RF Industries Ltd (RFIL) 2013 Q3 法說會逐字稿

Greetings and welcome to the RF Industries fiscal 2013 third-quarter financial results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, John Nesbett of IMS for RF Industries. Thank you, Mr. Nesbett. You may begin.

Good afternoon, and thank you for calling in. On the phone today we have Howard Hill, Chief Executive Officer; James Doss, President; and Mark Turfler, Acting Chief Financial Officer of RF Industries. Howard and James will provide an overview of operations, and Mark will review the financials, after which we will open the call up for questions.

I'll take a moment to read the Safe Harbor statement. Please note that except for historical statements, statements on this call may constitute forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934. When used, the words anticipates, believes, expects, intends, further, and other similar expressions identify forward-looking statements.

These forward-looking statements reflect management's current view with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcome 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 new 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.

Okay, with that done, I will now turn the call over to Howard. Go ahead, Howard.

Well, thank you, John. Welcome to our third-quarter fiscal year 2013 conference call. With me, Mark Turfler, our CFO; James Doss, our President, who will review the financials and other business highlights.

Our third-quarter and nine-month sales for fiscal year 2013 were another record for RF Industries. Our record third quarter is our fourth consecutive quarter with reported record sales and on our way for a 20th year of profitability.

Our balance sheet remains strong, with a healthy cash position. No debt will provide us the ability to support our long-term objective growth and also return capital to our shareholders through dividends.

During the past year we particularly focused on growing our position as a leader/provider of full-service custom interconnect solutions in the wireless and medical industries. Cables Unlimited has been our shining star for RF Industries, with record sales. CUI's hard work to deliver leading-edge interconnect products to a rapidly-growing wireless arena has paid off. The momentum they built will allow us to leverage our innovative design and manufacturing capability to address the needs of our customers.

RFI will focus on opportunities to grow our business within a dynamic, rapidly growing wireless infrastructure arena. FY 2013 sales for the connector and cable assembly segment remained relatively unchanged during the same period as FY 2012. The wireless segment increased in FY 2013 over the comparable FY 2012. The wireless segment increased with sales from the Los Angeles County Fire Department. The metal cabling and interconnect segment also had sales increase over the comparable period last year due to the increase from existing customers.

During the quarter the Company sold RF Neulink division. The divesting of RF Neulink division is part of the ongoing strategy to evaluate the performance of the division and better concentrate our energy on resources, on more growth, and increased margins for each division.

We remain committed to creating shareholder value through the growth of our business and returning capital to our investors with quarterly and special periodic dividend. I will now turn the conference call to our President, Mr. James Doss. Jim?

Thank you, Howard. Hello, everyone. As Howard mentioned, the third quarter was very strong for us. Our Cables Unlimited segment continues to drive our strong performance due to the success of fiber and power products, which have gained wide acceptance in the marketplace and see an increased demand.

Our fiber and power products are high-quality cables designed and targeted towards the wireless service providers who are updating the 4G networks. We are very optimistic about the continued growth in the wireless market and our opportunities to capitalize on this growth. We see these products and other customized solutions from our Company, and that they have a unique ability to offer new and existing customers the alternatives they need to remain competitive in this dynamic space. Our Cables Unlimited segment is focused on product innovation and development and will continue to offer new products.

In addition to the wireless telecom infrastructure, we also serve the interconnect needs of companies in the medical industrial sector and are seeing more opportunities for our products as they need more reliable and more sophisticated interconnectivity options.

As expected, we did experience a decline in revenues from the RF wireless segment during the quarter. Our RF Wireless division is distinctly different from our core connectivity business. At RF Wireless we provide full-service end-to-end communication systems, including hardware, mostly for municipal emergency response systems.

This business is focused towards municipal contracts; and with the economic and budget considerations that we have to navigate, sometimes it can be a bit lumpy. The good news is that this anticipated decline in the wireless segment was offset by the increased revenue in our core businesses of Cables Unlimited and the cable and connector segment.

In a related development, during the third quarter we did sell our RF Neulink division. That business designed and manufactured radio modems and receivers that provided high-speed wireless connections over long distances. In recent years RF Neulink did not contribute immediately to the Company's growth and profitability. In fact, the division contributed less than 1% of RF Industries' total sales for the six months ending April 30, 2013.

So with our commitment to an ongoing strategy to evaluate the performance of each of our divisions and to concentrate efforts and resources on the higher-growth and higher-margin core component, the divestiture of RF Neulink does make sense. Our balance remains strong, with more than $10 million in cash and no debt, which allows us to invest in our growth while returning capital to our shareholders, as Howard mentioned.

I will now turn the call over to Mark for a detailed review and discussion of the financial quarter. Mark?

Thank you, Jim. And I welcome our listeners. We had record consolidated net sales of $9.6 million for the quarter ended July 31, 2013; an increase of 31% over the prior-year quarter. This was largely due to the $2.8 million or 103% sales increase at our Cables Unlimited division due to the continued strong demand for their fiber and power products.

Companywide gross margin increased from 45.6% in the prior-year third quarter to 41.5% in 2013, largely due to a change in product mix, with a larger portion of our sales coming from Cables Unlimited, which typically has lower gross margins than the other segments of our business. We continue to see leverage in our selling and general line, as selling and general expenses for the quarter decreased to 22% of sales from 26% in the third quarter last year.

Third-quarter 2013 operating income of $1.6 million increased $395,000 or 34% when compared to the same quarter last year, largely due to the increase in sales at Cables Unlimited. Our third-quarter tax provision was $407,000, for an effective tax rate of 26%, compared to $397,000 for an effective tax rate of 34% for the same quarter last year.

Despite a lower effective tax rate in the third quarter of this year due to the exercise of our incentive stock options by our employees, the increased provision for tax is due to our significantly higher pretax income. However, we anticipate that going forward, the tax rate will be more comparable to prior years' effective tax rates.

Income from continuing operations of $1.2 million for the third quarter of fiscal 2013 increased $380,000 or 49% compared to $775,000 for the prior-year quarter. Basic and diluted EPS from continuing operations for Q3 2013 was $0.15 per share and $0.13 per share compared to $0.11 per share and $0.10 per share for comparable prior-year quarters, respectively.

As Jim noted earlier, the results from discontinued operations reflects the costs to shut down and sell our RF Neulink division during the quarter. As a result, loss from discontinued operations net of tax for the third quarter 2013 was $238,000 or $0.02 per diluted share, compared to $40,000 and no impact on earnings per diluted share for the prior-year quarter.

Net income of $917,000 for the third quarter fiscal 2013 increased $182,000 or 25% compared to $735,000 for the prior-year quarter. Basic and diluted EPS from net income for Q3 2013 was $0.12 per share and $0.11 per share compared to $0.11 and $0.10 per share for the comparable prior-year quarter, respectively.

On a year-to-date basis we reported record nine-month net sales of $29.1 million for the nine months of fiscal 2013 -- an increase of 52% compared to net sales of $19.2 million for the same prior-year period.

The biggest contributor to this increase was due to $15.4 million of sales from our Cables Unlimited division. Earlier today we issued a corrective press release to clarify that the sales from the entire Cables Unlimited division was $15.4 million rather than the originally-published $10.9 million figure, which had only referred to Cables Unlimited custom cable product sales.

On a year-to-date basis gross profit increased to $13 million on gross margins of 45% in the nine months of fiscal 2013 as compared to gross profit of $8.7 million and gross margin of 45% for the same prior-year period.

Operating income of $5.4 million for the nine months of fiscal 2013 increased 138% compared to operating income of $2.3 million for the same prior-year period. Income from continuing operations for the nine months 2013 was $3.9 million, or $0.52 per basic and $0.47 per diluted share, as compared to $1.5 million or $0.22 per basic and $0.20 per diluted share for the same prior-year period.

Net income of $3.6 million for the nine months of fiscal 2013 increased $2.1 million or 146% compared to $1.5 million for the same prior-year period. Basic and diluted EPS from net income for the nine months of fiscal 2013 was $0.48 per share and $0.43 per share compared to $0.21 and $0.19 per share for the comparable prior-year period, respectively.

Turning to the balance sheet, at July 31, 2013, we had $10.8 million in cash and cash equivalents, an increase $5.3 million since year end, primarily due to cash generated from operations as well as receipt of proceeds from the exercise of stock-option employees -- while paying out dividends totaling $1.8 million to our shareholders.

In addition to a current ratio of 8.1, we have no debt. As a result, our balance sheet remains extremely strong and provides a significant competitive advantage.

This concludes my discussion of financial results. Howard?

Thank you, Mark. I'd like to give a special thanks to our employees on their hard work and contribution to our successful growth, and to thank our shareholders for their support. We are looking forward to strengthening our financial position in years to come. I truly believe that RF Industries is at the right place at the right time.

So I'd like to turn over the floor to questions. Operator, we are ready for our first question.

(Operator Instructions). Wyatt Carr, Monarch Bay Securities.

Congratulations on a great quarter. I have a couple of questions. The gross margin decline was due to product mix. CUI, obviously, has the lower margin and is now, what, 53% of revenues?

Yes.

Okay. And CUI's margins run around -- if I'm not correct, correct me -- 35%. Is there room there to improve those margins? Is there a target that you have in mind that you could reach?

Well, I think the important part is to take a look at what we've also done with CUI. When we acquired Cables Unlimited, their gross margin levels at the time of our acquisition ran right around 30%, Wyatt; and we have actually worked pretty hard in the last couple of years to get them to the level that they are.

With the customization that goes into some of this in the work, it's very different from the traditional connector and cable assembly business. We're always looking to try to get increased efficiencies there. But with the type of product that they sell, there's high input component costs that we always have to deal with.

I think anything between that 35% and 40% range is acceptable for us. Obviously, we would like to be able to get those higher. But as the market demands more and more of these customized products, I think you are going to see that they are always going to have some price pressure in there, because of the absolute dollar amounts.

However, on the flip side of that, Cables Unlimited has done a very good job at helping control their SG&A costs. And even with their increased sales, they were able to offset some of that margin with the decreases in SG&A.

Super. And a question -- OptiFlex is a big part of your product mix in Cables Unlimited. I guess the question I have is, are you selling this to more than one distributor? Or are you only qualified with one? Do you have to go through qualification with other distributors? How many distributors are there that could possibly take up the OptiFlex product?

Well, the OptiFlex is more of a base line that we sell other products to all of our distributors through. It does have a limited amount of people who are currently selling it, Wyatt. We don't, obviously, tell our customer names on this and disclose that.

However, I can say the end users are very happy with it. And also, I think the important part to remember about OptiFlex is it was very much a gateway for us to get in and get the option to design other products that are around the OptiFlex -- that are on the tower, that are needed in that wireless infrastructure buildout. So it's led to other opportunities with multiple distributors for other products.

It's a brand-new product, so it's really kicking off. Our end user -- it's new to them, also. So it is one of these things that it will wrap up and get bigger and bigger.

Okay, super. And in connect, Jim, I think you talked about some new products that were coming in the RF connect space. Are these in fiber or coax, and what kind of traction have you seen?

They are more along the lines of traditional coax-type products. And actually, we are starting to see an uptick in some of that business.

They center around low PIM (inaudible). And there are a variety of products. There is probably about 10 different products that we have developed around that.

It will take time for us, because what happens is -- when you talked about that qualification process -- when we introduce these to our distributors for them to go out there and introduce them to their customers, there is a time lag. So in this quarter we did see more activity on that than we saw in the previous quarter when we introduced them.

But it will take -- you know, we anticipate internally it will take up to probably a year for that to fully get through all of our distributors, until we see a sustainable, significant sales level. So we still view that as kind of its infant stage for a product development for us.

Super. And then I have just one last question and a comment. The question is, with what we've seen recently within the connect business, do you see any impact to you of what has occurred with Molex or some of these others?

No, not really. I mean, I think you're always going to see some consolidation in any business. I think there is a lot of people that like the wireless space, and that cell components into the whole wireless industry. And I think Molex is probably just one of those companies that somebody sees as an opportunity.

Well, you know, there's -- the large holding company that bought Molex; obviously, they looked at it and saw the excitement in this wireless industry. You look in -- just in the last few years, with the Apple -- the iPhone and the other technologies, where we came from just back 20 years. Tremendous, tremendous change.

I think it speaks to the overall demand in the market for these type of products.

Agreed. One last comment. And that is, Howard, and Jim, and Mark, I really think that you've done a terrific job in paying out shareholders -- both special dividends, regular dividends, and still generate -- your cash has increased from $5 million a year ago to over $10 million now. Congratulations on that, and thanks for taking care of the shareholders.

Thank you, Wyatt. That's our job.

(Operator Instructions). We have no further questions at this time. I'll now turn the floor back over to management for closing comments.

Well, thank you very much. We're looking at a wonderful fourth quarter coming up. We see some of the increases around us, and we see some bounces around us. So our type of business is the phone rings, and we get the order. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time, and thank you for your participation.