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Edited Transcript of RDL.TO earnings conference call or presentation 8-Aug-19 2:00pm GMT

Q2 2019 Redline Communications Group Inc Earnings Call

MARKHAM Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Redline Communications Group Inc earnings conference call or presentation Thursday, August 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joan Ritchie

Redline Communications Group Inc. - CFO

* Stephen J. K. Sorocky

Redline Communications Group Inc. - CEO & Director

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Conference Call Participants

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* Gianluca Tucci

Echelon Wealth Partners Inc., Research Division - Research Analyst

* Cory Pala

E-vestor Communications Inc. - Principal

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Presentation

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Operator [1]

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Good morning. My name is Jackielyn, and I will be your conference operator today. At this time, I would like to welcome everyone to the Redline Communications Inc. second quarter conference call. (Operator Instructions). Thank you. Cory Pala, Head of Investor Relations, you may begin your conference.

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Cory Pala, E-vestor Communications Inc. - Principal [2]

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Thank you, Jackielyn, and good morning, everyone. Thank you for joining us for our 2019 second quarter conference call. On the call today is Stephen Sorocky, Redline's CEO; and Joan Ritchie, our Chief Financial Officer, who will provide a detailed financial review of the quarter. A replay of this call will be available through the next week, accessible per the details provided on the Q2 results press release issued yesterday after market closed. A webcast replay of this call will also be available for an extended period of time, accessible through the Investor Relations page on Redline's website.

Some statements made on today's call are forward-looking in nature and, therefore, are subject to certain risks and uncertainties, which are all outlined in detail in Redline's regulatory filings, which can be found on sedar.com.

Now with that, I'll hand over the call to Stephen Sorocky for his prepared remarks. Stephen?

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [3]

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Thanks, Cory. Good morning, everyone. Thanks for joining us today. In the last earnings call, I talked about how I found great and talented people at Redline, both the long-term employees of which there are many and the people who've joined us recently. I'm excited by Redline's opportunities in mission-critical applications where we excel. I'm focused on improving cash flow and achieving positive EBITDA each quarter. My immediate priorities are to generate more sales on attractive verticals and to streamline production and deliveries and to control costs.

During the quarter, management took steps to improve and focus the sales team and marketing activity to streamline production and to expedite deliveries and to bring operating costs into line with revenues. A number of staffing adjustments in our sales and support organization were completed and a preeminent marketing and social media firm, serving the technology and telecommunications industries, has been engaged to accelerate our lead generation and increase our market profile.

We are continuing to take action to improve our performance. During this quarter, I have had the opportunity to meet many of our oil and gas customers in both North America and the Middle East. Oil and gas represents over 1/2 of our revenues. Many of these customers have been repeat customers for many years. I found them all very engaged in the Redline relationship. The excellent performance of our products and the support Redline staff provide to these customer is widely appreciated. They all value their relationship with us and were highly interested in working with us to develop our product road maps. We see this as an important step in creating a long-term ongoing relationship with these and other strategic customers and to prioritize our investments. It will also help us evolve our current products into more industrial applications of 5G, which we see as an extension of our LTE. We plan to continue to developing these relationships and deepening our partnerships with our key clients.

On the LTE front, we have now refined our product development road map to include support for industrial LTE in a strategy leading us to 5G applications. This is in addition to our continued improvements and extensions of our successful virtual fiber products. We developed this road map in consultation with our salespeople, our technical teams and our customers from oil and gas and mining verticals. Our customers and prospects have helped us identify future use cases, including one that combines our LTE and virtual fiber products in a unique way. In the last earnings call, I mentioned the need for Redline to focus on a smaller number of things, smaller number of vertical markets, a smaller number of technology platforms.

Converging our virtual fiber and LTE product lines into a unified and flexible platform is one way to get that focus, getting us to faster and more effective development and future product evolution that aligns with what our customers want. It will allow us to accelerate our use of our resources for greater returns. It will allow us to fund the smaller number of bigger, more strategic choices, and it will allow us to support our sales team and customers better.

On the go-to-market side of our business, we will focus more of our resources on the markets where our rugged and reliable product attributes are most valued, oil and gas, mining and utilities. Through the history of success in these markets, we have a strong brand in these markets. And they are where the applications of our technology attracts higher returns on investment. We have already made some staffing changes to support this new focus, and we have retained a marketing agency who specializes in helping companies similar to ours. We continue to market and sell our TV White Space product to rural ISPs. And as part of our sales organization adjustments, we have included TV White Space in our sales territory manager activities, transitioning from our earlier business development stage.

We received a large order in Q2 from a new telecom service provider in our EMEA region for our RDL-3000 product line. They are using our products to provide higher-speed service to their business users. Large orders make up a good percentage of our revenues each quarter, making it challenging to realize a predictable revenue stream, but these key strategies when coupled with ongoing cost management, strong gross margins and more mature processes will help us achieve our core financial goal, which is improved and more predictable profitability. We look forward to showing improvements in these areas going forward.

I'll now hand over to Joan Ritchie, our CFO, to take us through the financials for Q2. Joan?

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Joan Ritchie, Redline Communications Group Inc. - CFO [4]

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Thanks, Stephen, and welcome, everyone. The financial statements and the management discussion and analysis were filed last evening on SEDAR. I trust you've now had a chance to review along with our press release, so I will focus on the highlights, and then, of course, we'll have our Q&A at the end of the formal part of the session.

The second quarter of 2019 was a period of much change for Redline as we continued the transformation of our strategic focus under Stephen's leadership. Overall revenue for the quarter was $5.7 million, down $0.1 million or 2% from last quarter and down $1.6 million or 22% over the same period last year. Revenue from oil and gas and mining market represented 49% of revenues in the quarter compared to 71% in the same period last year. This decrease was largely due to a narrowband replacement project with an oil and gas customer in South America having finalized. Offsetting this reduction was an expansion order from a major telecom service provider in Africa, making up for part of this year-over-year difference.

In Q2, we had order bookings of $6.1 million compared to $5.7 million last quarter and $7.1 million in the same period last year. Bookings represent accepted contracts or purchase orders received by the company in the quarter that have been assessed as deliverable in the near term. During the quarter, revenue -- Redline continued active discussions with several oil and gas, mining and utility customers to integrate our industrial LTE product into their private wireless networks.

Our backlog was $9.6 million at the end of the quarter, down 2% over last quarter. Our backlog represents the value of all open product and service contracts and purchase orders not shipped or earned at the end of the period. Longer-term support and warranty represents $3.1 million of this backlog.

Turning to margins. Product revenue mix resulted in blended gross margin of 59% in the quarter compared to 55% in Q2 of 2018, as a larger portion of our revenue was earned from higher-margin sector controller hardware and software shipments to oil and gas customers and telecom service providers.

On operating expenses. Overall operating costs for the same -- for the second quarter were $4.3 million, up $667,000 from the same period last year and up $288,000 from the first quarter as we continued to invest in R&D and refocused our sales and marketing resources on our core markets, as Stephen described. Operating expense in the current period included $310,000 in severance costs.

During the second quarter, we reported an adjusted EBITDA loss of $626,000 as compared to positive adjusted EBITDA of $621,000 in the same quarter last year. After taking into consideration the nonoperating income and expense items, net loss for the quarter was $915,000 compared to a net profit of $326,000 in the same quarter last year.

Net loss in the quarter computes to a loss of $0.05 per share compared to earnings of $0.02 per share in the same quarter last year.

Now turning to the balance sheet. As for our financial position, we continue to believe we remain in a solid position in terms of our working capital and modest debt level. Our cash position decreased by $1.5 million to $7.8 million as at the end of Q2. Our days sales outstanding or DSO improved slightly in the quarter as we proactively worked with customers to ensure timely collections and secure advanced payments.

Inventory increased in the quarter as we experienced some customer delays for items that have been built to ship in the quarter. We continue significant efforts to improve working capital, including reviewing all customer and vendor terms and applying significant efforts to streamline production and expedite deliveries. With our solid balance sheet and very careful management of expenses, we believe we have the resources we need to execute on our key strategies moving forward.

With that, I will turn the call back over to you, Jackielyn, for our Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Gianluca Tucci from Echelon Wealth Partners.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [2]

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I guess I'll start by asking for a pilot snapshot in terms of that activity in the quarter.

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [3]

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Thanks for being with us this morning. In terms of pilots, we have 2 new pilots in the previous quarter, small, but we expect they will be successful. And we also have verbal indication that another pilot on the LTE front is on its way for this quarter, which we're quite excited about. It's not a large -- necessarily a large revenue item, but it can lead to a very significant strategic opportunity in the future. So we see that as a very positive news.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [4]

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Okay. Great. And if I could take a step back and just ask in general terms, how should investors be -- or I guess, like, what should investors be expecting from RDL this year as your commercial transformation advances? And as a follow-up to that, can you talk a bit about the things that still need to be done that I guess, like, would invigorate and smooth out the quarterly bookings numbers?

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [5]

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Sure. So we -- what I'm trying to do with the company is really focus it in on areas that we kind of succeed with predictable profits and revenue numbers going forward, which we've struggled with, and we continue to struggle with. I'm focusing it on mission-critical markets. I think that's an area that we're very, very well known for. I've confirmed that with meetings with customers all over. We also find in those marketplaces that we have more opportunity for earning the kinds of margins that, that kind of high-end product deserves. And customers see the value in it. Some of our markets are more short-term, cost-focused and don't necessarily need the features that mission-critical brings. So I'm trying to focus in on the oil and gas, mining and utilities markets as key areas for our future growth, while at the same time, satisfying the customers we've had in other verticals and continuing on those. What I'm trying to do is line up our investments, to line up our sales and marketing, to reinvigorate our marketing, in particular, through retention of an agency that will help us in that area and really drive our ability to sell successfully at good margins. That I hope will -- my intention and focus is to ensure that, that results in a more predictable financial performance going forward, revenues and bottom line.

The other thing that I'm working on very focused in and very tightly on from a financial standpoint is making sure we're managing our cash flow, and we're generating cash going forward.

Sorry, just as the last point on there is we're lining up -- we've been working to line up our R&D product development resources. In keeping with that, we've met with customers to validate our thoughts on our product road map versus their expected requirements in the future and the timing of those requirements. And we've made a lot of progress on that. We're far from done, but I think we're far better than we were months ago.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [6]

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That's good color. So I guess an additional -- my follow-up to that question is, how should we thinking -- how should we be thinking about the second half of 2019 compared to the first half? It sounds like it's going to be a busier back-end loaded year than front-end loaded.

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [7]

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I really don't want to make predictions, except that on all those points that I just mentioned, you should see progress.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [8]

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Okay. That's fair. Then just the last one from me, I guess, Joan, R&D took a bit of an uptick or, in fact, quite an uptick sequentially from Q1. Can you talk about the areas that you're focusing on investing in today? And how should we be thinking about your R&D spend over the next few quarters?

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [9]

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Perhaps, I'll take that question, Gian. The R&D has had -- there's a number of severance provisions that have been booked into that in prior quarters. We are -- we have added some key staff, and I'm very proud with the kind of people that we added last quarter. I think we are at a full complement at this point so I don't expect to see that change very much. And the real issue for us is to ensure we've got a focus on the right opportunities to drive revenue and profitability and to do it in keeping with how fast we think those markets are going to develop. There's a lot of examples of what I referred to as hype around great ideas where the timing is not clear. We're trying to sort through that and make sure that the things that we're working on are going to be ready in the time frame that customers are willing to purchase them and require them. We've got a whole building full of engineers who like to work on cool things. The -- we need to just make sure that they're working on the right ones first. And that's kind of the flavoring behind the R&D focus and why I was talking about the product road map earlier.

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Gianluca Tucci, Echelon Wealth Partners Inc., Research Division - Research Analyst [10]

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Okay. And just a question here on gross margins. I guess how is the near-term product mix expected to be over the next quarter or 2 for modeling purposes in terms of your gross profit expectations?

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [11]

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So you've noticed that we had very good gross profit performance in this quarter. But it was quite good last quarter. I hope that, to some degree, it varies from quarter-to-quarter based on the mix. So for example, when we install our base stations, we tend to earn better gross margin. That is later followed up with the purchase of the end-user equipment, which tends to be at a somewhat lower margin. So there is a bit of a timing issue as to when all that happens. We have to install the base stations before they start ordering the subsequent equipment. But I think there's -- there won't be huge variability between -- away from what we've seen in these past 2 -- this quarter and the previous quarter.

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Operator [12]

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(Operator Instructions) There are no further questions at this time. Mr. Stephen Sorocky, I'll turn the call back over to you.

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Stephen J. K. Sorocky, Redline Communications Group Inc. - CEO & Director [13]

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Okay. Thank you very much, everyone, for your time this morning, and I look forward to reporting back to you with our Q3 results. Wish you a great day. Thank you very much.

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Joan Ritchie, Redline Communications Group Inc. - CFO [14]

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Thank you.

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Operator [15]

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This concludes today's conference call. You may now disconnect.