Good day, everyone, and welcome to the RF Industries Second Quarter Fiscal 2023 Financial Results Conference Call. [Operator Instructions] It is now my pleasure to turn the floor over to your host, Jack Drapacz. Sir, the floor is yours.

Thank you operator. Good afternoon, and welcome to RF Industries second quarter fiscal 2023 financial results conference call. With me on today's call are RF Industries President and CEO, Rob Dawson; and Senior Vice President and Chief Financial Officer, Peter Yin. Before I turn the call over to Rob and Peter, I'd like to have a few quick items. This afternoon, RF Industries issued a press release announcing its second quarter fiscal 2023 financial results. That results - excuse me, that release is available on the company's website at rfindustries.com. This call is also being broadcast live over the Internet for all interested parties, and the webcast will be archived on 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 used, the words anticipate, believe, expect, intend, future and other similar expressions identify forward-looking statements. These forward-looking statements reflect management's current views with respect to future events and financial performance and are subject to risks and uncertainties, and actual results may differ materially from the outcomes contained in any forward-looking statements. Factors that could cause these forward-looking statements to differ from actual results include 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 GAAP and non-GAAP reporting and present the reconciliation between the two for the periods reported in the earnings release. With that said, I will now turn the conference call over to Rob Dawson, President and Chief Executive Officer.

Thank you, Jack. Good afternoon, everyone. Thanks for joining our second quarter fiscal 2023 conference call. We had a solid quarter and delivered net sales of $22.3 million, a 3.7% increase against a strong Q2 last year. As anticipated, we shipped several customer orders that were delayed in the first quarter and our Optiflex hybrid fiber cable and interconnect products performed well. I think our Q2 results show what's possible in our business even with a challenging backdrop. Over the last few years, we have achieved significant growth yet there's always some volatility quarter-to-quarter, which makes it difficult to take a snapshot every 90 days for a company our size, especially in a market like this. Our growth trend hasn't been a perfect coffee stay up into the right chart every year. But directionally, we're doing the right things, and our number one focus right now is getting back to higher profitability. While we had a nice second quarter, the overall environment in the wireless carrier market hasn't really changed since our last call when we discussed a spending pause in wireless carrier CapEx and project delays. While our core interconnect offer, including custom cabling is performing well, back in small cell, our higher-margin and future growth drivers are being impacted by the sluggish CapEx spending as pressuring the consolidated gross margins and EBITDA in the short term. We expect a few more quarters of slower project spending and the related delays, but are optimistic that carriers will resume their build-outs, and we stand to benefit from that with our differentiated new higher-value solutions. Having navigated several wireless spending cycles, we know how this works, and flow spots like this are normal. We also know how to prepare for an upturn and feel strongly that the investments we made in…

Thank you, Rob, and good afternoon, everyone. Before I get into the comparisons, our second quarter of fiscal 2023 includes a full quarter of Microlab results compared to two months of Microlab results in the second quarter of fiscal 2022. We acquired Microlab in March of 2022. As Rob mentioned, we do not really see a change in the wireless carrier market spend since our last call as we continue to see a delay in wireless carrier CapEx. Our offering that was most impacted was our DAC and small cell solutions as we did not receive orders we were expecting and shipments related to existing orders continue to be delayed. Second quarter revenue was $22.3 million, up 3.7% compared to the same quarter last year. The increase is primarily related to our interconnect products and hybrid fiber cables, offset by a decrease in our small cell products. Second quarter gross profit margin was 27.4% as compared to 28.3% in the same quarter last year. The decrease is primarily related to lower revenue contribution from our small cell solutions, which have a higher margin profile compared to our blended gross margin rate. Operating income was $489,000 compared to operating income of $746,000 in the second quarter of fiscal 2022, primarily related to lower gross profit contribution from our small cell solutions and therefore, less leverage to cover costs. Net income was $581,000 for the second quarter or $0.06 per diluted share compared to $503,000 or $0.05 per diluted share in the same period last year. This is primarily due to an income tax benefit of $164,000 compared to an income tax provision of $136,000. Non-GAAP net income was $1.3 million or $0.13 per diluted share for the second quarter compared to $1.5 million or $0.15 per diluted share for the same…

[Operator Instructions] Your first question is coming from Josh Nichols from B. Riley. Your line is live.

Yes, thanks for taking my questions. And good to see the 2Q numbers, top and bottom line came in better than expected despite the challenging environment. I know visibility is probably fairly limited given the carrier CapEx slowdown, but any trajectory you could give us overall to what you're seeing in the business for the back half of the fiscal year relative to the first half?

Yes. Thanks, Josh. Good question. You're right. Visibility is pretty low. We're not alone in that. So if it's comforting to hear from others, I think it's something we're all kind of seeing and hearing in the space. I think all year, we've been saying we expect that the back half of the year to be better than the first. We generally think that's right. I think the one thing that I would say related to our Q2 numbers is they came in a little better than what we had expected originally for the second quarter, largely due to some demand being pulled in on hybrid fiber cables. So you look at that and how does that impact Q3 and/or Q4. It's not massive, but what numbers our size, it means quarter-to-quarter things can move around. So I think our general expectation is our back half should be better than the front. Putting that into 90-day increments is really difficult to do this in a setting though.

Fair enough. And is it fair to assume that the kind of gross margin profile of the business around this like 27%, 28%. There's opportunity for that to improve incrementally in the back half, I would think if your revenue is going to be a little bit better, but probably still my guess is below the longer-term 30% target? Or what are you thinking?

Yes. I think it's - so product mix is a big driver for us now. And that hasn't always been the big piece of our gross margin calculation. But it certainly is now because we have some definite higher value and higher-margin items in our portfolio. So the better those do, that can certainly have a positive impact, taking those margins up. You're probably looking at it right in the short term. And just sub 30% is probably where it makes sense to be although we're also taking out some - expect to be taking out some meaningful expenses. So the timing of that happening over the next couple of quarters if we get that done earlier without impacting the business in a negative way, it could certainly help our gross margins as well. So those are kind of the two key pieces of it. But we also feel like we're sort of at the from a CapEx perspective and what's going on, we're kind of at the bottom of the trough here, and we've been bumping along here for a few quarters. Sales still move around from a shin perspective but from a timing of larger venue-based or project-based kind of opportunities, we still feel like we're kind of sitting here at the bottom and starting to see the light at the end of the tunnel a bit.

Thanks. And then just on the SG&A front. So you're going to be down with the West Coast integration this quarter, East Coast by the end of this fiscal year. Your SG&A this year was the lowest it's been, right, for a few quarters. What type of impact is that going to have to the second half? Do you expect to remain around these levels or maybe come in a little bit? Or what's the expectation?

Yes. I think you'll see some onetime charges around some of these initiatives that we talked through to ultimately reduce our expenses. We'll be able to give some - I think, some better specifics at the end of Q3 around what that means going forward, but we certainly would expect our go-forward OpEx SG&A to come down in a meaningful way. We think it's going to be a real impact here. it's going to be confusing based on the onetime charges here for the next couple of quarters, but we'll give them a clearer sense of what that looks like as we get into our Q3 results.

Great. And then I think you mentioned two things to hit on, like, one, just like the cash flow. Is it fair to assume that your inventory was down here, you expect that to come down further? Is there any idea for what a normalized inventory level would look like or how long that may take? I'm just trying to think about the cash flow impact from the working capital side from just the operating improvements that you guys have already made?

Yes, that's fair. So I think we do believe there's room for inventory to come down more. Through the consolidation, it becomes really clear where we have duplicate inventory that maybe we didn't recognize before. So that's one focus area. The other is we're finally starting to see a little more normalized supply chain. So for us, sometimes it comes down to timing. There are some items that we ordered several weeks ago that had a 20- or 24-week lead time on them that are going to come in here shortly to address some projects that we have later in the year and early next year. So again, our number is small, so an order of a couple of hundred grand can move our inventory percentage point. But we believe that as we get through the year, you should our inventory start to come down, whether it happens exactly in Q3 or Q4 is hard to nail on timing there, but we're very focused on getting our liquidity up through rationalizing that inventory.

And then last question for me. You've talked about the backlog before. It was obviously very elevated with some of these large onetime orders that kind of had been delayed you're starting to see the beginning of a normalization. It looks like this quarter. Any visibility you have into like how much of the current backlog you expect to ship in like the back half of this year? I'm guessing you would expect the backlog to be materially lower from where it is today to more normalized levels unless you got some more large orders from some of the carriers.

Yes. And that last point is a big one that one or two meaningful orders of a few million bucks that are going to be drawn against over time, will artificially elevate that backlog, which we've been seeing. I've said in the past that backlog in the mid-teens is still a spectacular level for us and a huge amount of our day-to-day business really never hits the backlog. It comes in and goes out in a matter of sometimes hours, but certainly a matter of a few days. So it's really a snapshot of time. We do expect it to continue trending down some. I think that's good. We need to work through some of this 15-month-old kind of stuff that's been on the - from a bookings perspective that came in. It's good to work through that. I think it's helpful to see customers taking some of that inventory. So I would expect it to come down some more this year. The wildcard there being does someone show up in one of these projects and instead of placing it in chunks decide to place a blanket or something larger that could have a material impact to the positive on that too, which could happen.

Great. I'll pass the baton and let someone else to take a chance.

Great. Thank you, Josh.

[Operator Instructions] Thank you. That concludes our Q&A session. I will now hand the conference back to our host for closing remarks. Please go ahead.

Thank you, Matthew, and thanks, everyone, for joining our call today. We look forward to sharing our fiscal third quarter results with all of you in September. Have a good day.

Thank you, everyone. This concludes today's event. You may disconnect at this time, and have a wonderful day. Thank you for your participation.