in the current quarter, we have gotten a additional business secured in that same application were unable to deploy those at the moment for the reasons, we talked about earlier.
But we are pleased to see the booking they're certainly not the size of which this one particular implementation was but but we're encouraged to see the repeatability of that application.
Great. Thank you.
I can <unk>.
You have a sign that procrastinate from which I guess men.
Yeah.
Yes, <unk> [laughter] we.
[laughter], sorry, probably kind of <unk>.
[noise] opportunities that my <unk> <unk> <unk> <unk> you know later later in the year. Here is is we may become all split to come out the other side and maybe sellers expectations.
A little bit more realistic than maybe they are at this point. So just just curious.
You know, maybe maybe set another way or you get a better fire or [laughter], how do you feel about that yeah. Yeah right. That's a really good question you know as Jamie mentioned, we do you feel I will continue to generate cash continued to be profitable through this a pandemic and so as you.
In last quarter, we do anticipate.
Leverage position, improving our cash or cash position improving so we are we are still on the offense, you're looking at opportunities, it's a little bit harder to develop Rick new opportunities when you're doing it remotely.
But we've got a database of opportunity. So we've been mining for the last five years. So we're certainly in touch with.
Those opportunities and and we want to take advantage of of of these things should they present itself and I think at this phase where early enough that we we haven't seen as quite as many white flags. If you will go up in the air, but but we want to make sure that were there in case, there's an opportunity we can take advantage of.
<unk> <unk> <unk> <unk>. Thanks.
Again, Cassie casinos, any depressants time running a telephone keypad.
There are no pretty questions that that's time for some tends to make the mean.
Great. Thank you and closing did you solutions enable the automated and remote work, which has become even more important in today's pandemic environments.
We work differently, but we still work together.
<unk>. Despite the please stay safe and healthy. Thank you for everybody that joined the call today.
Maybe sometime till nine <unk> conference call Funky Avenue line <unk>.
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