RF Industries Ltd (RFIL) 2019 Q3 法說會逐字稿

Welcome to the RF Industries Third Quarter Fiscal 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this call is being recorded today, Thursday, September 12, 2019.

At this time, I would like to turn the conference over to Todd Kehrli of MKR Investor Relations. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to RF Industries' Third Quarter Fiscal 2019 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 third quarter fiscal 2019 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 on the Investor Relations page of the company's website.

I'd like to remind everyone that on 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 anticipates, believes, expects, 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 our 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.

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

Thanks, Tom, and good afternoon, everyone. Welcome to our third quarter fiscal 2019 earnings conference call. We're pleased to report another strong quarter with solid revenue growth, both sequentially and year-over-year. This top line increase was driven by both organic growth as well as inorganic growth from our recent acquisition of C Enterprises.

Organically, we continue to generate solid sales in the wireless carrier ecosystem in addition to growing our distribution business. Inorganically, we benefited from a full quarter of sales from C Enterprises and saw their sales improved significantly during the first quarter as the team performed very well.

The C Enterprises acquisition is a great example of our ability to bolt-on a complementary business and enhance their growth by making targeted investments and including them as part of our organization and culture. It's this combination of healthy organic and inorganic growth that gives me confidence in our long-term goal of achieving $100 million in sales in the next couple of years. I'll talk more about that later in the call.

Through the first 3 quarters this year, we're almost flat to last year through 3 quarters, even with last year's huge Q2. If I were to summarize simply how we're performing this year, it's that our core business has experienced nice organic growth, our acquisition has performed well and our concentrated Tier 1 wireless carrier business is still delivering nice results, though as expected, they're at a lower pace so far compared to last year and the timing of sales can be inconsistent.

We feel good about our potential to continue organic growth in our core business in excess, the carrier-related spending can cause wild swings for us. But we love that business and the opportunity that it presents us. Our strategy of getting to the end-user customers and then making it easy for them to purchase in whatever way they prefer is no more apparent than in a wireless carrier ecosystem. And we're working hard to leverage those successes into new relationships and projects.

In the third quarter, we also delivered net income of over $1 million. We did see a little pressure on our margins, which Mark will explain and talk more about in a few minutes. As we've said many times previously, we're proud that we can make money and be profitable at varying revenue levels. So even as revenues and margins move around a little bit as we transform the company and grow, we have a cost structure that's flexible and allows us to be very profitable.

As I talked about on prior calls, the macro headwinds of wage pressures and their relationship to tariffs can affect our margins in some time periods since the costs associated with our production teams is built in to our gross margin line, and material delays can obviously slow us down.

We've taken the opportunity to invest in our people and operations to allow for increased production capacity at multiple of our locations. Rewarding and retaining our production talent is crucial for us, and I'm thankful to be able to provide increases so these loyal team members can share in our success. We're planning for our future, and these investments should allow us to support much higher revenue levels as we work to grow the business.

Our backlog at quarter end was $8 million on third quarter bookings of $13.4 million. Subsequent to the end of the quarter, we've seen backlog increase further and it currently stands at just above $10 million. This, again, illustrates the nature of our business, where the significant volume of potential orders in our pipeline and the timing of those orders can affect frequent changes to our backlog when a snapshot is taken at quarter end.

In other words, with sales volumes like ours, $1 million or $2 million purchase order can cause wild swings in a few days. As I've said several times in the past, this is about long-term transformation of the company. And while an update every quarter is healthy, our results are easier to understand with a long-term view.

I'm pleased with our bookings in Q3. And on that topic, it's important to note that a large portion of C Enterprises' business is book and ship in a very short period of time. Meaning their sales will show up in our bookings number, but often won't be material in our long-term backlog number. It's all about timing. Going forward, we'll continue to provide both a backlog and booking number each quarter as we've been doing. In order to give visibility into how we're executing across our entire organization.

During the quarter, we generated continued sales from the Tier 1 wireless carrier ecosystem. Most of that is showing up in our Custom Cable segment and delivered by our Cables Unlimited team in Long Island, New York, which performed extremely well. We also saw increased business from our distribution channels as evidenced by the continued growth we're experiencing in our RF Cable and Connector segment, which grew about 4% sequentially and a little over 10% year-over-year. This represents the third straight quarter of double-digit growth year-over-year for this segment, underscoring the success we're seeing in executing our strategy to drive more business through distribution.

While the wireless ecosystem continues to be our biggest opportunity, we also see significant opportunities for growth in other areas. One of these is the transportation segment, where we saw some good sales growth this quarter, and believe there's an opportunity for both our custom and run rate products. We're just getting going with a new OEM customer that has a large public transportation opportunity that we feel very positive about. This is another good example of how we're working and starting to be successful in expanding the reach of our products beyond our historical target markets.

We continue to see steady opportunities in other OEM market segments, which are primarily the industrial markets such as manufacturing, aerospace, defense, utilities, oil and gas, mining and agriculture. As I mentioned earlier, our strategy focuses on generating both organic growth through our continued penetration of our key market segments and also inorganic growth. As we acquire complementary companies, we believe we can help those businesses through investment and providing a reinvigorated approach to growth as they become aligned around a common set of larger goals.

The acquisition of C Enterprises is a good example of how we're redeploying capital in a solid way to grow the business. In fact, I'm pleased to report that for the third quarter, C Enterprises generated sales of more than $3 million, well ahead of their historical annual run rate of $8.7 million. We don't necessarily expect that C Enterprises has already achieved a consistent new run rate, but we've proven that in a fairly short time, we can generate a much higher revenue and profitability level in that business.

As we noted at the time we acquired C Enterprises, their margins were a little lower than our overall blended margins for the business, and so a bigger revenue contribution from them is going to impact our overall margins a little bit, which we saw in the third quarter. But as we've been able to expand our revenue line, we've been working to increase their margins and have seen some decent progress.

We continue to pursue a very robust and growing pipeline of acquisition candidates. Our balance sheet remains strong and provides us with significant resources to go after additional acquisitions that make sense, and there's still the possibility of additional acquisitions this fiscal year.

As far as acquisition targets, I'm generally interested in companies in the $10 million to $20 million revenue range to give us access to new product set and new customers or segments. I'd still love to find some larger potential acquisition targets in the range of $25 million to $30 million in sales. Every acquisition takes a lot of effort to integrate in addition to the legal costs and other related costs. So I would rather put those resources to work on something larger and gain even more economies of scale.

On a related note, I would never underestimate the importance of cultural fit when working through due diligence in an acquisition process. We're looking for talented, like-minded leaders who want to be part of a positive long-term growth story. We want to get acquisitions right and not just go fast.

As I've mentioned before, one area of product focus is expanding our overall offer of the small cell bill of materials, so that we can capitalize on the densification opportunity related to the 5G buildout. We're also looking to potentially own other passive components that we can sell through our growing distribution channel. The 5G spend continues to be a big future opportunity, though not something we're consistently benefiting from today. We're having some good conversations on small cell applications as well as on hybrid-fiber opportunities that we believe will position us well for when that 5G spend accelerates.

While we really haven't seen any change from the inconsistent spending pattern that's out there for 5G, we continue to see our distributed antenna system products perform well. And in small cell, we have numerous conversations going on with carriers, neutral hosts and other integrators on both standard products and hybrid fiber solutions to try to spread out and get a stronger foothold in those markets.

Our Cables Unlimited Group, which is the Long Island location where our team handled the hybrid fiber business, has been doing such a good job getting products built and out the door that we've been giving some new opportunities to do additional product types, mostly related to traditional wireless macro sites, which has resulted in some potential new customers. Not all these have come to fruition yet, but from a customer standpoint, we think we've gained exposure to some additional piece of the business that can diversify us a little bit while we also continue to service our Tier 1 carrier customer extremely well.

In the coming months, we'll continue to work on key initiatives to further evolve the company with a positive growth culture and sales mindset. To that end, we're working to add or upgrade talent in key positions as we find savings through synergies and redundancies, we redeploy that capital to invest in the right talent to help move us forward.

As I mentioned on a prior call, we've been reviewing our overall sales organization and expect to launch a modified sales structure before the new fiscal year to capitalize on our offer to the market and to further our approach of doing business the way our customers want to do business.

Earlier, I shared that we've added production capacity over the past 2 years at multiple locations. We still have some best practice work to do on our operations and facilities and think that over the next several quarters, we can make even more progress toward upgrading our capabilities.

Finally, returning to the results. We're pleased with the steady progress that we're making in our multiyear transformation of the company. Through 9 months this year, we're basically flat to the first 9 months last year, which included that huge second quarter. As we look ahead at our anticipated results, we expect to achieve year-over-year sales growth in both the fourth quarter and for our fiscal 2019 full year. We also continue to execute well on our long-term growth plan and work toward our goal of reaching $100 million in sales over the next few years. That plan calls for low double-digit organic growth and layering in M&A for inorganic growth.

I don't expect to get the mix of those 2 things exactly right every quarter. And as I mentioned, the timing of carrier spend plays a big part in our organic growth. We still have lots of hard work ahead of us as we work on our fiscal 2020 goals and accountabilities for our teams. We feel good about our core business growth and are diligent about our redeployment of capital to continue driving growth. I'm very pleased with where we are so far for the year, and we're getting better at delivering consistent and more predictable results.

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

Thank you, Rob, and good afternoon, everyone. Our net sales in the third quarter were $15.5 million, an increase of $1.9 million or 14% compared to the preceding second quarter, an increase of $3.7 million or 31% compared to the third quarter a year ago. The increase in net sales reflects a full quarter of sales contribution from C Enterprises as well as growth in both our traditional run rate business and our project work in the OEM and wireless carrier markets.

Gross profit for the third quarter was $4.3 million, an increase of 4% compared to the preceding second quarter and up 6% compared to the third quarter of fiscal 2018. Gross margins of 28% of net sales declined when compared to 34% of net sales in the fiscal 2018 quarter, primarily due to product mix as the product set our Tier 1 wireless carrier customer bought this past quarter happened to have a lower margin.

In addition, we increased wages at all of our sites in order to be more ready to retain our production workforce and in some cases, to meet state-mandated minimum wage requirements.

Selling and general expenses were $2.6 million or 17% of sales compared to $1.8 million or 15% of sales in the third quarter last year. The $8.8 million increase was primarily due to the absorption of the additional selling and general expenses of the newly acquired C Enterprises business as well as the increased compensation due to the timing of bonus accruals. In addition, the most recent quarter also included costs related to marketing programs due to increased sales with our distribution partners. We also incurred costs related to the evaluation of possible ongoing strategic acquisition transactions.

Income from continuing operations for the third quarter was $1 million or $0.11 per diluted share compared to $1.1 million or $0.11 per diluted share in appreciating second quarter, and $1.6 million or $0.17 per diluted share in the third quarter of fiscal 2018.

Turning to the 9 months of fiscal 2019, net sales were $39.8 million compared to $40.3 million last year, which, as most of you know, included the largest series of orders in the company's history. Gross profit for the first 9 months was $11.5 million compared to $14.1 million, while gross margins were 29% of sales compared to 35% of sales in the same period last year. The decline in gross margins was primarily due to the product mix at the Custom Cabling segment as well as increased wages for our production team.

Selling and general expenses were $7 million or 18% of sales compared to $6.6 million or 16% of sales in the first 9 months last year. The increase in selling and general expenses was primarily due to the absorption of the selling and general expenses of the newly acquired C Enterprise business and onetime cost of $100,000 related to this acquisition in the second quarter of fiscal 2019, partially offset by a decrease in commission expense.

Income from continuing operations for the first 9 months of fiscal 2019 was $2.7 million or $0.28 per diluted share compared to $5.1 million or $0.54 per diluted share in the same period last year. At July 31, 2019, working capital was $26.7 million, up almost $3 million since year-end. Current ratio was 6:1, and there was no outstanding debt.

Cash and cash equivalent was $13.3 million at the end of the third quarter, down from $13.9 million at the prior quarter end. This decrease is partially due to the timing on the collection of our increased receivable balance that resulted from sales growth during our recently completed third quarter.

For the first 9 months to date, we've provided our shareholders a return on their investment of $0.06 per share cash dividend, and we recently declared our 37th consecutive quarterly cash dividend of $0.02 per share.

That concludes my discussion. I'll now turn the call back to Rob.

Thank you, Mark. As our financial results illustrate, we continue to execute well on our long-term growth plan. We generated solid sales growth, both sequentially and year-over-year in the third quarter. This increase reflects healthy growth both organically and through our recent acquisition. We remain very focused on our key initiatives to leverage our strong customer relationships and channel partnerships to further expand our footprint in the marketplace as well as to bring more complementary companies into the fold as we march towards our goal of reaching $100 million in sales over the next few years.

We appreciate the partnerships with our customers, distributors and suppliers, the hard work of our employees and the support of our shareholders.

With that, I would like to open the floor to questions. Dory, we're ready to take our first question.

(Operator Instructions) And our first question today comes from Josh Nichols with FBR.

I want to ask, looks like -- as far as -- how much of the Custom Cabling business is at really direct to carriers at this point for the quarter?

Yes. We don't really break it down that way, but it's a pretty meaningful amount. I mean, if you look at our growth over the last year in that segment, other than you've got an acquisition thrown in there. But the majority of our growth last year and it kind of continues quarter-to-quarter now has come out of that direct business or it's going to that same handful of customers, even if it's indirect. We sort of -- we have it going both directly and indirectly, but it ends up in the same place to allow for the build.

And is that business subject at all to like any of these long-term contracts or purchase orders? Or is it just a very quick turn business would then formalize longer-term agreements in place?

Yes. So we have master service agreements in place with all the key customers in that space. And in that process, we've been through kind of a traditional bidding that goes on in order to win and then retain that business.

So we have long-term relationships in place. We -- the way that, that handled, though, is we take purchase orders spread out over the course of time when needed. We work closely with the various carriers and integrators to understand their needs and try to project as best possible. But as my comments kind of pointed out, it starts and stops in kind of a holding fashion. It isn't necessarily consistent, but we're communicating directly with them daily and weekly to talk through those projections. So it's a long-term agreement that they draw against when needed.

Right. And could you dive into a little bit about some of these key customers, like which carriers you have these MSAs with specifically?

Yes. So we don't actually disclose that. And that's a long-standing approach that we've had, but same customer we've been working with for a few years now, and then various folks within their services ecosystem that we do business with as well. But we've been asked to keep that to ourselves, let's say, so we don't disclose it that way. There's only so many potential customers out there that they'll recognize that.

And then, I guess, what's really the differentiator between you and some of the other competitors, both large and small, that enable you to win some of the cell tower cabling business specifically?

Yes. So I think there's a couple of things. I mean our engineering capabilities are really good, especially on hybrid fiber. Power and fiber in one -- in one cable, those designs are really very quality and the team has done a good job of putting those together.

And then I think our flexibility and then customer service and turnaround time. We're very customer-friendly in the sense that we have a Custom Cable segment for a reason. We call it that for a reason. Doesn't have to be a standard off-the-shelf thing. And while a lot of our larger competitors maybe would prefer to do a much larger run with hundreds or thousands of the same exact cable, when you get into the macro sites, in particular, that are being hybrid fiber-fed for the remote radio head deployments, the lengths are inconsistent, the breakout of how many fibers and/or pieces of copper or the sizes of copper that go into those change pretty consistently. So I think it fits right into our wheelhouse of we can handle a significant volume, but we can tweak the designs and the production capabilities around that. And still hits reasonable time lines where we allow our customers to do their network deployment.

So I think, generally, in that business, that's the reason for it. I think that same concept sort of follows through across our entire business. We have enough scale where I think we can outcompete some of the little localized competitors that we have. It's a pretty fragmented market at that level. And then we -- when we get into more of the competition with the big multinational, in some cases multibillion-dollar companies out there, we're designed for great quality, flexibility and design and fast turn kind of business.

And then just diving in, since it looks like things are going pretty well at C Enterprises, you mentioned. Could you kind of help make sense? I mean it seems like a pretty bargain basement purchase price. If I'm correct, it's like $600,000, but they're doing $7 million in revs. And just this quarter alone, they did over $3 million. Like why was that such a bargain?

Yes. We talked some about that at the time of the deal. And I think the ownership and leadership team there, we had some good conversations and recognize that in combination with a larger entity and sharing some of the strategies and go-to-market capabilities, specifically from a distribution perspective, which is generally how they go to market. That together, maybe we were stronger than separate. So I think we've invested in some additional resources there, which allows them to perform. The sales team did a great job of dragging in some additional levels of business.

And I just think, generally, that team has benefited from having some investment and being a part of something bigger. Yes, I mean we -- by all accounts, I think it was a great deal. But I think that was a business that was roughly breakeven when we acquired it. And we needed to do some investments, and were happy to do that and thankful at the way that they're performing.

That provides some clarity. And then aside from the scale, could you talk a little bit about, from a strategic perspective, what C Enterprises brings to the company regarding new customers or product offerings?

Yes. Great question. So I think on the customer side, we've done business for a very long time with a lot of the different distributors. We've beefed up our distribution approach even before doing the acquisition. Two of their largest customers are 2 distributors that we've done business with for years and have just recently, in the last couple of years, started to really grow. So I think that the relationships that they had with those 2 large distributors are very helpful for us. It gave us -- spread us out a little bit from a customer perspective into some additional big relationships. And on the product side, it gave us more of a fast turn fiber offer than what we've traditionally done. Our Cables Unlimited group, which came in through an acquisition several years ago, 8 or 9 years ago, is great at fiber, Corning Gold House, just like C Enterprise is.

But I think most of their work is on the custom side, higher ticket items that require more engineering. C Enterprises gives us that fast turn, booking-to-ship kind of business that goes into some more traditional applications, data centers, traditional telco, those kinds of things as well as the capability to do fast turn, small cell fiber offerings, which is something that we believe will give us a nice opportunity going forward as the spend increases there.

And good to see the backlog numbers here at $10 million. Just historically, like what's the company's time to deliver, right, on that? It's fast turns, typically, I would think?

Well, so it depends. I think if you go back to 2 years ago, when I started here, our backlog was traditionally $2.5 million. We just didn't disclose it because it was not a material number. And if you took that and put it out over the course of the year, magically that ended up being about a monthly kind of turn or a little more than that.

I think now we see ours is built both with things that are going to go out in the next quarter. And if you go back 4 or 5 quarters, you kind of see the trend where we generally ship out our backlog and then some because we have the book and ship business.

But if the backlog never goes fully away. We have some of that, some portion of that, that is long-standing and gets drawn against over the course of several months or a few quarters. Generally, though, whatever is in our backlog will go out within the fiscal year. So that's why I'm pleased to see that we're booking new business and sort of backfilling that backlog every quarter, at least for the last 6 or 8 quarters.

And then just because you mentioned it for small cell in a big longer-term growth opportunity, like where is that now as far as today, the piece of the business? And where do you think that's going to be with the 5G rollout and transition over the next like 24 months or so?

Yes. I think it's a small piece of our business today. We shipped some of our traditional coaxial offer into it. We're working on some fiber-fed small cell opportunities today.

I think the spend there is interesting because the local legislation comes into play. I think if you were to ask any carrier trying to deploy small cells, the design is different, location to location, both because there may be different technical requirements, but also because local municipalities and local legislation isn't making it particularly easy to deploy those in a fast way.

So I expect that to accelerate. And I think certain cities and counties have found ways to streamline that process. But I don't expect that the real spend there to start freeing up until next year is the hope, although we see opportunities here and there for different designs. And I think it still seems to be hung up in a lot of the political conversation around wireless. And does it look okay? Is it safe? Some of those conversations that have proven out many times that it's safe, but that still drives a lot of the local conversation, which delays it.

Our next question today comes from Aaron Martin with AIGH Investment Partners.

It's Aaron Martin with AIGH, and congrats on another good quarter.

Can I go with a little more quantified about the gross margin at C Enterprises? Is it -- and the improvements you're making there, what kind of improvements can we expect? Are we talking about 1 or 2 percentage points? Or is it long term? Can you get to 3 to 5? What's kind of the scale of what we're talking about here?

Aaron, specifically related to C Enterprises? Is that the question?

Well, let's start there, and then we'll move on.

Okay. Got it. Yes. So I think as we disclosed when we made the acquisition and again, in our comments today, margins generally, they're a little lower than our blended margins. Some of their product lines are more commoditized maybe than some of the other ones that we've traditionally had. We knew that going in. And I think the team there has done a great job of finding the better opportunities that we get paid for the value that I think we deserve, and the fast turn business and the work that, that team does.

So we're expecting it to come up a little bit. I don't think we'd expect an overnight massive change. And they're not terribly low margins. They're not horrible. But when the performance there is as strong as it was, it's going to have an impact on, obviously, the average overall.

So we've seen it come up a little bit. I think we're expecting it to continue coming up a few percentage points is kind of our goal at this point to really test and see what's possible, both on the existing products, but also as we move into some additional applications.

Okay. And on the overall company, obviously, besides for the C Enterprises, it seems -- it sounds like in the legacy business, there was a reduction in gross margin this quarter based on some investments and capacity.

Longer term, putting this aside, we've talked about a $100 million revenue run rate goal. Can we talk about a long-term gross margin, operating margin goal?

Well, so yes, on the -- the gross line's a little easier to talk about all that. And I think it's not unlike what we've talked about previously. That 30% or low 30s is a good spot for us with the product mix that we have today.

I think, as I said on the prior call, when asked kind of a long term question, how high can that number go? Look, I think getting it up into the low 30s is a solid place with the product mix that we have today. As that mix changes, because our goal is to bring in additional higher-margin product lines and drive opportunities in those spaces, both organically as well as on the acquisition side, I think we can keep those margins back up there, 30% and above in the short term. Long term, I don't definitively know. This quarter was a great example of when we perform really, really well in a couple of key customer accounts and/or product lines, the customer happened to order some things that have -- that had a lower margin. If the mix has been a little different, those margins could have been up at that 30% number.

So it's hard to put a long-term number in place, but I think our goal remains to stay 30% or above. And this quarter was an example of -- we did some investments on the production side, assuming that we're going to keep driving growth, not just short term, but going long term, and we're going to have to have the right kind of people in place on the production teams to do that. Some of that was state mandated as well. We happen to be in locations where wage pressure is being mandated, which -- that's fine. It's built in there. And I think I'm appreciative of the fact that we can bounce around a little bit there. Though our goal is to stay back at that 30% or above.

Got it. And we talked about still looking out for Q4 that we expect to grow year-over-year sequential quarter end and on the whole year. Can we grow year-over-year, even excluding the C Enterprise revenue?

So there's an outside chance we could. I think it's -- it is hard to know exactly. We've got some meaningful things in our pipeline that it's going to come down to timing really.

My expectation, and I think what we've seen with C Enterprises is I'm having a harder time calling that inorganic growth, the more days that go by. And then being a part of the company, we're doing a good job of sharing business between the various locations and kind of traditional different sales models. They've done a nice job of working together, both with the other West Coast business as well as the East Coast operations.

So it's tougher to call that inorganic. But I think your question is a fair one, which it would take some work from a carrier spend perspective, in particular, to get us to achieve that organic growth year-over-year, not including anything from C Enterprises.

And our next question comes from [Hal Granger], a private investor.

Congratulations on coming forward and increasing your revenues. That's great.

Thank you.

Mark, I'm wondering if you could address the accounts receivable. So sales were up year-over-year, 31% in the quarter. Accounts receivables were up 69%. Was -- is that something you'd expect because of C Enterprise mix? Or can you talk about what's going on there?

Sure. Part of that is the fact to timing. A lot of it is timing when the sales actually occur. But in addition, as a result of getting some new businesses, sometimes we change the terms to accommodate what may work well for our customer and us as it relates to receivables and the payments. So sometimes, again, it comes down to timing as to when they're going to make payments and when we receive the cash.

So if you also noticed we had, I think, $2,000 of bad debt over the first 9 months. So the collection is not an issue. We've not had that in the past. So again, when it comes down to, it's just simply a timing issue.

Regarding C Enterprises, would you consider that the integration is pretty much -- well, how is that going? Is that pretty much done now? And now it's part of your ongoing operations? Or is there still more to go in integration?

Yes. I think we've done well there, and they've been great at joining our team and performing well against a set of goals. As we get ready to go into a new fiscal year here in another 1.5 months or so, we're kind of putting some more operational things in place. And I mentioned sales structure. We're going to get a little further down the path of getting our distribution sales teams operating more closely together. Because traditionally, while we may have called on some of the same customers, talking to completely different groups in some cases, so I think getting those relationships more centralized and getting us set up in a way that -- it makes it easier for our customers to do business with us, that's a big step for us, getting the distribution model in place and the direct OEM model in place as 2 distinct things with a distinct operating organization and sets of goals. And that's -- that's a piece of what we need to do.

In the short term, slightly longer term, I think we've done a decent job on getting shared business moving between the locations. But there's probably some operational opportunities just with similar kinds of production capabilities on both coasts that we can likely leverage out of that as well.

Okay. Drilling down on the C Enterprises' margins again. You're talking about gross profit margins are a bit less than the rest of RF Industries. If you looked at net income profit margins, which maybe you don't even break out or calculate yourself, but regarding C enterprises, is -- is that also a little bit below? Or is that -- or is C Enterprises indeed showing a net loss?

Yes. So we don't necessarily break it out that way. But I'll give you a general answer, which is that, that business is profitable for us at this point. And when we did the acquisition, we said we expected it to be immediately accretive through some things that we put in place to allow that and just allocation of the right people, and that continues to be the case. So that's a moneymaking operation for us in this quarter, but it's been great for us through the roughly 4.5 months that we've had them on board.

Okay. That's great. If I could make a comment. I see your Q came out 20 minutes before the call, along with, of course, your press release. It would be fantastic if we had more time to review the Q before the call. But overall, I think your level of communication and transparency is fantastic. So that's all.

I appreciate that, Hal. Yes, we've tried a few different timings on when we put something out and when we have the call. And this is the one that we've kind of settled on for now, but I appreciate the feedback.

(Operator Instructions) Our next question today comes from [Risto Vakoski], another private investor.

Congratulations on great results.

Thank you.

So I guess my first question is about salaries. It seems that it has a bit of a negative leverage here because we had great revenues. But since salaries seem to have gone up higher than the revenues, and that's both in the cost of goods sold and in the various operating expenses.

So is that -- I mean, I understand San Diego is kind of an expensive place to live. But is that kind of like a onetime step function due to certain legal changes? Or is that something that will continue? Would we be able to get positive leverage in the future?

Yes. So fair question. And versus it being salary changes, most of the increases that we experienced show up on a gross margin line because of our production folks. So primarily, hourly workers and in some cases, there had not been increases there in a few years, frankly. And so I think what you've seen is we've gone through increases at all locations to try to get people at the right market level, in many cases, well above the mandatory minimum wage that exists in that location.

There are further mandates over the course of the next few years in multiple of the places where we do have operations. But I think we've done a decent job of investing correctly in the people to allow us to grow the revenue line and keep up. These are the folks that are doing the actual production work on cable assemblies, in particular, whether that's fiber or coax or a combination thereof.

So I think you did see a step change function in this quarter. It's now built into our gross margin line, and it's incumbent upon us to perform well, price things right and reclaim that margin level that we believe we deserve.

All right. And is there opportunities to use automation to kind of decrease the percentage of, like, human labor costs?

Yes. So we've done a decent amount of that. I think it depends on the business. The word custom showing up in any kind of our operation sort of lends itself to -- there's a certain level of automation, but not everything could be automated. So I think we've done a decent job of automating what we can.

When I first got here, that was something I was on a quest to go find who has it automated completely? And the issue pops up that you can automate it for 1 million of the exact same thing. When you do 100 of the same thing and then change to something else, the ROI on that upfront investment becomes pretty tough to pull off. So there may come a scale level where we find an opportunity to do that again. But I think today, we're generally kind of looking at the automation that we can do is already built into the bulk of the business.

All right. And so in general, would you say that the trend in the industry is for -- going in your favor for more different, more customized solutions? Or is it the case that certain customized solutions are being tried out now and then they'll -- in the near future, they'll become like kind of a large-scale homogenous deployments?

Yes. I think the scale of custom deployments, I don't see people planning better. And I'd say that because that points itself to the fast turn business as well. There's the custom part, which is, yes, you need 50 or 100 or 200 or something, or maybe you need 10, that's one component. The other is, and I need it in 3 days, in 7 days, in 10 days, whatever the time frame might be. Those 2 things combined, I don't think they're going to go away anytime soon.

As I was leaving our office earlier today, for example, there was a gentleman picking up cable assemblies because he's got a job that he has to do an install on for a carrier. That pickup business and the availability for a contractor to back a truck up, and load it up with what he needs and get out and do the work, doesn't seem to be changing. And with small cells, if anything, I feel like it's going to get that much more so into a fast turn, place an order, it needs to be ready in a few days and then available at the right location.

So I feel like at least a portion of the business is going to stay the way that it is now. I think if we're talking bulk deployments, somebody wants to buy 1 million feet of fiber optic cable, that's not a space that we play in. And those will continue to be large-scale deals that get deployed over the course of several years versus site-by-site where 100 sites, there may be 2 that are the same, and the rest of them are buried in nature, which fits very well into our skill set.

All right. That's good to hear. And lastly, kind of a book-to-bill ratio below 1. And I asked this question last quarter as well. I assume this is nothing to worry about just because your business has a lot of like kind of short-term orders quickly fulfilled, so the kind of the book-to-bill ratio is not something that signifies what will happen in the next quarter. Is that still correct?

That's correct. Yes, it points to the nature of our business. We -- a portion of it is going to be book and ship in a very short period of time, which will throw off those kinds of ratios. But the best way to look at kind of the health of the business, our backlog remains strong. And this was another example as this quarter ended, where if some orders had come in 2, 3, 5 days earlier than our backlog would have been even higher at quarter end. Instead it ended at 8, and then subsequent, it's popped back up to 10 again.

So keeping -- by us disclosing our level of bookings in a quarter and where that leaves us for backlog, we feel like we're being really transparent on kind of the health of the business around those various metrics.

And our next question comes from [Charles Hilton], a private investor.

Interesting call. Congratulations.

Thanks.

It's clear the -- everybody is working very hard there. It's apparent because I know a few people and they're never available for lunch.

But anyway, I wonder if the cash -- the company has always been known for having a good cash position. I wonder how hard it has been working over this last quarter. And I wonder how it's distributed? CDs with your favorite bank that you may be locked in, but hopefully not. Anything else? Is there anything you can share with us? And what maybe the average yield was for the last 3 months or 9 months, whatever you prefer?

Yes. So Mark, just stepped back into the room. So the question is around our deployment of cash and what kind of a return we're seeing on that cash, whether that's CDs or other things. And is there any kind of return we can disclose for the last 3 months, 9 months, putting that cash to work.

Good question. We have looked at opportunities right now. Unfortunately, there aren't a lot. We've kept them in a fairly safe investment. And quite frankly, our earnings is as much as we possibly can. But at the moment, we're just keeping it in a money market account until we see a better opportunity.

Okay. So you're not knocking the leather off the ball? In other words, you can't boast of any younger bank eager for your business that might be giving you an advantage? Again, it's probably your favorite bank that is maybe giving you average or maybe even a below average?

So yes, I don't think we have a favorite bank. I certainly don't. But appreciate the question.

I think the cash position we have, our goal is to redeploy that cash, specifically in M&A. So I get it. We could probably do better on a -- from an earnings, putting that cash to work and earnings perspective. And if you've got a proposal, which I sense you might, would love to hear about it.

And it appears there are no further questions in the queue at this time. I would like to turn things back to management for any closing or additional remarks.

Thank you, Dory, appreciate it. And thanks, everyone, for your interest and support of our industries. We look forward to reporting our fourth quarter and full fiscal 2019 results in December. Thanks for joining today's call. Have a great day.

And that does conclude today's call. Thank you so much for your participation. You may now disconnect.