Grid Dynamics Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 7 speakers on the call.

Operator

Morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the 3rd 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. At this time, it is now my pleasure to turn the floor over to your host for today, Jen Belodeau, please go ahead.

Speaker 1

Thank you. Good morning and welcome to our conference call to discuss BK Technologies results Q3 of 2023. On the call today are John Suzuki, Chief Executive Officer and Scott Malminder, 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 historical facts are forward looking statements.

Speaker 1

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 VK's filings with the U. S. Securities and Exchange Commission.

Speaker 1

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.

Speaker 2

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 Malmander for a deeper dive into our financial results. We'll conclude by opening up the call for a brief Q and A.

Speaker 2

Turning to slide 3. We delivered strong 3rd quarter results, which included a 68% increase in revenue to 20,100,000 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 1st 9 months of 2023. And we remain on track to achieve our target range of shipping between 3,200,036 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.

Speaker 2

In the Q3, we continued to ship not just the BKR5000, but also our BKR9000 multiband radio. In fact, in September, we received an emergency order for the BKR-nine thousand 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 We'll be an ongoing relationship with the state. We continue to see great deal of market interest in the BKR 9,000, which With its enhanced multi band capabilities and cost effective price point is an attractive offering in the portable communications space. And there are 30 plus additional system tests underway.

Speaker 2

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 radio's multi bank capabilities and reliability, opening up opportunities for us to address a larger and more diverse market vertical. Turning to Slide 4. We saw significant order activity during the Q3. In addition to the BKR 9,000 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 Sanibel County because they are a good example of what we define as a Tier 3 County in terms of population density.

Speaker 2

There is an estimated 750 Tier 3 suburban to rural counties in the U. S. That we're targeting for the BKR 9,000 because we believe the radio is a great fit, Not just in its multi band capabilities, but its cost effective price point positioning us to gain market share. Order we received from the National Interagency Incident Communications Division and a $2,100,000 order from the Bureau of Land Management, which also included some BKR 9,000 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 $21,800,000 as of September 30, 2023.

Speaker 2

Slide 5. Slide 5 illustrates the continued traction we're seeing with our radios. As I mentioned a moment ago, in the Q3, 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.

Speaker 2

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 3rd quarter represents our 5th 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-nine thousand multiband radio to our product mix, we expect to see gross margin continue to improve through the Q4 and into 2024. Now I'll turn it over to Scott Melmejur, CFO to take you through the financials. Scott?

Speaker 3

Thanks, John. On Slide 7, you'll see a summary of our financial and operating results for the period ending September 30, 2023. Sales for the Q3 totaled approximately $20,100,000 compared with $11,900,000 for the same quarter last year. Revenues of more than $57,000,000 for the September year to date have surpassed the prior full year record of $51,000,000 Achieved in 2022. As John mentioned, we closed the 3rd quarter with an order backlog of 21,800,000 Gross profit margin in the 3rd quarter was 32% compared with 19% in the 3rd quarter last year.

Speaker 3

Selling, general and administrative expenses or SG and A totaled approximately $5,800,000 for the 3rd quarter compared with $4,600,000 for the same quarter last year. Operating income totaled $594,000 compared with an operating loss of $2,400,000 for the Q3 of last year. In the Q3 of 2020 3, 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 Q3 of 2023 compared with a net loss of $2,400,000 or $0.71 per basic and diluted share in the prior year period. And finally, at September 30, 2023, we have approximately $4,100,000 of cash and cash equivalents and no long term debt.

Speaker 3

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 $2,000,000 in cash expected from the East West transaction is expected to be used to pay down our line of credit.

Speaker 2

I will now turn the call back over to John. Thanks, Scott. Turning to slide 8. I'd like to provide you an update on our SaaS business. We previously detailed The public safety market represents a tremendous opportunity for SaaS solutions.

Speaker 2

AT and T regularly publishes their update Public safety FirstNet subscribers with the latest announcing 5,300,000 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 and T. With more first responders being equipped with smartphones, BK firmly believes that the next focus in public safety communication spend We'll be to make the first responders safer and more effective as they step out of their connected vehicle. Slide 9. Slide 9 provides a timeline of our SaaS business unit, which began with our applications for 3 patents in December of 2021.

Speaker 2

The 3 patent applications envisioned a set of new public safety services and features, which would be delivered through BK smartphone application BK AirPlay. In February 2022, We formalized our SaaS vision with the formation of a new business unit led by industry veteran, James Teal. 8 months later in October 2022, BK launched its 1st SaaS service, Interop 1. Interop won a push to talk over cellular service, which was quickly recognized for its unique patent pending capability 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.

Speaker 2

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 1st 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 INTERRUP-one 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.

Speaker 2

Slide 10 highlights an example of how InteropOne Tethering And Interop push to talk over cellular service can drive BKR9000 sales. Our recent $315,000 contract award from the U. S. Department of Defense required multi band, P25 network ready and be LTE capable. Our BKR-nine thousand with Interop-one tethering presented an alternative solution that met all requirements at a compelling price point.

Speaker 2

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.

Speaker 2

After careful analysis and consideration, we believe it makes sense or strategic sense to shift To an asset light model, as many of you know, we have always relied on to some extent on contract manufacturers To support our in house efforts, an East West has been a reliable partner to us for several years. We believe that outsourcing our manufacturing operations We'll 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 6 month period Commencing in Q1 2024 and we do not anticipate disruptions in our production schedules.

Speaker 2

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 light 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 in our 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.

Speaker 2

And as I mentioned earlier, we believe we are on well pace 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 BKR5000 has demonstrated proven success and its appeal to existing and new customers as they move through equipment upgrade cycles. Likewise, the multi band capabilities of the BKR 9,000 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.

Speaker 2

As a SaaS service, we anticipate InteropOne will play a meaningful role 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? Certainly.

Operator

Everyone at this time will be conducting a question and answer session. Thank you. Your first question is coming from Aaron Martin from AIGH Investments. Your line is live.

Speaker 4

Hi, good morning. Congratulations on the improvement in gross margin and the return to profitability. On the gross margin, I know you're not providing a breakdown between the PTR 9,000 and the 5,000. 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.

Speaker 4

So how much of the improvement really came from the mix versus coming from working out the supply chain issues?

Speaker 3

Yes. Thanks for the question. I would answer that basically Most of it is still due to our cost reduction efforts or our efforts to Impact production cost. 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 you know For 2024 and 2025, as our mix continues to improve with the 9,000 product in the SaaS business, I think That's where we'll have continued margin improvement over the 2024, 2025 period.

Speaker 4

Got it. And so I guess big picture, how should we think about the transition from the PTR5000 to 9,000 and mix going forward, as 2024, 2025, How do you anticipate them sort of moving side by side?

Speaker 2

Yes. Thanks for the question, Aaron. So, we view these products as addressing 2 separate markets. So the 5,000 has embedded itself Not only in our core legacy customers, which is Wildland Fire, but also in other rural communities. So as firefighters Our buying the BKR5000, we're finding that law enforcement within those communities, other fire departments Are buying the same radio for their day to day operations.

Speaker 2

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 5,000 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 a statewide system or an adjacent county system There's no guarantees on what frequency bands these systems would reside on. And again, these radios, the 9,000, In that particular case, that's their day to day radio, right? That's what they're using.

Speaker 2

So, although the 9,000 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 going forward, the adoption rate of the 9,000 is still to be determined. But if I looked at the adoption rate of the 5,000 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 9,000 where the initial orders which we've been seeing are small quantities, people testing the radio.

Speaker 2

And then as they build confidence in the radio, they'll start replacing their fleet with the 9,000. 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.

Speaker 4

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

Speaker 2

I think the simplistic way to look at it is, our historical margins for the company has been between 35% 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 9,000 Margins on top of that. And then you can layer in a factor for our new relationship with East West.

Speaker 2

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.

Speaker 4

Okay. And then The relationship with East West, since they're an existing contract manufacturer, that's why I guess we shouldn't really have any disruption. It's just The 6 month process is just transferring over more and more lines then one at a time. Is that how we should think about it?

Speaker 2

That's exactly right, Aaron. We're taking one line at a time.

Speaker 4

Okay. Going back to the Overall volume, I mean, it seems that we had a slightly better pricing environment this quarter. And I know you in the past you talked about that has to do Accessories that get shipped together with it, but it's nice to see that. But I look at the overall volume and then The guide for the year, it's nice that you talk about being at the high end of the 32,000 to 36,000 radios. But Considering where you are right now for the year, even the high end of that is kind of below where you've been any quarter so far this year.

Speaker 4

So how do we think about that, especially with the $20 plus 1,000,000 backlog that you have going At the end of the quarter.

Speaker 2

Yes. I think when I started this year, I had talked about 8000 to 10000 radios Shipping every quarter. And if you remember walking into this year, we had this enormous backlog From 2022 because for most of 2022 we couldn't ship. We started shipping in Q4. And so we kept at an accelerated pace throughout the year, so that we could normalize our backlog.

Speaker 2

We've been on extended lead times for quite a period. We believe that we'll be through that backlog and back to Normalized lead times probably by the 1st or Q2 of next year. So it's we were definitely at an elevated rate in the First half of this year, just to try and catch up on our backlog, but that's starting to normalize now.

Speaker 4

Okay. So that takes you then to the order rate. Obviously, Backlog was down sequentially quarter over quarter, a little bit about $2,000,000 Are we expecting that to continue as lead times come down? Or At the same time though as lead times are coming down, we are demand is growing for the 5,000 and then we've got the 9,000 on top of that. How should we think about backlog going forward and the ordering trend?

Speaker 2

Yes. So for because we are a bit of a seasonal business, right, The peak season for Wildland Fire and order intakes and shipments is Q2 and Q3. Historically, Our weakest quarter for new orders is Q4 and then gets better in Q1 and then goes forward. Because we're still driving our backlog down, 4th quarter order intake tends to be a lot smaller than say Q3 or Q2. But we believe it will still be larger than it was Year over year.

Speaker 2

Yes, year over year.

Speaker 4

Got it. Going back to Scott on the Obviously, nice to see EPS again. In terms of the calculation of the non cash loss On the FG Financial investment, ex that, if I were to sort of create a non GAAP EPS number, Would there be a tax difference or just add back in that $340,000 assume there would be non GAAP net income of $430,000,000 or so and about $0.13 of non GAAP EPS. Is that a proper calculation or would there be an adjustment on the tax

Speaker 3

No, we got tax loss carry forwards. So that number is correct. I did the same math and I agree with your math at about $0.13

Speaker 4

Got it. Okay. I just would definitely put out there that That calculation is correct and the FTE Financial is just a non cash non operating item. It would behoove the company to report a more Reflective non GAAP EPS number.

Speaker 2

Good point, Aaron. Thank you for that input.

Speaker 4

Okay. Thank you and congratulations on the progress.

Speaker 2

Thank you, Eric. Thank you.

Operator

Thank you. Your next question is coming from Brett Weiss from Janney Montgomery Scott. Your line is live.

Speaker 5

Hi, John. Hi, Scott.

Speaker 2

Good morning, Brad.

Speaker 5

John, I haven't had a chance to read the 8 ks on the agreement between us and East West. When I read it, what are the key clauses in that contract that I should focus on? What's Important for us in this type of arrangement and putting yourself in the shoes of East West, What was important for them?

Speaker 2

Yes. Let me just step back a little bit. So first, this is not a new relationship. We've been working with EastWest for over 2 years and we've had Progressive, scope, increased with them over that period. In fact, I first time I met with their CEO was a year last May And during the supply chain crisis and I was soliciting their help, which they were very nice and accommodating.

Speaker 2

So we've had a long term relationship and a successful one in terms of overall performance and we've been taking advantage of their global reach. They have, I believe, 12 manufacturing facilities across the world. The other comment I would make is, When you take a step like this, it's a major step because now we're dependent on East West, for making our revenues for our company. And we don't take that lightly. And picking the right partner is critical.

Speaker 2

One of the criteria That we used or looked at was picking a partner that was a good fit in terms of size In comparison to BK. And so when I say that, I mean there are a lot larger contract manufacturers out there. But if you look at the size of East West, and you look at the size of BK, we're in their top and other customer base. And so that was an important factor for me as I wanted to make sure that When we did have problems in the supply chain and of course it happens, that they pay attention to us And that we're just not a small customer on their list, but that we are a significant customer on their list. And so that's those are some of the criteria that we looked at when we started down the path With East West.

Speaker 2

Now you can get into a lot of the other details which are in the contract, right? There are delivery requirements and quality requirements. But at the end of the day, I think the important thing for this relationship to be Successful is for 1, BK, we should never forget that these are our products. They just happen to be manufactured In a different facility, right? So we own this product.

Speaker 2

That's one of the reasons why I kept all the machinery and production lines in our factory, so that when we make any changes on our product, we can run it through our own facility first Before we introduce it into East West and into production. And that does two things, right? 1, we get confidence that the change actually works. We understand the impacts on it before we start to introduce it into production. And the second is, is the time to introduce into production It's very short.

Speaker 2

So your disruption in production is very short. We did not enjoy that, under our previous arrangements. It was always a battle between getting validation of new products and production. So I think it's more than what you can see In the contract specifically, I think the contract is a pretty standard contract that you would see between a contract manufacturer And a company, I think we covered all our bases, in terms of ensuring deliveries and quality. And again, I think it's more about the partner we chose and why we chose East West in the first place.

Speaker 5

Great. Thank you for the answer. That's all for me.

Speaker 2

Thank you.

Operator

Thank you. Your next question is coming from Oren Hirschman from AIGH Investment Partners. Your line is live.

Speaker 6

Hi. Congratulations on the progress overall, especially gross margin. Can you tell us you mentioned another customer And I assume there's a lots of tests going on, on the SaaS offering. Can you kind of bring us up to date? Are there multiple customers that are live?

Speaker 6

Have they added any additional clients so that you could see how this scales for them? Give us whatever you can tell us at this point and There are a lot of tests going on currently?

Speaker 2

Yes. I think there's about 20 field trials going on, Oren, roughly. Wow. So it's pretty significant. Let me yes, so from a total revenue standpoint, still very small.

Speaker 2

It's a handful of customers that have actually paying customers, right? So it's not that big. But let me walk you through And this is this we see almost every week, right? We're at a trade show, and we had a state customer come by And the salesperson pitched InteropOne. So, hey, here's a solution that provides on demand emergency Communications using your smartphone and cellular system.

Speaker 2

And the person was so intrigued that the we were invited back to make a presentation to the broader audience at the state level. And so we did that expecting it would be like a 1 hour meeting. The meeting took 6 hours. And the beauty of the meeting was it started off as an InteropOne conversation, but it quickly moved to a B Care 9000. They had we had not gotten in front of this customer with this new radio.

Speaker 2

And for the next 5 hours, They spent time getting that radio operating on the state system and they were just totally excited About the radio and then the connection of the radio to InteropOne and that whole vision of tethering these devices together. And so I kind of look at InteropOne on a service on its own is still TBD in terms of how much revenue that's going to generate for the business. But in terms of pull through and our ability to get in front of customers that perhaps it would be more difficult for us to get in front of if we didn't have it, That's really proving itself out. People are interested in this service and it gives us a great opportunity to present the 9,000.

Speaker 6

I was going to ask you, is it specifically it goes together nicely with the 9000 or it goes even with the 5000 or really the 9000 that's why you keep mentioning it like that?

Speaker 2

Yes, it's both radios. But to be honest with you, when we're in front of those types of customers, they're interested in multi band radio. So yes, it tethers with the BK Series radio, so the 5000, the 9000 and any other radio that we bring on under the BKAR series radio line.

Speaker 6

Okay, great. I mean even if it's small revenues, obviously $1,000,000 or $2,000,000 of higher margin Current, with the 3,500,000 share count is quite meaningful. And obviously, it's nice to pull to the hardware also on the 9,000, the high margin 9,000. Thanks so much.

Operator

Thank you. That concludes our Q and A session. I'll now hand the conference back to John Suzuki for closing remarks. Please go ahead.

Speaker 2

Thanks, Matt. Thank you all for participating in today's call. We look forward to speaking with you again when we report our Q4. All the best to all of you and have a great day.

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