George Melas

George Melis from MKH Management asked about the development of Research Solutions' relationship with the 'long tail' of publishers concerning AI rights deals, their reactions, and potential hurdles to implementing new functionalities and services that benefit both parties. He also inquired about any current impact on revenue from 'RightsDel' (AI rights at the individual article level) and whether new B2B customers are meaningfully embracing the new API/AI model.

Answer

President and CEO Roy W. Olivier reiterated that the long tail of publishers has been their sweet spot for a decade. Chief Strategy Officer Josh Nicholson stated that the AI discussion is opening relationships with new publishers, including some larger ones and previous holdouts. Publishers are receptive because Research Solutions is publisher-neutral, has already processed their articles (no upfront cost), and offers infrastructure for monitoring, authentication, and tracking AI usage, which helps them address subscription challenges and demonstrate product value. Josh Nicholson noted that while it's too early to quantify the revenue impact from RightsDel, the company is exploring new revenue opportunities through subscriptions with AI access. He confirmed that new B2B customers are embracing the API model, with API pricing floors significantly higher than average contract prices, and the sales process is more straightforward due to easier testing and clear value proposition.

George Melis inquired about the development of relationships with 'long tail' publishers regarding AI rights deals, their reactions, and potential hurdles. He also asked about the current revenue impact of 'RightsDel' and if new B2B customers are meaningfully embracing the new API/AI model.

Answer

Roy W. Olivier, President and CEO, noted that the 'long tail' of publishers has been their sweet spot for a decade. Josh Nicholson, Chief Strategy Officer, confirmed active discussions with publishers of all sizes, emphasizing Research Solutions' publisher-neutral position, existing content processing, and infrastructure for AI usage tracking and authentication, which helps publishers navigate new challenges and potentially drives new revenue. He stated that RightsDel's revenue impact is still small but gaining traction, and that new API pricing has a significantly higher floor than average contracts, with new B2B customers embracing the API/AI model due to its straightforward testing and clear value proposition, leading to larger invoices.

George Melas inquired about any unusual factors impacting the adjusted gross margin of 7.9% in the quarter, the company's path to achieving net income breakeven by the June quarter, the ramp-up pace of the consignment program, the future growth prospects and restructuring of the Mexico facility, and the specific impact of the $1.2 million quarterly savings from the China wind-down on the P&L.

Answer

President and CEO Brett Larsen and CFO Tony Voorhees attributed the sequential drop in adjusted gross margin to program transfers, holiday production losses, and slight mix changes, emphasizing the need for increased sales volume. Larsen reaffirmed the expectation of reaching breakeven by fiscal year-end, noting the consignment program's gradual ramp-up due to equipment procurement and weather impacts, which is expected to boost both revenue and gross margin percentage. Larsen expressed optimism for Mexico's growth due to increased competitiveness from efficiency improvements and automation, with no further headcount reductions planned. Voorhees clarified that the $1.2 million quarterly savings from the China wind-down is a net number impacting both COGS and OpEx, with the bulk in COGS, expected to take full effect by fiscal year-end.

George Melas from MKH Management asked about unusual factors impacting the adjusted gross margin in the quarter, the company's path to achieving net income breakeven by the June quarter, the ramp-up pace of the consigned program, the outlook for growth and restructuring in Mexico, and the P&L flow-through of the $1.2 million quarterly savings from the China wind-down.

Answer

Brett Larsen, President and CEO, and Tony Voorhees, CFO of Key Tronic, addressed the adjusted gross margin, citing negative impacts from program transfers (Mississippi to Arkansas), holiday production losses, and slight mix changes. Brett Larsen reiterated the expectation of achieving net income breakeven by fiscal year-end, driven by the ramping consigned program which is expected to boost both revenue and gross margin percentage, despite a slower-than-anticipated ramp due to equipment lead times and an ice storm. Larsen discussed Mexico's restructuring, emphasizing increased efficiency and automation to become more competitive, expressing optimism for long-term growth based on recent quoting activity and customer visits. Tony Voorhees clarified that the $1.2 million quarterly savings from the China wind-down is a net number impacting both COGS and OpEx, expected to take full effect by fiscal year-end.

George Melas of MKH Management inquired about the accounting treatment of severance costs and balance sheet adjustments, and their impact on adjusted gross margin. He also asked about the revenue level needed to achieve a 10% gross margin, the drivers behind recent revenue changes, and the potential for further improvements in working capital, particularly inventory turns.

Answer

President and CEO Brett Larsen clarified that the severance was in COGS, while the $0.7M adjustment was split between OpEx and COGS. He estimated that an additional $20M in revenue could push gross margins toward 10%. Larsen attributed recent revenue declines to a significant reduction in demand from existing customers, which prompted cost-cutting measures. He also stated that Key Tronic manages over 90% of customer BOMs and is driving towards an inventory turn goal of four.

Asked for details on the new win's sourcing nature, questioned the recent reversal in the inventory reduction trend, inquired about gross margin deleveraging, and sought clarity on the reasons for withdrawing financial guidance.

Answer

The executive clarified the new win involves taking over from another outsourcer. The inventory increase was a direct result of the revenue shortfall but turns are expected to improve. The gross margin decline was due to high fixed costs on lower revenue. Guidance was withdrawn due to major uncertainties surrounding potential tariffs on goods from Mexico and China, which could cause unpredictable shifts in customer demand.

George Melas of MKH Management asked for clarification on the new energy resiliency win's sourcing, the reasons for the Q2 increase in inventory after several quarters of reduction, the dynamics of gross margin compression, and the rationale for withdrawing guidance.

Answer

President and CEO Brett Larsen stated that the new energy customer is currently outsourcing its product and was seeking a larger contract manufacturer with a global footprint. He confirmed the Q2 inventory increase was a direct result of the $15 million revenue shortfall, as components were already in transit, but expects inventory turns to improve. Larsen acknowledged that manufacturing overhead costs are largely fixed in the short term, which led to significant margin compression on lower revenue. He explained that guidance was withdrawn due to high uncertainty surrounding potential tariffs on goods from both China and Mexico, which could cause unpredictable shifts in customer demand.

Asked for clarification on the gross margin impact of the capitalized variance, plans for balance sheet improvement and debt refinancing, the status of a major power equipment customer, the potential EPS impact of delayed revenue, the sustainability of current gross margin levels, and the strategy behind CapEx spending in Vietnam.

Answer

The capitalized variance reduced Q1 gross margin by ~$0.8M and a similar impact is expected in Q2. The company is focused on reducing inventory and is actively looking to refinance debt. The power equipment customer is still a possibility for next season. The current high gross margin is supported by efficiencies and peso hedges, and the company aims to sustain it. CapEx in Vietnam is a strategic investment to build capacity ahead of expected demand from new customers migrating from China. Vietnam is expected to be ~10% of revenue by early fiscal 2026.

Inquired about the future of the company's gross margin after it exceeded 9% despite cybersecurity costs, the status of incentive compensation, the expected run-rate for SG&A and interest expense, and the new CEO's strategic focus following the recent leadership transition.

Answer

The executive stated the company's goal is to maintain a 9-10% gross margin. The current SG&A run-rate is likely low as it excludes future incentive compensation. The high interest expense is due to a recent bank amendment and is expected to decrease with Fed rate cuts or debt paydown. The new CEO's strategic focus will be on profitability and economic value-add, with no major leadership changes anticipated.

George Melas from MKH Management expressed concern regarding the continued growth in ImmuCell's inventory, particularly work-in-progress (WIP) like frozen colostrum and finished goods, and asked how the company plans to balance production levels with cash generation and overall cash management.

Answer

Timothy Fiori, CFO of ImmuCell Corporation, acknowledged the increased inventory levels, stating they are now at a more desirable state for the upcoming peak selling season. He emphasized the weekly planning process with sales and production teams to manage inventory, especially colostrum, and ensure it doesn't become excessive. Olivier te Boekhorst, President and CEO, reinforced Tim's disciplined approach to operational and financial execution.

George Melas from MKH Management inquired about ImmuCell's inventory management strategy, noting the continued growth in Work-In-Process (WIP) inventory, particularly frozen colostrum, and the record-high finished goods inventory, asking how the company plans to balance production with cash generation and management.

Answer

CFO Timothy Fiori addressed the inventory growth, stating current levels are desirable for the upcoming peak selling season and are managed through weekly planning with sales and production teams. President and CEO Olivier te Boekhorst emphasized Fiori's disciplined approach to financial and operational execution.

George Melas from MKH Management inquired about the factors contributing to the Q4 gross margin of 36.5%, which is below the historical mid-40s target, and asked about the strategy to return to over 40%. He also sought clarification on the significant increase in work-in-progress inventory and the plans for its utilization.

Answer

Michael Brigham, an executive, explained that the gross margin was impacted by a product mix shift towards the more complex Tri-Shield product, but noted this shift drives significant growth. He outlined that the path back to a 40%+ margin depends on a 2025 price increase combined with improved production yields and throughput now that contamination issues have been resolved. Regarding inventory, Brigham confirmed a buildup of colostrum resulted from production slowdowns but framed it as a strategic asset. This inventory is enabling the development of a new spray-dried, bulk product format for a different market segment, which is expected to launch in 2025 without regulatory hurdles.

George Melas inquired about the significant increase in cost of goods sold and resulting gross margin pressure compared to prior periods with similar revenue. He also asked for clarification on reduced sales and marketing expenses, the development of a new spray-dried product, and the latest status of the Re-Tain contract manufacturer's FDA inspection.

Answer

Michael Brigham (executive) attributed the gross margin decline to three main factors: costs from contamination events, lower production yields while optimizing for higher output, and a product mix shift towards the more expensive-to-produce Tri-Shield format. He explained that sales and marketing costs were down due to disciplined expense management. Brigham clarified the new product involves spray-drying colostrum into a bulk powder, a different process and format from the current concentrated capsules. Regarding Re-Tain, he confirmed the contract manufacturer's timeline to address FDA observations remains on schedule for December, with no new delays or accelerations.

Followed up on accounts receivable, asking about contract terms versus the high DSO. Also inquired about the source of new revenue growth and whether the company miscalculated by accepting new clients at lower initial gross margins.

Answer

The high DSO is driven by delays in billing (accrued revenue), which means the payment term clock hasn't started for some revenue. The majority of revenue growth came from new clients added in 2024. The company did not miscalculate on margins, as it's standard for it to take several quarters to optimize profitability for new clients.

George Melas expressed frustration with the RWS acquisition's performance and questioned the lessons learned. He also requested a specific breakdown of revenue loss from churn versus soft industrial volumes, details on the reduction in force, and the target for normalized Days Sales Outstanding (DSO).

Answer

Chairman Daniel M. Friedberg shared the frustration, attributing the problems to a small, specific part of the RWS business and early integration issues, and expressed confidence in new controls. CFO Brett Johnston broke down the $44 million annual revenue impact, attributing one-third to the mall business and splitting the rest between other attrition and temporary industrial volume loss. Johnston also stated the goal for DSOs is to return to the mid-60s, driven by better terms, faster billing, and shedding the slow-paying mall business.

George Melas of MKH Management asked about Spok's experience at the recent HIMS conference, the drivers behind the growth in professional and managed services, the status of hosted revenue, details on the two new logo wins, and whether there were any large deals in the sales pipeline.

Answer

CEO Vince Kelly described the HIMS conference as a success, with a targeted approach driving Q1 results and pipeline growth. COO Michael Wallace explained that managed services provide customers with fixed costs and Spok with ratable revenue and lower churn. CFO Calvin Rice noted that hosted revenue is separate, not yet material, and that there are large deals in the pipeline. Rice also highlighted a new business development team focused on acquiring new logos.

George Melas requested details on the progress of Spok's product roadmap in 2024 and the associated timelines. He then asked if these product advancements were the primary source of management's confidence in an anticipated increase in license sales for 2025.

Answer

CEO Vincent Kelly provided a comprehensive update on the product roadmap, highlighting the delivery of a new UI for the operator console, an enhanced Care Connect reporting package, a modernized hosting platform, and numerous updates to the Messenger product. He confirmed that these developments, combined with a growing sales pipeline and a new business development team, are the key reasons for his confidence in accelerating high-margin license sales.

George Melas of MKH Management inquired about the disappointing swimming pool sales in 2024 and the revenue opportunity and timing related to the new WinGD marine engine supply approval.

Answer

CEO Fei Chen acknowledged that 2024 pool sales were weak due to a poor sales pipeline built in 2023 but noted the pipeline has recently strengthened, expecting a recovery. For the marine market, she stated a pilot test with a WinGD licensee is underway, with results expected by the end of Q2 2025, which would precede commercial sales. She deferred providing a TAM estimate until the Q2 call.

George Melas of MKH Management asked for details on the performance of U.S. retail stores, including the variability between them, key learnings from recent openings, and how the company leverages its existing U.S. presence.

Answer

CEO Antonio Achille explained that average U.S. store sales have more than doubled to around $4 million since 2019. However, he acknowledged significant performance variability, with top stores generating over $6 million. This variance is attributed to factors like location, team quality, and assortment. Achille noted that the company has created a "retail excellence division" to standardize best practices and ensure more predictable results before accelerating new store openings.

George Melas of MKH Management asked for insight into the potential revenue mix by segment for 2019, particularly given the strong growth trajectory of the Physical Therapy (PT) business, which could approach $10 million in revenue.

Answer

Chris Romandetti, Chairman, President and CEO, responded that while not providing specific segment guidance, he anticipates a significant shift in the company's revenue composition. He projected that the mix would evolve from its previous 60% physician revenue and 40% ancillary revenue to approximately 40% physician and 60% ancillary in 2019. Romandetti highlighted that this shift is strategic, as ancillary services hold a much higher profit margin compared to the high costs associated with physician services.

George Melas from MKH asked about the total available market for the VIEW product, the challenges with the CONVERGE Pro 2 sales ramp, and the next milestones in the ongoing litigation.

Answer

CEO Zee Hakimoglu estimated the enterprise streaming market at around $500 million and noted the CP2 ramp is challenged by competition from infringers using ClearOne's patented technology. VP of Finance Narsi Narayanan added that the new platform requires significant channel training. Regarding litigation, Zee mentioned defending the patent at the patent office and a filed preliminary injunction as next steps.