Redline Communications Group Inc

TSX:RDL

Earnings Call Transcript

[Operator]

Good morning, ladies and gentlemen, and welcome to the Redline Communications Group Inc. Second Quarter 2021 Results Conference Call. [Operator Instructions]This call is being recorded on Thursday, August 12, 2021. I would now like to turn the conference over to Ronan McGrath, Interim CEO. Please go ahead.

[Ronan D. McGrath, Independent Director & Interim CEO]

Thank you. Good morning, everyone, and welcome to our Q2 2021 earnings call. I am Ronan McGrath, Interim CEO of Redline. With me today is our CFO, Philip Jones, who will discuss our financial results in some details. I'm very pleased to report on some good progress made by the Redline team in the second quarter as we continue towards our goal of profitable and sustainable growth. While Phil will provide more details, I'm happy to share that in Q2, Redline's revenues and orders were up 15% over the same period last year, while our backlog of orders also grew 14% over the same period.Quarter-over-quarter revenues increased 27% and bookings grew 60%. Growth in bookings came from customers across all core vertical markets. Customers who had previously put projects on hold due to COVID-19 are now releasing backlog orders and starting new projects. This increase is being seen across all core vertical markets, but the strongest in oil and gas.Customers in the Middle East and South America, both key markets for Redline were especially active in the quarter. This growth in orders has also resulted in a strong backlog of orders now totaling $11.7 million. Customers in core markets in the U.S. were somewhat less active, especially in mining, which continues to be affected by COVID-19, but we saw an increase in the number of orders placed for pilot projects in our LTE product line. These pilot project orders are coming from state and local government departments and utility companies and are often the first step in the larger project. Revenue growth from core markets also helped us realize gross margins of 61%, up from 58% a year ago. Customer churn in all markets has been minimal, and we continue to enjoy multiyear relationships with our largest customers. As noted in the Q1 MD&A, an early order for the company's newly announced RDL 3200 product was received in the quarter. It has now been fully shipped and installed and is exceeding customer expectations. We plan to make this product generally available in late Q4 and will incorporate feedback and suggestions from this customer.The government of Canada approved the use of TV white space spectrum. And on July 28, subsequent to the end of the quarter, we received certification approval from ISP. This approval allows us to sell TVWS product in Canada, and we've built sufficient inventory to prevent -- to remit a rapid response in customer demand. On March 31 this year, we announced the Canadian government has approved an investment into Redline via the Strategic Innovation Fund, SIF. This investment brings up to CAD 14 million into the company, earmarked for the development of innovative industrial 5G network solutions. Under the terms of the agreement, the fund will reimburse just over 40% of eligible R&D costs, labor, equipment and materials that we incur. The first investment submission of approximately $460,000 was received in Q2. And going forward, payments from the funds will be made quarterly. This has allowed us to accelerate our R&D efforts with new products expected in 2022. As with many companies, we've been feeling the impact of the global semiconductor shortage, which has resulted in longer lead time for some components. We've adjusted by ordering in advance, which to date has allowed us to largely meet our shipment goals.As we announced earlier this year, Redline's former CEO, Stephen Sorocky, left the company in May and when I took over as interim CEO. Our search for replacement is in its final stages, and we hope to announce a new appointment in the near future. Lastly, as COVID restrictions continue to be relaxed. We are gearing up for increased sales and marketing activities, including participation in industry conferences, a key part of our go-to-market strategy. We're looking forward to the future with a strong sense of confidence. And with that, I will turn over the meeting to Mr. Jones, who will now bring you through the results in more detail. Over to you, Philip.

[Philip Jones, Chief Financial Officer]

Thank you, Ronan, and welcome, everyone. The earnings press release for Redline Communications was issued yesterday after the close of markets and accompanied our filings on SEDAR last night of the Q2 2021 unaudited financial statements and Management Discussion and Analysis. I remind you that all numbers are in U.S. dollars unless otherwise stated. My comments will focus on key highlights of our financial results, followed by a Q&A at the end of the session. Revenue in the 3 months ended June 30, 2021, was $4.7 million, an increase of $0.6 million or 15% over the same period in 2020 and a 27% improvement over the $3.7 million reported in Q1 2021. Sales of hardware and software products continue to drive the majority of the company's revenue. In this segment, Q2 2021 revenues increased by 3% to $3.3 million from $3.2 million in Q2 of 2020. Revenue from professional services and third-party equipment is largely tied to network deployments as the company continues to focus on selling overall product solutions versus an equipment-only focus. Here revenue almost quadrupled, increasing to $862,000 from $268,000 in Q2 of 2020. Order bookings representing all accepted customer order contracts and purchase orders received were $5.3 million in the quarter, a 15% increase over the previous year and up 60% from 2021 Q1. Q2 2021 order backlog consisting of all open orders to be fulfilled at future dates as requested by our customers was $11.8 million, up 14% or $1.4 million when compared to the same period in 2020 and up $0.5 million or 4% from Q1 2021. Approximately 65% of the backlog is represented by orders from customers in the core vertical markets of oil and gas mining and utilities, and the majority of our backlog will be recognized as revenue in 2021.Due to our ongoing and consistent focus towards higher-margin recurring revenue streams from support, warranty and professional services activities over the previous 10 quarters, the company achieved gross margin of 61% in the quarter, an increase of 3 percentage points compared to Q2 2020. Professional services and third-party equipment margins for the 3 months ended June 30, 2021, increased from 58% in Q2 2020 to 81% in Q2 2021 as a result of a revenue mix consisting of a greater portion of high-margin network design services and technical training compared to lower margins earned on the sale of third-party equipment. Maintenance and support margins for the 3 months ended June 30, 2021, were 99%, unchanged over the prior period and the same period in the prior year. Operating expenses for the 3 months ended June 30, 2021, were $3.9 million, up 2% from the $3.8 million reported in the same period in 2021, but down 1% compared to Q1 of 2021. The year-over-year increases were driven mainly by costs incurred to develop, test, certify and launch Redline's new products. Adjusted EBITDA loss, a non-IFRS measure for the 3 months ended June 30, 2021, was $0.7 million as compared to an adjusted EBITDA loss of $1.1 million for the same period in 2020. The improved adjusted EBITDA results are due to both higher revenues and improved gross margins earned in the current period compared to the prior year. The net loss for Q2 2021 was $0.7 million, an improvement of $0.2 million over Q2 of 2020. Now turning to the balance sheet. Cash balances at the end of Q2 2021 were $2.7 million, a decrease of $2.6 million compared to Q4 of 2020 and $1.6 million compared to Q1 of 2021. The decline in cash balances is a result of both operating losses and increases in working capital. Working capital increases are mainly the result of the timing and revenue recognition as much of the 2021 Q2 revenue was earned in the last month of the quarter, and therefore, balances were not yet due at quarter end. The increase in accounts receivable was partially offset by a decrease in inventory, which is down $0.4 million since Q2 2020 as the company continues to make progress in aligning its production plans, supply chain and inventory management with the requirements demanded by the order backlog and the sales pipeline. As of August 11, 2021, cash balances have increased since the quarter end and are now in excess of $3.2 million. In March 2020, the Canadian Federal Government announced the Canadian Emergency Wage Subsidy, or CEWS program, as a response to the COVID-19 pandemic. In the 3 months ended June 30, 2021, the company recognized a benefit of $0.4 million recorded as other income in the financial statements. This amount received is approximately $0.1 million more than the prior quarter with $0.3 million less than the same period in the prior year. Please note that this benefit has been excluded from our adjusted EBITDA calculations. I would now like to turn the call back over to Brittany to conduct the Q&A session of the call. Thank you.

[Operator]

[Operator Instructions]There are no questions at this time. You may proceed.

[Ronan D. McGrath, Independent Director & Interim CEO]

No, wait a moment for any final questions.

[Operator]

[Operator Instructions]

[Ronan D. McGrath, Independent Director & Interim CEO]

Well, in the absence of any questions, I think we are complete. Thank you for attending. And have a good day. Take care. Thank you very much. Bye-bye.

[Operator]

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.