TESSCO Technologies Inc (TESS) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2015 TESSCO Technologies, Incorporated earnings conference call. My name is Erica and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions). I would now like to turn the call over to David Calusdian, from Sharon Merrill. Please proceed.

Good afternoon, everyone, and thank you for joining TESSCO Technologies' first quarter 2015 conference call. Joining me today are Robert Barnhill, TESSCO's Chairman and Chief Executive Officer, and Aric Spitulnik, the Company's Chief Financial Officer.

Please note that management's discussions today will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve a number of risks and uncertainties, and TESSCO's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO's public disclosure, including the Company's most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

With that introduction, I would like to turn the call over to Bob Barnhill, TESSCO's Chairman and CEO. Bob?

Good afternoon. Thank you for joining us today. I am pleased that we began our new fiscal year in line with our expectations, delivering revenue growth of 23% sequentially and 6% year-over-year, and growth in each of our markets.

Our transformation strategies and financials are strong, positioning us well to leverage the opportunities we are seeing as a result of the convergence of wireless and the Internet. TESSCO enables organizations to capitalize on these new opportunities by architecting and delivering the knowledge and product and supply chain solutions required to build, use, maintain, or resell wireless voice, data, and video systems.

Our strategic initiatives promise to transform the way we do business. And today I would like to highlight four of our key business generation initiatives. First is the fundamental growth driver, the development of solutions and products.

We are building a team that focuses totally on the solutions development and collaborates with product managers, defines the required products, and then develop an end-to-end customer offering. Today we are supporting a multitude of systems. And I would like to review two solutions that will be a part of aggressive campaigns this quarter to generate customer interest and sales.

We all demand that our mobile devices work anywhere, anytime. And TESSCO simplifies the challenge of enhancing cellular coverage and capacity, and provides a complete solution for both -- for residential, office, and outdoor venues.

Another example is the monitoring and control of remote assets, which requires a total solution from the edge to the core, all of which TESSCO offers. A few specific remote monitoring control systems are positive train control, video surveillance, and the oil and gas flow monitoring.

As an example of success, we are selling fully integrated systems for what is called the digital oil fields. We met the requirement for providing continual communications from a platform to allow the oil and gas companies to manage, measure, and track all data coming from the oil fields. Presently, we are also exploring for the future the end-to-end Internet of things monitoring and control.

The second major initiative is team-based selling. Today, we are reorganizing our entire sales organization into teams to better serve the customer and develop wider and deeper relationships. The sales teams are customer segment focused, and consist of development executives and account specialists.

The development executives are responsible for enhancing in-depth relationships with their assigned customers to understand their needs and deliver solutions to generate cross-sell and revenue growth. The account specialists are responsible for supporting their development executive partner and their customers. They are accountable to know the customer, and to be the immediate point of contact for project support, order entry, and all account management assistance, thus allowing the development executives to be with the customer 100% of the time to build opportunities and sales.

Supporting the sales teams are solutions architects. These technical experts support development executives to design end-to-end end solutions and assist in consummating the sale.

The third initiative is what we call iMarketing, which is our database, digital, online marketing and customer service. This system consists of three components, all integrated to serve the customer and develop new opportunities: TESSCO.com, the one-to-one guidance in communications, and big data.

The heart of the system is TESSCO.com, the definitive place for customers and potential customers to gain the knowledge and assistance to design and configure solutions, find and select products, and procure and control their entire supply chain. TESSCO.com also attracts opportunities through search and content marketing that define and develop new opportunities from existing and new customers.

TESSCO.com provides productivity for the customer and for TESSCO. It gives product recommendations, substitutes, alternatives, and companions. It confirms price and availability, and TESSCO.com allows total account management for order tracking and resolutions.

We are finishing the prototypes of our new online experience, both for TESSCO.com and our Ventev.com site. The proactive driver of iMarketing is the one-to-one system consisting of the customer relationship management, and campaign and communication engines. One-to-one allows customer personalized contextual communication. It provides sales opportunity guidance, and it presents timely results and key performance indicators for our marketing and sales units and individuals.

Big data is the third component and it is at the core of our iMarketing system. This unstructured database brings sales, customer, product, transaction, web, and marketing data into a single knowledge center, creating the foundation for deep business and operational insights and true one-to-one relationships with our customers. This past quarter, we utilized Big Data platform to design and measure new performance metrics, and provide dashboards and analytical tools to our business generation team.

The fourth initiative is our Ventev proprietary products. Ventev's mission is to create and develop products that meet unmet needs, providing customers with innovative products that are not available in the marketplace. Ventev consists of two distinct units, both utilizing central manufacturing and supply chain resources. The Wi-Fi and base station infrastructure unit focuses on product solutions for broadband communications in remote areas, asset tracking in industrial venues, and the deployment of Wi-Fi indoor, outdoor, and remote locations.

This quarter, we completed Wi-Fi deployments in two major college stadiums and provided new Wi-Fi antennas for upgrades at various fast food restaurants, big-box retailers, and high-end retail stores.

Our second Ventev unit, mobile accessories, is focused on mobile device protection and power. Last quarter, our offer of cases and screen protection and chargers for the Samsung S5 phone was very successful. We are now preparing for Apple's new iPhone 6 watch launch and a charger for Qualcomm's new Quick Charge technology for faster charge times on the Android devices.

In September, at the CTIAS show, we are introducing new cases, chargers, and power hubs. The distribution of Ventev accessories is now going beyond our traditional channels and into travel and hotel shops. Ventev now represents 12% of TESSCO's sales and a much larger percent of gross profit. And we expect strong growth going forward.

In addition to these business generation initiatives, we have a series of operational initiatives to transform many of our policies and procedures to better serve our customers while enhancing our productivity and profitability. The execution of both the business generation and the operations transformation initiatives require prudent investment in talent and technology. And, as a result, revenues may grow faster than earnings in the short-term just as we saw this quarter. However, as our initiatives gained traction, we expect to see accelerated revenue growth, margin improvement, and operational productivity, all resulting in bottom-line growth.

In summary, we have a lot going on. And I trust you can feel our commitment to growing the value we deliver to our customers and to you, our share owners. With that, I would like to turn it over to Aric to go over the financial details of the quarter.

Thanks, Bob. Let's look at the first quarter results. Revenue was $153 million compared with $144 million a year ago. As Bob mentioned, we saw revenue growth across all of our markets. Gross profit was just over $35 million in Q1, essentially on par with last year's first quarter. Gross margin was 23% compared with 24.6% a year ago.

This decline was primarily the result of a change in product mix, as we experienced increased sales of lower margin distributed antenna systems, or DAS, equipment. As we continue to be successful with DAS, we are trying to offset the lower margins by working on a deeper penetration of these customers with our higher margin infrastructure and installation, test and maintenance products.

SG&A expense was $29 million, up about 2% from the first quarter of 2014, primarily due to increased expenses associated with our investments in talent and technology. As a result, operating margins were 4% versus 4.8% in the prior year quarter.

While we continue to make these critical investments to drive future growth, we do expect operating margins to improve as the revenue we anticipate from these investments begins to be realized. Net income was $3.7 million, down from $4.3 million in the same quarter a year ago. EPS totaled $0.44 this quarter compared with $0.51 in the first quarter of 2014. However, we did show nice sequential growth over the $0.35 fourth quarter.

Now turning to the markets. In the public carrier market, revenues were up 11% year-over-year. However, gross profit was down 9%. We expected and witnessed a continuation of the slower spending from the tier 1 carriers compared with the year ago quarter, when they significantly increased spending to fill out the capacity of their networks.

By the end of calendar 2013, several phases of macro site LTE deployments had already slowed or had been completed. In the short-term, these carriers will be concentrating on densification efforts that are aimed at filling in coverage in capacity gaps in the network. Spend for the remainder of this year will be balanced between these densification efforts and DAS and small sale efforts. DAS remains strong and was the key growth driver for us this quarter and is expected to continue growing, while small cell deployments, which are still an important element of our carrier strategy, have not yet truly come to fruition.

In the commercial dealer and reseller market, much of the work that was delayed from severe weather in the fourth quarter came online in our first quarter. We have seen demand for increased indoor cellular and data coverage, which should indicate eventual demand for small cell systems, once that market develops more fully.

Revenues increased 6% and gross profit increased 4% from Q1 a year ago. In the private and government systems operator market, revenues grew 4% while gross profit increased 2% year-over-year.

On the private system front, we continue to make investments in talent and have many potential significant projects in the works. The slow economy continues to be an issue for many of our customers in this space. Some of these projects will also have a longer sales cycle than some of our traditional sales.

On the government side, with the approval of federal government budgets, we have seen funding for network builds begin to slowly be released.

Turning to our retail market, the release of the Samsung S5 phone was a key business driver as consumers returned to retail stores following the extreme winter weather that occurred in the fourth quarter. We continue to have success in the indirect dealer market. We also experienced success selling to cell phone repair customers and we expect that channel to grow in coming quarters.

Our balance sheet remains strong. Compared with the fourth quarter, inventory increased $11 million in Q1 as we saw a ramp up in orders and we stock inventory for the peak build season. Cash collections remained strong during the quarter and our cash stands at just over $6 million with no operational debt.

We set our dividend at $0.20 per share with a record date of August 6 and a payment date of August 20. We are maintaining our EPS guidance for fiscal 2015 in the range of $2.05 to $2.15. This guidance takes into account the investments we are making in new business generation, organizational talent, digital and online marketing, and our enterprise technology foundation. And it also takes into consideration the continued concerns about the state of the economy. Finally, it also assumes that we will grow revenues at a faster pace as our initiatives continue to take hold.

Thank you for your support of TESSCO. Operator, we will now open the call for some questions.

(Operator Instructions) Anil Doradla, William Blair.

I had a couple of questions. I mean, you talked about the sales force getting reorganized. What were the catalysts and reasons for reorganizing the sales force at this stage? Was it end market behavior? Was it customers? What were the key reasons?

Yes. It is a great question. The -- it is focused on the customer experience. And our sales force had been designed and built over the years as pretty much an independent resource. And they were responsible for the end-to-end service of a customer.

We did have a customer support group that was more of a pool. And so, what it ultimately did is it continued to diminish the time that salespeople could spend with a customer as they were working on the order entry, the logistics issues, the various resolution issues. This new team selling puts the responsibility on several people for an account, and you divide the expectations and the responsibilities so that the development executives can spend the time really getting deeper into an organization, finding out more about the customer, helping develop the opportunities and the needs. And then the account specialist is then the person that takes the order entry and manages the entire account for the customer.

The customer reaction -- I mean, we are just now implementing it. We are rolling out a major training program next week. But, from the customers that we have talked to and the approach that we have done, that they are looking forward to having the total team and backup that can help them all along the way.

So is this the first time you have reorganized your sales force, or have you done this periodically from time to time?

Well, we have been organizing around the customer type so that we have segments. So you have got a team that is responsible for oil and gas, a team that is responsible for transportation, a team that is responsible for enterprise. And so that was a part of the slow organization over time. This is the major transformation as it results to the total responsibilities -- the responsibility delegation that we are achieving.

I might mention, too, that we have got a -- to help effect this change, is the salesforce.com-based that -- where we measure, we can see all the leading indicators, the activities, the outcomes by the development executive as well as the account specialist, so that we make sure that nothing goes awry as we focus more and more on the time with the customer and giving the customer an extraordinary experience.

Switching gears, on a quarter over quarter basis, very strong growth in the June quarter. Historically, obviously, the June quarter has one of the stronger on a sequential basis. But, at 22%, almost 23% sequential growth, was there something that stood out this quarter? Because, obviously, it is much stronger than historical quarter over quarter growth, and would love to hear what is unique about this quarter.

Yes, I think a lot of that had to do with the DAS build out. So this is something that is relatively a new technology that we are doing very well with. And that is primarily in the public carrier space and also a little bit in the commercial resellers. So that was a very successful implementation for us this year.

We saw a lot of customers really liking those kinds of implementations and really appreciating the support we could give them on a complete solution as we tried to put the DAS equipment together with some of these other products to -- as Bob was talking about, creating these complete solutions. And that was a success for us this quarter.

And finally, on Ventev, that was about 12% of your revenue. Can you once again remind us what is your target objective is, call it in the next couple of years, in terms of revenue contribution from that segment or product line?

I think our internal goal is that Ventev grows faster than TESSCO as a whole, and so continues to be a larger portion of our business. And we are looking at continuing to improve the margins, as I mentioned -- that the gross margins are superior to the rest of the product line.

Thanks a lot. Congrats.

(Operator Instructions) Bentley Offutt, Offutt Securities.

A couple days ago, the Burlington Northern, which is the number two largest Class I railroad in the country, and the major union, the Sheet Metal, Air, Rail Union Transportation Division reached an agreement -- tentative agreement which would enable all of -- or about 60% of all of Burlington Northern trains, which are equipped with PTC, to be operated solely by one locomotive engineer without the onboard conductor. And as you might know, this has been a major goal of the railroad industry for many years because it has a significant improvement on their profitability, but it also allows them to run a lot more smoothly than in the past.

And this would engulf about 60% of their operating region, which is the Midwest to the Pacific Northwest. So it is a major step forward, I think, for positive training control. And so I was very interested if maybe you could give the listeners a little feel as to the participation that TESSCO has in this area -- this very big area.

Yes. We have developed this dark territory power and RF propagation station that -- where you can install this thing. It has the box for the radio, the sensor to assess the condition of the tracks, whether there is a switch that is in the wrong direction, assesses the condition of oncoming traffic. And then, if there is a chance for either a derailment or a collision, it takes -- seizes control over the locomotive, takes it away from the engineer, and shuts the locomotive down.

This is a very exciting project we have, worked in conjunction with GE that has all this sensing equipment. But we are doing the tower that has an articulating tower that -- where it has solar panels as well as battery backup and then the antenna system.

We continue to do test sites. We had a couple in the past quarter that went out. But, again, as we have talked before, it still has been very slow to take off. They continued to push out the mandatory date. The railroads look at it as an expense item rather than a revenue item and so they continue to push back.

But I agree with you. I think that, with what we have seen with various collisions and now with this Burlington situation, is that we trust that it is going to start to accelerate.

Aside from that, are you involved in the radios between the crossings to the outback? Do you have that technology?

We are not involved -- the radio that they are using for the positive train control is a specialized radio that we do not have availability of. Now, we are involved in the signaling in the communications side, but the point-to-point radios -- the point to multipoint. But we are not involved with the positive train control.

(Operator Instructions) And we have no further questions. I will now turn the call over to Bob Barnhill for any closing remarks.

Okay. Thank you. In summary, we are very excited about TESSCO's 2015. As the convergence of wireless and the Internet continues to drive expansion of new systems, TESSCO is uniquely positioned to be the source of the knowledge and product solutions for the organization that build, use, maintain, or resell wireless. The investment in our transformation initiatives will enhance the customer experience, create new market opportunities and productivity for us, and, as a result, drive revenues and profit growth.

In closing, I would like to thank our customers, our manufacturers, our team members, our share owners, and you for your continued support. Thank you for being a part of our call today and look forward to talking to you in about 90 days. Thanks. Bye.

Thank you for your participation in today's conference. This concludes the presentation. Everyone may now disconnect and have a good day.