Q3 2023 RF Industries Ltd Earnings Call
Greetings and welcome to the RF industries third quarter fiscal 2023 financial results Conference call.
At this time all participants are in a listen only mode.
And answer session will follow the formal presentation.
But he won't should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded I will now turn the conference over to your host Jack GFS you may begin.
Okay.
Thank you operator, good afternoon, and welcome to RF industries third quarter fiscal 2023 financial results Conference call with me on today's call are RF industries, President and CEO , Rob Dawson before I turn the call over to Rob I'd like to cover a few quick items.
This afternoon RF industries issued a press release announcing its third quarter 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 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 and actual results may differ materially from the <unk>.
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 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.
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 Rob Dawson, President and Chief Executive Officer.
Thank you Jack and good afternoon, everyone. Thanks for joining our third quarter fiscal 2023 conference call.
Our CFO Peter yen had to attend to a personal matter so I'll be handling today's call solo.
Our third quarter results tell the story of a very challenging quarter as you saw in our press release third quarter revenue was $15 7 million down 34% year over year I knew we had a tough comp against a record third quarter last year, but when I last spoke with you in June we are seeing steady order activity and the expectation of consistent shipments of hybrid fiber.
Cable.
Overall I thought we were seeing some decent momentum until we hit July .
The pause hit hard with many of our key projected shipments schedules put on hold customers were delaying delivery of their orders.
Or freezing new orders for project based deployments due to these delays we shipped virtually no hybrid fiber cable in the quarter.
Along with less sales of carrier approved RF passes.
And these surprising developments significantly impacted our quarter.
Those of you following the industry know that the wireless carriers have greatly curtailed their capital spending over the last few quarters.
Those carriers and the large neutral hosts have been restructuring their businesses to adapt to an environment of higher interest rates overstocked inventory and steep labor costs among other things.
This has included significant head count reductions in the entire carrier ecosystem.
Look across the board and Youll see even the big players in our space like the radio manufacturers are going through some challenging times and reporting number is well below the prior year in the North American market.
While we can't control the economic backdrop, we can control our own business and that's what we've been focused on.
We have a very strong management team and board with a lot of knowledge and insight gained from past experience that gives us a bias towards action.
We start with what we know to be true telecom is here to stay and continued investment in wireless infrastructure is mandatory not optional.
Second there is a tremendous pent up demand to improve telecom infrastructure across the U S, especially in the <unk> and <unk> build outs.
Third network Densification is the next phase of the build and is required to address coverage gaps and the constant consumer expectations for faster and faster connections with coverage everywhere.
Last 45 days alone, we've received orders and commitments of nearly $1 $5 million for integrated small cell trials.
We've also seen decent orders for passives and cabling for large stadium das builds.
This is what densification looks like and we believe that our offer is correctly positioned to benefit from it.
We also know that our major customers can't pushed the pause button indefinitely and when they get going they'll be looking for better and more cost effective solutions that.
That's where we plan to shine.
Timing can be hard to predict we know that RF industries has a broad selection of high quality interconnect products and next generation integrated systems.
And we're always innovating both on the wireless carrier space and other markets.
We recently launched our micro lab enterprise plus offering to serve the hundreds of integrators throughout the United States that are focused on enhancing cellular and public safety wireless in commercial buildings and multi dwelling units.
This opens the door to a new market opportunity that is not reliant on wireless carrier budget cycles and the early response to this exciting new offer has been very positive.
Additionally, we continue to think strategically and explore other markets beyond wireless such as wireline utilities transportation safety Aerospace and defense.
Because many of our products have applications relevant in these areas and we're looking to diversify our exposure to broader markets.
The growth we've seen with wireless carriers in the last few years can be viewed as a double edge sword. The good news is that we have positioned ourselves directly in line of sight of wireless carrier Capex, both organically and through M&A, which is a new position for the company and our almost 45 years in business.
When the Capex dollars flow, we see huge upside.
The other edge of the sword is when that Capex pauses and we have to retrench.
While we love the direct interaction with the wireless carrier ecosystem and the team has done a terrific job to get us to that position. We also continue to look for avenues of diversification.
Beyond investing in product development.
We've also been executing on our plan to control costs and drive further synergies by consolidating our facilities as we continue to focus on higher profitability.
In the third quarter, we completed our manufacturing and distribution consolidation and this helped reduce our quarterly operating expenses by $330000 this quarter compared to the same quarter last year.
And with the full benefit of this expense reduction in the fourth quarter, we expect even larger savings.
In total we expect annualized cost savings of approximately $2 5 million to $3 million.
As we strip out these costs and look to increase sales, we expect our profitability to improve in future quarters, although it's difficult to provide specific timing given the current broader market conditions.
What we do know is that when revenue returns will be in a strong competitive position with a highly attractive product portfolio, a capital light business model and substantial operating leverage.
Now I'll give some color on our third quarter financials.
As I mentioned earlier third quarter revenue was $15 $7 million down 34% year over year.
Primarily reflecting a much lower contribution from hybrid fiber cable as well as lower sales related to carrier projects involving approved RF components.
I do want to point out that our core interconnect products remained solid in the quarter and large shipments and orders that were put on hold still remain in our backlog.
The sales decline and product mix pressured consolidated third quarter gross profit margin, which came in at 24, 4% compared to 34% in the year ago quarter.
Operating loss was $2 million versus operating income of $1 $1 million in the comparable quarter again due to lower sales, including the cable products and RF components that I discussed.
Taken together. These factors resulted in a net loss of $1 $6 million or <unk> 16 per diluted share for the quarter.
Compared to net income of 771000 or <unk> <unk> per diluted share in the third quarter of 2022.
non-GAAP net loss was $784000 or <unk> <unk> per diluted share compared to non-GAAP net income of $1 6 million or <unk> 16 per diluted share for the same period last year.
Adjusted EBITDA loss for the third quarter was $940000. This compares to adjusted EBITDA of $2 1 million in the third quarter of 'twenty two.
Reflecting the impact of lower sales and less leverage to cover certain fixed costs.
At the end of the third quarter, our cash and cash equivalents were $4 1 million working capital was $22 8 million and $2 million was available under our revolver, we drew down our revolver by $1 million to cover leasehold improvements associated with the consolidation efforts I mentioned earlier.
During the quarter, we continued to work with our bank and we successfully renegotiated the terms of our debt covenants without any major changes to the structure of our term loan a revolver, giving us the leeway to navigate this challenging time.
Inventory was $20 $2 million at the end of the quarter up from $19 2 million in the year ago quarter. The year over year increase in inventory was primarily due to micro lab in which we've invested an additional $1 $5 million since last year.
On a sequential basis, we reduced inventory by $182000.
Looking ahead, we believe there's more room to reduce and rationalize our inventory without jeopardizing our value proposition of inventory availability for our customers.
We will continue to carefully manage our inventory levels to help build our cash position. We're also constantly reviewing our pricing policies as we look for opportunities to increase our margins.
Backlog was $17 $2 million at the end of the third quarter on bookings of $14 million as.
As of today backlog stands at $16 $7 million, which still includes many of the delayed hybrid fiber shipments.
In fiscal 2023, we're continuing to deal with market challenges that are pressuring our topline growth regardless, our focus on improving profitability is our top priority and we've set what we believe is an attainable goal of achieving an adjusted EBITDA above 10% of sales as market conditions normalize.
Regarding guidance for fiscal year 2023, with what we see today, it's difficult to predict what to expect in the near term based on current visibility, we expect fourth quarter sales to increase sequentially from the third quarter.
And then subsequent quarters will continue to improve throughout 2024.
While the near term environment is difficult to navigate our team is up to the task over the past six years, we've consistently we've significantly grown and transformed the business, while streamlining our operations for cost efficiencies.
And we've continued to innovate with new product offerings that both widen and diversify our market opportunity.
Once the Capex faucet turns back on we're ready.
Yes.
In closing I appreciate that it takes patience to wait out a business cycle. We've been through these pauses before and I think we might be seeing a bottom forming in our market.
While our quarterly revenue trend has been inconsistent and lumpy for the last several years, we've achieved significant growth and we remain committed to our long term strategy that has helped us profitably grow sales from $23 million to $85 million over that six year term.
We believe that Q3 was just a bump in the road similar to the many bumps we've overcome in the past few years long term RF industries is in a great position to generate solid returns for investors and we're grateful for the ongoing support of our shareholders.
With that I'll open the call to questions John .
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 and may be necessary to pick up your handset before pressing the star keys, one moment, please while we.
Poll for questions. Once again, please press star one if you have a question or comment.
First question comes from Josh Nichols with B Riley. Please proceed.
Hi, Dan This is Chuck no bond for Josh Nichols.
Please go ahead.
I was just wondering if you could speak a little bit more about like carrier capex cycles, and kind of what youre seeing in terms of when those as well.
Sure Yeah. Good question, So I mean look it's not abnormal.
A major build cycle generational like this one to have macro sites built first then theres, usually a pause while they consume that and then there'll be the more densification builds. So we think we're in that pause at the moment lease I think everyone that I talk to you agree that that's what's happening and we expect the with what we're hearing today, we expect getting into cash.
<unk> 2024 to be in a different environment I think we're we're hearing that not just from the carriers, but from the neutral host and tower companies the contractors and integrators.
We're hearing real site counts from people and there's folks out walking the sites to make sure of the bill of material is accurate. That's a phenomenon that typically leads to the cycle picking back up again.
Not that it couldnt happen towards the end of 'twenty three in a broader way because we are seeing a little bit of increase there, but I think the bigger expectation as we get into 'twenty four 'twenty five 'twenty six there's be some consistent spending on densification in particular.
Alright, great.
Sure.
Once again, if there are any remaining questions or comments. Please indicate so by pressing star one on your Touchtone phone.
Yes.
Once again Thats Star one if you have a question or comment.
Okay. It looks like we have no further questions in queue I'd like to turn the floor back to Robert Johnson for any closing remarks.
Thank you John and thanks, everyone for joining our call today.
We look forward to sharing our fiscal fourth quarter results in December and look forward to speaking to many of you over the next few days.
Good day.
This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.