Cemtrex, Inc. (CETX) Q2 2023 Earnings Call Transcript


Greetings, and welcome to the Cemtrex Second Quarter 2023 Financial Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

Before we begin the formal presentation, I would like to remind everyone that statements made on the call and webcast may include predictions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially. You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this presentation. Please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision to these forward-looking statements in light of new information or future events.

Throughout today’s discussion, we will attempt to present some important factors relating to our business that may affect our predictions. You should also review our most recent Form 10-K and Form 10-Q for a more complete discussion of these factors and other risks, particularly under the heading Risk Factors. A press release detailing these results was issued today and is available on the Investor Relations section of our company’s website, Your hosts today, Saagar Govil, Chief Executive Officer; and Paul Wyckoff, Chief Financial Officer, will present the results of operations for the second quarter ended March 31, 2023.

At this time, I will turn the conference over to Cemtrex Chief Executive Officer, Saagar Govil.

Saagar Govil

Thank you, operator, and good afternoon, everyone. I’m pleased to welcome you to today’s second quarter 2023 financial results conference call, a quarter, which we feel represents a true look into the company’s realignment and operating performance power. The second quarter of fiscal year 2023 was highlighted by a return to operating profit, driven by the sweeping efforts we have taken throughout the business. Sales execution by Vicon with multiple large orders resulted in revenue growth of 37% year-over-year.

In combination with operational improvements, the quarter led to a gross margin improvement of 1,360 basis points to 46%. We continue to expect increases in our gross margin over the next couple of quarters as we make further enhancements in Vicon’s business. Overall, operating income for the quarter increased to $0.4 million compared to an operating loss of $2.9 million a year ago. Our quarterly performance is now reflecting our shift in focus to the Vicon and Advanced Industrial Services, or AIS businesses.

With the actions we have taken to drive business improvement and the increasing demand for security solutions, we expect to achieve a full year operating profit for fiscal year 2024. We also believe that there is room within our inventory and asset base to draw extra liquidity in order to continue to maintain a healthy cash position. As a reminder, we have now modified our financial presentation into three segments: Security consisting of Vicon; Industrial Services consisting of AIS; and Cemtrex Corporate.

Year-over-year, improving revenues in our Security segment were led by Vicon with a 47% increase, driven by strong demand from customers for its award-winning roughneck cameras and Valerus video management software solutions. During the quarter, we released a new suite of AI-based analytics in an enhanced Vicon Roughneck AI Camera series, further improving our unified VMS platform for controlling video, access control, license plate recognition and other integrated applications. We view this release as the first step in our AI roadmap and ultimately believe that artificial intelligence is going to contribute massively to improving the security industry, and our product roadmap is intensely focused on leveraging these new AI tools to deliver features and benefits over the coming months and years.

Vicon orders included a recent $1.5 million order and follow-up $1.1 million order from a current large border protection customer in Texas to expand its security technology system with new security solutions. Increasing modernization of the current security infrastructure is accelerating the growth of the border security market, driven by the rise of geopolitical instabilities and an increase in border threat assessments. Another $0.8 million order for a new prison being built in the UK includes a full end-to-end system of Vicon’s surveillance products including hardware and software, equipped with the latest smart technologies to better protect prisoners, staff and public.

We see demand in the U.S and internationally from corrections facilities as a growth driver for us, as they’re increasingly focused – focusing on deploying the latest and greatest technologies. With Vicon on track to launch more products this year, as well as continued improvements to our core software platform, Valerus, we expect to drive further growth. We believe revenues for Vicon Industries based on our current demand, will exceed our earlier expectations of $28 million for fiscal year 2023, given, the growing demand for our products and solutions. Additionally, we see further opportunity to grow our gross margin percent in fiscal year 2024.

Revenue for our Industrial Services segment, AIS, increased 23% during the quarter, mainly due to increase demand for our services. We believe AIS will continue to expand revenue and may exceed our original 3% target of $21.8 million for fiscal year 2023, driven by continued strength in the Industrial Services market. The gross profit margin for AIS improved to 36% for the quarter compared to 29% for prior – for the year prior driven by increased prices and lower subcontractor costs. The gross margin percent is expected to maintain or exceed approximately 34% for the fiscal year 2023 for AIS.

Looking ahead, we believe that continued reshoring of manufacturing to the United States as well as investments in infrastructure here will play a key role in a AI’s long-term growth.

I’ll now turn over the call to Paul Wyckoff, our CFO to discuss the financials.

Paul Wyckoff

Thank you, Saagar. Revenue for the three months ended March 31, 2023 and 2022 was $16.1 million and $11.7 million respectively, an increase of 37%. This increase is mainly due to increased demand for the company’s products and services. The Security segment revenues for the three months ended March 31, 2023 increased by 47% to $9.9 million. The Security segment increased was due to an increased demand for security technology products under the Vicon brand.

The Industrial Services segment revenues for the quarter increased by 23% to $6.2 million, mainly due to increased demand for the Industrial Services products under the advanced Industrial Services brand.

Gross profit for the second quarter of 2023 was $7.3 million or 46% of revenues as compared to a gross profit of $3.8 million or 32% of revenues for the same period a year ago, mainly attributed to increased pricing and lower subcontractor costs.

Total operating expenses for the three months ended March 31, 2023 were $6.9 million compared to $6.7 million in the prior year’s quarter. The increase was due to an increase in research and development expenses for the period.

Operating income for the second quarter of 2023 was $0.4 million as compared to an operating loss of $2.9 million for the second quarter of 2022. The increase was primarily due to an increase in gross profits for the period.

Net loss for the quarter ended March 31, 2023, was $0.6 million as compared to a net loss of $4.7 million in 2022. Net loss decreased in the second quarter is compared to the same period last year, primarily due to the higher revenues and higher gross profits.

Cash and cash equivalent totaled $6.6 million at March 31, 2023 as compared to $9.9 million at September 30, 2022. Inventories increased $8.6 million at March 31, 2023 from $8.5 million at September 30, 2022.

I will now turn the call back to Saagar for a review of our 2023 outlook.

Saagar Govil

Thank you, Paul. In summary, with approximately $6.6 million in cash, our restructuring complete revenue growth, increasing margins, operating income improvement, and reduction in expenses, we believe we are well positioned to execute on our roadmap. With achieving a critical milestone of operating profit for the quarter, we are optimistic for the year ahead and the ability to achieve a full year positive operating income by fiscal year 2024, while driving attractive top line growth.

We look forward to providing additional updates in the months to come as we accelerate our efforts to build long-term value for our shareholders. I look forward to providing our shareholders with further updates throughout 2023. I thank you all for attending.

And now I would like to open it up for questions. Operator?

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from Jason Kolbert with Dawson James. Please proceed with your question.

Jason Kolbert

Hi, guys. Congratulations on the numbers, they look really good. What was the principal driver behind the growth at Vicon? Was it technology? Is it that your reputation is now you’ve met a couple of orders and you’re seeing reorders? Help me understand the dynamics of that and what it means for the rest of the year.

Saagar Govil

Yes. So it’s a good question. So I appreciate that. So I think it’s a combination of a lot of things working in sync with us. We think about it as kind of like a flywheel. So we have obviously a solid reputation. We are building on that reputation. As we get more in orders, we execute on them well, and we continue to build confidence with our customers. And that’s where we’re getting this repeat business. Naturally, the Vicon brand has been around. So we have a reputation in the market for delivering these kinds of mission-critical applications, such as corrections and border protection. It’s also just the environment. Frankly, we’re seeing the need for security to be ever present. And so there is just genuine interest in beefing up security. We have conversations every day with facilities where they’re just not doing enough on the security side and they think it’s time that they start implementing more and more the technology that’s out there, modernizing their infrastructure, right?

The CCTV has been around for decades, but a lot of facilities more than you’d expect to have pretty legacy infrastructure in place. So a lot of it is really about modernizing and bringing it up to speed. And there is no time like the present because there’s really novel technologies out there that we offer that companies can start to address even with our Roughneck AI Cameras, with license plate recognition, things like that. So there’s a lot of opportunity for upgrades and so forth.

And so because of the legacy installed base, being able to upsell into newer platforms, all of that contributes to our ability to continue to maintain those relationships, to build confidence, continue to move legacy systems into modern deployment, right, to continue to accelerate their growth. And we see that well into the future. There will be no shortage of those kinds of opportunities to really grow our business for the next several years.

Jason Kolbert

How important is AI? And competitively, what gives you the edge versus others that are going to be working to catch up?

Saagar Govil

So the reality is that in the industry, a lot of these AI tools are off-the-shelf. And many companies deploy them, but they deploy them poorly. One of the things that we take pride on is our software package, Valerus, is considered one of the easiest to use product in the market. So you can give customers tools, but if they don’t use it, it’s of no value, right? And so you generate sales by creating value for your customers. And I think we pride ourselves as an organization on being able to give these tools in a way that allows people to use them easily, deploy them quickly, get them up and running, and that’s really a critical part of the strategy and how we’re going to have to compete as we go forward.

So a lot of these tools, many of them start out as open source and then they get trained on specific data. I think the other side of it is having access to unique datasets, and we’re continuing to build a strategy that gives us that ability. So I think on a number of fronts, it’s going to be a competitive space, but I think we’re in the very early innings of what’s possible with AI, and it’s a huge, huge opportunity in front of us in terms of the scope and the potential to capitalize on that.

Jason Kolbert

And my last question has to do with the industrial side of the business. How are you managing the growth on that side? And help me understand kind of how you’re going to manage the growth of the company given the fact that you have these two very different divisions, both of which seem to be firing on all cylinders right now.

Saagar Govil

Well, we actually have a really fantastic team at AIS with our leadership team there and the managers underneath. So it’s a well-established business. It is firing on all cylinders and they’re continuing to find opportunities in the market to grow the business. So the truth is that Vicon and AIS operate completely independently and it works quite well. At the corporate level, we’re pretty lean from that perspective. And we empower our management teams to run the businesses effectively, right? And so the competencies around the nuances specific to each business, a lot of that is done at the management level and we delegate all over that.

So we don’t see that as an issue in terms of continuing to drive growth. In fact, I would say that in the last two years, we have a new management team in there, and they’ve demonstrated enormous ability to run the company well and continue to find areas of growth. And we’re optimistic that’ll continue going forward. And we’ll exceed probably our earlier expectations around growth. And then we also supplement that with acquisitions, right? So a lot of – we’ve managed a lot of acquisitions over the years, and I think that’ll be another area where we’ll be able to leverage a lot of value to that team and continue to scale the business. So I see opportunity there as well.

Jason Kolbert

Thank you so much. Congratulations on the quarter.

Saagar Govil

Yes. Thanks.


Thank you. Our next question is from Allan [ph] Rosenthal with Scarlett Knight Capital. Please proceed with your question.

Unidentified Analyst

Gentlemen, excellent quarter, fabulous work. Two questions. I’ll ask them both and then just listen to the response. The first one is, I think Title 42 ends tonight at midnight. How do you see that affecting Vicon’s business one way or the other, if at all? That’s first. And then the second question is in the Vicon business, given the new suite of products and solutions that were released over the last several months, can you talk a little bit about the margins in the business on that side of the business? And I’ll go back on mute and listen.

Saagar Govil

Sure. Thanks for the questions, Allan. So regarding Title 42, naturally we’ve gotten some big orders, as we said earlier, and as we communicated to the Street in the border vertical, it seems like Title 42 being vacated will have enormous ramifications or ensuing chaos is maybe the way to put it lightly. And so there’s clearly tremendous opportunity and now I can’t speak to specifically what the folks down there are thinking, but it sounds like a pretty chaotic situation.

And if things get – continue to get worse, that could drive more business for us. There’s no doubt about that. Naturally, we don’t want bad things to happen, but we are insecurity and our job is to provide the best solutions to address the needs of the border and to the customers that we provide our services to. So there’s certainly opportunity there. Ultimately, I think, it’ll be interesting to see how it plays out, but yes, there’s – as things get worse, there’s always a growing need for security. There’s no question about that. And then could you remind me about the second question?

Unidentified Analyst

Yes, I – it was regarding the fact that you had released the new suite of products and solutions, the AI cameras and so on. And just if you could speak a little bit to the margins you see in that business going forward, especially as it continues to grow, see an expansion and so on, what your thoughts for us?

Saagar Govil

Sure. Yes. So with respect to gross margins, software is going to become more larger part of our revenue as we go forward. And so, our perspective is that – as that continues to scale, and we sell more and more software that’ll continue to help move margin, gross margins up. And so we see that as over the next, in looking into fiscal year 2024, that there’ll be further opportunity to drive expansion there from that perspective. So, really it’s a combination of that. There’s also further opportunity from just logistical costs and so forth, infrastructure providing more, managing that side of the business in terms of shipping costs. So we see opportunity on both of us fronts. But I think as we continue to develop software solutions, specifically AI driven software solutions, there’ll be margin expansion as software becomes a bigger and bigger part of our overall revenue share.

Unidentified Analyst

Thank you. That’s great. I appreciate a great quarter. Looking forward to the next one.

Saagar Govil

Thanks. Any other questions?


Thank you. There are no further questions at this time, I would like to turn the call back over to Mr. Govil for any closing comments.

Saagar Govil

Thank you, operator. We would like to thank each of you for joining our earnings conference call today and look forward to continuing to update you on our progress and growth. If we were unable to answer any questions today, please feel free to reach out to our IR firm and regroup [ph] who’d be more than happy to facilitate or response. Thank you and have a good evening.


This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.