RFIL - NASDAQ

Greetings. Welcome to RF Industries Second Quarter Fiscal 2024 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 will now turn the conference over to your host, Margaret Boyce, Investor Relations at RF Industries. Margaret, you may begin.

Thank you, Paul. Good afternoon, everyone, and welcome to RF Industries' second quarter fiscal 2024 earnings conference call. With me on today's call are RF Industries' Chief Executive Officer Rob Dawson; President and COO Ray Bibisi; and CFO Peter Yin. We issued our Q2 earnings release after market today. That release is available on our website at rfndustries.com. I'd like 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 under the securities exchange laws. 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. 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 the risks and uncertainties discussed in the company's reports on Form 10-K and 10-Q and other filings with the SEC. RF Industries undertakes no obligation to update or revise any forward-looking statements. Additionally, throughout the 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 GAPP and non-GAPP reporting. With that said, I'll now turn the conference over to Rob Dawson, Chief Executive Officer. Rob?

Thank you, Margaret. Welcome to our second quarter fiscal 2024 conference call. I'm here today with Ray Bibisi, our president and COO; and Peter Yin, our CFO. I'll start with the highlights of second quarter results and our strong market opportunity. Ray will then discuss some updates in our sales organization of what we're hearing from customers. And finally, Peter will cover our financial results. Before I get started, I realized that we sold some of our own thunder when we pre-released an outlook for the second quarter a few weeks ago. While that preview will not become a normal practice, it was necessary since there was a material increase not just in order flow, but also in our backlog that we felt needed to be publicly disclosed. We're pleased to see early signs of a recovery in our core markets. In the second quarter, we saw meaningful sequential improvement. Net sales were up 19.7% to $16.1 million. Gross profit margin improved 540 basis points to 29.9%. Our operating loss was cut dramatically and adjusted EBITDA returned to positive territory. This is the strongest indication yet that our business is on the rebound after a very challenging 2023 marked by significant cuts in telecom CapEx spending. Our results show improvement largely due to a steady reduction in operating expenses, as well as the strategic transformation of our portfolio to offer higher quality, higher value solutions. As we've talked about for several quarters, we've been positioning the company to benefit from some major market trends by working to transform our product and solution portfolio. We believe that we're nearing an inflection point in that portfolio pivot, driving higher margins and strength in the market. Q2 is the first quarter where you can really start to see that transformation show up in our results. There was significant margin improvement driven by a better product mix. We've had the goal to return to 30% or greater in gross margins, and we effectively achieved that this quarter even with modest sales results. Additionally, with all the work the team have done on our operating expenses, we've created tremendous operating leverage in the business. To give a little more detail, this quarter our revenue reflected a greater contribution from newer product areas like small cell solutions and DAC thermal cooling products. These increased sales contributed to an overall better performance. And while we're just getting started with these solutions, going forward we expect that the shift towards higher value products is sustainable based on recent incoming orders. For example, last month we announced several large orders totaling approximately $4 million across multiple product areas, including a $2 million win for small cell solutions from one key customer in the Tier 1 wireless carrier ecosystem. Based on these recent orders, telecom companies seem to be moving forward on upgrading their infrastructure with cost-effective and technology-forward products. We continue to be bullish on medium and long-term recovery in our markets, and if wireless CapEx continues to normalize, that would certainly have a positive impact on our overall business across the board. That said, once you've been stuck in a trough for a while, you look for alternative ways to avoid repeating that experience. For our team, that means looking beyond our traditional markets for new opportunities to deploy our portfolio of technologically advanced products that have many applications. Fortunately, the growth of our product and solutions portfolio, both organically and through acquisitions, has greatly expanded our offer and our customer relationships. These new additions, along with our standard and custom interconnect products, have allowed us to explore new market segments outside of the wireless carrier space. We're working hard to expand our customer base in existing markets. We're also using the wins in those current markets to explore the opportunity in other market segments. We believe that our updated solutions offering is allowing us to help solve new communications and connectivity challenges and positions us for growth in the best end markets and opportunities with less cyclical and more valuable solutions. This expanded and transformed offer aligns us to benefit from enhanced spending on some of what I'll call market mega trends. Let me walk through a few of these trends where we feel our offer is relevant. First, an obvious one, 5G and the related densification of the wireless infrastructure to fill in coverage gaps and address capacity demands. We've been at the forefront of this discussion around densification for several years. And based on our history supporting stadium and large venue build-outs, RFI has a sterling reputation for supplying many components needed for these projects. With our integrated small cell and installation materials offer, we're primed for the expected increase of street-level coverage. Our reputation for being a reliable, easy-to-work with partner with a broad range of connectivity solutions is our calling card with the wireless carrier ecosystem. Second, with the insatiable need for data both in mobile and fixed environments and the related AI boom that we're all hearing about, we're seeing some helpful trends. Researchers have suggested that AI could also lead to a shocking amount of power consumption, up to a tenfold increase. This is not surprising based on estimates that data centers are expected to double in the next year. While we don't compete directly in the hyperscale data center space, we absolutely see that demand bleeding over into the edges of the network. The buildout of data centers is pushing networking equipment further to the edges of the network and into the small buildings, cabinets, and enclosures that reside there. This is where we can shine, by cooling this equipment in a cost-effective and environmentally sound way. Our DAC thermal cooling offer is seeing an increasing level of interest in several applications where we can help solve these energy needs. Next, the United States continues to have a heavy focus on providing high-speed Internet for everyone, regardless of where you live and work. The U.S. Government is spending billions of dollars to provide universal connectivity with high-speed Internet to all communities, but especially in underserved communities. Known as the Broadband Equity Access and Deployment or BEAD program, the government is providing over $42 billion to expand high-speed Internet access through infrastructure deployment and adoption programs in all 50 states and its territories. We're developing strong relationships in these markets and are actively working to become better positioned to benefit from this major uplift in infrastructure spending. Finally, with well-known initiatives in the defense and aerospace market, along with the new frontiers that are being driven by space companies, we believe that we can see meaningful additional streams of revenue from providing innovative solutions in these markets. We're already doing business with many companies in these areas through our custom cabling segment and feel that we are in the early stages of showing our value here. And as we discussed last quarter, a large percentage of our sales already come from markets that are unrelated to the wireless carrier applications. Plus, some of our key solutions in the wireless carrier space are aligned with operating and maintenance budgets versus CapEx spend. One example is again our DAC thermal cooling systems. These patented systems are built to stand the rigor of outdoor environments. Plus they have state-of-the-art technologies that can reduce operating expenses by up to 70% over conventional HVAC systems and can help companies achieve their green initiatives. Across many market segments, companies are now focused on updating their cooling infrastructure, which would benefit RFI by having the ability to flex between OpEx and CapEx spending. Looking ahead, we're optimistic these demand trends will continue, and we're excited to see the first real indication of what our business could look like with some wind to our back. I want to thank the RFI team for staying focused and continuing to manage the levers that we can control, like the customer experience, our cost structure, product quality, and a positive energy level. We appreciate the support from our customers and the opportunity to partner with a terrific and expanding customer base. We remain confident that we have the right business model, the right products and solutions, and the right team to capitalize on improving momentum to deliver increased shareholder value as we move into the back half of fiscal 2024. I'll now turn it over to Ray to discuss what we're hearing from our customers. Ray? Thank you, Rob?

Thank you, Rob. As previously mentioned, we have developed an impressive portfolio to support the connectivity and communication needs of several key markets. Our team has earned our customers' confidence as a go-to source for a broad and high-quality product portfolio, quick-turn solution, and attentive customer support. Many of our customers have communicated how they appreciate the value of our reliable partnership and our commitment to supporting them through challenging times. I applaud our teams for their customer-first mentality and their dedication to helping them with actionable solutions. As a part of our go-to-market strategy, we reorganized and strengthened our sales leadership team. John Cirincione has assumed the role of VP of Sales of Key Accounts, focus on end customer applications and business development. We have also added Mary Beth Smith, a 20-year veteran in sales and product management within the telecommunications industry. As Vice President of North American Distribution Sales, Mary Beth will be focused on further enhancing RFI's strong reputation within the channel segment. We are already seeing benefits of this realignment by winning new orders and will continue to focus on driving further cost reductions that will contribute to margin expansion as we scale our business. Over the past months, we have achieved significant wins, while expanding our market presence and launching new initiatives. These successes highlight the effectiveness of our strategic plan to meet the evolving needs of our customers. As we move forward we remain aligned in maximizing the opportunities ahead by leveraging our strengths, exploring new markets, and continually enhancing our product offering. We believe this focused approach will contribute to an even greater success for RFI in the future, driving growth and reinforcing our position as a leader in our industry. I will now turn it over to Peter to discuss our financials. Peter?

Thank you, Ray, and good afternoon, everyone. We're pleased with our second quarter operating results and are encouraged to see new order flow increasing, which is adding to our backlog and giving us positive momentum as we enter the second-half of the fiscal year. As I discuss the financials, I'll provide comparisons on a sequential and year-over-year basis. Second quarter net sales increased 19.7% sequentially, up to $16.1 million, up from $13.5 million in the first quarter. Net sales were down compared to $22.3 million in the prior year period. Second quarter gross profit margin increased 540 basis points to 29.9% and improvement from 24.5% in the first quarter of fiscal 2024 and up from 27.4% year-over-year. The increase in gross margin was primarily the result of a more favorable product mix along with increased efficiencies from facility consolidation and cost reduction initiatives. Operating loss was $415,000, an improvement from a loss of $2.1 million in the first quarter of 2024 and down from income of $489,000 year-over-year. During the second quarter, consolidated net loss was $4.3 million or $0.41 per diluted share, a sequential decline from a loss of $1.4 million or $0.13 per diluted share in the first quarter of fiscal 2024, and down from income of $581,000 or $0.06 per diluted share year-over-year. It's important to note here that in the current period, the consolidated net loss was driven primarily by a $3.6 million tax provision relating to evaluation allowance on our deferred tax asset balance, which is a non-cash event. Non-GAAP income was $132,000 or $0.01 per diluted share, an improvement from non-GAPP net loss of $1.4 million or $0.14 per diluted share in the first quarter of fiscal 2024 and down from non-GAAP net income of $1.2 million, or $0.11 per share year-over-year. Second quarter adjusted EBITDA was $572,000, up from adjusted EBITDA loss of $1.1 million in the first quarter of 2024, and down from adjusted EBITDA of $1.4 million year-over-year. Moving to the balance sheet, as of April 30, 2024, we had a total of $1.4 million of cash and cash equivalents, and we had working capital of $10.9 million and a current ratio of approximately $1.6 to $1, with current assets at $30.2 million and current liabilities at $19.3 million. The line of credit we entered into in March has a term of three years and will allow up to $15 million depending on our borrowing base. However, due to the structure of the loan, the outstanding balance has been classified as a current liability. As of Q2, we had borrowed $10.5 million from the line of credit. We believe that the amount of liquidity available to us will be sufficient to fund the anticipated operational needs of the company. Our inventory level was $16.4 million, down from $18.7 million last year. The decrease in inventory reflected our continued rationalization and bright sizing of our inventory as we continue to improve our processes and systems capabilities around the company's supply chain. Even with the reduced inventory level, we believe it supports our strategic business model of inventory availability. We continue to manage this closely as we expect to see increased demand in 2024 as spending in key markets gradually normalizes over the coming year. Moving on, we are seeing momentum build around new business. Our backlog as of April 30, 2024, was $18 million on second quarter bookings of $17.9 million. Subsequent to Q2, we've seen an increase in order flow, which we announced in a press release. And as of today, our backlog currently stands at $20 million. As we look ahead, we believe we have positioned the company for a positive macro demand, we believe we have positioned the company for the positive macro demand trends. We are excited about our opportunity to deliver high quality solutions to our customers, while generating improving financial results for our shareholders. With that, I'll open up the call for questions.

Thank you. At this time, we'll be conducting a question-and-answer session. [Operator Instructions] First question today is coming from Josh Nichols from B. Riley. Josh, your line is live.

Yes, thanks for taking my question. Great to see such a big sequential improvement in the margins despite what's still relatively modest revenue base compared to some of the historical numbers you guys have put up. Could you dive into that a little bit more? I'm kind of curious about the magnitude of the margin differential between some of these new densification and the direct air cooling products that you're seeing a big uptick in demand relative to the traditional offerings that you guys have sold?

Yes, sure. Thanks, Josh. Good question. I think one of the things we've talked about over the last several quarters, and at times I sort of felt like the boy who cried wolf, that we were going to see these things start to have an impact. And there really hadn't been a material impact in our top line results, including these higher value product lines. And while we're not specifically disclosing what those margins are, I can say that they're generally a good bit better than kind of our historical blend, which put us somewhere in the high-20s sort of over the last several quarters. So I think you're starting to see even a small impact from a top line perspective will drag those margins the right direction and we knew that was going to start to happen, I think we're in the early stages of seeing a broader impact in that mix. So the better those product lines do, which again, we feel pretty good about, it's going to have that meaningful impact. And as you pointed out, with modest sales growth, you can still get to a nice margin level, which we've been waiting to see that and be able to talk about it more specifically when it happens.

And then I guess when you're looking at these new products that they're picking up, there's a couple things, small, so you mentioned cooling offerings. Is there like one or two specific offerings that you are seeing some increased traction on in the near-term? And could you to that extent kind of elaborate on the pipeline you've already secured some pretty large wins there? Do you expect to see some other mid-high six figure, seven figure kind of overall awards for the remainder of this year for those offerings?

Yes, good question. I think so from a new opportunity perspective, we continue to have a pretty robust pipeline of opportunities, that some of which have been out there for a long time and some are showing up, because we're starting to have some successes and be able to use those as the tip of the spear to break into other opportunities and other customer needs. So I think we're sort of normalizing the business around seeing these six-figure purchase orders much more frequently, which is where we get into the materiality discussion of you go back five or six years ago and we would have disclosed something like that. Now we're at a point where you see several of them combined together and you put out news like we did a few weeks ago where we had this influx of $4 million in sales in a handful of large orders. I think we're getting used to the fact that those are going to come in more readily like that and will be drawn against over the course of time. And I think that's probably the bigger point here is, these are more programmatic from a sales perspective. So the sales cycle's a little longer. You have to get approval, which as we mentioned in the prepared notes, is something that we've done a good job of getting in front of them, getting a lot of different product lines approved by some key customers. It's not just one or two, in many cases, we're talking half a dozen customers who've given us approvals and/or are working in putting products in their labs to make sure that they'll fit the needs of what they have within their network. So I think the short answer is we expect those kind of larger six-figure orders to continue to flow every so often. I think that there's another point is some of these things, especially on the DAC, thermal cooling side, are more tied to an operating and maintenance budget, which may be, from an order perspective, more front-end loaded in a year, depending on purchasing patterns. Sometimes they'll put a large order in and draw against it for the year. Sometimes it becomes a quarterly sort of order placement, and then there's the -- call it immediate needs or more emergency needs that flow in kind of off and on throughout the year. So I think it's a new pattern that we're adjusting to. We'll disclose the materiality of them when they come in. But I think when you look at our backlog, going up from a sales perspective, going up $2.5 million, call it, and then seeing our backlog go up again, I think that gives us the momentum, whether the timing is always perfect on, in which 90-day period does something ship, I think overall we're seeing a definite uplift in our expected results.

That's great. I guess, like, you talked about the cadence a little bit, right, some very good sequential improvement. I guess when you look at the backlog, the mix, and that's only on just over $16 million of revenue, I guess it's fair to assume that you expect some potential sequential increases to revenue throughout the remainder of this year and that gross margins in the second-half would be north of 30%, does that revenue grow from the current base?

Yes. So I think your first point, we certainly expect the second-half of the year to be better than the first. It's sometimes hard and we, you know, a company of our size a $500,000 movement of a shipment from one week to the next can shift to another quarter and completely throw off what we've just said. So I'm cautiously optimistic to say, you know, we expect sequential growth. We certainly expect the second half of the year to be better than the first. And Q3 and Q4, it's hard to know which one's larger. Do they look the same? Those are the kinds of things that we monitor closely, but it's, I think, more important for us to look sort of year-over-year. If you look at the last three or four quarters combined, we're starting to see a recovery that says we expect the next several quarters to be way better than this trough that we've been living in for a little while here. As far as margins go, I think we're starting to see the impact of these higher margin items and the cost work that the team has done. So our expectation is that we're not going to fall backwards on those margins. Where exactly they shake out really does become this kind of inflection point of you see what a $16 million number looks like. If that number were to be $17 million or something greater, I think you're not only going to see way better margins, but the material amount of that is going to start to fall through to the adjusted EBITDA line. And that's really the biggest topic is, you know, we live and die at the gross profit line, which is very tied to product mix now, especially. And the better we can do on that top line, even a $0.5 million or $1 million increase will have a very significant impact on that bottom line, which again, we've been communicating that for some time. I think it's nice to finally have a quarter where you can go see. This is what we've been saying, and that's kind of where we are now, is hoping to be able to keep doing that, and we feel pretty good obviously with the backlog where it is that we've got some good wind in our back.

That's great color and then the last question for me I mean now two quarters in a row you've done a lot of operational enhancements too. I'm sure that that's close to not just the gross margin but the OpEx spend you've been at around like $5.3 million of OpEx each quarter in the first-half. Care to assume that like that's going to be a fairly stable run rate from here? Are there any other things that we should be cognizant of when we're thinking about the operating expenses for the back half?

Yes, so I think we, you know, $5.3 million a good number. We believe there's room to make that a little better. You know, we also need to be smart about the idea that we have taken out a lot of cost and the last thing you want to do is take out so much cost that you can't address the recovery of sales and the increased demand that's happening in the market. So we're trying to be patient and smart about it and kind of work through it as we see things changing. But I think overall we expect that there's opportunity to reduce that some additional amount as we go kind of through the next couple of quarters here and we would start the next fiscal year with an even lower OpEx flying than the $5.3 million. So I think you're seeing kind of a normal number, but there is room for us to, we believe, make that a little better.

Great. Thank you. I'll hop back in the queue.

Okay. Thanks, Josh.

Thank you. [Operator Instructions] And there were no other questions from the lines at this time. I'll now hand the call back to Rob Dawson, CEO at RF Industries for closing remarks.

Great, sounds good. Thank you, Paul. And thank you everyone for joining us today. The team and I look forward to sharing our fiscal third quarter results in September. Have a great day and enjoy your weekend.