RF Industries, Ltd.
Q2 2021 Earnings Call Transcript

Published: 14 Jun 2021

[Operator:]

Greetings. Welcome to the RF Industries Second Quarter Fiscal 2021 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 will now turn the conference over to your host, Jim Byers of MKR Investor Relations. Thank you. You may begin.

[Jim Byers:]

Thank you, Operator. Good afternoon. And welcome to RF Industries second quarter fiscal 2021 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.

[Rob Dawson:]

Thank you, Jim. Good afternoon, everyone. Welcome to our second quarter fiscal 2021 earnings conference call. I’d like to start with a brief review of our second quarter results and discuss what we’re seeing now and expects going forward before returning the call over to Peter to give more commentary on the financials. We are pleased to report sequential growth in both sales and profits in the second quarter. Sales for the fiscal second quarter came in just above $11 million, a sequential increase of 11% over the first quarter and up 6% from the prior year second quarter.

[Peter Yin:]

Thank you, Rob, and good afternoon, everyone. In Q2, we started to see increased demand and positive momentum, as business activity in our markets is starting to return to more normal levels. Sales in the second quarter at $11.1 million were up 11% sequentially and up 6% year-over-year. The increase is primarily related to the project revenue from the Tier 1 carrier customer for our hybrid fiber cable offering.

[Operator:]

Thank you. Our first question is from Aman Gulani of B. Riley Securities. Please state your question.

[Aman Gulani:]

Hey, guys. Thanks for taking my question and congratulations on the hybrid fiber orders, really good to see those starting to flow in. I wanted to ask about the hybrid fiber first. So what’s the expectation for gross margins going forward, maybe in the back half of the year and then into next year with some of these hybrid fiber? Again, I am sorry, should be some of these are hybrid fibers to your tower customers?

[Rob Dawson:]

Yeah. I think. So appreciate that, Aman. Thanks for the question. I think there’s two things probably in there that, that are important. One is that the profile of margins on that specific product line won’t be drastically different kind of than our blended margins, the way we’ve been flowing. There is a wildcard in there, which is, we’ve got everyone in the world experiencing same kinds of supply chain stuff. We’re handling that pretty well. But also the price of copper is something to keep an eye on within that. So we don’t expect a significant change to our margin profile based on that. But when you add that product line kind of to the rest of our mix, we still expect the same kinds of improving gross margins, as we’ve been talking about up into the high 20s trying to get to 30. And we think with a better mix over the next year plus some of the higher margin stuff, we can push up into the 30s. But I think that the summary is that product line will be different, almost cable, the cable, there’s different lengths, there’s different breakouts within them, a longer cable may have a lower gross margin percentage if there’s a lot of moving parts in there. But in general, we expect it to be right in line kind of with our overall corporate margins.

[Aman Gulani:]

Okay. That’s helpful. Thanks. And in terms of inflation, you mentioned, copper prices are increasing, are you able to pass those prices increases on to your customer?

[Rob Dawson:]

Yeah. So the -- really the place that we see that has an impact is more on the hybrid side than almost anywhere else. I mean, we see -- we have copper involved in a whole bunch of different products that we sell. Most of those it’s a smaller amount. The hybrid fiber have a really significant piece of -- multiple pieces of copper in each one of those cables. And I think our team did a really good job going into this potential piece of business of quoting fair prices and making sure we were taking into account the variability of how copper was shaping out. So part of the discussion there is making sure we place orders early enough to lock in some real pricing. So I don’t anticipate that we’re going to have to revisit customer conversations necessarily around pricing. I think we’ve given fair pricing that takes into account the price of copper. Where we need to take increases on some other product lines, we’re always reviewing that. So that’s part of kind of our standard operating practice. I don’t think we’re going to see significant increases, but we’ve taken some price increases over the last couple of quarters in different pockets of our business as it is to try to overcome some of those price increases that or cost increases, I should say, that we’re experiencing.

[Aman Gulani:]

Got it. That’s helpful. And then good to see that you got another Tier 1 wireless customer. What’s the sort of expectation from that customer? Do you expect to receive more orders from that customer maybe later this year or into next year?

[Rob Dawson:]

Yeah. So I think the short answer is, I don’t know. The slightly longer answer is, we certainly had that -- there have not been enough orders placed for that customer to build the network that they’re talking about me. I mean, our infrastructure would require a significantly more of that product type to build out the infrastructure they want to build. And what we know we’re one of multiple suppliers. We think it’s really on us to perform which we’ve been doing. And we believe if we keep performing and we’re happy that we’re receiving these size orders, but our team is very focused on making sure we can get things out the door in the right timeframe to make the customer happy and we’re hopeful that that will lead to more future orders. We don’t have definitive knowledge of what that might look like. But that’s pretty standard and having been through three or four major build cycles, that’s kind of how it goes. You get some orders, you need to perform to have the opportunity to keep getting them and the better you do, the better chance you have for more upside. So we’re hopeful on that. But I -- as soon as we know, obviously, we’ll let the world know. But at the moment, we’re fulfilling the ones that we have over the next several months and are hopeful we can get some more.

[Aman Gulani:]

Excellent. Okay. And just last question for me. Any updates on the -- on DAC deployments? I know your large distribution customer Tesco is seeing a bit of a lag in their DAC backlog. Are you seeing something similar in terms of DAC deployments?

[Rob Dawson:]

Yeah. So, I think, the standard distributed antenna system stuff in normal sized buildings has started to come back here and there. I think the ones that really make a dent in a backlog or have a bigger impact are stadiums and large venues. We have seen a couple of stadiums come back. They were projects that were slated to happen in, I will call it, late spring last year, that obviously stopped during the craziness that we all thought through there. So we’re seeing some of those come back. There’s a couple of them that have already some orders have been placed and we’ve benefited from some of those in our bookings. The full impact of all the stadiums and large venues coming back. We haven’t seen all those yet. But I certainly think we’re on the verge, especially as various sports seasons and that’s the traditional way to build one of those networks is when there’s not people in the stadium every day. So we’re happy to see people showing up in stadiums again. I think we’re seeing full stadiums in a lot of locations and multiple sports. But I think as we go into the fall, NFL season and then as baseball wraps up in the fall, also basketballs wrapping up here in the next month or so. I think we expect to see some of those stadium venues come back, which will certainly have an impact on us too.

[Aman Gulani:]

Thank you, gentlemen. I will pass it on.

[Rob Dawson:]

Thanks, Aman.

[Operator:]

Our next question is from Hal Granger of Great Quarter Research. Please state your question.

[Hal Granger:]

Hi, Rob and Peter. Congratulations on a lot of good things going on at the company. I see your stock in after hours trading is -- is trading up, suggesting that the market likes what they’re seeing in your release.

[Rob Dawson:]

That’s good. Thanks, Hal. Appreciate that.

[Hal Granger:]

I had a question about your acquisitions going forward? What -- are there certain areas you’re looking at? Are you looking to add to existing capabilities? Are you looking for additional capabilities? Where are you -- what are you thinking along those lines?

[Rob Dawson:]

Yeah. So I think -- appreciate the question, Hal. So I think, probably two things to that. One is, sticking with kind of things that I’ve stated in the past. We like passive components. So things that help fill out a build of materials in the project areas and solution areas where we do work today. So opportunities to fill in those gaps, things like power, antennas, cabinets, enclosures, are all areas that we benefit from and selling our solutions today and it may make sense for us to have a little more vertical control over that supply chain. So I think that’s one. The other piece is, we really like our distribution channels also. And so products that are distribution friendly and can help us gain some more share or some more access into our distribution. Customers and their customer bases are certainly things that we’re looking for. With that said, I’m never going to turn down a good deal on a Cable Assembly manufacturing scenario, but I feel like we’ve generally covered -- from a Cable Assembly perspective, we kind of have the complete offer that we need today. There may be a couple of pockets here or there that I would look at. But I think we -- we are showing our organic growth on the Cable Assembly side whether it’s fiber or copper or cox investing there to help grow that, that’s generally not a place that I’m looking at acquisitions, though, I do see a lot in that space and there may be one that turns our head at some point. But as of today, it’s kind of filling in other areas of the solution.

[Hal Granger:]

Okay. Thanks. What size are you looking at in terms of acquisition -- in terms of revenues of acquisitions?

[Rob Dawson:]

Yeah. So I think we’d like to go larger than what we’ve done in the past, doing deals in the $5 million, $6 million, $7 million, $8 million in sales levels. It’s hard to find synergies there, number one, and number two, we’re sitting on a balance sheet with $15 plus million in cash with more expected in incoming quarters. So I think when we look at that, we’re focused more in the $20 million to $30 million in sales kind of range. We think that’s a realistic size for us and nicely accretive to current sales levels and the improvement we have going on. We got to get on the market and get some more scale to get out of some of the noise that happens when you’re putting up sales numbers like this. It’s nice to get back to organic growth and that’s terrific. But we’d like to step that up a little bit. And if -- look, if we find something creative and interesting and different that’s out there that falls even beyond those guidelines. That’s great. I think our opportunity is huge with the balance sheet that we’re sitting on right now.

[Hal Granger:]

Okay. Thanks. Let me ask you a question that’s maybe a little more difficult and that is incentive compensation. Can you talk about, I am sorry I know that’s a Board consideration as far as incentive for you to Peter. But can you talk about the incentive compensation philosophy and then what -- then -- here’s an even more difficult question. What it might be prospectively in the future, if you’ve had some additions to the Board?

[Rob Dawson:]

Sure. I’ll take a stab at that as best I can. I think that the -- from an incentive comp perspective, I feel like we’re -- we put together a budget that we think is aligned with what shareholders would want to see and we are measured against that. So there’s a mix of revenue expectations, but most of it is on profitability and EBITDA expectations. And so Peter and I and the rest of the leadership team are tied to the same kinds of expectations that we want to put out from an earnings per share and a profitability perspective for shareholders. So it’s right in line with that, both whether that’s cash and/or equity, those things are aligned perfectly with what we think are the right values for our shareholders in returning growth. As far as future looking, I don’t think that’s going to change. I am -- and I am not someone that fights against having goals and then needing to achieve them to be able to, once you hit those milestones you get paid. If you don’t, you don’t get paid. I mean, that’s as simple as that. I’m a recovering sales guy. So I still function very much with a goal based kind of scenario and our entire team is built around that and the entire structure of the incentive comp is built around that.

[Hal Granger:]

Great. Thanks very much.

[Rob Dawson:]

Thank you, Hal.

[Operator:]

Our next question is from John Fichthorn of Dialectic Capital. Please state your question.

[John Fichthorn:]

Yeah. Hi, guys. Thanks for the time and nice quarter. Couple of questions. First, what’s the duration of the $22.8 million in backlog roughly? And are there any components or anything in the supply chain shortage that holds up that shipment that you’re concerned about?

[Rob Dawson:]

Yeah. Hey, John. Thanks for the questions. So two things, as far as how long that backlog is going to last? Well, I mean, short answer is, we don’t specifically know. We certainly think it will be drawn against over the next two quarters to three quarters, probably more like three quarters. So we started to get into the end of the calendar year and maybe even into the beginning of next calendar year. That can change. I think we’ve seen that the past with our results that customer can draw in and/or push out expectation on delivery of those orders. But kind of what we see today, we think there’s another, call it, three quarters-ish worth of shipment time could be a little more depending on how that goes. The supply chain side of it, that the one piece of it we talked a little bit about is copper. We can procure copper. We just got to make sure we control pricing on that and keep it under control, which I think we’ve done. And then some of the pre-finishing work on the hybrids in particular is done by outside partners, so making sure that we’re placing orders on them for the right volume, quantity, specific styles. Staying ahead of that, I think, we -- the team in Long Island has been doing a great job of staying ahead of that and making sure that we’re in line where we need to be, getting the orders that we need to. We haven’t seen massive supply chain issues. But I think the entire world, especially in materials like this are seeing delays. So, we’re seeing a week here or week there. Nothing at this point says we can’t meet the timeline of the next three years quarters for the customer to draw against that, though.

[John Fichthorn:]

So that backlog though primarily is driven by customer demand on timing, not your inability to ship?

[Rob Dawson:]

That’s right. Yeah. And we’ve been performing very well for this customer, and frankly, for all of our customers. But in this case, for this specific customer, we’ve been performing very well within the guidelines of what they expect and we think that’s going to continue.

[John Fichthorn:]

Okay. And kind of with the growing backlog, it would seem to me like you might have kind of a higher level of ability to guide and your guidance still seems kind of vague, right? It’s directional. Yeah, it’s got some year-over-year growth. But can you give us any more specifics either about how you feel on the next quarter of the shape of the rest of the fiscal year or why you’re uncomfortable doing that? I’ll take any of them.

[Rob Dawson:]

Yeah. Sure. So the why I’m uncomfortable part really comes down to timing. It’s -- we’ve been burned both in a good and a bad way in the past around, saying, specific, the next quarter, we’re going to see X. We had a $20 million quarter in our second quarter of 2018 and that is not at all where we expected it to be, when we had the call and gave guidance. It ended up being significantly higher. And then the next quarter after that was lower than expected, because we had taken so much that we thought was going to go in that quarter and pulled it forward. So we try to give, I think, as much helpful directional guidance as we can. We’re -- last year we did low $40 millions in sales. We certainly expect to exceed that even though we’re sitting at $21 million through two quarters, okay. So, again, that’s very general kinds of things, but we’re expecting Q3 to ramp from Q2 and Q4 to ramp from Q3, where we get back to some pretty significant year-over-year growth. That coupled with the idea that, how much it is backlog is going to go out the door and kind of what we’ve established as a base run rate. I mean, last year’s results of $43 million, whatever it was, it’s not going to be worse than that, right, in any. So that was the worst operating environment we’ve experienced. So you start layering in these growth quarters of another few million bucks in Q3, another few million bucks on top of that in Q4. I have a hard time saying exactly what that number will be. But when we kind of look at it, we’re thinking, okay, what do we do $13 million in Q3 and $15 million in Q4. Those are the kinds of ways that we look at the numbers.

[John Fichthorn:]

Okay. And are there a couple of kind of long shot upsides out there that you’re shooting for that might come in that you haven’t kind of worked into your budget? Like, do you have some, maybe even not so long shot, just talk to us about what the upsides? And also downside risk potentials, if there’s some of those that keep you awake at night?

[Rob Dawson:]

Sure. Yeah. I think -- from -- we’re coming off some comps that are pretty bad from last year. The numbers got really rough in the middle of the year. So, where -- when we look at downside risk, I don’t see much. I think more from -- we get through the rest of this fiscal year, it starts to become how do we grow off into a considerably bigger number next year. That’s -- there’s not downside risk to that, but it’s -- where are those numbers going to come from? If I look at our pipeline in general and some of the opportunities we have, whether it’s DAC or small cell or even some other OEM customers that we’re doing some work for. We have -- I don’t know what dozen multimillion dollar opportunities in the pipeline that have nothing to do with the hybrid fiber that we’re already talking about and we are hopeful that there’s more of that as well. So I think the upside is really driven by the big CapEx opportunities around the 5G build out, whether that’s on the macro side with the hybrids, small cell getting some momentum again and/or the DAC cooling solution benefiting from all this additional equipment out there. I think we’re just seeing a general return to kind of normal operating environments, which gives us a tremendous amount of comfort in our opportunity to grow. So we can certainly come in with bigger numbers than what I just laid out. Timing works into that and if any of these large million dollar plus deals come in, that’s a big number for us that can certainly swing us to the upside.

[John Fichthorn:]

Super. Thank you very much for that color. Appreciate it and good luck.

[Rob Dawson:]

Thanks, John.

[Operator:]

Our next question is from Aaron Martin of AIGH Investment Partners. Please state your question.

[Aaron Martin:]

Hi, guys. It’s glad to be talking about growth again. My question is on gross margin, as we get back to numbers we haven’t seen in a long time, $13 million, $15 million quarters or even larger as we look into next year. How do we think about gross margin and how much of that is volume dependent versus structurally just -- you’re not going to get too high? Can we -- if we’re hitting upper teens, can we start seeing a 30% -- three in front of the gross margin? How should we think about that as we’re seeing growth again?

[Rob Dawson:]

Yeah. Thanks, Aaron. Appreciate that. I think you’re looking at it right. I mean really the two things that move our gross margin is sales volume. Once we’ve fully absorbed labor, we can -- lots of good upside coming off once we’ve done that. And you’re seeing -- even at the $11.1 million in sale we just did, you’re kind of seeing where that, we start to see a little pick up in gross margin. So you get up into the teens, we’re going to pick up some percentage points there. The other is mix, we haven’t seen the full benefit of some of the higher margin product areas that we have, whether that’s small cell or DAC printing through in our numbers just yet. Those are products. Well, we made that acquisition in November of 2019. Starting to pick up some momentum and then it came to a grinding halt. So we haven’t really experienced any of our results, the potential upside of that higher margin mix of product areas. So we certainly think with higher sales numbers. Yeah, 30% starts to become something we look at, especially when you add the higher margin mix items in there.

[Aaron Martin:]

Okay. Excellent.

[Rob Dawson:]

Thanks, Aaron.

[Operator:]

There are no more questions at this time. We have reached the end of the question-and-answer session. I will now turn the call back to management for closing remarks.

[Rob Dawson:]

Thank you, Hillary, and thanks everyone for joining our call today. We appreciate your support of RF Industries. Peter and I look forward to reporting our third quarter results in September. Thank you again and have a great day.

[Operator:]

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.