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SURGE COMPONENTS INC (SPRS)·Q1 2019 Earnings Summary

Executive Summary

  • Q1 FY2019 delivered strong top-line and profitability: net sales rose 20.4% to $8.41M, gross profit increased 28.1% to $2.32M, and gross margin expanded 160 bps to 27.6% .
  • EPS of $0.13 reflected materially higher net income ($693.8K vs. $35.6K YoY), aided by margin mix and a tax benefit; management noted tariff pass-through and delivery shifts to Hong Kong as mitigants .
  • Operating discipline: selling & shipping expenses up only 4.0% despite revenue growth; G&A down 1.0% YoY; working capital at $6.19M supports continued growth .
  • Strategic highlights: training new sales teams in Brazil, market testing a patent-pending pinpoint alarm in the Challenge division, and continued focus on higher-margin customers .
  • Catalyst: margin strength and new product pipeline; note that consensus estimate comparisons appear limited given OTC Pink listing and lack of visible coverage .

What Went Well and What Went Wrong

What Went Well

  • Gross margin strengthened to 27.6% on higher-margin product mix and volume; gross profit up 28.1% YoY to $2.32M .
  • Management executed pricing and logistics mitigations: “pass along a portion of [tariff] costs” and “moving some customer deliveries directly to Hong Kong” to reduce impact .
  • Strategic expansion and product innovation: “launch of a new sales program in Brazil” and “began market testing our new patent pending pinpoint alarm system” (Challenge division) .

What Went Wrong

  • Tariffs on Chinese imports are still a headwind; effects expected to be similar to 2H18, with only partial pass-through achievable .
  • Selling and shipping expenses increased modestly (+4.0% YoY) on salesman compensation and freight out, partially offset by lower commission/travel .
  • Limited public analyst coverage (OTC Pink listing) restricts visibility on external estimates and reduces ability to benchmark beat/miss vs. Street .

Financial Results

MetricQ1 2018Q3 2018Q4 2018Q1 2019
Net Sales ($USD)$6,982,327 $9,281,710 $8,845,895 (FY18 $32,372,030 − 9M18 $23,526,135) $8,407,342
Gross Profit ($USD)$1,813,674 $2,107,403 $2,442,034 (FY18 $8,283,198 − 9M18 $5,841,164) $2,323,560
Gross Margin (%)26.0% 22.7% 27.6% (derived from Q4 GP/Net Sales) 27.6%
Net Income ($USD)$35,557 $337,558 $1,420,170 (FY18 $1,961,594 − 9M18 $541,424) $693,797
EPS (Basic, $USD)$0.01 $0.06 n/a$0.13
Operating detailQ1 2018Q3 2018Q4 2018Q1 2019
Selling & Shipping ($USD)$618,421 $705,638 $687,979 (FY18 $2,649,456 − 9M18 $1,961,477) $642,896
G&A ($USD)$1,097,956 $1,021,560 $855,098 (FY18 $4,069,823 − 9M18 $3,214,725) $1,087,037
Operating Income ($USD)$85,343 $549,871 $886,715 (FY18 $1,514,947 − 9M18 $628,232) $584,049
Other Inc/(Exp) ($USD)$(6,020) $(9,241) $600,966 (FY18 $587,639 − 9M18 $(13,327)) $(732)
Tax (Expense)/Benefit ($USD)$(43,766) $(26,808) $(67,511) (FY18 $140,992 − 9M18 $73,481) $110,480 benefit

Notes: Q4 FY2018 figures are derived by subtracting nine months (ended Aug 31, 2018) from full-year FY2018 results as reported in the 10-K; derived margins are computed from these components .

Segment breakdown: Surge reports two sales groups (Surge and Challenge) but does not disclose segment revenue by quarter; no segment table available .

KPIs (Q1 FY2019)

  • Export sales by geography ($USD): Canada $1,092,398; China $1,513,169; Other Asia $445,435; South America $81,621; Europe $326,913 .
  • Cash: $1,816,521; Working capital: $6,192,576 .
  • Inventory in transit: $1,102,736; slow/obsolete reserve: $233,565 .

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
Tariff impact on costs/revenues1H 2019Similar to 2H 2018 (context from FY commentary) “Effects of the tariffs to be similar to the second half of 2018”; partial pass-through; deliveries shifted to Hong Kong Maintained trajectory
RevenueFY2019Not providedNo formal numeric guidance provided in press release/10-Q n/a
Gross marginFY2019Not providedEmphasis on higher-margin customers; reported Q1 margin 27.6% (disclosed actual, not guidance) n/a
Opex/Tax rate/DividendsFY2019Not providedNo formal guidance disclosed n/a

Earnings Call Themes & Trends

TopicPrevious Mentions (Q-2: Q3 2018; Q-1: Q1 2018)Current Period (Q1 2019)Trend
Tariffs / macroQ3 2018: Tariffs effective July 2018; partial pass-through; moving deliveries to Hong Kong . Q1 2018: Concern about potential tariffs; investigating mitigations .Impact persisted; pass-through of portion; deliveries shifted to Hong Kong; effects expected similar to 2H18 .Ongoing mitigation; impact stable
Supply chain / lead timesQ3 2018: Component shortages and extended lead times through 2018 . Q1 2018: Shortages expected through H1 2018 .Conditions “returned back” to pre-shortage norms; sustained pricing .Improving
Product innovation (Challenge)Q3 2018/Q1 2018: Ongoing expansion of audible components; customization .Began market testing patent-pending pinpoint alarm system .Advancing
Regional expansionQ3 2018: Hong Kong office supports Asia; export strength . Q1 2018: Asia presence emphasized .Training new sales teams in Brazil; shifting deliveries to Hong Kong .Expanding footprint
Regulatory / corporate actionsQ3 2018: Shareholders approved reincorporation to Delaware .Reincorporated in Delaware on Feb 5, 2019 .Completed

Management Commentary

  • “Surge is off to an excellent start to 2019. We delivered year-over-year growth in net sales of 20.4% and a 28.1% increase in gross profit… Driven by a strong sales pipeline of more profitable customers, we also generated a 27.6% gross profit margin.” — Ira Levy, CEO .
  • “We… continued to strengthen our international footprint… training local sales teams in Brazil… shifted some customer deliveries directly to Hong Kong in 2019. This has helped to mitigate the impact of tariffs…” .
  • “We began market testing our new patent pending pinpoint alarm system… [and] actively develop a pipeline of new and innovative product lines to drive global customer acquisition and ongoing sales growth.” .
  • Tone: confident on profitable expansion and operational efficiency; deliberate approach to growth and shareholder value .

Q&A Highlights

  • The company hosted its Q1 FY2019 conference call on April 16, 2019 (9:00 AM ET) .
  • A full transcript was not available in the retrieved documents; no Q&A items could be extracted .

Estimates Context

  • Street consensus comparisons appear limited; SPRS is quoted on the OTC Pink market, which often correlates with reduced analyst coverage .
  • We were unable to retrieve S&P Global consensus estimates for Q1 FY2019 during this session; therefore, beat/miss vs. Wall Street consensus cannot be assessed.

Key Takeaways for Investors

  • Margin-led earnings power: Q1 gross margin at 27.6% on higher-margin mix supports sustained EPS improvement ($0.13 vs. $0.01 YoY) .
  • Tariff resilience: partial pass-through and logistics shifts (Hong Kong) have reduced tariff pressure, with management expecting similar impact as 2H18 .
  • Operational discipline: selling and shipping costs rose only 4.0% YoY despite 20.4% revenue growth; G&A dipped 1.0% YoY in Q1 .
  • New product optionality: Challenge division’s patent-pending pinpoint alarm in testing adds potential incremental margin and diversification .
  • Strong liquidity: $1.82M cash and $6.19M working capital provide flexibility for growth investments and operations .
  • Improving supply dynamics: normalization from prior component shortages should aid fulfillment and pricing stability .
  • Benchmarking caveat: limited external estimate coverage (OTC Pink) reduces traditional “beat/miss” catalysts; focus should be on execution, margin trajectory, and product pipeline .