2023-03-28 02:59:15 ET
Summary
- The company booked sales of $20.3 million and an operating loss of $1.57 million in Q4 which was below my expectations.
- The high-margin BKR 9000 multi-band radio still hasn’t been launched and cash and cash equivalents stood at just $1.92 million as of December.
- BK Technologies recently announced a reverse stock split and I think there could be significant stock dilution coming over the next few months.
- While I continue to think that BKR 9000 could be a game-changer due to its strong margins, I prefer to sit on the sidelines for the time being.
Introduction
In January, I wrote an article on SA about U.S. communications equipment company BK Technologies (BKTI) in which I said that it's likely to return to profitability in the near future and that the launch of the next-generation BKR 9000 multi-band radio seemed to be just around the corner.
Well, BK Technologies recently released its Q4 2022 results , and I think they were underwhelming. In addition, the BKR 9000 still isn’t on the market and the company has just announced a reverse share split, which is often followed by a share offering. In my view, BK Technologies has been underperforming lately and I’m cutting my rating on BKTI stock to neutral. Let’s review.
Overview of the Q4 2022 financial results
In case you haven't read any of my previous articles about BK Technologies, here's a quick description of the business. The company specializes in the manufacturing and sale of portable and mobile radios, repeaters, and base stations for public safety professionals and government agencies and its brands include BK Radio and RELM. Some of the key clients include the United States Armed Forces, the U.S. Department of Agriculture Forest Service, and the U.S. Department of Interior. In 2022, the U.S. Government accounted for some 38% of the sales of BK Technologies (see page 5 here ). Perhaps the most recognizable product of the company is the BKR 5000 single-band, VHF portable radio.
BK Technologies also has a Software as a Service business unit, which focuses on a Push-To-Talk over Cellular (PTToC) service named InteropONE. The latter enables universal interoperability for first responders in the public safety sector. According to the company, there’s a potential market opportunity worth about $150 million.
BK Technologies had a total of 148 employees as of December 2022, most of which were located at its manufacturing facility in the city of West Melbourne, Florida (see page 6 here ). Just over half of the employees are engaged in direct manufacturing or manufacturing support. The USA accounted for almost 97% of sales in 2022 and the main competitor of BK Technologies is Motorola Solutions (NYSE: MSI ) which is estimated to hold well over half of the U.S. land mobile radio (LMR) market.
Turning our attention to the Q4 2022 financial results, I was expecting revenues of about $25 million considering BK Technologies delivered a record 11,200 radios during the period. This is almost half of the amount of radios delivered for the entire year.
In addition, supply chain issues experienced in Q1 and Q2 were in the rearview mirror, and I was optimistic that the company could be in the black for Q4. Disappointingly, sales came in at $20.3 million while the gross margin declined to just 22%. BK Technologies blamed increased material, component and freight costs for the low margins and it seems it was unable to pass on cost inflation to customers. In addition, it appears that the economies of scale are inconsequential.
There was a one-time inventory adjustment of $0.25 million for components related to the BKR product line as well as write-off of $0.65 million of new product development components not included in final design of BKR 9000 multi-band radio. Yet, even when we account for these one-time expenses, the company is still in the red for Q4.
Speaking of the next generation BKR 9000 radio, this product still hasn’t been launched on the market which I find alarming considering the initial release date was planned for April or May of 2021 according to discussion on RadioReference . The launch of BKR 9000 has been delayed several times already and according to the latest corporate presentation, this product is now expected to be released by April (see slide 6 here ).
This product is key for the growth plans of the company in terms of unit deliveries and revenues, and I’m concerned that any further delays will derail its growth plans. For 2023, BK Technologies plans to ship between 32,000 and 36,000 radio units.
The company revealed in its Q4 2022 earnings call that the average selling price of the BKR 9000 is about two times higher than BKR 5000 while the unit costs are similar. This new product is crucial for the turnaround of BK Technologies, and I’m concerned that time is running out to avoid significant stock dilution here. You see, liabilities have been piling up and cash and cash equivalents were down to just $1.92 million as of December.
I expect the cash position to be even lower at the moment due to the lack of BKR 9000 sales in Q1 2023 and I’m concerned that a recently announced 1-for-5 reverse share split could be a sign that an equity offering is coming soon to strengthen the balance sheet. I think that there could be significant stock dilution coming and I plan to sit on the sidelines until BKR 9000 is finally launched.
Investor takeaway
The Q4 2022 results of BK Technologies fell short of my expectations, and I think that the balance sheet of the company is in a rough shape. The BKR 9000 radio still hasn’t been launched, which puts BK Technologies in a tough position from a financial point of view. This company is still on my watchlist, and I continue to think that BKR 9000 could be a game-changer due to its strong margins, but I prefer to sit on the sidelines for the time being as there could be significant stock dilution coming over the next few months. I’m switching my stance to neutral.
For further details see:
BK Technologies: Underwhelming Q4 Results And I'm Neutral Now (Rating Downgrade)