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Edited Transcript of TKOI earnings conference call or presentation 14-Aug-17 8:30pm GMT

Thomson Reuters StreetEvents

Q2 2017 Telkonet Inc Earnings Call

MILWAUKEE Aug 19, 2017 (Thomson StreetEvents) -- Edited Transcript of Telkonet Inc earnings conference call or presentation Monday, August 14, 2017 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Jason L. Tienor

Telkonet, Inc. - CEO, President and Director

* Richard E. Mushrush

Telkonet, Inc. - Acting CFO and Secretary

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to Telkonet second quarter earnings conference call. (Operator Instructions) Please note this conference is being recorded.

I'll now turn the conference over to your host, Jason Tienor, Telkonet's CEO. Thank you. You may begin.

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [2]

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Thank you, and good afternoon, and thank you once again for joining us for Telkonet's quarterly earnings call. We appreciate your continued interest and the opportunity to share our second quarter performance and forward outlook with you.

As you know, we've been extremely busy with the divestiture of our hospitality networking assets and the transformation of Telkonet's overall business. With the completion of the sales transaction at the very end of Q1, it's consumed the entirety of the second quarter to accomplish the corporate activities involved in splitting our operations. These activities were extensive and varied and encompassed all aspects of our business. From a corporate perspective, we've just recently completed numerous activities surrounding the divestiture, including the transfer of all Telkonet personnel and equipment to our recently completed corporate offices just 3 weeks ago, the relocation of all of our manufacturing and shipping facilities and activities to a new location mid-quarter and a complete split of all operating services, software and server hosting and development activities. While this transaction has created quite a bit of work during the quarter, the benefits of the transaction outweigh the demand that's placed on our resources.

From a financial perspective, we've seen a dramatic reduction in debt, a significant lowering of our corporate DSO, consistent revenue quarter-over-quarter and a dramatic financial repositioning, stabilizing Telkonet's business and positioning us for new and larger opportunities moving forward.

Within sales, we've seen continued penetration of the education market, demonstrated by a greater than $0.5 billion first project with a well-known southern university and a selection for a complete campus rollout by an East Coast university. Our partner growth continues to ramp with new international OEM and integration relationships, expanding our market penetration. And we have seen greater ability to forecast our business through earlier relationships with our customers by focusing on engineering and architectural processes and working our platform with the early mechanical specification activities.

Lastly, through the divestiture, we've been able to position our business for increased scale of opportunities through the use of increased inventory needs, performance and product bonding and extended project time frames.

Our reorganization has created sizable changes in engineering, enabling us to increase our pace of development for filling new opportunity requirements. This opportunity-driven product development has enabled us to participate in projects not possible in the past.

Finally, due to the corporate restructuring, we've been able to accelerate our new platform development of Project Titan, which will expand our addressable market moving forward. Because of our new capabilities, we've been able to drive significant new business development. One of our largest efforts in this regard is shown through our Partner Week, taking place here in Milwaukee with more than 20 sales and integration partners in attendance. Our use of new marketing and sales automation tools, such as our sales force deployment, has driven increased market awareness and market penetration across our target markets. And the hiring of a new Director of Marketing is driving greater effort into our market expansion activities.

As we look toward the future, our continued push into expanded sales and marketing and market expansion within and across verticals is core to our strategy of commercial growth and penetration. Concentration on partnership support and growth is primary to increasing revenues quickly and marquis project development has given us an ability to enter new and larger markets and relationships.

In summary, we've gone through an extensive transformation to date and are emerging a dramatically changed organization, financially poised to execute the wide variety of business cultivated over the past several years across our target verticals. With questions of inventory, bonding and financing no longer an issue, we're now preparing and eyeing the future of untethered growth. We're excited by the doors that this transaction has opened for us and look forward to the continued expansion of our EcoSmart platform.

With that, I'd like to thank you again and hand it over to Gene for a summary of our financial activities.

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Richard E. Mushrush, Telkonet, Inc. - Acting CFO and Secretary [3]

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Thank you, Jason. Ladies and gentlemen, good afternoon, and thank you for joining us. Today, I will be summarizing our 2017 second quarter and year-to-date financial results.

For the quarter ended June 30, 2017, Telkonet reported total revenues of $2.1 million, a 6% decrease compared to $2.3 million for the same period prior year. Recurring revenues with average margins of 70% grew 26% to $110,000 compared to the same period prior year.

Gross profits for the quarter were $1 million, down approximately 8% from $1.1 million last year. Gross margins remain consistent at 48% when compared to 49% for the same period prior year.

Operating expenses for the quarter were $1.9 million, a 22% decrease compared to $2.4 million for the same period in 2016. Included in last year's results were costs related to the 2016 contested proxy, a discretionary bonus awarded to various staff and research and general development expenses.

We incurred operating losses from continuing operations of $869,000 and $1.3 million for the quarters ended June 30, 2016, and -- I'm sorry, 2017 and 2016, respectively. Income from discontinued operations was $19,000 and $641,000 for the comparative quarters ended June 30, 2017, and 2016.

We reported negative adjusted EBITDAs, a non-GAAP measure from continuing operations of $853,000 and $1.3 million for the quarters ended June 30, 2017, and 2016, respectively. Total year-to-date revenues of $4 million represented a 22% decrease compared to prior year. Recurring revenues grew 8% year-over-year to $213,000.

Year-to-date gross profits were $1.9 million, down 30% from $2.7 million last year. Gross margins were 47%, down 5% when compared to last year, due in part to adjustments and inventory valuations.

Year-to-date operating expenses were $4.1 million compared to $4.5 million for the same period in 2016. Included in last year's results were costs related to the aforementioned 2016 contested proxy, the discretionary bonus awarded to various staff and general research and development expenses as well as the existence of various administrative positions that had been eliminated. We incurred operating losses from continuing operations of $2.2 million and $1.8 million for the 6 months ended June 30, 2017, and 2016, respectively.

Income from continued -- from discontinued operations was $590,000 and $1.3 million for the 6 months ended June 30, 2017, and 2016. Year-to-date EBITDA from continued operations were a negative $1.7 million in both 2017 and 2016.

We reported approximately $9.4 million in cash and equivalents at June 30, 2017, compared to $900,000 at this time last year. Cash used in continuing operations during the first 6 months was approximately $1.8 million compared to $1.9 million the prior year period. Although a first quarter accrual, a significant use of cash during the second quarter, was payment of the $500,000 investment bank fee resulting from the sale of EthoStream. We are already in the process of finalizing the networking capital escrow related to this sale. Proceeds are anticipated to be received during the third quarter. The indemnification escrow of $900,000 disclosed as restricted cash will be released net of any potential claims after a period not to exceed 1 year from the date of sale.

We reported a working capital surplus, measured as current assets less current liabilities, of $10.6 million at June 30, 2017, compared to a surplus of $470,000 at this time last year. Although nothing was outstanding on our asset base line of credit at June 30, 2017, we did have available borrowing capacity of approximately $1.1 million.

The second quarter was defined as a series of transitions ranging from migrating offices to personnel realignment to separating and intertwined systems infrastructure, all inherently disruptive to operations on their own. Now that the proverbial dust has settled, attention can once again be focused entirely on execution of our corporate objectives. Once again, thank you for your interest. And to our shareholders specifically, thank you for your continued support.

I'll now turn the call back to Telkonet's President and Chief Executive Officer, Jason Tienor.

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [4]

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Thank you, Gene. With that, I'll hand the call over to the operator to take any questions you might have. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from [Ed Stein].

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Unidentified Analyst, [2]

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Lots of little questions and a couple of big ones. The first little question is, I haven't ever seen on the financial statements or heard it discussed, with all the great technology breakthroughs we've had, do -- are we getting patent protection on all this stuff?

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [3]

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A very good question, [Ed]. One of the things that our newest board members have had significant conversation with executive management about was patent protection and of the new technology that we are adding as we advance our EcoSmart platform. Thus, due to this conversation, one of the things that our engineering staff and specifically our CTO, Jeff Sobieski, is very active with this, working with our attorneys to ensure that anything where we are able to provide coverage, we are assuming. So...

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Unidentified Analyst, [4]

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Great, okay. This is a technical question, which I don't even know enough technology to ask, but I think you'll get the idea. Since we are obviously very involved in the IoT and now that you read every day about somebody hacking things on the Internet, are we working on protection for our technology? Or is that going to be the customer's responsibility to prevent the hacking of our technology part of it?

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [5]

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That's a very good question, [Ed]. And fortunately, for us, security was an inherent development from the time that we began building EcoSmart back in 2009 forward because we had acquired a platform in the HVAC and energy efficiency space and because where Jeff and myself came from was the technology side of the acquisitions from 2007. We integrated that knowledge of technology and wireless into the mechanical engineering that was Smart Systems platform itself when we began creating our EcoSmart platform. Thus, as we move forward and integrate other third-party products, not only are we securing our ability to deter any type of activity of that sort, we also will only integrate with other third-party products that meet our standards for security and are able to be deployed into the markets that we service without security concerns.

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Unidentified Analyst, [6]

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Great. That's good to hear. Okay, the next one is a different kind of technical question. I reviewed the statements and the earnings release, and I can't reconcile the two. The earnings release, the 8-K press release, said that the net income attributable to common stockholders increased to $4.8 million from a loss of $0.6 million. But when you look at the numbers, it still looks like we haven't made a profit yet. Can somebody explain that?

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [7]

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One second, [Ed]. Ed , can you repeat that question?

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Unidentified Analyst, [8]

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Yes. In the earnings release, the 8-K press release, there is a statement, which sure got my attention, that said net income attributable to common stockholders increased to $4.8 million from a loss of $0.6 million in the prior year period. But when you look at the numbers, on the consolidated statements of operations, we still haven't made a profit, much less $4.8 million.

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [9]

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Well, that is reflecting the gain on the sale of EcoStream. We recorded approximately a $6.8 million gain on the sale.

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Unidentified Analyst, [10]

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I thought we had already reported that and -- okay, then that definitely explains it. Well, okay, my last question is the one I ask every quarter. Every -- we now have, as we said, the best technology. We now have great partners, great recommendations from our customers and several million dollars in the bank. And last quarter, I think several of us asked that does this mean that now we can look forward to having some profits from now on, and I understand there was a move involved this quarter. But if looking forward, do you think by the end of the year we will be seeing positive income instead of a smaller loss or a loss at all?

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [11]

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Absolutely, [Ed]. So as I shared with the previous earnings call, much as when we made the decision to move ahead with the divestiture of EthoStream, simply because we completed that decision, doesn't change where we are from one day to the next. We still have to create greater market awareness for our product. We still have to go out and execute on the sales activities and create the successes that will help us generate that type of profit. So we've made the product. We now have the funding to help us increase our activities with building a larger market base and servicing that larger market base, but it doesn't happen overnight. So much as I said in the previous call, I expect within the next -- within the first year or after the divestiture, that we are meeting our profitability expectations, but it will take that long for us to get from the sale itself to where we've built enough run rates for revenue increasing and our cost reconciliation that we're going to be profitable in and of itself. And as Gene stated, as I mentioned during my piece of the call, the last quarter has really been uncontinued divestiture or actually executing on the sale when we, at the very end of Q1, agreed to divest the assets. We spent the last 3 months actually moving through that, building out offices, get the employees and the staff moved and all of these services, software, hardware from our co-location facility split up. We're doing a lot of development just to rebuild the company to where we are today. Now moving forward, we feel that we have, as Gene mentioned, most of the dust settled. We'll be working entirely firmly on building the business, and we expect to see profitability achieved very quickly because of the fact that we have the resources to do so.

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Unidentified Analyst, [12]

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Okay. Sure, sounds good. And just the last follow-up is, is it working well, the instructions and the -- what you put on the Internet, so the personnel from Telkonet doesn't have to spend several days with every install that people can actually consult the Internet and learn how to do it without tying all of our personnel up?

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [13]

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Are you referring to EcoSmart University?

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Unidentified Analyst, [14]

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I think so. I'm not sure what I'm referring to.

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [15]

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Yes, the portal that we've created that allows us to move through training our third-party partners very quickly and allows them to utilize the information that we provided rather than having to call staff in order to resolve any issues they might have. It's been a enormous boost for us for building our third-party development channels and for building our channel sales as well, which is why, for the first time ever, I mentioned we will have -- be having a Telkonet Partner Week where we have both domestic and international partners coming here to Milwaukee for 3 days. They'll be trained on all of our new products, features, developments, our product integrations. They'll be learning very closely what advancements we've made through the last year. So that now when they go out and they're continuing to sell the EcoSmart platform, they're able to do more, more successfully and quickly than they have in the past. It's phenomenal for an organization of our size to be able to list more than 20 partners who are willing to come in and be trained all at one time by a company and a platform like EcoSmart. So we're very excited about it. It starts on Monday, and we're looking forward to a great week of having our partners, not only work with us and learn from us, but learn from one another and their successes.

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Operator [16]

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Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Jason Tienor for closing remarks.

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Jason L. Tienor, Telkonet, Inc. - CEO, President and Director [17]

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Well, thank you, operator. And thank you once again to everybody on the call for your interest in Telkonet. We appreciate any questions you might have, if you have any. Once the call is ended, you can reach us at ir@telkonet.com. And with that, I bid everybody a great afternoon.

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Operator [18]

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This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.