BK Technologies Corp

AMEX:BKTI

Earnings Call Analysis

BK Technologies Reports Growth and Optimism for Future Profitability

In the third quarter of 2024, BK Technologies maintained steady sales of $20.2 million, aligning with previous expectations. They achieved a gross margin of 38.8%, significantly surpassing the 35% target for 2024. The company raised its full-year GAAP EPS guidance to over $1.65, up from $1.50, and adjusted EPS to $1.92 from $1.77. A notable $3.3 million order from the Florida Forestry Service underlines strong demand for their BKR 9000 radio. The company also reported a $27 million backlog and expects ongoing margin improvements as manufacturing efficiencies continue to roll out.

Key Financial Highlights

In the third quarter of 2024, BK Technologies reported revenues of approximately $20.2 million, which is almost unchanged from $20.1 million in the same period last year. However, the company saw a substantial increase in operational success, leading to a GAAP earnings per share of $0.67, representing a significant rise from $0.03 in the prior year's quarter. The non-GAAP adjusted net income also rose to $2.7 million with an adjusted EPS of $0.75, up from $1.1 million or $0.33 from the previous year, reflecting enhanced profitability due to their cost-reduction initiatives.

Gross Margin Improvements

The gross profit margin stood at 38.8%, a notable improvement compared to 31.9% for the same quarter in 2023. This exceeds the company's target margin of 35% for 2024, suggesting effective execution of their cost-saving strategies and a favorable shift in product mix, particularly towards their BKR Series radios. The management anticipates continuing this trend, targeting gross margins to reach 50% by 2025.

Strengthened Balance Sheet

As of September 30, 2024, BK Technologies strengthened its balance sheet with approximately $4.2 million in cash and no debt. Working capital improved to about $22.7 million from $16.8 million at the end of 2023, and shareholders' equity rose from $21.3 million to $26 million during this period. This solid financial position allows the company to comfortably support its growth initiatives.

Operational Success and Future Expectations

The company maintained a backlog of $27 million due to robust order activity, particularly for the BKR 5000 and BKR 9000 radios, indicating a steady demand. They have revised their financial targets for 2024, now expecting full-year GAAP EPS to exceed $1.65 (previously $1.50) and non-GAAP EPS at $1.92 (previously $1.77). This positive revision reflects confidence in continued operational progress.

Customer Demand for New Products

There has been strong customer interest for the BKR 9000, highlighted by a $3.3 million order from the Florida Forest Service. This order signifies the versatility of the BKR 9000 across multiple departments in state and local agencies, thereby enhancing the radio's market penetration. The company expects more orders from various sectors, particularly in wildland fire efforts, which amplifies its growth prospects.

Outlook and Strategic Focus

BK Technologies remains committed to driving the adoption of the BKR 9000 and expanding its market share. The management is concentrating on winning new customers and enhancing relationships with existing ones. The firm is also focused on a broader Vision 2025 strategy, targeting revenue of $100 million with 50% gross margins by 2025. This aggregate potential underscores a long-term commitment to growth and profitability.

Conclusion and Investor Considerations

Investors should note that BK Technologies is currently on a promising trajectory with strong financial performance, improved operational efficiencies, and a strategic focus on growth markets. With a well-positioned balance sheet and rising profitability metrics, the company is set to capitalize on future opportunities in a growing market for communication technologies. Continued vigilance on order activity, especially pertaining to new product launches, will be crucial to sustaining this upward momentum.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, ladies and gentlemen, and welcome to the BK Technologies Corporation Conference Call for the Third Quarter 2024. This call is being recorded. [Operator Instructions]. Following management's prepared remarks, the call will be opened for questions. There's 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's call, 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 third 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 statements. Statements made during this conference call and presented in the presentation that are not based on historical facts are forward-looking statements. Such statements include, but are not limited to, projections or statements of future goals and targets regarding the company's revenue and profits. These statements are subject to known and unknown factors and risks.

The company's actual results, performance and 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 any such material differences have been described in this morning's press release in the BK's filings with the U.S. Securities and Exchange Commission.

These statements are based on information and understandings that are believed to be accurate as of today, and we do not undertake any duty to update such forward-looking statements.

Okay. I now turn the call over to John Suzuki, Chief Executive Officer 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 up the call for a brief Q&A.

The third quarter of 2024 was highlighted by solid progress and execution on our operational goals. We achieved our fifth consecutive quarter of profitability with GAAP earnings per share of $0.67 and year-to-date earnings per share of $1.33. Given our progress in the quarter, we will be providing updates to our financial targets later in this presentation.

Third quarter backlog remained strong at $27 million, supported by solid order activity for our BKR 5000 and BKR 9000 radios from both new and existing customers looking to upgrade their radio fleets. We also continued our trend of incremental margin improvement with gross margins of 38.8% in the quarter driven by a combination of strategic cost reduction initiatives and a shift in product mix to include more BKR Series radio sales.

During the quarter, we completed our manufacturing transition project to East West manufacturing with the majority of our third quarter revenue generated from products manufactured by East West. Additionally, lower product costs related to the transition favorably impacted our gross margin performance and we expect to see continued margin improvement moving forward as we realize the full savings of the East West partnership.

We continue to receive strong order activity for our BKR Series radios from both new and existing customers in the quarter. Specifically, the BKR 9000 is receiving substantial interest from state and local agencies, and our order activity has been encouraging. One order in the quarter that I'd like to highlight was received from the Florida Forest Service, a long-standing customer of BK. For the BKR 9000 at a total value of $3.3 million.

The radios will be used by several different branches throughout the organization including wildland fire and land management for fighting active fires and facilitating control burns as well as for research to improve biodiversity and ecosystem health.

This order demonstrates the versatility of the BKR 9000 across varying departments and operations and is an example of the increasing demand that we're seeing from this radio among state and local agencies. Looking at the gross margin, we drove continued improvement in the quarter, largely related to our ability to reduce manufacturing expense through the outsourcing of our radio manufacturing to East West.

We expect gross margins to continue to improve through 2024 and 2025 as we work towards achieving gross margins of 50%. As I mentioned earlier, we achieved our fifth consecutive quarter of profitability this quarter with earnings per share of $0.67 and we have significantly improved our profitability each quarter since the second quarter of 2023.

What you'll note here is that while third quarter revenues were consistent with fiscal 2023 levels, the cost-saving initiatives and the transition to East West manufacturing generated enhanced margin profile and profitability. Given our performance in the quarter and year-to-date, we have decided to revise our financial targets to better align with our expected results.

We are raising our GAAP earnings per share and non-GAAP earnings per share targets for the full year of 2024. We are now targeting full year GAAP EPS to exceed $1.65 per share, increased from our previous target of $1.50 per share and non-GAAP EPS of $1.92 per share, which is an increase over our previous target of $1.77. Order activity has been strong, and we're especially encouraged by the demand we're seeing for the BKR 9000 multi-band radio from our existing wildland fire customer base. We received several purchase orders for the BKR 9000 in the third quarter, including a $3.3 million order from Florida Forestry Service, as I discussed earlier, the Missouri Department of Natural Resources for their wildland fire operations, the Minnesota Department of Natural Resources for their wildland fire operations and the Gallatin County Sheriff's Department in Montana, representing interest for the 9,000 from a law enforcement agency in a Tier 3 county.

We closed the third quarter with a backlog of $27 million, which was supported in large by the adoption of the BKR 5000 and 9000, among new and existing customers. We anticipate that most of this backlog will be delivered in the fourth quarter of 2024 and the first quarter of 2025.

We completed the transition program with East West manufacturing in the quarter, a move that's already delivering cost reductions and production efficiencies. As we mentioned before, our move to East West is expected to provide continued enhanced gross margins while also allowing us to more closely focus on new product development. We retained a small production team in our facility in Florida for the final assembly and test of the BKR 9000 as well as to support the production of small -- of some of the smaller, low-volume specialty products.

A new streamlined build-to-order final assembly process for the BKR 9000 was implemented and is expected to be able to produce up to 20,000 radios per year at full capacity.

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]

Thanks, John. Sales for the third quarter totaled approximately $20.2 million, essentially consistent with $20.1 million for the same quarter last year, which is in line with our expectation that 2024 revenue will be consistent with 2023 results.

Gross profit margin in the second quarter was 38.8%, as compared to 31.9% in the third quarter of 2023, which surpasses our target margin level of 35% for 2024. We expect to continue to achieve margin improvement as we drive our cost reduction initiatives. Selling, general and administrative expenses, or SG&A for the third quarter totaled approximately $5.2 million compared to $5.8 million for the same quarter last year. Operating income totaled $2.6 million compared with an operating income of $594,000 in the third quarter of 2023. We recorded net income of $2.4 million or $0.67 per basic and $0.63 per diluted share in the third quarter of 2024 compared with net income of $90,000 or $0.03 per basic and diluted share in the prior year period.

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 $2.7 million or an adjusted EPS $0.75 per basic and $0.71 per diluted share compared with adjusted net income of $1.1 million or $0.33 per basic and $0.32 per diluted share in the third quarter of 2023.

We expect enhanced profitability as we continue to reduce costs and improve our gross margins and are confident in our revised target of full year GAAP EPS exceeding $1.65 and full year adjusted EPS target of $1.92 per share. We reported adjusted EBITDA of $3.1 million in the third quarter of 2024 compared with an adjusted EBITDA of $662,000 in the third quarter of 2023.

Turning now to the company's liquidity. We significantly strengthened our balance sheet in the year-to-date period. As of September 30, 2024, we have approximately $4.2 million of cash and cash equivalents and no debt. Working capital improved to approximately $22.7 million at September 30, 2024, compared with $16.8 million at December 31, 2023.

Driven by increases in accounts receivables that was somewhat offset by inventory reductions as we transitioned radio manufacturing lines to East West. Shareholders' equity has also increased to $26 million compared with $21.3 million at December 31, 2023, demonstrating the enhanced value we've achieved year-to-date.

With our visibility today, we believe that we are well positioned to continue improving our balance sheet through the balance of 2024 and that our current cash positioning, combined with anticipated cash generated primarily by radio sales and borrowing availability under our credit facility provides us with the working capital we need to grow our business. I'll now turn the call back over to John.

[John Suzuki, executive]

Thank you, Scott. With the third quarter now closed, I am pleased to say that we are on track to exceed our operational and financial targets for 2024. Our visibility today, we're confident in our ability to achieve full year GAAP EPS to exceed $1.65 per share, up from $1.50 and non-GAAP EPS of $1.92 per share, up from $1.77.

We have made solid progress throughout 2024 and believe these new targets better reflect our performance year-to-date, and where the business is heading going forward. As we close out the year, we remain focused on accelerating the BKR 9000 adoption rate winning new customers and growing our market share.

With that, we can now open the call for questions. Kelly?

[Operator]

[Operator Instructions] Your first question is coming from Aaron Martin with AIGH Investment Partners.

[Aaron Martin, analyst]

Congratulations on the quarter. And obviously, the increased operating leverage really shining through. So congratulations on that. Just a technical question of the $3.3 million order, was that included in the quarter-end backlog because you announced it after the end of the quarter?

[John Suzuki, executive]

Yes. Thank you for the question, Aaron.

[Aaron Martin, analyst]

Okay. And then are you -- can you remind us on the -- as we look towards Q4 and then going into the next year of the typical seasonality of the business.

[John Suzuki, executive]

Yes. Thank you again for the question, Aaron. This is John. So our strongest quarters for orders and revenues is Q2 and Q3. Our weakest quarter for new order business as Q4. And that's primarily driven from the fact that the third quarter is the end of the fiscal year for Federal government and they still represent about 35% or 40% of our business. So as you go into the fourth quarter, which is their first quarter of their fiscal year, their budgets are just not sat.

And as you know, we just went through an election. And they just went through a continuing resolution. So we continue to talk to our customers. We have an understanding of what they believe their budget will be. But typically -- and again, I think this year, they're just not going to be in a position to start placing purchase orders in the fourth quarter. So that tends to be a lot lower. The first quarter tends to be stronger because now that's in their second quarter of their fiscal year. And then we're into second and third quarter of the calendar year.

[Aaron Martin, analyst]

Got it. And on the gross margin, obviously, a great number, and you've always -- you've continually talked about not stopping there, even though you're past your target. So what's -- what can you tell us about the trajectory there again into Q4 in 2025?

[John Suzuki, executive]

Yes. I think the best way to characterize that, Aaron, is that we're targeting that 50%, right? And we believe that is achievable through both the transfer that we've done, the cost downs that we've done and the transition of the 9,000. So we believe that you'll see continued gross margin improvements. Now as we get closer to 50%, we may take one step back, two steps forward just because of the different quarters and what they bring. But we definitely are on track to achieve that. .

[Aaron Martin, analyst]

Got it. Okay. And then I guess that sort of brings up the Vision 2025 talked about a target of revenue of $100 million and 50% gross margins. And any thoughts around that again as we go into 2025 past the Q4 seasonality.

[John Suzuki, executive]

Sure. So Vision 2025 was set when I started with the business in July of '21. That remains our vision and that continues to be what the business is focused around achieving. In terms of what we will be looking at in 2025, I certainly don't want to get ahead of myself, and we'll be talking to the Street during our fourth quarter call, which I think is going to be in March of 2025. So at that point, we will provide you what our targets will be for 2025. But nevertheless, right, Vision 2025 exists, and that's what the business is driving towards. .

[Aaron Martin, analyst]

Okay. Congratulations on the progress. Actually, in the past, you've given us a number of radios shipped in the quarter. What was the number for Q3 or for the first 9 months?

[John Suzuki, executive]

So we actually stopped that practice, Aaron, and we actually communicated that on a call. And the reason for that was the competitive nature of the 9,000 and we just didn't want to provide any additional information to our competitors. Because again, the 9,000 really starts approaching on to their customer base. And so -- so for that reason, we decided not to disclose numbers of units sold.

[Aaron Martin, analyst]

Okay. Congratulations again on the progress operating leverage.

[John Suzuki, executive]

Thank you, Aaron. .

[Operator]

[Operator Instructions] You have a question coming from Samir Patel with Askeladden Capital.

[Unknown Analyst]

So I have three questions. The first is, maybe you could talk about -- you talked about continuing to ramp those efforts to sell the 9000, maybe you can talk about some of the market segments where you're the most optimistic. For example, I noticed that in addition to the Florida win that's more kind of a traditional customer. You highlighted a win with the Sheriff's Department in Montana, which I assume is maybe a new customer, and I know you were at IACP recently.

So maybe just some thoughts on kind of segments where you're continuing to focus where you're optimistic about being able to drive those sales.

[John Suzuki, executive]

Yes, that's a good question. So what we have been communicating in the past with the market for the 9,000 because it's an all band radio, we felt that, that radio was best positioned for law enforcement and what we call structured fire, so our local fire departments and ambulance services. So these are very large market segments that operate in urban environments. And typically, we haven't sold to them in the past. So it was a whole new market. If you look at the total market of radios in the U.S., which is about $2.3 billion, 85% of those radios fall into those types of categories.

And so when we started the program on the 9,000, we certainly view that as our largest market opportunity. As we've launched the product, what surprised us the most is just the adoption within the wildland fire. These are people that typically operate in One band, VHF. They're very cost conscious. And so our thought was that these guys would not be paying twice as much money for a multiband radio. What we found over the last year is, well, that's true for, say, U.S. Forestry one of our largest Federal customer.

They're still buying those 5,000. A lot of the state agencies, what we found out was they have a real need to communicate on the state-wide radio systems, which typically operate in a different band, say, 800 megahertz. And so they're making the business case that says, "Hey, I need my radios for forestry services and wireland fire -- it's got to be BK. Why don't I just pay a little bit more money and I can get a radio that I can use on the statewide system to inter-operate with all the other agencies."

And so that was probably our biggest surprise. Typically, again, these agencies are not as well funded as a state law enforcement, but they are getting the funding based on that requirement and that need. And so from our perspective, that's actually a very strong positive.

[Unknown Analyst]

I mean, I guess, the Boulder County order is kind of an example of that.

[John Suzuki, executive]

Yes. Boulder County is at a county level, exactly, exactly that, but at a county level, right? You had 26 fire departments. All of them had BK radios for wildland fire, but they also had a different brand radio for their structure fire operations. So when they respond to a fire in their town or in the city, typically, they're not using their BK radio, they're using a competitor's radio. When they made the decision to buy new radios, it made sense to them just to buy one radio for both operations for both missions. And then they could have on radio for all the fire services covering all missions. And of course, that was the BKR 9000.

[Unknown Analyst]

Okay. That's good. My second question, you didn't mention anything about the 9500. And kind of in the research I've done talking to people, it seems like there's a significant portion of the market that likes to purchase the mobile and portable radios as a bundle, and it seems like that's kind of a big unlocked for you once you get that to market. .

So maybe you could talk about how that development process is going, kind of how heavy of a lift that is relative to developing the 9000 and with your increased earnings and cash flow, is there any chance you could kind of reinvest maybe a little bit more to accelerate getting that product to market faster?

[John Suzuki, executive]

Excellent question, Samir. We did announce that we were starting a program for the 9500, which is the multiband mobile. We did say that we expected to bring that market in 2027. That's what we've said in the past. In terms of the development risk, they use a lot of the common architecture between the multiband portable, the 9,000, and what will be the 9500 mobile. So the core technology of doing multiband will be very similar, if not the same between the radios.

Now there are some new lines of differences between a handheld device and a device that's on mobile more in the mechanics that needs to be worked out. But that's engineering, that's well understood in our industry, and I think it's relatively low risk. Now the time line on this, why the time line takes as long as it does is because you're looking at all new mechanics. And so when you're going through mechanical designs, there's the design process and then there's the tooling, the time to do tooling, which could be 3 to 4 months. and then you produce the product and then you go through several iterations.

Unfortunately, it's not a high-risk function, but just takes a lot of time. And there's really -- it's really hard to compress that time. And so that's why we stated that we'd have a product out by 2027.

[Unknown Analyst]

Okay. Understood. And then the final question, sort of just a boring modeling thing. But I was looking at the deferred revenue line item on your balance sheet, and there's not really any disclosure around it and it's sort of not obvious to me other than InteropONE, what that might be. So could you just kind of clarify the source of the deferred revenue?

[Scott Malmanger, executive]

Yes. It's part of our product offering. We have extended warranties. And so according to GAAP, that's a deferred revenue until the extended warranty period is exercised. So that's primarily all of the deferred revenue.

[John Suzuki, executive]

Well, that is InteropONE .

[Scott Malmanger, executive]

Yes, the InteropONE.

[Operator]

Your next question is coming from [ Eric Wass ] with Mission Vertical.

[Unknown Analyst]

Congratulations on a great quarter and a good year here. Can you kind of take us through or help us with the working capital and kind of how you think that progresses over the next 6 months to a year?

[Scott Malmanger, executive]

Sure. Basically, the improved gross margins are generating the working capital improvement. And as I mentioned in the remarks, basically, we paid off all of our debt, including the line of credit, and we've established a new line of credit on October 30.

So we've got the working capital necessary to basically grow the business to our target of $100 million of revenue. And basically, that would be generated by product sales.

[Unknown Analyst]

Okay. So this is the right level for working capital at this point?

[Scott Malmanger, executive]

Yes.

[Unknown Analyst]

Okay. And then can you kind of talk about the progression of gross margin that's been fantastic. Is there seasonality to the improvement going forward just because of the seasonality of the business? Or how should we think about gross margins over the next couple of quarters?

[John Suzuki, executive]

Yes. Eric, it's John. So you've got so many factors that are impacting the gross margin as we go forward. So let me just hit some of the seasonality ones, right? In Q2, Q3, there are our strongest quarters, primarily because a lot of the Federal orders come in and get shipped. There are also -- the price on those radios are, I guess, lowest right? They're most aggressive because they give us the most volume. And so in Q2, Q3 tends to be more pressure on the gross margin because of the lower average selling price of those radios.

If you look in the past, you wouldn't see that in the chart because it was overachieved by the cost savings that we've had through our cost initiatives and then now going through East West. And then on top of it, as we go forward, we're getting more and more 9,000 shipped out, which is even a higher margin profile.

So when you -- when we map it out over the next year, we can see a couple of different scenarios happening based on when we ship, say, the Federal radios versus when we ship the 9,000 radios versus when some of the cost improvements would kick in. And so it's really hard for me to definitely say what that is going to look like. But in terms of price pressure, I guess, on mix, it's Q2, Q3, and that's mainly driven by the Federal radios.

[Operator]

You have a follow-up question coming from Samir Patel with Askeladden Capital.

[Unknown Analyst]

Yes. Sorry if I missed this, but any update on that BKR 9000-tethering capability with InteropONE, because I know that was one of the things you were kind of excited about in terms of being able to drive sales of InteropONE.

[John Suzuki, executive]

Yes. So we've been working on the tethering approach for this last year. The development team has made some great strides in that, but we're still not at the point that we're comfortable putting into our first responder's hand. But we do believe that the solutions that they're on track to get to that point.

It's not -- again, not about just making the calls and making the connection. It's about resilience, right? So you have to be able to do change knobs on the radio, do a whole bunch of crazy things, and that Bluetooth connection stays intact in all cases.

And so what we found was there were a few scenarios where the Bluetooth would drop or the audio would get distorted. And that's just not acceptable. And so we're trying to weed out those edge cases before we go into field trials with customers because it's a -- I would say it's a very new approach for this market.

The markets said that they're very excited about this. And the last thing we want to do is turn them sour on the technology because everyone has a preconception of Bluetooth as a reliable technology. And we want to make sure that whatever we put in the hands of these first responders even in a test environment is rock solid, and we're just not there yet today.

[Operator]

This does conclude our question-and-answer session. I would now like to turn the floor back over to John Suzuki for closing remarks.

[John Suzuki, executive]

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

[Operator]

Thank you, everyone. 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.