Earnings Transcript for TESS - Q4 Fiscal Year 2022

Operator: Ladies and gentlemen, thank you for standing by. My name is Brent and I’ll be your conference operator today. At this time, I'd like to welcome everyone to the Q4 2022 TESSCO Technologies’ Earnings Conference Call. It is now my pleasure to turn today’s call over to Mr. David Calusdian. Please go ahead.

David Calusdian: Good morning, everyone, and thank you for joining TESSCO’s Q4 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 discussion today will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve a number of 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’d like to turn the call over to Sandip Mukerjee, TESSCO’s President and CEO. Sandip, please go ahead.

Sandip Mukerjee: Thank you, David. Good morning, everyone. And thank you for joining us today. Our excellent fourth quarter performance kept our fiscal year of tremendous progress in the execution of our turnaround. We met or exceeded all of our guidance targets, not only the adjusted targets we discussed last quarter, but also those communicated in July, including positive adjusted EBITDA. And most importantly, we continue to see strong demand for our products and services, which resulted in record annual bookings and a record level of backlog at our year end. For full fiscal year 2022, our adjusted EBITDA improved from a loss of $12.8 million in fiscal 2021 to a positive $300,000 in fiscal 2022. This is an improvement of about 4% of adjusted EBITDA margin, and is a significant turnaround in only one year. Our success was due to the successful execution of our strategy, which enabled us to take share in a market that continues to be gripped by macro-economic challenges. Overall, we are in an excellent position as we enter our new fiscal year. We ended fiscal 2022 with record revenues, record bookings, and a record backlog. And our momentum continues to build with our turnaround strategy. Aric will talk more about our business outlook later in the call. But we are projecting another double digit revenue growth here and the continuation of improvements to our profitability. I will now walk you through the results and highlights of the past quarter in the following format. First, our two markets, carrier and commercial. Second, the three key elements of our business, namely distribution, Ventev and software. And third, the performance of tessco.com. Q4 marked another strong quarter for our carrier business, carrier revenue was up 27% year-over-year and gross profit was up 3%. Our bookings remained strong with growth of 6% year-over-year and our backlog was over $32 million. Gross margins in this market did decline this quarter due to changes in customer and product mix. Last year's fourth quarter was unusually high due to some one time pricing and cost benefits. So the year-over-year gross profit comparison for the quarter is not as favorable as the revenue growth. For the full fiscal year, however, gross margins increased from 11.1% to 11.6% in this market. For the full year, we posted record carrier annual revenues with a 27% increase over fiscal 2021. We also had record annual bookings which grew 29% and record backlog that grew 82% from fiscal 2021. Furthermore, as I mentioned, we were able to achieve this growth with higher gross margins. Within the Tier 1 Carrier Ecosystems, revenue this quarter grew 28% year-over-year, we achieved this growth with existing customers, as well as new customers. In Q4, Our strong customer relationships and deep experience, serving the sector helped us increase our market share. This included selling new product categories and services, as well as serving new regions. As previously announced, we had a big businessman win one of the largest wireless carriers earlier this year, and began shipping to them in 3Q. Our business with this carrier continued to grow in Q4. And we expect that growth to ramp throughout fiscal 2023. Our Tower significantly grew this quarter, up 39% year-over-year, our largest tower customer awarded us an additional business line that we expect will have steady growth throughout fiscal 2023. We have begun to place our Ventev products with our power customers and expect Ventev product sales to continue to grow this fiscal year. We also have made considerable progress with many of our general contractor customers, developing strong relationships and supporting them across multiple Tier 1 Carrier projects. As an example, we won business with a contractor that supports carrier networks, and focuses on DAS installation for large enterprise locations. We are also excited about our progress with edge data center solutions, and are working closely with integrators and general contractors to develop and deliver the solutions. To mitigate the global supply chain disruptions that have caused longer lead times, we have diversified suppliers where possible and have been very deliberate in our advanced product purchases. Our continued success in this market stems from a number of factors. First, our logistics and supply chain expertise. Number two, our proprietary engineering and production capabilities. Number three, our strong relationships with our existing customers. And number four, the successful execution of our business development efforts. I will now turn to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem. Q4 was a strong quarter for commercial revenue with a 7% increase year-over-year. Gross profit increased 16% year-over-year, as Ventev’s revenues were a record high this quarter. For the full year, the commercial business posted 6% growth. At the same times, bookings increased 16% and the record backlog was up 161%. Additionally, gross profit was up in the commercial business by 12%. As a combination of strong Ventev sales, and pricing strategies drove higher gross margins. As mentioned, global supply chain issues persisted this quarter, but provided some opportunities as well. We have been very pragmatic in setting customer expectations regarding lead times. And our customers tell us that they trust us to give them an accurate picture of the market. To mitigate long lead times, we have utilized our demand planning and supply chain teams to work directly with many of our customers. Several of these customers have provided us with Blanket Purchase Orders to help overcome inconsistent lead times and to keep their projects on course. This has allowed us to more effectively forecast and to order material to meet their needs. As a result, we have seen very low levels of order cancellation. And we consistently stress test our backlog, which is still very solid. We continue to see significant growth in the DAS space across enterprise, cellular and public safety. Many states have pending regulations for enhanced public safety communications that should drive the kinds of demand we have seen in broad markets like Florida. As such, we have aligned our stocking and solutions designed accordingly. Hospitals continue to be a large market segment that we access through our DAS integrators. Programs like AT&T enhanced in building or EIB program have opened multimillion dollar opportunities and we expect that growth to continue this fiscal year. Our bond market grew significantly, particularly in the network VAR and national solutions providers which grew 23% and 57% respectively year-over-year. We work closely with our customers and use careful forecasting to collaboratively plan for and to accommodate their projects. Turning now to the three key elements of our business, specifically, distribution, Ventev and software. Starting with our distribution business, we continue to win market share and develop new customer and manufacture relationships. Our line card is one of the most robust critical communications portfolios in the market, and includes, among other solutions, products for public safety DAS, cellular DAS, broadband, small cell, macro site, and CBRs/ private LTE. We have extensive offerings for LMR and two way solutions, public safety DAS, commercial DAS, and test solutions. In fiscal 2022, we achieved double digit growth with each of our top five suppliers. We continue to augment our turnkey offerings and our value added services, including solution development and design, site kitting, supply chain logistics, and provide cost efficiencies for our customers and reduce complexities for their deployments. Turning now to Ventev. On a full year basis, Ventev had record revenues, bookings and backlog with revenue growing 20%, bookings growing 27% and backlog increasing by 132%. These records were achieved despite global supply chain constraints and demonstrate the results of our strategic initiatives. Key market drivers for Ventev include 5G, private LTE and CBRs, which continue to increase opportunities across multiple verticals. Federal funding increases for infrastructure have driven opportunities for Ventev, such as configured power systems, and we have increased market share with existing and new customers, last quarter I discussed my work with the most valued auto maker. This past quarter we added two new configurations to power solutions for them, providing remote power via fiber. These were used in their parking lots to provide access to cameras, and network switching, without having to lay power cable. This past quarter, we launched several products, including for DAS, our Low PIM Indoor Cellular DAS Antenna and Indoor Public Safety DAS Low Profile Antenna, for mobility and fleet, a Dome Omni Antenna with Fakra Connectors. For power systems, a Universal Broadband Enclosure, ideal for remote radio heads, industrial networking switches, and routers, edge computers and rack mounted devices. And for Wi Fi, Universal Antennas 24/5 gigahertz. 6 ports with detachable jumpers, and eight dual band raised floor tile antennas. At the same time, we have taken several steps to mitigate supply chain disruptions. We have adjusted our buy cycles to align with lead time increases. We use extensive early forecasting, and advanced planning for ordering material for customer projects. And we are continually seeking to identify multiple sources of supply for key components. Regarding our software business, while revenue has not been material to this point, we made progress in Q4. We have doubled the number of devices we support and increase the number of brands supported on our platform. Customers and prospects tell us that our software offering is compelling in that first, the automated system we launched last quarter to expedite onboarding is highly effective, cutting traditional onboarding from weeks to days. We have special relationships with vendors that assist us in getting technical information to allow for quicker onboarding. Our solution is device agnostic. And our user interfaces are easy to navigate versus other platforms with more complicated workflows and interfaces. We are working on a number of opportunities and expect revenue from this business to begin ramping this fiscal year. Lastly, in terms of our sales channels, TESSCO sells both directly and online through tessco.com. We continued our intense focus on both attracting new customers to tessco.com and migrating existing customers onto that platform, which resulted in Q4 revenues of over $9.4 million. We also experienced 136% increase year-over-year to 1.6 million product detail views this quarter. New features include an exit popup window to capture customer email addresses. We also initiated Google Performance Max, which is a more efficient AI based ad placement tool, using paid search to engage customers throughout their purchase journey. With that, I will now turn over the call to Aric for the financial review. Aric?

Aric Spitulnik: Thank you, Sandeep. And good morning, everyone. As a reminder, the income statement amounts that I’ll reference are all from continuing operations and exclude this significantly diminished activity from our former retail business. Fourth quarter revenues increased 14.5% year-over-year to $101.6 million. We achieved these results despite industry wide disruptions in the global supply chain, which delayed receipt of inventory from vendors, limited our ability to ship product to customers, and contributed to year-over-year fourth quarter sales bookings growth of 11%. As Sandeep mentioned, we ended the quarter with another record level of backlog totaling $75 million at the end of Q4, and up 120% since the start of the fiscal year, and up 10% over Q3. Gross profit was $18.9 million for the fourth quarter of fiscal 2022 compared with $16.8 million for the same quarter of fiscal 2021. Gross margin was 18.6% of revenue for the fourth quarter of fiscal 2022 compared with 19% in the fourth quarter of last year. This was largely due to an unfavorable customer mix in our carrier market and larger excess and obsolete inventory charges, partially offset by pricing increases and a 58% increase in higher margin Ventev revenues. We remain focused on cost management. SG&A expenses as a percentage of revenues continued this year's trend of been significantly lower than the comparable amount from last year, representing 19.2% this quarter, as compared to 22.1% in last year's fourth quarter. We achieved this reduction despite a significant increase in freight expense caused by global supply chain disruptions. Fourth quarter fiscal 2022 net loss was $1 million, up slightly from the fourth quarter of fiscal 2021. Last year's net loss was positively impacted by a $2 million benefit from income taxes related to our ability to carry back losses under the CARES Act. Adjusted EBITDA was a positive $0.7 million in Q4. This compares with adjusted EBITDA loss of $1.9 million a year ago. Turning to the balance sheet, product inventory increased by $4.4 million in the fourth quarter. This was in support of managing through supply chain disruptions. We remain strategic in our overall inventory management in the face of persistent supply challenges. Accounts receivable increased by $7.1 million in the fourth quarter. This is reflective of a back loaded sales quarter that is typical for our fourth quarter, and was even more pronounced this year as a result of supply chain challenges. The balance on our line of credit decreased by approximately $1.4 million this quarter. However, as we discussed last quarter, we received $6.5 million on a mortgage related to a Reno facility. That mortgage is shown on the balance sheet primarily as long term debt. We ended the year with income tax receivables of $7.4 million. While the timing and receipts of these payments is entirely dependent on the IRS. We have received $3 million of this receivable subsequent to year end. Our results continue to trend in the right direction, and I'm pleased with how we are executing on our strategy. Despite macro level headwinds impacting our business, we believe that we will continue to see improvements in our results. Accordingly, we are now projecting for fiscal 2023 the following. Revenue of $450 million to $475 million, which would reflect growth of 8% to 14%. And net loss of $5 million to $2.1 million, which compares to a net loss of $3.3 million in fiscal year 2022 and adjusted EBITDA of between $4 million and $7 million, which compares to $0.3 million in fiscal year 2023. In short, our major achievements for fiscal 22 were revenue growth in both of our markets, improve gross margins, significant reduction in SG&A as a percentage of revenues, and most importantly, positive adjusted EBITDA for the year. With that, I will turn the call back over to Sandip.

Sandip Mukerjee: Thank you, Aric. Before we start the Q&A, I would like to underscore our accomplishments from fiscal 2022 and explain how they set us up very nicely for fiscal year 2023. In fiscal 2022, we met or exceeded all of our guidance targets we provided in July of 2021 at the start of our fiscal year, we grew revenue and bookings year-over-year by 12%, and 21%, respectively despite supply chain constraints. Our strategic initiatives with Ventev resulted in a record revenue year, our cost management and efficiency efforts resulted in improved operating margins. We continue to manage our cash well and gain additional liquidity to our increased ABL facility and the mortgage on our Reno property. We ended the year with a positive adjusted EBITDA with an improvement in adjusted EBITDA margin of 400 basis points in one year. And finally, we ended the year with a record backlog of over $75 million, which sets us up very nicely for fiscal 2023. As Aric mentioned, we are projecting the following for fiscal year 2023. And 8% to 14% growth in revenue, and adjusted EBITDA of between $4 million to $7 million, which would be a margin improvement of 400 to 500 basis points from fiscal year 2021 to fiscal year 2023. Furthermore, we continue to make progress on each of our three strategic pillars. And the evidence of our turnaround has never been more apparent. With that, we will now open the call for questions. Operator?

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

Bill Dezellem: Thank you, that’s Tieton Capital. And let's start with the supply chain. Are you seeing any signs of it improving? And if you are, are you anticipating that the lockdowns in China recently is going to reverse any improvement?

Sandip Mukerjee: Good morning, Bill. Thanks for the question. No, we are not seeing any material movement in the supply chain area, I mean product lead times are where they are, as we have discussed in prior calls, what used to be weeks in terms of product availability is now months, Bill. We have focused as we said on the call on diversifying our dependency on suppliers and supply chain. So that's where we are maneuvering. But in short, we don't see any material change in the supply chain issues.

Bill Dezellem: Thank you and then kind of using that as a lead in, the backlog in the commercial business grew more sequentially this quarter than it has in prior quarters. What led to what I'll call an outsized increase in your backlog this quarter?

Sandip Mukerjee: The primary reason for that, Bill, is our increased sales activity, better sales to our bookings grew, which is what drove the backlog.

Bill Dezellem: Congratulations. Let's jump to Ventev, I guess another area of good news. You referenced that sales were up 58%. That's, frankly, just a monster number. And you talk through it in your opening remarks. But do you have more detail that you can share relative to what's leading to that success with Ventev or is it as simple as winning some tower customer business and that's really the driving factor or is there more to it?

Sandip Mukerjee: Well, at the end of the day when you win purchase orders with customers, and you ship that's what drives your revenue and your bookings. But in terms of sub ledger details, if you will, Bill, well, Ventev has been a strategic area of growth for us and investment. So some of the underlying drivers are we've invested in sales specifically for Ventev, we have invested in supply chain inventory as well as we have greatly simplified, the number of SKUs we carry. And as we have talked about in past quarters, we have really shifted the dial from running this business in project mode versus product mode. So we have available inventory that for the most part can be customized very, very easily to drive deployments to ensure that our overall strategy that is yielding fruit for Ventev, but at the end of the day, it's about winning customers and shipping product, which we have done.

Bill Dezellem: Excellent. And then lastly, relative to the to the SaaS business, from what you see today, is this a business that could ramp I’ll just say extraordinarily fast, or should we have a much more conservative view of how quickly you can ramp devices on that software.

Sandip Mukerjee: So what we have said, Bill, is that we expect revenues to ramp during this fiscal year. So that's the expectation I would like to leave you with, in terms of what's giving us confidence is the work we have done in getting to launch this product. This was a brand new area for TESSCO. We've done that, in working with select customers, and many of them to prove in how we onboard devices, what opportunities these solution creates for our customers that is behind us. So we've treated this as a startup, if you will, investing in product and working with customers. At the end of fiscal ’22. We’ve invested in a small sales team, right startups too. And we now have leads from the broader TESSCO lead organization, sales organization, and we are following up on sales, which we will do, and that effort will ramp through the year.

Bill Dezellem: Okay, so this next question is from my point of ignorance, is there a small office -- a small number of large VARs that you're working with? And that would create ramp this at a really steep pace? Or is it lots of smaller customers that you need to be attentive to? Because it just, I posed the question in the spirit that it seems if your integration is as easy as, as you described, that sets up for an opportunity for a very steep revenue ramp. And yet, well, I'm particularly if it's a small number of large customers that you'd be working with initially right out of the gates.

Sandip Mukerjee: Yes, given that our go-to-market is fast, which is software as a service, we certainly want to get to the latter vision that you put on the table, which is a large number of customers. But given how we have invested, especially in our sales organization, we begin with a set of select VARs, who have been trialing the product and helping them get to market.

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

Unidentified Analyst: Hi, thanks for taking my questions. This is Jesse on for Maggie. Can you talk more about the investments in the sales team? How has that progressed over time? And what are your plans?

Sandip Mukerjee: Hey, good morning, Jesse. Thanks for the question. Look, we want to, our focus is to grow our business. So we have focused on the carrier and commercial segment on what we have described as new business development, new business generation. So this is adding new logos, adding new customers and adding new regions for existing customers. And we have been able to do that with both improving our sales processes, our sales discipline, plus investing in the sales team. On the Ventev side, we have invested in direct sales resources across the country in different regions. And we're also working on using channels to get beyond our traditional footprint in the US into Latin America, Canada, et cetera. And then Finally Jessie as I said with the maturity of our SaaS product. And how receptive customers have been, we've taken the next step to create a small sales team to drive those sales efforts.

Unidentified Analyst: That's helpful. And then as my follow up, what or are there any specific value added services that are particularly resonating with clients? Especially as you talk about the supply environment not changing?

Sandip Mukerjee: Yes, from a broader perspective, Jesse, we are investing in more complete solutions, and stocking with respect to solutions, in order to support that, as part of the solutions we go to market with and help our particularly VAR customers, and some of the end users, we help them with solution design. So these are designed services. We've spoken in past quarters about our focus on tower, power and in building RF distribution, type of design services that we coupled with our product sales. And we have improved on that by adding Ventev, cables, antennas, power solutions, so that TESSCO can be the one stop shop as our customers go to market. So those are the types of services that we have monetized and driven through fiscal 2022. Moving forward into fiscal ‘23, the SaaS offering we talked about, think of it as another value added capability that we will attach to our solutions. Hope that answers your question, Jesse.

Operator: There are no further questions at this time. I will now turn the call back to management for their closing remarks.

Sandip Mukerjee: Thank you, Brent. And thanks again, everyone, for joining us today. We appreciate your support of TESSCO. And I also want to take this opportunity to thank the TESSCO team members for all of their hard work and their dedication. We look forward to speaking with you again next quarter. This concludes our earnings call. Have a nice day.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today's event. You may now disconnect.