Redline Communications Group Inc

TSX:RDL

Earnings Call Transcript

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Redline Communications Group Inc. First Quarter 2020 Financial Results Earnings Call. [Operator Instructions] Please be advised that this conference is being recorded. [Operator Instructions]I would now like to hand the conference over to your speaker today, Stephen Sorocky, CEO. Please go ahead, sir.

[Stephen J. K. Sorocky, CEO & Director]

Thank you, Ian. And good morning, everyone. Thank you for joining us for our 2020 Q1 Conference Call. A replay of this call will be available through May 21 accessible per the details provided on our Q1 press release. A webcast and replay of this call will also be accessible through the Investor Relations page on Redline's website.Some statements made on today's call are forward-looking in nature and therefore, subject to certain risks and uncertainties, which are all outlined in detail in Redline's regulatory filings, which can be found on sedar.com.Again, good morning. I will begin with some remarks and then, I'll be followed by Philip Jones, our CFO, who will take you through the financial numbers and then, we will finally have a question-and-answer session where we welcome your questions. The first quarter of 2020 was dominated by uncertainty about the possible impacts of COVID-19 and falling oil prices. This uncertainty was offset by some strong positive developments on the financial side of our business.First, I wanted to discuss what we are seeing from COVID-19. In mid-March, we were able to move quite seamlessly into a remote work model. To date, all of our employees are safe and well. Despite having eliminated business travel, we continued to operate and support our client operations. Our financial controls are intact, and our sales and support activities are continuing. We are proud of the agility shown by our team at Redline in responding to the challenges and uncertainty we all faced in this environment.Our operations and support teams continued to adapt to supply chain and logistics challenges and to support our customers. We continued to work with our suppliers and manufacturing contractors to support our production in the face of the COVID impacts. In this environment, we are encouraged by the new customers we continue to bring onboard, most notably a key win in Saudi Arabia that was announced on April 20 and the market potential of our product development, including the RDL-6000 for the USA CBRS market as we released last week.Redline, along with its premier certified partner Al-Rushaid Technologies, was selected by one of the world's largest oil companies to provide seamless connectivity in their vast offshore and onshore oilfields in Saudi Arabia. This will enable industrial-grade, ultra-reliable, low latency broadband connectivity to a diverse array of critical assets. We see this win as a catalyst for growth and new business opportunities not only in oil and gas, but in all business segments across Saudi Arabia, adding to our strong presence in the Gulf region.We continue to see oil and gas activity from national oil companies, which are those backed by governments, mostly in the Middle East. This is a good sign, especially as global oil prices are down considerably over the last year. But at the same time, we remain cautious in our expectations for the timing of orders.The existing customers continue in their plans for network expansions. That good news aside, we have had a few delays in some orders as some countries in response to the pandemic are playing restrictions to the flow of people and goods across borders impacting the work required to complete orders. These kinds of border problems, while temporary, also have had an impact on our revenue in Q1.Orders to a small handful of customers, mostly in South America, couldn't be delivered and therefore, revenue couldn't be recognized. As the delivery has been completed, Q1 would have been a very good quarter indeed from a revenue perspective. This delay in shipments has translated into growth in our order backlog, which is now just under $10 million, up 16% over last quarter.It is also important to note that we continue to diversify our go-to-market efforts and over half of our backlog is from markets other than oil and gas.On the margin side of our business, our gross margin percentage increased 13 percentage points to 63% from 50% in the same period in 2019. This is a big increase, and it was the result of a number of factors, mostly a shift to sales of higher-margin industrial products for our customers in core markets in keeping with our strategy of focusing on markets for mission-critical reliable products.Continuing quarter-over-quarter growth in revenue from maintenance and support contracts has also helped as it is both recurring revenue and has higher than average margins. Suspending all business travel and canceling all upcoming marketing events that were to occur in Q2 and Q3 happened late in the first quarter, therefore, having a minor impact on Q1 expenses, which were largely flat over Q4. We do believe that COVID-related restrictions and uncertainty will continue to affect our business. So we will be managing expenses closely, including the deferral of any significant hiring for the foreseeable future.Some hardware component shortages are requiring us to source alternatives that may be more expensive. And due to COVID-related restrictions, one of our contract manufacturers is shifting manufacturing from their Mexican plant to a US-based facility and some final assembly to Redline in Canada.I don't want to steal Phillip's thunder, but I feel compelled to point out that despite reporting a loss in Q1, we actually grew our cash balance. This increase in cash is the direct result of proactive programs we've implemented to better manage working capital. A big congratulations to Philip and his team for this huge accomplishment. We also made a final $700,000 payment on the Ontario loan, which means that our debt balance is now 0.While the entire world is facing uncertainty right now, we continue on adapting to the new normal. The COVID-19 pandemic continues to be a significant concern to us and has impacted our product shipments and revenue. Nevertheless, we are proud of how we've been able to win new business with increased year-over-year bookings, generate positive cash flow, eliminate our borrowing, grow our margins, support our customers' operations, all while ensuring the safety of our staff. We will continue to closely monitor the ongoing impacts of the COVID-19 pandemic and the recent decline in oil prices on our business and continue to take measures to mitigate negative effects upon our business, including aggressively reviewing, monitoring and controlling expenses.With that, I will now hand over to Philip Jones, our CFO. Phil?

[Philip Jones, Chief Financial Officer]

Thanks, Stephen. And welcome, everyone. The earnings press release for Redline Communications was issued yesterday and accompanying our -- accompanied our filings on SEDAR last night of the interim financial statements and management discussion and analysis. My comments will focus on key highlights of our financial results followed by a Q&A at the end of the session.Looking at the results of Q1 2020 and comparing to this prior quarter and the same quarter in the prior year, we experienced the following. Overall, revenue for the quarter was $4.5 million, down $0.5 million or 11% from Q4 2019 and down $1.4 million or 29% over the same period last year. This is mainly the result of product shipments, which could not be delivered to a small number of customers, due to temporary border closures in South America and the Middle East and other logistics challenges associated with the COVID-19 pandemic.The core verticals of oil and gas, mining and utilities represented 64% of revenues in the quarter, up from 59% in Q4 2019 and compared to 60% in the same quarter last year as the company continues to focus on its core verticals.On a geographic basis, revenues were down in all regions compared to the prior quarter with the exception of the Asia Pacific region, which saw significant growth. Revenues would have been higher over the prior quarter in both South America and the Middle East, if not for the impacts of COVID-19. When compared to the same quarter in the prior year, revenues were up in both the Middle East and Asia Pacific regions.Revenues by product type were softer for hardware and software deliveries, both quarter-over-quarter and over the same quarter in the prior year, while maintenance and support revenue saw increases in both comparative periods. Growth in maintenance and support revenues are the 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.Q1 2020 order bookings were $5.9 million, down from $6.3 million in Q4 2019, but up from the $5.7 million in the same period of 2019. Bookings represent accepted contracts, purchase orders received by the company in the same quarter that have -- sorry, in the quarter that have been assessed as deliverable in the near term.Total backlog was $9.9 million at the end of the quarter, up 16% over last quarter, mainly as a result of COVID-19-related shipment delays. Our backlog represents the value of our 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 $3.2 million of the backlog total.The company experienced improved and increased gross margins compared to both the prior quarter and the same quarter in 2019. Gross margin was 63% in Q1 compared to 59% in Q4 2019 and 50% in Q1 of 2019. The increase is primarily the result of a shift in the revenue mix to sales of higher-margin industrial products to our core vertical markets, combined with increases in higher-margin support and maintenance revenues.Overall, operating costs for the first quarter were $4.1 million, essentially unchanged from the 2019 fourth quarter and the same period last year. We have increased our research and development expenditures, as we continued to focus on new product development and enhanced offerings for our customers. This area of increased costs were partially offset by a decrease in severance costs relative to the prior quarter and the same quarter last year.During the first quarter of 2020, we reported an adjusted EBITDA loss of $1 million as compared to an adjusted EBITDA loss of $0.9 million in the prior quarter and $0.8 million in the same quarter last year. After taking into consideration the non-operating income and expense items, net loss for the quarter was $1 million, compared to a net loss of $1.3 million in both the prior quarter and the same quarter in the prior year. On a per share basis, 2020 Q1 resulted in a loss of $0.06 per share, compared to a loss of $0.07 per share in the same period of 2019.Focusing on the company's balance sheet, the following are noted. The company generated $1.3 million of positive cash flow from operating activities during the quarter. The overall cash position increased by $300,000 during Q1 from $6.5 million at year-end to $6.8 million at the end of the quarter, following the final $700,000 repayment of the Ontario loan bringing the company borrowings to 0.The improved cash results were driven mainly by changes implemented during the quarter to the company's process and policies in the areas of billings, credit, collections and accounts receivable management, resulting in a 33% improvement in days sales outstanding during the quarter.The company will continue to focus on improved cash flow and overall working capital management in an ongoing effort to strengthen the balance sheet, so the company can execute on its strategy and business plans moving forward.With that, I will turn the call back over to Ian for a Q&A session.

[Operator]

[Operator Instructions] There are no questions over the phone lines at this time. I turn the call back over to the presenters.

[Stephen J. K. Sorocky, CEO & Director]

Okay. Thank you, Ian. Thank you, everyone, for your attendance this morning. I appreciate your support. I look forward to speaking to you soon. And I hope you're all keeping safe and well in a very unusual time. Have a great day. Thank you very much.

[Operator]

This concludes today's conference call. You may now disconnect.