Cemtrex Inc (CETX) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Cemtrex, Inc. Fiscal Year 2017 Third Quarter Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Garth Russell with KCSA Strategic Communications. Thank you. Mr. Russell, you may begin.

Thank you. Before we turn the call over to management, I would like to make the following remarks concerning forward-looking statements.

All statements in this conference call other than historical facts are forward-looking statements. The words anticipate, believe estimate, affect, intend, guidance, confidence, target, project and other similar expressions typically are used to identify forward-looking statements. These forward-looking statements are not guarantees of future performances and may involve and are subject to risks and uncertainties and other factors that may affect Cemtrex’s business, financial condition and other operating results which include but are not limited to the risk factors and other qualifications described in the risk factors section of our 10-K and 10-Qs as filed with the SEC. Therefore, actual outcomes and results may differ materially from what is expressed or implied by these forward-looking statements. Cemtrex expressly disclaims any intent or obligation to update the forward-looking statements.

At this time, it is now my pleasure to turn the call over to Saagar Govil, Chairman and Chief Executive Officer of Cemtrex. Saagar, the floor is yours.

Thank you, Garth, and thank you, everyone for joining our call today. I am joined by the CFO, Renato Dela Rama, as well as one of our directors, Aron Govil.

We will begin by providing you with an overview of our performance during the third quarter of fiscal 2017 which will be followed by the details of our financial results. After our prepared remarks, I'll be happy to answer any of your questions.

With that, let's get started. During the third quarter of 2017, we experienced solid total revenue growth of 13% to $27.8 million. And for the 9 months ended June 30, this resulted in total revenue growth of 54% to $87.7 million. In comparison, we reported full year of fiscal 2016 revenue results of $93.7 million. In the first 9 months of 2017, we have nearly achieved those results and anticipate another positive fourth quarter to close out fiscal 2017.

In April of 2017, we were pleased to record -- to receive a record number of new incoming orders for the month resulting in over $21 million over time. Included in these orders is our largest order to date of $15 million from an existing customer operating in the information technology market. Cemtrex has had a previous relationship with this customer, but this shows that customer's commitment to Cemtrex going forward and reaffirms the customer's support of Cemtrex's services and products. This deal is for $15 million over a 3-year period, and under the terms of this agreement, we will be providing manufacturing, assembly and logistics services to this client.

Securing a deal of this size from an existing customer is a great accomplishment. It is important for us to have a strong sales team that is capable of building off customer wins in order to further grow our business.

We are committed to further investing in our sales and marketing efforts and related activities in order to increase our sales pipeline. Our outlook is promising, and we believe our investments have been worthwhile and will continue to provide returns into the future.

We believe that our ability to attract and retain customers comes in from our ongoing commitment to understanding our customers' business performance requirements, and further, our expertise in meeting or exceeding these requirements, enhancing their competitive edge. We work closely with our customers to achieve a deep understanding of their goals, challenges, strategies, operations and products to ultimately build a long-lasting successful relationship. This will assist us going forward as we expand our relationship with each customer, helping to supply them with additional services.

Activity for both our Electronics Manufacturing Services division and Industrial Products & Services division continues to expand through new and existing clients. During the third quarter of 2017, we saw a greater focus of activity for our EMS division, resulting in year-over-year growth of 17%. However, we are pleased with the pipeline for both businesses we see moving forward.

Recently, we also announced the establishment of our new subsidiary, Cemtrex Advanced Technologies Inc., which is a fusion of our extensive experience in product design through our existing businesses. Under this new subsidiary, we will pursue both organic and inorganic growth opportunities in the Internet of Things and wearables markets by designing and developing product to support our customers ahead of the technology curve.

Our electronic manufacturing capabilities and know-how to support customers end-to-end needs has been key to the launch of our new subsidiary as we now have strong prowess in providing product design, sustaining engineering services and a successful track record of designing and manufacturing some of the most advanced products available in the market, from technology for particle accelerators to airbag jackets for motorcycle drivers. Our initial focus under the Cemtrex Advanced Technologies group is a reinventing a workspace environment, which has not evolved over the years at the same speed as technology has been advancing. This concept has been of interest to the company for some time, and it is exciting to have finally launched this division to make our concepts a reality.

We introduced our initial concept under development, the advanced smart desk, which reimagines a computer workstation form factor. It is an extremely cutting-edge concept with some key features to include a high-resolution multitouch display with ability to draw, scan documents, wireless connectivity for the cloud and next-generation wireless charging capabilities for mobile devices.

But the smart desk is just the beginning. We believe our experience in both industrial and consumer product development and design has helped us provide -- helped us to best identify our product pipeline moving forward. We are working quickly and diligently to make our ideas a reality.

To summarize, we are excited by the innovation happening at Cemtrex. In all of our divisions, we are taking our services and products to the next level. We are pleased with the brand we have developed thus far and look to increase our awareness moving forward.

As we look out to the end of fiscal 2017 and beyond, customer demand remains strong, and we expect to maintain attractive growth for the remainder of the fiscal year.

Turning to the detailed review of our financial results now for the quarter ended June 30, 2017. We reported quarterly revenue of $27.8 million, an increase of 13% compared to $24.7 million for the same period last year. This includes revenue of $13.5 million from the IPS division for the third quarter of 2017, an increase of 8% compared to $12.5 million for the third quarter of 2016. This growth is attributable to increased shipments and execution of orders during the quarter.

Revenue from the EMS division for the third quarter of 2017 was $14.3 million, an increase of 17% compared to $12.2 million for the third quarter of 2016. The primary reason for this increase is the acquisition of Periscope in May of 2016.

Total revenue for the 9 months ended June 30, 2017, came in at $87.7 million, an increase of 54% compared to $56.9 million for the same period in 2016. This revenue growth is primarily a result of the strategic acquisitions at AIS in December 2015 and Periscope in May 2016. We have also seen a steady organic growth in our business.

Per our business model, we remain on the lookout for potential future acquisitions to add on to our existing businesses as we continue to scale.

Looking at the performance of the divisions for the 9 months ended June 30. Revenue from the IPS division was $42 million, an increase of 27% compared to $33.2 million for the same period in 2016. This increase is primarily due to increased shipments of goods and execution of projects as well as our acquisition of AIS. Revenue from the EMS division for the 9 months ended June 30 was $45.7 million, an increase of 93% compared to $23.7 million for the same period in 2016. The primary reason for this growth is the acquisition of Periscope.

Gross margin for the third quarter of 2017 was 36% compared to 33% in the same period for 2016. For the 9 months ended June 30, gross margin was 33% compared to 31% for the same period in 2016.

Operating expenses for the third quarter of 2017 were $8.5 million or a 5.5% operating margin compared to $6.5 million or a 6.9% operating margin for Q3 2016. The increase in operating expenses year-over-year is attributable to an increase in sales, marketing and professional service costs.

For the 9 months ended June 30, 2017, operating expenses were $24.8 million or a 4.7% operating margin compared to $14.8 million or a 5.4% operating margin for the same period in 2016.

Net income for Q3 2017 was $1.2 million or $0.11 per share, compared to $1.4 million or $0.16 per share for Q3 2016. This decrease was due to increased sales and marketing expenses and a loss on disposal of assets.

For the 9 months ended June 30, 2017, net income increased 2% to $3 million or $0.26 per share compared to $2.9 million or $0.36 per share compared -- for the same period in 2016. This increase was primarily due to the acquisitions of AIS and Periscope.

Turning to the balance sheet, cash and cash equivalents as of June 30 were $13.2 million, up from $6 million as of September 30, 2016. The increase in cash is mostly attributable to the net proceeds of $12.8 million from the rights offering we completed during the second quarter of 2017.

Additionally, our book value per share is $3.49 as of June 30, up from $1.67 as of June 30, 2016, an increase of 108%.

In closing, we are pleased with the momentum we have made during the third quarter of 2017, especially in the advanced -- especially in the electronics manufacturing space from both our EMS division and our newly-launched Advanced Technologies division.

Our pipeline is strong in all of our businesses as we focus on building out our sales and marketing activities. We see the remainder of 2017 as an inflection point for the growth to come over the next 5 years.

This brings us to the end of our formal remarks. Operator, would you please open the call to questions?

(Operator Instructions) Our first question comes from the line of John Nobile with Taglich Brothers.

My first question, I'd like to know what percentage of your environmental sales are currently based in the U.S? And do you see this decreasing in light of the current administration's plan to withdraw from the Paris climate accord?

So thanks for the question, John. The environmental sales that we do in the United States are relatively small, I'd say under a couple of million in revenue, so let's say under $5 million. And I would say demand in the U.S. is weak due to the current administration's position on the overall issues relating to climate change and other gas pollutants. So our expectation is that there won't be significant growth here in the U.S. due to those -- due to the current administration. However, we still believe that the long-term growth for this type of products and services internationally will remain strong as other countries continue to expand their efforts in that regard.

Okay. I know the June quarter, you had a -- well, a growth in the industrial products segment. So I'm just curious if going forward, it may be more flat. Or do you continue to see this still growing in light of maybe the U.S. not really growing as much? I mean, I'm just trying to get a handle on how to project forward this segment's revenues. So would it be safe to say -- still growing but maybe not as robust as, say, the prior years?

No. I think that's not necessarily the case. We do have a strong services part of our business which is unrelated to the environment. And a lot of our revenues are projects we're doing globally. So we did 8% growth annually -- I'm sorry, year-over-year. And as I've mentioned in the past, our -- what we shoot for is 10%, and on average, that's kind of where we'll look to be. So it will fluctuate any given quarter and in any given year, but I think on average, we're still feeling pretty optimistic as far as the growth over 2- or 3-year periods and so forth.

Okay, great. And with your entrance into the IoT space, the Internet of Things, I don't know if you could talk about this quantitatively or even in a general sense, how accretive do you think this might be to your revenue, say in 2018 or beyond? I mean, I'm just trying to get a handle on this. I know it's kind of early to ask this question, but could you actually be quantitative on this? Or really until orders start coming in, we should wait...

I think in -- as far as quantitative, I don't want to give any specifics at this point in time. I think as we move forward over the next 6 months, there will be opportunity for us to give some indications as far as what we expect. We are working on developing technology and achieving various milestones to get products to market. And I think that will become clear as far as the revenue potential. But we are very bullish on this and I think there are immediate opportunities for revenue from this that will be accretive and grow the business and help us continue to build on that. So that will definitely be there, but I'm not going to give a specific number at this time.

All right. And even with the initial sale, even if they are very small to start with, that will be broken out on a separate line item on the income statement? Now, you'll have 3 segments, correct?

That's correct.

Okay. The medical device market, the strong growth projected for that segment there. So I'm just curious if you could break out what percentage of your EMS sales are driven by that market in particular.

Yes. I would say on the order of 25% to 30% is medical device-related revenue.

From the EMS segment? All right...

That's right.

Well, that's pretty significant, okay. I just have one final question relating to the EMS segment. This particular quarter, your gross margins in the EMS segment were approximately 41%. And I mean that's up significantly from -- let me see, last year, for the whole year, you were at about a 35% gross margin in EMS, and now, you're at 41% this quarter. So I'm trying to get a feel for what to expect going forward. Do you see this level sustainable? Or was there anything in it that might have caused it to be a little bit higher than what it normally should be?

I think it's just a product service mix. And as we restructure our operations, some of that fluctuates, but I expect it to continue to grow. But as I've mentioned to you before, it does fluctuate and it'll be between that 33 and 36 range. And I mean, we're going to do our best to sustain it, but it's always a challenge to maintain that. But it will fluctuate a little bit, I think, moving forward. But I think over the long-term, it will continue to grow as we expand our various services, our higher-margin services, our higher-margin products and so forth.

(Operator Instructions) Our next question comes from the line of Matthew Larson with Wells Fargo.

Question for you. What plans -- can you discuss the plans you have with the cash you have on the balance sheet? I think you raised it primarily to be in a position to make strategic acquisitions, use some to buy back some stock and what have you. And I wanted to know see whether or not you feel you're in a position to dramatically grow the revenues the way you did in the previous year or 2 through strategic acquisitions.

Yes. Thanks for the question, Matt. That's absolutely right. We're looking at a number of acquisitions that are a good use of cash to generate strong return for our shareholders and scale on order of magnitude that we have done in the past. So in 2010, we were doing $3 million in sales. And here we are in 2017 -- or 9 months doing about 80 -- over $80 million. So there's no question that we're thinking big and we're looking out there into the market and seeing what's available and what's possible. As with the nature of this process, we don't like to announce deals until we're a certain way down the road with any potential acquisitions. So as opportunities materialize, we'll certainly make announcements accordingly. And at this point, there's nothing concrete, I would say, but we're looking at a number of opportunities in both the industrial side and electronics side and sort of tangential to some of our existing businesses that can all add strategic value to the business. So as we make progress, material progress for sure, we'll definitely make an announcement in that light.

All right. Because I assume that's kind of your game plan. I mean, your stock is basically the same level it was when it got hit due to some article put out by a negative blogger. You guys made some moves that I felt were appropriate at the time. You bought back some shares. You initiated a dividend. And frankly, have executed for now 2 quarters. And -- but the real way to combat that would be to show some growth. And I know that you're looking to do it organically in some of the areas you've already discussed. But presumably, a strategic acquisition that would be immediately accretive would really be the sort of thing that could get a company of your size, I guess, to the next level. Is that kind of your thinking?

Yes, that's a fair assessment. And it's a -- we're absolutely looking at acquisitions that can continue to have strategic significance, strategic value and be accretive as we continue to grow here. So I think that's fair and I think we are looking to grow the business organically so I don't want to make it seem that, that's not possible as we've been able to continue growing quarter-over-quarter and so forth. But you're absolutely right. We are looking at acquisitions that can continue to help us grow and -- yes.

Well, as investors, I mean, you are entering high-growth fields in areas that command high premiums, high multiples like the Internet of Things or wearable technology. Do you -- you've touched on it. You've -- could we as investors hope to see further commentary from that, that would -- these are high-growth areas that, again, would kind of turn your stock back into a growth stock, which it's been, but unfortunately, it's kind of the stuck in sideways pattern, currently. And that's kind of what -- I know myself, as a fairly sizeable investor, would be interested in being involved in a company that is on the cutting edge of some very high-growth areas and has the potential, as you've all shown in the past, to make very good strategic acquisitions that are highly accretive. I mean, would that be a way to describe your company and one should attract investors based on your track record in this area?

Yes, absolutely. I believe it does. And I think as we continue to make progress on this front, we'll certainly make announcements with respect to our activities in this area. We are -- we have a strong plan as far as growing in this space through collaboration and partnerships with other companies that we see positioned well to deploy products in the field as well as our own internal product development. And so like you said, we're going to keep focusing on these high-growth markets and then supplement that with smart acquisitions. And that's really been our strategy, that's how we've grown from $3 million in sales to where we are today, and that's how I expect us to go from here we are today to $500 million in revenue in a couple of years.

The next question is a follow-up question from the line of John Nobile.

Just a quick question. My first question last time was about the percentage of your environmental sales that were currently in the U.S., you said it was a couple of a million or roughly less than $5 million. I just needed a clarification of are we talking about the quarter you just ended or are we talking about on an annual basis?

On an annual basis.

Annual. Okay. All right. That makes it actually even less significant than what I was thinking if it was on a quarterly basis. All right.

There are no further questions in the queue. I'd like to hand the call back over to management for closing comments.

I just want to thank everybody for participating on the call. We appreciate your interest in the company and we are looking forward to keeping you abreast of our activities as we continue to build the business and continue to achieve milestones. Our commitment is focused on delivering strong shareholder returns over the long term, and I think we've demonstrated that to this point. And I encourage all investors to continue following the story, and if you have any questions, please feel [to reach out to us]. Thank you very much for your time.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.