RF Industries, Ltd. (RFIL) Q2 2022 Earnings Report, Transcript and Summary

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. [Operator Instructions]. 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.

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?

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 5:30 a.m. Pacific Time for a change. I like to start with a brief review of our second quarter results and then discuss what we are seeing now in the market and what we expect going forward before turning the call over to Peter to give more commentary on the financials. Starting with the second quarter, we’re pleased to report strong revenue growth on both the sequential and year-over-year basis. Sales for the quarter came in at $21.5 million, a 27% increase sequentially from Q1 and a 94% increase over the second quarter last year. This growth reflects organic increases in both our revenue and margins in all of our divisions, along with the benefit of two-months of higher margin revenue contribution from our successful acquisition of Microlab that we completed during the quarter. On the bottom line, we reported GAAP net income of $503,000, non-GAAP net income of $1.3 million, and adjusted EBITDA of $2 million. We also had some one-time acquisition related charges the second quarter that Peter will share more on later in this call. We're pleased with the organic sales and margin improvement we generated in our legacy business during the quarter. At the same time, we're just a couple months into our integration of Microlab and are excited with what we're seeing. This acquisition is exactly what we thought it would be, and is a perfect fit with what we do both financially and with our business strategy. Microlab contributed two-months of sales to our second quarter generating $3.4 million, which on an annualized basis is more than $20 million in revenue. This is certainly in-line with our expectations and before any major new initiatives that we believe will help drive additional revenue. And they were immediately accretive to both our gross margin and bottom line. We're excited about the expanded customer opportunities we're already seeing with our broader product offering and the expanded relationships that Microlab brings. Microlab’s diverse and complementary product portfolio gives us access to a new set of high performance network operator approved products that we can sell through our growing customer base and through our extensive distribution channel. They also strengthen our market positioning and enhance our customer partnerships bringing additional strong direct and distribution relationships and giving us a higher percentage of the bill of materials in carrier DAS and small cell applications. Microlab has a strong brand and customer list, which provides complementary large and mid-tier carrier customers and enhances our value proposition. The combined company is well-positioned to expand market reach by deepening these existing relationships through cross-selling, while also establishing in-roads with new customers to provide additional scale, improved margins, and further revenue growth. Microlab products are approved by all the carriers and recognized by name and brands. In many cases as the de facto standard on [bill of materials] [ph] for venue and small cell deployments. This enables us to not only sell more Microlab products as these projects continue to expand, but to also engage earlier in the planning process with the customer and be a part of the discussion sooner, which we believe will lead to additional opportunities for our legacy and other products built into these bill of materials, particularly for venue and small cell deployments. A lot of Microlab’s products go into small cell shroud and cabinet deployments, which matches perfectly with our strategy and approach with our Schroff Tech small cell products. As we engage in conversations with shared carrier accounts, we're getting a very positive reception from customers when they learn of all the additional products they can get us. We think by leveraging the Microlab brand and being involved earlier in the carrier planning process, we can take our business to the next level by accelerating sales as we integrate our go to market teams and overall sales strategy. Now, let me quickly comment on our existing product areas and market segments and how they performed during the quarter. As I noted earlier, we saw revenue and margin improvement in all of our divisions in the second quarter. Our strong core distribution business continues to perform well and grow. Our RF coaxial cable and connector products and our C-Enterprises faster and fiber products together make up our primary offer sold through distribution. Both of these major product areas showed meaningful year-over-year growth during the quarter, and we expect to see continued steady growth from these two areas throughout the remainder of our fiscal year as we continue to build this baseline of core revenue. Our custom cabling segment, including the Optiflex hybrid fiber products, continues to have strong sales results. As you saw in our press release, we're excited to announce yesterday that we received a multi-million dollar order from a new customer for our hybrid fiber solution in support of a new North American wireless carrier 4G and 5G infrastructure build. This new order also represents a terrific collaboration between the various RF Industries sales teams. As our distribution sales team and our custom cabling technical sales and engineering teams all collaborated to deliver the right solution for this customer. This underscores the strength of our go to market strategy where we want to interact directly with the end customer to include us in the bill of materials and then make it as easy as possible for that customer to purchase through whatever channel makes the most sense. This is the first time in company history that we have multiple concurrent large customers deploying our Optiflex hybrid fiber solution in next generation wireless builds. We received more than $7.5 million in total orders related to this new customer for hybrid fiber, bringing our backlog to more than $34 million as of today. These orders from a new customer are another great win for our Cables Unlimited in Long Island and our Optiflex hybrid fiber solution continues to gain market share in the North American wireless marketplace. With this unique offer and strong value proposition in the market, we believe we're well-positioned to benefit as the overall spend on 4G and 5G deployments continues to increase. Our previous Tier 1 wireless carrier customer continues to draw against their existing purchase orders, and we had a solid quarter of shipments with them in Q2. We also continue to receive new smaller orders from them, including both in the second quarter and already in the third quarter. In addition, in other product areas, we're also finding brand new business with some of the large connectivity manufacturers in the cabling space that have come to rely on us to help augment their current offering. These companies appreciate our specialty in building faster and jumpers and assemblies in both the coaxial and fiber product areas. We're building certain products on their behalf that fit perfectly with the way we're structured and are right in our wheelhouse. This business is expected to represent about $2 million to $3 million or more in future total additional revenue per year and is becoming a bigger piece of our total business. So overall, our custom cabling continues to be strong and is a healthy piece of our business overall. And with our broad set of specialty products and value proposition of fast turn very specialized cable assemblies, we're finding additional new opportunities with our increased sales and marketing efforts to scale our business through expansion with our existing customers, as well as new business with some new mid-tier players beyond the carrier market. Turning to our small cell and DAC thermal cooling offerings, these continue to be huge opportunities that we expect will increase sales this year and next. The pipeline continues to build and we have a strong backlog of orders. We have a product actively shipping to several key small cell players, as well as ongoing discussions regarding future deployments with others. We've also been engaged in discussions with Tier 1 carriers and others about our DAC offerings and expect to see those conversations come to a head in the next quarter or two. Small cell continues to be strong and a healthy piece of our business. While small cell spending is not – is still not at the full level we expect it to be for all the reasons that we've talked about in the past, many of the projects that we've seen hanging out there for a while have started to come through and we're seeing some sales from those. While we're also winning project work with venues in large stadiums. And as I mentioned earlier, Microlab also has a large bill of materials in small cell and has been seeing this work increase too. So, we're winning some great small cell business and see some significant upside going forward. On the topic of small cells, last month we launched our innovative new small cell concealment solution called TruField, which expands our market opportunity with a proprietary new product we can sell to our growing customer base of wireless carriers and neutral host providers to meet the growing demand of 5G networks. TruField utilizes the proprietary outer shell material that can be configured to fit any small cell or current millimeter wave radio on the market and has gone through extensive independent lab and wireless carrier testing to provide true RF transparency across all frequencies. The material is lightweight and flexible and unzips to provide 360-degree access for easy installation, upgrades, and removal. This makes it much easier for technicians to work on, so it requires less people to physically go out and do the work, which is an important competitive advantage because of the number of available people in that technical field is a constrained resource and we see it continuing that way for some time. Looking back on the delays in small cell over the past couple of years, we believe we've actually benefited from this timing that has given us time to somewhat reinvent and strengthen our capabilities and product offerings. We're in a much stronger position now to get built into the deployments, we might have otherwise missed had they happened earlier. Now, turning to the topic of acquisitions. We're effectively complete with our integration of Microlab and they're now operating as part of our team. As we focus on our organic growth plans and layering in additional strategic acquisitions, we believe there are opportunities to do more and are seeing a strong deal flow. We're continuing to look for further larger acquisitions that fit our strategic plan of acquiring good quality companies with passive components that allow us to offer more of the bill of materials in key applications and that will provide us with access to new products that we can sell through both new channels and our existing and growing distribution channel. Finally, let me take a moment to discuss some of our goals for the rest of this year and going forward in future fiscal years. As we've discussed in the past, we have an internal goal to return our gross margins to 30% or higher. Because we have a lot of operating leverage in our business, we can deliver higher sales numbers with very little needed investments in SG&A. So with our sales and gross margins both increase, we have the goal of getting our adjusted EBITDA to 10% of sales or greater in the near term. As we grow, we believe we have even further upside to those numbers. As we discussed earlier in the current results, we delivered 28% gross margins and adjusted EBITDA was 9.3% of sales. We're not far from our immediate goals and we feel that we're getting better operationally even with the continuing headwinds in the macro environment. If we look out three to five years, we believe we can continue to grow profitably through both organic and inorganic initiatives. We've shown that we're diligent about our capital allocation and continue to provide strong returns on that invested capital. The Microlab acquisition is a great example of that as we showed immediate accretion from the deal in both sales and profit margins. We did this deal using low cost debt and have been successful at driving profitable growth while avoiding dilution. This kind of focus gives us aspirational goals of taking our adjusted EBITDA to levels even higher than 10% of sales in coming years. As we look to the second half of the year, we're increasing our guidance for fiscal 2022 annual revenue from 75 million to 80 million, which will include approximately 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 significant growth in our adjusted EBITDA as our profitability increases through 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. Overall, we're excited about the continued growth we're generating in our core business and the significant opportunities we're seeing through our Microlab acquisition for additional scale, overall margin and profitability improvement, and further revenue growth. With that, I'll now turn the call over to Peter for a review and discuss of the financial results for the quarter. Peter?

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 [$5 million] [ph] 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 [3.76%]] 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.

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

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?

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.

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?

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.

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?

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.

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 [vogue] [ph] now that the COVID concerns have relieved. I'm just curious about the opportunity on that front.

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 [Technical Difficulty. I think there's upside to that as we start to delve into more of the bill of materials in venues and small cells, but specifically the redesign around some of the Microlab products that can address a broad range of frequencies as stadiums go through 5G upgrades. We're seeing some of that now, but we absolutely believe that positioned for even more of it.

Last question for me, I guess, I'm not going to ask about some of the cost pressures and margin because you've kind of already talked about, I think 30% gross margin and double-digit EBITDA margin here in the back half. So, I assume you have those under control. Just looking at the cash flow, I was wondering the big inventory build over 19 million, do you expect that to kind of level out around this or from working capital do you maybe require a little bit more investment or is that going to wind down?

Josh, thanks for the question. The inventory levels, I guess it's just taking a temperature from kind of what we're seeing there. I don't expect our inventory to kind of jump up as much anymore quarter-to-quarter. So, I think it's leveled off, but if we find opportunities to stock up on certain items that we're seeing longer lead times on, we would certainly do that.

Yes, I think it's also important to note that the Microlab inventory being added was almost $4 million coming into our total. So, while we did specifically take things up and if you look at the amount of hybrid fiber we have going on, some of that – and [semi-finished] [ph] goods items, we needed to increase just to make sure we can fulfill orders in a timely fashion. So, those two things combined, I think we're in an okay position. I don't think we need any additional cash to continue running the business from an operations perspective related to inventory. We're buying cash flow and good and with the profitability that we're showing, we should be good. And as Peter said, we expect that inventory yet to sort of normalize. We're in a higher sales level than we've been in a while. So, we've gotten to a point where we can support it. I think we've kind of normalized around that.

Perfect. Well, I think I've hogged the mic enough, so let someone else take a chance. Thanks.

Thanks Josh.

[Operator Instructions] Next, we have David Wright with Henry Investment Trust. Your line is live.

Hi, Rob. Good afternoon.

Hi, David.

I wanted to ask you about R&D, which you call engineering and which historically has been a pretty reasonable number compared to revenues, are you picking up much additional engineering expense from the Microlab acquisition?

Yes, good question. Thanks. So, I'll say yes to that compared to what we've had, but know that it's already built into the adjusted EBITDA that we're dropping through and the expectations we had from the Microlab business, it's mostly a people cost there. There's some terrific talent within the Microlab team on the engineering and design and both on the RF side, as well as on the mechanical side, which we can leverage across the whole company and help us with our product roadmap, but it's not a – if you look at our SG&A now, this is the first quarter where you can sort of see that the Microlab involvement will have a full quarter of them to report here in a few months to see that. It's not over the top amount, it's still a pretty reasonable number of folks, but there is some headcount related to it. The other cost that a lot of times you get into R&D with testing and some other items is really not a material amount against the total. So, it's not going to be a massive incremental increase. You will see it against the Microlab business and we have centralized that across the entire company, but it's not really a material step change from what we've had.

So, is there engineering/R&D expense that has been a greater percentage of revenue than RF has been?

Well, yes, certainly more than what we've had. I mean, we've had very little historically. So, certainly higher than that. I don't have the exact number offhand. I'm happy to follow-up with that to you, but so yes, but I think the other thing to just point out in there is the Microlab operation in total, we added 40 employees and those 40 employees include sales and production and engineering and management and all of that combined still allows us to even on their trailing 12 months of 17 million, they did 3.5 million in adjusted EBITDA on that number. So, it's still not a massive number, but to your question, it is more than what we've spent historically. We're going to be able to report that more clearly as we've centralized that team. We put out a press release that Christoph Massonet, who came in through the Schroff Tech acquisition is heading up an engineering and technology team, which will include several of the Microlab folks. So as we get that normalized, we'll be able to report more specifically on that. So yes, as a percentage of sales, yes, higher than what we had, but still not a material number against their total or certainly not against ours now as a combined company.

Okay. Staying on that theme, can you talk a little bit about TruField and the partnership with Saint-Gobain and kind of how it evolved, what they brought to the table, and what you're doing on [your end] [ph]?

Sure. This is where I get to value with my technology talk, David. You'll be very impressed. So yes, the partnership is great. We actually have an additional partner on the technology and design side that we worked with industry experience to figure out that there was this potential need in the market for truly something that was RF transparent. So, as little interference as possible, as coming out of the radios and antennas, you want to have as much of that signal get through the material as possible. It's not a brand new application for someone like Saint-Gobain, the shroud material that we're talking here is Kevlar that is being used in things like microwave hops. If you look and see a microwave antenna on a public safety or other kind of tower, you'll often see that it is covered with a similar, kind of material, maybe not exactly, but similar. So, in those discussions, it became clear the type of material that we required to address the market opportunity and Saint-Gobain has a great offer there. So, we partnered with them, did some testing there, and it signed some agreements around exclusivity to work together to take this specifically to the 4G and 5G small cell and related markets. So, it's a few years in the making. I mean, this all kind of came about right in the heart of COVID and everyone working from home. So, it took a little longer to get to market than we would want, but it is a terrific partnership. They're a great company. Obviously, a major player in those kinds of applications globally. And we've been very happy with the response that we've seen out there in the market, but obviously from a material perspective, we wouldn't be able to do it without them and they've been supportive all along the way and we're happy to finally get that to market.

Okay. And then last one is for Peter. Can you give us any sense of what you think run rate SG&A should be as a percentage of revenues?

Sure. So, right now from a quarterly basis, we're sitting right at that kind of the 25%-ish range, so, I would – that's kind of the range where we're leveling out at. I think as we kind of get rid of some of these one-time charges, we should see that come down a little bit. But as we mentioned, there are some other projects that we're working on from an operational, kind of integrating some of the business units that we may have incurred some other one-time charges. So, I would say right around that 25% range is where we should be at.

Yes. And I think, David, just one thing to add. I think that from a normal operations perspective, if you set aside some one-time charges, we can deliver a higher sales number assuming we could sell more, right? We could deliver a higher sales number from a production perspective with very little incremental investment. So, the investments that we're taking on are more about long-term, sort of transformational things whether that's combining locations like we've already talked about on the West Coast or finding ways to tap into skill sets across different locations. So, we're not running completely independently five or six little things. We've been combining those now for years. There's some key things in front of us that allow us to get better at that. So, there'll be some offsetting synergies in the long-term to some of those expenses, but it's important to note that we could deliver a quarter like we just did. If we delivered that every quarter, there's no incremental real SG&A required there. It's nominal the best.

Okay. Thanks for taking my questions and good luck getting to your goals.

Cool. Thanks David.

Okay. Next, we have Orin Hirschman with AIGH Investment Partners. Your line is live.

Hi, thank you. Congratulations on the progress. Just a few numerical questions. Is there a seasonality in the business, meaning if you take 38 and add on another two quarters of 21 you get to 80, and keeping in mind, you even have a benefit of an additional million and a fraction in each of those quarters from Microlab’s. So, is that related to some type of timing on orders related to weather and installation?

Yes. Hey, Orin, good questions. So, the 75 million number that we put out before already included eight months of Microlab. So, we didn't – we're not – that's not the adder that's getting us 80. I mean we do expect Microlab to perform a little better than what we thought when we first got it, but a portion of that increase to go from 75 to 80 is Microlab. A larger portion of that is receiving some of these larger orders that we weren't necessarily certain we're going to come and we should see some of that push into – I mean go out in the end of our fiscal year. So, that's point one. On the seasonality point though, yes, so look, the more we have exposure to the wireless deployments going on in the industry, our first quarter is always seasonally tougher because you got, for us, especially November, December, January. The outdoor builds, many venue builds, and even small cell in a lot of cases, it's tougher to deploy in that timeframe. So, we always expect that to seasonally be a little slower or tougher to deploy and you're crossing a calendar year, which most of our larger customers that's their fiscal year and their budget is built on that. So, you may see some year-end or year beginning kind of spends or fits and starts around halting that spend. So, we do see that seasonality. I think that the bigger that our offer get, the broader that our offer gets into different applications that are not just wireless related, but medical defense and some of the other areas that we do have some business in, it's just dwarfed right now by the wireless industry, which that would smooth out some of the seasonality, but it's just not a big enough number to offset those – the movements I just talked about in wireless.

And does this go ahead the next two quarters in terms of seasonality or actually seasonally strong quarters or similar to this last quarter?

Yes. I think we expect them – with what we know today, we expect them to be similar to what we just did from a sales perspective. I think as we talked about in the prepared comments, I think the product mix will evolve both because we'll have a full quarter of Microlab, but also just our offer has been going through this evolution for a few years where it gets easier to understand when it's more consistent. So, I think from a sales perspective, [a math] [ph] will tell you, if we're going to say 80 million, we need to do a couple of similar quarters to what we just did. And with that, we expect our gross margins to continue having an opportunity to improve and that would print through to better adjusted EBITDA.

So, just a quick question on that, which was a nice EBITDA number almost to 10% already this quarter. So, just a really [quick back] [ph] in the envelope, just in terms of if you take Microlab and you look at the time of the acquisition, I forget what the gross margin was 42 maybe, 43, 41, something in that range. Please correct me. And…

I don’t think we disclosed that. I mean, I know wireless telecom group didn't and we haven't either. So, we haven't disclosed that, but it's certainly higher than our average blended margins as a company.

Okay. I don't know if they disclosed it or not, but you could work on that backwards from their pretty well both post quarter when they pulled it out basically and they did that massive proxy where they pulled it out, you can pretty much take the whole company gross margin post Microlab and pull it out and see what it was pre- Microlab, and [indiscernible] mistaken because it was somewhere in a very low-40 mark.

You're able to do math, but I can't do. So, that’s good.

So, assuming that that's – I'll make that a subset for a second, assuming if you work through the numbers, just really quick back of the envelope, it would mean that your existing business improved ever so slightly. On the gross margin side, I know we’ve talked and you've talked in past calls about getting the existing business for that Microlab to high-20s at least. [Multiple Speakers]

I would care – to use your words, I would characterize it as better than slightly. We had a nice improvement organically in our gross profit margins. And then we layered in some good couple of months from Microlab to get to that 28%. So it was a better organic increase I think than what we had expected go into the quarter. Some of that was pricing starting to feed through and just better margins overall in the mix, but we did see a nice increase organically and then layered in some good, even better margins on top of that.

Is Microlab a full gear on its margins right now or not quite yet because of when you buy any business the first few months, you're not getting necessarily normalized gross margin?

Yes, I would say, it's not normalized. I think the business is running from a market opportunity as we expected. We're seeing some nice opportunities having venues come back really helps. But I think there's – I generally believe there's upside on almost every line in that business. It's a great business. I'm happy we have it. I'm happy we have that team, but financially, I think there's opportunity for us to be even a little better, especially if we can drive higher sales numbers, because we already talked about the – with David's questions earlier around R&D and other, there's not a ton of SG&A in that business either, which those are the kinds of businesses that I love because now it comes to execution and strategy and going to market in a strong way, which we've got that backbone in that business already.

Okay. And just one last question. Schroff Tech also has potential or is today slightly higher on the margin, compared to overall corporate, if I remember correctly, correct me if I'm wrong on that?

Yes, you're right.

I guess, is the positive growth from let's say, Schroff Tech albeit of a small number over the overall revenue and Microlab being a slightly bigger number on the overall revenue, is that being offset, let's say, this new purchase order where the gross margin is just cut throughout or how should we view this? I mean we’re [looking through] [ph] on this.

Yes. So, I mean, you've hit on the two businesses that we have that have more innovation historically and therefore drive some higher profitability from a margin perspective. I think we've gotten good at managing – as we talked about in the past. some of the Tier 1 business that can get tough and very competitive and a lot of cost pressures. I think we've managed that well. I think our team designing these products is looking for every opportunity to make sure we can stay profitable. So, I wouldn't relate those two things. I don't think we're covering; I don't think Microlab and Schroff Tech are covering any yields that are happening elsewhere. We've actually got margin improvement happening nearly everywhere across the business in the key product areas that we're working on. So, I think the initiatives we have in place that our operations teams are driving, our finance teams driving, the pricing we've worked through on certain items from a sales perspective, I don't think there's any company in the world that's not seeing some cost pressures and trying to offset them. I think we've done a decent job of doing that. And also, I mean last quarter as we talked about the mix was very lopsided towards tier one customer spend on the hybrid fiber, which it was just a tough quarter from a cost and a mix perspective. So, we don't expect that to continue. It didn't continue. Things started getting better for us organically, but I don't think I don't expect to be covering over anything by having better margin business. I think we still believe the rest of our business not including Microlab’s should continue to come up and then you layer in having a full quarter of that higher margin performance. And with what we know today, again, the cost pressures seem to change almost by the minute from what we're seeing now, but we believe that both organic and inorganic margins should together help us.

Okay. Just two other quick questions. Is there a drag on the gross margin from any raw material within the inventory right now, meaning copper or something like that?

Well, so yes. So, the one place copper hits us, in hybrid fiber as much we say the word fiber in there, the other piece that makes it hybrid is copper for powering the radios at the top of the towers. That's been – that commodity has moved around a lot. I think we've managed it pretty well. The bigger thing as I've talked about in the past that I would say is a cost pressure for us is getting materials in a lead time that still allows us to address customer needs. And sometimes you have to pay a little more and or buy a little more than maybe you would have in a different scenario. So, it's manageable. I think we're working through it well. The team has done a good job on it, but there's definitely times where certain purchase orders have a higher cost basis than maybe what we have seen historically and what we'd like to see, but I don't think it's any one item. I mean, the bigger amount of materials that we need go into our hybrid fiber. We haven't seen some of those same challenges on the coaxial side or the fiber side that is much more available from more potential sources.

Okay. And final question just on traffic with the new cooling technology. It sounds like you kind of productized it now better, much better, in terms of really getting that to take off, have you done any marquee installations and where you can use some of those reference sites now to try and attract the bigger installations as Part A and Part B is are you in tests with those bigger installations, which give you any level of confidence that we're going to see a break in the [indiscernible] in the next quarter or two or three?

Yes. So, two part question, I'll say yes and yes. So, even before the acquisition, we’ve got some marquee Tier 1 wireless carrier customers and others that have deployed various sizes and types of the DAC thermal cooling product lines. We've taken that experience. There are some additional patents that have come through on some of those items that make it a little more innovative and even more effective. And in that, we have – we do have testing going on. We have things in market in small installments and large both with existing carrier customers and some new projects that we've been testing for some time. So, we have a tremendous amount of confidence in the opportunity. And in the history of what those products have done for us, I think that the go to market and the exercise that our sales team is going through is trying to take that nationwide, worldwide, whatever you want to call it. And in that, it takes a little time. There is a lot of testing that has to happen because this is a key piece of the way infrastructure gets deployed on the edge of the networks. So, I think I have a tremendous amount of comfort that we're in the right places with it and that it's more of a timing discussion than anything else.

But it's actually [in test] [ph] where you have funnel of test sites at this point?

Yes. So, not only test sites, but live sites that have been on air – sorry, that have been supporting equipment that's on air for some time. And the new things that we're deploying or launching product wise are just a good next generation fixing some of the things that people now want that might be different than what they've had in the past and making it better. So, yes, we have active tests going on both in the field and in more of a lab setting, as well as active deployments that have been out there for years in some cases, but certainly months with some of the newer items to make sure we can meet the requirements.

Great. Okay. Thanks so much.

Thanks Orin.

Okay. Next, we have [Chris Bukowski] [ph], Private Investor. Chris, your line is live.

Hello. So, this was partially answered, but I guess I was impressed that your margin increased sequentially or with the price of copper being like in the – being, I guess, recent record highs the last quarter. Have we decoupled from the price of copper or is it that you had inventory from before and the price of copper of this past quarter will – can show up in margin time in the next quarters?

Yes, it's a good question, Chris. So, no, I think that the exposure to copper pricing, you're already seeing in our results and I don't expect there to be a material change to that. There's nothing hidden in there that's any different. I mean the pressures have been the same now for several months for us, but it's important to note that the price of copper doesn't impact our entire offer across the board. You're talking somewhere 25% to 30% probably on a quarterly basis of sales would have more of a direct relationship to copper pricing. Even with that, that's built into what you see. Our last quarter Q1, we had margins – blended margins at the 24% level. That had some impact from that. I wouldn't say that that got cleaned up. That was still out there with the same impact. We just got a little better mix and a little better at taking care of that and I expect that to, sort of continue as it is going forward. So, I don't think there's any – there's no hidden scenario in there where copper is overly benefiting or damaging us that's going to be any different than it is in the next few quarters.

And on the other side of the coin, if we see kind of continued decreases of the price of copper, which is already happening somewhat in the current quarter, would you see increases in your margins or have you put in some kind of indexing in your prices?

I think in the longer-term, if it were to come down and stay down, we would see that. That's the kind of thing that with current inventory, I don't think would print through right away. I think you'd see it certainly a quarter and a half, maybe two quarters worth of lag on that, but it would definitely be a help. I mean, having copper prices come down would be a help to us in operating the business overall.

Okay. That's it for me. Thanks and congratulations on the great quarter.

Thank you, Chris.

I'd now like to turn the floor back to management for closing remarks.

Thank you, John, and thanks everyone for joining our call today. We appreciate your support of RF Industries. We're excited about our continued positive momentum in 2022 and the opportunities that lie ahead for the second half of the year. Peter and I look forward to reporting our fiscal 2022 third quarter results in September. Thank you again and have a great day.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.