BK Technologies Corp Q3 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Third Quarter 2024. This call is being recorded. All participants have been placed on a listen-only mode. Following management's remarks, the call will be open for questions. There’s 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's call, 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 third quarter of 2024. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, Chief Financial Officer. I'll 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. 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, 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 any such material differences have been described in this morning's press release and in BK's filings with the US Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements. Okay, I now turn the call over to John Suzuki, Chief Executive Officer of BK Technologies. Please 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. The third quarter of 2024 was highlighted by solid progress and execution on our operational goals. We achieved our fifth consecutive quarter of profitability with GAAP earnings per share of $0.67 and year-to-date earnings per share of $1.33. Given our progress in the quarter, we will be providing updates to our financial targets later in this presentation. The third quarter backlog remained strong at $27 million, supported by solid order activity for our BKR5000 and BKR9000 radios from both new and existing customers looking to upgrade their radio fleets. We also continued our trend of incremental margin improvement with gross margins of 38.8% in the quarter driven by a combination of strategic cost reduction initiatives and a shift in product mix to include more BKR Series radio sales. During the quarter, we completed our manufacturing transition project to East West manufacturing with the majority of our third quarter revenue generated from products manufactured by East West. Additionally, lower product costs related to the transition favorably impacted our gross margin performance and we expect to see continued margin improvement moving forward as we realize the full savings of the East West partnership. We continue to receive strong order activity for our BKR Series radios from both new and existing customers in the quarter. Specifically, BKR9000 is receiving substantial interest from state and local agencies, and our order activity has been encouraging. One order in the quarter that I'd like to highlight was received from the Florida Forest Service, a long-standing customer of BK for BKR 9000 at a total value of $3.3 million. The radios will be used by several different branches throughout the organization, including wildland fire and land management for finding active fires and facilitating control burns, as well as for research to improve biodiversity and ecosystem health. This order demonstrates the versatility of the BKR 9000 across varying departments and operations and is an example of the increasing demand that we're seeing from this radio among state and local agencies. Looking at the gross margin, we drove continued improvement in the quarter, largely related to our ability to reduce manufacturing expense through the outsourcing of our radio manufacturing to East West. We expect gross margins to continue to improve through 2024 and 2025 as we work towards achieving gross margins of 50%. As I mentioned earlier, we achieved our fifth consecutive quarter of profitability this quarter with earnings per share of $0.67 and we have significantly improved our profitability each quarter since the second quarter of 2023. What you'll note here is that while third quarter revenues were consistent with fiscal 2023 levels, the cost-saving initiatives and the transition to East West manufacturing generated enhanced margin profile and profitability. Given our performance in the quarter and year-to-date, we have decided to revise our financial targets to better align with our expected results. We are raising our GAAP earnings per share and non-GAAP earnings per share targets for the full year of 2024. We are now targeting full year GAAP EPS to exceed $1.65 per share, increased from our previous target of $1.50 per share, and non-GAAP EPS of $1.92 per share, which is an increase over our previous target of $1.77. Order activity has been strong, and we're especially encouraged by the demand we're seeing for the BKR 9000 multi-band radio from our existing wildland fire customer base. We received several purchase orders for the BKR 9000 in the third quarter, including a $3.3 million order from Florida Forestry Service, as I discussed earlier, the Missouri Department of Natural Resources for their wildland fire operations, the Minnesota Department of Natural Resources for their wildland fire operations, and the Gallatin County Sheriff's Department in Montana, representing interest for the 9000 from a law enforcement agency in a Tier 3 county. We closed the third quarter with a backlog of $27 million, which was supported in large by the adoption of the BKR 5000 and 9000, among new and existing customers. We anticipate that most of this backlog will be delivered in the fourth quarter of 2024 and the first quarter of 2025. We completed the transition program with East West manufacturing in the quarter, a move that's already delivering cost reductions and production efficiencies. As we mentioned before, our move to East West is expected to provide continued enhanced gross margins, while also allowing us to more closely focus on new product development. We retained a small production team in our facility in Florida for the final assembly and testing of the BKR9000, as well as to support the production of some of the smaller, low-volume specialty products. A new streamlined build-to-order final assembly process for the BKR9000 was implemented and is expected to be able to produce up to 20,000 radios per year at full capacity. I will now turn the call over to our Chief Financial Officer, Scott Malmanger, to go over our financial results for the quarter. Scott?

Thanks, John. Sales for the third quarter totaled approximately $20.2 million, essentially consistent with $20.1 million for the same quarter last year, which is in line with our expectation that 2024 revenue will be consistent with 2023 results. Gross profit margin in the second quarter was 38.8%, as compared to 31.9% in the third quarter of 2023, which surpasses our target margin level of 35% for 2024. We expect to continue to achieve margin improvement as we drive our cost reduction initiatives. Selling, general and administrative expenses, or SG&A for the third quarter totaled approximately $5.2 million compared to $5.8 million for the same quarter last year. Operating income totaled $2.6 million compared with an operating income of $594,000 in the third quarter of 2023. We recorded net income of $2.4 million or $0.67 per basic and $0.63 per diluted share in the third quarter of 2024 compared with net income of $90,000 or $0.03 per basic and diluted share in the prior year period. Non-GAAP adjusted net income, which adds back net realized and unrealized gain or loss on investments, stock-based compensation expenses, and severance expenses was $2.7 million or an adjusted EPS of $0.75 per basic and $0.71 per diluted share compared with adjusted net income of $1.1 million or $0.33 per basic and $0.32 per diluted share in the third quarter of 2023. We expect enhanced profitability as we continue to reduce costs and improve our gross margins and are confident in our revised target of full year GAAP EPS exceeding $1.65 and full year adjusted EPS target of $1.92 per share. We reported adjusted EBITDA of $3.1 million in the third quarter of 2024 compared with an adjusted EBITDA of $662,000 in the third quarter of 2023. Turning now to the company's liquidity. We significantly strengthened our balance sheet in the year-to-date period. As of September 30, 2024, we have approximately $4.2 million of cash and cash equivalents and no debt. Working capital improved to approximately $22.7 million at September 30, 2024, compared with $16.8 million at December 31, 2023. Driven by increases in accounts receivable that were somewhat offset by inventory reductions as we transitioned radio manufacturing lines to East West. Shareholders' equity has also increased to $26 million compared with $21.3 million at December 31, 2023, demonstrating the enhanced value we've achieved year-to-date. With our visibility today, we believe that we are well positioned to continue improving our balance sheet through the balance of 2024 and that our current cash positioning, combined with anticipated cash generated primarily by radio sales and borrowing availability under our credit facility provides us with the working capital we need to grow our business. I'll now turn the call back over to John.

Thank you, Scott. With the third quarter now closed, I am pleased to say that we are on track to exceed our operational and financial targets for 2024. Our visibility today indicates we are confident in our ability to achieve full year GAAP EPS to exceed $1.65 per share, up from $1.50 and non-GAAP EPS of $1.92 per share, up from $1.77. We have made solid progress throughout 2024 and believe these new targets better reflect our performance year-to-date and where the business is heading going forward. As we close out the year, we remain focused on accelerating the BKR 9000 adoption, winning new customers, and growing our market share. With that, we can now open the call for questions. Kelly?

Certainly. The floor is now open for questions. Your first question is coming from Aaron Martin with AIGH Investment Partners. Please pose your question. Your line is live.

Hi. Good morning, guys. Congratulations on the quarter. And obviously, the increased operating leverage really shining through. So congratulations on that. Just a technical question of the $3.3 million order, was that included in the quarter-end backlog because you announced it after the end of the quarter?

Yes. Thank you for the question, Aaron.

Can you remind us about the typical seasonality of the business as we look towards Q4 and the next year?

Yes, thank you for the question, Aaron. This is John. Our strongest quarters for orders and revenues are Q2 and Q3, while Q4 tends to be the weakest for new orders. This is mainly because the third quarter marks the end of the fiscal year for the Federal government, which accounts for about 35% to 40% of our business. As we move into the fourth quarter, the first quarter of their fiscal year, their budgets have not yet been established. Given that we recently had an election and they have undergone a continuing resolution, we continue to communicate with our customers to understand their budget expectations. However, this year, it appears they may not be ready to place purchase orders in the fourth quarter, leading to lower activity. The first quarter of the upcoming year should see stronger performance as it falls within their second quarter. Following that, we will be in their second and third quarters of the calendar year.

Got it. And on the gross margin, obviously, a great number, and you've continually talked about not stopping there, even though you're past your target. So, what can you tell us about the trajectory there again into Q4 in 2025?

Yes, I think the best way to characterize that, Aaron, is that we're targeting that 50%, right? And we believe that is achievable through both the transfer that we've done, the cost downs that we've done, and the transition of the 9000. So, we believe that you'll see continued gross margin improvements. Now, as we get closer to 50%, we may take one step back, two steps forward just because of the different quarters and what they bring. But we definitely are on track to achieve that.

Got it. Okay. And then I guess that sort of brings up the Vision 2025, talked about a target of revenue of $100 million and 50% gross margins. Any thoughts around that as we go into 2025 past the Q4 seasonality?

Sure. So, Vision 2025 was set when I started with the business in July of 2021. That remains our vision and that continues to be what the business is focused on achieving. In terms of what we will be looking at in 2025, I certainly don't want to get ahead of myself, and we'll be talking to the Street during our fourth quarter call, which I think is going to be in March of 2025. So, at that point, we will provide you with what our targets will be for 2025. But nevertheless, right, Vision 2025 exists, and that's what the business is driving towards.

Okay. Congratulations on the progress. Actually, in the past, you've given us a number of radios shipped in the quarter. What was the number for Q3 or for the first nine months?

So, we actually stopped that practice, Aaron, and we actually communicated that on a call. And the reason for that was the competitive nature of the 9000 and we just didn't want to provide any additional information to our competitors. Because again, the 9000 really starts approaching onto their customer base. And so for that reason, we decided not to disclose numbers of units sold.

Okay. Congratulations again on the progress in operating leverage.

Thank you, Aaron.

Certainly. You have a question coming from Samir Patel with Askeladden Capital. Please pose your question, your line is live.

Hey guys, Congrats on a good quarter.

Thank you, Samir.

I have three questions. First, could you discuss your efforts to sell the 9000 and the market segments where you feel the most optimistic? I noticed the recent win in Florida as a traditional customer, but you also mentioned a win with the Sheriff department in Montana, which seems to be a new customer. I know you attended IACP recently, so I’d like to hear your thoughts on the segments you're focusing on where you believe you can drive those sales.

Yeah, that's a good question. So what we have been communicating in the past with the market for the 9000 because it's an all-band radio, we felt that, that radio was best positioned for law enforcement and what we call structured fire, so your local fire departments and ambulance services. So these are very large market segments that operate in urban environments. And typically, we haven't sold to them in the past. So it was a whole new market. If you look at the total market of radios in the US, which is about $2.3 billion, 85% of those radios fall into those types of categories. And so when we started the program on the 9000, we viewed that as our largest market opportunity. As we've launched the product, what surprised us the most is just the adoption within the wildland fire. These are people that typically operate in band VHF. They're very cost conscious. And so our thought was is that these individuals would not be paying twice as much money for a multiband radio. What we found over the last year is, while that's true for, say, US Forestry, one of our largest federal customers, they're still buying those 5000. A lot of the state agencies have a real need to communicate on the statewide radio systems, which typically operate in a different band, say, 800 megahertz. They're making the business case that says, 'Hey, I need my radios for forestry services and wildland fire. It's got to be BK. Why don't I just pay a little bit more money and I can get a radio that I can use on the statewide system to interoperate with all the other agencies.' So that was probably our biggest surprise. Typically, these agencies are not as well funded as, say, state law enforcement, but they are getting the funding based on that requirement and need. So from our perspective, that's actually a very strong positive.

The Boulder County order is an example of that.

Yeah. Boulder County is at a county level exactly that, but at a county level, right? You had 26 fire departments. All of them had BK radios for wildland fire, but they also had a different brand radio for their structure fire operations. So when they respond to a fire in their town or in the city, typically, they're not using their BK radio, they're using a competitor's radio. When they made the decision to buy new radios, it made sense to them just to buy one radio for both operations for both missions. And then they could have one radio for all the fire services covering all missions. And of course, that was the BKR 9000.

Okay. That's good. My second question, you didn't mention anything about the 9500 and kind of in the research I've done talking to people, it seems like there's a significant portion of the market that likes to purchase the mobile and the portable radios as a bundle, and it seems like that's kind of a big unlock for you once you get that to market. So maybe you could talk about how that development process is going, kind of how heavy of a lift that is relative to developing the 9000, and with your increased earnings and cash flow, is there any chance you could kind of reinvest maybe a little bit more to accelerate getting that product to market faster?

Excellent question, Samir. We have announced the initiation of a program for the 9500, which is a multiband mobile device, and we expect to bring it to market in 2027. In terms of development risk, we utilize a lot of the common architecture from the multiband portable and the 9000, which will be quite similar for the 9500 mobile. The core technology for multiband functionality will largely remain the same across the radios. However, there are some distinctions between a handheld device and a mobile device, primarily regarding the mechanical aspects that need to be addressed. This is an engineering challenge that is well-understood in our industry and is considered relatively low risk. The timeline for this project is extended due to the need for entirely new mechanics. The process involves design work and tooling, which can take about three to four months, after which the product will be produced and go through several iterations. While this process does not present a high risk, it is time-consuming, and it is challenging to shorten that timeline. Consequently, we have indicated that we plan to release the product by 2027.

Okay. Understood. And then the final question, sort of just a boring modeling thing. But I was looking at the deferred revenue line item on your balance sheet, and there's not really any disclosure around it, and it's sort of not obvious to me other than InteropONE, what that might be. So, could you just kind of clarify the source of the deferred revenue?

Yes. It's part of our product offering. We have extended warranties. And so according to GAAP, that's a deferred revenue until the extended warranty period is exercised. So that's primarily all of the deferred revenue.

Well, that is InteropONE.

Yes, in the InteropONE.

Okay. Understood. Appreciate the clarification. I'll pass it back. Thanks.

Thank you, Samir.

Your next question is coming from Erik Voss with Mission Vertical. Please pose your question. Your line is live.

Hey, John, Scott. Can you hear me?

Yes, Erik.

Yes.

Congratulations on a great quarter and a good year here. Can you kind of take us through or help us with the working capital and kind of how you think that progresses over the next six months to a year?

Sure. Basically, the improved gross margins are generating the working capital improvement. And as I mentioned in the remarks, basically, we paid off all of our debt, including the line of credit, and we've established a new line of credit on October 30. So we've got the working capital necessary to basically grow the business to our target of $100 million of revenue. And basically, that would be generated by product sales.

Okay. So this is the right level for working capital at this point?

Yes.

Okay. And then can you kind of talk about the progression of gross margin that's been fantastic. Is there seasonality to the improvement going forward just because of the seasonality of the business? Or how should we think about gross margins over the next couple of quarters?

Yes, hi Eric, it's John. There are many factors affecting our gross margin moving forward. Let me address some seasonal aspects. In the second and third quarters, we generally see our strongest performance because many federal orders are placed and shipped during this time. The prices for those radios are at their lowest, which enables us to achieve higher volume. However, in Q2 and Q3, we often experience more pressure on gross margin due to the reduced average selling prices of those radios. Historically, this trend may not have been apparent in our figures because it was offset by cost savings from our initiatives and the ongoing East West efforts. As we progress, we're increasing shipments of the 9000, which has a more favorable margin profile. Looking ahead to the next year, we can anticipate several scenarios depending on the timing of shipments for federal radios versus the 9000 radios and when our cost improvements take effect. It's challenging for me to predict exactly how this will unfold, but the price pressure in terms of mix is most noticeable in Q2 and Q3, primarily due to the federal radios.

Okay. Brilliant. All right. Nice job, guys.

Thank you.

You have a follow-up question coming from Samir Patel with Askeladden Capital. Please proceed with your question. Your line is live.

Yes. Sorry, if I missed this, but any update on that BKR9000-tethering capability with InteropONE, because I know that was one of the things you were kind of excited about in terms of being able to drive sales InteropONE.

We have been developing the tethering approach for the past year, and the team has made significant progress. However, we are not yet ready to provide it to first responders. We believe we are on the right track to reach that point. It's not just about making connections; it’s about ensuring resilience. The Bluetooth connection must remain stable even when adjustments are made to the radio settings. We've encountered some scenarios where the Bluetooth connection drops or the audio becomes distorted, which is unacceptable. We aim to resolve these issues before conducting field trials with customers, as this is a new approach for the market. The market has expressed excitement, and we want to maintain their confidence in the technology, especially since Bluetooth has a reputation for reliability. We need to ensure that what we provide to first responders, even in testing, is completely reliable, and we are not quite there yet.

Understood. Appreciate it.

This does conclude our question-and-answer session. I would now like to turn the floor back over to John Suzuki for closing remarks.

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

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