Boxlight Corp Q1 FY2022 Earnings Call

Thank you, and welcome to the Boxlight First Quarter 2022 Earnings Conference Call. This call is being webcast and is available for replay. The remarks today will include statements that are considered forward-looking within the meaning of Securities Laws including forward-looking statements about future results of operations, business strategies and plans, customer relationships, market trends, and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today and are subject to certain risks and uncertainties and may cause the actual results to differ materially from the forward-looking statements. The detailed discussion of such risks and uncertainties are contained in the company's most recent Form 10-K, Form 10-Q, and other reports filed with the SEC. The company undertakes no obligation to update any forward-looking statements. On this call, management will refer to non-GAAP measures that when used in combination with GAAP results provide additional analytical tools to understand the company's operations. The company has provided reconciliations to the most directly comparable GAAP financial measures in the earnings press release which will be posted on the Investor Relations section of the company's website at investors.boxlight.com. And with that, I'll handover the call to Boxlight's Chairman and Chief Executive Officer, Michael Pope.

Hello, everyone. And thank you for joining the call today. We will be publishing a press release with our Q1 results shortly, which will be available in the next few minutes. We made substantial progress during the first quarter across several key company initiatives and delivered another strong financial performance with $64 million in customer orders, $51 million in revenue, and $1.2 million in adjusted EBITDA. We are experiencing growing demand for our solutions globally, as evidenced by our organic growth of 23% in customer orders and 34% in revenue over the first quarter last year. We concluded Q1 with $43 million in back orders, a 66% organic increase over Q1 last year and a healthy balance sheet with $11 million in cash, $49 million in inventory, $50 million in working capital, and $47 million in net assets. Despite continued supply chain, logistics, and other challenges, we're operating at a very high level. For the second quarter, we expect to deliver $54 million in revenue and greater than $2 million in adjusted EBITDA. There were a substantial number of orders that would have shipped in Q2 that will now ship in early Q3 due to product delays. However, we still expect to achieve our full-year guidance of $250 million in revenue and $26 million in adjusted EBITDA. We began 2022 with multiple tech and learning awards in the primary and secondary education categories for our MimioConnect blended learning platform, ProColor interactive displays, MyStemKits curriculum, and professional development services. Additionally, just this week, we received several awards from Innovate Magazine, including Education Technology Innovation of the Year for our Clevertouch IMPACT Plus touchscreen and overall business growth for our Clevertouch brand. During Q1, we launched our Mimio STEM mobile mission to Mars experience, a mobile van that is traversing across the country led by Braden Moreno, Director of STEM. The Mimio STEM mobile van is completely equipped with our award-winning STEM solutions and a ProColor interactive display and is designed to showcase our solutions to district and school leadership through hands-on activities based on Mars exploration. You can track Braden and receive Mimio STEM mobile updates on our social media pages. We're pleased with our continued progress in integrating our hardware and software solutions. Over the next several weeks, we will be releasing significant enhancements between our FrontRow conductor campus communication platform and our MimioMessage and Clevertouch live embedded messaging signage solutions. We plan to release and demonstrate the significant combined platform during the ISTE Education Conference in New Orleans in June. Just a few weeks ago marked the sixth anniversary of our acquisition of Mimio in April 2016. Later that year, we also acquired the Boxlight group, positioning us as a formidable education technology provider. From 2016 to date, we have acquired a total of 11 companies, including Sahara in 2020 and FrontRow in 2021, and we have grown from $0 in revenue to an expected $250 million in revenue this year. I'm proud of the company we're building, complete with extremely talented employees, industry-best solutions, and a vision to be a leading provider of interactive Technologies for both education and enterprise environments. Last month, we announced that Patrick Foley will be stepping down as Chief Financial Officer. Pat has been an integral part of our executive team and has provided exceptional leadership through a critical time, including our merger with Sahara, the acquisitions of interactive concepts and FrontRow, a debt refinancing with White Hot Capital Partners, and the adoption of various improved processes and procedures, among other achievements. We are evaluating candidates now to step into the CFO role, and Pat has agreed to ensure a smooth transition. I consider Pat a good friend, and we wish him the absolute best in the future. With that, I will now turn the time over to Mark Starkey to provide additional insights.

Thank you, Michael, and good evening from Barcelona, where we are showcasing our solutions to corporate and government customers at the international ISE events. We've had a fantastic three days here in Barcelona, where we have won the award for best business growth and the second award for Best Educational Technology. Q1 was another strong quarter for us. As Michael mentioned earlier, our Q1 revenues grew by 51% and 34% on an organic basis. In terms of bookings, we received up to $16.4 million of orders, representing 34% growth in Q1. If we exclude FrontRow, then the organic growth in order intake was 23% for the quarter. Some of our key orders in the U.S. included $10.9 million from Bloom, $6 million from our distribution partner, DNH, $2.2 million from Central Technologies, and $1.1 million from Data Projections. Overseas, we had some excellent orders, including $1.9 million from our partner in Denmark, Unit DK, $1.7 million from Roche Audio Visual in the UK, $1.7 million from Camera Mundi in Puerto Rico, and $1.5 million from ASI in Australia, to highlight a few. Approximately 54% of all orders were received from the U.S., with EMEA accounting for about 41%, and the rest of the world accounting for approximately 5%. We are seeing significant opportunities in all regions, but we particularly see very large-scale opportunities in the U.S. and in some parts of Europe. The largest opportunities are predominantly in the education sector, where we are bidding multiple tenders of 5,000 screens to 10,000 screens at a time. In the corporate sector, we're starting to see the return of work at office environments and the need to upgrade the collaboration tools in meeting rooms and larger conference rooms with Teams and Zoom compatible solutions. Our biggest challenge remains the management of the supply chain. We have taken a very proactive stance towards logistics since the start of the pandemic and are ordering at least six to nine months ahead to ensure we have adequate supply to meet demand. Excess logistics and freight costs are still impacting our gross margins, but we have taken specific measures, particularly in the U.S., to address the problem, and we anticipate gross profit percentages will continue to improve throughout Q2 and Q3. In summary, Q1 was a very strong quarter in terms of order intake and revenue, and our solutions are gaining significant traction in the market. We continue to develop our key partnerships and alliances across the globe, and I look forward to another record quarter in Q2. With that, I will now turn the call over to our CFO, Patrick Foley.

Thanks, Mark. And good afternoon, everyone. To further expand on what you've already heard from Michael, I would like to add a few figures to provide context to Boxlight's international operations. Total revenue in Q1 was $50.6 million, with AMEA, 41% or $20.6 million, of which the UK was 53%. The Americas accounted for 52% or $26.5 million, and the rest of the world, 7%, $3.5 million, which was mainly Australia. The top ten customers represent approximately 39% of total sales in Q1, with the single largest customer at approximately 16%. The top 20 customers represent approximately 52%. In terms of the sales product mix and gross margin, in Q1, hardware, including our integrated software solutions, remained the largest proportion of total revenues at about 90%. Of this total, 76% was from interactive flat-panel displays, 14% from classroom audio solutions, and the balance of 10% being related to IFPD accessories. The balance of all other total revenues came from software, services, and STEM solutions. Gross margin for the quarter was 24.9%. The IFPD margin was approximately 20%, which would've been slightly higher. However, as reported in previous quarters, increased transportation costs have reduced margins. We anticipate these higher costs will remain throughout 2022. In terms of our screen sizes in Q1 2022, the education sector represented 92.8% of all interactive flat-panel displays, with approximately 75% being 75 inch and 86 inch panels, which follows a consistent trend we've seen over the past 12 months. I will now review the first-quarter results. Revenues for the three months ended March 31, 2022 were $50.6 million, as compared to $33.4 million for the three months ended March 31, 2021, resulting in a 51.4% increase, primarily due to the inclusion of FrontRow and increased demand for our solutions in the U.S. and Europe. Gross profit for the three months ended March 31, 2022 was $12.6 million as compared to $8.6 million for the three months ended March 31, 2021. The gross profit margin for the three months was 24.9%, which is a reduction of seven basis points compared to the comparable three months in 2021. Gross profit margin adjusted for the net effect of acquisition-related purchase accounting was 27.4%, compared to the 28.0% as adjusted reported for the three months ended March 31, 2021. As previously reported, gross margins continue to be adversely impacted by supply chain challenges with increased freight costs, which are now expected to continue throughout 2022. However, we anticipate gross profit percentage improvements in Q2 and beyond as a result of reduced manufacturing costs. Total operating expenses for the three months ended March 31, 2022, were $16.0 million as compared to $10.6 million for the three months ended March 31, 2021. The increase primarily resulted from additional overhead costs associated with the acquired FrontRow operations, including related intangibles amortization, and growth in headcount and other related expenses. Other income expense for the three months ended March 31, 2022, was net expense of $1.5 million as compared to a net expense of $3.1 million for the three months ended March 31, 2021. The key movements were an increase in interest expense of $1.3 million and the reduction of $1.8 million in previous losses recognized upon the settlement of debt obligations, a $0.8 million current gain from the PPP loan forgiveness, and a $0.3 million reduction in changes in the fair value of derivative liabilities. The company reported a net loss of $4.9 million for the three months ended March 31, 2022, as compared to a net loss of $5.2 million for the three months ended March 31, 2021. The net loss attributable to common shareholders was $5.2 million and $5.5 million loss for the three months ended March 31, 2022 and 2021, respectively, after deducting the fixed dividends to Series B preferred shareholders of $317,000 in both 2022 and 2021. Total comprehensive loss was $6.6 million and $5.4 million loss for the three months ended March 31, 2022 and 2021, reflecting the effects of foreign currency translation adjustments on consolidation. The earnings per share for the three months ended March 31, 2022, was a $0.07 loss compared to a $0.09 loss for the three months ended March 31, 2021. EBITDA for the three months ended March 31, 2022, was a $0.3 million loss as compared to a $2.4 million EBITDA loss for the three months ended March 31, 2021. Adjusted EBITDA for the three months ended March 31, 2022, was $1.2 million as compared to $1.6 million for the three months ended March 31, 2021. Adjustments to EBITDA include stock-based compensation expense, gains-losses recognized upon the settlements of certain debt instruments, gains-losses from the re-measurement of derivative liabilities, and the effects of purchase accounting adjustments in connection with acquisitions. At March 31, 2022, Boxlight had $11.3 million in cash and cash equivalents, $49.6 million in working capital, $49.1 million inventory, $193.1 million in total assets, and $51.0 million in debt, $47.5 million in stockholders’ equity, $65.5 million common shares issued and outstanding, and $3.1 million preferred shares issued and outstanding. With that, we'll open up the call for questions.

Ladies and gentlemen, the floor is now open for questions. Please hold while we pool the questions. Your first question is coming from Brian Kinstlinger of Alliance Global Partners. Sir, please proceed with your question.

Great. Thanks so much for taking my questions. Your revenue was about $6 million higher than you had originally guided to, which was fantastic. Why was this not enough to offset any of the $800,000 change that you mentioned you accounted for and how the gains that you mentioned in your press release to hit your $2 million EBITDA guidance? I guess I'm just wondering why the pressure. Sorry, I made a mistake. Did the pressure related to supply chain get worse? Just trying to understand the outperformance on the top line that didn't help the bottom line. I hope that jumbling made sense.

No, Brian, that made sense. So yes, in Q1 we did see margin pressure and improved by the time we reached the end of the quarter. January and February were seeing the net impacts of the supply chain issues in most sectors. There have been fuel increases. There's also been continued and further delays as we've seen with lockdowns in China, and freight and shipping costs have actually increased again. So, we are seeing that pressure coming through in our margin.

But in order to make your appropriate return, everything is increasing. Are you not able to increase pricing at all? It seems that for the revenue you're generating, you should generate a little bit more profit.

Yes, absolutely, Brian. So, we are doing that. One of the key things though is we have increased pricing as we move forward, but some of the orders that we were delivering were pre-committed on previous pricing. So that's why they were released and sold into the market in Q1, as they were previously committed to prices on orders. We will see that improvement through the margin as we progress through '22.

Okay. And then in regards to the delays you talk about in the second quarter, I have it at $10 million if my estimate is the one I'm looking at. So where is that coming from? Is it the U.S.? Is it EMEA? Is it just a few customers? Is it many customers? And then what led to these delays?

Yes. So, I can —

Yes, Brian, in the supply chain, there are IFPDs from manufacturers in China. Due to the lockdowns, sourcing the components and getting them shipped has caused manufacturing delays. This will affect the timing in Q2 as we need the goods to fulfill orders. Some of these orders will be pushed from Q2 to early Q3 due to delays in production and supply across many markets.

Yes. Probably make up. So I guess my question would be, why are you comfortable still at $250 million? I assume that's going to back things up and you'll get some orders pushed from Q2 to Q3, similar to how some orders were pushed from Q3 to Q4. So, I guess I'm just trying to understand the issue.

So it should be hopefully a short-term timing thing. You were seeing, as we all know, the lockdowns inside of China currently, so it's obviously impacted factory output but also shipments, where ports have been closed. That has the knock-on effect of the products that would ordinarily land in a timely basis in Q2 and 3. So, as they resolve out, we should see that normalize beyond.

Last question. In terms of the revenue guidance, the September quarter is usually seasonally strong, I believe. It’s jumped up and down depending on when orders get pushed, but, I mean, should we assume that's 40% of the revenue guidance this year?

Yes, Brian. We haven't guided that core specifically, but yeah, I think if you look, historically, it's definitely north of 30% of total revenue. There is some shifting, as we talked about, from Q2 and Q3. So it very well could be closer to that figure, but —

How do you tell? How do you tell?

You can't tell at this point; that's correct.

Okay. Thanks, guys.

Yes, thanks, Brian. Thank you.

Thank you. Your next question is coming from Jack Vander Aarde at the Maxim Group. Sir, please pose your question.

Okay. Great. Thank you. Good afternoon, guys. I appreciate the update. Thanks for taking my questions. I just got the press release pulled up in front of me, so I have a few housekeeping things. Just bear with me if I'm quoting things incorrectly. I think I heard that the first-quarter gross margin was 24.9%, and then adjusted for acquisition accounting was 27.4%. I guess, first, is that correct? And then second is that gross margin also adjusted for the higher freight and shipping costs, or is that a third layer?

That is correct. The margins reported in the press release are 24.9%. The impact of the purchase accounting has two aspects. First, there are the deferred revenue adjustments reflected in the adjusted EBITDA calculation, and second, there is the fair market value adjustment for inventory due to the recent FrontRow acquisition. After these adjustments, the margin stands at 27.4%. Additionally, both pre-adjusted and post-adjusted margins would have been higher without the ongoing increase in freight and transportation costs, which we continue to experience. However, as we move forward, we expect revenue to grow through pricing increases and improved sourcing efficiencies, which should ultimately lead to higher margins.

Okay, just to follow up on that. You mentioned that you expect to improve gross margins throughout the year, starting in the second quarter. For clarity, the federal acquisition that resulted in the 27.4% margin for acquisition accounting will no longer be part of the calculations beginning in the second quarter, correct? However, you will still have shipping costs?

Yes. It will actually carry on through 2022, and then it will be fully amortized through this year. So that will continue throughout this year.

Okay. Understood. And then I think I heard $64 million of customer orders in the first quarter with the bulk from the U.S. and then IMEA. For the U.S. orders, just curious back when before the acquisition of Sahara, the story was always heavily tied in narrated around classrooms and school districts in the U.S. Just wondering for those U.S. orders, how much of this is related to existing school district and classroom customers and refresh cycles? And then are you getting additional traction by penetrating new school districts in the U.S.?

I would say it's Mark here. The majority of our orders come from new classrooms. While we do have some repeat business, we're primarily focused on acquiring new customers. Most of our significant orders come from large districts, which is driving the growth in our order numbers. This is why we remain confident about not reaching the $250 million target for the year.

The new districts we are bringing on are mostly updates of old technology. They are not starting from scratch; instead, they are typically replacing old interactive whiteboards or older technology, and we are encouraging those schools to adopt our interactive flat-panel displays and other solutions as part of that transition.

Okay. Michael, regarding that point, it seems that this refresh cycle is creating a good opportunity for you to achieve wins and engage further. Is there a specific refresh cycle? I’m considering the past and I imagine it varies, but is it still around a five-to-seven-year timeframe for classroom refreshes in the U.S.? If most of the new orders are coming from new customers, should we expect significant demand from long-time customers who are nearing their refresh upgrades?

Yes. So, the answer is yes, that five-to-seven-year time frame is still a good estimate of when those refreshes would happen. Keep in mind that the majority of the panels that we're installing have a five-year warranty. In some cases, we've gone as long as seven years on the warranty. Your follow-up question there on refreshes: we're going to start to see more and more of that. Keep in mind the majority of our sales because of our dramatic growth, we've had over the last couple of years; we have very few customers that we spent back five-plus years. However, we are expecting to start seeing some of that. We've had a couple of districts where we did about five years ago install, and we are seeing some repeat business on refreshes. We're starting to see some of that now, but I think you're going to see that in a much more dramatic way over the next couple of years because of our growth cycle.

Okay. Great. That's helpful. And then maybe just one more follow-up from me on OPEX run rate, just given FrontRow, I'm sure there's a lot of things involved here. They're more non-recurring; they're onetime in nature. So, if I look at the total OPEX G&A, is the biggest line item here? I don't know if you have a sense of seasonality and what a normalized OPEX level is now as the business acquisition settles in. What are we thinking on a go-forward quarterly basis for OPEX? Is this above what you think? Any help there would be appreciated.

Yes. That's going to be pretty normal because that's including obviously the amortization of the intangibles related also to the acquisitions continuing. So yes, that's pretty normal.

This is a good steady base or liquid gross forward.

Good indicator for your basis, yes.

Okay. And then just maybe one more; I'm not sure if I've heard it mentioned. The Samsung bundled collaboration efforts, are we making progress on this? Is this still a growth driver? Can you provide any information on the number of licenses sold, or is this not the focus? An update would be helpful.

Yeah. Our main focus with our Samsung partnership is on providing our software licenses. They are purchasing our MimioConnect licenses, which they then partner with their interactive flat-panel displays. We are getting traction there. They committed — remember last year we announced — they committed a million dollars of licenses that you purchased, and we expect them to purchase more licenses this year. We focus less on the distribution side of the business. We can distribute Samsung displays, but we're primarily focusing on our in-house displays. We're seeing less traction there; although we still are offering a bundle of Samsung Chromebooks with our software and training, that's gaining a little bit less traction in recent months. I think that's a function of there's a large amount of competition with that. So, we focus a little less on that as well. So, as far as the Samsung partnership, what you had to see, as far as traction over the next few months, is going to be us providing our software licenses of MimioConnect that are bundled with the Samsung displays.

Thanks. Great. That's it for me. I appreciate the color, guys. I'll hop back in the queue.

Yeah. Thanks, Jack.

Thank you.

Thank you. If there are no questions in the queue, I'm going to hand it back to management for final comments.

Thank you, everyone, for your support and for joining us today on the First Quarter of 2022 conference call. We look forward to speaking to you again in August when we report our Q2 2022 results. Thank you.

Thank you, ladies and gentlemen, 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.