FG Group Holdings Inc.
Q3 2014 Earnings Call Transcript

Published: 7 Nov 2014

[Operator:]

Good day, everyone, and welcome to the Ballantyne Strong Third Quarter 2014 Conference Call. All participants will be in a listen-only mode. (Operator instructions) After today’s presentation, there will be an opportunity to ask questions. (Operator instructions) Please also note that today’s event is being recorded. At this time, I’d like to turn the conference call over to Ms. Tricia Ross of Financial Profiles. Ma’am, please go ahead.

[Tricia Ross:]

Thank you. Good morning, everyone, and welcome to today’s third 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, Nate Legband. 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. We continue to see generally consistent results during the third quarter with our total revenues being in the $22 million range as they were during the first half of 2014. Within our cinema businesses, we continue to see a challenging market as expected. With overall domestic box office receipt down from last year and fewer blockbusters this year, theater owners are being more conservative in their capital expenditures. However, where there is demand, we are doing a good job of owning [ph] business. For example, we had a strong quarter selling our Library Management Systems into the Brazilian market. Our Library Management Systems consist of the servers and software that are utilized to support digital projectors. The Brazilian government has provided incentives to theater owners to convert to the digital platforms by the end of 2014. And this should continue to result in good sales for our Library Management Systems in the fourth quarter. We also had a solid quarter in our screens business as some of the advancements we introduced this year with our large format screen have all been well received. As a result, total revenues within the screen business were up more than 33% from the third quarter of last year. Within our Digital Media segment, we continue to make good progress in expanding our business development platform at the Convergent Media Systems. We are participating in and have been well received at industry conferences serving a wide variety of market segments. As a result of our efforts, we’ve had the opportunity to engage in more substantial discussions with many of the larger retail branch that are interested in expanding their use of digital media. Convergent has created many market leading innovations for our customer base and we are leveraging this expertise in innovative spirit across all the verticals we serve. To that end, we are sharing our expertise on a broader basis to the industry by publishing white papers and conducting training sessions to support our dealer network and customer base. This is steadily creating more awareness for the Convergent brand and generating more inbound inquiries from the prospects and referrals from our industry partners. We are consistently winning deals and we are engaging in discussions with a range of customers from smaller projects for independent proprietors to larger enterprise applications. It should be noted that the sale cycle for the larger deals continues to be lengthy as compared to the smaller projects. However, we are pleased with the quantity and quality of the leads that are being generated by our sales and marketing team and we expect our pipeline will expand its flow in the near future. We continue to invest in other businesses that we recently entered, such as the video security business. We continue to build the sales force and refine our go-to-market strategy in this business, including adding some new products to increase our flexibility and expanding our market coverage. As we look ahead, the near term outlook for the cinema business appears to be fairly stable, which should enable our financial performance to be relatively consistent going forward with our newer businesses increasing in scale, which should result in a higher level of profitability. With that, let me turn over the call to Nate for additional color on the company’s Q3 results. Nate?

[Nathan Legband:]

Thanks, Gary, and good morning everyone. Our total net revenues in the third quarter of 2014 were $22.7 million compared with $18.9 million in the same period of last year. The Managed Services segment generated revenues of $7.2 million in the third quarter compared with $2.7 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 $15.7 million in the third quarter compared with $16.2 million in the same period of the prior year. The primary driver of the decline was lower shipments in digital projectors. We shipped a total of 131 digital projectors in the third quarter compared with 170 in the same period last year. International shipments accounted for more than two-thirds of our shipments in the third quarter of 2014 compared with a little under half of our shipments in the same quarter of last year. The total decline in the number of projectors shipped was partially offset by the strong sales we had for our Library Management Systems and growth in screen sales as Gary discussed. Gross profit was $4.1 million compared with $3.3 million in the prior year. Our gross margin was 17.9% in the third quarter compared with 17.7% in the same quarter of the prior year. The increase in gross margin as a percentage of revenue was driven by the mix in our sales to higher margin products. Selling and administrative expenses were $4.9 million compared with $3.4 million in the prior year. The increase in SG&A was primarily attributable to the addition of convergent operations in the launch of our new products and – we recorded a tax benefit of $324,000 in the third quarter, which is a result of a shift in our earnings between the different taxing authorities. We generated a net loss of $109,000 or $0.01 per share in the third quarter of 2014 compared with net income of $46,000 which equates to breakeven on a per share basis in the same period a year ago. Ballantyne’s cash and cash equivalence balance is $24 million as of September 30, 2014, down from $26.9 million at the end of the prior quarter. The decrease was primarily due to an increase in inventory and capital investments to support future sales growth. We continue to have good liquidity and full access to our 20 million credit facilities, 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 lines.

[Operator:]

Ladies and gentlemen, at this time we’ll begin the question-and-answer session. (Operator instructions) And our first question comes from Tristan Thomas from Sidoti & Company. Please go ahead with your question.

[Tristan Thomas:]

Hey, guys. How are you?

[Nathan Legband:]

Very good, Tristan. How are you?

[Tristan Thomas:]

Well, not too bad. Just one kind of multicore question. Can you kind of walk us through the timeline you expect for some of the new managed service contracts and one in terms of some of the smaller projects you mentioned versus some of the bigger projects? And then maybe mention where you guys stand with some of the things you have out there now.

[Gary Cavey:]

Tristan, I’m not sure I caught all your parts of the question but let me –

[Tristan Thomas:]

Okay. Well, let me break – I’ll break it down a little bit and –

[Gary Cavey:]

Let me start with some of them and then you can help me here. But one, we have a number of pilots going on for our larger projects and it’s really tough to tell exactly when they’ll be launched. But we’re finding that the pilots and tests for some of these larger customers are quite pleased with what they’re seeing. They constantly are – they’re evaluating and we’re not quite sure when these things will start rolling out. But we see it – we expect it to be in 2015 for sure.

[Tristan Thomas:]

Okay. So typically I guess the run rate would be called what – it seems like it’s always kind of picked up the six months to a year. Is that a little too much?

[Gary Cavey:]

Yes, I would say that that’s – it varies about where the customer is on his decision point of exactly how he wants these things to work. Some are faster or slower than others. But generally, I think that’s right – six months to a year.

[Tristan Thomas:]

Okay. Now, is there any difference between some of the smaller retailers versus the larger retailers or is that more on about the –

[Gary Cavey:]

I think it’s more of on the scope of what they’re looking for. If they’re more enterprise wide systems, more complex versus more simpler solutions like wayfinding products.

[Tristan Thomas:]

Okay. So how many pilot programs have you got there? Is it something you could break up?

[Gary Cavey:]

I would say that we’re talking in the dozen category or more.

[Tristan Thomas:]

Okay. Just one final question more for Nate. So SG&A, this is really what we should expect moving forward roughly this level?

[Nathan Legband:]

Yes, most of the investment in the sales and marketing teams has already occurred, although we are continuing to evaluate as opportunities come up where we may need to add additional resources. So we do expect it to be fairly stable. But as our revenue grows, we would expect to see an increase in commissions and potential incentive compensation.

[Tristan Thomas:]

Okay, great. Thank you, guys.

[Gary Cavey:]

Thank you.

[Operator:]

(Operator instructions) And our next question comes from Chris Beach [ph] from Foxbell [ph]. Please go ahead with your question.

[Chris Beach:]

Good morning.

[Gary Cavey:]

Good morning.

[Chris Beach:]

I had a couple of questions. I guess the first one is you called out in the press release some incremental M&A, I’d just like to get a better feel for exactly what you’re talking about, especially in line with the fact that it doesn’t seem like the new strategy is yet to take hold. That’s number one. And then number two, maybe you can just qualify or quantify what you think is the recurring revenue piece of your reported revenues and then what that might represent relative to prior periods, both in terms of absolute dollars and components being monitored.

[Gary Cavey:]

Okay, I’ll take the first part of the question, Chris. This is Gary. One, we feel very confident that we’re on the right path with our businesses. And that’s including the traditional Ballantyne business as well as the Convergent. And regarding the acquisition activity, we constantly are looking at opportunities to enhance our existing businesses with the acquisitions and as well as organic growth. And so that’s something we’re constantly reviewing and looking at and taking everything else in perspective as well. Nate, do you want to answer the second part?

[Nathan Legband:]

Yes. Looking at the recurring revenue stream, I mean each additional projects we build on usually have a recurring revenue component. Right now, that’s something we haven’t disclosed and we haven’t looked at disclosing for the future. But that is something that we are expecting that recurring revenue stream to continue to grow as we have these significant rollouts.

[Chris Beach:]

Okay.

[Gary Cavey:]

Any other questions, Chris?

[Chris Beach:]

No, that will do it.

[Gary Cavey:]

Thank you.

[Operator:]

And ladies and gentlemen, at this time, we’ve reached the end of today’s question-and-answer session. I’d like to turn the conference call back over to management for any closing remarks.

[Gary Cavey:]

Thank you all for joining us today. We’re looking forward to speaking with you next quarter. Have a great day. Thank you.

[Operator:]

Ladies and gentlemen, that concludes today’s conference call. We thank you for attending. You may now disconnect your telephone lines.