RF Industries, Ltd. beats earnings expectations. Reported EPS is $0.01, expectations were $-0.03.
Operator: Greetings. Welcome to RF Industries Second Quarter Fiscal 2024 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Margaret Boyce, Investor Relations at RF Industries. Margaret, you may begin.
Margaret Boyce: Thank you, Paul. Good afternoon, everyone, and welcome to RF Industries' second quarter fiscal 2024 earnings conference call. With me on today's call are RF Industries' Chief Executive Officer Rob Dawson; President and COO Ray Bibisi; and CFO Peter Yin. We issued our Q2 earnings release after market today. That release is available on our website at rfndustries.com. I'd like to remind everyone that during today's call management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements under the securities exchange laws. When used, the words anticipate, believe, expect, intend, future, and other similar expressions.
Identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance, and are subject to risks and uncertainties. Actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include the risks and uncertainties discussed in the company's reports on Form 10-K and 10-Q and other filings with the SEC. RF Industries undertakes no obligation to update or revise any forward-looking statements. Additionally, throughout the call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our GAPP and non-GAPP reporting.
With that said, I'll now turn the conference over to Rob Dawson, Chief Executive Officer. Rob?
Rob Dawson: Thank you, Margaret. Welcome to our second quarter fiscal 2024 conference call. I'm here today with Ray Bibisi, our president and COO; and Peter Yin, our CFO. I'll start with the highlights of second quarter results and our strong market opportunity. Ray will then discuss some updates in our sales organization of what we're hearing from customers. And finally, Peter will cover our financial results. Before I get started, I realized that we sold some of our own thunder when we pre-released an outlook for the second quarter a few weeks ago. While that preview will not become a normal practice, it was necessary since there was a material increase not just in order flow, but also in our backlog that we felt needed to be publicly disclosed.
We're pleased to see early signs of a recovery in our core markets. In the second quarter, we saw meaningful sequential improvement. Net sales were up 19.7% to $16.1 million. Gross profit margin improved 540 basis points to 29.9%. Our operating loss was cut dramatically and adjusted EBITDA returned to positive territory. This is the strongest indication yet that our business is on the rebound after a very challenging 2023 marked by significant cuts in telecom CapEx spending. Our results show improvement largely due to a steady reduction in operating expenses, as well as the strategic transformation of our portfolio to offer higher quality, higher value solutions. As we've talked about for several quarters, we've been positioning the company to benefit from some major market trends by working to transform our product and solution portfolio.
We believe that we're nearing an inflection point in that portfolio pivot, driving higher margins and strength in the market. Q2 is the first quarter where you can really start to see that transformation show up in our results. There was significant margin improvement driven by a better product mix. We've had the goal to return to 30% or greater in gross margins, and we effectively achieved that this quarter even with modest sales results. Additionally, with all the work the team have done on our operating expenses, we've created tremendous operating leverage in the business. To give a little more detail, this quarter our revenue reflected a greater contribution from newer product areas like small cell solutions and DAC thermal cooling products.
These increased sales contributed to an overall better performance. And while we're just getting started with these solutions, going forward we expect that the shift towards higher value products is sustainable based on recent incoming orders. For example, last month we announced several large orders totaling approximately $4 million across multiple product areas, including a $2 million win for small cell solutions from one key customer in the Tier 1 wireless carrier ecosystem. Based on these recent orders, telecom companies seem to be moving forward on upgrading their infrastructure with cost-effective and technology-forward products. We continue to be bullish on medium and long-term recovery in our markets, and if wireless CapEx continues to normalize, that would certainly have a positive impact on our overall business across the board.
That said, once you've been stuck in a trough for a while, you look for alternative ways to avoid repeating that experience. For our team, that means looking beyond our traditional markets for new opportunities to deploy our portfolio of technologically advanced products that have many applications. Fortunately, the growth of our product and solutions portfolio, both organically and through acquisitions, has greatly expanded our offer and our customer relationships. These new additions, along with our standard and custom interconnect products, have allowed us to explore new market segments outside of the wireless carrier space. We're working hard to expand our customer base in existing markets. We're also using the wins in those current markets to explore the opportunity in other market segments.
We believe that our updated solutions offering is allowing us to help solve new communications and connectivity challenges and positions us for growth in the best end markets and opportunities with less cyclical and more valuable solutions. This expanded and transformed offer aligns us to benefit from enhanced spending on some of what I'll call market mega trends. Let me walk through a few of these trends where we feel our offer is relevant. First, an obvious one, 5G and the related densification of the wireless infrastructure to fill in coverage gaps and address capacity demands. We've been at the forefront of this discussion around densification for several years. And based on our history supporting stadium and large venue build-outs, RFI has a sterling reputation for supplying many components needed for these projects.
With our integrated small cell and installation materials offer, we're primed for the expected increase of street-level coverage. Our reputation for being a reliable, easy-to-work with partner with a broad range of connectivity solutions is our calling card with the wireless carrier ecosystem. Second, with the insatiable need for data both in mobile and fixed environments and the related AI boom that we're all hearing about, we're seeing some helpful trends. Researchers have suggested that AI could also lead to a shocking amount of power consumption, up to a tenfold increase. This is not surprising based on estimates that data centers are expected to double in the next year. While we don't compete directly in the hyperscale data center space, we absolutely see that demand bleeding over into the edges of the network.
A technician assembling a custom coaxial connector from individual components.
The buildout of data centers is pushing networking equipment further to the edges of the network and into the small buildings, cabinets, and enclosures that reside there. This is where we can shine, by cooling this equipment in a cost-effective and environmentally sound way. Our DAC thermal cooling offer is seeing an increasing level of interest in several applications where we can help solve these energy needs. Next, the United States continues to have a heavy focus on providing high-speed Internet for everyone, regardless of where you live and work. The U.S. Government is spending billions of dollars to provide universal connectivity with high-speed Internet to all communities, but especially in underserved communities. Known as the Broadband Equity Access and Deployment or BEAD program, the government is providing over $42 billion to expand high-speed Internet access through infrastructure deployment and adoption programs in all 50 states and its territories.
We're developing strong relationships in these markets and are actively working to become better positioned to benefit from this major uplift in infrastructure spending. Finally, with well-known initiatives in the defense and aerospace market, along with the new frontiers that are being driven by space companies, we believe that we can see meaningful additional streams of revenue from providing innovative solutions in these markets. We're already doing business with many companies in these areas through our custom cabling segment and feel that we are in the early stages of showing our value here. And as we discussed last quarter, a large percentage of our sales already come from markets that are unrelated to the wireless carrier applications.
Plus, some of our key solutions in the wireless carrier space are aligned with operating and maintenance budgets versus CapEx spend. One example is again our DAC thermal cooling systems. These patented systems are built to stand the rigor of outdoor environments. Plus they have state-of-the-art technologies that can reduce operating expenses by up to 70% over conventional HVAC systems and can help companies achieve their green initiatives. Across many market segments, companies are now focused on updating their cooling infrastructure, which would benefit RFI by having the ability to flex between OpEx and CapEx spending. Looking ahead, we're optimistic these demand trends will continue, and we're excited to see the first real indication of what our business could look like with some wind to our back.
I want to thank the RFI team for staying focused and continuing to manage the levers that we can control, like the customer experience, our cost structure, product quality, and a positive energy level. We appreciate the support from our customers and the opportunity to partner with a terrific and expanding customer base. We remain confident that we have the right business model, the right products and solutions, and the right team to capitalize on improving momentum to deliver increased shareholder value as we move into the back half of fiscal 2024. I'll now turn it over to Ray to discuss what we're hearing from our customers. Ray? Thank you, Rob?
Ray Bibisi: Thank you, Rob. As previously mentioned, we have developed an impressive portfolio to support the connectivity and communication needs of several key markets. Our team has earned our customers' confidence as a go-to source for a broad and high-quality product portfolio, quick-turn solution, and attentive customer support. Many of our customers have communicated how they appreciate the value of our reliable partnership and our commitment to supporting them through challenging times. I applaud our teams for their customer-first mentality and their dedication to helping them with actionable solutions. As a part of our go-to-market strategy, we reorganized and strengthened our sales leadership team. John Cirincione has assumed the role of VP of Sales of Key Accounts, focus on end customer applications and business development.
We have also added Mary Beth Smith, a 20-year veteran in sales and product management within the telecommunications industry. As Vice President of North American Distribution Sales, Mary Beth will be focused on further enhancing RFI's strong reputation within the channel segment. We are already seeing benefits of this realignment by winning new orders and will continue to focus on driving further cost reductions that will contribute to margin expansion as we scale our business. Over the past months, we have achieved significant wins, while expanding our market presence and launching new initiatives. These successes highlight the effectiveness of our strategic plan to meet the evolving needs of our customers. As we move forward we remain aligned in maximizing the opportunities ahead by leveraging our strengths, exploring new markets, and continually enhancing our product offering.
We believe this focused approach will contribute to an even greater success for RFI in the future, driving growth and reinforcing our position as a leader in our industry. I will now turn it over to Peter to discuss our financials. Peter?
Peter Yin: Thank you, Ray, and good afternoon, everyone. We're pleased with our second quarter operating results and are encouraged to see new order flow increasing, which is adding to our backlog and giving us positive momentum as we enter the second-half of the fiscal year. As I discuss the financials, I'll provide comparisons on a sequential and year-over-year basis. Second quarter net sales increased 19.7% sequentially, up to $16.1 million, up from $13.5 million in the first quarter. Net sales were down compared to $22.3 million in the prior year period. Second quarter gross profit margin increased 540 basis points to 29.9% and improvement from 24.5% in the first quarter of fiscal 2024 and up from 27.4% year-over-year. The increase in gross margin was primarily the result of a more favorable product mix along with increased efficiencies from facility consolidation and cost reduction initiatives.
Operating loss was $415,000, an improvement from a loss of $2.1 million in the first quarter of 2024 and down from income of $489,000 year-over-year. During the second quarter, consolidated net loss was $4.3 million or $0.41 per diluted share, a sequential decline from a loss of $1.4 million or $0.13 per diluted share in the first quarter of fiscal 2024, and down from income of $581,000 or $0.06 per diluted share year-over-year. It's important to note here that in the current period, the consolidated net loss was driven primarily by a $3.6 million tax provision relating to evaluation allowance on our deferred tax asset balance, which is a non-cash event. Non-GAAP income was $132,000 or $0.01 per diluted share, an improvement from non-GAPP net loss of $1.4 million or $0.14 per diluted share in the first quarter of fiscal 2024 and down from non-GAAP net income of $1.2 million, or $0.11 per share year-over-year.
Second quarter adjusted EBITDA was $572,000, up from adjusted EBITDA loss of $1.1 million in the first quarter of 2024, and down from adjusted EBITDA of $1.4 million year-over-year. Moving to the balance sheet, as of April 30, 2024, we had a total of $1.4 million of cash and cash equivalents, and we had working capital of $10.9 million and a current ratio of approximately $1.6 to $1, with current assets at $30.2 million and current liabilities at $19.3 million. The line of credit we entered into in March has a term of three years and will allow up to $15 million depending on our borrowing base. However, due to the structure of the loan, the outstanding balance has been classified as a current liability. As of Q2, we had borrowed $10.5 million from the line of credit.
We believe that the amount of liquidity available to us will be sufficient to fund the anticipated operational needs of the company. Our inventory level was $16.4 million, down from $18.7 million last year. The decrease in inventory reflected our continued rationalization and bright sizing of our inventory as we continue to improve our processes and systems capabilities around the company's supply chain. Even with the reduced inventory level, we believe it supports our strategic business model of inventory availability. We continue to manage this closely as we expect to see increased demand in 2024 as spending in key markets gradually normalizes over the coming year. Moving on, we are seeing momentum build around new business. Our backlog as of April 30, 2024, was $18 million on second quarter bookings of $17.9 million.
Subsequent to Q2, we've seen an increase in order flow, which we announced in a press release. And as of today, our backlog currently stands at $20 million. As we look ahead, we believe we have positioned the company for a positive macro demand, we believe we have positioned the company for the positive macro demand trends. We are excited about our opportunity to deliver high quality solutions to our customers, while generating improving financial results for our shareholders. With that, I'll open up the call for questions.
While we acknowledge the potential of RFIL as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than NVIDIA but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
To continue reading the Q&A session, please click here.
