Q1 2024 Earnings Summary
- Significant growth in space-related revenues: The company is working closely with major players like Amazon on satellite projects and is building relationships with others like SpaceX. Space-related revenues grew from $4.5 million in 2023 to a projected $7 million in 2024, with potential to double in 2025. This growth is expected to have a positive impact on gross margins due to higher-margin products.
- Emerging opportunities in AI applications: BELFA is starting to receive orders related to AI from both compute and networking sectors. With products suited for high-power, high-density applications required in AI, and strong relationships with wafer scale chip manufacturers, the company expects steady growth in AI-related revenues, with more significant increases in 2025 over 2024 and beyond.
- Revamped European sales force leading to new opportunities: The company has strengthened its European sales team, resulting in new large opportunities, including three fuse opportunities over $1 million each, with confidence in capturing at least two. Their European business is performing above market in Q1, indicating potential for accelerated growth in this region.
- Continued Weakness in the Magnetics Segment: Bel Fuse's Magnetics Solutions group experienced a 62% decrease in sales in Q1 2024 compared to Q1 2023, primarily due to lower shipments to a large networking customer as they work through existing inventory. This decline began in Q2 2023, worsened in Q4 2023, and is expected to persist into Q2 2024. Additionally, the company is not seeing the typical seasonal pickup from Q1 to Q2 in the Magnetics business due to depressed demand.
- Inventory Corrections Affecting Consumer and Networking Products: The company is facing challenges with inventory corrections in the consumer and networking markets, particularly impacting the Magnetics and Power segments. Inventory issues are significant in the consumer from CDI product group and products used in networking and consumer applications. Recovery from these inventory corrections is expected to be slow, affecting near-term sales.
- Delayed Impact from Growth Initiatives in Space, AI, and eMobility Markets: While Bel Fuse is optimistic about growth opportunities in space, AI, and eMobility, these areas are not expected to contribute significantly to revenue in the near term. For example, sales into space applications are projected to be $7 million for the full year of 2024, up from $4.5 million in 2023, which is still a small portion of overall sales. The AI market contribution is anticipated to become more meaningful in 2025 and beyond, and the eMobility products are expected to be market-ready in 2025, facing similar challenges as the broader EV market. This delayed contribution may not offset current weaknesses in other segments.
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Gross Margin Outlook
Q: How will gross margins change as sales recover?
A: Management expects gross margin to be influenced by product mix. Recovery in Magnetics, a lower gross margin business, will compress overall margins but contribute positively to operating profit and EBITDA. They have guided to 34% to 36% gross margin at current levels, and any increase in revenue should provide operational leverage, potentially improving margins. -
AI and Space Growth Opportunities
Q: Can you elaborate on growth in AI and space sectors?
A: Bel Fuse is working closely with major players in space, including Amazon's satellite projects, and aims to build relationships with others like SpaceX. In AI, they focus on networking players and emerging compute customers, providing high power density solutions essential for AI applications. They see exciting opportunities ahead but note that the big cloud giants are less of a focus due to commoditization. -
Inventory Destocking Outlook
Q: How is the inventory destocking situation progressing?
A: Management observed that inventory levels may have hit rock bottom in February. Key distributors in Europe suggest that inventory should normalize by the end of the fourth quarter, though improvement will be gradual and varied across products and customers. -
Share Buyback Program
Q: What is the expected pace of the share buyback program?
A: The company aims to complete the $25 million buyback program by the end of 2024. They have repurchased approximately $11 million so far. The pace may vary depending on market conditions and stock price, but the expectation is to be largely through the program this year. -
Recovery in Magnetics Business
Q: When will comparisons get easier after sales decline in networking?
A: The sharp decline in Magnetics began in Q2 of '23, worsening in Q4 with the most recent drop-off in November '23. Similar conditions are expected in Q2 of '24. Comparisons should get easier starting in the back half of the year as they lap over prior declines. -
Electric Vehicle Investment Update
Q: Any updates on the electric investment amid EV weaknesses?
A: The electric investment is on track, targeting product readiness in 2025. While facing similar challenges as the overall EV market in 2024, ongoing developments should position them well for market recovery. -
European Sales Initiatives
Q: How are the revamped European sales efforts progressing?
A: The new European sales director, with strong distribution relationships, has led to new opportunities, including three fuse projects over $1 million each. While sales cycles are long, the European business performed above market in Q1, and the team is excited about future prospects. -
Space Market Revenue Outlook
Q: What's the revenue opportunity in the space market over three years?
A: The space business is growing quickly with increased funding and satellite deployments. Revenue grew from $2–3 million historically to $4.5 million in 2023, projecting around $7 million this year. Doubling revenue by 2025 is possible, with further growth driven by targeted marketing and expanding customer reach. -
Gross Margin in Space Business
Q: Are new space orders at higher margins?
A: The space business has always had strong margins, and growth in this area will positively impact the overall gross margin mix. Management is keen to expand in this high-margin segment. -
Timing of AI Opportunity
Q: When will the AI opportunity impact results?
A: The company expects a steady climb in AI-related business, with more meaningful percentage growth in 2025 and beyond. They have started seeing orders in Q1 and Q2 of 2024 but are cautious about overestimating short-term revenue. -
Seasonal Pickup Post-Chinese New Year
Q: Is seasonal pickup after Chinese New Year still a factor?
A: Typically, there is a seasonal pickup after Q1, but this year it's less pronounced due to depressed Magnetics business. They are not seeing the usual increase from Q1 to Q2 within Magnetics, though there is a slight uptick. -
Factors Affecting Buyback Pace
Q: What factors influence the buyback pace?
A: The buyback pace depends on various factors, including the stock price relative to perceived value, market conditions, and cash position. Management believes the stock price undervalues the company and adjusts the buyback accordingly. -
Inventory Correction by Product Group
Q: Which product areas will see inventory correction sooner?
A: Inventory correction timing varies by product and customer. Military aerospace through distributors remains strong, while consumer-related products like Magnetics are more impacted by inventory issues. The Kinetic group, circuit protection, and power solutions are areas where problems persist. -
Breakdown of Space Revenue
Q: How much of the space revenue is from production orders?
A: The $2 million shipped in the first quarter is a mix of small runs and some production orders. The majority are small runs, but they expect larger runs starting in Q3 and Q4 as they ramp up and diversify customers.