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spk03: Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to remind everyone to the Tesco Technologies, Inc. 3rd Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question, simply press star, followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again, press star 1. Thank you. David Kaluzdian from Sharon Merrill, you may begin your conference.
spk04: Good morning, everyone, and thank you for joining Tesco's Q3 fiscal year 2022 conference call.
spk06: 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 a number of risks and uncertainties, and Tesco's results may differ materially from those discussed today. Information containing 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. Please go ahead.
spk05: Thank you, David, and good morning, everyone. Thank you for joining us. Our positive momentum continued in this third quarter. Revenue and bookings were up 3% and 7% respectively year over year. And our backlog grew to a new record of $68 million, which is up $34 million since the end of fiscal 2021. All of this demonstrates the growing demand for our products and services, along with the success of our sales and business development improvements. We also drove strong increases in our margins, with gross profit up 13% year over year, while our diligent cost management resulted in an improvement in operating income and adjusted EBITDA of over $6 million. This also marked the fourth consecutive quarter of sequential increases in adjusted EBITDA, which ended the quarter at a positive $1 million. These results are particularly impressive given the backdrop of industry-wide supply chain issues and inflationary pressures, which have contributed to product delays and increased freight costs. These challenges do not show signs of easing in the near term, but we continue to work with our customers and suppliers to mitigate their operational impact as we move forward with our strategic initiatives and turnaround efforts. The market is growing, our customers are bullish, We're seeing a robust uptick in demand, and our results are improving. I will now walk you through the results and highlights of this past quarter in the following format. First, our two markets, carrier and commercial. Second, the three key elements of our business, namely distribution, inventive, and software. And third, our performance on tesco.com. Starting with our carrier business, Q3 marked another strong quarter for revenue in this market. Q3 revenues were up 1% year over year and up 19% for the first nine months of the fiscal year. Backlog at the end of Q3 was $33 million, up 10% over Q2 and up 83% since the beginning of this fiscal year. Also, the third quarter was a record for gross profit, which increased 15% year over year and 36% year to date. Our continued growth is due to our logistics and supply chain management expertise, our proprietary engineering and production capabilities, our carrier-specific knowledge, and our business development efforts. The strongest growth in this market was from our contractors and tower owners. Contractor revenue was up 32% year over year, while tower owner revenue was up 11%. Looking ahead, Tower owners are telling us that they expect calendar 2022 to be a strong year for DAS installations. We're also expanding our tower solutions portfolio to include steel, security, and surveillance material. On our last earnings call, I discussed a number of new strategic customers, including one of the largest wireless carriers and the largest broadband company in the US. As expected, We began shipping to these new customers in the third quarter and expect increased demand from them throughout the calendar year. 5G continues to be a key market driver in this space and represents about 25% of our carrier spend. Our business development efforts have been highly effective, raising our market share with existing customers and expanding the number of customers we serve. As a result, we have a more diversified customer base with less revenue concentration in this market than ever before. Turning now to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem. In the third quarter, commercial revenue was up 5% year-over-year and up 6% for the first nine months of the fiscal year. Gross profit increased 13% year-over-year and 10% year-to-date. Bookings grew 9% sequentially and 18% year over year, while backlog grew 40% sequentially, up to $35 million, and was up 119% since the beginning of this fiscal year. Our utility segment had a strong quarter, up 32% sequentially. This growth was driven by increased broadband radio sales and IoT projects, where utilities were engaged in grid modernization. Utilities have some of the largest corporate fleets, and we have been selling equipment for fleet upgrades. We continue to see demand for private LTE networks as a foundational wireless platform that utilities can use to consolidate technologies under one network. We expect this to be a key driver for the remainder of this fiscal year and throughout calendar 2022. Furthermore, We're seeing positive results through our Nokia Global Partner Program relationship and already have over $2 million in registered projects in the pipeline. Turning to VARs, our VAR business grew 11% year over year. Much of that growth came from large hospitals and venues that are part of the AT&T Enhanced In-Building, or EIB, program. A number of other VAR customers completed projects in the third quarter across many industry verticals, including a multinational transportation company, a global online business and cloud computing company, a rapid transit system serving one of the largest metropolitan areas in the US, and the largest bakery company in the US. Sales to transportation companies grew 32% year over year and 66% sequentially. We are serving customers that are upgrading their wireless networks for example, by placing communications-based controls on trains. With ridership now beginning to recover after a long downturn, transportation companies are again investing to improve safety and enhance the commuter experience. I will now turn to the three elements of our business, namely distribution, vendors, and software, starting with our distribution business, where our goal for this year has been to grow market share, enhance our product and service offerings, and improve efficiencies throughout the organization. Our revenue and bookings growth, especially in the carrier market, demonstrates that we are indeed growing market share. Secondly, we continue to add strategic brands to ensure that we provide the most comprehensive product portfolio. This quarter, we added Uniden, which provides boosters that will help us simplify deployments in the public safety and commercial task space. We also added Council Rock, whose Anterix certification helps us provide IoT solutions for our industrial customer segments. And we added SolidRF, which provides access to fiber DAS product lines. Additionally, we're making progress on our cost efficiencies, as evidenced by our significant reduction in SG&A as a percentage of revenues, which totaled 18.9% this quarter compared to 23.8% in the year-ago period. Our efforts to improve profitability resulted in gross margin of 19.1% this quarter compared to 17.4% for the third quarter of last year. This was largely due to a favorable customer and product mix and was driven by a 23% increase in inventive revenues. Furthermore, We expect to largely complete our IT modernization over the next few months. As we have discussed before, this effort will provide us with significant cost efficiencies over time and will make Tesco even easier to do business with. Regarding our Ventus business, we had record sales this quarter, totaling $8.8 million. This represented sequential growth of 9% and year-over-year growth of 23%. Additionally, this was the fifth consecutive quarter of revenue growth. Ventus bookings grew 39% year-over-year and are the highest we have ever achieved. We were able to do all of this while maintaining our margin performance. In Q3, we had several new business wins, including providing product solutions to increase connectivity for vehicle production lines at the world's most valuable automaker. Outdoor wireless parking lot coverage for the largest tire retailer in the U.S. The continued rollout of multi-type distribution centers for the largest home improvement retailer. A Wi-Fi refresh utilizing our Meraki access points for a multi-billion dollar food distribution company. and maximizing AP coverage and performance for a multi-billion dollar global retailer with operations warehouses. This project used Cisco APs with customized Ventive antennas, requiring fewer access points to achieve the customer's coverage goals. This quarter, Ventive launched several new products, including support for additional APs for our universal handrail enclosure, integrated AP enclosure lines for hazardous environments, new antennas, including warehouse and concealed floor panel antennas, and new warehouse colocation mounts. Regarding our software business, as we announced in December, our device lifecycle management platform will be offered to our channel customers to provide them with a means to monetize device management and monitoring. This will enable them to provide additional services such as extended warranties, service level agreements, and more efficient field operations. During this quarter, we announced support for new BDAs on this platform from Comba and Westel to provide monitoring to the public safety sector, along with an agreement with Communications Electronics to incorporate device lifecycle management into their solutions for DAS projects. We recorded our first revenue from this business this past quarter. This is a significant milestone for Tesco and our strategy. However, as we have previously shared, we do not expect significant revenue this fiscal year, but we do expect to see revenues begin to ramp in our fiscal 2023. Moving on to our sales channels. As you know, Tesco sells both directly and online via Tesco.com. We continue to invest in Tesco.com to improve our customer service and order processing. We expect longer-term benefits to our profitability as sales on Tesco.com typically come with higher margin and are more cost efficient. In Q3, revenue from Tesco.com increased 3% year-over-year, totaling over $9.3 million. Engagements measured in product page views increased 160% year-over-year. We completed a number of enhancements this past quarter, including the launch of Intercom, an upgraded live chat experience, and an AI-based chatbot platform. In short, we're very excited about our progress on all of our strategic initiatives and the results we have achieved thus far. With that, let me turn it over to Eric for his financial summary.
spk01: Thank you, Sandy, and good morning, everyone. As a reminder, the income statement amounts that I will reference are all from continuing operations and exclude the significantly diminished activity from our former retail business. Third quarter revenues increased 3% year-over-year to $102.5 million, with growth in both our carrier and commercial markets. We achieved these results despite industry-wide disruptions in the global supply chain, which delayed receipt of inventory from vendors and limited our ability to ship product to customers. We also achieved year-over-year sales bookings growth of 7%. As Sandy mentioned, we had another record level of backlog at quarter end, totaling $68 million, doubling the amount since the beginning of the fiscal year. Gross profit was $19.6 million for the third quarter of fiscal 2022, compared with $17.3 million for the same quarter of fiscal 2021. Gross margin was 19.1% of revenues for the third quarter of fiscal 2022, compared with 17.4% in the second quarter of last year. largely due to pricing adjustments and a favorable customer and product mix, including a 23% increase in VENT of revenues. Gross margins in both the carrier and commercial markets continue to be ahead of last year's pace. We remain focused on cost management. SG&A expenses as a percentage of revenues continue to decline, totaling 18.9% this quarter, as compared to 23.8% in last year's third quarter. Last year's third quarter SG&A expenses as a percentage of revenues would have been 20.8%, excluding the costs associated with the consent solicitation. So still a very significant improvement. We achieved this reduction despite ongoing increases in freight expense caused by global supply chain disruptions. We continue to manage our IT and corporate expenses as we look to complete our IT modernization initiative in the next few months. Third quarter fiscal 2022 net income was $1.2 million compared with net loss of $5.7 million a year ago. In the third quarter, we recorded a benefit from income taxes of $1.1 million. This is related to a change in a tax accounting method related to the filing of our fiscal 2021 tax return. This return was filed last month and we now have over $7 million in receivables for taxes. We would expect to see those funds come in sometime in fiscal 2023. Adjusted EBITDA and adjusted EBITDA per share were $1 million and 11 cents respectively. This compares to adjusted EBITDA and adjusted EBITDA per share of a loss of $5.1 million and 58 cents respectively a year ago. Turning to the balance sheet. Product inventory decreased by nearly $6 million in the third quarter. as we have sold through much of the inventory that had spiked during Q1. We are remaining strategic in our overall inventory management in the face of persistent supply challenges. The balance on our line of credit decreased by approximately $7 million this quarter. Accounts receivable also decreased by almost $9 million. Cash flow from operations totaled $10.6 million this quarter. In early January, we announced steps we took to increase liquidity as we prepare for continued growth. Specifically, we entered into a mortgage on a Reno facility, resulting in a cash inflow of $6.5 million at a fixed interest rate of 3.38%. We also amended our line of credit, which, among other changes, increased the overall commitment from $75 million to $80 million. The net impact of these transactions is that we have improved our liquidity by over $14 million at a relatively low cost. While we don't expect to need this extra liquidity right away, we are looking ahead to make sure we have ample flexibility to execute on our growth plans and manage the current market environment. Our results continue to trend in the right direction, and I am pleased with how we are executing on our strategy. At the same time, the worsening supply chain disruptions are having an impact on our short-term results, and as such, we have updated our fiscal year 2022 business outlook to reflect our actual third quarter results and anticipated results for the fourth quarter. For fiscal 2022, we are now projecting revenue of $408 million to $425 million, which compares to $373 million in fiscal year 2021. a net loss of $5.5 million to $2.6 million, which compares to a net loss of $14.4 million in fiscal year 2021, and adjusted EBITDA of between a loss of $2.6 million to a profit of $0.4 million, which compares to a loss of $12.8 million in fiscal year 2021. With that, I will now turn the call back over to Cindy.
spk05: Thank you, Eric. To echo Eric's comments, On the business outlook, the supply chain issues have had a major impact on the projections we've made at the beginning of the year. With a normal supply chain environment, we are confident that our revenues would have been closer to the upper end of our original range we provided back in July. Our profitability would have been solidly within that original range as well. This is evident from our bookings growth and how our backlog has grown throughout the year. The Tesco team is fully focused on maximizing our results for this fiscal year. Before we start the Q&A, I'd like to reemphasize some of the key outcomes achieved during this quarter. We ended the quarter with $1 million in positive EBITDA and $1.2 million in net income. We grew revenue and bookings year over year by 3% and 7% respectively, in spite of the supply constraints. At the end of this third quarter, we had a record backlog of $68 million. Ventus had a record revenue and bookings quarter with record backlog. We improved our gross margin. Our cost management and efficiency efforts resulted in improved operating margins. And we continued to manage our cash well and gained additional liquidity through our new debt arrangements. Moreover, We also continue to make progress on all three pillars of our strategy, distribution, inventive, and software. The evidence of our turnaround has never been more apparent. With that, we will now open the call to questions.
spk03: At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Maggie Nolan from William Blair. Your line is open.
spk00: Hi. Thank you. Nice work on the expense initiative. I'm wondering what your kind of forward framework is for thinking about incremental operating margin dollars from incremental revenue.
spk01: Hey, Maggie. Good morning. So as we look ahead, obviously a couple different pieces of that from a margin standpoint, just a gross margin standpoint. We think where we are today is relatively close to where we'll be in the future. There's certainly some give and takes with product mix. And obviously Ventiv is a big driver of that as well. But then from an expense standpoint, we feel like the business is in very good shape, very able to scale with increased sales. revenues. We'll have some incremental things here or there as we continue to invest in the business, but we don't see any major changes in the upcoming years, I would say, or at least in the short-term period as far as a dramatic need to increase any expenses other than the variable expenses like freight and sales commissions and things like that that go along with incremental sales. So we do believe there's a lot of leverage in this business and scalability as we continue to grow the revenues.
spk00: Okay, thank you. And then on the guidance change, are you viewing this as a push out in demand? And as you think about changing your guidance and then where the backlog sits, how are you feeling about the setup going into fiscal 2023?
spk05: Hey, Maggie. This is Sandeep. Good morning. Let me take that. So we feel very good going into fiscal 2023. Let me comment on the backlog and the guidance. So first on the backlog, it's grown tremendously since the start of the year. We've doubled. So it's up to 68 million today. What is very evident is the predictability of how we retire the backlog. That is increasingly difficult. But the quality of our backlog is very good. We routinely stress test this. We've lost very, very, very little of the backlog. So it's stable. So that is going to hugely benefit us in the quarters going forward. From a guidance perspective, let me go with the backlog. With 68 million in backlog, if we could have retired just a third, of that backlog. That would have been an additional $20 million to our top line. At the margin performance we are demonstrating, that would have added approximately $3 million to our bottom line. However, that is hypothetical. We're going to try very hard to maximize this fiscal year, but it's very unpredictable and creates a very wide range as far as the guidance. So that's the comment on guidance. And then finally, in terms of future quarters and future years, this backlog is very beneficial to Tesco because we're very confident this will retire in upcoming quarters.
spk00: Thank you.
spk03: Again, if you would like to ask a question, it's star 1 on your telephone keypad. Your next question comes from the line of Bill Desolam from Taiton Capital.
spk04: Your line is open. Bill Deslin from Titan Capital, your line is open. My apologies.
spk02: I guess I can't manage my own mute button. So I'd like to pick up on the backlog, please. And normally I wouldn't ask questions that are theoretically this remedial, but I'd like to understand it better. Does Does the backlog indicate that you could have had 68 million more of revenues this quarter if the product was available, or does that backlog really split into two components? One, future projects that you will be completing, and then those projects that would be immediately available for completion if you had the product available.
spk05: Hey, good early morning to you, Bill. So it is a mix of both. Our customers, just driven by the supply chain realities, they're doing project planning on a longer horizon. So we do have what we call future-to-ship orders. However, a preponderance of our backlog, it falls into the first category that you described, that if we had product, we could ship and our customers would be able to consume it.
spk02: Okay, that is helpful. Would you care to give us the rough split, two-thirds, one-third, whatever it may be?
spk01: It certainly varies, obviously, all the time, Bill, but the two-thirds, one-third might be in the ballpark. It's hard for us to give you an exact number sitting here today, but I think that's a reasonable back-of-the-envelope estimate of what it would be.
spk05: And just to give some color to why it's difficult to pin down that number, I mean, the nature of the supply chain issues and the hunger for product is such that our customers will absolutely, those who have warehouse capabilities, if we have product, they would keep it and hold on to it just to de-risk their business going forward.
spk02: Right. And presumably in each of the prior quarters, you also had a split, but a meaningful portion of your backlog could have been shipped in those quarters had you had the product available.
spk05: Correct.
spk04: Okay, so...
spk02: I guess congratulations and what a challenge. So maybe let's kind of segue that into inventories. Inventories were down, which normally we think of as a favorable phenomenon. But in this environment, it seems like more inventory would be better. But I suspect that part of the reason your inventory was down was strong demand. So can you kind of tie together inventories how you're thinking about inventory and particularly that proportion of the backlog that would be immediately shippable if you had if you had the product it's the first of one remark related to your previous question just to help with your question on inventory what used to be a six-week cycle in terms of
spk05: issuing a purchase order for a product to actually being able to ship the product has become many months, almost six months still. So if you could keep that in mind as I go through and try and answer the rest of your question. So related to inventory, there's three things. There's the backlog. There's the completion of SKUs that we would need to push out. a product or a solution to a customer, and there's actual sales. So what I'm adding to your question is we are shipping product, generating revenue, and growing year over year. So a portion of our inventory goes towards that as well. The remaining is backlog and inventory that is waiting for components to come in to Tesco so that we can ship complete solutions to our customers. Now, in terms of looking forward, certainly the supply chain product availability affects our inventory. We might see a little bit of an uptick in the upcoming quarter, but we don't expect this to largely have much volatility.
spk01: Eric, anything you want to add to what I said? Just to reinforce that, I think we would like to have a little bit more inventory than what we had. I think I even said that last quarter that we expected inventory to be slightly ahead this quarter. That tells you where the supply chain is that we couldn't even keep up to that level. We certainly would have more inventory if it was available. That statement still holds true that we would like to be slightly higher than where we are today, not where we were at the beginning of the fiscal year, but definitely higher than where we are today.
spk02: Great. Thank you both. So continuing just a little bit more, if I may, on the inventory and backlog, you mentioned that your customers are planning further ahead and giving you orders with longer lead times. Is that indicative of supply chain issues and that they are simply themselves trying to get ahead of that so that you can order and for product that has a longer lead time, you have that or is there some other aspect to that that we're not thinking about?
spk05: The one other aspect, Bill, I would add is our own market share growth. We are doing business with more customers than we did before. So our demand is growing, which is adding to this quote-unquote problem, but the net to Tesco is positive because our bookings are growing, the quality of the backlog is very good, the supply chain issues are not just restricted to Tesco, it's an industry-wide phenomenon, and we are confident we'll retire the backlog in upcoming quarters.
spk02: That's great. Okay, I'm going to change topics entirely. Inflation. How much inflation are you experiencing? And in general, is inflation actually good for you because you take your margin on the same margin percent but on a higher dollar amount, which means your gross profit dollars would be higher?
spk05: Okay, so inflation, you know, touches us in many ways. There's labor, there's freight, and there's product. On the labor side, we are working to make Tesco a better place. So employees stay with us, feel good about being part of Tesco, and we're managing well through it. On the freight aspect, we have gone and looked at how what kind of freight discounts we give our customers, what kind of delivery guarantees we give our customers. And we have come up with a very good algorithm and a value prop for our customers that helps us manage freight out costs. That has been a net positive for us at Tesco. And from a product inflation or product price increase perspective, we're very diligently ensuring that we don't leave money on the table, we don't lose money, and we pass on the price increases towards our customers. And from an overall industry perspective, this inflationary dynamic that you are describing is well understood and well received. So we are being successful with our efforts. We've also done work overall in improving our gross margins. which is a result not just of the price effects we just discussed now, but our overall solution mix. We are diligently, as per our strategy, adding more Ventive to our solutions. You've seen an uptake of 23% year-over-year in Ventive performance. So the net solution that we push to our customers, that we ship to our customers, is more appreciative to Tesco. With 11% increase in revenues, our margins have actually increased 16%. So hopefully that gives you full color on what we are seeing, Bill.
spk02: Great. And I'll actually take your answer to lead to the next question, specifically Ventev. Would you talk in more detail, I know you did in your opening remarks, but expand on those if you would, please, relative to... how you were accomplishing that significant growth preventive, essentially what drove it?
spk05: I'll make four points briefly, hopefully that will cover the dynamics. So first, as part of our strategy, we have moved from a project mode of operation to a product mode of operation. I mean, we've talked about this at length on these calls. I'm just making a reference to something we've discussed before. This has made our product more standard, more configurable, as opposed to customizable, and that has been a good news story for us. And kudos to the Ventus team for having been able to turn the dial so quickly. So that is point one. Point two, we have partnerships like the Cisco Design-In Partnership that gives us access to a whole slew of customers that we did not have channels to before. mainly the Cisco VARs. We're seeing a lot of projects come out of those partnerships, and it's net beneficial for both Tesco as well as Cisco. Third is our focus on sales, where we have doubled down. Much of the inventive opportunities have come from our commercial side of our business, and you've seen the net improvement in performance on both the commercial side of our business as well as on the ventive side. The last point is innovation. We gave color during the earnings call to a number of pretty remarkable projects that we have done, solving some unique challenges our customers have had with enclosures, antenna configurations.
spk04: I'll refer you back to the earnings transcript, but it's really innovation.
spk02: And so would you anticipate as a result that Ventive's growth will continue at an above industry and above Tesco growth rate?
spk05: We're very bullish on Ventive, and I think the bookings narrative for Ventive that we shared during our call is indicative of that.
spk02: Great. Thank you for taking all my questions, and congratulations on the successes you did have.
spk04: pretty difficult supply chain environment. Thank you.
spk03: There are no further questions at this time. I turn the call back over to the management team for some closing remarks.
spk05: Thank you, operator. And thanks again to 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. And this concludes our earnings call. Thank you again and have a nice day.
spk03: And this does conclude today's conference call. Thank you for your participation.
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