RF Industries, Ltd. (RFIL) Q3 2018 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the RF Industries Third Quarter Fiscal 2018 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this call is being recorded today, Wednesday, September 12, 2018. At this time, I would like to turn the call over to Mr. Todd Kehrli of MKR Group. Please go ahead.

Thank you, operator. Good afternoon and welcome to RF Industries third quarter fiscal 2018 financial results conference call. With me on today’s call are RF Industries’ President and CEO, Rob Dawson and Chief Financial Officer, Mark Turfler. Before I turn the call over to Rob and Mark, I would like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its third quarter fiscal 2018 financial results. That release is available on the company’s website at rfindustries.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’s website. I would like to remind everyone that on 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 the Section 21E of the Securities Exchange Act of 1934. When used, the words anticipates, beliefs, expects, 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 the 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 new 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 and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. I will now turn the conference call over to Rob Dawson, President and Chief Executive Officer. Rob?

(Audit Start 2:30)Thank you, Todd. Good afternoon, everyone and welcome to our fiscal 2018 third quarter conference call. We're pleased to report another very strong quarter. As you saw in our press release from this afternoon, we followed up our largest quarter ever in Q2 with our second largest quarter ever in Q3. Net sales and net income both showed big growth over Q3 last year, with gross margins and operating margins increasing significantly as well. Mark will provide more details on the financials shortly. But basically, if we hadn’t put up such an amazing a Q2, then we'd be calling Q3 a record quarter. Our biggest wins in the quarter came from the tier 1 wireless carrier market, where we're finding growth opportunities for our fiber and coaxial solutions. We're very well positioned with one of the tier 1 carriers and in varying stages of increasing our relationship with the others. In this market, we're benefiting from the spend related to network upgrades around 5G. So with that said, most of the growth that we've seen so far this year has come from 4G site upgrades and retrofits. We’re now receiving purchase orders related to true 5G site builds and expect those to continue in the coming quarters and years. I’ll talk more about 5G later on the call. Overall, our largest customers in the quarter were distributors as usual, which gave us growth in our core cable and connector business, though we also saw solid results from our OEM and industrial customers. Our distributors act as a force multiplier for us by allowing us to reach more than 5,000 unique customers every year. They are also a great way for us to manage credit risk and inventory carrying costs. As for our backlog, beginning in January this year, we started disclosing our order backlog, which we believe is a relevant data point to share with our investors. Our focus on booking new business and building a backlog has given us the ability to see out [ph] a few months in the business where we historically haven't had that. At the end of Q3, our backlog stood at $8 million. However, since the end of Q3, we received additional new purchase orders which bring our total backlog to a very healthy $11 million. While it’s not our practice to provide forward-looking numbers, in this instance, I think it helps provide some visibility into what can otherwise be a hard business to predict. It’s tough to measure a company like ours on a short term, quarter-to-quarter basis since we're going through a pretty significant growth cycle. I said in my last call in June that things can be a little lumpy as we evolve our sales and market strategies. We're working on a long-term platform for profitable growth, and as a result, there may be some inconsistent quarters in the short term. We’re working hard to smooth out our results that provide a better long-term view of the business. But right now, this really is about timing. The backlog increase since the end of Q3 underscores this. Timing is really everything for us right now. The good news is that we're proving we can make money at lots of different levels of revenue by controlling G&A and driving solid gross margins. So even as revenue quarter-to-quarter might vary, we can still be profitable. The first nine months of this fiscal year have been quite a ride. As we go through this evolution of our business, we've clearly seen some nice growth with our year-to-date revenue more than doubling and our year-to-date net income at 5.4 million through nine months, up from $77,000. Just over a year ago, when I joined the company, we began a turnaround in the business that started with us defining a general direction we wanted to go. That direction involved both transforming the culture of the company to better include the four historical divisions into operating as one company, and better defining our addressable market segments and the best way to service those segments. We knew we wouldn’t get it 100% right as we moved out, but it was important for us to get moving and increase our pace of execution while being thoughtful about our approach, yet prepared to pivot along the way as we learn more. The first step was to clearly identify who we are, what value we offer, what market segments we're targeting, and how best to go to market. So in simple terms, we design, engineer, and manufacture cable assemblies, jumpers, and wiring harnesses. They may be made from varying kinds of coaxial cable, fiber, copper, or a mix of multiple of these materials. We’ve built a majority of our assemblies in the United States using the materials and brands defined by our customers. We're also a manufacturer of several of the passive components used in the manufacturing of jumpers and cable assemblies. We do sell these products as standalone products as well. These are things like connectors, adaptors, splitters, couplers, [indiscernible] cable and others. As I’ve mentioned before, our core value proposition is about quality, speed, flexibility, and customer service, where we manufacture incredibly high quality products with a fast turnaround time and a high attention to customer needs and details. We deliver exactly what the customer wants, and we’ll customize for their requirements, including things like labeling and testing. Amazing customer experiences meet the repeat long-term business relationships and lots [ph] of referral business. I feel we do these things better than anyone in this space, and we're very focused on outperforming our competitors. I'm confident this is how we differentiate ourselves in the market, and I believe this is why we're growing sales and gaining market share. While historically we’re in a fast turn business, where we build and ship out customer orders in a matter of few days, we're heavily focused on building a portion of our business around longer-term projects and the relationships that go with them. That will allow us to better manage our workload and supply chain. We’re seeing success with this transition, largely driven by our ability to gain spec position in customer projects and being included on customer bills of materials. Additionally, as we increase our influence over these bills of materials, it will allow us to include more of our own manufactured components. This approach along with better managing our workload and supply chain is producing better gross margins and operating margins. The directional move for us has also helped us learn a lot about our company and our market opportunities. We found through this process that some things are working very well. For example, as I just discussed, our strategy to influence end users to include our products in bill of materials, applying [ph] on the best channels to service those customers has produced some solid growth in sales. We will continue to leverage and exploit new opportunities that have come through using this approach. We've also found that by beginning to move toward a one-company culture and operating structure, we see possible growth and cost synergies as well as an opportunity to better leverage the talents of our team across the entire business. (Audit End) On the other hand, we've also found some things that aren't working perfectly and might not be a great fit for us going forward. Because of this, we may make decisions to exit certain market segments, product lines or areas of business in the future. Overall, the directional move in our acceleration has shown us what’s possible, as we leverage our core value proposition and capitalize on the opportunities we’ve uncovered. Now, let me take a minute to discuss where we expect to focus in the market in coming quarters. We obviously are going to continue to work hard to increase sales, improve our gross margins, maintain cost controls, as we build the growth culture as one company. Our solid results show that some of the growth strategies we’ve undertaken are clearly working. As I mentioned earlier, the majority of our growth over the last year has come from large OEM customers and customers in the tier 1 wireless carrier ecosystem. In the tier 1 space, I often get asked about 5G. While I still believe that we're in the infancy of the 5G spend, our growth in the last year in the carrier market was actually more related to 4G upgrades as the interim step to 5G as I mentioned earlier. I do believe that we're positioned incredibly well with some carriers as the true 5G wave begins. The bulk of 5G for us is still really yet to come. It's important to note that 5G is about coverage capacity as much as it is about network speeds. This densification of the network will drive demand for traditional macro side upgrades, but also an increase in distributed antenna systems and small cell deployments. So while both our fiber and coax businesses will benefit from the macro site builds, we’re also positioned extremely well to experience growth in our traditional coaxial assembly and connector business in the densification process. A couple of additional points. In our traditional run rate cable and connector business, we grew 6% in Q3 over the prior year, which is a testament to our distribution sales approach. We expect that growth to continue. In our OEM business, we service most of these customers directly due to the highly customized nature of these cable assemblies and wiring harnesses. We continue to leverage our longstanding relationship with these blue-chip customers to be part of in our recurring long term business. The comments on the market that I just covered really address organic growth in the past year and our focus areas to keep that going. On the inorganic side, I continue to review some M&A deal flow and while I have nothing specific to discuss today, I expect that in coming quarters, there will be some possible acquisitions to further diversify our customer base, our product set or market segments, along with adding talent to the team. As we focus on further growing sales, leveraging our distribution channels and maintaining strong margins and profitability, we're optimistic about the rest of the fiscal year and our continued momentum. We appreciate the partnership with our customers and suppliers, the hard work of our employees and the support of our shareholders. In my first year at RF Industries, I'm pleased with the improvements we've made to the business so far, but this was only a start. Our solid financial results illustrate our strategy for the long term is beginning to pay off. We're executing on a good, simple strategy to outwork everybody else in a similar space and we're seeing the positive results of our efforts. With our focused areas and hard work of the team, we expect to again post significant growth in sales and earnings compared to the prior year for both the current fourth quarter and the full current fiscal year ending October 31. With that, I'll now turn the call over to Mark Turfler for a detailed review and discussion of the financial results for the quarter. Mark?

Thank you, Rob and good afternoon, everyone. Our second highest ever quarter sales of $13.9 million increased 77% or $6 million from the prior year quarter. The majority of the increase was from our Custom Cabling segment, highest shipments of custom fiber optics cable, copper cabling and other products. Gross profit for the quarter increased by 106% from a year ago to 4.6 million, while gross margins improved to 33% from 28%. The year-over-year increase in gross margin was primarily due to growth in sales, which had the effect of spreading certain fixed manufacturing costs over a larger revenue base. Selling and general expenses were $2.1 million, an increase of $300,000 over the prior year quarter, due to higher compensation costs related to the strong sales gains. Despite this increase in expenses, our selling and general expenses as a percentage of sales declined to 15% of sales, compared to 23% of sales in the third quarter last year, reflecting the company's increased operational efficiencies. Our second highest ever quarter net income of $1.7 million or $0.18 per diluted share increased significantly from net income of $192,000 or $0.02 per diluted share in the third quarter of last year. Net margin for the third quarter was 13% compared to 3% in the third quarter last year. Turning to the first nine months of fiscal 2018, I will touch on some of our results that I believe are worth highlighting. Net sales were $47 million, the highest ever sales for the first nine month period, an increase of 111% or 25 million from the same period last year. Gross profit increased by $10 million to $16 million, while gross margins increased to 34% from 27%. But both selling and general expenses increased $2 million, as a percentage of sales, declined to 17% of sales from 25% of sales. Net income was 5.4 million or $0.57 per diluted share, the highest ever net income and EPS for the first nine month period compared to net income of 77,000 or one penny per share for the same period last year. The decrease in our effective income tax rate for the first nine months of fiscal 2018 was obviously due to the tax act and the benefit of R&D tax credits. The company has invested a majority of the savings that we realized from the tax act into our amazing team with an additional chunk spent on key resources to improve our market position. Turning to our cash flow and liquidity. We generated $6 million of cash from operations for the nine month period or $0.60 per share, while also providing our shareholders, a return on their investment of a $0.06 per share cash dividend. Total cash and cash equivalents were nearly $12 million at our most recent quarter end. As previously mentioned by Rob, our current backlog stands at approximately $11 million, which has largely been what we had at the beginning of our third quarter. That concludes my discussion. I’ll now turn the call back to Rob.

(Audit Start 17:00)Thanks, Mark. As we’ve discussed, we achieved another strong quarter in Q3, the second best in our history with continued strong sales growth, double-digit operating margins, strong cash flow, and increased net cash balance and earnings per share of $0.18. We also declared our 33rd consecutive quarterly dividend. As we move toward the end of our fiscal year, we expect to again post significant growth in sales and earnings compared to the prior year for both the current fourth quarter and full fiscal year. With that, I’d like to open the floor to questions and we're ready to take our first question.

[Operator Instructions] We’ll take our first question from Orin Hirschman with AIGH Investment Partners.

Hi. Congratulations on the results.

Thanks, Orin.

In terms of the 5G build out, any thoughts as to when that really begins to gain steam for you? I know, it started to trickle in just a drop, but really hasn’t had the big effect yet. There has been lots of announcements publicly, which is a lot different than six months or nine months ago, and there's also been -- it appears at least to us on the base case inside in terms of standardizing hardware and software upgradability, as all of these announcements I think today or yesterday in terms of four cities coming from one of the majors, when does it begin to really become more of a business and flashes [ph] to the state business for you?

Yeah. Good question. So, it's a hot topic for us. Obviously, we've been talking about the impending events of 5G for some time, and yeah, it’s not only in the last week, but in the last quarter or so, we've learned a lot more about the various topologies that the different carriers are going with from a design perspective. So for us, I think, we're just starting to see the beginning of it. Some purchase orders that have rolled in, in the last couple of months are specifically related to 5G, and we can identify that. We can't always tell when a product is being purchased for 5G necessarily. But in this case, we can and we know that they are products that we expect in specifically for 5G with one of the carriers. So, what we're seeing is start, it seems like it’s picking up steam at this point, but I wouldn't say that we're in the full throes of the excitement around it just yet. It is kind of just getting going over the last couple of months after a lot of conversation about it over the last few quarters.

Great. And a special note of thanks on the gross margin, even with quarter-to-quarter lower sales, the gross margin was quite incredible. Is there more room to go there?

Yes. So, you're welcome first on that. I’m glad that made you happy. We think they are -- being in the low-to-mid 30s, I think, it is a good spot for us at the moment. I think if we can do better at some of this longer-term business where we can take some cost out of the supply chain, both from a supplier perspective as well as just managing our workforce and our workload a little more easily, a lot of that hits on the gross profit line. So that'll help. And then the last piece is, the better we do with getting influence into a bill of materials where we can include more of our specifically manufactured products that are our brands where we have higher margin on those products. If we can include more of those in our bill of materials versus using someone else's materials, that also gives us some upside on that. So I think we're -- I feel pretty good about the low-to-mid 30s, especially compared to where we were a year ago. I think, there may be a little bit of upside, but it’s going to take some work for us to be able to make that happen. So I think as far as expectations going forward, I think the last couple of quarters are kind of a good indication of where we see margins kind of maintaining.

Okay. And just one other question, if I may, on the acquisition strategy. As you’re clearly looking to things that are anti-dilutive as well and especially with the cash generation becoming more steady here and significant and obviously allowing you to have borrowing power that the company never had before, can it be done using primarily borrowed fund/available cash as opposed to having to use stock?

So I certainly think it can. I mean, the good news is not only do we have a solid cash position that continues to increase, and with our cash flow the way it is, we expect that to keep going up. At the same time, we have no debt. So that allows us a lot of flexibility and deal structure of how we might want to finance something. With that said, stock is at a solid number, and it could be helpful in doing some deals, but I don't think it's necessarily required. So it's really going to come down to what is the deal and who is it that we're specifically talking about sidewise and what structure makes the most sense. But I think your point is a very good one and I don't think necessarily that stock is required, but it's really going to depend on a specific situation.

[Operator Instructions] With no further questions in the queue, I would like to turn the call back over to management for any additional or closing remarks.

Great. Thank you, Ann. I appreciate that. Thanks everyone for your interest and support in RF Industries. Mark and I look forward to reporting our fiscal 2018 fourth quarter and full year results in December. Thanks for joining our call. Have a great day and we look forward to talking to you soon.

This does conclude today’s conference. We thank you for your participation. You may now disconnect. (Audit End)