Q1 2023 RF Industries Ltd Earnings Call
Greetings and welcome to the RF industries first quarter fiscal 2023 financial results Conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. Please.
This conference is being recorded I will now turn the conference over to Jack.
As senior Vice President you may begin.
Thank you operator, good afternoon, and welcome to RF industries first quarter fiscal 2023 financial results Conference call.
With me on today's call are RF industries, President and CEO , Rob Dawson, and senior Vice President and Chief Financial Officer, Peter again.
Before I turn the call over to Robyn Peter I'd like to cover a few quick items.
This afternoon RF industries issued a press release announcing its first fiscal 2023 financial results.
That release is available on the company's website at RF industries Dot Com. This call is also being broadcast live over the Internet for all interested parties and the webcast will be archived on the Investor Relations page of the company's website.
I want to remind everyone that during today's call management will make forward looking statements that involve risks and uncertainties. Please note that except for the historical statements statements on this call today may constitute forward looking statements within the meaning of section 21 E of the Securities Exchange Act of.
<unk> 1934.
When used the words anticipate believe expect intend future and other similar expressions identify forward looking statements. These forward looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties.
Actual results may differ materially from the outcomes contained in any forward looking statements.
Factors that could cause these forward looking statements to differ from actual results include delays in development marketing or sales of products and other risks and excuse me and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q.
And other filings with the Securities and Exchange Commission.
RF industries undertakes no obligation to update or revise any forward looking statements.
Additionally throughout this call we will be discussing certain non-GAAP financial measures today's earnings release and the related current report on form 8-K describe the differences between our GAAP and non-GAAP reporting and present the reconciliation between the two for the periods reported in the earnings release.
With that said I will now turn the conference over to Boston, President and Chief Executive Officer.
Thank you Jack and good afternoon, everyone.
For joining RF industries first quarter fiscal 2023 conference call.
We delivered net sales of $18 3 billion in the first quarter, which is an eight 4% increase year over year, we expect it to do better.
And I'll explain why.
Even though our first quarter is our seasonally slowest period.
We anticipated shipping an additional $1 4 billion in orders that were delayed due to customer requests and timing of shipments.
It will be recognized in future quarters.
This revenue would have made a big difference on our margins and bottom line.
Yes.
As the quarter wound down we saw some definite signs of slowing in capex spending from wireless carriers.
Coming off a record year for us we sized our operations to handle higher capacity levels with carriers now announcing cost cutting plans and tightening budgets, we took steps to realign our own cost structure.
To that end and with the full support of our board of directors, we've accelerated our 2023 strategic plan to consolidate and streamline operations and reduce operating expenses.
These additional savings along with our healthy and diverse run rate business will allow us to continue to deliver a solid performance in the near term and to sustain any extended challenging macro market conditions.
The big question for suppliers like Us is how and when the revised carrier Capex will be deployed.
While we are seeing steady growth in our core interconnect products wireless carriers are slowing larger site build outs of their planned <unk> and <unk> networks.
This directly affects our project based business sales of small cells that thermal cooling systems hybrid fiber cables and in venue wireless deployments all of which are directly related to carrier capex.
By now I've been through at least four major wireless build out cycles.
And there are always some unexpected delays and pauses.
Lockdown was especially true when it stopped projects in their tracks.
Eventually we get on the right side of what the carriers need to do to stay competitive and keep their customers happy while also leveraging the benefits of new advancements in radios and other technologies. However.
However, with the current macro factors of inflation and high interest rates. The timeline has certainly become more unpredictable.
That's all beyond our control and that said each time, we run into obstacles, we've been able to fight our way through it and get better at.
Starts are focusing on what's in our control and what levers we can pull to both gross sales and become a more cost efficient business.
To that end as I mentioned, we are now accelerating our plan to streamline our operations and to reduce operating expenses.
Today, Peter and I are speaking to you from our new San Diego facility that now houses our corporate headquarters and several production lines. We've already moved our coaxial cable operation with no production downtime, which is pretty amazing considering the complexity of a move like that.
Other product lines like our faster and fiber will follow in the next few months when completed our west coast operations will be fully consolidated in an efficient state of the art facility manufacturing built in America specialty interconnect products.
On our fourth quarter call in January we mentioned our plans to consolidate some of our east coast operations. This year, we've now pushed that timeline forward for certain product lines.
We're also looking at operating expenses with an eye towards saving expenses wherever we can without impeding our ability to serve our customers and continue to grow.
With inflation everything is more expensive wages materials insurance you name it.
Plus logistics, and especially scheduling of transportation remains a challenge.
Most of our cost savings will come from consolidating operations and streamlining operations, but we will also continue to carefully manage operating expenses across the board.
Through all of these focus areas, we expect to realize more than $2 million of annualized savings this year and add at least another $1 million of cost savings next year.
Regarding guidance for fiscal year 2023.
What we see today, it's difficult to predict with much certainty what to expect in the near term.
Judging by what our customers are saying, we are cautiously optimistic that larger projects to gradually pick up with greater momentum in the back half of the year.
While the first half of the year will be impacted by the changes in the carrier market. We expect second quarter sales to increase sequentially from the first quarter and net sales and profitability in the second half of the year will improve significantly significantly over the first half.
Notwithstanding the headwinds were experiencing we remain committed to our long term strategy that has helped us profitably grow sales from $23 million to $85 million over the last five years.
Our core run rate business continues to benefit from a steady and diverse customer base and tends to be less project centric and driven mostly by day to day orders wire.
Wireless carriers will continue to invest in <unk> and <unk> build outs over the next several years and the acquisitions. We've made over the past few years, especially micro lab are game changers.
We have a compelling business model and outstanding team and a dynamic and prudent approach to managing our business to meet changing market conditions and customer demand.
I am confident that we are well positioned to manage near term volatility respond to pent up customer demand when the market normalizes and to deliver profitable growth and returns to our shareholders over time.
With that I'll now turn the call over to Peter to discuss our financials Peter.
Thank you.
Afternoon, everyone.
Before I get into the comparisons. Please note when comparing to prior year fiscal 2022, our numbers in fiscal 2023 include the results of micro lab, which we acquired in March of 2022.
As Rob mentioned sales in the first quarter, which seasonally is our lowest quarter of the year were $18 3 million and included a $5 $1 million contribution from micro lab product.
This represents a year over year increase of $1 4 million or eight 3% we.
We experienced lower sales in our project business to wireless carriers as compared to the prior year relating to our hybrid fiber small cell and dark products.
First quarter gross profit margins increased to 27, 7% from 24, 1% in the same quarter last year. The 360 basis point increase was primarily due to the contribution of micro lap higher margin sales.
Net loss was $1 2 million for the first quarter or <unk> 11 per diluted share compared to a net loss of $277000 in the first quarter of 2022 or <unk> <unk> per diluted share non.
non-GAAP net loss was $25000 or zero cents per diluted share for the first quarter compared to non-GAAP net income of $691000 or <unk> <unk> per diluted share for the first fiscal quarter of 2022.
Adjusted EBITDA for the first quarter was $78000 compared to $691000 in the first quarter of 2022.
The decrease when comparing to the prior year for GAAP, non-GAAP and adjusted EBITDA related to the lower than expected sales during our first quarter fiscal 2023 during the lower due to the lower sales.
We were unable to fully absorb our operating expenses.
I do want to note that in our balance sheet. There is a deferred revenue line of $1 1 million, which we historically do not have this relates to the accounting for revenue recognition on one order we expect to recognize the majority if not all of this revenue in our second quarter halfway.
We recognized $1 1 million dollar revenue in our first quarter. Our gross margin profit would have increased approximately 100 basis points with the contribution to our operating income of approximately $500000.
As Rob also touched on we are accelerating our efforts to consolidate and streamline operations and to reduce expenses.
We expect to benefit from these savings in future quarters with some savings beginning.
Excuse me, what some savings some savings being recognized as early as our current fiscal second quarter.
While we are consciously optimistic about our outlook. These expense reductions will position RF to better navigate the unpredictable macroeconomic environment.
At the end of the first quarter, our balance sheet remains strong with cash and cash equivalents of $3 8 million working capital of $25 $1 million and the four 3 million available under our revolver.
Inventory was $20 9 million up from $13 $5 million last year $5 4 million of the increase was related to micro lab.
We are carefully monitoring and managing our inventory levels to meet near term customer requirements, while staying true to our customer value proposition of delivering products reliably and quickly.
We believe there is opportunity for us to rationalize our current inventory position, which would help free up cash and build upon our overall cash position for other investments.
As we move through the year, we'll have a clear line of sight on what the lower carried inventory looks like.
Our backlog remains healthy going going into the second quarter at $24 $5 million on first quarter bookings of $15 million and as of today, our backlog stands at $24 million.
This concludes my comments operator, we are ready to open the line for questions.
Yes.
Thank you. Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing.
The Star Keys, one moment, please while we poll for questions. Once again Thats Star one if you have a question or a comment.
First question comes from Josh Nichols with B Riley. Please proceed.
Yes.
I know you hit on some of the carrier spending impacts, but just looking at the other piece of business like the RF connector and cable Assembly business has been pretty consistent at over $9 million for the past two quarters.
Is there can you give a little bit more detail on the variability of that segment and do you think that that segment is going to be able to.
Kind of pick up and still see some decent year over year growth.
Clearly the micro lab business this year.
Yes, thanks, Josh so yes.
The kind of daily run rates.
Business that we have which we call our core run rate business largely runs through distribution. It's been steadily growing I mean really the whole five years that.
Now that I've been here, when we kind of pivoted harder into more distribution.
<unk> added some other product lines to that it continues to be healthy diverse.
Solid margins and growing so even with <unk>.
Project downturns kind of like I talked about in my comments, it's not uncommon for carriers to pull back on larger projects, but the daily run rate stuff still has to go on and Thats really where that business place. So we feel feel good about that in several product lines I think the ones that are the most impacted by large.
Capex projects call, it whether youre talking venues or traditional tower sites or small cells.
He is our small cell offer our DAC thermal cooling offer our hybrid fiber cable.
And then occasionally you know some of the big bill of materials into large venues like stadiums.
While we still feel good about those I think those are slower than what we expected them to be in the short term.
Thanks, and then just focusing in a little bit more.
I know you've really built up the company's inventory over the past 12 months or so.
That was.
Sensually flat right down modestly quarter over quarter.
With the second quarter are expected to be up but do you think it's going to be more of a second half weighted 'twenty fiscal 'twenty. Three do you expect to use some of that inventory to help cash flow generation over the next couple of quarters or what's the trajectory for inventory looks like from here.
Yeah. Good question, So I think Peter touched on this a little bit in his comments and maybe I'll go first and if you have some that Peter feel free to jump in I think we do expect inventory to come down over the course of time that was already sort of part of the plan was we.
We had to get ahead of some supply chain stuff in the last year or two we added micro lab I think we took their inventory up.
From from historical levels again to address some some growth in that business from where it had been but as we start to work through some of these not only things in our backlog, but just getting our arms around the micro lab business has helped us get smarter about the inventory too. So we expect to turn that into cash.
And free up some cash flow from that over the next few quarters I don't know Peter if you have any other color that you want to add to that.
No I think Rob touched on mostly that I think we are Josh we're looking at it closely from a turns perspective Friday and seeing that we're making sure. We're turning our inventory. So we are having the best use of our cash. So that's something we're looking at and we'll be better able to speak to that in future quarters as we just kind of monitor.
The supply chain and see what's needed and not in the new kind of lead times and built that into our new model going forward.
Thank you then.
Just looking at a little bit more.
Into some of the business lines I guess, if you could provide a little bit more context or color as I guess like the decrease in carrier spending what you are seeing like pretty broad based amongst U S carriers I know that ATT.
And Verizon looks like there is some slow down there for the Capex spend and I guess, what's the biggest opportunity.
For upside if you think about the back half of the year is that there are still these timelines are theyre trying to head and that should be more favorable for the company's hybrid fiber.
<unk> and other small cell offerings.
Yes, I think you just hit the three big ones, there, which is great. So so hybrid fiber no. We still have a lot of that in our backlog.
And the team's done a great job getting that out the door, it's really that that's one that when there's a slowdown and they may take less.
Less truckloads of that stuff showing up on sites to go build so we do believe that that will start to get better.
Those shipments will become a little more normal as we get through the year the bigger opportunity, though is that the sales levels of both the DAC thermal cooling in the small cell product lines.
Our lower than they should be certainly lower than we expected them to be and really lower than kind of historical levels over the last few years since that acquisition was made so that's one that.
Are those two product areas are both areas that we expect there to be meaningfully increase meaningful increases in the back half of this year small.
Small cells at one where it's been out there for a long time and I talked to a lot of my peers on this it's still kind of a wild west getting it nailed down and seeing consistent site counts and designs around these builds.
Getting better at it the pipeline looks good we booked some nice orders.
But some of the stuff sitting in the backlog for that Hasnt moved at all in the last quarter and a half so.
Those are the areas, we see biggest opportunities coupled with.
Bigger sales of micro lab products and kind of the pull through of a full bill of materials for venue based das the large building large venues like stadiums and otherwise those are the those are the bigger ticket sales for us that we think are going to be better in the back half as things normalize a bit.
Thanks, and then last question for me good to hear the company's got some cost savings initiatives and Youre pushing ahead with.
With the consolidation and integration efforts here I know there was around $500 million of onetime and noncash costs.
Any comments about the level that youre going to see in <unk> and wins, one of those going to be over and how quickly that $2 million of annualized cost savings is going to be coming out of the opex line items.
Maybe I'll tackle that first and let Peter add some specifics.
So I think the the.
Taking 2 million out in total.
There's already a chunk not quite half of that I think we've been able to.
Get in place earlier in this year. So we will start to recognize that in the current quarter and go forward.
I think the remaining amount of that and we're taking out kind of as we speak over the next quarter and a half or a little more so all of fiscal 'twenty four should have the benefit of those savings.
The remaining 1 million that we call out for fiscal 'twenty four will be once we fully consolidated locations, we think theres room to get even better technology wise and just efficiencies of doing production. So some of it we're going to see right away.
And.
Start to print through but the big impact of that I think as we get late in the year. It should really start to show through.
And we're expecting sales to go up as well so that's really the win on both ends as we as we get a little better Peter do you want to add anything to that yes.
Yes, Josh so called related to the 500000 that you mentioned, we add back we should see that.
Depending on the timing of the move on the East coast there'll be some some of that.
Still going in there maybe items related to our caution cost initiatives that may show up at the one time charge here, but we wouldn't expect to see that.
Whether it's heavy in Q2 and some into Q3, but it's Bob.
But by Q4 time.
A lot of that should have gone away.
Thanks, Rob and Peter are pass the Mike. Thanks.
Thank you.
It's again, if you have a question or a comment please press star one on your Touchtone phone. The next question comes from David Wright with Henry Investment Trust. Please proceed.
Hey, Rob.
<unk>.
Hi, David.
Excuse me.
You mentioned getting going in the new San Diego facility.
What's going on with New Jersey for example, or as micro lab out of.
The legacy micro lab facility and kind of what's the timeline for the new combined New Jersey.
Yes. Thanks, David Good question. So so still still in the same facility, where they've been where we've been operating for about a year since we made that acquisition.
That change and move to a new location is in the July timeframe.
For us so it will have.
Micro lab and some other product lines moving there, but that will all take place in July .
And then does that does that have you completely consolidated.
What you wanted to move into the new New Jersey facility.
I think it doesn't mean near term yes.
The great thing about that location is we do a lot of small cell business in thermal cooling business frankly in the mid Atlantic and northeast.
The greater New York area as one of the largest capex markets. There is in the United States for obvious reasons. So it's.
Centrally located and allows us to not only do a good job of micro lab offer but start to handle some of the some of the other product lines like small cells and related in that.
In that location as well to service those more localized customers I think there'll be more overtime more opportunities for us to get any better even better.
But the way we've allocated it today it's.
It gives us some space for growth and a balance of inventory East coast West coast as well as we get better at that.
Right right. So your does that quite you have personally comment contemplate and you hope to have done by July .
Yes, I would say as we get into August we expect to have.
The majority if not all of that completed that's right.
Okay, and then kind of staying with the relocation.
John touched on it.
Excuse me touched on it.
Yes.
The 444000 noncash and other one time charges is any of that related to facilities consolidation.
No so I'll take that one.
David that the 4% to $44000 there its basically a non cash.
Rent charge related to the new facility, we werent occupying the space yet we entered into this space February .
So there were still charges.
Related to lease expense on our books and Thats, what Youre seeing there is the 444.
Okay.
Hum.
<unk> and <unk>.
How can you give us an idea.
Kind of the cost of these facility relocations overall.
Youre talking of one time charges related to actually doing the moves or in total just increases and other things.
Kind of in total.
Yes, so I think a lot of what we did here was paid for by the tenant improvements like normal real estate moves so taken care of I think all in by the time, we're setting down it's probably 1 million Bucks.
Thereabouts, when we've moved multiple locate multiple facilities into into this one we still have the facility investor needs to move in here, but so from a west coast perspective, there are some meaningful investment to do with it will allow us to take out.
But that's for the Wolfcamp.
Correct and a much smaller number east coast will be a fraction of that.
Okay.
As in.
In the next quarters are we going to see.
non-GAAP add back for these.
These charges are you going to carve them out that way or not.
Yes, it's a one time charge on the non-GAAP side, we will add it back it's going to become less material fairly quickly here youll start to see some more normalized.
Easier to understand comparisons as well, we've got a lot going on obviously, so you start seeing the number of moving pieces around accounting rules and onetime expenses.
It will start to get a lot more understandable as we get through Q2 into Q3, but yes, there'll be there'll be a little bit of non-GAAP add backs.
Great. Okay. Thanks for taking my questions.
Thanks, David.
If there are any remaining questions. Please indicate so now by pressing star one.
Okay.
Okay. It looks like we have new further questions in queue. We have reached the end of the question and answer session. I will now turn the call back over to Rob to Austin for closing remarks.
That's great. Thank you John and thanks, everyone for joining our call today.
If you are attending the 30 <unk> annual Roth Conference Tomorrow, We hope to see you there and we look forward to sharing our fiscal second quarter results in June have a good day.
Thank you.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.