RF Industries Ltd (RFIL) 2018 Q1 法說會逐字稿

Welcome to the RF Industries fiscal 2018 first-quarter results conference call. (Operator Instructions). As a reminder, this conference is being recorded today, Wednesday, March 14, 2018.

Please note that, except for the historical statements, this release may constitute forward-looking statements within the meaning of Section 21e of the Securities Exchange Act of 1934. When used the words anticipates, believes, expects, intends, future or 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 statement.

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 within the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements.

I would now like to turn the conference over to Rob Dawson, President and Chief Executive Officer, and Mark Turfler, Chief Financial Officer of RF Industries. Rob, you may begin.

Good morning, everyone. Welcome to our fiscal 2018 first-quarter conference call. With me is Mark Turfler, the Company's CFO, who will review our financial and business highlights in a few minutes.

We are obviously extremely pleased to be able to report significant growth in revenue, gross profit and net income in the first quarter of fiscal 2018. Overall sales grew 56% in the quarter compared to Q1 last year. We drove increased sales at all divisions versus Q1 last year and we controlled costs, allowing us to deliver improved margins and profitability. Mark will give more details on this shortly.

This is a solid start to the year and shows that we are executing well on our strategies for long-term growth. As I've discussed on prior calls, including the one in January, we are building a culture of positive energy and accountability where we leverage correct channels and invest in the right resources to address the needs of the market.

These new go-to-market strategies and channel models are working with higher sales and bookings across all divisions in Q1, as I mentioned. The hard work of the team in these areas helped us raise our backlog to $20.2 million as of January 31, 2018 compared to $4 million at October 31, 2017. That's an increase of $16.2 million in three months.

We continue to build momentum and, while we are cautiously optimistic about the rest of the year, we do expect our current backlog to power significant growth in net sales for the fiscal second quarter ending April 30, 2018, as compared to the same quarter last year.

Additionally, the Board and I are very pleased that these results allowed us to declare a $0.02 per share dividend, our 31st consecutive quarterly dividend. With that I will now turn the call over to Mark for a detailed review and discussion of the financial results for the quarter. Mark?

Thank you, Rob. And thank you again for joining us on the webcast today. Judging from our first-quarter results, it appears that Rob's new go-to-market strategies and channel models are working as net sales for the first quarter of fiscal 2018, technically our seasonally weakest quarter, increased 56% to $10.3 million compared to $6.6 million in the first quarter of last year.

As a matter of fact, net sales have increased sequentially each quarter since the first quarter of 2017. The increase in net sales, as well as product mix, during Q1 2018 were the primary drivers for the increase in gross margins to 30% from 28% of the same -- sales in the same quarter last year.

Selling and general expenses for Q1 2018 increased by $0.2 million over the same quarter last year to cover higher commission and accrued bonuses as a direct result of the increase in sales. However, as a percentage of sales, these expenses declined to only 21% of sales compared to 30% of sales in the first quarter last year.

In addition, operating margin swung to a positive 5.4% of sales compared to a negative 5.4% of sales in the first quarter last year.

The new tax law also provided a benefit this quarter as our effective tax rate dropped significantly. Much of the year-over-year reduction in our tax rate is due to the new law which allows fiscal year companies to blend their tax rates this year. Our effective federal tax rate for this quarter is based on two months of the old 35% tax rate and one month at 21%.

We were also able to take a benefit on our net deferred tax liabilities this quarter, which we are now -- recorded at the lower federal rate. Thus, as a result of these two changes in the tax law, we were able to reduce our tax provision and therefore increase our net income by over $100,000.

While this quarter's effective tax rate is low due to these one-time adjustments, we do expect to realize significantly lower rates going forward than we have historically reported.

Net income for the first quarter increased to $0.5 million or $0.05 per share compared with a loss of $0.2 million or $0.02 per share in the first quarter of last year. As a matter of fact, net income for the first quarter of 2018 exceeded all of net income for the entire fiscal 2017.

Moving on to the balance sheet, cash and cash equivalents as of the end of our first quarter 2018 stood at $5.9 million, down slightly from the $6 million at fiscal 2017 year-end. Some of this cash was used to fund the higher inventory and accounts receivable necessary to support the increase in sales.

We also used cash to pay dividends of $176,000 in the first quarter. At January 31, 2018, working capital increased to $13.9 million compared to $13.2 million at the end of fiscal 2017. Our current ratio was 3.8 to 1 and we still have no outstanding debt. We remain committed to our dividend program and recently announced a dividend of $0.02 per share with a record date of March 31 and a payment date of April 15.

As Rob previously mentioned, subsequent to fiscal year ended October 31, 2017, we experienced an increase in orders of products and services at each of our four divisions. As a result of these increased orders, our backlog increased from $4 million since year-end 2017 to $20.2 million as of January 31, 2018.

A substantial amount of this backlog is expected to be filled in the upcoming quarter ending April 30, 2018. And the remaining amount of the current backlog to be largely filled by the end of the current fiscal year ending October 31, 2018.

In summary, we had strong sales, high gross margins, (technical difficulty) and administrative expenses declined as a percentage of sales. Fourth-quarter net income eclipsed full-year 2017 earnings, working capital improved and we declared our 31st consecutive quarterly dividend. Furthermore we expect strong sales for the second quarter of 2018 as a result of a significant increase in backlog.

This concludes my discussion of the first-quarter financial results. Rob?

Thanks, Mark. Mark stole my thunder on the review so I will make it easy. We remain focused on driving growth in our key markets and leveraging channel partnerships to best serve our customers. We continue to feel positive about the direction of the business. The hard work of the team is providing momentum as we move through the year and is evidenced by the strong backlog we've built and expect to fulfill in Q2 and after.

With that, Jake, I'd like to open the floor to questions. We are ready for our first question.

(Operator Instructions). Aaron Martin, AIGH Investment Partners.

You have Aaron and you have Orin as well. Congratulations on another quarter of progress since you came on board. In particular are there any products across the product lines that are getting extra traction? It feels that the biggest pickup in backlog is obviously in the connector and cable division.

What's going on there? Is there a slew of products? Is there a specific market niche that you are fulfilling? Is it a build out on the wireless side where they need your products and you're putting them all together? Give us whatever color you can.

Yes, sure. Thanks for the question, Aaron. So I think for us all four of our historical divisions, the way we've typically talked about the business in the past, showed growth in the quarter over the prior year. So, the good news is we saw some diversity in the growth.

As far as major things that are causing it; we are seeing the every boats rise effect of carrier spending. I think we have done a nice job of getting -- the team has done great at getting positioned correctly so that in the carrier space, when they do spend, we are thought of as a relevant player both on the coaxial side and on the fiber-optic side.

So, if you're looking for what drove the lion's share of our growth there, it was better positioning within the key markets. And specifically we saw a little upside in the carrier ecosystem.

In particular there's been, I would say, an underinvestment in that space, which is a credit to you guys in terms of gaining additional market share even over the last quarters to continue to make progress since you came on board. There are indications that there's finally a loosening of the purse strings here particularly in anticipation of quarterly 5G build out. Is that one of the drivers here?

I think that -- yes that's the gigantic question I think everyone is asking. And as I listen to calls and releases from other companies that are in a similar space and a similar product line to us, I think what we are seeing is very early preparations for 5G. And in some cases it's hard to tell the difference between what's happening today and true 5G.

There's a lot of prep work that goes into getting a network ready. The good news is we are on the path of the component side. So we're not going to see the wild swings of making a radio or having the active gear that is a major driver of deciding when they are going to deploy that technology.

For us, passive components -- it's the cable, the connectors, the jumpers, all the equipment to allow those radios to function. And I think we are seeing -- certainly seeing some building. And I feel like if it's not true 5G it's certainly a step in that direction.

Okay, great.

Are you finding other applications outside -- surprise applications for your cable that's driving the growth outside of the wireless connectivity?

For example, data center?

Yes, I think historically if you look at the way we talked about the business, we spent a lot of time talking about the wireless market. And the name is RF Industries, so that sort of makes sense. But if you look at the way the business is structured today, we have a significant amount of business into industrial OEMs, whether that's aerospace and defense or true industrial equipment manufacturers. We are seeing nice growth there.

We also have a key component of our business that is into data centers and co-location businesses. That also saw some nice growth in the quarter. So, while we are benefiting from positioning ourselves effectively in the wireless space, which is where I think we've been thought of for a long time, we are functioning in the two way radio space as well, which is as far away from carrier CapEx as you can get.

And we are also doing a good job -- the team is doing a great job of getting positioned in the right OEMs, making sure people understand our value and just leveraging the conversations we've been having for years to see what else we can do for growth.

Are there any particular individual OEMs that are driving the growth, customers where you are gaining a bunch of share or that's not what it's about?

No, I don't think you -- in the quarter I don't think we saw any one major OEM drive some growth. We've got some very long-standing customers that we do decent many numbers with many of them. And it's just continuing to service them almost as a recurring revenue stream because we've been doing business with them for so long.

So, for us it's -- when we set this year motion it was very simple -- hey, let's return to growth, profitable growth, make sure we can cover the dividend. Let's do all the good blocking and tackling that we should be doing. And that led to some conversations with the majority of our customers asking what we could do better and how we could do more.

And so, we are seeing some growth from that. I'd love to say it's some elaborate scheme that I cooked up that's driving it, but it's really just working hard and being good to our customers and seeing what we can do to help.

The customer that was 36% of revenue in the quarter, is that a distributor or is that an end customer?

Yes, it's a distributor. As usual, our largest customers are distributors.

Got it. And then can you talk to the sustainability of the trends that you are seeing right now?

Yes, so a little bit I guess is the short answer. The longer answer is our backlog of $20 million, $20.2 million that we had at the end of January is going to sustain us for a while. We expect a significant portion of that to go out in the current quarter, our second-quarter that's happening now. And then fulfill the majority of that throughout the rest of the year.

Beyond that, we historically have not had a large backlog, which is why it's rarely if ever been disclosed. But I think at this point it's an obvious thing we have to talk about. We are very, very focused as a team at getting into the -- leveraging this into a long-term focus in the business so that we can drive consistent growth.

I think I feel really good about what we've done and how the team has executed on the specific plans per business. To give much visibility beyond what we've said would be tough to do. I think I'll be better at that answer on the Q2 call which will be in June. I should have a lot more insight.

And just my last question for us, and thank you for taking all our questions and we'll do more off-line with you. But just in terms of two way radios, do you mean through a public safety build out for example?

Yes, but not the way -- public safety gets a lot of buzz right now and that's more around the Public Safety desk and FirstNet and sort of the big spend that's going on around getting better coverage. I was really more referring to -- we've got a long list of historical customers who buy from our distributors that are maintaining two-way radio systems or installing two-way radio systems.

Some of those may be for public safety. It could also be on a college campus or any number of other applications. So my reference to two-way was less about the big buzz of public safety today and more about the historical two-way radio systems.

Okay great, thanks so much. Congratulations.

(Operator Instructions). [Steve Cole], Mangrove Investments.

Congratulations on a good quarter. Let me touch on a couple things. First of all, maybe, Rob, you could speak to the core San Diego business a little bit. Obviously it did uptick, but I know one of the strategies is to continue to drive more business through these other channels.

And we've heard a little bit about [DAF] and I gather that's getting traction. But maybe you can give us an update on how are you feeling with that business and some of those channels and opportunities? Do you expect that to continue to gain momentum as well as we work through 2018?

Yes, good question. Thanks, Steve. I think the cable and connectors group, which is our historical business based here in San Diego, we saw some nice growth year-over-year and had a decent year last year overall. I think for us there continues to be significant upside.

For us to realize that upside we have to get ourselves positioned correctly in some of the larger carriers, being a part of the bills of materials that are being put together by integrators, carriers, power companies, contractors. We need to be on that list as either spec position or an as good kind of scenario.

When we get those conversations and get to show the product quality we get a good shot at winning some business. And so, we are in the midst of that now. We are doing a good job of having the conversations and we are seeing a little bit of upside.

I will say, as much as don't like the word seasonality, that seems to be the one business that we have that does have a little seasonality to it around the first quarter. So, I think we need to work hard to drive some growth. But I feel good about our prospects there specifically related just to the quality and price points of our product.

Customers love it when they get it. And so our connectors are great quality, we make great cable assemblies. A lot of low PIM cable assemblies which are typically used in DAS deployments, we are certainly one of the incumbents in that space. So, I think we feel really good about it but there's definitely meaningful upside there.

Next question and just curious, obviously we've had -- with the acquisitions you've had Rel-Tech turn up quite nicely and it looks like Comnet and Cables Unlimited have turned up. What do you attribute it -- part of that, again, more success designing into some things?

And I know obviously if we look back at yesteryear, Darren had some success. Are things changing there? Are you guys doing a better job assessing the market and working with these customers to help design into these things? Or what's changed or what is changing in that area?

Really I think the biggest thing is level of intensity and energy around our opportunities. And that's a simple way of saying the sales team has done a terrific job of getting positioned and finding opportunities. And then our product team has continued to respond, whether it's a product that we already have theoretically on the shelf or that we are making every day. Or if it's something that requires a tweak and a slightly new design which we are turning around quickly.

And I think that's a big advantage for us in the market is our speed from conversation to design to turn around to actually producing the products. We are quick and we are flexible in doing that.

So I think the team has responded extremely well in customizing some of these solutions that the customers need. And that's happening in multiple different locations of our various acquisitions through the years. But certainly as Cables Unlimited has proven many times in the past, they can take almost any scenario, find a solution and turn it around quickly.

And last question is going to be an odd one since we haven't talked about it in a while. But I noticed RadioMobile royalties, it's always great to have royalties because it is kind of free money stream. But I noticed they were -- we didn't get too much for this quarter. Did something change there or what's happening with that? I can't remember how long you had that tail on RadioMobile.

So that expired. The royalties on that expired last year I think it was.

Yes, last year and it expired and that was it.

That helps explain that. Okay, guys, thank you very much and I appreciate you taking the questions.

(Operator Instructions). [Gregory Graves].

Just two brief questions. One is has the significant increase in your backlog, will it require any additional capital investment to meet those requirements on a timely basis?

So, minor investments which we've already made. So you would see the lion's share of those already built into the results that you're looking at. I think the majority of what needed to happen -- there was a little bit of equipment needed just to make sure we could increase our volumes. That is already built into the Q1 results. So, going forward I wouldn't expect any major capital expenses.

Okay. And by any chance would you expect a similar blip in demand in this existing quarter to keep the backlog at a relatively high level as we go into the rest of the year?

I would love to say yes and that I knew the answer to that certainly, but we are working hard on that. That is the big question because the obvious scenario here is we have this large amount of business we need to produce and get it out the door and make the customers happy, which we seem to be doing.

We got to, at the same time, backfill that business. And as I mentioned previously, our typical backlog we didn't disclose, but it was more in the $3 million range let's call it if you go back over the years. So when we jumped it to $4 million back when we released in Q4 we felt really, really good about what we were doing. And we were in the throes of trying to add to it, which we then did producing this $20 million number.

We continue to book aggressively against our goals and booking new business and driving growth. So, I can't give definitive answers on can we keep that number up where it is, but I can tell you that there is no other focus of the team at the moment.

As simple as it may sound, I talk about it to the team, we need to sell stuff and then we need to make stuff. And right now we are clearly making stuff as fast as we can and the sales team is very focused on selling stuff to back fill that so we can stay busy. So, I'll have a much clearer answer to that, Greg, when we get to the second quarter call.

All right. And the last question is I've read a lot about cryptocurrency processing centers. Do any of your products fill a need in that area -- that you are aware of?

Not specifically that I am aware of. We do sell a meaningful amount of product into the data center and co-location space. Somebody is using that bandwidth to do something. But we don't have a specific push into the crypto centers; not that it couldn't be done. Clearly there's cables and connectors being used in those configurations, but not that I am aware of.

All right, thank you.

(Operator Instructions). With no additional questions in the queue, I'll be happy to turn the call back to your host for closing remarks.

Thank you, Jake. Thanks to all of you for joining our call this morning. I'd also like to thank our employees, customers and shareholders for believing in the Company and supporting us. We really appreciate your interest in RF Industries and look forward to sharing our Q2 results in June, as I've mentioned a couple times.

As always please feel free to reach out to me or Mark if you have any additional questions outside of this call. Have a good rest of the day. Thanks again and we'll talk to you soon.

Ladies and gentlemen, this does conclude your conference for today. We do thank you for your participation. You may now disconnect.