Boxlight - Earnings Call - Q1 2020
May 18, 2020
Transcript
Speaker 0
Thank you and welcome to the Boxlight Full Year twenty nineteen and First Quarter twenty twenty Earnings Conference Call. By now, everyone should have access to the full year twenty nineteen earnings press release issued on May 12 and the first quarter twenty twenty press release issued on May 15. The 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, may make additional forward looking statements in response to your questions.
Forward looking statements are based on management's current knowledge and expectations as of today and are subject to certain risks and uncertainties and 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 company's most recent Form 10 Q, Form 10 ks 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 company's operations. The company has provided reconciliations to the most directly comparable GAAP financial measures in the earnings press release which will be posted on the Investor Relations section of the company's website at investors.boxlight.com.
And with that, I'll hand the call over to Boxlight's Chief Executive Officer, Michael Pope.
Speaker 1
Good morning, everyone. Thank you for joining the call. I'd like to especially thank our shareholders, partners and customers for their confidence and support during this critical time as a company. We've gone through significant transitions since our 2016 merger of Mimio and the Boxlight Group and our subsequent IPO in 2017. Since that time we have attracted a tremendous management team, assembled a global channel partner network, closed the acquisitions of Cohuba, Quizdom, EOS Education, Modern Robotics, Robo3D and MyStemKits, continued to innovate with award winning products and services, consolidated our operations and supply chain and organized our systems and accounting under one ERP system.
We are proud of our progress and I believe we are well positioned as a company for future growth. We had a slower than expected fourth quarter, but we are pleased with our progress during the first quarter. For Q1 twenty twenty, we reported that revenues increased by 15% to $5,700,000 and orders increased by 85% to $7,600,000 over the same period in 2019. Additionally, our adjusted EBITDA loss improved by 41% to $1,000,000 and our adjusted EPS improved by 51% to a loss of $08 Our CFO, Takesha Brown will provide more financial details shortly. During the quarter, we delivered on several key contracts including San Diego Unified in California, Montgomery County in Maryland, Jefferson County in Colorado, Frederick County in Maryland, and Penn Manor in Pennsylvania.
We were also selected by Shelby County Schools in Tennessee and Netherland Independent School District in Texas for our interactive displays, and by Union County Public Schools in North Carolina for our Mimio MyBot robotics coding system. During the first quarter we introduced new channel partners including JBNA as a national partner, AISIS in Texas, and CT International in Mexico. We continue to win opportunities with strong partners including TRACS, Howard Technology Solutions, CDWG, Visual Techniques, DHE Computer Systems, Central Knox, and Digital Age Technology among others. In March, we entered into an agreement with DNH Distributing, a 100 year old technology distributor with warehouses across The U. S.
And Canada. We expect this distribution relationship will allow us to better meet the needs of our reseller channel. During the quarter, we announced that Dan Lees had accepted the position as Senior Vice President of Global Sales and Marketing. With more than twenty five years of experience, Dan is an accomplished business leader with global experience in sales and marketing. He previously led Boxlight's Global Services business unit, which more than doubled in size in 02/2019.
We also appointed Ryan Lagouti as senior vice president of STEM solutions, and Brayden Moreno as director of STEM solutions. Ryan and Brayden previously led Robo three d and MyStem Kids, and now head our Global STEM Strategy. Although the education industry is experiencing a transition, our company mission and vision have not changed. We are committed to become the leader of innovative and effective educational technology solutions. We aim to improve learning and engagement in classrooms and help educators enhance student outcomes and build essential skills.
We understand that we must be nimble and flexible and innovative to meet the demands for today's evolving education requirements. Today's educational environment provides additional challenges with the COVID-nineteen crisis and the complications of distance learning and added safety concerns for students and educators. Throughout The US and many countries globally, schools have shifted to a digital learning environment for the remainder of this current school year. Although some school systems have announced they will not return to the classroom in the fall, we believe most K-twelve school systems will return with modified schedules and physical safety measures. Many will also adopt a hybrid model of both in class and distance learning.
The initial data from digital learning has been concerning, reporting widening achievement gaps, especially for underprepared and disadvantaged students. Additionally, many students do not have access to digital devices or reliable internet access. As parents and guardians return to work, distance learning also presents logistical complications with students remaining home. Educators need effective strategies, technology solutions, professional development, and training as they navigate this new environment and determine their approach to meet safety and educational needs. Our solution suite includes software tools for both in class and distance instruction.
We also offer significant professional development resources, including customized consulting, educator courses, and certifications to assist education systems in their distance learning or blended learning initiatives. We recently released a collection of multimedia resources to train K-twelve teachers on tools to deliver distance learning during closures. We offer a series of live webinars, self paced online professional development courses, and access to our team of digital learning specialists for personalized support. Since mid March, we have provided virtual professional development sessions to nearly 9,000 educators, including 1,200 for webinars, 3,800 for labs and playgrounds, nearly 1,400 for one on one coaching sessions, and nearly 2,000 for online courses. I accepted the CEO role on March 20 at an unprecedented time.
We began working from home as a company and that same week due to COVID-nineteen, which was escalating, we had reported historical operating losses and struggled with a limited balance sheet and declining stock price. As an executive team, we agreed that we were at a point where we had to make some immediate difficult decisions. That first week, we budgeted to reduce our annual operating expenses by 5,000,000 including a reduction in our annual payroll expense by over $2,000,000 or a 30% reduction in our staff. Although a difficult decision, we believe it was necessary to put us on a more conservative path to positive cash flow and profitability. The payroll reductions were largely to administrative and supportive roles and we believe our sales targets are still intact.
We also expect to raise additional debt or equity capital this year to reduce our payables, increase our inventory levels and provide a working capital buffer. The combination of our reduced operating budget, run rate sales forecast, and plans for additional investment will position us for significant financial improvement, including plans to operate on a cash flow positive basis and be financially self sufficient. We continue to commit to a diversified product mix and improving gross profit margins. During 2019, over 50% of our sales were from interactive flat panels. We expect 2020 to show a double digit dollar improvement in sales from other product categories including classroom accessories such as our MimioClarity distributed audio system, software solutions with a focus on recurring subscription revenues, STEM education solutions with training and standards based content, and professional services.
Last month we closed on the acquisition of Robo3D, a leading brand of three d printers, and MyStemKits, the largest online collection of K-twelve STEM curriculum for three d printing. In addition to three d printing solutions, our STEM education portfolio also includes our MyBot robotics and programming system, the LabDisc portable STEM lab, our MimioView document camera, and STEM specific curriculum and professional development. We expect our STEM education division will be a tremendous growth and profit center while empowering today's students with hands on learning to prepare them for beyond the classroom. We are also focused on broadening our geographic footprint with a particular focus on Europe and Latin America. Both markets grew in 2019 and we expect continued growth in our international markets in 2020.
With that, I will now turn the call over to our CFO, Takesha Brown.
Speaker 2
Thanks, Michael. I will now review our fourth quarter twenty nineteen results. Revenue for the three months ended December 3139 was $5,300,000 a decrease of $6,700,000 or 56% compared to $12,000,000 for the three months ended December 3138. The decrease is primarily attributable to 2018 revenue, including $4,600,000 of previously deferred revenue related to a large Clayton County contract. In addition, the company adopted the new revenue recognition guidance ASC Topic six zero six, which resulted in a year to date adjustment of $600,000 that was recorded in the 2019.
Gross profit for the three months ended December 3139 was $700,000 a decrease of $2,300,000 compared to $3,000,000 for the three months ended December 3138. The resulting gross margin was 12.6% for the three months ended December 3139 compared to 25.2 for the three months ended December 3138. The decline in gross profit was primarily related to the year to date revenue adjustment of 600,000.0 related to ASC Topic six zero six adoption and an increase in customs expense of 200,000.0. General and administrative expenses for the three months ended December 3139 was 3,900,000 relatively flat compared to 3.8 for the three months ended December 3138. Research and development expenses for the three months ended December 3139, was $300,000 flat compared to the three months ended December 3138.
Operating loss for the three months ended December 3139 was $3,500,000 an increase of $2,400,000 or 224% compared to $1,100,000 for the three months ended December 3138. Net loss for the three months ended December 3139 was $3,300,000 an increase of $2,700,000 or 448% compared to $600,000 for the three months ended December 3138. The resulting EPS loss for the three months ended December 3139 was $0.29 per diluted share compared to $06 per diluted share for the three months ended December 3138. The increase in net loss is primarily due to decreased revenue and an increase in operating expenses as a percentage of revenue. Adjusted EBITDA loss for the three months ended December 3139 was $3,100,000 an increase of $2,700,000 or 710% compared to $400,000 for the three months ended December 3138.
Next, our financial results for the year ended December 3139 were as follows. Revenue for the year end December 3139 was $33,000,000 a decrease of $4,800,000 or 13% compared to $37,800,000 for the year ended December 3138. Gross profit for the year ended December 3139 was $8,900,000 an increase of $200,000 compared to $8,700,000 for the year ended December 3138. The resulting gross margin was 27.1% for the year ended December 3139 compared to 22.9% for the year ended December 3138. General and administrative expenses for the year end December 3139 was $15,800,000 an increase of $800,000 or 5% compared to $15,000,000 for the year ended December 3138.
The increase was primarily driven by an increase in payroll costs. Research and development expenses for the year ended December 3139 was $1,200,000 an increase of $500,000 or 83% compared to $700,000 for the year ended December 3138. The increase in research and development expense was related to contract services for software consultants and salaries. Operating loss for the year ended December 3139 was $8,100,000 an increase of $1,100,000 or 15% compared to $7,000,000 for the year ended December 3138. Net loss for the year ended December 3139 was $9,400,000 an increase of $2,200,000 or 31% compared to $7,200,000 for the year ended December 3138.
The resulting EPS loss for the year ended December 3139 was $0.88 per diluted share compared to $0.72 per diluted share for the year ended December 3138. The increase in net loss was primarily due to decreased revenue, increase in operating expense as a percentage of revenue and increase in interest expense. Adjusted EBITDA loss for the year ended December 3139 was $5,900,000 an increase of $2,000,000 or 49% compared to $3,900,000 for the year ended December 3138. Our financial results for the three months ended 03/31/2020 were as follows. Revenue for the three months ended 03/31/2020 was $5,700,000 an increase of $700,000 or 15% compared to $5,000,000 for the three months ended March 3139.
The revenue growth reflects increased volume related to U. S. Panel sales. Gross profit for the three months ended 03/31/2020 was $1,600,000 a decrease of 100,000 compared to $1,700,000 for the three months ended March 3139. The resulting gross margin was 27.8% for the three months ended 03/31/2020 compared to 33.4 for the three months ended March 3139.
The decrease in gross profit was primarily driven by customized pricing on competitive bids for flat panels. General and administrative expenses for the three months ended 03/31/2020 was $3,900,000 relatively flat compared to $3,800,000 for the three months ended March 3139. Research and development expenses for the three months ended 03/31/2020 was 300,000.0, an increase of 100,000.0 or 34% compared to 200,000.0 for the three months ended March 3139. The increase is related to contract services for software consultants. Operating loss for the three months ended 03/31/2020 was $2,700,000 an increase of $400,000 or 14% compared to 2,300,000 for the three months ended March 3139.
Net loss for the three months ended 03/31/2020 was 1,900,000.0 a decrease of $2,700,000 or 58% compared to $4,600,000 for the three months ended March 3139. The resulting EPS loss for the three months ended 03/31/2020 was $0.16 per diluted share compared to $0.45 per diluted share for the three months ended March 3139. The decrease in the net loss was primarily due to increased revenue, a decrease in operating expense as a percent of revenue, change in fair value of derivative liabilities and gain on settlement of outstanding debt. Adjusted EBITDA loss for the three months ended 03/31/2020 was $1,000,000 a decrease of $800,000 or 41% compared to $1,800,000 for the three months ended March 3139. With that we'll open up the call for questions.
Speaker 0
Thank you. The floor is now open for questions. If you do have a question please press star then one on your telephone keypad to join the queue. And our first question we take from Brian Kinstlinger with Alliance Global Partners. Please go ahead.
Speaker 3
Great. Got a bunch. I'll ask a few and then I'll get back in the queue. Historically, your tech has been for the classroom, like you said. In your portfolio of technology, where are you seeing the most demand given the move to iLearning?
Speaker 1
That's a good question, Brian. I think initially my response would be that we think there's still going be a large demand for in classroom technology. We don't think that that demand is going to slow much. You know, we're expecting when schools go back in the fall, which we think the majority will, although, you know, we're watching the data like everybody, that there's gonna be a place for the classroom. However, there will be added distance and digital learning.
And so there's an added opportunity there to provide additional tools. And we're absolutely looking at that. And there's really two areas. Number one is software. Schools need software that's gonna work for both in classroom and at home.
And so we have software that works in that manner, but we're actually developing additional software that we hope to launch in the near future that will provide additional tools. And then secondly, there needs to be a tremendous amount of training and professional development. You know, educators aren't they're not currently trained on how to work in this environment, and they need education themselves on how to be successful in this new environment. And we have a lot of tools around that that we can help educators starting at the school district level put a plan in place for distance or hybrid learning in class and out of class, as well as training individual teachers on how to be effective in their classrooms.
Speaker 4
Great.
Speaker 3
And then you really didn't say how COVID-nineteen is impacting revenue. You said that your goals are still the same. But have you seen pressure on orders or even shipments on past orders from late March to May? What have the trends been like? And should we expect that 2020, like many other companies, are going to be a challenge to grow revenue year over year?
Speaker 1
Yeah, so we're still figuring that ourselves, Brian, right? We're seeing what's happening and we're monitoring on a daily basis what's happening in the education community. We do think there's going be some slowdown. We haven't quantified it at this point, but we think that there will be some slowdown in industry, and then I think also for us as a company. But I don't think it'll be dramatic.
You know, I think we're looking at probably flat line, you know, versus last year is our preliminary assessment. But we hope to put out some more guidance as time goes on. I would add there's still a lot of money out there for EdTech, right? Budgets generally haven't shrunk. And there's actually been new funding, too, that's come from the federal government and other sources to help provide additional assistance with the current environment.
There has been a shifting in what solutions schools are buying, and that, to some extent, does affect us, right? Our largest piece of sales come from interactive flat panels. And if schools are looking at more distance learning tools, then funds may be diverted from, you know, classroom specific technologies to technologies that work over a distance environment. So we're monitoring that. But I would say for the year probably some slow, but we don't believe it will be dramatic.
Can
Speaker 3
you just still comment on what order and or revenue has looked like from late March to May? I mean most companies have commented on the pressure they've seen. Maybe you can talk about those trends that you've seen in the short term.
Speaker 1
Yes. So I would say for our business it's a little bit different than if we were, say, a consumer products company or something, right, where the order comes in immediately. You know our sales cycle is a long sales cycle. And so as a result of having a longer sales cycle, we actually didn't see a dramatic slowdown when COVID-nineteen first hit because we had a lot of orders in the works, and we've still been shipping orders. And so I would say we haven't seen a dramatic slowdown yet, but we think that that could kick in over the next few months.
So I would say we're still on pace as of now. I would say flat with last year as of now. But the future is going to be more telling to us over the next several weeks and couple of months.
Speaker 3
Great. And then I get your mix can change the gross profit percentage in dollars dramatically. But can you talk about with your cuts what overhead looks like so we can see what kind of gross profit gets you to profitability?
Speaker 1
Yes. So what we mentioned on the commentary was that our operating budget over 2019, which, you know, you can pull OpEx expenses from 'nineteen, we reduced our OpEx expenses by about $5,000,000 in our budget. So, you know, if you take that and reduce it by $5,000,000 that gives you a baseline there. And then that includes payroll. We reduced payroll by about $2,000 in annual expense.
Then as far as gross profit, we'll expect to be at 30% plus for the year. That's our figure. Know, we mentioned that last year. And we hope that we can start to grow that. But the expectation even though Q1 came in below that, the expectation for the year that we would be minimum 30% gross profit margin.
Speaker 3
Great. Last question I have for now, although it's a long time ago it seems, you mentioned the year over year numbers for revenue in the December were down because of a strong 2018. But if I recall, you were expecting significant growth and growth to accelerate over the course of 2019 that didn't materialize and some of that may have been New York City that you thought would be a big driver. So without commenting year over year on what happened in the fourth quarter, the numbers were so much lower than I think you guys were voicing a long time ago.
Speaker 1
Yes. So yes, I would say Q4 was definitely slower than expected. We had a large pipeline that we thought that we would close a much bigger sales figure, and it didn't happen the way we thought. I would say we were probably a little over aggressive too on our forecast for Q4. And some of that was related to us having such a strong Q4 in 2018.
But when you look at it with hindsight, you know, I think it's maybe not as bad as at first glance. And I would point to a couple things. Number one, our orders. If you look at orders for Q4 'nineteen versus Q4 'eighteen they were flat. So you know, of course the orders come in prior to delivery, but that's an indicator.
And I think the other thing that's interesting to note is that we began Q4 of 'eighteen you'll remember, Brian, back then that we had a large deferred revenue number. It was actually $5,700,000 that we began Q4 of 'eighteen with. And then we also began Q4 of 'eighteen with 4,000,000 of back orders. We had about $10,000,000 in the hopper going into Q4 versus going into Q4 'nineteen we had about 2,000,000. So we had kind of a slower start.
So I think some of it was just over optimism by management, and that's not something we plan to repeat. And then some of it was the fact that we thought that we were going to close some larger opportunities that did not close in the timeframe we expected.
Speaker 3
Great, thanks so much.
Speaker 1
Great questions. Thank you Brian.
Speaker 0
Next we go to John Nobile with Taglich Brothers. Please go ahead.
Speaker 4
Hi, good morning Mike and Takesha and thanks for taking my questions on this call. I just wanted, I know you were speaking about, you know, in light of all the school closures going to online learning, you're looking to really boost your software in this area and in class training. But you have a Boxlight Together program. So I just wanted to get some clarification on that. I think it's offered for free, but my question really is, is it possible to monetize that program, your Boxlight Together program?
Speaker 1
The answer is yes. So we offer free resources absolutely to get school districts and principals and educators in the door and give them some initial training, right, and some initial content. But the goal would be to then convert those to longer term and high value, high margin professional development customers. So that's the plan with that. You know, I should say twofold.
It wasn't the only plan, right? So one plan was hey, we really wanted to give back to the education community, so we provided that campaign for that. But secondarily, yes, we want to convert those into revenue paying school districts.
Speaker 4
Okay. And I don't know if I need to bring this up or not. I think it was the assumption that the Clarity start up issues were going to be not really an issue. But I just wanted to make sure that those that it adversely impacted your 2019 results. I remember the last conference call that was brought up as far as those startup issues.
But are those clarity issues behind you now? Or are there anything else that might be lingering in regard to that?
Speaker 1
Yeah, a good question, John. So we still had some additional issues with getting Clarity fully launched. We are delivering Clarity now, but we have had some slowdowns in the manufacturing process, which are a result of COVID-nineteen. Those are getting finalized as we speak, and we think we'll be at a point where we can fully go out and market and sell that solution next quarter. So it's been a little disappointing.
It's a great solution. In fact, we think it can compete with any other solution in the marketplace and it fulfills a real need. But it's been a little bit frustrating the fact that it's taken us longer than expected to get that launched and fully operational.
Speaker 4
Okay. Well, thanks for that information. And I know at least last I checked there were robust growth projections for the educational robot market. I was hoping that you could talk a little about your business in that market since your acquisition of Modern Robotics in 2019 and your outlook for 2020. And I preface that by saying not just 2020 but beyond, assuming that school systems return to normalcy in the near term by the fall, things are back.
Like you had mentioned earlier, a lot of kids are going back to the actual schools themselves and not learning from home. So I was hoping just to get your take on that, how the Modern Robotics acquisition might play into your 2019 and I mean, me, 2020 and beyond numbers.
Speaker 1
Yeah. So the answer is it absolutely will play into. You know, we've talked a lot about STEM education and they're needing to be a provider of a comprehensive STEM solution, and we aim to be that provider. And you'll see that we've continued to invest in STEM, right? Robotics and programming is one of those areas within STEM, but you also saw that we recently bought Robo3D in My STEM Kits company, which comes with a three d printing solution, which is another foundational technology for STEM education.
And then also we appointed Ryan Ligouti as the head of our STEM solution. And so Ryan, he's been on the job for about a month, he hasn't been there very long. But he's working on a more comprehensive solution offering for STEM education. He's going to lead us over the next several months to make sure that we can see some tremendous growth with STEM solutions. But back on the MyBot, absolutely our MyBot solution is part of that, and we think that there can be tremendous adoption.
I would say for last year it was a little slower than expected ramping up. Some of that was making sure that we had the marketing right. Some of that was making sure we had content and lesson plans that were tied to standards, that kind of thing. But we've made a lot of improvement there to where we have a solution that's more fully baked now. And we have a great team and some added salespeople that are STEM specific out there selling.
And so I think that the next couple quarters you're gonna see growth and we'll start to eat into that large market for robotics and programming.
Speaker 4
Okay, and in regard to the Robo3D and MyStemKit acquisition, I was just curious because I know in the press release it wasn't mentioned as far as the type of revenue that might have been generated. So I don't know if I should be of the assumption that it wasn't really that significant in 2019. Or do you have those actual numbers for 2019 from these two companies?
Speaker 1
So we didn't report that. But I'll tell you trailing twelve months for the two companies was about $1,000,000 in revenue. So it wasn't substantial, but it was significant, $1.5 in three d printing to education is significant. And they were selling through a lot of our same channel partners that we sell through, like Trox and, you know, Howard and some of these names that we mentioned before. So there was an easy tie in there.
And then also the idea that that team that was selling successfully three d printing solutions could also sell our broader STEM suite, which of course includes, like I said, the robotics solution, but also our LabDisc and our MimioView and some other items. I think that's an easy progression to have them sell a broader STEM solution suite. So I would think that the added solution suite with additional resources from our company, you know, would show that over the next twelve months hopefully we're significantly higher than that 1,000,000 point dollars that that team was generating.
Speaker 4
Okay, well that's good to hear. Thanks for that input. Just one final question, I'll open it up for others. One of the press releases, you said that you would be supplying an additional 150 panels to the Nederland, Texas school system by 2023. I was hoping you could comment on how much revenue you expect that to generate and if you believe that that could lead to more box flight technology being used in that district given, I think it was mentioned, dollars 151,000,000 bond passed to further the So use of new I'm just curious, you know, what you're seeing from that school district in regard to this.
Speaker 1
Yeah, I think the important question there is what additional opportunities we could see, of course, in that school district, but all of the school districts that we step into, right? We're not always going in with a fully comprehensive solution for every single classroom in the district. Sometimes it's a slower rollout, or it may be pilot, or it may be a smaller subset. And I would say the answer is in every case if we start with just a handful of panels, our goal is to go in and try to put panels in every classroom, but also absolutely we're talking about professional development and we're talking about STEM solutions and we're talking about other accessories like our audio distribution system and others. And so the answer is I believe there's opportunity there.
I don't have an exact revenue figure for that. I don't think Takesha would either. We'd have to pull that for you. But I would say that there absolutely is an opportunity to grow that. And if you wanted to do some rough math, revenue per panel is going to be a couple thousand dollars per panel.
So you can multiply that times the number of panels we mentioned in the press release.
Speaker 4
Okay. I appreciate that input. I'll open it up for others, McHugh.
Speaker 0
Next we go to Allen Klee with National Securities. Please go ahead.
Speaker 5
Yes, hello. You mentioned that you have back orders of $7,600,000 Can you remind us of when you have back orders, is there a rule of thumb for how long it takes for that to get recognized as revenue?
Speaker 2
Typically our I'm sorry, this is Takesha. Typically with our back orders, they usually turn pretty quickly in the quarter depending on the availability of inventory. And one of the things that Mike mentioned is that we're in a pretty good place now. We haven't had any issues with getting our inventory in from China due to the COVID. So that's working on our behalf.
So pretty much the majority of what's in our backlog should turn within the quarter.
Speaker 5
Thank you. And then my the only other question I have is can you would we expect seasonality upon among quarters to be what it's been historically or because of what we're going through to think of it maybe a little differently this year?
Speaker 2
Think the base of it I'm sorry. I think the base of it would pretty much be the same. However, as mentioned earlier, we may see some slowing in Q2, because of the change in the schools trying to figure out what they're going to do and how they're going to prepare, for the fall. So you may see a slight decline in the second quarter, but then hopefully ramping back up in third and fourth. So maybe fourth is a little higher than anticipated and Q2 is a little bit lower.
Q3 and Q4 may be a little bit higher and Q2 a little lower for this year. I don't know if I
Speaker 5
can give
Speaker 4
you anything
Speaker 1
add to that. Okay. Yes. I think that's a good way to think about it. And it makes sense of course Allen right because with schools shutting down, you know, still working but working from home and not being in office or in a school, you know, that caused some delays.
And then also schools tried to identify how they're going to tackle the current strategy with distance learning. That slowed some of the buying. But we think that schools by now are having solutions in place and are planning for the next school year, and so we think that buying will start to ramp up again. And I think it's important to note that budgets are still strong as of now. There's been some constriction on certain budgets with reallocations.
But generally from what we're hearing, the school districts we're working with and the partners we sell through, the budgets are still strong and we're expecting Q3 and Q4 to be on par or higher is what Takesha mentioned.
Speaker 5
Thank you very much.
Speaker 0
And we have an additional question from Brian Kinstlinger with Alliance Global. Please go ahead.
Speaker 3
Yes, great. Thanks. To Ellen's question on the $7,600,000 of back order, can
Speaker 1
you speak to
Speaker 3
what the product mix looks like, maybe what the driver of some of that revenue is? And does that also mix with your 30% gross margin, you know, kind of commentary for 2Q?
Speaker 2
So the majority of that backlog is going to be related to our hardware business which that would align with what we're saying from a margin perspective.
Speaker 3
I thought the hardware was a little bit lower than the 30%. So would we not see a little bit lower in the 2Q?
Speaker 2
So actually our hardware if you look at it after we kind of take out a whole bunch of other items like warranty and shipping that is a little bit higher of what we're seeing right now, right, at about the 30%. But we also are anticipating some additional items from a professional development perspective that will offset that. So at this point we're anticipating that our margins will be around 30%. Now it was a little bit lower in the first quarter because San Diego was one of our really big projects that came through in first quarter. And so we had some specialty custom pricing related to that which resulted in a little bit lower margin than we anticipated.
But we do foresee that for the year it'll be the 30% or a little bit higher than that.
Speaker 1
Just to clarify that this $600,000 that was customer orders right during Q1. Then we ended the quarter with back orders of 4,500,000.0
Speaker 3
Got it. So the $4,500,000 is a yet to be recognized revenue for 2Q?
Speaker 1
That's correct.
Speaker 2
Correct.
Speaker 3
And can you speak to the order trends more recently in April and May?
Speaker 1
So Brian, our orders have still been strong, but that, based on where you've been in similar times past and then also based on expectation, But that's because we had a lot in the hopper, like we said, a lot that was in the works that are still being shipped and fulfilled. I think the real test will be over the next few weeks, in the next month or so. That's when we're going start to see our orders still coming in and can we still maintain strong business. As of now though, yes, we've been strong at this point in time.
Speaker 3
Great. Thanks so much.
Speaker 0
And that was our final question. The floor returns to Michael Pope for closing remarks.
Speaker 1
Great. Well, thank you everyone for your support and for joining us today on our first quarter conference call. We look forward to speaking with you again in August when we report our second quarter results. And that is the end of the call. Thank you again.
Speaker 0
This does conclude today's teleconference. You may now disconnect your lines at this time. We thank you for your participation. Have a great day.