Tessco Technologies Earnings Call Insights: Large Projects and Mobile Device Releases

Tessco Technologies (NASDAQ:TESS) recently reported its third quarter earnings and discussed the following topics in its earnings conference call.

Large Projects

Brian – William Blair and Company: It’s (Brian) for Anil. Wanted to focus mainly on two segments, first the public carrier market some good growth there, just wanted to ask about I mean basically the key drivers are there a lot of large projects that you expect to normalize over the next couple of quarters?

Robert B. Barnhill, Jr. – President and CEO: North American carriers are really starting to get behind the 4G networks and we are seeing a lot of AT&T, Verizon, Sprint, where we are actively deploying their networks. We haven’t seen any real – anything from T-Mobile yet, so that the Tier 2s if you will follow behind the Tier 1s. And we’ve really structured our sales team around these, what we call the ecosystem of the public networks and we have not only the have carriers and you have got the OEMs with the program managers in our traditional strength with the general contractors. So, it’s a combination of the increase spend, but also a result of our intense focus and reorganizing the sales teams to really be focused on the harvesting the opportunities in this segment.

Brian – William Blair and Company: So, are there significant large projects that are ramping right now or?

Robert B. Barnhill, Jr. – President and CEO: It’s now they are aggressively building – I mean it’s still – I mean it’s strong but it’s all the 4G systems and they are pretty much spread across the carriers and across the country.

Aric M. Spitulnik – VP and Controller: And we think that continue on for a while.

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Brian – William Blair and Company: Then can you actually talk about the linearity of that business, did you see an influx I mean, it sounds like you guys are seeing something that frankly other people are talking about more in 2013 than in the December quarter. So, I was just curious, if you saw an influx towards the end of the quarter or was it pretty kind of a straight line pretty strong throughout the quarter?

Aric M. Spitulnik – VP and Controller: It was fairly strong throughout the quarter. I think what’s maybe happening is we’re probably picking up a little more market shares. So, it may not be that they are doing that much more building, but we’re also involved in more right now that we have been especially last year which was a down year for us in that market.

Brian – William Blair and Company: Then the margins have been pretty resilient on that business despite some good revenue growth. Is there some kind of mix shift that’s going on or is it just leverage, or how are you maintaining that margin?

Aric M. Spitulnik – VP and Controller: I mean that margin has gone down a little bit in that carrier business around some of our infrastructure products, but we’ve been able to maintain pretty much everywhere else a pretty strong consistent margins with the previous year. Some of it, some of the improvement on other things have been mixed, which offset a little bit of the levers that we don’t have of these bigger builds.

Brian – William Blair and Company: Then shifting gears to the 3PL relationship. Looking forward to moving past the stuff, but I do have a few questions on it. As it winds down, is the $186 million you are saying that’s the total relationship and not just the 3PL. I just want to clarify that?

Aric M. Spitulnik – VP and Controller: That is just the 3PL. But if you look at the segment, what we listed here where carriers, that’s well bigger than the $186 million, so the difference between that is what we’ll continue on into next year, other Tier 1 carriers plus the other components of the Tier 1 that will continue on.

Brian – William Blair and Company: So what percentage of revenue was your largest customer?

Aric M. Spitulnik – VP and Controller: I think it was 34% this quarter.

Robert B. Barnhill, Jr. – President and CEO: When you take out that 3PL relationship, there is no customer bigger than…

Aric M. Spitulnik – VP and Controller: About 8% versus so far this year has been our biggest customer if you take out the main customer. That’s 8% on the remaining business, not 8% on the total today.

Brian – William Blair and Company: Can you just, give an idea, if you know it sounds like it’s a little bit unpredictable but just out the trajectory are you expecting kind of a linear progression through the end of March or is there a bigger step down in one quarter versus the next quarter.

Robert B. Barnhill, Jr. – President and CEO: I think this quarter will be step down from last quarter and we are expecting it to be totally transitioned by the end of March, end of the fiscal year. Just to reiterate what we said in the past is that the all of the expenses are variable other than some key talents that we’ve already redeployed into the core market and then the inventory receivables are in very good shape. So there won’t be any major afterlife cost if you will.

Brian – William Blair and Company: So just more specifically on the OpEx levers that you have I mean how, you are basically saying it is variable. So it’s kind of one for one where you can quickly take out the 3PL OpEx out of the model, as the revenue gets adjusted or you adjust to that, revenue trajectory?

Robert B. Barnhill, Jr. – President and CEO: Its 100% variable by piece. So there is no fixed cost in that at all. Other than that key talent that we’ve already redeployed into the core.

Brian – William Blair and Company: Then you just commented on it, on the 3PL is there, there is some sort of agreement or you are taking steps that will kind of protect you from getting stock with that inventory?

Robert B. Barnhill, Jr. – President and CEO: This has been very mutually 3-2 transition we are working as partners on this transition. So inventory and receivables there is no risk there at all.

Brian – William Blair and Company: Then just kind of bigger picture on fiscal ’14. I assume we will get a better picture next quarter, but can you just give idea I guess the one way to look at it is ranking the growth profile of each of the core businesses. I mean are you the way that the year-over-year trajectory was this quarter is that indicative of what you are expecting 2014 just ranking wise, so public carriers that where you are most bullish on fiscal ’14?

Aric M. Spitulnik – VP and Controller: I’d say the public carriers and the user market, there is the user market is combined with the government market and the government market while continuing to be challenging since there is not whole lot of money in the government market right now. But the user market, we’re still pretty bullish on that just had a bit of down year after really strong year, year before but we still think there is ton an opportunity in that user space. And I think the public carrier space will continue to be strong for us as well. We’re looking at some decent growth there as well and not explosive there.

Mobile Device Releases

Steve Shaw – Sidoti & Company: Do you guys anticipate any major mobile device releases and if so any specific timetable you might have in mind?

Robert B. Barnhill, Jr. – President and CEO: The mobile devices, the device accessories will continue with that the whole sweet of charging and power devices and also the protection and carry case. So, it’s going to be more of a, not a let say a big bang if you will, but a continued introduction of new products, new packaging and new value for the retailers as well as we’re taking these products into the commercial market as well as retail, so, you will probably see more coming in through the commercial market in addition to the retail market.