Q2 2023 RF Industries Ltd. Earnings Call
Good day, everyone and welcome to the RF industries second quarter fiscal 2023 financial results Conference call.
At this time, all participants have been placed on listen only mode and we will open the floor for your questions and comments after the presentation.
It is now my pleasure to turn the floor over to your host Jack Jack Drip as Sir the floor is yours.
Thank you operator.
Good afternoon, and welcome to RF industries second 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 Yen.
Before I turn the call over to Robyn Peter I'd like to cover a few quick guidance. This afternoon RF industries issued a press release announcing its second quarter fiscal 2023 financial results that results excuse me 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 $19 34.
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 and actual results may differ.
Materially from the Athens 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 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.
Released.
With that said I will now turn the conference call over to Rob Dorset <unk>.
<unk> Chief Executive Officer.
Thank you Jack good afternoon, everyone. Thank you for joining our second quarter of fiscal 2023 conference call. We.
We had a solid quarter and delivered net sales of $22 3 million or.
Three 7% increase against a strong Q2 last year.
As anticipated we shipped several customer orders that were delayed in the first quarter that our <unk> hybrid fiber cable and interconnect products performed well.
I think our Q2 results show, what's possible in our business, even with the challenging backdrop over the last few years, we've achieved significant growth, yes, theres always some volatility quarter to quarter, which makes it difficult to take a snapshot every 90 days for a company our size, especially in a market like this.
Our growth trend hasnt been a perfect hockey stick up into the right chart every year, but directionally, we're doing the right things at our number one focus right now is getting back to higher profitability.
While we had a nice second quarter the overall environment in the wireless carrier market Hasnt really changed since our last call. When we discussed a spending pause in wireless carrier Capex.
And project delays.
While our core interconnect offer including custom cabling is performing well.
<unk> in small cell are higher margin and future growth drivers are being impacted by the sluggish capex spending.
That's pressuring the consolidated gross margins and EBITDA in the short term we.
We expect a few more quarters of slower project spending and the related delays, but are optimistic that carriers will resume their build outs and we stand to benefit from that with our differentiated new higher value solutions.
Having navigated through several wireless spending cycles, we know how this works and flow spots. Like this are normal. We also know how to prepare for an upturn and feel strongly that the investments we made in our business, we will kick into gear when carriers refocus their attention on the <unk>.
Additionally, many of our products have applications beyond wireless and.
We're thinking strategically about diversifying into other industries, where we have a smaller presence that could grow much larger over time.
Building wireline utilities transportation and aerospace and defense.
Let me just say, we are executing well and showed progress on what's in our control in the second quarter. We continued to make progress on our strategic transformation of RF industries, one key element to implementing a growth mindset throughout the company is redefining our value proposition in the market.
To that end, we launched our rebranding initiative to better connect RF well established reputation for the current market.
After 45 years in operation, we now have a new logo and fresh brand identity that embraces both our history and a significant evolution of the company and our product offerings.
This was unveiled in early may at the connectivity Expo events.
And when fully completed by year end, we'll have a new corporate image redesign of the website and a new investor presentation.
This rebranding reflects our strategy to target both current and new markets with a more cohesive corporate identity that connects our powerful product portfolio to our routes.
On our last call I touched on our 2023 strategic plan to reduce operating expenses by consolidating and streamlining operations.
I'm pleased to report that we're making solid progress last quarter, we moved our coaxial cable operation to our new San Diego facility with no production downtime and this week, we're adding are faster in fiber optic lines. So that same facility.
In July we are consolidating some of our east coast operations, which includes moving the micro lab production operation and then combining our small cell das product lines later this summer.
<unk> production lines of the heavy lift, but so far everything has gone smoothly without any disruption to our customers.
The money that we're investing in consolidations will lead to significant efficiency gains that ultimately cost savings. We expect these moving expenses won't be largely behind us at the end of our third quarter.
At the same time as I mentioned previously we have been investing in product development, primarily within our integrated systems product offerings.
This spending has resulted in some higher operating expenses, which in turn has created a short term drag on earnings until sales from these product lines ramp up as we expect in coming quarters.
This important development cycle that keeps us competitive in the market is largely completed.
As we strip out these costs and look to increase sales, we expect to be a much more profitable business in future quarters, though it's difficult to give a specific timing in the short term.
Now I'd like to take a few minutes to expand a bit on the current operating environment.
We believe we will see a few more quarters of the capital expenditure downturn among wireless carriers for the reasons I discussed earlier.
Based on our experience these down cycles, usually last three to four quarters.
Once capital expenditures pickup we see significant leverage in our P&L that could have a favorable impact on gross margins.
Either from higher sales or product mix shift or both.
As we reduce expenses any incremental sales should flow to the bottom line.
To better understand our business the math is fairly straightforward.
If we do $20 million in quarterly sales, a 30% gross margin, we would deliver $6 million in gross profit or operating expenses have been hovering around $6 million per quarter. So that puts us roughly a GAAP breakeven around $20 million sales level.
Higher or lower sales will obviously change the operating profit number so as we increase our focus on selling higher margin products the mix alone in a quarter to take our profitability up.
Looking at it from the expense side, we anticipate lower operating costs based on our facility consolidations and other initiatives and are also working hard to rationalize our inventory position, while being careful to maintain our core business proposition of availability and faster.
Lower Opex and inventory would obviously also help us deliver higher profits.
So far fiscal 2023 has served up some new market challenges that are pressuring our topline growth.
As I said earlier based on our experience. We think these are near term hurdles.
Regardless, our focus on improving profitability is our top priority and we have set a goal of achieving an adjusted EBITDA above 10% of sales through our margin improvement and expense reduction initiatives.
Regarding M&A as a growth oriented team will be looking at potential acquisitions to complement our business right.
Right now deal flow is relatively slow, but there are opportunities out there and valuations seem to be normalizing.
While we continue to focus on organic growth with our existing infrastructure, some specialty sectors like aerospace and defense may require strategic M&A to make an impact.
The overall environment remains challenging, but we're not standing still we see tremendous growth opportunity ahead once the Capex Plaza turns off.
Our core business is strong and sustaining us and we're starting to see some green shoots of interest in our higher value products and solutions something thats been lacking over the last few quarters. In fact, some recent orders that we booked early in the third quarter give us more confidence that we're gaining traction with new products as we move through the rest of our fiscal year and into fiscal 2000.
94.
We think we're in a great position to generate solid returns for investors over the long term and we're grateful for the ongoing support of our shareholders.
With that I'll turn the call over to Peter to discuss our financials.
Thank you, Rob and good afternoon, everyone before I get into the comparisons or second quarter of fiscal 2023 includes a full quarter of micro lab results compared to two months of micro lab results in the second quarter of fiscal 2022, we acquired micro lab in March of 2022, as Rob mentioned, we did not.
We really see a change in the wireless carrier market has been since our last call as we continue to see a delay in wireless carrier capex.
Our offering.
Was most impacted was our das and small cell solutions as we did not receive orders, we were expecting and shipments related to existing orders continue to be delayed.
Second quarter revenue was $22 $3 million up three 7% compared to the same quarter last year. The increase is primarily related to our interconnect products in hybrid fiber cable offset by a decrease in our small cell products.
Second quarter gross profit margin was 27, 4% as compared to 28, 3% in the same quarter last year. The decrease is primarily related to lower revenue contribution from our small cell solutions, which have a higher margin profile compared to our blended gross margin rate.
Operating income was $489000.
As compared to operating income of $746000 in the second quarter of fiscal 2022, primarily related to lower gross profit contribution from our small cell solutions, and therefore less leverage to cover costs.
Net income was $581000 for the second quarter or <unk> <unk> per diluted share compared to $503000 or five cents per diluted share in the same period last year. This is primarily due to an income tax benefit of $164000 compared to an income tax provision of 136000.
Yeah.
non-GAAP net income was $1 3 million or <unk> 13 per diluted share for the second quarter compared to $1 5 million or <unk> 15 per diluted share for the same period last year adjusted EBITDA for the second quarter was $1 4 million compared to $1 9 million in the <unk>.
Second quarter of 2020 to the.
The decrease is primarily related to product mix as discussed earlier related to lower sales from our higher margin products and therefore less leverage to cover certain fixed costs.
We continue to focus on lowering expenses through consolidation and streamlining our operations and working to reduce ongoing operating expenses.
We expect the cost saving benefits from the consolidation of our West coast headquarters and facilities, which will be completed during our current fiscal third quarter and the upcoming consolidation of some of our east coast operations, which we expect to be completed in our fiscal fourth quarter. These related expense reductions will better position us to NAV.
The challenging economic environment.
To minimize our downside and increase our profitability when our product mix shifts to include a greater portion of high margin solutions that are project based and dependent upon carrier Capex spend.
At the end of the second quarter, our cash and cash equivalents was $4 3 million.
Working capital of $25 $1 million and the four 3 million available under our revolver.
Subsequent to quarter end, we drew down our revolver by $1 million to cover leasehold improvements associated with the consolidation efforts mentioned earlier.
Inventory was 20.
$4 million up from $19 $1 million last year, primarily due to micro lab, which we have invested an additional $1 $5 million since last year.
On a sequential basis, we reduced inventory by $550000 or approximately 3% as we worked through some delayed project shipments from the first quarter.
Looking ahead, we believe there is opportunity to further reduce and rationalize our inventory, which would help to increase our cash position.
We understand this is a lever we can pull to help our liquidity and are actively monitoring our inventory levels such that our value proposition of being available to our customers is not negatively impacted.
Our backlog at the end of the second quarter was $18 $9 million on second quarter bookings of $16 $7 million and as of today, our backlog stands at $17 $6 million the.
The decrease in our backlog primarily relates to shipments against our hybrid fiber cables.
This concludes my comments operator, we're ready to open the line for questions.
Certainly at this time will be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
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Once again, if you have any questions or comments. Please press star one on your phone.
Please hold while we poll for questions.
Thanks.
Your first question is coming from Josh Nichols from B Riley Your line is live.
Yes, Thanks for taking my question and good to see.
Two Q numbers top and bottom line come in better than expected despite the challenging.
Environment I know visibility is probably fairly limited given the carrier capex slowdown but.
Any trajectory you could give us overall to what youre seeing in the business for the back half of the fiscal year relative to the first half.
Yes, Thanks, Josh good question.
Youre right visibility is pretty low.
We're not alone in that so.
If it's comforting to hear from others I think it's something we're all kind of seeing and hearing in this space I think all year, we've been saying we expected the back half of the year to be better than the first gen.
Generally think thats right I think the one the one thing that I would say related to our Q2 numbers as they came in a little better than what we had expected originally for the second quarter.
Largely due to some demand being pulled in on hybrid fiber cables. So you look at that and how does that impact Q3, <unk> Q4, it's not massive but with numbers or size. It means.
Quarter to quarter things can move around so I think our general expectation is our back half should be better than the front.
Putting that into 90 day increments is really difficult to do in this in this setting now.
Fair enough and is it fair, it's fair to assume that the kind of gross margin profile of the business around this like 2728%.
There's opportunity for that to improve incrementally in the back half I would think if your revenue is going to be a little bit better, but probably still my guess is below the longer term, 30% target or what are you thinking.
Yes, I think so product mix is a big driver for us now and that hasn't always been.
The big piece of our of our gross margin calculation, but it certainly is now because we have some some definite higher value and higher margin items in our portfolio. So the better those do that can certainly have a positive impact taking those margins up youre, probably looking at it right in the short term.
<unk> is up 30% is probably where it makes sense to be although we're also taking out some some expected to be taken out some meaningful expenses. So the timing of that happening over the next couple of quarters. If we get that done earlier without impacting the business in a negative way it could certainly help our gross margins as well so those are.
The two key pieces of it but we also feel like we're sort of at the.
From a from a capex perspective, and what's going on and we're kind of at the bottom of the trough here and we've been bumping along here for a few quarters.
Sales still move around from a shipment perspective, but from a timing of larger venue based or project based kinds of.
Opportunities, we still feel like we're kind of sitting here at the bottom and starting to see the light at the end of the tunnel of it.
Thanks, and then just on the SG&A front, so you're going to be down, but the west coast integration This quarter East coast by the end of this fiscal year.
Your SG&A. This year was the lowest it's been right for a few quarters.
What type of impact is that going to have to the second half do you expect it to remain around these levels or maybe come in a little bit or let's see expectation.
Yes, I think you'll see some you'll see some one time charges around some of these initiatives that we talked through to ultimately reduce our expenses will be able to give some I think some better specifics at the end of Q3 around what that means going forward, but we certainly would expect our go forward Opex SG&A to two.
To come down.
In a meaningful way, we think it's going to be a real impact here.
It's going to be confusing based on the onetime charges here for the next couple of quarters, but we'll give we'll give a much clearer sense of what that looks like as we get into our Q3 results.
Great and then I think you mentioned.
Two things to hit on like one just like the cash flow is it fair.
Fair to assume that your inventory was down here you expect that to come down further is there any.
For what a normalized inventory level would look like or how long.
That may take I'm, just trying to think about.
Improvements that you guys have already made.
And through the consolidation it becomes really clear, where we have duplicate inventory that maybe we didn't recognize before so that's one focus area. The other is we're finally starting to see a little more normalized supply chain. So for us sometimes it comes down to timing. There is some items that we ordered several weeks ago that had.
'twenty or 'twenty four week lead time on them that are going to come in here shortly to address some some projects that we have later in the year and early next year. So again, our number is small so in order of a couple of hundred Grand can move our inventory percentage points, but we believe that as we get through the year you should see our inventory.
<unk> start to come down whether it happens exactly in Q3 or Q4 is hard to hard to nail on on timing there, but we're very focused on getting our liquidity up through rationalizing that inventory.
<unk>.
And then last question.
For me I, you've talked about the backlog before it was obviously very elevated with some of these larger one time orders that kind of had been delayed.
You're starting to see the beginning of a normalization it looks like this quarter.
How much of the current backlog do you expect to ship in the back half of this year.
I'm guessing you'd expect backlog to be.
Materially lower from where it is today to more normalized levels unless you got some more large orders from some of the carriers.
Yeah that last point, a big one that.
One or two meaningful orders of a few million Bucks.
They're going to be drawn against overtime will artificially elevate that backlog, which we've been seen I've said in the past that.
Backlog in the mid teens is still a spectacular level for us and a huge amount of our day to day business really never hit the backlog.
It comes in and goes out in a matter of sometimes hours, but but certainly a matter of a few days. So it's really a snapshot in time, we do expect it to continue trending down some I think thats. Good we need to work through some of this 15 month old kind of stuff that's been on.
From a bookings perspective that came in.
It's good to work through that I think it's helpful to see customers, taking some of that inventory.
So I would expect it to come down some more this year the wildcard there being.
It does somewhat show up in one of these projects and instead of placing it in chunks decided to place a blanket or something larger that could have.
Could have a material impact to the positive on that too which could add.
Great.
But Tom let someone else take a chance great. Thank you Jeff.
Thank you once again, everyone. If you have any questions or comments. Please press star then one on your phone. Please hold while we poll for questions.
Thank you that concludes our Q&A session I will now hand, the conference back to our host for closing remarks. Please go ahead.
Thank you Matthew and thanks, everyone for joining our call today, we look forward to sharing our fiscal third quarter results with all of you in September and.
Have a good day.
Thank you everyone. This concludes today's event you may disconnect at this time and have a wonderful day.
You for your participation.