Q2 2024 Earnings: Archrock, Energy Recovery, and A10 Networks Navigate Market Challenges

Earnings call: Archrock reports a substancial increase in net income reaching $34 million By Investing.com

Archrock Inc. (NYSE: NYSE:AROC), a leading provider of contract compression services, has reported a substantial increase in net income for the second quarter of 2024, reaching $34 million, up from $25 million in the same quarter of the previous year. The company's adjusted EBITDA also rose by 15% to $130 million. In a strategic move, Archrock announced the acquisition of TOPS, a similar contract compression company, for $983 million, a deal expected to close by year-end. This acquisition is anticipated to bolster Archrock's market position and enhance earnings and dividends. Despite slight cooling in dry gas plays, the company's majority presence in liquids-rich areas, particularly the Permian, and its pricing power are expected to continue driving positive business performance. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights In summary, Archrock's second quarter of 2024 has been marked by strong financial performance and strategic growth through the acquisition of TOPS. The company's leverage ratio and unchanged earnings forecast reflect a stable financial environment. With its strategic positioning in liquids-rich areas and control over pricing, Archrock is poised to continue its trajectory of robust business performance and shareholder value creation. InvestingPro Insights Archrock Inc. (NYSE: AROC) has demonstrated a strong financial performance in the second quarter of 2024, with notable increases in net income and adjusted EBITDA. InvestingPro data and tips provide additional context to the company's current valuation and future prospects: InvestingPro Data indicates that Archrock's market capitalization stands at $3.51 billion, with a P/E ratio of 23.57, reflecting investor confidence in the company's earnings potential. Furthermore, the company's revenue for the last twelve months as of Q1 2024 was reported at $1.03 billion, showing a robust growth of 17.17%. The gross profit margin for the same period was high at 56.43%, indicating strong operational efficiency. In line with the company's strategic growth, two InvestingPro Tips highlight Archrock's investment appeal: 1. Archrock is trading at a low P/E ratio relative to near-term earnings growth, suggesting that the stock may be undervalued given its growth potential. 2. The company has maintained dividend payments for 11 consecutive years, demonstrating its commitment to returning value to shareholders. InvestingPro offers additional insights on Archrock, with 5 more tips available that further elucidate the company's financial health and investment potential. These tips can be accessed through the dedicated Archrock page on InvestingPro: https://www.investing.com/pro/AROC. The strategic acquisition of TOPS and the company's strong positioning in liquid-rich areas are expected to bolster Archrock's market presence and enhance earnings, aligning with the InvestingPro Tip that analysts predict the company will be profitable this year. Moreover, the company's history of dividend payments and its impressive return over the last year reinforce its appeal to income-focused investors. Full transcript - Exterran (NYSE:EXTN) Holdings Inc (AROC) Q2 2024: Operator: Good morning. Welcome to the Archrock Second Quarter 2024 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Rapine. You may begin. Megan Repine: Thank you, JL. Hello, everyone, and thanks for joining us on today's call. With me today are Bradley Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the second quarter of 2024. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock's management team. Although management believes that, the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that, such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted gross margin, adjusted gross margin percentage, free cash flow, free cash flow after dividend and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's second quarter results and to provide an update of our business. Bradley Childers: Thank you, Megan, and good morning, everyone. Archrock's second quarter performance reflects the earnings power we've built through our investment in high-quality assets, exceptional customer service, and efficient execution. The long-term and year-over-year strength and durability we see in our overall performance and as reflected in our second quarter results is also supported by the affordability and abundance of U.S. natural gas, which will continue to fuel growth in its demand, use and production. This strong performance as well as the strength and durability are both further bolstered structurally by the continued capital discipline being employed across the energy sector. Now with that backdrop, let me start today's call with a summary of key highlights from the second quarter. Our net income of $34 million was up from $25 million in the second quarter of 2023. Adjusted EBITDA of $130 million was up 15% versus the prior year period. The increase was driven primarily by higher pricing, combined with a sharp focus on cost management leading to strong profitability. We maintained our sector-leading financial position including a leverage ratio of 3.2x. We continue to deliver meaningful returns to our shareholders. Our quarterly dividend per share was up 6%, compared to a year ago, all while maintaining robust dividend coverage of 2.6x for the quarter. This was a great quarter for Archrock, thanks to a fantastic team of dedicated employees, who work hard every day to deliver safe and excellent service to our customers and attractive returns to our shareholders. Now with the acquisition of TOPS that we announced last week, we will further enhance our position as the premier contract compression services company in the U.S. and I'll expand on that in a bit. Turning to Archrock operations. Market conditions for compression remain highly constructive, predominantly in oil plays with associated gas production like the Permian Basin. The robust market is reflected in our second quarter contract operations operating and financial results. Our fleet remained fully-utilized with utilization exiting the quarter at a rate of 95%. Booking (NASDAQ:BKNG) activity increased sequentially, as we continue to build an order book into 2025. We expect to see sustained compression booking demand well into the future, as our customers plan for the call on natural gas production to support LNG export capacity growth and incremental electric generation demand from AI and data centers. On pricing, with utilization at historic highs and continued strong booking activity, we're maintaining the pricing prerogative and capturing additional rate increments. The second quarter marks our 11th consecutive quarter of sequential increases in our monthly revenue per horsepower, which increased to $20.85. Continued price increases and strong cost control drove adjusted gross margin percentage to 65%, up 300 basis points year-over-year and consistent with the prior quarter. The Aftermarket Service segment had another solid quarter. Revenues totaled $45 million remained elevated as great service is driving repeat business with customers. Second quarter adjusted gross margin of 22% exceeded our full year guidance expectation, as we continue to focus on high-quality and high-margin work. From our first rate customer base to our highly-standardized fleet and excellent customer service, we are known for in the field to our most recent digitization and emission reduction efforts. The actions we've taken to enhance our business should benefit our performance for years to come. The acquisition of TOPS aligns with this strategic focus and is an exceptional opportunity to expand our contract compression operations, earnings and cash available for dividend. With TOPS, we're adding 580,000 horsepower of young assets, including approximately 500,000 operating horsepower and a substantial and contracted backlog of new equipment. As we've previously discussed, this strategic and immediately-accretive acquisition carries four main benefits. First, the acquisition of high-quality assets with contracted cash flows, adds meaningful low risk growth. The TOPS fleet has an average age of three years, is 95% utilized and backed by fee-based contracts with blue chip customers. Second, the acquisition enhances our scale and complements our existing Permian Basin compression capacity. The addition of TOPS is expected to increase Archrock's Permian Basin compression capacity by 30% to approximately 2.2 million operating horsepower. Third, this acquisition accelerates the growth of our electric motor drive fleet and augments our internal electrical expertise. TOPS is the leading provider of electric motor drive compression. With this acquisition, we expect our electric compression fleet to increase to 648,000 horsepower or 15% of our pro forma fleet. And fourth, this transaction is consistent with our financial and capital allocation priorities, and we expect it will facilitate the accelerated return of capital to shareholders. We're buying a rapidly-growing business with a substantial and contracted backlog. We expect the acquisition to be more than 10% accretive to earnings per share and at least 20% accretive to cash available for dividend per share in 2025. TOPS has both high caliber equipment and a talented team that we're excited to welcome at Archrock. The transaction is expected to close by the end of 2024 and we're confident in our ability to effectively integrate the acquired assets into our existing business. In summary, with today's robust market of growing natural gas production and compression demand, one of our top priorities has been investing in high-quality and high return compression assets. Equally as important, we've been funding these investments within our cash flow, so that we've been able to deliver on our commitments to increasing cash returns to investors, while maintaining a strong balance sheet. The acquisition of TOPS aligns with this strategic focus and is an exciting milestone for Archrock that builds on the meaningful progress we've made, orienting our business for the future and for long term success. With that, I'd like to turn the call over to Doug for a review of our second quarter performance, 2024 standalone guidance and financing strategy for the TOPS acquisition. Douglas Aron: Thanks, Brad, and good morning, everyone. Archrock delivered another strong quarter of financial results. Net income for the second quarter of 2024 was $34 million. This included a non-cash $4.4 million long-lived and other asset impairment, as well as transaction related expenses of approximately $1.8 million. We reported adjusted EBITDA of $130 million for the second quarter 2024. Underlying business performance was strong in the second quarter, as we delivered higher total adjusted gross margin on a sequential basis. For the second quarter, growth capital expenditures totaled $62 million, bringing year to date growth CapEx to $140 million. We expect our 2024 growth capital will be first half weighted. Maintenance and other CapEx for the second quarter of 2024 was $29 million, bringing the total for the first half of 2024 to $51 million. Turning to the balance sheet. We exited the quarter with long-term debt of $1.6 billion. Our leverage ratio at the end of the quarter was 3.2x, calculated as total debt divided by our trailing 12 month adjusted EBITDA. As Brad mentioned earlier, we are acquiring TOPS for total consideration of $983 million, which will be funded with a combination of $826 million in cash and 6.87 million newly issued common Archrock shares to the seller. Archrock intends to fund the $826 million cash portion of the total consideration with a combination of equity and debt. On the equity portion, last week, we announced the pricing of a common stock offering, raising net proceeds of $256 million at an offering price of $21 per share. The funding structure keeps us on track to achieve our financial targets, including maintaining a consistent leverage ratio of between 3x and 3.5x. Post-transaction announcement and equity raise, all three rating agencies reaffirmed their Archrock credit ratings and outlook. The strong financial flexibility, I just described continued to support increased capital returns to our shareholders. We've recently declared a second quarter dividend of $0.165 per share or $0.66 on an annualized basis. This is consistent with the first quarter of 2024 dividend level and up 6% versus the year ago period. Cash available for dividend for the second quarter of 2024 totaled $72 million leading to an impressive quarterly dividend coverage of 2.6x. Importantly, we believe, the increase in pro forma discretionary cash flow from the addition of TOPS will further enhance our financial flexibility and capacity to increase dividends to our shareholders over time. As you saw in our earnings release issued yesterday, Archrock reaffirmed its full year 2024 annual EBITDA and capital expenditure guidance. Our guidance excludes the pending acquisition of TOPS. We plan to announce our expectations for the combined company once the transaction closes by the end of 2024. Excluding TOPS, our 2024 adjusted EBITDA is expected to range from $510 million to $540 million, which represents an increase of 17%, compared to $450 million in 2023. 2024 growth CapEx is expected to total approximately $190 million. This is flat compared to the growth CapEx of $190 million in 2023. Our full year '24 maintenance CapEx forecast of $80 million to $85 million and other CapEx forecast of $20 million to $25 million both remain unchanged. In closing, the market remains as strong as we've ever seen it and Archrock is in the strongest position in the company's 70 year history. We have an opportunities-rich market and expect to invest in high return opportunities, profitably grow our business, while prioritizing and growing shareholder returns and maintaining an industry-leading balance sheet. We are excited to welcome the TOPS team, and we look forward to building an even stronger Archrock together for the benefit of our employees, our customers and our investors. JL, with that, we are now ready to open the line for questions. Operator: Thank you. [Operator Instructions] Your first question comes from the line of James Rollyson of Raymond James. Your line is open. James Rollyson: Good morning. Brad, year-to-date, you've obviously spent well more than half of your growth CapEx, which implies a softer second half on that front. Just curious, your horsepower totals haven't moved that much in the active category so far. I know you've also realized some proceeds from selling some stuff still, but maybe just a little color on kind of fleet dynamics like how much horsepower you've delivered? How much has been put in the field? How much have you sold? Just kind of some color on that if you don't mind. Bradley Childers: Thanks, Jim. On the overall position of the horsepower in the business, we're super excited to just maintain the 95% utilization rate that we've achieved. One of the impacts of that is you can imagine, it does mean that, we've put to work a ton of the idle fleet horsepower that we previously had maintaining it at a high rate. That also means, there's less horsepower in the fleet to go back to work. The trade-off is, we get to book less of that, but it's because it's active, working and highly profitable. That's one dynamic that you're seeing on the relatively flat horsepower quarter-over-quarter. The second thing we'll note is that, the market has definitely cooled a bit as we've seen a little bit of give back in some of the dry gas plays. Fortunately, as you can see in the numbers, it's completely immaterial into our overall fleet position as the vast bulk of our horsepower is going to work in the liquids-rich place, 60% of it goes to work in the Permian on a bookings basis right now. Those are a couple of the dynamics we've seen, in what I think is a relatively flat period of time. Finally on a really good news front, bookings has continued to remain robust. Even though the horsepower activity itself is a little bit flattish for us in this current period, what 2025 offers is still a very robust bookings set from our customers, as they prepare for future natural gas production growth starting in 2025 as LNG projects come online. That's a lot of what you're seeing. Finally, I'd point out that actually you're right the CapEx budget for the year 2024 was definitely front end loaded. James Rollyson: Yes. I appreciate that color. Just kind of since you brought up the new-build part of that equation or new orders, just maybe kind of a status update on what lead times look like today and another thing that's been helping in addition to the tight market drive pricing is just the fact that, the cost of equipment has gone up and maybe just some color on kind of what inflation has been there, is that starting to level off, et cetera? Bradley Childers: Actually, on the easy stuff, lead times are in the 40 weeks, plus or minus depending upon the category equipment. But we would describe it as a very normalized market. Inflation has returned to more historic levels. That is for equipment coming into the system in the 3% to 5% range on a per item increase basis. That's our expectation. That's the easy stuff to point out. What we also see then is just robust bookings continuing going forward with that. What's exciting about the market today though is that, it's not about lead times, it's constraining the market. Equipment costs are definitely up and that means the price of bets has gotten bigger and further reinforced a lot of discipline in the market. Capital still remains at elevated levels. That cost has enforced discipline in the market. But, what all of this goes to is the thing we think is really driving a lot of discipline in the market is the investors demand and focus on free cash flow generation, strong balance sheets and continued growth in returns to investors. That level of discipline means that, no one's going to borrow expensive money to place expensive bets without the security of a commitment and a booking with a contract in place with a customer already. That's what's really driving the market. We think it's about capital discipline. We don't think it's about supply chain constraints. Operator: Your next question comes from the line of Steve Ferazani of Sidoti. Your line is open. Steve Ferazani: Good morning, Brad and Doug. Appreciate all the detail on the call. Obviously, impressive continued growth on the revenue per horsepower. Just trying to get a sense now, are we getting closer to spot? Is there still a lot of room to go, as you reset pricing on previous contracts and with the new capacity coming online? Bradley Childers: At these levels of high utilization, we still believe we have pricing prerogative. Spot pricing remains elevated, compared to where the entire fleet is and we will continue to opportunistically bring the fleet up to market pricing as our contracts permit us to do so over time. On the good news front, when we evaluate our ability to either increase pricing, because the contract is eligible for it, because it has a renegotiation in it, or it has an automatic price increase in it, or we have the ability to drive pricing under the contract terms, we estimate that over the next 18 months we'll still be able to eligible to increase pricing on 80% to 90% of the horsepower in the fleet. Over time, we expect to continue to work on bringing that gap, narrowing that gap. Steve Ferazani: Excellent. You talked about, you have less idle capacity to bring back. The only number that surprised me on the quarter was the higher maintenance CapEx yet. Your guidance didn't changed, which implies, this is by far the highest quarter. Usually, that's because of higher make ready. Is that what happened? Did you just happen to have more idle capacity coming back this quarter? Or, was there something else in that higher maintenance CapEx? Douglas Aron: No, Steve, I definitely would not read anything into that. I think we had some parts expense, some timing in the quarter, some of that can vary just depending on when the work gets done. As you said, we think our current guidance is absolutely good, and I wouldn't read into anything beyond that. Steve Ferazani: Last one for me just on the continued strength with the aftermarket business. Is this a new reasonable run rate for your aftermarket? Can you maintain these above 20% margins? What's your outlook? Any changes? Douglas Aron: With the market as tight as it is, not just in contract operations, but also in the fleets of our customers, our customers are very focused on maintaining their horsepower candidly better than they have in the past. There's less idle capacity. That's driving a lot of really good service activity, which is higher margin and higher profit work to our truck. Our team is doing an excellent job with, both capturing it and executing on it. I believe that as the market remains at these elevated levels of utilization that translates into strength and continued profitability both on the revenue line as well as in the profit, we can obtain in our aftermarket service business. Operator: Your next question comes from the line of Selman Akyol of Stifel. Your line is open. Selman Akyol: Thank you. I wanted to follow-up on a couple of comments. In your prepared remarks, I think you talked about the market is cooled, some give back in dry gas plays, and you're repositioning those assets into liquid plays. Can you maybe quantify how long that takes and how much horsepower are we looking at and should we see some sort of bump from redeploying those assets in the third or fourth quarter? Bradley Childers: Thanks, Akyol. We should not expect to see a bump. You should not expect to see any real impact to the redeployment of those assets. What I was suggesting, however, is that with the small amount of horsepower in the dry gas plays that was reduced in the quarter, and we're talking about a fractional percentage of our fleet. It still has an impact in marginal growth at a period of time, when equipment is not going back to work as aggressively in 2024, as it did in 2023. I don't think you should expect to see any negative impact on that at all, other than that equipment will go back to work probably in some of the dry gas plays, some of it will be redeployed elsewhere over time. It's so marginal that it will not be transparent from a financial perspective or from a cost perspective is what I really should say. Selman Akyol: Just following up sort of on the last questioning in terms about getting closer to spot. I think you said, over the next 18 months, you get price increases on 80% to 90% of the eligible fleet. I was wondering, if I could push you and just ask how much of the fleet is eligible over the next 18 months to be repriced? Bradley Childers: That was the number between 80% and 90% of the fleet should be eligible for repricing in that period of time. Operator: There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks. Bradley Childers: Great. Thank you everyone for participating in our Q2 review call. Archrock's underlying business performance is outstanding and we're excited about the top scale, which we believe will create substantial shareholder value. I look forward to updating you on our progress in the future. Thanks everyone. Operator: This concludes today's conference call. You may now disconnect.

Energy Recovery, Inc. (ERII) Q2 2024 Earnings Call Transcript

Energy Recovery, Inc. (NASDAQ:ERII) Q2 2024 Earnings Conference Call July 31, 2024 5:00 PM ET Company Participants James Siccardi - VP, Investor Relations David Moon - President & CEO Conference Call Participants Pavel Molchanov - Raymond James Ryan Pfingst - B. Riley Securities Jason Bandel - Evercore ISI Operator Greetings, and welcome to the Energy Recovery 2Q '24 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, James Siccardi, Vice President of Investor Relations. James Siccardi Hello, everyone, and welcome to Energy Recovery's 2024 Second Quarter Earnings Conference Call. My name is Jim Siccardi, Vice President of Investor Relations at Energy Recovery. I'm here today with our President and Chief Executive Officer, David Moon; and Brandon Young, our Controller and Interim Chief Accounting Officer. During today's call, we may make projections and other forward-looking statements under the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995 regarding future events or the future financial performance of the company. These statements may discuss our business, economic and market outlook, growth expectations, new products and their performance, cost structure and business strategy. Forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates or projections. Forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. We refer you to documents the company files from time to time with the SEC, specifically the company's Form 10-K and Form 10-Q. These documents identify important factors that could cause actual results to differ materially from those contained in our projections or forward-looking statements. All statements made during this call are made only as of today, July 31, 2024, and the company expressly disclaims any intent or obligation to update any forward-looking statements made during this call to reflect subsequent events or circumstances, unless otherwise required by law. At this point, I will turn the call over to our Chief Executive Officer and President, David Moon. David Moon Thanks, Jim, and thank you all for joining us today. I'm joined today by Brandon Young, our Controller and Interim Chief Accounting Officer. Brandon has been an integral part of our financial leadership team for many years. Before I get into the second quarter results, I want to update you on our CFO search and our strategic planning process or what we call Playbook process. First, I want to call your attention to the press release that went out earlier today regarding our new Chief Financial Officer. I'm pleased to announce that Michael Mancini will become our new CFO effective August 5. Michael brings experience leading high-growth engineering and technology-focused start-up companies, 2 of which he served as CFO. He has extensive financial, operational and capital markets experience from a diverse career, including banking, private equity and hedge funds. Michael's experience will serve us well as we expand into the new Wastewater and CO2 markets and work to further strengthen our relationships with our shareholders. Regarding our Playbook process, we have moved from the "Where to Play" phase to the "How to Play" phase. This "How to Play" phase will include critical milestones and financial targets that will form the foundation for how we communicate our progress with all of you in the years to come. While we still intend to share a high-level summary of our Playbook during the third quarter earnings call, I've decided that a more appropriate form would be to host a webinar in the fourth quarter to share the details. We will be providing the details for this webinar by the end of the third quarter. Now let us move to the second quarter update. Beginning with Water. We are maintaining revenue guidance of $140 million to $150 million for the year. There are 4 reasons why I remain confident in this guidance. First, we achieved second quarter Water revenue of $26.9 million, which was $6.4 million better than the same quarter last year, thanks in large part to strong Megaproject and OEM performance in MEA in Europe. There were several shipments worth noting that we've discussed in previous calls. We are pleased to report that we completed shipment of the Perur project in Chennai, India. As a reminder, this was the project that slipped out of December last year. As is the case with large-scale infrastructure projects, there are execution risks that are out of our control that could cause delays. It is important to note that while our position remains strong in the mega project space, we are not immune to these risks. We delivered the first shipment in the second quarter worth $4.2 million, and the second shipment this month worth $4.1 million. Once constructed, this will be the largest desalination plant in India, delivering 400,000 cubic meters per day. We also shipped the first phase of 3 phases: the Hassyan IPP project in Dubai, UAE worth $5.2 million. Once constructed this 820,000 cubic meter per day plant will be the largest desalination plant in Dubai. This serves as another example of large-scale project slippage. In this case, the project was retendered and timing was adjusted, but our position to execute this project remains strong throughout the entire process. We expect the remaining 2 phases to ship within this calendar year. Second, we announced in July the signing of $15 million in contracts to supply Pressure Exchangers to several SWRO desalination plants in India, which included the Perur project. The remaining 4 projects are expected to ship in 2024. All together, these plants will provide over 670,000 cubic meters of clean drinking water to communities in India each day. As one of the most water-stressed countries in the world, India continues to invest in desalination projects to supplement its fresh water supply. We continue to observe a growing divergence between the world's fresh water supply and demand, and this trend can be observed in countries like India, where it's home to 18% of the world's population but only has 4% of the world's freshwater resources. Third, our current 2024 total revenue, which includes revenue recognized in the first half of the year and signed projects under contract yet to be delivered, totals approximately $107 million or 74% of the midpoint of our guided range for the year. This compares to roughly $118 million or 89% of the guided range at the same time in 2023. This reflects a 9% decrease year-over-year. The decrease is driven by the timing of the closure of several large-scale project contracts. We currently have approximately $25 million of mega project draft contracts that we are anticipating finalizing over the next several weeks that we plan to deliver this year. Our strong performance of contracted activity and the draft contracts under finalization underpins our confidence in reaffirming our guidance for this year. And fourth, our Wastewater pipeline continues to grow, and we've increased our signed wastewater contracts by almost 5% as compared to last year at this time. As predicted, we had a slow start to the year, primarily driven by the economic conditions in China. We are monitoring the situation closely, but have already seen an uptick in bid activity and plan to have a very active second half of the year in this sector. Based on current projected delivery schedules, we expect that 35% of the second half water revenue will fall into Q3 and 65% in Q4. This would put the third quarter water revenue at $35 million to $39 million in the fourth quarter at $66 million to $72 million. Now let's move to our CO2 business. As I stated during our last call after the successful completion of lab testing, our second-generation PX G in the second quarter. Our first gate for 2024, we have now moved towards our second gate, which is the installation of 30 to 50 sites by the end of Q4 2024. We planned to have 10 of these sites installed by the end of August to capture critical summer data that would then form the foundation for a white paper we will publish in the fourth quarter. I am pleased to report that we now have 9 second-generation PX G sites operating in the U.S. and Europe as of July 15 with the 10th site to start up in August. Additionally, we have contracted with a highly respected third-party engineering firm, DC engineering, to measure and verify energy savings provided by our second-generation PX G at 6 of the 10 sites. They will also assist us in the white paper development. These 6 sites are in California, which are Vallarta and Grocery Outlet; Ohio, which is Kroger; Belgium, which is Delhaize; and Spain, which is ELDA Foods. The site in Spain will be a large food processing plant. DC Engineering is an industry leader in commercial and industrial refrigeration design, management and compliance services. In fact, many of their engineers have worked for large retailers. In such a conservative industry as food retail, third-party verification of a new technology is paramount. In fact, if you have faith in your technology as we do, you will proactively engage a respected third-party or university to independently verify your claims in a field setting. This is exactly what we are doing with DC Engineering. The last time I worked with them was on a new ammonia carbon dioxide cascade refrigeration system for a supermarket chain in the Southeast. In fact, our results were so well received. We and our supermarket customer were awarded the EPA's Greenchill Platinum certification for environmentally advanced refrigeration systems. Such an exercise becomes table stakes when sitting in front of end users. With DC Engineering's assistance, our white paper will become the catalyst for our OEM partners and us to accelerate PX G adoption with the end users. DC Engineering is currently in the measuring phase. Additionally, our OEM partners, Hillphoenix and Epta, will be collecting data on our behalf at 2 of the 10 sites located in Canada, which is Loblaws and Hungary, which is Auchan, respectively. We will be collecting data at the remaining 2 sites. And finally, we have 40 sites in our pipeline for 2024, including the 9 sites already operating. Now let's move to the financial update. Our gross margin rebounded from the first quarter of the year with the second quarter coming in at approximately 65%. Our gross margin expectation for the third quarter is 62% to 64% as we continue to manage Q400 ramp-up production challenges. We are confident we will have most of these challenges, which are largely material handling in nature behind us by the end of the third quarter, including adding additional Q400 capacity by the end of the year. We had expected the Q4 under would only comprise about 25% of our water PX demand for 2024, but have been pleasantly surprised that it's trending towards 50% for the year. Our full year gross margin guidance remains at 64% to 67%. Our operating expenses increased 21% over the second quarter of last year, primarily due to onetime expenses. Now as mentioned last quarter and as expected, we continue to experience onetime costs associated with the work in support of our long-term growth strategy, our Playbook as well as some executive transition costs. The combined impact of these onetime expenses totaled $4 million in the second quarter. To recap onetime cost and operating expense to date, we incurred $800,000 in the first quarter and $4 million in the second quarter. The second quarter breakdown is as follows: $2.6 million for Playbook consulting and $1.4 million for recruiting and executive transition cost. We are maintaining our operating expense guidance for the year of $78 million to $80 million, which includes the estimated $7 million in onetime costs. We expect operating expense to come in at $21 million to $22 million for the third quarter. Of the remaining approximately $2.2 million of onetime costs, we expect 75% to be spent in the third quarter and 25% in the fourth quarter. As a result of these onetime items, we experienced a small net income loss in the quarter, though with a large sequential improvement from the previous quarter and putting us very close to breakeven. We are on track to moving to positive operating income as the remainder of the year progresses. And lastly, we continue to grow cash in the second quarter, increasing our cash and investment position in the second quarter from $129 million to $138 million. We currently expect to end the year between $140 million and $150 million. So to sum up, we delivered a strong quarter supported by a growing backlog, which gives us confidence in our full year revenue guidance of $140 million to $150 million. We anticipate our Wastewater business to generate $12 million to $15 million in revenue. We expect to have 30 to 50 sites with our PX second-generation PX G installed by the end of the year. And we are maintaining our gross margin guidance of 64% to 67% and operating expense to $78 million to $80 million. With that, now let's move to Q&A. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from the line of Pavel Molchanov with Raymond James. Pavel Molchanov Probably start with the Playbook. I know you do not want to -- kind of front run the specific targets that you will unveil towards the end of the year. But just conceptually, will you provide kind of revenue, earnings, any other metrics? And will it be by product line? David Moon Pavel, this is David Moon. Nice to hear your voice today. So the guidance that will -- so we'll break out, as I said on -- just a few minutes ago, we're going to break out the release of the Playbook into -- we'll have -- we'll provide the '25 and '26 revenue guidance as part of the earnings call for Q3, maybe a few milestones, but it will be pretty high level. And then when we when we get to the actual webinar that we'll have later in Q4, we'll provide more detail around not only years in terms of years out. It will be a 5-year look, but we'll also provide not just revenue but also earnings and also a look by business unit as well. Pavel Molchanov Okay. That's something for us to look forward too. When you talk about DC engineering in the measuring phase as it relates to the refrigeration product, what exactly is being measured? Is it the energy savings or something else? David Moon Yes. So there's two specific -- so there's two specific metrics that were -- that are being validated or measured by DC engineering. One is just purely energy segments. And then the second is capacity extension. And I think we've talked in previous calls well about how the PX G provides capacity extension and high heat load dates. And so DC engineering is measuring and confirming both of those. Pavel Molchanov And as you speak with prospective customers, do they have a particular threshold or target that they want to see in terms of the improvement in the refrigeration system? David Moon I think so. Largely, the feedback has been around -- it's a very first cost conscious industry. And so largely, the feedback has been around pay that period. And anything from 2 to 3 years is acceptable. And so that's been sort of the -- and so then you can roll in capacity extension under that, you can roll in certain energy saving as part of that. But that's the primary feedback we get or what end users supermarkets way you'd be looking for. And that's a very, very short payback period. Pavel Molchanov Okay. Last question, a little bit more macro. Is there any evidence that interest rate -- high interest rates, currency, oil price or anything else is structurally hindering the development of desalination in the Middle East? David Moon None. I'd say nothing that we can see at this point. And our field team is as good as it gets and as close to customers as any. And so far, full steam ahead. Operator The next question comes from the line of Ryan Pfingst with B. Riley Securities. Ryan Pfingst I know you don't want to get ahead of the 3Q update and webinar in the fourth quarter around CO2. But maybe can you talk a little bit about the recently deployed PX G's and maybe how they performed compared to what you were seeing from the prior generation? David Moon So I think what's most important about what we've seen out of the second gen is that they're just -- they're not running nonstop. No vibration, sound levels are better than the first gen PX G which were the 2 issues that we saw wanted to solve for when we developed the second gen. And so field time so far, they're running like clockwork in the field. So very, very pleased thus far with the performance we've seen in the field. And we're starting to get in several areas like Southern California, we're starting to get really some stress test, our PX G stress test, right? I mean we've had 100-plus degree days in Southern California for most of the last month or so and so far so good. So we're happy with the performance. Ryan Pfingst Great. And then turning over to the Water side. The AI theme is obviously super topical today and data centers are huge consumers of water. Are you hearing anything in terms of desalination or RO and wastewater participating there? David Moon So we're starting to push that discussion on our side. And so this is something we've been talking about the last 3 or so months about how we can -- we capture a lot of data. There's a lot of -- our PXs are data-rich in terms of opportunity. And so we're talking to our EPCs and all lines operators about how potentially we can go faster and some ideas we have on the AI front. We're not getting pulled that we're pushing, we're doing and pushing at this moment. Ryan Pfingst Okay. Interesting. And then maybe just one more. Could you potentially talk a little bit about 2025? I know you just said the macro wasn't really hindering desalination projects moving forward. But what are you seeing in terms of the visibility you have on 2025 today and the potential growth for you guys? David Moon Yes. So I think -- so we're confident we're -- this 2024 will be the 10th consecutive year of growth that we've had. And I would say, looking where sort of understanding today, I would say that 2025 should be no different. I mean, that should be the 11th year of growth that we'll be looking at for ERI. So more to come when we talk in third quarter, certainly as part of the webinar, but I see the growth trends, the macro story continues to look good. So -- and we're going to continue to ride that way. So I think it looks good for 2025. Operator The next question comes from the line of Jason Bandel with Evercore ISI. Jason Bandel First question on the refrigeration side. I know you mentioned in your prepared remarks about Kroger test in our PX G and I saw their recent announcement that they're going to start using the CO2 refrigeration system starting next year. Just curious, based on your experience so far, what would a typical supermarket rollout look like? Do they typically start with new store openings and distribution centers? Do they kind of wait for the end of the useful life for older systems? Like how is that transition typically happen? David Moon It's going to really depend. So in this space, there are -- what we call first movers or first adopters and then their followers. And so those sort of supermarkets fall in those 2 camps, sort of nobody in between really. And I see Kroger as someone that you would call an early adopter, right? And so how this will play out with Kroger, we're doing the one store announced Cincinnati. It's getting a lot of exposure, by the way, because it's their headquarters. And that continues to go well and as Kroger begins to work on their capital plans for rolling out CO2 over the next 5 years. And I believe we have a real chance to be a part of those capital plans. And they'll go faster. And they'll start with stores that are older, most likely that are older, where there may be some leaks, may be a problem. The system might not be running well or it's just the equipment is sort of at its expiration day. And so they'll start with the older stores first. And then as the new stores are obviously built, those would be certainly CO2, but I think they'll start from the bottom of their list and their most problematic stores will be where they start. Jason Bandel Got it. Okay. That makes sense. And then with the white paper, the OEMs, will they feel comfortable with the amount of run time data in the white paper? Or will some want to see even more run time data in order to get comfortable with the real-world performance of the PX G? David Moon Yes. So it's a very good question. So the run time that we've laid out as part of this work with DC Engineering has been largely given to us by the OEMs. And so this is what they're mandating. This is what they're comfortable with in order to be able to sit with end users and have this next discussion. And so we are following their direction when it comes to run time. And what's critical is this is the summer period, and nothing more, nothing less. And so if we come out of the summer period with good results, that will be enough then to take our discussion to the next level. Jason Bandel Got it. Now switching gears a little bit to Wastewater. I know you reiterated the full year revenue guidance despite the slower start to the year. Just curious if you can provide a little more color. I will give you the confidence that the second half revenue will come in to meet your full year guidance. David Moon Yes. So we did about $600,000 in wastewater this quarter, which was equal to what we did at this time last year. Our backlog, as I talked about earlier, is growing -- we're seeing an uptick over the last 4 weeks, we've seen a real uptick in quoting that we hadn't seen for a while, largely driven by China. And so we're seeing that China is starting to see just an increased level of activity that we haven't seen for the year in China. And so I think that bodes well for the rest of the year. And if we look at the uptick and quality plus what we've already count on the books in terms of backlog, we're still comfortable with the 12% to $15 million of guidance, even though we started slow. Jason Bandel Understood. And one last one for me. Just on the CFO search process. I know you went -- kind of went through Michael's background in the prepared remarks. Just curious if you can share a little more details on, I guess, how you decided to then picked him. And if you regret not having an overlap with Josh starts? David Moon Look, I think in a perfect world, have been great. If we would have had some overlap. But Michael is an experienced CFO. He brings a skill set with his start-up work. He knows how to work under pressure given his previous background. He knows how to work with investors. He'll hit the ground running. I have no doubt. And so yes, would have been good, yes, but where he'll hit the ground he nearly starts next Monday. And so -- and Josh has been kind enough to say that he will make himself available if needed. So I'm pretty happy that we hit the ground running. I'm not worried about that. Operator [Operator Instructions] There are no further questions at this time. I would like to turn the call back to James Siccardi for closing remarks. James Siccardi Thank you, everyone, for joining us this evening. We look forward to speaking to you again in the third quarter call and as a webinar. Please take care. Operator This concludes today's conference. You may disconnect your lines at this time. Enjoy the rest of your day.

Archrock, Inc. (AROC) Q2 2024 Earnings Call Transcript

James Rollyson - Raymond James Steve Ferazani - Sidoti Selman Akyol - Stifel Good morning. Welcome to the Archrock Second Quarter 2024 Conference Call. Your host for today's call is Megan Repine, Vice President of Investor Relations at Archrock. I will now turn the call over to Ms. Rapine. You may begin. Megan Repine Thank you, JL. Hello, everyone, and thanks for joining us on today's call. With me today are Bradley Childers, President and Chief Executive Officer of Archrock; and Doug Aron, Chief Financial Officer of Archrock. Yesterday, Archrock released its financial and operating results for the second quarter of 2024. If you have not received a copy, you can find the information on the company's website at www.archrock.com. During this call, we will make forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934 based on our current beliefs and expectations as well as assumptions made by and information currently available to Archrock's management team. Although management believes that, the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that, such expectations will prove to be correct. Please refer to our latest filings with the SEC for a list of factors that may cause actual results to differ materially from those in the forward-looking statements made during this call. In addition, our discussion today will reference certain non-GAAP financial measures, including adjusted EBITDA, adjusted gross margin, adjusted gross margin percentage, free cash flow, free cash flow after dividend and cash available for dividend. For reconciliations of these non-GAAP financial measures to our GAAP financial results, please see yesterday's press release and our Form 8-K furnished to the SEC. I'll now turn the call over to Brad to discuss Archrock's second quarter results and to provide an update of our business. Bradley Childers Thank you, Megan, and good morning, everyone. Archrock's second quarter performance reflects the earnings power we've built through our investment in high-quality assets, exceptional customer service, and efficient execution. The long-term and year-over-year strength and durability we see in our overall performance and as reflected in our second quarter results is also supported by the affordability and abundance of U.S. natural gas, which will continue to fuel growth in its demand, use and production. This strong performance as well as the strength and durability are both further bolstered structurally by the continued capital discipline being employed across the energy sector. Now with that backdrop, let me start today's call with a summary of key highlights from the second quarter. Our net income of $34 million was up from $25 million in the second quarter of 2023. Adjusted EBITDA of $130 million was up 15% versus the prior year period. The increase was driven primarily by higher pricing, combined with a sharp focus on cost management leading to strong profitability. We maintained our sector-leading financial position including a leverage ratio of 3.2x. We continue to deliver meaningful returns to our shareholders. Our quarterly dividend per share was up 6%, compared to a year ago, all while maintaining robust dividend coverage of 2.6x for the quarter. This was a great quarter for Archrock, thanks to a fantastic team of dedicated employees, who work hard every day to deliver safe and excellent service to our customers and attractive returns to our shareholders. Now with the acquisition of TOPS that we announced last week, we will further enhance our position as the premier contract compression services company in the U.S. and I'll expand on that in a bit. Turning to Archrock operations. Market conditions for compression remain highly constructive, predominantly in oil plays with associated gas production like the Permian Basin. The robust market is reflected in our second quarter contract operations operating and financial results. Our fleet remained fully-utilized with utilization exiting the quarter at a rate of 95%. Booking activity increased sequentially, as we continue to build an order book into 2025. We expect to see sustained compression booking demand well into the future, as our customers plan for the call on natural gas production to support LNG export capacity growth and incremental electric generation demand from AI and data centers. On pricing, with utilization at historic highs and continued strong booking activity, we're maintaining the pricing prerogative and capturing additional rate increments. The second quarter marks our 11th consecutive quarter of sequential increases in our monthly revenue per horsepower, which increased to $20.85. Continued price increases and strong cost control drove adjusted gross margin percentage to 65%, up 300 basis points year-over-year and consistent with the prior quarter. The Aftermarket Service segment had another solid quarter. Revenues totaled $45 million remained elevated as great service is driving repeat business with customers. Second quarter adjusted gross margin of 22% exceeded our full year guidance expectation, as we continue to focus on high-quality and high-margin work. From our first rate customer base to our highly-standardized fleet and excellent customer service, we are known for in the field to our most recent digitization and emission reduction efforts. The actions we've taken to enhance our business should benefit our performance for years to come. The acquisition of TOPS aligns with this strategic focus and is an exceptional opportunity to expand our contract compression operations, earnings and cash available for dividend. With TOPS, we're adding 580,000 horsepower of young assets, including approximately 500,000 operating horsepower and a substantial and contracted backlog of new equipment. As we've previously discussed, this strategic and immediately-accretive acquisition carries four main benefits. First, the acquisition of high-quality assets with contracted cash flows, adds meaningful low risk growth. The TOPS fleet has an average age of three years, is 95% utilized and backed by fee-based contracts with blue chip customers. Second, the acquisition enhances our scale and complements our existing Permian Basin compression capacity. The addition of TOPS is expected to increase Archrock's Permian Basin compression capacity by 30% to approximately 2.2 million operating horsepower. Third, this acquisition accelerates the growth of our electric motor drive fleet and augments our internal electrical expertise. TOPS is the leading provider of electric motor drive compression. With this acquisition, we expect our electric compression fleet to increase to 648,000 horsepower or 15% of our pro forma fleet. And fourth, this transaction is consistent with our financial and capital allocation priorities, and we expect it will facilitate the accelerated return of capital to shareholders. We're buying a rapidly-growing business with a substantial and contracted backlog. We expect the acquisition to be more than 10% accretive to earnings per share and at least 20% accretive to cash available for dividend per share in 2025. TOPS has both high caliber equipment and a talented team that we're excited to welcome at Archrock. The transaction is expected to close by the end of 2024 and we're confident in our ability to effectively integrate the acquired assets into our existing business. In summary, with today's robust market of growing natural gas production and compression demand, one of our top priorities has been investing in high-quality and high return compression assets. Equally as important, we've been funding these investments within our cash flow, so that we've been able to deliver on our commitments to increasing cash returns to investors, while maintaining a strong balance sheet. The acquisition of TOPS aligns with this strategic focus and is an exciting milestone for Archrock that builds on the meaningful progress we've made, orienting our business for the future and for long term success. With that, I'd like to turn the call over to Doug for a review of our second quarter performance, 2024 standalone guidance and financing strategy for the TOPS acquisition. Douglas Aron Thanks, Brad, and good morning, everyone. Archrock delivered another strong quarter of financial results. Net income for the second quarter of 2024 was $34 million. This included a non-cash $4.4 million long-lived and other asset impairment, as well as transaction related expenses of approximately $1.8 million. We reported adjusted EBITDA of $130 million for the second quarter 2024. Underlying business performance was strong in the second quarter, as we delivered higher total adjusted gross margin on a sequential basis. For the second quarter, growth capital expenditures totaled $62 million, bringing year to date growth CapEx to $140 million. We expect our 2024 growth capital will be first half weighted. Maintenance and other CapEx for the second quarter of 2024 was $29 million, bringing the total for the first half of 2024 to $51 million. Turning to the balance sheet. We exited the quarter with long-term debt of $1.6 billion. Our leverage ratio at the end of the quarter was 3.2x, calculated as total debt divided by our trailing 12 month adjusted EBITDA. As Brad mentioned earlier, we are acquiring TOPS for total consideration of $983 million, which will be funded with a combination of $826 million in cash and 6.87 million newly issued common Archrock shares to the seller. Archrock intends to fund the $826 million cash portion of the total consideration with a combination of equity and debt. On the equity portion, last week, we announced the pricing of a common stock offering, raising net proceeds of $256 million at an offering price of $21 per share. The funding structure keeps us on track to achieve our financial targets, including maintaining a consistent leverage ratio of between 3x and 3.5x. Post-transaction announcement and equity raise, all three rating agencies reaffirmed their Archrock credit ratings and outlook. The strong financial flexibility, I just described continued to support increased capital returns to our shareholders. We've recently declared a second quarter dividend of $0.165 per share or $0.66 on an annualized basis. This is consistent with the first quarter of 2024 dividend level and up 6% versus the year ago period. Cash available for dividend for the second quarter of 2024 totaled $72 million leading to an impressive quarterly dividend coverage of 2.6x. Importantly, we believe, the increase in pro forma discretionary cash flow from the addition of TOPS will further enhance our financial flexibility and capacity to increase dividends to our shareholders over time. As you saw in our earnings release issued yesterday, Archrock reaffirmed its full year 2024 annual EBITDA and capital expenditure guidance. Our guidance excludes the pending acquisition of TOPS. We plan to announce our expectations for the combined company once the transaction closes by the end of 2024. Excluding TOPS, our 2024 adjusted EBITDA is expected to range from $510 million to $540 million, which represents an increase of 17%, compared to $450 million in 2023. 2024 growth CapEx is expected to total approximately $190 million. This is flat compared to the growth CapEx of $190 million in 2023. Our full year '24 maintenance CapEx forecast of $80 million to $85 million and other CapEx forecast of $20 million to $25 million both remain unchanged. In closing, the market remains as strong as we've ever seen it and Archrock is in the strongest position in the company's 70 year history. We have an opportunities-rich market and expect to invest in high return opportunities, profitably grow our business, while prioritizing and growing shareholder returns and maintaining an industry-leading balance sheet. We are excited to welcome the TOPS team, and we look forward to building an even stronger Archrock together for the benefit of our employees, our customers and our investors. JL, with that, we are now ready to open the line for questions. Thank you. [Operator Instructions] Your first question comes from the line of James Rollyson of Raymond James. Your line is open. James Rollyson Good morning. Brad, year-to-date, you've obviously spent well more than half of your growth CapEx, which implies a softer second half on that front. Just curious, your horsepower totals haven't moved that much in the active category so far. I know you've also realized some proceeds from selling some stuff still, but maybe just a little color on kind of fleet dynamics like how much horsepower you've delivered? How much has been put in the field? How much have you sold? Just kind of some color on that if you don't mind. Bradley Childers Thanks, Jim. On the overall position of the horsepower in the business, we're super excited to just maintain the 95% utilization rate that we've achieved. One of the impacts of that is you can imagine, it does mean that, we've put to work a ton of the idle fleet horsepower that we previously had maintaining it at a high rate. That also means, there's less horsepower in the fleet to go back to work. The trade-off is, we get to book less of that, but it's because it's active, working and highly profitable. That's one dynamic that you're seeing on the relatively flat horsepower quarter-over-quarter. The second thing we'll note is that, the market has definitely cooled a bit as we've seen a little bit of give back in some of the dry gas plays. Fortunately, as you can see in the numbers, it's completely immaterial into our overall fleet position as the vast bulk of our horsepower is going to work in the liquids-rich place, 60% of it goes to work in the Permian on a bookings basis right now. Those are a couple of the dynamics we've seen, in what I think is a relatively flat period of time. Finally on a really good news front, bookings has continued to remain robust. Even though the horsepower activity itself is a little bit flattish for us in this current period, what 2025 offers is still a very robust bookings set from our customers, as they prepare for future natural gas production growth starting in 2025 as LNG projects come online. That's a lot of what you're seeing. Finally, I'd point out that actually you're right the CapEx budget for the year 2024 was definitely front end loaded. James Rollyson Yes. I appreciate that color. Just kind of since you brought up the new-build part of that equation or new orders, just maybe kind of a status update on what lead times look like today and another thing that's been helping in addition to the tight market drive pricing is just the fact that, the cost of equipment has gone up and maybe just some color on kind of what inflation has been there, is that starting to level off, et cetera? Bradley Childers Actually, on the easy stuff, lead times are in the 40 weeks, plus or minus depending upon the category equipment. But we would describe it as a very normalized market. Inflation has returned to more historic levels. That is for equipment coming into the system in the 3% to 5% range on a per item increase basis. That's our expectation. That's the easy stuff to point out. What we also see then is just robust bookings continuing going forward with that. What's exciting about the market today though is that, it's not about lead times, it's constraining the market. Equipment costs are definitely up and that means the price of bets has gotten bigger and further reinforced a lot of discipline in the market. Capital still remains at elevated levels. That cost has enforced discipline in the market. But, what all of this goes to is the thing we think is really driving a lot of discipline in the market is the investors demand and focus on free cash flow generation, strong balance sheets and continued growth in returns to investors. That level of discipline means that, no one's going to borrow expensive money to place expensive bets without the security of a commitment and a booking with a contract in place with a customer already. That's what's really driving the market. We think it's about capital discipline. We don't think it's about supply chain constraints. Your next question comes from the line of Steve Ferazani of Sidoti. Your line is open. Steve Ferazani Good morning, Brad and Doug. Appreciate all the detail on the call. Obviously, impressive continued growth on the revenue per horsepower. Just trying to get a sense now, are we getting closer to spot? Is there still a lot of room to go, as you reset pricing on previous contracts and with the new capacity coming online? Bradley Childers At these levels of high utilization, we still believe we have pricing prerogative. Spot pricing remains elevated, compared to where the entire fleet is and we will continue to opportunistically bring the fleet up to market pricing as our contracts permit us to do so over time. On the good news front, when we evaluate our ability to either increase pricing, because the contract is eligible for it, because it has a renegotiation in it, or it has an automatic price increase in it, or we have the ability to drive pricing under the contract terms, we estimate that over the next 18 months we'll still be able to eligible to increase pricing on 80% to 90% of the horsepower in the fleet. Over time, we expect to continue to work on bringing that gap, narrowing that gap. Steve Ferazani Excellent. You talked about, you have less idle capacity to bring back. The only number that surprised me on the quarter was the higher maintenance CapEx yet. Your guidance didn't changed, which implies, this is by far the highest quarter. Usually, that's because of higher make ready. Is that what happened? Did you just happen to have more idle capacity coming back this quarter? Or, was there something else in that higher maintenance CapEx? Douglas Aron No, Steve, I definitely would not read anything into that. I think we had some parts expense, some timing in the quarter, some of that can vary just depending on when the work gets done. As you said, we think our current guidance is absolutely good, and I wouldn't read into anything beyond that. Steve Ferazani Last one for me just on the continued strength with the aftermarket business. Is this a new reasonable run rate for your aftermarket? Can you maintain these above 20% margins? What's your outlook? Any changes? Douglas Aron With the market as tight as it is, not just in contract operations, but also in the fleets of our customers, our customers are very focused on maintaining their horsepower candidly better than they have in the past. There's less idle capacity. That's driving a lot of really good service activity, which is higher margin and higher profit work to our truck. Our team is doing an excellent job with, both capturing it and executing on it. I believe that as the market remains at these elevated levels of utilization that translates into strength and continued profitability both on the revenue line as well as in the profit, we can obtain in our aftermarket service business. Your next question comes from the line of Selman Akyol of Stifel. Your line is open. Selman Akyol Thank you. I wanted to follow-up on a couple of comments. In your prepared remarks, I think you talked about the market is cooled, some give back in dry gas plays, and you're repositioning those assets into liquid plays. Can you maybe quantify how long that takes and how much horsepower are we looking at and should we see some sort of bump from redeploying those assets in the third or fourth quarter? Bradley Childers Thanks, Akyol. We should not expect to see a bump. You should not expect to see any real impact to the redeployment of those assets. What I was suggesting, however, is that with the small amount of horsepower in the dry gas plays that was reduced in the quarter, and we're talking about a fractional percentage of our fleet. It still has an impact in marginal growth at a period of time, when equipment is not going back to work as aggressively in 2024, as it did in 2023. I don't think you should expect to see any negative impact on that at all, other than that equipment will go back to work probably in some of the dry gas plays, some of it will be redeployed elsewhere over time. It's so marginal that it will not be transparent from a financial perspective or from a cost perspective is what I really should say. Selman Akyol Just following up sort of on the last questioning in terms about getting closer to spot. I think you said, over the next 18 months, you get price increases on 80% to 90% of the eligible fleet. I was wondering, if I could push you and just ask how much of the fleet is eligible over the next 18 months to be repriced? Bradley Childers That was the number between 80% and 90% of the fleet should be eligible for repricing in that period of time. There are no more questions. Now I'd like to turn the call back over to Mr. Childers for final remarks. Bradley Childers Great. Thank you everyone for participating in our Q2 review call. Archrock's underlying business performance is outstanding and we're excited about the top scale, which we believe will create substantial shareholder value. I look forward to updating you on our progress in the future. Thanks everyone. This concludes today's conference call. You may now disconnect.

Earnings call: A10 Networks navigates market challenges with steady growth By Investing.com

A10 Networks (NYSE:ATEN), a provider of advanced network security solutions, reported a decrease in revenue for the second quarter of 2024, with figures reaching $60.1 million, marking an 8.7% drop year-over-year (YoY). Despite the downturn, the company experienced a notable 25% increase in its enterprise segment revenue. A10 Networks has been actively diversifying its portfolio and investing in AI-based solutions for network management and security. The company remains profitable and is on track to meet its full-year business model objectives, including a forecast for single-digit earnings per share (EPS) growth. A10 Networks has also announced a quarterly cash dividend of $0.06 per share, reflecting its commitment to creating shareholder value through capital returns. In conclusion, A10 Networks is managing a challenging market environment by focusing on enterprise growth and AI investment, while maintaining profitability and shareholder returns. The company's leadership remains optimistic about future enterprise revenue acceleration and is strategically positioning itself to cope with the service provider market's spending shifts. Operator: Thank you for joining. I would like to welcome you all to the A10 Network's Second Quarter 2024 Financial Results Conference Call. My name is Brika and I'll be your moderator for today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Tom Bauman with FNK IR. Thank you. You may proceed Tom. Tom Bauman: Thank you all for joining us today. This call is being recorded and webcast live and may be accessed for at least 90 days via the A10 Networks' website, atennetworks.com. Hosting the call today are Dhrupad Trivedi, A10's President and CEO, and CFO, Brian Becker. Before we begin, I would like to remind you that shortly after the market closed today, A10 Networks issued a press release announcing its second quarter 2024 tour financial results. Additionally, A10 published a presentation and supplemental trended financial statement. You may access the press release, presentation, and trended financial statements on the Investor Relations section of the company's website. During the course of today's call, management will make forward-looking statements, including statements regarding projections for future operating results, including timing, including our potential revenue growth, demand, industry and customer trends, our capital allocation strategy, profitability, expenses and investments, our positioning, our repurchase and dividend programs and our market share. These statements are based on current expectations and beliefs as of today, July 30, 2024. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially, and you should not rely on them as predictions of future events. A10 does not intend to update information contained in these forward-looking statements, whether as a result of new information, future events or otherwise, unless required by law. For a more detailed description of these risks and uncertainties, please refer to our most recent 10-K and quarterly report on Form 10-Q. Please note that with the exception of revenue, financial measures discussed today are on a non-GAAP basis and have been adjusted to exclude certain charges. The non-GAAP financial measures are not intended to be considered in isolation or as a substitute for prepared results in accordance with GAAP and may be different from non-GAAP financial metrics presented by other companies. A reconciliation between GAAP and non-GAAP measures can be found in the press release issued today and on the trended quarterly financial statements posted on the company's website. Now, I would like to turn the call over to Dhrupad Trivedi, President and CEO of A10 Networks. Dhrupad Trivedi: Thank you, Tom, and thank you all for joining us today. The North American Service Provider market remains choppy, even as spending is trending positive in an overall direction. The market sentiment improved in the first quarter versus second half of 2023, but we still saw projects moving across quarters. Year-to-date, our Service Provider revenue, excluding North America is up 20%, demonstrating that this is largely a North American market issue related to timing of carrier CapEx. Encouragingly, much of these headwinds in the second quarter were offset by improving strength in the Enterprise segment. We have been devoting resources, both R&D investments and additional sales and marketing muscle to target Enterprise opportunities. These investments are bearing fruit. Enterprise related revenue increased 25%, offsetting much of the 25% decline in the Service Provider segment. Additional investments are in process now and we expect A10's position in the Enterprise market to continue to improve. During the quarter, one of the world's largest digital communications technology company, with nearly 100,000 employees worldwide, chose A10 displacing their previous vendor for their hybrid infrastructure solution. Our commitment to technical performance with a re-energized enterprise portfolio, global technical support and alignment with customers business goals led A10 to secure this win in the quarter and showcases our ability to compete and win in the Enterprise space with the most demanding infrastructures. As we look at our pipeline for the second half of the year, this segment is expected to grow faster than Service Provider segment and provides the basis for continued growth in this vertical. Growing the Enterprise business is a part of our ongoing strategic focus on driving predictable performance. Diversification remains core to our overall strategy, enabling A10 to navigate challenging conditions better than peers and over the long-term, driving growth that outpaces the broader market segment. Clearly, 2024 has been a challenging year for North American service providers so far as they navigate market challenges for their own businesses. A10 is not alone in this exposure, but our business model and diversification has enabled us to maintain robust profitability in line with our targets despite these headwinds. For the first half of 2024, we delivered EPS expansion year-over-year in line with expectations and expect to accomplish this on a full year basis. Longer term, we continue to be built to grow at a low double-digit pace faster than the market, with our profitability and cash generation helping growth faster than the top line. Simultaneously, we are investing in our next wave of growth products, including initiatives to capitalize on growth tied to new AI solutions which continue to grow in scope and have some time before they are fully commercialized. As I have discussed in the past, A10 has long used AI in our Security Solutions, especially those that address DDoS attacks. We are increasing the use of AI focused agile solutions to enable our customers to better identify, address and remediate a growing wave of security threats. Bad actors are utilizing AI, and we are evolving our technology to address these new threats. These tools are increasingly must have for our customers, and we expect to add to our security and AI backed arsenal of solutions in the coming quarters. Security Solutions as a percentage of sales continue to trend in line with our long-term growth goals. Our new engineering investments are related to developing AI based solutions for customers to better manage and secure their networks. This includes better insights to predict network performance, as well as new capabilities to address threats in real time that have emerged with AI network traffic. In keeping with our historic strengths on understanding network traffic in real time, we are also working with customers to evolve our hardware to support next generation data centers needed to support performance and latency needs for AI traffic in all kinds of new models. We are engaged with customers and channel partners to enable their roadmap as the market matures and moves into commercialization phase in the future. While we invest in new solutions, new technologies and reallocate sales resources A10 remains solidly profitable even as we navigate near-term revenue headwinds. Once again, I'm proud that we have achieved our non-GAAP EPS targets even with these investments and market challenges. Just a few years ago, these factors would have resulted in significant losses. Today, we are systematically profitable. Our gross margins in the second quarter were in line with stated goal of 80% to 82% and our adjusted EBITDA margin was nearly 26% in line with our profitability goals. As revenue conditions normalize, we expect our profitability to improve further. We remain committed to achieving our long-term stated goals while driving growth. A10's consistent ability to meet profitability targets even amidst revenue challenges underscores the resilience of our business model. The results year-to-date position us to achieve our full year business model objectives, including targets for gross margin and adjusted EBITDA margin, as well as growth in our full year non-GAAP EPS. We have continued to buy back stock and our cash flow has more than funded our buyback and dividend programs. With that, I'd like to turn the call over to Brian for a detailed review of the quarter. Brian? Brian Becker: Thank you, Dhrupad. Second quarter revenue was $60.1 million, a decrease of 8.7% year-over-year. As Dhrupad described, quarter-to-quarter volatility in the North American service provider sector continued to be high offset by improvements in the Enterprise segment. Product revenue for the quarter was $29.5 million, representing 49% of total revenue. Services revenue was $30.6 million or 51% of total revenue. Second quarter recurring revenue increased 11% compared to the second quarter last year and deferred revenue increased 6%, demonstrating stronger product sales for the past several quarters and continued demand for our Enterprise solutions. These metrics, coupled with a strong pipeline of opportunities, further validate our confidence that we are not losing opportunities to competitors. As you can see on our balance sheet, our deferred revenue was $140 million as of June 30, 2024, up 6.3% year-over-year. With the exception of revenue, all of the metrics discussed on this call are on a non-GAAP basis unless otherwise stated. A full reconciliation of GAAP to non-GAAP results are provided in our press release and on our website. Gross margin in the second quarter was 80.9%, in line with our stated goals of 80% to 82%. Adjusted EBITDA was $15.5 million for the quarter, reflecting 25.8% of total revenue. Non-GAAP net income for the quarter was $13.2 million or $0.18 per diluted share compared to $14.5 million or $0.19 per diluted share in the year ago quarter. Diluted weighted shares used for computing non-GAAP EPS for the second quarter were approximately 75.5 million shares compared to 75.4 million shares in the year ago quarter. On a GAAP basis, net income for the quarter was $9.5 million or $0.13 per diluted share compared to net income of $11.6 million or $0.15 per diluted share in the year ago quarter. Turning to the year-to-date results, revenue was $120.8 million, down 2.2% year-over-year. Product revenue was down 15%, representing approximately 49% of total revenue, and services revenue was up 15%, representing about 51% of total revenue. Year-to-date non-GAAP gross margin was 81.4% in line with our target range. We reported $23.9 million in non-GAAP operating income, down 16% compared with $28.5 million in the first six months last year. Adjusted EBITDA was $29.4 million, reflecting 24.3% of total revenue. Non-GAAP net income for the first six months was $25.9 million or $0.35 per diluted share, up from $24.5 million or $0.32 per diluted share in the year ago quarter period. On a GAAP basis, net income for the first six months was $19.2 million or $0.26 per diluted share, compared with net income of 15.6 million or $0.20 per diluted share. During the quarter, we generated $11.3 million in cash from operations. Year-to-date, cash generated by operations was $43.8 million in line with our full year targets. Turning to the balance sheet, as of June 30, 2024, we had $177 million in total cash, cash equivalents and marketable securities compared to $159.3 million at the end of 2023. During the quarter, we paid $4.5 million in cash dividends and repurchased $11.8 million worth of shares. We also continue to carry no debt. The Board has approved the quarterly cash dividend of $0.06 per share to be paid on September 3, 2024 to shareholders of record on August 15, 2024. We have $34.8 million remaining in our $50 million share repurchase authorization as of June 30, 2024. We expect 2024 full year EPS growth in single digits in line with expectations, and we continue to target gross margins of 80% to 82% and adjusted EBITDA margins of 26% to 28% on a full year basis. I'll now turn the call back to Dhrupad for closing comments. Dhrupad Trivedi: Thank you, Brian. A10 maintains a strong competitive position in the markets, supported by durable long-term growth catalysts. Short-term volatility in the North American Service Provider market does not alter our long-term strategy and we are making steady progress to enhance our position in the enterprise market. Our strategic diversification remains a key advantage, enabling consistent profitability even during periods of revenue headwinds. We also continue to create shareholder value through the return of meaningful capital to shareholders Operator you can now open the call up for questions. Operator: Thank you, Dhrupad. [Operator Instructions] You have the first question from Anja Soderstrom with Sidoti. You may proceed. Hi, good afternoon. Stephan Guillaume: Hi good afternoon. This is Stephan Guillaume on for Anja Soderstrom. Can you guys hear me? Tom Bauman: Yes, we can hear you. Thank you. Stephan Guillaume: Thank you. I guess my first question is, are you still seeing service providers come back in the second half, and how are your conversations with them? Dhrupad Trivedi: Yes, good question. So I think first, as I mentioned in the body of the call, our service provider conversation is very much North America specific because we have healthy growth outside of that. So within North America, I think there are two things we are seeing. One is they continue to manage sort of the spending level. Well, projects can get scoped differently and moved across periods and our assumption, of course, is a lot of their decisions around making significant capital investments are related to a cost of capital B market uncertainty, including an election period right now. So our conversations with them generally show that they continue to spend a little bit because a lot of the things we do are in the path of either revenue generation or becoming more secure. However, the newer projects tend to be pushed out in time a little bit. When we think of our second half, our assumptions really around delivering results are that we continue to make steady progress on Enterprise footprint. Second is we continue to see execution that we saw in the first half from service providers outside of North America and then within North America I think we continue to find ways between the balance of our customers to deliver that growth at the point at which they get confident and start reinvesting CapEx. Of course, we will benefit from that as well. But our plan on second half is not predicated on a sharp snap back in spending from them. Stephan Guillaume: Thank you for the color there. Can you also talk about the competitive environment? In the past you've said that you're taking share are you still doing that? Dhrupad Trivedi: Yes. So I would say there are two ways to look at that right? So first is if you look at the broader market and you look at a lot of the growth rates that you are seeing from companies in our sector or industry, they are all kind of plus, minus 2% kind of range. Right? So that's one. Second is the way we think about gaining share is when we can trace and point to an actual displacement of a competitive solution. And I would say that certainly in the Enterprise market, we feel that we are able to replace some of the solutions and I would say that's the most basic way we think about gaining share. And if you look at our Enterprise segment growth on a year-to-date basis, half-to-half, we grew about 7%, which I would say is at least slightly above market average. Stephan Guillaume: All right, thank you. And so what kind of pricing power do you have in this environment? Dhrupad Trivedi: So I would say pricing is a balanced thing. So obviously we have input cost inflation, which we try to find ways to offset, and we offset that with maybe price increases selectively to customers and then the rest with productivity. But I think we are very selective because we want to do it in a very methodical way versus going up and down on prices. I think for us it's a mix of overcoming input costs through productivity and selective price increases where we don't have a choice but to pass it on. Stephan Guillaume: Thank you. And the last one from is, where are you in the innings of seeing results from the changing of your sales team? Dhrupad Trivedi: So I would say if you think of our business, two thirds is Service Provider, one third Enterprise. Enterprise is a little bit bigger now. On the Service Provider side, of course, we have a very mature, experienced sales team where the focus is on improving our capability to cross sell more products to existing customer base. Right? On that dimension, I think we are making good progress. Some regions obviously are farther ahead than others, so there is still room for us to continue growing through that. On the Enterprise side, we have brought in obviously new sales talent as well as how we go-to-market in terms of our portfolio and products as well. And I would characterize that as we are probably somewhere between third and fourth inning on that journey. Operator: Your next question comes from Gray Powell with BTIG. You may proceed. Gray Powell: Okay, great, thanks. So, yes, a few questions from my side. Maybe just to start off at a high level, can you talk about what you saw in terms of the overall spending environment and macro headwinds? And, I mean, I know you've talked about it some in the prepared remarks. It sounds like North American service provider may have caught you by surprise, but outside of that, would you say that things were stable? Did anything change positively or negatively? Just, I don't know any more color you could provide there. Dhrupad Trivedi: Yes no, good question Gray. I would say absolutely that if I think of my three regions, I would say APJ is stable on Enterprise and Service Provider side. EMEA is stable on enterprise and service provider side. And North America, I would say we are making good progress on enterprise, so it offsets maybe some market weakness and then within North America Service Provider. I think we were not necessarily surprised, but I think what evolved was some of the re-scoping of projects versus cancellations or complete push outs. So that was the only thing. That's why we feel good about full year. And if you remember Q1, we did slightly better than we thought, and Q2 is slightly worse, but it's still plus minus $2 million or $3 million. So that's the sort of volatility or movement we see. And our goal is obviously to use the remaining pieces to offset that so that when North America has the spending comes back and it only helps us from there. Gray Powell: Got it, okay. And then within the context of the full year, should we still be expecting like maybe low single-digit growth in revenue or closer to flat now? Dhrupad Trivedi: I think we would probably say low single-digit still feels right, although it's more back end loaded, so it's always risky. But our plan is, obviously, if it's slightly below that to that, how do we bridge back to getting out to our non-GAAP EPS results, so either way. Gray Powell: Okay. Okay, great. And then last question. Free cash flow in the first half of the year was actually really strong. What drove that? And just any directional pointers you can give us or maybe talk about, like free cash flow margins relative to EBITDA margins and pointers there? Dhrupad Trivedi: Yes, good question. Yes, go ahead, Brian. Brian Becker: Yes, no free cash flow. A number of factors led into that. I mean, last year we had pretty poor linearity. I think we're seeing the benefits of some of that return to cash spending and releasing cash into the market and benefiting our free cash flow. As you pointed out, we've talked about free cash flow being really strong last quarter at nearly $30 million. So we've got another $10 million of free cash flow approximately this quarter. But our full year cash flow target, from a free cash flow perspective should be in the sixties if everything continues to go as planned. Dhrupad Trivedi: And Brian, our EBITDA is a good proxy for free cash flow precisely because there's not too much CapEx variable here. Operator: Thank you, Gray. [Operator Instructions] We now have Hamed Khorsand with BWS Financials. You may proceed. Hamed Khorsand: Hi. So talking about this North America Service Provider, this has been a topic for about a year now. So is this, given the growth you saw in Q2, it obviously points to actual revenue decline on that part. So are you losing share or how are these service providers just cutting back so much spending without you losing share? Dhrupad Trivedi: Yes, so I think, good question, Hamed. So maybe just level set on a couple of data points, right? So if you look at North American Service Provider, I think in the last two or three days, I think AT&T (NYSE:T), Verizon (NYSE:VZ), they've all published CapEx. And you can see that in 2024, they are projecting CapEx declines of between 6% to 8% year-over-year and it's all of them. And the cable companies are projecting slightly less than that. So that's one data point that says it's not that market is plus 10 and we are negative. Second is the way our products are designed at these customers. We are in their operational workflow to run the network and publish results on SLA achievement and things like that. So is it likely they are looking at competitors? Maybe. But we have a pretty good understanding of what is deployed. We track all those devices. Our support team knows every device that is active and how much traffic is going through it. That gives us confidence that it's more linked to their CapEx spending cycle versus competitive. And the last data point is, when they do approve a data center, we do get the PO. Right? So we have a reasonably good correlation of when the project is approved and we are in the mix we get that PO. But it is I mean, I think the CapEx plans of these companies are public, right? So you can see those here. Hamed Khorsand: Okay. And then if I heard you right, you're investing more on the Enterprise sales side. So does that mean we should see an acceleration in Enterprise revenue eventually, maybe two, three quarters down the line? Dhrupad Trivedi: Yes, you should, and I think the thing I would point to Hamed is even now, right, which is very early, is that on a year-over-year basis, half-to-half, the Enterprise business grew 7%, which you can compare to our peers. And even on the SP side, by the way, you can compare to Juniper, for example, to see relatively if we are losing or gaining. So on the Enterprise side suddenly as the teams mature and we get better value proposition market fit, we expect that to continue to grow. And as I said, if we don't want to do that, instead of SP sales, we want to do that as a way to reduce the impact of that volatility. Hamed Khorsand: Okay, my last question is on that when you were talking about digital tech company, how much of an impact does that have on revenue, if any in Q2? And will it be -- how significant of this is it for revenue going forward? Dhrupad Trivedi: Yes. So I think I would say it was not a 10% customer, but it has the potential to be somewhere between 5% and 10% over time. Operator: Thank you, Hamed. [Operator Instructions] We have had no further questions registered, so I'd like to hand back to President and CEO at A10 Networks, Dhrupad Trivedi for some final remarks. Dhrupad Trivedi: Thank you. And thank you to all of our shareholders for joining us today and for your continued support and thanks to also all the A10 employees around the world. Thank you. Operator: Thank you all for joining today's call. You may now disconnect and please enjoy the rest of your day.

Universal Stainless & Alloy Products, Inc. (USAP) Q2 2024 Earnings Call Transcript

June Filingeri - President, Comm-Partners LLC Chris Zimmer - President & Chief Executive Officer Steve DiTommaso - Vice President & Chief Financial Officer Good day, and thank you for standing by. Welcome to the Universal Stainless Second Quarter Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, June Filingeri. Please go ahead. June Filingeri Thank you, Jessinda. Good morning. This is June Filingeri of Comm-Partners and I also would like to welcome you to the Universal Stainless conference call and webcast. We are here to discuss the company's second quarter 2024 results reported this morning. With us from management are Chris Zimmer, President and Chief Executive Officer; John Arminas, Vice President and General Counsel; and Steve DiTommaso, Vice President and Chief Financial Officer. Before I turn the call over to management, let me quickly review procedures again. After management has made formal remarks, we will take your questions. Our conference operator will instruct you on procedures at that time. Also please note that in this morning's call, management will make forward-looking statements. Under the Private Securities Litigation Reform Act of 1995, I would like to remind you of the risks related to these statements, which are more fully described in today's press release and in the company's filings with the Securities and Exchange Commission. With these formalities complete, I would now like to turn the call over to Chris Zimmer. Chris, we are ready to begin. Chris Zimmer Thank you, June. Good morning, everyone and thank you for joining us. The second quarter was a period of significant achievement for Universal. Sales reached a record $82.8 million, gross margin hit an all-time high of 25.4% of sales, record net income of $8.9 million or $0.90 per diluted share and adjusted EBITDA was a record $18.5 million or 22% of sales. Our ability to achieve this level of sales and profitability is the direct result of our strategic focus and capital investment in our aerospace market capacity and capabilities namely in premium alloys and other critical products for commercial aircraft and defense applications. That focus has delivered a richer product mix and a broader base of customer approvals in a market with substantial growth potential for the foreseeable future. As evidence of our progress, we achieved record aerospace market sales of $68.6 million in the second quarter, representing 83% of total sales with premium alloys at 25% of total sales, mainly driven by aerospace. An important profitability driver is the targeted and sustainable margin improvement projects we continue to put in place. These projects combined with the change in our mix towards aerospace and premium products, represent a structural change in the level of margin we are achieving. The acceleration of our margins in the second quarter and the growth of our adjusted EBITDA, which increased 47% quarter-over-quarter and 135% year-over-year are indicators of this new level of profitability. Additionally, our second quarter benefited from higher base selling prices along with stabilizing commodity prices. We continue to invest in our premium alloy capacity and we are adding a second 18-ton furnace shell for the VIM at our North Jackson facility in the middle of 2025 and a new box furnace this quarter to support growth at the forge. We also remain fully focused on managing working capital and generating positive cash flow to fund our strategic capital expenditures as well as paying down debt. In the second quarter net cash generated by operating activities totaled $7.3 million and total debt reduction was another $3 million, bringing the total debt reduction over the past four quarters to $15 million, a decrease of 16%. Backlog remained solid at $297 million at the end of the second quarter versus $325 million at the end of the first quarter. We are continuing to work with customers to manage order entries in order to pull in lead times, which better serves them while strengthening our competitiveness. From an operations standpoint, total production in the second quarter was up 4% sequentially, that follows a 12% sequential increase in the first quarter, as we further benefit from our Capital Modernization Projects throughout the plants. Through those projects we are realizing process improvements and an increased stability in our manufacturing process, enabling our production levels to ramp. There was positive news on the workforce front earlier this month, with the signing of a new five-year Collective Bargaining Agreement with the hourly production and maintenance employees at our North Jackson facility. It's a good contract; serving the best interest of our employees, our customers and our shareholders. The capabilities of our North Jackson facility and our capital investments there have an essential role in our growth strategy. A further positive development in the second quarter was the return of Universal Stainless to the Russell 2000 and 3000 indexes. We believe it reflects our substantial progress over the past year, in achieving our growth objectives and in building value for our shareholders. Turning to our end-markets, let me begin with Aerospace. Second quarter sales were a record $68.6 million, up 14% from the first quarter and up 34% from the second quarter of 2023. Year-to-date sales increased 29% to $128.8 million. I've just returned from the Farnborough Airshow, where the enthusiasm and optimism about the future of the aerospace market demand remains as strong as ever. The importance of the show for Universal was the opportunity to make further inroads in expanding our base of major customer approvals as well as in deepening current customer relationships on both commercial Aerospace & Defense, we were successful on both fronts. As expected, Boeing and Airbus announced major deals at the show. There were encouraging wins for Boeing, including an order for 20, 787 Dreamliners for Japan Airlines, an order for 20, 777-9s from Qatar Airlines. Airbus also won orders including one from Japan Airlines for both wide-body aircraft and a single-aisle 321neos. Boeing's focus at the air show was on safety, quality and their plan to meet customer commitments. While Boeing recently pushed back by a few months their production plans for the 737 MAX. COO Stephanie Pope, told reporters at the air show that they are seeing significant improvement in the flow of their 737 factory and she confirmed their production target of a steady rate of 38, 737 MAX airplanes per month by the end of this year. sThey also plan to return to producing five 787s per month later this year, as the supply of parts continues to improve. To-date Boeing has continued to work with the supply chain to ensure reliability and sufficient inventory for the ramp-up in production rates. While our customers are closely monitoring the recent pushback in production target dates, we have only seen minimal order adjustments and there have been no cancellations. Confidence in aerospace demand is based on the fundamentals underpinning the commercial, Airplane and Defense aerospace market which point to an extraordinary and sustainable growth opportunity. Not only has air travel recovered to pre-COVID levels, but TSA screened a record three million passengers on July 7. The surge in air travel and forecast of continued growth are driving up demand from airlines for new more fuel-efficient planes, to replace aging aircraft and support their fleet expansion plans. The need is increasingly urgent, as airlines have had to postpone route expansions as they await overdue deliveries. Somewhat ironically, the delay in new planes is driving another aerospace segment, the parts aftermarket and MRO, which we estimate to be about 5% to 10% of our Aerospace business. The potential size of the commercial aerospace market can be seen in the combined net bookings of Boeing and Airbus, which totals more than 14,000 aircraft. All of this translates into a substantial need for premium alloys today and in the years to come. Strong fundamentals are also driving demand in defense. Ongoing geopolitical conflicts have resulted in record global military spending which reached $2.4 trillion in 2023 including increased military budgets at NATO countries. In the US, $884 billion defense budget for 2024 is aimed at modernizing weapon systems and technology, and expanding capacities and capabilities for advanced jet fighters, military helicopters, drones and combat vehicles, all require specialty and premium alloys. The defense industry is a growing and increasingly important part of our aerospace sales representing 15% to 20%. That demand combined with strength in commercial aerospace and the extensive number of new OEM approvals that we have received in recent years are the primary drivers of our overall growth. Our company is in the strongest position we have been in to respond to the aerospace market opportunities. Turning to the balance of our markets. Heavy equipment market sales were $5.2 million or 6.3% of the second quarter sales which is 11% lower than the first quarter. Customers remain hesitant to build inventory in the face of changing market demand for EVs versus hybrids and gas engine vehicles. GM for example saw second quarter sales strengthen in gas-powered vehicles while the pace of growth of their EV models slowed. Given the slowing pace of EV demand growth they are pushing back plans for a new Buick electric vehicle, although they do plan to introduce other new EV models in the coming months. Model changeovers are a positive driver of tool steel demand, whether for gas-powered, hybrid or electric vehicles. We expect our heavy equipment market sales to pick up later in the year and in 2025 demand to return to historic robust sales levels, post-election once the automotive industry has better clarity and direction and the confidence to make substantial investments into new production lines. Energy market sales totaled $5.1 million in the second quarter or 6.2% of sales, which is 15% lower than the first quarter, but up 17% from the second quarter last year. The energy category combines our oil and gas and power generation sales which we reported separately prior to 2024, and better reflects our strategy in the energy market, as we have shifted production capacity to aerospace products in recent quarters. We plan to increase our energy market sales in future quarters, as our production capacity continues to expand. General industrial markets totaled $3.3 million or 4% of sales in the second quarter, which is 22% lower than the first quarter, but up 3% from the second quarter last year. We had expected our sales in this market to grow which are mainly from semiconductor manufacturing, but general industry demand continues to remain modest. The long-term prospects in this market remain positive as US semiconductor sales are continuing to gain traction amid the rapid development of AI and as semiconductor manufacturing returns to the US with the help of the CHIPS Act. We expect our general industrial sales to improve post-election and remain poised to benefit from strengthening market dynamics in 2025. Looking at the balance of the year, our strong backlog puts us in a great position to increase sales next quarter and further expand our margins, generating more free cash flow from operations. Now let me turn the call over to Steve for his report on our financials. Steve DiTommaso Thanks, Chris. Good morning, everyone. As you can see in the numbers, our sales growth has continued in the second quarter consistent with our expectations. This is fueled by the effort from our team to execute on a robust market for our aerospace products, delivering record top line quarterly sales of $82.8 million. Our overall shipment volume increased compared with the first quarter by 2%. This included a strong increase in the aerospace end market shipments, partly offset by lower shipments in the heavy equipment end market driven by soft demand and lower shipments of conversion services. Our expectation is strong recovery for heavy equipment in 2025 after completion of the US election cycle later this year. Additionally, continuous improvement projects layered throughout the organization have delivered lower costs and better yields. This has delivered record profitability as measured by gross margin, operating income, net income, EBITDA or adjusted EBITDA. Our diluted earnings per share of $0.90 trails only the fourth quarter of 2017, which benefited from tax adjustments driven by new tax laws and two quarters from much earlier in the company's history when the diluted share total was much lower. Gross margin totaled $21 million in the first quarter or 25.4% of sales compared with 18.9% of sales last quarter and 14.3% in the first quarter of last year. The significant sequential improvement is primarily driven by three sustainable factors. First, the impact of cost and yield initiatives executed to specifically improve product profitability, also a richer mix of aerospace products, and finally the ongoing recognition of our higher base prices. Our expectation is to continue to drive profitable growth for the foreseeable future through execution of the margin project initiatives, while maximizing our supply to aerospace and defense. Selling, general and administrative costs totaled $8.2 million in the second quarter compared with $7.4 million in the first quarter and $6.8 million in the second quarter of last year. Quarterly SG&A has increased compared to 2023 due to higher employee-related costs, business insurance expenses and audit and accounting support expenses. We expect SG&A to approximate $8.5 million per quarter through the second half of this year. Our operating income for the quarter is $12.8 million, which is a company record. We committed on our last two calls that we will see meaningful operating income growth each quarter as the impact of the margin initiatives fall through to the income statement and we realize the benefit of the 16 price increases that were announced over the last three years. There is more good to come from both of those factors in the balance of the year. We also reduced interest expense by $150,000 to a total of $1.9 million for the quarter $100,000 of the decrease relates to our lower total debt levels and $50,000 relates to lower average interest rates. Term SOFR, which drives our rate for the majority of our debt was flat, but we achieved a 25 basis point reduction in our spread above SOFR for our bank debt near the end of the first quarter. This reduction benefited Q2 and will benefit our rate going forward. And we had the opportunity to reduce the rate by another 25 basis points in Q3 and expect to see that benefit in the Q4 income statement. We recorded income tax expense of $2.1 million for the first quarter resulting in an effective tax rate of about 19%. For the year-to-date, the effective tax rate is 19.3% and includes a projected annual ETR of 20% and $100,000 of a discrete benefit related to share-based compensation items. Net income for the quarter was $8.9 million or $0.90 per diluted share. This more than doubles Q1 diluted EPS and brings the year-to-date figure to $1.33. The current quarter diluted EPS is the highest since Q1 2007 excluding the fourth quarter of 2017 which benefited from the tax adjustment. EBITDA was $17.9 million. Adjusted EBITDA includes an add-back, for noncash share compensation and was $18.5 million, a 46% growth over Q1 and the highest level in company history. Our income adjusted for noncash items generated $16.2 million, during the quarter. We grew net working capital by $5 million as AR grew from the timing of our Q2 sales, and inventory grew along with increasing VIM in North production to support ramping VIM sales. We spent $5.5 million on capital expenditures, bringing year-to-date CapEx to about $11 million. We expect full year 2024 capital expenditures to total approximately $18 million. Our debt paydown was about $3 million in Q2. We expect to pay down our revolver and decrease our net debt each quarter for the rest of the year. That concludes the financial update and I'll hand the call back to Chris. Chris Zimmer Thanks, Steve. In summary, our sales and profitability reached new levels in the second quarter, with record sales of $82.8 million, record gross margin of 25.4%, record net income of $8.9 million or $0.90 per diluted share and record adjusted EBITDA of $18.5 million. The combination of our focus on aerospace and premium alloys, with targeted margin improvement projects has been transformational as we've created a structural change in the margins we can achieve. That change is sustainable going forward and we plan to build upon it. We continue to invest in our premium alloy capacity and efficiencies, while also reducing debt. We remain fully focused on managing working capital, generating positive cash flow to further fund capital investments and debt reduction. For the balance of this year, we continue to see opportunities to grow our top line and expand our gross margin. As I said in today's release, we remain highly optimistic about our growth momentum and strategy for 2025 and beyond. This concludes our formal remarks. Operator, we're ready for questions. Thank you. At this time, we'll conduct the question-and-answer. [Operator Instructions] Our first question comes from Phil Gibbs at KeyBanc. Question was just on some of the capital spending initiatives that you have and what you mentioned incrementally, this morning. So currently you have, the VARs being commissioned at the current time and then you mentioned, more debottlenecking initiatives or growth and size of the potential end of them. That sounds like it's more relegated to next year, but kind of take us through where you are on some of the bigger items this year, and then what you announced today and what the goals are? Chris Zimmer Yes. Our capital this year, capital spending is going to be in the $18 million neighborhood. You can expect half of that, a little more than half of that to go towards what we call sustainability. So this is the maintenance and the upkeep of legacy equipment. We've got about $4 million going towards modernization projects. So this is the ability for us to be able to implement technology throughout the plants, helping a new generation of workers in the plants, work more efficiently and safely and get back to some of the production levels that we had enjoyed when we had what I call the pre-COVID workforce, and all the tribal knowledge that they contained and these modernization efforts are really starting to take hold as we've been expanding our production levels each quarter. And finally, the growth in ROI side of the CapEx spending is going to be in the neighborhood of $5 million to $6 million. These are going to be things like furnace capacity a number of the alloys that we're producing that are more advanced require a little bit more time in the furnaces. So, we're adding furnace capacity at the forge and downstream, putting investments into a number of areas that are either down money for investments next year like the VIM, or areas to be able to enhance our pull-through on the finishing side. I gave you a little bit of color. Hopefully that answers it Phil. Phil Gibbs What would you describe as your primary bottleneck right now in terms of capacity or capability? And then secondly, on the labor front, are there any thoughts that you need to add more targeted areas there? Or do you feel like you've got the right set of folks coming up the curve at the moment? Chris Zimmer Yes. So let me talk a little bit about what's been pacing lead times. For our premium products, VIM primary melt has been the area that has really been pacing lead times. We did have a very strong quarter ramping melt production there. We're on track to have another record production quarter at to VIM here in the third quarter, all in line with what we've got baked into the backlog. Aside from VIM melt production pacing lead times, finishing, particularly on small diameters has been another area that has also been pacing lead times, simply because of the nature of the labor intensity of the smaller diameter product. From a labor standpoint, we have seen better stability, but I'm not where we want it to be. We still have opportunities to continue to pull-through and retain workers at a higher level. As we get them working safely and efficiently following instructions and working to the levels that we need them to work at, I think we're really close to getting back to those pre-COVID production levels, which we're just shy of right now. But I expect as we move through the second half of this year into 2025, we'll return to those production levels. So, labor has improved. It's stabilized. But I think we can still continue to get better fully staffing up and securing those reliable good workers that we need. Phil Gibbs And how should we be thinking about net working capital over the balance of the year? And then within that, have you -- and I know the margins have been obviously outstanding but was there any misalignment still going on or is that still over? So, I guess two questions: one on the net working capital and one on whether or not that there's any raw material misalignment? Chris Zimmer Yes. So you'll see that inventories went up a little bit in the second quarter. The primary driver there is that we did get a little bit ahead of ourselves in melt by design late in the second quarter, knowing that we had some planned annual maintenance outages at our melt shops. So we will bring our inventories and our working capital levels back down to ending first quarter levels by the time we exit the third quarter here. So getting those inventories back under control, getting back realigned on that commitment to grow our top line while keeping our inventory levels flat to down. And remind me your second question there Phil. Phil Gibbs Was there any raw material misalignment in the second quarter? And what do you expect in the back half? Thanks. Chris Zimmer Yes, it was very minor. It was only an adverse about $500,000 to $600,000 that we see the misalignment impacting the second quarter. It got to the point where we didn't specifically call it out. So just modestly negative, but we're now seeing enough stability in surcharges and in the raw material flows that I don't expect it to have any type of a misalignment here in the third quarter. Thank you. Our next question comes from Bob Sales at LMK Capital Management. Good morning. Nice quarter. A couple of questions. First of all, on the premium alloy mix how much -- if you were to guess how much of that premium alloy goes into defense versus commercial aero? Chris Zimmer The majority. So the premium alloys lend themselves to structural components within defense applications both on fixed-wing fighter craft and on helicopters. The premium products also lend themselves to the engine part of the business. So obviously, you've got engines and fighter jets, but these premium products are also going into engines that are in the commercial aerospace side of the business. So rough cut, I'd say about two-thirds of those premium products are aligned with defense applications and about one-third of it ultimately into engines for commercial applications. Bob Sales Okay. Thank you. And then can you touch on the backlog a little bit? I think you mentioned -- can you expand on what you mentioned about the fact that order entry you're working with customers on order entry. I assume that meant that earlier in the year you were putting more orders into the system that you were constrained by and that's given some -- and you probably have some relief with throughput now, but I'm not sure I'm right. So can you expand on that a little bit? Steve DiTommaso Yes. The primary driver there as you look back particularly in 2023 when we had a high watermark for backlog at that time, we had premium alloy lead times that were out in the 70-week to 80-week range depending upon the size range of products. It makes it very difficult for our customers to plan on demand being that far out with the visibility that they have. So we've been working with customers assuring them an allocation so that they feel comfortable that they are going to have a spot in line with us but we've been walking back our lead times. And these days we've gone from call it mid-70s to right around 45-week to 50-week lead times on those premium alloys. And we've done that just by controlling order entry on a controlled basis periodically opening up the order book for customers to layer in new orders. So that total level of demand on aggregate of what we expect in the quarters to come continues to increase. But we've just been walking in the lead times. So this has been very helpful to our customers. It's given them the ability to layer in a higher assurance that the sizes and the grades that they're ordering align with what they need. This has been a very good thing for customers. And it's also helped to enhance us from a competitive standpoint. So as we continue to walk those lead times back in and ramp our production levels it's going to put us in a better position to sustain our growth trajectory. Bob Sales And what level do you feel will be -- for your premium what level do you feel like will be normalized lead times? Chris Zimmer Well that's a good question because I think we're still in an environment for the foreseeable future. And by that I mean years where we've got an environment where demand is going to outpace supply. And I'm speaking for the industry not just Universal Stainless. So the capacity is going to come as we ramp our efficiencies and we've got some modest increases that are going into the equipment at our VIM facility to be able to give us more capacity and throughput there. But I suspect that living in the call it 10-month to 14-month range industry-wide is probably going to be the new norm. A lot of that is going to depend upon the sustained growth and demand of these premium alloys and the ability for Universal and the industry for that matter to continue to ramp our throughput and production levels. Bob Sales Okay. And then lastly on backlog, so we don't draw any erroneous conclusions. Do you expect backlog continues to trend down over the next several quarters, as you make improvements? Or do you expect that it will maintain the level that we've seen this quarter? Chris Zimmer Well, I think my bias would be that it would move sideways to slightly down. I think the one wildcard there is, while it's clear that the aerospace and defense business continues to remain extremely strong, we continue to win new pockets of share, as we gain approvals but those markets outside of aerospace continue to be a bit muted. We think that some of it is tied to the election. The market is looking for some certainty moving forward. So we're turning in record results right now and we're not quite firing on all cylinders. Once that tool steel plate market or heavy industry market starts to pick back up, energy market, semiconductor that will help to bolster up our backlog and it's going to help to fuel the top line as well too. I've got a bit of a conservative approach. I'm not sure that we'll see that economic benefit in those other markets for us, until the latter half of 2024 going into 2025. But if the markets wake up and they decide that they want to start surging on order entry we're poised and ready to be able to meet that demand. Thank you. [Operator Instructions] Our next question comes from Phil Gibbs at KeyBanc. Phil Gibbs Thank you. My question was around the comments in the release on the sustainable cost improvement or efficiencies that you garnered as part of your gross profit margin outcome something certainly that appeared new to the discussion. So maybe talk a little bit about what that means and why you highlighted it this quarter? Thanks. Chris Zimmer Okay. Sure. Yeah. These -- I'm going to have Steve talk a little bit about it. He's worked closely with our industrial engineers technology and operations group quantifying these initiatives to reduce material costs ops costs improve yields. So Steve, do you want to touch base a little bit on these initiatives and why we're just now calling it out? Steve DiTommaso Sure. So we implemented some specific projects in our -- in 2023 as part of our 2024 plan to drive margin improvement. So some examples of those are actively reviewing heat charge makeups for our melt shops, and we trialed and successfully implemented lower cost methods of melting product without sacrificing quality. Another example would be yield improvement. So we carved out subsets of our product categories. We attacked our flat rolled plate business and some different components of our round bar business to drive yield improvement. So as I described those right melts and yield improvement they took some time and effort to implement. They work through our inventory and reach the P&L upon shipment. So we're really starting to see the benefits of those projects pop in Q2, which is why we're calling them out now. They're a significant part of that margin improvement. And we wanted to highlight them to drive home the message that they're sustainable. These are things that we've implemented and won't go away. Phil Gibbs Lastly for me, kind of on a different track, you've been -- you've been adding capability to the operations recently and then also overtime when you made the big acquisition a decade plus ago to sort of get you where you are with North Jackson. So there's certainly interest in building certain capabilities for the industry. And then there's sort of a limited asset set of places that can do these things. Has that drawn more interest in the M&A, environment? Is there -- is there -- and do you think the M&A environment could get more, active? I think one-by-one-by-one we've seen obviously with the Titanium operations that used to be out there in the marketplace which drove over [indiscernible] things like that overtime, PCC things have kind of gotten gobbled up. So there's sort of a lack of -- kind of a lack of assets out there seemingly in your wheelhouse. But are there any thoughts that there should be more consolidation in the market? Is that something that's being talked about more broadly by the industry? Chris Zimmer Yeah. I think you're spot on the idea that what we do is a unique spot in the Specialty Metals industry. There's, not a lot of players out there doing what we do. We know about Acerinox acquiring Haynes. It looks like that deal is getting ready to go through final approvals and to happen. As a public company, we're always susceptible to having those types of discussions. But I can tell you that our focus right now has been around executing on our strategy. We've got a big backlog, that we need to be able to eat into that I think is going to continue to drive better results. As we look around the industry and opportunities for us to be able to supplement our growth where we can find capacities we're utilizing them asssets out there in the marketplace that had historically supported automotive demand for example being able to partner up with some people to help us on the finishing side. And we do that in kind to wherever we've got some available capacities we'll offer out those conversion services to other customers. But you're right, the market is tight. VIM supply is tight demand is fantastic and it's only going to get stronger. But this is an industry that needs to find a way to grow. It needs to find a way to support all these planes that we need to build. But in short our focus right now is just being able to execute realize the full potential of the assets that we have, a very organic structure there, but keeping our eyes open on ways that we can find partners to help us accelerate that growth. Thank you. Our next question comes from Bob sales at LMK Capital Management. You don't consistently tell Denny Oates that this business is really easy to run, do you? Chris Zimmer Nos. No. No. I've been having fun in a new role. We've got a really good team here. So it's made the successful transition a lot user because we got a really good team here. Bob Sales I'm sure Denny is listening so I couldn't resist the question. Thank you. I'm showing no further questions at this time. I will now like to turn the call over back to Chris Zimmer, for closing remarks. Chris Zimmer Thank you. Thank you everyone for joining us this morning. The first half of 2024 was one of substantial progress and momentum and we're focused on continuing to achieve both of those during the rest of this year. I look forward to updating you all on the progress during our third quarter call. Thanks, and have a great day. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

Cohu, Inc. (COHU) Q2 2024 Earnings Call Transcript

Cohu, Inc. (NASDAQ:COHU) Q2 2024 Earnings Conference Call July 31, 2024 4:30 PM ET Company Participants Jeff Jones - CFO Luis Muller - President and CEO Conference Call Participants Brian Chin - Stifel Ross Cole - Needham & Company David Duley - Steelhead Securities Operator Good day, and thank you for standing by. Welcome to Cohu's Second Quarter 2024 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jeff Jones, Chief Financial Officer. Please go ahead. Jeff Jones Good afternoon and welcome to our conference call to discuss Cohu's second quarter 2024 results and third quarter outlook. I'm joined today by our president and CEO, Luis Muller. If you need a copy of our earnings release, you may access it from our website at Cohu.com or by contacting Cohu Investor Relations. There's also a slide presentation in conjunction with today's call that may be accessed on Cohu's website in the Investor Relations section. Replays of this call will be available via the same page after the call concludes. Now to the Safe Harbor. During today's call, we will make forward-looking statements reflecting management's current expectations concerning Cohu's future business. These statements are based on current information that we have assessed, but which by its nature is subject to rapid and even abrupt changes. We encourage you to review the forward-looking statement section of the slide presentation and the earnings release, as well as Cohu's filings with the SEC, including the most recently filed Form 10-K and Form 10-Q. Our comments speak only as of today, July 31st, 2024, and Cohu assumes no obligation to update these statements for developments occurring after this call. Finally, during this call, we will discuss certain non-GAAP financial measures. Please refer to our earnings release and slide presentation for reconciliations to the most comparable GAAP measures. Now I'd like to turn the call over to Luis Muller, Cohu's president and CEO. Luis? Luis Muller Good afternoon. Second quarter results were in line with guidance, with non-GAAP gross margin of approximately 45%, as we continue to navigate the trough of this semiconductor cycle. Revenue of nearly $105 million was split 66% recurring in the balanced systems. Systems revenue increased sequentially in consumer, optoelectronic, and computing markets, although offset by declines in automotive, industrial, and mobile. Despite soft market conditions, we continue to execute well on new product developments and deliver on design wins to expand customer and addressable markets. The most notable validation of our strategy was a recent customer benchmark award of an estimated $100 million business over five years for test automation and inspection systems. This award includes Krypton, our new inspection metrology platform targeting larger semiconductor devices. We also had a second customer select Krypton last quarter for an aerospace application. Combined with Cohu's AI inspection, which is part of our DI-core software suite, Krypton is delivering higher yield and productivity while enabling our customers push for automating back-end manufacturing. Putting this into perspective, Cohu's inspection metrology revenue was about $70 million during the prior upcycle and primarily driven by mobile semiconductor inspection. We're targeting to grow this business to $100 million over the midterm, expanding applications to other market segments where we can add value to our customers. We also had a good quarter in our tester business and placed our Diamondx tester at two subcontractors in Taiwan. We received the first order for a Diamondx mixed signal configuration from a leading test subcontractor in Cheng Li, Taiwan, and another Taiwanese OSAT selected Diamondx to test RF IoT devices from a leading IC fabless company. We're tracking to plan to expand the Diamondx customer footprint, positioning the tester as a cost-effective broad application platform that enables customers to efficiently test our roadmap products in the coming decade. In support of this growth strategy, we announced in June the opening of a new engineering design center in Penang for development of test instrumentation. While sub-seasonal test utilization in the automotive market is impacting near-term revenue for both systems and interface products, we are pleased to have landed a major silicon carbide customer for our new cStrider power probe card. cStrider utilizes Cohu's horizontal MEMS technology to enable improved performance and durability for testing power semiconductors such as silicon carbide. The product enables high current carrying capacity and with a multi-site pressure technology enables high voltage test at temperature. This is Cohu's newest offering in probe card technology designed to meet the expanding needs of power semiconductor testing. Our goal since the acquisition of Xcerra almost six years ago has been to drive interface revenue penetration to 50% or more of Cohu's systems. Last quarter results placed us at a two-year average penetration of 44% or about 9 points higher than when we started this journey. In this soft market environment, we're applying the same playbook of past cycles and have been diligent in lowering expenses, effectively delivering a strong gross margin while preserving critical R&D investments. Estimated test serialization has improved now for the second quarter in a row to 74%, a 2 point sequential increase over the first quarter. Although we expect broad capacity orders to be triggered around 80% test serialization, it has been encouraging to see the quarter-over-quarter improvements, particularly in computing that is up 3 points sequentially to 70% and mobile that's up 2 points to 69% utilization. The positive news comes tampered by automotive utilization down 1 point quarter-over-quarter to 77% at the end of June. Our data indicates that Cohu's largest customers in the analog semiconductor market are starting to see improved test cell utilization, likely at a pace that will put the industry in a recovery mode in the first half of 2025. In the meantime, we're carefully managing expenses to optimize cash flows, but now more than ever focused on design wins and execution of innovative product developments. Let me now turn it over to Jeff to provide further details on second quarter results and third quarter guidance. Jeff? Jeff Jones Thanks, Luis. Before I walk through the Q2 results and Q3 guidance, please note that my comments that follow all refer to non-GAAP figures. Information about the non-GAAP financial measures, including the GAAP to non-GAAP reconciliations and other disclosures, are included in the accompanying earnings release and investor presentation, which are located on the investor page of our website. Now turning to the Q2 financial results, Cohu delivered revenue and profitability in line with our guidance. Q2 revenue was $104.7 million. Recurring revenue, which is largely consumable driven and more stable than systems revenue, represented 66% of total revenue in Q2. During the second quarter, no customer accounted for more than 10% of sales. Q2 gross margin was 45.1% in line with guidance and driven by Cohu's resilient recurring business. Operating expenses for Q2 were $46.9 million and lower than guidance by approximately $1.6 million, driven by lower labor and labor-related costs. Second quarter non-GAAP operating income was approximately break-even and adjusted EBITDA was 3.8%. Interest income, net of interest expense, and a foreign currency loss of approximately $400,000 was $1.8 million. Q2 pre-tax income consists of foreign profits combined with a loss in the U.S. The Q2 tax provision of $2.7 million reflects tax expense on foreign profits, but no tax benefit from the U.S. loss due to our valuation allowance against deferred tax assets. Non-GAAP EPS for the second quarter was a $0.01 loss. Now moving to the balance sheet, we generated positive cash flow from operations in Q2 of $1.1 million, despite trough revenues. Overall cash and investments decreased by $9 million during Q2 to 262 million, due mainly to $8 million used to repurchase 267,000 shares of Cohu Common Stock. CapEx in Q2 was $2 million, with approximately $1 million related to our factories in the Philippines and Malaysia, supporting operations for our interface and automation businesses. Overall, Cohu's balance sheet remains strong to support investment opportunities to expand our served markets and technology portfolio in line with our growth strategy and return capital to shareholders through our share repurchase program. Now moving to our Q3 outlook, we're guiding Q3 revenue to be in the range of $95 million-plus or minus $5 million, reflecting continued weakness across end markets, and although test cell utilization at customers' production facilities increased quarter-over-quarter, it remains below the historical threshold for customers to add more test capacity. Q3 gross margin is forecasted to be approximately 45%, better than the financial target model at this level of revenue, due in part to Cohu's differentiated products and our stable high margin recurring business, which adds resilience to profitability and provides consistent cash flow through industry cycles. We expect gross margin to increase again when our revenue recovers with a broader semiconductor device market recovery and with better absorption of our factories' infrastructure costs. Operating expenses for Q3 are projected to decrease about a $1 million quarter-over-quarter to approximately $46 million, due primarily to a reduction in labor and optimizations as we completed certain product developments. As I noted on prior earnings calls, we have taken action to reduce operating expenses without sacrificing critical new product investments while navigating through the trough of this cycle. As a result, we're now modeling operating expenses to average approximately $46 million per quarter in the second half of this year. We're projecting Q3 interest income, net of interest expense, and foreign currency impacts to be approximately $1.8 million at current interest rates. We expect Q3 adjusted EBITDA to be approximately 1%. The Q3 non-GAAP tax provision is expected to be approximately $1.8 million because of tax on foreign profits without benefit from the U.S. loss. Until markets recover, we expect a similar tax provision profile as we navigate through this cycle. The basic share count for Q3 is expected to be approximately 47 million shares. That concludes our remarks and now we'll open the call to questions. Question-and-Answer Session Operator [Operator Instructions]. Our first question will come from the line of Brian Chin with Stifel. Brian Chin Hi there, good afternoon. Thanks for letting us ask a few questions. I guess, can you perhaps just provide a little color on the revenue outlook in 3Q by equipment versus recurring and also across key markets like mobility and industrial and automotive? Jeff Jones Hey Brian, I'll provide the recurring versus system. So in Q3, we're expecting recurring to be about 68% of the revenue, 32% for systems. Luis Muller Yeah, I think you can look at the presentation, Brian. We have the system's revenue distribution by markets where it came out stronger in the mobile as a percentage of total, followed by at 9% automotive, 7%, industrial, consumer, 5%, computing, 4%. Brian Chin Thank you. Also, do you expect a similar composition in Q3 for those markets? Luis Muller No. When you look forward, we saw sort of strengthening demand in the computing and mobile markets and continued weakness in automotive. So I think what you see going forward is maybe computing will climb up the ladder and get closer to the mobile segment. Brian Chin Got it. Just a couple more for me. Do you anticipate test cell utilization trending higher into year end? And after operating at lower utilization for many quarters, if not years, I'd imagine there's been some retirement or maybe cannibalization of some of your installed base as a precursor to that maybe shipment pickup that you anticipate in first half of next year. Are you seeing test handler kit or spares revenue start to tick up? And do you have any visibility into sort of the 4Q revenue trend? Luis Muller Yeah, so multiple questions there. As far as utilization goes, we don't forecast utilization, Brian. We don't really have a model for that. But sitting at 74% and considering that end of the year is typically the seasonally lower quarter for demand, I would venture to say that utilization will be flattish to perhaps up a 1 point or 2 by the end of the year. So that's where we're on the utilization front. It really depends on the puts and takes between improvements in mobile and computing and where automotive goes from here. I forgot what the other elements of your question were, but I think you talked about sort of how that impacts cannibalization of equipment. And we're certainly seeing that cannibalization happen right now at our customers, which has negatively impacted sale of spare parts. Quite honestly, it has even negatively impacted sale of interface products where certain customers are sub-optimizing the utilization of the equipment that they have simply because they don't have that need in as much to run production and they're trying to conserve expenses. We expect that the first thing, the first real signs we'll see will be a surge in spares demand before we see a demand increase in equipment. We have not seen that in the second quarter. Brian Chin I guess sort of maybe just to clarify that part of my multiple part question there, AP companies, you know, they've pointed to something like double digit declines in the auto industrial and even the manufacturing sector. So, I guess my question is, how much do you see the mobility test markets this year, how much do you see the test handling market X memory down this year and in relation to ATE's, and I ask that also because these equipment run rates, look like maintenance or even really sub-maintenance levels. And so, I mean, when was the last year that handling market maybe was this low, maybe 2018 and what was the trend in the market, the following year? I imagine it was a pretty decent downslope. Luis Muller Yeah, I don't have a specific year-over-year, maybe Jeff does, but I don't have it on my fingertips here for the handler market, but I think it is, I'll think about this in a second, I think, yeah, it's definitely a double digit sort of in the teens decline, perhaps even 20% decline year-over-year in '24. It's actually lasting fairly long now, if you think about the quarter-over-quarter sequence since kind of the middle of last year into where we are today, so if you look at past cycles, it's not uncommon to see revenue sort of go up 40%, 50%, even 60% on a year-over-year basis when you have a prolonged drought, by having right now in the test and test analyst space. But with that said, don't have a prediction for you right now for 2025, other than the general discussion with customers is positive, particularly in computing and mobile in a near term, some indicatives of industrial market recovery as well in the beginning of '25. And then I think, the wild card here is with the -- where's the turn of the corner [ph] on the automotive market. Brian Chin Okay, that's helpful. Thanks, Luis. Thanks, Jeff. Operator Our next question will come from the line of Ross Cole with Needham & Company. Ross Cole Hi, thank you for taking my question on behalf of Charles. So you had mentioned with Krypton, you have two new customers. And previously, I know you had mentioned that Krypton had been qualified. So are these the separate customers from the qualification you had previously mentioned, or is it the same? Luis Muller Hi, Ross. We issued a press release here at the end of June about a qualification at a major automotive customer in Europe. Now we're talking about two. One of these two is the one that was part of that press release. But we also had a second customer, Qualified Krypton, at the very end of June, also a European customer, coincidentally, both European customers. So we have two customers qualified, one in the automotive space, one for an aerospace application for starters. And like I said, one of these were part of the press release we did in the middle of June. Ross Cole Great, thank you for clarifying. And then if I can ask a second question as well, it sounds like you still expect auto and industrial weakness to continue a little longer. So you're seeing the mobile PC recovery first. And were you expecting that to start taking, the recovery mode to start taking place around the first half, '25, it sounded like you said? Luis Muller Computing and mobile, we will see still, we're going to see the turn this year already. I mean, we're seeing the demand and the revenue expectation here in the fourth quarter. I think the unfortunate counter to that is the automotive continues to be weak. And so you kind of have to net out the weakness in automotive with the improving demand in mobile and computing for the fourth quarter of this year. Ross Cole All right, great, thank you. Operator [Operator Instructions]. Our next question will come from the line of David Duley with Steelhead Securities. David Duley Good afternoon. A couple of questions from me. I guess you talked about a silicon carbide probe card win, which I think is kind of a new piece of business. I was wondering if you might elaborate a little bit more on why you won the business and what the opportunities are in probe cards for power and silicon carbide for you guys. Luis Muller Hi, Dave. Yeah, great question. And you're correct. This is a power probe card is a new, completely new product line for us. We have been supplying power contactors for the industry, and including silicon carbide, actually. This has been a successful business for us, a differentiated business. And customers have asked us to basically bring what we're doing in known good die, singulated die test into a probe card environment, sort of a probe environment. So we've done exactly what the customers have asked. And the first customer has qualified the product, placed an initial PO, and we have two other customers right behind it in qualification mode. So we're pretty excited to bring a new solution here that we believe, for customer's feedback, that it's quite differentiated because it allows you to do multi-site testing of devices that have very high currents, very high voltages. David Duley And, you know, could you help us understand what the size of this opportunity is, either in the market, or what might be for you guys? Luis Muller Yeah, yeah, yeah. Good, yeah, I recall you asked that question, too. Sorry about that. David Duley Yeah. Luis Muller Now, we're looking at this particular customer that we broke in. We see their spending being about $7 million a year. So let's see how much of that we can get. David Duley Okay. And then, changing topics to the Diamondx wins, I think you mentioned a mixed signal win and another win in IoT, I guess. Luis Muller Yeah. David Duley You know, help, maybe help us understand, again, the same question is, how big of opportunity do you think the expansion of your Diamondx platform is in total, either in the TAM or the opportunities for you guys? I appreciate all the detail. Luis Muller Yeah. This one I'm going to have to be a little bit more vague on the opportunity size. Frankly, it's not that we have that much precision in this one. But it is a, there's a Diamondx mixed signal configuration at a, you know, sort of leading OSAT in Taiwan. You know, the tester selection was largely driven by a fabulous company into that OSAT. We tend to target things that are sort of $5 million chunks of business. Whether this will be that or not, it's a little difficult for us to pinpoint at this time. And then the other one was an RF IoT device application, also at an OSAT in Taiwan, and driven by a Taiwanese fabless RF company. Also, same story here. You know, we target $5 million chunks. As you know, the RF market is not in its best shape at this moment. So I think we're looking at that as a opportunity for a $5 million byte into next year. David Duley Okay. Thank you very much. Luis Muller You're welcome. Operator Our next question will come from the line of Mayur Puri [ph] with B Riley. Q - Unidentified Analyst Hi, I'm calling in for Craig from B Riley. My question is just like, how can we look at the kind of shape of the eventual recovery? And what are some leading indicators that we can take a look at to see when that recovery is starting to pick up? Luis Muller Yeah, hi. You know, it's a good question. And realistically, you going to look at it market-by-market, right? Not every market goes in tandem. It's not one monolithic semiconductor or end market driver. So we're seeing the, obviously have seen for several quarters now, just not that much of a benefit for Cohu. But we've seen the AI data center GPU market rise and concurrent with that, the DRAM or HBM application. That has been going on for a few quarters now. Reminder, Cohu doesn't participate in memory today. We're now starting to see sort of the computing server market started to show signs of recovery. Along with that, we're seeing some green shoots in the mobile market. As I said before, we'll see some of that revenue materialize in the fourth quarter. What comes behind that is likely to be industrial based on conversations we're seeing with customers today. And that is probably a Q1 2025 story. And I think the big question mark still for us included is at what point does automotive start to recover? And that's very important for Cohu because Cohu's largest market segment is automotive. So automotive was the last to come down in this cycle and will naturally be the last to come back up. Question mark is it first quarter, second quarter next year exactly when that will happen is what we're trying to understand. So a recovery has started. But it's going to go through phases, market segment by market segment, probably over the next year. Q - Unidentified Analyst Thank you so much. Operator That concludes today's question-and-answer session. I'd like to turn the call back to Jeff Jones for closing remarks. Jeff Jones Thank you. And before we sign off, I'd like to mention that we'll be participating in some conferences over the next few months. And they are the Needham Virtual Conference on August 21st, the Jeffries Conference in Chicago on August 27th, the Evercore Conference also in Chicago on August 28th, and the Citi Conference in New York City on September 6th. So if you're interested in meeting with us at any of those conferences, please let me know or reach out to the respective research analyst to schedule a meeting. So thank you for joining today's call and we look forward to speaking with you soon. Operator This concludes today's conference call. Thank you for participating. You may now disconnect.

Earnings call: Forrester's Q2 results show mixed performance amid transition By Investing.com

Forrester (FORR) reported a mixed financial performance in its second-quarter 2024 earnings call, with CEO George Colony and CFO Chris Finn providing insights into the company's ongoing transition to Forrester Decisions. While total contract value (CV) bookings grew by 5% year-over-year, overall revenue declined by 10%, affected by underperformance in the Events and Consulting businesses. Despite the challenges, Forrester is making progress with its Forrester Decisions migration, expecting 80% of CV in Forrester Decisions by year-end. The company has revised its full-year revenue guidance to $425 million to $435 million and earnings per share to $1.37 to $1.57, reflecting the current headwinds. Key Takeaways Company Outlook Bearish Highlights Bullish Highlights Misses Q&A Highlights Forrester is navigating a period of transition, with efforts to enhance its product offerings through tools like Izola and a strategic focus on migrating clients to Forrester Decisions. The company is actively managing its sales force, working to improve retention, and remains proactive in buyback activities. Despite the challenges faced in the Events and Consulting segments, Forrester's leadership is optimistic about the company's stabilization and growth prospects as it continues to adapt to the evolving market landscape. InvestingPro Insights Forrester (FORR) has been navigating through a transformative phase, and real-time data from InvestingPro provides a deeper look into the company's financial health and market position. As of the last twelve months as of Q1 2024, Forrester holds a market capitalization of approximately $377.75 million, indicating its size and influence within the industry. Despite the reported revenue decline, the company boasts an impressive gross profit margin of 57.22%, reflecting its ability to maintain profitability in the face of revenue headwinds. InvestingPro Tips highlight several key points that investors may find valuable when considering Forrester's prospects. Firstly, the company is expected to be profitable this year, which aligns with the optimistic view shared by Forrester's leadership during the earnings call. Moreover, Forrester's strong return over the last month, with a 13.58% price total return, suggests a positive market response that could be indicative of investor confidence in the company's strategic initiatives. Additionally, analysts have revised their earnings expectations downwards for the upcoming period, which may warrant attention from investors as this could impact future performance. However, it's worth noting that Forrester's balance sheet holds more cash than debt, providing financial flexibility and potentially mitigating risk for investors. For those seeking more detailed analysis and further insights, InvestingPro offers additional tips on Forrester, which can be accessed through the InvestingPro platform. For a comprehensive understanding of Forrester's financials and to explore more InvestingPro Tips, interested readers can visit https://www.investing.com/pro/FORR. With a total of 10 additional tips listed on InvestingPro, investors can gain a more nuanced view of Forrester's financial standing and future outlook. Full transcript - Forrester Research (NASDAQ:FORR) Q2 2024: Operator: Good afternoon, and thank you for standing by. Welcome to Forrester's Second Quarter 2024 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Vice President of Corporate Development and Investor Relations, Ed Bryce Morris. Please go ahead. Ed Bryce Morris: Thank you. And hello, everyone. Thanks for joining today's call. Earlier this afternoon, we issued our press release for the second quarter 2024. If you need a copy, you can find one on our website in the Investors section. Here with us today to discuss our results are George Colony, Forrester's Chief Executive Officer and Chairman; and Chris Finn, Chief Financial Officer. Carrie Johnson, our Chief Product Officer; and Nate Swan, Chief Sales Officer, are also here with us for the Q&A section of the call. Before we begin, I'd like to remind you that this call will contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as expects, believes, anticipates, intends, plans, estimates or similar expressions are intended to identify these forward-looking statements. These statements are based on the Company's current plans and expectations and involve risks and uncertainties that could cause future activities and results of operations to be materially different from those set forth in the forward-looking statements. Factors that could cause actual results to differ are discussed in our reports and filings with the Securities and Exchange Commission. And the company undertakes no obligation to publicly update any forward-looking statements whether as a result of new information, future events or otherwise. Lastly, consistent with our previous calls, today we will be discussing our performance on an unadjusted basis, which excludes items affecting comparability. While reporting on an unadjusted basis is not in accordance with GAAP, we believe that reporting numbers on this adjusted basis provides a meaningful comparison and an appropriate basis for our discussion. You can find a detailed list of items excluded from these adjusted results in our press release. And with that, I'll hand it over to George. George Colony: Thank you, Ed. And I'd like to welcome everyone to Forrester's second quarter 2024 investor call. I will cover the following four themes before turning the call over to Chris Finn for our financial update. Number one, Forrester's Q2 financial performance; two, Forrester Decisions and the enhancements we're making to the product; three, our second quarter events; and four, changes in Forrester's management team and Board. Turning first to second quarter performance. While total contract value or CV showed a decrease of 3%, we beat our CV bookings plan in the quarter, representing growth of 5% year-over-year. These results were driven by improved renewal rates of Forrester Decisions, a greater-than-expected volume of cross-sell deals, and improving new business flow from both vendor and enterprise user clients. As a result, wallet retention increased by one point to 89%. Despite positive movement in contract value bookings, Q2 revenue was down 10% year-over-year, primarily driven by underperformance in our Events and Consulting businesses. We continue to stay on track converting contract value over to Forrester Decisions. In Q2, 73% of our CV was in Forrester Decisions, up from 70% at the end of Q1. We remain on plan to hit our target of 80% of CV in Forrester Decisions by year-end. As contracts convert, we are seeing an increase in the percentage of deals that are multiyear. 68% of FD contract value is now two or more years in length. These longer terms make sense for clients as their initiatives and transformation projects span a series of years. For Forrester, multiyear deals are beneficial as they renew at higher rates and give the company a more predictable flow of revenue. Our long-term goal is to move 80% of our FD research contracts to multiyear. We are becoming increasingly confident that our research CV business is stabilizing, and we expect to show modest net contract value increase, or NCVI, by year-end as we exit the Forrester Decisions transition. I would now like to give you an update on our ongoing product enhancements. In Q2, we made our generative AI tool, Izola, available to all clients of Forrester Decisions. The Izola prompt is now the third most common action taken by clients, behind selecting a report and conducting a traditional indexed search. The percentage of questions that Izola answers from a single prompt reached 91% in Q2, up from 86% in Q1. And here are a few client quotes. And this first one is from a VP of supply chain. "There's so much research and assets and goodness from Forrester. Izola helps me carve through all of that to find exactly what I want." And here's a quote from a VP of customer experience. "Before Izola was launched, I spent hours trying to remember where I had found a nugget of information in your research. Instead of having to go back and thumb through research, I can now just type my question to Izola and the right research will pop right up for me." We continue to enhance Izola, adding question-and-answer history logging two weeks after the full launch. I believe that Gen AI will make our research more accessible and useful for our clients. It is the most important change in our business since the web in 1991. Now the company is not only leading in the use of AI, we are aggressively expanding our research coverage of the technology for our clients. In Q2, we published a comprehensive evaluation of large language models. The AI Foundation Wave breaks down LLM offerings strategy and market presence across 21 criteria for 10 providers. This evaluation is the first of its kind from any major research firm, and it brings clients critical insight as they begin to build out their first Gen AI applications. Available for just two months, it is already in the top 15 most-read Forrester reports year-to-date. Now as investors know, Forrester Wave, which evaluates over 1,000 vendor offerings per year, are a central pillar of the Forrester Decisions' value proposition. Technology purchases constitute significant long-term financial risk for large companies. The Wave de-risks those decisions. In Q2, the Wave was enhanced with a new interactive tool, enabling our clients to clearly see each Wave's evaluation criteria, scale explanations and scores. Clients can customize Wave findings based on their company priorities to easily compare vendors and create shortlists based on their specific requirements. This new tool is driving platform use and bringing added value to our clients who rely on Forrester Wave for an assessment of the market. Reprints are an important ancillary business to research, and we have built a new platform to administer and distribute this product. Our newly launched Reprints hub will allow clients to easily manage their licenses within the core digital forrester.com platform. Switching to our new in-house platform brings us operational efficiencies and cost savings, and it has enabled the creation of a new product, Flexible Reprints, which launched at the end of the second quarter. The continuous improvement of our contract value products is having an impact. Twice a year, we administer a client satisfaction survey, and in Q2, the results of that survey ticked up by three points, a significant swing. Improved products and increased customer satisfaction set the stage for higher renewal, enrichment and new business rates, which will result in strong contract value growth. In Q2, we held our two largest events, B2B Summit in Austin and CX Summit in Nashville. Both events scored at high levels for content, value and experience. Valuable case studies were presented from a number of companies, including Prudential (LON:PRU), Nedbank and IHH Healthcare Singapore. While our content and value delivery excelled, we did not meet our sponsorship targets for either event, and this will have an impact on our full year revenue. I'd like to end my remarks with some recent additions to the Board and the leadership team. At our Board meeting last week, I introduced two new members: Cory Munchbach and Bob Bennett. Cory is the CEO of the customer data platform BlueConic. She is a former Forrester analyst who covered business and consumer tech trends and the mar-tech landscape, whose expertise will help us in the B2B marketing space. Bob Bennett is a serial entrepreneur and inventor, most recently the CEO of payments company EngageSmart, which Bob founded and took public. Bob has been a relentless driver of annual recurring revenue in the software space, and valuable to us as we look to drive CV growth. Both Cory and Bob will be excellent representatives for shareholders. Turning to the management team. We announced the appointment of Jobina Gonsalves as our new Chief People Officer in Q2. Jobina has more than 20 years of global HR experience across Asia, Europe and North America. She is a great addition. And now I'd like to turn the call over to Chris for a full update on our financial performance. Chris? Chris Finn: Thanks, George, and good afternoon, everyone. We saw positive signs in our CV business in the second quarter as CV bookings exceeded our plan, revenue performed in line with expectations, and retention metrics improved modestly from Q1. However, the non-CV portion of the business continues to be challenged. Our Events business underperformed in what is our largest Events quarter, and the headwinds we have seen in Consulting continue. Although we believe these headwinds are transitory in nature, the challenges of our non-CV businesses have led us to lower our financial guidance for the year. Despite the mixed results, we are encouraged by the continuation of positive trends in our CV business from Q1 into Q2, including reaching 73% of CV in Forrester Decisions, an ever-growing contribution of multiyear deals, and the ongoing improvements in our retention metrics. Our continued go-to market work involving sales, marketing and customer success is starting to pay dividends from a pipeline, new business and renewal perspective. This gives us renewed confidence in our ability to deliver flat to slightly positive CV performance by year-end. CV declined 3% in Q2, a slight improvement from the 4% decline in Q1. And overall revenue decreased 10%. For the total company, we generated $121.8 million in revenue, compared to $135.6 million in the prior-year period. In terms of our revenue breakdown for the quarter, research revenues decreased 5% compared to the second quarter of 2023, with revenue from our subscription research products down 1%, coupled with declines in our reprint and our other smaller and discontinued products. Overall client retention of 73% and wallet retention of 89% improved slightly compared to Q1, while Forrester Decisions specific client retention of 81% was down slightly and wallet retention of 90% improved versus the first quarter. As we complete the Forrester Decisions migration in 2024, we expect retention metrics to slowly improve throughout the year. Although overall client count is down from the prior quarter, Forrester Decisions client count continues to grow, and Forrester Decisions client retention remains well above overall client retention by approximately 8 points. It should also be noted that even though client count is down, CV per client continues to grow. And with the cross-sell and up-sell opportunities inherent with the Forrester Decisions platform, we believe CV per client will continue to grow meaningfully into the future. We remain on track for our Forrester Decisions migration plan, and we now have approximately $237 million of CV or 73% of total CV on the platform. We are targeting approximately 80% of total CV on Forrester Decisions at year-end. The remaining 20% will be in the non-Forrester Decisions products like Reprints and our Feedback Now business, as well as less than 5% in the legacy research products. Our Consulting business posted revenues of $24.8 million, which was down 17% compared to the prior year. Both the Consulting and Advisory product lines had a challenging quarter. Macro headwinds impacting our Consulting business will continue throughout 2024. These headwinds are causing our clients to put off buying decisions and limit their discretionary spending on Consulting. And finally, regarding our Events business, we held four events in the second quarter and posted revenues of $13.4 million, representing a decrease of 25% compared to the second quarter of 2023. The Events challenges were primarily driven by sponsorship declines and, to a lesser extent, lower ticket sales. We saw conditions worsen in Events from our prior outlook, and we are being cautious with our revised outlook for both Consulting and Events for the remainder of the year. This is the cause of the adjustment to our guidance this quarter. Continuing down our P&L on an adjusted basis, operating expenses for the first quarter decreased by 5%, primarily driven by lower compensation and related costs. Specifically on headcount, for the second quarter, we were down 8% compared to the same period in 2023. We continue to monitor headcount, hiring and attrition very closely. Operating income decreased by 30% to $17.9 million or 14.7% of revenue in the current quarter, compared to $25.7 million or 19% of revenue in the second quarter of 2023. Lower operating income and margin were primarily driven by the revenue declines in our Consulting and Events businesses. Interest expense for the quarter was $0.8 million, up slightly versus the second quarter of 2023. Finally, net income and earnings per share decreased 29% and 28%, respectively, compared to Q2 of last year, with net income at $12.9 million and earnings per share at $0.68 for the current quarter, compared with net income of $18.1 million and earnings per share of $0.94 in the second quarter of 2023. Looking at our capital structure, during the first half of 2024, cash flow from operating activities was negative $2.3 million and capital expenditures were $2.3 million. Cash flows were negatively impacted by the payment of the litigation settlement last quarter, as well as severance payments under our restructuring plans. We had $110.8 million of cash and investments as we exited the quarter. We repurchased approximately $3.9 million worth of shares in the quarter. This leaves approximately $88 million of our stock repurchase authorization intact. As noted earlier, guidance for 2024 has been updated, so let me provide some additional commentary on the outlook for the year. Revenue is now expected to be in the range of $425 million to $435 million. This guidance assumes the outlook for the research business remains unchanged with a mid-single-digit decline, a decline in our Consulting business in the low 20s, and a decline in our Events business in the high 20s for the year. Operating margins are now expected to be in the range of 8.5% to 9.5%. Interest expense is expected to be approximately $3 million for the year. We are continuing to guide to a full year tax rate of approximately 29%. Taking all of this into account, we are now expecting earnings per share in the range of $1.37 to $1.57, down from our previous guidance of $1.50 to $1.70. As expected, 2024 is proving to be a challenging year as we finish the Forrester Decisions migration amid an uneven macroeconomic backdrop. We're starting to see some positive signals as we progress through the first half of 2024, specifically within our core research business. The ongoing improvements to the Forrester Decisions product, the importance of generative AI disruption, and the go-to-market enhancements are setting the stage for growth in 2025. We believe in our product strategy, the value of Consulting and Events to drive retention and new business, our ability to guide clients through technology change, and the long-term trends supporting the business. Thank you all for taking the time today. And with that, I will hand the call back to George. George Colony: Thank you, Chris. Before we go to Q&A, I'd like to reiterate the main themes. Number one, our CV business is stabilizing. Number two, the Forrester Decisions transition is on track, and we expect it to be complete by year-end. Three, there were a number of product innovations, led by Izola. Four, Events in Q2 scored well in content but fell short in sponsorships. And five, two excellent new members have joined the Forrester Board. Thank you for listening, and I will now hand the call over to the operator for Q&A. Operator: [Operator Instructions] And I show our first question comes from the line of Anja Soderstrom from Sidoti. Please go ahead. Anja Soderstrom: Hi. Thank you for taking my questions. You have a lot of internal transitions going on this year. So how dependent are you in the macro environment to improve to show some revenue growth in 2025? George Colony: Your question was, are we looking for macro to change? Anja Soderstrom: Yes. How dependent are you for that to change, given you're transitioning and the expansion you have with existing clients -- seems like you have a lot of internal things going on that could help you in 2025. So how dependent are you on also the macro environment improving? George Colony: I think somewhat, I mean, this is going through a transition like this, Anja, has been -- it's always difficult, but doing it in this economic environment has made it much more challenging. That being said, I think there are glimmers around the edges. I know on our Board meeting there was talk about the U.S. looking better, Europe looking maybe a little bit worse. But I think we're going to see some rate cuts here in the second half of the year, and I know Chris has stronger views than I do on this. But some rate cuts in the second half of the year and early in 2025. And that's going to -- I think that's going to help the general economy. It's going to help us. That's my... Chris Finn: Yes. I agree with that, George. I would think, in general, though, look, given this challenging environment, I don't think it's really changed significantly. I think it's still tough out there. But to your point, we're making a lot of addressing, a lot of issues on our end, and the work that the go-to market team and Nate and the sales organization has made, I think, are helping tremendously. We're starting to see some of that positive result and positive results from a CV perspective. But it's early yet, and so -- but nothing that we're doing right now from a forecast perspective is relying on anything changing in the macro environment. I mean this is just continuing to delve into the issues and try to find growth where we can. George Colony: And the tech economy, Anja, is still recovering, no doubt about that, even the large -- for the large vendors. Anja Soderstrom: Yes. And how is the government clearance coming along? Nate Swan: We feel very -- Anja, it's Nate. We feel very confident in our plan with the government. We're seeing, not just U.S. but around the world, we have opportunity to earn that business. It's obviously a big quarter in the U.S. for the federal government in Q3. Feel like we're well positioned and are expecting big things from that team this quarter. So really excited, and excited about what we're seeing across government around the world. George Colony: We're hearing from government teams, Anja, that they want an alternative in the research space. And so we've been engaging on that. Anja Soderstrom: Okay. Sounds exciting. And then in terms of the Events business, it seems like that was a bit of surprise maybe, mostly on the sponsorship side. What are you hearing there? And what do you think the reason is for that? And what kind of initiatives are you taking for next year to improve that? Carrie Fanlo: I'll take that. Anja, it's Carrie. The sponsorship business, as you can imagine, is 100% tied to the high-tech industry. And as we saw companies look to get more value out of, obviously, what we talked about as already a very good event, I think we struggled a bit to react to a more challenging sales environment there, more of a solution sell on that event, similar to what we've seen in the sort of core Forrester business. We do have new leadership in our event sales sponsorship business that has -- this leader has an outstanding track record of elevating the skills needed of a sponsorship team. So we're confident that we can adjust to the changing market, and the new leadership will help us get there, especially based off the strengths of the events experience that we're offering. Operator: And I show our next question comes from the line of Vincent Colicchio from Barrington Research. Please go ahead. Vincent Colicchio: Yes. Nate, I'd like an update on how you're feeling about the sales force. There's was a drop in the number of -- total number of salespeople in the quarter. Wondering if that's involuntary and then just wondering if you feel like you've got a strong, balanced sales force, or if the strength there is more concentrated in a few members. Nate Swan: Yes, Vince. Great question. Thanks very much. Feel very good about the progress that we're making with the sales force. So we really focused in Q2, we had three specific messages that we were working on with the sales organization, building pipeline, number one. Rolling out our retention process across the organization, so lots of great work across the Forrester ecosystem, including customer success, the sales organization and the analyst community, to make sure we were delivering for our clients and get an operational retention system in place and structured. And then finally, we've rolled out our Forrester sales process to make sure that we are consistently working with more senior-level executives and connecting with them on the issues and initiatives that they're working on. All three of those, it was a lot of work, across the sales and sales operations, customer success, and really across Forrester, are operating really well. Very pleased with the progress that we've made. Pipelines are improving. We saw a 30% improvement in-quarter of our pipelines. We need to just convert that to growth. But the first step is actually getting it into the pipeline. So feel really good about that. The sales headcount is just normal attrition. We are stepping into our performance management. We hire really good people into the sales organization. We're trying to bring them back into the organization if they're not performing. And then some people will choose to opt out if it's not the place that they want to be. But our intention with our performance management program is to manage people back into the business and help them be successful. So we've been doing that. We're seeing a little bit higher attrition than we did in 2023, but that was expected going into this year. So, nothing outside of the plan. And we'll continue to bring in head count where we see a really good opportunity. So the plan is staying steady with that single-digit headcount growth throughout this year. So anything else I can clarify? George Colony: Good candidates on the street though, right? Nate Swan: That's a great point, George. We have seen some really good candidates. I know several of my regions have been commenting about the high quality that we're seeing coming into the organization, which is a big change from a couple of years ago where it was really difficult to find high-end talent. Vincent Colicchio: Very helpful color. It was nice to see CV stabilize. And Chris, you had mentioned the outlook for CV in the next two quarters. I missed that. Did you say flat to up slightly? Chris Finn: Yes. Well, for the full year, Vince, we expect CV to be flat to slightly up as we continue through the migration. We're confident in getting to 80% plus of our CV to be in FD by the end of the year. And from a heritage perspective, I mean, we're less than 12% at this point on heritage, and we're continuing to drive migration pretty significantly. And then for the high-risk portion, that sub-50, I mean, we're less than 4% at this point. And we expect overall heritage in general by the end of the year to be less than 5%. So we are really on track to be fully through the migration effort by the end of the year. George Colony: Yes. And Vince, the sub-50 is small vendors, below $50 million in revenue. Chris Finn: Yes. Vincent Colicchio: And George, are you seeing the effectiveness of Izola, it sounds impressive, helping spur additional sales of seats? Nate Swan: I'll jump in on this, Vince. I wouldn't say we can say there is a quantified number based on what we see with Izola, but our clients like it. We have a lot of valuable research, so to be able to cut through to exactly what they're looking for, it helps. We want people to access, use and come back. So the quicker they can get that, the more likely they are to engage with Forrester. Our sales people love to be prepared with it. So they go out to a meeting with a client and they use Izola to help prep on some of the issues and show how it can help them. And then, frankly, we've gotten a lot of clients that have come back to us and said, "Hey, we really like how you've done this within your business. We'd actually like to talk to your product tech team as to how did they actually make that happen so quickly." So we're seeing some really good signs from our clients and prospects that this is helping them. They're really interested in how we did this and made it work so quickly. Carrie Fanlo: One thing I'll add, Vince, it's Carrie, is, as a reminder, Izola is only available to customers in Forrester Decisions and Forrester Market Insights, so the new portfolio. So it's also helping our sales discussions from a migration perspective. It's not available to our heritage clients. George Colony: I think what's interesting, Vince, is that some of the heritage clients are saying, "Hey, can we get Izola with the heritage product?" And we're saying, no, you cannot. But the fact that they're even asking for it is a great sign. Vincent Colicchio: And one last one. Chris, should we expect you to be proactive on the buyback activity in the second half? Chris Finn: Yes. We're going to absolutely continue to look to be opportunistic about buybacks for the rest of the year as we watch performance closely, and that hasn't changed. Operator: I'm showing no further questions in the queue. At this time, I would like to turn the conference back to Chris Finn, CFO, for closing remarks. Chris Finn: Yes. I'd like to just thank everybody for joining us today. Any follow-up questions, please contact Ed and myself. Thank you very much. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Horizon Technology Finance (HRZN) Q2 2024 Earnings Call Transcript

Paul Johnson - KBW Bryce Rowe - B. Riley Securities Christopher Nolan - Ladenburg Thalmann Paul Johnson - KBW Ladies and gentlemen, good morning. And welcome to the Horizon Technology Finance Corporation Second Quarter 2024 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Megan Bacon, Director of IR and Marketing. Please go ahead. Megan Bacon Thank you. And welcome to Horizon Technology Finance Corporation's second quarter 2024 conference call. Representing the company today are Rob Pomeroy, Chairman and Chief Executive Officer; Jerry Michaud, President; Dan Devorsetz, Chief Operating Officer and Chief Investment Officer; and Dan Trolio, Chief Financial Officer. I would like to point out that the Q2 earnings press release and Form 10-Q are available on the company's website at horizontechfinance.com. Before we begin our formal remarks, I need to remind everyone that during this conference call, the company will make certain forward-looking statements, including statements with regard to the future performance of the company. Words such as believe, expect, anticipate, intend or similar expressions are used to identify forward-looking statements. These forward-looking statements are subject to the inherent uncertainties in predicting future results and conditions. Certain factors could cause actual results to differ on a material basis from those projected in these forward-looking statements and some of these factors are detailed in the risk factor discussion in the company's filings with the Securities and Exchange Commission, including the company's Form 10-K for the year ended December 31, 2023. The company undertakes no obligation to update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. At this time, I would like to turn the call over to Rob Pomeroy. Rob Pomeroy Welcome, everyone, and thank you for your interest in Horizon. Today, we will update you on our performance and our current overall operating environment. Dan Devorsetz will take us through recent business and portfolio developments, Jerry will then discuss the current status of the venture lending market, and Dan Trolio will detail our operating performance and financial condition. We will then take some questions. On our conference call last quarter, I began by speaking about the nature and current status of the venture lending business. Venture debt is driven by the demand for advanced technology and the support of risk-taking venture investors. It is an exciting and rewarding endeavor. The Horizon platform has one of the most experienced team of venture lenders, and we are passionate about the venture industry, the role of venture debt in the industry, and the prospects of both. We seek investment opportunities that drive technological innovation by companies that are backed by committed investors who have already made significant investments. These development stage companies rely on additional investment to provide the financial resources to operate and further advance their technology and businesses, and venture debt provides a critical source of such additional capital. When we underwrite a venture loan, we base our investment thesis on a number of factors, including the strength of the enterprise's technology or market position, its ability to further develop its market and technology, and its ability to grow its revenue or attract additional institutional capital or strategic interest. We understand that business plans and markets of these companies are subject to many kinds of detours, and the agility of management teams and investors is necessary to navigate ever-changing waters. As seasoned venture lenders, we know that plans and the environment are always changing, including jolts to the macro environment, like the one we experienced last year with the tech bank crisis. Global unrest, higher interest rates, and pandemics can upset business plans and require management, investors, and venture lenders to pivot. We have experienced all of these impacts over the past several quarters, but we believe we are starting to see the beginnings of a recovery in the venture ecosystem. We recognize these signs because we have seen and worked through negative cycles in the past. Our management team has an average tenure in the venture lending business of over 20-years. We have experienced supporting our companies through these difficult times and in maximizing the value of our stressed investments. The macro environment continues to hamper the recovery of certain stressed assets in our portfolio, but we continue to rely upon our expertise and take the appropriate actions to preserve the value of our investments as the markets begin to improve. Looking forward, as we always have through up and down cycles, we continue to be optimistic about Horizons prospects. Our portfolio yield is strong, and our earnings have covered our distributions for over six years. Our pipeline is growing with quality new customer opportunities. We have strengthened our liquidity and balance sheet. And the technology markets are active and in need of the debt investments we are uniquely able to provide. This is the essence of the venture lending model. I will now turn the call over to Dan, Jerry, and Dan to give you the details of our second quarter results and progress. We appreciate your continued interest and support in the Horizon Technology Finance platform. Dan? Our portfolio size reduced in the second quarter to $647 million, as modest originations were more than offset by prepayments and normal portfolio amortization, as well as fair value adjustments. In the second quarter, we funded four debt investments totaling $11 million, one of which was to a new portfolio company and the remainder to existing portfolio companies. As we previously anticipated, the market for quality new venture loans remained soft for much of the first half of the year, resulting in fewer prospective lending opportunities in Q2. As such, our focus in the second quarter was to carefully seek new opportunities and continue to focus on supporting our existing portfolio. More recently, we're seeing increased market activity and we are building our pipeline with companies across our target sectors, which possess disruptive technology in large and important markets and are supported by quality investors who have made recent investments. As a result, while the portfolio reduced in size in Q2, we have made considerable progress on some excellent new opportunities, including several awarded transactions, which we are currently underwriting and documenting. We are increasingly confident that we will return to portfolio growth beginning in the third quarter. That said, we will always be disciplined in our approach to originating loans to new companies. We will not chase growth for the sake of growth. During the quarter, we experienced one loan prepayment totaling $34 million in prepaid principal. Since the end of the quarter in July, we also received three prepayments totaling $30 million. These recent prepayments are mostly driven by refinancing activity, including several refinancings resulting from positive revenue performance, allowing the borrowers to graduate from venture debt into more traditional and lower cost forms of debt financing. This is an expected and positive part of the venture debt cycle. Unfortunately, we are not yet seeing prepayments driven by IPOs and M&A activity, which would be a strong signal that the debt and equity markets are returning to more historical behavior. Our onboarding debt investment yield of 13.7% during the second quarter remained high compared to our historic levels. We expect to continue to generate strong onboarding yields with our current pipeline of opportunities, further demonstrating our capabilities in structuring and pricing transactions to continue to produce strong net investment income. Our debt portfolio yield of 15.9% for the quarter was once again one of the highest yielding debt portfolios in the BDC industry. Our ability to generate these industry-leading yields continues to be a testament to the profitability of our venture lending strategy and our execution of that strategy across various market cycles and interest rate environments. As of June 30, we held warranted equity positions in 99 portfolio companies with a fair value of $29 million. Structuring investments with warrants and equity rights is a key component of our venture debt strategy and a potential generator of shareholder value. In the second quarter, we closed $13 million in new loan commitments and approvals, and ended the quarter with a committed and approved backlog of $138 million compared to $168 million at the end of the first quarter. We also are currently underwriting a number of new transactions expected to fund during the third quarter. We believe our pipeline, combined with our committed backlog with most of our funding commitments subject to companies achieving certain key milestones, provides solid base to prudently grow our portfolio. As of quarter end, 88% of the fair value of our debt portfolio consisted of three and four rated debt investments compared to 90% on March 31. 12% of the fair value of our portfolio was rated two or one, up from 10% on March 31. We are working very closely on our stressed investments in order to maximize additional recoveries, though it is admittedly a historically difficult environment to do so. We continue to collaborate with all of our management teams, investors, and stakeholders to help navigate this challenging period. To summarize, we are optimistic about sourcing and originating new venture loans to grow our portfolio in the coming quarters. The current portfolio continues to benefit from the interest rate environment, and we will continue to work with our borrowers to maximize outcomes. With that, I'll turn it over to Jerry for a look at that overall venture industry and current environment. Turning now to the venture capital environment. According to PitchBook, approximately $56 billion was invested in VC-backed companies in the second quarter, the highest total over the past eight quarters. However, the increase was principally due to a couple of outsized deals and the overall pace of VC investment remained well short of 2021 and 2022 loads. The most challenging issue in the venture ecosystem right now is a significant lack of exit opportunities with VC-backed tech and life science companies. Limited Partners and VC funds are not getting capital returned and are very reluctant to invest more in venture capital funds. According to PitchBook, VC funds are presently managing or have access to approximately $1.2 trillion of LP capital. While there have been a few outsized exits over the last 12 months, they are not reflective of the overall market and do not move the needle on the enormous backlog of the VC-backed companies that would like to find an exit. While valuations have declined significantly over the past 24 months they have not yet created excitement or momentum on the M&A and IPO front until the M&A and IPO markets truly open up for VC backed companies, the rest of the VC ecosystem, including investments in capital raising will be somewhat muted. That said, there are recent positive economic indicators leading into Q3 including the rate of inflation decreasing to 3% in July, while the U.S. GDP grew 2.8%, which barring orders will likely result in a lowering of interest rates in the second half of 2024. To that end, we believe the combination of lower interest rates and a significant reduction in the valuation of VC-backed tech and life science companies over the last two years may result in a vastly improved M&A market in the second half of 2024 or early 2025. Generally, when M&A markets improve, the IPO market for tech and life science companies accelerates as IPO investors become more optimistic and seek to participate in high-quality tech and life science IPOs. Additionally, VC fundraising benefits from a lower interest rate environment and a more robust M&A market. VC fundraising in Q2 of $28 billion, while well off fundraising levels of 2021 and 2022 did reflect a significant increase over Q1 fundraising levels of approximately $10 billion. Again, should M&A activity improve, it may allow VC funds to begin to return capital to VC Limited Partners, which could improve the fundraising environment before the end of the year. While VC investment activity was slow in Q2, VC firms did continue to invest in new AI tech companies as well as healthcare service companies that are using enhanced technology capabilities to provide improved and lower-cost healthcare services to the healthcare market. In terms of market conditions for new venture loan investments, we are optimistic about high-quality venture debt opportunities that we have screened or vetted, which provide us with potential new investments in the weeks and months ahead. Our pipeline remains robust at $1.7 billion as of today, a testament to our reputation, brand and sourcing capabilities. We are increasingly confident that we will return to portfolio growth in the back half of this year. To sum up, while we will continue to navigate through the ever-changing VC environment, we remain focused on credit quality and providing our portfolio companies with support to ensure optimal outcomes. But just as importantly, we are committed to sourcing high-quality investment opportunities to grow our portfolio in the second half of 2024 in order to ensure we generate solid NII for our shareholders and build additional long-term value. With that, I will now turn the call over to Dan Trolio. . I'll start with a review of our efforts to strengthen our balance sheet and capital structure in the quarter, and then I'll provide a review of our second quarter results. We took significant steps to enhance our capital resources in the quarter. First, we completed amendments to our key banks and New York Life credit facilities, reducing our cost of capital, increasing our credit availability and extending our investment periods. In addition, we added a new $100 million credit facility, which increases our overall capacity. To be able to match new debt capacity with equity, we continue to opportunistically access our ATM program as we successfully and accretively sold over $1.5 million in shares in the quarter, raising $17 million. We believe these actions will allow us to grow the portfolio in the coming quarters. As of June 30, we had $150 million available liquidity consisting of $117 million in cash and $33 million in funds available to be drawn under our existing credit facilities. We currently have no borrowings outstanding under our $150 million KeyBank credit facility, the $181 million outstanding on our $250 million New York Life credit facility and $50 million outstanding on our new $100 million Nuveen credit facility, leaving us with ample capacity to grow the portfolio. Our debt-to-equity ratio stood at 1.36:1 as of June 30 and netting out cash on our balance sheet, our net leverage was 1:1, which is well within our target leverage. Based on our cash position and our borrowing capacity on our credit facilities, our potential new investment capacity as of June 30 was $386 million. Turning to our operating results. We had another solid quarter from an NII standpoint, once again generating NII that more than covered our distributions. For the second quarter, we earned investment income of $26 million compared to $28 million in the prior year period primarily due to lower interest income on our debt investment portfolio. Our net investment portfolio on a net cost basis stood at $675 million as of June 30, compared to $720 million as of March 31, 2024. For the second quarter of 2024, we achieved onboarding yields of 13.7% compared to 13.4% achieved in the first quarter. Our loan portfolio yield was 15.9% for the second quarter compared to 16.3% for last year's second quarter. Total expenses for the quarter were $12.4 million compared to $11.9 million in the second quarter of '23. Our interest expense increased to $7.9 million from $7.2 million in last year's second quarter, due to higher interest rates on our borrowings. Our base management fee was $3 million, down from $3.2 million in the prior year period. We had no performance-based incentive fee in the second quarter as we continue to experience the deferral of incentive fees otherwise earned by adviser in the quarter under our incentive fee cap and deferral mechanism. The deferral was driven by net unrealized losses on our portfolio. We expect deferrals to end in the back half of '24. Investment income for the second quarter of '24 was $0.36 per share compared to $0.38 per share in the first quarter of $0.24 and $0.54 per share for the second quarter of 2023. The company's undistributed spillover income as of June 30 was $1.28 per share. We anticipate that the size of our portfolio, along with the portfolio's elevated interest rates and our predictive pricing strategy will enable us to continue generating NII that covers our distribution over time. Given the current macro environment and although we did have a solid July in terms of prepayments, we expect prepayment activity will remain modest in the near term. To summarize our portfolio activities for the second quarter, New originations totaled $11 million, which were offset by $12 million in scheduled principal payments and $45 million in principal prepayments and partial paydowns. We ended the quarter with a total investment portfolio of $647 million. We expect a return to growing the portfolio in the second half for the year. At June 30, the portfolio was $109 million in a portfolio of warrant, equity and other investments in 103 companies with an aggregate fair value of $38 million. Based upon our outlook, our Board declared monthly distributions of $0.11 per share for October, November and December of 2024. We remain committed to providing our shareholders with distributions that are covered by our net investment income over time. Our NAV as of June 30 was $9.12 per share compared to $9.65 as of March 31, 2024, and $11.7 as of June 30, 2023. The $0.52 reduction in NAV on a quarterly basis was primarily due to our paid distributions and adjustments to fair value, partially offset by net investment income and accretive sale of equity. As we've consistently noted, nearly 100% of the outstanding principal amount of our debt investments bear interest at floating rates with coupons that are structured to increase if interest rates rise with interest rate floors. This concludes our opening remarks. We'll be happy to take questions you may have at this time. Thank you. [Operator Instructions] Our first question is coming from the line of Douglas Harter with UBS. Please go ahead. Unidentified Analyst Hi, this is actually [Cory Johnson] on for Doug. So this quarter, two rated loans went from one to four loans and one rated loans went from four to five. Could you talk a little bit about the reasons for some of the downgrades? Dan Devorsetz Sure, Cory, this is Dan Devorsetz. Nice to speak with you. So in our portfolio and in the market right now, it's challenging sometimes to get rounds completed. Some of our deals are, and some of the names on that list are in the process of raising money, or getting acquired. They have disruptive products and technology in large markets, and they're definitely innovating. But there is, in cases where there's some delays, or in commercialization, or some delays in R&D, where in a more normalized or robust market, investors might fund through that and get to the other side. In today's market, those rounds are a bit more challenging, to come by. That's particularly true in cases where there, are multiple investors in the syndicate. And they might have some different priorities, or different challenges that they're seeking. So even if there are some investors that are supportive and willing to invest, if there's one or two in the syndicate that are having challenges, pulling those rounds together can be a bit of a challenge. So, we're seeing that and we're working with these companies to get them properly capitalized, so that they can execute on their plan. So that's kind of the overarching primary reason, is most of them are a function of the macro funding environment. Unidentified Analyst Thank you. And just one more question. And you had also mentioned earlier that you guys are seeing more activity in markets. Are there any particular sectors in which you're starting to see more activity? Dan Devorsetz It's really, the pipeline is, as we said in the remarks, it's really quite across our sectors of technology, life science, healthcare services, sustainability. It's quite - it's really across those sectors. We are seeing a lot of use of AI in a number of those sectors. You have to be careful to make sure that they're actually using that for business reasons, and not just using it as a buzzword. But we're seeing a lot of AI enabled technology and sustainability in healthcare, certainly in life science. So it's really a cross section of our markets. Thank you. [Operator Instructions] Our next question comes from the line of Paul Johnson with KBW. Please go ahead. Paul Johnson Yes, good morning. Thank you for taking my questions. In terms of the challenged companies in the portfolio, I mean, in your opinion, is the deterioration that you have seen? Has that, what has driven that for the most part, is it just kind of been this lack of exit opportunities, or lack of kind of available financing? Or as you were mentioning earlier, has it really been this LP kind of, disruption holding up potential refinancing rounds, et cetera. What has been the biggest, biggest challenge with some of these new non-accruals? Rob Pomeroy So I think - you hit the nail on the head again there. The lack of exit markets, lack of IPOs, although they're starting to happen, but we need a bunch more. And the reduction in strategic M&A bleeds into the willingness and capability of the VC's to continue to fund across their portfolio. So it's really, the exit markets drive a lot of behavior across the ecosystem in terms of funding, in terms of LP's, in terms of companies that are in need of cash, being able to access it. So the exit markets are the macro, and then that leads into deal-by-deal specifics. Paul Johnson Thanks for that. And in terms of all that, I mean, how would you, I guess, describe, the difference in performance here, or perhaps the state of its current recovery in terms of kind of later stage, versus earlier stage companies? Is there a big difference there, or is it all kind of under the same challenges? Rob Pomeroy So that's a really interesting question. I'd say, in general, earlier stage companies that have yet to prove their business model, on a unit economic basis, but have strong products, which would traditionally be supported, are having a bit more challenges than the later stage companies that are growing and have unit economics, but are still burning capital. Those tend to be a bit more, a bit more successful in the capital raiser exits, but that's not universal by any means. Paul Johnson Yes. I appreciate that. And then I guess, moving over kind of, to the quarter and to the results, I mean how should investors, I guess, be thinking about earnings, given we were at $0.36 this quarter without the incentive fee? If we add that back in, that could potentially put NII below the dividend, although that may not come into play maybe until next year, depending on how the total return hurdle works out. But how should investors kind of, be thinking about earnings as we move forward? And if we get kind of what you're talking about, recovery in M&A potentially less pressure on downward valuations, should we expect earnings to pick up from here, or how should we think about that? Rob Pomeroy So yes, well, I would look at that based on the portfolio size, and what we've been - we talked about year-over-year, is the venture debt model assumes prepayments every quarter, and prepayments have been picking up from the last couple of quarters than, compared to the prior year. So this run rate is kind of where you could expect it, but it's definitely determined based on prepayments. So it could fluctuate quarter-over-quarter. Sorry about that, I was on mute there. Last one I would ask there, is just kind of, in general, sorry I lost my place in my notes here, but let's just end it there. That's all from me. Thank you. Thank you. Our next question comes from the line of Bryce Rowe with B. Riley Securities. Please go ahead. Bryce Rowe Thank you. Appreciate the time here. Maybe wanted to ask about some of the prepared remarks you made in terms of second half pickup, and trying to maybe size up what that could look like. I mean obviously, you've had some prepayment activity here in the third quarter, so wanted to get a feel for, how that second half pickup could look. Is it kind of, is it dependent on rate cuts, or a strengthening of the economy? And - then wanted to ask a couple other questions after you answer that? Thanks. Jerry Michaud Hi, Bryce. This is Jerry Michaud. I'm going to partially answer it. Now I'm going to let Dan jump in with some actual numbers here. So, we have been signaling in the first and second quarter that we wanted to basically hold our fire and make sure markets where we're actually starting to make a significant turn relative, to the venture capital ecosystem. And that's what we've done. And so that's what you have seen so far. However, as we indicated in our remarks, we believe the second half is going to be a significantly better environment overall for venture lending. And in that regard, and again, I'll let Dan give you some numbers here, but I think we noted we've already had about $30 million in prepayments already in July, but we've also had fundings that have exceeded that in July. So and we have a very good pipeline. So both in awards, transactions at being underwritten additional commitments we put in the portfolio. So, we do expect a much stronger second half relative - just to our own environment. What we're doing here at Horizon. We're seeing quality investments. And again, I'll let Dan talk a little bit more about that. But so in addition to prepayment activity, which does generate additional fee income, as Dan Trolio mentioned, we're also expecting fairly reasonable growth in the portfolio over the second half. So we're much more bullish here, as we start the second half of the year. I mean I think it goes almost without saying, but I'll say it anyway, if interest rates do go lower in the second half of the year. I think that that's going to really open up the overall VC ecosystem, and we're going to start seeing better exits. We know we have a lot of late-stage companies in our own portfolio that are looking for exits. So, we're pretty optimistic about that. But I'm going to let Dan give you a little more info on that. Dan Devorsetz Sure, Jerry. Bryce, so, just specifically, so over the last kind of month or two since the middle of June to really yesterday, we've received seven awards for a total of over $160 million, $170 million of total commitments. A good portion of that $25 million or so would fund - could fund in Q3 if they make it all the way through our process. Those deals, as I said earlier, across our sectors. It's a combination of some portfolio opportunities for deals that are doing well, either current or previous portfolio companies as well as new deals. So - and we have a pipeline of near-term proposals out there that we think will add to that number over the coming weeks. So we funded one yesterday. There's a few more that are scheduled to fund in the coming weeks. So that's just some additional detail that put some specifics around where we are from a pipeline basis. Bryce Rowe Excellent. That's helpful. And so when we kind of think about - I mean, you all have been pretty proactive from a capital structure perspective, sitting on a bunch of cash. I mean I don't know if this is a record level of cash in terms of percentage of assets, but I would imagine it's pretty close still raising equity on the ATM. You've got the new credit facility. So just curious with that. With those potential fundings, how should we think about the balance sheet, how will you use the cash to push it down? Will you continue to raise equity on the ATM? And/or would you draw some on the credit facilities to fund? Just trying to think about all those dynamics? Dan Trolio Yes, sure, that would probably, I would say, all of the above. First part of that process would be to use the cash on the balance sheet. And then, when we think about our debt capital and our equity capital and what we have available. We look to what we have lined up for funding in the quarter, and what we need. And so, we'll continue to pull each one of those levers as needed. Bryce Rowe Okay. And then maybe last one for Dan. There's a subsequent event in the Q with a - look to be a restructuring or transfer of the Nexii investment. Can you talk about what that's going to look like in terms of debt versus equity? Did you swap some there to get equity? Or are the debt obligations still out there? Dan Devorsetz Thanks Bryce. So again, Dan Devorsetz. So yes, Nexii was acquired out of the Canadian court process by investor group that is really experienced buyer and operator of construction technology companies. Our loan is, we got a small amount of cash and some senior debt - but the - going forward, we have primarily both preferred and common equity positions, and we are supporting the buyer as they execute their plans. Bryce Rowe All right. I think that's it for me. Appreciate the time. Thank you. [Operator Instructions] Our next question is from the line of Christopher Nolan with Ladenburg Thalmann. Please go ahead. Christopher Nolan Hi, guys. On Bryce's question on leverage, what flexibility do you have to use cash to paydown the New York Life facility, or this Nuveen facility? Dan Trolio These are structured financing. There's more flexibility in the New York Life facility than there is in Nuveen facility, but we do have the ability to paydown and draw up again. Christopher Nolan Okay. And then given you have some - all the extra cash and a lot of moving pieces, but any opportunity to buy your 2026, or 2027 notes from the market? Dan Trolio Yes. I mean we do have the opportunity to do to do that. However, those are price fairly nicely, the 4.78% and 6.25%. So it makes more sense to leave it out today based on what we're putting our debt investments on and the spread we're getting between those. Christopher Nolan Okay. And did you guys mention what the spillover was in the quarter? Our next question is from Paul Johnson with KBW. Please go ahead. Paul Johnson And just one more for me. Can you just tell me what percent of your companies in the portfolio, I guess, the sole lender in that company versus being a partner or lender perhaps? Rob Pomeroy You broke up there a little Paul. Can you repeat that? I'm sorry, I couldn't - I didn't hear the question. Paul Johnson I was just asking what percent of your portfolio companies? Are you the sole or kind of lead lender in that company as opposed to being partnered with another lender? Rob Pomeroy So there are - there's a portion of our portfolio where we are partnered, or sub to bank lending, primarily revolvers. But in terms of our particular position, we are almost always the sole lender. We're about 75% or approximately 75% of our deals are senior in the cap table with no bank partner. Thank you. Ladies and gentlemen, there are no further questions. I would now hand the conference over to Robert Pomeroy, Chairman and CEO. Please go ahead, sir. Rob Pomeroy Thank you all for joining us this morning. We appreciate your continued interest and support in Horizon, and we look forward to speaking with you again soon. This will conclude our call. Thank you. The conference of Horizon Technology Finance Corporation has now concluded. Thank you for your participation. You may now disconnect your lines.

Westwood Holdings Group, Inc. (WHG) Q2 2024 Earnings Call Transcript

John Ehinger - Chief Compliance Officer Brian Casey - Chief Executive Officer Terry Forbes - Chief Financial Officer Good day and thank you for standing by. Welcome to the Second Quarter 2024 Westwood Holdings Group Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, John Ehinger, Chief Compliance Officer. Please go ahead. John Ehinger Thank you and welcome to our second quarter 2024 earnings conference call. The following discussion will include forward-looking statements that are subject to known and unknown risks, uncertainties and other factors, which may cause actual results to be materially different from those contemplated by the forward-looking statements. Additional information concerning the factors that could cause such a difference is included in our press release issued earlier today, as well as in our Form 10-Q for the quarter ended June 30, 2024 that will be filed with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. You are cautioned not to place undue reliance on forward-looking statements. In addition, in accordance with SEC rules concerning non-GAAP financial measures, the reconciliation of our economic earnings and economic earnings per share to the most comparable GAAP measures is included at the end of our press release issued earlier today. On the call today, we have Brian Casey, our Chief Executive Officer and Terry Forbes, our Chief Financial Officer. Good afternoon, everyone and thanks for joining us for Westwood's second quarter 2024 earnings call. I am looking forward to discussing our results and key developments from the past quarter as well as giving you a quick look into our outlook for the remainder of the year. Before diving into the details, I'd like to highlight a few key points that we will be discussing today. Within our distribution channels, we funded exciting new mandates in our institutional business and saw positive flows into our energy strategies. Significant developments included our investment in the Texas Stock Exchange, which is seeking regulatory approval to launch next year and the successful launches of our ETFs and our managed investment solutions capability. We have lots of exciting news to share. So let's get started with our long-term performance, which continues to be a source of pride for us here at Westwood. The second quarter presented a challenging and complex market environment for investors. The S&P 500 rose, but returns were highly concentrated among a handful of mega cap growth stocks, particularly if linked to artificial intelligence. This narrow market leadership led to significant performance disparity, with the Russell 1000 Growth Index gaining 8.3%, while the Russell 2000 Value Index declined 3.6%. Outside the LargeCap growth, most market segments struggled with 6 out of 7 S&P 500 sectors declining. Economic data was mixed, with growth slowing and then persistent inflation and this pushed expectations for interest rate cuts further out into the future. In the bond market, returns were muted as interest rates held relatively steady. High-yield bonds led the way as investors take comfort from the concept that a growing economy, together with stable interest rates, will avert potential defaults. Longer dated treasury bond prices declined as the long end of the yield curve rose given the general expectation that higher rates will stick around longer. The yield curve remained inverted, however, much to the consternation of many economists who insist that a yield curve inversion implies a future recession. This environment underscores the benefits to investors of Westwood's focus on identifying and investing in high-quality companies across market capitalizations and asset classes. Our U.S. value strategies have demonstrated long-term consistency as they all outperformed over trailing 3, 5 and 10-year periods. Also, our SMidCap strategy's outperformance over 3 and 5 years, places it among the top performers in its Morningstar peer category. Our Multi-Asset strategies are also delivering strong results, with most of them outperforming over the trailing 3 years. Our alternative income strategy ranked in the top 35 of its Morningstar peer category for trailing 3 years and our credit opportunity strategy finished in the top 23% of its divestment category for the trailing 3 years. As for income alternatives, our global real estate and real estate income strategies both posted strong 3-year track records, landing in the top 12% and 3% of their respective eVestment categories. Lastly, our MLP and Energy Infrastructure strategy has also begun to improve in performance and peer rankings. Our MLP and Energy Infrastructure mutual fund and SMA strategies are important elements in our suite of energy product offerings. And we're very pleased with our recent improvements. While the market's narrow leadership presents short-term challenges, we believe our focus on high-quality companies, positions us well in environments when growth becomes scarcer. Turning to our wealth management business, we experienced net outflows of $89 million, a third of which were for expected tax payments, required minimum distributions from IRAs and small pension outflows. On a positive note, our new business pipeline has grown with our engagement with centers of influence, which should foster future opportunities for Westwood Wealth. Our ongoing work to enhance our client experience includes the implementation of new alternative asset tracking software, which provides the most accurate and timely reporting for our clients holding alternative assets, and we held very successful client events in Houston and Dallas this past quarter. Most importantly, we've made a number of experienced key hires in Houston and Dallas to help us lead and grow the trust and wealth management business. Moving to our institutional and intermediary distribution channels. We had net outflows of $193 million. $100 million of this came from a 25-year institutional client who rebalanced from equities to fixed income. We're excited about several new mandates, including a new $43 million SMid CIT client that funded during this past quarter. Our pipeline remains robust, and we recently secured a new $125 million SMid mandate that should fund later this year. To recap, our institutional team won several mandates in the first half and most should fund in the second half. Our won but not funded levels are approaching $400 million and our pipeline is north of $1.5 billion in future business. We're particularly excited for the coming launch of our managed investment solutions capability, which we expect to take place during the third quarter. We have already conducted numerous meetings with prospects, including in-depth discussions with premier national consultants. I would have to say that the reception has been overwhelmingly positive, and we hope to have secured new clients for managed investment solutions by this year-end. Our intermediary channel had net outflows of $103 million, but they were bright spots, too, particularly in our MLP strategies, where our mutual fund reported positive net inflows. Our SmallCap strategies also experienced positive net flows in both mutual fund and UMA vehicles. SmallCap has witnessed an increase in search activity recently, and many broker-dealers are highlighting SmallCap valuations as highly attractive relative to other equities and they're recommending increased exposure. We anticipate this trend to continue to play out in the second half, which should lead to increased flows and search activity for our SmallCap and SMidCap strategies. In addition, concerns over high equity market valuations are driving potential allocations to other strategies, including income opportunity, which is a tactical asset allocation strategy focused on long-term capital appreciation potential, downside protection and distributed income. After facing years of headwinds in traditional energy, Westwood is excited and well positioned to benefit from positive tailwinds forming in the energy space. Our mutual fund has improved and relative performance and peer rankings and our recently launched ETFs, MDST and WEEI are gaining traction. Our first ETF, Westwood Salient Enhanced Midstream Income, ticker symbol MDST, launched in early April and our second ETF, Westwood Salient Enhanced Energy Income, ticker symbol WEEI, launched in May. Both are actively managed funds designed to provide advisers and investors with robust solutions for generating high distributable monthly income, combining dividend yield and options premiums from covered call, plus potential equity appreciation with the midstream and broad energy sectors. Our ETFs have provided monthly distribution since their inception. Based on June's distributions paid on July 2 and at that day's closing prices, our funds had annualized yield of 11.3% for WEEI and 10.7% for MDST. The MDST ETF is approaching $50 million in assets under management and is experiencing good volumes, an important threshold for broader platform inclusion. We continue to execute our ETF distribution strategy, focusing on registered investment advisers and intermediary platforms with trading access to both ETFs. We recently made a strategic hire to lead our ETF sales and distribution strategy. Chris Doran came on board on July 15, bringing with him over 25 years of ETF sales experience. Chris has directed ETF external sales teams, developed sales strategies to increase market share, fostered relationships with centers of influence at home offices and coached internal sales and hybrid personnel. ETFs represent the fastest-growing segment of the asset management industry, and there are few professionals with more experience than Chris in raising assets in the ETF industry. We're excited about our entry into the ETF market, and having Chris join us will accelerate our plans to participate in this growing segment of the industry. I'm very pleased to report that our private fund, Westwood Energy Secondaries 1, was fully invested and due to the demand and the attractiveness of investments available to the fund. We created a continuation vehicle of $14 million for Aspinali, a private Canadian oil and gas company, which was fully invested. With Westwood's full suite of energy product offerings and vehicles, including mutual funds, ETFs, private funds and separate account strategies, we really feel we're at the right place at just the right time with the right solutions to cater to the needs of our clients. Now let me highlight some new developments for Westwood. Westwood has just made a $1.5 million investment in the brand-new Texas Stock Exchange, which is seeking regulatory approval to launch next year, and we are honored to be among the list of founding investors. Westwood is the only Texas-based publicly traded asset management and wealth firm listed as a founder of the TXSE. We are proud to have our business headquarters in Texas, always working together with a can-do attitude to find a way forward. CEOs from around the world are taking notice and moving their headquarters to Texas. We have positive demographics, a pro-business environment, great cost of living and no state income tax. Looking ahead, we're excited about several more initiatives. We're planning to expand our collective investment trust, CIT offerings, and our SmallCap and LargeCap strategies to better serve larger defined contribution plan. We're considering launching Westwood Energy Secondaries 2 later this year, as we believe the energy market may be entering a secular bull market. We have demonstrated our confidence in Westwood's future and have also accelerated our buyback program. This quarter, we returned approximately $1.1 million to shareholders via our share repurchase program, buying back 86,000 shares. As we move into the second half, we see significant opportunities, particularly in our Multi-Asset and real asset funds that span real estate and energy. Our multi and real asset strategies are really attractive options for yield conscious investors in a market where valuations are compelling, and we're seeing more interest in our SmallCap and SMidCap strategies, as broker-dealers highlight their attractive valuations to their clients. In closing, while the current market presents challenges, it also offers opportunities that play to Westwood's strength. Our diverse range of strategies, expanding product and business capabilities and our bedrock commitment to delivering value to clients position us well. We are particularly excited about the potential multiyear tailwind for energy, where our full suite of product offerings across various vehicles is ready to go. Thank you for your continued support and confidence in Westwood, where we remain committed to delivering long-term value to our clients and shareholders. I will now turn the call over to Terry Forbes, our CFO. Terry Forbes Thanks, Brian, and good afternoon, everyone. Today, we reported total revenues of $22.7 million for the second quarter of 2024 compared to $22.7 million in the first quarter and $21.9 million in the prior year second quarter. Revenues were flat to the first quarter and up from last year's second quarter. Our second quarter comprehensive loss of $2.2 million or $0.27 per share compared with income of $2.3 million or $0.27 per share in the first quarter due to changes in the fair value of contingent consideration and income taxes, which resulted in a loss for the quarter. Non-GAAP economic losses were $0.5 million or $0.06 per share in the current quarter versus earnings of $3 million or $0.36 per share in the first quarter. Our second quarter comprehensive loss of $2.2 million or $0.27 per share compared with last year's second quarter income of $2.9 million or $0.36 per share, primarily due to changes in the fair value of contingent consideration and income taxes, which resulted in a loss for the quarter. Economic losses for the quarter were $0.5 million or $0.06 per share compared with earnings of $4 million or $0.49 per share in the second quarter of 2023. Firm-wide assets under management and advisement totaled $16.8 billion at quarter end, consisting of assets under management of $15.8 billion and assets under advisement of $1 billion. Assets under management consisted of institutional assets of $7.6 billion or 48% of the total, wealth management assets of $4.2 billion or 27% of the total and mutual fund assets of $3.9 billion or 25% of the total. Over the quarter, our assets under management experienced market depreciation of $51 million and net outflows of $0.3 billion. And our assets under advisement experienced market depreciation of $5 million and net outflows of $51 million. Our financial position continues to be very solid, with cash and short-term investments at quarter end totaling $44.1 million and a debt-free balance sheet. I am happy to announce that our Board of Directors approved a regular cash dividend of $0.15 per common share, payable on October 1, 2024, to stockholders of record on September 2, 2024. That brings our prepared comments to a close. We encourage you to review our investor presentation we have posted on our website, reflecting quarterly highlights as well as a discussion of our business, product development and longer term trends in revenues and earnings. We thank you for your interest in our company, and we will open the line to questions. [Operator Instructions] And our first question comes from Mac Sykes of GAMCO. Your line is open. Mac Sykes Good afternoon everyone. Since the successful launch of your ETFs and the new hires, I was wondering if you could just give us a little more color on the strategy going forward. I mean do you see more of a complete suite of ETFs that represent your broader products, or do you see yourself focusing more on kind of niche offerings, differentiated, etcetera? Brian Casey Mac, we intend to make a much bigger expansion into the ETF. And we are taking a look at what products we have internally that we could potentially convert to ETFs. We are also watching closely to see what others are doing with respect to creating dual share classes within a current mutual fund. I think that could be very interesting as well. And we have got some great product ideas ahead. So, we are excited about it. We have had some pretty good volumes so far with the two ETFs that we have. And we really feel like the energy sector is entering a secular bull market, as I mentioned in my prepared comments. We are just seeing a lot of interest across the board. We designed these ETFs so that they pay a monthly income, and those are double-digit annualized yields, which are terrific and are very attractive in today's world. Any other questions beyond that, Mac? Mac Sykes Just - no, that's fine, and just one follow-up. On the Texas exchange investment, in the past, you have made a few investments. Should we think about this as more of a unique investment for capital appreciation on your capital, or are there some synergies there in terms of marketing with the exchange and being in Texas, etcetera? Brian Casey Yes. So, we think it will be a great investment. I want to be clear that this has to be approved by the regulators, and that will take some time to do. But it's exciting because Dallas is really becoming viewed as the center coast, if you will. Companies continue to move here in droves. People are moving here constantly. The economy is booming in Texas and we are excited to be a part of it. One of the goals of the Texas Stock Exchange is to list not only the companies that are here today, but the companies that are coming here today. And I think last count, we have got 53 or so of the Fortune 500 companies that are now in Texas. They also want to make a push to lift the ETFs and ETNs. So, that's a big part of what they want to do. So, it's exciting to be part of it. They will be right down the street. I am sure there will be lots of opportunities to market with them. And we do think that it will be a very good long-term investment if it is approved. I will now turn it back to Brian for closing remarks. Brian Casey Okay. Great. Well, thanks everybody. The contingent consideration for our Salient transaction made for messy earnings this quarter, but we only have one more quarter of this calculation that will impact earnings. So, we will be done with that. But we are making good progress. We have had some funded wins in July. And so just to give you an update, as of 7/31 today, AUM is back to where it was at the first quarter, which is close to $17.2 billion. In addition, we are funding a $207 million mandate this Friday, and our new business pipeline is well over $1 billion, with several won, but not yet funded wins coming over the next month or two months. The collective investment trust we created have been particularly popular with some of the larger consulting firms as they are able to white label them and their clients defined contribution with 401(k) plans. So, we are going to expand that with our small cap and large cap strategies and hopes of attracting additional business into what is a very fast-growing segment for the consulting community. And then I would also say that Managed Investment Solutions is making great progress on systems, and we should be ready for due diligence from prospective clients in a week or so. And every single meeting request has been accepted and we are anxious to land our first client. And as we look ahead, as I mentioned, we intend to really expand our ETF business, and we will have some exciting news to share with you in the months ahead. So, thanks for taking time to listen today, and please call me or Terry, if you have further questions or visit westwoodgroup.com and go to the Investor Relations section. Have a great day. This concludes the question - this concludes today's conference call. Thank you for participating and you may now disconnect.

Radware Ltd. (RDWR) Q2 2024 Earnings Call Transcript

Yisca Erez - Director, Investor Relations Roy Zisapel - President and Chief Executive Officer Guy Avidan - Chief Financial Officer Hello, and welcome to the Radware Conference Call discussing Second Quarter 2024 Results. Thank you all for holding. You will have the opportunity to ask questions to our speakers later on in the Q&A session. [Operator Instructions] As a reminder, this conference is being recorded July 31, 2024. I would now like to turn this call over to Yisca Erez, Director, Investor Relations at Radware. Please go ahead. Yisca Erez Thank you, operator. Good morning, everyone, and welcome to Radware's second quarter 2024 earnings conference call. Joining me today are Roy Zisapel, President and Chief Executive Officer; and Guy Avidan, Chief Financial Officer. A copy of today's press release and financial statements, as well as the investor kit for the second quarter are available in the Investor Relations section of our website. During today's call, we may make projections or other forward-looking statements regarding future events or the future financial performance of the company. These forward-looking statements are subject to various risks and uncertainties, and actual results could differ materially from Radware's current forecast and estimate. Factors that could cause or contribute to such differences include, but are not limited to, impact from changing or severe global economic conditions, the COVID-19 pandemic, general business conditions and our ability to address changes in our industry, changes in demand for products, the timing in the amount of orders and other risks detailed from time to time in Radware's filing. We refer you to the documents the company files and furnishes from time to time with the SEC, specifically, the company's last Annual Report on Form 20-F as filed on March 18, 2024. We undertake no commitment to revise or update any forward-looking statements in order to reflect events or circumstances after the date of such statement is made. Thank you, Yisca, and thank you all for joining us today. We ended the second quarter of 2024 with revenues of $67 million and non-GAAP earnings per share of $0.20, all succeeding the high end of our guidance. These results were driven by our cloud security business with cloud ARR growing 19% year-over-year. Strong acceptance of our DefensePro X DDoS protection and continued OpEx cost control also contributed to our performance. We generated $23 million of cash flow from operations in the second quarter and $44 million in the first half of 2024. During the first six months of this year, cyber attacks continue to rise in number, scale, and complexity. Network layer DDoS attacks per customer increased double digits, and web DDoS attacks in particular continued to climb quadrupling over the second half of 2023. This surge was influenced by geopolitical conflicts and international events like the EU Parliament elections, Euro 2024, and the Paris Olympic Games. With more attackers using generative AI and AI-enabled attack tools to accelerate time-to-attack and attack progression, organizations worldwide face significantly greater risks to the business operations. To address these challenges, customers need AI-powered protection, in other words, to fight AI with AI. With that, we are proud to introduce our new Radware EPIC-AI which powers our security solutions and infuses AI-powered intelligence and capabilities to all layers of our platform. Leveraging state-of-the-art AI and generative AI algorithms, EPIC-AI is designed to significantly improve attack detection and mitigation capabilities, and reducing time to resolution. EPIC-AI introduces new AI algorithms such as cross-module attack correlation both behavioral algorithms and automated false-positive autocorrection. It also includes a new API business logic protection algorithm. Unlike competitive solutions that rely on past attacks' log analysis for detection and remediation recommendations, our AI-powered API protection works automatically, continuously and in real-time to identify bad actors and block their attacks. For our customers, this translates into optimized protection and significantly faster time to resolve. We are pleased to announce that analysts recognize the strength of our AI capabilities. In May, GigaOm evaluated the AI protection capabilities of 13 security providers in our space in the 2024 Radar for Application and API Security Report. In the report, GigaOm stated Radware is the only vendor in this analysis to earn a top score on the AI-enhanced vulnerability detection criterion. Radware includes everything that we currently look for in the future. In addition, Gartner's 2024 Peer Insights Voice of the Customer Report for Cloud Web Application and API Protection named us a strong performer, noting that 99% of customers are willing to recommend Radware. To continue to meet our customers' evolving security and infrastructure needs, we accelerated our pace of innovation. During the second quarter, we added numerous new capabilities to our cloud security platform. We expanded our cloud platform with DNS-as-a-Service capability and with our NoKey solution for privacy protection, storage and management. We also introduced a new compliance solution to help organizations easily navigate and streamline the process of meeting PCI DSS 4.0 requirements. This new pillar for our cloud application protection service offers customers dedicated controls, extensive visibility and easy-to-access reports. The PCI DSS regulation went into effect on March 31, 2024, and will become mandatory starting March 31, 2025. To support our growing cloud customer base, we launched a new cloud security service center in Paris. The facility will help customers' increased resiliency and comply with local data privacy requirements. The launch extends our DDoS and web application attack mitigation capacity to 15 terabyte across more than 50 cloud security service centers worldwide. We plan to open three to four additional centers by the end of 2024. We believe that EPIC-AI and the additional modules in our cloud security platform increased the business value our customers extract from our solutions. Going forward, we expect these benefits will generate more traction for our offerings, increase our ARR and enhance platform stickiness. In our on-prem security business, we also see encouraging momentum. DefensePro X with its superior DNS and web DDoS mitigation capabilities is gaining strong market traction. For example, we closed a multimillion-dollar deal with one of the largest stock exchanges in Europe. The customer recognized the need to protect the network and applications from both volumetric and web DDoS attacks. The combination of our new AI-powered DNS protection with DefensePro X performance convinced them of the necessity to upgrade their current infrastructure. Our ability to mitigate the sophisticated Layer 7 DDoS attacks without the need to hand over certificates was another key motivating factor in their purchasing decision. DefensePro X also earned us new logos and a good example is the European insurance institution. The customer was interested in enhancing protection for their services and infrastructure, and DefensePro X provided crucial protection that the incumbent could not offer. This deal was part of a broader Cisco project. In summary, although customer spending patterns have not yet returned to previous levels, we delivered solid results for the second quarter. We are excited about the momentum in our on-prem security business as well as the advancements in our cloud security strategy, particularly with the launch of our new EPIC-AI. Looking out into the second half of 2024, we remain focused on accelerating our cloud business and believe we are well positioned for future growth and increased profitability. Thank you, Roy, and good day, everyone. I'm pleased to provide the analysis of our financial results and this performance for the second quarter of 2024 as well as our outlook for the third quarter of 2024. Before beginning the financial overview, I'd like to remind you that unless otherwise indicated, all financial results are non-GAAP. A full reconciliation of our results on a GAAP and non-GAAP basis is available in the earnings press release issued earlier today and on the Investors section of our website. Revenue for the second quarter of 2024 was $67.3 million compared to $65.6 million in the same period of last year. This growth was mainly driven by cloud security business expansion and DefensePro X success with our carriers and large enterprise customers. The cloud security business expansion is reflected in the 19% year-over-year increase in cloud ARR, which reached approximately $70 million and accounted for 32% of total ARR in the second quarter of 2024, up from 28% in the same period of 2023. Our total ARR reached approximately $217 million, representing 7% adjusted growth over the same period of last year. Over the past few quarters, we witnessed signs of recovery in customer spending, although it has not yet returned to previous levels. On a regional breakdown, revenue in the Americas in the second quarter of 2024 grew 12% year-over-year to $30.1 million and accounted for 45% of total revenue. On a 12-month trailing basis, America revenue decreased 10% year-over-year. EMEA revenue in the second quarter of 2024 was $22.8 million, representing 1% year-over-year increase and accounted for 34% of total revenue. On a 12-month trailing basis, EMEA revenue decreased 9% year-over-year. APAC revenue in the second quarter of 2024 was $14.4 million, which represented a decrease of 11% year-over-year and accounted for 21% of total revenue. On a 12-month trailing basis, APAC revenue increased 1% year-over-year. I'll now discuss profits and expenses. Gross margin in Q2 2024 was 82.2%, approximately similar to 82.3% in the same period of 2023. Operating expenses decreased 6% year-over-year from $52 million to $49 million for the second consecutive quarter, at the lower end of our guidance. Operating income reached $6.3 million compared to $1.9 million in the same period of last year. We are selectively adding investments to accelerate cloud security growth in R&D to increase our technology moat, go-to-market and infrastructure. Yet, we remain dedicated to driving efficiency and EPS growth and diligently managing our expenses. Radware's adjusted EBITDA for the second quarter has doubled to $8.3 million or $11 million excluding the Hawks business compared to $4.1 million or $6.8 million, excluding the Hawks business in the same period of last year. Financial income was $4.1 million in the second quarter. The tax rate for the second quarter in 2024 was 15.4% compared to 14.8% in the same period of last year. We expect the tax rate to remain approximately the same next quarter. Net income in the second quarter nearly doubled to $8.8 million as compared to $4.5 million in the same period last year. Diluted earnings per share for Q2 2024 doubled to $0.20 versus $0.10 we had in Q2 2023. Turning to the cash flow statement and the balance sheet. Cash flow from operation in Q2 2024 was $23 million compared to cash flow from operation of $4.9 million in the same period of last year. This brings cash flow from operation year-to-date to $44.2 million. The improvement in the cash flow from operation is mainly attributed to the increase in net income, along with strong billing performance in the second quarter of 2024. As of June 30, 2024, approximately $66 million remained in our share repurchase plan. We ended the second quarter with approximately $397 million in cash, cash equivalent, bank deposits and marketable securities. I'll conclude my remarks with guidance. We expect total revenue for the third quarter of 2024 to be in the range of $67.5 million to $69 million. We expect Q3 2024 non-GAAP operating expenses to be between $49.5 million to $50.5 million. We expect Q3 2024 non-GAAP diluted net earnings per share to be between $0.19 and $0.21. I'll now turn the call over to the operator for questions. Operator, please. We are now opening the floor for question-and-answer session. [Operator Instructions] Our first question comes from Alex Henderson from Needham. Your line is now open. Alex Henderson Great, thanks. And let me just express my hope that everybody is safe and healthy at Radware and your families. I wanted to just hit the first question around the signs of recovery that you indicated. Can you dive into a little bit more what signs you're seeing? Is it improved closure rates? Is it larger deal sizes? Is it stronger pipeline? What are those signs of recovery that you mentioned? Roy Zisapel Thanks a lot, Alex. So I would distinguish between the types of offerings we have. At the cloud security platform, we've seen all along strong momentum, strong growth and it's evident also this quarter. Where we saw weakness in the past, and it's still not back to normal, as we've noted, is mainly on the large CapEx deals, the on-prem ones. We're starting to see what we think is a bit of acceleration in the momentum of those deals. Obviously, some closures. I talked on some of them, especially on the DefensePro X, we are seeing, given the heightened security challenges as well as this new platform and refresh cycle, we are starting to see faster closure rates, very strong pipeline, much more activity. We still need to monitor how quickly we translate that to revenues. But definitely, we see a pickup also on the on-prem side of our business. Alex Henderson If you could address the partnership revenue streams and specifically, what you're seeing in terms of visibility there, that would be very helpful. Thanks. Roy Zisapel Yes. Our OEM partners continued, if I look at them together, to execute well for the quarter. It's still in the very high level of our performance. We see strong opportunities and actually better partnership with both. So I think also here, we're seeing them, for example, adding more of our cloud security solutions to their customer base. We're seeing them adopting our new DefensePro X, et cetera. So they are aligned with all the innovation and new capabilities we're bringing, they're exposing all of that in their price list, spot numbers, sales training, webinars and so on. So definitely, I think that's at least for now in a record level and we believe there's obviously much more potential. The potential with those two partners is immense for us, and we're starting to get more traction. Our next question comes from Chris Reimer from Barclays. Your line is now open. Chris Reimer Hi. Congratulations on the strong results and thanks for taking my questions.. First off, I wanted to ask about operating expenses. Considering the last few quarters, we've seen some nice decreases in the strict cost management you've been talking about, how should we be looking at that playing out towards the rest of the year? And might we see continued declines or is this going to level off at some point? Roy Zisapel So we already mentioned it. We are not really planning to continue the decline. On the contrary, we may see some increase and we're seeing a lot of opportunities in go-to-market. We think we have a great opportunity to open the gap from competition regarding the mentioned EPIC-AI, generative AI product and the like. So OpEx will probably continue to grow slightly. Chris Reimer Got it. Got it. And the growth in the Americas on this quarter, can you give any color around that, what kind of - what was that growth stemming from? Was that new customers? Was that specific closures that you managed on the quarter, just in terms of how that has built that growth there? Roy Zisapel Yes. So first, we had nice growth this quarter in revenues, and it's always nice to speak about growth, but I want to remind everyone that the way we look on a territory or a region is more on a 12-month period. We think it's normalizes for some, I would say, ups and downs we might have because of CapEx projects, et cetera. So on a 12 months, it's clearly we still have work to do on the Americas. In general, we saw very good business from actually existing customers there with long commits to our solutions. And we do see Americas as a significant place. We can improve our results. So we believe there's a significant upside in the Americas. Some of the investments that Guy alluded to are obviously focused on that region. As we mentioned, it's going to be a first growth in revenues and then expenses. But definitely, we see Americas as a place we can accelerate growth in. Our next question comes from George Notter from Jefferies. Your line is now open. George Notter Hey, thanks a lot, guys. I wanted to ask some questions about the DefensePro X refresh cycle. I think it really started in earnest, I think, earlier this year. But I'm curious about what kind of traction you guys are getting. Any metrics you can give us on pacing of the rollout, maybe the mixture of DefensePro X relative to historical DefensePro appliances? Any more sense you can give us on the progress there would be interesting. Thanks. Roy Zisapel Yes. So I think you're right, the real contribution started a bit in Q1 and now more in Q2. The main indicators we see are very strong growth in pipeline and strong engagement also with our very large customers. The reason for that is on several aspects. First, like every appliance refresh cycle, customers would need to move over the next two, three years from announcement that took place a year ago. So obviously, as time comes, more and more customers are pushed there. But that some, I would say, is the smaller part of the story. The bigger part is that in DefensePro X, we have a battery of new algorithms. I mentioned the DNS, I mentioned the web TLS, that are very critical to block existing attacks waves that we're seeing now. Obviously, when we've developed all these algorithms, we were looking forward to what hackers might be able to do or where the market is going. And what we are seeing now, we are seeing waves of such attacks that DefensePro X is unique in its capabilities to block, for example, web layer DDoS attacks without the need to open the encrypted traffic. That's a significant advancement that we have or all the complicated DNS attacks. So many of our large customers are starting to see or experience these attacks on their infrastructure and there's obviously a clear need to protect. DefensePro X is the best answer for that. So the attack landscape and our ability to do that is a very strong contributor. And the third one is that in DefensePro X, we have our new own designed FPGAs that are providing 3 to 4x performance improvements across many parameters. It's not only packet per second - sessions, [indiscernible] traffic, ability to challenge attackers. It's basically wire speed on 800 gig in any platform that we use the FPGA for. So that capacity increases, matches what our customer experience in their networks that are scaling in session transactions. So significantly better performance, and as a result, price performance, very strong capabilities in attack protection that are critical to those large customers and refresh cycle. We think that all of that together is coming together this year. Maybe last year, we've seen less of that attacks, this year with more attacks, more time on the time line, bigger capacities that are needed, a bit maybe better budget environment. All of that is really driving what we see as a strong opportunity for us. George Notter Got it. And then what's the mix of DefensePro X in terms of your appliance shipments this quarter relative to the historical products? Okay. Fair enough. And then the other one I had was just on the EPIC-AI capability. Can you just remind me how you guys are monetizing that? Is that now in your cloud scrubbing services? Is that now embedded in DefensePro X? I'd love to hear more about the monetization there and how you're going to market with it. Roy Zisapel Okay. So this framework of AI capabilities is going to span all our solutions, the on-prem and the cloud, the initial instances of that is taking place in the cloud security modules for API, both WAF and DDoS as well as in the DefensePro X application protection. Additional modules like the cross-correlation AI and the AI SOC agents, the predictive SOC will be across all our solutions, and you're going to see announcements in the coming years. So we see that is impacting all our solutions. Obviously, initially, will benefit that in DPX and cloud. But going forward, it's going to be a significant improvement to all our security benefit as an add-on layer for all our existing revenues. George Notter Got it. Are you guys charging for that on an a la carte basis or is that rolled into the existing API bot, DDoS software capabilities? Roy Zisapel Yes. It depends on the capability. So first, it only appears in our highest bundle. So it drives bundle adoption to what we call complete to start with. Second, the predictive SOC, the AI SOC is going to be charged separately as well. So it's both on moving customers to the higher end of the packages plus add-on modules for everything that is across multi-module or cross-correlation or management or AI SOC and so on. Our next question comes from Alex Henderson from Needham. Your line is now open. Alex Henderson Great. I was hoping you could talk a little bit about the expansion of your cloud data center CapEx plans and where we are in terms of that rollout and how much further you think you need to go? What's the cash use or CapEx expenditures look like? Guy Avidan So we mentioned earlier that we expect to increase number of locations between 3 to 4 throughout the year. CapEx will grow a little bit more than it was this quarter, which was close to $1 million. So we think it's going to be closer to $2 million for quarter. That's going to be the impact. Based on demand, based on new locations, this number can grow in 2025. Alex Henderson And as you're looking at the coverage, how much - where are you relative to the coverage that you think you need given your current scale? Is this a three, four, five-year process to continue to build out geographies? Roy Zisapel I think overall, for the global market, we are well covered. What we are doing now, we're adding in, I would say, specific countries, additional capabilities based on partnership or local regulation. So I think the scale of the platform is 15 terabyte, I think it's doing very well. As we've mentioned, we're 50 locations worldwide. So let's assume we're covering already all the G20 countries pretty well. But we do see opportunities, especially with partnership or remote countries, et cetera, to extend the cloud business through those local pops, and then we do that. As Guy mentioned, I think our ROI overall on those pops as we scale the customers is very, very good. So it's a very good business decision. But we do that obviously with partners and when we have that business, the global network, I think it builds well. Alex Henderson If I look at the cloud growth, it actually decelerated a couple of percentage points. Can you talk a little bit about why that's the case? And do you expect it to reaccelerate? Roy Zisapel Yes. I think we definitely wanted to reaccelerate. And as you see, we're investing both in locations that you alluded to, but also in capabilities and modules. I've mentioned the DNS-as-a-Service, I mentioned NoKey, I mentioned the PCI DSS compliance as well as strengthening the platform. And so obviously, we have programs in the company. I think we can accelerate it. We're investing more in that. It's a strong growth opportunity. We want to go back first to where we were in, and let's see how we end the year. But that's definitely where we are heading. Alex Henderson So should we think about it as a 20% to 25% type growth business longer-term? Roy Zisapel That's how we think about it, and we need to get back there. Thank you. We are now concluding our question-and-answer session. I'd now like to hand back over to Roy Zisapel, for final remarks. Thank you for attending today's call. You may now disconnect. Have a wonderful day.

Earnings call: CarParts.com navigates tough quarter, eyes future growth By Investing.com

CarParts.com, Inc. (PRTS) faced a challenging second quarter with a decline in revenue and gross profit, as reported during their recent earnings call. Despite these headwinds, the company is making strategic changes to improve margins and position itself for a stronger fiscal year 2025. The quarter saw a decrease in sales due to pricing actions and a shift in customer focus, but CarParts.com is optimistic about its path to profitability, with progress in logistics and a focus on more profitable customers. The company expects to see improved financial performance starting in the third quarter and into the next year. CarParts.com, Inc. (PRTS) is navigating through a turbulent period marked by a downturn in sales and profitability. The company's strategic efforts to rebound are underscored by recent market data and analyst insights that highlight both challenges and potential opportunities for investors. InvestingPro Data metrics reveal a market capitalization of $68.04 million, suggesting a relatively small player within the industry. The company's Price/Earnings (P/E) ratio stands at -4.55, reflecting the market's concerns over its current profitability. Moreover, the Price/Book (P/B) ratio of 0.62 indicates that the stock may be undervalued relative to the company's book value, which could attract value investors. Two pertinent InvestingPro Tips for CarParts.com include the observation that analysts have revised their earnings downwards for the upcoming period, indicating potential headwinds in financial performance. However, it's worth noting that the company has experienced a significant return over the last week, which could signal investor optimism in the company's turnaround strategies or short-term market fluctuations. For those considering an investment in CarParts.com, more insights are available on InvestingPro. Currently, there are 15 additional InvestingPro Tips that could guide investment decisions. To access these insights and more, use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription. Operator: Good afternoon. [Operator Instructions] Please note this call is being recorded. I would now like to pass the conference over to our host, Tina Mirfarsi, Senior Vice President of Global Communications and Culture. Please go ahead. Tina Mirfarsi: Hello everyone, and thank you for joining us for the CarParts.com Second Quarter Conference Call. Joining me today are David Meniane, Chief Executive Officer Ryan Lockwood, Chief Financial Officer and Michael Huffaker, Chief Operating Officer. Before I turn it over to David to start the meeting, I have some important disclosures. The prepared remarks and responses to your questions could contain certain forward-looking statements related to the business under the federal securities laws. Actual results may differ materially from those contained in or implied by these forward-looking statements due to risks and uncertainties associated with the business. For a discussion of the material risks and other important factors that could affect results, please refer to the CarParts.com annual report on Form 10-K and 10-Q as filed with the SEC, both of which can be found on our Investor Relations website. On the call, both GAAP and non-GAAP financial measures will be discussed. A reconciliation of GAAP to non-GAAP financial measures is provided in the CarParts.com press release issue today, and with that, I would now like to turn the call over to David. David Meniane: Thank you, Tina, and thanks everyone for joining us today. I'd like to start with the most important takeaways from this quarter before I turn it over to Ryan to review our financial performance in detail. Last quarter, we discussed our emphasis on financial discipline by focusing on driving gross and net margins, accelerating efficiency and effectiveness to quickly deliver improved profitability, and achieving a path to sustainable and profitable growth with strong long term free cash flow. In the second quarter, we made significant progress on gross margin and operating efficiencies, which reinforces our confidence that we're on the right track. We expect fiscal year 2024 to be a low watermark year as we execute on the changes we have been making. This should position us for a strong fiscal 2025 and beyond, and we are confident in our roadmap and our opportunity as a leading online retailer in a highly fragmented $400 billion auto parts market. In the first half of the year, we updated our pricing and marketing acquisition strategies to target more profitable customers and generate higher gross margins. As a result, in the second quarter, we saw sequential margin improvement with product margins at 54%, up 210 basis points. From Q1, we expect Q3 to be sequentially higher. Combined with the cost reduction initiatives I'll discuss in a moment. We anticipate better unit economics on less volume. However, pricing actions and beginning to change the overall profile of our customers negatively impacted sales, which were down to $144 million from $177 million in the prior year period. Our operational highlights for the quarter were as follows. We continued to optimize our product and price assortment to maximize the profitability of our e commerce channel. Our mobile app continues to drive strong momentum with over 450,000 downloads, more than double the number from the beginning of the year. In addition, in just twelve months after launching, mobile app sales accounted for 8% of our total e-commerce revenue, with approximately 80% of our customers shopping on mobile. Over time, we expect direct in app purchases to drive savings and advertising spend by reducing our reliance on search engines and performance marketing as well as incentivizing repeat purchases. Second, we continue to invest in our marketing channels. We are making strides on building brand awareness and recognition of our leading digital first and customer centric automotive e-commerce strategy, which is critical to capturing our target high value customer base. In July, we launched our first ever comprehensive brand campaign. Our now that's my speed campaign. Along with our new tagline-Quality Parts Priced Right, is running across top social media platforms, YouTube and connected TV. This campaign highlights our customer value propositions, our extensive selection of over 1 million quality parts at competitive pricing and our hassle-free e-commerce solution. We are committed to moving up the marketing funnel to establish CarParts.com as one of the most trusted and recognizable brands in the industry. Our goal is to become the go to destination for all automotive repair and maintenance needs, capitalizing on our infrastructure, website traffic and customer lists. We also want to welcome our new Chief Marketing Officer, Christina Thelin, who brings over 20 years of experience in marketing with an extensive background in building global brands and award-winning campaigns across several Fortune 500 companies including Google (NASDAQ:GOOGL), Twitter, Visa (NYSE:V) and Procter&Gamble. As CMO, Christina will lead our strategic marketing initiatives as we continue to expand our market presence, drive customer engagement and increase awareness for CarParts.com. We are confident that her strategic marketing vision and proven track record will help propel our company forward. We are thrilled to have her on the team. And third, we made significant progress on the upgrade of our logistics and reduction of our freight cost. We've identified opportunities for pick, pack and shipping optimization that will drive reductions in freight costs and improve margins. Combined with our product margin improvement, we believe we can continue to improve gross margin after freight in the third quarter. Higher gross margin percentage combined with operational efficiencies should result in increased profitability for the company. In June, our new Las Vegas Fulfillment Center became operational and is now shipping more than 10% of our network volume. As we exit the year we expect this building to handle close to 20% of the company volume as we service the western part of the country. The facilities assortment, paired with a state-of-the-art AI powered PIC module and extensive conveyance allows for a significant reduction in operating costs. This investment was made to drive operating leverage and growth in the form of process efficiencies and improved conversion for customers in the region. We expect those savings to start ramping in the second half of 2024 and fully realize in 2025. I'll now turn the call over to Ryan to lead us through our financial results. Ryan Lockwood: Thank you, David. In Q2, we reported revenues of $144.3 million, down 18% from $177 million last year. The decline was driven primarily by deliberate price increases to drive gross margin expansion combined with softer consumer demand. Gross profit for the quarter was $48.4 million, down approximately 20% compared to the prior year. Gross margin was 33.5% of sales, down from 34.2% in the prior year period and up sequentially from 32.4% last year. Gross margin improvement from increased prices and expanded brand margins related to our efforts in the quarter were offset by higher year-over-year freight costs. As David mentioned, driving gross and net margin to strengthen financial discipline is the central part of our strategy and we expect to see continued improvement in the quarters ahead. GAAP net loss for the quarter was $8.7 million compared to net loss of $0.7 million in the prior year period, primarily driven by lower flow through from gross margin combined with certain one-time costs. We reported adjusted EBITDA loss of $0.1 million, down from $6.3 million in the prior year period, primarily due to costs related to the move and opening of our new Las Vegas facility. Technology transformation costs as well as special project expenses related to our strategy refocus, the total amount of expenses outside of our normal operations was approximately $2.8 million in the quarter. Turning to the balance sheet, we ended the quarter with $34 million of cash and no revolver debt. We generated $354,000 of interest income in the second quarter. Our significant cash position and untapped revolver continues to support our business plan as we finalize the opening of our new semi-automated Vegas Fulfillment Center, our free cash flow should improve. The inventory balance at quarter end was $109 million versus $114 million in the prior year. Turning to our outlook for 2024. For the full year, we expect revenues at the low end of our guidance range of $600 million to $625 million, reflective of our gross margin improvement focus for the year. We remain in line with our previously stated gross profit margin guidance of 33% plus or minus 100 basis points. David Meniane: Thanks Ryan. As we've outlined, we are positioning CarParts for the future through our work to balance gross margin expansion and revenue. These improvements span our entire business from customer facing improvements to enhanced product assortment and process changes that are making us more efficient across every operating group at the company. We are forging a path that we expect will result in achieving sustainable and significantly positive adjusted EBITDA next year, while working towards achieving a 6% to 8% adjusted EBITDA margin and enhanced free cash flow generation in the medium term. We expect to emerge from this period of transition strongly positioned to capture the tremendous and growing opportunity in front of us within a highly fragmented and underserved $400 billion automotive aftermarket. Our customers are excited by our offering and our business is becoming more efficient, highly differentiated, scalable and difficult to replicate. We remain firmly focused on becoming the go to destination for all automotive repair and maintenance needs. I would like to thank each and every person across our global teams for their hard work and commitment as we continue to execute on our transformation. Thank you everyone for joining today's call. We'll now turn it over to the operator and open it up for your questions. Operator: [Operator Instructions] Our first question comes from the line of Ryan Sigdahl from Craig-Hallum Capital Group. Ryan Sigdahl: Hey, good afternoon, guys. Good. I want to start with guidance. So, Q2 normally seasonally strongest quarter from a volume standpoint, revenue standpoint, even at the low end of your guidance range, it implies sequentially revenue will be up in the back half, Q3 to Q4 on average, I guess, relative to Q2, so I guess what gives you that confidence, given it seems you guys are prioritizing margin overpriced and volume here? Ryan Lockwood: Yes, I think we're going to end up trying to run. It's a little bit unconventional, I guess, given prior seasons, but we do think that we can run a little bit flattish through the whole back half, comparable to Q2. And I think what gives us the confidence is a lot of the things that David mentioned. We have a lot of projects that are backloaded coming out essentially every month from now until the end of the year, and we think a lot of those are going to give us a tailwind on revenues. Ryan Sigdahl: Can you maybe elaborate or give us a little more timeframe on what those specific projects are? David Meniane: Yeah, Ryan, it's David. We have a number of things on the e-commerce roadmap and the mobile app. We have some stuff around search. We have upsell cross sell, we have several fee income initiatives, and at the same time it's combined with kind of a more fully comprehensive marketing roadmap. We just launched our campaign which is showing early signs of positive progress. At the same time we have assortment expansion, so we have a very aggressive roadmap. But I think we definitely have the confidence that we can hit the numbers. Ryan Sigdahl: Then just switching over to the Vegas DC with that transition. I guess any quantifiable metrics you can share on efficiency gains, leveraging technology more, I know, in that facility, but anything you can share kind of old versus new there? Michael Huffaker: Yeah. Hey, this is Michael. So we're in early days of the building. We've been open for about two weeks thus far, and we are meeting our weekly ramp up plan to take the building to full entitlement. Over the course of next year we would expect to get about $2 million in efficiency savings out of this building comparably over the previous. So, we will spend the rest of this year ramping up and optimizing the building, and then we expect $2 million in savings for 2025. Ryan Sigdahl: Great, Ryan, and then I believe you mentioned increased profitability in the company starting Q3. David, I don't remember who said in the prepared remarks, if I take $2.8 million of the non-recurring costs add that back to EBITDA in Q2, because it doesn't look like you guys did that in your reconciliation. I guess what's the relative benchmark for improvement? Is it quarter-over-quarter year-over-year? Just help us think about kind of the EBITDA and profitability ramp through the rest of the year? David Meniane: Thanks, Ryan. I think what we're really alluding to is we believe that we'll have gross margin expansion. So what happens is we really saw some pretty good sequential gross margin expansion through sequentially every month through Q2, and we expect that to continue through the remainder of the year. So, we think that Q3 gross margin should be higher than Q2. I think for full EBITDA through the remainder of the year. We're working hard to try and maximize that, but it's obviously going to be contingent on certain of the project that David mentioned launching, and then us capturing that profitability as well as balancing some of this improvement with these investments that it takes to get these projects launched. Ryan Sigdahl: Last one for me, Ryan, you previously said $30 million of cash exiting the year estimated. Any update to that? No? Ryan Lockwood: That sounds about right. I would say $25 million to $35 million of cash to exit the year dependent on inventory. Ryan Sigdahl: I'll turn it over to the others. Thanks, guys. Good luck. Operator: Thank you. Our next question comes from the line of Ryan Meyers from Lake Street Capital Markets. Ryan Meyers: Yep. Hi, guys. Thanks for taking my questions. First one for me, just kind of a follow up on the first question that Ryan had asked about hitting the guidance. Can you maybe talk about what you've seen here in Q3 so far and what, you know, some of these initiatives, how they've played out, and if you've seen, in fact, some of that bucking, that sequential or, sorry, that seasonal trend that you guys have seen in the past, just kind of talk about what you've seen so far here in Q3. Ryan Lockwood: Yes, so far in Q3, it's actually a little tricky. We had a little bit of a headwind because we're moving Vegas, which was planned and expected. So when we move inventory from one location to another, it becomes non saleable temporarily while it's on the truck and in the containers until it gets unloaded. And so that makes the read on the current quarter a little tough. And like everybody else you're probably talking to on your other calls, we were impacted by CrowdStrike as well as a lot of our vendors that we work with. FedEx (NYSE:FDX), for example, I believe is one of them, and we don't really know how many customers were impacted. So despite that, we still feel on track for the quarter. The most recent week that we just completed, which is pretty clean, is on track. So we still feel good about the quarter, but the read so far on P7 is a little bit behind. But a little bit of that was planned. David Meniane: And if I can add to that, it's David, Ryan. I think if you take a step back and you look at the margin profile that we started with at the beginning of the year, that's not a margin profile that we were comfortable with. And so some of it is macro or related to our customer base, but there's definitely some variables that are within our control. And so what I'm happy about is that we took significant action around pricing, promotions and discounts, warehouse operations, and overall cost structure, which we've talked about on the last call. So the good news is we acted quickly and we made significant progress. So, for me, the evidence points that I'm looking at is Q2 was better gross margin than Q1. We expect Q3 to be better gross margin than Q2. There's some noise in the P&L in Q2 because of onetime cost and the Vegas move. But once we cycle through these expenses, I think the P&L is going to be much cleaner. And I have full confidence that next year, both top line and bottom line will look significantly better. So it's definitely, it's a transition year for us, but I think we have visibility on much better numbers in the next six months. Ryan Meyers: Okay, got it. And then thinking about some of the more price sensitive segments that have been a drag on the business, you know, in the past, like lighting and mirrors, I think you guys have called out. I mean, have you seen any changes there in the demand environment at all? Or is it still some of those customers are trading down for, you know, more inferior type products? David Meniane: Yeah, that's a great question. You know, historically, our customer was definitely the price sensitive, lower income, discount seeking customer. And part of the exercise that we're going through is kind of a very deep segmentation, trying to focus on the customer base that has a higher propensity for returning more profitable, more efficient marketing spend. And so we're shooting on lower volume but more profitable customers. We haven't seen a change from Q1 to Q2. The environment is still quite tough. So if you look at our top line, I'd say some of it is not specific to CarParts.com dot. It's more macro. And that customer base, and some of it is intentional, raising prices, less reliance on discounts and promotions. Now, the good news is if you combine that with all the initiatives around operational efficiency, it should trickle down to the bottom line. Now, obviously it's going to take a couple quarters, but I think long term, like focusing on that customer that is more profitable for us is going to pay off. Ryan Meyers: Okay, got it. Thanks for taking my questions. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Magnachip Semiconductor Corporation (MX) Q2 2024 Earnings Call Transcript

Steven Pelayo - The Blueshirt Group, IR YJ Kim - Chief Executive Officer Shinyoung Park - Chief Financial Officer Thank you for standing by. Welcome to the Magnachip Semiconductor Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. After this presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Steven Pelayo of The Blueshirt Group. Please go ahead, sir. Steven Pelayo Hello, everyone. Thank you for joining us to discuss Magnachip's financial results for the second Quarter ended June 30, 2024. The second quarter earnings release that was issued today after the market closed can be found on the company's Investor Relations website. The webcast replay of today's call will be archived on our website shortly afterwards. Joining me today are YJ Kim, Magnachip's Chief Executive Officer; and Shinyoung Park, our Chief Financial Officer. YJ will discuss the company's recent operating performance and business overview, and Shinyoung will review financial results for the quarter and provide guidance for the third quarter. There will be a Q&A session following the prepared remarks. During the course of this conference call, we may make forward-looking statements about Magnachip's business outlook and expectations. Our forward-looking statements and all other statements that are not historical facts reflect our beliefs and predictions as of today, and therefore, are subject to risks and uncertainties as described in the Safe Harbor statements found in our SEC filings. Such statements are based upon information available to the company as of the date hereof and are subject to change for future development. Except as required by law, the company does not undertake any obligation to update these statements. During the call, we also will discuss non-GAAP financial measures. The non-GAAP measures are not prepared in accordance with generally accepted accounting principles, but are intended as supplemental measures of Magnachip's operating performance that may be useful to investors. A reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures can be found in our second quarter earnings release in the Investor Relations section of our website. Hello everyone and thank you for joining us today and welcome to Magnachip's Q2 earnings call. Q2 revenue was $53.2 million, down 12.8% year-over-year, but up 8.4% sequentially. This was above the mid-point of our previous guidance range of $49 million to $54 million. Consolidated Q2 gross profit margin of 21.8% was down 0.4 percentage points year-over-year, but up 3.5 percentage points sequentially. The overall gross margin result was above our previous guidance range of 17% to 19%. Both MSS and PAS gross margins were higher than our previous guidance. Shinyoung will provide more details in her section. Revenue in our Standard Product business, which is comprised of MSS and PAS businesses, was $50.8 million, down 1.1% year-over-year, but up 11.6% sequentially. Standard Product business gross margin was 23.1%, up nearly 2 percentage points sequentially. Now, let me provide more detailed comments for each of our Standard Products business lines. Beginning with MSS. Q2 revenue was slightly above the high-end of our guidance at $11.6 million, down 6.2% year-over-year, but up 28.7% sequentially. The quarter-over-quarter revenue growth was due to increased demand from OLED DDICs for China smartphone OEMs, as well as automotive and Power IC for LCD TV and OLED IT panels. We continue to collaborate with several OLED panel makers and smartphone OEMs targeting the China market. As a reminder, we have multiple DDICs in various stages of development and customer evaluation. These designs span the entire smartphone market spectrum from the mass market-tier to the premium-tier segments, as well as other display markets such as automotive and wearables like smartwatches. During Q2, we held a formal Opening Ceremony to mark the launch of our new operations in China under our wholly-owned subsidiary Magnachip Technology Company, Ltd. or MTC. The goal of MTC is to expand the company's display driver IC and Power IC businesses in China. The event attracted a broad audience, including representatives from existing and prospective customers, strategic investment portfolio managers, various members of the supply chain and government officials. We recently hired Mr. Bing Lu as the new Co-President of MTC. With over 25 years in the semiconductor industry, he brings a wealth of experience in scaling China businesses. Mr. Lu has a diverse background spanning mobile phones, automotive, home appliance, IoT, PC, enterprises, and industrial sectors. He has held key business management roles at Synaptics, Invensense/TDK, Texas Instruments and NXP Semiconductor. We look forward to leveraging Mr. Lu's expertise to drive sales and marketing growth in China. Today, we also announced WM Lee, our General Manager of Mixed-Signal Solutions, has decided to retire after more than a decade with the company. We are deeply grateful for WM's years of exceptional service and wish him the very best. In Q2, we secured a purchase commitment from the smartphone design-in that we referenced in our Q1 earnings call. The commitment is for a premium OLED smartphone targeted at a leading Chinese smartphone manufacturer. Our plan is to initiate mass production of the chip with potential revenue contributions currently expected to begin by the end of the year. This design win is built on 28-nanometer technology and incorporates advanced 8 transistor LTPO panel features. In addition, we continue to make progress with another leading Chinese smartphone OEM and are currently in the final design validation phase. As previously mentioned, we also have been selected to collaborate on this smartphone maker's upcoming winter 2024 model featuring our next-generation chip. In Q2, we provided samples of this chip, which incorporates improved brightness control and power -- lower power consumption, to the panel supplier, and upon completion, we will proceed with design validation at the smartphone OEM. In June, we taped out a next-generation OLED driver designed with key enhanced IP including sub-pixel rendering SPR, refined color enhancement, color filter, brightness uniformity control and more than 20% reduction in power consumption than previous generation. We believe more power efficient DDICs will be increasingly important as the smartphones integrate high performance AI functionality, as well as adopt larger foldable and flexible screens. This chip, which is targeted for feature-rich smartphones in China, is expected to be sampled to a broad array of OLED panel makers in Q4. Finally, after taping out in Q1, we sampled in Q2 our first OLED smartwatch DDIC. This opportunity showcases our strategy to expand into new, high-growth adjacent markets. With regard to our automotive DDIC business, revenue increased for the second quarter in a row. The strongest activity is coming from European end customers. Our Power IC business, which is included in MSS, saw strong sequential growth from LCD TVs and monitors during Q2. Further, due to earlier design wins with a major Korean customer, we saw a notable sequential increase for OLED IT panels as global notebooks makers continue to launch new models with OLED displays. We continue to collaborate with this customer for upcoming models and we are developing products for both LCD TV and OLED IT panels for potential new customers. In summary, within MSS, we are executing our strategy and making steady inroads with top tier panel makers and major smartphone OEMs, while also working to drive revenue from adjacent markets in wearables, automotive, TV and IT panels. For Q3, we forecast sequential revenue growth in MSS driven by previously announced OLED smartphone design wins, as well as growth from automotive and the refurbished smartphone display markets. Moving on to PAS, Q2 revenue was $39.2 million, up slightly by 0.6% year-over-year and up 7.4% quarter-over-quarter. As I said before, the sequential increase was broad based, so I'll share some details by application. The Industrial segment saw a strong rebound in solar as issues with excess distributor and customer inventory in China now appear largely resolved. Our new 75A/1200 volt IGBT has a design opportunity in solar applications and should begin mass production in the second half of the year. E-bikes also grew in Q2 and we are well positioned to benefit from the high-speed e-motor market for scooters and motorcycles where we see an approximate doubling of the bill of materials content compared to a traditional e-bike. Lastly, lighting and other markets such as power tools saw sequential growth. While a relatively smaller contributor to PAS, the order volume of the Automotive segment rebounded sequentially as we build on our past success in Korea and now see additional design wins and mass production ramps targeted for automotive customers in Japan and China. The end applications vary widely and include IGBTs for automotive heaters and powertrains, as well as medium-voltage MOSFETs for various automotive functions related to steering, water pumps, compressors, cooling fans, seats, windows and battery management systems. The Communication segment increased sequentially driven by continued demand for LV MOSFETS for high-end foldables and leading-edge AI smartphones in Korea. We also are seeing incremental design win opportunities for tablets, wearables and China smartphones. As we mentioned on our last earnings call, the PAS design pipeline for low-voltage MOSFETs positions the company well for the next-generation of smartphones coming in late 2024 and into 2025. We believe our latest smartphone LV products are well positioned to benefit from industry trends towards foldable screens and increasing AI on-chip integration, which requires much lower power consumption than before. Our latest LV power devices consume 20% less than previous generation. In Consumer, we saw growth from TV as China brands gear up to increase market share. Further, our Super Junction MOSFET and IGBT products are seeing increased demand in home appliances such as refrigerators and induction cooktops. In summary, the overall Q2 PAS results were in line with our earlier expectation for a gradual recovery in our Power business during the first half of 2024 driven in part by inventory reductions in the channel. We believe the breadth of demand will continue in Q3 driven by leaner distribution channels and design wins for existing and new products, as well as seasonality. We are continuing to execute in delivering a strong new product pipeline for power in 2024. We believe many of these new products will have similar to Tier 1 class performance and will allow us to penetrate new markets in computing and premium OLED TVs. Additionally, the new products will begin to help fill idle Gumi fab capacity in 2025 created by the phase-out of the Transitional Foundry Services business. I'll come back to wrap up the call after Shinyoung gives you more details of our financial performance in the second quarter and provides Q3 guidance. Shinyoung? Shinyoung Park Thank you, YJ, and welcome everyone on the call. Let's start with key financial metrics for Q2. Total revenue in Q2 was $53.2 million, which came above the mid-point of our guidance range of $49 million to $54 million. This was down 12.8% year-over-year, but up 8.4% sequentially. Revenue from MSS business was $11.6 million, slightly above the high-end of our guidance range of $9.5 million to $11.5 million. This was down 6.2% year-over-year, but up 28.7% sequentially. PAS business revenue was $39.2 million, slightly below the mid-point of our guidance range of $38 million to $41 million. This was up 0.6% year-over-year and up 7.4% sequentially. Revenue from Transitional Foundry Services declined to $2.3 million as we continue to wind down this service as we've explained previously. Consolidated gross profit margin in Q2 was 21.8%, above the high-end of our guidance range of 17% to 19%, down from 22.2% year-over-year, but up from 18.3% sequentially. MSS gross profit margin in Q2 was 34.6%, above the upper end of the guidance range of 30% to 33%, down from 36.4% in Q2 2023 and down from 44.6% in Q1 2024. As a reminder, we recognized non-recurring engineering revenue in Q1 2024. The year-over-year decline was mostly due to unfavorable product mix. PAS gross profit margin in Q2 was 19.7%, above the upper end of the guidance range of 15% to 17%, down from 23.1% in Q2 2023, but up from 15.4% in Q1 2024. The upside versus guidance was mostly due to stronger-than-expected U.S. dollar against Korean Won and the sale of reserved inventories primarily for solar applications. The year-over-year decline was mainly due to a lower Gumi fab utilization rate from the wind-down of Transitional Foundry Services. Turning now to operating expenses. Q2 SG&A was $11.7 million, as compared to $11.3 million in Q1 2024 and $12.1 million in Q2 2023. Q2 R&D was $12.7 million, as compared to $11.2 million in Q1 2024 and $11.3 million in Q2 last year. As a reminder, R&D expense fluctuates quarter over quarter due to the timing of product development and Q2 this year had higher mask set costs, which was in line with our expectation. Stock compensation charges included in operating expenses were $1.1 million in Q2, compared to $0.9 million in Q1 and $2.0 million in Q2 last year. Q2 operating loss was $12.8 million. This compares to an operating loss of $13.5 million in Q1 and operating loss of $10.7 million in Q2 2023. On a non-GAAP basis, Q2 adjusted operating loss was $11.6 million, compared to adjusted operating loss of $12.6 million in Q1 and adjusted operating loss of $7.8 million in Q2 last year. Net loss in Q2 was $13 million, as compared with a net loss of $15.4 million in Q1 and a net loss of $3.9 million in Q2 last year. Q2 adjusted EBITDA was negative $7.6 million. This compares to a negative $8.4 million in Q1 and negative $3.6 million in Q2 last year. Our GAAP diluted loss per share in Q2 was $0.34, as compared with diluted loss per share of $0.40 in Q1 and diluted loss per share of $0.09 in Q2 last year. Our non-GAAP diluted loss per share in Q2 was $0.21. This compares with diluted loss per share of $0.28 in Q1 and diluted loss per share of $0.06 in Q2 last year. Our weighted average diluted shares outstanding for the quarter were 38.2 million shares. Under our $50 million stock buyback program authorized in July 2023, we repurchased, in Q2 2024, approximately 0.5 million shares for aggregate purchase price of $2.3 million, leaving about $30 million remaining authorization as of June 30, 2024. Moving to the balance sheet. We ended Q2 with cash of $132.5 million and we also have an additional non-redeemable short-term financial investment of $30 million which has a maturity date in November 2024. This amount is classified on our balance sheet as short-term financial instruments. Net accounts receivable at the end of the quarter totaled $31.2 million, which represents an increase of 2.9% from Q1 2024. Our days sales outstanding for Q2 was 53 days and compares to 56 days in Q1. Our average days in inventory for Q2 was 76 days and compares to 71 days in Q1. Inventories, net at the end of the quarter totaled $34.8 million and $31.5 million in Q1 2024. Lastly, Q2 CapEx was $0.9 million. For the full year 2024, we reiterate our prior CapEx to spend $10 million to $12 million, primarily for our PAS business and Gumi fab. This includes approximately $3 million to $4 million of one-time CapEx for our newly established operating entity in China. Now moving to our third quarter and full year 2024 guidance. While actual results may vary, for Q3 2024, Magnachip currently expects consolidated revenue to be in the range of $61.5 million to $66.5 million, including approximately $1.5 million of Transitional Foundry Services. MSS revenue to be in the range of $14.5 million to $16.5 million, up 33.7% sequentially and 46.2% year-over-year at the mid-point. This compares with MSS equivalent revenue of $11.6 million in Q2 2024 and $10.6 million in Q3 2023. PAS revenue to be in the range of $45.5 million to $48.5 million, up 19.8% sequentially and 14.6% year-over-year at the mid-point. This compares with PAS equivalent revenue of $39.2 million in Q2 2024 and $41 million in Q3 2023. Consolidated gross profit margin to be in the range of 22.5% to 24.5%. MSS gross profit margin to be in the range of 36.5% to 39.5%. This compares with MSS equivalent gross profit margin of 34.6% in Q2 2024 and 28.8% in Q3 2023. PAS gross profit margin to be in the range of 18.5% to 20.5%. This compares with PAS equivalent gross profit margin of 19.7% in Q2 2024 and 28.6% in Q3 2023. For the full year 2024, we currently expect MSS revenue to grow double digits year-over-year as compared with MSS equivalent revenue of $44.4 million in 2023, consistent with what we communicated at the beginning of the year. PAS revenue to grow double digits year-over-year as compared with PAS equivalent revenue of $151.3 million in 2023, consistent with what we communicated at the beginning of the year. Transitional Foundry Services revenue will decline in 2024, as expected. We expect this revenue to phase out by the end of the year. Consolidated revenue flattish-to-slightly down, compared to prior expectation of flat-to-up-slightly year-over-year. Consolidated gross profit margin between 19% to 22%, above our prior expectation of 17% to 20%. This compares with the consolidated gross profit margin of 22.4% in 2023. Thank you. And now I will turn the call back over to YJ for his final remarks. YJ? YJ Kim As you know, we are undergoing a transformation of our business that will unfold over the course of two years. The first major transition involves the shift in our priorities to be laser-focused primarily on China expansion for our OLED display business. The second major transition involves filling idle capacity in our Gumi fab as a result of the previously disclosed wind-down of the Transitional Foundry Services business. We've already taken initial steps to realize our objectives by streamlining the structure of the company by creating separate MSS and PAS businesses to better align our product strategies. More recently, we formed a wholly-owned MTC subsidiary in China with the goal of accelerating our business there. We currently are pursuing multiple new OLED design opportunities with panel makers and smartphone OEMs in China. As we've said previously, filling idle capacity in Gumi with Power products is a high priority because of the impact on margins. A positive sign is that our Power business is expected to show sequential growth again in Q3 as a result of new design wins and leaner channel inventories. Longer term, we have a pipeline of new Power products that we expect to begin to contribute to wafer starts in Gumi over the course of 2025 and beyond. Our Power business in 2024 is currently forecast to grow by double digits over 2023. We have much work ahead to achieve our objectives, but I'm encouraged that our business strategies are pointing us in the right direction and I'm committed to taking any steps necessary to drive shareholder value. Thank you. That concludes the prepared remarks section of our call today. Operator, you may now open up the call for questions. Certainly. [Operator Instructions] Our first question comes from the line of Suji Desilva from ROTH Capital. Your question, please. Suji Desilva Hi, YJ. Hi, Shinyoung. Congratulations on the progress here. The OLED business is growing again nicely. Can you talk about, YJ, how many products are supporting that and how many are still on the come? Similarly, maybe customers and models, just to give a sense of where we are in fulfilling your pipeline? YJ Kim Yes. Suji, very good question. So, obviously, you see we have a multiple design engagement, as well as multiple products in development. So, in terms of the design model opportunity, we are heavily designing to about four models that will go production in the next few quarters and that includes about three smartphones and one smartwatch. Obviously, we are also discussing more products as we speak and there are more models in the after-service market that we also disclose. In terms of products, we have two new products that we sampled in Q2, one for the next-generation OLED smartphone and one for smartwatch. And we just taped out the new product that has the next-generation IP, such as the sub-pixel rendering, color enhancement, the color uniformity management and less than 20% power reduction than previous generation, where that will be broadly -- expected to be broadly sampled to multiple panel maker. So, those are the pipeline and stages that we have. Suji Desilva Okay. Very helpful. And then on the gross margin side, if I take your full year guide, it would seem like gross margin is declining in the fourth quarter. I just want to make sure my math is correct there. And then, more importantly, what are the drivers for gross margin to improve, and the key ones were 2025, and remind us what the target gross margin is again? Shinyoung Park So, the -- Suji, the gross margin for the full year, the year-over-year decline was mainly due to the phase-out of the Transitional Foundry Services, because we had those revenue in the first half and also $1.5 million in Q3. So, that's coming down. So, the Transitional Foundry Services comprise approximately 20% to 25% of our equipment capacity. So, that portion becomes idle. So, that's impacting our gross margin for the full year. So, that's the main driver for the decline. But we were actually, we came a little higher in Q2, and we called out during the call that there was mainly due to some of the product mix improvements, reversal of some of the reserve inventories and favorable kind of FX impact on us. So, we kind of have that. And also Q3, we kind of guided flat, almost flat for the PAS. So, at the midpoint. The full year, we raised our guidance range by 200 basis points at the bottom and at the top. So, that's what we are seeing, the improvement for the full year 2024. YJ Kim And Suji, I forgot to also mention that the, I think today in the script, we said the, most of the next-generation OLED DDICs is 20% less power and our LV MOSFET is also 20% less power. This is very critical as we see new smartphones with AI-integrated features that will draw more power. So, this kind of power reduction is really needed for next-generation smartphones. Suji Desilva Okay. And then Shinyoung, YJ, the key drivers of gross margin improvement at 2025, is that refilling the Gumi fab capacity that freed up or are there other elements to it? Shinyoung Park That is correct. That's the -- we are going through the transformation, as we pointed out. We are trying to fill the idle capacity in 2025. So, new products, new generation products are rolling out, and so that will help us fill our idle capacity beginning in 2025. Thank you. And our next question comes from the line of Martin Yang from Oppenheimer. Your question, please. Martin Yang Thank you. Thank you for taking my question. First, congratulations on recruiting Bing Lu, a very solid hire with a strong background. Can you maybe talk about his priority and his responsibility in China? YJ Kim Thank you. Yes. Bing Lu is a very seasoned executive, and as you said, he has a very good proven record in China. So, he is the Co-President of MTC. So, he is responsible for the sales and marketing and business of the MTC, whereas the focus is OLED, driver IC and the Power IC. Martin Yang Got it. And also, a clarifying question regarding your reference to OLED panels for IT. Is your current involvement with -- about your Power IC products for those products or are you supplying driver IC for OLED panels for IT applications? YJ Kim The -- right now, initially, Power IC is the main driver. Martin Yang Got it. And the next question is regarding your comment on power savings for your new DDIC products. Can you maybe give us more context around what does that 20% power savings mean for overall panel consumption or in the context of how that translates to overall a smartphone power savings? YJ Kim Yeah. So, the high-end smartphone nowadays is either foldables or integrated AI, right? So, that consumes a lot more power. So, you need to offset the power consumption in many ways. Like today, we have the MOSFET we talked about and then driver IC. So, you need to save as much power as you can and giving that kind of 20% saving in the next-generation will really help out on the high-end smartphone. So, again, the saving is also a function of the features. So, I think the high-end has a lot more functionality and the on-chip AI integrated, which consumes more power. But if you were not to add those things, I mean, you're talking quite significant saving in the actual applications. Thank you. And our next question comes from the line of Quinn Bolton from Needham. Your question, please. Nick Doyle Hi. This is Nick Doyle on for Quinn Bolton. Thanks for taking my questions. You're lowering the fiscal year revenue target just slightly. You pointed out inventory levels are better. So, could you expand on what accounts for that slight change? YJ Kim Yes. So, I think the -- we -- on the power, we are growing 7.4% in Q2, approximately 20% Q3. So, that's quite a very good growth in the linear channel. But so, at the same time, with that kind of growth, we do see some seasonality. So, that's the only thing that we would describe that on the fourth quarter. Nick Doyle Okay. So, just a little more seasonality than typical in that December quarter. YJ Kim The -- December quarter is a seasonally low quarter for us before the COVID, yeah, when you go to normal cycle. Yeah. Nick Doyle Right. Do you have a view on whether these AI functions can drive a mobile replacement cycle? And I think you just touched on it, but how are you exposed to the trend? Is that mainly in the MSS segment or do you have also a PAS lever? YJ Kim Oh! Yeah. In fact, we mentioned about the PAS. The low-voltage MOSFET, that is going to all the leading the Korean smartphone that has a built-in AI. So, our low-voltage MOSFET consumes 20% less than previous generation. So, we do see whether it's the OLED DDI or the component in the smartphone in power is requiring that kind of competitiveness to be a win to the next-generation AI-based smartphone or affordable phone, which consumes more power. Nick Doyle Okay. And then last one, if I could sneak in. Your gross margins are moving higher. So, as they continue to improve, have you thought about a quarterly breakeven level and is that possible in 2025? Shinyoung Park I mean, we don't really guide for the 2025, but it's really the function of the revenue and the gross margin. So, the gross margin is improving as compared with our previous expectation. So, some moving pieces. So, we have more visibility for 2024, so we guided up our gross margin full year guidance by 200 basis points. Going into 2025, definitely new products that are rolling out into the field are going to help us. They'll fill our capacity, but the utilization rate and all of the manufacturing efficiency and cost and everything, we're all going to be impacting our 2025 gross margin. So, the quarterly-wise revenue, we'll have to see like $15 million to $15.5 million per quarter-ish. That should be a breakeven for the past business, as we've disclosed previously. But again, it's all kind of the function of the revenue, like, and the gross margin. Thank you. This does conclude the question-and-answer session of today's program. I'd like to hand the program back to Steven Pelayo for any further remarks. Steven Pelayo Thank you. This concludes our Q2 earnings conference call. Please look for details of our future events on Magnachip's Investor Relations website. Thank you and take care. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.

Garmin Ltd (GRMN) Q2 2024 Earnings Call Transcript

Joseph Cardoso - JPMorgan George Wang - Barclays David MacGregor - Longbow Research Jordan Lyonnais - Bank of America Benjamin Bollin - Cleveland Research Ivan Feinseth - Tigress Financial Partners Noah Zatzkin - KeyBanc Capital Markets Erik Woodring - Morgan Stanley Thank you for standing by. My name is Christina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Garmin Limited Second Quarter 2024 Earnings Conference Call. [Operator Instructions] I will now turn the floor over to Teri Seck, Director of Investor Relations. Teri, you may begin. Teri Seck Good morning. We would like to welcome you to Garmin Limited's second quarter 2024 earnings call. Please note that the earnings press release and related slides are available at Garmin's Investor Relations site on the Internet at www.garmin.com/stock. An archive of the webcast and related transcript will also be available on our website. This earnings call includes projections and other forward-looking statements regarding Garmin Limited and its business. Any statements regarding our future financial position, revenues, segment growth rates, earnings, gross margins, operating margins, future dividends or share repurchases, market shares, product introductions, future demand for our products, and plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this earnings call may not occur, and actual results could differ materially as a result of risk factors affecting Garmin. Information concerning these risk factors is contained in our Form 10-K filed with the Securities and Exchange Commission. Presenting on behalf of Garmin Limited this morning are Cliff Pemble, President and Chief Executive Officer; and Doug Boessen, Chief Financial Officer and Treasurer. At this time, I would like to turn the call over to Cliff Pemble. Clifton Pemble Thank you, Teri, and good morning, everyone. As announced earlier today, Garmin delivered another quarter of outstanding results with double-digit growth in consolidated revenues and operating income. Consolidated revenue increased 14% to $1.51 billion, a new second quarter record, with three business segments reporting strong double-digit growth. Gross margin was 57.3%, operating margin expanded to 22.7%, resulting in operating income of $342 million, up 20% year-over-year. We reported pro forma EPS of $1.58, up 9% over the prior year, which is a remarkable result considering the significantly higher effective tax rate. During the quarter, our global employment surpassed 20,000 associates, and we were recognized as a top employer by Forbes as well as U.S. News and World Report. We are proud of our associates who dedicate themselves to delivering growth through innovative and highly differentiated products. Given our strong performance in the first half of the year, we are updating our full year guidance. We now anticipate revenue of approximately $5.95 billion and pro forma EPS of $6. Doug will discuss our financial results and outlook in greater detail in a few minutes. But first, I'll provide a few remarks on the performance of each business segments. Starting with fitness. Revenue increased 28% to $428 million, primarily driven by wearables. Gross and operating margins improved to 57% and 25%, respectively, resulting in operating income of $108 million. During the quarter, we launched the Edge 1050 premium cycling computer with a vivid color touchscreen display, a built-in speaker for audible feedback, and Garmin Pay mobile payments. Also during the quarter, we celebrated Global Running Day, with Garmin users running nearly 11 million miles, beating last year by more than 2 million miles. Given the strong performance of the fitness segment, we are raising our revenue growth estimate to 20% for the year. Moving to outdoor. Revenue decreased 2% to $440 million, primarily driven by lower revenue from adventure watches following the anniversary of the fēnix and epix Pro Series launch. Gross and operating margins were 65% and 31%, respectively, resulting in operating income of $136 million. During the quarter, we launched the Approach Z30 smart laser rangefinder, with the range relay feature, which sends distance measurements to a compatible Garmin smart watch or the Garmin Golf smartphone app. We also launched our first cellular-based dog tracking collar, the Alpha LTE. This small rugged device attaches to existing dog collars and pairs with the Alpha app so users can view their dog's movement from a smartphone or an Alpha handheld device. The outdoor segment has performed as we anticipated so far this year, and we expect growth to accelerate in the back half of the year with new product launches. As such, we are maintaining our 7% revenue growth estimate for 2024. Looking next at Aviation, revenue was relatively flat in the second quarter at $218 million. We continue to see growth in OEM product categories, while the aftermarket declined in an ongoing normalization following the somewhat uneven results of the prior year. Gross and operating margins were 74% and 23%, respectively, resulting in operating income of $50 million. For the ninth consecutive year, we were recognized by Embraer as the best supplier, most recently in the Electrical & Electrical Systems category for our G3000 Prodigy Touch flight deck in the Phenom 100 EV and Phenom 300E. The Aviation segment has performed as expected so far this year, and we are maintaining our estimate of flat revenue in 2024. Turning to the marine segment. Revenue increased 26% to $273 million, primarily driven by the acquisition of JL Audio. Excluding JL Audio, revenue increased approximately 7%, outperforming widely reported market trends. Gross and operating margins improved to 54% and 22%, respectively, resulting in operating income of $60 million. We recently expanded the Force Kraken trolling motor series, adding a 48-inch shaft length to accommodate a broader range of both sizes. We also expanded our ice fishing offerings with the Panoptix PS-22 Ice Fishing Bundle, an ultra portable live sonar solution for winter fishing, which won a best of category award at this year's ICAST, the world's largest sportfishing trade show. This is our fourth consecutive win in the ice fishing category and seventh consecutive award at ICAST. Additionally in the quarter, we were once again selected as an exclusive supplier to Independent Boatbuilders Incorporated through 2029 for both traditional marine electronics as well as audio equipment. Given the strong performance of the marine segment, we are raising our revenue growth estimate to 15% for the year. And moving finally to the auto OEM segment, revenue increased 41% to $147 million, primarily driven by growth in domain controllers. Gross margin was 16%, and the operating loss decreased to $12 million. Our auto OEM segment continues to be recognized as an outstanding partner. We recently received the 2024 Global Award for Excellence in Technology and Development from Yamaha Motor for our motorcycle infotainment solutions. Auto OEM has performed as expected so far this year, and we are maintaining our 50% revenue growth estimate for 2024. So that concludes my remarks. Next, Doug will walk you through additional details on our financial results. Doug? Douglas Boessen Thanks, Cliff. Good morning, everyone. I'll begin by reviewing our second quarter financial results, my comments on the balance sheet, cash flow statement, taxes, updated guidance. We posted revenue of $1.507 billion for the second quarter representing a 14% increase year-over-year. Gross margin was 57.3%, a 20 basis point decrease from the prior year quarter. Operating expense as a percentage of sales was 34.6%, a 140 basis point decrease. Operating income was $342 million, a 20% increase. Operating margin was 22.7%, a 120 basis point increase. Our GAAP EPS was $1.56. Pro forma EPS was $1.58. Next, we look at our second quarter revenue by segment and geography. During the second quarter, we achieved double-digit growth in three of our five segments, led by the auto OEM segment with 41% growth. Fitness and marine segments had 28% and 26% growth, respectively. By geography, we achieved double-digit growth of 18% in the EMEA region and 15% in the Americas region. APAC region growth was 1%. Looking next at operating expenses. Second quarter operating expense increased by $46 million or 10%. Research and development increased approximately $19 million year-over-year, primarily due to engineering personnel costs. SG&A increased approximately $27 million compared to prior year quarter, primarily due to increases in personnel-related expenses, including the impact of the acquisition of JL Audio. A few highlights on the balance sheet. Cash flow statement and taxes. We ended the quarter with cash and marketable securities of approximately $3.4 billion. Accounts receivable increased both year-over-year and sequentially to $808 million, following seasonally strong sales in the second quarter. Inventory balance decreased year-over-year but increased sequentially to approximately $1.3 billion. During the second quarter of 2024, we generated free cash flow of $218 million, a $3 million decrease from the prior year quarter. CapEx expenditures for the second quarter 2024 were $37 million, approximately $15 million lower than the prior year quarter. We expect full year 2024 free cash flow to be approximately $900 million, capital expenditures of approximately $350 million. For the second quarter of 2024, we paid a dividend of approximately $144 million and purchased $10 million of company stock. At quarter-end, we had approximately $290 million remaining of the share repurchase program which is authorized through December 2026. We had an effective tax rate of 17.9% compared to 8.9% in the prior year quarter. Increase in effective tax rate is primarily due to the increase in the combined Switzerland tax rate in response to global minimum tax requirements. Turning next to our full year guidance. We estimate revenue of approximately $5.95 billion compared to our previous guidance of $5.75 billion. We expect gross margin to be approximately 57%, higher than our previous guidance of 56.5% for the year-to-date performance. We expect an operating margin of approximately 21.3%, compared to our previous guidance of 20%. We also expect pro forma effective tax rate of 16%, which is higher than our previous guidance of 15.5%, due to projected full year income mix and tax jurisdiction. This results in expected pro forma earnings per share of approximately $6, an increase of $0.60 from our previous guidance of $5.40. This concludes our formal remarks. Christina, could you open the line for Q&A? Yes, thank you. [Operator Instructions] Your first question comes from the line of Joseph Cardoso from JPMorgan. Your line is open. Joseph Cardoso Good morning and thanks for the question. So maybe first question here is just on the guide. When I take a look at the updated full year guide, the implied second half outlook suggests maybe a more muted revenue flow-through to earnings than maybe we are accustomed seeing for Garmin. Can you maybe just walk through the puts and takes there and perhaps driving the pressures on the incremental margins into the second half? And then I have a follow-up. Thank you. Douglas Boessen Yes. So when we think about that, yes, relating to the gross margin, back half versus what we've seen in the first half, we'll continue to see segment mix have an impact. That will have an impact to reduce the gross margin in the back half. As it relates to expenses, yes, we'll continue to make investments in R&D, primarily to support our innovation. Joseph Cardoso Got it. And then maybe just as my second question, marine on an organic basis continues to outperform the broader market trends that you guys have been highlighting. And so I was just curious if you could double-click on the outperformance there. Like, what are you seeing broadly as the drivers of the share gains Garmin has experienced, for example? Is it broadly across the portfolio? Or are you seeing better trends more in a particular area of the portfolio? And then maybe just curious what other factors could be contributing here, and any thoughts on how sustainable this could be from your vantage. Thanks for the question guys. Clifton Pemble Yes, Joe, I think our performance in the aftermarket is definitely much better than the overall market. And even in the OEM channels that we serve, our performance is much better than the broader markets than reporting. I think we attribute this to really our product lines highly innovative and very broad. We're doing very well, and in chartplotters, we have the best mapping, and sonar systems, radar and autopilots. And trolling motors are somewhat of a newer category for us. It's expanding and helping us to take share. And your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is open. Erik Woodring Hey guys, good morning. Thank you for taking my call. Doug or Cliff, either one of you, I just want to kind of get your viewpoint. As we think about the guidance increase, obviously, nice outperformance in 1Q, so you were tracking above and now we've seen you raised guidance. Would you say that that increase in guidance is solely a reflection of the better first half? Or are you seeing some of that sustain into the second half relative to your expectations? Just want to kind of get a sense, is this kind of a reflection just of 1Q outperformance? Or is the second half of the year better than you thought as well? And then I have a follow-up. Thank you so much. Clifton Pemble Yes, Erik, I think there's a lot of moving pieces that go into the guide. In some cases, as in fitness, I think we're very optimistic and encouraged by our performance. And so there's a little more optimism in that guide as we anniversary the launches of the major products that we had last year. And then in marine, I think we're mostly taking a wait-and-see approach. We're rolling forward certainly the higher performance. But as has already been noted, the marine market is generally stabilizing, and so we're simply just taking a slightly different view there. And everything else remains in line with what we had earlier said. Douglas Boessen And one thing to add in marine, we are anniversarying the JL Audio acquisition end of Q3 also. Erik Woodring Okay. No, that's very helpful. And then, Doug, maybe for you. Your free cash flow kind of seasonality historically has been a bit volatile, but more often than not you do about 35% to 40% of annual free cash flow in the first half of the year. If we take your updated viewpoint on free cash flow, I believe it was up $900 million for the year, it would imply first half free cash flow is actually more like, call it, 70%, which would be at least near decade high. Can you maybe just help us understand some of the seasonality or moving pieces as it relates to free cash flow? Why the second half of the year would be so much weaker than we see historically for you guys? And that's it for me. Thanks so much. Douglas Boessen Good question. There is a working capital consideration you take into consideration also. So one of which is inventory. Last year, in the back half, we saw some benefit relating to our inventory being lower. This year, we expect in the back half that we would be increasing our inventory. On a year-over-year basis, we probably expect inventory decrease in line with sales, so there will be a use of cash in the back half for inventory. And your next question comes from the line of George Wang from Barclays. Your line is open. George Wang Hey guys, thanks for taking my question. Two parts. Firstly, can you give update thoughts on capital allocation, especially given still elevated cash balance, just the 2Q, the buyback was pretty small, just -- and also a related question just on the CapEx, you guys have still guided pretty elevated CapEx full year being $350 million, with the 1H being smaller spend. Maybe you can walk me through how you think about these two parts. Douglas Boessen Sure. As it relates to capital allocation, it's consistent with what we've had in the past, our priorities are really reliable dividends, investments back in our business as CapEx, also acquisitions such as JL Audio and then share buybacks. And share buybacks is really depending upon the market and the business conditions. We'll take a look at that every quarter. As it relates to CapEx, yes, the back half, those investments really relate to so investments in our manufacturing facilities. Also, we'll have some invest IT projects to enhance some of our security infrastructure as well as we're continuing our renovations of our facilities here in Kansas. George Wang Okay. Just a quick follow-up, if I can squeeze in. I just wanted to, kind of honing on the auto OEM, especially kind of as we look beyond the BMW, the main controller. Last quarter, you guys alluded to two new wins just on the infotainment system side there. I assume it's higher margin. Can you kind of give a bit more thoughts and color if you can? Kind of I assume it's going to ramp starting from 2026 kind of in infotainment system, maybe kind of -- any color would be appreciated. Clifton Pemble Yes, George, we announced those additional awards last quarter. Nothing has really changed in that since then. We're working hard to bring those to market, as we mentioned, starting in 2026. In terms of the margin profile for those products, I would just point out that's still domain controller products. And so that carries that typical mid-teens kind of gross margin that we've been talking about with it as well. So it's very much in line with the business that we're currently seeing settle in, in terms of the auto OEM revenue structure. Your next question comes from the line of David MacGregor from Longbow Research. Your line is open. David MacGregor Yes, good morning everyone. Thanks for taking the questions. I guess I wanted to just pick up on the discussion around the OEM auto, and congratulations on the progress there. You're obviously in the market with a product that is succeeding with customers and building on the BMW, now with Yamaha and others. But I guess I'm a little confused on why there isn't a little more scale benefit in terms of your margin outlook. And so you mentioned there's still controllers and there's still that kind of gross margin profile that you've communicated in the past. But I would have thought maybe the -- your EBIT contribution would build as you build scale in that business. So is it just not a scale? It's just more variable cost than this than we expected? Or how should we think about the longer-term economics as you grow that business? Clifton Pemble Yes. I think, David, if you look where we are this quarter versus last year, there's been a big swing in product mix to that domain controller category, which what we've been saying for the past year is that that would definitely be a margin impact because of the profile of those products. And so that's what's driving our gross margin this year compared to last year. And it pretty much put the gross margin dollars kind of even with last year. So there's a big transition point that we've already gone through. You saw our engineering and expense structure come down, and so our loss decreased. And I would point out that auto OEM also absorbs a certain amount of allocated costs across the company, which would otherwise go to other segments. So we're starting to see that leverage. We're probably a little bit behind where we thought we would be, although we're talking about very small numbers in terms of the difference. And so we're looking forward to the additional volume ramp and seeing those leverages come into play as the efficiencies go up. David MacGregor Okay. Maybe I could just shift gears and ask about fitness and outdoor, and just if you could talk about what you're seeing in retail conditions and retail inventories at this point. Clifton Pemble Yes. We watch it very closely. We're able to see our sell-in versus our registrations. And we believe that the channel is really very clean right now. The products are selling through at a very consistent rate with our sales in. And the products seem to be very popular and people really appreciate them. So we're really excited about our performance in wearables in general. David MacGregor Okay. And just last for me, on the marine guidance, up 15%. How much of the incremental growth there is coming from the addition of the trolling product offering? And just expanding that, having a product that maybe you didn't have to offer a year earlier. Clifton Pemble We don't break out specifics on that, but I would say that trolling motors are contributing to that increased organic revenue. But it's not the only category. In fact, chartplotters were also very good. And that's an indicator basically of the market robustness and the strength of our product line as people are installing it on their boats. David MacGregor And did you say what organic growth in marine was excluding JL? Your next question comes from the line of Jordan Lyonnais from Bank of America. Your line is open. Jordan Lyonnais Hey good morning. Thanks for taking the question. A few of your competitors have started launching smart rings. Is that something Garmin is interested in, would be looking to expand to for the fitness line? Clifton Pemble Well, we're interested in all kinds of product categories, including that, and others. So far, we've done very well with our wearables, and I think it has the most utility. But there's certainly a group of people that like that kind of form factor. So we keep open minds to the categories and we explore all possibilities. Jordan Lyonnais Got it. And then just a follow-up too, are you seeing any increases in promotions from you guys pushing it through retailers or anything else? Clifton Pemble I don't think the promotional activity is materially different. We have a yearly cadence around the calendar of our retailers, most recently, for example, Prime Day. The mix of products that we offer can vary from year-to-year, and that can probably affect whether it's more promotional or less. But in general, I would say it's shaping up to be a pretty typical year. Your next question comes from the line of Ben Bollin from Cleveland Research. Your line is open. Benjamin Bollin Good morning, everyone. Thanks for taking the question. Cliff, I'm interested in your thoughts on the year-to-date performance in fitness, obviously, remarkable. How do you think about the drivers to what you've seen? You had certainly a product with Forerunner 165. I'm curious about that. Any thoughts on TAM? And then if you have any perspective on how a strong cohort of customers added during COVID, is there a bigger refresh opportunity? Any thoughts on that would be helpful. Clifton Pemble Yes. I think our year-to-date performance has been remarkable. We credit it to the strength of our product line. It's certainly not just the Forerunner 165. We have the 965 and 265 which are also doing very, very well, the vivoactive 5 on the low end of advanced wearables, as well as the Venue 3 and 3S, all of which has been popular. So we're seeing success across the range of products from high end to low end. In terms of the overall market, I would say that it's generally stable. It's not a huge growth market, but it's a huge market. And our opportunity is really share gains, which we see happening with the kind of results that we're driving. So we're excited about that. And in terms of refresh opportunities, we track that, new users versus existing users and what kinds of products that they go from and what they go to. And definitely, we see this refresh cycle that occurs with our customer base every two to three years. And we're starting to see some of that, especially as our new products really leapfrog the generation or two behind where they might have already had a product that they were using. So definitely, there's ongoing opportunities with the existing customer base. Benjamin Bollin Okay. The last one for me. Also curious how you think about potential AI opportunities for both internal and customer use cases. It seems like you have a very unique high-fidelity data set in Connect. Just curious your thoughts on what you guys could be looking at or some options around AI. Thank you. Clifton Pemble Yes. I think we're no different than most companies. We look at AI as a potential business tool, and we're doing some of that. Some of what we look at there, we take a wait-and-see approach because there's still a lot of claims that AI is making that have yet to be demonstrated. But in terms of product-specific uses, I would say that a more constrained model around customer data and trends is something that we're very interested in. And we continue to explore possible features that we would have in our products in the future driven by that technology. Your next question comes from the line of Ivan Feinseth from Tigress Financial Partners. Your line is open. Ivan Feinseth Thank you. Congratulations on another great quarter and a great first half. In the slides, you talked about the strength in fitness was driven by wearables, but the revenue decline in outdoor was driven by adventure watches. What is the difference between the -- what's driving the strength in the fitness wearables, let's say, versus the outdoor wearables? Clifton Pemble I think that the outdoor wearables, Ivan, was really when we passed the pipeline fill of our fēnix and epix Pro releases from last year. And as we look forward, we're basically factoring in our additional product releases that we have for the rest of the year, and we anticipate that will grow as we move forward. Ivan Feinseth And then like some of the functionality like with the launch of the Pro models, you have the updated or the better ECG measurement and there's ongoing talk in health focus of the importance of HRV. Like can you talk about like how -- are there some things that are driving upgrades in sales? And what do you envision as far as future functionality? Clifton Pemble Yes, I think we've really been a pioneer in those kinds of sensor measurements, particularly when you look at HRV, which drives many of our metrics in our devices, from performance condition to sleep quality. These are all very important things. And so we've been on the forefront of that. And our practice has been, and our history has been, as we invent these features, we roll them across product lines and expand the functionality broadly and make it available to even more users. Your next question comes from the line of Noah Zatzkin from KeyBanc Capital Markets. Your line is open. Noah Zatzkin Hi, thanks for taking my questions. First, kind of just a housekeeping question. Could you remind us how to think about the mix between aftermarket and OEM within the marine business post addition of JL? And then second, you guys have obviously been able to maintain strong margins and what's been a kind of choppy marine industry. So from a margin perspective, exiting this year, assuming the industry is on a more stable footing, like how do you kind of think about like the kind of longer-term margin structure of the marine business? Thanks. Clifton Pemble Yes. So our marine business is mostly comprised of aftermarket, especially in this environment where boat building is at a reduced level as field inventory has worked down. With the addition of JL Audio, a lot of those sales we probably categorize more in the aftermarket area, although there is some that goes to OEM. It's a little harder to track in marine because some of the distribution channels are independent distributors who sell and turn to smaller boat builders. And so it isn't always possible to track exactly which products go where. But in general, we're seeing strength in the aftermarket channels as well as better-than-industry performance in the OEM side. In terms of the margin picture, I would say that other than the impact that we've talked about with JL Audio as a dilutive factor, overall, we don't see any change in the overall marine margin structure, especially as you mentioned towards the end of the year, we would see that the segment and the market really will continue to perform in the ranges that have been historically true. [Operator Instructions] Your next question comes from the line of Erik Woodring from Morgan Stanley. Your line is open. Erik Woodring Hey guys. Thanks for taking my follow ups. Just two quick ones, if I may. Maybe big picture, some of the questions have maybe alluded to this topic. But I'd say there have been some growing concerns around consumer spending. We're also hearing about some evidence of incremental, let's call it, hardware spending in Europe -- hardware setting weakness in Europe, excuse me. Just given your significant exposure to each market, can you maybe just give us some detail on exactly what you're seeing from an end demand standpoint related to the consumer? Are you seeing any trading down? It doesn't seem like it, but I just want to make sure we get your perspective given kind of how wide you reach is. And then just a quick follow-up. Thanks. Clifton Pemble Yes. I think, Erik, we would say that there's not any significant evidence that spending patterns for our product lines and our customer base are currently being impacted. It's a little hard to say it's not because we don't have control data to measure that against because we're doing so well. But we do tend to target a customer base and product ranges that are not at the commodity low-end level. So we make premium products with clear differentiators, and customers seem to appreciate them and step up for them. So it would appear that that is resonating with customers. Erik Woodring Okay. That makes a lot of sense. And then maybe just last one. If you look at Garmin Connect MAUs, strength there, at least growth there has been very consistent in the mid-teens on a monthly basis year-over-year. Is there any way that you can help us understand what of that growth is new customer additions versus prior Garmin customers just reengaging with the Connect app? And does that behavior look any different than past cycles or past periods? Just trying to understand kind of the strength of new users versus existing users that are just reengaging. And that's it for me. Thanks. Clifton Pemble Yes. Our Connect registration behaviors, we've mentioned those from time to time that most of the new accounts and the new devices we see registered on Connect are from new customers. We do see a healthy number of existing customers that continue to engage with Garmin and they upgrade their devices. And we see, frankly, a robust secondhand market where people might sell one of their products and trade up to another one, and somebody, a brand-new customer to Garmin, comes into Connect, which gives us an opportunity to then upgrade them in the future. So in general, I would say it's a very healthy environment, and mostly still driven by new customers. Thank you. With no further questions. Teri, I'll turn the floor back over to you. Teri Seck Thank you all for joining the call today. Doug and I are available for callbacks. And we hope you have a great rest of your day. Goodbye. Thank you. This does conclude today's conference call. You may now disconnect. Have a great day.

Consumer Portfolio Services, Inc (CPSS) Q2 2024 Earnings Call Transcript

Charles Bradley - Chief Executive Officer Danny Bharwani - Chief Financial Officer Mike Lavin - President and Chief Operating Officer Good day everyone, and welcome to the Consumer Portfolio Services 2024 Second Quarter Operating Results Conference Call. Today's call is being recorded. Before we begin, management has asked me to inform you that this conference call may contain forward-looking statements. Any statements made during this call that are not statements of historical facts may be deemed forward-looking statements. Statements regarding current or historical valuation of receivables because dependent on estimates of future events are also forward-looking statements. All such forward-looking statements are subject to risks that could cause actual results to differ materially from those projected. I refer you to the company's annual report filed March 15th for further clarification. The company assumes no obligation to update publicly any forward-looking statements, whether as a result of new information, further events or otherwise. With us here is Mr. Charles Bradley, Chief Executive Officer; Mr. Danny Bharwani, Chief Financial Officer; and Mr. Mike Lavin, President and Chief Operating Officer of Consumer Portfolio Services. Thank you and welcome to our second quarter earnings call. Probably the best way to sum up the quarter, it was a good quarter, but we're still trying. We're beginning to make that transition from what we'll call watchful waiting on our portfolio to where we can start growing again. We probably need in terms of being absolutely certain that credit is made to turn another six to nine months, but we have gotten to the point where we're confident enough in the performance of the pools that we've been restarted to grow this quarter. Our quarter-over-quarter growth is 25%, year-over-year it's 36%, so really putting an effort and start growing again. Mostly because we finally think we're looking at most of what would be the 23-C, 23-D and 24-A securitizations, 24-A being the newest that we're looking at. And the performance there has turned a corner enough to where we're confident that the overall performance going forward will be fine. And with that we've been able to start growing again. So, but still, even at that point, and - at least in the second quarter, we're still concerned with making sure our credit is very good. We're working on expanding our footprint in terms of sales and we, of course, anxiously waiting some word on whether interest rates will go down towards the end of the year. So, I think, we'll go through some of the other highlights, but basically we're about to turn the corner. We're really focused on growing again and hopefully this timing will all go together towards the end of the year when interest rates come down. I'll talk more about that, but for the moment I'll turn it over to Danny for the financial stuff. Danny Bharwani Thanks Brad. Going over the financial results for the quarter, revenues were $95.9 million, which is a 5% increase over the $91.7 last quarter and a 13% increase over the $84.9 million in the June quarter last year. For the six months, $187.6 million is a 12% increase over the $168 million last year. Included in the revenue numbers are a mark to finance receivables on our fair value portfolio I would say. Mark that shows the - $5.5 million mark shows the outperformance of that portfolio during the quarter. That compares to - we didn't have a mark in the same quarter last year and for the six months that mark was $10.5 million in the six months for 2024. Also included in the revenue numbers are the increase in interest income, driven by the growth, as Brad said, the growth in new loan originations. We originated $431.9 million in the second quarter, which is a 25% increase over our first quarter and a 36% increase over the $318.4 million last year. So that those two facts are driving the increase in revenues. Moving over to expenses, $89.2 million for the quarter is up 5% over the $85.2 million last quarter, compared to $66.3 million in the second quarter last year. For the six months, expenses were $174.4 million, which is a 33% increase over the $131 million for the six months last year. A couple of items to note for expenses, we had a reversal in the provision for losses on our legacy portfolio. You might recall our legacy portfolio is the loans we originated prior to 2018, which is mostly gone by now. It's mostly amortized. There's only about $13 million of that left. But during the quarter we did reverse about $2 million of credit losses. That was previously reserved. That was no longer required because the performance had been better than expected. That compares to a reversal of $9.7 million in the second quarter of last year. And for the six-month period that reversal was $3.6 million for the 2024 quarter and $18.7 million last year. The other increase in expense, primarily driven by the increase in interest expense, which has increased to $46.7 million this quarter, compared to $35.7 million last year. Now, obviously the increase in interest rates had something to do with that increase in interest expense, but part of that increase is also due to portfolio growth, again driven by the higher origination levels during the year. Moving on to pretax income, $6.7 million is comparable to the $6.6 million last quarter versus $18.6 million last year. For the six months pretax income was $13.2 million, down from $37 million last year. Similarly, net income is $4.7 million for the second quarter, down from $14 million the second quarter last year. For the six-month period, net income is $9.3 million, down from $27.8 million last year. The same trends follow for earnings per share, $0.19 for the second quarter this year, down from $0.55 last year. For the six months, $0.38 per diluted share compared to $1.09 last year. So again, these trends are all driven by the increase in interest expense and expenses overall, somewhat offset by the increase in revenues from the higher portfolio balance. Moving on to the balance sheet, our finance receivables at fair value is $2.960 billion is a 6% increase from the first quarter and a 13% increase from the $2.6 billion last year. Our total debt balance is $2.9 million for - as of June 2024, is up 16% from the $2.5 billion last year. And lastly, on the balance sheet, our shareholders equity, another record high for the company, $280.3 million, is up 10% from the $255 million last - June of last year. Looking at other metrics, the net interest margin, $49.2 million in the second quarter, is flat from $49.2 million last year. For the six months, it's $99 million as compared to $99.5 million last year. Core operating expenses is down 1% this quarter from last quarter, but it's up 10% from the $40.3 million last year. On a year-to-date basis, core operating expenses were $89.3 million is up 10% from the $81.2 million in the June quarter of last year. As a percentage of the managed portfolio, core operating expenses is down to 5.7% from 6% in the first quarter, but it's up from 5.5% in the second quarter of 2023. And lastly, the return on managed assets 0.9% in the second quarter compared to 2.6% in the second quarter last year. The same numbers for the year-to-date period, 0.9% for the six months compared to 2.6% for the six months of 2023. Thanks, Danny. In operations, a couple follow-up comments in originations and sales. The demand for subprime business remains strong. We received 310,000 apps in the second quarter of 2024 that compares to 281,000 apps in the second quarter of 2023. That's a 10% increase in apps year-over-year. That's in light of the fact that we did 500 million less in 2023 than what we're projected to do this year. In terms of sales, we hired 14 new reps in the second quarter, going from 72 reps to 86 reps, that's a 19% increase. And as Brad and Danny mentioned, as we continue to grow the business, we will continue to grow our outside sales and our inside sales team with a goal to be around 110 reps at the end of the year and growing that rep force even further as we dig into 2025. One aspect of growing the business in the second quarter and beyond was we continue to expand our large dealer group base. That's dealer groups with more than ten rooftops under their umbrella. We reached 99 large dealer groups in the second quarter, taking that from 76 in the second quarter of 2023 and 61 in the second quarter of 2022. All told, that's a 62% increase over the last two years in our large dealer group additions. What that's done is that it's allowed us to add roughly 900 rooftops to our dealer base, with only increasing, say, 30 dealerships in total, that's super-efficient. That's a meaningful increase in large dealer groups as we have taken that footprint from 17% of our business in 2022 to 26% of our business as of the end of the second quarter. We are well on our way to meeting our goal of that being 30% by the end of the year. As part of that large dealer group base, we continue to originate volume from the major rental car companies, including Enterprise, Hertz and Avis. A few other organic metrics of growth, we were able to grow our dealer loyalty in the second quarter. That's how many deals per dealer we do on a monthly basis. So we were able to grow that. We were able to increase our capture percentage in the second quarter. We were able to increase our average funding dealers per rep in the second quarter, quarter-over-quarter, and year-over-year. And we were able to lower our funding time to get the dealers paid to just over two days. That's the facets - that's the fastest it's been in company history. And we all know that dealers like to get paid fast, and that goes to our efforts to increase our customer service to the dealerships. In terms of our current risk profile, we're holding a strong 20.49% APR, and we've been able to hold that APR strong during our growth inflection so far in 2024. Our FICO has increased to 578, which is higher than our historical FICO of 565. That's reflected of our emphasis on getting more upper tier paper, so we're earmarking the upper tranche of the subprime branch. Our LTVs remain flat in the second quarter, running around 119%, which is down from 120% in 2023 and down from 125% in 2022. So, we've made some progress in hammering down our LTVs, moving from '22 into the second quarter of '24. Of exceptional note, we were able to lower our debt-to-income and our payment-to-income in the second quarter over our first quarter. So overall, we have a strong risk profile during our growth cycle. Switching to portfolio performance, DQ greater than 30 days for the second quarter was 13.29%, that's compared to 11.72% in the second quarter of 2023. That said, so far in 2024 we've been able to lower the DQ month-over-month for the first six weeks of 2024. So, we are seeing some positive trends in lowering the DQ so far in 2024. Annualized net charge-offs for the second quarter was 7.2%. That's compared to 6.29% in the second quarter of 2023. As with our DQ, we have also been able to moderately lower our charge-offs month over month in the first six months of 2024. So good trends in the charge-off rate so far in 2024 as well. Our extensions remain flat in the second quarter. And benchmarking those extensions with our competitors, we remain at market average. We continue to see remarkable success in the use of our extensions. We do have an extension model that uses algorithms to provide those extensions and we recently did a study of extensions granted in December of 2023 and compared those two accounts that did not get an extension in 2023 and ran that study through June of 2024. And we found that the accounts that did get extensions versus the accounts that didn't get extensions saw a 41% decrease in charge offs. So our extension methodology is working. As Brad said, generally speaking, we're sort of quickly exiting or flushing through the challenging 2022 vintages. The second half of 2023 is showing market improvement. And while it's early in the game, the '24s are looking great and we're cautiously optimistic that the CNLs will return to the historical norms. Turning to technology, we continue to layer in AI based technologies into our operations in the front end of the business and the back end of the business. Our latest project, we completed our pilot of a conversational AI voice bot that is actually used by a few of our competitors in the industry. We expect to fully launch this AI voice bot in August. We're probably going to use it on collecting our potential delinquencies. That's 1 to 29 days. And we expect that will reduce our roll rate and help our collections in the later buckets. The pilot testing revealed incredible efficiency in making a high volume of calls, establishing right-party contact, and converting that RPC to promises to pay and at least 10% of the time in real-time payments on the spot. So we're excited about that. The other thing we did in the quarter was we launched our second phase of our document processing AI bot in originations. We've had the first phase implemented for the last year. The second phase concentrates on checking proof of income upfront, which allows us to process the deal faster and pay the dealer faster. And it's also more accurate and detects fraud upfront. A few miscellaneous things. In the second quarter, or actually in the first six months of 2024, we were able to reduce our occupancy costs significantly by renegotiating and renewing four of our five leases. Our fifth lease is up for renewal now and we are working on that as we speak. So all good things. And with that, I'll kick it back to Brad. Charles Bradley Thanks Mike. Looking at the industry, we sit in a pretty good place. By and large, everyone in our industry is trying to deal with the performance problems created in 2022 and 2023. As we mentioned in previous calls, we've done better than most, if not even better than that. So, we're very comfortable with how those pools are performing. We think it's going to take some time for some other folks to work through it. We'll see how that affects the industry. I think it can only affect the positively. As few of the weaker players go away, the big players will pick them up. So we don't have that problem. One of the things we have pointed out in the past is the barriers to entry in our industry now are very extreme. No one has come in in the last five or almost ten years. And so I think that gives the people here a leg up, gives people who are doing the credit better than most, like us, an even bigger leg up. And so the real trick now is we're focused on growth. We want to get to the position where we're growing a lot and we have real production as we roll into the new year and hopefully experience some declining interest rates, then we'll start making lots of money again. So, that's really the plan. I think in terms of the economy, our number one thing is unemployment. Unemployment seems to be fine. We think the economy looks healthy. We'll see what the elections do, but probably we're even more interested in what the rates will do. So, with the current economic conditions, it would appear, and sooner or later they'll begin to lower rates. And that's where it really helps us. So our goal is to do probably two things in preparation for that time. One is to make sure that a credit is exactly where we think it's going. And two, to get in a growth position where we're funding lots and lots of loans as we roll into declining interest rates. So second quarter, somewhat like the first quarter, not all exciting. It's like building blocks. We are building things so that when the time is right, we'll be in the best possible position, take advantage of it, both economically and financially. We're strong on cash. Having done that residual deal, we have lots of money tied up in our securitizations that money is beginning to flow out. So we're really in a very good position to take advantage of the next few quarters. So with that, we'll let it go and we'll see you next quarter. Thank you all for attending. Thank you. This concludes today's teleconference. A replay will be available beginning two hours from now for 12 months via the company's website at www.consumerportfolio.com. Please disconnect your lines at this time and have a wonderful day.

Earnings call: Camden National Corporation's Q2 financials show growth By Investing.com

Camden National (NASDAQ:CAC) Corporation (NASDAQ: CAC) has announced a net income of $12 million or $0.81 earnings per diluted share for the second quarter of 2024, indicating a solid financial performance with a focus on disciplined execution and expense control. The company has reported a marginal increase in nonperforming assets but maintains strong asset quality. They are investing in technology to enhance customer experience and efficiency, expecting to see continued expansion in net interest margin and estimating operating expenses to remain between $27.5 million to $28 million for the rest of the year. In conclusion, Camden National Corporation's second-quarter earnings call reflected a company in a strong financial position, with disciplined management and strategic investments in technology. The company's focus on maintaining asset quality and growing its deposit base, alongside its wealth management and brokerage services, positions it for potential future growth. Still, the company also acknowledges challenges in the form of mixed loan and deposit growth, as well as uncertainties in achieving their net interest margin goals. Investors and stakeholders will be watching closely to see how Camden National Corporation's strategies unfold in the coming quarters. Operator: Good day, and welcome to Camden National Operations Second Quarter 2024 Earnings Conference Call. My name is Lydia, and I will be your operator for today's call. [Operator Instructions] I'll now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer. Renée Smyth: Thank you, Lydia. Good afternoon, and welcome to Camden National Corporation's conference call for the second quarter of 2024. Joining us this afternoon are members of Camden National Corporation's executive team Simon Griffiths, President and Chief Executive Officer; and Mike Archer, Executive Vice President, Chief Financial Officer. Please note that today's presentation contains forward-looking statements and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is contained in our second quarter 2024 earnings release issued this morning and in other reports we file with the SEC. All of these materials and public filings are available on our Investor Relations website at camdennational.bank. Camden National Corporation trades on the NASDAQ under the symbol CAC. In addition, today's presentation includes discussions of non-GAAP financial measures. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release which is also available on our Investor Relations website. I am pleased to introduce Camden National Corporation's host, President and Chief Executive Officer, Simon Griffiths. Simon Griffiths: Thank you, Renée, and good afternoon, everyone. We appreciate you joining our call today. I will provide a few comments on our most recent quarter, and then I'll turn it over to Mike to dive into our second quarter financial performance, and then we'll open up for Q&A. I'm pleased to report, as we mark the halfway point through 2024, we continue to execute well in the uncertain environment. Despite macroeconomic headwinds, we remain committed to executing our long-term strategy of optimizing our balance sheet and deepening customer relationship through advice-based conversations and exceptional customer experience. Our team is building momentum and leveraging process automation and innovative solutions to deliver stellar advice to our loyal customer base. Earlier this morning, we reported net income of $12 million or $0.81 earnings per diluted share for the second quarter of 2024. Highlights for the second quarter include a 6 basis point increase in net interest margin over the previous quarter. Disciplined execution and expense control, which exceeded our expectations and guidance previously communicated for the second quarter and continued strong asset quality demonstrated by favorable credit quality metrics, which benefit from our disciplined underwriting culture and keen asset management. Our reported net interest margin increase as a result of deposit cost pressure beginning to ease during the back half of the second quarter as we started to benefit from seasonal deposit flows in our markets are taking decisive action on certain high-cost, noncore deposit relationships and continued asset allocation remix as we utilize investment cash flows to fund loan growth. Mike will expand on the net interest margin discussion and drivers in a few minutes. Our team continues to focus on driving deposit growth, both through new customer acquisition and by deepening relationships with our existing customers. Including by leveraging data and analytics to make informed, swift decisions. As Fed rate cuts become increasingly likely, we are ready to quickly act to manage our funding costs. As we saw, while interest rates were increasing, we expect the first 25 to 50 basis point rate cut likely will result in a lower beta than subsequent rate cuts as we balance customer needs and market competition. We remain focused on improving our operating leverage. During the second quarter of 2024, revenues increased 3% over the previous quarter, and noninterest expense remained flat. We continue to take disciplined actions to maintain and manage costs in response to net interest margin pressure while also driving opportunities to increase fee income and diversify our revenue base. Credit continues to perform in line with expectations and by all measures, our credit metrics continue to perform better than pre-pandemic levels. We continue to manage credit rigorously consistent with our disciplined credit culture. For the second quarter, we reported strong asset quality with just a marginal uptick in nonperforming assets, which accounted for just 17 basis points of total assets as of June 30, 2024. Our commercial loan portfolio remains well balanced with no meaningful concentration risk. Our credit risk team continues to review our portfolio proactively and have not identified any systemic areas of concern. We continue to see moderate loan demand in our communities. Our residential mortgage pipeline has remained consistent quarter-to-quarter. And at the same time, we have seen a sizable uptick in our commercial loan pipeline primarily driven by a few larger commercial real estate opportunities. We are seeing nice momentum in fee income spurred by a focus on investment in wealth management and brokerage services. Combined, our wealth and brokerage services generated revenue of $3.3 million in the second quarter, an increase of 11% over the first quarter of this year. The increase is driven by sales activity and continued strength in the financial markets, we have crossed over $2 billion in assets under administration as of June 30, 2024, representing an increase of 12% compared to June 30, 2023. We are well positioned to expand our advisory distribution by leveraging our new wealth operating platform and mobile app as we stay committed to full relationship banking and growing and diversifying our fee income. We continue to make significant progress on digital roadmap and innovation ideation. Last quarter, we shared we invested in new online deposit account opening platform, and I'm pleased to report that it remains on schedule to go live at year-end. This new technology will enable customers to open fund and use deposit accounts within minutes whenever and wherever they choose. We will leverage this technology to steer into our omnichannel approach which aims to provide a consistent customer experience across all digital and brick-and-mortar sales and marketing channels to provide a uniform customer experience. Our robotics automation team continues to surpass expectations. We recently celebrated processing over 2 million support service transactions through our digital platform. At our current velocity, we will process 1 million transactions every six months. Additionally, our robotics automation reached a milestone with a newly developed API integration into our customer service work for management tool. For the first time, this allows true end-to-end automation predictable, repeatable customer service activities creating real capacity across multiple internal departments. Further, our data analytics team partnered on AI beta, pilot with a third party for data scientist simulation, simplifying the technical skills needed to request higher-order analytic models. If successful, this has the potential to drive sophisticated analytics further into the hands of business units and the pilot will be completed in Q4. We believe our investments in talent, technology, products and services will continue to benefit as macroeconomic conditions improve and that our strong foundation will permit us to generate consistent, sustainable and long-term performance as we remain focused on execution and involving the bank to meet customer and shareholder expectations. Now Mike will provide some highlights from the second quarter. Mike Archer: Thank you, Simon, and good afternoon, everyone. This morning, we reported a net income of $12 million and diluted earnings per share of $0.81 for the second quarter of 2024 and net income of $25.3 million and diluted EPS of $1.72 through the first six months of the year. We are pleased with our second quarter financial results as they demonstrate real momentum within our core business, as highlighted by our reported non-GAAP pretax pre-provision income of $15.5 million, which was up 9% on a linked quarter basis. As a reminder, in the first quarter of this year, we recorded a negative provision expense of $2 million as we released loan reserves due to the strength of our loan portfolio and we recovered $910,000 of proceeds upon the sale of our Signature Bank (OTC:SBNY) bond. With our solid earnings for the second quarter, our tangible capital position grew during the quarter. As of June 30, 2024, on a non-GAAP basis, our tangible book value per share stood at $28.34, up 2% from the first quarter and 11% over the past 12 months. Total revenues for the second quarter of 2024 increased 3% over the first quarter of 2024. Net interest income grew 3% during the second quarter to $32.2 million, led by an increase in net interest margin of 6 basis points to 2.36%. In June, a $100 million balance sheet interest rate swap matured, providing approximately 5 basis points of lift for the partial month, and we anticipate 6 to 7 basis points for a full month's benefit at current interest rates. In June, we also began to see normal inflows from seasonal deposits in our market. Looking forward, we anticipate continued net interest margin expansion during the third quarter due to the aforementioned factors, along with the continued redeployment of investment cash flows to support new loan originations at current market rates. Noninterest income for the second quarter of 2024 totaled $10.6 million, an increase of 3% over the first quarter of this year. As Simon noted in his comments, we are seeing positive momentum across our brokerage and wealth business lines. Regarding mortgage banking, we continue to sell our qualifying residential mortgage production. For the second quarter, we sold 52% of our residential mortgage production. And through the first six months, we sold 51% of our production. As we work our way back to historical financial performance levels, we are focused on the management of operating expenses and driving positive operating leverage while continuing to invest in the organization. Noninterest expenses for the second quarter of 2024 were $27.3 million, a small decrease from the first quarter of this year. The positive combination of lower noninterest expense and revenue growth for the second quarter improved our non-GAAP efficiency ratio on a linked-quarter basis. Our efficiency ratio for the second quarter of 2024 was 63.53% compared to 65.55% for the first quarter of 2024. Based on these results for the second quarter, we are now estimating our quarterly operating expenses will range between $27.5 million to $28 million for the remainder of the year. Moving to the balance sheet. Total loans as of June 30, 2024, were $4.1 billion and grew less than 1% in the second quarter of 2024 and 1% through the first six months of this year. Our loan growth for the first half of 2024 has been mixed across our loan segment. We continue to maintain our loan pricing discipline across our products in the current interest rate environment. Total deposits as of June 30, 2024, were $4.5 billion, a decrease of 1% during the second quarter of 2024 and 2% through the first half of the year. The decrease in deposits during the second quarter and the first half of the year reflects the decisive actions we took to manage and optimize net interest margin. Through the first six months of the year, we managed out approximately $150 million of high cost municipal interest checking and CD balance as part of this effort. Our loan and deposit products are geared towards driving full relationship banking and us being the primary bank for our customers. In the second quarter, we launched our high-yield savings product which is a new money product requiring that the customer also maintained a checking account with us. We've been pleased with these results of the product, which includes an 8% growth in savings deposits in the second quarter of 2024. Our asset quality for the second quarter continued to be strong, supported by excellent credit quality metrics, including nonperforming loans of 0.23% of total loans, annualized net charge-offs of 4 basis points of average loans and past due loans of 5 basis points of total loans. Nonperforming loans and net charge-offs modestly increased in the second quarter compared to the first quarter but we do not believe they reflect any signs of systemic stress within our loan portfolio. The strength of our asset quality, combined with modest loan growth gave us the confidence to hold loan loss reserves at 0.86% of total loans as of June 30, 2024, which was consistent with our loan loss reserve coverage ratio as of the end of last quarter. Our capital and liquidity positions also continue to be strong. Our non-GAAP tangible common equity ratio increased 22 basis points from the second quarter to 7.34% as of June 30, 2024, which included the repurchase of 50,000 shares of common stock totaling $1.6 million of capital. Our uninsured and uncollateralized deposits as of June 30, 2024, were 14.6% of total deposits and our available liquidity sources were 2x uninsured and uncollateralized deposits. This concludes our comments. We'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Steve Moss with Raymond James. Your line is open. Please go ahead. Steve Moss: Good afternoon. Maybe starting off with the margin guidance here. Start the margin guidance here. In terms of the -- Mike, you said you had a 5 basis point lift from the swap expiring this quarter and then additional -- or you expect 6 to 7 basis points of benefit for a full month. So am I hearing you correctly in thinking about, call it, 11 or 12 basis points of additional margin upside going forward here in the third quarter? Mike Archer: No. No, Steve. Good question. So as we think about margin for next quarter, we're thinking that we're probably in the neighborhood of 3 to 7 basis points, let's call it, 2.39 to 2.43-ish for the third quarter, which is a function of what you just mentioned there, the additional lift of the $100 million loan swap that ran off as well as some of the seasonal flows and other activity occurring. Steve Moss: Okay. And just as we think about the seasonal flows on deposit costs, I mean definitely seeing -- nice seeing your guys as the deposit cost increases slow down here, but definitely seeing it across the board. Curious if you think like in addition to seasonal flows, you could get a little bit more of a lift here just given that deposit costs are likely stabilize you get the massive repricing. Mike Archer: Yes. I think -- so in terms of just deposit costs, I want to say, for June, we landed on 230, 236 off the top of my head for -- excuse me, all-in funding costs, not deposit costs. I do anticipate that we'll continue just to hang around there, maybe up a basis point or 2, but then we'll just continue to have the continued asset yield expansion as well as we move forward. So as we're thinking about our seasonal deposit flows. I do think we are seeing the benefit there. I think one of the questions is we still see a level of remix as well. So as we're thinking about that on a go forward over the next few months, Steve, we think that could level itself off and call it, 1 or 2 basis points up on, from a remix could be offset by the seasonal flow. So that's how we're thinking about deposits and funding cost rate at this moment. Steve Moss: Okay. Great. That's helpful. And then, Simon, in your comments, you mentioned, I guess, like moderate loan demand, but that you're seeing some sizable -- I think commercial real estate opportunities is what you said. Just kind of curious if you can give a little color around those larger commercial real estate opportunities you're seeing. Simon Griffiths: Yes. Thanks, Steve. I mean, just overall, we see -- continue to see a nice demand across our business. We're seeing low single-digit loan growth for the third quarter and that's been pretty consistent with this quarter. Certainly seeing some nice opportunities, particularly in the commercial real estate side. We're also seeing on the resi side, nice pickup in our home equity business and solid demand on the resi mortgage side as well. So overall, I think it continues the theme that we've been articulating, Steve, which is we're leveraging the balance sheet, focusing on relationships, being conscious, obviously, of quality and broadening that out and leveraging the opportunities we have to commit to the communities that we serve and continue to lend into those communities. Steve Moss: Got you. And are the projects multifamily in nature or industrial? Just kind of curious as to like where you're seeing the type of demand, if you will. Simon Griffiths: Yes, it's a mix. It's definitely a mix. We definitely have some of those multifamily, couple of -- we have a couple of multifamilies that particularly. We've had a couple of hotels, high-quality hotel locations in some great locations as well. I take those sort of -- probably the two kind of things we've seen come through. Steve Moss: Okay, great. I appreciate all the color. And I'll step back in the queue here. Thank you. Operator: Our next question comes from Matthew Breese with Stephen. Please go ahead. Matthew Breese: Good afternoon. I was hoping you could talk a little bit more about the high-yield savings program. I guess, first, what rate are you offering on that program so long as folks meet all the criteria? Two, does it continue? And three, what's the expectation for how that program might impact deposit cost overall, but in particularly the savings category, given at least on the average balance sheet, still at a really low level, just some thoughts there. Mike Archer: Yes, sure. I can start off there, Matt. So we did -- as I mentioned, I think our savings growth for the quarter was 8%. I want to saying that was in the neighborhood of around $50 million. The majority -- the vast majority of that certainly was from that high-yield product. Overall, I want to say that the weighted rate that we put on the high yield of 4.13% for the quarter. So we do have a couple, call it, tiers there around 4%, 4.4%, 4.5% that we're out there selling and marketing and have had good traction. And as we said, I mean, we're really trying to drive new customer acquisition along with that product as well. I think one of the things that we're also in the back of our heads thinking about is CDs start to reprice and start to roll off here over the coming months as well as being thoughtful of trying to get the money back into illiquid products, have the ability to roll down the curve if and when that happens. So we're trying to balance all those factors, and be certainly very thoughtful about that. Simon Griffiths: Matt, this is Simon. So just add to that. Matt, I'll just add just a comment to that. It's continue to see one of the nice things about the CD roll off and we continue to have about 80% retention, which is very favorable, leverage these relationships to really deep and expand into other products as well. So we're really seeing that opportunity to engage our clients and look for opportunities deepen as I mentioned. Matthew Breese: I appreciate that color. Maybe just looking at the NIM, it feels like we're at that inflection point for you all where deposit cost increases start to slow, while asset yields really start to reprice higher. As you extend and look at your outlook for beyond '24 and into 2025, how much of the lost ground on the NIM can we recapture? Can we get back to a, call it, a 2.75 type NIM based on forward curve. I think there's three or four cuts in there. Just some overall thoughts on the longer-term trajectory of the NIM, not just the next one or two quarters, but in the '25. Mike Archer: Yes, it's a great question. I think to your comment there, Matt, is certainly going to matter what the shape of the curve is. I mean, I certainly hope that we get back to margin levels that we were at certainly a few years ago. How fast we get there to be seen. Certainly, as we think about Fed rate cuts, hopefully over coming months and quarters, assuming that the yield curve doesn't the long end doesn't go down with it. That will certainly be beneficial to us. And as you anticipate, to your comment there, I do anticipate us getting back to $270 million I don't know off the top of my head how fast that is. But certainly, something we're certainly steering into. And as we've been communicating now for years and quarters is we really are focused on optimizing margin, and we want to get that. We're focused on growing the business, but we want to do it profitably, and that's top of mind for us. Matthew Breese: I appreciate that. The last one for me is just some help on the fee income front. Outlook for the rest of the year. But then within that, just to point where you have some additional leverage. Could you just update us on the wealth management business, assets under management, what you're doing to grow that, the mortgage banking effort as well? Simon Griffiths: Yes. Thanks for the question, Matt. On the fee income front, for the third quarter, I think very much in line with what we reported this quarter. We've got an estimated range of about $10.5 million to $11 million. And certainly, we think that the fourth quarter fee income might come in will probably come in a little higher than that, about $10.75 million to $11.25 million, that's due to the annual leisure incentive bonus that we have in the fourth quarter. So overall, I think the underlying picture for us is continuing to invest in that business and the wealth business. I think we've got some nice traction there. As we reported, we were up just over 10% and I think we see nice momentum on the brokerage side. We brought Garrett in to lead the wealth business, and he's starting to certainly build that out, and that's certainly an area that we believe has a lot of opportunity for us given our geography and given the momentum we have with that team. So it's an area that we continue to look to and I think can be a nice area of growth for us going forward. Matthew Breese: Excellent. I'll leave it there. Thank you for taking all my questions. Operator: Thank you. [Operator Instructions] We have no further questions. So this concludes our question-and-answer session. I'd now like to turn the conference back over to Simon Griffiths for any closing comments. Simon Griffiths: Well, thank you. I want to thank you all for your time today and your interest in Camden National Corporation. We wish you all a great rest of your day, and thanks for your time. Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

OneSpaWorld Holdings Limited (OSW) Q2 2024 Earnings Call Transcript

Allison Malkin - ICR Leonard Fluxman - President, Executive Chairman and CEO Stephen Lazarus - Chief Operating Officer and Chief Financial Officer Good day, and welcome to the OneSpaWorld Second Quarter Fiscal 2024 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Ms. Allison Malkin of ICR. Please go ahead. Allison Malkin Thank you. Good morning, and welcome to OneSpaWorld's second quarter 2024 earnings conference call and webcast. Before we begin, I'd like to remind you that certain statements and information made available on today's call and webcast may be deemed to constitute forward-looking statements. These forward-looking statements reflect our judgment and analysis only as of today and actual results may differ materially from current expectations based on a number of factors affecting our business. Accordingly, you should not place undue reliance on these forward-looking statements. For a more thorough discussion of the risks and uncertainties associated with the forward-looking statements to be made in this conference call and webcast, we refer you to the disclaimer regarding forward-looking statements that is included in our second quarter 2024 earnings release, which was furnished to the SEC today on Form 8-K. We do not undertake any obligation to update or alter any forward-looking statements, whether as a result of new information, future events, or otherwise. In addition, the company may refer to certain adjusted non-GAAP metrics on this call. An explanation of these metrics can be found in our earnings release issued earlier this morning. Joining me today are Leonard Fluxman, Executive Chairman, Chief Executive Officer and President; and Stephen Lazarus, Chief Financial Officer and Chief Operating Officer. Leonard will begin with a review of our second quarter 2024 performance and provide an update on our key priorities. Then Stephen will provide more details on the financials and fiscal year 2024 guidance. Following our prepared remarks, we will turn the call over to the operator to begin the question-and-answer portion of the call. Thank you, Allison. Good morning, and welcome to OneSpaWorld's second quarter 2024 earnings conference call. It's a pleasure to speak to you all today to share another period of record performance. Our team delivered an outstanding second quarter, capping off an excellent first half of the year. The consistent strong performance of our business evidences the power of our operating platform to provide unsurpassed guest experiences for our cruise line and destination resort partners. And driven by a continued momentum and scaling impact of our growth drivers, we are once again increasing our annual guidance beyond the quarter's outperformance. With earnings today, we also announced that our Board of Directors adopted an annual cash dividend program, which recognizes our ability to leverage our industry leading operating platform, integrated growth initiatives, and asset-light business model to generate ongoing increasing after-tax free cash flow. Turning to the highlights of the quarter. Total revenues increased 12% to a record $224.9 million compared to $200.5 million in the second quarter of 2023. Income from operations increased 40% to a record $18.8 million compared to $13.4 million in the second quarter of 2023. Adjusted EBITDA increased 25% to $27.1 million compared to $21.6 million in the second quarter of 2023, and unlevered after-tax free cash flow increased 18% to $23.8 million compared to $20.1 million in the second quarter of 2023. The unlevered after-tax free cash flow conversion rate was 88% in the second quarter of 2024. The expansion in our ship count continued during the period. At quarter end, we had health and wellness centers on a 197 ships with an average ship count of 188 ships for the quarter compared with 183 ships and an average ship count of 177 ships in the second quarter of 2023. At quarter end, we had 4,300 cruise ship personnel on vessels compared with 3,813 cruise ship personnel on vessels at the end of the second quarter of 2023. The quarter included continued progress towards our key strategic priorities. Let me share some highlights with you. First, we captured highly visible new ship growth with current cruise line partners and added new cruise line partnerships to our fold. To this end, in the second quarter, we opened health and wellness centers on two new ship builds, one with Cunard and the other with Silversea Cruises. This follows the opening of our health and wellness centers on the Icon of the Seas and Sun Princess in the first quarter, bringing our year-to-date new builds to four. We continue to expect to end fiscal 2024 operating onboard 198 vessels. Second, as it relates to our higher value services and products, as you recall, we introduced new cryotherapy body services and new cryotherapy and LED facial services to complement the new technology driven Elemis Biotec 2.0 facial and LightStim therapy, which augments our acupuncture revenue. We will continue to ramp these new services to the entire fleet over the next few quarters. Third, we focused on enhancing health and wellness center productivity. We grew key maritime operating metrics with continued strong growth in revenue passenger per day, weekly revenue, and revenue per staff per day. This was driven by growth in total cruise guests utilizing the spa and the number of treatments per guest, which benefits from the success of our technology enhancements, our expertise in staff training, and the simplification of our service menu options and treatment blends. Additionally, we continue to attract and retain staff, which has led to an increasing percentage of experienced staff members working onboard. We are pleased to see more of our staff members sign on for additional contracts, reflecting the compelling workplace environment we provide and their affinity towards our company. These more experienced staff members are also skilled at recommending product and service options, which combined with the simplification of our service menu and treatment blend led to growth in higher-price products and services. Pre-booking revenue as a percentage of services remains strong at 23%, even as we phase in new partners that are just beginning to scale. We continue to see passengers that pre-book services spend 30% more than those that do not pre-book. And finally, we continue to expand productivity within our Medi-Spa. The quarter saw same spa revenue overall up double-digit year-over-year. We continue to increase the number of doctors and nurses we have onboard and add to our service offering. At quarter end, Medi-Spa services were available on 144 ships, up from 142 ships in the first quarter this year, and up from 129 ships at the end of the second quarter of 2023. We remain on track to expand Medi-Spa offering to 148 ships this year. Fourth, we further enhanced our financial position and flexibility. Our balance sheet strength was bolstered by our repayments of our first lien term loan this quarter. And fifth, as mentioned, our Board of Directors approved and reinstated an annual cash dividend program with the initial quarterly dividend payment of $0.04 per common share payable to shareholders on September 4, 2024 of record as of the close of business on August 21, 2024, reflecting the strength of our asset light business model and consistent record of growth. In summary, we are pleased to report an excellent second quarter and first half of the year and remain excited about our business outlook. Our third quarter is off to a strong start, and we remain confident in our ability to deliver robust operating and financial performance, both in the near and long-term. Overall, we continue to expect fiscal 2024 to represent another year of record growth and increased value for our shareholders. With that, I'll turn the call over to Stephen, who will provide more details on our second quarter results and guidance. Stephen? Stephen Lazarus Thank you, Leonard. Good morning, everyone. We are pleased to report ongoing strength with the delivery of better-than-expected results across all key financial metrics in the second quarter. We continue to drive shareholder value with the quarter generating record revenue, record net income, and record adjusted EBITDA. And we ended the period with a stronger balance sheet and delivered positive cash flow. I am also pleased that our Board demonstrated confidence in our business outlook and our ongoing ability to generate strong cash flow with the initiation of an annual cash dividend program. Sharing more detail on the second quarter we reported earlier this morning, total revenues were $224.9 million compared to $200.5 million in the second quarter of 2023. The increase primarily was attributable to our average ship count increasing to 188 health and wellness centers onboard ships operating during the quarter compared with our average ship count of 177 health and wellness centers onboard ships operating during the prior quarter together with our continued productivity gains across our operations. Cost of services were $150.8 million compared to $137.2 million in the second quarter of 2023 with the increase again being primarily attributable to costs associated with increased service revenues of $180.8 million in the quarter compared with service revenue of $163.2 million in the second quarter last year. Cost of products were $37.1 million compared to $32.2 million in the second quarter of 2023, the increase primarily attributable to costs associated with increased product revenue of $44 million in the quarter compared to product revenue of $37.3 million in the second quarter of 2023. Net income was $15.8 million or net income per diluted share of $0.15 as compared to a net loss of $3.2 million or net loss per diluted share of $0.03 in the second quarter of 2023. The improvement was primarily attributable to a $12.2 million decline in other expense from the change in the fair value of the warrant liabilities and more importantly, a $5.4 million increase in income from operations. As you know, the change in fair value of warrant liabilities was the result of the remeasurement to fair value of the warrants exercised during the second quarter of 2024, reflecting changes in the market price of our common stock and other observable inputs deriving the value of these financial instruments. Importantly though, there are no outstanding warrants as of quarter end. The $5.4 million positive change in income from operations primarily derived from the increase in the number of health and wellness centers onboard vessels and our continued productivity gains. Adjusted net income was $21.7 million or adjusted net income per diluted share of $0.20 as compared to adjusted net income of $15 million or adjusted net income per diluted share of $0.15 in the second quarter of last year. Adjusted EBITDA was $27.1 million compared to adjusted EBITDA of $21.6 million in the same period of 2023. Moving on to the balance sheet, we ended the quarter with a stronger balance sheet including total cash of $63.7 million after repaying $15 million of our first lien term loan during the quarter. Since the second quarter of fiscal 2022, we have repaid over $109 million of indebtedness and we have reduced our debt now to $123.8 million as of June 30, 2024. In the second quarter, unlevered after-tax free cash flow was $23.8 million compared to $20.1 million in the second quarter of 2023. Moving then on to the guidance, with our strong second quarter performance and a positive outlook, for the second time this year, we have increased our fiscal 2024 guidance beyond the outperformance in the first half. We now expect revenues to increase 11% and adjusted EBITDA to increase 18% at the midpoint of the guidance ranges from our fiscal 2023 actual results. For full-year 2024, we now expect total revenue in the range of $870 million to $890 million versus our previous guidance of $860 million to $880 million and adjusted EBITDA is now expected in the range of $102 million to $108 million, up from our previous guidance of $95 million to $105 million. We expect to end fiscal 2024 on 198 cruise ships and at 52 resorts. For the third quarter, we expect total revenue in the range of $235 million to $240 million and adjusted EBITDA in the range of $27 million to $29 million. Our third quarter guidance assumes an ending ship count of 197 and resort count of 52. In summary, we enter the third quarter strongly positioned. We are confident in our outlook and our ability to continue to deliver increased value for our shareholders as we execute our proven strategies supported by our advantageous operating platform, robust growth initiatives, and asset-light business model. And with that, we will open up the call for questions. Chuck, if you could please open the call? Thank you. Thank you. We will now begin the question-and-answer session. [Operator Instructions]. And the first question will come from Gregory Miller with Truist Securities. Please go ahead. Gregory Miller Thank you very much. Good morning, Leonard and Stephen. My first question relates to product spend. I'm curious how product spend is trending post-treatment today. The second quarter revenues looked quite strong. Are you seeing any changing trends and what types of products or price points are resonating more with your guests today? Hey, there. Can you hear me? Stephen Lazarus We can, Greg. I thought Leonard would take the question. Maybe he just dropped off momentarily. Leonard Fluxman Yes, sorry, Greg. I was on mute. Yes, thanks. Product demand and service demand continues to be very strong. We see many benefits associated with some of the new services we've rolled out, the many simplifications. And so we see retail attachments being just where we need it. I think there's room to improve it as we continue to simplify menu choices, which actually promotes good retail attachments. So demand is there, and we're very happy with the progress on retail attachment. Gregory Miller Thanks. And in terms of my follow-up, this relates to spa menu pricing, and it's maybe a little bit more of a hypothetical question, but I'm going to try to ask anyways. To my understanding, you look at United States high end resorts for benchmarking in terms of spa menu pricing. I'm curious, how much is the U.S. resort spa menu pricing a potential ceiling for you in terms of your own spa menus? For example, if you're in the position where your demand is stronger than a U.S. resort today, which is quite possible, given many affluent Americans are traveling abroad this summer, including, of course, going on cruises, do you expect to get much pushback if you raised pricing above an equivalent state-size alternative? Leonard Fluxman Yes, so look, we always look at land-based high-end resorts. I mean, listen, not every single banner, you would say, is in that particular category. So we -- I mean, remember, Greg, we go across many, many different categories of demographic and consumer. So we look at a lot of different land-based data as we determine where pricing should be, and if you compare us to luxury or high end, as you say, we're definitely still quite value oriented. We think there may still be an opportunity down the road, not right now. But certainly for 2025, we will, as part and parcel of our budgeting process, look at the opportunity where we can take further pricing. The next question will come from Max Rakhlenko with Cowen & Company. Please go ahead. Max Rakhlenko Hey, thanks a lot guys. And congrats on a really strong quarter. So first, curious if you can provide some additional color on the implied fourth quarter revenue and margin guidance. Seems like it could be pretty conservative on both top and bottom line, just given the run rates you're seeing, as well as the implied third quarter. So just how are you framing and sort of what's the thinking that's going into the fourth quarter? Stephen Lazarus Yes, Max, good morning. As you know, the fourth quarter seasonally is a softer quarter for us, and historically, that has been the case, shift, reposition and, obviously, we come out of the much more productive summer vacation period for North American school holidays. So it's not atypical to see a softer fourth quarter than the third quarter, and our implied margin for the fourth quarter at the midpoint is 11.9% on an EBITDA basis. So it's not far short of where we've delivered in the first and second quarter, and just gives us the opportunity to the extent that we would need to do any type of promotional activity because of those re-positionings, et cetera, to do so. So I think the short of it is it's what we would expect seasonally and also from a demand perspective based upon where the ships begin to sail during the first half of that quarter as they reposition. Max Rakhlenko Got it. Okay, that's helpful. And then congratulations on announcing the dividend. So curious, what's the strategy around the growth profile of the dividend? How are you thinking about that? And then balancing it with continuing to pay down debt, is the strategy to pay down debt completely over the medium term, or would you be okay continuing to carry some level even longer? So just curious about the balance of dividend versus the debt paydown. Stephen Lazarus Yes, I think the word that you use is most appropriate, the balance. As you obviously know, everybody knows, we do continue to have debt. We also do have a share repurchase program that is in place, and so we like the flexibility to be able to allocate between the share repurchases, the debt paydown, and of course now there's also the dividend. Yes, we would be comfortable carrying some debt. I think we've already previously mentioned that the debt is at a very manageable level, net debt well below 1% in terms of where we would want it to be. So I mean, one turn rather. So, yes, we're absolutely comfortable, and I think it'll just come down to what makes the most sense, right? Opportunistically, the stock repurchases may come into play over time. There's certainly the opportunity to grow the dividend, and depending on what happens with interest rates will drive how aggressive we are in paying down the debt. Maksim Rakhlenko Got it. And just a quick follow-up on that point. Your cash on the balance sheet continues to grow. So is that related to potentially just having some dry powder to buy back stock, or what's the rationale for that? Stephen Lazarus So it is at a higher point than it traditionally has been. A driver of that is, as you know, our line of credit expired in March, and we did not renew it. So it really is just to have some additional liquidity on the one hand, and, yes, look, to the extent that there's an opportunity on the stock repurchase side, it's always nice to have some cash to be able to pull the trigger on that. The next question will come from Sharon Zackfia with William Blair. Please go ahead. Sharon Zackfia Hi, good morning. It was really impressive to see what it looks like spot productivity actually accelerate from where you had been, which is already at really good levels. And I know, Leonard, in your comments, you talked about treatments per guest improving and some tech enhancements that were helping drive that, among other factors. Can you talk about what those tech enhancements are and kind of what you have coming down the pike? I think you have some investments in AI going on right now, but I'm not sure if they've manifested yet in any way in the back of house or front of house at the spas. Leonard Fluxman Yes, thanks, Sharon. These are good questions. So let me just answer the simple one first. We have not rolled out any AI enhancements yet. They're still in development phase. I would say sort of first innings. We're going through identification of opportunities, particularly onboard, and then certainly in supply chain and other areas in the back office of OneSpaWorld. But there's nothing in place right now, nor anything that will, in 2024, impact the ability to use AI to drive better productivity. So, we're working on it. It's in its early stages of development, and we certainly are very, very excited about some of the areas that we are going to tackle with respect to enhancing further productivity enhancements from start with the use of some of the AI technology. But once we have it fully developed, once we have it ready to roll out, we will certainly be happy to talk to everybody in the community, shareholders, et cetera, about what this AI will do for the operations. Obviously, it's going to take some testing, et cetera. So, too early to comment, but certainly exciting to see what it may do for us once we roll it out. With respect to productivity gains, we saw definitely a pickup in the number of guests coming through our spas. I mean, it was close to about 500,000 more. But then the denominator of the new ships went up a lot more. So effectively, we're treating more people. The simplification of our menus, which is helping promote both service demand and retail attachment, all led to better productivity during the quarter. And certainly, that productivity continues as we start at the third quarter. Sharon Zackfia And thanks for that. And then on product margin, it's kind of beating my model every quarter. And so, Stephen, can you talk about what the drivers are of product margin? And I know you don't own Elemis anymore, but where can product margin go? And are we seeing Medi-Spa kind of help elevate this? I'm trying to figure out -- we're in the mid-teens now, well above 2019, I mean, what's the line of sight on how high we could see product margin ultimately go? Stephen Lazarus Sure. So, Medi-Spa, no. There's no real product attachment of note as it relates to Medi-Spa services at this point in time. So that is not helping. As it relates to the cost of the product, and yes, we no longer own Elemis. But, as you know, we did enter into, pre the companies disaggregating, a long-term supply agreement. So the cost side of that is fixed in terms of go-forward. And so, where you see improvements there, it's around things that we're doing onboard. And the biggest driver right now, frankly, is just the continued productivity improvements and the lack of discounting being required in order to promote those sales. The next question will come from Laura Champine with Loop Capital. Please go ahead. Laura Champine Hi, my question is also on that product side, which is beating our estimates. I'm wondering if you have looked at additional product lines you could add there. I know we've talked about ways to build an e-commerce business so that your customers keep paying you even after they've left the ship. Is there M&A that could be done there that we would need to do to have sort of an e-commerce side of the business or just share kind of your growth thoughts on products? Leonard Fluxman Yes. Thanks, Laura. No, we don't have a need. I mean, Elemis really -- we're involved in the R&D side. We certainly sit on the calls. We give them a lot of ideas about what's working in our particular world versus their land-based and retail outlets. So whatever we think may be needed, I mean, we're still a pretty large customer of theirs, they listen and they provide us with the necessary development of products. In some cases, certainly in the luxury area, we do offer a smaller complementary range. I mean, we have some product on there. We've even added product that we don't own into those lineups when needed. But I have to tell you, Elemis' lineup across face and body is more than enough for us to continue to grow. And all of our services and protocols that we use, all are -- the architecture around those services are supported on the back bar and the retail side by the development of the Elemis product range. And so we are very excited about new things coming from Elemis next year. So there is really no need to look at this. And we get approached all the time to put products on board because we have such an incredible showcase and showroom and trial and test for our guests and consumer. But at the same time, we have a very good deal -- long-term deal, as Stephen mentioned, with Elemis, and we'll continue to keep that as our dominant range. With respect to the e-commerce side, we do sell Elemis on e-commerce, but then Elemis sells a lot of e-commerce on its own website. So we don't -- we compete against them, but not in the same way because it's mostly our guests that are buying products that they've brought onboard. We continue to look at what we can do to expand the e-commerce side. It's certainly doing better than it did in 2019. And to the extent that something looks like it might be worth adding to e-commerce and the post-guest experience and sale, we'll do that, but there's nothing right now. The next question will come from Assia Georgieva with Infinity Research. Please go ahead. Assia Georgieva Good morning guys. [Technical Difficulty] to start with my congratulatory remarks. Great Q2, great increase to the outlook. And the fact that you reinstated the dividend is fantastic. And then, Stephen, you said that we don't have to deal with the warrants [Technical Difficulty] is the date that I remember quite clearly. Can I ask a question on occupancy because I think it's an opportunity and it can go both ways. One of the major brands that you serve on has pretty much gotten to the historical levels of occupancy. Another one who may have reported earlier today is still lagging behind the historical levels. So it seems that with greater occupancy opportunity, you might be able to continue to grow beyond what the ship count is. Is that a fair assessment? Stephen Lazarus So, Assia, I would point out that, as you know, we only service a small proportion of guests onboard anyway, and generally speaking, occupancies have pretty much gone back to historical levels. Some of them may be even are surpassing that. But when that happens, as you know, when they're getting above the 100%, it's typically because they're filling those cabins with kids. And so that's really not our target audience per se. So I'm not -- I don't really think from a cruise line occupancy perspective, there's still lots of opportunity for us. Obviously, we love the fact that they always fill their ships and they historically have done that and are now continuing to do that again. But when you start getting to 113 plus, 100-plus-percent occupancy, the marginal increment for us is not that significant. Assia Georgieva Fair enough, Stephen. Thank you. And because you guys mentioned Silversea and Icon -- and if I can add Utopia, three different types of demographics that would go on those ships even between Icon and Utopia. How do you view the product that Royal is presenting, basically a shorter party-type voyage on Utopia versus Icon of the Seas, a family-type voyage versus Silversea, whether it's Ray or Nova, a much higher-end customer without any family, without any kids I mean, longer voyages. How do you view these three different types of demographic target markets? Leonard Fluxman Assia, thanks. I think it's a very smart way that Royal Caribbean has approached the market. They're offering a family choice and the Icon is an incredible layout for families and kids. And then I think by introducing Utopia, shorter cruises, more younger demographic, maybe a little bit more partying going on, I think is also quite smart as well. And I think we've seen those kind of demographic across different banners and it's never been an issue for us. And look, our training and the way that we go to work on different types of length of itineraries, different types of demographics, caters to this. So I think it's very exciting that they are offering two identical ships catering to two different demographics. And I think they'll do equally as well. Silversea in the luxury markets, beautiful ships, longer itineraries, no kids, as you say. We continue to excel on there as well, and our recent results on there have been outstanding. Assia Georgieva And so between Utopia, the party market, the younger demographic, and Icon, the more family-oriented, do you think that you may have a greater penetration rate at Utopia? Leonard Fluxman It's too early to tell. I think a three, four-day mix makes people make quicker choices because they've got a shorter period of time with the three days or four days, they got one extra day for deciding when they're going to participate in some of the amenities including spa. But listen, I think the ship is outstanding. I think the itinerary that it's chosen for the three, four days, I think, will complement competitiveness against their other vessels. So no, I don't see any challenges. Certainly nothing that we can't adapt to. And this is not the first time we're handling three and four day party cruises. We've done this for decades. Assia Georgieva I was actually going the other way. I was thinking this was more of an opportunity than a challenge. Younger couples don't have kids, can spend time at the spa as opposed to playing with their kids. And I sound like I'm anti-kid and I'm sorry, I'm not. Is the Utopia-type product is actually better for you. Leonard Fluxman It could well be. But remember, whether you're on the family ship or the party ship with no kids or if you're on the family ship, the Icon with kids, the way in which the itinerary is laid out on the Icon, the ability to put different kids at different ages in different types of programs doesn't impede the married couple from participating and enjoying many things that adults like to do onboard. So no, look, is there an opportunity to do better with the younger crowd? Possibly. But then again, we'll have to see, as a consumer group, how they behave. So yes, it could be an opportunity, but I certainly don't think the Icon is disadvantaged by it. Assia Georgieva All right. Fair enough. And if I may ask one last question. We know that pre-bookings tend to be a multiplier in terms of what gets spent onboard. And you mentioned in your prepared remarks that having brands that are onboarding with you, they may not be quite as attuned to or not have the pre-booking engine that would actually feed into pre-booked spa. So what is the opportunity in 2025, do you think in terms of pre-booking penetration versus what we have had this year? Leonard Fluxman So look, as I mentioned, we were still onboarding different banners and continue to onboard them to get to scale. We think pre-booking will continue to move upwards. There are some good banners still to get onto the pre-booking platform at scale. We think there is a lot of work to be done with our cruise line partners with respect to enhancing the pre-booking experience and journey. We continue to provide content. We continue to provide different types of views of what is available onboard and we will continue to augment that so that they adapt to it and continue to improve the pre-booking journey. I think if they utilize everything that we're giving them, we will certainly see pre-booking start to move northwards. Pre-booking, we are currently at about 30% penetration in terms of pre-bookings? The 30% you mentioned is, a pre-booked guest, on average spend 30% or slightly more than that than a guest that do not pre-book. Assia Georgieva Okay, perfect. Thank you so much guys and again great quarter and thank you for the great news this morning. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Leonard Fluxman, Executive Chairman for any closing remarks. Please go ahead, sir. Leonard Fluxman All right. Thanks, Chuck. Once again, thank you all for joining us today. We're very excited about the results for the first half of 2024, and we look forward to speaking with you when we report third quarter results and seeing many of you during our upcoming investor meetings. Thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.