Blonder Tongue Laboratories, Inc.

Q3 2021 Earnings Conference Call

10/22/2021

spk02: Good morning, ladies and gentlemen, and welcome to the Blondertongue Laboratory's third quarter 2021 earnings call. At this time, all participants are in a listen-only mode, and the floor will be open for your questions and comments following the presentation. It is now my pleasure to turn the floor over to your host, Ted Grau. Sir, the floor is yours.
spk06: Thank you. Hi, everybody. Good morning, and thank you for joining us and participating in our 2021 third quarter and first nine months earnings call. I'm Ted Grau, Chief Executive Officer and President of the company. As we give our remarks this morning, we will be discussing certain subjects that will contain forward-looking statements, including management's view of our prospects and the evolving trends in the market. As you know, the future is all but impossible to predict, so I caution you that actual results may differ materially from those that may be projected in our comments. We would ask you to refer to our prior SEC filings, including our Form 10-K for 2019 and 2020, and our filed 10-Q forms for each quarter of 2020, and for the first and second quarters of 2021, and our upcoming 10-Q for the third quarter of 2021. Each of those filings include additional detailed information concerning factors that could cause actual results to differ from the information discussed this morning. With me today are Stephen Shea, Chairman of the Board for Blondertongue Laboratories, and Eric Skolnick, our Chief Financial Officer and Senior Vice President. Eric's remarks will follow mine and will cover our detailed financial results. All of us will be available to answer questions you may have during a Q&A session immediately following our prepared remarks. Overall sales for the third quarter increased slightly by $1,000 to 4.172 million from 4.171 million in the third quarter of 2020. This yielded a net loss of $201,000 for the quarter compared with a net loss of 1.787 million for the third quarter of 2020 last year. Despite this quarterly loss, the fundamental change from one year ago is the product mix being sold and the expanded customer base of the company. Overall, we made strong progress in the third quarter on several fronts. First, we've had strong sales growth of our newer high technology products. This has yield higher margins on a large portion of our sales. Those include our video encoding, transcoding, digital video transmission, video security, and video signal processing product lines, such as our NXG, our Clearview and our AirCaster product lines. Second, on the sales front, we've performed very well in the quarter turning a number of customer relationships into longer term, more consistent supply arrangements. And we greatly increased our bookings and multi-month product backlog in the process of doing that. Additionally, we've had a couple of significant product design wins at major service operator accounts that have yielded bookings last quarter during Q3 for delivery in Q4 and Q1 2022. And these design wins also have the possibility of yielding some longer term sales. The overall sales performance and slow but steady market recovery are providing us with current optimism in increasing sales for future quarters. Third, we've been able to maintain the gains that we made in 2020 in terms of lowering our overall operating expenses while at the same time continuing to invest in the company's long tradition of engineering and R&D. We've continued to release a number of new products and product enhancements this year, including during the third quarter. On the negative side, like most companies in the electronics industry worldwide, we are starting to see some operational impacts from the global supply chain situation. In our case, we experienced a very specific short-term semiconductor disruption late in the quarter of Q3. This disruption and the related increase in the cost of some semiconductors had a material adverse impact on the results of operations for the quarter. The unexpected increase in material costs negatively affected our margins and delays in obtaining a portion of our semiconductor supply resulted in delayed product shipments of several products by as much as a month. Based on negotiations with and the agreement from several key customers, we've been able to successfully implement certain product price increases on the affected products that have offset our higher material costs. We were also able to resume full production of the products that were affected by the end of the quarter. Overall, as we enter the fourth quarter, the company is seeing growing bookings and a recovering telecommunications cable TV and fiber optic technology marketplace. But at the same time, we are seeing a tightening of the supply chain situation on a range of semiconductor and other electronics components. During Q3 and even earlier, we have been compensating for these challenges by performing longer look ahead planning on our manufacturing jobs. Right now, it appears that disruptions in supply chain will continue to provide us and many other companies with challenges into 2022. Now, I would like to pass things over to Eric Skolnick, our Chief Financial Officer, to cover our detailed financial results. Eric.
spk05: Thanks, Ted. Blunder Tongue Laboratories net sales increased $1,000 or 0.02% to $4,172,000 for the third quarter of 2021 from $4,171,000 for the comparable period in 2020. Net loss for the three months ended September 30, 2021, was a loss of $201,000, or a two-cent loss per diluted share, compared to a net loss of $1,787,000, or a diluted loss of 18 cents per share for the comparable period in 2020. The third quarter included an increase in sales of IP video transcoder products and next-gen IP digital video processing products, offset by a decrease in sales of analog video head end products, consumer premise equipment CPE products, and hybrid fiber coax, HFC, distribution products. Sales of transcroter products were $1,732,000 and $543,000. Next gen products were $420,000 and $89,000. Analog video head end products were $176,000 and $323,000. CPE products were $113,000 and $1,379,000, and HFC distribution products were $404,000 and $599,000 for the third three months of 2021 and 2020, respectively. For the nine months ended September 30, 2021, net sales decreased $291,000, or 2.4%, to $11,761,000 in 2021, from $12,052,000 for the comparable period in 2020. Net income for the nine months ended September 30th, 2021 was $1,011,000 or eight cents per diluted share compared to a net loss of $5,061,000 or a 52 cent loss per diluted share for the comparable period in 2020. Net income for the nine months ended September 30th, 2021 included $1,769,000 worth, which is related to a gain on our debt forgiveness of the company's PPP loan, and $1,804,000 of other income related to the employee retention tax credit. Net cash used in operating activities was $627,000 for the first nine months of 2021, compared to net cash used in operating activities of $2,000,000 $149,000 for the comparable period of 2020. The decrease in sales for the nine months is primarily attributable to a decrease in sales of DOCSIS data products, digital video head-end products, HFC distribution products, CPE products, and analog video head-end products, offset by an increase in sales of video transcoder products and NXG products. Sales of DOCSIS data products were $681,000 and $1,807,000. Digital video head end products were $2,348,000 and $2,603,000. HFC distribution products were $1,327,000 and $1,769,000. CPE products were $1,096,000 and $3,051,000. Analog video head end products were $657,000 and $838,000. Transcoder products were $3,805,000 and $937,000. And NXG products were $1,311,000 and $570,000 in the first nine months of 2021 and 2020, respectively. The company expects bookings of transcoded products to remain healthy as market exposure to and acceptance of those products continues. The company expects sales of CPE products to continue to trend lower than in prior periods as the company, consistent with its business plan, transitions these products into a higher margin but lower revenue services, fulfillment, and support business model, and works to promote an expanded array of distribution, content delivery, and processing technologies to those service provider customers. The company's primary sources of liquidity have been its existing cash balances, cash generated from operations, amounts available under its revolving credit facility, which is the mid-cap facility, amounts available under the subordinated loan facility, and cash generated from sales from its common stock, as well as funds made available to the company through participation in several federal government financial assistance programs, implemented pursuant to the Coronavirus Aid Relief and Economic Security Act, including the Paycheck Protection Program and the Employee Retention Tax Credit. At September 30, 2021, the company had $516,000 available under the MidCap facility. As disclosed in the company's 2020 Annual Report on Form 10-K last year, the company experienced a decline in sales, a reduction in working capital, a loss from operations, and net cash used in operating activities in conjunction with liquidity constraints. These factors raise substantial doubt about the company's ability to continue as a going concern. Certain of the above factors still exist. Accordingly, there still exists substantial doubt about the company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability of the recorded assets or the classification of the liabilities that might be necessary should the company be unable to continue as a going concern. Now I would like to open up the call to the question and answer session.
spk02: Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star 1 on your phone now. We ask that while posing your question, you please pick up your handset if listening on speakerphone to provide optimum sound quality. Once again, if you have any questions or comments, please press star 1 on your phone now. Please hold a moment while we poll for questions. Your first question is coming from George Gasper. Your line is live.
spk01: Yes. Good morning. Quite frankly, the report looks pretty good. My question relates to the product line shift that's underway at Blondertongue. And can you give us some comparison as to The size of the markets that you're entering into versus the size of the markets that you're coming out of. I know that might be very difficult to answer, but I think it's important to get an idea that the product areas that you're moving into have reasonably broad markets. Can you get into that?
spk06: I can talk at a high level on the question. I think when it gets into details, I think it's a very, it's a little bit of a murky field in terms of nailing down specific numbers in terms of TAMs. What I can say is that the transcoder, the video transcoder, video encoding business appears very healthy to us the market appears very healthy to us it's growing from the segments that we're going after we're going after segments that we were not directly had significant market share in in the past so that they are there are markets that had you know they're much larger markets than the the small percentages that we played in in the past We're making some headway there in gaining share for sure. You know, how much larger they are beyond where we're at. I mean, we certainly know that there's a lot of growth. There's a lot of service operators that are not our customers today that we are actively going after. But I would hesitate to give you any hard numbers. We do know it's a much larger market than the portion that we're currently winning in.
spk01: Well, what's impressive is the transition that you have going. It's very significant how you have moved and the contraction of the previous markets that you were in. Is the problem of getting components similar in nature as a problem? In other words, the products that you're moving into versus where you come from, are the problems in the industry pretty much common throughout the whole area or do they have more, there's more problems in the transcoder area that you're going into?
spk06: No, we don't see that any particular segment of technology is seeing any particular problem with the supply chain. It's really a broad problem. It's a problem of some of the materials that are used by the semiconductor manufacturers in their building different products. And it is a broad problem across small and large suppliers. in the industry. It is an amazing situation. So I don't think that our, I don't think, to sort of paraphrase your question, we're not specifically seeing a problem because we're in a big focus on growing our encoder and transcoder business. We would be seeing this across the board. Now, in both the press release and in my spoken comments earlier in the call, we pointed out a very specific situation that happened in Q3 that was related to a specific supplier. So one of the things, and I've mentioned this on I think the last two quarterly calls, we've held up, we believe we've held up incredibly well through supply chain disruptions that started earlier in the year and where we had been hearing third hand from some of our customers that that some of our competitors had been quoting things like four, five, six, and seven month lead times on products, we were within our normal two to four to six week kind of timeframes across the board. We were holding up incredibly well. The one thing that happened in the middle of Q3 really came out of left field because it was on products that had been ordered over a year ago had been confirmed as having monthly delivery dates on specific dates through the quarter and all through Q4 and came with basically one week's notice. We had a specific supplier call us up one week before delivery was supposed to be arriving on our doorstep and say, there aren't any chips. And by the way, our costs are going up dramatically to produce these chips. So let's work out how we can continue the supply to go. So it took quite a lot of activity to whip that specific situation back into shape. And then following the resumption of production, we had to run around and and the sales teams had to go to every affected customer where we're not just going to absorb these dramatic price increases and take the entire hit on our margins. We were successful at passing that along to the customer. Thankfully, we have great loyal customer base and just a great set of relationships with our customers. So although that was not an easy situation, it was successful in the end. What we don't know, I still feel like we're holding up better than others, but we are seeing a wider range of smaller parts becoming harder to get. We're still successful. Overall, our production lines are still up and running at full capacity right now, but we're nervous. I think the news indicates that we should be nervous and we should be doing everything in our power to find ways to mitigate any risk in the supply chain area, and we're doing that.
spk01: Just in sum, it was interesting the way you reviewed the ability to get your customers to come through and start lifting off and supporting some of the cost increases that you've run into And obviously they're anxious to get the product. And so I assume that's got a lot to do with your ability to get them to raise the prices versus what they were expecting to pay previously. Is that correct?
spk06: That is correct. But it also, you know, another tool was, you know, we made assurances that as soon as the costs of our production go down, we're going to be resuming production. you know, we're not going to be taking advantage of this long term. So it's a little bit of a two-way direction in terms of trust. Yeah, I think I'll just leave it at that.
spk01: Okay. All right. Well, in just summation from here, it's pretty exciting to see what you have accomplished in the nine months of this year. And I think it goes a long way with suggesting that You're not too far away from moving from the deficit side to the profit side at the bottom line here. I would hope that we're not too far away on that. Thank you.
spk06: Sure, and I do want to point out that I certainly did not want to have this call reporting yet another loss. for the quarter, and I do believe that if it weren't for these specific supply chain issues, we'd be having more positive numbers to show today. Right.
spk01: Thank you.
spk06: You're welcome. Thanks for the question.
spk02: Your next question is coming from Gregory Urban. Your line is live.
spk03: Good morning, guys. Hi, Greg. And congrats in keeping the lights on. And in response to what you just said, it sounds like if you subtracted out the supply chain issues that two things would happen. Number one, given the change in the product mix, that the margins would be higher. and that the sales would be up to the point where for the first time in how long we'd have a positive quarter. Is my presumption there correct?
spk06: Well, I had certainly been working with Eric and the other management of the company to achieve that last quarter for sure, 100%. I was feeling very, very optimistic that we would have been able to get there We definitely hit some headwinds in the middle of the quarter and the end of the quarter that worked very strongly against us. To answer specifically on some of the specific elements of your question, absolutely the margins would have been significantly higher for the quarter if it hadn't been for that main supply chain issue and some other very smaller ones that aren't really material. It definitely impacted our margins in a big way for the quarter. No question about it. Would we have been profitable for the quarter if it hadn't been for those specific things? I think the strong likelihood would have been very high, but we don't want to peg, you know, without doing a very detailed analysis on exactly, you know, specific impacts, we don't want to sit here and say 100%, you know, one way or the other. We certainly would have been a lot more, The number would have been much better if it hadn't been for the situation. There's another element to what happened in Q3 in the supply chain disruption that also negatively impacted the margins, which is we had to literally shift production planning around every single week that we were running through these disruptions through the middle and the end of the quarter. And that meant we had to, we were able, sorry, we had to run smaller batch sizes on different products, which, as you can imagine, works against you in terms of efficiency. It puts more labor on a per-unit basis. It's all the things you don't want to do when you run a factory. But we were forced into that because when you can't get parts to build what you're supposed to build in a certain quantity, then you make the adaptation and you shift. And we did what we needed to do. But that was the other, it wasn't just, so when you see the margin numbers, it wasn't 100% of those lower numbers are not all from material costs. It was the fact that we also had to run smaller batch sizes on other products to compensate and keep the line running. And that negatively affects the margins because of the labor content.
spk03: Thanks for that explanation, but overall, it looks like comparing Q3 to Q2 of this year, margins were only down a little over 1%, so it wasn't a tremendous decline.
spk06: Okay, I don't have those numbers exactly in front of me, but on the affected products... On the most affected products, so on a blended basis, I'm not going to say you're wrong because you probably have the numbers in front of you and I don't. But what I was alluding to before was that for the most affected products, there was a much more substantial product margin impact on those particular products for the quarter. Now when you blend them in with everything else we build, maybe it didn't have such a big impact. But I know we would have had a much more substantial impact profit on those products if we hadn't been disrupted.
spk03: Again, subtracting out, supposing we could subtract out the supply chain issues, give us any idea what your overall margin target is across all product lines?
spk06: Yeah, I don't think we should give you a particular number. I know that, you know, I would personally like us to be four or five points better than we've been, you know, running the last few months. And I think we have a path to get there if the supply chain issues don't. Let me say it a different way. If it weren't for these supply chain issues, I think there's a very clear path for us to getting three, four points better than we've been running the last few months. Sorry, the last few quarters.
spk03: Okay. Well, thanks for that. That sounds good to my ears.
spk06: I'd certainly like bigger numbers than that, but I want to be a little bit conservative on this.
spk03: And I missed it. Eric, do you have the cash flow from operations for Q3?
spk05: Sure. Obviously, we don't report that, but I can tell you what it is. For Q3, our cash flow used in operating activities was $753,000 for just the quarter alone. That compares to $120,000 for Q3 of 2020 used in operating activities. Okay.
spk03: And it looks like we're still in good standing with mid-cap. Yes.
spk06: Very much so, yes.
spk03: Okay, well, I saw that you had the Fifth Amendment, and I assume it was related to supply chain. You had the issuance of the one promissory note. Correct, yes. Well, it was good that you were able to obtain that, but I guess depending on supply chain issues, there will be further negotiations there. anticipated in that area. Let's see what else. Overall, things sound like they're improving with the relationships, the product mix available to address your new markets. And it's good that you were able to resolve the supply chain issue that was apparent at the end of the quarter. I appreciate what you've said already regarding the supply chain, but you're still anxious. So that sounds like that's going to be the major factor overhanging future operations, correct?
spk06: for the foreseeable future, I would totally agree with that. And what's challenging is just as we felt like we were really feeling great about the sales situation and the bookings have been really fantastic the last three to four, five months, and they continue, now the challenge has sort of shifted unexpectedly to you know producing the things that have been booked right so it's and keeping the flow and keeping the factory at capacity so that we have the efficiencies that yield the margins that we'd like to be to be getting so yes that that is the that that looks to be the major headwind for the next three months six months kind of time frame beyond that it's hard to say but
spk03: It's got to be a frustrating feeling when you've got this one entity between you and the goal line.
spk06: Yes, you're absolutely right, Greg.
spk03: And finally, any feedback, anything from the exchanges about the potential listing problem?
spk06: Well, we continue to file quarterly updates with the NYSC American, but Eric, I think you wanted to touch on that.
spk05: Yes, we would owe them another quarterly update after we file the queue. The last time we had conversations with them was pretty much they accepted our revised plan and we're still doing our best to make compliance by December 10th.
spk03: Thanks, guys. Overall, I agree with George's, you know, it sounds positive, but nonetheless frustrating. So keep up the good work. Hopefully keep your spirits up as you go along.
spk06: Thank you very much, Greg. We really appreciate your calls every quarter.
spk03: Thank you.
spk02: Your next question is coming from David Kuhl. Your line is live.
spk04: Hi, thank you. A while back, I don't know if it was the last quarter or two quarters ago, you mentioned some development with Dash for doing some streaming. I was wondering if that was still in progress and how it's going and how long it would be before there's an MVP or minimum viable product available. No.
spk06: Yeah, so we have prototypes of that product already sitting with a number of operators. It is past the MVP product stage. We've got feature complete and we are actually winning some sales. They're small initially. We expect that to grow. So the product is basically ready and it's sitting both in long-term QA in our lab, but also sitting at more than five service operators around the country, approaching 10 at this point, some of which have already started to purchase the product.
spk04: Oh, nice. Yep. So what kind of content is being streamed?
spk06: So the way you should visualize this is a lot of service operators have been moving their fundamental distribution technologies to a sort of over-the-top style distribution, even if they themselves are not providing that content over the top like a Netflix-style service offering, they'll still use the same kinds of technologies like MPEG-DASH or HLS to route their content around their own private networks, right? So as those operators make that fundamental architectural change in the way they distribute video, the equipment that we create and produce and sell to the market has to follow that arc of technology transition. So those operators that have made the full transition to IP television style technologies for their residential services, they also need technologies like ours to grab those signals and process them and provide them to different types of needs like MDUs, like B2B interfaces, like head-end distribution equipment, scrambling equipment, content protection equipment. So that's where we're applying MPEG-DASH and HLS and some other technologies.
spk04: Okay. Sorry, I didn't mean to interrupt, but let me just see if I could summarize that. So it sounds like the application is to be used by other companies to stream their content to their customers or their internal people.
spk06: That's correct.
spk04: Okay. Can you talk about the pricing model on that and – we expect that to go? Would it just be for current customers or is it for something anybody could use without your hardware?
spk06: Oh, I see what you're saying. No, today the current model is that we provide that those technologies will be riding on top of our own hardware. We will enhance the The business model by all those products with the latest technology require service level agreements. So we will have a recurring element to the revenue stream with those products because they need maintenance. New feature sets, new elements to the standard come up and they need some firmware updates and software updates. So that's how we enforce an SLA element onto that revenue model. So it is an overall better revenue model when we win those deals, and we're starting to see an uptick in our SLA percentages for sure.
spk04: Okay, great. Thank you. Yeah, you're welcome.
spk02: We have no further questions from the lines this time. I would now like to turn the floor back to Ted Grau for closing remarks.
spk06: Great. Thank you all for listening, and... We look forward to hearing from everybody next quarter, and we appreciate everybody's time this morning. Thank you.
spk02: Thank you, ladies and gentlemen. This concludes today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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