Edited Transcript of RDL.TO earnings conference call or presentation 31-Mar-20 2:00pm GMT

MARKHAM Apr 2, 2020 (Thomson StreetEvents) — Edited Transcript of Redline Communications Group Inc earnings conference call or presentation Tuesday, March 31, 2020 at 2:00:00pm GMT

Redline Communications Group Inc. – CFO

* Stephen J. K. Sorocky

Redline Communications Group Inc. – CEO & Director

Ladies and gentlemen, thank you for standing by, and welcome to Redline Communications Group Inc.’s Fourth Quarter and Year-End Results Conference Call. (Operator Instructions) Please be advised that today’s conference is being recorded. (Operator Instructions)

I would now like to hand the conference over to your first speaker today, Stephen Sorocky, CEO. Thank you. Please go ahead, sir.

Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [2]

Thanks, Julianne, and good morning, everyone. Thanks for joining our Q4 and year-end conference call this morning. I will make a few remarks to begin. And then Philip Jones, our CFO, will continue after me, and we will have a Q&A following up.

I look back at the last few — look back at our call a few short months ago and realize nobody could have predicted we’d be reporting in the midst of a pandemic. And yet here we are. Since that last earnings call, we’ve also seen the market flood with crude oil, bringing the world price for oil down to under $30 a barrel from the $50 a barrel in that same time frame. While these are strong headwinds and create much uncertainty, Redline’s move to diversify its markets, both geographically and vertically and our increasing maturity as an organization will serve us well going forward.

I do want to take a minute to expand on what we’re doing to grow our business and to move closer to predictable, sustainable operations. Our new executive team has been in place for about 1 year now, and we have shifted from planning to execution in the following ways. We are a small company, and we must stay focused to be successful, recognizing that we need to balance the desire for focus against the risk of putting all our eggs in one single basket. We have elected to focus our product development, sales and marketing on 3 core vertical markets: oil and gas, mining and utilities, targeting companies who have the potential to become large, long-term customers. That doesn’t mean we won’t continue selling to our other markets, such as government, telecom and military. But it does mean that our R&D and most of our sales efforts will be aligned with deeper penetration in our core markets of oil and gas, mining and utilities. Our R&D efforts will be focused on developing products that meet the needs of these markets. Our product development planning is being done in collaboration with key customers in these markets.

LTE remains the cornerstone technology in the company’s product development strategy, and we are now executing against LTE product development road maps that we completed last year. This road map includes support for industrial LTE and a product development strategy targeting industrial applications of the 5G standard. Also our next-generation Virtual Fiber product will support the expansion of our installed base of mission-critical and reliable point-to-point and point-to-multi-point networks into the future.

We are strengthening our existing sales channels to realize revenue growth. The investments we have made in developing these channels can now be leveraged to grow our revenues by strengthening our partner relationships and putting our resources towards both selling and co-marketing with our channel partners. This has allowed us to reduce some of our sales expenses.

We’re also encouraged by the many positive signs in these markets, such as growth in invitations from customers and channel partners to bid on large projects and the positive feedback from industry influencers about our products.

That said, the investment we have made in becoming more mature as an organization has resulted in significant improvements in how we forecast our future revenue. Our sales funnel has now much more visibility into current and future quarters, much more granularity and completeness and is of much higher quality than we have — as we now have the discipline in place to no-bid when we don’t think our chances of winning are good and to concentrate our efforts on our most promising opportunities.

While the COVID-19 pandemic and the oil price changes are increasing uncertainty in our business, we are in a better position to take proactive measures and decisions to benefit our business and adjust as appropriately — as appropriate. We are seeing some impacts of COVID on our business. Travel restrictions mean people aren’t traveling to customer locations, remote work practices across the supply chain and customer community are expanding time lines, and some lead times in our supply chain have been extended. No orders have been canceled to date. Most of our line staff are continuing their work remotely, which not only mitigates the risk of potential exposure to the virus, but also helps us to ensure that Redline’s support and services continue to our customers and partners.

What we can’t fully predict is what will happen in the future. We know these are unprecedented times and there are many things we can’t control, but what we can do is keep our employees motivated and safe, with now over 90% working from home; maintain our discipline as a business and be prepared to react quickly if events, outside of our control, require us to do so.

In closing, I would like to take this opportunity to thank our Redline team, partners and customers for the support during this very challenging period.

I’d now like to ask Philip Jones, Chief Financial Officer, to discuss our financial results. Phil?

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Philip Jones, Redline Communications Group Inc. – CFO [3]

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Thank you, Stephen, and welcome, everyone. The earnings press release for Redline Communications was issued yesterday and accompanied our filings on SEDAR last night of the audited financial statements, management discussion and analysis and annual information form. My comments will focus on key highlights of our financial results, followed by a Q&A at the end of the session. My initial comments will focus on the 2019 annual results, followed by comments specifically for Q4 2019.

Full year 2019 revenues were $23.7 million, down 13% from 2018. The overall softening in revenues is largely driven by the relative timing of our customers’ projects and purchase decisions from year-to-year. On a geographic basis, revenues were lower in North and South America, while increasing in the Middle East region. Our other geographies were consistent with the prior year. Maintenance and support revenues have increased year-over-year in terms of both dollars and as a percentage of our sales mix.

Gross margin for 2019 was 55%, up 3% from 2018 due to a combination of product mix, such as the increase in higher-margin support and maintenance activities along with margin improvements in hardware and software products arising from engineering cost reduction efforts and improved supply chain relationships.

Operating expenses were $16.6 million for the year, up 12% or $1.8 million over the prior period. Included in the amount was $0.8 million in onetime severance costs related to changes in the leadership team that took place throughout 2019. The remainder of the increase is largely attributed to increased head count to support new product development initiatives focused on next-generation wireless products for our core markets, namely oil and gas, mining and utilities.

As a result of lower revenues and increased operating expenses, the adjusted EBITDA loss for the year was in $2.3 million compared to a $0.3 million profit in 2018. Adding back nonoperating income and expense items, we recorded a net loss of $3.7 million in 2019 compared to a net loss of $0.4 million in 2018. On per share basis, net loss of $0.22 per share in 2019 compared to a loss of $0.02 per share in the prior year.

The company ended the year with cash of $6.5 million, down $3.1 million from the prior year, resulting mainly from operating losses, investment in capital assets and intellectual property and the partial repayment of the Ontario loan of $0.7 million.

Looking at the results of Q4 2019 and comparing to both the prior quarter and the same quarter in the prior year, we experienced the following. Revenue for the quarter was $5 million, down $2.1 million or 29% from Q3, and down $2.5 million or 33% over the same period in the last year. Revenue would have been higher in Q4, if not for approximately $0.8 million in product that was in transit at year-end.

The overall softening in terms of dollars was experienced across all verticals. The core verticals of oil and gas, mining and utilities represented 59% of revenues in the quarter compared to 62% in the same period last year. On a geographic basis, revenues were down quarter-over-quarter across all geographies, with the exception of the Asia Pacific region, which saw modest increases. Compared to the same quarter in 2018, revenues have increased in both the Middle East and the Asia Pacific regions.

Revenues by product type were softer for all segments, both quarter-over-quarter and over the same period in the prior year, with the exception of maintenance and support revenues, which saw increases in both comparative periods. Growth in maintenance and support revenues are a result of initiatives put in place by the company over the past year to more actively seek out and promote these recurring and higher-margin revenue streams to accompany Redline’s hardware and software sales.

Q4 2019 order back — order bookings were $6.3 million, up from $5.8 million in Q3 and below the $11 million in the same period of 2018. Bookings represent accepted contracts or purchase orders received by the company in the quarter that have been assessed as deliverable in the near term. Total backlog was $8.5 million at the end of the quarter, up 15% over the last quarter, mainly driven by the quarter-over-quarter increased bookings. Our backlog represents the value of all open product and service contracts and purchase orders not shipped or earned at the end of the period. Longer-term support and warranty contracts represent $3.4 million of the backlog total.

The company experienced improved and increased gross margins compared to both the prior quarter and the same quarter in 2018. Gross margin was 59% in Q4 compared to 54% in Q3 of 2019 and 55% in Q4 2018. The increase is a result of both the product mix as well as component cost reductions within our hardware products.

Overall operating costs for the quarter were $4.1 million, essentially unchanged from the third quarter and the same period last year. If not for $221,000 of onetime accrued severance included in the Q4 2019 results, operating expenses would have been lower both quarter-over-quarter in the same year and compared to the same quarter in the prior year.

During the fourth quarter of 2019, we reported an adjusted EBITDA loss of $0.9 million as compared to an adjusted EBITDA profit of $0.2 million in the same quarter last year. After taking into consideration the nonoperating income and expense items, net loss for the quarter was $1.3 million compared to a net profit of $0.2 million in the same quarter last year. On a per share basis, 2019 Q4 resulted in a loss of $0.08 per share compared to earnings of $0.01 per share in the same period of 2018.

Turning our attention to the company’s balance sheet. Our cash position decreased by $1.7 million during Q4 to $6.5 million at the end of the quarter driven mainly by an increase in days sales outstanding as well as an increase in inventory on hand. Since year-end, the company has implemented new policies and procedures related to billings, credit and collections and has experienced a significant improvement in terms of days sales outstanding and the overall level of past due accounts receivable. The company will continue to focus on improved cash flow and working capital management in an ongoing effort to strengthen the balance sheet and to execute on its strategy and business plans moving forward.

With that, I will turn the call back over to Julianne for our Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Robert Tattersall, a private investor.

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Robert Tattersall, [2]

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Can you talk a little more about the order backlog? I know the total is $8.5 million. And if I understood correctly, about $3.4 million is maintenance and service, which I assume is spread out over the next calendar 12 months. Does that imply there’s about $5 million of physical product in the backlog? And what’s the time frame over which this will be delivered?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [3]

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Okay. Thanks for the question, Rob. The $3.5 million backlog on maintenance and services typically rolls out over 3 years. Some of them are less. Some of them are slightly longer, but as a rule of thumb, it’s spread over 3 years. The balance of the $5 million, $8.5 million less $3.5 million, is equipment that we will be shipping within the year.

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Robert Tattersall, [4]

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Within the year?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [5]

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Within — the most of that will go within 2 quarters, some of it might drag a bit longer than that, depending on customer installation times.

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Robert Tattersall, [6]

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Okay. And a follow-up question, if I can. If I heard correctly, about 60% of your revenues are still coming from the oil and gas sector. And the quarter that we are looking at now in December was a — before there was the dramatic, I guess, collapse in the price of oil. Is it reasonable to expect that, that percentage will diminish as more and more oil companies are significantly cutting back on their capital expenditure programs?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [7]

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It’s a very good question, and we certainly are looking to the experience in the past as to how it’s going to affect us going forward. As I mentioned in my remarks, to date, we’ve had no cancellations of orders. And we see — related to the oil and gas prices, we’ve seen no delays. It’s encouraging, but I must caution — strongly caution that this is changing by the day and by the week right now. So going forward, I have to be perfectly honest that I don’t know how it’s going to affect us. We’ve been pleased with how we’ve been making progress over the last quarters, but every week right now, we’re just having to watch.

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Operator [8]

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Your next question comes from [Ole Pragel], a private investor.

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Unidentified Participant, [9]

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Yes, I saw that you did pay back the final installment on the loan during March. That’s correct?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [10]

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That’s correct.

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Philip Jones, Redline Communications Group Inc. – CFO [11]

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That is correct.

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Unidentified Participant, [12]

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Right. So considering that — so going forward, can we expect that OpEx will be the same as the last quarter, around $4.0 million in each quarter going forward?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [13]

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Well our — right now, we’re looking at OpEx very closely, simply because we’ve — we’re reacting and proactively taking steps around the COVID crisis or COVID pandemic. So for example, we’ve frozen all travel within the company. So all of our salespeople, all of our installation people, there’s no travel going on. So that will have — that will reduce our expenses in that area. We have frozen all new hiring with very few exceptions going forward. So I — they will certainly not be going up. They will likely to go — likely be going down.

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Unidentified Participant, [14]

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Well, you must have a good idea how much this last — this present quarter is going to be, roughly speaking. So you think that it might be less than $4 million.

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [15]

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That would be my assumption at this point.

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Unidentified Participant, [16]

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Assumption, okay. You mentioned that…

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [17]

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[Ole], we generally don’t comment looking forward on our numbers. So we’re not going to start today.

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Unidentified Participant, [18]

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Right. So you mentioned that the LTE, you’re going to — that it will somehow complement 5G, is that — or at least that was my interpretation of the — in the MDA — M&A. So in what way will that happen?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [19]

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So we spend a lot of time explaining and working with our customers around what their requirement is for their business going forward. And we often suffer from the impression that LTE and 5G are 2 different things. We really don’t see them that way. There’s a specification that governs that entire technology and LTE to 5G is basically an evolution. And more capabilities and more performance and features are added as you evolve through those various releases as they refer to.

We have focused on the aspects in 5G that are important to industrial customers. So for example, what we see in the industrial space is the desire for extremely high reliability and extremely low latency or delays from when a signal was sent and a response is received. If you think about controlling an electrical utility or equipment in a mine site, that high reliability and that quick responsiveness or low latency are the important things to our customers. Less important would be things in the 5G specification that address incredible density of users. So if you think about a downtown city and an intersection where you have thousands of people, they — that’s a certain kind of capacity that needs to be built into the equipment to deal with that and work effectively. We don’t concentrate on that because our customers do not. They simply don’t have that need. They’re more, again, focused on latency and reliability.

So what we’re doing in our business, in our LTE development is looking at the evolution of LTE towards the full 5G spec in those particular areas, and we’re concentrating our R&D in those areas, which is what our customers are telling us they’re going to need over the next years. And that’s — so when I talk about complementing the Virtual Fiber, what that’s doing is giving us that open standard to connect all the devices and the Internet of Things, to the networks that our customers are thinking of building over the next couple of years. And we’re very fortunate to be well established and well regarded by these customers around the world. And they’re talking to us about being ready with our technology for when they need it in the coming years. And that’s really driving our product road map, which we’ve developed in conjunction with the customers.

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Unidentified Participant, [20]

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So does the LTE — does it have the bandwidth that normally the 5G would have? I understand the latency. But like for example, would — could it be used for video conferences and like telemedicine and such?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [21]

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Our — we don’t have any customers who are using it in that way or expected to be using it in that way. The bandwidth for telemedicine and the bandwidth for videoconferencing would be different than someone who’s trying to turn a device off and on or understand what the temperature or the pressure of that device might be.

So that’s — when I talk about the specifications, they’re so broad that no one person, no one company, no one vendor will address all of them. It wouldn’t make sense for your customers. So we’re trying to focus in on our customer base and build on the relationships we have there to make sure we have the product that they’re going to buy over the next years?

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Unidentified Participant, [22]

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Yes. Well, that’s what I thought, but I had to ask the question. So the — when — so now that you’ve paid back, what — the $700,000, is that — that you paid back in — to Ontario for the loan, is that U.S. dollars or Canadian dollars?

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Philip Jones, Redline Communications Group Inc. – CFO [23]

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All numbers reported are U.S. dollars.

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Unidentified Participant, [24]

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Okay. So right now, you would have some, I guess, certainly less than $4 million left in cash?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [25]

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We’re not reporting a current quarter.

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Unidentified Participant, [26]

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What’s that?

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [27]

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We’re not reporting our current numbers at this — on this call.

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Operator [28]

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We have no further questions. I’ll turn the call back over to the presenters for closing remarks.

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Stephen J. K. Sorocky, Redline Communications Group Inc. – CEO & Director [29]

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Well, thank you very much for your attendance today. Just to follow up on that last comment. We are laser-focused on cash and extending it. And as Phil mentioned, we are — we have taken steps to dramatically improve our working capital, management and have no fear, we are absolutely focused on the cash to make sure that we continue to be a viable business. Thank you very much. I look forward to speaking with all of you soon, and I wish you a great day and safe — to stay safe in these challenging times. Thank you.

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Operator [30]

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Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect.

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