Q2 2023 TESSCO Technologies Inc Earnings Call
And thank you for joining Tesco Q2 fiscal year 2023 conference call. Joining me today are Sandeep, Leukergy, Tesco, President and Chief Executive Officer, and Eric Potomac, 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 a number of risks and uncertainties and Tesco as results may differ materially from those discussed today.
Formation concerning factors that may cause such a difference can be found in <unk> public disclosures, including the Companys. Most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission with that introduction I'd like to turn the call over to Sandeep <unk>, Tesco President and CEO Sandy. Please go ahead.
Yes.
Thank you David.
Everyone.
Thank you for joining us today.
I am extremely proud of our record performance this quarter.
Our revenue gross profit net income and adjusted.
EBITDA achieved this quarter demonstrate the successful execution of our turnaround strategy.
Two years ago, we announced our three pillar strategy to strengthen and streamline our distribution business <unk>.
<unk> in our inventive product line and launched a new software business, which we now call Cashcall observer.
Since then our focus has been to drive revenue growth by delivering excellent service and value.
Direct our investments on higher growth markets, namely <unk> and wireless.
Improved gross margins by adding differentiated value through inventive desktop observer pricing discipline and by growing our business via Tesco Dot com.
Growth EBITDA, utilizing <unk> operating leverage and to implement a new ERP driving new revenues and improving our operating efficiencies.
This quarter, we have demonstrated progress across all of our strategic initiatives.
Furthermore, we have effectively managed expenses and turned around the trajectory of every line of business improved every sales channel and improved in every market segment.
These actions produced a record revenue quarter with dramatic improvements in profitability.
Strong performance by both our carrier and commercial sales teams produced record revenue, while maintaining a near record high sales backlog Q2 revenues totaled $121 million up 11% year over year.
Our sales backlog at the end of the second quarter totaled $98 million.
Compared to the record $99 million at.
At the end of the first quarter. Additionally, we remain focused on driving profitable growth, resulting in a $2 4 million year over year improvement in net income and a $2 5 million improvement in adjusted EBITDA.
Net income was $1 2 million.
<unk> with a loss of $1 3 million a year ago, and adjusted EBITDA was $2 $3 million.
Compared with a loss of <unk> 2 million a year ago.
Regarding our supply chain, we've seen signs of improvement in several of our product lines, where.
But we expect global delays will continue to be a challenge and cause short term spikes in inventory.
Over the improvements to our lead times in certain product lines will allow us to retire some of our backlog more quickly.
I will now walk you through the results and highlights of this past quarter in the following format.
First our two markets carrier and commercial.
The three key elements of our business, namely distribution vendors and software and third our performance on Tesco Dot com.
Q2 was a record quarter for our carrier business carrier revenue was up 10, 7% year over year and 10, 3% sequentially.
Gross profit was up 23, 6% year over year, and nine 6% sequentially due to a more favorable customer and product mix our carrier backlog at the end of Q2 was over $47 million.
Up 57% year over year.
We have improved our market share with AT&T turf contractors growing 48% year over year, our tariff customers confirm that we do an exceptional job at reallocating and distributing material to make sure that their sites are not impacted by the ongoing supply chain challenges. Additionally, many of our.
Larger tough customers are very optimistic about calendar 2023, and believe it will be a big year for them.
Also the major tier one carrier customer that we signed last year continues to grow quarter over quarter, we are working on expanding into new product categories and into new markets.
I will now turn to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem Q2 was a very strong quarter for commercial revenue with an 11, 3% increase year over year and a five 4% increase sequentially.
Gross profit increased 21, 6% year over year, and seven 6% sequentially.
Our commercial sales backlog at the end of the quarter was at $52 million or 106% increase year over year.
Our scale.
Nickel expertise value added services program management support and personalized account coverage are the key reasons why our customers rely on desktop.
I mentioned in previous quarters that hospitals were large market segment that we have access to our docks integrators.
That continues to be the case through the AT&T enhanced in building program. Our EIB, we were able to book over $1 $4 million. This past quarter from our EIB contractors and shipped over $3 7 million.
We still have a sizable backlog for that program totaling over $8 8 million.
Which we expect to be able to ship over the coming months.
The strength of <unk> reputation as a preferred partner is leading to new project wins outside of the EIB program.
Our utility market grew 34% year over year and 31% sequentially. These strong results confirm our strategy of helping electric utilities, modernize and assisting with their overall grid automation projects.
Our strength with utilities continues to be a combination of our technical expertise and a focused and experienced sales team.
Growth initiatives in this market include Aventis business development campaign around automated metering infrastructure, which is already resulting in wins across multiple investor owned utilities fleet.
Fleet is starting to recover a bit and we're seeing some of these utilities might get once again. We are also seeing strong demand in test equipment, and our positioning our universal broadband and closure as a simple turnkey solution for utilities deploying wireless.
Our volume market grew 3% year over year, which was slightly down sequentially. Our transportation segment grew 43% year over year, which was down 5% sequentially.
This included projects to support microwave equipment for class one railroad customers.
On a competitive basis <unk> has a robust offering that includes more than just products. Our solutions team program management personalized account support logistics services and strategic supplier relationships put us in a very strong position not only to win but to win with profitable margins.
And create long term relationships. Additionally, we are leveraging these value added services and enhanced support resources to gain customer loyalty through improved execution, which creates real partnerships with our customers. We're very encouraged by the strong momentum we're carrying into the second half of the year.
Turning now to the three key elements of our business, specifically distribution Vantiv and software.
Starting with our distribution business, we remain focused on increasing our market share and are reviewing new strategic supplier relationships to help diversify <unk> overall business and to buffer against supply chain constraints as I mentioned earlier, while the supply chain has improved somewhat.
Many products still have very long lead times, we are utilizing our demand planning and supply chain teams to work directly with many of our customers, which is encourage many of them to provide advanced purchase orders to help overcome inconsistent lead times and to ensure the timely completion of their projects.
And forecasting and in ordering the materials they need we leverage our relationships with our manufacturer partners to Poland product delivery dates where possible and offer substitute items, where appropriate we remain focused on driving a positive customer experience and setting Tesco apart by making it easier.
For both customers and suppliers to do business with us.
Turning now preventive our strategy of industrializing, our <unk> operations continues to yield results.
<unk> had its second highest quarter in our history growing 25% year over year and 6% sequentially.
Highest revenue quarter was achieved in Q4 of fiscal 2002.
Rents have increased market share with a wide range of existing customers, including a competitive retail electricity and natural gas supplier.
<unk> largest athletic apparel company.
The third largest retailer in the world and the world's two largest entertainment conglomerates.
<unk> has provided these two companies with products for general public wireless access as well as for amusement ride functionality.
Additionally, vintage has introduced several new products this past quarter.
New solar system for 60% to 90 watts, which supports iOS.
Devices.
Stainless steel version of our physical design and closure that is popular with customers and can be used both indoors and outdoors.
Antenna and cable and site hardware with factory jumpers typically used in the automotive industry.
Our Wifi six E omni and directional antenna to support Cisco E applications.
And a 300 to 6000.
Hertz omni feeling antenna as well as low perm tablets.
Regarding our software business, we have made progress in the offering including Onboarding additional devices.
Implementing new user workflows under Tesco Observer portal.
Automated workflows to create customer accounts solutions templates and configurations under deployment platform and also enhancements to our SNMP intelligence server.
Additionally, we have signed several new customers to Tesco observer and have a growing pipeline of opportunities for both existing and prospective customers.
In terms of our sales channels, we sell both directly.
<unk> online through Tesla Dot Com, we continue to attract new customers to Tesco Dot com, which resulted in a record quarterly revenue of $11 million.
Lastly, I would like to provide you with an update on our ERP conversion, replacing our legacy ERP system that had been in place for 40 years.
This effort will also replace and modernize several other standalone software packages that we utilize.
This project has taken longer and has been costlier than initially anticipated.
To date capitalized costs have been about $39 million.
Once the system goes live the final amount of capitalized costs will be amortized over a seven year period.
We are in the final stage of our implementation and are confident in going live with the system during the fourth quarter.
Once the new system is live we expect significant reduction in legacy system expenses, a reduction in non capital implementation costs, and many realizable business enhancements and efficiencies, including reductions in resources needed to run our business more.
More efficient inventory repurchasing and better freight utilization, we expect to realize these benefits in fiscal 2024, along with a strong return on our investment with that I will turn the call over to Eric for the financial review.
Thank you Sandeep and good morning, everyone. As a reminder, the income statement amounts that are referenced are all from continuing operations and exclude the activity from our former retail business.
We had a record quarter for our combined carrier and commercial segments totaling $125 million up 11% year over year.
This is the fourth consecutive quarter of sequential growth for our carrier segment and the second consecutive quarter of sequential growth for our commercial segment.
Sales backlog at the end of the second quarter totaled $98 million compared to $99 million at the end of the first quarter.
These results were achieved despite industry wide disruptions in the global supply chain.
Gross profit was $24 2 million for the second quarter of fiscal 2020, threep compared with $19 8 million for the same quarter of fiscal 2022.
Gross margin was 21% of revenues for the second quarter of fiscal 2023, compared with 18, 2% in the second quarter of the prior year largely as a result of favorable customer and product mix, including a 25% increase in sales of venting products.
Second quarter of fiscal 'twenty, three selling general and administrative expenses increased eight 1% from the prior year quarter to $22 7 million, primarily as a result of increased variable expenses associated with the 11% increase in revenues.
Overall SG&A expenses as a percentage of revenues were 18, 8% in the second quarter of fiscal 'twenty, three compared with $19 three in the prior year quarter.
This quarter, we began to break out expenses as a percentage of revenues by variable and fixed expenses.
The variable expenses consist of roughly 50% of freight out expenses and the remaining 50% primarily in distribution center labor and sales commissions.
This quarter's variable SG&A as a percentage of revenues was up from six 1% in last year's second quarter to six 3%. This quarter as we continue to see freight charges from carriers increase largely due to fuel surcharges and other accessorial charges.
Our operational and pricing discipline has ensured that we pass on the rising freight costs to our customers.
<unk> are included in revenue and gross profit.
Fixed SG&A as a percentage of revenue is down from 13, 2% to 12, 5%.
We have been able to support investments inventive Tesco observer and we.
With reductions to most other areas of the support organization.
We will continue to focus on fixed expense reductions and the implementation of the new ERP will enable us to continue these efforts in fiscal 'twenty four.
Second quarter fiscal 'twenty three net income was $1 2 million compared with a net loss of $1 3 million in the second quarter of fiscal 2022.
Adjusted EBITDA and adjusted EBITDA per share were $2 3 million and 25, respectively for the second quarter of fiscal 'twenty three.
This compares with adjusted EBITDA and adjusted EBITDA per share of a loss of <unk> 2 million and a loss of <unk> <unk>, respectively for the second quarter of last year.
Turning to the balance sheet.
At quarter end, the outstanding balance under the Companys $80 million line of credit was $53 5 million and we had $3 3 million in cash and cash equivalents.
Product inventory increased by $14 6 million in the second quarter in part to manage through the supply chain disruption Sandeep discussed.
While we remain strategic in our inventory management, we are working on reducing our overall inventory levels.
We expect inventory levels and our line of credit balance to be more variable for the next few quarters as parts of the supply chain improve while other parts remain constricted.
Accounts receivable increased by $9 3 million in the second quarter. This is reflective of a back loaded sales quarter that was EBIT more pronounced due to the supply chain challenges.
We ended the quarter with income tax receivables of $3 7 million all.
All of the associated tax returns have been filed.
And then timing of receipts of these payments is largely dependent on the IRS and the state of Maryland.
I am very pleased with how we are executing on our strategy and the resulting records we've achieved despite macro level headwinds impacting our business. We are encouraged by our first half results the strong sales and even more so with a near record backlog and believe that we will continue to see strong results in the second half and that we are on pay.
To meet our guidance ranges.
Accordingly, we are reaffirming our guidance for fiscal year 2023, which is as follows.
Revenue of $450 million to $475 million, which would represent growth of 8% to 14%.
And net loss of $5 million to $2 1 million, which compares to a net loss of $3 3 million in fiscal year 2022.
And adjusted EBITDA of between $4 7 million, which compares to <unk> 3 million in fiscal year 2022.
With that I will turn the call back to Sandy.
Thank you Eric.
Before we open the call to questions I want to reiterate some of the highlights from this quarter.
Our Q2 revenues totaled a record $121 million up 11% year over year.
Strong performance by both our carrier and commercial sales teams, while maintaining high sales backlog.
Our focus on driving profitable growth yielded a $2 $5 million year over year improvement in adjusted EBITDA and a $2 4 million improvement in net income.
We expect our new ERP to launch in our fourth fiscal quarter and to begin realizing meaningful benefits in fiscal year 'twenty four.
We are on pace to meet our guidance ranges.
And most importantly, our turnaround strategy continues to produce solid results, improving efficiencies and driving growth and profitability across our business.
With that we will now open the call to questions.
I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Jesse Wolfson from William Blair. Your line is open.
Alright. Thank you. This is jesse on for Maggie Congrats on the nice results. This quarter I wanted to ask about Tesco observers so Doug.
<unk> taken for revenues to ramp in the second half still hold true.
What's kind of informing your expectations and how do you think about the cadence of those wins ramping up.
Hey, good morning, Jesse Thanks for joining thanks for the thanks for the question, Yes, I mean, we we repeat that we expect these revenues to ramp.
Through the remainder of this year and into fiscal 2024, we have a number of customers using the service and paying for it we haven't broken out those numbers theyre small.
But as we said earlier and as you repeated we expect the revenues to ramp.
Okay.
Got it and then one quick follow up for me.
Sure.
It's helpful that you began to break out.
G&A by variable and fixed on that variable component.
<unk> has historically been 50% freight and what would that look like in <unk>.
Normalized times.
Thanks, Jessie its Zurich certainly the freight numbers. This the last couple of quarters have been higher than they have been in the past.
I would say, it's probably a little bit less than 50%. If you go back to.
Q3 years before the supply chain issues that really impacted us because really the other stuff.
Compensation related to labor in the warehouse.
And.
And sales commissions would be relatively consistent so.
Going to be a little bit less than prior years, but I wouldn't say dramatically less certainly less.
Yes.
Got it thank you for taking our questions.
Thanks Jesse.
And again, if you would like to ask a question Press Star then the number one on your telephone keypad.
Your next question comes from the line of Stephen Cole from mangrove growth. Your line is open.
Hi, good morning, guys.
A few questions.
Let me talk a little bit about the ER.
Conversion I just want to make sure.
Sure I am understanding so we spent $39 million capitalized and I think you said, Eric you're expecting a strong return on that investment or maybe sandeep.
Much of that can you explain what a strong return looks like and I know you had talked about a lot of different areas that youre expecting again.
Some benefits from that.
What does the cadence look like of that.
And I know that's been a bigger project when would you expect but we're obviously looking forward to being turned on as well.
Yes, thanks, Steve Good morning.
As we go live with the system next quarter.
See start to see the benefits from it.
Beginning in FY 'twenty four.
Those benefits will ramp over time for sure.
We're looking at we're not saying exactly what the amounts are but we expect them to be several million dollars over.
On an annualized basis starting.
With those benefits starting to show up.
In the early part of FY 'twenty four.
Steve If I could this is sandeep. Thanks for the question in the early morning to you just to amplify a couple of things that Eric said, we're we're very pleased that we.
Finally going to launch this excited about it.
Some of the items, we mentioned during the call we expect benefits in overall opex.
Reduction.
Better inventory management.
Which will help us on our income statement and better freight management as well. So so it's multifaceted plus we expect some.
Revenue benefits as well, but as Eric said and to underscore we expect several million dollars on an annualized basis.
Beginning with fiscal 'twenty four.
Alright.
Just for banks or the backlog for a minute.
So you guys have seen a nice pick.
Pick up on margin, which is encouraging on the gross side.
<unk>.
Some of the efforts, but none of them Tuscola dotcom, great quarter, it looks like Youre too how much of that backlog is shifting so can you give us a sense.
More skewed towards commercial.
The theoretical bottom margin or how would you look at that today.
Steve If you go back to the call.
Actually you gave the absolute numbers the breakdown.
$52 million on the commercial side and the remainder up to $98 million is on the carrier side.
In terms of the tons, we are seeing in backlog.
Perhaps the following statement will help.
If you look at the quality of our backlog, which we have stress test.
We routinely.
80, plus percent of the backlog is less than 120 days or so our backlog is turning and given the bookings that our team is generating.
We are creating more backlog.
That helps Steve Stephen one other point.
Yes, one other point on the backlog if you go back a year when backlog was around $54 million the carrier revenues, where backlog was a little bit higher than the commercial so that's shifted.
In the past year and that'll help us given the commercial margins are so much higher than the carrier market.
Yes.
So you guys, obviously and this is a bigger picture when you look I don't think sandi above ever.
First time that you said everything is up across.
Favorable.
Kpis that you have right and you've got a lot of them.
I'm sure it's not lost on our.
Our share price continues to languish above.
More than it's not exactly a great environment for smaller cap names, but curious on what do you see when you look at how the company is performing.
The stock is reflecting that performance.
Number one what do you see changing the core of the company a better valuation.
Going forward.
Steve Thanks for the question, obviously a very.
<unk> subject for the company from a company perspective, we focus on the fundamentals. So if you think of where we are investing we are investing in growth markets five.
<unk>.
Wireless <unk> related accessories in the commercial segment and that growth is helping us from a revenue perspective.
Second through better service better bundling with Vantiv observer.
Our operating discipline, we are driving gross margin improvement and you noted that and thanks for that Steve.
And expense perspective.
We are growing revenue faster than we're growing we're needing to grow expenses that is giving us operating leverage. So we are fairly confident that as the market improves and grows and the supply chain issues, even out we will not only be able to grow revenue, but be able to grow EBITDA faster than revenue.
I mean, thats our value proposition and that's what we will we are committing to delivering and we expect the situation to be improve once we get our new ERP in place.
Alright.
So when we look and I know, it's a little early to give enrollment halfway through.
Crude but.
From a bigger macro side Eric.
Eric how do you look at FY.
Plenty of floor without getting into specific numbers.
Still looking.
The strong topline growth better operating leverage.
And a favorable mix.
Or how do you see just some general for looking at this point.
We'll get a chance Steve at the end of.
In the next quarter or so to give more precise guidance, but at this point.
At the risk of being retrofitted right for fiscal 'twenty before we see markets growing.
Alright, we see more investment in <unk>, we see more investment in private LTE. So we will continue to hunker down on the growth markets.
Focus on gross margin improvement will be a continuum.
We have demonstrated that we can move the needle.
With the diversification across vendors, we're confident we can maintain or grow that and then our focus will be on creating and exploiting that operating leverage to grow EBITDA.
Alright. Thank you guys very much like the back in the queue on your folks a chance to hop off. Thank you Craig good quarter. Thank you Steve.
Your next question comes from the line of Bill <unk> from Titan Capital. Your line is open.
Okay, Thank you and nice quarter.
A group of questions.
Let me start and just say in general we are hearing you correctly.
You feel like the business is gaining momentum is that in essence.
The message we're trying to convey.
Correct.
Really pleased with the quarter.
You've heard me over the last four quarters I think.
Continuous improvement I'm very very pleased with how the team performed and how we executed this quarter.
Yes.
That's helpful and I would like to use that as a as a segue into my next question, which really relates to your guidance.
And if.
If we look at the.
Net income.
Guidance.
And the EBIT guidance and compare that full year number relative to what you have.
What you have already contributed in the first half.
Okay.
It seems that the guidance is.
Certainly conservative and at the low end is probably.
Probably just.
Wait conservative at this point.
Yes, the business were to in fact turnaround.
And.
And start to deteriorate, which is really the opposite from what you are what you are seeing and what the markets are indicating.
Are we missing in our thought process here.
Okay.
Well I'll take each of those EBITDA you have to look at it a little bit differently than net income.
Net income issue is really the depreciation on the new system. So.
$39 million will be depreciating that over seven years, so that's a big chunk of expense level.
Income statement in the fourth quarter, so that will have an impact a negative impact on us.
Our net income one is certainly on the we think we will certainly be on the high side or the good side of of that one.
On EBITDA I think we are at two eight now.
<unk>.
Six or so run rate the guidance is $4 seven.
Very confident in the second half of the year being very strong.
And hopefully next quarter, we're going to be in a place where.
We might be able to increase that but.
Yes for now we're very confident in the guidance and hitting the numbers that we've laid out.
Yeah, Bill just to underscore a couple of things.
Eric said, we're obviously very pleased as I said at the end at the risk of being rapidly.
With our performance in the first half.
We're bullish about the second half the supply chain issues continue though Brian if you go back to the remarks, we made earlier, we are seeing some improvement in some product categories the remainder, especially.
The more integrated circuit dependent electronics dependent.
<unk> those are still constrained so we need to we need to take that into into effect, but we are we are confident about the guidance.
And based on your question. If you are if we were to say more towards the higher end, we're happy to say that I mean, thats, where we are focusing.
That is helpful and so the business continues.
There is a chance to be certainly maybe even better than that more at the higher end, but it sounds like you are incorporating in.
Some reality is that the supply chain issues still exist.
That's right Youre correct.
Okay that is helpful.
And it helps connect those dots. Thank you.
Let me shift now to next year, if I may relative to the turf contractors seen next year.
It's going to be strong.
And given the supply chain issues. The question that I have is does that imply that although revenue will likely go up in the carrier segment is it your backlog will also go up because the strength that they think they are seeing this will be hard to.
Fully capture given the supply chain challenges.
Do you see it unfolding in some different way.
It's a pretty dynamic nature.
In the supply chain.
Bill has been difficult to predict I would stay away from that but from a.
Fundamentals perspective, these markets are growing and our emphasis has been to maintain inventory drive investment towards the growth markets.
And what we said about turf contractors.
Is one evidence of that so.
These markets are growing and we want to grow with it.
And we're going to be relentlessly focused on maintaining the right inventory.
A very determined to get the ERP go live fourth quarter and just build upon the operating leverage that we're creating.
Thank you.
And so kind of continuing on that or is it a turf contractors.
Okay.
Willing or maybe even just able to give you orders now so that you can that you can be working on.
Getting the <unk>.
Product in hand, so that you can supply them with a need or an <unk> bin.
Okay.
More cautious.
And therefore, it does create more of a challenge with that with that supply chain.
Yes, the turf contractors are just one part of our business Bill. If you were if you had made the statement you made in general and at large I would've agreed the turf contractors, specifically are driven by the builds.
The carrier they serve.
Provide so they have contracts with the carrier they serve and that drives that.
Their business and how far out they look but overall, if you back away and look at.
Our customer base at large.
People are planning on a longer horizon, and our planning with US which is a good thing for Tesco.
A longer horizon, and we are being able to do the kinds of things you are alluding to.
Great. Thank you and.
Relative to.
Deserve or Tesco observer.
Just a commentary that you're hearing from.
From your customers of ours.
Relative to the options that they have versus.
Versus observer, and how observed <unk> working.
Relative to kind of what they would like now that youre rolling out commercially in out of beta.
Yes.
<unk> by the feedback I mean, there is a need in the market that observers is being able to fill.
It's a value add that our customers specifically the vars can bring to their customers.
And as.
As is the case with software very good feedback that we are incorporating into our roadmap going forward.
And.
My impression.
And I like your feedback on National I think I'll make this my last question will be.
It is.
Alright are the Vars Bay.
Basically finding this to be a pretty easy.
And one that they want to make meaning their customers the large customers.
Want to know what's happening with their network and they really don't have a way to do that very well.
But observer accomplishes that and his heart.
And it's on a relatively inexpensive basis since it said done as SaaS and the vars like it because they almost have zero work to do and are able to collect a monthly monthly fee.
And when there is work to do they generate additional revenue from anytime that there is something has gone wrong with the with the customer's network.
Is there anything about that.
We've learned that is inaccurate.
You're generally correct.
<unk>.
So there is a need in the market for our <unk> customers to manage critical components of their network.
The vars would like to sell this.
A new capability for them.
And so we expect these things to ramp over time as opposed to spike.
We are pleased with where we are.
Great.
Thank you all for taking.
Many questions.
Thanks, Bob.
And there are no further questions at this time I will turn the call back over to the management team for some closing remarks.
Thank you Rob.
Thanks again, everyone for joining us today, we appreciate your support of Tesco.
And thank you to the Tesco team members for all their hard work and dedication that makes these results possible.
I look forward to speaking with all of you again next quarter. This concludes our earnings call have a nice day.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Sure.