Earnings Transcript for TESS - Q2 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the Q2 2022 TESSCO Technologies Inc. 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 may be recorded. I would now like to hand the conference over to your speaker today, David Calusdian. Thank you. Please go ahead.

David Calusdian: Good morning, everyone, and thank you for joining TESSCO's Q2 Fiscal Year 2022 Conference Call. Joining me today are Sandip Mukerjee, TESSCO's President and Chief Executive Officer; and Aric Spitulnik, the Company's CFO. Please note that management's discussions today will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve several risks and uncertainties, and TESSCO's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO's public disclosures, including the Company's most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission. With that introduction, I would like to turn the call over to Sandip Mukerjee, TESSCO's President and CEO. Sandip, please go ahead.

Sandip Mukerjee: Thank you, David, and good morning, everyone. Thank you for joining us. Our second quarter performance provides further compelling evidence that the work we have done in implementing our strategic initiatives are yielding positive results, while setting us up for even greater long-term success. Our revenues grew 3% sequentially and 22% year-over-year, with gains in both our markets. These results include another record performance for our carrier market as we continue to grow share. We are seeing a continuing uptick in demand. The market is growing and customers are bullish. Total sales bookings were up 38% year-over-year, reflecting robust demand for our products and services. At the same time, we continue to make progress with our Ventev business, where bookings grew 17% year-over-year, the highest we have ever achieved. And we saw increasing utilization and growth in revenue on our website, tessco.com, both sequentially and year-over-year. While we are excited about the strong demand environment, we are also cautious about the global supply chain disruptions, challenges with freight and predictability of product availability. These do not show signs of easing in the near term. For TESSCO, this means longer lead times, increasing freight costs and delays in converting bookings to revenue. Together with our improved bookings, this has created a backlog larger than anything we have seen. Despite these challenges, we've been able to deliver strong improvements in our bottom line results. Adjusted EBITDA improved by $0.9 million sequentially and $2.1 million year-over-year. The operating efficiencies we have architected allow us to drive more of our growing revenue and margin dollars to the bottom line and have us well positioned to achieve our full year operating plan. I will now walk you through the results and highlights of the past quarter in the following format

Aric Spitulnik: Thank you, Sandip, and good morning, everyone. I'll now walk you through our financial results. As a reminder, the income statement amounts are all from continuing operations and exclude the significantly diminished activity from our former retail business. Second quarter revenues increased 22% year-over-year to $108.5 million due to strong demand across our carrier and commercial markets. As Sandip said, the Q2 carrier market revenues were another record high and commercial revenues were the highest achieved in the past seven quarters. Gross profit was $19.8 million for the second quarter of fiscal 2022, compared with $17.1 million for the same quarter of fiscal 2021. Gross margin was 18.2% of revenue for the second quarter of fiscal 2022, compared with 19.3% in the second quarter of last year. Gross margins in the carrier market continue to be ahead of last year's pace, but we still expect some contraction in the second half of the year based on customer and product mix. Commercial margins were lower than normal this quarter due to some larger projects that were at lower margins, but we expect commercial margins to be better in the remaining two quarters of the fiscal year. Overall, we would expect total margins in the second half to approximate where they were in the first half. We remain focused on cost management. In fact, we lowered overall SG&A as a percentage of revenues 410 basis points from 23.4% to 19.3% year-over-year. We achieved this reduction despite a significant increase in freight expenses. We continue to manage our IT and corporate expenses as we look to complete the major IT initiative later this year. We expect to realize efficiencies and support expenses and a reduction in IT expenses outside of depreciation over time as we realize the benefits associated with this new platform. Second quarter 2022 net loss was $1.3 million, compared with a net loss of $2.9 million a year ago. Adjusted EBITDA was a loss of $200,000 compared with a loss of $2.3 million a year ago. Turning to the balance sheet. As we had expected, product inventory decreased by nearly $12 million in the second quarter. The supply chain issues we've experienced this year caused an inventory spike in the first quarter. We worked through that extra inventory during Q2. We would expect more normal quarterly fluctuations in the coming quarters, but the volatile supply chain may still lead to some temporary spikes in inventory. The balance on our $75 million line of credit increased by approximately $6 million this quarter. This was due in part to the increase in inventory from the first quarter that was paid for during Q2. Accounts receivable also increased by $6 million. We did receive our IRS tax refunds of $4.3 million during the third quarter. We are still owed another approximately $6 million in tax refunds, but do not expect the majority of that to be received until later in FY 2022 or into early FY 2023. At the end of Q1, our payables and accrued expenses exceeded our receivables by $12 million. Our receivables now exceed payables and accruals by nearly $8 million. This should have a positive effect on operating cash flows in the second half of the fiscal year. Our first half performance has us well positioned to achieve our fiscal 2022 operating plan targets that we provided in July. These include

Sandip Mukerjee: Thank you, Aric. In closing, we had another record revenue quarter in our carrier business and the highest revenue in our commercial market since Q4 of fiscal year 2020. We're gaining market share and adding new customers. Our backlog, including Ventev, is at historically high levels. And our tessco.com website has achieved improved metrics across the board with the highest quarterly revenue in three years. And all of these have contributed to a significant improvement in our profitability, as evidenced by the $2.1 million year-over-year improvement in adjusted EBITDA. We continue to make progress with the growth strategy we launched last year. And with markets beginning to emerge from the pandemic-related slowdown, the evidence of our turnaround is becoming very apparent. We remain focused on our cost control assets and expect significant improvement in our overall profitability this fiscal year compared with fiscal 2021. With that, we will open the call for questions. Operator, please go ahead.

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

Ted Starck-King: This is Ted on for Maggie. Great results. Just wanted to see kind of what is your level of visibility to the midpoint of the full year guidance? And what needs to happen to get to the upper end of the guidance range? And I guess conversely, what does the low end of the guidance range represent?

Aric Spitulnik: It's a good question. On the revenue side, I think we have visibility into being very close to the mid to upper half of that range. We've talked a lot about our bookings being higher than our revenues. So we have a significant backlog for the second half of the year. On the profitability side, that's a little harder to forecast with the changes in product mix that have been going on. From an expense side, we think we're in good shape. But we're not going to get too much into what exactly needs to happen to be low to high, but we think we're in a good position to at least be at the low end of all of those ranges.

Sandip Mukerjee: Just to reaffirm -- and good morning, Ted, and thanks for the question. As both Aric and I said on the call, we both believe that we are well positioned to meet that guidance. From a revenue and bookings perspective, as you heard us on the call, we are far more bullish. The supply chain issues, the team is navigating very well, and we will continue to navigate. So we think we're very well positioned to be in that zone.

Ted Starck-King: All right. Great. It's helpful. My second question is regarding kind of the supply chain there. So Sandip, you mentioned that clients are doing purchase orders earlier with you guys. How has this stated that supply change -- supply chain changed clients' behavior and the conversations that sales is having with clients?

Sandip Mukerjee: Yes. To put it simply, Ted, in a simple sentence, everybody is being forced to do much more forward planning than we have been used to or the industry has been used to. And people are wanting to get in line for when products become available to be the first to get it. So that is driving behavior. For us, that means a few things. The one I like is customer intimacy. So we are working very closely with our customers to understand their future projects, their current projects and their supply needs. That's always a good thing. So we are very embedded in that. We're able to bring some of the supplier intelligence, some of the pricing intelligence that we have from suppliers to the mix. So that's overall helpful to everybody. The orders we are getting are not too far out years into the future, but a couple of quarters into the future than otherwise people would have placed.

Ted Starck-King: All right. Great. That's helpful. And maybe just kind of a quick follow-up there. How has the size and scope of projects sort of evolved over the last several quarters? Are you seeing any change in the average size of orders?

Sandip Mukerjee: Well, let me come at this from three different data points. So on the carrier side, the 5G builds are intensifying. Projects are lumpy, as we've said before. Order sizes are about the same. On the commercial business side, we are seeing robust demand. And as our bookings progress shows, we're really very positive and very pleased with the year-over-year cadence. So we are seeing bigger orders there. And then finally from tessco.com, we are seeing much bigger orders than we have seen before. So people are getting used to all of the progress and improvements we've made on tessco.com. It's more of a TESSCO internal thing as opposed to a market issue, but I think it gives you a flavor across the board for the question you're asking.

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

Bill Dezellem: A group of questions. The first one I'd like to start out with is the $14 million inventory decline. In normal times I would ask what led to that large decline in inventory. But is it simply fair to say that that's a function of the demand and the bookings, the supply chain issues, et cetera? Or is there something else going on there that's more insightful?

Aric Spitulnik: That's probably about 80% of the answer is the supply chain issues that spiked up in Q1, and we significantly attacked that to get those down in Q2. We've also done a good job of managing the inventory a little bit tighter than we were, given the supply chain issues that we see and the volatility. As I said, there will be some ups and downs. And we do expect a small increase here in the third quarter, but not nearly what we saw in the first quarter. So there's still going to be some lumpiness to the inventory because of the supply chain issues, but I think we're managing it very tightly and should be in good shape for the rest of the year.

Bill Dezellem: And then do you -- I'm kind of carrying on with that thought. Do you have the inventory that you want now, or are you still short? And if you are still short, kind of what could revenues have been or what would revenues have been had you been able to fully supply what was desired by your customers?

Sandip Mukerjee: So, very good early morning to you, Bill. You asked a few things in that one question, so let's unpeel it a little bit. So the first part of your question was, do we have the inventory that we need. Not entirely, which is why our backlogs have grown. And what we are seeing is a lot of products come in and turn around very, very quickly. So that's the nature of the business. So we are constrained. And the constraints, to give you some color, is mainly with things like power cable, electronics. Anything that requires or relies on chipsets, resin, those are products that are constrained and we don't have the inventory on hand. And as soon as the inventory comes in, it goes out and sometimes with other inventory that customers want, along with the power cable or those electronics. So I think that is the first part of your question. The second part of your question had to deal with backlog and how much more revenues had been, if I understood your question correctly. So Bill, that's a difficult one to answer because our customers are purchased -- are placing orders into the future, as we discussed with the last question. So when would they be ready to receive product, it's a little bit of a question mark. However, I will give you the following bit of color. Historically, our backlog has been between $10 million to $20 million. Over the first half of this year, it's more than doubled. If you assume that we would have shipped half of that, that would have been an additional $20 million-plus in revenue, but not every quarter. I'm giving you color for what we might have done for the full first half. Hopefully that gives you the color you were looking for.

Bill Dezellem: That is helpful. And then let me shift to tessco.com. I may have missed this as with the early morning that you referenced, but did I hear correctly that your page views are up more than 200%? And if that's the case, would you talk to why that is the case? And we recognize that page views don't equal revenues, but is this somehow a leading indicator, or is that more of a real-time indicator of activity? How do we translate that to the future?

Sandip Mukerjee: I think I would share with you the excitement we have internally, not just with that stat, but overall. And you are correct. Page views are eyeballs on our website, and that's the leading indicator to commerce that you can conduct over the website. And we have seen, and we've shared numbers over the last couple of quarters. We did $10 million and a little more last quarter in revenues through tessco.com. This quarter, we did $11 million and a little more. So yes, those page views are exciting. It tells us we have made significant improvements in the product catalog, both from a presentation perspective and from a content perspective. So that's what is exciting our customers. And we're making more of an effort to move our business online, because as I said on the earnings call, it's much more efficient for us to process from a cost perspective. Thank you for that question, Bill.

Operator: I will now turn the call back over to management for closing remarks.

Sandip Mukerjee: Thank you, operator. And thanks again, everyone, for joining us today. We appreciate your support of TESSCO. And also, thank you to our team members for all their hard work and dedication. We look forward to speaking with you next quarter. Have a wonderful day.

Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.