RELM Wireless (RWC) CEO David Storey on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: RELM Wireless (RWC)

RELM Wireless Corporation (NYSEMKT:RWC)

Q2 2014 Results Earnings Conference Call

August 13, 2014; 09:00 a.m. ET

Executives

David Storey - President & Chief Executive Officer

Bill Kelly - Chief Financial Officer

Analysts

Allan Lyons - Vestal Venture Capital

Al Shams - American Capital Partners

Ed Shultz - Private Investor

Operator

Good morning ladies and gentlemen and welcome to RELM Wireless Corporation, Second Quarter 2014 Conference Call. This call is being recorded.

At this time, all participants have been placed in a listen-only mode. Following management’s formal remarks the call will be opened to questions. (Operator Instructions)

Before turning the call over to Mr. Storey for opening remarks, I would like to remind you that statements made during this conference call that are not based on historical facts are forward-looking statements. These statements are made in reliance on the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 and 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. Some of the factors and risks that could cause or contribute to such material differences have been described in RELM's Annual Report on Form 10-K for the year ended December 31, 2010 as filed with the SEC.

Additional factors and risks maybe described from time to time in the company's subsequent filings with the SEC. We refer you to these sources for additional information.

I would also like to point out that remarks made during this conference call are based on information and understandings that are believed to be accurate as of today’s date, August 13, 2014. RELM does not undertake any duty to update any forward-looking statements.

This call is the property of RELM Wireless Corporation. Any distribution, transmission, broadcast or re-broadcast of this call in any form, without the expressed written consent of the company is prohibited.

A replay of this call will be available one hour after the conference call through September 4, 2014. To access this replay, dial 877-344-7529 or 412-317-0088 for international callers and enter the code 100-49-826 or visit RELM's website. Thereafter the call will be archived on RELM's website.

In addition, if you would like a copy of the company's press release announcing its first quarter financial and operating results, please contact RELM Wireless at 321-984-1414.

I would now like to turn the call over to Mr. David Storey, President and CEO of RELM Wireless Corporation. Mr. Storey, you may begin.

David Storey

Thanks you Andrew and welcome to the RELM Wireless conference call for the second quarter and six months ended June 30, 2014. We are pleased you could join us for today's call.

On the heels of our best first quarter in more than a decade, the second quarter was stronger with sales 46% higher than last year’s second quarter and 16% higher than this year’s first quarter. Both quarters combine to yield our best six-month revenue performance in over 15 years.

Pretax income for the second quarter was $1.29 million, a 152% better than last year’s second quarter and our year-to-date pretax performance improved 84% over last year, producing $1.6 million.

The growth in total sales was again driven by our public safety APCO P25 Digital Products. Those revenues grew 82% from last year’s second quarter digital sales and 15% from the first quarter of this year.

During the first six months of the year we continue to realize success with new public safety customers at various government agencies, as demonstrated by our announcements regarding both federal and state opportunities. Public safety bookings represents 93% of our total bookings for the year, with our legacy D-series at 81% of planned levels, while the new expansive of KNG line of products generating nearly three times the level of the legacy public safety product lines.

In addition to increasing sales momentum, we made positive progress in gross profit margins, realizing a 2.6% improvement from the first quarter. This margin performance was fueled by growth in total sales and a more favorable sales mix weighted towards higher margin P25 Digital products, along with greater manufacturing volumes, which improved efficiency.

Our inventory management program continued to have a positive impact on operation and the balance sheet. Net inventory is now 26% below its February 2013 high point and at its lowest levels since 2009.

This has been a key factor contributing to our improved working capital and cash positions. Speaking of which, RELM's cash and trade receivables of $15.4 million are 65% higher than last year at this time and 43% higher than December of 2013.

On our quarter one call and in my letter to the stockholders, I emphasized four keys for our growth. Strengthen legacy customer stronghold, expand into new federal customers, develop our presence in state and local markets, and grow internationally.

This first half of the year, we have been attacking each of these key growth areas. Our phase of wins with new customers, federal, state and local has been encouraging. Just as important, procurement activity from our legacy customers has shown resurgence. With an especially active fire season underway, there are realistic prospects for that dynamic to continue.

We continue to actively pursue international opportunities and have logged some nice sales wins. Their overall volume however has not yet met our expectations or our policy threshold for public announcement.

The pipeline of promising international prospects holds to doubling growth potential. In most respects the first six months of 2014 have unfolded according to our business plan. We are in front of more new customers and accordingly the awareness of RELM appears to be on the rise. We are establishing a positive reputation.

We have more reference accounts than every before, which are helpful in spreading the message of RELM’s value proposition to new first time customers. Successfully landing new customers however can come with formidable challenges. One such challenge has been particularly troublesome. It continues to be an all too common practice for government agencies at all levels to direct their procurements to a sole source; usually the market leader.

We see this literally everyday at RELM. Such tactics fly in the face of the APCO P25 standard, a standard that advocates two primary objectives, inoperability and competition. These sole source procurements increase total cost for the buying agencies and ultimately you and me the taxpayers.

With an assist from RELM who protest at various levels, these sole source activities have started receiving attention from the press and subsequently from the house committee on energy and commerce.

The committee has requested a review by the Inspector General for the Department of Homeland Security of specific DHS procurements. We are hopeful that shining a spotlight on these practices will eventually lead to increasingly open and level competition.

In a legitimately competitive environment we believe the strength of our products, technology and service provide the necessary foundation for growth moving forward. We believe RELM represents the true spirit of APCO, delivering savings and service with its world-class products. In fact, that is what our business plan is built upon.

This concludes my overview this morning and I would now like to turn the call over to our Chief Financial Officer, Bill Kelly. Bill will review the results of the second quarter and six months ended June 30, 2014. Afterwards I will make some closing remarks and address your questions. Bill.

Bill Kelly

Thanks Dave. Our financial and operating results for the second quarter and six months ended June 30, 2014 are as follows. Net sales for the second quarter 2014 increased 46.3% to approximately $9.1 million, compared with $6.2 million for the second quarter in 2013.

Sales of P25 Digital Products for the quarter increased 81.5% to approximately $6.6 million, compared with $3.6 million for the second quarter last year. For the six months ended June 30, 2014 net sales increased 27.3% to approximately $16.9 million, compared with $13.3 million for the same period last year.

Sales of P25 Digital Products for the six-month period increased 46.2% to approximately $12.3 million, compared with $8.4 million last year. The improvement in sales for both the second quarter and six-month period was attributed primarily to orders from new customers and state, country and municipal public safety agencies, as well as increased demand from legacy customers. These orders were for P25 Digital products, including our newer KNG models.

Our gross profit margin as a percentage of sales for the second quarter 2014 was approximately 42.8% compared with 43.9% for the second quarter last year. For the six months ended June 30, 2014 gross profit margin as a percentage of sales was 41.6%, compared with 44.9% for the same period last year.

The gross profit margins for the year-to-date, particularly in the first quarter reflected competitive pressures and a less favorable sales mix compared with the same period last year. Also, manufacturing volumes were impacted by inventory reduction initiatives, resulting in sub-optimal absorption of our manufacturing support expenses. These factors improved during the second quarter as gross profit margins increased 2.6% from the first quarter.

SG&A expenses for the second quarter 2014 totaled approximately $2.8 million or 31.3% of sales compared with $2.3 million or 37.8% of sales for the second quarter of last year. For the six months ended June 30, 2014 SG&A expenses totaled approximately $5.4 million or 31.9% of sales, compared with $5.1 million or 38.3% of sales for the same period last year.

Engineering and product development expenses for the quarter totaled approximately $902,000 or 10% of sales, compared with $918,000 or 14.8% of sales for the same quarter last year. For the six-month period, engineering and product development expenses totaled approximately $1.8 million or 10.6% of sales, compared with $1.8 million or 13.8% of sales for the same period last year. The decreases in engineering and product development expenses were attributed primarily to the amortization of capitalized software.

Marketing and selling expenses for the second quarter totaled approximately $1.1 million or 12.1% of sales, compared with $732,000 or 11.8% of sales for the second quarter last year. For the six-month period marketing and selling expenses totaled approximately $2 million or 11.7% of sales, compared with $1.8 million or 13.3% of sales. The increase for both periods was related primarily to the sales commissions and incentive compensation, which directly correlates with the increase in total sales.

General and administrative expenses for the second quarter totaled approximately $839,000 or 9.3% of sales, compared with $688,000 or 11.1% of sales for the second quarter last year. For the six-month period, G&A expenses totaled approximately $1.6 million or 9.7% of sales, compared with $1.5 million or 11.1% of sales for the same period last year. The increases for both periods were attributed primarily to incentive compensation and public company related expenses.

Pretax income for the second quarter was approximately $1 million compared with $409,000 for the second quarter last year. For the six-month period, pretax income totaled approximately $1.6 million, compared with $888,000 for the same period last year. The improvement in pretax income was generally the result of increased sales and gross profit margins.

For the second quarter we recognized income tax expense of $357,000 compared with $212,000 for the second quarter last year. For the six-month period, income tax expense totaled $484,000, compared with $286,000 for the same period last year, and of course our income tax expense is primarily non-cash.

For the second quarter we realized net income of $672,000 or $0.05 per diluted share versus $197,000 or $0.01 per diluted share for the second quarter of the prior year. For the six-month period, net income totaled $1.1 million or $0.08 per diluted share, compared with $602,000 or $0.04 per diluted share for the same period last year.

As of June 30, working capital totaled approximately $27.3 million, of which $15.4 million was comprised of cash and trade receivables. This compares with working capital of $25.7 million and $10.8 million in cash and trade receivables at the end of 2013. As of June 30 there were no borrowings outstanding under our revolving credit facility.

I will now turn the call back over to Dave.

Dave Storey

Thank you, Bill. Our first quarter performance was good and a promising start to the year. The second quarter, even better. Together they gave us our best sales for the first six months period, since I arrived at RELM in 1998, and the second quarter was our ninth consecutive quarter of profitability.

But profitability is not our only priority. Sales growth remains priority number one. We must capture greater market share. I am optimistic that we have started to achieve this growth.

That was the strategy behind the development of the KNG line of products, which enable us to address $2.1 billion in market potential. Both quarters this year showed growth over their comparable quarter and from preceding quarters. We have gained traction with new first time customers and are working from our larger funnel of new qualified opportunities.

Additionally, our legacy business has remained a solid contributor, while the KNG product line spurs growth. As you know, support of the wildland fire community is the strength of ours. Moving into the third quarter with a severe fire season unfolding, we are preparing to respond to increase demand with both product lines from the agencies that will need our support.

Operationally, we are refining efficiencies and looking for cost reductions to continue the positive trend in gross profit margin improvement, practicing what we preach, continues improvement.

With the first wave of the KNG product line complete, our development team has turned its attention towards new technologies and features designed to enhance our competitive position. We are aggressively battling for ligament open competition, a leveled playing filed truly based on the P25 standard, with equal footing that’s not biased in favor of one company through the use of use of exclusionary tactics. That goal has proven illusive through the years, but as I mentioned earlier, there are signs we may be making progress.

So, the first half of the year has been mainly successful. The building blocks are in place for a strong finish to the year. We are committed to propelling the momentum we are gathering towards spectacular, finishing 2014 strong and planning for a promising future in 2015 and beyond.

We will now move on to the question-and-answer portion to today’s conference call. I would like to remind everyone that we do not provide financial and operating guidance on a quarterly or annual basis and accordingly we will not answer questions in that regard.

Andrew, we are now ready to open the floor for questions.

Question-and-Answer Session

Operator

(Operator Instructions). The first question comes from Allan Lyons of Vestal Venture Capital. Please go ahead.

Allan Lyons - Vestal Venture Capital

Thank you. Congratulations Bill and Dave. It’s really obviously a strong first half and hoping we’ll see the same kind of improvements into the second half.

David Storey

Thanks Allan

Bill Kelly

Thanks Allan.

Allan Lyons - Vestal Venture Capital

You’re welcome. A couple of questions I have. Since the stock buyback is unlikely, based upon where the stock is gone to and your parameters of doing stock buyback, has there been any consideration to some dividend, something like $0.10 to $0.15 a quarter. It seems like the company has the cash and it doesn’t bind them in terms of anything substantial, but it provides a nice base for a yield on a current basis.

Bill Kelly

Hi Al, this is Bill. Speaking first to the buyback, the buyback program as it was originally established last year, ended at the end of 2014 and your right with your stock at its current levels. A new program has not been put in place.

The topic of the use of our capital and our cash is a primary importance to us and of course to the Board. We have not at this point made a definitive plan for dividend, but that is not to say that that’s off the table. It’s a topic that will be taken up certainly as we move forward together with Dave and I on the Board in determining what the best use of our working capital is to maximize our return to shareholders.

Allan Lyons - Vestal Venture Capital

Okay, I appreciate that. And just a follow up question, I know you don’t give any financial guidance, but looking at your revenue numbers over the years, it seems and if you can comment on it, that you have a reasonable opportunity to meet or beat your 2006 revenue, which is around $32.5 million. Is that certainly something feasible as you see it?

Bill Kelly

Yes, I do believe it’s feasible. As you know, the third quarter is usually one of our better quarters historically. We are looking for sort of an upsurge in federal spending. We have more and more state and local opportunities.

One of the things to keep an eye on, we did announce a nice win in the end of 2013, a component of the department of Homeland Security. We secured a contract for $9.5 million with that agency. That is not an IDIQ. That’s a real contract and all we need them to do is get the funding for it. So we haven’t realized the benefit of that contact yet.

I am hopeful and we are working towards and preparing to be able to respond if funding appears and if funding is going to appear, probably it would happen between now and the end of the September, and that does not mean by and stretch of imagination that it would be all $9.5 million, but we don’t know what size it could be. That agency has been known to buy in large trenches. It’s all according to what funding they get. That contract was a four-year contract. It had to find some extensions.

But it was an important contact because we spent 10 years kind of proving the products out to this agency who is very friendly to us and a strong hold of the market leader and now we intend to kind of prove that they made a wise choice in choosing RELM products.

So there is that and then we had a nice win in the second quarter with another federal agency and that trench of $1.4 million and those raters are being deployed and we expect that relationship to continue moving forward also. That’s two recent new federal wins that’s part of our strategy, and of course we want to get a lot more of them moving forward.

Allan Lyons - Vestal Venture Capital

Okay. Well, thank you. I’ve asked my two allotted questions. I’ll go back in the queue. Thanks.

Bill Kelly

Okay.

Operator

(Operator Instructions). The next question comes from Al Shams of American Capital Partners. Please go ahead.

Al Shams - American Capital Partners

Gentlemen good morning, and Dave, congrats to you and your team on a good first half. It seems like to me that this issue with the very, very large competitor and lack of a fair playing deal is really one of the big issues facing the company. Can you speak to more specifically how you plan to address that and deal with that?

And then second question, do you think we are going to have those kind of issues when you approach the international market?

David Storey

Well, I’ll answer your second question first. Yes, we will. We do run into the same – in fact it’s probably even more difficult internationally, because we don’t have the international muffle that the market leader has. I mean they have 1,900 sales people out there, so I’m sure that its probably a little less, because they’ve been going though some consolidation also and they are becoming more focused.

I see that now that they are shrinking to more of a public safety provider, they are becoming very aggressive. So the after standard amazingly was really driven by Motorola and created by Motorola, but it is really built upon those two components of interoperability and competition.

It’s just that when you think of it – when you think of it this way, they’ve had sort of an 85-year head start on RELM. When you look at RELM and where we’ve come from, just in the very recent past we’ve made this technological investment and we entered the Trunking market and we have TDMA products and we have this very powerful value proposition, which if you are not familiar with it, please go up on our website and take a look at it. The company has got a lot of technology behind it.

But it is just within the last three years and so that means that most of the end users out there are used to the Motorola technology and they are honestly used to Motorola’s business model.

We are currently, protesting one of the agencies out there of the Department of Justice, tried to initiate a sole source, $0.5 billion contract with Motorola and we initiated a protest and then we were joined by others and other competitors in that protest to stop that, and honestly there is no legitimate reasoning behind it. So the tactics will continue. Even last year it was kind of humorous, it wasn’t so sad in the TACON contract, which is administered by the secret service.

That’s a very open contract. We’re on it, it’s an IDIQ, its $3 billion. That was a vehicle that we won, Homeland Security contract, but the secret service itself did exactly what the FBI is going to do now, sole source with Motorola. And they usually get their way and they are buying very expensive radios that are sometimes three times the expense that a RELM radio costs, the price of a RELM radio.

But that doesn’t mean – as you know Al, you’ve known us for a number of years. That is our challenge. I do believe it’s a marathon and it’s not a sprint and the key is to break off chunks of the market share and to perform really well in these wins that we have captured and the word will spread. And we do have fans out there in agencies, but most of the rank and file, feel more comfortable with the market leaders product on their hip. We have to change that dynamic.

Al Shams - American Capital Partners

Yes. One last Dave, one last follow-up question and I’ll turn it to somebody else. How do we stand in the State of Texas? Is that really kind of a bright spot for us, Harris County and other municipalities there?

David Storey

Well, Harris County is an opportunity and that’s a very good example. That county is very knitted to the Motorola. They have Motorola infrastructure, they have mostly Motorola products, that’s an opportunity for us. It is showing, it is proving difficult, because Motorola controls the entire package there, the infrastructure and components that we have to make sure that our products work on their infrastructure. We are making headway there.

I’ve always been a little disappointed in Texas, because it’s a VHF, most of the state is a VHF conventional state and it should be doing better. We have a new sales regional manager down there, whose roughly -- he’s been with us for a year and I believe he’s making headway and our VP of Sales, Tim Vitou is working with him to expand our presence there.

And also as you know, one of our other competitors, you have Johnson, they’ve had some success. So it still remains a target rich state and I’m not pleased with the level of success we’ve had there yet.

Al Shams - American Capital Partners

Okay, thank you and good luck.

David Storey

Thank you.

Operator

The next question comes from Ed Shultz (ph), a private investor. Please go ahead.

Ed Shultz - Private Investor

Yes, hi. Thank you for taking my call. Two quick questions. The first one is more of a bookkeeping question. The capitalized software, I guess that sounds just a little over $1 million at this time and you’ve been amortizing roughly $200,000 each quarter. Should we look at that, that that will essentially run off in the next five quarters or will that tail off over a longer period of time?

Bill Kelly

This is Bill Kelly. You’re looking at it correctly. It will tail off over the next two years. We have two projects that are in the capitalized software, but you’ll see the largest tail-off in the next – yes, the next five quarters. You actually hit it on the head.

The largest of those projects is in the last year, it will start in the last year, that’s amortization in the fourth quarter of this year. So you’ll start to see a tail off in the fourth quarter. It will continue during 2015 and after that the remaining project is relatively small and that will go out. That will actually take the next two and a half years to fully amortize, but the amount isn’t nearly as mature as what we’re seeing right now.

Ed Shultz - Private Investor

Okay, thank you. And then the second question I have is, could you give us a sense of what your backlog was at the end of the quarter?

David Storey

Well, we usually don’t give the backlog number out. It was healthier than the last number of years, but Ed, being an ops guy, backlog will become something to crow about when there’s enough of it to be more predictable with the results and in most companies, most companies have a larger backlog than RELM. What RELM prides itself on is the speed to which it can turn an order into a shipment revenue. So the good news, it’s growing, but I’m not quite sure exactly what the backlog number is.

Ed Shultz - Private Investor

Okay fine, that’s understandable (ph). Okay, that’s all I had for questions and once again, congratulations on a great quarter.

David Storey

Thank you very much.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Storey for any closing remarks.

David Storey

Thank you, Andrew. I would like to thank everyone for participating in today’s call. We look forward to visiting with you again when we report our third quarter 2014 results in November. Thank you and have a good day.

Operator

Again as a reminder, a replay of this call will be available one hour after the conference call through September 4, 2014. To access this replay dial 877-344-7529 or 412-317-0088 for international callers and enter the code 100-49-826 or visit RELM’s website. Thereafter the call will be archived on RELM’s website. You’ll be prompted to record your name and company when joining.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.

F

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