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Edited Transcript of RDL.TO earnings conference call or presentation 12-Nov-19 3:00pm GMT

Q3 2019 Redline Communications Group Inc Earnings Call

MARKHAM Dec 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Redline Communications Group Inc earnings conference call or presentation Tuesday, November 12, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joan Ritchie

* 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

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Redline Communications Group Inc. Third Quarter Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Joan Ritchie, CFO. Thank you. Please go ahead.

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Joan Ritchie, [2]

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Thank you, Jody, and good morning, everyone. Thank you for joining us for our Redline's 2019 Third Quarter Conference Call. On the call today, along with myself, we have Stephen Sorocky, Redline's CEO; and Philip Jones, Redline's incoming CFO. Together, we'll provide a detailed financial review and an update of the quarter.

A replay of this call will be available through the next week, accessible per the details provided on the Q3 results press release issued yesterday after market close. 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.

Just a reminder, some statements made on today's call are forward looking in nature, and therefore, subject to certain risks and uncertainties. All are outlined in detail in Redline's regulatory filings, which can be found on SEDAR.

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, Joan. Good morning, everyone, and thank you for joining on this call and taking the time to hear about Redline.

Our Q3 results reflect good progress along our path to improvements in profitability and cash. Our revenues have grown quite significantly over last quarter. Our margins are holding in the mid-50% range. And with our cost structure adjustments, we've seen a decline in losses quarter-over-quarter. Furthermore, despite showing a small loss in the quarter, we've been able to increase our cash position through improved inventory management and receivables collections.

Our revenues this quarter are aligned with our commitment to focus our resources on the markets, where our rugged and reliable product attributes are most valued: oil and gas, mining and utilities. The majority of our revenue continues to come from oil and gas and from our Virtual Fiber product line. Our existing oil and gas customers, especially those outside of North America, continue to extend their Redline networks. Many of them have been buying from us for years, a testament to the value that our products continue to deliver to mission-critical systems as well as the strength of our support to their installation and maintenance.

That said, the oil and gas market in North America continues to develop. We received an exciting customer-funded pilot from a U.S.A.-based oil and gas customer for an LTE system, a significant development in the application of our LTE product line to the oil and gas vertical.

We continue to focus on building our pipeline in our core vertical markets, especially oil and gas, utilities and mining, and on targeting customers and companies who have the potential to become large, long-term customers and where our rugged and reliable product attributes are most valued.

Since our last earnings call, we have signed up 3 customers for paid pilots of our LTE pilot -- our LTE product line. Two of these were signed during Q3 and 1 just after the end of the quarter. All of these pilots are for our LTE product line. Two are mining companies, and 1 is in oil and gas. All of these have the potential to drive over $3 million in lifetime revenue.

We feel that a key indicator of future success is our ability to sell pilot projects that demonstrate the capabilities of our products and our customers' environment. We attach particular significance to paid pilots, which we feel is a strong indicator of a serious prospect, given the commitment demonstrated by such customers.

Continuing on the LTE front, there are 2 other developments that are worthy of mention. We've developed an innovative partnership with a company called Blue Danube. Their artificial intelligence-enabled antenna coupled with a Redline radio can enhance the performance of a customer's private LTE network. For example, this combination can support the unique requirements of autonomous vehicles, which are strategically important in some mining operations.

Our business model is largely focused on the development and deployment of private networks, which in the case of LTE have been hampered by a lack of available spectrum. Companies who wanted to use LTE had to sublicense spectrum from a carrier, even when it was available, it tended to be expensive.

Last year, the FCC said that they would make some LTE spectrum available for use by noncarriers, and as a result, we have invested in upgrading our LTE product line to support this new band called CBRS. This past September, the FCC finally announced a limited number of commercial deployments with full availability expected in 2020. This is a significant market event, long awaited, and it represents a big opportunity for us in the U.S. market. One of our current pilots is for a private LTE network using this band, so we are in the market early.

On the Virtual Fiber product development front, we're pleased to release an advanced software upgraded -- upgrade for our RDL-3100 product line. This is a significant evolution of our Virtual Fiber product that enables additional functionality and creates a platform for future feature additions for our customers, while maintaining compatibility with existing customers' Redline networks.

In summary, we're pleased with our progress this quarter. We've delivered improved financial results. We've grown our pipeline and shifted to pilots of financial commitments associated with them. And we are positioned to be an early entrant into the U.S. private LTE market with CBRS.

As you know from our previous announcement, Philip Jones has joined Redline and becomes our CFO today. I'm pleased to see Phil join our team, and I welcome him to Redline. Joan will -- Joan Ritchie, who has served as our CFO for several -- for many years, will continue to support Phil through the end of the year, continuing the transition, which began on October 15.

Before handing over the next part of the call to Joan, I'd like to take this opportunity to thank Joan for her many contributions to Redline. She's been a key part of Redline for many years, and we all wish her the very best in the future.

I'll now hand over to Joan to take us through the financials for Q3. Joan?

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Joan Ritchie, [4]

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Thanks, Stephen, and thank you for your kind words. 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.

Overall, revenue for the quarter was $7.1 million, up $1.4 million or 24% from last quarter and up $0.5 million or 8% over the same period last year. Revenue from the oil and gas and mining market represented 66% of revenues in the quarter, compared to 63% in the same period last year. This increase was primarily due to several large oil and gas orders for South America and Asia that were delivered during the period.

In Q3, we had order bookings of $5.8 million compared to $6.1 million last quarter and $7.6 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.

Our backlog was $7.4 million at the end of the quarter, down 23% over last quarter, as the company focuses on reducing the time lag from order received to shipment of equipment and ultimate delivery. 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 $3.2 million in backlog.

Turning to margins. Product revenue mix resulted in blended gross margin of 54% in the quarter, compared to 46% in Q3 of 2018. This increase reflects both the product mix, which consisted of higher margin sector controller hardware sales and software key sales combined with cost reduction initiatives on high-volume products achieved through reengineering.

Looking at our expenses. Overall, operating costs for the third quarter were $4.1 million, up $548,000 from the same period last year as part of our planned development strategy and down $251,000 from the second quarter, a quarter in which the company took action to refocus its sales and marketing efforts.

During the third quarter of 2019, we reported an adjusted EBITDA loss of $33,000, an improvement compared to an adjusted EBITDA loss of $307,000 in the same quarter last year.

After taking into consideration the nonoperating income and expense items, net loss for the quarter was $248,000, an improvement compared to a net loss of $516,000 in the same quarter last year. Net loss in the quarter computes to a loss of $0.01 per share compared to a loss of $0.03 per share in the same quarter of last year.

Now turning to the balance sheet. As for our financial position, we believe we remain in a solid position in terms of our working capital and modest debt level. Our cash position increased by $400,000 to $8.2 million as of the end of Q3.

Inventory decreased in the quarter and days sales outstanding, or DSO, improved in the quarter as we continued actions to reduce inventory, including a push towards just-in-time purchasing to reduce our inventory levels and as well proactively work with customers to ensure timely collections and secure advanced payments.

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 careful management of expenses, we believe we have the resources we need to execute on our growth strategy moving forward.

So that concludes my comments on the third quarter results. I'd just like to take a minute to add that this will be, as Stephen said, my last investor call as I'll be stepping down as CFO today and leaving Redline at the end of December. I've truly enjoyed my time at Redline and want to express my sincere thank you to Stephen and the other Board members for their constant support over the years. I know that you're in very good hands as I transfer the baton to Philip Jones. I have enormous confidence in the employees, the leadership team and the Board of Directors and as well in Redline's prospects moving forward. In closing, I want to wish Stephen, Phil and the rest of the Redline team all the best.

And with that, I will turn the call back over to you, Stephen -- or Jody, pardon me, for our Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Gianluca Tucci of Echelon.

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

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Steve, I think that you spoke about this, but I didn't catch all of it. Can you give us an update on your pilot activity in Q3 and so far in Q4?

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

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Sure. Thanks for joining us. The pilots that I mentioned, in particular, were 2 LTE pilots that occurred during the quarter and 1 that occurred just days after the end of the quarter that I thought was worth mentioning. These are 3 LTE pilots, customer funded, and they're in our oil and gas and our mining verticals.

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

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Okay. And you said that the LTV of those 3 contracts potentially if they turn on, is $3 million in sales?

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

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$3 million or greater. It depends on the customer, and we're finding that customers tend to phase these projects and they start with a pilot, as I mentioned, and then they'll do -- depending on the customer, depending on the situation, they'll phase in the deployments over a number of years. And I think $3 million or more is a good rule of thumb.

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

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Okay. And in terms of streamlining operations, I did see through the MD&A that you're closing your California office soon. How much more is to be done on your streamlining efforts and expected cost savings annually if like you have a ballpark figure to put out there?

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

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I'm constantly -- I'll take that in 2 parts. Firstly, California office and then the -- and then just ongoing streamlining. I am always looking for ways to improve our business and to focus that. I've been here now for, feels like years, but it's been about 9 months, and I continue to get my arms around various opportunities and -- to drive the focus that I want to see in the business. So I don't see any major changes, but I can't say today that as the market changes, as our competition changes, that we won't be making some adjustments as we go forward.

The California office, I found is -- had a couple of people there who are excellent staff, but we inherited that office from the acquisition of PureWave years ago and the amount of money that was being spent to maintain that office and the operations there was something I thought was just not a good investment of funds. We've retained the people and moved to basically a small home office kind of an environment, which many of our staff work with. And we've actually now closed up the office itself, everything is packed and we're sublease -- we're looking for a sublease or a change to our lease there over the next while. Our lease there expires in Q2 of next year. So that's the longest that we'd have to continue if we aren't successful in trying to sublease it or to get out of the lease earlier.

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

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Okay. Just a question on your R&D spend. I did see that it ticked up sequentially to over $1 million. Can you talk about like where that delta is being spent in terms of your efforts?

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

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It's being spent in 2 areas. One is in the area of our LTE product line to position it for the mobility that some of our existing customers are looking for downstream. They want to be able to connect devices and sensors to the network, and we're preparing our products to do that well. In particular, we're moving towards the Release 13 standard of -- related to NB-IoT, I apologize for the technical terms, but it's basically the portion of the 5G specification that applies to our customers. 5G is -- gets a lot of hype for high speeds, but if you look at it in detail, there are certain aspects around reliability, around distance, around low latency or quick response time when signals are sent back and forth. And we're focusing on exactly what our customers want in that specification and to be ready when they are. That's sort of area number one.

The second is on the Virtual Fiber product line. We continue to do cost reduction and prepare our products for additional performance to our existing customers. They have networks installed that they continue to expand, and they want our product line to be ready for that expansion. So we spend money in that area, both in adding additional capabilities in our software; and secondly, also dealing with the fact that from time to time in all of our products, some of the components become end of life, and we have to do some reengineering to replace them with other components. It's just a natural part of this business.

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

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Okay. And then finally, here on bookings and backlog. I think it was a pretty soft quarter for both of those. Are you expecting a rebound in bookings and backlog sequentially in Q4? And how should we be framing that into 2020?

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

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Right. So in terms of the backlog, Joan mentioned that we are working hard to convert our backlog into revenue with -- in a shorter time frame, and we had some success in that area. Some of our backlog is building in the area of recurring service and maintenance contracts, about 3.2 at the end of the quarter -- $3.2 million at the end of the quarter. So those are all positives. The bookings will go up from time -- from quarter-to-quarter. I don't see any fundamental change in what's happening on our bookings. It's -- when we have $1 million orders that come in one quarter to the other, we do get a bit of lumpiness. I expect that will continue.

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Operator [12]

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(Operator Instructions) And there are no further questions at this time. I will turn the call back over to Stephen Sorocky.

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

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Okay. Thanks, Jody. Thanks, everyone, for your attention today and your continuing support, and I look forward to speaking with all of you in the near term. Thanks very much, and have a great day.

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Operator [14]

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Thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect.