Earnings Transcript for TESS - Q1 Fiscal Year 2022

Operator: Good day and thank you for standing by. Welcome to the Q1 2022 TESSCO Technologies Incorporated Earnings Conference Call. At this time all participants are in listen-only mode. After the speaker's presentation there will be a question-and-answer session. . Please be advised that today's conference is being recorded. . I would now like to hand the conference over to your speaker today, Mr. David Calusdian. Please go ahead.

David Calusdian: 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.

Sandip Mukerjee: Thank you, David, and good morning, everyone. Thank you for joining us. This past quarter the results confirmed, that the works we have done on 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 offering. 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 million 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 results in a full year net loss of between $6.4 million to $4.1 million, and that compares to a $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.

Aric Spitulnik: 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 then 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 macro-economic conditions and growing market share, particularly in the carrier market. As Sandip 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 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 and corporate 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 million 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.

Sandip Mukerjee: 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're 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 the 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, please go ahead.

Operator: . Your first question is from the line of Maggie Nolan with William Blair.

Maggie Nolan: Thank you. On the supply chain shortages, how does the pace of supply compared to three months ago and what are your expectations, or what is kind of baked into your outlook for the remainder of the year?

Sandip Mukerjee: Good morning, Maggie. Thanks for the question. We see roughly the same performance, our lead times has 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. And the first is longer range planning with our customers, because they see the pain as well. So getting ahead in terms of future business future project is the way to mitigate their pain and that's what we're focusing on.

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

Sandip Mukerjee: Thanks, Maggie. Good question. I think I will underscore a couple of comments I made during the first part of the discussion. So within both of our markets, the carrier market as well as the commercial market, we see much improved performance environment relative to access to site, 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.

Maggie Nolan: Okay, thank you. And then I know you expect the spend related to IT initiative to decrease. But is there a little more color that you give around the magnitude of that the timing of that going forward? Thank you.

Sandip Mukerjee: Aric, do you want to take that.

Aric Spitulnik: Yes, sure. Hi Maggie. 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 doing business with TESSCO. So we're excited about that project coming to an end later this fiscal year.

Maggie Nolan: Alright, thank you all for the update.

Aric Spitulnik: Thanks Maggie.

Sandip Mukerjee: Thanks, Maggie.

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

Tim Call: It's good to see improving and positive outlook. With your new Nokia business, will that be using the space that the formal retail inventory in business we're using? Or do you have to add new warehouse?

Sandip Mukerjee: So we're not planning on adding new warehouses Tim, its existing operations and the focus of Nokia, this is Nokia, as 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 describe, very specifically, the parts of the portfolio that we're excited about are around small cells, microwave, broadband. So 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.

Tim Call: 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?

Sandip Mukerjee: Absolutely. Our retail inventory as Aric said much diminished. I mean that activity is…

Aric Spitulnik: Essentially all gone.

Sandip Mukerjee: Essentially all gone at this point and we've been able to use that inventory and repurpose it for our commercial and carrier business.

Tim Call: Well, thank you for outlining a bright future. Looking forward to seeing more of it.

Sandip Mukerjee: Thanks. Thanks for your comment. And thanks for joining the call Tim.

Operator: . Your next question comes from the Bill Dezellem with Tieton Capital.

Bill Dezellem: Thank you, I had a group of questions and I like to start with just a point of clarification. Did we hear correctly that you are expecting inventory to be significantly lower than the $69 million at the end of the year? Or were you referencing something else?

Aric Spitulnik: 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 till now. But we expect that some of the supply chain issues we work through them and we run a little bit tighter with some of 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.

Bill Dezellem: Great, thank you. So with the implication then be that you will be generating cash in the second quarter?

Aric Spitulnik: 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 expect especially with that cash payment from the tax amount coming in to have some positive cash flow this quarter.

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

Sandip Mukerjee: Bill, good morning, good early morning to you. Thanks for the question. 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 pay how much more we would have shipped, but that number would likely be somewhere in between those two. 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 of we'll be flush out the healthy backlog that we've created. Absolutely.

Bill Dezellem: Thank you. And in the press release, you made reference to stronger demand ahead of us. Does that comment suggested booking strength will strengthen from here?

Sandip Mukerjee: We are optimistic, for three reasons, Bill that I said. One is, just reopening of America, right. 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 give color and Aric did as well, into where we are seeing that demand from. So we're positive about the demand. We're seeing - we're bullish about 5G, it's about 25% of our revenue, 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 and so 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 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.

Bill Dezellem: That's helpful. And just jump onto that carrier comment. You had record revenues in the carrier business. Is it the 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?

Sandip Mukerjee: 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, 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 a large nationwide wireless carrier, plus a cable broadband provider also nationwide. Those revenues, our bookings were not included in this quarter, we expect them to be additive to our business in the second half of this year.

Bill Dezellem: Thank you. I appreciate that. And 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 this turning the corner?

Sandip Mukerjee: Yes, so three things, to reiterate that we said, I mean, it's the same metrics, though from what, if 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, Ventev revenue and margins plus Tessco.com. And again, our online sales, much of it comes from the commercial segment, so the growth there is an early indicator.

Bill Dezellem: Thank you. And then lastly, and I'll turn it over to someone else. Does the positive adjusted EBITDA imply 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 would be the case?

Aric Spitulnik: Yeah, I don't - we didn't obviously give that kind of detail. But it doesn't necessarily, I mean that we don't - we try to avoid the core release with all the supply chain issues going on. So is it possible? Yes. Is it something we're going to say no, there's too much uncertainty on a quarter-to-quarter for us to be able to definitively say yes or no to that question?

Bill Dezellem: All right. Thank you, and thanks for taking all of my questions.

Aric Spitulnik: Thank you, Bill.

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

Sandip Mukerjee: Thank you, operator and thanks 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.

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