BK Technologies Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 10, 2023

There are 8 speakers on the call.

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. Please note this conference is being recorded.

Operator

I will now turn the conference over to your host, Jen Belodeau. You may begin.

Speaker 1

Thank you. Good morning, and welcome to our conference call to discuss BK Technologies' results for the Q2 of 2023. On the call today are John Suzuki, Chief Executive Officer and Scott Mellinger, 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.

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 BK's filings with the U. S. These statements are based on information and understandings that are believed to be accurate as of today, We do not undertake any duty to update such forward looking statements.

Speaker 1

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.

Speaker 2

Thank you, John. 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 Maugh Manager 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 saw continued momentum in the Q2 with revenue growing 57% to $19,000,000 compared The Q2 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 will end up at the high end of our radio delivery guidance or even potentially surpassing it. In the Q2, we were very pleased to receive FCC certification for our BKR-nine thousand multi band radio.

Speaker 2

And we completed our first shipment of the BKR 9,000 in early June to the U. S. Army. With its enhanced capabilities and cost effective price point, the BK9000 is a very attractive Next generation portable communications radio. As we discussed on other calls, we expect the multi band capabilities of the BKN-nine thousand 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.

Speaker 2

Turning to slide 4. Our BTR5000 saw continued demand and strong order activity during the Q2, particularly as existing customers upgraded their portable communications technology. Of note, we received 2 large orders totaling over 5,100 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 long time 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 $24,000,000 as of June 30, 2023. Slide 5.

Speaker 2

Slide 5 illustrates the continued traction we're seeing with our BTR5000 radio. As mentioned a moment ago, in the Q2, 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 6. Our gross margin performance for the Q2 was disappointing as we experienced delays in implementing our cost reduction initiatives.

Speaker 2

Those initiatives have now been launched in earnest. And as a result, we anticipate the 3rd quarter margins We'll 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 that now includes the BigCare 9000 Multiband 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.

Speaker 2

Slide 7. Slide 7 shows our highly experienced engineering development and manufacturing teams who were instrumental to the launch of our innovative BKR-nine thousand Multiband Portable Communications Radio. In June, We received FCC certification and P25 compliance assessment program or P25 cap approval for the BKR-nine thousand and began shipping the BKR-nine thousand shortly after. Our first shipment of the BKR 9,000 radios was to the U. S.

Speaker 2

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 And to the market opportunity for the BKR 9,000 and what makes this radio such an exciting opportunity for our company.

Speaker 2

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 Our adjacent P25 trunk systems operate in a different frequency band.

Speaker 2

So there is a real need For a multi band radio that can operate on all 4 of the LMR frequency bands. BK has completed or is in the process of testing the BK R9000 on over 30 P25 trunk systems. Most of these are large statewide, regional and or county P25 systems with hundreds of thousands of radio users. The BKL9000 has passed the P25 compliance assessment program, but each T25 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.

Speaker 2

Early feedback from system owners has been positive, With many owners indicating minimum configuration or software changes required to approve the BKR9000. 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 received 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 BKARE 9,000 to more customers. As we continue to receive system approvals, our order book continues to grow.

Speaker 2

Our shipment plan remains modest initially as we prime our production line and ramp up as we head into the Q4 and 2024. Now I'll turn it over to Scott Mehlmannager, CFO to take you through the financials. Scott?

Speaker 3

Thanks, John. On Slide 8, you'll see a summary of our financial and operating results for the period ending June 30, 2023. Sales for the Q2 totaled approximately $19,000,000 compared with $12,100,000 for the same quarter last year. As John mentioned, we closed the 2nd quarter with an order backlog of 24,000,000 Gross profit margin in the 2nd quarter was 27% compared with 14% in the Q2 of last year. Selling, general and administrative expenses or SG and A for the 2nd quarter totaled approximately $6,000,000 compared with $5,400,000 for the same quarter last year.

Speaker 3

SG and A expenses included increased spending as we launched And improved market awareness of the BKR 9,000. Operating loss totaled 700 and $84,000 compared with an operating loss of $3,700,000 for the Q2 of last year. In the Q2 of 2023, we recognized the net unrealized loss of $376,000 On our investments compared with a net unrealized loss of $602,000 in the same quarter last year. We recorded a significantly reduced net loss of $1,300,000 or 0.39 dollars per basic and diluted share in the Q2 of 2023 compared with a net loss of 4,300,000 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.

Speaker 3

We should continue our progress towards profitability. And finally, as of June 30, 2023, we have approximately $2,700,000 of cash and cash equivalents 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.

Speaker 2

Thank you, Scott. On Slide 9, 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 8000 to 10000 radios per quarter.

Speaker 2

And based on the backlog and forecasted demand, We maintain our stated annual shipment target of between 32,036,000 radios. As I said earlier, based on where we sit, this is a conservative estimate and we believe there's a good chance that we will end up on the high end of our radio delivery guidance for the year. 2nd, we are focused on driving gross margin improvement through 2023. And the 3rd area of focus is around our continuing efforts to establish strategic beachheads In the federal, state and local public safety markets for the BKR 9,000 multiband portable radio and Interop 1. We believe that establishing these beachheads is important as we plan for continued growth in 2024 and achieving our 2025 revenue goals.

Speaker 2

Slide 10. On our last slide, we reiterate our long term goal of reaching $100,000,000 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 BKR5000 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 9,000, we have 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 times, potentially saving lives.

Speaker 2

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

Operator

At this time, we will be conducting a question and answer session. A confirmation tone will indicate that your line is in the question We do have our first question. It comes from Matt Williams with Freeze Associates.

Speaker 4

Question. 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?

Speaker 2

Yes. So, our core business is in Wildland Fire. So Their busy season is like now, right, 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 Q1 versus The average revenue, shipped, per radio in the Q2, 2nd 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.

Speaker 2

And so, if you look at the total first half of the year, it's within what we had said historically was about 2 And we're tracking to that this year. In terms Of the number of radios shipped in the Q2 versus the Q1, Manus, I assume that you're asking Why didn't we ship more radios? Yes, that's Mike Turin. Yes, okay. Yes, So from a production standpoint, I can say that we produced a similar number of radios.

Speaker 2

We did have about 1,000 radios sitting on our dock in that last 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 Radio shipped. But from a production standpoint, we're holding to that line.

Speaker 4

Got it. So I presume that 1,000 or so ADOS has shipped subsequent to QN?

Speaker 2

Yes.

Operator

All

Speaker 4

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?

Speaker 4

Was it continued higher component costs? Just what is it that Slowed your progression on gross margins.

Speaker 2

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.

Speaker 2

But we believe, right, we could get these costs out of these radios and 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.

Speaker 4

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

Speaker 3

This is Scott Melmanger. I would say that the best way to say it is, as 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.

Speaker 2

Yes. If I can put an exclamation point on that, Matt, I would say that we're confident that we can get there. The issue is the timing and the when. And Yes. Like I said, we're aggressively moving towards that.

Speaker 2

And certainly, some of the cost initiatives we'll start seeing in Q3.

Speaker 5

Yes. Got it.

Speaker 4

All right. Couple more quick things. So on your OpEx, flattish to up sequentially. I thought there were some cost cutting programs. Just wondered if you could share if that OpEx level is the appropriate run rate going forward or if we should expect Any changes over the next couple of quarters?

Speaker 3

I would say on the OpEx side, Once again, we are launching the BKR 9,000. So we have Incremental costs associated with market awareness and some of the Costs for production increases and that sort of thing. So I think we're going to We're continually managing our cost structure to the best of our ability and our focus For the remainder of the year, it's definitely going to be on our gross margin improvement initiatives. I think that is about as good as I can nail that down.

Speaker 4

Okay. Got it. All right. Last thing for me is, any data points, milestones on INTEROP-one That you can share with us or even anecdotally in terms of what you're seeing with regard to market interest?

Speaker 2

Yes. No, thanks for that question, Matt. Appreciate it. So we have a number of trials going on and we're getting some excellent feedback, from these customers. I actually plan to do a more extensive presentation on InteropOne Next quarter, so if it's okay with you, I'd like to punt this for next quarter.

Speaker 2

What I wanted to do was really focus this call on the 9,000. I mean, it's been such a long time in coming and we're very excited about this particular product. But in terms of interop-1, we continue to get more field trials. And like I said, the feedback from the clients are extremely good. In fact, we're actually about to release, a second version of Interop, like an enhancement based on all the feedback That we're getting we'll have that released in the next month or so.

Speaker 2

So development continues and feedback continues to be strong.

Speaker 4

Thanks guys.

Operator

Our next questioner is Aaron Martin with AIGH Investment Partners.

Speaker 5

Hi, good morning, John. Good morning, Scott. I want to focus on the 9,000, so let's go there. Congratulations on SEC certification. It's great.

Speaker 5

I'd say a long time coming. What should we Back in terms of the mix shift towards the 9,000 over the coming quarters and into 2024. And then obviously that as that ties into ASPs and then ultimately gross margin.

Speaker 2

So Aaron, what we've said is, for this year, right, we're shipping 32 1,000 radius, that's going to be inclusive of some VKR 9,000s. On the total number for the year, It's not going to be a material number, but it will be much more material in the Q4 because that's when we're going to start ramping production. Beyond that, I'm not providing guidance or targets on the mix Between our revenue, our radios sold. It's a very competitive situation, especially on the 9,000. And I think that just keeping it at a total number of radio shipped is the approach that we're going to take.

Speaker 2

Now that being said, Right. As we ship more 9000s, clearly, the revenue per radio is much higher on the 9000 and the margin is much better. And so as we ship more 9000s, you'll see, that those two numbers grow over time, especially as we go into 2024 where the mix will be more prevalent.

Speaker 5

Okay. If we talk about the gross margin, Obviously, the cost downs that you're talking about are material. In your initial plan to get to 35% for the year, which imply well north of that on a run rate for Q4. I assume the shift towards the $9,000 was a bigger piece of that rather than just The cost down because the ASP increase is much larger. Is that accurate?

Speaker 2

I wouldn't say that specifically, Aaron. I think we expected to do better in our gross And we were disappointed in our lack of execution, right? I don't know how else to say it, right? And It's like we lost a quarter a bit. I mean, we did improve our margins and yes, I'm thankful for that.

Speaker 5

I mean, it's a little more than 1%.

Speaker 2

Yes. It's not where we wanted it to be or expected it to be, right? And so that's really what's pushing it off More than anything else.

Speaker 5

I guess what I'm trying to figure out is the 2 big components is the cost downs And then obviously the mix shift, and then there's some accessory shift there. Obviously, those are higher gross margin. But I'm trying to sort of Get at how much of those two items Are part of the getting us to 35 plus percent gross margin, how is it split between those 2 big items? And then this delay On the cost downs, is that the only delay? Is there also a delay on the mix shift towards the 9,000 or not?

Speaker 5

I'm just

Speaker 2

Yes. So the latter is not, right? What happened in Q2 was an execution, Right. And so the programs that we thought we would have introduced into the factory That would result in better gross margins for our products were delayed. And but those programs are or some of those programs Coming to an end, we have a series of programs that we had planned throughout the year.

Speaker 2

But the ones that had, I would say, a more material impact We thought our gross margins were going to be in Q2. Those programs are now being introduced into our factory. And so we'll see an impact on Q3. We never planned to ship a lot of radios on the 9,000 initially. So the number of radios that we shipped is basically the plan.

Speaker 2

Our 3rd Q4 plan hasn't changed.

Speaker 6

Okay. So it's all you're saying all the

Speaker 5

changes are on the cost downs in those programs. And so Independent of those, obviously, we're going to be seeing some material or a step up in 9,000 in Q4 that should Move the gross margin. And then in addition to that, on the execution side, we're looking for these programs to be Fully in place by Q4 or close to

Speaker 2

it? Yes. That's a good summary, Aaron. We had a speed bump in Q2 in essence, right? And we're now picking it up in Q3, but the 9,000 is an independent stream.

Speaker 5

Okay. And The 9,000 on its own is enough for pull a step function rather than this?

Operator

You'll notice

Speaker 3

It will be a step function throughout 2024 is the way I would describe it.

Speaker 5

Okay. Thank you very much and congratulations on the continued progress.

Operator

Thank you, Eric. Thank you. We now hear from Scott Weiss with SEMCO.

Speaker 7

Hey, John. Hey, Scott.

Speaker 2

Good morning.

Speaker 7

I have got two questions. The Delay in the 1,000 phones at the last week of the quarter due to this accessory, was this accessory a BK made product or was it a 3rd party product?

Speaker 2

It's a BK product, but it was a product that was manufactured by 1 of our contract manufacturers. And you have to understand, right? I mean, you're talking a matter of days, right? But at the end of the day, if you miss that window, it doesn't fall into the month or the quarter.

Speaker 7

Yes. And then the last question is your cash balance didn't move much. You were free cash flow positive Cash flow positive by a bit, but at $2,600,000 in cash, do you have enough for working capital purposes? And then with that, the investment loss of $400,000 plus or so in the quarter, and I believe you've lost near 1,000,000 For the year, can you comment on that and what the plans are and what that investment loss is and what your plans are for that?

Speaker 3

Yes. We continually review the investment losses, Scott, And we've had numerous discussions about that investment and look at The alternatives that we have available as far as an asset. As far as the Working capital situation, we continue to manage the line of credit availability Based on our interest costs, you'll notice that our interest costs are higher. So we are managing Our line of credit in maintaining the cash balance that we think we need. So All in all, I think we have a good cash position to Obtain or achieve our growth plans, growth initiatives using the line of credit that we have And we'll manage accordingly.

Speaker 3

But you're exactly right. We'll have cash positive Results going forward. So that should fund any growth that we have.

Speaker 7

Okay. Thank you.

Speaker 3

You bet.

Operator

Our next participant is Oren Hirschman with with AIGH Investment Partners.

Speaker 6

Hi, good morning. How are you? And congratulations definitely on progress. I have one more question, just something with margin side. Just A lot of the gross margin improvement was supposed to come substantially from going through the higher cost inventory.

Speaker 6

What actually happened this past quarter? And does that mean that there was actually negative progress on the gross margin and because of the offset From the going through that higher cost inventory, we're getting towards the lower cost inventory, how should we view that dynamic?

Speaker 3

There is an amount of inventory that we purchased during the supply chain issues of 20 22, and we use an average cost basis for the inventory. So there is some bleed over of the inventory, but the miss in the 2nd quarter was due to a number of very specific cost reduction initiatives That we just failed to execute on, I'm glad to say or happy to say that we completed those now and we Expect to see incremental improvement over 2nd quarter results back to more the trend that we were For the last 3 or 4 quarters since mid last year. So that's how I would describe it.

Speaker 6

Okay. I'm going to reiterate the question. Do you still have the tailwind of

Speaker 3

Yes. I would say That's a good assessment. I look at it as a tailwind for that incremental improvement.

Speaker 6

And that's over the next 1, 2 quarters until it's completely bled off?

Speaker 3

Pardon me, I sorry.

Speaker 6

I'm saying it's about another 1 or 2 quarters in terms of when that higher price inventory works its way through?

Speaker 3

Yes. I would say That's the way it will work. I think I mentioned it on prior calls. We had 20 to 25 Specific components that we purchased through the brokerage markets is that You know, are bleeding through now. So part of that,

Speaker 2

I mean, we did see a small margin improvement right in Q2 and a lot of that was the tailwind piece of it. We were obviously planning and working towards getting the actual cost down, which we didn't achieve in Q2. So that will give you an idea of what the tailwind gave us.

Speaker 6

Okay. In terms of getting additional Where are we with that? I know you're going to save the big update for next quarter, but are we seeing Like a second, 3rd, 4th customer albeit small?

Speaker 2

We are. In fact, actually, we received an order from Our first reseller. So this is a fairly large dealer in the United States Who looks at this service and approached us about reselling InteropOne. And so since then, We've actually had a couple of other inquiries. I find that specifically encouraging, right, because these guys are really close To the users in these different communities and the fact that they see value in reselling the service, I think it's very encouraging.

Speaker 6

But do they have an end customer and they're just taking it on Hoping to find an end customer?

Speaker 2

Yes. They have well, they have a number of end customers. So they're a fairly large reseller Of Lamobile Radio, they do service for this customer base. And so what they see is the service has value And they want to be able to resell that service to the end customer to their end customers.

Speaker 6

But my question is, has any have any of their

Operator

end customers actually expressed signed on with them where they

Speaker 6

went through with the Actually expressed signed on with them where they went through with the actual just where they just I'm sorry.

Speaker 2

I'm sorry. I'm sorry. Yes, my understanding is yes.

Speaker 6

Okay. Okay. That's definitely a positive trend. And Just let me know, I just go on the wire again for the alternative investments here that even taking a loss on it, The cash would be better kept in your pocket and it would be less confusing to your investment community. I am liquidating that investment or swapping it back from PKI shares would be accretive to you.

Speaker 3

Yes, sir. We continue to evaluate our investment.

Speaker 6

Okay. Thanks.

Speaker 2

Thank you, Warren.

Operator

There are no further questions in the queue. At this time, I would like to turn the call back over to the hosts for any closing remarks they may have.

Speaker 2

Thank you, Mike. Thank you all for participating in today's call. We look forward to speaking with you again when we report our Q3. All the best to you and have a great day.

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