BK Technologies Corp Q1 FY2023 Earnings Call

Good morning, ladies and gentlemen, and welcome to the BKTI First Quarter 2023 Earnings Call. This call is being recorded. Following management’s remarks, the call will be open to questions. There is a slide presentation that accompanies today’s remarks, which can be accessed via the webcast. At this time, it is my pleasure to turn the floor over to your host for today, Mr. John Nesbett of IMS Investor Relations. Please go ahead.

Thank you. Good morning, and welcome to our conference call to discuss BK Technologies results for the first quarter of 2023. On the call today are John Suzuki, Chief Executive Officer; Scott Malmanger, Chief Financial Officer. I’ll take a moment 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 and 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 and 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 that have been described in this morning’s press release and in the BK 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 do not undertake any duty to update such forward-looking statements. Okay. I’ll now turn the call over to John Suzuki, Chief Executive Officer at BK Technologies. Go ahead, John.

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 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. Our first quarter is off to a strong start with the shipment of 10,001 radios, which is on the top end of our previously announced target to ship 8,000 to 10,000 radios per quarter. The improved shipment volumes drove revenue growth of 184% in the quarter to approximately $19 million with improved gross margin of 26%. Our increased shipment activity was primarily related to our improved and expanded manufacturing capabilities, which have allowed us to ramp production of the BKR 5000, which is seeing tremendous demand. We continue to make progress toward the launch of our BKR 9000 Multi-Band Radio. Compliance testing continued through the quarter, and it is our understanding that the testing is near complete, with the expectation that we will receive FCC certification shortly thereafter. As we’ve mentioned, we’re seeing a great deal of interest in the BKR 9000. We’re looking toward formally launching this multi-band technology whose capabilities are expected to open up a larger addressable market with several new market verticals. From a marketing standpoint, in late March, we traveled to Las Vegas to participate as a premier sponsor of the International Wireless Communications Expo, or IWCE. This is an important event in our industry, attended by more than 4,000 professionals from the public safety and critical communications industry. Over the course of the 2-day event, we showcased all our products and technology. We were especially excited to demonstrate and highlight our newest offerings, the BKR 9000 and our InteropONE SaaS service. Turning to Slide 4. During the quarter, we saw a strong and steady order activity for our BKR 5000 as new and existing customers expand and upgrade their portable communications technology. Booking activity in the quarter remained strong, and we ended the quarter with an order backlog of $22.9 million as of March 31, 2023. The recent orders include a $1.4 million follow-on order from the Washington State Department of Natural Resources and a $781,000 order from the California Department of Forestry and Fire Protection. We have previously supported these 2 customers, providing BK portable communications equipment and technology and their continued confidence in and reliance on our offerings is great to see. Following the close of the first quarter, we also received a $970,000 order for the BKR 5000 from the Oregon, Washington Bureau of Land Management, another long-time BK customer. I also want to highlight that during the quarter, we received our first purchase order for our InteropONE push-to-talk over cellular service from a large public safety agency located in a top 5 metropolitan area in the U.S. We’re excited to have this first one under our belt and confident that there will be many more orders for this unique service offering moving forward. Slide 5. Slide 5 illustrates the continued traction we’re seeing with our BKR 5000. In the quarter, we shipped 10,001 units coming in at the top end of our quarterly shipment target. Our manufacturing and production operations are executing well. And as we move through 2023, we are targeting the shipment of 8,000 to 10,000 radios each quarter. Turning to Slide 6. With production lines ramped up and our shipment cadence steady, we are driving improved margin as we are able to get more and higher-priced products delivered to our customers. On this slide, you can see how the global supply chain issues negatively impacted our margins through much of 2022. While we were creative and nimble in our efforts to secure parts and components, it was an expensive endeavor, and our production and delivery capabilities were constrained for much of 2022. As we move through 2023, we anticipate that we will see steady quarter-to-quarter gross margin improvement, and we reiterate our full year 2023 gross margin target of 35%. Slide 7. Slide 7 provides an update on the launch of our BKR 9000. During the first quarter, FCC testing was ongoing. Throughout the process, we stayed in close contact with the test lab and our understanding is that the final test phase is nearing completion, so we expect to receive FCC certification shortly. Once we receive certification, we will turn our attention to completing the transition from development to manufacturing and shipping. There is a great deal of market interest in the BKR 9000, and the first months of production will be dedicated to fulfilling the current backlog orders. While it’s taking a bit longer than originally planned, we believe we’re very close to getting this product into customers’ hands and we’ll keep you informed as we continue to move closer to the finish line. Now I’ll turn it over to Scott Malmanger, CFO, to take you through the financials. Scott?

Thank you, John. On Slide 8, you will see a summary of our financial and operating results for the period ending March 31, 2023. Sales for the first quarter totaled approximately $18.7 million compared with $6.6 million for the same quarter last year. As John mentioned, we closed the first quarter with an order backlog of $22.9 million. Gross profit margin in the first quarter was 26% compared with 22% in the first quarter last year. Selling, general and administrative expenses, or SG&A, for the first quarter totaled approximately $5.9 million compared with $4.9 million for the same quarter last year. SG&A expenses included increased spending for the product introduction of the BKR 9000 as well as one-time costs associated with the ATM and with our sponsorship and participation at IWCE. First quarter operating loss totaled $1 million compared with an operating loss of $3.4 million for the first quarter of last year. In the first quarter of 2023, we recognized the net unrealized loss of $113,000 on our investments compared with an unrealized loss of $496,000 in the same quarter last year. We recorded a significantly reduced net loss of $1.3 million or $0.07 per basic and diluted share in the first quarter of 2023 compared with a net loss of $3.9 million or $0.23 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 see profitability levels improve as well. And finally, as of March 31, 2023, we have approximately $2.8 million of cash and cash equivalents and only $258,000 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 will need to grow our business. I will now turn the call back over to John.

Thank you, Scott. Turning to Slide 9. On Slide 9, we lay out our focus for 2023. We remain focused on maximizing production efficiency. Our capacity is set to produce up to 10,000 radios per quarter or $40 million for the full year. We’re targeting production at 8,000 to 10,000 radios per quarter and a shipment of 32,000 to 36,000 radios for the full year. Based on backlog and forecasted demand, with our visibility today, we believe 2023 shipment activity will come in at the high end of our full year target. Second, we are focused on driving gross margin improvement with a gross margin target of 35% for the full year 2023. We believe this target is achievable for several reasons. The higher cost parts and components purchased last year are almost exhausted and were replaced with parts purchased at a more normal historical cost level. Price increases established in 2022 will start to be more prevalent in our product mix during the balance of 2023 shipments. In the elevated and steady production rates, we expect to see improved operating leverage. Lastly, we’re working hard to achieve incremental product cost improvements throughout the year. There’s still a lot of work to be done this year, but we’re off to a good start, and we will remain committed to improve gross margins throughout the year. In our third area of focus, we want to continue 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 goal. Slide 10. On our last slide, we reiterate our longer-term goal of reaching $100 million in revenue by 2025. We are investing to drive profitable growth with the vision to establish BK as a premier personal communications technology provider for the public safety and critical communications markets. Our BKR 5000 is a proven success in its appeal to new customers as well as to existing customers. Likewise, the launch of the BKR 9000 will considerably expand our target markets. Finally, we’re excited about securing our first of what we believe will be many new customers for InteropONE. We think this new offering will improve first responder safety and response times, potentially saving lives. 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 will turn the call over to the operator for questions. Operator?

Thank you very much. We are now opening the floor for questions. Your first question is coming from Orin Hirschman from AIGH Partners.

I want to go back to the gross margin. Obviously, in order to get still quick back-of-the-envelope math, in order to get to a year target of 35% in gross margin, you’re going to have to have a second half gross margin that exceeds that number by a few percentage points in order to balance out the math from the Q1. How much of that comes from just the component issue going away versus additional efficiencies? Because it sounds like on the additional efficiency side, you’re at a very efficient run rate. So how do you get to that high 30s number that you’re going to need to get to?

Orin, it’s John Suzuki. I’d like to make a few comments before handing it over to Scott for further insights. There are several positive factors helping us move forward. First, on the material cost front, during the first quarter, we utilized a substantial amount of the higher-cost materials purchased in 2022. As we progress into the second quarter and beyond, that material is becoming less available, and most of what we are currently buying is at much lower or historical prices. While there are still a few components that remain more expensive, the overall mix is much improved. Next, the price increases we implemented last year are beneficial. We had a significant backlog to address, and we processed older orders first, which were at previous lower prices. Now that we are working through the backlog, most of the shipments in the first quarter reflect the higher prices. As for production efficiency, we are building in improvements as we maintain steady operations, which is helping us deliver more effectively. Another important area is product cost reduction. We had several projects planned in 2022, but we initially focused on material issues to ensure we could ship products. Those projects are currently making progress, and we anticipate seeing cost improvements starting from Q2 and continuing through Q4. Lastly, we expect margin enhancement primarily from product mix, particularly with the sale of the BKR 9000 compared to the 5000. While the number of BKR 9000s we expect to ship this year may not be significant overall, we anticipate a positive impact on our gross margins in the fourth quarter, and this trend will continue into 2024. Scott, would you like to add anything further?

Thanks, John. I think you explained it well. We do have a number of initiatives that we’re looking at for specific cost reductions on the products. We expect to achieve those in the second quarter here. So we’ll have incremental improvement quarter-over-quarter through the rest of the year.

Okay. I have a couple of other questions. Regarding the 9000, I know you've mentioned that the gross margins at reasonable production levels should be significantly better. This is a question I haven't asked before, and we've known each other for about two years since we took our positions. Do you view the 9000 as an addition to the 5000 business or as something that will compete with it?

I would say majority additive, not 100% because there will be some of our current customers in wildland fire, the battalion chase for example, who are willing to pay twice as much money for a Multi-Band Radio. So there’ll be some overlap, but we view the 9000 as being totally additive. It’s new market verticals that we have not historically sold to.

Could you speak to your customer base in Europe if becomes a positive, as you mentioned, because it’s cannibalistic, they’re buying the same number of radios at double the price with you getting a better gross margin as well on that 2x on a percentage basis, it’s obviously one for you. Can you see some percent of your customer base material percent wanting to migrate to Multi-Bands or not really?

That's a good question, Orin. You can view it from several perspectives. Ultimately, it depends on their budgets. Our strongest client base making a case for purchasing Multi-Band Radios is in California. CAL FIRE is a major customer; every fire department in California is part of CAL FIRE. The state uses all four frequency bands. When firefighters respond to a wildland fire, they carry their BK radios. However, when they switch back to their home system, many choose a competitor’s radio because their technology isn’t compatible. This creates an opportunity; when replacing their home system radios, they might think, why not choose a BK 9000 Multi-Band Radio? This way, they would only need one radio that works for both their home system and wildland missions. We have to see how this plays out, but there is definitely a compelling argument, especially in California's fire departments that operate in the higher frequency bands, particularly in larger city centers, for them to consider migrating entirely to the BKR 9000. This would be beneficial for us as it represents an upsell.

Okay. And last question, just a quickie. The InteropONE, is that first customer deployed yet? And do you think we’ll see this quarter or next quarter customer number 2 or 3 more?

Yes, the first customer has deployed the system and has been using it for about one to two months now. The feedback we've received has been extremely positive. Regarding new orders, we have conducted several field trials at various levels of government. Each time we showcase InteropONE to potential customers, the feedback is consistent. They appreciate that it offers a unique capability not available from our competitors, as well as our pay-as-you-go pricing model. Many have explored similar services from other providers but found them too expensive since they require a subscription for every first responder or agency member. This can be quite costly when considering hundreds of subscriptions. Our model requires only a few subscriptions, often just one for team leaders. Charges only apply when they start using the service and inviting guest users, which is when it becomes necessary. Ultimately, the value of the service often justifies the cost during such incidents.

Okay. We don’t appear to have any further questions in the queue. Scott Weis has just popped into queue from Semco Capital.

Congratulations on a good quarter. I have 2 quick questions. One, in our past conversations, you indicated to expect revenue per device of around $2,000. And it looks like this quarter, you came in around $1,870 per device. Can you comment on that number and where you expect it to go between now and the rest of the year? And then my second question is the investment losses on the balance sheet. Can you comment on what those investments were?

Let me address the first question before passing the second one to Scott. You're touching on an important metric we monitor closely, which is revenue per radio. To provide context, revenue per radio includes the cost of the radio as well as all the accompanying accessories and services. When we ship a radio, like the BKR 5000, we include not just the radio but also a battery, charger, antenna, speaker, and microphone. These items are all considered accessories. The unique aspect of these accessories is that while the radio itself might have a lifespan of 7 to 10 years, the accessories typically need replacement every 1 to 2 years, depending on usage. Therefore, I sell the radio once, but I continue to sell accessories throughout the life of the radio in the field. In terms of our revenue and unit shipments from 2021 and 2022, the revenue per radio was about $2,000 per unit. Looking specifically at 2022, in the third quarter, we reached approximately $2,200, while in the fourth quarter, it was around $1,800. This indicates a certain seasonality in the revenue per radio unit. Most of our accessory sales occur during fire season, primarily in the second and third quarters. Consequently, we anticipate seeing higher revenue per radio shipment during these quarters compared to the first and fourth quarters. Nevertheless, on average, for 2021 and 2022, it stood at $2,000 per radio shipped. Looking ahead, 2023 is projected to be a remarkable year for us in terms of units shipped. We are closely monitoring whether the $2,000 figure holds for this year. While I can't definitively say if that will happen due to the anticipated volume increase—we're projecting a nearly 40% rise in units shipped in 2023—we'll have to observe how the quarters unfold. We do expect to ship more accessories in the upcoming quarters. Now, regarding the second question, I will pass that on to Scott.

Basically, the investment on the books is an investment that was made back in 2018, so a number of years ago. We continue to monitor that investment to see if now would be a good time to exit that position or not, but that’s something that we review constantly or every quarter. So that’s kind of where we’re at with the investments. So those are unrealized losses. So we’ll see where we go from there.

Okay. John, one follow-up to your answer. Assuming the 9000 is certified and launched at some point over the next, call it, 3, 6 months, given the higher ASP on that, I would assume that your revenue per device in the back end of the year will be higher than what we’ve seen over the last few quarters. Is that correct?

Yes, I don't want to commit to the fourth quarter specifically due to the ratio of 9000s to 5000s and other radios being shipped. Generally, as the product mix shifts toward more 9000s, the revenue per radio will increase. In the fourth quarter, number of radios to be shipped will influence our performance, and I want to manage expectations by noting that we will gradually introduce the 9000s. Initially, we will release a limited number of radios, then increase the quantity in subsequent quarters. This approach allows us to gather solid feedback from customers and address any issues promptly. Ideally, everything will go smoothly, and demand will be strong. However, we need to be careful about how quickly we roll these out to ensure we deliver a quality product.

Thank you very much. That appears to be the end of our question-and-answer session. I will now hand back to management for closing remarks.

Thank you all for participating in the call today. We look forward to speaking with you again when we report our Q2. All the best to all of you, and have a great day.

Thank you, everybody. This does conclude today’s conference call. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.