TESSCO Technologies Incorporated

Hello, and thank you for standing by. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Tesco Technologies Incorporated third quarter 2023 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 would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I would now like to turn the conference over to David Galuzian from Sharon Merrill. Please go ahead.

Good morning, everyone, and thank you for joining Tesco's Q3 Fiscal Year 2023 conference call. Joining me today are Sandeep Mukherjee, Tesco's President and Chief Executive Officer, and Eric Spitulnik, 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 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. Please note that the company will be referencing slides available through the webcast link on the events and presentations page of the company's investor relations website. With that introduction, I would like to turn the call over to Sandeep Mukherjee, Tesco's president and CEO. Sandeep, please go ahead.

Thank you, David. Good morning, everyone, and thank you for joining us today. Q3 was another excellent quarter for Tesco as we continued to execute successfully on our strategy. Before we get to the specifics of Q3, let me start by recapping that strategy, which I've shared with you throughout this fiscal year. Our goals have been to drive revenue by delivering excellent service and value. Focus revenue opportunities on higher growth 5G and wireless infrastructure. Improve gross margins by adding differentiated value through product mix, Ventive, Tesco Observer, and operating disciplines. launch a modern ERP, improving our operating efficiencies, and utilize Tesco's operating leverage to grow EBITDA faster than revenue. We do not seek to be the lowest cost distributor. Our customers achieve true savings from the efficiencies gained through our optimized logistics, procurement, and project management expertise. Moreover, we leverage these value-added services and enhanced support resources to generate customer loyalty through improved execution, which has led to real partnerships with our customers. Our Q3 results demonstrate the successful execution of our strategy. We achieved double-digit year-over-year improvements in revenue, gross profit, and adjusted EBITDA. Both of our business segments, carrier and commercial, contributed to a year-over-year increase in revenue of 12%. Our margins continue to improve as a result of pricing strategies, diversification of our supplier base, and focus on higher margin business opportunities that have been central to our strategy. This quarter, our gross margin was 20.6% and up 1.5 percentage points year over year. Our adjusted EBITDA was $1.8 million, up $0.8 million year over year. Furthermore, we see continued improvements in the global supply chain. This has improved product lead times and has resulted in bookings returning to more normal levels. We still ended the quarter with a strong sales backlog of $84 million. I will now walk you through the results and highlights of the past quarter, starting with our carrier market. In Q3, our carrier revenue was up 12% year over year. and our gross profit increased 16%. Year-to-date, revenues are up 8% and gross profit is up 19%. We ended the quarter with a sales backlog of $41 million. Margin improvements are a result of what I had said earlier, our strategy to consistently add value for our customers. This quarter, we introduced new warehousing solutions that allow our customers to manage their general contractors more effectively. We recorded two significant wins this quarter, both related to 5G builds and upgrades. The first is a project with our largest tower owner customer, and the second is a new relationship with one of the largest AT&T turf contractors. Together, these opportunities exceed $40 million and will primarily be recognized in fiscal year 2024. I will now turn to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem. In Q3, our commercial revenue was up 12% year over year, and our gross profit increased 23%. Year to date, revenues are up 11%, and our gross profit is up 19%. We ended the quarter with a sales backlog of $43 million. Our scale Technical expertise, value-added services, program management support, and personalized account coverage continue to be the reasons why customers rely on Tesco. Ventus and Tesco Observer help differentiate our offering and enhance our margin performance. We continue to refocus on our end-user customers. As a result, our utility market grew 38% year-over-year. These strong results confirm our strategy of helping electric utilities modernize and assist with their overall grid automation projects. Our three growth initiatives in this market included a venture business development campaign around automated metering infrastructure, which has already resulted in shipments across multiple investor-owned utilities. We continue to see strong demand in test equipment and are positioning our venture's universal broadband enclosure as a simple turnkey solution for utilities that are deploying wireless. In the government market, we have signed new state and local contracts. This market grew 19% year-over-year and is now up 3% year-to-date. Our VAR market grew 13% year-over-year. We had a number of significant wins this past quarter, including a VAR that moved all of its microwave business to us, a large national service provider, that awarded us several large projects for major theme parks, and another sizable win for a VAR to support automation for a large mining company. Furthermore, we continue to win public safety and cellular DAS opportunities due to our inventory stocking position and our technical and logistical expertise. Turning now to Ventive. In Q3, our Ventive revenue was up 13% year over year, Year-to-date, revenues are up 19%. Ventive is growing faster than our distribution business. We have improved our Ventive margins and have a 30% year-over-year increase in sales backlog. Ventive increased market share with a wide range of existing and new customers, including a pioneer in inpatient telehealth. providing them with antennas to enable Wi-Fi monitors in hospital rooms, a solution for an NFL stadium, cable assemblies for a bar that is installing DAS into a subway system, antennas for a large cruise line, antennas to upgrade the Wi-Fi in scientific laboratories, and an innovative solution for a vineyard through the Cisco DesignIM program. Regarding our sales channels, we continue to sell both direct and online through Tesco.com. And in Q3, achieved quarterly revenue of $9.9 million, up 6% year over year. As a part of our ERP transformation, Tesco launched a new Tesco.com, which provides many new features and capabilities for our customers. And as we announced last month, we formally launched our new ERP system. This project has been much more complex and has taken longer than initially planned. But all our foundational capabilities are now in place, and the launch has been very, very smooth. We are now in hypercare, which will continue through Q4, along with higher non-depreciation expenses. We are expecting incremental depreciation of approximately $1.5 million in the fourth quarter, which will impact net income, but not EBITDA. Expenses associated with the ERP will significantly reduce in our next fiscal year starting April. The new ERP system will provide us with considerable operating efficiencies over our legacy systems, including improved inventory management and freight capabilities. We expect to begin to achieve a strong return on our investment in our upcoming fiscal year and a positive effect on EBITDA. With that, I will turn the call over to Eric for the financial review.