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TESSCO Technologies. (NASDAQ:TESS)

Q1 2015 Earnings Conference Call

July 23, 2014 05:00 p.m. ET

Executives

David Calusdian – Investor Relations, Sharon Merrill

Robert Barnhill – Chairman and Chief Executive Officer

Aric Spitulnik – Chief Financial Officer

Analysts

Anil Doradla –William Blair

Bentley Offutt – Offutt Securities

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2015 TESSCO Technologies Incorporated Earnings Conference Call. My name is Erika (ph), and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards end of the conference. (Operator Instructions) I would now like to turn the call over to David Calusdian from Sharon Merrill. Please proceed.

David Calusdian

Good afternoon, everyone and thank you for joining TESSCO Technologies’ First Quarter 2015 Conference Call. Joining me today are Robert Barnhill, TESSCO’s Chairman and Chief Executive Officer; and Aric Spitulnik, the company’s Chief Financial Officer.

Please note that management’s discussions today will contain forward-looking statements about anticipated results and future prospects. Forward-looking statements involve a number of risks and uncertainties and TESSCO’s results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO’s public disclosure, including the company’s most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission.

With that introduction, I would like to turn the call over to Bob Barnhill, TESSCO’s Chairman and CEO. Bob?

Robert Barnhill

Good afternoon. Thank you for joining us today. I am pleased that we began our new fiscal year in line with our expectations delivering revenue growth of 23% sequentially and 6% year-over-year and growth in each of our markets.

Our transformation strategies in financials are strong, position us well to leverage the opportunities we are seeing as a result of the convergence of wireless and internet. TESSCO enables organizations to capitalize on these new opportunities by architecting and delivering the knowledge and product and supply chain solutions required to build use, maintain or resell wireless voice, data and video systems.

Our strategic initiatives promise to transform the way we do business and today I would like to highlight four of our key business generation initiatives. First, is the fundamental growth driver the development of solutions and products. We are building the team that focuses totally on the solutions development and collaborates with product managers to find the required products and then develop an end to end customer offer. Today, we are supporting the multitude of systems and I would like to review two solutions that will be a part of aggressive campaign this quarter to generate customer interest and sales.

We all demand that our mobile devices work anywhere and anytime and TESSCO simplifies the challenge of enhancing cellular coverage and capacity and provides a complete solution for both for residential, office and outdoor venues. Another example is the monitoring and control of remote assets which requires a total solution from the edge to the core all of which TESSCO offers. A few specific to remote monitoring and control systems are positive train control, video surveillance, and the oil and gas flow monitor.

As an example of success we are selling fully integrated systems for what's called the digital oil fields, we met the requirement for providing continued communications from a platform to allow the oil and gas companies to manage, measure and track all data coming from the oil fields.

Presently, we are also exploring for the future the (inaudible) things monitoring and control. Effective measure initiative is team based selling. Today we are reorganizing our entire sales organization to teams to better serve the customer and develop wider and deeper relationships. The sales teams are customer segments focused and consist of the development executives and account specialist.

The development executives are responsible for enhancing in depth relationships with their assigned customers to understand their needs and deliver solutions to generate cross sales and revenue growth. The account specialists are responsible for supporting their development executive partner and their customers. They are accountable to know the customer and to be the immediate point of contact for project support or their entry in all account management assistance thus allowing the development executives to be with the customer a 100% of the time to build opportunities in sales.

Supporting the sales teams our solutions architects. These technical experts support development executive to design end to end solutions and assist in consummating the sale. The third initiative is what we call eye marketing which is our database digital online marketing and customer service. This system consists of three components, all integrated to serve the customer and develop new opportunities. TESSCO.com the one to one guidance and communications and big data. The heart of this system is TESSCO.com. The definitive place for customers and potential customers to gain the knowledge and assistance to design configure solutions, find and select products and secure and (inaudible) the entire supply chain.

TESSCO.com also attracts opportunities through search and content marketing to define and develop new opportunities from existing and new customers. TESSCO.com provides productivity for the customer and for TESSCO. It gives product recommendations, substitute, alternatives and companions and this confirms price and availability and TESSCO.com allows total account management for order tracking and resolutions.

We are finishing the prototypes of our new online experience both for TESSCO.com and our Ventev.com site. The proactive driver of eye marketing is the one to one system consisting of the customer relationship management and campaign and communication engines. One to one allows customer personalize contextual communication. It provides sales, opportunity guidance and presents timely results and key performance indicators for our marketing and sales units and individuals. Big data is the third component and it's at the core of our eye marketing system. This unstructured database brings sales, customer product transactions web and marketing data into a single knowledge center, creating the foundation for deep business and operational insights and through one-to-one relationships with our customers.

This past quarter we utilized big data platform to design and measure new performance metrics and provide dash boards and analytic tools to our business generation team. The fourth initiative is our Ventev proprietary products.

Ventev’s permission is to create and develop products that meet unmet needs providing customer with innovative products that are not available in the marketplace. Ventev consists of two distinct units both utilizing central manufacturing and supply chain resources.

The Wi-Fi and PlayStation infrastructure unit focuses on product solutions for broadband communications in remote areas, asset tracking and industrial venues, deployment of Wi-Fi indoor, outdoor and remote locations.

This quarter, we completed Wi-Fi deployments in two major college stadiums and provided new Wi-Fi antennas through upgrades at various fast-food restaurants, big box retailers and high end retail stores.

Our second Ventev unit, mobile accessories focused on mobile device protection and power. Last quarter our offer of cases in screen protection and chargers for the Samsung S5 phone was very successful. We are now preparing for Apple's new iPhone 6 launch and a charger for Qualcomm’s new quick charge technology for faster charge times on the Android devices.

In September, at CTIF show we are introducing new cases, chargers and power hubs. The distribution event of accessories is now going beyond our traditional channels and into travel and hotel shops. Ventev now represents 12% of TESSCO’s sales in a much larger percent of gross profit and we expect strong growth going forward.

In addition to these business generation initiatives, we have series of operational initiatives to transform many of our policies and procedures to better serve our customers while enhancing our productivity and profitability.

The execution of both the business generation and the operations transformation initiatives require prudent investment in talent and technology and as a result revenues may grow faster than earnings in the short term just as we saw this quarter. However, as our initiatives gain traction, we expect to see accelerated revenue growth, margin improvement and operational productivity all resulting in bottomline growth.

In summary we have lot going on and I trust you can feel our commitment to growing the value we deliver to our customers and to your share owners.

With that I would like to turn it over to Aric to go over the financial details of the quarter. Aric?

Aric Spitulnik

Thanks Bob. Let's look at the first quarter results. Revenues were $153 million compared with $144 million a year ago. As Bob mentioned we saw revenue growth across all of our markets. Gross profit was just over $35 million in Q1 essentially on par with last year's first quarter. Gross margin was 23% compared to 24.6% a year ago. This decline was primarily with the result of a change in product mix as we experienced increased sales of lower margin distributed antenna systems or DAS equipment. As we continue to be successful with DAS, we are trying to offset lower margins by working on a deeper penetration of these customers with their higher margins infrastructure and installation test to maintenance products.

SG&A expense was 29 $million up about 2% from the first quarter of 2014 primarily due to increased expenses associated with our investments and talent and technology. As a result operating margins were 4% versus 4.8% in the prior year quarter while we continue to make these critical investments to drive future growth we do expect operating margins to improve as the revenue we anticipate from these investments begins to be realized.

Net income was $3.7 million down from $4.3 million in the same quarter a year ago. EPS totaled $0.44 this quarter compared with $0.51 in the first quarter of 2014. However, we did show nice sequential growth over the $0.35 fourth quarter.

Now turning to the markets, in the public carrier markets, revenues were up 11% year over year. However gross profit was down 9%. We expected witnessed to continuation with slower spending from the tier 1 carriers compared with the year ago quarter when they significantly increased their spending to fill out their capacity of their networks.

By the end of calendar 2013, several phases of macro site LTE deployments had already slowed or have been completed. In the short terms of these carriers will be concentrating on densification efforts that are aimed to filling and coverage in capacity gaps in the network.

Spend for the remainder of this year will be balanced between these densification efforts and DAS from small cell efforts. DAS to remain strong and was the key growth driver for us this quarter and is expected to continue growing. Once more cell deployments which are still an important element of our carrier strategy have not yet truly come to fruition.

In the commercial dealer and reselling market, much of the work that was delayed from severe weather in the fourth quarter came online in the first quarter. We have seen demand for increased indoor cellular and data coverage which should indicate eventual demand for small cell systems once that market develops more fully. Revenue has increased 6% and gross profit increased 4% from Q1 a year ago.

In the private and government systems operating market, revenues grew 4% while gross profit increased 2% year-over-year. On the private system front, we continued to make investments in talent and have many potential significant projects in the works. The slow in economy continues to be an issue for many of our customers in this space. Some of these projects will also have a longer cell cycle than some of our traditional sales. On the government side, with the approval of Federal government budgets, we have seen funding for network bills begin slowly be released.

Turning to our retail market, the release of the Samsung S5 phone was a key business driver as consumers returned the retail stores following the extreme winter weather that occurred in the fourth quarter. We continued to have success in the indirect dealer market. We also experienced success selling the cell phone repair customers and we expect that channel to grow in coming quarters.

Our balance sheet remains strong. Compared with the fourth quarter, inventory increased to $11 million in Q1 as we saw ramp up in orders and stock inventory for the pick build season. Cash collection remains strong during the quarter and our cash stands at just over $6 million with no operational debt.

We set our dividend at $0.20 per share with the record date of August 06 and the payment date of August 20. We are maintaining our EPS guidance for fiscal 2015 in the range of $2.05 to $2.15. This guidance takes new account the investment we are making and new business generation organizational talent, digital and online marketing and our enterprise technology foundation and also takes a new consideration that continue concerns about the state of the economy.

Finally, we would also assume that we will grow revenues at a faster pace as our initiatives continue to take hold.

Thank you for your support at TESSCO. Operator, we will now open the call for some questions.

Question-And-Answer-Session

Operator

[Operator Instructions] Your first question comes from the line of Nil Doradla with William Blair. Please proceed.

Anil Doradla –William Blair

Hey guys. I have couple of questions. Burney, I mean you talked about the sales force getting reorganized, what were the catalysts and reasons for reorganization of sale force at this stage. Was it end market behavior, was it customers. What were the key reasons?

Robert Barnhill

Yes, it’s a great question. It's focused on the customer experience and our sales force have been designed and built over the years and say pretty much an independent resource and they were responsible for the end service of the customer. We did have a customer support group that was more of a pool and so what it ultimately did is it continued to diminish the time that sales people could spend with the customer as they were working on the order entry, the logistics issues, the various resolution issues.

This new team selling put a responsibility on several people for an account and divide the expectations and the responsibility so that the development executive can spend the time really getting deeper into an organizational finding out more about the customer, helping develop the opportunities and the needs and then the account specialist is then the person that takes the order entry and manages the entire account for the customer. The customer reaction I mean we were just now implementing that we were rolling out a major training program next week but from the customers they will talk to and they approach that we have done, they are looking forward to having a total team and backup that can help them all along the way.

Anil Doradla – William Blair

So is this the first time you have reorganized your sales force or have you done this periodically from time to time.

Robert Barnhill

Well, we have been organizing around the customer type so that we have segments, so you have got a team that's responsible for oil and gas, the team that's responsible for transportation, a team that's responsible for enterprise and so that was the part of the slow organization over the time. This is the major transformation as results to the total responsibilities delegation that we are achieving. I might mentioned too that we have got a to help in fact this change is the salesforce.com based that where we measure, you can see all of the leading indicators, the activities, the outcomes by the account – the development executive as well as the account specialist so that we make sure that nothing goes array as we focus more and more on time with the customers and given the customer that extraordinary experience.

Anil Doradla – William Blair

Switching gears, I mean on a quarter-over-quarter basis, very strong growth in the June quarter. Historically obviously the June quarter has one of the stronger sequential bases but almost 23% sequential growth I mean is there something that’s stood out this quarter because obviously it's much stronger than historical quarter-over-quarter growth and I would love to hear what is unique about this quarter.

Aric Spitulnik

Yes Anil, I think a lot of that have to do with dash built out. So this is a something that's relatively a new technology that we are doing very well with and it's primarily the public carrier space and also little bit in the commercial retailers. So that was a very successful implementation for us this year. We saw a lot of customer really liking that those kinds of implementations and really appreciating the support we can give them on a complete solutions as we try to put the dash equipment together with some of these other products they can– as Bob was talking about creating these complete solutions and that was a success force for this quarter.

Anil Doradla – William Blair

Okay and finally on Ventev that was about 12% of your revenue, can you once again remind us Barney, what’s your target objective, probably in the next couple of years in terms of revenue contribution from that segment or product line?

Robert Barnhill

Yes I think our internal goal is that Ventev grows faster than TESSCO as a whole and so continues to be a larger portion of our business and we are looking at continue to improve the margins as I mentioned that the gross margins are superior to the rest of the product line.

Anil Doradla – William Blair

Okay great. Thank a lot guys. Congrats. And we will catch up later.

Robert Barnhill

Thank you. We will talk to you.

Operator

[Operator Instructions] Your next question comes from the line of Bentley Offutt with Offutt Securities. Please proceed.

Bentley Offutt – Offutt Securities

Good afternoon, Barney.

Robert Barnhill

Hey Bentley, how are you?

Bentley Offutt – Offutt Securities

Couple of days ago, the Burlington Northern which is remember two largest class fund rail road in the country and the major union the ship, metal, air, rail union transportation division reached an agreement, tentative agreement which would enable all of, about 60% of all of, Burlington Northern trains which are equipped with PTC to be operated solely by one locomotive engineer without the on-board conductor and as you know this has been a major goal of the railroad industry for many years, because significant improvement on their profitability but also allows them to run lot more smoothly than the past. And this would engulf about 60% of their operating region which is the mid west to the Pacific Northwest. So it’s a major step forward I think for (inaudible) control. So I was very interested if maybe you could give the list as little you know as to the participation that TESSCO has in this area, this very big area.

Aric Spitulnik

Yes we have developed this dark territory power and RF propagation station that where you can install this thing, it has a box for the radio, the sensors to access the condition of the tracks whether there is switched in the wrong direction, assesses the condition of oncoming traffic and then if there is a chance for a either derailment or a collision it takes ceases control over the locomotive takes it away from the engineer and shuts the locomotive down. This is very exciting project we have. We are working in conjunction with GE that has all of these sensing equipment but we are doing the power that has an articulating tower where it has solar panels as well as battery backup and then the antenna system. We continue to do test sites. We had couple in this past quarter that went out but again as we have talked before has still been very slow to take off. They continue to push out the mandatory date the railroad look at it as expense side and rather than revenue item and so they continue to push back but I agree with you and I think what we have seen with various collisions and now this Burlington situation that we trust that it's going to start to accelerate.

Bentley Offutt – Offutt Securities

Aside from that, are you involved in the radios between the crossings to the (inaudible) do you have that technology?

Robert Barnhill

We are not involved that the radio they are using for the positive train control is specialized radio that we do not availability of. Now we are involved in the singling and the communication side with the point to point radios, point to multi but we are not involved with the positive train control.

Bentley Offutt – Offutt Securities

Okay fine. Thank you.

Robert Barnhill

Thank you. Good to talk to you.

Operator

[Operator Instructions] We have no further questions. I will now turn the call over to Robert Barnhill for any closing remarks.

Robert Barnhill

Okay. Thank you. In summary, we are very excited about fiscal 2015. It’s a conversion of wireless and internet continues to drive expansion of new systems, TESSCO is uniquely positioned to be the source of the knowledge and product solutions for the organization that built use maintain of these wireless. Investment in our transformation initiatives will enhance the customer experience, create new market opportunities and productivity for us and as a result drive revenues and profit growth.

In closing, I would like to thank our customers, our manufacturers, our team members, our share owners and you for your continued support. Thank you for being the part of our call today and look forward to talking to you about 90 days. Thanks. Bye.

Operator

Thank you for your participation on today's conference. This concludes the presentation. Everyone may now disconnect and have a great day.

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Source: TESSCO Technologies' (TESS) CEO Robert Barnhill on Q1 2015 Results - Earnings Call Transcript

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