Q2 2023 BK Technologies Corp Earnings Call
Okay.
Greetings and welcome to the BK technologies second quarter 2023 conference call. At this time, all participants are in a listen only mode.
<unk> 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 note this conference is being recorded.
I'll now turn the conference over to your host Jen <unk> you may begin.
Thank you good morning, and welcome to our conference call to discuss the BK technologies results for the second quarter of 2023 on the call today are John <unk>, Chief Executive Officer Scott.
Scott Mallender, Chief Financial Officer, I will take a moment now to read the Safe Harbor statement statements made during this conference call and presented in the presentation that are not based on historical facts are forward looking statements. Such statements include but are not limited to projections or statements or future goals and targets regarding to the company's revenue and profits. These statements are subject.
To known and unknown factors and risks the company's actual results performance or achievements may differ materially from those expressed or implied by these forward looking statements and some of the factors and risks that could cause or contribute to such material differences have been described in this morning's press release and the BK in Bk's filings with the U S Securities and Exchange Commission. These statements are based.
On information and understandings that are believed to be accurate as of today and we do not undertake any duty to update such forward looking statements.
As a reminder, there's a slide presentation that accompanies today's remarks, which can be accessed via <unk>.
The BK technologies homepage.
And now I will turn the call over to John Suzuki C. O BK technologies go ahead Jonathan.
Thank you John Thank you everyone for joining today.
I'll start by reviewing some of the highlights of our operations and financial results during the quarter.
Then I'll turn it over to our Chief Financial Officer, Scott mile manager for a deeper dive into our financial results.
We will conclude by opening up the call for a brief Q&A.
Turning to slide three.
We saw continued momentum in the second quarter with revenue growing 57% to $19 million compared to second quarter of last year.
During the quarter, we shipped 8938 radios bring.
Bringing our first half shipment total to 18939.
With the progress, we're making we are maintaining our annual shipment target range of 32 to 36000, but we believe theres a good chance that we'll end up at the high end of our radio delivery guidance.
Even potentially surpassing it.
In the second quarter, we were very pleased to receive FCC certification for BK or 9000 multi band radio.
And we completed our first shipment of the BK or 9000 in early June to the U S Army.
With its enhanced capabilities and cost effective price point. The beak here 9000 is a very attractive next generation portable communications radio.
As we discussed on other calls we expect the multibank capabilities of the BK of 9000 to open up a larger addressable market with several new market verticals and we're excited to bring this new portable communication solution to new customers.
Turning to slide five.
Slide four.
<unk> 5000, and saw continued demand and the strong order activity during the second quarter, particularly as existing customers upgraded their portable communications technology.
Of note we received two large orders totaling over 5100 radios from the USDA for service.
As well as a significant purchase order valued at 924000 from the Washington State Department of natural resources.
Both agencies are longtime BK customers, and we're and we're grateful to partner with them as they upgrade to newer more reliable portable communications technology.
Booking activity in the quarter was strong and we ended the quarter with a backlog of $24 million as of June 30th 2023.
Slide five.
Slide five illustrates the continued traction we're seeing with our BK or 5000 radio.
As mentioned a moment ago in the second quarter, we shipped 8938 units, bringing us to a total of 18939 radios shipped year to date.
With our visibility today, we believe second half shipment levels will be in the range of 13000 to 17000.
And anticipate closing out the year on the high end of this range.
Turning to slide six.
Our gross margin performance for the second quarter was disappointing.
As we experienced delays in implementing our cost reduction initiatives initiatives.
Those initiatives have now been launched in earnest and as a result, we anticipate the third quarter margins will be favorably impacted.
Unfortunately, this delay does mean that we no longer anticipate meeting our gross margin target of 35% for the full year.
That said with initiatives now underway and with a favorable product mix.
Now that now includes the big here 9000, multi band radio we expect to see continued gross margin improvement through the balance of the year.
Our expectation is that these cost initiatives will drive further savings in 2024, as we continue our commitment to quarter over quarter margin expansion.
Slide seven.
Slide seven shows our highly experienced engineering development and manufacturing teams, who are instrumental to the launch of our innovative big here 9000, multi band portable communications radio.
In June we received FCC FCC certification and P 25 compliance assessment program or P 25 cap approval.
For the BK or 9000 and began shipping.
That would be care 9000 shortly after.
Our first shipment of the <unk> 9000 radios was to the U S Army.
Since this initial delivery we have received several additional orders from the U S Army and we're pleased to continue to expand our relationship.
I'd like to take a moment to dive a little deeper into the market opportunity for the <unk> 9000, and what makes US radio is such an exciting opportunity for our company.
In the U S alone there are about 1000 P 25 truck radio systems.
For the most part each state operates their own statewide P 25 radio system, which provides an overlay radio communication to regional.
Tony and city old P 25 radio systems.
It's very common that these overlay or adjacent P 25 truck systems operate and a different frequency band. So there is a real need for a multi band radio that can operate on all four of the LMR frequency bands.
BK has completed or is in the process of testing the big here 9000 on over 30 P 25 truck systems.
Most of these are large statewide regional <unk> County, P 25 systems with hundreds of thousands of radio users.
The <unk> 9000 has passed the peak 25 compliance assessment program, but each P. 25 system order requires further approval on their specific system.
BK has years of experience acquiring system approval for our legacy P 25 radios.
And this history is helping us expedite the individual approval process.
Early feedback from system owners has been positive.
With many owners, indicating minimal configuration or software changes required to approve the <unk> 9000.
Customers are impressed with the look and feel of the radio.
Which provides high end capabilities at.
At a reasonable price point.
While still early on and anecdotal.
We received feedback that our audio sounds better than our competitors' products and that radio performs better and noisy RF environments.
We are encouraged by this feedback and energized to bring the BK or 9000 to more customers.
As we continue to receive system approvals.
Our order book continues to grow.
Our shipment plan remains modest initially as we primary production line and ramp up as we head into the fourth quarter and 2024 now.
Now I'll turn it over to Scott and I'll measure CFO to take you through the financials Scott.
Thanks, John on.
On slide eight you'll see a summary of our financial and operating results for the period ending June 32023.
Sales for the second quarter totaled approximately $19 million compared with $12 1 million for the same quarter last year.
As John mentioned, we closed the second quarter with an order backlog of $24 million.
Gross profit margin in the second quarter was 27% compared with 14% in the second quarter of last year.
Selling general and administrative expenses or SG&A for the second quarter total approximately $6 million compared with $5 4 million for the same quarter last year.
SG&A expenses included increased spending as we launched an improved market awareness of the BK or 9000.
Our operating loss totaled $784000 compared with an operating loss of $3 $7 million for the second quarter of last year.
In the second quarter of 2023, we recognized a net unrealized loss of $376000 on our investments compared with a net unrealized loss of $602000 in the same quarter last year.
We recorded a significantly reduced net loss of $1 3 million or 39 cents per basic and diluted share in the second quarter of 2023, compared with a net loss of $4.3 million or $1 28 per basic and diluted share in the.
Year period.
It is our expectation that with continued strong sales performance and gross margin improvement, we should continue our progress towards profitability.
And finally as of June 32023, we have approximately $2 7 million of cash and cash equivalents and only $24000 in long term debt.
From a liquidity standpoint, we believe that our current cash position combined combined within <unk>.
Anticipated cash generated primarily by radio sales and borrowing availability under our credit facility provides us with the working capital that we need to grow our business.
I will turn the call back over to John .
Thank you Scott.
On slide nine we reiterate our operational and strategic focus for 2023.
First we remain focused on maximizing production efficiency or capacity is set to produce up to 10000 radios per quarter or <unk> 40 for the full year.
We are targeting production of 8000 to 10000 radios per quarter and based on the backlog and forecasted demand.
We maintain our stated annual shipment target of between 32 and 36000 radios.
As I said earlier based on where we said this is a conservative estimate and we believe there's a good chance that we will end up on the high end of our radio delivery guidance for the year.
Second we are focused on driving gross margin improvement through 2023.
And the third area of focus is around our continuing efforts to establish strategic beachheads in the federal state and local public safety markets for the BK or 9000.
Multi band portable radio and Interop one.
We believe that establishing these beachheads as is important as we plan for continued growth in 2024, and achieving our 2025 revenue goals.
Slide 10.
On our last slide we reiterate our long term goal of reaching $100 million in revenue by 2025.
We are investing to drive profitable growth and to establish BK as a premier communications technology provider for the public safety and critical communications market.
Our <unk> 5000 is a proven success in its appeal to new customers as well as to existing customers as they move through their equipment upgrade cycles.
Likewise now that we've launched the <unk> 9000.
We have the opportunity to significantly expand our target markets and grow our brand recognition among our new customer audience.
Finally, we think Interop one has the ideal.
Capabilities to improve communications between first responders.
Which will in turn improve safety and response times potentially.
Potentially saving lives.
As a SaaS service, we anticipate Interop, one will play a meaningful role in delivering high margin reoccurring revenue as we gained market presence over time.
With that I'll turn the call over to the operator for questions Mike.
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 that your line is in the question queue. You May Press Star two if you would like to remove your question from the queue.
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One moment, please while we poll for questions.
We do have our first question comes from Matt Williams with freeze associates.
Question.
John I wondered if you could just take a minute to talk about seasonality in the business and maybe the number of units shipped in Q2 versus Q1.
Yes, so our core business is in the wildland fire so.
They're busy season is like now ranks in Q2 and Q3.
It tapers off in Q4 and starts to build in Q1 again.
So if you look at.
For example.
The average revenue per radio shipped in the first quarter versus the average revenue.
<unk> per radio in the second quarter second quarter is a lot higher and that's because.
As these fire teams are being deployed out to wildland fires, they're checking their kit and they're ordering a lot of accessories.
And so if.
If you look at the total first half of the year. It's within what we had had said historically was about $2000 of radio and we're tracking to that.
This year in terms of.
Of the number of radio shipped in the second quarter versus the first quarter.
<unk>.
I assume that you are asking why didn't we shipped more radios.
Yeah Okay.
Yes so.
So from a production standpoint, I can say that we produced a similar number of radios. We did have about 1000 radio sitting on our dock in that last week, we were expecting some shipments of Av.
A specific accessory that had to ship with this radio.
It came in a little bit late.
So.
If I had been weak earlier, we would have been closer to 10000 radios shipped but from a production standpoint.
We're holding to that to that line.
Got it so I presume that 1000, or so radio says shift subsequent to Q and yes.
Yes, Alright got it that's helpful. And then you talked about gross margins kind of coming in below what you were hoping for can you talk about what the issues were was it just slower realization of some cost savings was the continued higher component costs.
What is it that.
<unk> your progression on gross margins.
So let me take the component cost first rate.
We've seen as the component cost is more or less stabilized I mean, there's still a few components there are slightly out of whack, but.
In general I would say its normalized the the bigger issue is in the programs that we had for specific cost downs, because we again, we brought these radios into our factories from offshore.
And we had a number of programs to update these radios and bring the costs down and so we had a very aggressive target this year I would say.
But we believe rate we could get this these costs out of these radios and give these margins up on these products.
In Q2.
We had anticipated that we would start recognizing some of those cost savings and we just did not because some of the development was delayed some of the certifications and then getting it into the factory all of that said, we believe that we know that thats being introduced in this quarter and it will have a favorable impact into the <unk>.
<unk> of this quarter.
Got it is there a gross margin number that you think you can achieve in the second half.
Maybe the exiting run rate.
This is Scott.
<unk>.
I would say that the best way to say it is we are expecting we continue to expect incremental quarter over quarter improvement for the remainder of this year and through 2024.
In the past, we've said, we're trending back towards the historical rates in the upper <unk> mid to upper 30% range and we're still comfortable that we're trending towards that direction.
If I can put an exclamation point on that Matt I would say that we're confident that we can get there and the issue is the timing and the when and.
Yes, like I said, we're aggressively moving towards that and then certainly some of the cost initiatives. We will start seeing in Q3, yes got it alright couple of more quick thing so on your Opex.
Flattish to up sequentially.
There were some cost cutting programs just wondering if you could share if that opex level is the appropriate run rate going forward or if we should expect any changes over the next couple of quarters.
I would say on the Opex side.
Sure.
Once again, we are launching the BK or 9000, so we have.
Incremental costs associated with market awareness and some of the.
Cost for production increases and that sort of thing so.
I think we're going to we're continually.
Yes.
Managing our cost structure to the best of our ability and our focus for the remainder of the year is definitely going to be on our gross margin improvement initiatives.
So I think I.
I think that is about as good as I can.
No nail that down.
Okay got it Alright last thing for me is.
Any data points milestones on interrupt one that you can share with us or even anecdotal in terms of what youre seeing with with regard to market interest.
Yeah, no. Thanks for that question and I appreciate it.
So we have a number of trials going on and we're getting some excellent feedback from these customers actually plan to do a more extensive.
Presentation on Interop one.
Next quarter so.
If it's okay with you I'd like to pump. This four for next quarter, what I wanted to do was really focus this call on the 9000.
It's been such a long time in coming and we're very excited about this particular product, but in terms of Interop Interop. One we continue to get more field trials and like I said the feedback from the clients are extremely good in fact, we're actually about to release.
A second version of interrupt I can enhancements based on all the feedback that we're getting we'll have that released in the next month or so.
So development continues and feedback continues to be strong.
Alright, thanks, guys.
Our next questioner is Aaron Martin with AIG H investment partners.
Hi, Good morning, John morning, Scott.
I want to focus on the 9000, so let's go there.
Alicia elasticity certification, it's great because it's a long time coming.
What should we expect in terms of the mix shift towards the 9000.
Over the coming quarters and into 2024.
And then obviously that ties in to ASP.
And then ultimately gross margin.
So Aaron what what we have.
What we've said is for this year right. We're shipping 32 to 36000 radios thats going to be inclusive of some big here nine thousands.
On the total number for the year, it's not going to be a material number but it will be much more material in the fourth quarter, because thats glorious start ramping.
Production beyond that I'm not providing.
Our guidance or our targets on the mix between between our revenue.
Our radio sold it's a very competitive situation, especially on the 9000 and.
I think that just keeping it at a total number of radio shipped as is the approach that we're going to take now that being said right as we ship more nine thousands clearly they.
The revenue per radio is much higher on the 9000 and the margin is much better and so as we ship more nine thousands youll see.
That those two numbers grow over time, especially as we go into 2024, where the mix will be more prevalent.
Okay.
We can talk about the gross margin obviously the cost downs that you are talking about are material.
In your initial plan to get to 35% for the year, which imply.
Well north of that on a run rate for Q4.
I assume.
Shift towards the ninth valves it.
It was a bigger piece of that rather than just the cost down because.
The increases.
Much larger.
Is that accurate.
I wouldn't I wouldn't say that specifically are in I think.
We expected to do better in our gross margins in the second quarter and we were disappointed in our lack of execution right I don't know how to say it right.
And.
It's likely last quarter, a bit I mean, we did improve our margins and thankful for that number more than 1% yes.
Yes, it's not where we wanted it to be or expected it to be right and so.
So that's really what's pushing it and pushing it off more than anything else I guess, what I'm trying to figure out is the big component is the cost down and then obviously the mix shift.
And then theres some accessories shifts there all the things that those are higher gross margin, but I'm trying to sort of get that.
How do you know how much of those two items are.
Right.
Part of.
Getting up to 35 plus percent gross margin.
How is it split between those two big items and then this delay on the cost downs is that the only delay is there also a delay on the mix shift towards the 9000 or not.
So the latter the latter is not right what happened in Q2 was an execution right and so so the programs that we thought we would have introduced into the factory that would that would result in better gross margins for our products.
Were delayed.
And those programs are some of those programs are coming to an end we have a series of programs that we had planned throughout the year.
But the ones that had.
I would say a more material impact to what we thought our gross margins, we're going to be in Q2. Those those programs are now being introduced into our factory and so we will see an impact on Q3, we never plan to ship a lot of radios on the 9000. Initially so the number of radios that we shipped is basically the plan.
<unk>.
Our third and fourth quarter plan Hasnt changed.
Okay. So youre, saying all of the changes are all of the cost downs in those programs and so.
Pendant of those obviously were going to be seeing some.
Material or step up in nine thousands in Q4 that should the gross margin and then in addition to that on the execution side. We're looking for these programs to be fully in place by Q4 or close to it yeah.
Yes.
That's a good summary, Erin we hit a speed bump in Q2 in essence right.
And we're now picking it up in Q3, but the 9000 as an independent upstream.
Stream.
Okay.
The 9000 on its own is is it enough or hold.
Hold a step function.
Rather than.
Yes.
You'll notice them.
There'll be a step function throughout 'twenty four is the way I wouldn't describe it.
Okay. Thank you very much and congratulations on the continued progress.
Thank you. Thank you.
We now hear from Scott Weis that Semco.
Hey, John Hey, Scott.
I have got two questions the delay in the thousand phones at the last week of the quarter due to this accessory was this accessory at BK made product or was the third party product.
The.
BK product, but it was a product that was manufactured by one of our contract manufacturers and then you have to understand right. I mean, you are talking a matter of days rate by the end of the day, if you Miss that window it doesn't fall into the month of the quarter.
Yeah.
And then the last question is your cash balance didn't move much your free cash flow positive cash flow positive by a bit but at $2 6 million in cash.
Do you have enough for working capital purposes, and then with that the investment loss of 400000, plus or so in the quarter and I believe you've lost near $1 million for the year can you comment on that and what the plans are and what that investment loss is and what your plans are for that.
We continually.
We view the investment losses Scott.
And it's we've had numerous discussions about that investment and.
Look at.
The alternatives that we have available as far as an exit.
As far as the <unk>.
Working capital situation.
We continue to manage.
The.
Line of credit availability based on our interest costs, you'll notice that our interest costs are higher so we are managing.
Our line of credit and maintaining the cash balance that we think we need so.
All in all.
I think we have a good cash position to obtain or achieve our growth plans growth initiatives using the line of credit that we have.
And we'll we'll manage accordingly, but you're exactly right.
We'll have cash positive results.
Going forward so.
That should.
Fund any growth that we have.
Okay. Thank you.
You bet.
Our next participant is orin hirschman with AIG investment partners.
Hi, Good morning, how are you and congratulations definitely I'm Congress I have one more question just sticking with margin side.
A lot of the gross margin improvement was supposed to come just naturally from going through the higher cost inventory.
What actually happened this past quarter and does that mean that there was actually negative progress on the gross margin.
The offset from the.
From the going through that higher cost inventory, where we're getting towards the lower cost inventory, how should we view that dynamic.
There is an amount of inventory that we purchased during the supply chain issues of 2022.
And we use an average cost basis for the inventory. So there is some bleed over of inventory, but the miss in the second quarter was due to a number of very specific cost reduction initiatives that we just failed to execute on.
I'm glad to say are happy to say that we've completed those now and we expect to see.
Incremental improvement over second quarter results back to more the trend that we were.
On.
<unk>.
For the last three or four quarters.
Mid last year.
So that's how I would describe it.
Okay.
The basic question do you still have the tailwind of a couple of hundred basis points from working through the higher the higher inventory.
Are we in that.
Yes, I would say that's a that's a good assessment.
I look at it is that as a tailwind for that incremental improvement.
And that's over the next one to.
Two quarters.
<unk>.
Pardon me.
Sure.
Yeah.
I'm sorry, it's about another one or two quarters in terms of when that higher priced inventory works its way through.
Yeah, I would say is.
That's that's the way it will work.
I think I mentioned it on prior calls we had 20% to 25 spin.
Specific components that we purchased through the.
The.
Brokerage market that are.
Bleeding through now so so part of that I mean, we did see a small margin improvement rate in Q2, a lot of that was the tailwind piece of it.
We were obviously planning and working towards getting the actual cost downs, which we didn't achieve in Q2.
So I'll give you an idea of what the tailwind gave us.
Okay in terms of getting additional customers or your SaaS offering.
Okay.
Where are we with that I know youre going to save the big update for next quarter, but are we seeing.
Second third and fourth customer, albeit small.
We are.
In fact actually we received an order from.
Our first reseller.
So this is a.
Fairly large dealer in the United States.
Who looks at the service and approached us about reselling Interop one.
So since then.
And we've actually had a couple of other inquiries.
Find that specifically encouraging right because these guys are really close.
To the users and in in these different communities.
And the fact that they see value in reselling the service I think is very encouraging.
They have an end customer or they're just taking it on.
I think you'll find an end customer.
Yes, they have while they have a number of end customers.
So they are fairly large reseller of land mobile radio they do service for this customer base.
And so what they what they see as the service has value and they want to be able to resell that service to to the end customer to their end customers.
But my question is has any have any of their end customers is actually expressed.
Signed on with them, where they went through with the actual.
Well, they're just sorry, or an expectation, yes, my understanding is yes.
Okay. Okay. That's that's definitely a positive trend.
And.
Just like Oh, let's go onto the wire again.
Benjamin.
Even taking a loss on it the cash better.
Kevin in your pocket.
Yeah.
Our investment community.
I am liquidating that investment or swapping it back for Ishares.
Accretive to you.
Yes, there we continue to evaluate.
Our investment.
Okay. Thanks.
Thank you Lauren.
There are no further questions in the queue at this time I would like to turn the call back over to the hosts for any closing remarks, they may have.
Mike. Thank you all for participating in today's call. We look forward to speaking with you again, when we report our Q3, all the best to you and have a great day.
Yes.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.