Earnings Call Transcript - BKTI Q2 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Second Quarter of 2025. This call is being recorded. 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, Jen Belodeau of IMS Investor Relations. Please go ahead.

Jennifer Belodeau, Investor Relations

Thank you, Holly. Good morning, and welcome to our conference call to discuss BK Technologies results for the second quarter of 2025. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, 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. 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. 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. With that out of the way, I'll turn the call over to John Suzuki, CEO of BK Technologies. Please go ahead, John.

John M. Suzuki, CEO

Thank you, Jen. Good morning. Thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and financial results during the second quarter, and then I'll turn over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We'll conclude by opening the call for a brief Q&A. This was a strong quarter for us. Our BKR product line is being well received in the marketplace, and we are seeing the benefits of the strategic initiatives we have put in place to enhance and grow long-term profitability for shareholders. The strong operational execution is evidenced by continued revenue growth, significantly enhanced gross margin and profitability. Second quarter revenue increased 4.5% to $21.2 million, consistent with the single-digit revenue growth we previously targeted for 2025. As I will address later in the presentation, it is now our expectation that revenue growth will be high single digits for 2025. Gross margin in the quarter improved significantly to 47.4% compared to 37.3% in the second quarter of 2024. Fully diluted GAAP EPS was $0.96 compared with $0.47 in the second quarter of 2024. On a non-GAAP basis, fully diluted adjusted EPS of $1.30 in the second quarter meaningfully outpaced non-GAAP fully diluted adjusted EPS of $0.55 in the second quarter of 2024. During the second quarter, we launched RelayONE, a rapidly deployed portable repeater kit designed to extend range and facilitate interoperability among different types of public safety and military radios. RelayONE is a newly branded BK ONE family of offerings focused on developing innovative interoperable communication solutions for first responders. In conjunction with the launch, we received a purchase order from the Larimer County Sheriff's office based in Fort Collins, Colorado for RelayONE, which will be used by their search and rescue team. Larimer County has a population of around 360,000 and Fort Collins is their most populous city and the county seat. Federal order activity began to pick up just after the close of the quarter. During the month of July, we received several purchase orders from the USDA Forest Service totaling $12.9 million. The orders included the largest single purchase of the BKR 5000 since its debut and underscore our position as a leading communications provider in the federal wide land space. We also received orders from various federal, state and local government agencies, bringing the total order value to $17.8 million for the month of July alone. It appears that while the Department of Government Efficiency may have delayed the timing of the federal orders, federal budget money is now flowing. Slide 4 illustrates our successful efforts to drive improved gross margins through the diversification of our product mix, our cost savings outsourced manufacturing model and disciplined expense management. The 47.4% gross margin we achieved in the quarter is a significant improvement over last year and also improved on a sequential basis from 47% in the first quarter of 2025. With our visibility today and the U.S. tariff uncertainty mostly behind us, we've increased our full year margin target to at least 47%, reflecting our confidence in the trajectory of our business and improved operating model. Strong market demand for our BKR Series radios has driven solid revenue growth. Agencies at the local, state and federal levels are choosing our advanced public safety communication solutions for their radio fleets. As I mentioned a moment ago, we saw significant federal order activity in the month of July, and we expect this to continue through the third quarter as wildland fire activity intensifies and the federal fiscal year comes to an end. We view the order activity we're seeing as validation of the high reliability and performance of our radios in mission-critical situations where there is zero margin for error. With that, I'll turn it over to Scott Malmanger, CFO, to give a more detailed overview of our second quarter financial performance. Go ahead, Scott.

Scott A. Malmanger, CFO

Thanks, John. My prepared remarks will focus on the second quarter results. For a full review of year-to-date results, please consult the press release issued earlier today or the earnings presentation posted on our website. We are pleased to announce the launch of our new Investor Relations website. This launch is part of our ongoing commitment to transparency, accessibility and keeping our shareholders informed. Sales for the second quarter totaled $21.2 million, an increase of 4.5% compared with $20.3 million in the second quarter of 2024. Sequentially, revenues increased 11.1% compared to the $19.1 million in the first quarter of 2025. As John mentioned, gross profit margin in the second quarter was 47.4% compared with 37.3% in the second quarter of 2024, reflecting improved sales mix and cost reduction initiatives, including the successful transition of manufacturing to East-West manufacturing. Selling, general and administrative expenses, or SG&A, for the second quarter increased slightly to $6 million compared to $5.5 million for the same quarter last year. We strategically invested in engineering, product development and sales and marketing to support our long-term growth while keeping our other G&A expenses flat for the quarter. Specifically, engineering and product development expenses for the second quarter of 2025 increased to $2.3 million or 10.9% of sales compared with approximately $2 million or 9.8% of sales for the same quarter of fiscal year 2024. This increase is primarily attributed to non-capitalizable development costs for the BKR multiband mobile radio product. Sales and marketing expenses also increased slightly to approximately $1.9 million or 9.2% of sales compared with approximately $1.7 million or 8.4% of sales for the second quarter of fiscal year 2024, primarily due to the addition of new salespeople and increased trade show participation. Other G&A expenses stayed flat for the quarter at $1.8 million as we continue to diligently manage our expenses. Operating income totaled $4 million in the second quarter of 2025, representing operating margin of 18.9%. This compares with operating income of $2 million in the second quarter of '24 or operating margin of 10%. The increase demonstrates the operating leverage that we are beginning to see in our business as we efficiently execute our strategy. The company achieved GAAP net income of $3.7 million or GAAP EPS of $1.03 per basic or $0.96 per diluted share in the second quarter of 2025 compared with the net income of $1.7 million or $0.47 per basic and diluted share in the prior year period. Non-GAAP adjusted earnings, which adds back net realized and unrealized gain or loss on investments, noncash stock-based compensation expenses, noncash deferred tax provisions and severance expenses was $5.1 million or $1.39 per basic share and $1.30 per diluted share in the second quarter of 2025. This is compared with adjusted earnings of $2 million or $0.56 per basic and $0.55 per diluted share in the second quarter of 2024. We reported non-GAAP adjusted EBITDA of $4.4 million in the second quarter of 2025, a significant increase over non-GAAP adjusted EBITDA of $2.5 million in the second quarter of 2024. Second quarter 2025 adjusted EBITDA margin was 20.7%, which for the first time, surpassed our target adjusted EBITDA margin of 20%. Slide 7 demonstrates our track record of delivering strong and improving profitability, driven by sales growth and improved revenue mix and higher margins. Both adjusted EBITDA and adjusted earnings have grown significantly. With our current visibility, we believe that we are well positioned to continue delivering improved profitability and enhanced value to our shareholders. Our balance sheet continues to strengthen, providing us with increased financial flexibility to execute on our growth strategy and pursue the larger market opportunity before us. At June 30, we had $11.9 million of cash and cash equivalents and no debt. Working capital improved to $28.9 million at June 30, 2025, compared with $23 million at December 31, 2024. Working capital at June 30, 2025, included approximately $11.9 million in cash and cash equivalents compared with $7.1 million at December 31, 2024. Shareholders' equity increased to $36.8 million compared with $29.8 million at December 31, 2024. We are pleased with the significant improvement we have seen in our balance sheet liquidity and look forward to continuing carefully deploying capital to drive long-term shareholder value. I will now turn the call back over to John.

John M. Suzuki, CEO

Thanks, Scott. Our second quarter performance is characterized by exceptional execution. The tariff landscape appears to be settling down. Based upon the order activity we're seeing, the potential impacts of the Department of Government Efficiency on government spending have been muted. With our current visibility and increased confidence as we head into the back half of 2025, we have updated certain previously stated full year financial targets as follows. We are maintaining our single-digit revenue growth target. However, we now expect to be on the high end of this range. We now expect gross margin for the full year to be 47-plus percent, raising the 42-plus percent target we previously provided. Given we expect revenues at the high end of our range and the improved gross margin, we're raising our full year GAAP EPS target to $3.15, up from our previously stated target of $2.40. Lastly, we're raising our full year non-GAAP adjusted EPS target to $3.80, up from our previously stated target of $2.80. The higher increase in our non-GAAP guidance versus our GAAP guidance is due to an expected increase in noncash stock-based compensation for the year. Now that I have been with BK for 4 years, it's increasingly clear to me there is a huge opportunity to grow BK into a much larger and considerably more profitable business for shareholders, and we're committed to retaining the team that has gotten us to where we are today. As we move through the balance of 2025, we will continue to invest in our sales and marketing efforts to expand adoption of our BKR 9000 multiband radio, which commands a higher price point than our BKR 5000 single-band radio and drives enhanced margins for our business. The growth of our solutions business remains a priority as well. We're strategically building R&D and engineering capabilities to strengthen our software expertise and offerings and position BK at the forefront of the next generation of public safety communications. Finally, development of our next-generation BKR 9500 multiband mobile radio is progressing well. As a companion radio to the BKR 9000 multiband handheld portable radio, the 9500 mobile radio will be installed directly into first responder vehicles. Our investment level in the BKR 9500 will continue to increase as we near the launch and begin recognizing revenue in 2027. With that, we can now open the call for questions. Holly?

Operator, Operator

Your first question for today is from Jaeson Schmidt with Lake Street.

Jaeson Allen Min Schmidt, Analyst

Congrats on a really strong quarter. I want to start with that lift to the gross margin outlook. Curious how much of that is being driven by just feeling better about the tariff environment versus this really favorable mix shift that you noted in Q2.

Scott A. Malmanger, CFO

Yes, Jaeson, I think I'll try to take that question. Thanks for the question. Basically, the tariff expectations earlier in the year were very uncertain. So we took a good conservative approach to the tariffs, and that's the primary driver. But in addition to that, our shift to higher-margin products and the cost savings that we are realizing related to the outsourcing production with East-West Manufacturing is also a significant contributor.

Jaeson Allen Min Schmidt, Analyst

Okay. No, that's really helpful. And then with the 9000, just curious if you could provide some more color on how that's tracking? Was it up sequentially and year-over-year?

John M. Suzuki, CEO

Jaeson, it's John Suzuki. Thanks for the question. So I believe what I had stated on the last call was that our expectation for this year is that we're going to ship 2 to 3 times more radios than we did last year. So clearly, that's much higher than last year, and we believe that trajectory will continue throughout the year.

Jaeson Allen Min Schmidt, Analyst

Okay. Perfect. And then you noted some really strong order patterns in July. Maybe I missed it, but what was the backlog number exiting Q2?

Scott A. Malmanger, CFO

Yes. The backlog number exiting Q2 was about $16 million, and that was basically a little bit lower than what we would have anticipated, but it had a lot to do with the federal orders that we received early in July. So if you take that into consideration, it seems reasonable.

Operator, Operator

Your next question is from Samir Patel with Askeladden Capital.

Samir Patel, Analyst

Congrats, as everyone else is going to say, on a great quarter. I always like to ask this, what's the progress on the tethering and with the InteropONE and then any milestones on the 9500 development?

John M. Suzuki, CEO

I'll address the first part of your question, Samir. Thank you for asking. The InteropONE tethering is still under development and making progress, but there are no updates at this time. Once we have the product ready for field testing, we will share that information on one of our calls. The interest in InteropONE remains very high, and we have ongoing trials. This product is significantly aiding our sales of the BKR 9000. Currently, in the public safety market, customers looking to purchase new radios are also inquiring about our strategy for transitioning to LTE or cellular. InteropONE is intended to enhance the LMR product, specifically the BKR 9000, which customers seem to appreciate. Once the tethering is finalized, it will enable push-to-talk over cellular calls through LMR radios via smartphones. This concept has been very well received by clients, and we are eager to introduce this product to the market. However, since this pertains to public safety, it's a complex program, and we won’t launch it until it's fully ready. I apologize, Samir, I overlooked the second part of your question.

Samir Patel, Analyst

It was just milestones on the 9500, just how the development is going.

John M. Suzuki, CEO

Yes. So I'll just refer back to my comments. The 9500 is on track. We expect to complete the development, and we expect to get revenue for that product in 2027.

Samir Patel, Analyst

Okay, that's great. I want to explore the guidance upgrade a bit. Regarding revenue, how much of it is related to obtaining those federal orders that might have been affected by DOGE, which you were uncertain about compared to other factors like local and municipal business? Similarly, concerning margins, how much is attributed to the continuation of USMCA versus other factors influencing your decision to raise the guidance?

John M. Suzuki, CEO

Yes. Thanks, Samir. Let me try and take a cut and Scott can correct me if I'm wrong. So obviously, we had an outlook this year of being in that single digit. The thing that we were uncertain about was the DOGE impact and the impact that would have on the federal order flow. If, for example, it had a strong impact, delayed orders such that they couldn't spend the money that had been budgeted, that would have resulted in us ending up on the low side. That has passed, and the orders are flowing. We received what we were expecting in terms of the large orders. We continue to get orders through the third quarter. That's why we ended up on the high side of that revenue flow. If you look at the first quarter or the first 2 quarters, most of that was state and local business. Year-over-year, that's actually up, driven primarily by the adoption of the BKR Series radios. State and local continues to grow and seems not impacted by DOGE, which was more on the federal side. In terms of the margins, I think in the first quarter call, we had said that we wanted to put out a target that included our best guess on the impact of the tariffs. When we set the targets back in March, there was a lot of conversation around tariffs on products from Canada and Mexico. What we had decided was to take our best estimate on the impact of those tariffs on our products, and in conjunction with that, we also did a price increase on our products. As it's turning out, many of our products are covered under USMCA and, because they're produced in Mexico and in Canada, they are continuing to come in tariff-free. That looks like the administration's position through the balance of the year. So that's a big chunk of the favorability. Offsetting that, we have a number of our accessories coming out of Vietnam, which historically had been a very low or zero tariff environment. It initially got hit with a 10% tariff and now a 20% tariff. In response to that, we've increased our pricing on some accessories that are coming out of Vietnam. We didn't want to do that, but a 20% tariff is just more than anyone can absorb. Clarity on the tariff situation, while not ideal, for this year, we believe it's behind us. That's why we have more confidence in our gross margins.

Samir Patel, Analyst

Great. And based on our history, I'm not sure if you'll answer this, but I have to try. So you talked about qualitatively your expectations for very strong growth and the big opportunities. Obviously, a lot of momentum here in the back half of the year based on your guidance. Any reason to think that wouldn't continue into 2026 or anything that you're seeing regarding one-time benefits that you don't expect to repeat? Or again, I know you're not going to give any guidance for 2026, but would you expect a continuation of revenue growth and margin improvement at this point?

John M. Suzuki, CEO

Yes. I appreciate the question, Samir. I certainly don't want to get ahead of myself. Our focus right now is making sure that we deliver the strong results in the second half in line with what we stated. In terms of '26 and beyond, we will have an opportunity in March to talk about our full year in 2025, how we performed against our Vision 2025 targets. One of those was the 20% EBITDA, which I'm pleased that we hit this quarter. All that said, I think that we're bullish on the company. We're bullish on the future. We think there's plenty of opportunity for growth for us.

Operator, Operator

Your next question for today is from Aaron Martin with AIGH Investment Partners.