Earnings Call Transcript - MITQ Q4 2022

Operator, Operator

Greetings and welcome to the Moving iMage Technologies' Fourth Quarter and Full Year Fiscal 2022 Earnings Conference Call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brian Siegel, Senior Managing Director and Hayden IR. Thank you, sir. You may begin.

Brian Siegel, Senior Managing Director

Good morning. And welcome to the Moving iMage Technologies' fourth quarter and full year fiscal 2022 earnings conference call and webcast. With me today, is Chairman and CEO, Phil Rafnson; co-Founder and Executive VP of Sales and Marketing, Joe Delgado and CFO, Mike Sherman. Today's call will begin with prepared remarks and followed with a Q&A session. For those of you on the webcast can submit your questions through the webcast portal, and we'll do our best to answer them. Please note this event is being recorded. This earnings call may contain forward-looking statements as defined in Section 27A of the Securities Act of 1933 as amended, including statements regarding, among other things of company's business strategy and growth strategy, expressions which identify forward-looking statements speak only as of the date the statement is made. These forward-looking statements are based largely on a company's expectations and are subject to a number of risks and uncertainties, some of which cannot be predicted or quantified and are beyond our control. Future developments and actual results could differ materially from those set forth in contemplated by or underlying the forward-looking statements. In light of these risks and uncertainties, there can be no assurance that the forward-looking information will prove to be accurate. Now I'd like to turn the call over to Phil. Phil?

Phil Rafnson, CEO

I'm Phil Rafnson, CEO of Moving iMage Technology, also known as MiT. Similar to last quarter, I will begin by discussing the overall industry trends that present significant growth opportunities for MiT in the coming years. After that, Joe will outline MiT's business and growth strategy, and then Mike Sherman, our CFO, will review today's results, followed by a question-and-answer session. MiT caters to the commercial cinema and live event sectors in various ways. Currently, most of our business involves cinema owners and operators. In North America, there are about 40,000 screens, with 18,000 located outside the top five circuits. While we collaborate with major players, our primary business lies with small to medium-sized operators. As many know, this industry faced severe challenges due to COVID during 2020 and the first half of 2021, with box office income plummeting from over $11 billion in 2019 to $2.1 billion in 2020. The latter half of 2021 saw the industry start to bounce back, a trend that has persisted into 2022, with numerous blockbuster films already released. Looking ahead, we anticipate at least three more major releases this year, including Avatar: The Way of Water, Black Panther: Wakanda Forever, and the new Black Adam film featuring The Rock. For 2023, we have a solid lineup of upcoming releases that bode well for an even more robust year. Additionally, as I've mentioned in previous calls, we foresee several favorable factors that will benefit the cinema and live venue industry. Firstly, there's the availability of government grants. Under the CARES Act, non-publicly traded live event operators have received over $16 billion in grants through the SBA. The Shuttered Venue Operations Grant program has so far dispensed almost $14.6 billion, with over $2.5 billion allocated to cinema operators. This influx of funds is initiating a multi-year growth cycle. The theater operators are using these grants to support operations and to refurbish, upgrade, and construct new modern theaters, thereby enhancing the overall cinematic experience. This includes the addition of amenities such as in-house bars and lounges, breweries, restaurants, and in-cinema dining. Dine-in cinemas are rapidly becoming one of the industry's most dynamic segments, and we are strategically positioned within this market. Lastly, we are at the onset of a technology upgrade phase, particularly concerning laser projectors and servers. During the last upgrade cycle, we contributed to about 17,000 cinema screens over a span of nearly five years. Therefore, we believe there's substantial potential for growth ahead. So, how does MiT play a role? We are involved in the design, manufacturing, integration, and distribution of technology and hardware tailored for the theater industry. We maintain strong relationships with suppliers, key technology providers, and customers, as well as architects and technical staff who assist in designing our offerings. Over 70% of our revenue is derived from small to mid-sized cinema operators, who are expanding at a faster rate than the largest three that we also collaborate with. From a recognition standpoint, we have also established over 40 in-home screening rooms for industry VIPs, including senior executives, producers, and directors. In summary, I want to express my gratitude to our dedicated employees, without whom we wouldn't be in what we believe is the strongest position we have ever held as a company in terms of operations, finances, products, and competition. To our current and future shareholders, I understand your concerns; as the largest shareholder, I share in your experience. The business and our stock are on an upward trajectory, and we are diligently working to attract new investors. I am enthusiastic about our substantial growth prospects and aim to elevate MiT into a company generating over $50 million in revenue in the coming years. Now, I'll hand the call over to Joe.

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Thank you, Phil. And good morning, everyone. I'm going to start with a review of our four-pillar growth strategy. The first pillar is driving revenue growth and margin expansion by shifting our product mix towards higher margin and proprietary products. Our proprietary products fall into two categories. First, our proprietary manufactured goods, which we do right here in Fountain Valley, California. Today, we have nearly 50 of those proprietary manufactured products that tend to help increase project margins and overall margins when sold à la carte. During our fourth quarter, we strengthened this product line and enhanced our accessibility strategy with a very smart purchase of the USL product line, where we essentially acquired inventory and existing orders for the cost of just the inventory. Second are the products we feel have disruptive potential. For example, we bundled a solution for venue management called CineQC. CineQC is a recurring revenue, SaaS platform hardware and service solution for quality assurance, theater operations, staff management, inventory control, back office analytics, and remote access and control over auditorium systems. We believe there's nothing like it available in the industry. The signing of National Amusements as a customer was a strong validation of that solution, and we hope to have more to announce in fiscal 2023. Next, we have MI Translator, which will provide a high-end product for our accessibility strategy. The MI Translator is a multi-language translation device with a word-tutoring revenue service attached. This is disruptive, operating brings multi-language in-theater captioning capabilities, including American Sign Language through augmented reality. The market in North America alone is tremendous, with over 70 million non-English proficient speakers that may not have previously attended movies or, for those who did, they could now have a significantly enhanced movie-going experience. It received outstanding reviews when we debuted it at CinemaCon earlier this year and is key and part of our long-term growth strategy. The second pillar of our growth strategy is moving beyond cinema. The first opportunity involves Caddy, which is the market leader in cinema. However, the real opportunity here is in stadiums and arenas, where it has seen an 80% share in such markets as the NFL and MLB. The current product line has much higher than company average margins. However, we have not seen as quick a recovery in new stadium and arena builds or upgrades since the pandemic, which makes sense given the multibillion dollar price tags. As this market begins to thaw, which we're starting to see happen in cinema, we expect our strong position will drive growth in this part of our business. I'm very excited about the next opportunity, Esports, where I expect to see an opportunity for growth in fiscal 2023. In Esports, we have a partnership with Sandbox, which is developing amateur Esports and gaming leagues throughout the country, and we are in the process of signing theater operators to host these leagues with their excess theater capacity. It's a win-win situation, where the theater owner utilizes its excess capacity and gets concession revenues while Sandbox can offer a differentiated experience. We will serve as the exclusive technology provider for Sandbox and have developed a mobile card that integrates all of the necessary technology to enable Esports on the movie screen including Wi-Fi consoles and accessories. Each theater will require one complete system that consists of six gaming cards and a production card, so the potential here for initial sales and then refreshed sales over time as new consoles and technologies advance. The initial interest has been extremely high; because Sandbox closes deals, we expect to receive orders shortly. While the core Caddy products have yet to recover, we see a greater opportunity to leverage our Caddy product line's strong position in sports stadiums and arenas as a touch point for fan interaction. In development, we have potentially disruptive new digital products and services that we hope to be trialing by the end of fiscal 2023. Another longer-term opportunity would also leverage Caddy's strong relationship with stadiums and arenas and their operators. Similar to cinema, there are no software products similar to CineQC and we see an opportunity to adapt this platform to stadiums and arenas. Our third pillar looks to markets beyond North America. We'd established relationships overseas prior to the pandemic, and we are now able to reconnect. For a number of reasons, we believe we can accelerate moving beyond North America from our original 18 to 24-month timeframe. So besides National Amusements signing, which currently involves only the North American locations, we see the opportunity to introduce CineQC and MI Translator internationally. Sandbox has also garnered a lot of interest outside of North America. We see this as another route to growing our international presence. The fourth part of our strategy, which supports the first three pillars, is accretive M&A. There are three main areas on which we will focus. The first is consolidating industry technology, equipment providers, and broadening our offerings. The acquisition of the USL product line was an excellent example of this strategy. The second is acquiring strategic products and services with recurring revenue streams. This will likely focus on SaaS or other subscription-type offerings to enhance our portfolio and provide higher value to our customers. Finally, we look at companies that can enhance and add to our customer relationships. In conclusion, we're still in the early innings of our growth opportunity. We have numerous secular tailwinds on our backs that are just beginning to turn into high revenue levels. We also have several potentially disruptive technologies in development that will bring recurring revenues while driving higher margins over time.

Mike Sherman, CFO

Thanks, Joe. Good morning, and thank you, everyone, for attending our earnings call. Like last quarter, I'm going to spend a little time reviewing our model, and then I'll take you through the quarter followed by a Q&A session. Before I move on though, there is a company-specific issue related to our friends at Cineworld, which owns Regal filing for bankruptcy protection. First, while a customer, we currently have no exposure to Regal financially. Second, we don't expect a negative impact on our business related to the situation in fiscal 2023, and depending upon the outcome, we believe there are scenarios where we could pick up some additional business. Should any of these scenarios play out, we will discuss this in more detail, but for now, we'll let the process play out. Currently, projects are the key driver for our business making up roughly two-thirds of revenue. For projects, we basically serve as a project manager procuring and reselling FF&E and services for refurbishing, upgrading, and building new theaters. Since much of this comprises passed-through costs, margins are in the mid-teens. We have several routes to improve project margins. First, we provide installation services, which tend to have margins in the mid-20s. Second, we resell technology products, which tend to have margins in the high teens to low 20s. Finally, we sell our higher margin proprietary manufactured offerings, with margins ranging from 35% to 55%. As we continue to increase the number of proprietary manufactured products, we expect the mix to shift to more favorably impact gross margin. Over the near term, we expect our proprietary manufactured products and the higher margin resale of technology products to drive this margin expansion. Over time, as our CineQC SaaS platform becomes a larger contributor, as we release our MI Translator, and as other products in development come to market, we expect this to shift more significantly away from FF&E. Now I'll move into the results. Fourth quarter revenue increased 167% to $5.6 million, much of this was related to a pickup in projects to build new theaters or upgrade existing theaters. The pipeline here remains strong, and we expect to work through most of the pandemic delayed projects during the first half of fiscal 2023. Gross Profit also increased 256% to $1.5 million from $0.4 million last year. Gross margin was up 680 basis points to 26.8%. Non-GAAP operating expenses were $3.8 million, versus $1.7 million last year. The increase was driven mainly by a return to normal sales and marketing activities and higher public company expenses, fees excluded $235,000 in stock-based compensation. Our non-GAAP operating loss was $0.1 million versus $0.6 million last year. Non-GAAP net loss and loss per share were $0.4 million and $0.04 a share, versus $0.6 million and $0.11 a share last year respectively. Please note that for our non-GAAP loss and our loss per share during the fourth quarter excluded the above operating adjustment. Moving to the balance sheet. Our cash cash equivalents and marketable securities were $7 million, down $2.8 million from last quarter due to the acquisition of inventory from the USL product line and adding some technology inventory ahead of price increases. Looking to fiscal 2023, we'd be remiss to not acknowledge the potential disruption of geopolitical events, inflation, and the threat of recession as the year goes on. That said, at this time, we are providing revenue guidance of $22 million to $23.5 million or revenue growth of 20% to 28%. Within this range, we expect non-GAAP earnings per share to be between $0.04 and $0.08. I want to provide a little more color on our financial model. For 2023, we're modeling strong gross margin expansion into the mid to high 20s, mainly due to a mix shift towards higher-margin proprietary products such as the acquired USL product line, improved performance from Caddy, sales of our Esports products, and a small contribution from CineQC. We also have good operating leverage in this model, with non-GAAP operating expenses which tend to be mostly fixed, expected to be about $5.6 million for fiscal 2023. Finally, we don't expect to be a taxpayer in fiscal 2023. And we are modeling 10.9 million shares. I'd like to thank everyone for attending today's call. And I look forward to speaking with you again on the first quarter call.

Brian Siegel, Senior Managing Director

Brian, are there any questions?

Operator, Operator

Our first question comes from Kurt Caramanidis with Carl M. Hennig. Please go ahead with your question.

Kurt Caramanidis, Analyst

Not a bad pronunciation. Thanks, everyone. To start, I want to mention that you provided a comprehensive outlook for the company, which is reassuring, as it reflects the capabilities of a much larger organization. You go into significant detail, and some of my questions have been addressed. Firstly, regarding the buyback, I don't believe you have repurchased any shares so far. Is that window closed now until your report in November? Given that the stock, which was much higher, has declined, it seems like a good opportunity. Could you clarify the buyback situation?

Mike Sherman, CFO

Yes. Hey, thanks for joining us and for the call. This is Mike Sherman, the CFO. So currently, right now, the company's focus has been on ensuring that we have the capital for acquisition purposes for growth and for our carrying out our new product developments. We have established, as you've seen the policy for the buyback. It's only recently that the stock now has come down. So this discussion will be part of our upcoming board meeting. We will have probably some more insight into what the next steps, if any, would be related to any kind of repurchase. But I agree with you.

Kurt Caramanidis, Analyst

Okay, marketable securities, are those basically short-term bonds, so you're making more versus cash?

Mike Sherman, CFO

Yeah, that's correct. Very conservative approach.

Kurt Caramanidis, Analyst

Okay, great. Lastly, I think you've kind of alluded to this. But as your revenues go up, it seems like you've got a really nice pathway to some larger revenues. You would expect margin expansion to go, as you kind of alluded to as well, with your fixed costs. You're getting incremental margin on, as the revenue goes up. Is that the way we should look at it?

Mike Sherman, CFO

That's correct.

Kurt Caramanidis, Analyst

Thank you very much. You do an excellent job of breaking things down, so we have a clear understanding of the current state of affairs. One thing to clarify, is Q1 essentially over? Is that what gives you confidence in your guidance? Or do the uncertainties and challenges make you a bit more cautious in your outlook?

Phil Rafnson, CEO

Mike, you want me to address that?

Mike Sherman, CFO

Sure. Why don't you go ahead?

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Without disclosing anything regarding the first quarter, but our confidence remains pretty strong because of a macro view, right. We feel, as we've stated, as Phil has made pretty clear in his opening statement. The industry overall, in spite of whatever economic headwinds are, we feel it's in a very, very strong position, right. It's still a very economical way to get out of home entertainment even in some more difficult economic headwinds. So we remain confident going forward for sure.

Kurt Caramanidis, Analyst

Great, thanks a lot guys. Look forward to the next call.

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Thanks very much.

Operator, Operator

Our next question comes from the line of Scott Weis with Semco Capital. Please proceed with your question.

Scott Weis, Analyst

Thank you. Appreciated. Great quarter, guys. Congratulations. With regard to the September quarter, your fiscal Q1, we are now mostly through it. Can you give us some commentary on what you're seeing over the past couple of months?

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Hey, Scott. It's Joe. Always a pleasure to speak with you, sir.

Scott Weis, Analyst

Thanks, Joe.

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

I mean, as I mentioned to our last caller, our overall enthusiasm for the industry at large remains very strong. Subsequently, confidence in our business remains strong.

Scott Weis, Analyst

Okay. With regard to the fiscal '23 revenue guide. Can you provide a little bit more detail and break down what is coming from the core products, the legacy products versus the newer products like CineQC, for example, and the others?

Mike Sherman, CFO

Well, this is Mike Sherman, by the way. Thank you for your question on it. I don't have the details to give you that in front of you. What I can tell you is how we derived the guidance was to take a very balanced approach. We took what we know right now in our backlog and added to that, the pipelines and with our expectations related to that. And then we also added the expected new product releases that we plan for this upcoming fiscal year. We then risk adjusted it for potential disruption, whether it's geopolitical or related to inflation or the threat of recession, in order to de-risk it. At this early stage of the year, we feel that this is an appropriate guidance from a revenue standpoint. And of course, as the year goes on, if there are any changes to that, we will update accordingly.

Scott Weis, Analyst

Okay, thanks. And then last question with regard to the new products. Can you talk a bit about the CineQC pipeline? Have you rolled out to National Amusements yet? And if not, what's the timing on that? And then of the other new products, can you talk about the timing of their rollout to the marketplace?

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Yeah. Hi, Scott, it's Joe again. Yeah, we've actually finished the domestic rollout for National Amusements. We anticipate more international expansion and more domestic expansion. As far as the timeline, we're looking towards the end of this fiscal and the beginning of the next. We feel that once CineQC is anchored, it'll start to produce and sell reorders both internationally and domestically.

Scott Weis, Analyst

So we should expect to see revenues in the September quarter, if you've already deployed domestically?

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Because we deployed, the billing cycle doesn't start until the second quarter, Scott.

Scott Weis, Analyst

Okay, thank you. And then what?

Operator, Operator

I'm sorry, sir. Can you repeat your question?

Scott Weis, Analyst

Can you share what the timing of the rollout of some of the other new products like MI Translator, among some of the others?

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Not yet. As we mentioned in the call, Scott, we're going to be in the trialing. We would like to keep our exhibitor partners informed while we're trialing and getting the product management and customer feedback a little closer to the vest. But we're pretty excited about how that's going.

Scott Weis, Analyst

Okay, thank you. Nice quarter.

Joe Delgado, Co-Founder and Executive VP of Sales and Marketing

Thanks, Scott. Appreciate your support, sir.

Mike Sherman, CFO

Thanks, Scott.

Operator, Operator

Thank you. We have no further questions at this time. And with that, the conclusion of today's call. You may disconnect your lines this time. Thank you for your participation. And have a wonderful day.