BK Technologies Corp

AMEX:BKTI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Second Quarter 2024. This call is being recorded. [Operator Instructions] 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, John Nesbett of IMS Investor Relations. Please go ahead.

[John Nesbett]

Thank you. Good morning, and welcome to our conference call to discuss BK Technologies results for the second quarter of 2024. On the call today are John Suzuki, Chief Executive Officer; and Scott Malmanger, Chief Financial Officer. I'll take a moment to read the safe harbor statement.

Statements made during this conference call and presented in the presentation that are based on historical facts or forward-looking statements. Such statements include, but are not limited to projections or statements of future goals, targets 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 BK's filings with the Securities and Exchange Commission. These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements.

Okay. I will now turn the call over to John Suzuki, CEO of BK Technologies. Please go ahead, John.

[John Suzuki, executive]

Thank you, John. Thank you, everyone, for joining today. I'll start by reviewing some of the highlights of our operations and financial results during the quarter, then I'll turn it over to our Chief Financial Officer, Scott Malmanger, for a deeper dive into our financial results. We'll conclude by opening the call for a brief Q&A.

Our second quarter results reflect strong operational progress demonstrated by record new order activity, revenue growth, improved gross margins and lower operating expenses. All helped to drive our fourth consecutive quarter of profitability with GAAP net income of $1.7 million or $0.47 per share and non-GAAP earnings of $0.55 per diluted share. The transition of our product lines to EastWest manufacturing continues with the BKR 5000 and KNG mobile lines now fully transferred and the transition of our BKR9000 product line expected to be complete by the end of Q3.

As a result of our outsourcing activities to date, we started to realize lower manufacturing costs in the second quarter, and we anticipate additional cost savings once the transition is fully complete. The BKR9000 continued to gain traction in the market this quarter, especially among our wildland fire customer base. Customers that already use our KNG or BKR5000 radios recognize the benefits of the multiband BKR9000 with many beginning to integrate the new radio into their fleets and utilize its multiband capabilities in their broader missions. We received several purchase orders for both the BKR5000 and 9000 in the second quarter from state and local agencies, including the California Department of Forestry and Fire Protection, or CalFire, totaling $15 million as well as $1.1 million order from the Mississippi Forestry Commission.

Slide 4. Second quarter gross margins improved to 37.3%, surpassing our target margin levels of 35%. Our cost reduction initiatives have been a key driver of this recent improvement, spearheaded by the transition of our manufacturing to EastWest, which has allowed us to realize lower product costs. We expect gross margins to continue to improve through 2024 and 2025 as we work towards achieving gross margins of 50%.

As you can see in the graph on Slide 5, we've achieved improved earnings per share each quarter since the second quarter of 2023 as well as 4 consecutive quarters of profitability. In the second quarter, we achieved net income of $1.7 million compared to a net income loss of $1.3 million in the second quarter of 2023. As a result of our ongoing cost reduction initiatives and shifting product mix that includes the higher-margin BKR9000 multiband radio, we've been able to drive enhanced profitability and revenue over the past several quarters. We are encouraged by our improved performance and we believe we are well positioned for continued improvement as we target full year 2024 GAAP earnings per share in excess of $1.50 or non-GAAP adjusted EPS in excess of $1.77.

Slide 6. Our BKR5000 and BKR9000 radios drove record new order booking activity in the second quarter. As I mentioned a moment ago, CalFire, a long-standing customer of BK Technologies purchased place purchase orders in the quarter totaling over $15 million for our KNG mobile radio, BKR5000 portable radio and BKR9000 multiband portable radio. Additionally, we received orders from the Bureau of Land Management and the Portland, Oregon Fire & Rescue, demonstrating the BKR Series radio's popularity among federal, state and local agencies as wildland fire activity increases demand for reliable communications technology.

We're very pleased with the traction that the multiband BKR9000 has been gaining in the market, both with our existing customers and new ones that are recognizing the value multiband capabilities can add to their fleet. In the second quarter, we also received purchase orders for the BKR9000 from the Mississippi Forestry Commission, the City of Ventura California Fire Department and the California Department of Parks and Recreation.

Overall, market interest in our BKR Series radios is increasing. Our radio serve as a critical communications equipment, particularly for first responders in rugged and remote terrains. Right now, over 6,500 firefighters and support staff are fighting one of California's largest wildfires on record, the Park Fire, which has burned over 400,000 acres and is only 34% contained, and our radios are on the front line with the first responders. Fires like these are becoming more and more prevalent throughout the United States, quadrupling in frequency in the last 3 years, and we anticipate that demand from agencies tasked with fighting these fires will continue to increase as a result.

Slide 7. Our transition to EastWest manufacturing and adoption of an asset-light model for our business is going well. I'm pleased to report that the majority of the BKR5000 radios shipped in the quarter were manufactured by EastWest. Also during the second quarter, we transferred our KNG mobiles to the EastWest Manufacturing facility in Juarez, Mexico.

Our focus is now on the transfer of the BKR9000 production by the end of the third quarter, at which point all manufacturing will reside at EastWest. The asset-light model is a key focus and major initiative for our business and has already resulted in lower inventory and lower product costs with a positive impact on our merchant performance. Additionally, the outsourced manufacturing model allows us to focus our internal resources on product development, engineering and marketing of our products.

I will now turn the call over to our Chief Financial Officer, Scott Malmanger, to go over our financial results for the quarter. Scott?

[Scott Malmanger, executive]

Thank you, John. Sales for the second quarter totaled approximately $20.3 million compared to $19 million for the same quarter last year, but increased sequentially by approximately 11%, which is in line with our expectation that 2024 revenue will be consistent with 2023 results.

Gross profit margin in the second quarter was 37.3%, which, as John mentioned, surpasses our target margin levels of 35% for 2024, and we expect to continue realizing incremental margin improvement as we drive our cost reduction initiatives. Selling, general and administrative expenses or SG&A for the second quarter totaled approximately $5.5 million compared to $6 million for the same quarter last year. Operating income totaled $2 million compared with an operating loss of $784,000 in the second quarter of 2023.

We recorded net income of $1.7 million or $0.47 per basic and diluted share in the second quarter of 2024 compared with a net loss of $1.3 million or $0.39 per basic and diluted share in the prior year period. We reported adjusted EBITDA of $2.5 million in the second quarter of 24% compared with an adjusted EBITDA loss of $786,000 in the second quarter of 2023.

Non-GAAP adjusted net income, which adds back net realized and unrealized gain or loss on investments, stock-based compensation expenses and severance expenses was $2 million or an adjusted EPS of $56 million per basic share or $0.55 per diluted share compared with a loss of $840,000 or $0.25 per basic and diluted share in the second quarter of 2023.

We expect to enhance profitability as we continue to reduce costs and improve our gross margins and remain confident in our target of full year GAAP EPS exceeding $1.50 and full year adjusted EPS target exceeding $1.77 per share. Turning now to the company's liquidity. We have been able to significantly enhance our balance sheet through the first 6 months of the year. As of June 30, 2024, we have approximately $3 million of cash and cash equivalents and no long-term debt.

Working capital improved to approximately $20.3 million at June 30, 2024, compared to $16.3 million at December 31, 2023, driven by increases in accounts receivable that was somewhat offset by inventory reductions as we continue to transition radio manufacturing lines to EastWest. With our visibility today, we believe that we are well-positioned to continue improving our balance sheet through the balance of 2024.

We believe that our current cash position combined with anticipated cash generated primarily by radio sales and borrowing availability under our credit facility provides us with the working capital that we need to grow our business. I will now turn the call back over to John.

[John Suzuki, executive]

Thank you, Scott. Launched in the fall of 2020, the BKR5000 remains a strong and consistent driver for our business. The BKR9000 launched just 1 year ago is proving to be successful with both our Wildland Fire customers as well as structure fire, law enforcement and ambulance services.

We continue to focus on further accelerating market adoption of the BKR9000 as we lay the groundwork for growth in 2025 and beyond. We're pleased with the progress we're seeing with regard to our margin profile, which continues to improve, thanks to our focus on cost reduction and the diversification of our product mix. The outsourcing of our manufacturing has also benefited our margin performance over this last quarter, and we expect to see further margin improvement as we move through the balance of the year.

And finally, the new order activity for both our BKR5000 and BKR9000 have driven a record-breaking first half in terms of new orders booked. As we move through the balance of the year, we believe that we are well positioned to continue driving improved performance for our shareholders and remain confident in our ability to exceed full year GAAP EPS of $1.50 and non-GAAP adjusted EPS of $1.77

With that, I will now open the call for questions. John?

[John Nesbett]

[Operator Instructions] The first question comes from Brett Reiss with Janney.

[Brett Reiss, analyst]

John, Scott, can you guys hear me because I'm working from home.

[Scott Malmanger, executive]

Yes.

[John Suzuki, executive]

Brett, we can hear you.

[Brett Reiss, analyst]

I actually have a question on the software that you have that helps first responders link your radio systems with their cellphone. In view of the tragedy with the attempted assassination of former President Trump, is your software or solution to different governmental bodies on scene, having maybe better coordination to prevent these types of events?

[John Suzuki, executive]

Brett, a short answer to that question is yes. InteropONE was a solution that was envisioned to provide an interoperability solution between different agencies at the local, state and federal. As you can see what happens at the tragic infinite in Pennsylvania. From the reporting that we've seen to date, it appears that the state and local governments had established a unified command center with excellent communications. But the Secret Service had a separate command center, and it seems as if they failed to cross communicate between this.

This is not obviously not a best practice for these types of agencies. Normally, they would do much better in the preplanning side, and they would establish a common communication platform where all agencies, local state and federal can communicate together. InteropONE was designed really to address this. And it does it in a very simplified manner over cellular. And it allows for these different agencies that don't normally communicate together a mechanism for our communications platform where they can establish a unified command for communications. So again, the answer is yes. This was the purpose of InteropONE was to provide solutions to these types of events.

[Brett Reiss, analyst]

John, have you in the light of this strategy, have you gotten a greater degree of questions and inquiries and possibly using the InteropONE?

[John Suzuki, executive]

Yes. Since that day, we've been at 2 major shows. And what I can say to you is when we are presenting our solution to the various public safety agencies, pretty much everyone commented on the fact that this would have been a useful tool in the case of a situation in Pennsylvania. So that was totally unprompted. I think the market who -- the agencies that get a demonstration of this capability, understand the power of it and understand the application. So that -- again, it's a tragic situation that happened. But certainly it's highlighted the need for a product like InteropONE to be generally used amongst the different public safety agencies.

[John Nesbett]

[Operator Instructions] The next question is from Jon Old with Long Meadow Investors.

[Jonathan Old, analyst]

Scott, congrats on the great results. It looks like, obviously, things are improving by the quarter, cash growing credit facility lower, I'm just sort of trying to tease out as you look forward over the next year or so, sort of priorities on use of cash and capital allocation, specifically wondering whether a stock buyback program is something that's being considered given where the stock has been trading.

[John Suzuki, executive]

This is John Suzuki. So our priority right now is to rebuild our balance sheet. But given the recent decline in our share price, there has been a dialogue at the Board level that we should be looking at reactivating our buyback program. So we agree. We feel that the share prices at this level is certainly deserving of consideration for the company to take some of its new cash flow and purchase shares back. We would agree with that.

[Jonathan Old, analyst]

Okay. I should know this, but is there one in place? Or does a new one have to be authorized. I should know that, but I don't. I'm sorry.

[John Suzuki, executive]

Yes. That's fair. The authorization we have is a few years old, and we would probably be -- it would be best for us to reauthorize that if we were going to go ahead and do that. And so that's something that the Board will be considering.

[John Nesbett]

The next question comes from Aaron Martin with AIGH Investment Partners.

[Aaron Martin, analyst]

Scott, congratulations on the strong quarter, particularly on the gross margin. And I think this is the first time you've put out there a new target of 50%. Can you, I guess, elaborate on that in terms of -- I know you want to be out there to make sure that people realize that just because you passed your 35% target doesn't mean you're done. But in terms of the trajectory on the gross margin and in the shorter term and maybe the medium term, how we should be thinking about it?

[Scott Malmanger, executive]

Yes. So we had actually set a Vision 2025, where we had set some ambitious goals of achieving $100 million in revenue and 50% gross margins. I just wanted to kind of reset that we are still tracking towards that. Now whether we're going to achieve 50% gross margin in 2025 for the full year, we'll have to go through our budgeting process, and we'll provide guidance on that in the fourth quarter call. But what I can say to you is that based on the plan that we have in place, we believe that a gross margin of 50% is achievable for this business. And it's just a matter of getting some of the work completed and then you'll start seeing those margins on a quarterly basis.

[Aaron Martin, analyst]

Got it. And that's entirely based upon the hardware business, that's even without the software business or that's including the software business?

[Scott Malmanger, executive]

The software component is still relatively small, Aaron. So obviously, it includes it, but it's not a material number when you're dealing with the type of revenues that we have.

[Aaron Martin, analyst]

Got it. And then in terms of the InteropONE and the software business, is it at a point here where we're seeing the cross-selling in terms of driving the BKR9000 or BKR9000 driving InteropONE interest? What can you tell us about that?

[Scott Malmanger, executive]

Yes. I think I've mentioned on previous calls, right, definitely from an interest standpoint, right? Every customer that we talk to with the 9000 or InteropONE, they go hand-in-hand together. In terms of actual sales, the key part of that is the tethering capability, which we had anticipated to be complete by now. That's still under development. And so until we get that tethering capability where we can connect these devices together seamlessly and get that into the marketplace. I think it's going to be -- customers are just waiting to test that out. And I think once we have that ability, then you'll see the sales pull through either way.

[Aaron Martin, analyst]

Got it. And what was the bookings number for the quarter?

[Scott Malmanger, executive]

I'm sorry, Aaron, I missed that question.

[Aaron Martin, analyst]

What was the bookings number for the quarter? I saw the rise in backlog, what was the bookings number?

[Scott Malmanger, executive]

Go ahead, John.

[John Suzuki, executive]

Yes, I was just going to mention the first half was $50 million. I'm not sure what the breakout was maybe Scott knows, but the first half was $50 million in new orders bookings.

[Scott Malmanger, executive]

Correct. Second quarter was $28.2 million, and the 6 months was $50.5 million. That's correct.

[Aaron Martin, analyst]

Okay. And I know on the revenue number, the 9,000 is still a relatively small number. So I look at the bookings, obviously, which is forward-looking, is it 9,000 starting to become more material on the booking -- percentage of the bookings?

[John Suzuki, executive]

Yes.

[Aaron Martin, analyst]

It's still a vast majority of the 5,000?

[John Suzuki, executive]

Yes.

[Aaron Martin, analyst]

Okay. Going back to the tethering capability, do you have an updated timeline on when that's going to be available and complete?

[John Suzuki, executive]

It's development, Aaron. So to be clear, right, we're connecting these 2 devices via Bluetooth, right? And it is in a public safety application. And so the thing has to be rock solid and easy to establish and we're just not there yet. And we're not comfortable yet. Once the team gets it to that point, then we will do our field trials and then we'll be promoting it. The interest level is off the chart, I will say, customers really like the approach that we're taking on this. We just need to get it to work reliably for public safety.

[Aaron Martin, analyst]

Got it. Jumping around again. Last quarter, I asked you on the inventories about getting it down. I know you take it down about another $1 million this quarter, with this quarter being the transition of the final step to manufacturing to EastWest. I guess, would we expect another stepdown in Q3 and then more dramatic afterwards once all manufacturing has been transferred over? How should we think about that?

[John Suzuki, executive]

Yes, you're correct.

[John Nesbett]

Thank you. We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

[John Suzuki, executive]

Thank you, John. Thank you all for participating in today's call. We look forward to speaking with you again when we report our Q3 results. All the best to all of you, and have a great day.

[John Nesbett]

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.