TESSCO Technologies Inc (TESS) 2021 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q4 2021 TESSCO Technologies, Inc. Earnings Conference Call. (Operator Instructions) Please be advised that today's conference may be recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, David Calusdian from Sharon Merrill. Thank you. Please go ahead, sir.

Good morning, everyone, and thank you for joining TESSCO's Q4 and fiscal year 2021 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'd 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 and I hope you and your families are staying safe, and like the rest of us at TESSCO, are looking forward to a post-pandemic normal. Our results this quarter reflect the lingering effects of the pandemic along with more recent impacts from disruptions to the global supply chain. We did however experience a significant upward trend in customer demand in the second half of our fiscal year, which resulted in the biggest order backlog we have had since before the pandemic.

When we established our strategy for last year, we certainly envisioned a very different market environment. But despite the pandemic, we made substantive progress in each area of our plan and achieved several milestones with respect to our key performance initiatives. All of the above, along with market projections for industry-wide growth, gives us confidence as we begin the new fiscal year. The 4 elements of our strategy were to divest our retail business, to allow total focus on the wireless infrastructure construction market, drive growth and efficiency in our core distribution business, develop our Ventev business into a leading innovator of products to help customers resolve infrastructure construction challenges, and develop proprietary services to support the products our customers deploy in their networks and to address their biggest pain points throughout the construction, deployment and management cycles.

With the sale of our retail assets in December, the fourth quarter of fiscal 2021 marked the real beginning of a TESSCO. Several recent wins and R&D highlights position us to build sustainable and profitable growth. Some of the highlights include increased market share in the AT&T ecosystem, a leading position in the Verizon minor material program, renewals of several state contracts, the reversal of the declining trend in our 2-way segment logging substantial growth, Ventev's warehouse antennas and mounts spec'd for use in several Fortune 100 facilities, expanded Ventev antenna business beyond Wi-Fi, we stopped selling broadband antennas covering LTE, CBRS and 5G bands, Ventev award of a patent for the outdoor Wi-Fi bollard, and beta testing of our first software-based service offering with one of our key VAR customers. Before I provide you with more detail on the progress with our strategy, let me walk you through our Q4 performance in both of our reported markets.

Let us start with our VAR and integrator business. Our VAR and integrator business includes all wireless infrastructure business outside the carrier ecosystem. As we have noted previously, many of our VAR customers have reduced their workforces due to challenges caused by delayed projects, limited access to venues, and government approval delays. While it is difficult to predict exactly when these issues will be resolved, during the second half of the fourth quarter, we saw signs of increased walk-throughs, designs, and quotes. We believe that these are encouraging and early indications that the impact of the pandemic is lessening. Some specific highlights in Q4 included new cellular DAS installations in medical facilities, manufacturing plants, global logistics providers, courthouses and jails as well as warehouses of a leading global online company, strong year-over-year double-digit growth in 2-way sales driven by better inventory stocking positions and stronger focus by our sales team, renewals of purchasing contracts with over 20 states and community wireless projects to support mobility for first responders as well as edge connectivity for underprivileged youth.

Our focus on the utility sector continues. Key wins this quarter included a long-term multi-million dollar purchase contract with an investor-owned utility, Ventev integrated solutions to enable multiple grid modernization applications for one of the largest gas and electric utility holding companies in the U.S., a refresh of a large portion of test equipment for one of the country's largest electric power holding companies and a new contract with one of the largest investor-owned utilities.

It is also important to note that we saw significant double-digit year-over-year growth in fleet and mobility solutions. We added some key brands to our line card in support of the VAR and integrator customers including Samsara, which offers IoT solutions focused on industrial applications and fleet. We also began offering Samsung private LTE products, these are turnkey solutions for industrial customers, electrical co-ops, rural service providers and OEMs. Much of the Samsung product is expected to be used in large public venues and office spaces. Our complete CBRS solution includes a partnership with Federated Wireless to provide SAS and core network services.

Turning to the public carrier market. Our improved offer and strong focus on business development during this last fiscal year has resulted in maintaining market share with the top turf contractor, significantly improving market share with the next 2, and breaking new ground with 2 emerging turf contractors. Additionally, we have maintained strong market share in the Verizon minor materials program. We continue to lead in sales directly to Verizon and are amongst the leaders in sales to Verizon general contractors. We are focused on continued development of this general contractor market, which we expect will drive sales growth in fiscal 2022. Our strength in the carrier ecosystem is due to; one, our recognized logistics and supply chain management expertise; two, TESSCO's proprietary engineering and production capabilities, which address needs that are unmet by our competitors; and three, our strong focus on new business development and market share growth.

We estimate that approximately 20% of our Carrier segment sales this quarter were related to 5G. Throughout this quarter, Q4, and continuing into this current quarter we have built a large backlog of business. Of that backlog approximately 60% is related to 5G builds. In both our markets, we have seen an increase in customer demand in the second half of our fiscal year, but given the ongoing supply chain disruptions, we are not yet seeing revenue improvement. We currently have the largest order backlog we have had since the onset of the pandemic. At the end of Q4, our backlog was over 46% higher than that at the end of Q3. And the backlog in the second half of fiscal year '21 was 40% higher than the first half.

This unique situation is a result of 3 factors. First, our own improvements in sales and business development are creating new opportunities and new bookings for TESSCO. Second, global supply chain disruptions, which have been well documented and have impacted companies across the globe. Accumulated demand backlog from the pandemic, ocean container shortages, and overburden capacity at U.S. ports have all contributed to longer lead times and disruptions we are now seeing. Additionally, the ice storms in Texas in mid-February delayed shipments for some of our largest manufacturers. And finally, the increased intensity of new 5G builds is requiring new products and configurations. The global supply chain issues are keeping the industry from meeting this new demand in a timely manner.

These supply chain disruptions are continuing into this quarter as well. Logistical challenges, container issues and global shortages in chips are impacting the largest OEMs. Overall, lead times have more than doubled on some products. To mitigate the impact of extended lead times and product shortages we have taken several steps. We are diversifying our vendor offerings to enable alternative product suggestions for customers, we have increased the depth and breadth of our demand planning efforts with key customers, and we are selectively increasing stocks of high demand and constrained inventory.

Turning to our key performance initiatives. First, our IT transformation project consisting of modernizing our core systems and enhancing our website tessco.com. Benefits of these improvements to customer service and order processing, enhancements to our purchasing effectiveness we believe these will have a positive impact on long-term operating profitability. Given the scope of the transformation, we're moving forward thoughtfully. Vaccine availability and reduction in the number of COVID cases has given us the confidence to bring employees back to the office after Independence Day. This will allow us to begin live, hands-on training with employees, update business processes, and go live with our enhanced IT platform. We expect this to happen during the second half of our fiscal year.

Regarding tessco.com we have implemented several improvements. These include features to enhance customer tracking of orders, a new proxy shop feature enabling TESSCO sales reps to provide real-time assistance for online orders, expanded support through live chat and chat box features, shopping cart and browser abandonment solutions to capture a greater percentage of online browsing, and continued content build-out to make tessco.com the #1 destination for information in the wireless industry.

We are already seeing results from these enhancements. In Q4, our cart and browser abandonment solutions resulted in over $1 million in recovered revenue, and our online revenue continues to grow as a percentage of overall sales. Moreover, customers are spending more time and getting more information from tessco.com as evidenced by a 100% increase in the number of product detail page views compared to the first half of the year. To accelerate our progress on these enterprise and digital initiatives, we recently hired Jesse Hillman as TESSCO's Chief Operating Officer. Jesse has over 30 years of experience and has held numerous CIO and leadership roles including his most recent position as Vice President of Information Technology at LightBox Holdings. Jesse will assist with our IT transformation to better support our customers and drive efficiencies throughout the organization.

Our 3-pillar strategy continues to direct our efforts and in fiscal 2021 we made progress in each area. The first revolves around our core distribution business. As I previously discussed, we are seeing strong market share gains in the carrier business. We are also focused on high growth sectors in the VAR and integrator market such as utilities and government. We believe that we are in a better position to grow when the effects of the pandemic subside and the economy improves.

Our operational performance improvements have been concentrated in the modernization of our ERP system, enhancements to tessco.com, improving our inventory planning and management, maximizing our design services capabilities, and restructuring our sales support organization to best meet the needs of our customers and our sales team. At the same time, our profitability improvements are focused on driving increased web commerce, offering unique TESSCO solutions including the use of our margin-enhancing Ventev product and driving cost efficiencies throughout the business.

The second pillar of our strategy is to industrialize our Ventev operations, scaling our capabilities and driving innovation. Our progress in this area included the elimination of over 2,000 SKUs leading to reductions in excess and obsolete inventory costs, transportation costs and lower engineering change management expenses. The addition of power systems, cable connectors and jumpers and enclosures and antenna SKUs to our robust product offering, the greater use of feedback from customers and vendor partners to guide roadmap decisions, and our new partner designation by Cisco in their Internet of Things Design-In Program.

The third pillar is our development of proprietary value-added and software driven service offerings to resolve complexity and pain points for our customers. We are building out an array of services that will generate high margin and recurring revenue. We are expanding our focus on broader utilization of our industry-leading design services. For example, we provided over 1,000 designs this fiscal year for DAS, LMR, tower, broadband and DC power systems, and demand has increased over 20% per year for the past 3 years.

Finally, our initial software product offering, which is now in beta testing will be a cloud-based device lifecycle management services solution. It will provide customers with the data and analytics needed to manage a wide variety of devices from deployment to replacement. We expect formal launch of this product later this fiscal year.

With that, I will turn the call over to Aric for the financial review. Aric?

Thank you, Sandip, and good morning, everyone. As Sandip mentioned, our Q4 results reflect the impact of the pandemic along with some disruptions to global supply chains. Nonetheless, improvements in our strategic execution improving customer demand and increased order backlog gives us a great deal of confidence for fiscal year 2022. Starting with the top line fourth quarter revenues totaled $88.7 million compared with $105.8 million in last year's fourth quarter, and $99.2 million in the sequential third quarter.

The year-over-year decrease was due to lower sales in both of our markets largely due to the pandemic. Our ability to ship product and recognize revenue was also impacted by global supply chain delays. Gross profit for the fourth quarter was $16.8 million compared with $19.6 million for the year-ago period. Gross margin was 19% of revenue compared with 18.5% last year. The year-over-year increase in gross margin was a result of increased margins in our Carrier market due to changes in customer mix. While we have made some improvements in the carrier margin, which will have a positive impact going forward, we do expect a year-over-year decline in carrier gross margins in fiscal 2022.

SG&A expenses for the fourth quarter decreased 16.8% from the prior year quarter to $19.6 million due to lower sales and cost control initiatives, including reduced headcount, marketing, information technology and corporate expenses. For the fourth quarter of fiscal 2021, the loss from continuing operations before income taxes was $2.8 million compared with a loss of $13.3 million in the fourth quarter of fiscal 2020. The fourth quarter of fiscal 2020 loss included a goodwill impairment charge of $9.1 million.

Net loss from continuing operations was $1.7 million or $0.20 per share for the fourth quarter of fiscal 2021, compared with a net loss of $7.9 million or $0.92 per share for the year-ago period. Both 2020 figures include the goodwill impairment charge. Our Q4 loss from discontinued operations was $1.2 million versus $6.2 million last year. The fourth quarter loss from discontinued operations was largely related to taxes and other changes in estimates for various reserves. The consolidated net loss was $2.9 million or $0.33 per share for the fourth quarter of fiscal 2021. This compares with a consolidated net loss of $14.1 million and a loss per share of $1.65 for the prior year fourth quarter.

Adjusted EBITDA and adjusted EBITDA per diluted share from continuing operations for a loss of $1.9 million in $0.22, respectively. This compares with adjusted EBITDA and adjusted EBITDA per share of a loss of $2.6 million and $0.30, respectively for the year-ago period.

Now onto the balance sheet. Inventory is down significantly from the end of fiscal 2020 due to the sale of retail. Commercial inventory is up slightly as we continue to balance our stocking positions with anticipated customer demand. Accounts receivable were $70 million compared with $83 million at the end of fiscal 2020 also as a result of the retail sale. We are continuing to work down receivables and other retail-related assets and liabilities. At year end, we had approximately $5 million of AR from retail customers over half of which was from Voice Comm related to product purchased in the transition period. We expect approximately $8 million in tax refunds, $4 million of which is related to fiscal year 2020. That return has been filed and is awaiting IRS processing. The remaining $4 million relates to fiscal year 2021. We will be working on filing that return shortly.

We ended the year with an outstanding balance under our $75 million line of credit of $30.6 million and we maintained a balance of $1.1 million in cash and cash equivalents. Our borrowing base allows us full access to this line of credit. The covenants kick in at $62.5 million, so we have over $30 million of availability at year end.

Fiscal 2021 was clearly a challenging year for many companies and TESSCO was no exception. However, our divestiture of the retail business was a key component of our long-term strategy. I see improvements in both the internal and external landscapes. Our sales team is showing improved booking results and is off to a nice start in the first half of this first quarter. Externally, the impact of the pandemic is beginning to lessen and the macroeconomy is trending up. All of this gives us confidence in our ability to improve revenue and profitability in fiscal 2022.

With that, I'll turn the call back over to Sandip.

Thank you, Aric. While we are encouraged by the recent signs of the macroeconomic recovery in the U.S. and the improving demand from our customers as evidenced by our increased bookings, our visibility regarding the future pace of recovery is limited by several factors including widespread supply chain delays and disruptions across the industry.

For fiscal year 2022 we expect to see a significant lessening of the impact of the pandemic and an improving macroeconomic environment. Combining these external conditions with continued execution of our strategy we believe that we will show significant year-over-year growth in revenues in both of our markets. We will also maintain our focus on cost controls and expect to achieve significant improvement in our overall profitability. We have the right strategy in place to seize these opportunities, and I look forward to reporting our continued progress to you.

With that, we will open the call for questions. Operator, please go ahead.

(Operator Instructions) And your first question comes from Maggie Nolan with William Blair.

With everything that's going on in the supply chain, what are you seeing in terms of unit costs and inflation, and have you had any initial conversations with clients about pricing?

Looking back at the quarter we are reporting on and the fiscal year we haven't seen cost points move tremendously. And there are always puts and takes but the answer to your question is we don't -- we have not seen that dynamic. In terms of looking forward and anticipating some of these issues, we are always in discussions with both customers and suppliers, Maggie, so it's not a concern. Inflation is not a concern here.

Okay. And then it's great to hear the Q4 bookings metric, is there any additional color you can share on how things are trending in April and May?

Aric I believe already addressed that. I will just repeat, Maggie, and hopefully that gives you some color. We are seeing continued improvements, good results in terms of bookings intensity. It's the result of 3 things, we believe. First, it's our own improvements and our own sales initiatives and biz dev efforts bearing fruit. Second, we are seeing more walk-throughs, designs request for quote, so we do see an uptick in intensity of this business across the board. And we are seeing growth in new 5G site construction. So all of those are good signs for TESSCO and we are seeing good results in terms of bookings in the first half of this current quarter.

Okay. And then it's good to hear about the 5G build. I'm wondering, is there any opportunity on the margin for projects related to 5G versus what you've done in the past?

So a couple of points, Maggie. So first in terms of new biz dev and new wins, we do see possibility for improvement, but those will not show up in results through the volumes increase from those new contracts. And second, as part of our strategy, we are always looking for opportunities to include more Ventev content. We're more successful with that in Tower segment as opposed to the carrier builds where things have to be spec'd-in a priori and our flexibility in shifting products is somewhat limited, but we are seeing improvements in terms of how much Ventev we can sell into this carrier ecosystem.

Okay. And then last one from me, I'm sorry if I missed it but can you quantify the impact that the supply chain had on both VAR and carrier revenue?

Maggie, this is Aric. We're not going to quantify it exact dollars, but what we've said is that it's higher than it's been in any point over the course of the last 12 months from before the pandemic. So it's hard for us to give you an actual number but it's definitely considerable enough for us to be talking about.

(Operator Instructions) And your next question comes from Bill Dezellem with Tieton.

You may have already answered this, but I do want to make sure that I'm really clear that throughout the March quarter that your trends were improving essentially, that January was the lowest month and February better than January, March improved and April improved further. Is it correct in terms of what you were saying?

Yes. Bill. Second half of the prior quarter was better than the first half of the quarter. I think we also said that the second half of the year -- fiscal year was better than the first half of the fiscal year.

Right. And then relative to Maggie's question with supply chain, do you view it at this point now as worsening further or has it now stabilized or I can't imagine that it's improving but I'll -- I guess for the multiple choice, I'll throw that out.

We are still continuing to see the lead time issues. The underlying drivers are many. I won't repeat, Bill. But for us, it's the lead time issues and they have doubled and trending upward. So we don't see that effect lessening in the immediate future.

Right. And then your VAR margins were up roughly 60 basis points in the Q4 versus the Q3, is that just noise or is there something -- something there is worthy of conversation?

No, it's just mix reserve of product mix and customer mix. Nothing -- Ventev was flattish from Q3 to Q4, so if there's anything significant driving that, just a mix issue.

Okay. And then relative to Ventev and -- what's the next most important thing that you need to be doing with Ventev to improve your -- further penetrate and improve that business?

Yes, Bill, in prior quarters we didn't spend much time on the transcript today. But in prior quarters, I have discussed our focus on solutions, how we actually get a mix of third-party products that we distribute coupled together with Ventev enclosures, antennas, cables. So the overall percentage of Ventev in any unit shipment is higher than what it is today. So we have a team focused on that. We have added technical capacity to that team. That team is executing. And these solutions will help -- the intent behind the solutions is margin improvement, as you are asking, and we expect to see an intensity pickup of being able to sell these complete solutions -- these complete kits, if you will, to our customers going forward.

Great. And then 2 carrier questions. First of all, you mentioned that the carrier margins are expected to decline in fiscal '22 versus this year, is that implying that you all are expecting volumes to increase meaningfully from carrier in the new fiscal year?

We definitely expect the volumes to increase as we said. We expect revenue growth in both of the markets, and it's also an indication that some of the larger customers will be a bigger piece of that growth in the overall mix of the business. So it's good news, but we at least wanted to point out though that the margins are expecting to go down a little bit from where they were. It was pretty high this quarter. Some of the larger customers weren't as strong but some of those -- the newer customers and some of the other things we're doing around Ventev, as Sandip was talking about, did have a small impact this quarter that did help out this quarter. Sorry, that's the next...

Great. And then I missed the comment in the opening remarks, there was an AT&T milestone that was referenced. Would you talk more about that please?

Yes, Bill, what we said was improved market share in the overall AT&T ecosystem. As you know, we've had a strong focus and we've talked about this on prior calls in new business development, securing new logos and breaking ground with our offer -- our overall turf offer, which has had great receptivity in the marketplace. What we mentioned during the call is, we have maintained our prior positions with some of the larger customers. We have improved significantly new positions with other top customers who have large market share in the overall ecosystem. And then, the third point we made was we have broken new ground meaning, we had established new relationships, new business, new revenues with a couple of new turf contractors.

At this time, there are no further questions. I will now hand the call back to management for closing remarks.

Thank you, operator, and thanks to everyone for joining us today. We appreciate your support of TESSCO. I would like to end the call by thanking our team members for their continued hard work and dedication. Have a great day. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect.