Boxlight Corporation (BOXL) on Q3 2022 Results - Earnings Call Transcript
Operator: Thank you and welcome to the Boxlight Third Quarter 2022 Earnings Conference Call. By now, everyone should have access to the press release issued this afternoon. This call is being webcast and is available for replay. The remarks today will include statements that are considered forward-looking within the meaning of securities laws, including forward-looking statements about future results of operations, business strategies and plans, customer relationships, market trends and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on managementâs current knowledge and expectations as of today and are subject to certain risks and uncertainties that may cause the actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties are contained in the companyâs most recent Form 10-K, Form 10-Q and other reports filed with the SEC. The company undertakes no obligation to update any forward-looking statements. On this call, management will refer to non-GAAP measures that, when used in combination with GAAP results, provide additional analytical tools to understand the companyâs operations. The company has provided reconciliations to the most directly comparable names in the earnings press release, which will be posted on the Investor Relations section of the companyâs website at boxlight.com. And with that, Iâll hand the call over to Boxlightâs Chairman and Chief Executive Officer, Michael Pope.
Michael Pope: Hello, everyone and thank you for joining. Also on the call are Mark Starkey, our President; and Greg Wiggins, our Chief Financial Officer. Mark is joining us from London, and Greg and I are joining from our corporate office here in Atlanta. The third quarter was our strongest to date with $69 million in revenue and $10 million in adjusted EBITDA. Revenue grew by 13% and adjusted EBITDA by 38% over the same quarter last year. We have delivered double-digit or greater revenue growth for 8 consecutive quarters and continue to gain meaningful market share globally. Recent movements in foreign exchange rates have impacted our financial results, specifically the weakening of the pound and the euro against the U.S. dollar. If foreign exchange rates had held constant during the quarter, we would have reported greater than our guidance of $70 million in revenue and $10 million in adjusted EBITDA. Our gross profit margin for the third quarter improved to a record 31%, a dramatic increase over our Q1 gross margin of 25% and Q2 gross margin of 28%. The improvement was largely a result of additional decreases in supply chain and logistics costs. We expect gross profit margin greater than 30% for the fourth quarter. For both the 3 and 9 months ended September 30, for the first time as a company, we generated positive cash flows from operations. We also ended the quarter with an improved balance sheet, including $22 million in cash, $49 million in inventory and $62 million in working capital. Our debt balance as of September 30 was $59.2 million. However, subsequent to quarter end, we made a principal payment of $4.25 million, reducing our current debt balance to $55 million. We are expecting only modest growth in the fourth quarter and have revised our guidance to $48 million in revenue and $2 million in adjusted EBITDA, resulting in our full year guidance of $227 million in revenue and $18 million in adjusted EBITDA. Our full year guidance represents revenue growth of 23% and adjusted EBITDA growth of 49% over the full year 2021. Although we have experienced slowing demand in recent months, we still expect to deliver double-digit revenue growth in 2023 and significant improvement to our gross profit and adjusted EBITDA margins. We are a global company with offices across the United States, Western Europe, Canada and Australia. Today, we have nearly 300 employees and full-time contractors, including over 100 individuals in our sales organization that manage hundreds of channel partners with thousands of sales representatives across the globe. We also have over 100 employees and full-time contractors in our R&D, professional development and customer service teams that develop, deliver and support our complete lineup of hardware, software and service solutions. Earlier this year, we introduced our new generation interactive flat panels and sizes ranging from 55 inches to 98 inches under our brands Clevertouch and Mimio. Our current test screens have been our most successful solution to date with upgraded hardware and software, including Android 11, upgraded speakers, USBC inputs with hardware optimization, multi-user profiles and launch streams, our Clever software portfolio and compatibility with Google Classroom and Cloud accounts. During the third quarter, we launched our all-in-one LED video walls with sizes ranging from 120 inches to 220 inches. We also introduced our Clever hub wireless presentation system with built-in digital Chinese capability and touchscreen functionality designed for video conferences, meeting rooms, classrooms and training rooms. Our interactive and non-interactive displays, video walls and media players all come enabled with our Clever software assets, Clever Store, Clever Share and Clever Lives. Clever Stores are cloud-based app store with hundreds of vetted applications. Clever Share is our collaboration tool providing enhanced screen sharing and screen testing functionality. And Clever Live is our digital signage software platform, enabling the creation, deployment and management of content across multiple displays in any location and the ability to send out alerts and messages integrated with our front-row audio solution for campus communication. During the quarter, we also pushed significant updates to our education platforms, Lynx whiteboard and MimioConnect. Lynx Whiteboard is a cloud-based software tool that provides for whiteboarding, lesson plan creation and delivery and student collaboration across multiple platforms and devices. It is available free of cost for download on every major app store. Today, we have nearly 200,000 registered users and 25,000 monthly active users on Lynx Whiteboard that are engaging with over 100,000 monthly sessions. Our MimioConnect-blended learning platform is the most feature-rich solution on the market for its virtual and hybrid learning. During the quarter, we added several additional features, including the ability for students to add and save their own annotations and notes to instruct their lessons, teacher functionality to view student work live as well as share students work screens or notes to the front of the class display, student polling via text messages and enhanced STEM lessons with set math and science simulations. During the quarter, we launched our first pilot of MimioConnect with a large school district, and we expect meaningful monetization of the platform with several school districts beginning next year. In December of last year, we announced the acquisition of FrontRow adding robust audio and campus communication tools to our product line. We continue to integrate FrontRow solutions into our broader solutions suite and have since introduced our integrated AV campus communication system under the brand, Attention. Attention enables announcements, tells and alerts to be delivered as both audio and video simultaneously across the school. This new integration makes communicating and school campuses significantly easier, including emergency communications. We continue to receive recognition for our solutions. And during the third quarter, we earned 11 Best for Back-to-school 2022 awards from Tech & Learning. The solutions awarded include Mimio Pro 4, Clever Lives, MimioConnect MyStemKits, EOS education and attention by FrontRow. With that, I will now turn the time over to our President, Mark Starkey.
Mark Starkey: Thank you, Michael. Despite strong inflationary headwinds, record drops in the value of the euro and sterling and recession peers across EMEA, we still managed to achieve a record quarter for both revenue and profit in Q3. Before that, I must thank our employees, our customers and our investors as this performance would not have been possible without their continued support. As Michael stated earlier, we booked $44 million of orders in the quarter, which is down 14% from Q3 last year. However, on a year-to-date basis, the value of orders booked for the first 9 months of this year was $191 million compared with $179 million booked in the first 9 months of the previous year, representing 7% year-on-year growth. On a local currency basis, the growth rate is much higher as the EMEA business has been impacted by the significant devaluation of both euro and sterling. We are now forecasting more than $220 million order intake for this financial year. Our largest customer in Q3 in terms of order intake was Blue in the U.S. with $5.9 million of orders received. Our organic growth in the U.S. has been very significant, and we anticipate more than 130% growth in gross profit for the full year in the U.S. In terms of other key customers in Q3, we received $2.2 million of orders from Camera Mundi, our partner in Puerto Rico; $2.1 million from Graphics Distribution, our U.S. distribution partner; $1.6 million from Central Technologies in Tennessee; and $1.4 million from D&H Distributing. Bischoff AG in Switzerland was our largest customer in EMEA, ability placing $1.5 million of orders in the quarter. We received $1.4 million of orders from Unit DK in Denmark and $1.1 million from IDNS in the UK, to name a few. Overall, the U.S. accounted for 44% of our orders booked during Q3. The UK accounted for 26%; Europe, excluding the UK, accounting for 24%; and the rest of the world, 6%. In Q3, 67% of our revenues came from sales of interactive flat panels, both Mimio and Clevertouch, with our FrontRow audio solution accounting for 8% of revenues and 14% of gross profits. Our market share of IPDs in the U.S. increased from 5.3% in Q1 to 8.4% in Q3 according to the latest report from Futuresource. Our market share in Europe was similar and increased from 5.6% in Q1 to 6.6% in Q3. We remain in the top two IMPD providers in the UK with 14.4% market share. We continue to be in the top two brands for market share in Ireland, Australia, Austria, Sweden, Finland, Denmark, Belgium, Switzerland and South Africa. Our biggest opportunity for significant growth remains in the U.S. where we are ranked number five with an average market share of 6.6%; and Germany, where we are ranked number seven, with 4% market share. In terms of market size, the U.S. market for ISPD is estimated to be worth $2.2 billion in 2022, according to Futuresource. The market in EMEA is slightly smaller and estimates to be worth $2 billion. Overall, this gives us an addressable IFPD opportunity in our two key markets of about $4.2 billion. Given that we have single-digit market share, we believe we have plenty of room for substantial organic growth over the next few years. In terms of end users, we had another quarter of great wins across the globe. In Puerto Rico, we received orders from more than 2,000 Mimio Pro 4 screens to be supplied to schools right across the territory, and we expect to win another 3,000 screens in the imminent future for both interactive and non-interactive solutions. We also won a tender to provide more than 500 Mimio Pro 4 screens in Port Arthur, Texas. The solution included a rollout of professional development to help the school district implement the technology. In Germany, we had a fantastic tender win in Dusseldorf with a minimum requirement of 668 86-inch Impact MAC screens, but with potential for over 1,000 screens to be supplied over the next 2 years. In Switzerland, we won a project to supply 650 86-inch Clevertouch screens to the Canton of Tasino. They selected our Clevertouch solution against the competition based on the best product features. These are just a handful of the many projects that we won in Q3. We continue to grow our corporate teams in both EMEA and the U.S. and develop solutions to the problem that many enterprises are having, as they adapt to the new hybrid world working both remotely and in offices. In summary, Q3 was an outstanding quarter with record revenues and profitability. We believe we are well positioned to weather any potential downturn in market conditions due to our strong mix of K-12 business, mixed with corporate and higher education solutions. Our focus remains on growing our business in a profitable and sustainable way by increasing our market share in the key territories that we operate. With that, I will now turn the call over to our CFO, Greg Wiggins.
Greg Wiggins: Thanks, Mark, and good afternoon, everyone. I will now review our third quarter results. Revenues for the 3 months ended September 30, 2022, were $68.7 million as compared to $61 million for the 3 months ended September 30, 2021, resulting in a 12.7% increase, primarily due to the inclusion of FrontRow and increased demand for our solutions in the U.S. FrontRow revenues for the 3 months ended September 30, 2022, totaled $5.6 million or approximately 8% of our total revenues. As previously mentioned FX headwinds significantly impacted operating revenues for Q3 2022. On a constant currency basis, operating revenues increased 22% for the 3 months ended September 30, 2022. Taking a closer look at Q3 2022 revenues, EMEA revenues totaled $25.1 million or 36% of our total revenues. Americas revenues totaled $43.1 million or 63% of our total revenues, while revenues from other markets totaled $0.6 million or 1% of our total revenues. Our top 10 customers represented approximately 34% of total sales in Q3, with the single largest customer at approximately 17% and are based across a number of markets, namely the U.S., UK, Puerto Rico and other European countries. Approximately 42% of total sales are covered by the top 20 customers. In Q3 2022, hardware comprised the largest proportion of total revenues at approximately 96%, of which approximately 69% related to our flat panel displays, with the balance related to classroom audio solutions and device accessories. The balance of our total revenues are comprised of software, professional services and STEM solutions. Gross profit for the 3 months ended September 30, 2022, was $21 million as compared to $15.8 million for the 3 months ended September 30, 2021. Gross profit margin for the 3 months ended September 30, 2022, was 30.6%, which is an increase of 470 basis points over the comparable 3 months in 2021. Gross profit margin, adjusted for the net effect of acquisition-related purchase accounting, was 31.6% as compared to 27.1% as adjusted for the 3 months ended September 30, 2021. The improvement in gross profit margin in Q3 2022 compared to Q3 2021 is primarily due to higher margins associated with FrontRow products, lower manufacturing costs and continued reductions in certain freight costs. Total operating expenses for the 3 months ended September 30, 2022, were $14.6 million as compared to $12.3 million for the 3 months ended September 30, 2021. The increase primarily resulted from additional overhead costs associated with the acquired FrontRow operations, including related intangibles amortization and employee-related expenses to support the growth of our U.S. and EMEA operations. Excluding FrontRow, operating expenses decreased by $0.5 million to $11.8 million. Other expense for the 3 months ended September 30, 2022, was a net expense of $2.8 million as compared to net expense of $1.4 million for the 3 months ended September 30, 2021. The increase was primarily due to an increase in interest expense of $1.7 million associated with increased borrowings related to our credit facility; changes in derivative liabilities of $113,000; and increases in other expenses of $128,000, partially offset by a decrease in gain on settlement of debt of $600,000 from the prior year period. The company reported net income of $3.1 million for the 3 months ended September 30, 2022, as compared to net income of $729,000 for the 3 months ended September 30, 2021. Net loss attributable to common shareholders was $2.8 million and $412,000 for the 3 months ended September 30, 2022 and 2021, respectively, after deducting the fixed dividends to Series B preferred shareholders of $317,000 in both 2022 and 2021. Total comprehensive loss was $1.9 million and $1.3 million for the 3 months ended September 30, 2022 and 2021, respectively, reflecting the effect of foreign currency translation adjustments on consolidation, with the net effect in the quarter of $5 million loss and $2 million loss for the 3 months ended September 30, 2022 and 2021, respectively. Earnings per share per basic and diluted share for the 3 months ended September 30, 2022, was $0.04 and $0.03, respectively, compared to EPS per basic and diluted share of $0.01 for the 3 months ended September 30, 2021. EBITDA for the 3 months ended September 30, 2022, was $8.5 million as compared to $4.7 million EBITDA for the 3 months ended September 30, 2021. Adjusted EBITDA for the 3 months ended September 30, 2022, was $9.9 million as compared to $7.2 million for the 3 months ended September 30, 2021. Adjustments to EBITDA include stock-based compensation expense, gains losses from the remeasurement of derivative liabilities, gains losses recognized upon the settlement of certain debt instruments and the effects of purchase accounting adjustments in connection with recent acquisitions. Now turning to our results for the year-to-date period. Revenues for the 9 months ended September 30, 2022, were $179 million as compared to $141.2 million for the 9 months ended September 30, 2021, resulting in a 26.8% increase due primarily to the acquisition of FrontRow in December 2021 and increased demand for our solutions across all markets. On a constant currency basis, operating revenues increased 34% for the 9 months ended September 30, 2022, compared to the 9 months ended September 30, 2021. Gross profit for the 9 months ended September 30, 2022, was $50.5 million as compared to $37.2 million for the 9 months ended September 30, 2021. The gross profit margin was 28.2% for the 9 months ended September 30, 2022, compared to 26.3% for the 9 months ended September 30, 2021. Gross profit margin, adjusted for the net effect of acquisition-related purchase accounting, was 30% for the 9 months ended September 30, 2022, as compared to 28% as adjusted for the 9 months ended September 30, 2021. Total operating expenses for the 9 months ended September 30, 2022, were $46.6 million as compared to $34.2 million for the 9 months ended September 30, 2021. The increase primarily resulted from additional overhead costs associated with the acquired FrontRow operations in December 2021, including related intangibles amortization and employee-related expenses to support the growth of our U.S. and EMEA operations. Other expense for the 9 months ended September 30, 2022, decreased approximately $0.6 million to net expense of $5.1 million, as compared to net expense of $5.8 million for the 9 months ended September 30, 2021. The decrease was primarily due to a gain of $0.9 million recognized upon the settlement of certain debt obligations in 2022 compared to a loss of $3 million recognized upon the settlement of certain debt obligations in 2021 and a $1.7 million decrease in the fair value of derivative liabilities, partially offset by an increase in interest expense of $4.7 million associated with increased borrowings under our credit facility. The company reported a net loss of $2.7 million for the 9 months ended September 30, 2022, as compared to a net loss of $7.2 million for the 9 months ended September 30, 2021. The net loss attributable to common shareholders was $2.7 million and $7.2 million for the 9 months ended September 30, 2022 and 2021, respectively, after deducting fixed dividends to Series B preferred shareholders of $952,000 in each period and the fair value revaluation deemed contribution of $367,000 following the redemption amendment with the Series B shareholders during the 9 months ended September 30, 2021. Total comprehensive loss was $13.2 million and $8.4 million for the 9 months ended September 30, 2022 and 2021, respectively, reflecting the effect of cumulative foreign currency translation adjustments on consolidation with the net effect year-to-date of $11.4 million loss and $1.7 million loss for the 9 months ended September 30, 2022 and 2021, respectively. The earnings per share loss per basic and diluted share for the 9 months ended September 30, 2022, was $0.04 compared to a loss of $0.12 per basic and diluted share for the 9 months ended September 30, 2021. EBITDA for the 9 months ended September 30, 2022, was $12.9 million as compared to $5.2 million of EBITDA for the 9 months ended September 30, 2021. Adjusted EBITDA for the 9 months ended September 30, 2022, was $16.3 million as compared to $14.1 million for the 9 months ended September 30, 2021. Now turning to the balance sheet. At September 30, 2022, Boxlight had $22 million in cash, $62.3 million in working capital, $49.4 million in inventory, $214.5 million in total assets, $59.2 million in debt and $46.8 million in stockholdersâ equity. At September 30, 2022, Boxlight had 74.1 million common shares issued and outstanding and 3.1 million preferred shares issued and outstanding. With that, we will open up the call for questions.
Operator: Your first question is coming from Brian Kinstlinger at Alliance Global Partners. Please pose your question, your line is live.
Brian Kinstlinger: Hey, great. Thanks, guys. A nice third quarter. I wanted to start by understanding the factors that was driving the reduction in the revenue and EBITDA guidance. How much was change in demand versus change in FX? And then on the demand side, was it all Europe? Or was it also the U.S.? And if you could maybe delineate.
Mark Starkey: Mike, would you want to start with that one?
Michael Pope: Yes, I can start with that. Yes. So yes, so Q3 came in about just barely short of where we expected. That can be explained by FX, foreign exchange rates are held constant, we would have came in north of where we expected for Q3. But for Q4, youâre right, we did reduce our guidance for Q4. And of that reduction, we came up with Greg, about half of that or so that can be explained by FX. And about half of that, I would say, is a slowing of demand that weâre seeing right now, which we think may be temporary, but weâre seeing a little bit of a slowing of demand thatâs coming in via customer orders.
Brian Kinstlinger: And is that the U.S.? Is that Europe? Where are you seeing? Or is it across the board?
Michael Pope: Well, so across â a little bit across the board. I mean FX clearly is in Europe. Yes, go ahead, Mark, do you want to jump in?
Mark Starkey: Yes, was good. I think the actual number, I mean, from Q3 and Q4 from where â when we were guiding 2 50, it was $10 million on FX and then the balance of the delta was $13 million, which was both across EMEA and the U.S., probably more in EMEA than the U.S. And itâs probably â we know there is still a lot of lesser funds in the U.S., which is kind of why weâre still more confident that it could be a temporary slowdown because we know there is a lot of funds still to be spent in the U.S.
Brian Kinstlinger: Yes, yes. And then as we look to next year, I think that the Futuresource is now revised just some estimates. And so maybe the market will be down given the surge in spending youâve been really successful in gaining share since the two companies and two brands have merged. How do you think about next year, your ability to grow if the market does in fact decline? And what gives you confidence that you can continue to grow in that market, if that is the case?
Michael Pope: Yes. So, a couple of thoughts, and then Mark can pretty jump in. So, first off, as Mark mentioned, we are still a small percentage of the total market. So, here Futuresource is showing that growth in interactive flat screens is slowing and actually declining a little bit perhaps in certain markets. But because we are still a small piece of the total market, we are confident we can continue to take market share, which is most of our revenues today are from us taking market share from some of our key competitors as these technologies refresh. So, when we are looking at the next year, we are still very confident in double-digit revenue growth next year, perhaps not quite as confident as we had been before a bit of a slowdown, but still, we are confident in our ability to take market share. And I would add on top of taking market share with some of our historical technologies and solutions we have been selling. Also we have launched several new solutions, and we believe that those can contribute in a meaningful way starting next year to our revenue that will also make up some of the difference, if there continues to be a little bit of slowing of demand.
Brian Kinstlinger: Great. Two more questions. The first one is â sorry, yes, please.
Mark Starkey: Yes. I was just going to touch on it very, very quickly. I think we have got great products. And I think if we go head-to-head with our competitors on the shoe out, very often we will win. So, we know we have got great products. And our sales team, we have got a great sales team, and that is growing, right. Itâs more has been focused on building that sales team, both in the U.S. and EMEA. So, itâs now about taking market share. So, if we can take market share, we know we are going to grow.
Brian Kinstlinger: Okay. Like I said, two more questions. The first one is maybe talk about â I think you mentioned this in one of your answers to my questions. Whatâs left in terms of stimulus spend for education? I guess I am a little surprised U.S. is down if there is still lots more funds, but maybe we have eaten through a lot of that, maybe take us through where we are with that.
Michael Pope: Yes. So, there were stimulus packages that were passed across the globe. We have talked about in the past and of course, the largest was in the U.S. In the U.S., there were really three stimulus packages that were passed, starting with the CARES Act and then â and that was in March of 2020. And then, of course, the largest happened in 2021 with the Biden activity passed. But in total, those were $191 billion in the U.S. that were planned to education. Of that $191 billion, the last stimulus package was $123 billion or what we talked about SR3, right. So, SR funds 1, 2 and 3, SR3 was $123 billion. The vast majority has not been spent. In fact, I just got a report just earlier this week of a group that tracks. They survey school districts across the country, hundreds of them, and they came back with very low-double digits, like in the teens percentage of what has been spent of that $123 billion. So, I am a bit surprised actually by the future source results that show a slowing in 2023 and 2024 because there still is a lot of money to be spent. I am not surprised we are seeing a little bit of a lull now because school districts hurried up and bought a bunch of solutions as they got back to in-person learning, and they had this additional money, they went out and they bought devices and they bought interactive screens and other technologies. And I think part of the low now is just a result of when you buy a whole bunch, having a little bit of a breather. But I will say, whether Futuresource is accurate or not, there absolutely is tremendous amount of money still available to be spent in the U.S., in particular, in this Federal stimulus money. And we are actively going after school districts to be part of that solution. In fact, we have talked about in the past, in addition to us marketing to them to sell our solutions, which qualify for that Federal money, we also have an in-house grant writer and we have consultants in-house that help school districts to apply for that money and help plan to spend that money in responsible ways.
Brian Kinstlinger: Great. That is super helpful. The last question I want to sneak it in and so I have got is, if you can touch on the pricing environment, are your competitors getting more aggressive given you are gaining share and/or a potential weaker market? And then help us on the gross margin, the puts and the takes with what we are hearing from some other companies I cover that are talking about shipping container rates back to pre-COVID levels. So, those are the puts and takes, maybe talk about both of them and how you think about gross margin going forward?
Michael Pope: Yes. So, a couple of things. One, you have seen our gross profit improvement. In Q3, we came in at 31%. You will remember, Q1, we were 25%, Q2, 28%. And then also we guided to Q4, we expect to be north of 30%. And I would say going into next year, we think we can hold that north of 30% gross profit margin for some time. We are benefiting right now with higher margins on interactive displays, which we know we wonât hold on to forever. There definitely is going to be more competition on pricing. But right now, we have held our pricing high. We have had minimal discounting thatâs true across the globe, yet we benefited from lower costing both on buying our solutions, but then also, as you mentioned, freight. You talked specifically or made a comment on container costs, and you probably heard from other companies, those were back down to single digit, and we have seen those even as low as $5,000 to $6,000 coming to the West Coast. And that is a dramatic reduction from the height of well over $20,000 a container when we were shipping from China. So, we definitely have seen transportation costs come down, again, buying â the cost of buying our solutions has come down, but we have held those prices high. And I think, again, we will benefit from these higher gross profit margins even on panels, we think, through 2023. But we will start to see some pressure at some time in the near future with our competitors dropping prices. And our strategy is to be able to sell our other solutions around the panel, not just to be panel dependent. We expect to sell our software solutions, our STEM solutions, our accessories, including audio, among others. And that is whatâs going to help us to maintain high gross profit margins when we are looking out 1 year, 3 years, 5 years into the future
Brian Kinstlinger: Great. Thank you so much.
Michael Pope: Yes. Thanks Brian.
Operator: Your next question is coming from Jack Vander Aarde with Maxim Group. Please post your question. Your line is live.
Jack Vander Aarde: Okay. Great. I appreciate the update, guys. Thanks for taking my question. Michael, great to see the record gross margin and the positive GAAP EPS result despite the FX impact. I noticed that G&A, OpEx ticked down quite a bit this quarter. Is this also FX weighted, or did you guys make some structural cost cuts or reductions?
Michael Pope: Yes. It was not specifically FX related. It was a combination of a handful of things, but we have had some reductions in our costs in certain areas. And some of those are synergies of bringing some of the acquired companies that we brought in, in recent years, including FrontRow, December 31 of last year, we have had some reductions, some costs as part of gaining efficiencies across the organization. Some of those cost reductions were offset by increasing our sales team, which we have added some strategic hires. We added several additional sales reps in Germany. For example, we bolstered our enterprise team here in the U.S., among other areas. But I would say, yes, across the board, we have had some cost reductions. And the OpEx that you see for Q3, that should be indicative of what you should expect going into Q4 and at least beginning of next year.
Jack Vander Aarde: Okay. Great. Thatâs really helpful color. And then also, it sounds like gross margins you expect to remain strong next year as well. So, thatâs good. Maybe just a quick housekeeping question that you normally provide ending back orders. I didnât catch on the press release, do you have that number on hand?
Michael Pope: Yes. So, back orders are currently around $20 million at the end of Q3.
Jack Vander Aarde: Okay. Got it.
Michael Pope: Yes. Jack, we didnât add it to the end. I think we were still trying to reconcile a couple of numbers when we â when you it. So, through that reconciliation, we didnât. We likely will add that back next quarter and put that in the press release and in our talk track.
Jack Vander Aarde: Okay. Yes. No worries. Obviously, itâs a tough economic environment. We are seeing it from everywhere. I see the customer orders decreased for the first time in quite some time. But just given your positive outlook expectations for, I think you said double-digit revenue growth in 2023 and you expect improved margins, do you still expect improved profitability as well, or I donât know, any indication on the profitability and cash flow line for 2023?
Michael Pope: Yes. So, we havenât provided specific guidance to that. But I think you could arrive at an estimation and you could do that by â I think double-digit revenue growth next year is our expectation. Now, thatâs going to be on the lower side considering the current environment, but you can tack on double-digit revenue growth. And then also gross profit margins because they have improved, we are expecting that to continue into next year. And so if you tack on 30% or greater gross profit margin in next year, and then as we mentioned, operating expenses, it should be relatively flat. Yes, you are going to see substantially improved profitability and that ought to be absolutely north of 10% adjusted EBITDA, but we are â our 10% adjusted EBITDA margin, but we havenât guided to a specific number.
Jack Vander Aarde: Okay. Great. And then maybe just one more question for me. Since we are coming up on the anniversary of the FrontRow acquisition, I think I see you did $5.6 million of revenue this quarter. Just how is the business? How has FrontRow performed relative to your expectations kind of at the time of the acquisition? And then has FrontRow recently also experienced a similar decline in customer order demand and how do you expect that business to look next year?
Michael Pope: Yes. So, the demand for FrontRow solutions has actually declined by more than the rest of our business. And I think that was a result of post-COVID, a lot of school districts went out and they bought audio solutions. And I think there is a bit of a lull now because a lot of the audio demand was gobbled up pretty quickly, and we are kind of in this low period. But that being said, our outlook is very positive when you are looking out the next several years, and there is a couple of reasons for that. One, we are still working with our broader partner network to sell audio and a lot of those partners had not sold audio in the past. There is a lot of opportunity there, and thatâs across the U.S. and Europe and globally. I think also most of the sales from FrontRow, the vast majority, well over 90%, have been in the U.S. and we see an opportunity to sell FrontRow more globally, and we will start to see that happen. But then also, we talked about more recently that we have added more and more integrations of the FrontRow audio solutions, the campus communication solutions, into our broader solution suite, specifically our interactive flat panels and displays as well as our new media hub among others. And those integrations, we believe, are going to result in us being able to broaden the market demand for that combined solution or that integrated solution. And so that story is resonating quite well out in the channel, and we expect it to see growth. And also, if you look at our largest competitor in the audio space, they are well over double our size, and they are an audio-only company. And so we are quite confident that we can start to take market share from that competitor among others. And so again, if you are looking into next year, we are definitely going to see growth as well as into future years.
Jack Vander Aarde: Great. Thatâs helpful color. And I actually have one more question, just back to your comments, Michael, in the prepared remarks. You mentioned something about, I think a debt repayment subsequent to quarter end. Can you just review that again with me?
Michael Pope: Yes. Happy to. Yes. So, we â per our loan agreement with White Hawk, we had an $8.5 million figure that was to be paid by February of next year, end of February. So, we early paid half of that $8 million â or $8.5 million. So, we paid $4.25 million. We made that payment last week. And we made it early because we had excess cash on the balance sheet, and we figured we would save some interest. And so the additional $4.25 million payment, we will make honored before February, but likely by the end of this year, we will make that additional payment again in an effort to save some. A note that, as I mentioned in our earlier messages and you can see in our financial statements, we generated positive cash flow from operations, both for the third quarter and for the nine months ended September 30. And so we are generating positive cash flow. We expect that to happen going into the future. And we are going to be in a position to be able to continue to pay down debt as needed or have cash for other initiatives.
Jack Vander Aarde: Okay. Excellent. I appreciate the color there. Thatâs good news to hear. I will hop back in the queue. Thanks.
Michael Pope: Thanks Jack.
Operator: There appear to be no further questions in queue at this time. I would now like to turn the floor back over to Michael Pope for any closing remarks.
End of Q&A:
Michael Pope: Great. Well, thank you everyone for your support and for joining us today on our third quarter 2022 conference call. We look forward to speaking to you again in March when we report our 2022 full year results.
Operator: Thank you, ladies and gentlemen. This does conclude todayâs conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.
