MOVING iMAGE TECHNOLOGIES INC. (MITQ) Q1 2024 Earnings Call Transcript

Greetings, and welcome to the Moving iMage Technologies First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. Please follow the operator's instructions. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Siegel, Senior Managing Director. Thank you, sir. You may begin.

Thank you, operator. Good morning, and welcome to Moving iMage Technologies earnings conference call webcast. With me today is Chairman and CEO, Phil Rafnson, who will provide an industry overview, Co-Founder, Executive VP of Sales and Marketing, Joe Delgado, who will provide a strategy and business overview, and our CFO, Bill Greene. For those of you who have not seen today's release, it is available on the Investors section of our website. Before beginning, I would like to remind everyone that except for historical information, the matters discussed in this presentation are forward-looking statements that involve several risks and uncertainties. Words like believe, expect, anticipate mean that these are our best estimates as of this writing, but there can be no assurances that expected or anticipated results or events will actually take place. Actual future results could differ materially from those statements. Further information on the company's risk factors is contained in the company's quarterly and annual reports filed with the SEC. Now I'd like to turn the call over to Phil. Take it away.

Thank you, Brian, and thank you all for joining us today. I'm Phil Rafnson, CEO of Moving iMage Technologies, or MIT. As you consider MIT as an investment, industry and company-specific factors will contribute to our future performance. First, I'll address the cinema industry as it stands today. Then Joe will discuss why we are so excited about the future, where we are introducing potentially disruptive technologies into cinema, eSports, stadiums, arenas, and other live entertainment venues. Historically, our business has been cyclical, driven by new technology and technology upgrade cycles. We are currently in the early stages of one right now, where newer technologies such as laser projectors, upgraded servers, new screens, and smart sound systems are being purchased to replace older technologies. Additionally, we are seeing cinema owners build new theaters and upgrade and refurbish older ones. These new theaters often include new amenities such as dine-in, bars, and more—all with the intent of making going to the movies a destination experience. From an industry growth standpoint, as I've discussed previously on these calls, COVID took a toll on the industry. Over the past two years, we have returned to a more normalized environment with the box office originally expected to approach pre-pandemic levels this year. Unfortunately, the Hollywood strikes have negatively impacted the box office over the near term, but theater owners are pivoting to new movie content, whether it be sports, eSports, or concerts to offset some of the lost revenue. An example is AMC partnering with Taylor Swift to show her concerts in theaters. While this alternative content helps, it doesn't fully compensate for the lost box office and concession revenue during the holiday season for our customers. Additionally, now that the actor strike is over, we expect the studios to move ahead aggressively with marketing and releasing new movies. Before returning the call over to Joe, I'd like to thank our dedicated employees. Without them, we would not be in what I believe is the strongest position we've ever been in as a company from an operational, financial, product, and competitive perspective. Thank you, Joe.

Thank you, Phil, and good morning, everyone. I'll start by briefly reviewing our business and providing updates on each area. Today, cinema is our core legacy business, which consists of FF&E projects and selling our proprietary U.S.-manufactured goods and third-party technologies. As Phil mentioned, this part of our business has historically been more cyclical and lumpy with project start dates often being pushed out. Additionally, FF&E projects tend to be at the low end of our gross margin profile, although there is strong operating leverage in this part of our business. Today, FF&E remains the largest part of our business. However, given the lower margin profile, lumpiness, and timing factors I just mentioned, a major part of our strategy going forward is to shift our mix towards higher-margin products and smooth out the lumpiness and cyclicality. For cinema, this includes expanding our existing lineup of over 50 proprietary manufactured products, including our ADA compliance products and Caddy lines, the former of which was a contributor to our strong first-quarter results. By manufacturing these products, we can significantly increase our margins on FF&E projects and our overall company gross margin when sold a la carte. Additionally, our partnership with LEA professional for smart power amplifiers is another potential source of growth and margin expansion for both FF&E projects and core sales. After the end of the quarter, we announced our first two orders for these products, and we currently have several large circuits in testing. We're confident in this relationship because each screen needs 5 to 6 power amplifiers on average, and LEA is so confident in its product quality that its warranty is 2 times the industry standard. Between the quality at LEA and supply chain and quality issues at their competitors, which are also deemphasizing the cinema market, I feel optimistic about sales continuing to ramp in fiscal year '24. So what's next for cinema? What truly excites me is that we are in the latter stages of going to market with a set of potentially disruptive high-margin technology offerings that will also bring recurring services revenue. First, I'll discuss our MI translator. The MI translator is a multi-language technology solution with a recurring revenue stream that forms the high end of our accessibility strategy. The market in North America alone is tremendous with over 70 million non-English proficient speakers who may not have previously attended the movies. With this product and service, those who did attend previously can now have a significantly enhanced moviegoing experience. This is a new product class for the industry, and adoption has yet to occur. That said, I believe there are now catalysts that play into adopting the MI translator solution. The North American Theater Owners organization, known as NATO, established the Cinema Foundation, an industry nonprofit charge with promoting and expanding the industry and the overall moviegoing experience. Our own Frank T serves on its Board of Directors, and one of the foundation's top marketing priorities is to expand outreach and bring more ADA non-English-proficient patrons to the movies. These initiatives fall right into the wheelhouse of MI translator, and there was tremendous enthusiasm and interest in the product at CinemaCon and subsequent trade shows. We believe that this industry effort bodes well for the success of MI translator, and we will keep you appraised as things develop. In Q3, our SaaS-based quality control platform is another example. We've been working with National Amusements, a large international movie circuit, on upgrading and improving this product. While we've made significant progress, there's still work to do, and we're evaluating options to get this to the finish line. Unfortunately, the additional development has also delayed our plans to roll out the product more broadly. However, once complete, we will have a much more robust, tested, and scalable offering to bring to other circuits. The next opportunity for us is to move beyond cinema. Here, we're targeting two areas: other live entertainment venues and eSports. I believe eSports has the potential to be a significant incremental growth driver for us this year. In May, we did an investor presentation, which is available on our IR website with Rick Star, Founder of our eSports partner, SNDBX. He laid out his vision for creating the little league of eSports by setting up local, amateur leagues in movie theaters hosted on the big screen. Not only is this a very attractive activity for parents and kids, but for theater owners themselves. With a SNDBX league, a theater can fill excess capacity of over 6,000 empty seats per year and get a return on their investment in as little as 8 months. That is a compelling return in general, but especially for theater owners who are used to getting an ROI of 18 to 24 months. Rick then went on to state that he already had an active pipeline in North America of over 2,500 locations and another 500 internationally, and our relationship with these same customers confirms these numbers. Right now, SNDBX is out doing a funding round, which will enable him to start to ramp up locations more quickly, so please stay tuned. Finally, the growth opportunity I'm most excited about is what we currently call e-Caddy. We have infused our e-Caddy product line of cup holders with technology, and we'll develop applications and services for use in stadiums and arenas. We introduced the e-Caddy concept to executives at three major league baseball stadiums over the past three months. We got great feedback on the type of applications that would excite them and identified potential partners as well. This month, we'll perform additional market research with a fourth stadium executive, which will allow us to further solidify the picture for the apps and services that drive demand for this product. The total addressable market here is huge with millions of existing seats becoming retrofit candidates in addition to new stadium and arena builds. The potential here on its own is tremendous, but in combination with e-sports, my translator, and CQC, they can reshape our business and financial models in the future. We'll keep you appraised as these milestones hit. As I mentioned on our previous call, we've accelerated our strategy to expand outside North America. We have established relationships overseas before the pandemic and have been reconnecting over the past few quarters. The opportunities here encompass many products that we believe can smoothly transition to the international markets, including our new and development product lines. Additionally, the cinema market in Europe is just starting to recover from the pandemic roughly two years after we did so. The timing for us to explore these opportunities couldn't be better. Initially, we see the opportunity for LEA smart power amplifiers, having received requests for quotes from cinemas in the U.K. and Germany. We also see the opportunity for MI translator and CineQC to move to international markets in the years to come. SNDBX already has a pipeline established outside North America. Finally, we have an active corporate development program that includes the business development deals we made with SNDBX and LEA acquisitions such as the ADA product line and other ongoing activities. In conclusion, we're still in the early innings of our growth opportunity for our emerging technologies, while our legacy business continues to improve. With that, I thank you, and I'll turn it over to Brian.

Thanks, Joe, and thank you, everyone, for attending our earnings call. I'm going to spend a little time reviewing our model, and then I'll take you through the quarter, followed by Q&A. To date, our legacy FF&E projects have been the key driver for our business, making up roughly 60% to 65% of revenue. As Joe and Phil mentioned, FF&E projects are more cyclical and can often see start dates pushed out as we saw in FY'23. We serve as a project manager procuring and reselling FF&E and services for refurbishing, upgrading, and building new theaters. As a large part of these projects involves pass-through costs with a small margin added in, project margins are in the mid-teens. We have several routes to improve these margins, including upselling installation services, scoping our proprietary manufactured products into the project for retail clear margin technology products that include projectors and servers, and more recently, funding some products through our relationship with LEA Professional. Next, we sell our higher-margin proprietary manufactured offerings a la carte, which have margins ranging from 35% to 55% and include our fabrication, Caddy, and ADA compliance products. Additionally, since we are in the early days of a multiyear technology upgrade cycle, we received discrete orders for servers, projectors, and LEA power amplifiers, all of which have gross margins above the company average. In the near future, as our emerging products like MI translator and CineQC hit the market and start to scale, we expect our mix to shift even more significantly away from FF&E; these products will likely have gross margins above 50%. Now moving to our first quarter results. We reported revenue of $6.6 million, up 13% versus last year. Gross profit increased 17% to $1.8 million. Gross margin was up 80 basis points to 27.4% in the quarter, resulting from a favorable product mix. GAAP operating expenses were $1.4 million, down 5% versus last year, mainly due to corporate governance costs. GAAP operating income was $0.4 million versus an operating loss of $0.1 million last year. GAAP net income and EPS was $0.4 million and $0.04 per share versus a loss of $0.1 million and $0.01 per share last year. Non-GAAP net income and EPS were $0.4 million and $0.04 compared to net income of $0.1 million and $0.01 per share last year. Moving to the balance sheet, our cash and cash equivalents were $6.4 million at the end of the first quarter, down $200,000 from the fourth quarter, mainly reflecting changes in working capital. Now I'll provide an update on our fiscal year '24 outlook. The writers and active strikes have impacted our customers by driving uncertainty into their budgeting process. As a result, we're providing our fiscal year '24 outlook last month on our Q4 23 earnings call. We built in some conservatism into our commentary by only focusing on our legacy business. As I said at the time, we expect to see low double-digit top line growth while paring losses and approaching breakeven, and our views this quarter remain the same. Note, this guidance took into account the impact of the active strikes on our second quarter results, which when combined with traditional seasonal weakness, we expect to see really down versus last year, but then we'll see a stronger second half. Next, I will provide upside opportunities that were excluded from our forecast, and I will now update these items. There's an ADA product refresh at a top 5 cinema circuit that would begin in the second half of fiscal 2024. We recently held conversations with this circuit and feel we are well positioned to get this multimillion-dollar order. For eSports, last quarter, I said that our guidance included flat sales of our movie sports systems through FY'23, which was roughly 15 to 20 systems. I apologize, but I misspoke. In FY'23, we only recognized revenue for 8 systems or received orders for 16 systems. Therefore, anything over 8 systems sold in fiscal year '24 will be upside to our guidance. Additionally, once SNDBX closes its funding round, we expect to quickly move to rollout leagues at the circuits that ordered the 8 systems that were not shipped in fiscal year '23 and then start to ramp additional locations. Next, as I discussed in our recent investor presentations, our incremental opportunity for selling LEA smart power amplifiers is very significant. Still, we included $0 for sales of these products in our FY'24 guidance. So any orders, including the two orders we announced in the second quarter, would be upside. With a total market of about $630 million in North America and about 5% to 10% annual attrition rates, the replacement market is $32 million to $63 million annually. So hypothetically speaking, capturing just 10% of this could add $3 million to $6 million in annual revenue, which is material considering we only reported $20 million in fiscal '23. And this doesn't even take into account new projects or international sales. Moving to CineQC, we continue to work closely with National Amusements to enhance the system. Once this happens, we expect they will start to roll out CineQC to their 500 international locations, which were not included in our guidance. We will also then start to market this product to other cinemas and build the pipeline. Finally, any sales of the MI translator or international sales would also be upside. Regarding catalysts, you should be looking for announcements on the key initiatives mentioned during this call and the upside opportunities I just mentioned. We plan to provide milestone updates for our emerging products and announce whatever orders we can through press releases and earnings calls this year. Also of note, we put in place a 10b5-1 trading program for our share repurchase program. This went into effect on November 1 and allows us to be in the market every trading day, regardless of whether we are in a blackout period. Overall, I continue to believe we've never been in a stronger position within cinema. We are excited that our new initiatives are moving forward. We prudently want to ensure that we have the right offerings and that they are ready for prime time before we start marketing more aggressively. Just to let everybody know, Joe and I will be at the Sidoti MicroCap conference this week, so please tune in to the webcast at 3:15 p.m. Eastern Time on Wednesday. The link is available on our website. If you are interested in any one-on-one meetings, please reach out to me or request one throughout the quarter. I want to thank everyone for attending today's call and look forward to speaking with you again on our next call in mid-February.

Please follow the operator's instructions. Our first question comes from the line of Neil Fegans, a Private Investor. Please proceed with your question.

First of all, it's great to see the nice performance of the core business, and you covered a lot of ground on the $45 early-stage new initiatives. I wanted to see if I could drill down a little bit more on a couple of them. For the benefit of me and I think others, could you review what our contractual relationship terms are with SNDBX in terms of what the two or three primary elements of that agreement are and what our equity ownership interest in them is right now based on their current capital structure?

With respect to SNDBX, the equity position, I think Brian can probably share a little bit more about this in detail. But I think we assume something like 6% of equity, and it depends on where we're going to land with respect to their first round of funding. Aside from supplying the technology, we have that exclusive supplier agreement in place. I believe that is a 3-year exclusive supplier agreement.

And that's for the eCaddy? And is the revenue to us still around $43,000?

Yes.

So yes, it's a multimillion-dollar exclusive supply agreement. There's technology sharing and ownership as part of that. Generally, we're talking $40,000 to $50,000 per system. Okay. Are you all—Phil and Joe—considering taking a piece of this current round? I believe you have a first right of refusal on all of their future financings, if I'm not mistaken.

Yes. You broke up at the beginning of that question. Neil, I'm sorry.

I was asking if you're planning to participate in this next financing round?

Yes, we're not going to comment on that. The round is still ongoing, and it's just not something we're going to comment on at this point.

Let me ask another quick one here. Is there any visibility on potentially landing any large sports arenas, either new builds or refresh? That really hasn't been part of the conversation since I became interested in the company. But is there any visibility probably more likely on some of the large stadiums refreshing and needing sizable dollar amounts of your Caddy product lines?

Yes. This is a brand new technology, nothing like this has been released.

Yes. I'm not talking about e-Caddy. I'm talking about just the Caddy line as it exists today, the legacy.

Yes, there is existing—we're looking at an existing pipeline now for sure. We work closely with the major seating companies like e-Caddy and Irwin seating out of Michigan. Yes, there are new builds and remodels going on in arenas and stadiums now. However, that has lagged. I think we've mentioned in prior calls that has definitely lagged behind like our core business, cinema, but it is now starting to pick up.

And Joe, would you say the likelihood of landing one or more of those opportunities is likely in 2024? Or is there just not good enough visibility to say that yet?

I think we've got a couple of really good candidates that should land this fiscal year.

And listen, one more quick one. How should we be thinking about e-Caddy, the next generation of the Caddy product? Should we be thinking more likely revenue generation in 2025? Or are you thinking that it's still possible that we could start to have that product formalized, finalized, and ready to go to market and generating sales late this year?

What I'll say about that, Neil, is the excitement level for us here at the company is tremendous because of the feedback that we've got. We want to be very judicious with respect to our approach to market. We are going to get our ducks in a row. It's all about the voice of the customer, right? We're entering a space that has never existed. We want to ensure that we come into the market with a product and service that is both robust and flexible enough to meet the customers' needs at the arena and stadium level, the operational level. And, of course, from a revenue standpoint, it has to bring value to both sides, right, us and the arena and stadium operator. I think we're well on our way to doing that.

Okay.

Just to build on that, I would probably be looking to fiscal 2024 as a development year. We're still talking to some stadiums this month. From that, we'll be able to go out and start to develop the roadmap and the actual service that will be provided. So I probably wouldn't look to any business this year. If the device gains some business, that would again be another category of upside. But I would look at it as sometime next year and beyond.

Well, listen, I'll yield the floor here. I'd just like to reiterate, great-looking core numbers. You guys are basically trading only $0.15, $0.20 above cash and you're profitable. So hopefully, an active IR program to get out and increased visibility. But thanks again, and I'll leave the floor.

Ladies and gentlemen, that does conclude our question-and-answer session. And with that, the conclusion of today's call. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.

Thanks, everybody.