Q2 2022 TESSCO Technologies Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Q2 2022, you can't go Technologies, Inc. Earnings Conference call. At this time, all participants are in a listen only mode.
The speaker's presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone. Please be advised that today's conference maybe recorded if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today.
David Corinthian. Thank you. Please go ahead.
Good morning, everyone and thank you for joining <unk> Q2 fiscal year 2022 conference call. Joining me today are Sandy will Kijiji, Tesco as President and Chief Executive Officer, and Eric <unk> The company's CFO.
Please note that managements discussions today will contain forward looking statements about anticipated results and future prospects forward looking statements involve several risks and uncertainties and test post results may differ materially from those discussed today information concerning factors that may cause such a difference can be found in Tesco as public disclosures include.
The Companys most recent Form 10-K, and other periodic reports filed with the Securities and Exchange Commission with that introduction I would like to turn the call over to Sandeep Moca G. <unk>.
Tesco as President and CEO Sandy. Please go ahead.
Thank you David and good morning, everyone. Thank you for joining us.
Our second quarter performance provides further compelling evidence that the work we have done in implementing our strategic initiatives are yielding positive results, while setting us up for even greater long term success.
Our revenues grew 3% sequentially and 22% year over year with gains in both our markets.
These results include another record performance for our carrier market as we continue to grow share.
We are seeing a continuing uptick in demand the market is growing and customers are bullish.
Dolby sales bookings were up 38% year over year, reflecting robust demand for our products and services at.
At the same time, we continued to make progress with Adventist business.
Bookings grew 17% year over year, the highest we have ever achieved.
And we saw increasing utilization and growth in revenue on our website <unk> com, both sequentially and year over year.
While we are excited about the strong demand environment. We're also cautious about the global supply chain disruptions challenges with freight and predictability of product availability.
These do not show signs of easing in the near term.
For Tesco this means longer lead times, increasing freight costs and delays in converting bookings to revenue.
Together with our improved bookings this has created a backlog larger than anything we had seen.
Despite these challenges we have been able to deliver strong improvements in our bottom line results.
Adjusted EBITDA improved by <unk> 9 million sequentially, and $2 1 million year over year.
The operating efficiencies, we have architected allow us to drive more of our growing revenue and margin dollars to the bottom line and have us well positioned to achieve our full year operating plan.
I will now walk you through the results and highlights of the past quarter and the following format.
First our two markets carrier and commercial.
The three elements of our business distribution vendors and software and third our performance on Tesco Dot com.
Starting with our carrier business as I mentioned, the second fiscal quarter marked another record for revenue.
Carrier market revenue was up 44% year over year, and 2% over the first quarter, which was our previous record quarter.
Carrier market bookings were up 80% year over year. Our continued strength is due to our logistics and supply chain management expertise, our proprietary engineering and production capabilities and the successful execution of our business development initiatives.
Within the tier one carrier ecosystems revenues this quarter grew 38% year over year.
We achieved growth with existing customers and added new customers.
We expect continued robust demand driven by C band bills and alternatives both programs that are being launched.
The strongest performance this quarter came from our tower business with triple digit year over year growth.
We anticipate that our business will remain strong in Q3.
Highlights include Dash power systems designs and strong <unk> sales as many sites reopened following the Covid shutdowns.
We expect to expand our market share with these customers through new security and surveillance projects as well as additional sales of steel for that tower construction.
Regarding new business, we are seeing sales to the new customers, we mentioned last quarter and we will ship our first orders for one of the largest wireless carriers in the current third fiscal quarter.
We expect the demand from this customer will continue to grow we have also shipped product to the largest broadband company in the U S and expect demand from that customer to continue to grow over the coming quarters as well.
<unk> continues to be a key market driver in this space and currently represents about 25% of our carrier spend.
Our business development efforts have been highly effective enhancing our market share with existing customers and expanding the number of customers that we service.
While demand from our carrier segment continues to grow several key products remain highly constrained due to the supply chain disruptions. We are working closely with our customers to forecast demand and with our vendor partners to mitigate these challenges.
Turning now to the commercial market, which includes all wireless infrastructure business outside of the carrier ecosystem.
The commercial market had its best revenue quarter in seven quarters.
Being 5% sequential and 10% year over year growth.
Sales bookings were up 16% year over year.
The largest growth factor this quarter was again, our var customers up 10% sequentially and 29% year over year.
This growth was driven by our sales focus on these vars continued lessening of the pandemic impact we described in prior quarters and availability of inventory targeted and budgets for this sector.
We our demand planning with our top vars to better forecast product to meet their demand, especially given the current supply chain disruptions. Our progress in this area has shortened lead times and reduced our var customers stock on hand, many of our var customers have utilized our design services and we are working with.
These customers to assist them with the necessary product purchases.
Bookings have been strong which should result in continued growth in the second half of the year.
While revenues were down 8% year over year.
Our utility business is regaining momentum and sales grew 19% sequentially.
Bookings were also strong growing 29% sequentially. We're now engaged with several customers in advanced planning for upcoming technology projects, we're seeing a demand for private LTE networks as a foundational wireless platform that utilities can use to consolidate technologies under one.
Network.
These initiatives require longer planning cycles, and we expect them to reach maturity in calendar 2022 or.
Our solutions expertise and our line card put us in a very good position, especially with the recent supply relationships that we have announced.
Replicating the model, we established with utilities, we have created a new government team to build upon the success, we've had with federal state and local governments as well as government fires.
Turning now to the three key elements of our business, namely distribution Vantiv and software.
Starting with our distribution business, we continue to win market share and develop new customer and manufacturer relationships.
Our line card is not one of the most robust critical communications portfolios in the market and includes among other solutions products for public safety Das cellular das broadband small cell macro site and CD Rs slash private LTE.
Our turnkey offering value added services, including solution development and design site kitting and supply chain logistics provide cost efficiencies for our customers and reduce complexities for their deployment challenges.
We're making progress with our IP infrastructure modernization projects, which we expect to largely complete by the end of this fiscal year one.
Once implemented we will realized several enhancements. Some of these will include reduced freight in costs improved delivery consolidation streamlined inventory transfers ability to proactively identify potential order delays and streamline closing our financial statements.
These enhancements will provide us with further cost efficiencies and make Tesco easier to do business with.
The industry wide supply chain challenges has been extended lead times for many products and a growing order backlog.
We have been addressing these issues on two key fronts first we have increased our forward looking demand planning with customers, which has resulted in many of our customers providing us with purchase orders earlier than they had in the past.
Second we have worked very closely with our vendor partners to address supply availability and price increases.
And as a result, we create opportunities for ourselves to make educated purchases of constrained inventory to help our customers and predict test gross margins.
Despite the headwinds we will remain focused on our business development efforts to drive growth in our markets, while continuing to drive efficiencies throughout our company.
Also we will work closely with our customers and our suppliers to mitigate supply disruptions and inflationary pressures with a goal of improved profitability.
Regarding our Ventas business bookings grew 17% year over year totaling the highest we have ever achieved.
Sales were flat sequentially and year over year due to supply chain issues.
Included in our bookings and revenue this quarter, our custom enclosures and power solutions purchased by Vars to provide fiber aggregation solutions for five G. While at the end.
And customers are the larger nationwide carriers.
This business unlocks a new revenue stream for our commercial market driven by <unk> deployments. We believe this business will grow and help both our carrier and commercial results in future quarters.
Other innovations from vented this quarter include a variety of enclosures.
<unk> and var solutions, all developed using the product validation focus we embarked on 18 months ago, when we launched our three pillar strategy.
And as the bookings demonstrate these innovations have been well received by customers from many verticals, including clean energy federal agencies warehouse operators and universities to name a few.
Our focus and strategy is to ensure attachment of vantiv products with LMR Slash two way public safety Das and small cell solutions, which improve both margins and customer satisfaction.
Regarding our software business as we mentioned last quarter, our device monitoring and alerting service.
Generally available or GE milestone and is now in production.
We now have a number of customers using this platform and we are in commercial discussions to help them scale and include this capability as part of their own go to market strategies.
Additionally, as a sign of industry acknowledgment, we have Oems using our device monitoring capabilities to showcase their own products as well.
While we expect initial revenues this fiscal year as we have said before these revenues will ramp in fiscal 2023.
Lastly in terms of our sales channels <unk> cells, both directly and online through Tesco Dot Com. Our continued focus on Tesco Dot com resulted in an increase in the number of buying customers. The number of repeat customers and the size of orders we have seen thus far.
Last quarter.
Sales on Tesco Dot com generally come at higher margins and are more cost efficient to process.
In Q2 revenue increased 12% sequentially and 18% year over year totaling $11 million.
Engagements measured by product page views increased by 280% year over year.
We're very excited about our progress and the results we have achieved.
With that.
Let me turn it over to Eric for his financial summary for this past quarter.
Thank you Sandeep and good morning, everyone.
I'll now walk you through our financial results.
As a reminder, the income statement amounts are all from continuing operations and exclude the significantly diminished activity from our former retail business.
Second quarter revenues increased 22% year over year, $208 5 million due to strong demand across our carrier and commercial markets.
Sandeep said the Q2 carrier market revenues were another record high in commercial revenues were the highest achieved in the past seven quarters.
Gross profit was $19 8 million for the second quarter of fiscal 2022, compared with $17 1 million for the same quarter of fiscal 2021.
Gross margin was 18, 2% of revenue for the second quarter of fiscal 'twenty two.
Compared with 19, 3% in the second quarter of last year.
Gross margins in the carrier market continues to be ahead of last year's pace, but we still expect some contraction in the second half of the year based on customer and product mix.
Commercial margins were lower than normal this quarter due to some larger projects that were at lower margins, but we expect commercial margins to be better and the remaining two quarters of the fiscal year.
Overall, we would expect total margins in the second half to approximately where they were in the first time.
We remain focused on cost management in fact, we lowered overall SG&A as a percentage of revenues 410 basis points from 23, 4% to 19, 3% year over year.
We achieved this reduction despite a significant increase in freight expenses.
We continue to manager and corporate expenses as we look to complete the major it initiatives later this year.
We expect to realize efficiencies and support expenses and a reduction in it expenses outside of depreciation over time as we realize the benefits associated with this new platform.
Second quarter 2022, net loss was $1 3 million compared with a net loss of $2 9 million a year ago.
Adjusted EBITDA was a loss of 200000 compared with a loss of $2 3 million a year ago.
Turning to the balance sheet.
As we had expected product inventory decreased by nearly $12 million in the second quarter.
The supply chain issues, we've experienced this year caused inventory spike in the first quarter.
We worked through that extra inventory during Q2.
We would expect more normal quarterly fluctuations in the coming quarters, but the volatile supply chain may still lead to some temporary spikes in inventory.
The balance on our $75 million line of credit increased by approximately $6 million this quarter.
This was due in part to the increase in inventory from the first quarter that was paid for during Q2.
Accounts receivable also increased by $6 million.
We did receive our IRS tax refunds of $4 $3 million during the third quarter.
We are still owed another approximately $6 million in tax refunds.
But do not expect the majority of that to be received until later in FY 'twenty two or into early FY 'twenty three.
At the end of Q1, our payables and accrued expenses exceeded our receivables by $12 million.
Our receivables now exceed payables and accruals by nearly $8 million.
This should have a positive effect on operating cash flows in the second half of the fiscal year.
Our first half performance has us well positioned to achieve our fiscal 2022 operating plan targets that we provided in July.
These include number one achieving between 408 and $442 million in full year revenue.
Number two achieving full year adjusted EBITDA of between breakeven to $2 4 million.
And third a full year net loss of between $6 4 million to $4 1 million.
We continue to improve our results both sequentially and year over year and I am very excited about the direction we're heading in.
With that I will turn the call back over to Cindy.
Thank you Eric.
In closing we had another record revenue quarter in our carrier business and the highest revenue in our commercial market since Q4 of fiscal year 2020.
We're gaining market share and adding new customers.
Our backlog, including Vantiv is at historically high levels.
And our <unk> Dot Com website has achieved improved metrics across the board with the highest quarterly revenue in three years.
And all of these have contributed to a significant improvement in our profitability as evidenced by the $2 $1 million year over year improvement in adjusted EBITDA.
We continue to make progress with the growth strategy, we launched last year and with markets beginning to emerge from the pandemic related slowdown the evidence of our turnaround is becoming very apparent we.
We remain focused on our cost control efforts and expect significant improvement in our overall profitability this fiscal year compared with fiscal 2021.
With that.
We will open the call for questions. Operator. Please go ahead.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press, the pound or hence tea.
Standby, while we compile the Q&A roster.
Your first question comes from the line of Maggie Nolan with William Blair. Your line is open.
And then deepen Eric this is Ted on for Maggie.
Great results.
Good to see kind of what is your level of visibility to the midpoint of our full year guidance.
And what needs to happen to get to the upper end of the guidance range.
Firstly, what was the low end of the guidance range.
Good morning, Ted.
So good question on the revenue side, I think we have visibility into.
And to be very close to the mid to upper half of that range.
We have.
We've talked a lot about our bookings being higher than our revenues. So we have a significant backlog for the second half of the year on.
On the profitability side, that's a little harder to forecast.
With the changes in product mix that had been going on.
From an expense side, we think we're in good shape, but we're.
No, we're not going to get too much into what exactly needs to happen to be low low to high but yes.
We think we're in a good position to at least be at the low end of all of those ranges.
Just to reaffirm and good morning, guys and thanks for the question as both Erik and I said on the call.
We both believe that we are.
Well positioned.
To meet that guidance.
From a revenue and bookings perspective, as you heard us on the call.
Far more bullish the supply chain issues. Some of the team is navigating very well and we will continue to navigate so well.
We think we're very very well positioned to be in that zone.
Alright, great. Thanks Thats helpful.
Second question is regarding kind of the supply chain. There. So sandeep you mentioned the clients are doing.
<unk> started earlier with you guys.
Has the data supply chain.
Supply chain cadence client behavior.
And the conversation.
Is having with clients.
Yeah to put it simply.
It's simple sentence, everybody is being forced to do much more forward planning there.
And we have been used to or the industry has been used to.
People are wanting to get in line for when products become available.
The first to get it so that is driving behavior.
For us that means a few things.
The one I like his customer intimacy. So we're working very closely with our customers to understand their future projects. They are current project and their supply needs. That's always a good thing. So we are very embedded in that.
We're able to bring some of the supplier intelligence some of the pricing intelligence that we have from suppliers.
So that's overall helpful to everybody.
The orders we are getting.
Not too far in out years into the future with a couple of quarters into the future than otherwise people would have placed.
Alright, great Thats helpful and maybe just kind of a quick follow up there.
How has the size and scope of projects and sort of evolved over the last couple of quarters are you seeing any change in the average size of orders.
Well, let me come at this from.
Three different.
Data points, so on the carrier side.
<unk> those are intensifying.
No.
<unk> are lumpy as we've said before.
The sizes are about the same.
On the commercial business side, we are seeing a.
The robust demand.
And as our bookings progress shows we're really we're really very positive and very pleased with the year over year cadence. So we are seeing bigger orders there and then finally from desktop Dot com.
We are seeing much bigger orders that we have seen before so people are getting used to.
All of the progress and improvements we've made on the dot com, it's more of a Tesco and tunnel thing as opposed to a market issue, but I think it gives you a flavor.
Across the board for the question Youre asking.
Alright, great. Thanks for taking our questions.
Thank you.
Again as a reminder, if you would.
Like to ask a question. Please press star one on your telephone keypad Thats Star one.
Your next question comes from the line of Bill <unk> with Titan capital.
Your line is open.
Thank you a group of questions. The first one I'd like to start out with is the $14 million inventory decline.
In normal times I would ask what led to that large decline in inventory.
But is it simply fair to say that that's a function of the.
Demand in the bookings the supply chain issues et cetera, or is there something else going on there just more insightful.
Good morning, Bill, that's probably about 80% of the answer is the supply chain issues that spy.
Spiked up in Q1, and we significantly attack that to get those down in Q2.
We've also done a good job of managing the inventory a little bit tighter than we were given the supply chain issues that we see in the volatility.
As I said, there will be some ups and downs.
Come in and turn around very very quickly right. So that's the nature nature of the business. So we are constrained and the constraints to give you. Some color is mainly with things like power cable electronics anything that requires Ah relies on chipsets resin those are products that are.
Constrained and we don't have the inventory on hand, and as soon as the inventory comes in it goes out and sometimes with other inventory that customers want along with the power cable or those electronics. So I can.
That is the first part of your question.
The second part of your question had to deal with with backlog and how much more revenues had been if I understood. Your question correctly.
[noise] correctly. So then that's a difficult one to answer because our customers are purchase are placing orders into the future as we discussed with the last last question. So when they're when would they be ready to receive products.
It's a little bit of a question Mark However, I'll give you the following.
Eight of color historically are.
Backlog has been between $10 million to $20 million over.
Over the first half of this year.
It's more than doubled.
If you assume that we would have shipped half of that.
That would've been an additional 20 million plus in revenue, but not every quarter I'm, giving you color for what we might have done for the full first cough hopefully that gives you. The color you were looking for.
Net net net is helpful. Thank you and and then let me shift to Tesco Dot com.
I may have missed this is with the early morning, Itchy reference, but did I hear correctly that your page views are up 200 more than 200% and if that's the case.
Would you talk to.
Why that is the case and and we recognize that page views don't equal revenues, but is this somehow a leading indicator or is that more of a real time indicator of of activity, how do we translate that to to the future.
Thank you I would share with you the excitement we have internally much.
Not just with that stack, but but overall and you are correct in our page views are eyeballs on our web site.
And that's the leading indicators to commerce that you can conduct over the web site and we have seen and we've shared numbers over the last couple of quarters, we did $10 million in a little more last quarter and revenue through Tesco Dot com. This quarter, we did $11 million in a little more.
So yes, those page views are exciting it tells US we have made significant improvements in the product catalog both from a presentation perspective and from a content perspective. So that's what is exciting our our customers and we're making more of an effort to move our business on the.
Line, because as I said on the on the earnings call.
It's much more efficient for us to process from a cost perspective.
Thank you for that question, though.
Pretty thanks for the time.
I will now turn the call back over to management.
And remarked.
Thank you operator, and thanks again, everyone for joining us today, we appreciate your support of Tesco.
And also a thank you to our team members for all their hard work and dedication. We look forward to speaking with you next quarter have a wonderful day.
Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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