BK Technologies Corporation (AMEX:BKTI) Q3 2023 Earnings Call Transcript

BK Technologies Corporation (AMEX:BKTI) Q3 2023 Earnings Call Transcript November 12, 2023

Operator: Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Third Quarter 2023. This call is being recorded. All participants have been placed on a listen-only mode. Following management’s remarks, the call will be open for questions. There is a slide presentation that accompanies today’s remarks that can be accessed via the webcast. At this time, it is now my pleasure to turn the floor over to your host for today, Jen Belodeau. Ma ‘am, please go ahead.

Jen Belodeau: Thank you. Good morning and welcome to our conference call to discuss BK Technologies’ results for the third quarter of 2023. On the call today are John Suzuki, Chief Executive Officer and Scott Malmanger, Chief Financial Officer. I will take a moment to read the Safe Harbor statements. Statements made during this conference call and presented in the presentation that are not based on the 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. Okay. with that out of the way, I’ll 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 3. we delivered strong third quarter results, which included a 68% increase in revenue to $20.1 million, improved gross margins and a return to profitability. During the quarter, we shipped 9,310 radios, bringing our shipment total to 28,249 for the first nine months of 2023. And we remain on track to achieve our target range of shipping between 32,000 and 36,000 radios for the full year.

With our visibility today, we believe we have a very good chance to achieve the high end of our radio delivery guidance. In the third quarter, we continued to ship not just the BKR 5000, but also our BKR 9000 multiband radio. In fact, in September, we received an emergency order for the BKR 9000 from the state of Hawaii as it contended with the aftermath of the devastating wildfires in Maui County. We mobilized quickly to get a shipment out to this new customer and we’re pleased to have had the opportunity to assist during a difficult time and to launch what we hope will be an ongoing relationship with the state. We continue to see great deal of market interest in the BKR 9000, which with its enhanced multiband capabilities and cost-effective price point is an attractive offering in the portable communication space.

The BKR 9000 has completed field tests on more than 19 P25 trunk systems, and there are 30-plus additional system tests underway. BK has years of experience acquiring system approval for our legacy P25 radios and this history is helping to expedite the individual approval process. As we move forward, we expect the success of these field tests will serve as further verification of the radios’ multiband capabilities and reliability, opening up opportunities for us to address a larger and more diverse market vertical. Turning to slide 4. We saw a significant order activity during the third quarter. In addition to the BKR 9000 order from the state of Hawaii that I just mentioned, we also received an order from Sandoval County, New Mexico, valued at 963,000.

I highlight Sandoval County, because they are a good example of what we define as a Tier 3 county in terms of population density. There is an estimated 750 Tier 3 suburban to rural counties in the U.S. that we’re targeting for the BKR 9000, because we believe the radio is a great fit, not just in its multiband capabilities, but its cost-effective price point positioning us to gain market share. For the BKR 5000, there continues to be strong demand as demonstrated by a $3.4 million order we received from the National Interagency Incident Communications Division and a $2.1 million order from the Bureau of Land Management, which also included some BKR 9000 radios for test and evaluation. So, it’s been a very busy quarter in terms of order activity and we ended the quarter with an order backlog of $21.8 million as of September 30th, 2023.

Slide 5. Slide 5 illustrates the continued traction we’re seeing with our radios. As I mentioned a moment ago, in the third quarter, we shipped 9,310 units, bringing us to a total of 28,249 radios shipped year-to-date. And I will repeat my point from a moment ago that we believe we’ll close the year out on the high end of our targeted range of 32,000 to 36,000 shipments for the full year 2023. Turning to slide 6. Our gross margin performance continues to make progress and we are seeing the positive impact of our cost reduction initiatives and higher revenue. Our gross margin improvement in the third quarter represents our fifth consecutive quarter of sequential margin improvement with the continuation of our initiatives to reduce product costs coupled with the addition of the higher margin BKR 9000 multiband radio to our product mix.

We expect to see gross margin continue to improve through the fourth quarter and into 2024. Now, I will turn it over to Scott Malmanger, CFO, to take you through the financials. Scott?

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Scott Malmanger: Thanks, John. On slide 7, you’ll see a summary of our financial and operating results for the period ending September 30th, 2023. Sales for the third quarter totaled approximately $20.1 million, compared with $11.9 million for the same quarter last year. Revenues of more than $57 million for the September year-to-date have surpassed the prior full-year record of $51 million achieved in 2022. As John mentioned, we closed the third quarter with an order backlog of $21.8 million. Gross profit margin in the third quarter was 32% compared with 19% in the third quarter last year. Selling, general and administrative expenses or SG&A totaled approximately $5.8 million for the third quarter, compared with $4.6 million for the same quarter last year.

Operating income totaled $594,000, compared with an operating loss of $2.4 million for the third quarter of last year. In the third quarter of 2023, we recognized a net unrealized loss of $342,000 on our investments, compared with the net realized gain of $76,000 in the same quarter last year. We recorded net income of $90,000 or $0.03 per basic and diluted share in the third quarter of 2023, compared with a net loss of $2.4 million or $0.71 per basic and diluted share in the prior-year period. And finally, on September 30th, 2023, we have approximately $4.1 million of cash and cash equivalents and no 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.

The additional $2 million in cash expected from the East West transaction is expected to be used to pay down our line of credit. I will now turn the call back over to John.

John Suzuki: Thanks, Scott. Turning to slide 8. I’d like to provide you an update on our SaaS business. We previously detailed that the public safety market represents a tremendous opportunity for SaaS solutions. AT&T regularly publishes their update, Public Safety FirstNet subscribers with the latest announcing 5.3 million connections over 27,000 public safety agencies. Verizon does not publish their frontline public safety connections, but it is believed to be similar in size to AT&T. With more first responders being equipped with smartphones, BK firmly believes that the next focus in public safety communication span will be to make the first responders safer and more effective as a step out of their connected vehicle. Slide 9.

Slide 9 provides a timeline of our SaaS business unit, which began with our applications for three patents in December of 2021. The three patent applications envisioned a set of new public safety services and features, which would be delivered through BK’s smartphone application, BKRplay. In February 2022, we formalized our SaaS vision with the formation of a new business unit led by industry veteran, James Teel. Eight months later, in October 2022, BK launched its first SaaS service, InteropONE. InteropONE Push To Talk Over Cellular service, which was quickly recognized for its unique, patent pending capability to form on-demand talk groups in five minutes or less, using any smartphone associated with any cellular carrier. Our first paying InteropONE subscriber was officially onboarded in January of 2023.

Since the launch, several federal, state and local government agencies have been field-trialing the service. Based on this customer feedback, in August 2023, BK released new features, enhancing the user experience when using InteropONE. Recently, our InteropONE customer base expanded to include our first international customer from Canada. Our second patent application looked at an innovative approach to bridge LMR radios with LTE smartphones. In October ’23, we demonstrated our patent pending InteropONE tethering feature, which enables first responders using BKR radios the option to communicate over a private P25 network or a public cellular network. Slide 10. Slide 10 highlights an example of how InteropONE tethering and Interop Push To Talk Over Cellular can drive BKR 9000 sales.

A recent $315,000 contract award from the U.S. Department of Defense required multiband, P25 network ready and be LTE capable. Our BKR 9000 with InteropONE tethering presented an alternative solution that met all requirements at a compelling price point. It’s always great to expand our relationship with the U.S. Department of Defense, particularly when we do so by beating an incumbent competitor with a new innovative solution. Turning to slide 11. We recently announced our strategic decision to shift our production operation to East West manufacturing. After careful analysis and consideration, we believe it makes sense, or a strategic sense, to shift to an asset-like model. As many of you know, we have always relied on, to some extent, on contract manufacturers to support our in-house efforts and East West has been a reliable partner to us for several years.

We believe that outsourcing our manufacturing operations will simplify supply chain management, which has become a challenging part of our day-to-day operations, and will enable us to continue reducing both production and product costs. Additionally, by moving supply chain management and production to East West, we can focus on our core competencies, the development and marketing of LMR communications technology. In addition to the operational benefits, East West, a portfolio company of MSD partners, has become a shareholder of BK based on their confidence in our products and the long-term market opportunity. We anticipate that the transition to East West will take place over a six-month period commencing in Q1 2024 and we do not anticipate disruptions in our production schedules.

With the move, our existing Melbourne facility will now focus on new product introduction in support of our engineering efforts. We’re confident that the move to an asset-like model will help us ensure efficient fulfillment of the high demand we’re seeing for our products while also strengthening margins over time. Moving to our final slide, slide 12. We are energized by the market interest we’re seeing for our products and optimistic about the opportunities we’re seeing to expand our customer base by tapping new vertical markets. Our operational strategy remains focused on maximizing production efficiency and as I mentioned earlier, we believe we are on well-paced to meet our high end of our stated annual shipment target of between 32,000 and 36,000 radios for the full year.

BK’s reputation as a premier communications technology provider for the public safety and critical communication market is established and growing. Our BKR 5000 has demonstrated proven success in its appeal to existing and new customers as they move through equipment upgrade cycles. Likewise, the multiband capabilities of the BKR 9000 provide us the opportunity to significantly expand our target markets and grow our brand recognition among a 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 time 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. Matt?

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Q&A Session

Operator: [Operator Instructions] Your first question is coming from Aaron Martin from AIGH Investments. Your line is live.

Aaron Martin: Hi. Good morning. Congratulations on the improvement in gross margin and the return of profitability. On the gross margin, I know you’re not providing a breakdown between the BKR 9000 and the 5000, but can we sort of break down the sequential improvement in gross margin? The factors obviously last quarter, there was — you were talking about supply chain and logistics parts as a big improvement. So, how much of the improvement really came from the mix versus coming from working out the supply chain issues?

John Suzuki: Yes. thanks for the question. I would answer that, that basically, most of it is still due to our cost reduction efforts or our efforts to impact production costs. So, I would say that we continue to expect margin improvement as we realize lower production costs associated with the East West arrangement and then as for ’24 and ’25 as our mix continues to improve with the 9000 product in the SaaS business, I think, that’s where we’ll have continued margin improvement over the ’24-’25 period.

Aaron Martin: Got it. And so, I think it’s a big picture, how should we think about the transition from the BKR 5000 to 9000 and mix going forward as you know ’24-’25. How do we anticipate them sort of living side-by-side?

Scott Malmanger: Yes. thanks for the question, Aaron. So, we view these products as addressing two separate markets. So, the 5000 has embedded itself, not only in our core legacy customers, which is wild on fire; but also in other rural communities. So, as firefighters are buying the BKR 5000, we’re finding that law enforcement within those communities, other fire departments are buying the same radio for their day-to-day operations. So, what was used primarily for going on mission for fighting fires is now becoming more of a mainstay radio. On the 9000, that radio is over twice as expensive as the 5000 and it addresses basically a different market. It’s really targeted for those customers, who are looking at operating in multiple frequency bands, because they have to interoperate perhaps with the statewide system or an adjacent county system, and there’s no guarantees on what frequency bands these systems would reside on.

And again, these radios in 9000, in that particular case, that’s their day-to-day radio. That’s what they’re using. So, although the 9000 can be used for wildland fire, it’s really being purchased for day-to-day operations. And so, there will be some small overlap between the customer base, who are buying the 5000 and the 9000, but these are going to be different markets. So, if I look at — so if I look going forward, the adoption rate of the 9000 is still to be determined. but if I looked at the adoption rate of the 5000 and just kind of break out the base customer base, it was still fairly significant, but it took about 18 months before it started to really gain some traction. And so, we expect something similar for the 9000, where the initial orders, which we’ve been seeing are small quantities, people testing the radio, and then as they build confidence in the radio, they’ll start replacing their fleet with the 9000.

And so, we’ll see quarter-over-quarter increases in order volume through 2024, and then we’re expecting a larger increase in 2025 as more and more of the people have confidence in the radio.

Aaron Martin: Okay. So then, in the shorter-term, we talked about gross margins, sequentially improving in Q4 and then into 2024 as well. That is all basically being driven from operational items and costs down rather than revenue mix pretty much.

John Suzuki: Yes. I think the simplistic way to look at it is our historical margins for the company has been between 35% and 40%. So, we’re still not there, right. And so, we still have activities that we’re doing to get us to that point. And then you can layer in the 9000 margins on top of that. And then you can layer in a factor for our new relationship with East West, just because of their production capabilities, we’re expecting additional cost downs across the board. And that’s why we targeted in 2025, we believe our gross margins for 2025 will be at 50%. So, it’s a long journey, Aaron, to get there, but we believe there’s a path to get there.