Earnings Transcript for TESS - Q4 Fiscal Year 2021

Operator: Ladies and gentlemen, thank you for standing by. And welcome to the Q4 2021 TESSCO Technologies, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ 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 from Sharon Merrill. Thank you. Please go ahead, sir.

David Calusdian: 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.

Sandip Mukerjee: 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 four 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 product 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 marks the real beginning of the new 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 Materials Program, renewals of several state contracts, the reversal of the declining trend in our two-way segment, logging substantial growth.

Aric Spitulnik: 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 give 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 earlier 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 included 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 were a loss of 1.9 million and $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're 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 to 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. 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 macro economy 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.

Sandip Mukerjee: 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: . Your first question comes from Maggie Nolan with William Blair.

Maggie Nolan: Hi. Thank you. 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?

Sandip Mukerjee: Hi. Good morning, Maggie. Thanks for the question. Looking back at the quarter we're 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.

Maggie Nolan: 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?

Sandip Mukerjee: 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 three things we believe. First, it's our own improvements and our own sales initiatives and those efforts bearing fruit. Second, we are seeing more walkthroughs, 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.

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

Sandip Mukerjee: So a couple of points, Maggie. So first in terms of new build dev and new wins, we do see possibility for improvement. But those will not show up in results until 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 dollar segment as opposed to the carrier builds where things have to be and our flexibility and shifting products is somewhat limited. But we are seeing improvements in terms of how much Ventev we can sell into this carrier ecosystem.

Maggie Nolan: Okay. And then the last one for 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?

Aric Spitulnik: Maggie, this is Aric. Thanks for the questions. We're not going to quantify in exact dollars. But what we've said is that it's higher than it's been at 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.

Maggie Nolan: Okay. Thanks for the time.

Sandip Mukerjee: Thank you, Maggie.

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

Bill Dezellem: Great. Thank you. 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 that correct in terms of what you were saying?

Sandip Mukerjee: Yes, Bill. Good morning. Thanks for the question. 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.

Bill Dezellem: Right. Thank you. 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 guess for the multiple choice, I'll throw that out?

Sandip Mukerjee: 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.

Bill Dezellem: Right. Thank you. And then your VAR margins were up roughly 60 basis points in Q4 versus the Q3. Is that just noise or is there something there that's worthy of conversation?

Aric Spitulnik: No, it's just a mix reserve of product mix and customer mix, nothing -- Ventev was flattish from Q3 to Q4. So there's nothing significant driving that, just a mix issue.

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

Sandip Mukerjee: 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 pick up of being able to sell these complete solutions, these complete kits, if you will, to our customers going forward.

Bill Dezellem: Great. Thank you. And then two 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?

Aric Spitulnik: 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 and 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.

Bill Dezellem: Great. Thank you. 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?

Sandip Mukerjee: 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 have established new relationships, new business, new revenues with a couple of new turf contractors.

Bill Dezellem: Great. Thank you both. I appreciate the time in taking my questions.

Sandip Mukerjee: Thank you for the questions, Bill.

Aric Spitulnik: Thanks, Bill.

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

Sandip Mukerjee: 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.

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