FG Group Holdings Inc.
Q1 2014 Earnings Call Transcript

Published: 8 May 2014

[Operator:]

Good morning ladies and gentlemen and thank you for standing by and welcome to the Ballantyne Strong First Quarter 2014 Conference Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, there will be a question and answer session. (Operator Instructions) And as a reminder this call is being recorded today May 8, 2014. I would now like to turn the conference over to Tricia Ross. Please go ahead.

[Tricia Ross:]

Good morning, everyone. And welcome to today’s First Quarter 2014 earnings call. Today’s call and webcast may contain forward-looking statements related to the company's future operating results. Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including but not limited to quarterly fluctuations and results, customer demand for the company’s products, the development of new technology for alternate means of motion picture presentation, domestic and international economic conditions, the management of growth and other risks detailed from time-to-time in the company’s Securities and Exchange Commission filings. Actual results may differ materially from management’s expectations. Joining us today from management are President and CEO, Gary Cavey; and CFO, Mary Carstens. At this time, I would now like to turn the call over to Gary. Gary?

[Gary Cavey:]

Thank you, Tricia. Good morning, everybody. Thanks for joining us. The first Quarter unfolded much as we expected with our total revenues reflecting reduced sales associated with the winding down of the digital rollout in the U.S. and Latin America, offset by the revenue from our acquisition of Convergent . However, most notably we are starting to see improvement in gross margin that we are targeting with the transition to a more Managed Services and [quick] business model. While our total revenue is declined by $5.6 million from the first quarter of 2013. We actually had an increase in gross profit of $300,000. This translated into an improvement in gross margin of nearly 5 percentage points at 19.1 percentage point for the first quarter of 2014. This improvement in gross margin reflects the growth the Managed Services segment which accounted for 38% of our total revenue in the first quarter of 2014 up from just 9% in the same quarter last year. We are clearly headed in the right direction and we continue our efforts to grow the Managed Services business. We should see the higher gross profit positively impacting our bottom line. As we indicated on our last conference call, we have a number of legacy projects at Convergent Media Systems that are winding down and the business development pipeline is in the process of being rebuilt. We continue to have sales in marketing talent at Convergent, they can help us more effectively penetrate the markets we are targeting and communicate the comprehensive end to end solutions that we offer in digital media. With the expansion of the sales force in the more aggressive business development mindset that we are implementing, we are seeing a steady increase in the number of new business opportunities we are pursuing and the overall sales pipeline has increased substantially from the time that we completed the acquisition of Convergent. We are developing more marketing and merchandising tools for the business development and we have also created a new sales showroom that we can utilize to show prospects the type of digital media campaigns we can create and execute on their behalf. Within the showroom, we have areas highlighting the work we can do in a variety of different environments including retail stores and banks. We are getting good leverage out of the showroom as we continue to utilize it as a showcase for many of the other products we offer throughout the company such as our screens our security products. I talked about the introduction of a new and cloud based video security solutions on our last call and we have had good start for this business. We have already made a number of sales to customers in a variety of different markets including hospitality, healthcare and schools. Some of these customers have started with pilot program typically covering just a small number of buildings or facilities that is to get more comfortable with utilizing a cloud-based solution for their (inaudible) these programs should be expanded to a greater number of occasions . As an example we completed installations of surveillance cameras at five campuses of a large school and we are anticipating additional orders for 20 campuses later this year. And in addition to the sales of the surveillance equipments these programs are generating revenue opportunities for us through installations and ongoing monitoring services. So we are very pleased with the rollout so far and it looks like this is going to be a good business for us. Staying within the system’s integration segment we are very excited about the new lines of screens that we are introducing in our strong NDI subsidiary. As most of you know we’ve developed a reputation as a go-to firm whenever anyone in the world needs a complex large from (inaudible) screen design and manufacture to create a unique entertainment experience. Now for the first time, with our new integrated cyber screens we are taking our world class cinema quality screens to smaller venues such as conference rooms, media rooms, museums, schools and worship facilities. We will be offering both big screen and motorized retractable versions of screens in a wide range of sizes that are ideally suited for the professional audio/visual market, the focus is on servicing these smaller venues. The new product line will open up an entirely new market for us that we believe can help with our continued growth in our screen business in the years ahead. With that lets me turn the call over to Mary for additional color on the company’s Q1 results. Mary?

[Mary Carstens:]

Thanks, Gary. Good morning everyone. Our total revenues in the first quarter of 2014 were 22 million compared with 27.6 million in the same period of last year. The Managed Services segment generated revenues of 8.4 million in the first quarter, compared with 2.5 million in the same period of the prior year. The increase is primarily due to the acquisition of Convergent Media Systems. Our Systems Integration segment generated revenue of 14 million in the first quarter, compared with 25.5 million in the same period of the prior year. Decline is primarily attributable to lower shipments of digital theater equipment to Latin America. We shipped a total of 134 projectors in the first quarter compared with 366 in the same period last year. A little more than half of our shipments this quarter were into the China market where gross margin tends to be lower than domestic sales due to the highly competitive market. Gross profit of 4.2 million, compared with 3.9 million in the prior year. Our gross margin was 19.1% in the first quarter, compared with 14.2% in the same quarter of the prior year. The addition of Convergent’s higher margin revenues and the ability to leverage our sales service cost due to higher service of revenue more than offset the reduction of margin dollars in our systems integration segment due to the reduced sales of projector systems. Although I would like to note that Convergent’s and the systems integration segment also enjoyed a 180 basis point improvement due to the mix of product sold. Selling in administrative expenses were 5.4 million, compared to 3.4 million in the prior year. The increase in SG&A was attributable to the addition of the Convergent operations. The effective tax rate for the quarter ran about 20% which is consistent with the prior year. We generated a net loss $600,000 or $0.04 per share in the first quarter of 2014 compared with a net income of $600,000 or $0.04 per share in the same period a year ago. Ballantyne's cash and cash equivalence balance was 25.5 million at March 31, 2014 down from 28.8 million at the end of the prior quarter. The decline is primarily due to a reduction in payables which is largely related digital projectors that were ordered from (inaudible) sold to customers during the fourth quarter of 2013. We continue to have good liquidity and full access to our $20 million credit facility providing additional capital resources for potential transactions and Internet growth. At this time Gary and I are ready to answer your questions. Operator, please open the line.

[Operator:]

[Operator Instructions] And our first question does comes from the line of Tristan Thomas with Sidoti & Company

[Tristan Thomas:]

Good morning.

[Gary Cavey:]

Good morning.

[Tristan Thomas:]

Couple of questions for you, could you just maybe comment on your screen business during the quarter how that compared to year over year?

[Gary Cavey:]

Mary, can you handle that one?

[Mary Carstens:]

Yes, actually the screens were up slightly but the margins were improved by a couple of percentage, I am going to get the specifics there for you (inaudible).

[Tristan Thomas:]

Okay, great and then another question you mentioned on the last question the first quarter is seasonally slow especially in China for projectors relating to the Chinese New Year, could we look for an uptick in the second quarter or do we think 49 is kind of a new norm what we should expect moving forward?

[Gary Cavey:]

Tristan, it’s really hard to predict since what we are going see in China. It seems like we have got a pretty consistent flow of business last year and right now it appears that things are running pretty much true to the form this year.

[Tristan Thomas:]

Then overall and as I know was particularly hard you to conversion, I mean the 5.4 million quarter is that would you expect something normal run rate?

[Mary Carstens:]

Yes, I think we are going to continue to what – Gary has been talking about, we are continuing to build our sales and marketing. We are making adjustments in other areas. So I think that's still a good number.

[Tristan Thomas:]

Okay and then just touching on conversion little bit, are there good revenue recognized in this quarter, is there some legacy business included in that and should I expect some of that to fall out moving forward?

[Mary Carstens:]

The current run rate for the business, I think is actually pretty consistent going forward and what we will see, at least for the legacy business and then with these other new products and things coming on, we hopefully were looking for an uptake in revenue.

[Tristan Thomas:]

Okay but that really, to my guess and (inaudible) most of the legacy business that's going to be a (inaudible).

[Mary Carstens:]

Yes that's true.

[Tristan Thomas:]

Okay and you mentioned that your sales pipeline is higher than may be acquisition, could you have some quantify that and in terms of backlog the best to do it but, some actual tangible numbers to be great.

[Gary Cavey:]

Tirstan, this is Gary. (inaudible) I could tell you is we probably seeing opportunities and presentations that moves in, the past one almost more than 75% than before.

[Tristan Thomas:]

Okay.

[Gary Cavey:]

So we are reaching into a lot of different markets as well as deeper penetration in the distinct markets that the Convergent it served, but due to the merchandising and marketing in the sales showroom, the hiring of additional sales people is having substantial impact as far as seeing those opportunities.

[Tristan Thomas:]

Okay then just one final question. Do you have any success trying to may be cross sell some of the Convergent services to the movie theaters you already do business with?

[Gary Cavey:]

Definitely. We are seeing things like when we were dealing with some security opportunities. The people ask us about digital signage and vice versa and the same holds true with our new screen business, is that totally different market than we are used to be in and so we see a combination of all our products, there is a opportunity to cross sell almost all the products with (inaudible) customers and so it’s kind of nice going in, the customer might have just be interested in security and then finds out or she finds out about our other business screens and things like that and they are very interested as well in that in sometimes. So it’s a great and then all of that is backed by our service and installation in our network operation center, covering all the businesses so it’s a nice (inaudible).

[Tristan Thomas:]

Okay, great I think I am out of questions for now. Thank you.

[Mary Carstens:]

Just for your information, the screen sales was up about a half million dollars in the quarter.

[Operator:]

And at this time, I would like to turn the conference back over to Gary Cavey for any closing comments.

[Gary Cavey:]

Thank you for listening to this financial releases and update and we are looking forward to the next quarter to update you. Have a great day.

[Operator:]

Thank you. Ladies and gentlemen that will conclude the conference call for today but if you would like to listen to a reply of this conference, you may do so by dialing either [phone] or (1800) 406-7325. You will need to enter the access code of 4681716. Our telephone numbers once again are [phone] or (1800) 406-7325 with the access code of 4681716. Again many thank you for your participation today’s call. You may now disconnect your lines at this time.