TESSCO Technologies Inc (TESS) 2017 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the TESSCO Technologies Third Quarter 2017 Financial Results Conference Call. (Operator Instructions). Now I would like to turn the conference call over to David Calusdian of Sharon Merrill Associates. Please ago ahead.

Good morning, everyone, and thank you for joining TESSCO's Q3 conference call. Joining me today are Murray Wright, TESSCO's President and Chief Executive Officer; and Aric Spitulnik, the 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 disclosures, 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 Murray Wright, TESSCO's President and CEO. Murray?

Thank you, David. And good morning everyone. Thank you for joining us. After four months at TESSCO, I'm optimistic about the position we hold in our markets and our potential to grow revenues and earnings at a faster rate. Most of our markets are forecasting solid growth during the next several years, and we all expect TESSCO to capitalize on that growth opportunity. The question, of course, is how do we do that? As we seek to drive sustainable growth in revenue and earnings, we are recalibrating our go to market strategies and looking to rebalance resources to acquire new customers and to gain greater market share with our current customers.

Our focus is on becoming more aggressive in various markets while developing a more efficient and effective business model to support our efforts. To carry out this mission, we're prioritizing four areas: enhancing our e-commerce and electronic tools, optimizing our go-to-market strategy, improving our product and vendor management effectiveness and increasing our margins and operating leverage through diligent expense management.

First, we are continuing to invest in our e-commerce capabilities and our electronic tools. As you know from our re-launch of Tessco.com, our website is a vital tool in interacting with both new and existing customers. It is imperative that we keep e-commerce and productivity tools at the leading edge of our industry. Although we will continue to allocate the resources necessary to make sure this is the case, we do not expect next year's CapEx to be materially different from our current run rate.

Second, the sales organization is the engine that drives our success. One of my first tasks was to conduct a search for an experienced, dynamic person to lead our sales team. I was delighted in December to appoint Pete Peterson to the position of Senior Vice President of Sales. Pete brings a diversified set of executive leadership skills and discipline to TESSCO. He was previously Vice President of Global Channels at a leading data storage and networking company and a Senior Vice President of both Sales and Advanced Infrastructure Solutions at Tech Data Corporation, where he and I also worked together.

Pete has the skills and leadership to make a difference at TESSCO. He has already begun addressing our go to market strategies, creating a more performance-oriented sales team and working with other Company leaders to streamline our sales processes. He is bringing a fresh perspective and outstanding leadership to our sales organization.

Third, we are striving to ensure TESSCO is a sales-centric and customer-oriented organization. And to that end, this month we named Charles Kriete as our Senior Vice President, Product Management and Solutions. Charles will be responsible for vendor partner relationships and developing new go-to-market product and service solutions. His experience in the Internet of Things and the mobility market will enable us to create more opportunities with our customers and will enhance TESSCO's value proposition. Since I came aboard, we have talked about accelerating our growth, and we expect Charles's aggressive entrepreneurial spirit and leadership to help drive that acceleration.

And finally, we understand our window to implement change is not open-ended. We are currently reviewing our cost structure and building a plan to improve sales, enhance productivity and profitability. We expect to have new initiatives in place this quarter to hit the ground running as we begin our 2018 fiscal year in April. We'll share highlights of our progress that we're making on these actions in upcoming quarters.

Now, turning to the third-quarter performance. We made progress on the top line, achieving both year-over-year and sequential revenue growth in the same quarter for the first time in more than four years. We were successful in winning orders from key large customers, which helped contribute to our growth and gives us optimism about continuing that success. We have instilled more customer focus across the company, and we are holding people more accountable for their performance.

We are also keenly aware that sales is a team effort, and we are building deeper collaboration among sales, product management, supply chain, logistics, marketing and finance to construct a faster, better customer experience. We believe this is having a positive effect in these early days.

Aric will go into more detail on each of our markets, but I want to give you a brief update on what we are seeing in the carrier space. As you know, we've been transforming our approach to the carrier market. Based on our recent sales efforts, carrier revenues increased by double digits both sequentially and compared to the third quarter last year. Revenues from the public carrier market grew 16% from the third quarter a year ago, the first year-over-year growth in this market in seven quarters. We have also seen a nice lift in carrier revenues in January over last year. And it may be too early to declare this a trend, but it's certainly good to see this growth.

During the past several months, our Tier 1 carrier customers have been working aggressively to cut costs while still maintaining control of their supply chain and procurement and increasing their speed to market. This practice by the carriers can create great opportunities for TESSCO, as we help them serve their customers better by providing a complete solution, leveraging our program management, supply chain, product and logistics expertise.

Utilizing TESSCO enables the carriers to become more efficient with the planning and purchasing of material and the management of the general contractors. It also helps them achieve closer to a just in time inventory position, improving their inventory turns while maintaining tight deployment schedules. So far, we're pleased with these developments.

Looking ahead to our fiscal fourth quarter, which historically is our most challenging quarter, we expect modest improvement in revenues from the fourth quarter of last year and better year-over-year bottom line results.

Going forward, we are excited about our opportunities to improve productivity and increase operating margin while delivering an enhanced customer experience in fiscal 2018. We are focused on becoming more aggressive and developing a more efficient business model to support our efforts. TESSCO already is in a terrific position to capitalize on the growth of the wireless industry and the Internet of Things during the next several years. We are focused on accelerating our progress and we look forward to sharing examples of our success in coming quarters.

Now I'll turn the call over to Aric to discuss the results in more detail. Aric?

Thank you, Murray. And good morning, everyone. I'm going to provide comments on the overall performance and some detail about what drove the results for each market. In the third quarter, revenues were $147 million, up from $135 million in the second quarter and $140 million in the third quarter a year ago. We saw increased revenues across several different markets, as we were successful in winning significant orders from a number of key customers.

Gross margin was 20.4% of revenue, compared with 21.4% during the second quarter and 21.1% a year ago. The decline in gross margin was due to a product and customer mix change and not a result of a change in our pricing strategy. SG&A expense increased $1.2 million from the second quarter and $3.2 million from a year ago. While we have been winning business in our retail market, our costs have been impacted by a significant increase in retail orders that has driven higher freight, marketing and operations costs.

These orders are generally smaller and are more costly to process and ship than those in the other markets. As a percentage of sales, SG&A was 18.9%, compared with 19.8% of sales in the sequential second quarter and 17.7% of sales in the third quarter a year ago. As a result of these higher expenses, operating income was $2.1 million, compared with $2 million in the second quarter and $4.7 million a year ago.

As we said, we are formulating a plan to improve operating margins, and we expect to have an update on that during our fourth quarter call. Net income for the third quarter was $1.2 million or 15 cents per share, compared with $1 million or 12 cents per share in the second quarter and $2.9 million or 35 cents per share in the third quarter a year ago.

Now turning to the markets. The Public Carrier market, which includes not only the large Tier 1 carriers but also the contractors, integrators, program managers and tower owners that support these carriers, improved significantly both sequentially and from a year ago. This increase was primarily due to orders from significant tower owner and program manager customers. Gross profit also improved by double digits from both periods as a result of the increase in sales.

These large customers tend to earn better pricing and therefore, we saw a decline in gross margins this quarter. In the Government market, sales and gross profit declined sequentially and from a year ago. We saw many large federal projects pushed out as customers waited for the new presidential administration and the new budget to be in place.

We expect some of the activity originally scheduled for Q3 to shift into the current fourth quarter. We continue to drive more opportunities in this quarter based on the investments we've made in talent during the past few years, and we're optimistic about our potential in coming quarters. In the Commercial Dealers and Resellers or VAR market, revenue and gross profit were down sequentially and from a year ago.

For us, this market is currently heavily dependent on sales to two-way radio dealers. These sales have declined steadily throughout fiscal 2017 as customers move away from two-way solutions. To mitigate this impact, we are enabling our two-way radio VARs to expand their offerings to include public safety DAS. At the same time, we've seen improved gross margins in this market, as we have been proactively selling more Ventev products and solutions.

In the Private System Operator market, revenues and gross profits increased double-digits both sequentially and year over year. As expected, we saw a pick-up in sales from the large repair center customer that purchases higher margin Ventev products. Our value proposition has also been well received in this market, specifically with utility customers, where we achieved strong results this quarter.

Turning to the Retail market, sales were up by high-single digits sequentially and mid-single digits year-over-year. The Retail channel continues to be a strong business for us, and this was evident again this quarter. Most of our customers in this market -- many of our customers in this market -- have been consolidated in recent years, leaving a smaller number of larger dealers. This consolidation as well as changes in product mix has resulted in the gross margin decline this year.

While still profitable in total, our retail market profitability has also been impacted by the operations issues I discussed earlier. Ventev sales, which includes both mobile device accessories and infrastructure offerings totaled 15% of overall revenues during the quarter, as both sides of Ventev were very strong. The increase on the accessories side of the business was partially driven by the repair center customer I mentioned earlier, but also by continued strong demand for the high-quality power products Ventev offers for a variety of wireless devices.

The growth in Ventev Infrastructure sales was primarily driven by the Ventev Wi-Fi business, which saw strong enterprise customer growth through its VAR channels as we implemented some unique customer solutions. We're also seeing continued success in the Private Systems Operator market, which is further validation that our Ventev product and solution offerings are making a difference.

Looking at the balance sheet, inventory declined by about $9 million from the sequential second quarter, as we sold through mobile device accessory product during the iPhone 7 launch and retail holiday shopping season. The Samsung Note 7 recall created significant challenges including difficulties for many manufacturers and customers, who had sold or purchased accessories for the new device. We worked diligently with Samsung, our manufacturing partners and our customers to ensure a quick resolution to the situation and successfully resolved all accessory products and inventory relating to the recall with minimal cost to TESSCO.

Cash flow from operations was $100,000 during the third quarter and $600,000 for the first nine months. Overall cash on the balance sheet was $8.4 million. We remain committed to our dividend program and have set our dividend of 20 cents per share with a record date of February 15th and a payment date of March 1st.

For the fourth quarter, we expect both revenues and bottom line performance to improve from fourth quarter of fiscal 2016. However, the fourth quarter is seasonally our most challenging, and we anticipate results will be lower than in the sequential third quarter. We are very optimistic about TESSCO's future. We remain confident in our ability to grow revenues in the coming quarters and to execute on our plan to improve operating leverage and earnings performance. We look forward to sharing our success with you in the coming quarters.

With that, operator, we will open the call for questions.

(Operator Instructions). Our first question comes from Anil Doradla with William Blair. Your line is now open.

Hi Aric and Murray, this is Joe Hodes in for Anil. So welcome to TESSCO to Pete and Charles, that's exciting news. It will be good to see what the sales organization can do with the new SVP. Murray, we talked a little bit last quarter, but I think you had just joined, so it was maybe a little too early. But can you just give us a sense of what the main takeaways you've had are in your first four months and what you think the biggest things to focus on, maybe anything incremental to what you said in your opening remarks?

Well thanks, [Joe]. I think you mentioned, adding Pete and Charles to the team has been a significant addition. Both are very experienced and have different skill sets, and I'm confident that they will both make an impact. So, you know, they're clearly in the assessment stages -- I'm not that far ahead of them on the business.

But I mean, overall, we think there are just some tremendous opportunities for us on the go-to-market piece, and whether that's verticalization, sales force -- how we structure the sales force, compensation, making sure we're aligned with our manufacturer vendor partners, looking for the vertical market opportunities. Those are initiatives that are pretty detailed, and we're working on an elaborate go-to-market strategy to encompass all of those factors. I think it will have a big impact on the business. It'll take some time to get the momentum going, but you know, that's what my assessment would be in these early days.

Great, and I guess we'll have to wait until next quarter to hear the details of the plan. But I guess, can you kind of talk about what you'll be focusing on, or do you not even know to that kind of detail? Meaning, is it just going to be cutting SG&A on a nominal basis, working on gross profit, getting back to top line growth, or is it all kind of mixed in together? And I guess any detail you have and what steps you'll be taking to get to improved profitability?

I would yes to all of that. I think it's pretty comprehensive. We're looking for improvements across the business. And the way I like to look at it is, how do we improve productivity in our business, improve the customer experience and still allow us to grow and improve our financials? And we think that we have that responsibility to our shareholders, and it's going to take us some time to put the puzzle pieces together. But I'm very -- I feel pretty confident and feel pretty good about the talent that we've added to the team. And I'd also add the responsiveness of the TESSCO organization, as well, has been excellent.

Great. Aric, can you give any more detail on the SG&A uptick? I know you talked about some factors and that, but can you quantify the Samsung Note 7 impact? And then, should we be expecting SG&A to decline on a nominal basis going forward, or remain flat, or is this kind of increase potentially going to continue?

Yes, as we look at this quarter -- the Note 7 issue really didn't have a whole lot of impact on SG&A, other than it took some time from the product team and some of the other teams to work on it. But from a cost standpoint, it really wasn't an incremental cost. The biggest increases were primarily in compensation around the operations costs. As I mentioned the retail orders that we saw this quarter were a lot higher than we've seen in the past, and that really drove an increase in operations costs.

Some of the sales and the other business generation teams have had some increased costs, just from the number of people and the quality of the people that we've hired in the past. So that was an increase over last year. And then a little bit of marketing increase, as well.

So those were the big drivers. And then I think the other one was actually our bonus programs and our bonus program last year was -- we saw a decrease in our bonus expenses, based on the way that we calibrate our annual bonuses, based on where we are in any given year. We reduced bonuses significantly in the third quarter of last year. So it was kind of an anomaly that has an impact on the comparative quarter. It's not to say this year's bonuses are significant -- with our results, they're not -- but from a comparative standpoint, it was an increase over last year.

And going forward?

Going forward, as we look at the fourth quarter, we should expect a decrease compared to the third quarter, largely based on the variable expenses going down. And then as we're successful on what Murray had mentioned, as far as operating expense reductions as we look into next year, we're not as concerned about the overall number. It's more about the margin, the operating margin, and we want to see that improve over where we are now. So we're definitely expecting that to happen as we get into next year. There's going to be a lot of movement around the organization, so we're not ready to quantify a number to that yet. But we definitely would expect operating margins to improve as we execute that plan.

Great. Murray, this is the second quarter, I think, that you've talked about the impact the election cycle. I think last quarter we thought that it might get pushed back into fiscal third quarter. And now you're saying there might be an uptick in the fourth quarter as, sort of, people process the results. Can you talk about just more -- any more detail you can give in that regard, and how confident you are that those deals will be able to close in the fourth quarter? And what's the general consensus when you talk to your partners and customers about how they're feeling about the general situation?

Well, I'd just say from a brief comment perspective, Joe, I think everybody's still digesting a little bit. But I think from our perspective, you know, we're in growth mode with our Government business, and there's lots of opportunity for us to participate in. And you know, based on what we see so far, we think that as we go forward it could be very good for TESSCO. I think we just have to remain open minded about this and just see how things play out a little bit. But you can be assured that we are focused on the Government business and we have invested in the Government business recently in FY '17. So we're expecting to see an uptick in that business as we move forward, and there's no reason to believe right now that that shouldn't happen.

And Joe, to answer your question about, specifically in the third quarter, the orders that got pushed out, some of those have already closed in January. So we definitely would expect an uptick in the Government market in Q4, based on some of those deals closing in Q4.

(Operator Instructions). Our next question comes from Bill Dezellem with Tieton Capital. Your line is now open.

Thank you. Good morning. A group of questions. First of all, the carrier rebound that you saw, was that concentrated with a limited one carrier, or did that really cut across to two or three of them?

The sales weren't directly to the carriers they were to tower owners and some of the other program manager and contractors. But it was, I think the end users were really across several different carriers, maybe not all of them, probably three of them were really driving it for our sales. So I think it was more across the board than concentrated with just one.

And we have seen some commercials on television that imply that there might be a little ramp up in competition amongst the carriers. Is the ramp that you are seeing tied to some of those claims on TV, or is it completely different? I'm hoping you can share some insights as to why you think the rebound is starting to take place now?

Yes, I don't think it's because of the competition levels as of yet, although at some point that will absolutely help us. Right now, I think it's more based on a couple projects moving forward that have been a little slow to move out, especially some of the indoor projects. And then I think it's also a little bit about the increased focus we've had on the carriers with some of the new talent that we've brought in and really going aggressively after some customers they haven't done a lot of business with us in the past, whether they are turf contractors or some other contractors. So we're starting to see some nice business with some names that haven't been longstanding TESSCO customers in this space. So it's more about a market share increase for us than it is about the carriers have suddenly taken off. While we are seeing more activity from them, I wouldn't say the carriers have opened up and are ready to go like they were in 2014, at this point. But we're seeing more activity from them, and we're being more aggressive and winning some things that maybe we weren't planning a year ago.

Bill, I would look at it this way. The way that we have the market segmented, there is an ecosystem around the carriers and we, as Aric said, we're winning business in the ecosystem. And if the CapEx spending ramps up with the carriers, we will absolutely participate in that. But I think, as you've heard on many other calls, that transformation that was occurring at TESSCO was around selling solutions and selling differently. And I think that what we're seeing is some of that starting to take hold now.

That is helpful, thank you. And a couple additional questions. Would you discuss the recalibration of your go-to-market strategy?

Okay. Is there anything in particular? I'm looking at a couple of things. I think -- first of all, based on the assessment of where we are, we are looking at everything from sales compensation, regionalization, the vertical markets, how we deploy our resources, what the coverage models look like. For example, inside sales doing the field representation. And so, from a go-to-market perspective, including our pricing strategy and various markets on the Web and other places, so it's quite comprehensive. We're just doing an assessment of where we are today and making sure that we're positioned in the next fiscal year to execute changes based on what we see happening in the market.

So at this point in the evaluation, do you have conclusions as to what you need to do, or are you still evaluating that mix of inside versus field sales et cetera?

Well, we have two brand-new executives and Charles has only been here for six days, I think, Bill. So they will be instrumental in helping to formulate that. And I think we're putting them on a pretty aggressive timeline to try and get us ready for our annual operating plans as we launch, then, the new year in April. So it's clearly work in progress for us, right now. And I'd say next call we'll have more detail for you, but we're into a lot of the details right now and getting both Charles and Pete up to speed on the company and the market.

Great, that's helpful. And my next question may also be a little premature, but I will head down the path, anyhow. Talk a little if you would, please, about your strategy to build the commercial dealer and reseller market, if you would, please.

Well, you know, once again, I think that's an integral part of our overall go-to-market strategy. And we have a significant amount of our business with our VARs, and I think the question that we're trying to answer, Bill, is, is this the best that we can do? And if the answer is, we think we can make improvements, then we have to determine how we're going to go and approach our VARs, who are crucial partners for us, and make sure that we are targeting the right markets, targeting the right VARs and we're delivering a value proposition that will be able to tap into the extensive product line that we've got. So once again it's work in progress, but it's a cornerstone for the overall go-to-market strategy. The VARs will play an instrumental role in our future.

Thank you. And I'm showing no further questions. I will now like to turn the call back over to Murray Wright for any further remarks.

All right. Well, I'd just like to say thank you to everyone for joining us today. We certainly value your support and will look forward to speaking with you all at our next conference call in May. Have a great day.

Ladies and gentlemen, thank you for participating in today's conference. You may now disconnect. Everyone have a great day.