Cemtrex, Inc. (NASDAQ:CETX) Q1 2023 Earnings Call Transcript

Cemtrex, Inc. (NASDAQ:CETX) Q1 2023 Earnings Call Transcript February 14, 2023

Operator: Greetings, and welcome to the Cemtrex First Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on the forward-looking statements, which reflect our opinions only as of the date of this presentation.

Please keep in mind, that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events. Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued today, and is available in the investor relations section of our company’s website cemtrex.com. Your host today, Saagar Govil, Chief Executive Officer, and Paul Wyckoff, Chief Financial Officer will present results of operations for the first quarter ended December 31, 2022.

At this time, I will turn the call over to Cemtrex’s Chief Executive Officer, Saagar Govil. Please go ahead.

Saagar Govil: Thank you, operator, and good afternoon, everyone. I’m pleased to welcome you to today’s first quarter 2023 financial results conference call. The first quarter of fiscal year 2023 was highlighted by continued top line growth, as we grew sales by 27% year-over-year. Additionally, the different steps we have taken operationally have led to a gross margin improvement of 790 basis points to 42%. We expect to see continued increases in our gross margin over the next couple of quarters, as we drive improvements in our business. In November 2022, we completed the divestiture of noncore assets to focus on accelerating our Vicon and advanced industrial services brands and reduced expenses at the Cemtrex corporate level.

This transformative business restructuring is now beginning to reflect more fully in our quarterly performance. Overall, operating income improved with the operating loss for the quarter declining by 41% and we are pleased with the progress we are making to drive better financial results since our shift in focus. In Q1 and going forward in conjunction with the divestiture, the company has modified its financial presentation into three segments, security, consisting of Vicon industrial services consisting of advanced industrial services and Cemtrex corporate. Year-over-year improving revenue for the company was led by our security segment with a 61% increase on strong demand. Vicon is building a dominant security technology brand, focused on delivering industry leading solutions for commercial, industrial and government applications.

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We continue to see strong demand from customers for our award winning roughneck cameras and Valerus video management software solutions. Most recently, in January, Vicon received a $1.5 million order from a current large border protection customer in Texas to expand it’s security technology system with new security solutions. With Vicon software currently deployed at the site, the new order expands the customer state of the art video surveillance security capabilities with the addition of award winning roughneck multisensor cameras and servers. We believe Vicon is well positioned for growth as the industry shifts to SaaS models leveraging AI and cloud technology solutions for today’s highly dynamic environment. Turning to our industrial services segment AIS, revenue decreased slightly during the quarter, mainly due to products and services record revenue recognition timing.

We continue to see increasing demand and monetizing opportunities for AIS with the need for predictive maintenance services reshoring of manufacturing back to the US and growing complexity and industrial equipment. With over 35 years in the industry and high repeat business, AIS is a significant source of cash flow and has a strong balance sheet, empowering the ability to offer more comprehensive services due to inventory and equipment. As the industrial and manufacturing economy in the US continues to thrive, we believe AIS has significant potential for expansion, particularly with bolt-on acquisitions. Most recently, we also announced the capitalization restructure effecting a one for 35 reverse stock split that has allowed us to regain full compliance for continued listing on the NASDAQ capital market for our common stock.

I’ll now turn the call over to Paul Wyckoff, Chief Financial Officer to discuss financial

Paul Wyckoff: Thank you, Saagar. Revenues for the first quarter of 2023 totaled $12 million compared to revenue of $9.4 million for the first quarter of 2020, a 27% increase year-over-year. The increase in revenue for the year was due to increased demand for the company’s products and services. The security segment revenues for the first quarters of 2023 and 2022 were $7 million and $4.4 million respectively, an increase of 61%. The security segment increases was due to an increased demand for security technology products under our Vicon brand. Industrial services segment revenues for the first quarter of 2023 decreased by $2 million to 2% to $5 million, mainly due to timing of the recognition of revenue for segments products and services.

Gross profit for the first quarter of 2023 was $5 million or 42% of revenues, as compared to gross profit of $3.2 million or 34% of revenues for the year ago period. And the percentage increase is mainly attributed to the increased prices and lower subcontractor costs. Total operating expenses for the first quarter of 2023 was $7 million compared to $6.5 million in the prior year’s quarter. The increase was due to an increase in research and development expenses to the period. Operating loss for the first quarter of 2023 was $2 million, a 41% decline as compared to an operating loss of $3.3 million for the first quarter of 2022. The decrease was primarily due to an increase in the profit — in gross profit for the period. Net loss for the first quarter of 2023 was $6.1 million, as compared to a net loss of $4.5 million in 2021.

Net loss increased in the first quarter as compared to the same period last year, primarily due to the loss on discontinued operations. Cash and cash equivalents totaled $5.8 million at December 31, 2022, as compared to $9.8 million in September 30. 2021. Inventories increased $116,492 or 1% to $8,604,759 at December 31, 2022 from $8,487,817 at September 30, 2022. The increase in inventories is attributable to inventories in transit yet to be sold. I’ll now turn the call back to Saagar for a review of our 2023 outlook.

Saagar Govil: Thank you, Paul. In summary with our restructuring complete and strong performance for Vicon and AIS, we continue to be well positioned to create long term value for our shareholders. Looking ahead, we continue to believe revenues for Vicon Industries based on our current demand should increase by approximately 16% to $28 million for fiscal year 2023, given the launch of our AI based analytics solutions, improvements to Valerus and additional select sales. Furthermore, gross profit margin percentage for Vicon is expected to increase to approximately 48% for the fiscal year 2023. We believe AIS will continue to expand revenues by 3% to $21.8 million for fiscal year 2023 driven by continued strength in the industrial services market, gross profit margin percentage for AIS is expected to improve to approximately 34% for the fiscal year 2023 for AIS.

With all the combined actions taken to drive business improvement, we believe the operating loss over the next four quarters to be under approximately $2.5 million. The effects of these changes were only partially demonstrated in our December quarter performance due to the timing of the restructurings and we expect our March and June quarters performance to reflect the improvements more fully. We also believe that, we can reduce inventory by more than 1.5 million over the course of fiscal year 2023. As we’ve seen supply chain constraints improve. This will allow us to offset the cash loss from the expected operating loss over the next couple of quarters by the cash obtained from the reduction in inventory, reducing the burden on our overall cash position.

With approximately $5.8 million in cash, our restructuring revenue growth increasing margins, operating improvement and reduction in expenses. We believe we have sufficient capital in the short term to focus on executing on our roadmap. Our expectation is that, the company will see improved financial results moving into the rest of 2023. With escalating demand for our businesses and our shift in focus to capture significant near-term opportunities. We believe we can reach positive operating income by 2024. We continue to work to position the company on the path of sustainable financial model and for long term growth, which we believe will provide long term value for our shareholders. I look forward to providing our shareholders with further updates throughout 2023.

And I thank you all for attending. And now we’d like to answers some questions. Operator?

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Q&A Session

Operator: Thank you. Ladies and gentlemen, at this time we will be conducting a question-and-answer session. Our first question comes from the line of Jason Kolbert from Dawson James. Please go ahead.

Q €“ Jason Kolbert: Saagar, how are you? Congratulations on the quarter and also really appreciate the guidance which is very, very solid and consistent with what you discussed in the prior quarter. One question I have is I’d like to understand sequentially while the numbers are up year-over-year, it seems like they’re down slightly sequentially. And is that an artefact of fourth quarter, is that typically not a great period for the company. So I wondered if you could address that?

Saagar Govil: Sure. And thanks for the question, Jason. As you know in this quarter, a lot of the revenue growth was driven by Vicon and Vicon’s business is largely project driven. And sometimes the timing of when those projects are executed is not always within our control. We do have a general sense of the overall demand and the backlog and so we have reasonable affirmation that the demand is growing for this business, but sometimes the timing of when projects are closed or when they’re executed and shipped and invoiced will fluctuate from period to period. There is also a little bit of seasonality. So — and that really depends on budgeting cycles for some of our different types of clients, whether it’s government or schools and so forth.

And that does sometimes play a role in terms of sequentially. So we tend to analyse the business more on a year-over-year basis to determine our overall success in terms of whether we’re improving the business and less on a sequential basis from a revenue perspective, from an operating expense perspective sequentially certainly matters.

Q €“ Jason Kolbert: And talking a little bit about the large contract award associated with border security, obviously that’s a very hot topic right now. And it seems to me that success in the installation and execution of that system could set the stage for much, much more. So can you discuss a little bit about what it took to win that order and what other municipalities or border states or border municipalities might be next?

Saagar Govil: Yeah, appreciate the question. So with respect to border, so due to NDAs in place, we’re generally not able to talk specifics about our customers in this area. However, we do actually quite a bit of federal work with respect to border protection. If you look at the company, on average over the last five years, Border Protection is one of our largest segments in terms of individual segments and represents probably 5% to 10% of our revenue on average. And so with the unfortunate migrant crisis, there is certainly an opportunity to expand on that. And the federal government does work a little bit more slowly, but because of the current situation, there’s certainly a number of different opportunities have popped up.

So we’ve taken some steps internally. We’ve created a task force and devoted some more resources towards pursuing these opportunities. And I think we think that there’s a lot of potential with respect to an opportunity to deliver more solutions for border protection. Actually, we have a great product called the thermal sensor that can monitor about half a mile of area per unit. And that’s — it’s an incredible product for border protection. So I think going forward, we actually have a lot of demonstrated competency and reference customers with respect to border protection. And so we’re going to be spending certain amount of resources, getting the word out and renting a marketing to put these solutions out in front of new clients. A lot of states are taking this more seriously now.