Vislink Technologies Inc (VISL) 2017 Q3 法說會逐字稿

Welcome to the xG Technology Third Quarter 2017 Earnings Conference Call.

(Operator Instructions) Please note that this event is being recorded today, November 15, 2017.

I would now like to turn the conference over to Daniel Carpini, Vice President of Marketing at xG Technology.

Mr. Carpini, please go ahead, sir.

Thank you very much, operator.

Thank you all for joining xG Technology's Third Quarter 2017 Earnings Conference Call.

Joining me today in the call are George Schmitt, Executive Chairman and Chief Executive Officer; and Roger Branton, Chief Financial Officer.

Before we turn the call over to management, I'd like to remind everyone of the safe harbor statement referenced in SEC filings.

The Private Securities Litigation Reform Act of 1995 provided a safe harbor for certain forward-looking statements, including statements made during the course of today's call.

Statements contained herein that are not based upon current or historical fact are forward-looking in nature and constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

Such forward-looking statements reflect the company's expectations about its future operating results, performance and opportunities that involve substantial risks and uncertainties.

These statements include, but are not limited to, statements regarding the intended terms of the offering and closing of the offering and the use of proceeds from the offering.

When used herein, the words anticipate, believe, estimate, upcoming, plan, target, intend and expect and similar expressions as they relate to xG Technology, its subsidiaries or management are intended to identify such forward-looking statements.

These forward-looking statements are based on information currently available to the company and are subject to a number of risks, uncertainties and other factors that could cause the company's actual results, performance, prospects and opportunities to differ materially from those expressed in or implied by these forward-looking statements.

For a more detailed discussion of some of the ongoing risks and uncertainties of the company's business, I'll refer you to the company's various filings with the Securities and Exchange Commission.

Now I'd like to turn the call over to Mr. George Schmitt, Executive Chairman and Chief Executive Officer.

George?

Okay.

Thanks, Daniel, and good evening, everyone, and thanks for joining us.

The -- tonight, Roger, Branton and I, and John Payne and James Walton, who run our major business units, are all in the U.K. So if we sound a little bit jet-lagged, it probably is because that's so.

But we thought it was very important that we have this call tonight since we released earnings yesterday.

And I think we'll get through it just fine, tired or not.

I want to start with just a few highlights from Q3.

We received over $2 million in orders for a new HCAM product.

We completed our MicroLite 2 product for general release.

Those are both critical pieces for our future revenue streams.

As of September 30, we had a backlog of almost $8 million on our books, over $2 million of which should have shipped in Q3, but we had a procurement problem and a quality problem on a key chipset.

We will not ship product that we are not sure is absolutely as good as we can make it.

And so we did not ship over $2 million of orders that we could have shipped in the last quarter.

You will note an increase in inventory on our balance sheet that will disappear by year's end, but in that inventory increase are the components and parts that we had purchased for that $2 million of backlog.

Today, our backlog is over $10 million, much of which will ship in the month of December.

So at year-end, I expect you will see an increase in accounts receivable and a decrease in cash because the inventories that we have purchased will ship, but collections for a big part of this quarter's sales will be paid next year.

That should not be an issue for anyone.

We will manage our cash carefully, and we will be just fine.

We expect our revenues for the full calendar year to be about $55 million, in line with the guidance that we had given since last December when we first began raising money and working on the Vislink acquisition.

This may be impacted a little bit by foreign currency exchange rates.

A year ago, we had pegged the pound at $1.30.

It's a few pennies under that right now, and we can't predict the next 6 weeks, but it's likely it will be $0.01 or $0.015 below that.

I would also like to take just a minute to talk about seasonality in our business.

We had hoped that we could break the pattern of the last 15 years, but really, we're unable to do so.

So you should always expect Q1 and Q3 to have lower revenues than Q2 and Q4, and you should expect Q4 to be the highest revenue quarter of the year.

And we will expect that we will ship over $20 million of revenue during the fourth quarter, some of that, of course, because we have a few million plus a little that should have shipped in the third quarter.

We had very carefully watched our cash flows, and we believe that it will be tight in the second half of December and the first week or 2 of January, but we will be fine.

During the day today after our earnings release last night, I received a number of calls and e-mails from investors asking a few questions, and I want to address those now.

A number of folks called and asked if we were going to do another reverse stock split.

And the answer is, unequivocably, no.

There's absolutely no reason to do that, and we aren't even thinking about it.

I have also been asked several times today if we're contemplating an equity raise.

Again, the answer to that is no.

We are not contemplating an equity raise for any reason looking forward.

I was also asked if we are doing any acquisitions.

The answer to that is we are looking at potential acquisitions, but we are also dealing with our bankers, all of them, so that we -- if we did make an acquisition, it will be funded by debt and not by equity.

There is no discussion with any potential acquire -- company that we might acquire of using equity in any way, shape or form.

If we do, do a deal, we will be funded by debt.

I have also been asked several times during the quarter and again today about where are the Army contracts that we talked about on our last call.

The answer is we still have not been given the orders.

We know we have one -- 2 of them, one of which, I hope, will be announced in the next few days, but that is a relatively small one and it's really from DoD.

The bigger Army contract can come any day.

We have about $1 million in finished goods that we have prepared to ship for that order when it comes.

The Army had a change in the people in charge.

And for those of you that have never dealt with that apparatus, there is no way you can make it move quickly.

We know that we're the only company that met the spec and bid on the order.

But as of this moment, unless something happens since we got on this call 15 minutes ago, it is not here yet.

And yes, we do have some of that in our $55 million projection, but not a huge amount.

So -- and that's my overview of the quarter and where we are.

And I've tried to answer some of the questions that have been coming into us today.

I'll turn it over to Roger to go through in more detail with the financials.

Roger and I are not in the same place because we're doing different things over here, but we will be together tomorrow for our board meeting in Colchester.

Roger, why don't you go ahead and run through the financials?

And then we'll take as many questions as there are.

Okay.

Thank you, George, and good evening, everyone.

So let's start with the third quarter income statement.

Revenues were $10.2 million compared to $1.9 million last year, an increase of $8.3 million.

Revenues were a record high and attributable to the acquisition of Vislink.

The exchange rate impacted revenues negatively by $200,000.

Otherwise, revenues were $10.4 million.

Cost of components and personnel were $5 million compared to $970,000 last year.

The increase is related to Vislink.

There was a onetime noncash purchase price amortization charge of $957,000 included in cost of components and personnel.

Excluding this amount, cost of components and personnel was approximately $4.1 million.

Adjusting for the exchange rate impact, gross margins increased and were approximately 60% compared to 49% for the same quarter of last year.

G&A expenses were $6.4 million compared to $2.3 million in 2016, an increase of $4.1 million.

The increase is due to the inclusion of $3.1 million of expenses from Vislink.

The other increases were $700,000 in stock-based compensation, $100,000 in consulting fees and $500,000 in onetime acquisition-related costs.

The increases were offset by a decrease of approximately $300,000 of fees associated with the company's listing on the NASDAQ.

R&D expenses were $2.8 million for the quarter compared to $1.4 million last year.

The increase is due to inclusion of $1.1 million of expenses from Vislink.

The other increase was $400,000 stock-based compensation.

The increases were offset by savings of $100,000 in legacy personnel.

Depreciation and amortization was $1.1 million, which includes $600,000 of additional depreciation on the step-up in assets from the Vislink acquisition.

Excluding this, depreciation and amortization decreased approximately $800,000 when compared to the same quarter of last year.

The decrease is from taking impairment charges at the end of 2016, which resulted in less amortization in the third quarter of this year.

The net loss for the third quarter was $5.5 million.

And excluding purchase price amortization, acquisition-related and restructuring charges, foreign exchange impact, the third quarter net loss was $2.5 million compared to a net loss of $3.1 million for the same period last year.

The EBITDA loss for the third quarter was $3.4 million.

Again, excluding the purchase price, acquisition-related charges and restructuring charges, foreign exchange impact, the third quarter EBITDA had a loss of $1.9 million compared to $1.7 million in the same period last year.

For the 9 months ending 2017, revenues were $33.7 million compared to $4.5 million for the same period last year, representing an increase of approximately $29 million.

The exchange rate impacted revenues negatively by $771,000.

Otherwise, revenues were approximately $35 million.

Cost of components and personnel were $20.3 million compared to $2.2 million for the same period last year.

There was a onetime noncash purchase price amortization charge of $2.5 million included in the cost of components and personnel.

Excluding this amount, cost of components and personnel was approximately $17.8 million.

Adjusting for the exchange rate impact, gross margins were approximately 49% compared to margins of 51% for the same period last year.

G&A expenses were $19.3 million compared to $6.7 million for 2016, representing an increase of $12.6 million.

The increase is the inclusion of $5.4 million of expenses as a result of the Vislink acquisition, onetime restructuring charges, severance costs and acquisition fees totaled $4.8 million and are included in G&A.

Other increases during the 9 months were $700,000 in stock-based comp.

Excluding onetime charges, G&A expenses were approximately $14.5 million.

R&D expenses were $7.1 million for the 9 months compared to $4.6 million last year.

The increase of $2.5 million is due to the inclusion of $2.3 million of expenses related to Vislink, $300,000 of onetime restructuring charges and $600,000 of stock-based compensation expense.

The increases were partially offset by decreases of $700,000 in costs related to legacy personnel.

Depreciation and amortization was $3.3 million for the 9 months, which includes $1.6 million of additional depreciation on the step-up in assets from the Vislink acquisition.

Amortization and depreciation was $4.1 million last year, a decrease of $2.4 million.

Again, the decrease is due to less amortization of intangible assets as the company took further impairment charges in the fourth quarter of 2016.

Net income for the 9 months was $1.7 million.

Excluding purchase price amortization, acquisition-related and restructuring charges, foreign exchange impact, net income for the 9 months was $12.1 million compared to a net loss of $13.6 million for the same period last year.

EBITDA income for the 9 months was $5.6 million.

Excluding purchase price amortization, acquisition and restructuring charges, foreign exchange impact, third quarter had EBITDA income of $15.2 million compared to an EBITDA loss of $8.6 million for the same period last year.

Regarding non-GAAP charges, when normalizing earnings, we do take into account non-GAAP onetime charges, including the purchase price amortization, acquisition-related fees, restructuring charges, foreign exchange adjustments, charges that do not necessarily impact operational performance.

We also include severance costs or any other material onetime charges.

We use these non-GAAP financial measures for planning purposes and to allow us to assess the performance of our operation as compared to budgets.

Moving on to the balance sheet.

As of September 30, 2017, we ended the quarter with $4.7 million in cash.

Inventory was $19 million.

Accounts receivable was $8 million.

Total current assets, $33.5 million.

Current liabilities were $14.7 million, which equates to approximately $18 million of working capital, which compares to $8 million at December 31, 2016, or a $10 million improvement.

At quarter end, xG's debt, including long-term obligations and accrued interests, stood unchanged at $2 million.

Moving to the cash flow statement.

Net cash used by operating activities for the 9 months ending September 30 was $2.6 million compared to $6.5 million used in operations for the same period last year.

Taking into account $6 million that was paid on with the conversion of debt, the company is cash flow positive from operations for the 9 months by $3.4 million.

Net cash used in investing activity for the 9 months ended September 2017 was $6.9 million compared to net cash use of $35,000 last year.

The primary use of cash was $6.5 million towards the acquisition of Vislink.

Net cash provided by financing activities was $5 million for the 9 months ended September 30.

Inflows were a net $8 million from the issuance of equity and warrants and outflows of $2.8 million that was paid on the promissory notes.

So with that, I will turn back over to the operator for Q&A.

(Operator Instructions) And looks like our first question comes from Brian Kinstlinger with Maxim Group.

You mentioned the $8 million in backlog.

For comparative purposes, can you tell us what that looked like in the previous 2 quarters?

And that's first.

Yes.

I will have to try to remember.

Again, for the first quarter, I think it was $3 million or $4 million.

It was about $6 million or so at the end of the second quarter.

But Brian, I will get you the exact numbers overnight, though that's my memory of about where it was.

Roge, do you have any other memory?

I don't, George, but that sounds accurate.

Okay.

And then, of the $20 million...

Brian, we'll get them for you, Brian.

Yes, that's fine.

And then I just want to understand that it was spiking here.

And then of the $20 million or so in revenue expected in the fourth quarter, how much of that is coming from orders that have yet to be placed for you versus either already recognized or coming from backlog?

I know you are now at $10 million of backlog.

Yes, I -- yes, that's fine.

I know the number that we're -- right now that we don't have signed orders on is about $3 million.

We've already shipped about $5 million.

We have another couple of million to go this month and $10 million next month.

We have what we call pending orders of about $5 million, $5.5 million beyond that.

So of that $5.5 million, we need to turn a couple of million to get to $20 million, which will get us to $55 million.

Got it.

So you had about great visibility to 17.

Another $3 million out of that $5 million get you to $20 million.

Is that a fair way to characterize it?

That's pretty close, Brian.

We -- I have a call every Wednesday.

I had one this morning.

And that's where we go through all of the sales and what any of us can do to help the sales guys out.

We have that every Wednesday, and those are the numbers this morning.

And everybody is feeling we have a pretty good handle on that.

Unless something happens, it's an act of God.

We have pretty good feeling of what we'll turn, and we think we'll turn a little more than $20 million.

The only thing that I'm really worried about is the British pound and that exchange rate.

Yes, and we can't control that.

But I'm over here in England, have been here for a couple of days.

And I'm watching what's going on in parliament.

And they have at least one minister who manages to impact the pound pretty regularly.

But we've been above $1.30 for the last 3 or 4 months.

And at the end of the year, the way that works, as we know, is we take the average for the whole year and apply it to all the pound-denominated revenue for the whole year.

So I'm hopeful that, that number will get much closer to $1.30 than it was at the end of the third quarter where it was a little below $1.27, I think.

So -- but if we look at the Army, the $1 million of product that you have, I think, in inventory but not being shipped yet.

Knowing how slow the government is in purchasing and given we've ended the budget flush, which happens in September for the federal government, could that slip another 6 months to even almost a year to September when the next budget flush happens?

Or is there a particular (inaudible) for that so quickly?

Well, we know that...

So what are they waiting for?

What does that million-dollar product have?

Or can you not say?

I don't -- the answer is we don't know what's going on.

When we started working on those orders 6 or 8 months ago, we had an Army captain who was responsible for the order.

She was moved back to the states.

A specialist, which is around the equivalent of a sergeant, has taken it over.

He decided to put out an RFP because he was looking at a lot more than what we were looking at and he wanted to make sure that if we get the IDIQs for the program into a much larger purchase.

He has given us a number of dates when he is going to issue it.

We know because the specification in the RFP was for one of our pieces of equipment.

We know that none of our channel partners or resellers reply to it.

We are the only ones who did.

And obviously, we'll be the lowest-priced one in any event, but the order has not been given to us yet.

Last time we spoke with him, he said, "I'll get it done when I get around to it." But it is for use in Afghanistan.

It is needed by the army of people in Afghanistan, and I don't think it's going to take 3 or 6 more months to come out.

I might have a couple of people who have been in the military on our board, and we will be discussing what we ought to do or should we do nothing tomorrow in our board meeting because it is a bit of a problem.

Because when the whole damn thing started, we were told it's going to be here in the June time frame.

We know that -- where we have to ship it to.

We have to ship it to Bagram Air Force base in Afghanistan.

When we were told that, I took a chance, and it's me and my decision to go ahead and preorder and premake this product for our military.

So I've got at least around $0.5 million in components and labor that we put into this process, probably a little bit more than that but around there.

And it's just been pain in the rear end, but I think it will come before the end of the year.

Okay.

And then one for Roger if I ask my other question.

If I look at the gross margin adjusted for the onetime item, you're at about 60%.

Is that sustainable as we move to next year?

So does that depend on mix?

And if it does depend on mix, what are the higher-margin pieces versus the lower-margin pieces?

Well, good question because that number did stick out this quarter.

I mean, part of it was related to an in-house study we did on inventory.

There was a minor adjustment to that.

But I'm going to defer that question to George or James Walton.

I know from the Army contract that margins are higher than 60% and somewhere in the 70%.

So as far as sustainability, depending upon when that Army order is fulfilled, that would help margins tremendously.

But again, it's part of the product mix this third quarter.

What I can tell you, Brian is, we know that we have a pretty rich product mix.

We know that our new products have higher margins on them and they'll continue for a while, but we also have some lower-margin stuff in our mix.

Our satellite products are closer to 40.

And when we resell satellite service, they go down into the teens.

I think the fourth quarter will also have a pretty rich product mix regardless of whether we get the Army's order or not.

But the -- I don't think that we're going to sustain 60% in the long run.

I'm still using numbers around 50% -- between 45% and 50% for the gross margins when I'm putting together budgets.

But we do have a very good third quarter, and we'll have a good first quarter as well.

All right.

And then lastly.

Can you talk about Auction 97 and where we are in the process so that eventually, obviously, the market will be ready for an uptick in technology?

Yes.

John Payne, can you answer that a bit?

Yes.

The -- Brian, this question is in respect really for the uptick was around the broadcast comp of the Auction 97, so the effects of that auction on the broadcasters.

That's still progressing its way through, getting agreements in place with the broadcasters in the shared spectrum between DoD.

And so once those are in place and understood, we will have better visibility on the timing of when that refit would happen.

But we're still -- crystal ball, a lot of things that, I think, would go into making that happen is getting more visibility towards the end of '18 as, I think, we had talked about on a previous call.

So towards the end of '18 into '19 when the refit might occur.

Yes.

I just wanted to make sure that still is in those kind of time frame.

Yes.

We will -- we don't have much of anything from that auction other than the work we're doing with SwRI with the government in our outlook for next year, which we'll be going through with our board tomorrow in pretty good detail.

(Operator Instructions) At this time, there do not appear to be any more questions in the queue.

So ladies and gentlemen, this will end the question-and-answer session.

The conference has now concluded.

We'd like to thank you all for attending today's presentation.

You may now disconnect from the call.

Thank you very much.