Ballantyne Strong, Inc. (NYSE:BTN) Q2 2017 Earnings Conference Call August 7, 2017 5:00 PM ET
Lance Schulz - Senior Vice President, Chief Financial Officer, and Treasurer
Kyle Cerminara - Chairman and Chief Executive Officer
Sean McGann - Private Investor
Good day and welcome to the Ballantyne Strong Second Quarter 2017 Conference Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded.
I would now like to turn the conference over to Mr. Lance Schulz, Chief Financial Officer at Ballantyne Strong. Please go ahead.
Good afternoon, everyone, and welcome to today's second quarter 2017 conference call. We would like to remind everyone that today's call may contain forward-looking statements related to the Company's future operating results. Except for the historical information, it may include forward-looking statements that involve risks and uncertainties, including, but not limited to, quarterly fluctuations in results, customer demand for the Company's products, the development of new technology for the markets the Company serves, domestic and international economic conditions, the management of growth and other risks detailed from time-to-time in the Company's Securities & Exchange Commission filings. Actual results may differ materially from management's expectations.
Joining us on the call today is Kyle Cerminara, Chairman and Chief Executive Officer and Ray Boegner, President of Cinema.
At this time, I would like to turn the call over to Kyle.
Hi everyone and thanks for joining us today. I'd like to take this opportunity to thank all of you that made the journey down to Fort Lauderdale, Florida for our Annual Meeting. We had a great turnout, we believe the best in the history Ballantyne Strong. We plan on making these events well worth your time and we encourage you all to attend next year if possible.
I'd also like to welcome Lance Schulz to Ballantyne Strong, Lance joined us in late March as our new Chief Financial Officer, Lance spent over 15 years at TD Ameritrade and we're very excited to have him on the team.
It's been approximately two years since the new board became responsible for the oversight of Ballantyne Strong and set a new overall strategy for the company. Every decision we've made since then has been motivated by our desire to increase value for our company’s shareholders with Fundamental Global’s investment partnerships being the largest shareholders of the company. We're continuing the strategic review that began in mid-2015 to position the company in the most ideal mix of businesses to create long term shareholder value. Our objective continues to be to build a high performing holding company with a diverse mix of businesses that contribute to the overall cash flow of the company.
Similar to nearly all corporate turnarounds, their investments required to achieve the best outcomes for shareholders, and there are consequences for less optimal decisions of the past. We're continuing to see our investments to position Ballantyne Strong to be a much larger company in the coming years. We believe these investments are necessary to achieve the desired results of larger and highly profitable company.
We're also optimistic about the investments we've made to date. We'll adjust our spending and investment strategy if we do not see the desired results within a reasonable amount of time. We also change our mix of businesses to achieve the ideal balance between growth and profitability. I'd like to take a few minutes to review our second quarter earnings and discuss items that disproportionately impacted the quarter.
Loss from operations in the second quarter was $0.8 million compared with income from operations of $2 million in the same period the prior year. Our second quarter was negatively impacted by bad debt expense of approximately $400,000 from a customer in our Digital Media business that predated our current Digital Media management team. We also had an increase of approximately $400,000 of audit and legal expenses in the second quarter primarily due to the 2016 restatement and material weakness remediation efforts.
Finally, we had an increase of approximately $400,000 in consulting and software licensing expenses in the second quarter, primarily due to the implementation of our new CRM and ERP information systems.
Our total net revenues in the second quarter were $19.4 million compared with $20.6 million in the same period of last year. Our Cinema segment generated revenue of $9.6 million in the second quarter compared with $11.3 million in the prior year. This decrease was driven by decreased sales of projectors, digital parts, and warranties, partially offset by a slight increase in screen sales. We expect Cinema revenue to further decrease as we terminate our distributorship for certain cinema lamp products in July 2017 due to very low margins earned on these products.
The lamp products were expected to generate approximately $3 million in revenue during the second half of 2017, but were not expected to be material to gross profit or the overall profitability of the company. In fact, we believe that by eliminating these products, we will be able to improve the profitability of the company by focusing our time and resources on more productive activities.
Revenue from the Digital Media segment was $9.8 million in the second quarter, which was essentially flat from prior years, increase in sales of digital signage equipment and installation services were offset by decreases in service contract revenue.
Gross profit was $5.3 million compared with $6.1 million in the prior year. Gross profit as a percentage of revenue was 27.2% in the second quarter compared with 29.9% in the same period of the prior year.
Selling and administrative expenses were $6.1 million in the second quarter of 2017 compared to $4.2 million in same period of the prior year. Our selling expense in the second quarter of 2017 increased to $1.4 million from $1.1 million in the same period the prior year. Our administrative expenses of $4.7 million in the second quarter increased in comparison to $3 million in the same period of the prior year.
This increase was driven as I discussed before by $0.4 million increase in consulting and software licensing costs associated with our CRM and ERP system implementation, $0.4 million in bad debt expense, $0.4 million in audit and legal expenses primarily related to the restatement of our 2016 financial statements and our internal control remediation efforts, and then an additional $0.3 million in employee related costs.
We had to make a rather large investment in our corporate infrastructure. As we've discussed in the past, we're currently in the process of implementing a new cloud based CRM, ERP and CPM. These new systems will give us the tools we need to improve our forecasting capabilities and will enable us to make significant improvements in our operating efficiencies and scalability of our operations. This investment also enables us to reduce the need for future capital expenditure requirements that reduces our exposure to traditional system obsolescence.
We're prioritizing efforts around new business and investment opportunities that we can be positioned to grow the company in the future. We've made investments for both our Cinema and Digital Media segments, one of the larger investments that we made in our Cinema segment is for the expansion of our factory at Strong/MDI in Canada. This expansion will increase our structure and specialty screen fabrication capabilities, the expansion will also immediately enable us to realize new operating efficiencies as we've previously been limited by the constraints of the space we had.
In addition to the factory expansion, we've begun investing more heavily in research and development and we'll continue to do so over the next several quarters. This investment includes the purchase of additional equipment and hiring additional resources. These investments in R&D are critical to our abilities to develop world class laser screen capabilities and therefore paramount to our growth strategy for the business.
In the Digital Media segment, we've made sizable investments particularly over the past few quarters, we're investing in several strategic areas within this business. First, we've added new sales positions to position the company for growth. We've made investments in product development and technology, and we’ve restructured our marketing spend to ensure we're getting the highest return for investments.
We expect that together all of these things will enable our sales team to continue to build our strong sales pipeline, another exciting area we've been investing in is the development of our new proprietary software platform for our Digital Media business. This proprietary software platform, called Fusion DX, once fully developed will create an efficient, highly scalable, and standardized platform to service our customers and deliver measurable value. We expect it will enable us to improve our margins, provide improved scalability, and allow us to innovatively differentiate our offering.
We previously told you about our new Digital Media product offering and digital signage as a service or DSaaS, which is the industry's first fully managed digital signage offering. It allows our customers to skip the traditional capital outlay associated with the digital signage implementation and shift those costs into their operating budget. It also simplifies what have traditionally been complex technology choices, our customers don't have to worry about choosing the right vendors and complicated integration efforts usually associated with digital signage programs. Our DSaaS offering is an end to end approach that includes everything our customers need all for a simple monthly price.
At the end of June, we announced a new master equipment lease agreement for the purchase of leasing taxicab vehicle tops displays that we intend to use to provide digital signage as a service to our customer beginning in the third quarter. We are excited about this new customer agreement and we expect it to begin adding to our profitability later in 2017. There are also other significant sales opportunities that we are working to close over the next coming months in our Digital Media business.
Our closely held ownership has increased over 37% of our outstanding shares versus approximately 31% a year ago. I expect that this trend will continue in the quarters and years ahead. As I’ve said in the past, I truly value the ownership culture that we've created in this company, and I believe the culture is evidence of the very strong alignment between the interest of the leadership of the company and our shareholders.
Next, I'd like to take some time to ground everyone again on the strategies we've been working against. Many of you know that over the course of the last several quarters, we've significantly reshaped and redefined the strategy of the company. The roots of strategy center on making the most optimal capital allocation decisions across our portfolio of businesses, investments, and new opportunities. As I’ve said before, this new strategy is paramount to our vision for this company and future success. We believe that centering ourselves in every decision we make on this strategy will enable us to generate significant value for our shareholders over the long term.
I’ve said this in the past when we talked about our strategy update, it's important to reiterate again, when we speak about our strategy in the long term, we're talking in terms of many years rather than a few months or quarters. We've continued to invest in both our Cinema and Digital Media divisions over the past quarters as I mentioned earlier. We've also continued to make investments beyond our existing businesses and other industries where we see opportunities to generate high returns. These investments may include equity positions and public companies or complete acquisitions of other companies. The key to these investments is that we're able to generate high returns on invested capital while minimizing risk.
Before we close today, I want to highlight again for you as I do each quarter some critical pieces to our plan going forward. First, we'll continue to evaluate cost savings and investment opportunities within our existing businesses. Next, we'll continue seeking out and creating new investment opportunities beyond our existing business. We also continue to drive our new culture of zero complacency, ownership, and accountability in all aspects of the business.
And lastly, we'll continue hiring and pushing to retain the best people and driving our team to incorporate long-term thinking in each and every decision we make.
In closing, we have a great deal of opportunities ahead, and I look forward to continuing the update on our progress and growth over the coming quarters and years.
That concludes our presentation for our second quarter, and we'll now open the lines to answer questions. Operator, please open the line.
[Operator Instructions] The first question comes from Sean McGann, who is a private investor. Please go ahead.
Hi good afternoon. I was wondering if you could provide any information on the issuance of the long term debt that you referenced in your press release.
Yes, sure. We have a building down in offer at Georgia that houses are convergent media business, part of our Digital Media operations, and we took effectively a $2.5 million, a $2 million fixed mortgage on that with another $1 million line of credit, which I believe we've used about $0.5 million of that.
Okay, thank you.
[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Kyle Cerminara for any closing remarks.
Again thank you all for joining us on the call this afternoon. We appreciate the support of our shareholders for the work we're doing. We continue to be very committed to achieving our ultimate vision for the company and generating real value for our shareholders. We are on our way and we've made a lot of progress since we started in 2015, but we know and we knew when we set out on this process that the transformation of this company will take time. We'll continue to be relentless in our mission to build Ballantyne into a highly profitable holding company. We appreciate your time today and we look forward to talking to you again in the future. If you at any time have questions please reach out to us and we'd love to answer them.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.