bkti_ex991
Transcript
of
BK
Technologies Corporation
First
Quarter 2021 Earnings Call
May 13,
2021
Participants
Timothy
Vitou - President, BK Technologies Corporation
Bill
Kelly - Executive Vice President and Chief Financial Officer, BK
Technologies Corporation
Presentation
Operator
Good
morning, ladies and gentlemen, and welcome to the BK Technologies
Corporation Conference Call for the First Quarter 2021. This call
is being recorded. All participants have been placed on a
listen-only mode. Following the management's remarks, the call will
be open to questions.
Before
turning the call over to our President, Mr. Timothy Vitou for
opening remarks, I will provide the following Safe Harbor
statement. Statements made during this conference call 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 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
yesterday's press release and in 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.
I will
now turn the call over to Mr. Timothy Vitou, President of BK
Technologies. Mr. Vitou, you may begin.
Timothy Vitou - President, BK Technologies Corporation
Thank
you, Matthew, and thanks everyone for joining today. I'll arrange
my comments as follows: first, I'll highlight our financial
results, next, I'll spend some time providing operational updates,
then I'll turn the call over to Executive Vice President and Chief
Financial Officer, Bill Kelly, to dive deeper into the financial
results. We'll conclude by opening the call for a brief
Q&A.
Beginning
with our financial results, Q1 revenue came in at $8.6 million
compared with $10.9 million in the first quarter of last year.
Revenues in Q1 were below internal expectations, due in part to the
timing of certain orders from our existing customers, as well as
some supply chain constraints.
Like
many enterprises, COVID-19 has disrupted the operations of some of
our customers and supply chain partners, slowing their ordering and
fulfillment processes, respectively. It is important to emphasize
this is not a demand issue, but rather a timing issue. Some of
these orders have now been booked or are in the final procurement
stage, giving us confidence that the second quarter will show
growth.
Even
with a short-term sales decrease, our gross margins were slightly
above last year, reflecting efficiencies we have driven into our
manufacturing operations, that have improved our utilization and
absorption of manufacturing and support expenses.
We also
realigned our sales and marketing teams, and implemented other
initiatives over the past year to optimize our expense structure,
reflected in our 16% reduction in SG&A in Q1, versus Q1 of last
year.
In
short, the company is well-positioned to see margin growth as we
continue to scale our business. It's important to stay focused on
the big picture. Over the last four years, this business has been
totally transformed. We brought in a new executive management team
and a new Board of Directors, implemented new R&D and
engineering strategies, a new product roadmap and new manufacturing
strategies.
While
revenue in Q1 was down compared to the previous year, primarily due
to timing of orders, our new BKR 5000 is being very well-received
with product approvals and orders, from very demanding existing and
new customers alike. This is reassuring given that we supply a
critical product with life and death ramifications.
The
next step in our product evolution is the BKR 9000. This new
product which we expect to launch this year, has the potential to
be transformative to our business. We've taken the time to listen
to existing and potential customers, so that we can address their
needs. The key advancement of the BKR 9000 is that for the first
time, BK Technologies will have a product with multiband
capabilities. This exponentially expands our potential market
verticals and positions us for larger contracts.
As of
right now, with our existing BK products, we can go after
approximately 20% of the $2.3 billion LMR addressable market. The
multiband capabilities of the BKR 9000 significantly expands the
percentage of the addressable market we can pursue.
With
the addition of the BKR 9000 to our family of products, we'll be
able to effectively compete in new market verticals, such as oil
and gas. We will also be able to penetrate deeper into the
municipal public service market, and will have the capability to
grab a larger piece of the police and structure fire markets. The
two largest LMR market verticals.
For
decades, the market leader Motorola has had what we estimate to be
over 70% market share. We firmly believe that the market is ripe
for disruption. Today, we have a low single digit market share, we
project that with an increase of just a few percentage points in
our market share has a potential to bring us to $100 million plus
in annual revenue.
Additionally,
the 9000 has even more attractive margins than our current product
offerings. If you project out longer-term, as we penetrate these
additional verticals and the business scales, we should be able to
achieve gross margins over 50%, SG&A of less than 32% of sales,
and an operating margin more than 12%. There's a lot of work to do
to get there, but we see a clear path to achieving that over
time.
I've
spoken a lot about land mobile radio and our opportunity within
this $2.3 billion addressable market. And there's plenty of
opportunity for us within that number to drive growth.
However,
that said, it's important to note that part of our longer-term
strategy is to look at contiguous opportunities beyond LMR, that
give us access to the additional areas of the $14.6 billion public
safety market.
For
example, this could include markets such as managed services, or
emergency management tools and solutions, or cybersecurity
equipment. This is not an immediate focus, but it's important to
understand our long-term objectives, of further expanding
addressable market beyond LMR, and building BK Technologies into a
much larger company for shareholders.
Two key
areas of focus have been product technology development, and
improving our manufacturing processes. On the technology
development front, we've significantly enhanced our capabilities
over the past few years. We recently opened and announced our new
technology innovation center in South Florida. The Technology
Innovation Center's mission is to explore leading-edge
communication technologies, and leverage that in designing
solutions to wide ranging communication challenges, facing today's
public safety professionals.
Leading
the Technology Innovation Center is BK's Chief Technology Officer,
Dr. Branko Avanic, who brings with him over 30-years of technology
and development experience at Motorola. He's assembled a highly
skilled engineering team with deep backgrounds in a broad array of
technology disciplines, and extensive direct experience designing
state of the art communication technology solutions.
We also
launched several strategic initiatives several years ago, to
significantly upgrade manufacturing processes. This includes
bringing certain activities such as surface mount technology, or
SMT in-house, while migrating others to U.S.-based manufacturing
partners and qualified second sources for backup.
This
strategy allows for improved quality control and shortens
development lead time, while guarding against business
interruptions, which ultimately yields benefits in product costs,
inventory throughput, and working capital management.
Additionally,
we now have a more cyber secure supply chain, which is increasingly
important to government agencies.
Now
let's dig into some of the customer traction we have seen for the
BKR 5000 since we last spoke. First, we received various approvals
of the new technology from customers. We received fire approval
rating from the U.S. National Interagency Fire Center, or NIFC for
the BKR 5000. Our engineering team worked closely with the NIFC
team to achieve the status of fire approved for Interagency Fire
use. This authorization enables the product to be used by all
Federal employees and all personnel under contract with Federal
government, working on wildland fires and forest health
protection.
We
received approval from the U.S. Department of the Interior, the DoI
for the BKR 5000. This complements our NIFC fire approval
certification, providing the necessary approval for the DoI
purchases, including high risk fire and law enforcement
use.
The DoI
further noted that the product passed on every risk assessment code
that they test. DoI agencies combined have an estimated 80,000 BK
radios deployed across the nation. We've also had multiple orders
for the BKR 5000 from some of the most demanding customers. We won
a new strategic customer in the state of California.
The
Idaho Department of Lands placed the largest single order in many
years, upgrading the BKR 5000. We also secured business from a new
municipal Fire and Rescue customer in Idaho, a state that ranks
second in the nation for the percentage of homes at risk from
wildfires.
We are
awarded a new service contract by the U.S. Department of
Agriculture's Forest Service for maintenance and repair of BK
products. Replacing the previous service contract, this new
contract extends our long-standing relationship with Forest
Service, and provides us with reoccurring service revenue for many
years.
The BKR
5000 was selected for purchase and deployed by the Kentucky chapter
of a global environmental organization, with more than 1 million
members in 70 countries. Alberta Health Services extended their
contract. One of our key strategic objectives has been to establish
a presence internationally. And this provides a foundation from
which to grow our business in Canada. The Washington Department of
Natural Resources, a very long-standing customer is starting to
migrate to the BKR 5000, that's a sign of their confidence in the
product.
Finally,
highlighting our broad product platform NIFC purchased our KNG2
series P150 and P400 technology solutions.
Unfortunately,
natural disasters are only getting more common, as we've all seen
over the past few years. BK provides the people on the frontline
with these products that they can depend on in life and death
situations. We take great pride in that and look forward to getting
our products in the hands of more of these heroes.
I'll
now turn the call over to Bill Kelly, our Executive Vice President
and Chief Financial Officer, who is going to review the financial
and operating highlights. Bill?
Bill Kelly - Executive Vice President and Chief Financial Officer,
BK Technologies Corporation
Thanks,
Tim. Following is a summary of our financial and operating results
for the period ending March 31, 2021.
Sales
for the first quarter totaled approximately $8.6 million, compared
with $10.9 million for the first quarter last year. As Tim
reported, revenues in the first quarter were below internal
expectations, due in part to the timing of certain customer orders,
and delays within our supply chain.
Like
many enterprises, COVID-19 has disrupted the operations of some of
our customers and supply chain partners, slowing their processes.
As Tim mentioned, this relates to timing rather than demand.
Several of these customer orders have now been booked or in the
final procurement stage, giving us confidence that second quarter
will yield growth.
Gross
profit margins as a percentage of sales for the first quarter were
36.2% compared with 35.8% for the first quarter last year. While
gross profit margins for the first quarter of 2021 were materially
consistent with the same quarter last year, they were adversely
impacted by approximately 3.3% for one-time inventory reserves,
related to our legacy product line the KNG series.
Absent
this impact, gross profit margins for the first quarter of 2021
would have been approximately 39.5%.
Last
year, we reduced manufacturing operations employment and other
manufacturing-related expenses, and these reductions have improved
our utilization and absorption of manufacturing and support
expenses.
Selling,
general and administrative expenses or SG&A for the first
quarter decreased approximately $770,000 or 16.2%, to approximately
$4 million, which was 46.4% of sales. This compares with $4.7
million, or 43.6% of sales for the same quarter last
year.
In the
first quarter last year, consistent with the employment and expense
reductions in our manufacturing operations, we reduced SG&A
employment as well as other expenses in sales, go to market,
engineering and headquarters. These reductions impacted SG&A
expenses, but were made later in last year's first and second
quarter. We recognized an unrealized gain of $205,000 on our
investment in PIH, compared with an unrealized loss of $306,000 for
the first quarter last year.
Our net
loss for the three months ended March 31, 2021, narrowed by
approximately $498,000 or 41.8%, to approximately $694,000 or $0.06
per basic and diluted share, compared with a loss of approximately
$1.2 million, or $0.09 per basic and diluted share for the same
quarter last year.
As of
March 31, 2021, working capital totaled approximately $13.2
million, of which approximately $10.9 million is comprised of cash,
cash equivalents and trade receivables. This compares with working
capital totaling approximately $15.1 million at 2020 year-end,
which includes $13.3 million of cash, cash equivalents and trade
receivables.
Our
capital return program has paid 20 consecutive quarterly dividends.
The last one was paid on April 26, 2021.
That
concludes my remarks. We will now move on to the
question-and-answer portion of the conference call. I would like to
remind everyone that we do not provide financial and operating
guidance on a quarterly or annual basis.
We're
now ready to open the floor for questions.
Operator
Certainly.
Ladies and gentlemen, the floor is now open for questions.
[Operator Instructions] There are no questions in the queue at this
time. Your first question is coming from Walter Ramsey [ph]. Your
line is live.
Q: Thank you. Good morning. Congratulations. I got a couple
of questions. The 9000 product line, can you tell us when you
expect that to officially hit the market?
Timothy Vitou - President, BK Technologies Corporation
Thanks
for the question, Walter. This is Tim. The 9000 is still tracking
for release this year. There are several stages as you know, when
we release the 5000. For example, there's a considerable amount of
customer approvals that are required quite a bit of certification,
of course, FCC approval. That's one level of release.
The
second is when we start beginning customer orders and taking
customer orders, I think you've seen we've already announced we've
already accepted some pre-orders for that radio. I believe that
we're still on track. It would be disingenuous to say a specific
date like, July 7, something like that. We're looking at it from
just a pure standpoint of when the radio is going to be released
from engineering to manufacturing for commercial release. And that
is still gated for the second-half of this year.
Q: Okay. So the product is still being
developed?
Timothy Vitou - President, BK Technologies Corporation
We're
in pretty much of a lockdown mode at this point, Walter. There's,
again, so many levels of development, I could get into some crazy
detail if you'd like on what level of the development it is. We're
in the stages of -- the engineering team is doing their very
advanced testing on the product.
Again,
when we look at when we release a radio, it's when we plan on
taking orders. And then when Randy our COO, is prepared to
commercially release that product to the customer. So the
development process is still developing.
You'll
notice that I mentioned in my portion of the conversation this
morning that we've had extensive feedback from our customers, which
is, it's like music to our ears to get that level of concern and
interest in helping us develop this product. So, we are taking our
time making sure that we're absorbing all of this input we're
getting from our customers in the feedback, so that we can include
it to make sure that this radio is an absolute product that
delivers what the customers are looking for.
Q: Okay. That sounds good. And then as far as the current
product line goes the 5000, then the older can KNGs, what
percentage of the orders now are the 5000 compared to the -- which
I guess you would call the legacy stuff?
Timothy Vitou - President, BK Technologies Corporation
Our
legacy equipment still dominates for sure. We are accepting and
we've released quite a few press releases, you'll noticed in the
last six months on very strategic customers, already migrating to
the 5000. I'm not sure that I'm prepared to give an exact 20%, 40%
percentage number, but what's encouraging Walter is that the sales
level that I monitor on a very daily basis, excuse me, all are
quoting. And our RFP and RFQ responses have been substantially
geared toward the 5000 going forward.
We
still have some very long-standing customers that are diehard KNG
fans, and are continuing to still purchase that product. So, I
think it's a very fluid percentage that's going to be obviously
growing much, much quicker and much deeper into the 5000 as we go
forward.
Q: Okay. And I don't know if anybody else's in the queue,
but if not, just if you could comment on the supply problems
getting the parts from overseas, I guess. You indicated that was a
problem. And also the customers themselves that they were virtual
or they've gone back to real life, so to speak, and business as
usual. Are you still battling it out with the zoom calls and all
that stuff?
Timothy Vitou - President, BK Technologies Corporation
Two
part questions, supply chain and then the access to customers due
to COVID, as I listened, Walter. The supply chain, we are seeing
extended lead times. And the difficulty or the challenge in Randy
and his team from the procurement office is trying to make sure
that we're staying ahead of the curve. We are shipping right now.
We can deliver to all of our customers the requirements they need,
just on a pretty much an extended basis.
We used
to have a book to ship ratio that was literally in days, it's now
turning more in the weeks, nothing that's preventing us from or
causing any customer concern. It's just giving them the guidance
that they were not going to take an order Monday and ship at
Friday. We're going to take an order Monday, and it may ship in a
couple of weeks. And they're perfectly okay with that. It's hard to
tell really how the supply chain will unfold. But we're monitoring
it extremely closely.
The
second-half of your question was about customer access, and it's an
interesting dynamic. We are seeing some access to customers. Years
ago, we'd go into a meeting with a customer group and they'd have
10 people on their side of the table to one or two of us. And we'd
be presenting to the masses. When we kind of shifted into a zoom
remote mode, we still had that dynamic where we'd be one or two
people on the call and they'd have their eight or nine or 10 on
their side on the zoom call.
What's
happening now is they're allowing us to come in, but it's one on
one, it's kind of interesting. I prefer it to be the zoom, where we
can talk to more people at one time. So as some of these government
agencies, which is all we deal with city, county, state and Feds,
as they open their doors, and we're allowed in they're still giving
us a little bit of a straight arm on face to face. But I believe
that the kind of world is shifted Walter into a zoom-oriented kind
of world. And I think that our sales guys are becoming very, very
efficient at presenting and talking and selling over the tool. Last
year was our second highest sales number on record.
I don't
see that changes a whole lot, maybe in the next couple of quarters
with the vaccine and as people are opening up, more and more
governments are opening up, we will be allowed in to bigger sales
events. I noticed the industry shows are starting to fire up again
later this summer in August and September. So that's always a good
sign as well.
Q: Okay. Well, thanks for answering the questions. That's
great.
Timothy Vitou - President, BK Technologies Corporation
You
bet. Thank you, Walt.
Operator
Thank
you. [Operator Instructions] There are no further questions in the
queue at this time. I will now turn the floor back to our
hosts.
Timothy Vitou - President, BK Technologies Corporation
Thank
you, Matthew, and thanks everyone for participating today. We look
forward to speak with you again when we report our Q2, 2021
earnings results in August. All the best all of you, and have a
great day today.
Operator
Thank
you, ladies and gentlemen, this does conclude today's event. You
may disconnect your lines at this time, and have a wonderful day.
Thank you for your participation.