Robert Palle - CEO Eric Skolnik - CFO Steven Shea - Chairman of the Board

Greetings and welcome to the Blonder Tongue Laboratories' Fourth Quarter and Year End 2017 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Bob Palle. Thank you. You may begin.

Good morning and welcome to Blonder Tongue's fourth quarter and year end 2017 financial reporting teleconference. Before we begin this morning with any details of performance, I'd like to preface my remarks and those made by other Blonder Tongue representatives, who may be speaking today, by reminding you that we will be discussing certain subjects, which will contain forward-looking statements, including management's view of our prospects and evolving trends in the marketplace. As you know, the future is impossible to predict, so I caution you that actual results may differ from those that maybe projected in our comments this morning. I would ask you that you refer to our prior SEC filings, our Form 10-Q for the third quarter 2017, prior quarters, and 10-Ks for years 2017 and 2016 for additional information concerning factors that could cause actual results to differ from the information that will be discussed this morning. With me today are Eric Skolnik, Blonder Tongue's Chief Financial Officer; and Steve Shea, Chairman of the Board. All of us will be available to answer any questions you may have following our presentations. First, the essence of the fourth quarter press release comments bear repeating. While we are generally satisfied with the full year 2017 performance and especially the fourth quarter 2017 performance, we remain concerned about the first half of 2018. However, we anticipate the performance in the second half of 2018 should recover to 2017 levels. During the last investor conference call in November, we provided an update on the progress of the newly introduced NeXgen Gateway, NXG product line. Today, we are pleased to report the following progress. NXG systems are presently in laboratory testing at two mid-sized MSOs. The test results so far have been very positive and are on track. The third operator placed its first NXG order for approximately $50,000. This first order should be both delivered and installed later this month. Also we plan to be in laboratory testing phase in several additional MSOs during the second quarter. We anticipate the successful laboratory test will lead to increasing NXG order activity in the latter half of 2018. Now, I would like to turn the call over to Eric Skolnik, company’s Chief Financial Officer and following, Eric, we will have an open question-and-answer session. Eric?

Thank you, Bob. Net sales increased $121,000 or 2.2% to $5,570,000 for the fourth quarter 2017 from $5,449,000 for the comparable period in 2016. Net income for the three months ended December 31, 2017 was $256,000 or $0.03 per share compared to a loss of $338,000 or $0.04 loss per share for the comparable period in 2016. For the year ended December 31st, net sales increased $777,000 or 3.5% to $23,283,000 million in 2017 from $22,506,000 in 2016. The net loss for the year ended December 31, 2017 was a loss of $384,000 or a loss of $0.05 per share compared to a loss of $1,195,000 or loss of $0.16 per share for the comparable period in 2016. The increase in net sales is primarily attributable to an increase in sales of data products offset in part by a decrease in sales of digital video headend products, analogue video headend products and contract manufactured products. Sales of data products were $6,942,000 and $2,701,000. Sales of digital video headend products were $9,438,000 and $11,777,000. Sales of analogue video headend products were $1,819,000 and $2,317,000 and sales of contract manufactured products were $840,000 and $1,176,000 in 2017 and 2016 respectively. The increase in sales of data products in 2017 is primarily attributable to an increased level of purchases by one customer. The Company has experienced and expects to continue to experience a shift in product mix from analog products to digital products. Now, I would like to turn the call over to our Q&A session.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question is from Dale Norton [ph], a private investor. Please go ahead.

I have several questions related to the upcoming transaction on your sale and leaseback. As you are shifting from depreciation to a rental expense, you indicated in your prior release approximately what that is. How is that going to breakdown roughly on the cost of goods in the various SG&A, G&A and R&D costs? Any guidance on that?

Well, the depreciation on the building is currently in G&A as -- and the interest expense of course is below the line on our debt. So, it would basically just be a re-shifting I guess I should say, from those components to more of a lease payments perspective.

Okay, so the lease then goes into that’s going to be roughly in the G&A.

Correct.

Replacing that depreciate -- okay. Second thing, it appears from the statement that you folks are going to be retiring the term. Yet you’ve been amortizing expenses in fees. Are you anticipating in the second quarter that you’re going to have to amortize the remainder of those fees as well?

Yes, in fact, yes, if something them would have to go away, depends on whether or not we still have a revolving facility or not, we'd kind of be…

No, I fully understand that, Eric. I suspect that that’s still a large enough cost that it might be worth at least identifying what that is at some point. Finally, in the past, it’s not really been an important question, but as you folks are certainly gaining viability and looking for a rather positive outlook. Could you give us a feel for what capital expenditures is likely to be over this next year, and what you’re kind of thinking about where that goes, and then R&D spending as well?

Right now, I think both would similar.

Okay, around 200 -- no, it's 136, 138 for CapEx last year?

Yes, so we would expect it to be probably similar. But anyway 160, 130 -- as we think it’s going to be similar, but we reserve the right to make investments where we think it’s appropriate. If something comes up, we believe important, okay.

Oh, of course, the budget is….

Right now, today, we don’t have any plans to -- we don’t -- I am sorry, I cut you off, sorry.

No, no. I appreciate where you are headed. I've done your kind of stuff. Any -- even positive -- I am sensing that without having senior manufacturing facility that you folks are largely an assembler and the kind of cost that you would associate with producing printed circuits boards, you are not going to have. But I will ask the question, are there any possibilities that a diligence effort might identify environmental costs associated with building? And then I’ve got one more question after this please.

I don't know what -- can you tell me approximately where you’re headed with the environmental front?

Yes -- no -- well, the environmental, I was with the Company that had a clean background itself but stuff leased in from another company and they ended up having all kinds of remediation costs and I am just wondering to what extent EPA and the folks like that have given you guys a clean bill of help through the years?

We haven’t in the past had anything that of significance that’s been identified.

Okay, that’s fine, yes.

But we -- but obviously, normal due diligence stuff has to occur of course between now and the time that transaction closes.

No, to the extent that this happens, the last time, I looked your book value of the facility, we don’t know. The only thing that I saw was the gross was about 3.1 million and I am wondering what you anticipate the after-tax gain on that sale is going to be.

Well, after-tax gain remains to be chained just to make -- because we’re not sure exactly what it will close. But we would anticipate of course that we would be a significant cash event of course as a result of doing the transaction.

Yes, yes, okay. Already, well. I should leave the room for somebody else. Thank you very much.

We appreciate your call. Thank you.

[Operator Instructions] We do have another question here from Gregory Urbin [ph] also a private investor. Please go ahead.

Could you elaborate at all on what you anticipate over the next few months regarding sales of both the data and the headend products?

Well, you mean, are you suggesting that whether we forecast whether it’s going to be up or down or?

Right, right.

Or are you trying to get me to nail a number or something, I am a little confused so.

Well, look by subtraction, it looks over a quarter or compared to quarter three that in both of those categories sales were rather flat or essentially…

We had projected them to be flat.

Right.

I think and also, as I remember, as I recall, right.

Right, and given the uncertainty, we’ll take that as a positive for now. Given that you've had a cash flow positive and EPS positive for the fourth quarter.

Correct.

I noticed that for the year, there was no mentioned of the HFC distribution cost. Are those or revenues those are pretty much staying the same across quarters?

Yes. That is correct. It wasn't a significant change from the year -- from 2016 to 2017 with regards to those products.

Right, and I guess getting back to my initial question about the -- you showed, evidently, have some concern about revenue for the first half of the year whether that applies primarily to data or to the headend products even that you had a substantial one -- as you said, one customer contributed primarily to the increase in revenue from the data products?

Okay, so what we see is our largest customers having growing things, and their installed pace has slowed, and they have inventory and they will slow down some in the first half.

And is that a data?

I'm sorry I know it sounds like I stopped and I'm really wasn't done. Their contract pace, their inbound is just as rapid as it has always has been here recently. And so after they work office inventory, we think things will return in the latter half of the year.

Well, I take it, and that's been what they tell you. They're expecting a rebound.

No, that's not what I said. What I said was their inbound contract pace has just as favorable as it has always been, but their install pace slowed. And they have inventory and they have to work off that inventory with their install pace picking up.

Okay.

Is that clear now?

That's clear. And so we're having an installed problem?

Not a problem, it's just -- they haven't growing pains. They're just having trouble coming up the ramp, so it's -- they purchased a lot of stuff and now they have inventory they have to work off. So, it's not uncommon in this business for people who get a little bit of ahead of themselves.

Okay. Well, I think I've digested that. On the last time we've talked about the NeXgen product. And if I remember correctly, we didn't have all the modules ready to go for that. What's the -- is that a fully developed product now?

We'll probably be developing on this product line for three to four, five years at least that's our hope as we roll it out. And we're going to ship full system here this month, so you can't do that without having all the modules.

When -- I know it's early -- probably early to project, but when do you think that the rollout of the NeXgen product might?

We're starting right -- it's starting right now. Was I not clear in my remarks?

Right, I understand it's starting. But by the end of the year, you expect it will be in six figures with that product in sales?

I hope so, but that's our plan.

Okay.

Yes that will be our plan, so that's we're counting on. But we can't predict the future, but we're doing very, very well in our tests and the laboratory test. And we've actually made a sale and we're going to install it later this month

That's all good, going back to the sale of the facility. Is that on track? And you have any idea when that might close?

Well, it is on track and Eric can share with you the details that we know.

Well, it's -- there is a due diligence period. So, we have to wait for that to be finished and then they have time after due diligence period to close. So, we would expect it to be done sometime, if everything went well but I like the second -- excuse me, the first half of June.

All right, that sounds good. And sterling is on board with all this?

Yes, sir.

And from reading the K, you’re trying to keep the revolver alive with that?

That is correct, yes.

That won’t require total renegotiate -- a total renegotiation with them?

That is correct.

Okay, that’s good. Well, I hope we can do that. And finally, assuming that the sale goes through without a hitch, what do you expect to have as a net, let’s call it a net profit or a net gain from the after taxes?

I’m not really prepared to discuss that at this point. I think we’ll have to wait until the second quarter.

Okay. Alright well good luck in the interim.

Thank you.

Thank you. Thanks for hanging in there with us.

And we do have a follow-up question here from Dale Norton. Please go ahead.

Okay, sorry I had a couple of more here. One is kind of a handholding question. As I ran through the K with the discussion, is there any public source of industry information and perhaps numbers that I might get into? My real background lies elsewhere and I need to have my handheld to understand what you guys are up to? Yes, market information or a discussion, industry information something like that?

Well, I guess, if I was in your position, the type of information that I will go get is all the big players. I would look at CISCO. I would look at ARRIS, A-R-R-I-S. They're both public companies. They dominate the share of equipment supply in this area and in this genre. And I also would look at our key competitors, ATX is private, but I guess you can’t find out much there, ATX networks. But then Vecima is public, they’re both Canadian companies. So you have to multiply everything by 0.7 or whatever. But those are two of our key competitors that we’re in the second. Vecima is a public company. So you get this much history by looking at their stuff as looking at our stuff goes back a long way.

Would you please spell that last name for me?

V as in victor, E as in echo, C-I-M-A.

Okay, one other question here and then I’ll not bother you anymore today. As I was looking at your inventory, it appears that your numbers continue to come down and the non-current inventory continues to drop. Number one, what’s in there? Number two, how much better in terms of your various turn do you expect to get certainly relative to your revenues? You figured turns are going to continue to improve in the categories or you’re about done particularly with the whip?

Yes, we would expect that the inventory turns will continue to improve. Your first quarter was what is in the long-term inventory, the long-term inventory represents inventory that is not expected to be sold or used with the next 12 months net of any reserves that maybe appropriate.

Okay, well that’s in the K, I understand that but is there a particularly category that what is it going to be raw materials or things along the lines of PCPs or the finished goods that are out, I don’t know?

No, it’s a mixture of -- again, it’s a pretty formula based type of calculation. That’s not necessarily dominated by any one type of category or another.

Okay, thank you for your patience with me.

Thank you. There are no further questions in the queue. I'd like to turn the floor back over to management now for any closing comments.

Thank you very much for your patience and your participation. And have a great day and we will talk to you at the next call.

This does conclude today's teleconference. Thank you again for your participation. You may disconnect your lines at this time.