BK Technologies Corporation (AMEX:BKTI) Q2 2023 Earnings Call Transcript

BK Technologies Corporation (AMEX:BKTI) Q2 2023 Earnings Call Transcript August 10, 2023

Operator: Greetings. Welcome to the BK Technologies Second Quarter 2023 Conference Call. At this time all participants are in a listen-only mode. A question and answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Jen Belodeau. You may begin.

Jen Belodeau: Thank you. Good morning and welcome to our conference call to discuss BK Technologies results for the second quarter of 2023. On the call today are John Suzuki, Chief Executive Officer, and Scott Malmanger, Chief Financial Officer. I will take a moment now to read the Safe Harbor statement. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include but are not limited to projections or statements of future goals and targets regarding the company’s revenue and profits. These statements are subject to known and unknown factors and risks. The company’s actual results, performance, or achievements may differ materially from those expressed or implied by these forward-looking statements.

And some of the factors and risks that could cause or contribute to such material differences have been described in this morning’s press release and in BK’s filings with the U.S. Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. As a reminder, there is a slide presentation that accompanies today’s remarks, which can be accessed via the BK Technologies homepage. And now, I will turn the call over to John Suzuki, CEO of BK Technologies. Go ahead, John.

John Suzuki: Thank you, Jen. Thank you, everyone, for joining today. I’ll start by reviewing some of the highlights of our operations and financial results during the quarter. Then I’ll turn it over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We’ll conclude by opening up the call for a brief Q&A. Turning to slide three. We saw a continued momentum in the second quarter, with revenue growing 57% to $19 million, compared to second quarter of last year. During the quarter, we shipped 8,938 radios, bringing our first half shipment total to 18,939. With the progress we’re making, we are maintaining our annual shipment target range of 32,000 to 36,000, but we believe there’s a good chance that we’ll end up at the high end of our radio delivery guidance, or even potentially surpassing it.

In the second quarter, we were very pleased to receive FCC certification for our BKR 9000 multiband radio, and we completed our first shipment of the BKR 9000 in early June to the U.S. Army. With its enhanced capabilities and cost-effective price point, the BKR 9000 is a very attractive next-generation portable communications radio. As we discussed on other calls, we expect the multiband capabilities of the BKR 9000 to open up a larger addressable market with several new market verticals, and we’re excited to bring this new portable communication solution to new customers. Turning to slide four. Our BKR 5000 saw continued demand and strong order activity during the second quarter, particularly as existing customers upgraded their portable communications technology.

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Of note, we received two large orders totaling over 5100 radios from the USDA Forest Service, as well as a significant purchase order valued at 924,000 from the Washington State Department of Natural Resources. Both agencies are longtime BK customers, and we’re grateful to partner with them as they upgrade to newer, more reliable portable communications technology. Booking activity in the quarter was strong, and we ended the quarter with a backlog of $24 million as of June 30, 2023. Slide five. Slide five illustrates the continued traction we’re seeing with our BKR 5000 radio. As mentioned a moment ago, in the second quarter, we shipped 8,938 units, bringing us to a total of 18,939 radios shipped year to date. With our visibility today, we believe second half shipment levels will be in the range of 13,000 to 17,000, and anticipate closing out the year on the high end of this range.

Turning to slide six. Our gross margin performance for the second quarter was disappointing. As we experienced delays in implementing our cost reduction initiatives, those initiatives have now been launched in earnest, and as a result, we anticipate the third quarter margins will be favorably impacted. Unfortunately, this delay does mean that we no longer anticipate meeting our gross margin target of 35% for the full year. That said, with initiatives now underway, and with a favorable product mix now includes the BKR 9000 multi-band radio, we expect to see continued gross margin improvement through the balance of the year. Our expectation is that these cost initiatives will drive further savings in 2024 as we continue our commitment to quarter over quarter margin expansion.

Slide seven. Slide seven shows our highly experienced engineering development and manufacturing teams who are instrumental to the launch of our innovative BKR 9000 multi-band portable communications radio. In June, we received FCC certification and P25 compliance assessment program, or P25 CAP approval for the BKR 9000, and began shipping the BKR 9000 shortly after. Our first shipment of the BKR 9000 radios was to the U.S. Army. Since this initial delivery, we have received several additional orders from the U.S. Army, and we’re pleased to continue to expand our relationship. I’d like to take a moment to dive a little deeper into the market opportunity for the BKR 9000 and what makes this radio such an exciting opportunity for our company. In the U.S. alone, there are about 1,000 P25 trunk radio systems.

For the most part, each state operates their own statewide P25 radio system, which provides an overlay radio communication to regional, county, and city-owned P25 radio systems. It’s very common that these overlay or adjacent P25 trunk systems operate in a different frequency band, so there is a real need for a multi-band radio that can operate on all four of the LMR frequency bands. BK has completed or is in the process of testing the BKR 9000 on over 30 P25 trunked systems. Most of these are large statewide, regional, and or county P25 systems with hundreds of thousands of radio users. The BKR 9000 has passed the P25 compliance assessment program, but each P25 system owner requires further approval on their specific system. BK has years of experience acquiring system approval for our legacy P25 radios, and this history is helping us expedite the individual approval process.

Early feedback from system owners has been positive, with many owners indicating minimum configuration or software changes required to approve the BKR 9000. Customers are impressed with the look and feel of the radio, which provides high-end capabilities at a reasonable price point. While still early on and anecdotal, we receive feedback that our audio sounds better than our competitors’ products, and the radio performs better in noisy RF environments. We are encouraged by this feedback and energized to bring the BKR 9000 to more customers. As we continue to receive system approvals, our order book continues to grow. Our shipment plan remains modest initially, as we primer production line and ramp up as we head into the fourth quarter and 2024.

Now, I’ll turn it over to Scott Malmanger, CFO, to take you through the financials. Scott?

Scott Malmanger: Thanks, John. On slide eight, you’ll see a summary of our financial and operating results for the period ending June 30, 2023. Sales for the second quarter totaled approximately $19 million, compared with $12.1 million for the same quarter last year. As John mentioned, we closed the second quarter with an order backlog of $24 million. Gross profit margin in the second quarter was 27% compared with 14% in the second quarter of last year. Selling, general and administrative expenses, or SG&A, for the second quarter total approximately $6 million, compared with $5.4 million for the same quarter last year. SG&A expenses included increased spending as we launched and improved market awareness of the BKR 9000. Operating loss totaled $784,000, compared with an operating loss of $3.7 million for the second quarter of last year.

In the second quarter of 2023, we recognized the net unrealized loss of $376,000 on our investments, compared with the net unrealized loss of $602,000 in the same quarter last year. We recorded a significantly reduced net loss of $1.3 million, or $0.39 per basic and diluted share in the second quarter of 2023, compared with a net loss of $4.3 million, or $1.28 per basic and diluted share in the prior year period. It is our expectation that with continued strong sales, performance, and gross margin improvement, we should continue our progress towards profitability. And finally, as of June 30, 2023, we have approximately $2.7 million of cash and cash equivalent, and only $24,000 in long-term debt. From a liquidity standpoint, we believe that our current cash position combined with anticipated cash generated primarily by radio sales and borrowing availability under our credit facility provides us with the working capital that we need to grow our business.

I will turn the call back over to John.

John Suzuki: Thank you, Scott. On slide nine, we reiterate our operational and strategic focus for 2023. First, we remain focused on maximizing production efficiency. Our capacity is set to produce up to 10,000 radios per quarter, or 40,000 for the full year. We are targeting production of 8,000 to 10,000 radios per quarter, and based on the backlog and forecasted demand, we maintain our stated annual shipment target of between 32,000 and 36,000 radios. As I said earlier, based on where we sit, this is a conservative estimate, and we believe is a good chance that we will end up on the high end of our radio delivery guidance for the year. Second, we are focused on driving gross margin improvement through 2023. And the third area focus is around our continuing efforts to establish strategic beachheads in the federal, state, and local public safety markets for the BKR 9000, multi-band portable radio, and InteropONE.

We believe that establishing these beachheads is important as we plan for continued growth in 2024 and achieving our 2025 revenue goals. Slide 10. On our last slide, we reiterate our long-term goal of reaching $100 million in revenue by 2025. We are investing to drive profitable growth and to establish BK as a premier communications technology provider for the public safety and critical communications market. Our BKR 5000 is a proven success in its appeal to new customers as well as to existing customers as they move through their equipment upgrade cycles. Likewise, now that we have launched the BKR 9000, we have the opportunity to significantly expand our target markets and grow our brand recognition among our new customer audience. Finally, we think InteropONE has the ideal capabilities to improve communications between first responders, which will in turn improve safety and response times, potentially saving lives.

As a SaaS service, we anticipate InteropONE will play a meaningful role in delivering high-margin, reoccurring revenue as we gain market presence over time. With that, I’ll turn the call over to the operator for questions. Mike?

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Q&A Session

Operator: At this time, we will be conducting a question and answer session. [Operator Instructions]. We do have our first question. It comes from Matt Williams with Friess Associates.

Matt Williams: John, I wondered if you could just take a minute to talk about seasonality in the business and maybe the number of units shipped in Q2 versus Q1?

John Suzuki: Yes. So, our core business is in wildland fire. So, their busy season is like now, in Q2 and Q3. It tapers off in Q4 and starts to build in Q1 again. So if you look at, for example, the average revenue per radio shipped in the first quarter versus the average revenue shipped per radio in the second quarter, second quarter is a lot higher and that’s because as these fire teams are being deployed out to wildland fires, they’re checking their kit and they’re ordering a lot of accessories. And so, if you look at the total first half of the year, it’s within what we had said historically was about $2,000 a radio. We’re tracking to that this year. In terms of the number of radio shipped in the second quarter versus the first quarter, Matt, I assume that you’re asking why didn’t we ship more radios?

Matt Williams: Yes, that’s my question.

John Suzuki: Yes. Okay. Yes, so from a production standpoint, I can say that we produced a similar number of radios. We did have about 1,000 radios sitting on our dock in that last week. We were expecting some shipments of a specific accessory that had to ship with this radio and it came in a little bit late. So, if it had been a week earlier, we would have been closer to 10,000 radios shipped, but from a production standpoint, we’re holding to that line.

Matt Williams: Got it. So I presume that 1,000 or so radios has shipped subsequent to Q end?

John Suzuki: Yes.

Matt Williams: All right, got it. That’s helpful. And then, you talked about gross margins kind of coming in below what you were hoping for. Can you talk about what the issues were? Was it just slower realization of some cost savings? Was it continued higher component costs? What is it that slowed your progression on gross margins?

John Suzuki: So let me take the component costs first, right? What we’ve seen is the component cost has more or less stabilized. I mean, there’s still a few components that are slightly out of whack, but in general, I would say it’s normalized. The bigger issue is in the programs that we had for specific cost downs, because again, we brought these radios into our factories from offshore, and we had a number of programs to update these radios and bring the cost down. And so, we had a very aggressive target this year, I would say. But we believe we could get these costs out of these radios and get these margins up on these products. In Q2, we had anticipated that we would start recognizing some of those cost savings, and we just did not, because some of the development was delayed, some of the certifications, and then getting it into the factory.

All that said, we believe that, well, we know that that’s being introduced in this quarter, and it will have a favorable impact into the margins of this quarter.

Matt Williams: Got it. Is there a gross margin number that you think you can achieve in the second half? Maybe the exiting run rate?

Scott Malmanger: This is Scott Malmanger. I would say that the best way to say this is we are expecting, we continue to expect incremental quarter-over-quarter improvement for the remainder of this year and through 2024. In the past, we’ve said we’re trending back towards the historical rates in the upper 30s, mid to upper 30% range, and we’re still comfortable that we’re trending towards that direction.