FG Group Holdings Inc.
Q2 2014 Earnings Call Transcript

Published: 8 Aug 2014

[Operator:]

Good morning, and welcome to the Ballantyne Strong Second Quarter Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note this event is being recorded. I'd now like to turn the conference over to Mr. Tony Rossi of Financial Profiles. Please go ahead.

[Tony Rossi:]

Thank you, Ed. Good morning everyone, and welcome to today's second quarter 2014 conference 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'd now like to turn the call over to Gary. Gary? Gary Cavey Thank you, Tony. Good morning, everyone. Thanks for joining us. Our second quarter results were relatively consistent with what we experienced in the first quarter. As a general overview, we continue to see year-over-year declines in projector sales as the digital roll out is largely completed, while new our businesses are offsetting some of the revenue decline and providing better gross margins. Within our cinema businesses, our projector sales have returned to a level that is relatively consistent with the order volumes we saw prior to the start of the digital conversion cycle. However, the current operating environment in the cinema market is extremely challenging, which limits the opportunities to grow this business. It's been a disappointing summer for theater owners, as box office sales are at their lowest level since 2006, and are down approximately 17% from last year. This level of decline is having an impact on the capital spending plans for theater owners, which we see in both order volumes for new projectors and in terms of projects for our remaining services business. In the cases where theater owners are moving ahead with capital spending, we're doing a great job of winning that business. The most recent example is the two-year exclusive supply agreement that we signed with Cinepolis, which is the fourth largest chain of movie theaters in the world. For the next two years, whenever Cinepolis present a new screen in one of its theaters we'll be the exclusive supplier. We've done business with Cinepolis for several years, but this is the first time that we have formalized an exclusive supply agreement that covers the full breadth of the screen products that we offer, and it's a great endorsement of the quality of products that we provide. However, with these types of supply agreements, few and far between in the cinema industry, the diversification and growth strategy we have implemented becomes all that more important to the company. Within the digital media business, we continue to build a good pipeline of opportunities at Convergent Media Systems, although the sales cycle continues to be very long and customers have showed a propensity for delaying or cancelling digital media initiatives. This makes it even more important to build a robust pipeline that we manage through the inevitable delays that occur, and still have enough opportunities to move the needle on our revenue growth. As we've discussed on past calls, Convergent was focused primarily on Sony-specific objectives for their vertical segments. They continue to maintain and service some legacy customer relationships within that growth of business. As a result, we had to do a complete rebuild of Convergent sales and marketing functions, which was essentially hiring assistance at the time of acquisition. We brought in some good experienced sales talent, and we have made good progress in building out the ecosystem of industry relationships that we need to generate leads and new business opportunities. These include relationships and partnerships with hardware companies, software companies, advertising agencies and other players within the digital media industry that need a comprehensive digital solution provider that help them serve the needs of their customers. We're particularly excited about the opportunities we now have to work with other hardware vendors. As you may remember, Convergent was a subsidiary of Sony and they only worked with Sony equipment in the past. We're now completely agnostic from the hardware perspective, which opens up opportunities for us to work with other major hardware vendors in this space, including servicing their existing installations. It will now take some time for these relationships and partnerships to bear fruit, but we feel good about the foundation we're building at Convergent and the opportunities we have to grow this business in the future. We believe we have a lot of synergies among the new businesses that we have entered, and we're very focused on showcasing our complimentary product or offerings and our ability to deliver comprehensive solutions for clients. During June, we exhibited for the first time at InfoComm, which is the largest annual conference and exhibition for AV buyers and sellers nationwide. As we mentioned on our last call, the professional AV market is a new area that we're targeting. During the conference, we showcased a comprehensive product line up for Pro-AV Dealers and integrators that included our new small format projection screens, digital signage and lighting solutions. It was a very productive event for us, and we want that serve as a great starting point for building our channel partnership relationships in generating awareness for our products in Pro-AV markets. We also continue to get a lot of interest in our new video security systems. Right now, we're developing a good base of pilot programs as customers build their comfort level with using a cloud-based security solution before committing to a larger roll out. We're getting the most traction in the healthcare, education and municipality markets, and we think this is as the business matures it will become a meaningful contributor to our revenue stream. With that, let me turn the call over to Mary for additional color on the company's Q2 results. Mary? Mary Carstens Thank you, Gary, and good morning everyone. Our total net revenues in the second quarter of 2014 were 22 million compared with 24.4 million in the same period of last year. The Managed Services segment generated revenues of 7.6 million in the second quarter, compared with 3.3 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 14.8 million in the second quarter, compared with 21.5 million in the same period of the prior year. The primary driver of the decline was lower shipments of digital projectors. We shipped a total of 144 digital projectors in the second quarter compared to 250 in the same period last year. The mix of shipments between domestic and international was roughly the same compared to the prior year. Gross profit was 4.2 million compared with 4.7 million in the prior year. Our gross margin was 19.3% in the second quarter compared with 19.2% in the same quarter of the prior year. In the second quarter of 2013, our gross margin was positively impacted by higher margin revenue related to the completion of the World Trade Center Beacon and Uplights Project. Our current business mix with higher ongoing contributions from our managed services segment as well as higher margin products that had been recently introduced into systems integration segment will provide a more sustainable foundation for maintaining our gross margin at this higher level. Selling and administrative expenses were 4.4 million compared with 3.3 million in the prior year. The increase in SG&A was primarily was primarily attributable to the addition of convergent operations. As a general comment about SG&A, the timing of certain spending items such as tradeshows and [operating] (ph) services can create some volatility in our SG&A on a quarter-to-quarter basis. We also continue to invest in sales and marketing to support the growth of convergent and the ramp up of our new products in the systems integration segment, which should result in somewhat higher SG&A levels going forward. We reported a tax benefit of 472,000 in the second quarter, which reflects an adjustment in our effective tax rate for 2014, which is a result of a shift in our earnings between the different taxing authorities. We generated net income of $400,000 or $0.03 per share in the second quarter of 2014 compared with net income of 1.3 million or $0.09 per share in the same period a year ago. Ballantyne's cash and cash equivalents balance was 26.9 million at June 30, 2014, up from 25.5 million at the end of the prior quarter. The increase was primarily due to the positive cash flow generated from operations during the second quarter. We continue to have debt liquidity and full access to our 20 million credit facility providing additional capital resources for potential transactions and internal growth. At this point Gary and I are ready to answer your questions. Operator, please open the line.

[Operator:]

Thank you. (Operator Instructions) Our first question comes from Tristan Thomas of Sidoti & Company. Please go ahead.

[Tristan Thomas:]

A couple of questions for you, could you maybe provide a little insight regarding the amount of pilot program do you have after convergent and how long some of those are in the process?

[Gary Cavey:]

Good question, Tristan. This is Gary. And we have around half a dozen to a dozen that are ongoing. And it really varies with the customer requirement. Sometimes they run in as long as, the shortest maybe 90 days to 120 days, but sometimes they run as long as a year.

[Tristan Thomas:]

Yes. Another follow-up question that how does -- you really mentioned you had a couple of pilot programs after the video surveillance as well. Is that typically a shorter duration or are we looking at similar timeframe?

[Gary Cavey:]

Those, I don't think we have enough experience yet to truly say, but I would say that they are shorter than the other ones, Tristan, I would say they are closer to three to six months.

[Tristan Thomas:]

Okay. Got you. Could you maybe provide us a little update on what your small format screen business is doing? I know it's new; I am just curious if you are gaining any traction.

[Gary Cavey:]

Well, we are setting up Pro-AV dealers, we are seeing quite a bit of traction there. And one of the things we are finding here is not only is it for what I call standard screens of smaller format, but custom and special screens with special events. We are actually seeing quite a bit of activity in that area and success. So, it's pretty diverse. It's not just the board rooms and universities and things like that, but for concerts and many other types of activities.

[Tristan Thomas:]

Okay, got you. Can you jump into project yourself in fact this is a normalized run rate. So does this mean -- I am just curious what's going on overseas especially in China?

[Gary Cavey:]

We are trying it pretty competitively. And their path, their way of putting in new theatres is being pretty consistent, but it's pretty competitive and our activity there results or stand pretty consistent of what we've been doing in the past.

[Tristan Thomas:]

Okay. One final question just regarding SG&A, I know you alluded to probably a pick up in the coming quarters, but I mean the run rate from first quarter and second quarter down about a million. I mean, excluding the additional expenses you are expecting, would this be a normalized run rate now that Convergent has been in the fall for a couple of quarters.

[Mary Carstens:]

No. We truly had a low quarter this (technical difficulty) in the second quarter, Tristan, and certainly as we continue to add some resource that we expected to get us closer to the maybe a slightly lower than that Q1 run rate. We have said consistently, it's going to be around that 5 to 5.1.

[Tristan Thomas:]

Okay, got you. And then one final question. Could you just provide a little color on the -- what changed regarding tax rate?

[Mary Carstens:]

You mean in the quarter for the SG&A?

[Tristan Thomas:]

I am sorry, just regarding the tax rate.

[Mary Carstens:]

Oh, the tax rate?

[Tristan Thomas:]

Yes.

[Mary Carstens:]

So it was truly just truing it up based on where the revenues were coming in. And historically you look at longer term run rate, but we are looking at it on a quarterly basis due to the fluctuating business model.

[Tristan Thomas:]

Okay, got you. Thanks, guys.

[Gary Cavey:]

Thank you, Tristan.

[Operator:]

At this time, I'm showing no further questions. And I would like to turn the call back over to management for any closing remarks.

[Gary Cavey:]

Thank you all for joining us today. We look forward to speaking with you in the next quarter. Have a great day. Thanks very much.

[Operator:]

The conference is now concluded. Thank you for attending this presentation. You may now disconnect.