Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Revenue and EPS exceeded the high end of guidance, with revenue totaling $604 million and EPS at $1.51.
- Orders in the second quarter were up 9% sequentially, marking the third consecutive quarter of orders growth.
- Trailing 12-month free cash flow was strong at $234 million, allowing for reinvestment in high-return opportunities.
- Acquisition of Precision Optical Technologies enhances product capabilities in the broadband market.
- Gross profit margins increased by 10 basis points to 38.2%, despite lower volume.
Negative Points
- Second quarter revenue decreased 13% year-over-year, with a 13% organic decline.
- Net income was $62 million, down from $82 million in the prior-year period.
- EBITDA margins decreased by 130 basis points to 16.5%.
- Revenue in the industrial automation solutions segment was down 12% compared to the prior year.
- Revenue in the enterprise solutions segment was down 13% compared to the prior year.
Q & A Highlights
Q: First, I wanted to ask about the smart buildings order increase. That was a bit surprising to me, that strength, and perhaps it's just my memory that's fading as to whether that's a normal seasonal dynamic or whether that's -- we should interpret that as a cyclical sort of upturn in demand.
A: Yeah. Well, good morning, Will. I think we expected smart buildings to have a good booking scorer, given all the work that's been initiated on our core verticals that we've talked about. Non-commercial real estate vertical markets that really are seeing activity as part of infrastructure development, that includes healthcare, hospitality, data centers, et cetera. So we expected bookings to increase sequentially. Yeah, this is a little better than our expectations. I think part of it is just that our business is gaining share in that whole area because of improving product mix, more fiber, more solutions approach as we go and talk to customers. We've seen, for example, more customers in our CICs in Q2, talking about more smart buildings type of applications than we've seen previously, right. So if you remember, it's been more industrial in nature, our solutions approach and it's shifting, or it's -- we are adding smart buildings applications to that whole approach. So that's also helped. So yeah, I think it's a mix of all of those things and we feel good that it's going to continue in that same direction.
Q: The next, you sort of touched on it already, but I'm hoping you can update us on traction in the CICs. Maybe you can talk about things like your traffic close rates which have been very strong in the past, pricing strategies that you see there working for you, and that would be really helpful. Thank you.
A: Yeah. So I think we've talked about last year on a full year basis we did about 60 to 65 major validation visits, what we call, proofs of concept visits at our CICs across the world. We also brought on stream more capacity because we inaugurated CICs in Bangalore in India, and in Shanghai. So all of that added up. And we think we can do something like 250 to 300 real high-quality validation visits. We are tracking somewhere in that, about half of that rate right now, right? So in the first full year of capacity, that's where we are tracking. So it is an increase over what we did last year. I think it's fairly significant. Obviously, there is still a little bit of uncertainty, especially in European markets, so we see projects coming in for discussion that are still kind of more long-term. So it does impact close rates as such as we measure for the next 12 months. So I think the pipeline increase is more than the increase in close rates, obviously, that's improving too. And then pricing, I think in general, if you see our gross margins have continued to be, as expected, slightly better in spite of volumes being down, that's essentially driven by solutions mix. And so I think while I don't want to call out pricing per se, it's a combination of mix and pricing, but that is obviously working well for us. So overall, I would say that our investments in the CICs have proven to be fairly successful. Our pipeline has expanded a lot. Our close rates are expanding and I think pricing is holding up as expected.
Q: Just wondering how you're thinking about the EBITDA contribution as the top-line expands. And I guess if we think about similar revenue levels, should we anticipate similar margin there, or how much expansion could we expect just kind of given the structural changes that you've had in the business?
A: Yeah. Hey, David, this is Jeremy. So the framework that we've given in the past has been that as we grow organically, we would expect incremental EBITDA margins of about 30% on the incremental revenue. I think that framework still holds going forward. So I would use that as your guideline for modeling. The way that works out, by the way, is from an EBITDA margin expansion standpoint, if you grow mid-single digits, you get maybe 60 basis points of EBITDA margin improvement, I guess, for every mid-single digit growth in revenue.
Q: When you think about the July quarter and what you've seen there, are you seeing customers that are still enthusiastic about their orders or maybe incrementally more positive, or are you seeing any caution? We're hearing that there is a bit of caution at least in ordering patterns. I'm just curious if that's what you're seeing as well, or if there's anything, any puts and takes around that bookings? Thank you.
A: Yeah. Let me start here with maybe a couple of qualitative remarks, and then Jeremy can add to that. So clearly, there is still -- the destocking has not finished, right? There is still some left. I think we've seen like that point of inflection where things have started becoming incrementally better. And when we talk to customers now, there is more confidence about projects that are planned over the next 6 months to 12 months, there is more discussion about specifics, timelines, et cetera. So that tells us that at the end user level there is increased confidence, and I think that's especially true in the Americas, right, we are seeing that. I think we continue to see a little bit of that destocking playing out in EMEA, especially in Germany, where it's more OEM machine builder type of markets that focus on exporting that equipment. So there are flavors, but yeah, I think there is still caution. So you're right about that.
Q: Just curious, like how this positions as the macro environment kind of starts to maybe improve over the next 12 months to 18 months. I mean, it puts you in a really good position. It sounds like still on track for that. And any update kind of where you are on that path would be great.
A: Yeah. No, absolutely. So I think, Rob, in the medium term, we feel really good about all the drivers that impact our businesses. I think at a very general level, first, anything that is impacted by legacy networks or data complexity, or shortage of skilled labor or expensive capital is a good place for us to go and talk about our solutions, right. And that's, as you can imagine, is happening pretty much across the board in the vertical markets where we focus. So whether that's in healthcare, or whether that's in material handling or warehouse management, et cetera, it's all -- the dynamics are similar, right? So -- and then if you add to that the acceleration caused by the reindustrialization, especially in the American context, I think that's certainly very helpful for our business. So the way I think about this is that we've spent a lot of time over the last three, four years building out that capability, especially in our more industrial-focused markets. Over the last 12 months, we've brought that approach also to our enterprise markets. Now the last 12 months were a little quiet in terms of growth. As Jeremy
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
