Q1 2024 RF Industries Ltd Earnings Call
Participants
Margaret Boyce; IR; Financial Profiles Inc
Robert Dawson; CEO; RF Industries Ltd
Ray Bibisi; COO; RF Industries Ltd
Peter Yin; CFO; RF Industries Ltd
Josh Nichols; Analyst; B. Riley Securities Inc
Greg Graves
Ethan Starr
Presentation
Operator
Greetings, and welcome to the RF Industries First Quarter Fiscal 2024 financial results conference call.
At this time all participants are in a listen-only mode and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Margaret Boyce, Investor Relations for RF Industries. Margaret, you may begin.
Margaret Boyce
Thank you, Pam, and welcome everyone, to Arista Industries' First Quarter Fiscal 2024 earnings conference call. With me today is with me on today's call are F. industries, CEO. Rob Dawson, President and Chief Operating Officer, Ralph Beattie, and CFO, Peter Jensen. Before I turn the call over to Rob and Peter, I'd like to cover a few quick items we issued our Q1 earnings release after market today. That release is available on our website at our app industries.com.
I'd like to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that statements on the call today may constitute forward-looking statements within the meaning of Section 21 E. of the Securities Exchange Act of 1934. When used the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements in these forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the Company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. Rf Industries undertakes no obligation to update or revise any forward-looking statements.
Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 10-K describe the differences between our GAAP and non-GAAP reporting.
With that said, I'll now turn the conference over to CEO. Rob Dawson. Brad, please go ahead.
Robert Dawson
Thank you, Margaret, and welcome to our First Quarter Fiscal 2024 conference call. I just want to welcome Ray BBC's participation in our call recently promoted to President. Ray will play a key role in shaping the next generation of our business strategy and operations, and as such, will be a valuable addition to our quarterly calls for the first quarter, we reported net sales of $13.5 million, down 27% year over year. While the first quarter has always been our seasonally slowest period. Sales were lower than anticipated, largely due to more than $2 million of customer shipments and orders that were delayed in the quarter. Importantly, these orders were not canceled and we expect they will be shipped over the next few quarters. Fortunately, our lower cost structure helped us weather this rough period when the market recovers. Our cost reduction initiatives will yield even greater benefit and help us return to profitable growth.
Turning to the overall market, it feels like the ice might be sign on the low CapEx spend and sluggish activity we experienced for over a year. We're finally starting to see some early signs of reversal from the CapEx downturn that made fiscal '23 so challenging as a welcome relief from the dramatic 17% decline in CapEx spending last year. Telecom companies guidance for 2024 indicated a CapEx spend to increase of up to 5%, and we're seeing this reflected in our business.
Important to clarify, more of the 2024 CapEx is related to densification of wireless networks, which aligns nicely with our expanded product offerings. We're encouraged that many projects which have been in the sales pipeline for several quarters begin to convert, began to convert into purchase orders in February even better. This increase in new orders is primarily high-value products like our DAC. thermal cooling solutions and small cell trials that are being purchased by multiple customers in the Tier one wireless carrier ecosystem. This has led to a substantial increase in our quarterly backlog, which now stands at $19.3 million, up $3.1 billion compared to January 31. The progress we made in 2023 to become a leaner and more efficient operation will have a meaningful impact on profitability. As this carrier CapEx spending normalizes and our top line growth resumes, we believe this recovery will be gradual, but has staying power. Our backlog growth is comprised of multiple orders across a variety of customers and diverse geographies, not just one large order that's moving the needle with several customers. We have signed long-term master agreements. This means that as long as we continue to execute, will remain part of their build plans, not just for 2024. But for the long term, one customer in particular is beginning the first phase of a multiyear program of 5G deployment and infrastructure updates with a master agreement in place with this customer. We're optimistic this will result in repeatable business for our FI. We have also positioned RFID to benefit from diversification that isn't CapEx and market-specific. It's important to note that a portion of our products and solutions align well with operating and maintenance budgets versus CapEx. We believe that solutions like our Dac thermal cooling systems are helping us smooth out the peaks and valleys of carrier CapEx by addressing annual updates and upgrades that are part of a carrier's maintenance budget. We've been working hard to successfully build strong relationships and a greater presence with our carrier customers and capturing some of their maintenance budget as another source of funding separate from CapEx projects.
It's also important to note that last year, 57% of our sales came from diverse end markets outside of wireless carrier applications such as manufacturing, public safety, energy, hospitality, education and medical. In addition, we're continuing to explore opportunities with new customer segments, including cable companies, wireline telecom carriers and industrial markets that could develop into meaningful business over time. As I've said before, we felt strongly that our wireless carrier customers could only stay on the sidelines for so long to stay competitive, they need to continuously improve the telecom infrastructure to meet customers' expectations for speed and coverage. Not only are they focused on the 4G and 5G macro towers, but also on network densification to meet both new and pent-up demand.
In the telecom market, we made significant investments in our Integrated Systems product line and can now offer a broad selection of high quality interconnect products and next-generation integrated systems. This positions us to gain a larger percentage of our customers' bill of materials by having the leading edge products they need for key applications.
In addition to expanding our portfolio of high-value products. Over the last year, we executed our plan to control costs and drive further synergies by consolidating our facilities, while the work we did in 2023, reduced our annual expenses by $2.5 million. We have other initiatives underway to potentially reduce annual expenses by another $3 million by the end of fiscal year 2024. And Ray will provide more details during his remarks.
In 2023, we accomplished a great deal through the hard work and dedication of our outstanding team. And Ray as Chief Operating Officer, was very instrumental in achieving this progress. Recognizing that leadership in February, we promoted him to President and Chief Operating and Chief Operation Officer. This promotion expenses leadership role at RFI beyond operations to include greater oversight on our go-to-market strategies. I'm confident that they will make significant contributions to shaping our business strategy, go-to-market and operations for the next phase of our strategic plan.
Looking ahead to 2024, we're optimistic about our future prospects we have a strong competitive position with a highly attractive product portfolio, a capital light business model and substantial operating leverage. As you've heard me say before, as capital expenditures pickup, we see significant leverage in our P&L that can have a favorable impact on gross margins, either from higher sales, a better product mix, a better product mix shift or boat plus as we reduce expenses, any incremental sales should flow to the bottom line with what we know today, we expect Q2 sales to increase sequentially over Q1 as we begin to benefit from the substantial new order flow that I discussed earlier. I want to thank our employees who work diligently to improve our operations and set the company up for future success. I also want to thank our shareholders who have been patient through the downturn. We appreciate all of your support, and I'll now turn the call over to Ralph ABC to speak about our operations. Ray.
Ray Bibisi
Thank you, Rob. I'm truly honored to assume the role of President of RF Industries and excited to speak with you today about the opportunities that lie ahead in my capacity. I will be leading our FI's sales, product management, engineering and operations teams across all business units and product areas. Our goal is to closely align these teams with our go-to-market strategy that will facilitate enhanced cross-selling of our diverse portfolio and solutions. This strategic alignment is designed to establish a more cohesive and efficient organizational structure that will help us capitalize on significant market opportunities. I'm confident that fostering greater integration within our market-facing team will give us a competitive edge as we pursue these opportunities.
As mentioned by Rob earlier, our initiative to drive further cost reductions will continue through 2024. We see opportunities for improvement in several areas such as direct material facilities and equipment, product design and development, along with the benefits of applying lean principles company-wide to improve operation efficiencies.
In addition to our ongoing cost reduction initiative, we have organized the tiger team focused on cash generation. While this initiative will examine several best practices to strengthen our business. Its immediate priority will focus on minimizing excess and obsolete inventory for potential benefits from both cost reduction and cash generation programs will enhance our financial strength of our organization. Furthermore, I am very excited about the collaborative spirit and enthusiasm of my new team. Together, we've engaged in discussions around sales strategy, market diversification market share as well as product roadmap and rationalization. We are totally aligned and maximizing the opportunities ahead that will contribute to a bright future for our FI. It's an exciting time for our Company.
And with that, I will now turn it over to Peter to discuss our financial results at Cedar.
Peter Yin
Thank you, Ralph, and good afternoon, everyone. As Rob mentioned, our first quarter results were lower than we expected. However, we are excited to see spending improving and having a positive impact on our backlog.
First quarter sales were $13.5 million, a decrease of $4.9 million or 27% decrease year over year and down 15% on a sequential basis. First quarter gross profit margin decreased to 24.5% from 27.7% year over year. The 320 basis points decrease reflected the impact of lower sales and less leverage to cover certain fixed costs. First quarter operating loss was $2.1 million compared to an operating loss of $1.2 million in the prior year period. The operating loss was primarily due to lower sales volume and lower contribution from higher-margin products offset by lower operating expenses.
In the first quarter of 2024, our net loss was $1.4 million or $0.13 per diluted share, and our non-GAAP net loss was $590,000 or $0.06 per diluted share compared to a net loss of $1.2 million or $0.11 per diluted share and a non-GAAP net loss of $25,000 or $0 per diluted share for Q1 2023. First quarter. Adjusted EBITDA was negative $1.1 million compared to positive adjusted EBITDA of $78,000 in Q1 2023.
Moving to the balance sheet. As of January 31, we had a total of $4.5 million of cash and cash equivalents and have working capital of $21.6 million and a current ratio of approximately 2.9 to 1 with current assets of $32.9 million and current liabilities of $11.3 million. As of July 31, we borrowed $12.5 million under our term loan and $500,000 from the revolving credit facility related to the credit facility. As you saw in the third amendment filed at the end of February. We have been working over the last several months to ensure we have access to liquidity and flexibility needed to support the recovery of our business. As of today, we have refinanced the term loan that was put in place in 2022 with a new asset-based revolver with a new lender. This revolver will support our next phase while giving us the working capital flexibility to handle potentially uneven deployments in customer orders.
Our inventory was $18 million, down from $18.7 million last year. The decrease in inventory reflected our continued rationalization and rightsizing of our inventory to address the lower demand level we experienced in 2023. We believe our current inventory level supports our strategic business model of inventory availability, and we continue to manage this closely as we expect to see increased demand in 2024 as CapEx spending gradually normalizes over the coming year.
Moving on, we are seeing momentum built around new business. Our backlog as of January 31, was $16.2 million on first quarter bookings of $13.6 million. Subsequent to Q1, we've seen an increase in order flow. And as of today, our backlog currently stands at $19.3 million. As we look ahead, we're optimistic the positive trends we are seeing with our customers will continue to benefit our sales. We're excited about our opportunity to drive top line growth and generate profitability through key customer projects and higher value solutions.
With that, I'll open up the call for your question.
Question and Answer Session
Operator
Thank you.
At this time will be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue, you may press star two. If you would like to remove your question from the queue For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again, please press star one on your phone at this time. If you wish to ask a question, please hold while we poll for question.
And the first question today is coming from Josh Nichols from B. Riley. Josh, your line is live.
Josh Nichols
Yes, thanks, to take my question on I know the carrier CapEx market has obviously been tough specifically for last year and the first quarter is a little bit of a seasonally low for you guys, but good to hear that the revenue is expected to pick up in 2Q just given what we're seeing for the decent backlog jump. I'm just kind of curious, do you think if there's going to be more of an incremental or material sequential pickup in 2Q, or do you think a lot of that backlog is going to be coming in like the fiscal second half of this year, and we just think of the cadence of the acceleration over the next few quarters?
Robert Dawson
Yes, Josh, thanks. Good question. I think I'll give kind of a few two reactions to the question or to answer to the question. So one is what we've been through in the last four quarters. I have a hard time predicting exact timing on when these orders are going to flow. So I'll just I'll give that caveat kind of dip again, but I think that the broader pieces, we expect some of the orders we've been seeing to help us in Q2. I'm not going to give specific guidance on Q2 revenue number, but we certainly expect nice recovery starting to show in the second quarter and then through the rest of the year, I mean these orders that we've seen to take the backlog up, as I said in my prepared remarks, it's not a one-time thing. We have scenarios occasionally where we get a large order and we draw against it for some period of time. This is several recurring orders around several different projects with multiple customers that are not just the month of February was great from a bookings perspective, but it's not just that. I think we've continued to see those into March, helping that backlog, and we expect there to be more sort of continuing as the year goes on. So hard to give exact timing, but we certainly expect to sort of accelerate from here.
Operator
Josh, any more questions?
Josh Nichols
Yes, one more question. Sort of just looking at the OpEx structure, you guys have gotten pretty lean and mean over the last 12 months, I'd say and add $2.5 million of annualized operating savings. And you mentioned on the call that could be potentially another $3 million of additional savings. Could you just maybe elaborate on where those are potentially coming from specifically what the company plans to do or any extension associated with achieving those?
Robert Dawson
Sure.
Yes.
Maybe I'll give a kind of a first pass on and then I'll let Ray add some of the specific initiatives at a high level that the team is driving. So generally, it's sort of a continuation of the things that we began had planned going into fiscal '23 with the combining of locations to allow us to get started on some of these streamlining opportunities. So it's sort of the next phase of that and continuing down the path of the good diligent various work streams that the team has been driving.
So Rene, do you want to mention some of the specific items that you had a few in your prepared remarks that maybe just recap those at a high level, what the items are that some of the initiatives the team is driving.
Ray Bibisi
Sure.
Thanks, Robyn And Josh, like I kind of mentioned in my dialogue, we're looking at multiple facets of the business on direct material is one element on, as Rob mentioned, facilities on the consolidation of facilities and the synergies that we can benefit from those consolidations. We're also looking very heavily into product design on manufacturability of new product design and then the other. The other big element is of the lean principles on eliminating waste in our operation, our manufacturing processes and our processes across the board. So we kicked this off in 2023. We see other opportunities moving into 2024. And we think that there's that there's more that can be accomplished as we move into this year.
Josh Nichols
Thanks.
And then last question for me.
I guess like given the anticipated upswing in revenue throughout the rest of the year and the fact that you've talked about, you're probably going to be getting some higher-margin revenue from small cell and DAS, things like that. How should investors be thinking about the potential margin expansion over the coming quarters for the Company?
Ray Bibisi
Yes. Maybe I'll give a first pass and let Peter add some specifics there.
So I think the general summary is we need to be as a specific sales number to allow us to cover fixed charge, right? That is one of the things that Peter mentioned in his comments. And I think just at a high level, as we see product mix get better, we brought our breakeven way down. But as we see the product mix get better around these higher margin items, I think that is one key area where we should see the margin expansion start to happen. Peter, you want to add some specifics there?
Peter Yin
Sure.
Hey, Josh.
Thanks, hopped on. So as as the year continues and we see the improvements in the top line and the product mix getting better, I think we can expect us to get closer to 30% range where we've been, Josh, coming off a 35 at 24.5 on that, that not a great number for us, but I think with the sales improving and kind of the synergies we report on last year and continuing on to this year. As we see the sales from the higher kind of margin stuff start to start to ship out the gilt yield, you'll see a quicker improvement to our gross margins with well, we saw some sales increase here.
Josh Nichols
Great. That's all for me.
Thanks, guys.
Robert Dawson
Thanks, Jeff.
Operator
Thank you.
And once again, it will be star-1 if there were any other questions at this time. Once again, star one if you wish to ask a question. Once again, that's star one if you wish to ask a question at this time.
And the next question is coming from Greg Graves. Greg is a private investor.
Greg Graves
Gentlemen. I just have one simple question related to the activities in the U.S. and China. Could you give us a rough idea of how we live, how much you are relying on China for some of the components that go into our parks?
Robert Dawson
Yes. Thanks, Gregg. Good question. So small, as in less than 10% of our inventory has a direct connection there. Now that's direct. That doesn't mean that US-based suppliers that we're purchasing from are also sourcing something, but our exposure that we're aware of is, I would say less than 10% of our inventory.
Greg Graves
Thank you. That's very reassuring.
Robert Dawson
Thanks, Greg.
Operator
Thank you.
And the next question is coming from Ethan Starr Eaton is also a private investor.
Ethan Starr
Yes, thank you. There was some mention of some obsolete out-of-date inventory in your inventory figure.
I'm wondering roughly, can you give me give some guidance as to the percentage or dollar figure roughly about the inventory and what your hopes are for moving it out the door?
Robert Dawson
Yes, I think we've been so giving a specific network we're not going to give a specific number on it. I can tell you is it's a small percentage of our total and in some cases, it's not actually obsolete. It's just been slow moving and we've made the decision to turn that into cash to move some stuff out of there. So it's not going to have a massive material change to our inventory level, but some of the decline that you saw in our current inventory and it is $18 million as we reported, and it was [$18.9 million] prior quarter. So that part of that is selling through some inventory, but part of that is also reducing those numbers. So it's not I don't want to overstate the obsolete word. We certainly want to say, yes, there is some in there that we needed to move out, but it's more about, I think, just rationalizing and turning into cash if it hasn't been moving.
Ethan Starr
Okay.
Well, thanks for correcting me on the improper use of obsolete and look forward to next quarter's results.
Robert Dawson
frankly.
But I think we said the word obsolete. So that's on us not huge. Thank you.
Ethan Starr
Okay, perfect.
Operator
Thank you.
There were no other questions at this time. I would now like to hand the call back to Rob Dawson, CEO at RF Industries. For closing remarks.
Robert Dawson
Thanks, Paul, and thanks, everyone, for joining our call today, and we look forward to reporting our second quarter results in June. Have a good day.
Operator
Thank you. This does conclude today's conference. You may disconnect your lines at this time. Have a wonderful day. Thank you for your participation.
