Good day, everyone and welcome to the RF Industries Third Quarter Fiscal 2020 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded Thursday, September 10, 2020. At this time, I'd like to turn the call over to Mr. Todd Kehrli of MKR Investor Relations. Please go ahead.

Thank you, operator. Good afternoon and welcome to RF Industries third quarter fiscal 2020 financial results conference call. With me on today's call are RF Industries' President and CEO Rob Dawson; and SVP and Interim Chief Financial Officer, Peter Yin. Before I turn the call over to Rob and Peter, I'd like to cover a few quick items. This afternoon, RF Industries issued a press release announcing its third quarter fiscal 2020 financial results. That release is available on the Company's website at rfindustries.com. This call is being broadcast live over the Internet for all interested parties and the webcast will be archived in the Investor Relations page of the Company's website. I want to remind everyone that during today's call, management will make forward-looking statements that involve risks and uncertainties. Please note that except for the historical statements, statements on this call today may constitute forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. When use the words anticipate, belief, expect, intend future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties and actual results may differ materially from outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements differ from actual results include delays in development, marketing or sales of products and other risks and uncertainties discussed in the Company's periodic reports on Form 10-K and 10-Q and other filings with the Securities and Exchange Commission. RF Industries undertakes no obligation to update or revise any forward-looking statements. Additionally, throughout this call, we will be discussing certain non-GAAP financial measures. Today's earnings release and the related current report on Form 8-K describe the differences between our non-GAAP and GAAP reporting and present the reconciliation between the two for the periods reported in the release. And now, I'll turn the call over to Rob Dawson, President and Chief Executive Officer. Rob?

Thank you, Todd. Good afternoon, everyone. Welcome to our third quarter fiscal 2020 earnings conference call. Thanks for joining us today. I hope that all of you're staying safe and healthy. Similar to our last call, I'd like to start my comments by providing some brief details around the significant challenges we experienced during the quarter and how we responded. Then I'll turn to what we're seeing now and why we think things are finally moving in the right direction. First, the fast summarized version. May was a very tough month, the quarter count better from there, while sales in the short-term hit bright spots, where the gross margins came away up to nearly 29%. The bottom-line improved with adjusted EBITDA increasing to $292,000. Our balance sheet remains very strong. We see sales beginning to recover in Q4. Our opportunity pipeline continues to be robust. Finally, we expect, fiscal '21 is going to be much better. Now for some more detail. Looking back on a quarter, we followed a very tough Q2 with an even tougher Q3. Our third quarter results were significantly impacted by COVID-19 with software bookings beginning in late March and April due to project and build plan delays in both our direct and distribution customers impacted by state mandated stay at home orders. All of which we discussed on our June earnings call. As a result, revenue in the month of May was the lowest we've seen in two years. The March, April and May period was definitely the most challenging environment that we've seen. The good news is that while we started the quarter poorly, we saw revenue began to improve in June and July, and we ended the quarter feeling like some normalcy was starting to creep back in. We're nowhere near back to…

Thank you, Rob, and good afternoon, everyone. I hope everyone is doing well and is in good health. While I've been with RF since 2014, first as Controller and then more recently as Vice President of Finance and Operations, I am excited to step into my new role as interim CFO, and I am looking forward to working more closely with Rob and the management team to help get us back on a path to growth. I'm also looking forward to speaking with our current and potential investors on a regular basis, which certainly includes all of you. Turning to the quarter, rather than read our financial results, which you can see in the financial table of our earnings release and 10-Q, I instead like to focus on providing more context around the numbers and highlights some of our operational improvements we achieved this past quarter, setback we experienced and any forward looking business that I'm able to share. So, jumping right in. The third quarter was certainly less than ideal given the significant impact COVID-19 has on the global economy and our company. As previously mentioned, under the Paycheck Protection Program, we did apply for it and receive PPP loans of approximately $2.8 million during the quarter, which we use primarily to cover payroll costs. We anticipate that the PPP loans will be eligible for forgiveness, and we will be applying when the window to do so opens with our lender. However, as Rob mentioned, even in this tough operating environment, we did a good job operationally to keep expenses low. In fact, while revenue was down from prior quarter, we were able to make more money in Q3 at the gross profit line, increasing our gross profits by $140,000 on revenue of $9.5 million compared to revenue of…

Thank you. [Operator Instruction] We'll take our first question from Aman Gulani from B Riley. Please go ahead.

Hey guys. Thanks for taking my question. First question is, given that your recent trough in sales in the July quarter, would it be fair to say that you profitability has also reached a bottom? I mean, clearly you're able to maintain profitability despite the headwinds. So I wanted to get a sense for, what profit, profitability could look like once start -- things start to pick up a little bit? Where do you see gross margin and EBITDA margin when some of these projects set to come back specifically on the 5G side?

Yes, thanks Aman. I appreciate the questions. So, yes, I think you characterize it well. That was, we think the trough on from a sales perspective and related to that the profitability impact, which frankly is harder I think in the second quarter than it did the third. Time to react during the second quarter was much less obviously to the situation going on around us. So cleaning up the expense line a little bit, getting some of the G&A in order, getting our production teams working in a difficult environment, but getting them staggered shifts and figuring out the best way to manage that, which we did quickly, ALLOWED us to get better in Q3. So that kind of second half of March, all of April, May timeframe was collectively the trough on both items, sales and I think from an earnings perspective, as well. So, we do expect, we're going to maintain G&A levels, like we have for some time, We're keeping them low, even while we invest in the right kinds of things. And I think that, from a gross margin perspective, seeing those increased 28.6%, we certainly saw a trough on that in the in the prior quarter. So, I think we feel good about that. But the goal that I've stated for several quarters is to try to keep our margins 30% or better with the low-30s being something that I think is attainable, when it comes to really the two big variables. The product mix being the obvious one, and then the other one being our ability to fully absorb our labor in an effective way. And a lot of that is just getting better at managing those fluctuations and forecasting. So what we think the margins are fine. It's nice that they increased the way they did that gave us some help there, from a bottom-line perspective, still like to see those come up a bit. And they would do that with a higher sales number. I mean, that's kind of the punch line. All this is a sales number like that. I'm pleased we're able to take our margins off, they would have been even better if the sales number had been a little higher just around the reuse of labor. So the other piece of your question around EBITDA margins. I think those will come up as much with the gross margins as anything else. In our business, the gross margin is really where this happens. We don't have wild fluctuations below that line. And we have at the gross line both product costs, but then also labor costs related to that. So, those two things combined really with labor being the bigger one cause the fluctuations, so that the better we do on the gross line, you're going to see EBITDA margins come up as well.

And just get a little more granular on the quarter. And you mentioned that May was the bottom and then you saw uptick in June and July. Can you comment on what sort of month over month growth you were seeing from like May to June and then to July?

Yes, we thought 10% to 15% sequential growth in each of those months. So May to June, June was 15-ish percent better than May and we have similar percentage growth July over June. So, it was, I mean, it doesn't speak to anything being amazing. May, it just speaks to May being a really tough month, but I think that the bigger thing was a while we haven't yet gotten back to the exact kind of pre-levels that we were seeing in January and February. We're seeing some normalcy around project timeframes and things that we have been pushing out further and further and further are starting to show up, and we're making progress on some of the big initiatives that we've been working on. So yes, we saw some pretty significant growth numbers, especially if we compared July to May, we were -- that's a 35 plus percent kind of gross number there.

And then, how would you say your visibility into the five key CapEx is relative to last quarter? I mean, it seems as though a lot of the wireless carriers. Have really slowed the CapEx for the year, I mean, it's maintaining their CapEx guidance for the year, but maybe from the products that have been delayed? But have you seen a little bit more activity with some carriers relative to others? And do you potentially see situation where you have another big quarter like you did back in April 2018?

Yes, so I think we're getting a little more visibility on CapEx. I wouldn't call it completely clear at this point, but I think to that earlier comment I made project timelines and projections are starting to be spoken of and we're starting to put some things on the calendar, and that's helpful. That means there's real spend that's sitting out there. I think our expectation is, while it's been quiet generally. We've seen where T-Mobile has been spending is really more on macro sites in certain markets, not every market. Verizon and AT&T seem to have pivoted a little differently in their spent with altered from what we expected. They still been spending, but I don't think that 5G and specifically small cell kinds of deployments, I haven't been the number one focus in those infrastructures. There has been a lot of fiber deployments, in the last couple of quarters, as we've seen the infrastructure needs to look different than it did just a couple quarters ago. But I think that also leads to these more edge-based multi use sites that can be used wireline, wireless, they can see small cells, they could see DAC deployments, or they could be a neighborhood that needs high speed internet. So, we've seen that the CapEx just change a little bit from what we expected going into the year. And we don't play in all of those market segments due to our product mix. And I think that's the piece that we're very well positioned, on DAC small cells certain components in a macro sites, less so on the wireline side. And so that that's the part earlier I was talking about applications. We got to continue adding new applications and market segments that we can push our products into, but I…

And then last question for me and I'll jump back in the queue. Can you talk about the approved direct air cooling system project, that North American carrier that you mentioned on the call? Can you comment on the potential size of that opportunity you said that can lead to recurring revenue? Do you think that customer becoming maybe like a top two or three customer for RF?

Yes good question. So I think as far as total order of magnitude, the first article that we put in their hands a few months ago that went well. They've been great to work with, and that led to the first purchase order, which as I mentioned was six figures, which we don't get orders like that every day. That's our business has a lot of distribution built into it. So you see a lot of smaller orders. So it's nice to see those kinds of things come in. And there's a deployment schedule being worked out right now. We don't have all the details on exactly the size in total, but our expectation is that there's a, another round of purchase orders coming soon to very soon. And then over the course of the next several quarters or years, we'll be deploying next chunks of the network. And it's a certain cabinet type that we're helping the carrier address. So, it's not going to be the entire network, but it's still there's going to be quarters where it's certainly possible. It could become a top customer. There'll be others where it won't just base on that, that build out schedule. So it's always also going to be tough for an end user customer. Who's spreading a project out over time to be in the top couple because of the size of some of our distribution relationships, where they're taking us to 4,000 or 5,000 of their customers in some cases, it's likely our biggest customers are usually going to be distributors, but that doesn't mean that in a short term window there can't be a spike in there for some time when infrastructure builds like this.

And I am jumping one more. Can you comment on your Tier 1 wireless customer? What sort of visibility do you have into their ordering patterns? You know, like being from conversations you've had with them in the last couple of months?

Yes, I think so. We now, I mean, the good news is we're now doing work with all of the Tier 1’s in the U.S. and more than one product set in each case. We've gotten some additional approvals, but I think that the larger relationship that we've had over the course of several years, which has gone quiet over the last several quarters, going back, frankly to a last call, it September timeframe when their ordering pattern kind of slowed down expected, but it slowed down. We started to see pockets of that return. We certainly haven't seen an order of magnitude that we had in the prior couple of years. And again, that was expected. We weren't expecting that size of the relationship to continue. But I think the team has done a nice job of parlaying that into other product opportunities within that carrier and others. So I have we're getting some visibility into overall CapEx and kind of byproduct area how they're intending to deploy in the next handful of years. And really that falls into the broader bucket of, I think what the world would characterize as 5G CapEx. Again, whether it's 5G or 4G, small cell macro site, not always completely cut and dry in some cases, but we certainly expect the spending pattern to increase and we've seen some improvement in that even in the last handful of weeks.

[Operator Instructions] We'll take our next question from Josh Nichols from B. Riley. Please go ahead.

Thanks for taking my question and get to speak with you Peter. Congratulations on a new position as well, I know you've done with the Company for some time, though. That's it, one thing I did want to ask is. It's good to see that things are rebounding, but could you provide any more color on one or two product offerings that are seen a little bit stronger or softer rebounding? Just as we get a little bit of a feel for the cadence for this rebound into 4Q and next fiscal year?

Yes, sure. Thanks Josh. So, I think we've had a couple of products that have stayed generally consistent through this, our RF coaxial connectors, cables, jumpers, and our fast turn fiber has generally stayed consistent. Haven't seen huge swings, we expected those to grow. They haven't but they stayed roughly flat. The other kind of the good and the bad, if we look at the rest of the offerings, we haven't seen the hybrid fiber, come back to levels even close to levels that we saw with the prior few years and that's again, we weren't expecting the same levels, but we haven't seen that return in the same kind of over the course of the last several quarters. We start to see pockets of that show up here and there, but it's not nearly the level that it was. On the other side of that are, I feel really bullish on the DAC and the small cell opportunities, that was targeted, but the reception we've received from customers both U.S., Canada, international in some cases. We're seeing some interesting discussions that fall right into our wheelhouse and are generally not custom products, things that we're already doing. So, we feel good about retrofitting the cooling approach to cabinets and enclosures and even small buildings that blur the lines with kind of an edge data center. Feel good about the pipeline building there and I think the other thing that has recovered, which the last few quarters have been tell our wire harness business was doesn't get nearly as much conversation, because it's not necessarily wireless related. It's going into large OEM manufacturing customers. We've seen that customer base come roaring back in the last, well, I'll say the last month, frankly, compared to where it has been. And so that product type is long standing relationships and good blue chip customers. And while products a product, they all look a little bit different. It's a similar, heavy multi-conductor kind of product line that goes mostly into industrial or defense kinds of customers. Largely a regional footprint, but we've seen that business come back as well. So, if you go back to my comments, during the call, I think we're betting on the idea that our distribution business with our core and our run rate stuff will continue to be strong. Our distributors are doing a great job there, but we expect that we're going to see some bigger growth opportunities in the pipeline from the back and small cell product lines.

Next to the additional product line color on that, and then I think everyone's kind of aware for the impact that this has had for the space probably right with demand. But you've been doing this for a while and have a lot of experience in the industry. Could you talk a little bit how it's also impacted maybe the competitive environment? And how RF Industries may be positioned as we go into, like next fiscal year, with this new dynamic?

Sure, yes. No, I appreciate that question. I think, two things I'll say, first is, I'm thankful that over the last few years, we really diversified our distribution channels to make sure that we're getting through a lot of different customers. Without that this would have been a much tougher experience for us. And so, I think we managed to mitigate the damage from that and I think those relationships have actually gotten stronger over the course of the last few quarters. We kept operating, we kept providing materials as quickly as our customers have gotten used to specifically in the distribution space, so I feel really good about our competitive impact there. The other thing is I think this has caused if you're a considerably larger company with a lot of product lines, like smaller competitors are, I think you'll find it. This space that we're in, largely talking about cable assemblies and passive component is one that's it's hard to keep up with unless you're really focused on it. And we are, we've done a good job on some of the fast turn fiber, some specific connector types that not everyone's able to do. We've done a great job of servicing those, and I think we're taking share in that and again, I don't want to be too specific on it on purpose, but it's, we're deploying certain cable assemblies with a really specific connector type on them. That is, it's hard to do and we've used this last couple of quarters to really get word out on that not everyone was able to produce those and keep up with demand there. So feel good about that. The last piece is, I think the slowdown actually gave us the ability to take a breath and get the right…

[Operator Instructions] And we have no further questions. I’ll now like to turn the call back over to management for any closing remarks.

Thank you. I'm incredibly proud of our team. And on behalf of the board and management team, I'd like to thank our employees for their creativity, positive spirit and resilience during these challenging times. Thanks everyone for your interest and support of RF Industries. We look forward to reporting our fourth quarter and full fiscal 2020 results in December, and hopefully speaking with some of you at our virtual investor conference presentations prior to that. Thank you again for joining our call. Please stay safe and have a great day.

And this does conclude today's call. Thank you for your participation. You may now disconnect.