RF Industries Ltd
NASDAQ:RFIL
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
2.58
4.44
|
| Price Target |
|
We'll email you a reminder when the closing price reaches USD.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
RF Industries Ltd
Earnings Call Analysis
Q1-2024 Analysis
RF Industries Ltd
RF Industries welcomes Ray Bibisi in his recent promotion to President, marking him as a key figure in the company's strategic journey. First quarter net sales totaled $13.5 million, representing a 27% decline from the previous year. This downturn was attributed to a $2 million delay in customer shipments and orders—importantly, not cancellations—and is expected to be recovered in the forthcoming quarters. This period marks the lowest seasonally for the company, but the instituted cost-cutting measures have buffered the financial impact and are set to yield greater benefits as the market stabilizes.
After enduring over a year of reduced capital expenditure (CapEx) spending, which plunged by 17% last year, there is a burgeoning sign of recovery with an anticipated increase in telecoms CapEx by up to 5% for 2024. The company's backlog reflects this positive shift, rising to $19.3 million, a notable $3.1 million increment since January. With an emphasis on the densification of wireless networks, RF Industries' product lineup has found alignment with current industry trends, securing purchase orders that are expected to augment their long-term growth and profitability.
RF Industries has also broadened its reach, with 57% of its sales stemming from diverse market sectors that extend beyond wireless carrier needs. This move grants the company leeway from the volatility of CapEx cycles and is part of a broader strategy to tap into new customer segments, including cable companies, wireline telecom carriers, and industrial markets, envisaging future growth opportunities.
The company's financial footing is solid, with available liquidity including $4.5 million in cash and cash equivalents. Proactive management of their credit facilities has provided additional liquidity to support business recovery. Inventory levels, currently at $18 million, have been judiciously managed to match the lower demand experienced in 2023, aligning with growth expectations as CapEx spending normalizes throughout 2024.
RF Industries remains cautious yet hopeful regarding the exact timing of order fulfillment, given the unpredictability of the past four quarters. Nevertheless, the company is confident in witnessing a sequential revenue uptick in Q2 and a steady inflow of orders beyond February's robust bookings, indicating a possible acceleration in the business tempo going forward.
Continuing the strategic initiatives started in fiscal 2023, the company focuses on direct material costs, facility consolidations, and lean operational principles to achieve an additional $3 million in annual expense reductions. These ongoing efforts in streamlining operations and product design are poised to further improve operational efficiency throughout 2024.
Amidst an evolving top line and favorable product mix, RF Industries anticipates its gross margins to recover closer to the 30% range—a significant improvement from the current 24.5% realized from $13.5 million in sales. The shift toward higher-margin offerings coupled with sales increases is expected to spearhead this margin enhancement quickly enough to be realized in the current year's performance.
You don't have any saved screeners yet
Greetings, and welcome to the RF Industries First Quarter Fiscal 2024 Financial Results Conference Call. [Operator Instructions] Please note this conference is being recorded.
I will now turn the conference over to your host, Margaret Boyce, Investor Relations for RF Industries. Margaret, you may begin.
Thank you, Paul, and welcome, everyone, to RF Industries' First Quarter Fiscal 2024 Earnings Conference Call. With me today -- with me on today's call are RF Industries CEO, Rob Dawson, President and Chief Operating Officer, Ray Bibisi; and CFO, Peter Yin.
Before I turn the call over to Rob and Peter, I'd like to cover a few quick items. We issued our Q1 earnings release after market today. That release is available on our website at rfindustries.com.
I'd like to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that statements on the call today may constitute forward-looking statements with the meaning of Section 21E of the Securities Exchange Act of 1934. When used, the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements.
Factors that could cause these forward-looking statements to differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements.
Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 10-K describes the differences between our GAAP and non-GAAP reporting.
With that said, I'll now turn the conference over to CEO, Rob Dawson. Rob, please go ahead.
Thank you, Margaret. Welcome to our first quarter fiscal 2024 conference call. I also want to welcome Ray Bibisi's participation in our call. Recently promoted to President, Ray will play a key role in shaping the next generation of our business strategy and operations and, as such, will be a valuable addition to our quarterly calls.
For the first quarter, we reported net sales of $13.5 million, down 27% year-over-year. While the first quarter has always been our seasonally slowest period, sales were lower than anticipated, largely due to more than $2 million of customer shipments and orders that were delayed in the quarter. Importantly, these orders were not canceled, and we expect they will be shipped over the next few quarters. Fortunately, our lower cost structure helped us weather this rough period. When the market recovers, our cost reduction initiatives will yield even greater benefit and help us return to profitable growth.
Turning to the overall market. It feels like the ice might be thawing on the low CapEx spend and sluggish activity we experienced for over a year. We're finally starting to see some early signs of reversal from the CapEx downturn that made fiscal '23 so challenging. As a welcome relief from the dramatic 17% decline in CapEx spending last year, telecom companies' guidance for 2024 indicated a CapEx spend increase of up to 5%, and we're seeing this reflected in our business. Important to RFI, more of the 2024 CapEx is related to densification of wireless networks, which aligns nicely with our expanded product offering.
We're encouraged that many projects, which have been in the sales pipeline for several quarters, began to convert into purchase orders in February. Even better, this increase in new orders is primarily high-value products, like our DAC thermal cooling solutions and small cell shrouds, that are being purchased by multiple customers in the Tier 1 wireless carrier ecosystem. This has led to a substantial increase in our quarterly backlog, which now stands at $19.3 million, up $3.1 million compared to January 31. The progress we made in 2023 to become a leaner and more efficient operation will have a meaningful impact on profitability as this carrier CapEx spending normalizes and our top line growth resumes. We believe this recovery will be gradual but has staying power.
Our backlog growth is comprised of multiple orders across a variety of customers and diverse geographies, not just one large order that's moving the needle. With several customers, we have signed long-term master agreements. This means that as long as we continue to execute, we'll remain part of their build plans, not just for 2024 but for the long term. One customer, in particular, is beginning the first phase of a multiyear program of 5G deployment and infrastructure updates. With a master agreement in place with this customer, we're optimistic this will result in repeatable business for RFI.
We have also positioned RFI to benefit from diversification that isn't CapEx- and end market-specific. It's important to note that a portion of our products and solutions align well with operating and maintenance budgets versus CapEx. We believe that solutions like our DAC thermal cooling systems are helping us smooth out the peaks and valleys of carrier CapEx by addressing annual updates and upgrades that are part of a carrier's maintenance budget. We've been working hard to successfully build strong relationships and a greater presence with our carrier customers, and capturing some of their maintenance budget is another source of funding separate from CapEx projects.
It's also important to note that last year, 57% of our sales came from diverse end markets outside of wireless carrier applications, such as manufacturing, public safety, energy, hospitality, education and medical. In addition, we're continuing to explore opportunities with new customer segments, including cable companies, wireline telecom carriers and industrial markets that could develop into meaningful business over time.
As I've said before, we felt strongly that our wireless carrier customers could only stay on sidelines for so long. To stay competitive, they need to continuously improve the telecom infrastructure to meet customers' expectations for speed and coverage. Not only are they focused on the 4G and 5G macro towers, but also on network densification.
To meet both new and pent-up demand in the telecom market, we made significant investments in our Integrated Systems product line and can now offer a broad selection of high-quality interconnect products and next-generation integrated systems. This positions us to gain a larger percentage of our customers' bill of materials, by having the leading-edge products they need for key applications.
In addition to expanding our portfolio of high-value products, over the last year, we executed our plan to control costs and drive further synergies by consolidating our facilities. While the work we did in 2023 reduced our annual expenses by $2.5 million, we have other initiatives underway to potentially reduce annual expenses by another $3 million by the end of fiscal year 2024. Ray will provide more details during his remarks.
In 2023, we accomplished a great deal through the hard work and dedication of our outstanding team, and Ray, as Chief Operating Officer, was very instrumental in achieving this progress. Recognizing his leadership, in February, we promoted him to President and Chief Operating -- Chief Operation Officer. This promotion expands his leadership role at RFI beyond operations to include greater oversight on our go-to-market strategies. I'm confident that Ray will make significant contributions to shaping our business strategy, go-to-market and operations for the next phase of our strategic plan.
Looking ahead to 2024, we're optimistic about our future prospects. We have a strong competitive position with a highly attractive product portfolio, a capital-light business model and substantial operating leverage. As you've heard me say before, as capital expenditures pick up, we see significant leverage in our P&L that can have a favorable impact on gross margins, either from higher sales, a better product mix shift or both. Plus, as we reduce expenses, any incremental sales should flow to the bottom line. With what we know today, we expect Q2 sales to increase sequentially over Q1 as we begin to benefit from the substantial new order flow that I discussed earlier.
I want to thank our employees who worked diligently to improve our operations and set the company up for future success. I also want to thank our shareholders who have been patient through the downturn. We appreciate all of your support.
I'll now turn the call over to Ray Bibisi to speak about our operations. Ray?
Thank you, Rob. I'm truly honored to assume the role of President of RF Industries and excited to speak with you today about the opportunities that lie ahead. In my capacity, I will be leading RFI's sales, product management, engineering and operations teams across all business units and product areas.
Our goal is to closely align these teams with our go-to-market strategy that will facilitate enhanced cross-selling of our diverse portfolio and solutions. This strategic alignment is designed to establish a more cohesive and efficient organizational structure that will help us capitalize on significant market opportunities. I'm confident that fostering greater integration within our market-facing team will give us a competitive edge as we pursue these opportunities.
As mentioned by Rob earlier, our initiative to drive further cost reductions will continue through 2024. We see opportunities for improvement in several areas such as direct material, facilities and equipment, product design and development, along with the benefits of applying lean principles company-wide to improve operational efficiencies.
In addition to our ongoing cost reduction initiative, we have organized a tiger team focused on cash generation. While this initiative will examine several best practices to strengthen our business, its immediate priority will focus on minimizing excess and obsolete inventory. The potential benefits from both cost reduction and cash generation programs will enhance our financial strength of our organization.
Furthermore, I am very excited about the collaborative spirit and enthusiasm of my new team. Together, we've engaged in discussions around sales strategy, market diversification, market share as well as product road map and rationalization. We're totally aligned in maximizing the opportunities ahead that will contribute to a bright future for RFI. It's an exciting time for our company.
And with that, I will now turn it over to Peter to discuss our financial results. Peter?
Thank you, Ray, and good afternoon, everyone. As Rob mentioned, our first quarter results were lower than we expected. However, we are excited to see spending improving and having a positive impact on our backlog.
First quarter sales were $13.5 million, a decrease of $4.9 million or 27% decrease year-over-year and down 15% on a sequential basis. First quarter gross profit margin decreased to 24.5% from 27.7% year-over-year. The 320 basis point decrease reflected the impact of lower sales and less leverage to cover certain fixed costs.
First quarter operating loss was $2.1 million compared to an operating loss of $1.2 million in the prior year period. The operating loss was primarily due to lower sales volume and lower contribution from higher-margin products, offset by lower operating expenses in the first quarter of 2024.
Our net loss was $1.4 million or $0.13 per diluted share, and our non-GAAP net loss was $590,000 or $0.06 per diluted share compared to a net loss of $1.2 million or $0.11 per diluted share and a non-GAAP net loss of $25,000 or $0.00 per diluted share for Q1 2023. First quarter adjusted EBITDA was negative $1.1 million compared to positive adjusted EBITDA of $78,000 in Q1 2023.
Moving to the balance sheet. As of January 31, we had a total of $4.5 million of cash and cash equivalents and have working capital of $21.6 million and a current ratio of approximately 2.9:1 with current assets of $32.9 million and current liabilities of $11.3 million. As of July 31, we borrowed $12.5 million under our term loan and $500,000 from the revolving credit facility.
Related to the credit facility. As you saw in the third amendment filed at the end of February, we have been working over the last several months to ensure we have access to liquidity and flexibility needed to support the recovery of our business. As of today, we have refinanced the term loan that was put in place in 2022 with a new asset-based revolver with a new lender. This revolver will support our next phase while giving us the working capital flexibility to handle potentially uneven deployments in customer orders.
Our inventory was $18 million, down from $18.7 million last year. The decrease in inventory reflected our continued rationalization and rightsizing of our inventory to address the lower demand level we experienced in 2023. We believe our current inventory level supports our strategic business model of inventory availability, and we continue to manage this closely as we expect to see increased demand in 2024 as CapEx spending gradually normalizes over the coming year.
Moving on, we are seeing momentum build around new business. Our backlog as of January 31 was $16.2 million,on first quarter bookings of $13.6 million. Subsequent to Q1, we've seen an increase in order flow, and as of today, our backlog currently stands at $19.3 million.
As we look ahead, we're optimistic the positive trends we are seeing with our customers will continue and benefit our sales. We're excited about our opportunity to drive top line growth and generate profitability through key customer projects and higher-value solutions.
With that, I'll open up the call for your questions.
[Operator Instructions] And the first question today is coming from Josh Nichols from B. Riley.
I know the carrier CapEx market has obviously been tough, specifically for last year, and the first quarter is a little bit of a seasonally low for you guys. But good to hear that the revenue is expected to pick up in 2Q.
Just given what we're seeing for the decent backlog jump, I'm just kind of curious, do you think that there's going to be more of an incremental or a material sequential pickup in 2Q? Or do you think a lot of that backlog is going to be coming in like the fiscal second half of this year when we just think of the cadence of the acceleration over the next few quarters?
Yes. Josh, thanks. Good question. I think I'll give kind of 2 reactions to the question or 2 answers to the question. So one is with what we've been through in the last 4 quarters, I have a hard time predicting exact timing on when these orders are going to flow. So I'll just -- I'll give that caveat kind of to begin.
But I think the broader piece is we expect some of the orders we've been seeing to help us in Q2. Not going to give specific guidance on a Q2 revenue number, but we certainly expect nice recovery starting to show in the second quarter and then through the rest of the year.
I mean, these orders that we've seen to take the backlog up, as I said in some of my prepared remarks, it's not a onetime thing. We have scenarios occasionally where we get a large order and we draw against it for some period of time. This is several recurring orders around several different projects with multiple customers that are not just -- the month of February was great from a bookings perspective, but it's not just that. I think we continue to see those into March, helping that backlog, and we expect there to be more sort of continuing as the year goes on. So hard to give exact timing, but we certainly expect to sort of accelerate from here.
And Josh, any more questions?
Yes. One more question, sorry. Just looking at the OpEx structure, you guys have gotten pretty lean and mean over the last 12 months, I would say, and $2.5 million of annualized operating savings. And you mentioned on the call that you could be potentially another $3 million of additional savings. Could you just maybe elaborate on where those are potentially coming from specifically? Or what the company plans to do? Or any expenses associated with achieving those?
Sure. Yes. Maybe I'll give kind of a first pass on, and then I'll let Ray add some of the specific initiatives at a high level that the team is driving.
So generally, it's sort of a continuation of the things that we began and had planned going into fiscal '23 with the combining of locations to allow us to get started on some of these streamlining opportunities. So it's sort of the next phase of that and continuing down the path of the good diligent various work streams that the team has been driving.
So Ray, maybe you want to mention some of the specific items. I know you had a few in your prepared remarks, but maybe just recap those at a high level what the items are that some of the initiatives the team is driving.
Sure. Thanks,Rob. And Josh, like I kind of mentioned in my dialogue, we're looking at multiple facets of the business: the direct material is one element; as Rob mentioned, facilities, the consolidation of facilities and the synergies that we can benefit from those consolidations; we're also looking very heavily into product design; manufacturability of new product design. And then the other big element is the lean principles: eliminating waste in our operations, our manufacturing processes and our processes across-the-board.
So we kicked this off in 2023. We see other opportunities moving into 2024, and we think that there's more that can be accomplished as we move into this year.
And then last question for me, I guess, like given the anticipated upswing in revenue throughout the rest of the year and the fact that you've talked about you're probably going to be gaining some higher-margin revenues from small cell and DAC, things like that, how should investors be thinking about the potential margin expansion over the coming quarters for the company?
Yes. Maybe I'll give a first pass, and let Peter add some specifics there.
So I think the general summary is we need there to be a specific sales number to allow us to cover fixed charge, right? That was one of the things that Peter mentioned in his comments. And I think that just at a high level, as we see product mix get better -- we brought our breakeven way down. But as we see the product mix get better around these higher-margin items, I think that is one key area where we should see the margin expansion start to happen.
Peter, do you want to add some specifics there?
Sure. Josh. Thanks, Rob. So as the year continues and we see the improvement in the top line and the product mix getting better, I think we can expect us to get closer to 30% range where we've been, Josh, coming off of a $13.5 million at 24.5%, that -- not a great number for us. But I think with the sales improving and kind of the synergies we've worked on last year and continuing on to this year, as we see the sales from the higher kind of margin stuff start to ship out, I think you'll see a quicker improvement to our gross margins with some sales increase here.
[Operator Instructions] The next question is coming from [ Greg Graves ]. [ Greg ] is a private investor.
I just have one simple question. Relative to the activities in -- with the U.S. and China, could you give us a rough idea of how much you are relying on China for some of the components that go into our parts?
Yes. Thanks, [ Greg ]. Good question. So -- small, as in less than 10% of our inventory has a direct connection there. Now that's direct. It doesn't mean that U.S.-based suppliers that we're purchasing from are also sourcing something, but our exposure that we're aware of is, I would say, less than 10% of our inventory.
And the next question is coming from [ Ethan Starr ]. [ Ethan ] is also a private investor.
There was some mention of some obsolete out-of-date inventory in your inventory figure. I'm wondering, roughly, can you give some guidance as to the percentage or dollar figure roughly about the inventory and what your hopes are for moving it out of the door?
Yes. Thanks, [ Ethan ]. So giving a specific -- we're not going to give a specific number on it. I can tell you, it's a small percentage of our total. And in some cases, it's not actually obsolete. It's just been slow moving. And we've made the decision to turn that into cash to move some stuff out of there. So it's not going to have a massive material change to our inventory level. But some of the decline that you saw in our current inventory, I think it's $18 million as we reported and it was $18.9 million prior quarter, so that part of that is selling through some inventory, but part of that is also reducing those numbers.
So it's not -- I don't want to overstate the obsolete word. We certainly want to say, yes, there is some in there that we needed to move out. But it's more about, I think, just rationalizing and turning it to cash if it hasn't been moving.
Okay. Well, thanks for correcting me on the improper use of obsolete and look forward to next quarter's results.
Thanks, [ Ethan ]. I think we said the word obsolete. So that's on us, not you. Thank you.
There were no other questions at this time. And I would now like to hand the call back to Rob Dawson, CEO at RF Industries, for closing remarks.
Thanks, Paul, and thanks, everyone, for joining our call today. We look forward to reporting our second quarter results in June. Have a good day.
Thank you. This does conclude today's conference. You may disconnect your lines at this time, and have a wonderful day. Thank you for your participation.