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Edited Transcript of BDR earnings conference call or presentation 6-Nov-19 4:00pm GMT

Q3 2019 Blonder Tongue Laboratories Inc Earnings Call

Old Bridge Nov 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Blonder Tongue Laboratories Inc earnings conference call or presentation Wednesday, November 6, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Edward Rowland Grauch

Blonder Tongue Laboratories, Inc. - President & COO

* Eric S. Skolnik

Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary

* Robert J. Pallé

Blonder Tongue Laboratories, Inc. - CEO & Director

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Blonder Tongue Third Quarter 2019 Results Call. After the presentation, there will be a question-and-answer session. (Operator Instructions) At this time, it's my pleasure to turn the floor over to Mr. Bob Pallé, CEO. Sir, the floor is yours.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [2]

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Thank you very much. Good morning, everyone. Welcome to Blonder Tongue's 2019 Third Quarter and 9 Months Financial Reporting Teleconference. We thank you for your participation.

Before we begin our presentation this morning, I'd like to preface my remarks and those made by other Blonder Tongue representatives, who may be speaking today, by reminding you that we will be discussing certain subjects, which will contain forward-looking statements including management's view of our prospects and evolving trends in the marketplace. As you know, the future is impossible to predict, so I caution you that actual results may differ from those that may be projected in our comments this morning. For additional information of concerning factors that could cause actual results to differ from the information that will be discussed this morning, I would ask you that you refer to our prior SEC filings, including our Form 10-Qs for prior quarters, including the first and second quarters 2019 and our 10-Ks for years 2018 and '17 as well as our 8-Ks.

With me today are Steve Shea, Chairman of the Board; Ted Grauch, President and Chief Operating Officer; and Eric Skolnik, Chief Financial Officer. Our presentations will follow in that same sequence. And following the presentations, all of us will be available to answer any questions you may have during the question-and-answer period.

As stated in prior teleconferences and in my letters to you for prior years, we outlined the areas within which we needed to achieve major improvements in order to effect a successful turnaround in our financial performance, and as a result of those major improvements, drive an increase in stockholder value. We remain committed to achieving those goals.

We believe that our comments in the press release this morning bear repeating. We are disappointed in the level of sales for the third quarter and the resulting financial performance. Last quarter, we announced our intention to increase the intensity of our new product sales initiatives and lower our operating expenses.

Regarding new product sales initiatives, we recently introduced the ClearView Transcoder line of products. The first of these ClearView 4:2 is now in production and anticipated to be approved by large cable and satellite video entertainment service providers in the near future. Two additional versions of the ClearView family of products are planned to be released for production prior to the end of this year. Several of these will comprise new modules that have been developed in response to specific Tier 1 service provider use-case requests, which will enable the company's NeXgen Gateway products to perform additional encoding, transcoding and video security functions. We anticipate that this enhanced functionality will lead to increasing sales to those and other service providers.

We also continue to be pleased with the response to our IPTV Set-Top Box initiative. IPTV Set-Top Box sales increased 50% from the second to the third quarter, and we expect IPTV Set-Top Box growth to continue into future quarters.

Regarding operating expense reduction efforts, during the third quarter, a number of cost savings initiatives were implemented; however, it is clear that we need to take additional steps to reduce them further. These additional steps will be implemented in a manner that will enable us to maintain the momentum that we have developed with the NeXgen Gateway and IPTV Set-Top Box initiatives.

Putting a little color on the ClearView series of products mentioned in the press release this morning, the ClearView series of products are state-of-the-art devices that effectively manage the full suite of digital signal processing functions, including decoding, encoding, transcoding, transrating, encrypting and decrypting. This new Blonder Tongue technology is being made available in several physical formats, including both the traditional 19-inch rack format and the blade style modular format for the NeXgen Gateway series of products. We believe that the breadth and capability of these new products should drive market acceptance, which will inure both our top and bottom lines in a material way.

Similar to the comments that I made during the second quarter earnings call, we believe that we have engaged the management talent and committed the resources to move both the new product development and sales initiatives forward. As the company transitions to these new products and technologies, we expect to go through a period of continuing investment of our financial resources before we see expected positive impact on our profitability.

Now I'd like to turn the call over to Ted Grauch, BT's President and Chief Operating Officer. Ted?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [3]

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Thank you, Bob, and good morning, everybody. As Bob has touched on this morning and as we stated on previous calls this year, our current sales levels have not met our targets and are not at a level yielding acceptable financial performance for the company overall. We've been and are continuing to adapt our management actions to resolve this as quickly as possible.

A major portion of these issues have been due to a changing market for specific types of cable and telecommunications equipment, moving from legacy coax-based infrastructure towards a larger segment moving more quickly towards fiber, wireless, Ethernet and more recently -- most recently, including distributed access technology.

In addition to those changes, we've also seen a rapid movement at the beginning of 2019 for demand in more advanced IP-based transcoding technology compliant with the newer Internet, CDN and overall over-the-top video requirements. Blonder Tongue is actually -- had actually anticipated all of these trends during 2018, and we've had a number of new product lines in development for the last 1 to 2 years that are now entering the market in order to address these market changes and technology trends.

For immediate impact, we have continued to make efficiency changes in the organization and in operations that are working to lower our monthly operating costs month-over-month. We've also released a series of new products since Q1 this year to address the market trends and are now seeing positive sales momentum on the large majority of those fronts, including our NeXgen Gateway flagship product, our new advanced technology IP transcoders and coders and our efforts to create system sales into service operators by providing value-added solutions with IP television set-top boxes and customization services. This last program is taking advantage of the IP television conversion trends that are going on across North America with Tier 2 and Tier 3 telco, cable and municipal fiber operators right now.

As Bob mentioned, we are seeing -- we have seen specifically strong growth in this component of our sales from Q2 to Q3 of this year. We have also seen very good growth in our NeXgen video signal processing product line year-over-year, including a Tier 1 and several Tier 2 operator wins and good initial sales of our new fiber distribution product line launched earlier this year.

Overall, we're taking the necessary measures to move towards monthly profitability, lowering our operating costs and investing in technologies in line with market trends. We're also investing in the sales activities that will turn those new product introductions into revenue with the goal of achieving growth before the end of this year.

Now I would like to turn the call over to our Chief Financial Officer, Eric Skolnik. Eric?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [4]

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Thank you, Ted. Good morning. The third quarter 2019 net sales were down 6.2% as compared to prior year. And our gross margin decreased to 29% compared to 42.9% in the prior period due to our more traditional product mix being blended with lower-margin product lines. As a result of the company's growth of the IP Set-Top Box sales, which carry a lower margin than the company's more traditional product lines. The gross margin as a percentage of sales is lower than historical trends. The company anticipates additional growth in sales of these IPTV Set-Top Boxes, and as a result, the company expects that gross margin as a percentage of sales will remain at a lower level for the foreseeable future.

Operating expenses for the third -- 3 months of 2019 were up approximately 14.5% as compared to the comparable period last year. This increase is primarily due to salary and headcount increases, which were necessary due to the company's prior continued efforts to contain and reduce these costs as well as an increase in various consulting fees.

For the 9 months ended September 30, 2019, net sales were down 9.0% as compared to the prior year, and our gross margin decreased to 31.3% compared to 42% in the prior period due to the aforementioned blended product mix and growth in sales of the lower-margin IPTV Set-Top Boxes.

Operating expenses for the first 9 months of 2019 were up approximately 21.7% as compared to the comparable period last year. This increase is primarily due to salary and headcount increases necessary due to the company's prior continued efforts to contain and reduce these costs.

On the financing front, I am pleased to report that on October 25, 2019, the company consummated a $5 million financing transaction with MidCap Business Credit. This new credit facility consists of a $5 million revolving line of credit and matures in 3 years and replaces our existing credit facility with Sterling National Bank, which has been terminated. We believe that the funding terms will improve our liquidity and provide us with greater working capital to help fund our current and planned future operations.

Now I'd like to open up the call to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We do have a question coming through from [Gregory Bourbon], private investor.

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Unidentified Participant, [2]

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Before we get to income, since the 10-Q is not released, a couple of questions. What is the operating expense for this quarter? What was the OpEx?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [3]

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The operating expenses for this quarter are $2,814,000.

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Unidentified Participant, [4]

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Okay. Roughly the same as Q2. And the cash flow from operations?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [5]

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Well, we don't do it on a quarterly basis. The 9-month number is expected to be $5 million used in operating activities.

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Unidentified Participant, [6]

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All right. And given the new financing ability, what level of borrowing is available?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [7]

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The biggest change from the -- from a liquidity perspective between the old facility and the new facility is that the new facility currently only has a $500,000 block and our old facility had a $2 million block. And that is the biggest significant change. So that's a pickup of $1.5 million.

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Unidentified Participant, [8]

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Okay, $1.5 million increase, all right. Let's see. It seems like this ClearView line is going to be a major impetus going forward. What's the time line? Specifically, are we to expect any revenues from this prior to the end of the year?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [9]

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We do.

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Unidentified Participant, [10]

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And what -- any guess or estimates as to what the market size might eventually be?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [11]

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We're thinking $2 million a year approximately, $1.5 million to $2 million a year add.

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Unidentified Participant, [12]

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Okay. And have we signed on it with any more Tier 1s?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [13]

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We have not -- we're working on additional Tier 1s. We haven't signed on to any additional Tier 1s.

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [14]

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We've had 3 additional Tier 1s in our sales funnel active engagements. We have not closed any of them yet. So the processes are looking very positive, but of course, we can't make any commitments until things are actually closed in writing, right? And sometimes -- as you know, if you follow this industry, sometimes the sales cycles in this kind of equipment can be long.

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Unidentified Participant, [15]

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Long, right. In the press release, you mentioned new modular -- new modules in development in your kind of conversation with Tier 1. Is that with the current Tier 1? Are you fielding those requests with the folks in the funnel, so to speak?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [16]

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Both.

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Unidentified Participant, [17]

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Okay. I have to see what else I have for you. The outstanding growth in the set-top box, 50% quarter-to-quarter, that is Q3 to Q2, can we expect anywhere near that rate of increase to -- or percentage increase to persist?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [18]

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As the overall revenue of that new business segment grows, as you know, sustaining that level of growth, I would say, depends on a few factors. But we see it being a growth segment for at least the next year, if not 1.5 years or 2 years, so.

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Unidentified Participant, [19]

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All right. Well, that's very welcome, given the sort of the flattening of the legacy business and until the ClearView line gains a foothold. How do we stand in -- with the introduction of these new products vis-à-vis the competition, are we near the head of the line? Or where do we stand overall?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [20]

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Sorry, Bob and I are looking at each other to see who should answer that one. I'll take a first step. So with some of the Tier 1 prospects we're working as well as some of the bigger Tier 2s, depending on their use cases, I think we are definitely at the head of the line related to our ability to meet the features and functions of the developing markets. So we've got sort of -- to put it more bluntly, we believe we've got really interesting new functions and capability and a set of newer technologies in a newer, more modern architecture than most, if not all, of our competitors at the moment. Now our competitors won't stand still. That won't stay forever. But these products tend to take long R&D cycles. So we've got to step up from the sales perspective in our opinions. Anything to add to that, Bob?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [21]

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No, I think that's accurate.

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Unidentified Participant, [22]

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Okay. These distributed (inaudible), can you elaborate on that? That caught me by surprise. What are we referring to exactly there?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [23]

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We did a press release at the yearly SCTE Cable-Tec Expo show -- trade show just a little over a month ago. We are -- we have released a product that supports a Remote PHY. So it's sort of the next-generation of DOCSIS, where a portion of that DOCSIS capability is distributed over an HFC network by telcos, municipal fiber operators, et cetera. It allows them to push fiber more deeply into the network, allows them to distribute the equipment deeper into their network and closer to residential customers' homes. And our particular product allows interoperability with some of the bigger players, and that interoperability is sort of hosted and overseen by the CableLabs standards organization. So it's sort of the next generation of DOCSIS, but it doesn't exclusively use coax technology, it uses fiber and Ethernet to get a higher bandwidth data deeper into a distribution network in the residential environment.

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Unidentified Participant, [24]

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Okay. Well, thanks for the elaboration. And again, market size, any guesses?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [25]

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That one, we're trying to be very conservative internally because we're just testing the waters on this. But I think it's too early for us to share information publicly on that. But it is absolutely the newest generation of technology related to cable operators, who still have a portion of their network be coax in the last mile or the last 1/4 mile. This is the latest technology related to them upping their bandwidth speeds of delivery to homes. And it has been in the works for years and just coming into the point where operators are starting to make decisions on this technology.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [26]

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Yes. There is a lot of information, [Greg] about the DAS, the Distributed Access Systems available. And I applaud Ted for being cautious about how much we could get and what we see that we can do. But we're going to leverage our present customer base or the products that we plan to sell. So we think we can operate in this market, but you'll see when you go do your research that the Tier 1s are talking about spending billions of dollars on this, so.

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Unidentified Participant, [27]

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So was this and the ClearView, were those the reference for the new verticals in the last call or 2? Or are there any others?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [28]

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There are others in the works that we have in press release. So I think we'll keep them confidential for the moment, but we're aware we're spending some R&D and partnership time to bring some additional product lines marketing new verticals that we have not announced yet.

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Unidentified Participant, [29]

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Well, given that it's going to be 4.5 months or so before the next call, I appreciate any press releases in the interim regarding market introductions of any sort. And finally, as mentioned in the last call, how are we -- how is the lease of the new space -- the space going?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [30]

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Any one of us can speak to it. The -- it's not leased. The town -- lower level people have made it extremely difficult for us to get through all of that and be ready for a CO. We're now in position. So when we tour prospective tenants, the space is ready, and we can sign in any moment. And the CBRE people, who we think are great, are amping up their activity and helping us get the space leased. Did I do that accurately?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [31]

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Yes, you did.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [32]

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Eric's actually a little closer to the nuts and bolts on this.

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [33]

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You're correct, yes.

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Unidentified Participant, [34]

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All right. Keep your nose to the grindstone, and look forward to a boost in revenue, if not by the end of the year, then soon thereafter.

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Operator [35]

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(Operator Instructions)

We do have a question from [Lloyd Sims], private investor.

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Unidentified Participant, [36]

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So can you comment on, I guess, the core part of the business, the digital video headend products? They're down 50%, and I assume that's where a majority of the margin is to the bottom line. So I guess, with that decline -- I understand you have the new products coming in. But what's happening there? And when do we expect that to plateau?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [37]

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So you mentioned the number 50%. That's not a number I've got in my head, but...

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Unidentified Participant, [38]

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But I think it went from 2.2 to 1.2 from last quarter. Is that correct?

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Edward Rowland Grauch, Blonder Tongue Laboratories, Inc. - President & COO [39]

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Yes. Yes, yes. Right. So there are 2 major elements and a few minor elements related to that decline that are all alluded to in the press release. The demand cycle for the older version of our encoder products took a fairly significant decline in the first quarter this year. We had anticipated the trend that those products would be in decline either this year or next year. The timing of that decline was a bit of a surprise. So we accelerated the introduction of the new products that we've been working on since at least the middle of last year. And those have started to come online over the summer and now actively selling and in production. So that will pick up some chunk of that reduction year-on-year.

The other element is in a different market segment that deploys DOCSIS products that has traditionally been very strong in the last few years. And again, we knew the general trend has been in the decline, that's why we've been investing in some other technologies that have not been released yet. And further to [Greg's] previous question, we'll be press releasing those new verticals in the new year at some point. But fundamentally, those market segments took a very steep decline in the end of the first quarter or early second quarter and have not recovered yet despite a big push in sales. The market just has moved faster than our customers had told us, faster than our customers had anticipated themselves. And we are working to accelerate that product introduction to make up that loss.

The good news, if there is any to glean out of that whole situation, is that even though that piece of the market has declined, the new products that we're introducing and where the market has turned is still sustaining. From what we can see currently, we'll still sustain the same level of margin when we reintroduce the newer products that cover where the market has moved. So we do believe that portion of our business will not -- does not have specific margin pressure. We have more scale pressure than margin pressure.

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Unidentified Participant, [40]

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And just a little bit more clarity. Is it the industry has shifted away from the product? Or are they waiting for new types of technology and they're looking at other technologies out there, so they're delaying purchases? Or -- because I think some -- you mentioned we launched the new products about a year ago. So that's why I'm kind of wondering, I guess, why such a decline. And is it a market share loss to a competitor? Or is it more the market on hold from a buying perspective as they analyze -- take a look at the new technologies that are out there?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [41]

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I'd say -- I don't have perfect clarity on exactly the volume of sales that some of our competitors have enjoyed since the January, February time frame when we saw some of this change. But we do know specifically that it's a blend of the 2 things you just talked about. Part of it is the customers are -- we actually do have customers waiting on our product introduction. And in the meantime, they have gone to products that our customers themselves would prefer not to be buying, but they need to be buying some of them as a stop gap while we finish our product introductions and release our products. So it's a blend of both. I can't tell you if it's 50-50 or 70-30, but it's a percentage of both. We've got good loyal customers waiting on new products. They've had to fill some gaps. We have lost some share, but we think it's temporary, because the products we have just introduced are standing head and shoulders from a quality perspective above what we believe our competitors have. And that's not just our own opinion, but it's coming from our customers.

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Unidentified Participant, [42]

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And do you expect this to be the trough? Or have we hit bottom at this point?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [43]

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Boy, I wish I knew the answer to that question. From what we can see and what our customers are telling us, we don't see -- we can't anticipate right now a very specific new hit like we experienced twice earlier this year on those product segments. We're not hearing those rumblings from our customers currently. It doesn't mean we won't be blindsided. But we're trying to keep our eyes open, and we're trying to engage, and I particularly have been trying to engage my sales teams to ask tougher questions and push the customers to be more open and free with their opinion, so we can anticipate not be blindsided.

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Unidentified Participant, [44]

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Okay. Just on the hotel end and the change in technology that's going on there, do you see a lot of delayed purchases as they wait to see different technologies pan out from an industry perspective as opposed to, let's say, your specific product perspective?

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [45]

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I don't see -- well, let me answer the question this way. The particular encoder and transcoder technologies that have been part of what we've just been talking about the last few questions, we have seen some of our customers delay some deployments waiting for our new products. We've seen them slow down some deployments because of technology transitions. Most of those slowdowns happened in Q1 and early Q2 time frames. Those have been starting to pick back up, and we see the demand is there, now that we're just starting to introduce some of the products coming out of production and into the field.

But at a macro level, no, I don't see the hotel segment changing dramatically related to waiting for some new technology or waiting for one of the service operators to change anything dramatically. No, I don't. I think there will be potentially large changes depending on what AT&T does with DIRECTV, because they're a big part of the hotel and hospitality video service provider. But that's yet to come, because AT&T has said that they want to sell off DIRECTV. So that could have a future effect, but we don't know the timing and any details around that. And even if they did make that move, we don't think it would have any immediate effects on the business, because those would play out over a long period of time, those transitions.

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Unidentified Participant, [46]

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Yes, I didn't mean to take away from the -- all the positives that are happening too, so congratulations on the other side of the business. Just when will the Q be issued?

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Eric S. Skolnik, Blonder Tongue Laboratories, Inc. - Senior VP, CFO, Treasurer & Secretary [47]

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The expectation is it's going to be filed on Friday.

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Operator [48]

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Since there are no further questions at this time, I'd like to turn the call back over to you for any closing comments.

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Robert J. Pallé, Blonder Tongue Laboratories, Inc. - CEO & Director [49]

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Thank you very much. Thank you to everyone for participating in our teleconference, and we look forward to speaking with you next quarter after the first of the year. Have a great day.

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Operator [50]

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And ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time, and have a great day.