BKTI - AMEX

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Second Quarter of 2025. This call is being recorded. [Operator Instructions] There is a slide presentation that accompanies today's remarks, which can be accessed via the webcast. At this time, it is my pleasure to turn the floor over to your host for today, Jen Belodeau of IMS Investor Relations. Please go ahead.

Thank you, Holly. Good morning, and welcome to our conference call to discuss BK Technologies results for second quarter 2025. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, Chief Financial Officer. I will take a moment to read the safe harbor statements. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenue and profits. These statements are subject to known and unknown factors and risks. The company's actual results, performance or achievements may differ materially from those expressed or implied by these forward- looking statements, and some of the factors and risks that could cause or contribute to such material differences have been described in this morning's press release and in BK's filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward- looking statements. With that out of the way, I'll turn the call over to John Suzuki, CEO of BK Technologies. Please go ahead, John.

Thank you, Jen. Good morning. Thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and financial results during the second quarter, and then I'll turn over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We'll conclude by opening the call for a brief Q&A. This was a strong quarter for us. Our BKR product line is being well received in the marketplace, and we are seeing the benefits of the strategic initiatives we have put in place to enhance and grow long-term profitability for shareholders. The strong operational execution is evidenced by continued revenue growth, significantly enhanced gross margin and profitability. Second quarter revenue increased 4.5% to $21.2 million, consistent with the single-digit revenue growth we previously targeted for 2025. As I will address later in the presentation, it is now our expectation that revenue growth will be high single digits for 2025. Gross margin in the quarter improved significantly to 47.4% compared to 37.3% in the second quarter of 2024. Fully diluted GAAP EPS was $0.96 compared with $0.47 in the second quarter of 2024. On a non-GAAP basis, fully diluted adjusted EPS of $1.30 in the second quarter meaningfully outpaced non-GAAP fully diluted adjusted EPS of $0.55 in the second quarter of 2024. During the second quarter, we launched RelayONE, a rapidly deployed portable repeater kit designed to extend range and facilitate interoperability among different types of public safety and military radios. RelayONE is a newly branded BK ONE family of offerings focused on developing innovative interoperable communication solutions for first responders. In conjunction with the launch, we received a purchase order from Larimer County Sheriff's office based in Fort Collins, Colorado for RelayONE, which will be used by their search and rescue team. Larimer County is a population of around 360,000 and Fort Collins is their most populous city and the county seat. Federal order activity began to pick up just after the close of the quarter. And during the month of July, we received several purchase orders from the USDA Forest Service totaling $12.9 million. The orders included the largest single purchase of the BKR 5000 since its debut and underscore our position as a leading communications provider in the federal wide land space. We also received orders from various federal, state and local government agencies, bringing the total order value to $17.8 million for the month of July alone. It appears that while DOGE, the Department of Government Efficiency may have delayed the timing of the federal orders, federal budget money is now flowing. Slide 4. Slide 4 illustrates our successful efforts to drive improved gross margins through the diversification of our product mix, our cost savings outsourced manufacturing model and disciplined expense management. The 47.4% gross margin we achieved in the quarter is a significant improvement over last year and also improved on a sequential basis from 47% in the first quarter of 2025. With our visibility today and the U.S. tariff uncertainty mostly behind us, we've increased our full year margin target to at least 47%, reflecting our confidence in the trajectory of our business and improved operating model. Strong market demand for our BKR Series radios has driven solid revenue growth. Agencies at the local, state and federal levels are choosing our advanced public safety communication solutions for their radio fleets. As I mentioned a moment ago, we saw significant federal order activity in the month of July, and we expect this to continue through the third quarter as wildland fire activity intensifies and the federal fiscal year comes to an end. We view the order activity we're seeing as validation of our high reliability and performance of our radios in mission-critical situations where there is zero margin for error. With that, I'll turn it over to Scott Malmanger, CFO, to give a more detailed overview of our second quarter financial performance. Go ahead, Scott.

Thanks, John. My prepared remarks will focus on the second quarter results. For a full review of year-to-date results, please consult the press release issued earlier today or the earnings presentation posted on our website. We are pleased to announce the launch of our new Investor Relations website. This launch is part of our ongoing commitment to transparency, accessibility and keeping our shareholders informed. Sales for the second quarter totaled $21.2 million, an increase of 4.5% compared with $20.3 million in the second quarter of 2024. Sequentially, revenues increased 11.1% compared to the $19.1 million in the first quarter of 2025. As John mentioned, gross profit margin in the second quarter was 47.4% compared with 37.3% in the second quarter of 2024, reflecting improved sales mix and cost reduction initiatives, including the successful transition of manufacturing to East-West manufacturing. Selling, general and administrative expenses, or SG&A, for the second quarter increased slightly to $6 million compared to $5.5 million for the same quarter last year. We strategically invested in engineering, product development and sales and marketing to support our long-term growth while keeping our other G&A expenses flat for the quarter. Specifically, engineering and product development expenses for the second quarter of 2025 increased to $2.3 million or 10.9% of sales compared with approximately $2 million or 9.8% of sales for the same quarter of fiscal year 2024. This increase is primarily attributed to non-capitalizable development costs for the BKR multiband mobile radio product. Sales and marketing expenses also increased slightly to approximately $1.9 million or 9.2% of sales compared with approximately $1.7 million or 8.4% of sales for the second quarter of fiscal year 2024 primarily due to the addition of new salespeople and increased trade show participation. Other G&A expenses stayed flat for the quarter at $1.8 million as we continue to diligently manage our expenses. Operating income totaled $4 million in the second quarter of 2025, representing operating margin of 18.9%. This compares with operating income of $2 million in the second quarter of '24 or operating margin of 10%. The increase demonstrates the operating leverage that we are beginning to see in our business as we efficiently execute our strategy. The company achieved GAAP net income of $3.7 million or GAAP EPS of $1.03 per basic or $0.96 per diluted share in the second quarter of 2025 compared with the net income of $1.7 million or $0.47 per basic and diluted share in the prior year period. Non- GAAP adjusted earnings, which adds back net realized and unrealized gain or loss on investments, noncash stock-based compensation expenses, noncash deferred tax provisions and severance expenses was $5.1 million or $1.39 per basic share and $1.30 per diluted share in the second quarter of 2025. This is compared with adjusted earnings of $2 million or $0.56 per basic and $0.55 per diluted share in the second quarter of 2024. We reported non-GAAP adjusted EBITDA of $4.4 million in the second quarter of 2025, a significant increase over non-GAAP adjusted EBITDA of $2.5 million in the second quarter of 2024. Second quarter 2025 adjusted EBITDA margin was 20.7%, which for the first time, surpassed our target adjusted EBITDA margin of 20%. Slide 7 demonstrates our track record of delivering strong and improving profitability, driven by sales growth and improved revenue mix and higher margins. Both adjusted EBITDA and adjusted earnings have grown significantly. And with our current visibility, we believe that we are well positioned to continue delivering improved profitability and enhanced value to our shareholders. Our balance sheet continues to strengthen, providing us with increased financial flexibility to execute on our growth strategy and pursue the larger market opportunity before us. At June 30, we had $11.9 million of cash and cash equivalents and no debt. Working capital improved to $28.9 million at June 30, 2025, compared with $23 million at December 31, 2024. Working capital at June 30, 2025, included approximately $11.9 million in cash and cash equivalents compared with $7.1 million at December 31, 2024. Shareholders' equity increased to $36.8 million compared with $29.8 million at December 31, 2024. We are pleased with the significant improvement we have seen in our balance sheet liquidity and look forward to continuing carefully deploying capital to drive long-term shareholder value. I will now turn the call back over to John.

Thanks, Scott. Our second quarter performance is characterized by exceptional execution. The tariff landscape appears to be settling down. And based upon the order activity we're seeing, the potential impacts of DOGE on government spending have been muted. With our current visibility and increased confidence as we head into the back half of 2025, we have updated certain previously stated full year financial targets as follows. We are maintaining our single-digit revenue growth target. However, we now expect to be on the high end of this range. We now expect gross margin for the full year to be 47-plus percent raising the 42-plus percent target we previously provided. Given we expect revenues at the high end of our range and the improved gross margin, we're raising our full year GAAP EPS target to $3.15, up from our previously stated target of $2.40. Lastly, we're raising our full year non-GAAP adjusted EPS target to $3.80, up from our previously stated target of $2.80. The higher increase in our non-GAAP guidance versus our GAAP guidance is due to an expected increase in noncash stock-based compensation for the year. Now that I have been with BK for 4 years, it's increasingly clear to me there is a huge opportunity to grow BK in a much larger and considerably more profitable business for shareholders. and we're committed to retaining the team that has gotten us to where we are today. As we move through the balance of 2025, we will continue to invest in our sales and marketing efforts to expand adoption of our BKR 9000 multiband radio, which commands a higher price point than our BKR 5000 single-band radio and drives enhanced margins for our business. The growth of our solutions business remains a priority as well. We're strategically building R&D and engineering capabilities to strengthen our software expertise and offerings and position BK at the forefront of the next generation of public safety communications. Finally, development of our next-generation BKR 9500 multiband mobile radio is progressing well. As a companion radio to the BKR 9000 multiband handheld portable radio, the 9500 mobile radio will be installed directly into first responder vehicles. Our investment level in the BKR 9500 will continue to increase as we near the launch and begin recognizing revenue in 2027. With that, we can now open the call for questions. Holly?

[Operator Instructions] Your first question for today is from Jaeson Schmidt with Lake Street.

Congrats on a really strong quarter. I want to start with that lift to the gross margin outlook. Curious how much of that is being driven by just feeling better about the tariff environment versus this really favorable mix shift that you noted in Q2.

Yes, Jaeson, I think I'll try to take that question. Thanks for the question. Basically, the tariff expectations earlier in the year were very uncertain. So we took a good conservative approach to the tariffs, and that's the primary driver. But in addition to that, our shift to higher-margin product and the cost savings that we are realizing related to the outsourcing production with East West Manufacturing is also a significant contributor.

Okay. No, that's really helpful. And then with the 9000, just curious if you could provide some more color on how that's tracking? Was it up sequentially and year-over-year?

Jaeson, it's John Suzuki. Thanks for the question. So I believe what I had stated on the last call was that our expectation for this year is that we're going to ship 2 to 3x more radios than we did last year. So clearly, that's much higher than last year, and we believe that, that trajectory will continue throughout the year.

Okay. Perfect. And then you noted some really strong order patterns in July. Maybe I missed it, but what was the backlog number exiting Q2?

Yes. The backlog number exiting Q2 was about $16 million, and that was basically a little bit lower than what we would have anticipated, but it had a lot to do with the federal orders that we received early in July. So if you take that into consideration, it seems reasonable.

Your next question is from Samir Patel with Askeladden Capital.

Congrats, as everyone else is going to say, on a great quarter. I always like to ask this, what's the progress on the tethering and with the InteropONE and then any milestones on the 9500 development?

So I'll take the first part of that question, Samir. Thank you for the question. So the InteropONE tethering is still in development, and it's progressing. So there's really no update at this point. Once we have the product ready for field testing, we'll provide that information on one of our calls. In terms of InteropONE, the interest level continues to be very high. We have trials going. It's really a product that's helping us sell our BKR 9000. In the market space today in public safety, customers who are looking at purchasing new radios are also asking the question about what your strategy is for your path towards LTE or cellular. InteropONE is designed as an augmentation to the LMR product. So it's an augmentation to the BKR 9000. That story seems to resonate very well with customers. And of course, when we get the tethering completed, that will actually allow you to operate push- to-talk over cellular calls through your LMR radio via your cell phone. That story has resonated extremely well with the clients. And so we're very anxious to get that product to market. But at the end of the day, this is public safety. It is a difficult program, and we're not going to launch it before it's ready. In terms of -- I'm sorry, Samir, I forgot your second question -- second part of the question.

It was just milestones on the 9500, just how the development is going.

Yes. So I'll just refer back to my comments. The 9500 is on track. We expect to complete the development, and we expect to get revenue for that product in 2027.

Okay. Fine. That's great. And then I just want to dig in a little bit to the guidance upgrade. And I just wanted to ask, so to the extent -- so on the revenue side, how much of it just represents kind of getting those federal orders that you think were potentially going to be impacted by DOGE that you were previously uncertain about relative to other factors such as kind of the more local and municipal business? And then similarly, on the margin, how much of that is just due to USMCA still being in place due to other -- relative to other factors impacting your decision to increase the guidance?

Yes. Thanks, Samir. Let me try and take a cut and Scott can correct me if I'm wrong. So obviously, we had an outlook this year of being in that single digit. The thing that we were uncertain about was the DOGE impact and the impact that would have on the federal order flow. And so if, for example, it had a strong impact, delayed orders such that they couldn't spend the money that had been budgeted, that would have been -- we would end up on the low side, right? That has passed, right? The orders are flowing. We received what we were expecting in terms of the large orders. We continue to get orders through the third quarter. And so that's why we ended up on the -- we're going to end up on the high side of that revenue flow. If you look at the first quarter or the first 2 quarters, right, most of that was state and local business. And year-over-year, that's actually up, and that's driven primarily by the adoption of the BKR Series radios. So state and local continues to grow and seemed not impacted by DOGE, which was more on the federal side. In terms of the margins, I think in the first quarter call, we had said that we wanted to put out a target that included our best guess on the impact of the tariffs. And if you remember at the time we did the call was back in -- I think it was back in March when we set the targets, there was a lot of conversation around tariffs on products from Canada and Mexico. That was, I guess, the first set of conversations that the administration was putting out. And so what we had decided was we were going to take our best estimate on the impact of those tariffs on our products. And in conjunction with that, we also did a price increase on our products, those two things. So as it's turning out, right, a lot of our products are covered under USMCA and -- because they're produced in Mexico and in Canada, they are continuing to come in tariff-free. And that looks like that's going to be the position of the administration through the balance of the year. So that's a big chunk of the favorability. Offsetting that, we have a number of our accessories coming out of Vietnam, which historically had been a very low or zero tariff environment. It initially got hit with a 10% tariff and now a 20% tariff. And so in response to that, we've just increased our pricing on some of the accessories that are coming out of Vietnam. It's not something we wanted to do, but a 20% tariff is just more than anyone can absorb. And so I think clarity on the tariff situation, while it's not ideal, at least we believe for this year, it's behind us. And that's why we have more confidence in our gross margins.

Great. And based on our history, I'm not sure if you'll answer this, but I have to try. So you talked about kind of qualitatively your expectations for very strong growth and the big opportunities. Obviously, a lot of momentum here in the back half of the year based on your guidance. Any reason to think that wouldn't continue into 2026 or kind of anything where you're seeing onetime benefits that you don't expect to repeat? Or again, I know you're not going to give any guidance for 2026, but would you expect just kind of a continuation of revenue growth and margin improvement at this point?

Yes. I appreciate the question, Samir. I certainly don't want to get ahead of myself, right? I think our focus right now, right, is making sure that we deliver the strong results in the second half in line with what we stated. In terms of '26 and going forward, we'll have an opportunity in March, right, to talk about our full year in 2025, how we performed against our Vision 2025 targets, one of which was that 20% EBITDA, which I'm pleased that we hit that this quarter. And then, of course, setting the vision for 2030, which is about reshaping the business and what we think we could be going forward. All that said, I think that we're bullish on the company, right? We're bullish on the future. We think that there's plenty of opportunity for growth for us.

Your next question for today is from Aaron Martin with AIGH Investment Partners.

John and Scott, congratulations on a fantastic quarter. And obviously, taking a step back over the past 4 years of your tenure, John, it's been an amazing transformation. A couple more shopkeeping items for me. Scott, on the tax rate, you're getting close to finishing up your NOLs, if I calculate it correctly. What should we think about as we go into '26, '27 for a tax rate for the company? And am I correct that we're going to start paying cash taxes?

Correct. Yes, I think your assessment is right. What I've been told by our tax experts is we should look at something for total for federal and state in the range of 25% to 26%, now that depends a lot on what we have for, like you said, the R&D tax credit. And that's why we are seeing a lower rate for this year because we're still using up some of our R&D tax credits.

Got it. Okay. And obviously, you're showing the operating leverage, but there is a slight uptick in the OpEx. How should we think about that going forward? Is this small step-up where we need to be and now it levels out? Or should we expect further small step-ups as we look to more opportunities and ramping sales and marketing for the 9000? How should we think about that?

Aaron, let me take that question, right? So first is that we will continue to spend more on the launch -- for the launch of the BKR 9500. As you get to product launch, your expenses increase in terms of the number of prototypes and things that you're doing. So it's not just labor, it's material expenses. And then it comes down after you launch it -- launch that product. And then we will be talking about in the March time frame, what other products that we're looking at over the next 5 years under Vision 2030. So I'll leave it at that for that point. And in terms of the sales and marketing, this is really about getting the adoption around the 9000. And we're going to do everything we can that we feel is prudent, right, to either put more salespeople in the field or involve ourselves in more trade show events, anything we can do to get more visibility. We think -- I mean, from the feedback we're getting from the marketplace is we've got a solid product. We have a really good product. We just need to get that product in more and more hands. And so to the extent that we're going to spend more money to get that product in more hands, that's what we're going to do.

So a follow-up to that. On the -- what's the sales cycle time line for the -- that we're seeing with the BKR 9000. Are we increasing now, is it 6- to 9-month sales cycle? Is it 12 months in some of your federal things where there's more budgeting going into it? How should we think about the sales cycle on the 9000?

Yes. So the short answer is 18 months. That's the short answer. So the longer answer is it depends on the size of the customer, right? I mean we have our customers, Florida State, for example, bought the BKR 9000. They were actually looking at the 5,000 initially. And they spent 2 years evaluating that product before they made a very large purchase. California, CAL FIRE, very similar, 2 years. And those are existing customers, right? Now they are very large customers buying large quantities of radios, and they're making a decision to refresh their fleet. Smaller customers, again, 80% of law enforcement in the United States have 80 officers or less. And so when they're buying radios, they're buying a handful of radios at a time. It's still a major purchase for these small departments. But to buy two or three radios to try them out is less risky. And so typically, from introduction to getting a sale of two or three radios can be as short as 6 months, it's still time because it's not pocket change for these organizations. They have to get approval for it. And then they'll try that radio out for another 6 months, maybe a year before they say, okay, I like this radio. I'm going to standardize on this radio for my fleet, and then they'll start buying whatever they have budgeted. It could take -- if they get grant money, they could replace their fleet in a year. More typically, they'll replace 10% of their radios every year.

Got it. So the increases now and the opportunity now on the 9000, we should -- that should create tailwinds end of '26, perhaps into '27 on that increased spend. Is that a fair way to...

Yes. We don't see a limit on the 9000 at this point. We're touching a lot of customers, and we're going to continue doing that. And as we get more radios in the field, we get more referrals, and we get more orders. That's just the way the game is played. I mean there are 30,000 agencies across the United States. The big agencies are very tough, right, and they take a long, long time. But the majority of the agencies are small, they're cost conscious and they're just looking for a good replacement radio perhaps at a better price. That's our offering is we can get them into multiband, which is something they want. But today, they can't afford with the other manufacturers. So we just ask them to give us a try, and that's what they're doing.

Got it. And then I'm going to try again on the OpEx side of it, if you're willing to be a little more granular in the guidance because I'm still with the high single-digit top line growth and the 47%-plus gross margin, I'm still sort of struggling to get to your EPS number. It still seems extremely conservative on the EPS side unless -- I mean, I don't think in '26, we're starting to pay taxes and unless dramatically off on the OpEx. So I'll try to get -- can you be more granular on the OpEx guide?

So Aaron, just so I understand your question, and then I'm probably going to pass it to Scott. Your question is that you feel that our EPS guidance is too conservative based on what you...

Yes. I mean, I'm doing the math, I'm taking this high single-digit revenue growth and taking 47%-plus gross margin that you've guided to, your current operating expense rate, which is slightly elevated and just computing and imputed EPS based on that. And I'm still -- I'm struggling to get down to the number that you've guided for.

I'm going to let Scott answer that. Scott?

Yes. Thanks for the question, Aaron. Basically, I will say that I remain conservative. We feel that most of the tariff stuff is behind us, but that's subject to change at any moment, at least that's kind of what I've seen. So I am conservative. I have been conservative in the past. I think you'll recognize that. But I'm very comfortable with the guidance that we've provided.

[Operator Instructions] Your next question is from Jon Old with Long Meadow Investors.

John and Scott, thank you on the incredible results, appreciate it. I wanted to get your take on the sort of the size and addressable market for the 9500 relative to the existing radios that you have in the market today. Is it as big, bigger, smaller, just generally the opportunity there relative to what's the radios that we currently have on the market?

Yes. Thanks for the question, Jon. We're going to provide some updated guidance in March because we'll be getting closer to that launch. But just to look at some of the numbers that we've talked about in the past, right, we talked about the U.S. device market, handhelds, mobiles being about $2.3 billion, right, $2.3 billion. If I look at that marketplace for devices, there's a split between what we call handheld radios, so radios that you would carry in your hand or traditionally would be on your hip. So things that you would normally see from law enforcement officers when they're walking around. The second device is something that you would install in your vehicle, so like your stereo radio. It's fixed permanently in the vehicle. If I look at the historical split, it has been trending towards more handheld radios than mobile radios. But historically, it's been somewhere around 60% handhelds, 40% mobiles are now trending maybe 65-35. So if you take that $2.3 billion market, 60% to 65% of that is handhelds, which is what the BKR 9000 is. And then that leaves another 35% to 40% of the market, which would be the market for the BKR 9500 mobile vehicle. Again, some of these numbers, we're hoping to get refreshed as we set for our Vision 2030 to give you a better -- more insight because we believe that this is going to be a strong product for us. It's a companion radio to the BKR 9000 and that we think that because of the seating we're doing with the 9000, we'll start seeing sales on that fairly quickly.

And just a follow-up. So if you -- are they -- would they be sort of connected in some way? So in other words, if you get a customer with the 9000 or 9500, are they likely to buy both together such that if you have one of them, it makes the customer more sticky, I hope that I make sense of the question.

Yes, it does, Jon. Thanks for the question Yes, it does make sense. Thanks for the question. I think the -- if I was to make an analogy for this, right, it's kind of like I'm an iPhone user, I'm an Apple user. Therefore, when I bought my tablet, I bought an iPad, right? It's not to say that these things work together, but there's some seamlessness in terms of how you operate the two, right? If I can operate my iPhone, I can operate my iPad. That's very similar between the 9000 handheld radio and the 9500 mobile radio. They're two different devices, but how they operate, how the user uses those radios is very, very similar. And so while in some cases, customers will buy and start upgrading their fleets at the same time, it's very normal for them to focus on either one or the other products during the refreshment cycle. So customers will typically start with handhelds because they have a shorter life cycle replacement and then follow up with the mobile radios. So we're seeing customers who are buying our 9000 that are continually asking us when are we going to get the 9500 because that's the product they want to buy. They don't want to buy another radio, a different manufacturer's radio because, again, just from an operator's perspective, the -- how it operates is very similar, and it's just simpler training for their first responders.

Got it. I understand. That's great. So the extent that you can build a complete ecosystem that's going to probably lead to higher retention of customers and better sales, I would think.

Yes. And that's our goal, Jon, is the ecosystem around the handhelds, the in vehicles as well as the software side, right, InteropONE and BK ONE solutions, building that ecosystem.

Your next question for today is a follow-up question from Samir Patel.

John, I just wanted to follow up on that last answer you gave. Very simple question. When you were talking about that split in the TAM between the mobile radios and the portable radios, were you referring to dollars or units? Because my assumption is that the mobile radio probably has a different ARPU. So if you could just clarify that.

Yes. So I kind of gave a range, Samir. You are correct, right, that the split in dollars is different than the splits in units, that the mobile radio is a more expensive device than the handheld device. It's a few percentage difference between the two. So it depends -- every survey that I've seen, the dollar split between the devices is greater because the -- sorry, yes, greater because the number of -- the mobile radio is more expensive. And then -- but if you look at device count, it's smaller.

We have reached the end of the question-and-answer session, and I will now turn the call over to John Suzuki for closing remarks.

Thank you, Holly, and thank you all for participating in today's call. We look forward to speaking with you again when we report the third quarter results. All the best to all of you and have a great day.