2023-06-13 19:11:17 ET
Summary
- The company shipped over 10,000 radios in Q1 which allowed it to boost its gross profit margin to 26.1%.
- In my view, BKTI could be back in the black by the end of 2023 thanks to decreasing materials costs as well as the high-margin BKR 9000 radios.
- The first shipment of BKR 9000s was made in early June and this product should start to have some positive impact on the gross margin in Q4.
- In my view, revenues for the full year could surpass $80 million.
Introduction
I've written three articles on SA about communications equipment maker BK Technologies ( BKTI ), the latest of which was in March when I said that the Q4 2022 results fell short of my expectations and the balance sheet was in a rough shape.
BKTI’s revenues increased significantly in Q1 2023 thanks to significantly increased radio shipments but the company remained in the red. Yet, I expect BKTI to get in the black by the end of the year as the company recently announced the first shipments of its high-margin BKR 9000 multi-band radio. In my view, the company has a good chance to improve gross margins to 35% by the end of 2023. Let’s review.
Overview of the recent developments
In case you're not familiar with BKTI, here's a short description of the business. The company is involved in the design and production of portable and mobile radios, repeaters, and base stations for public safety professionals and government agencies in the USA and some of its main clients are the United States Armed Forces, the U.S. Department of Agriculture Forest Service, and the U.S. Department of Interior. The main product of BKTI is the BKR 5000 portable radio and the company also has a SaaS business unit that focuses on public safety smartphone apps. The latter has developed a Push-To-Talk over Cellular (PTToC) service named InteropONE which enables universal interoperability for first responders in the public safety sector. In Q1 2023, the company received its first order for InteropONE from a large public safety agency in the USA. BKTI has a 54,000 square feet manufacturing facility in West Melbourne, Florida, which has a production capacity of around 10,000 radios per quarter. It aims to produce between 8,000 and 10,000 radios per quarter for 2023, with total shipments of the year of 32,000 to 36,000 radios (see slide 9 here ). The major U.S. competitor of the company is Motorola Solutions ( MSI ) which holds well over half of the U.S. land mobile radio (LMR) market.
In Q1 2023, BKTI shipped a total of 10,001 radios thanks to expanded manufacturing capabilities and this allowed it to boost its gross profit margin to 26.1%.
Yet, the margins are still far from the Q4 2021 levels due to cost inflation, and I’m concerned that the gross margin of BKR 5000 could remain below 30% in Q2 2023. Looking at the Q1 2023 financial results, BKTI remained in the red despite revenues soaring by 184.3% year on year to $18.7 million. SG&A expenses rose by 19.7% to $5.9 million due to increased spending for the introduction of the BKR 9000 multi-band radio as well as a one-time expense for attending the International Wireless Communications Expo (IWCE) trade show.
BKR 9000 is a new and improved version of BKR 5000 which has been delayed several times. According to discussions on RadioReference , it was initially supposed to be released in April or May 2021.
Well, on June 5, BKTI announced that it received approval for BKR 9000 from the Federal Communications Commission (FCC) and on June 7, the company said that it completed the first shipment of this product. Considering BKR 9000 has the same unit costs as BKR 5000, but its average selling price is about two times higher according to BKTI's Q4 2022 earnings call , I’m optimistic that the company could be back in the black by the end of 2023. BKTI said during its Q1 2023 earnings call that higher cost parts and components in 2022 were almost exhausted, and I think that BKR 9000 should enable it to boost its gross profit margin above 35% by Q4 as well as achieve its goal of reaching $100 million in revenues by 2025. According to the company’s Q1 2023 earnings call, the number of BKR 9000s that are expected to be shipped this year is not large, but this product should start to have some positive impact on the gross margin in the last quarter of the year. In my view, it’s possible that 2023 revenues surpass $80 million. Overall, I think that this could be a strong year for BKTI thanks to lower materials costs as well as the launch of BKR 9000 and that the company could post a positive annual net income for the first time since 2020.
I rate BKTI as a speculative buy as I think there are several major risks for the bull case at the moment. I’m concerned about the falling order backlog as well as the company’s balance sheet. You see, the backlog of unshipped customer orders came down by $4.1 million quarter on quarter to $22.9 million at the end of March. The net debt, in turn, climbed to $4.6 million in March from $4.5 million in December and BKTI finished Q1 2023 with just $2.8 million in cash. The working capital was down by $0.8 million quarter on quarter to $12.5 million. In my view, any production issues or shipment delays related to BKR 9000 could lead to significant stock dilution as liquidity runs out.
In March 2023, BKTI carried out a 1-for-5 reverse share split which could be a sign that an equity offering is coming soon. At the moment, the company has an at-the-market (ATM) offering agreement with ThinkEquity under which it can offer to sell up to 4,225,352 shares up to an aggregate offering price of $15 million.
Investor takeaway
BKTI had a solid start to 2023 as radio shipments and margins improved, and I expect Q2 to be even better thanks to decreasing materials costs. In addition, the company’s BKR 9000 radios have finally been launched and this paves the way for further revenue growth and margin improvement starting around the last quarter of 2023. In my view, BKTI could become profitable by the end of the year, and this is likely to be a significant catalyst for the share price. That being said, my rating on the stock is speculative buy due to concerns about the falling backlog and weak balance sheet.
For further details see:
BK Technologies: Margins Are Improving And BKR 9000 Shipments Begin (Rating Upgrade)