TESSCO Technologies Inc (TESS) 2022 Q1 法說會逐字稿

Good day, and thank you for standing by. Welcome to the Q1, 2022 TESSCO Technologies Incorporated Earnings Conference Call. (Operator Instructions) I would now like to hand the conference over to your speaker today, Mr. David Calusdian. Please go ahead.

Good morning, everyone, and thank you for joining TESSCO's Q1 Fiscal Year 2022 Conference Call. Joining me today are Sandip Mukerjee, TESSCO's President and Chief Executive Officer; and Aric Spitulnik, the company's CFO. 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 Sandip Mukerjee, TESSCO's President and CEO. Sandip, please go ahead.

Thank you, David, and good morning, everyone. Thank you for joining us. This past quarter's results confirm our strategic initiatives over the past 18 months are yielding positive results. Our revenue grew 18% sequentially and 9% year-over-year, with gains in both our markets, Carrier and the Commercial business.

Furthermore, our growth in sales bookings was even stronger, up 37% year-over-year, showing robust demand for our products and services. This past quarter was a record for our carrier market, as we continue to grow share with our existing customers while adding new customers to our portfolio. We also saw increasing utilization and strong growth in revenue on our website, tessco.com, both sequentially and year-over-year. At the same time, we continue to make progress, industrializing and refining our Ventev business while developing our software offerings.

Our strong execution, coupled with the post-pandemic recovery across our markets and the industry-wide adoption and implementation of new technology give us confidence in our operating plan of the following: achieving between 408 and $442 million in revenue, representing 9% to 18% growth over last year. Number two, achieving full year adjusted EBITDA of between breakeven and $2.4 million, this compared to a loss of $12.8 million last year. These result in a full year net loss of between $6.4 million to $4.1 million, and that compares to $14.3 million loss last year. This is an improvement of between $7.9 million to $10.2 million year-over-year.

I would now like to walk you through the results and highlights of this past quarter in the following format. First, I will speak about our two markets, Carrier and Commercial; second, the three elements of our business, distribution, Ventev and software; and finally, the performance of tessco.com. To help everyone follow our progress through the year, more easily, we will stick to this format for the remainder of this fiscal year.

Let me start with the Carrier business. This first fiscal quarter marks the highest Carrier market revenue in TESSCO's history. Our continued strength is due to our logistics and supply chain management expertise, our proprietary engineering and production capabilities and the successful execution of our business development efforts. Carrier market revenue was $46 million, up 17% year-over-year. Notably, our AT&T ecosystem revenue grew 28% year-over-year, while our Verizon ecosystem revenue grew 26% year-over-year. The overall Carrier market bookings were up 64% year-over-year.

Within the AT&T ecosystem, we achieved growth with existing customers and added new customers by solidifying our overall AT&T offer. As a result, we increased our market share within this ecosystem. Key factors that resonated with the turf contractors has been our demand planning expertise and our reliable execution. We're working on some new projects that can further increase our market share. And during the second half of calendar 2021, we expect demand in this ecosystem to increase, driven mainly by the C-band builds.

As for the Verizon ecosystem, once again, we increased our market share with existing customers and develop new relationships. Our tower owner business grew 4% year-over-year. Although DAS installations with one of our tower owner customers were down significantly last year, you will remember, due to building closures and limited access, they are now picking up as pandemic-related limitations continue to ease. `Our business development efforts outside of the AT&T and Verizon channels are also producing results. We have won new business with another of the largest wireless carriers in the U.S., and we have been awarded the contract to provide equipment for small cell sites for one of the largest broadband companies in the U.S. We expect revenues from these two customers in the second half of the current fiscal year.

Our success in our Carrier business is in large measure, the result of our having implemented strategic adjustments to get the right people focused on the targeted initiatives. We spent last year focused on business development, and those efforts are now yielding results. As overall market conditions improve, we see growing demand for our products, solutions and supply chain services. Furthermore, 5G will continue to be a key market driver in this space. We estimate that 5G currently represents approximately 25% of our Carrier spend.

Let me turn to the commercial market, which includes all wireless infrastructure business outside the Carrier ecosystem and which we previously referred to as Var and Integrator. The commercial market had its best revenue quarter since the fourth quarter of our fiscal year 2020. Revenues were up 10% sequentially and 3% year-over-year. Bookings were up 21% year-over-year and our gross margins improved over 200 basis points to 24.4%. The largest growth sector this quarter was with our VAR customers, up 23% year-over-year. This growth was driven by our sales focus on these bars, the continued lessening of the pandemic-related impact we described earlier and greater availability of inventory targeted for this sector.

Our utility business had a tepid quarter as existing projects near completion. Customers are currently in the investigation phase of new technology investments, including Private LTE, microwave and broadband. TESSCO is well prepared with new vendor relationships, solutions and expertise to support these opportunities as they develop. The success we have demonstrated with new business development in the Carrier market is also being aggressively pursued in our commercial market. For the commercial business, this includes an emphasis on Ventev sales and the continued focus on tessco.com sales, which we expect will lead to increased revenue and gross profit performance.

I will now turn to the three key elements of our business, namely, distribution, Ventev and software. Starting with our distribution business. We continue to win market share, develop new customer relationships and add new OEM partners. Additionally, we are making progress with our IT infrastructure modernization projects, which will provide cost efficiencies and make TESSCO much easier to do business with. We have focused on adding new manufacturing partners to our line card, identifying those who are thought leaders in wireless, particularly as private LTE and 5G mature.

We expect a growing demand for small cell solutions to support both Carrier customers as well as utilities. We recently joined the Nokia Global Partner program, which allows us to distribute Nokia's wide range of products and services. As a result, we now offer one of the most robust and comprehensive credible communications portfolios in the market, including a range of turnkey solutions. This in conjunction with our value-added services, including everything from solution development and design, to site kitting and logistics, help to manage total project costs for our customers and minimize their deployment challenges.

Like most industries, the wireless industry continues to experience supply chain challenges. For TESSCO, this has resulted in longer lead times for certain products. We are mitigating this by detailed and forward-looking demand planning with our customers. In the short term, this will create some swings in overall inventory that Aric will discuss in more detail. But will also create a healthy backlog for TESSCO that will eventually convert to revenues.

Looking ahead, we will continue to focus on driving growth and creating efficiencies throughout our distribution business, which in turn will help us improve profitability. Regarding our Ventev business, sales grew 3% year-over-year, totaling $8 million. Bookings for Ventev grew 23% year-over-year and were among the highest Ventev has ever achieved.

In Q1, we had several new business wins, including a major home fitness company, one of the world's largest search engines, a major credit card company, a leading provider of fiber infrastructure and a large multinational technology company. Ventev's large and growing customer base now includes 35 of the Fortune 100 companies. This quarter, Ventev launched several new products, including Indoor Omni and Directional CBRS Antennas, 4 and 6 Lead Femto Patch Antennas, Tate Floor Panel Antennas, BTRM400 and Cisco Dart enabled enclosures. Our focus is to ensure attachments of Ventev products with LMR, two way, public safety desk and small cell solutions. When we are able to sell these differentiated solutions kitted together, our margins improve, along with customer satisfaction. Additionally, as you may recall, we established a partnership with Cisco. We have a Cisco design in program. This program has yielded new business and revenues with several customers. Moreover, there are additional attractive opportunities in the pipeline with national service providers and large Cisco virus.

Turning to our software business. Our device monitoring and alerting service met our general availability or what is called the GA milestone this quarter and is now in production, providing customers with a single interface to monitor disparate network devices. This last quarter, we engaged new companies on the platform and initial reviews of the service have been very favorable. We are presenting this product to our reseller customers to include as part of their service offerings. This will provide them with a product to resell and to attach to products they procure from our line card.

Over the next few quarters, we will continue to add new features to this platform, such as remote management and software updates. Although revenue in this area will not be significant this fiscal year, we believe it will begin to ramp in fiscal year 2023. Our immediate focus is to add new reseller customers and new devices, leveraging the strong relationships we have with VARs on our target list.

Lastly, in terms of our sales channels, TESSCO sells both directly and online via tessco.com. Improvements to tessco.com are a part of our ongoing IT transformation. The benefits to date have included improvements to our customer service and order processing, and we expect a longer-term benefit to our profitability. Our sales on tessco.com come with higher margins and are more cost-efficient to process. In Q1, revenue increased 15% year-over-year, totaling over $10 million. Engagements measured by product page views increased 223% year-over-year. Enhancements completed this past quarter include launching a B2B buyer research platform and adding in stock notification e-mails. We are very excited about our progress and the results we have achieved. With that, let me turn it over to Aric, for his financial summary for this past quarter. Aric?

Thank you, Sandip, and good morning, everyone. I will now provide an update on our financial results. As a reminder, these income statement amounts are all from continuing operations and exclude the significantly diminished activity from our exited retail business. First quarter revenues totaled $105 million compared with $96.5 million for the first quarter of fiscal 2021. As a result of improving macroeconomic conditions and growing market share, particularly in the carrier market. As Andy mentioned, the carrier revenues were a record this quarter. These results were accomplished despite industry-wide disruptions in the global supply chain that delayed receipt of inventory from vendors and impacted our ability to ship product to customers in each of our markets.

Gross profit was $19.7 million for the first quarter of fiscal 2022 compared with $16.5 million for the same quarter of fiscal 2021. Gross margin was 18.8% of revenue for the first quarter of fiscal 2022 compared with 17.1% in the first quarter of last year. Gross margin was up in both markets. In Carrier, the growth was a result of an improved customer mix. However, margins did climb from the highs in Q4 as expected. Due to expected changes in customer mix, we believe margins will be somewhat lower for the remainder of this fiscal year.

In the Commercial market, product mix and pricing adjustments to offset increasing freight costs helped account for the higher margins this quarter. Our focus on cost management is working well. Despite higher variable expenses this quarter, primarily due to higher freight expenses associated with increased revenues, sales commissions and health insurance, our overall SG&A as a percentage of revenues dropped from 22.3% to 20.6%. We are carefully managing our IT incorporate expenses, which both decreased significantly this quarter.

As we get past our major IT initiative, we expect both it and other company-wide support expenses to decrease further. First quarter fiscal 2022 net loss was $2.2 million compared with a net loss of $4.9 million in the first quarter of fiscal 2021. Adjusted EBITDA and adjusted EBITDA per share were a loss of 1.1 and $0.12 respectively, for the first quarter of fiscal 2022. This compares with adjusted EBITDA and adjusted EBITDA per share of a loss of $3.5 million and $0.41, respectively, for the first quarter of fiscal 2021.

Turning to the balance sheet. You will notice that inventory has increased by $16 million this quarter. This was a result of the supply chain disruption Sandip discussed, which has caused us to hold nonconstrained inventory for longer periods, while waiting for complementary constrained inventory to arrive. We also made some strategic investments in areas such as two way inventory, which did help us grow sales. However, our visibility into the supply chain and healthy customer demand based on our backlog gives us confidence that this number will be significantly lower by the end of Q2.

The balance on our $75 million line of credit also increased by $9 million this quarter. This was partially offset by an increase in cash of $1 million. The increase in inventory did help drive some of the increase in the line, but payables were also up by a slightly less amount. The remaining increase is being driven by operating results, IT investments and changes in other working capital amounts. We did receive our fiscal 2020 income tax refund in July, so next quarter will be positively impacted by that $4 million receipt.

From a financial perspective, the revenue increases, especially the increase in bookings, gives us confidence that we have turned the corner and the improving market conditions and execution of our strategy are beginning to deliver much better results. With that, I will turn the call back over to Sandip.

Thank you, Aric. In closing, we had record revenue in our Carrier business and the highest revenue in our Commercial market in over a year. We're gaining market share. We are adding new customers and new OEM partners. And our tessco.com website has demonstrated improved metrics across the board. We've made progress on each of our three pillars that I first discussed with you in January of 2020. And now that the pandemic-related challenges appear to be easing, the indicators of the progress of our turnaround are more apparent. We expect stronger demand, a healthy backlog and the continued execution of our turnaround strategy to lead to strong year-over-year growth in both the Carrier and Commercial markets. At the same time, we remain focused on cost controls and expect significant improvement in our overall profitability this fiscal year. With that, we will open the call for questions.

(Operator Instructions) You have your first question from the line of Maggie Nolan with William Blair.

On the supply chain shortages, how does the pace of supply compared to 3 months ago? And what is your expectations or what have you kind of baked into your outlook for the remainder of the year?

We see roughly the same performance. Our lead times have increased, and they're about the same. And thinking about the rest of the year, we don't expect much improvement. We believe we'll have to live with this for the rest of the year. As I said on the call, we have several things that we are doing to mitigate. I mean first is longer-range planning with our customers because they see the pain as well. So getting ahead in terms of future business, future projects is the way to mitigate their pain, and that's what we are focusing on.

And then in terms of site access, can you provide a little bit more of an update around maybe the environment there, the ability to get on-site and as well as the expectations for that aspect of the COVID impact for remainder of the year?

I think I will underscore a couple of comments I made during the first part of the discussion. So within both our markets, the Carrier market as well as the Commercial market, we see much improved performance environment relative to access to sites, permits, projects opening up. I think that is one driver for our results. So we're very excited about that. And even into this quarter, we are seeing that continue.

And then I know you expect the spend related to IT initiatives to decrease. But is there a little more color that you can give around the magnitude of that the timing of that going forward?

Aric, do you want to take that?

Yes, sure. We expect that to start to slow down here in the second half of the year and definitely by next year, a significant reduction in the cash outlay for IT expenses. And then we also expect that project to have some significant benefits across the entire organization on efficiencies as well as overall ease of business with TESSCO. So we're excited about that project coming to an end later this fiscal year.

Your next question comes from the line of Tim Call with the Capital Management Corporation.

It's just seeing an improving and positive outlook. With your new Nokia business, will that be using the state of your former retail inventory and business what do you think? Or do you have to add new warehouses?

So we're not planning on adding new warehouses, Tim, it's existing operations. And the focus is Nokia -- this is Nokia's their equivalent of Carrier and Commercial portfolio, focus on the carrier segment like we do today, plus utilities, transportation, it's much more of the commercial business, as we described. Very specifically, the parts of the portfolio that we are excited about are around small cells, microwave, broadband. So we don't -- we're not anticipating having to add warehouses. We will use our continuing operations to support Nokia, and we're excited that this will give us a trust in the verticals that I just mentioned.

The inventory space that retail used to take in your warehouses, have you been able to convert that and use that space for other uses?

Absolutely. Absolutely. Our retail inventory is, as Aric said, much diminished. I mean that activity is generally essentially all gone at this point. And we've been able to use that inventory and repurpose it for our Commercial and Carrier business.

Your next question comes from the line of Bill Dezellem with Tieton Capital.

I had a group of questions. And I'd like to start with just a point of clarification. Did we hear correctly that you were expecting inventory to be significantly lower than the $69 million at the end of the year? Or were you referencing something else?

Yes. We expect the inventory that's currently on the balance sheet to be significantly reduced next quarter. It increased significantly from the end of the fourth quarter until now. But we expect that some of these supply chain issues, we work through them and where we run a little bit tighter with some of those -- these customers. And we expect that inventory to reduce, not to the point of where it was at the end of the year. I think that number was a little bit artificially low, but somewhere in between where it was at the end of the year and where it was at the end of this quarter.

And so would the implication then be, that you will be generating cash in the second quarter?

We would hope to see that happen. We are still working through a lot of payables are also on the higher side right now. So we will be also paying for a lot of that inventory at the same time. So they will somewhat offset but we would -- we expect, especially with that cash payment from the tax amount coming in to have some positive cash flow this quarter.

And then just a point of understanding here, does a 37% bookings increase imply that sales would have been up 37% had you not had the supply chain issues? Or is there some friction in there that we're not fully thinking about?

So there's always backlog that we have. It's usually much, much smaller than where we are today. So the way I think about it is, it's not just the bookings growth but also the shipping growth that you should consider. So those two numbers, as we described, was 37% bookings growth, shipping growth of 9%. So it's somewhat arbitrary to try and say how much more we would have shipped, but that number would likely be somewhere in between those two, right? So I think you can do the math, could we have shipped more in the absence of supply chain issues? Absolutely. Will we ship more, will we flush out the healthy backlog that we've created? Absolutely.

And in the press release, you made reference to stronger demand ahead of us. Does that comment suggest that bookings strength will strengthen from here?

We are optimistic. For three reasons, Bill, that I said. One is, just reopening of America, And when you compare year-over-year, we have a very favorable view of the future. Second, we are seeing increasing projects. I think I gave color and Aric did as well into where we are seeing that demand from. So we're positive about the demand. We are seeing -- we're bullish about 5G. It's about 25% of our revenue and the 4G and earlier technology build-outs will continue. They don't win immediately, but the new technologies pick up for specific marketing, launch plans that our customers or their customers actually we're bullish about that. A lot of the infrastructure spend should be positive as well. And then not to take away from the fact that our own turnaround strategy in terms of efforts we launched a few months ago, many months ago, they are going to bear fruit, and you're seeing the results of that.

And just to jump on to that Carrier comment. You had record revenues in the Carrier business. Is it a correct assessment that the Carrier industry spending is not at a record? And if that is correct, do you have the data at where the industry spend is relative to the prior peak?

So we see the same reports, Bill, that I'm sure you do in terms of Carrier CapEx, budgets and what ADI and other analysts project. So that CapEx view has not increased substantially. What we are seeing is really our increased market share. Both within customers we had before, right, through better performance. And then we have absolutely one new logos and new customers, not just this quarter, but the quarters leading up to these results. We also announced another sense of optimism for us going forward is we have a new customer, We're not naming them but at large nationwide wireless carrier, plus a cable broadband provider also nationwide. Those revenues or bookings were not included in this quarter. We expect them to be additive to our business in the second half of this year.

Jumping to the commercial business for a moment. What are the metrics that you can share with us today or that we should be looking at that are demonstrating that commercial segment is turning the corner.

Yes. So three things to reiterate that we said. I mean it's the same metrics, Bill, from a -- that you use from a carrier perspective. It's the bookings growth, which was pretty large this quarter. It's the year-over-year revenue growth that we look at. And if you want to think of sub ledger details, much of our Ventev business goes through the commercial channel. So the Ventev, bookings growth, the Ventev revenue and margins plus tessco.com. and again, I mean, our online sales are much of it comes from the commercial segment, so the growth there is an early indicator.

And then lastly, and I'll turn it over to someone else. Does the positive adjusted EBITDA implied that one quarter of this fiscal year, you will have positive net income? Or maybe I should ask the question in the sense of what's your confidence that, that would be the case?

Yes. I don't -- we didn't obviously give that kind of detail, but it doesn't necessarily mean that we don't -- we try to avoid the quarterly with all of the supply chain issues going on. So is it possible? Yes, is it something we're going to say now, no. There's too much uncertainty on the quarter-to-quarter for us to be able to definitively say yes or no to that question.

There are no additional questions. I would like to turn the call over to the management for closing remarks.

Thank you, operator, and thanks to everyone, for joining us today. We appreciate your support of TESSCO. And also thank you to the TESSCO's team members for all their work, dedication through the last several quarters that has made these results possible. This concludes our earnings call. Have a nice day this concludes our earnings call. Have a nice day.

This concludes today's conference call. You may now disconnect.