RF Industries Ltd (RFIL) 2020 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the RF Industries Second Quarter Fiscal 2020 Financial Results Call. (Operator Instructions) As a reminder, this call is being recorded today, Thursday, June 11, 2020.

At this time, I'd like to turn the conference over to Jim Byers with MKR, Investor Relations. Please go ahead.

Thank you, operator. Good afternoon, and welcome to RF Industries Second Quarter Fiscal 2020 Financial Results Conference Call.

With me on today's call are RF Industries' President and CEO, Rob Dawson; and Chief Financial Officer, Mark Turfler.

Before I turn the call over to Rob and Mark, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its second quarter fiscal 2020 financial results. That release is available on the company's website at rfindustries.com.

This call is being broadcast live over the internet for all interested parties, and the webcast will be archived in the Investor Relations page of the company's website.

I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements.

Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities 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-K describe the differences between our non-GAAP and GAAP reporting and present a reconciliation between the two for the periods reported in the release.

I'll now turn the call over to Rob Dawson, President and Chief Executive Officer. Rob?

Thank you, Todd (sic) [Jim]. Good afternoon, everyone, and welcome to our Second Quarter Fiscal 2020 Earnings Conference Call. Thank you for joining today's call. I hope that all of you and your family and friends are staying safe and healthy.

I'd like to start my comments by providing some detail around the significant challenges we experienced during the second quarter and how we responded, and then I'll turn to what we're seeing now and why we think things are moving in the right direction. I don't want to dwell too much in the past of what has been a difficult operating environment for most businesses, but I do think it will be helpful to share our experiences in the quarter to better understand our results, and then go on to what's next, as we continue to execute on our growth strategy.

As an essential business, we remained open during our second quarter to serve and provide support to our customers, even as much of the world was shutting down. During this period of uncertainty, we continued to focus first and foremost on the health and safety of our employees, our customers and our suppliers. Protecting these resources is of the utmost importance, and we have taken significant actions to ensure everyone's safety. On behalf of the Board and management team, I want to first thank our employees for their fortitude, innovation and positive spirit in providing essential services to our customers with little interruption. Our production and support teams are the rockstars of this company and kept things moving throughout a difficult time. I can't thank them enough.

We stated on our last earnings call in March, which occurred only days prior to the mandated stay-at-home orders, that we were unsure of the full economic impact of the coronavirus and anticipated that it may present a short-term speed bump in our growth. My exact quote was that, "even with the situation around us potentially getting difficult, our balance sheet gives us flexibility to manage the business as well as weather any crazy storms, like the one we're dealing with at the moment."

In fact, the timing of this unfavorable economic event occurred right in the middle of our second quarter, which ended on April 30. Needless to say, it had a significant impact on the results that we're reporting today. Lots of companies have released results through the March time frame, but when you include April in the results, you definitely get a picture of how difficult the operating environment became.

While we clearly saw our sales impacted in the quarter, even with the tough environment, we were able to deliver adjusted EBITDA of $176,000. It's also important to note that we came out of the quarter with substantially the same cash of roughly $14 million and overall financial position we had going into the quarter. All things considered, we weathered it pretty well.

Looking back on the quarter, in February, we were executing well on our go-to-market plan and generating solid momentum with good run rate business and a healthy pipeline in our project business. Through the early part of March, our results were on track with our outlook. However, as we move further into March and began operating during the stay-at-home period as an essential business, things became tougher and our operations were negatively impacted, more on that in a moment.

By mid-March, as California and New York locks down, we saw many of our customers close up shop for a period of time, including some distributors. And by late March, we saw the momentum we were building, drop off significantly. The challenges continued into April. What started with project delays, worked its way through other areas of our business, including some customers in our OEM segment closing down for several weeks.

Eventually, our generally healthy and diverse distribution business was affected, as many of our distributors reduced orders or temporarily closed some locations. And we saw our project-based business heavily impacted on numerous fronts, starting with the obvious CapEx spending pauses as well as with fieldwork crews, encountering difficulty picking up materials, accessing buildings and venues, getting right of way to do installation and maintenance work. And finally, local zoning and site lease challenges made it difficult for tower and neutral host companies to execute on build plans.

All of these factors contributed to most things getting delayed, with customers holding off on accepting shipments and pushing things out for some amount of time. It felt like the world stood still for a while. The project business was basically missing in the final 6 to 7 weeks of Q2, and the roughly $3 million-plus in related sales that we expected in the quarter didn't happen. And that's just the project work since in addition, our core run rate was slower than usual.

As I said before, with a company of our current size, a few million dollars in revenue makes a big difference. And in April is when we really saw the impact.

Things were equally challenging from an internal operations perspective. While we quickly pivoted to a remote workforce, it's the nature of our business, that 70% of our team are production and support staff that need to be physically on-site to build products. So as we remained open, we committed to additional measures to protect the safety of our employees and continued with the best practices we had already implemented as outlined by the CDC and state governments.

These measures included social distancing through staggered and multiple shifts, supplying personal protective equipment, additional cleaning supplies, along with enhanced sanitation services and being flexible with our employees who are impacted directly or indirectly related to the COVID-19 pandemic. As a result, we incurred roughly $50,000 of increased production and operating costs during the quarter. This included paying out small bonuses to some of our employees on the production and support teams as a thank you for their incredible efforts to show up on-site and ensure products continue to ship.

And as the pandemic worsened, our operations changed even more over the course of several weeks, as we begin to further stagger shifts in our workforce to protect our employees. In March, we were separating our team into smaller groups, ultimately adopting multiple shifts under different time frames, which negatively impacted the productivity of our teams and ultimately caused a hit to our gross margins. By April, we unfortunately saw a direct impact of the illness on a few team members, particularly affecting our operations in the Northeast in Connecticut and New York.

There were several weeks where we were operating with a significantly reduced production team. Although we're considered an essential business, we were certainly not going to mandate work ahead of someone's health. All of these challenges obviously made for an extremely difficult month in April, which had a significant negative impact on our quarter. We remained committed to keeping our people healthy and on the job as best we could. And I think we did a very good job weathering the storm, especially considering the type of business that we run.

And while many things were out of our control, we focused on the things we could control: inventory levels; sales and customer service efforts; and taking care of each other. Most importantly, I'm very thankful that all of our teams made it through, including healthy recoveries by all affected team members.

Thankfully now, let's change gears and talk about what we're seeing currently and where we're going, as we continue to execute on our long-term growth plan. While May was challenging and felt a lot like April, as we move further into our current quarter, we're starting to see things improve, not in every aspect of our business, but we're certainly seeing signs of life around purchasing and a slight pickup in our core run rate business.

We also continue to integrate the 2 acquisitions that we did last year. There's a balancing act here. You have to acquire, then you have to integrate and digest. It takes a while to bring these things in and get the momentum, and we haven't yet seen the full potential of these 2 acquisitions. In fact, with a couple of quarters behind us since our acquisition of telecom supplier, Schroff Technologies. We're starting to see increased activity and positive momentum around new business development in this division. And are beginning to build a nice pipeline of opportunities, both for small cell and their thermal cooling solutions.

As many of you know, Schroff Tech brought us 2 primary product offerings. The one we've spoken more about is the family of custom designs, pole-ready, 4G and 5G small cell integrated enclosures, which provide improved aesthetics and reduced small cell installation time from days to hours. Schroff Tech both expands our overall offer in the small cell bill of materials so that we can capitalize on the upcoming network densification opportunity; and also diversifies our exposure to the carriers, giving us additional buckets of money to tap into within the carrier CapEx spend.

The second offer from Schroff Tech is an energy-efficient thermal cooling solution for wireless base stations and remote equipment shelters, which can decrease the telecom carriers air conditioning costs by up to 75%. You'll hear us use the term Direct Air Cooling, or DAC, when discussing opportunities for these solutions.

So in addition to the substantial opportunity we see within small cell, Schroff Tech's thermal cooling solutions enable us to offer a definitive value proposition, centered around a better design and clear cost and energy savings and is allowing us to initiate a different kind of sales conversation with a new set of customers.

To give some color on the types of new opportunities we're seeing, let me walk through a few of them. We're currently engaged with a large North American carrier that's doing a trial of a potential cabinet retrofit using Schroff Tech's DAC thermal cooling solution, including remote monitoring, temperature regulation and cooling of the equipment in the cabinet. This kind of solution is particularly relevant today. With the shift to remote working, there's a substantial increase in the demands placed on existing wireless and wireline infrastructures, including potential heat issues inside cabinet's enclosures in small buildings. The energy savings proposition that we can offer is a key driver behind our opportunity with this carrier, and we're seeing similar opportunities with other potential carrier customers as well.

Second, we continue working with a large U.S. carrier on Direct Air Cooling upgrade kits in several markets, with expected monthly recurring business to continue and increase into calendar Q4.

Third, we're in discussions with a large carrier to drive spec position for Schroff Tech Direct Air Cooling units in their cabinets. This could lead to several thousand sites over the next few years.

Next, we have ongoing small cell concealment trout opportunities in the Northeast with another large wireless carrier, where we have a long-standing relationship.

And finally, we're actively beginning discussions with a few traditional wireline distributors where we believe we have a relevant offer and market opportunity in the wireline carrier and world telco space with MSOs and to push further into the smaller edge data center segment.

Each of these opportunities ranges from a few hundred thousand dollars to a few million dollars over multiple quarters. While some are still in early stages, many of these are conversations that have started in the last 3 to 4 months, which makes us feel very positive on the long-term growth prospects for the Schroff Tech business and reinforces the reason we did this acquisition.

There are several more similar opportunities that I look forward to discussing in the future, as we make progress in our sales efforts. We believe the significant opportunity we see around our Direct Air Cooling solutions is only going to get bigger. As any place where there's a cabinet, small enclosure, large enclosure or small building that houses electronics is an opportunity for Direct Air Cooling. And we're well positioned with a patented product line that squarely focused on improved technology and the related energy savings.

Looking ahead, while we experienced delays in a large number of capital projects across all segments in Q2, we're hopeful that this delayed business will reappear later this fiscal year and into 2021. The part we do know is the wireless spend will recover. As now more than ever, users are demanding more from their carriers, which will drive the need for continued investment in their networks and the related infrastructure. We continue to feel very confident in how we're positioned to take advantage of this eventual infrastructure spend.

In addition to the Schroff Tech opportunities that I discussed earlier, we have several other opportunities at various stages in our pipeline. I want to reiterate that the multiple DAS and structured cabling projects that we have in play for a large carrier, the several DAS projects for stadiums, large venues and large office buildings, the small cell densification deployments in metro areas and the anticipated Tier 1 carrier spend, have all seen delays due to CapEx shifts, building access issues or crew shortages that we expect to be back on track soon. Also, we continue to gain approvals for a quick turn fiber program with carriers and neutral host companies.

Looking at Q3, it remains difficult to provide specific guidance in the near term due to the continued uncertainty around the impact of the coronavirus on our supply chain and on our customers. Having said that, we had already expected much of the wireless carrier spend to be loaded in the back half of our fiscal year. While that may now get pushed into our next fiscal year, we do believe we'll see a much more consistent spend going forward as long as the world doesn't see repeated disruptions during that time.

As you may have seen through our 8-K filing, we received funds under the Paycheck Protection Program, or PPP, in early May, totaling $2.8 billion. This funding we received has given us an opportunity to continue to work through these uncertain times with most of our team intact. With the funding, we've been able to keep our people employed with benefits even as we clearly experienced reduced activity. We've also been able to take advantage during this period of lower activity to cross-train our team and expand our skill sets. So that we can continue -- that as we continue to recover, we'll be in a much stronger position in terms of our production capabilities. The PPP loan that we received is intended to be forgiven, subject to any provisions of the CARES Act.

Lastly, given the current challenging environment and continuing uncertainties of the pandemic, our Board of Directors has elected to suspend our quarterly dividend payment. We believe putting our dividend on hold is the right thing to do and that in the current environment, these proceeds are better used to strengthen our business and seize on opportunities to regain some of the growth trajectory that we were generating prior to the pandemic. Specifically, we have accelerated our investment in our business generation resources and activities related to the Schroff Tech solutions that I mentioned earlier, and to further diversify our relationships in the carrier ecosystem. We also continue to upgrade talent and look forward to continuing to streamline our organization.

Additionally, we remain squarely focused on delivering shareholder value. And as we've consistently said, consolidation probably makes sense in our industry. Like any responsible company, we're always looking at value-enhancing opportunities. We're confident in the long-term prospects of our business and remain focused on our growth plan, to drive demand creation and expand our participation into different buckets of CapEx spend.

The Board and leadership team are confident that with our solid financial standings, we remained well positioned to successfully navigate through this challenging operating environment and emerge a stronger company. We will be flexible and ready to react to anything thrown at us since we expect things to continue to be fundamentally different and certainly erratic at times.

With that, I'll now turn the call over to Mark for a detailed review and the discussion of the financial results for the quarter. Mark?

Thank you, Rob, and good afternoon, everyone. Jumping right in, our net sales in the second quarter were $10.4 million, a decrease of 23.7% or $3.2 million compared to $13.6 million in the second quarter of fiscal 2019. The year-over-year decrease in net sales reflects a decrease in our project-based business, resulting from the slowdown in carrier spending as well as the other factors that Rob just described. This decrease was partially offset by additional sales contributed by our newly acquired subsidiaries, Schroff Tech, who we did not own in fiscal 2019; and C Enterprises, whose prior year quarter results were for a 6-week period.

At quarter end, our backlog stood at $5.7 million, up from the $5 million number at our prior quarter end. The bulk of this increase came from our Schroff Tech division, which Rob just spoke about.

Gross profit for the second quarter was $2.6 million compared to $4.1 million in the second quarter last year. Gross margins were 25% of net sales compared to 30% of net sales in the second quarter a year ago. The decline in margins was primarily due to lower sales in our project-based business that resulted in lower coverage of fixed production costs, production mix at the Custom Cabling segment and increased sales at the C Enterprise subsidiary, whose gross margin are lower than the blended margins of our other divisions.

Total operating expenses increased $100,000 to $2.8 million or 27% of net sales compared to $2.7 million or 20% of net sales in the second quarter last year. The increase was primarily due to the inclusion of newly acquired Schroff Tech's operating expenses in a full quarter for C Enterprises. This increase is partially offset by the $300,000 decrease in the valuation of Schroff Tech's earn-out liability. Excluding the impact of Schroff Tech's additional operating expenses, second quarter operating expenses declined approximately $700,000 when compared to the second quarter last year.

Also included in total operating expenses for the second quarter were the following 3 expense items: first, $173,000 of amortization expense, an increase of $104,000 over last year as a result of the Schroff Tech acquisition; secondly, $97,000 in stock-based compensation expense, an increase of $19,000 over the second quarter last year, due in part to onetime compensation costs related to our recently hired Chief Revenue Officer; and lastly, approximately $50,000 of increased production and operating costs for supplies, sanitation services and other costs to keep our employees safe related to COVID-19 pandemic.

Net loss for the second quarter was $184,000 or $0.02 per diluted share compared to net income of $1.1 million or $0.11 per diluted share in the second quarter last year.

We are also providing some non-GAAP financial measures, including non-GAAP net income, non-GAAP earnings per share and adjusted EBITDA. Our earnings press release includes a reconciliation between the GAAP and non-GAAP reporting. We firmly believe these non-GAAP financial measures provide useful information to investors with which to analyze our operating trends and performance.

Non-GAAP net loss for the second quarter was $73,000 or $0.01 per diluted share compared to non-GAAP net income of $1.2 million or $0.13 per diluted share in the second quarter last year. Non-GAAP net loss for the second quarter of fiscal 2020 excluded $97,000 in stock-based compensation expense.

Adjusted EBITDA for the second quarter of fiscal 2020 was a positive $176,000 compared to $1.7 million in the second quarter last year. Adjusted EBITDA for the second quarter excluded $97,000 of stock-based compensation expense and $173,000 of amortization expense, which increased to $104,000, primarily due to the impact of acquiring Schroff Tech. Adjusted EBITDA excludes a tax expense of $3,000 compared to a $315,000 tax expense in the second quarter last year.

With our financial position of cash and cash equivalents of $14.1 million, working capital of $23.5 million and a current ratio of 5.1:1 at the end of the second quarter, we remain well positioned to navigate through this challenging operating environment and emerge a stronger company.

That concludes my discussion. I would now like to open the floor to questions. Operator, we're ready to take our first question.

(Operator Instructions)

We'll take our first question from Josh Nichols with B. Riley.

And I know you mentioned there's clearly been some revenue headwinds for the quarter as most companies have kind of been experiencing in the current environment, no big surprise there. But one thing I did want to mention is that the company has historically, and this quarter as well, done a very good job about managing the bottom line with this variable cost structure. We're still generating positive EBITDA, like, despite the revenue headwinds. How should we think about the OpEx expenses going forward as you look at the back half of this fiscal year and the company's commitment to kind of getting back to being consistently profitable?

Yes. Thanks, Josh. Appreciate the question. It's a good one. It's is a hot topic for us, obviously, at the moment. So I think, I mean, to your point, we were looking for some positives in the quarter as obviously, there was a lot of challenges, and I hate putting together a commentary around how difficult things were. But the ability for us to kind of weather that storm was something we knew we could do, and we still get a chance to keep doing that. But we've got to rate the ship on a few expense items. I think the -- I mentioned the PPP loan that we took at -- the -- after Q2 ended. That's allowed us to keep our team generally intact and try to get through what's continuing to be a difficult operating environment. But that money is meant to get you through 8 weeks roughly and make sure that everyone is intact, which we've done. Our intent is that will be forgiven. We're using that for the correct things, and our expectation is that, that loan will be forgiven in the timeframe that the CARE Act has kind of set out.

So beyond that, I think if we return to growth levels and sort of see the revenue return that we saw disappear during the quarter. I think it gives us an opportunity to keep our team generally intact from an expense load. If we don't see that, we'll have to make some adjustments. We've already started to review that pretty aggressively. The one big misnomer that kind of happened in Q2 is our gross margins get hit in a weird way when production -- when the productivity of our production team falls off.

So we need to make sure those folks are able to keep working, and we have to make sure we're keeping their schedules full if that were to change, and we're just going to have to write that ship to get it back to where we have a little more invariable and less in the fixed cost side. We've built the engine over the last couple of years around the growth numbers that we were seeing. And as I mentioned, getting in even to early March, still look like we were going to be okay from that. And I mentioned it got real quiet and weird there for a while. And so there's certainly an opportunity for us to shore up the expense line, rely a little more on variable and outsource prefinishing and outsourced labor in places.

Additionally, though, I think we also need to make sure we're investing in the continued growth of our Schroff Tech investment and generally the carrier space. So I think that there's a balancing act here of to how many production team members do we need versus making sure we keep our business generation engine intact and even potentially accelerate. I'm not great at sitting still and waiting out a global pandemic. We've generally done that for a few months, but we're kind of at a point where, to your question, we need to shore up some of the expense line, which we're absolutely doing. At the same time, we've got an opportunity to come out of this in a strong way as the spending is a little more consistent.

That's helpful. And then I did want to ask -- I know you mentioned that you're in an interesting situation because you were impacted for a large chunk of the quarter in April quarter end with some better visibility than with some other players who reported March, may had been talking about. You mentioned that you've been seeing a pickup in activity. Could you provide any type of color as far as broadly what you're looking for, at least for the current quarters? Is it fair to kind of assume, I guess, what I'm getting at is that 2Q maybe like a revenue trough is what we may see at least based on the current trajectory?

Yes. So it's hard to say. I think that's -- I'd love to give a really definitive answer around some, even life guidance for the quarter. I think, when we look at May, May didn't look drastically different than what we saw in the April timeframe. April had a few pockets in there where we saw some okay things, some emergency orders and some sort of unexpected new hospitals popping up and things that we were able to participate in, which was nice. I think really what we're starting to seeing now in June is the world seems to be getting back to some purchasing patterns that are more consistent that we understand.

We're also hearing the projects that I mentioned a whole bunch of that were kind of put on hold or pushed out. We're starting to hear chatter about timeframes and when they'll be -- when customers will be releasing various budgets and expectation of installations. So it's hard for me to know, is that going to happen? We're halfway through our third quarter roughly now. And I think we're in a place where we're starting to see it open more, and I expect to -- I'm hopeful that June will be better than what May was. And this is normally a time of the year where we've seen acceleration for the outdoor build season in a lot of our wireless business. We've got a nice pipeline of stuff. I can't be certain that all of that's going to hit in the third quarter. So it's hard for me to specifically define it. If we were to have a tough Q3, I think, Q4 would be a meaningful recovery over that with what we see at this point.

So I know that's not a direct answer to your question. The reason it's tough, I think, in the amount of our business we now do and fast turn can change in a day. We had weeks where it was like that, man, is this going to recover in a meaningful timeframe, and then the next day here comes the big kind of fast turn orders that had to go out in a day or 2. So we have that dynamic, plus these projects just sitting on the sidelines. I'd love to say that in July, we'll start to see those accelerate. But if for some reason, that were happen into the August timeframe, and that would miss our third quarter.

So I don't know how to give you an exact number, but I don't expect Q3 to be an amazing quarter. But I think that's part of the reason why we did go and request and receive the PPP funds. Because in that time frame, it was really hard to tell what was going to happen next. And once I started seeing the distribution business affected, that has been pretty steady and has been accelerating. I mean our cable and connector segment grew 20% in Q2 over Q1, and that's with a massive drop-off in the final month. And so seeing those start to come back, it's helpful. But those aren't the huge dollars that will drop and allow us to kind of get the big growth numbers.

Yes. And then what are you seeing as far as 5G spend. Clearly, I mean, there was a big push out, at least in the first calendar quarter. Is that something that you're just hearing a little bit more chatter on? Or is your guess that, that's going to be more like calendar second half and into '21? Whenever you're going to start seeing some of these larger orders potentially flow through?

Yes. So having talked to carriers, our distributors, other manufacturers that are partners with ours or peers of ours, people are kind of seeing the same thing. It's different carrier-by-carrier on what the expectation is. But I think the things that we expected to start around now, I mean, typically, this is the time of the year where you get into late spring, early summer, is when you would see building activities pick up, specifically, especially on outdoor kind of things.

I think T-Mobile has come out and been pretty aggressive. Although I know there's still right-of-way and zoning issues at times that get in the way of that. Verizon and AT&T have been, I would say, a little more passive, at least from what we've seen and cautious and smart about it, which I think we believe is pushing out those projects and some of that increased spend a little further this year. We already expected this year to be back half loaded from a project perspective for us, which relates to a lot of that CapEx. I think, if I'm offending, man, I'm going to say, it'll start to pick up later this year. But I think into '21 is where I would expect there to be a larger sort of increase in that spend. That can also change very quickly.

But I think to your earlier point, when you start looking at April results for a lot of businesses, and most companies released through March and pulled guidance and said, "Hey, we're not sure what's going to happen next." Having operated through April, it was an interesting time and caused a whole bunch of chaos. And I think that's when we started seeing CapEx get kind of held off until they rocketed. We're not going to do any projects. We're, not going to pull in any sites, we're not going to take any inventory because we have no one to receive it. Like those are some of the challenges that are more logistics. You got to have people physically able to receive materials and then go out on-site and do the work. So I'm expecting as states start to reopen we're certainly hearing the chatter increase, which leads me to believe it's towards the end of certainly second half calendar, maybe a little back to further weighted towards end of calendar Q3 into Q4. And then '21, I would think, we're going to have to see that spend because the demand is still there.

And then just I think you discussed briefly on like the gross margin profile. How should we be thinking about the gross margin going forward as far as the product mix between what you have with like custom cables, coaxial cables and RF connectors? And how do you think that's going to trend based upon what's in the pipeline today?

Yes. So I think the better we do in the Schroff Tech business, that'll help us. I mean, what we've said in the past is their margin profile is considerably better than what we have across the rest of our business. So I think I'm encouraged for multiple reasons on that business, but the margin profile will definitely help. The margins we saw this -- during Q2 were directly affected more by challenges of productivity, where you got some overhead built into your production teams and yet you're not able to pump materials out in the same way. We've, I think, generally remedied most of those things around the social distancing setup and otherwise. And our margins without that, our pricing and our margins on that side kind of stayed the same. It was really more about the variability of our teams and keeping those folks in place.

So I expect that after Q1, that was kind of the trough in our margins. They obviously came down in Q2, but it was more about productivity than anything else. I think going forward, the better performance we see from our RF business and from the Schroff Tech's business and some recovery in the Custom Cable business, we were really impacted in Custom Cable, both from an order perspective, but also those 2 operations where that business primarily happens in Connecticut and New York, were both heavily impacted personnel-wise. So I think we still have that 30% kind of low 30s goal out there. And from a gross margin perspective, I think it's very attainable. It's where we should be. And we're expecting as the Schroff Tech business picks up, that, that will start to help us pull that margin higher.

And then last question for me. Good to see that there's a number of opportunities in the pipeline with the recent acquisition of Schroff. How much revenue contribution was there from that acquisition? Just so I could get a little bit better apples-to-apples comparison?

And two, like given the company's balance sheet and that a lot of these smaller competitors are probably in a tough operating environment, I would assume, but maybe without your financial wherewithal, would you consider this to be like kind of a target-rich environment in a position where you might be looking to do an acquisition or 2 over the next couple of quarters?

Yes. So on the first part, Schroff Tech, they had a light quarter largely. We had one specific project that we expected to ship out that didn't go. But they did just $1.2 million, maybe in sales, something like that in the second quarter, which was generally consistent with what they did in the first quarter. That's not where we expect that business to be short term or long term, frankly. Yes, that's -- we expect a growth engine there. But there was a definite impact on the small cell side of being able to get out and do a lot of that work because just this year, definition of small cell that's going in a densely populated area. Well, that made it really tough. And places like New York and New Jersey, where we have a meaningful business in that space came to a halt for obvious reasons. So we expect their contribution to certainly increase over time. Even with that, that's a profitable business. They do a good job, and that team is doing a nice job of helping us find these additional opportunities.

To your second question around M&A. So we have a whole bunch of conversations going on, leading into that the world shutting down. And some of those have continued. I think sellers at the moment are a little skittish on are they going to get real valuations? And do they feel like it's a fair time to do this?

With that said, I think, as time goes on, it will get a little easier to understand new levels of revenue or profitability or difficulty in operating. And I do think there will be some decent targets. I'm still getting a few opportunities a week that come across my desk from a variety of sources. I think the thing that we just need to be cautious of is not getting lured into a bunch of little acquisitions that would be very difficult to do anyway. That's a lot of work for a small return. In an environment like today, can you physically get out, see an operation, get involved and do the things you need to do to get involved? So I'm cautious, but I think over the next quarter or so, absolutely interested in going that direction and finding some of those targets. I think I've already got some in our conversations. We just need to let a little time and go by and make sure that what we're seeing is realistic.

(Operator Instructions)

We'll take our next question from [Hal Granger with Greater Quarter Research].

I wanted to congratulate you guys in a very, very difficult quarter on having positive EBITDA and a loss of only $0.02 per share and maintaining your super strong balance sheet, which these days is more and more important. At the same time, is taking care of your employees and your customers. So that's -- I think you guys did a good job with all that. So congratulations.

Thank you.

Can -- housekeeping items starting with it. Right-of-use asset, does that have to do with Schroff Tech?

That's lease accounting. It's the new lease accounting that we have to go through on the way we handle that from a balance sheet perspective. So that's what you're seeing there.

Right. Okay. So that's independent of the Schroff Tech?

It is. Yes.

Okay. Can you review -- so the dividends, which I think it's fine that you guys focus more on operations and growth and not so much on dividends. So I agree with the Board's decision there. Can you give some sense about what the Board's or your feeling might be regarding dividends in the future?

Yes. So it's something that we obviously review every quarter. The company has had a long-standing dividend in place going back in 10 years, something like that or close to it. And it's been a nice way, I think, to provide a return. That -- it's become a 1%, 1.5% kind of yield over the course of the last little while, as we've seen in the current stock position. So we still review it quarterly. This was a tough conversation. And I think there's reasons why, I'm certain there's some folks that are in our stock that appreciate the dividend. There's a whole separate set that wants the growth focus. And I think the discussion, in this case, really came down to something that I've said publicly for a few years, which is, if we have a better use of capital, I think we would rather deploy that around growth.

And one of the things that we've done are in the process of doing a little more, and I mentioned this is, we can't just sit back and hold our breath and wait for everything to get better from a sales and business generation perspective. I think that's a -- for us that the danger is game to play. I mean, you saw the impact in Q2 of some projects being pushed out. Fine, I don't love it. But it's the way things worked out. There's a chance for us to double down on some of these newer pieces of technology, Schroff Tech and otherwise that we've invested in.

And I think there's some business generation resources that we need to continue investing in and adding to the business as well as upgrading talent overall, and it's not a huge expense. But when you look at on an annual basis, paying out $750,000 or $800,000 in dividend payments, and then you look back on the last couple of years in the M&A that we've done, we've gotten some affordable and fair deals on the M&A side. We've added some good members to the team. I think investing in that now is a great time to do it with the intent to coming out of whatever this thing is in a stronger fashion with the right people and the right seats.

We still need to streamline the operations in some spots to some earlier comments that I made. But I think the better use of that capital is to both invest in our team in the right spots as well as looking for some potentially good M&A that will likely present itself over the next few quarters.

Okay, great. Can I ask you about Cables United? So when I'm looking at your financials, you talked about the $700,000 decline in expenses year-over-year. Some of that, I imagine, has to be employees somewhere. And then you mentioned that, unfortunately, Cables United in Connecticut and New York was affected by coronavirus. It -- when I'm looking at that, I'm kind of reading in that a lot of that $700,000 had to do with employee expenses at Cables United and now after you've gotten your PPP loan, you've hired back a lot of those employees. Is that a correct read? Or can you give us some color on what was going on there?

Yes. So you're partially right. I think that there's kind of 2 big things in there. One is we kept our entire team employed with pay and benefits through this entire process. And that was something that I said to our leadership team going back to early March timeframe when it was pretty clear we were starting to see some weirdness, that got into the third week of March.

And it was important to me that our team had some comfort that they were safe. They were going to have benefits, the last thing they needed was to worry about that changing. And we didn't really know what we were walking into. I mean, we had our second -- I mean, our first quarter conference call back on March 12. That night was the night we found out that schools were closing in California. The next Thursday is when in California and New York, sort of subsequently one after another shutdown.

So we made some decisions at that point to keep our team in seats with pay, with benefits to keep them okay. Now productivity-wise, obviously, as I talked about, we had some tough times. But the majority of what you're seeing there, we obviously had lower commissions and a few less hours being worked, less over time. You start adding all that up, and it can get to a pretty decent-sized number, especially when you're comparing it to prior year results that were significantly higher. So you've kind of got a mix of some people costs in there as well as just some lower expense loads. But we purposely did not go in and take out a bunch of folks in that business.

Okay, great. Great for you. And that's -- I'm sure your employees appreciate that, and it pays off in the long run.

Let me see the -- let me end my questions with the project-based carrier spending, it seems to me that, that's something that likely will happen. It's not, as you mentioned, it's not clear when the timing is going to be. But is it reasonable to be pretty confident that the bulk of that carrier spend, which would have happened this calendar year will happen in the future at some point. Hopefully, next calendar year, if it's not -- hopefully, this calendar year, but if not next.

Yes. So I think our expectation is that, that most of that should come back over time. The one uncomfortable part is the more time that goes by with restrictions of travel and locally showing up in certain places, it makes it harder, I think, to go through RFP or vendor selection processes and some of the things, it's carriers may be incentivized to be less creative about the number of providers that they use. We've been on a trajectory where we've been breaking into new things sort of consistently over the course of the last few years and seeing some upside from that, both in real time and then future looking. And the more time that goes by and the harder it is to keep those relationships, building and growing and getting your aim into new places. That's my one concern around it from a positioning perspective.

I think the spend is going to be there. It's definitely difficult to find those opportunities to displace the gigantic companies that might be in there now, which we've seen some success on in the past. So I'm comfortable saying, I think the spend is coming back. I think we're still positioned very, very well. I'm hopeful that we keep getting the opportunities to play in that space the way we have, even with some of the kind of logistical challenges that are being thrown at us.

(Operator Instructions)

We'll take our next question from Chris [Bocwoski] private investor.

And my question was already answered. Good luck.

(Operator Instructions)

And at this time, we have no further questions.

I would like to turn the conference back to your speakers for any additional or closing remarks.

Thank you. In closing, I'm incredibly proud of our team. And on behalf of the Board and management team, I would again like to thank our employees for their creativity, positive spirit and resilience during these very challenging times. Thanks, everyone, for your interest and support of RF Industries. I look forward to reporting our fiscal 2020 third quarter results in September. Hopefully speaking with some of you at our virtual investor conference presentations before then. Thanks for joining our call. Please stay safe. Have a great day and now you can take a breath. Thank you.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.