RF Industries Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
September 14, 2023

There are 4 speakers on the call.

Operator

Welcome to the RF Industries Third Quarter Fiscal 2023 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. I will now turn the conference over to your host, Jack Japes. You may begin.

Speaker 1

Thank you, operator. Good afternoon, and welcome to RF Industries' 3rd quarter fiscal 2023 financial results conference call. With me on today's call are RF Industries' President and CEO, Rob Dawson. Before I turn the call over to Rob, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its Q3 fiscal 2023 financial results.

Speaker 1

That release is available on the company's website at rfindustries.com. This call is also being broadcast live over the Internet for all interested parties, Call management will make forward looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on 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 the outcomes contained in any forward looking statements.

Speaker 1

Factors that could cause these forward looking statements to differ 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 ks and 10 Q and other filings with the Securities and Exchange Commission, RF Industries undertakes no obligation to update or revise any forward Looking statements. 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 ks describe the differences between our GAAP and non GAAP reporting and present the reconciliation between the two for the periods reported in the earnings release. With that said, I will now turn the conference over to Rob Dawson, President and Chief Executive Officer.

Speaker 2

Thank you, Jack. Good afternoon, everyone. Our 3rd quarter results tell the story of a very challenging quarter. As you saw in our press release, 3rd quarter revenue was $15,700,000 Down 34% year over year. I knew we had a tough comp against a record Q3 last year, but when I last spoke with you in June, we were seeing steady order activity And the expectation of consistent shipments of hybrid fiber cable.

Speaker 2

Overall, I thought we were seeing some decent momentum until we hit July. The pause hit hard with many of our key projects and shipment schedules put on hold. Customers were delaying delivery of their orders or freezing new orders for project based deployments. Due to these delays, we shipped virtually no hybrid fiber cable in the quarter, Along with less sales of carrier approved RF passives and these surprising developments significantly impacted our quarter. Those of you following the industry know that the wireless carriers have greatly curtailed their capital spending over the last few quarters.

Speaker 2

Those carriers and the large neutral hosts have been restructuring their businesses to adapt to an environment of higher interest rates, Overstocked inventory and steep labor costs among other things. This has included significant headcount reductions in the entire carrier ecosystem. Look across the board and you'll see even the big players in our space like the radio manufacturers are going through some challenging times and reporting numbers well below the prior year in the North American market. While we can't control the economic backdrop, we can control our own business and that's what we've been focused on. We have a very strong management team and Board with a lot of knowledge and insight gained from past experience that gives us a bias towards action.

Speaker 2

We start with what we know to be true. Telecom is here to stay and continued investment in wireless infrastructure is mandatory, not optional. 2nd, there's a tremendous pent up demand to improve telecom infrastructure across the U. S, especially in the 4 gs and 5 gs build outs. 3rd, network densification is the next phase of the build and is required to address coverage gaps and the constant consumer expectations for faster and faster connections With coverage everywhere.

Speaker 2

In the last 45 days alone, we've received orders and commitments of nearly $1,500,000 for integrated small cell shrouds. We've also seen decent orders for passives and cabling for large stadium DAS builds. This is what densification looks like and we believe that our offer is correctly positioned to benefit from it. We also know that our major customers can't push the pause button indefinitely And when they get going, they'll be looking for better and more cost effective solutions. That's where we plan to shine.

Speaker 2

While timing can be hard to predict, We know that RF Industries has a broad selection of high quality interconnect products and next generation integrated systems. And we're always innovating both in the wireless carrier space and other markets. We recently launched our MicroLab Enterprise Plus offering To serve the hundreds of integrators throughout the United States that are focused on enhancing cellular and public safety wireless in commercial buildings and multi dwelling units. This opens the door to a new market opportunity that is not reliant on wireless carrier budget cycles and the early response to this exciting new offer has been very positive. Additionally, we continue to think strategically and explore other markets beyond wireless such as wireline, utilities, transportation, safety, Aerospace and Defense, because many of our products have applications relevant in these areas and we're looking to diversify our exposure to broader markets.

Speaker 2

The growth we've seen with wireless carriers in the last few years can be viewed as a double edged sword. The good news is that we have positioned ourselves directly in line site of wireless carrier CapEx, both organically and through M and A, which is a new position for the company in our almost 45 years in business. When the CapEx dollars flow, we see huge upside. The other edge of the sword is when that CapEx pauses and we have to retrench. So while we love the direct interaction with the wireless carrier ecosystem and the team has done a terrific job to get us to that position, we also continue to look for avenues of diversification.

Speaker 2

Beyond investing in product development, we've also been executing on our plan to control costs and drive further synergies By consolidating our facilities as we continue to focus on higher profitability. In the Q3, we completed our manufacturing and distribution consolidation, And this helped reduce our quarterly operating expenses by $330,000 this quarter compared to the same quarter last year. And with the full benefit of this expense reduction in the Q4, we expect even larger savings. In total, We expect annualized cost savings of approximately $2,500,000 to $3,000,000 As we strip out these costs and look to increase sales, We expect our profitability to improve in future quarters, although it's difficult to provide specific timing given the current broader market conditions. What we do know is that when revenue returns, we'll be in a strong competitive position with a highly attractive product portfolio, A capital light business model and substantial operating leverage.

Speaker 2

Now I'll give some color on our 3rd quarter financials. As I mentioned earlier, 3rd quarter revenue was $15,700,000 down 34% year over year, Primarily reflecting a much lower contribution from hybrid fiber cable as well as lower sales related to carrier projects involving approved RF components. I do want to point out that our core interconnect products remained solid in the quarter and large shipments and orders that were put on hold still remain in our backlog. The sales decline and product mix pressured consolidated 3rd quarter gross profit margin, which came in at 24.4% Compared to 30.4% in the year ago quarter. Operating loss was $2,000,000 versus operating income of $1,100,000 in the comparable quarter, Again, due to lower sales, including the cable products and RF components that I discussed.

Speaker 2

Taken together, these factors resulted in a net loss of $1,600,000 or $0.16 per diluted share for the quarter, Compared to net income of $771,000 or $0.08 per diluted share in the Q3 of 2022. Non GAAP net loss was $784,000 or $0.08 per diluted share compared to non GAAP net income of 1,600,000 or $0.16 per diluted share for the same period last year. Adjusted EBITDA loss for the Q3 was $940,000 This compares to adjusted EBITDA of $2,100,000 in the Q3 of 2022, reflecting the impact of lower sales and less leverage to cover certain fixed At the end of the 3rd quarter, our cash and cash equivalents were $4,100,000 Working capital was $22,800,000 And $2,000,000 was available under our revolver. We drew down our revolver by $1,000,000 to cover leasehold improvements associated with the consolidation efforts I mentioned earlier. During the quarter, we continued to work with our bank and we successfully renegotiated the terms of our debt covenants without any major changes to the structure of our term loan or revolver, giving us leeway to navigate this challenging time.

Speaker 2

Inventory was $20,200,000 at the end of the quarter, up from $19,200,000 in the year ago quarter. The year over year increase in inventory was primarily due to MicroLab, in which we've invested an additional $1,500,000 since last year. On a sequential basis, we reduced inventory by $182,000 Looking ahead, we believe there's more room to reduce rationalize our inventory without jeopardizing our value proposition of inventory availability for our customers. We'll continue to carefully manage our inventory levels to help build our cash position. We're also constantly reviewing our pricing policies as we look for opportunities Increase our margins.

Speaker 2

Backlog was $17,200,000 at the end of the 3rd quarter on bookings of $14,000,000 As of today, backlog stands at $16,700,000 which still includes many of the delayed hybrid fiber shipments. In fiscal 2023, we're continuing to deal with market challenges that are pressuring our top line growth. Regardless, Our focus on improving profitability is our top priority and we've set what we believe is an attainable goal of achieving an adjusted EBITDA above 10% of sales as market conditions normalize. Regarding guidance for fiscal year 2023, with what we see today, it's difficult to predict what to expect in the near term. Based on current visibility, we expect 4th quarter sales to increase sequentially from the 3rd quarter and that subsequent quarters will continue to improve throughout 2024.

Speaker 2

While the near term environment is difficult to navigate, our team is up to the task. Over the past 6 years, We've consistently we've significantly grown and transformed the business while streamlining our operations for cost efficiencies And we've continued to innovate with new product offerings that both widen and diversify our market opportunity. Once the CapEx faucet turns back on, we're ready. In closing, I appreciate that it takes patience to wait out a business cycle. We've been through these pauses before, And I think we might be seeing a bottom forming in our market.

Speaker 2

While our quarterly revenue trend has been inconsistent and lumpy for the last several years, We've achieved significant growth and we remain committed to our long term strategy that has helped us profitably grow sales from $23,000,000 to $85,000,000 over that 6 year term. We believe that Q3 was just a bump in the road similar to the many bumps we've overcome in the past few years. Long term, RF Industries is in a great position to generate solid returns for investors and we're grateful for the ongoing support of our shareholders. With that, I'll open the call to questions. John?

Operator

Thank you. At this time, we will be conducting a question and answer

Speaker 3

Hi, there. This is Kat Knope on for Josh Nichols.

Operator

I was

Speaker 3

just wondering if you could speak a little bit more about Like carrier CapEx cycles and kind of what you're seeing in terms of when those will resume?

Speaker 2

Sure. Yes, good question. So I mean, look, it's not abnormal in a major build cycle generational like this one to have macro sites built first, Then there's usually a pause while they consume that and then there'll be the more densification build. So we think we're in that pause at the moment, Elyse. Think everyone that I talk to agrees that that's what's happening.

Speaker 2

And we expect the with what we're hearing today, we expect getting into calendar 2024 to be in a different environment, I think we're hearing that not just from the carriers, but from the neutral hosts and tower companies, the contractors and integrators. We're hearing real site counts from people and there's folks out walking the sites to make sure the bill of material is accurate. That's a phenomenon that typically leads to the cycle picking back up. And again, not that it couldn't happen towards the end of 2023 in a broader way, Because we are seeing a little bit of increase there, but I think the bigger expectation is we get into 2024, 2025, 2026, there should be some Consistent spending on densification in particular.

Speaker 3

All right, great. Thanks so

Operator

Okay. It looks like we have no further questions in queue. I'd like to turn the floor back to Robert Dawson

Speaker 2

Thank you, John, and thanks everyone for joining our call today. We look forward to sharing our fiscal 4th quarter results in December and look forward to speaking to many of you over the next few days. Have a good day.

Operator

This concludes today's conference and you may disconnect your lines at this time. Thank you for your participation.

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Key Takeaways

  • 34% year-over-year revenue decline to $15.7 million in Q3, driven by a pause in hybrid fiber cable shipments and reduced sales of carrier-approved RF passives.
  • Wireless carriers and neutral hosts have substantially curtailed capital spending amid high interest rates and inventory build-up, causing key project delays and order freezes.
  • Facility consolidation in Q3 delivered $330,000 in operating expense savings, contributing to a target of $2.5–3 million in annualized cost reductions to improve margins.
  • New orders and commitments of nearly $1.5 million for small cell shrouds plus the launch of the MicroLab Enterprise Plus platform aim to diversify revenue beyond carrier CapEx cycles.
  • Management expects sequential Q4 sales growth and is targeting adjusted EBITDA above 10% of sales as market conditions normalize and network densification spending resumes.
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Earnings Conference Call
RF Industries Q3 2023
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