TESSCO Technologies Incorporated

Q2 2022 Earnings Conference Call

10/28/2021

spk00: Ladies and gentlemen, thank you for standing by and welcome to the Q2 2022 Tesco Technologies, Inc. earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during a session, you will need to press star one on your telephone. Please be advised that today's conference may be recorded. If you require any further assistance, please press star zero. I will now let the HANA conference over to your speaker today, David Kalusian. Thank you. Please go ahead.
spk03: Good morning, everyone, and thank you for joining Tesco's Q2 Fiscal Year 2022 conference call. Joining me today are Sandeep Mukherjee, Tesco's President and Chief Executive Officer, and Eric Sputonik, 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 Tesco's results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in Tesco'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 Sandeep Mukherjee, Tesco's President and CEO. Sandeep, please go ahead.
spk02: 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 continued to make progress with our vendors 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, tesco.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 Tesco, 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. First, our two markets, carrier and commercial. Second, the three elements of our business, distribution, vendors, and software. And third, our performance on Tesco.com. Starting with our carrier business, as I mentioned, the second fiscal quarter marked another record for revenue. Carrier market revenue was up 44% year-over-year and 2% over the first quarter, which was our previous record quarter. Carrier market bookings were up 80% year-over-year. Our continued strength is due to our logistics, and supply chain management expertise, our proprietary engineering and production capabilities, and the successful execution of our business development initiatives. Within the Tier 1 carrier ecosystems, revenues this quarter grew 38% year-over-year. We achieved growth with existing customers and added new customers. We expect continued robust demand driven by C-band bills and alternative bill programs that are being launched. The strongest performance this quarter came from our tower business, with triple-digit year-over-year growth. We anticipate that our business will remain strong in Q3. Highlights include DAS power systems designs and strong DAS sales, as many sites reopened following the COVID shutdowns. We expect to expand our market share with these customers through new security and surveillance projects, as well as additional sales of steel for their tile construction. Regarding new business, we are seeing sales to the new customers we mentioned last quarter. And we will ship our first orders to one of the largest wireless carriers in the current third fiscal quarter. We expect that demand from this customer will continue to grow. We have also shipped product to the largest broadband company in the U.S. and expect demand from that customer to continue to grow over the coming quarters as well. 5G continues to be a key market driver in this space and currently represents about 25% of our carrier spend. Our business development efforts have been highly effective, enhancing our market share with existing customers and expanding the number of customers that we service. While demand from our carrier segment continues to grow, several key products remain highly constrained due to the supply chain disruptions. We are working closely with our customers to forecast demand and with our vendor partners to mitigate these challenges. Turning now to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem. The commercial market had its best revenue quarter in seven quarters. posting 5% sequential and 10% year-over-year growth. Sales bookings were up 16% year-over-year. The largest growth sector this quarter was again our VAR customers, up 10% sequentially and 29% year-over-year. This growth was driven by our sales focus on these VARs, continued lessening of the pandemic impact we described in prior quarters, and availability of inventory targeted and purchased for this sector. We are demand planning with our top VARs to better forecast product to meet their demand, especially given the current supply chain disruptions. Our progress in this area has shortened lead times and reduced our VAR customers' stock on hand. Many of our VAR customers have utilized our design services, and we are working with these customers to assist them with the necessary product purchases. Bookings have been strong, which should result in continued growth in the second half of the year. While revenues were down 8% year over year, our utility business is regaining momentum, and sales grew 19% sequentially. Bookings were also strong, growing 29% sequentially. We're now engaged with several customers in advanced planning for upcoming technology projects. We're seeing a demand for private LTE networks as a foundational wireless platform that utilities can use to consolidate technologies under one network. These initiatives require longer planning cycles, and we expect them to reach maturity in calendar 2022. Our solutions expertise and our line card put us in a very good position, especially with the recent supply relationships that we have announced. Replicating the model we established with utilities, we have created a new government team to build upon the success we've had with federal, state, and local governments, as well as government buyers. Turning now to the three key elements of our business, namely distribution, vendors, and software. Starting with our distribution business, we continue to win market share and develop new customer and manufacturer relationships. Our line card is now 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 CDRS slash private LTE. Our turnkey offerings, value-added services, including solution development and design, site kitting, and supply chain logistics, provide cost efficiencies for our customers, and reduce complexities for their deployment challenges. We're making progress with our IT infrastructure modernization projects, which we expect to largely complete by the end of this fiscal year. Once implemented, we will realize several enhancements. Some of these will include reduced freight in costs, improved delivery consolidation, streamlined inventory transfers, ability to proactively identify potential order delays, and streamline closing of financial statements. These enhancements will provide us with further cost efficiencies and make Tesco easier to do business with. The industry-wide supply chain challenges have meant extended lead times for many products and a growing order backlog. We have been addressing these issues on two key fronts. First, we have increased our forward-looking demand planning with customers, which has resulted in many of our customers providing us with purchase orders earlier than they had in the past. Second, we have worked very closely with our vendor partners to address supply availability and price increases. And as a result, we create opportunities for ourselves to make educated purchases of constrained inventory. to help our customers and protect Tesco's margins. Despite the headwinds, we will remain focused on our business development efforts to drive growth in our markets while continuing to drive efficiencies throughout our company. Also, we will work closely with our customers and our suppliers to mitigate supply disruptions and inflationary pressures with a goal of improved profitability. Regarding our ventures business, Bookings grew 17% year-over-year, totaling the highest we have ever achieved. Sales were flat sequentially and year-over-year due to supply chain issues. Included in our bookings and revenues this quarter are custom enclosures and power solutions purchased by VARS to provide fiber aggregation solutions for 5G. While the end customers are the larger nationwide carriers, this business unlocks a new revenue stream for our commercial market driven by 5G deployments. We believe this business will grow and help both our carrier and commercial results in future quarters. Other innovations from Ventus this quarter include a variety of enclosures, cabinets, and power solutions, all developed using the productization focus we embarked on 18 months ago when we launched our three pillar strategy. And as the bookings demonstrate, These innovations have been well received by customers from many verticals, including clean energy, federal agencies, warehouse operators, and universities, to name a few. Our focus and strategy is to ensure attachment of ventive products with LMR slash two-way, public safety DAS, and small cell solutions, which improve both margins and customer satisfaction. Regarding our software business, as we mentioned last quarter, our device monitoring and alerting service met generally available or GA milestone and is now in production. We now have a number of customers using this platform, and we are in commercial discussions to help them scale and include this capability as part of their own go-to-market strategies. Additionally, as a sign of industry acknowledgement, we have OEMs. using our device monitoring capabilities to showcase their own products as well. While we expect initial revenues this fiscal year, as we have said before, these revenues will ramp in fiscal 2023. Lastly, in terms of our sales channels, Tesco sells both directly and online through Tesco.com. Our continued focus on Tesco.com resulted in an increase in the number of buying customers, the number of repeat customers, and the size of orders we have seen this past quarter. Sales on Tesco.com generally come at higher margins and are more cost efficient to process. In Q2, revenue increased 12% sequentially and 18% year-over-year, totaling $11 million. Engagements measured by product page views increased by 280% year over year. We're very excited about our progress and the results we have achieved. With that, let me turn it over to Eric for his financial summary for this past quarter.
spk04: Thank you, Sandeep, 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 Sandeep 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 percent of revenue for the second quarter of fiscal 2022, compared with 19.3 percent 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 in 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. The 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 FY22 or into early FY23. 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, number one, achieving between $408 and $442 million in full-year revenue. Number two, achieving full-year adjusted EBITDA of between break-even to $2.4 million. And third, a full-year net loss of between $6.4 million to $4.1 million. We continue to improve our results both sequentially and year over year, and I am very excited about their direction we're heading in. With that, I will turn the call back over to Sandeep.
spk02: Thank you, Eric. 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 venters, is at historically high levels. And our Tesco.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.
spk00: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound or hash key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Maggie Nolan with William Blair. Your line is open.
spk05: This is Ted on for Maggie. Great results. Just wanted to see kind of what is your level of visibility, 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?
spk04: Morning, Ted. So good question. On the revenue side, I think we have visibility into the full year. 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. you know, we're not going to get too much into what exactly needs to happen to be low to high, but, you know, we think we're in a good position to at least be at the low end of all of those ranges.
spk02: Just to reaffirm, and good morning, Ted, and thanks for the question. As both Eric and I said on the call, you know, we both believe that we are well positioned, you know, to meet that guidance. From a revenue and bookings perspective, as you heard us on the call, you know, we are far more bullish than The supply chain issues, I mean, the team is navigating very well, and we will continue to navigate. So, you know, we think we're very well positioned to be in that zone.
spk05: All right, great. Thanks. That's helpful. My second question is regarding kind of the supply chain there. So, Sandeep, you mentioned that clients are doing purchase orders earlier with you guys. How has the state of the supply chain changed client behavior and the conversations that sales is having with clients?
spk02: Yeah, 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. You know, the one I like is customer intimacy. So we're 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, not years into the future, but a couple of quarters into the future than otherwise people would have placed.
spk05: All right, great. That's helpful. Maybe just kind of a quick follow-up there. How has the size and scope of projects and purchase orders evolved over the last several quarters? Are you seeing any change in the average size of orders?
spk02: Well, let me come at this from, you know, three different data points. So on the carrier side, I mean, the 5G bills are intensifying. You know, 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're seeing bigger orders there. And then finally, from Tesco.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 tesco.com. It's more of a Tesco internal thing as opposed to a market issue, but I think it gives you flavor across the board for the question you're asking. All right, great.
spk05: Thanks for taking our questions. Thank you, Tesco.
spk00: Again, as a reminder, if you would like to ask a question, please press star 1 on your telephone keypad. Again, that's star 1. Your next question comes from the line of Bill DeZellum with Titan Capital. Your line is open.
spk01: Thank you. 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, you know, 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, etc.? Or is there something else going on there that's more insightful?
spk04: Good morning, Bill. 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 in 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.
spk01: And then do you kind of carry 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?
spk02: 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 placing orders into the future, as we discussed with the last question. So when would they be ready to receive product? That's a little bit of a question mark. However, I'll give you the following bit of color. Historically, our backlog has been between 10 to 20 million. You know, over the first half of this year, you know, 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.
spk01: That is helpful. Thank you. And then let me shift to Tesco.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 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?
spk02: Thank you. I would share with you the excitement we have internally, you know, not just with that stat, but overall. And you are correct. You know, 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 tesco.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.
spk01: Great. Thanks for the time.
spk00: I will now turn the call back over to management for closing remarks.
spk02: Thank you, operator. And thanks again, everyone, for joining us today. We appreciate your support of TESCO. 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.
spk00: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer

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