Vislink Technologies Inc (VISL) 2017 Q4 法說會逐字稿

Welcome to the xG Technology 2017 Earnings Conference Call.

(Operator Instructions) Please note that this event is being recorded today, April 3, 2018.

I would now like to turn the conference over to Scott Gordon of CORE IR Investor Relations.

Mr. Gordon.

Please go ahead, sir.

Thank you, Bryan, and thank you all for joining xG Technology's 2017 Earnings Conference Call.

Joining me today on 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 provides 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 the 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 its 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.

And now it's my pleasure to turn the call over to George Schmitt, Executive Chairman and Chief Executive Officer.

George?

Okay.

Thanks, Scott, and thanks to all of you on the call for taking the time to hear our story, and we look forward to answering any questions you might have.

2017 was a very good year for our company.

We completed the acquisition of Vislink and successfully integrated our operations.

I'll leave all the numbers to Roger, except to say that we're very pleased with the revenue that we achieved, around $48 million, during last year and would remind everybody that the first 5 weeks of the year, we did not have Vislink as part of our operation.

So in the full year normalized, one could expect that, that number is around $1 million a week.

We had a few very significant events.

Obviously, after the acquisition, we significantly cut costs, as we eliminated redundancies.

But a few of the real highlights of the year, we were awarded a $12.5 million 3-year contract by the U.S. Army as the largest contract our company ever received.

Of that, we converted a bit over $1 million to revenue in 2017.

It's about $4 million less than we had expected and had been led to believe it would happen, but the remainder will be ordered over the -- approximately the next 2.5 years.

We shipped our very first Ultra High Definition cameras, known better as HCAMs, late in last year.

It was a development that was even more difficult than we had anticipated.

Those of you that have bought televisions lately will notice that or have noticed, I'm sure, that the -- all the new TVs advertise 4K Ultra High Definition TV.

We have the only wireless camera system that matches that television format in the world today.

During -- and during the first quarter, we shipped 50 systems to our customers and expect to deliver more than that each quarter of 2018.

We had hoped that we would be able to get that accomplished during the fourth quarter of 2017, but we fell short.

The -- and I'll talk a bit about the technical aspects of this device that's critical to broadcasters.

It -- the mainboard is 12 layers thick and it has over 1,200 components on it.

And when you add up all the bits and pieces, there are over 20,000 bits and pieces that have to come together right to make that board done -- work.

And that development was done in-house by our very talented engineers.

We did have a delay in a ReSpin that we had not anticipated that caused us to not deliver the systems that were ordered in 2017.

Those were delivered in the first quarter of this year.

But we still are having some supply chain issues.

And so we'll deliver what we can during Q2 and onward.

But I expect that we'll deliver well over 200 of these systems during calendar 2018.

I want to quote one of our talented engineers.

I thought it was -- only an engineer could say this.

He said, this is just not -- his name is Bob William -- [Rob Williamson].

He said, this is not just a technical achievement, it's really a work of art.

Now only an engineer could fall in love with a 3x5 board, but the complexities that we had to work through and develop in-house were pretty challenging for everybody.

And as of this moment, and I think it's important for everybody who has interest in our company, we still have the only working and shipped wireless HCAMs in the world today.

And our people know it, and we also know the specs that other people have that were -- that are working on competitive pieces.

Ours is the smallest, the lightest, consumes the least power and is the first one in the marketplace.

So we're counting on these systems, which can be worth over $50,000 and start in the mid-30s.

We're counting on them to help us develop additional revenues during this year.

Among other new products that we introduced during this year were the MicroLite 2, which is a miniature COFDM wireless video transmitter for capturing live video.

And we also developed our DragonFly product, which is another miniaturized wireless video system that could work well in drones and any lightweight systems and in body cameras and will certainly support broadcast sports and reality-based productions.

We took on some pretty tough challenges last year.

And while we didn't get everything done during calendar 2017, we have now begun 2018 in a very good way in delivering these state-of-the-art products to our customers around the world.

And lastly, from my point of view at least, we've begun now to manage -- product manage and integrate our products here in our 3 divisions.

We have end-of-lifed about 20 legacy products across our product portfolio.

But more important than that, our existing products will be simplified, let customers order what they want as far as size goes for example, in our Mobile Commander product line, but have the insides, the working parts be the same, no matter what product the customer orders on the end.

And to that end, we have our product management people and engineers working and hope to complete, during this quarter, road maps for us to simplify our product development and -- which will help simplify our supply chain and also reduce our inventory requirements, which tie up a hell of a lot of our cash and working capital.

So those are some highlights.

I'll leave all the number work to our CFO, Roger Branton, who is better at numbers than I am, at least most of the time.

But with that, Roger, why don't you go ahead and run through the numbers for last year?

Sure.

Thank you, George, and good afternoon, everyone.

Thank you for joining us today.

I'm going to be a little bit redundant with what George provided, but we did fully complete the integration of Vislink by year-end.

On a top line basis, xG had over 600% growth in revenues in 2017 over the prior year, in which we only owned Vislink for 11 months, as George mentioned.

While we had a higher budget, we are nonetheless very pleased with that growth.

Growth sometimes brings inefficiencies in the cost structure.

We mitigated that with the implementation of cost savings programs.

Before completion of the acquisition, we had internally projected cost synergies and savings upward of $5 million.

Again, we're very pleased that we exceeded that goal in only the first year after closing on Vislink.

We do expect additional cost saving synergies to continue and are expected to be $3 million to $4 million in 2018.

While we have consolidated around a stable base of business going forward and we are well positioned to grow further, both organically and via mergers and acquisitions, we are considering M&As that are both strategic bolt-on ones and larger, more strategic acquisitions.

We are emphasizing a target set to include strong management teams that will add to and/or supplement our own as well as position xG for the next level of growth.

So regards to the fourth quarter, I'll go over some key highlights.

Adjusted revenues were $14.1 million compared to $2 million last year, an increase of $12.1 million.

The adjusted revenues included $7,000 of foreign exchange impact.

Adjusted cost of components and personnel were $7 million compared to $900,000 last year, the increase primarily related to Vislink.

There was a onetime purchase price amortization charge of $900,000 included in the cost of components and personnel.

So adjusting for the exchange rate impact and those onetime charges, gross margins were approximately 49.3% compared to 55.6% for the same period last year.

Adjusted G&A expenses were $7.1 million compared to $2.9 million in 2016, an increase of $4.2 million, again, the increase due to the inclusion of G&A expenses from the Vislink acquisition.

There was onetime acquisition-related expenses, which totaled around $600,000.

Adjusted R&D expenses were $2.2 million for the quarter compared to $1.5 million last year, again, the increase due to the inclusion of the R&D expenses for Vislink.

Stock compensation expenses totaled $400,000.

Adjusted depreciation and amortization was $500,000, which excludes $600,000 of additional depreciation that was taken on the step up in assets from the Vislink acquisition.

Excluding that, depreciation and amortization decreased approximately $900,000 when compared to fourth quarter last year.

The decrease is attributed to additional impairment charges taken in 2016, which resulted in less amortization in the fourth quarter of 2017.

Adjusted net loss for the quarter was $9.7 million compared to a net loss of $9.1 million for the same period last year.

Purchase price amortization and acquisition related charges and foreign exchange impact totaled $2.5 million.

Adjusted EBITDA loss for the fourth quarter was $9.2 million compared to a EBITDA loss last year of $7.6 million.

So moving on to the full year, ending 2017, adjusted revenues were $48.8 million compared to $6.6 million for the same period last year, representing an increase of approximately $42.2 million.

Foreign exchange impact rate -- impacted net revenues negatively by $1 million.

Adjusted cost of components and personnel were $24.7 million compared to $3.1 million for the same period last year.

There was a onetime -- noncash purchase price amortization charges totaling $3.5 million for 2017.

Adjusting for this, again, the gross margins were approximately 49.3% compared to 53% for the same period last year.

Adjusted G&A expenses were $21.6 million compared to $9.5 million for 2016, representing an increase of $12.1 million.

Onetime restructuring charges, severance costs and acquisitions fees totaled $5.4 million for 2017.

The increase in G&A is primarily related to the Vislink acquisition and associated onetime charges.

Other significant increases during the 12 months were $900,000 in stock-based compensation expense.

Adjusted R&D expenses were $8.4 million for the 12 months compared to $6.1 million last year.

The increase is due to the inclusion of $3.7 million of R&D expenses from Vislink.

Onetime restructuring charges totaled $1.4 million for 2017.

Other significant increases included $900,000 in stock-based comp.

The increases were partially offset by decreases of $800,000 in costs related to legacy personnel.

Adjusted depreciation and amortization was $2.1 million for the 12 months ending December '17.

Amortization and depreciation was $5.6 million last year or a decrease of $3.5 million.

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

Adjusted net income for the 12 months was positive $3.2 million compared to a net loss of $21 million for the same period last year.

Purchase price amortization, acquisition-related charges, foreign exchange impact totaled $13.5 million for 2017.

Adjusted EBITDA for the 12 months was $6 million positive compared to an EBITDA loss of $16.2 million for the same period last year.

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

We also include severance costs and 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 operations as compared to budgets.

The company had approximately $13.5 million of non-GAAP charges, which was primarily related to the Vislink acquisition, which needs to be normalized to reflect the operational performance.

With regards to the balance sheet, at December 31, 2017, we ended the year with $2.8 million in cash.

Inventory was $14.8 million.

Accounts receivable was $8.3 million.

So total current assets equaled $26.5 million.

Current liabilities were $19 million, which equates to a $7.5 million working capital ratio.

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

As far as the cash flow statement, net cash used by operating activities for the 12 months ended December 31, 2017, was $4.5 million compared to $8 million in operations used for the same period last year.

Taking into account the $6 million we paid on the debt assumption, the company was cash flow positive from operations for the 12 months by approximately $1.5 million.

Net cash used in investing activities for the 12 months ended 2017 was $6.9 million compared to net cash used of $35,000 for the same period 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 12 months ended December 17.

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, which is compared to $16.8 million of cash provided by operations last year.

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

(Operator Instructions) First question today is from Josh Goltry with Maxim Group.

I'm in for Brian Kinstlinger, by the way.

So I have a few questions.

First, as it relates to the HCAM supply constraints, has that issue been resolved?

And also, did you begin shipping the product in March or earlier?

Okay.

Let me handle that one.

We shipped most of the product in March.

We had, I think, 7 or 8 that were shipped before then.

The supply chain problems appear to all be resolved.

But the truth, Josh, is if I had had 50 more components, I had 50 more orders I could have shipped.

But we couldn't get enough of the final boards that we had and the chassis that we needed shipped to us in the second half of March.

So we were constrained in the orders that we could fill by what we were able to get.

It appears to be resolved, but until we get the shipments that we ordered in -- and we don't do our own pick-and-place on boards, we don't manufacture the boards ourselves.

We do all the design work and all that, but we're dependent on other suppliers for that.

We think all those problems are solved today, but I'll feel a lot more comfortable in about 10 days.

Okay, understood.

Also, so do you expect to have the entire $3 million backorder of the HCAMs by the end of the second quarter?

We will have at least that much by the end of the second quarter.

At least, okay.

We -- yes, we have in hand today -- I'll give you a little more detail on that, just so you can know where we are.

We shipped 50 HCAMs during Q1.

We had 52 orders that we couldn't ship in Q1.

52 that you couldn't ship, okay.

Yes, we just didn't have stuff.

And in one case, one customer has ordered 18 systems of that 52 for delivery later in this year.

But when I add up all the orders that we have in-house and the orders that -- some customers have given us preliminary orders.

We know that we have orders for 200 systems in hand today.

And so when I said earlier we expect to deliver at least 50 each quarter this year or more, I know that we've got 200 and our salespeople are far hungrier than to sit around and have quarters where they don't get any commissions.

So we will do at least 200 during the year.

(Multiples speakers) more than what we know today.

Okay, got it.

And also, can you remind us the margin profile of HCAMs?

And is it higher or lower than the company average?

The HCAM, on a straight product line product, should be between 55% and 60%.

We have given discounts to some customers if they turn in their old product that they purchased from us or somebody else.

We've done that, because there are parts there that we can turn around and use for new HCAMs.

But the margin should stay north of 50% no matter what.

And...

Okay, got it.

And what's next?

So also -- so what are the expectations for the Army order?

And do you think that since the new budget passed for the fiscal '18 year, will the demand increase?

And if so, if you guess, what's your best guess on the timing?

Well, the Army had 3 years from when they gave us the order at roughly the beginning of the fourth quarter of last year.

We had been told that they would order around $5 million worth right away.

The first order came in at a bit over $1 million.

We have tried -- we know where the product is used.

It's used by -- primarily by our folks in Afghanistan and primarily to take pictures of poppy fields and transmit them back, so that they can be dealt with.

We expect that we'll get $4 million or $5 million during this year, but the Army has not given us any indication yet.

John Payne is on the line with us.

John, you may have more current information than I do.

If what I -- if you have anything to add, please do.

Yes.

Thanks, George.

No, nothing to add.

It is a blanket order with releases each year.

And so the year -- first year is in the circa 500, I'm sorry, $5 million.

And that should be -- we're expecting that to be concluded by the end of Q3 of this year with another $5 million on the following year, and then the balance the third year.

That's as much information that I have.

Okay.

Let me just try to get all this down.

Sorry about that.

Okay.

And with the first quarter already complete, can you give us a sense of the March quarter revenues?

Well, I can -- I -- we don't know exactly what they are.

Unfortunately, the U.K. takes -- has national holidays on Good Friday and the Monday after Easter.

I was on with my guys this morning.

What I can tell you is they'll be higher than they were last year, as you would expect they should be.

And -- but I don't know the exact number yet.

But I -- I'm pretty sure they're pretty north of $10 million at least.

We did $9.6 million last year.

Okay.

And last one, do you expect to be cash flow positive in the first half of '18?

Well, we'll be close.

We are -- we watch cash pretty carefully every day.

And we do have some stock-based compensation in the company, and we'll continue with that.

If everything went the way we have it in the budget, yes, we would be cash flow positive in the first half of the year.

(Operator Instructions) Our next question comes from Brian Kinstlinger with Maxim Group.

So a couple of questions.

First of all, regarding M&A, you mentioned some potentially, I think, large transactions in your release and maybe in your comments.

What kind of businesses are these?

And what would the transaction potentially look like?

Well, they're -- they would give -- the one that we're looking the most carefully at would give us a larger presence with the U.S. military than we have today and would make us a little bit stronger in the camera world than we are today and would give us some technology that we lack, particularly a mesh technology that we have some interest in.

Whether or not we can pull it off will depend largely on getting audited financial results from the target company and us being able to raise significant debt to do this.

And the reason the audited financials are critical is we had some cash uses in the first quarter that were not planned, because we were unable to allow any stock-based compensation to be paid.

And the SEC would not allow it, because we did not have audited financials from the Vislink acquisition.

We aren't going to make that mistake a second time.

So we're waiting for fully audited financials.

They are due out sometime this month.

And then we'll see where we're all at.

We may have to do some equity.

But if we can't predominantly finance any acquisition with debt, we're not going to do them.

And it's just that simple.

So Roger, you are pretty close to this as well.

Do you have anything you want to add?

Well, no.

I mean, it's a good question, Brian.

I mean, we review on a quarterly basis, at least the targets that guys like John Payne and James Walton recommend and John Coleman.

And we're charged with going to have to find and negotiate a deal that we can do.

As George mentioned, we do the due diligence, and we're not going to make some of the mistakes we made before.

But as evidenced from before, we bought 2 companies fairly well.

We recorded bargain purchase gains on IMT and Vislink.

So we're just going to go out and make sure we do a deal that we can do that's right for shareholders.

So we're involved in those discussions right now.

And then just touching on the HCAM also, is their average selling price $30,000?

Is it $50,000?

Is it somewhere in between?

The average in the first quarter was around $35,000.

It depends on the configuration and the frequencies the customer wants.

The low-end product is -- only has the Ultra High Definition 4K format.

So if you want to order a cheap camera -- well, a relatively cheap video system with Ultra High Definition, you order that one.

Most of the customers, excuse me, Brian, are ordering a much more complex system that allows you to either have one Ultra High Definition feed or 4 high-definition feeds at the same time on the same frequency.

So -- and most of the customers are buying that.

If you buy that along with a complex receive system, some of them run up into the $50,000 range.

But for safety's sake, something in the mid-30s is probably about right.

John Payne, you -- I know you've sold a few over here.

Do you have anything you want to add to that?

No, George.

That's -- in the -- in line the -- selling the full 4K units as well as multiple HD feeds is going well.

Right.

They use that simple camera in the blimps at the Daytona 500 to show all the aerial shots.

And so in terms of what's been sold, is it primarily one customer?

Or is it quite a few customers?

No.

Yes, more than 20.

We haven't had any -- we have one -- of the 200 that we expect, we have orders and preliminary orders on, the largest single order is for 18 systems.

Most of the people are buying 1 or 2 or 3 at this point.

And what is the market opportunity?

Let's say, do each of these customers have the ability to buy 100?

Is it more like 10?

I mean, how do you think...

Well, it depends on the -- look, if ESPN decided that they wanted to never again have somebody wandering around behind a cameraman winding up a cable, they could buy a few hundred.

But they could have bought a few hundred of the old format too, and they didn't.

They still -- when you go to a basketball game at Madison Square Garden, I think you went to one recently, Brian, you see that guy behind them all the time winding up the cable.

That's what goes away with the wireless solution that we provide.

We know that, just in our own customer base, that there are over 2,000 of the old-fashioned wireless units that we sold.

We believe the market worldwide is probably more than double that.

And we've made our first bigger inroads in China.

I think we've got an order for over $1 million worth from -- over several quarters from a Chinese firm now.

So what is issue with the supplier?

I mean, is it a specialty part that is not made for other products?

I mean, what are you having trouble obtaining?

That 16-layer board that I talked about with 1,200 components on it earlier, that is made just for us.

And we -- there are some people in the company who say, I should go buy a pick-and-place machine and go do all that work ourselves.

But I'm not ready to go that far yet.

But if we continue to have problems with manufacturers able to dedicate the lines to us, then somebody will twist my arm enough that we'll reconsider that.

The rest -- all the parts are pretty unique.

The demodulators are designed for us as well.

The coding that we use is a little different than anybody else's.

But basically, getting the board and then the software to run it right, and the software is our issue, has been what's delayed us.

So then when you talk about reordering 200, it's not a ton, obviously, for economies, for suppliers.

Do you imagine that you won't be able to really get past this for at least a year, the supplier constraints?

No.

I think -- well, I talked to the President in the last 35 days, more times than he and I would like to talk.

They tell me that they will meet our demands and we'll know whether they can or can't.

We've ordered components for 100 systems to be delivered during Q2.

That's more than I told you that I was going to ship.

And if I get the 100, maybe I'll be shipping 100.

But I don't expect that the issues that we had will continue.

And frankly, now that the board is stable, and we know that -- we've run it for more than 10 consecutive days without a failure.

Now that we know the board is stable and they know the board is stable, it's a lot simpler for them, easier for them to put the boards together and get them to us.

The -- so a couple of other questions.

We looked at the costs in the fourth quarter.

There were some onetime items there.

Can you talk about what overhead looks like or operating expenses look like maybe in the first quarter or how you see them quarterly for the year?

Are we -- should it be $1 million less than they were in the fourth quarter, a little bit higher than that?

Are you cutting costs in there?

Are you expanding?

We should have lower costs in the first quarter than the fourth quarter, because we had a few onetime charges that got into our expenses in the fourth quarter that will not happen in the first quarter.

So I'm expecting them to be lower.

The only thing that we have added that will offset some of what I know we'll save is several salespeople, and they all come with a quota.

And the board and -- at our request, authorized some increase in sales positions.

Unfortunately, we also had to terminate a few that weren't doing what they did.

And so our net is only up for a couple of positions.

But other than that, we should have lower G&A and operating expenses.

Can you quantify it?

Are we are talking about $0.5 million less a quarter?

Well, on G&A, it should be -- compared to the fourth quarter -- yes, probably more than that compared to the fourth quarter.

We had around $700,000 of onetime charges that I know of without going through in great detail in the fourth quarter.

And then you mentioned -- while you couldn't talk about first quarter revenue despite the quarter being closed, you're confident more than $10 million, it still puts you well below the fourth quarter.

Is there a seasonality?

Talk about a seasonality in the business and what happened in the fourth quarter that won't repeat in the first quarter.

Yes, the first quarter is historically the lowest quarter of the year by far for the company, with the second and fourth quarter being the strongest, as we go back and look at what happened before we purchased these companies.

The third quarter is higher than the first quarter, but lower than the second, primarily because of vacations in the rest of the world.

In the U.S., we work about 400 hours a person more than they do in the rest of the world in those summer vacations in Europe.

And Asia slowed things down for us in the third quarter.

They have historically.

This past fourth quarter, had we not had the hiccups that we had, we could have shipped the 50 systems we shipped in the first quarter in the fourth quarter.

So we just are behind in delivering.

We're not losing any orders, because customers don't have anybody else to give an order to that they can get delivered.

But if everything went well, we could do well north of 50 that I said we would do, at least in the second quarter.

And I'll know better in a few weeks whether or not I get those boards.

Finally, what is the breakeven point for revenue in a quarter?

I mean, obviously, mix can change a little bit, but your margins are what they are.

So...

I mean, typically, we need about $5 million a month in revenue to cover everything, cash and noncash.

Ladies and gentlemen, this will end the question-and-answer session today.

The conference is now concluded.

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

You may now disconnect from the call.

Thank you.