RF Industries, Ltd.
Q2 2022 Earnings Call Transcript

Published: 15 Jun 2022

[Operator:]

Greetings, welcome to the RF Industries Second Quarter Fiscal 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. . Please note this conference is being recorded. I would now like to turn the call over to your host, Mr. Todd Kehrli of MKR Investor Relations. Thank you. You may begin.

[Todd Kehrli:]

Thank you, operator. Good afternoon and welcome to RF Industries second quarter fiscal 2022 financial results conference call. With me on today's call are RF Industries President and CEO, Rob Dawson; and Senior Vice President and Chief Financial Officer, Peter Yin. Before I turn the call over to Rob and Peter, I’d like to cover a few quick items. This morning, RF Industries issued a press release announcing its second quarter fiscal 2022 financial results. That release is available on the company's website at RF Industries.com. This call is being broadcast live over the internet for all interested parties, and the webcast will be archived on the Investor Relations page of the company 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 21E 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 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 Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. 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 release. I'll now turn the call over to Rob Dawson, President and CEO, Rob?

[Rob Dawson:]

Thank you, Todd. Good afternoon, everyone. Welcome to our second quarter fiscal 2022 earnings conference call. It’s nice to not be doing this at 5

[Peter Yin:]

Thank you, Rob, and good afternoon, everyone. We are pleased to report revenue growth on both the sequential and year-over-year basis, along with improved margins and profitability. Sales in the second quarter were $21.5 million, up 27% sequentially from the first quarter and up 94% from the second quarter last year or up 64%, excluding Microlab sales. Our gross profit margin was 28%, up sequentially from 24% in the first quarter and up from 27% in the second quarter last year, which excludes the impact of the employee retention tax credit recognized in last year's Q2. Our revenue increase and improved gross margins for the second quarter reflect organic growth in all our divisions, along with the benefit of two-months of higher margin revenue contribution from Microlab. Excluding the contribution from Microlab, the business remains profitable even with the one-time charges of $637,000 that was recognized during the quarter. As we have noted previously, we continue to experience a series of cost headwinds, primarily related to the state of the supply chain that have put pressures on our margins. We have been taking steps to address these headwinds, which includes working with our customers on updated pricing, purchasing inventory at larger quantities, placing our orders much sooner, and at a locked-in price. We increased our inventory position significantly in the second quarter, up 42% or from Q1 and up 71% or $8 million from Q2 last year. The acquisition of Microlab accounted for 3.9 million of the inventory increase. We believe that inventory availability is extremely important in our markets, especially in times of supply chain volatility and as our sales are increasing. Our approach of targeted inventory increases allows us to better support our customers' needs and stay ahead of some of the delays and extended lead times we are seeing in similar product areas from some of our competitors. With these efforts, and a full quarter of contribution of higher margin revenue from Microlab in the current third quarter, we expect to see our gross margins continue to further improve throughout the remainder of the fiscal year. Turning to our balance sheet. Our cash and cash equivalents were $3.8 million and working capital was $27 million at the end of the second quarter. Our cash balance reflects the cash used in the second quarter to pay a portion of the Microlab purchase price and the additional one-time acquisition related charges. As I noted on the last call, a portion of our acquisition of Microlab, we secured low cost debt, which included a $3 million revolving credit facility and a $17 million term loan at ] interest. While this debt is something new to the company, we maintain a healthy cash flow and the acquisition of the Microlab business more than covers our monthly debt service. The company has not drawn from the available $3 million revolver. Adjusted EBITDA in Q2 was $2 million, up from adjusted EBITDA of $355,000 in the second quarter last year. As I mentioned earlier, the company incurred additional one-time charges of $637,000 in the second quarter. These charges primarily consisted of acquisition related, legal, and investment banker fees. Additionally, we continue the integration of Microlab and further consolidate our operations and physical manufacturing footprint. We anticipate other potential one-time charges that will ultimately allow us to achieve key cost synergies. Backlog was $27.6 million at April 30, on second quarter bookings of $18.8 million. As of today, backlog stands at more than $34 million. Turning to our outlook. As Rob noted, we are increasing our guidance for fiscal 2022 from annual revenue greater than $75 million to annual revenue of $80 million, which includes eight months of Microlab revenue this fiscal year. And with this expected 40% increase in full-year revenue versus fiscal year 2021, we continue to expect our profitability to continue to further improve throughout the remainder of the year with the goal of getting back to 30% gross margins and getting 10% of sales dropping through to adjusted EBITDA. That concludes my discussion. Operator, we are ready to take our first question.

[Operator:]

Thank you. First question is coming from Josh Nichols with B. Riley. Josh, your line is live.

[Josh Nichols:]

Yes, thanks for taking my question and great to see things are off to a strong start with Microlab. Just curious, so the company has bumped up its guidance and you've been pretty clear that you think the second half is probably going to be stronger than the first year. I'm just curious how much of that $34 million of backlog today expected to kind of flow through the income statement in the back half versus how much is going to be left for next year?

[Rob Dawson:]

Yes. Thanks, Josh. I appreciate the question. So, it's tough to tell, I guess, is the short answer. I think our general expectation with our backlog is something around 50% of it is actionable in the short-term, which is usually within a quarter or two. The other 50% could be longer than that. And again, those are kind of historical ways that we look at it. It's somewhat unprecedented for us to be sitting again at a backlog of above $30 million, you know as long as we have, you know we even want to drop to 27, that's still a gigantic number against our total sales. So, I think our expectation is that we can clearly, sort of see half or a little better of that going out the door. That doesn't get us to the numbers we need for the rest of the year, which is where our book and ship business comes in that generally doesn't show up in the backlog. You pick any snapshot in time and it's hard to capture that daily book and ship. So, I think we expect to enter even through the next couple of quarters. We expect to enter next fiscal year still with some nice backlog to go out, specifically against some of these hybrid fiber orders, as well as some of the project orders that we're seeing now around the larger venue and related builds.

[Josh Nichols:]

And then just a follow-up on that. Again, nice to see the win for the hybrid fiber from actually a new customer, right? You previously got a couple wins from one-to-one wireless carrier, I guess if you could elaborate a little bit on what's the genesis about that relationship? Is that something that you've been working on for a while? Does it come through the Microlab acquisition and opportunity to build on that?

[Rob Dawson:]

Yes, good question. So, this is one that our team has been working on for some time. It was a new relationship going back a year or two, but we have account management that maintains relationships and makes sure that we're uncovering opportunities for the entire offer. And when something is discovered, you want to bring in the right resource to help close it. This was not an opportunity that we were fully aware of even going back a quarter and a half or so. So, go back four or five months and I don't think we were nearly as clear on what this was – the potential was here. So, our sales team did a great job of staying in touch. It's the same sales team we've had in place with some of the shift that we made going back four or five years ago to get people aligned with specific accounts both direct and distribution. And so from that, uncovered some opportunities brought in the team that is experts in these product areas and in the go to market in those specific products, and led to some nice business. And so it wasn't a complete unknown for us, but I think it was one that, sort of shows the strength of our go to market that we're trying to cover both distribution and direct with the right resources and then collaborate the best we can to drag in as much as we can around our offer. So, in a perfect world, every carrier is buying every piece of our offer. That's not practical, but we want to make sure we're winning the things that are realistic for us and this is one that our track record of good performance in hybrid fiber with other customers, other big wireless carriers in the North American space have really helped us have a pedigree now in that world. And so that printed through in some nice new business for us.

[Josh Nichols:]

And then you touched on it during the call, but wanted to follow-up, so I know small cell deployments have been slower than for last year or so, but it seems like you are engaged with the customers there, maybe there's some early stage wins, but I guess what's kind of the revenue opportunity there for the back half and potentially next year and also if you could kind of hit on some of the direct air cooling opportunities as well or what you’re seeing in the market today?

[Rob Dawson:]

Yes. So, on the small cell side, it's getting tougher for us to nail a number on that. When we're talking, Schroff Tech integrated small cell cabinets, that's a much easier thing to quantify, which we're seeing growth from a few million bucks and sort of when we made that acquisition, we're expecting that to grow certainly into next year, but what is harder to quantify is a lot of Microlab products go into small cell deployments. Some of that goes through distribution. Some of that goes to neutral host kinds of companies. So, it's not always easy for us to tell, but I think we view the opportunity with that along with TruField, the new shroud that we launched. I think we'd be disappointed if we weren't able to start quantifying a small cell overall offer that's showing 30%, 40%, 50% kind of increases, which would put us up. We're probably doing all-in, I don't know, $12 million, $15 million, it's just, sort of extrapolating from our total results of things going into small cell kinds of deployments. We believe that that's one of those applications we could be doing a ton more certainly going into next year as we hope that spend increases a little better and normalizes. I think on the DAC thermal cooling side, we've got some things in the works right now, discussions with customers and future looking long-term projects that I would say the same thing. I'd be disappointed if that product line wasn't giving us $6 million, $8 million, $10 million a year in sales. It's certainly available in the market, but it's a significant go to market and sales exercise for us. A lot of those things as we've talked about we had to productize it to make it a little more understandable and marketable across all the different markets and channels. Now that we've done that, and had that in place and some marketing materials to go with it, I think the next generation product lines that match current needs certainly have that opportunity to put up those kinds of numbers for us. So, when we look at growth, those are two key areas obviously in our offer. That could be some big purchase orders and long-term projects similar to what we do on the hybrid fiber side. So, adding more of those kinds of opportunities should help smooth out some of the lumpiness in our quarter-to-quarter results.

[Josh Nichols:]

Yes. And then I guess any one or two big opportunities that may not be in the backlog that could be hanging out there for potential wins, just thinking more about Microlab? I know they do a lot of work with like outdoor venues and things that are clearly back in now that the COVID concerns have relieved. I'm just curious about the opportunity on that front.

[Rob Dawson:]

Yes. So that's a great one. I think when we look, when we closed that acquisition and we talked to trailing 12-month sales of, call it, $17 million, I think that was artificially low based on – there was really no project work in there for some of these venues. And I think along with those coming back and an enhanced go to market focus and strategy with existing Microlab customers, as well as some of the relationships that RF Industries had legacy wise, we absolutely see growth opportunity for the business. I mean, we just – in two months did 3.4 million, you annualize that it's a little over $20 million in the Microlab business area. I've said all along, I thought this was a normalized $20 million to $22 million a year