TESSCO Technologies Incorporated (NASDAQ:TESS) Q2 2023 Earnings Conference Call October 28, 2022 8:30 AM ET
Company Participants
David Calusdian – Sharon Merrill
Sandip Mukerjee – President and Chief Executive Officer
Aric Spitulnik – Chief Financial Officer
Conference Call Participants
Bill Dezellem – Tieton Capital
Operator
Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the TESSCO Technologies Inc. Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. David Calusdian from Sharon Merrill, you may begin your conference.
David Calusdian
Good morning, everyone, and thank you for joining TESSCO’s Q2 fiscal year 2023 conference call. Joining me today are Sandip Mukerjee, TESSCO’s President and Chief Executive Officer; and Aric Spitulnik, Company’s CFO. Please note that the management discussion today will contain forward-looking statements about the anticipated results and future prospects.
Forward-looking statements involve a number of risks and uncertainties and TESSCO’s results may differ materially from those discussed today. Information concerning factors that may cause such a difference can be found in TESSCO’s public disclosures, including the company’s most recent Form 10-K and other periodic reports filed with the Securities and Exchange Commission.
With that introduction, I’d like to turn the call over to Sandip Mukerjee, TESSCO’s President and CEO. Sandip, please go ahead.
Sandip Mukerjee
Thank you, David. Good morning, everyone, and thank you for joining us today. I am extremely proud of our record performance this quarter. Our revenue, gross profit, net income, and adjusted EBITDA achieved this quarter demonstrates the successful execution of our turnaround strategy. Two years ago we announced our three-pillar strategy, to strengthen and streamline our distribution business, invest in our Ventev product line, and launch a new software business, which we now call Tessco Observer.
Since then our focus has been to drive revenue growth by delivering excellent service and value; direct our investments on higher growth markets, mainly 5G and wireless; improve gross margins by adding differentiated value through Ventev, Tessco Observer, pricing discipline and by growing our business via tessco.com; grow EBITDA utilizing TESSCO’s operating leverage and to implement the new ERP driving new revenues and improving our operating efficiencies.
This quarter, we have demonstrated progress across all of our strategic initiatives. Furthermore we have effectively managed expenses and turned around the trajectory of every line of business, improved every sales channel and improved in every market segment. These actions produced a record revenue quarter with dramatic improvements in profitability. Strong performance by both our carrier and commercial sales teams produced record revenue while maintaining a near record high sales backlog.
Q2 revenues totaled $121 million, up 11% year-over-year. Our sales backlog at the end of the second quarter totaled $98 million compared to the record $99 million at the end of the first quarter. Additionally, we remained focused on driving profitable growth resulting in a $2.4 million year-over-year improvement in net income and a $2.5 million improvement in adjusted EBITDA. Net income was $1.2 million compared with a loss of $1.3 million a year ago and adjusted EBITDA was $2.3 million compared with a loss of $0.2 million a year ago.
Regarding our supply chain, we’ve seen signs of improvement in several of our product lines, but we expect global delays will continue to be a challenge and cause short-term spikes in inventory. However, the improvements to our lead times in certain product lines will allow us to retire some of our backlog more quickly.
I will now walk you through the results and highlights of this past quarter in the following format. First our two markets; carrier and commercial; second, the three key elements of our business, namely distribution, Ventev and software; and third, our performance on tessco.com.
Q2 was a record quarter for our carrier business. Carrier revenue was up 10.7% year-over-year and 10.3% sequentially. Gross profit was up 23.6% year-over-year and 9.6% sequentially due to a more favorable customer and product mix. Our carrier backlog at the end of Q2 was over $47 million, up 57% year-over-year. We have improved our market share with AT&T turf contractors growing 48% year-over-year. Our turf customers confirm that we do an exceptional job at reallocating and distributing material to make sure that their sites are not impacted by the ongoing supply chain challenges.
Additionally, many of our larger turf customers are very optimistic about calendar 2023 and believe it would be a big year for them. Also, the major tier 1 carrier customer that we signed last year continues to grow quarter-over-quarter. We are working on expanding into new product categories and into new markets.
I will now turn to the commercial market, which includes all wireless infrastructure business outside the carrier ecosystem. Q2 was a very strong quarter for commercial revenue with an 11.3% increase year-over-year and a 5.4% increase sequentially. Gross profit increased 21.6% year-over-year and 7.6% sequentially. Our commercial sales backlog at the end of the quarter was at $52 million, a 106% increase year-over-year. Our scale, technical expertise, value added services, program management support, and personalized account coverage are the key reasons why our customers rely on TESSCO.
I mentioned in previous quarters that hospitals were a large market segment that we have access to our DAS integrators. That continues to be the case. Through the AT&T Enhanced In-building Program, or EIB, we were able to book over $1.4 million this past quarter from our EIB contractors and shipped over $3.7 million. We still have a sizable backlog for that program totaling over $8.8 million which we expect to be able to ship over the coming months. The strength of TESSCO’S reputation as a preferred partner is leading to new project wins outside of the EIB program.
Our utility market grew 34% year-over-year and 31% sequentially. These strong results confirm our strategy of helping electric utilities modernize and assisting with their overall grid automation projects. Our strength with utilities continues to be a combination of our technical expertise and our focused and experienced sales team. Growth initiatives in this market include a Ventev business development campaign around automated metering infrastructure, which is already resulting in wins across multiple investor owned utilities.
Fleet is starting to recover a bit and we are seeing some of these utilities buying kits once again. We’re also seeing strong demand in test equipment and are positioning our universal broadband enclosure as a simple turnkey solution for utilities deploying wireless. Our VAR market grew 3% year-over-year, but was slightly down sequentially. Our transportation segment grew 43% year-over-year, which was down 5% sequentially. This included projects to support microwave equipment for Class 1 railroad customers.
On a competitor’s basis TESSCO has a robust offering that includes more than just products. Our solutions team, program management, personalized account support, logistic services and strategic supplier relationships put us in a very strong position not only to win but to win with profitable margins and create long-term relationships. Additionally, we are leveraging these value added services and enhanced support resources to gain customer loyalty through improved execution, which creates real partnerships with our customers. We are very encouraged by the strong momentum we are carrying into the second half of the year.
Turning now to the three key elements of our business, specifically distribution, Ventev and software. Starting with our distribution business, we remained focused on increasing our market share and are reviewing new strategic supply relationships to help diversify TESSCO’S overall business and to buffer against supply chain constraints.
As I mentioned earlier, while the supply chain has improved somewhat, many products still have very long lead times. We are utilizing our demand planning and supply chain teams to work directly with many of our customers, which has encouraged many of them to provide advanced purchase orders to help overcome inconsistent lead times and to ensure the timely completion of their projects. This helps us in forecasting and in ordering the materials they need. We leverage our relationships with our manufacturer partners to pull in product delivery dates where possible and offer substitute items where appropriate. We remain focused on driving a positive customer experience and setting TESSCO apart by making it easier for both customers and suppliers to do business with us.
Turning now to Ventev, our strategy of industrializing our Ventev operations continues to yield results. Ventev had its second highest quarter in our history growing 25% year-over-year and 6% sequentially. The highest revenue quarter was achieved in Q4 of fiscal 2022. Ventev increased market share with a wide range of existing customers, including a competitive retail electricity and natural gas supplier, the world’s largest athletic apparel company, the third largest retailer in the world, and the world’s two largest entertainment conglomerates. Ventev has provided these two companies with products for general public wireless access as well as for amusement ride functionality.
Additionally, Ventev has introduced several new products this past quarter, a new solar system for 60 and 90 watts, which supports PoE devices, a stainless steel version of a Cisco design enclosure that is popular with customers and can be used both indoors and outdoors, antenna and cable and site hardware with factor [ph] jumpers typically used in the automotive industry, a Wi-Fi 6E Omni, and directional antenna to support Cisco AE applications and a 300 to 6,000 hertz omni ceiling antenna, as well as low BIM [ph] tappers.
Regarding our software business, we have made progress in the offerings including onboarding additional devices, implementing new user workflows on the Tessco Observer portal, automated workflows to create customer accounts, solutions, templates, and configurations on the deployment platform, and also enhancements to our SNMP intelligent server. Additionally, we have signed several new customers to Tessco Observer and have a growing pipeline of opportunities for both existing and prospective customers.
In terms of our sales channels, we sell both directly and online through tessco.com. We continue to attract new customers to tessco.com, which resulted in a record quarterly revenue of $11 million.
Lastly, I would like to provide you with an update on our ERP conversion, replacing our legacy ERP system that had been in place for 40 years. This effort will also replace and modernize several other standalone software packages that we utilize. This project has taken longer and has been costlier than initially anticipated. To date capitalized costs have been about $39 million. Once the system goes live, the final amount of capitalized costs will be amortized over a seven-year period. We’re in the final stage of our implementation and are confident in going live with the system during the fourth quarter.
Once the new system is live, we expect significant reduction in legacy system expenses, a reduction in non-capital implementation costs, and many realizable business enhancements and efficiencies, including reductions in resources needed to run our business, more efficient inventory purchasing and better freight utilization. We expect to realize these benefits in fiscal 2024 along with a strong return on our investment.
With that, I will turn the call over to Aric for the financial review.
Aric Spitulnik
Thank you, Sandip, and good morning everyone. As a reminder, the income statement amounts that I will reference are all from continuing operations and exclude the activity from our former retail business. We had a record quarter for our combined carrier and commercial segments totaling $120.5 million, up 11% year-over-year. This is the fourth consecutive quarter of sequential growth for our carrier segment and the second consecutive quarter of sequential growth for our commercial segment.
Sales backlog at the end of the second quarter totaled $98 million compared to $99 million at the end of the first quarter. These results were achieved despite industry industry-wide disruptions in the global supply chain. Gross profit was $24.2 million for the second quarter of fiscal 2023 compared with $19.8 million for the same quarter of fiscal 2022. Gross margin was 20.1% of revenues for the second quarter of fiscal 2023 compared with 18.2% in the second quarter of the prior year, largely as a result of favorable customer and product mix, including a 25% increase in sales of Ventev products.
Second quarter fiscal 2023 selling, general and administrative expenses increased 8.1% from the prior year quarter to $22.7 million, primarily as a result of increased variable expenses associated with 11% increase in revenues. Overall, SG&A expenses as a percentage of revenues were 18.8% in the second quarter of fiscal 2023 compared with 19.3% in the prior year quarter.
This quarter we began to break out expenses as a percentage of revenues by variable and fixed expenses. The variable expenses consist of roughly 50% of freight out expenses and the remaining 50% primarily in distribution center labor and sales commissions. This quarter’s variable SG&A as a percentage of revenues was up from 6.1% in last year’s second quarter to 6.3% this quarter as we continue to see freight charges from carriers increase largely due to fuel surcharges and other accessorial charges. Our operational and pricing discipline has ensured that we pass on the rising freight costs to our customers, which are included in revenue and gross profit.
Fixed SG&A as a percentage of revenue is down from 13.2% to 12.5%. We have been able to support investments in Ventev, Tessco Observer, and IT with reductions to most other areas of the support organization. We will continue to focus on fixed expense reductions and the implementation of the new ERP will enable us to continue these efforts in fiscal 2024.
Second quarter fiscal 2023 net income was $1.2 million compared with a net loss of $1.3 million in the second quarter of fiscal 2022. Adjusted EBITDA and adjusted EBITDA per share were $2.3 million and $0.25 respectively for the second quarter of fiscal 2023. This compares with adjusted EBITDA and adjusted EBITDA per share of a loss of $0.2 million and a loss of $0.02 respectively for the second quarter of last year.
Turning to the balance sheet, at quarter end the outstanding balance under the company’s $80 million line of credit was $53.5 million, and we had $3.3 million in cash and cash equivalents. Product inventory increased by $14.6 million in the second quarter, in part to manage through the supply chain disruptions Sandip discussed. In order to remain strategic in our inventory management, we are working on reducing our overall inventory levels. We expect inventory levels and our line of credit balance to be more variable for the next few quarters as parts of the supply chain improved while other parts remain constricted.
Accounts receivable increased by $9.3 million in the second quarter. This is reflective of a back loaded sales quarter that was even more pronounced due to the supply chain challenges. We ended the quarter with income tax receivables of $3.7 million. All of the associated tax returns have been filed, and then timing of receipts of these payments is largely dependent on the IRS and the State of Maryland. I am very pleased with how we are executing on our strategy and the resulting records we have achieved.
Despite macro level headwinds impacting our business we are encouraged by our first half results, the strong sales, and even more so with a near record backlog, and believe that we will continue to see strong results in the second half, and that we are on pace to meet our guidance ranges. Accordingly, we are reaffirming our guidance for fiscal year 2023, which is as follows; revenue of $450 million to $475 million, which would represent growth of 8% to 14% and net loss of $5 million to $2.1 million, which compares to a net loss of $3.3 million in fiscal year 2022, and adjusted EBITDA of between $4 million and $7 million, which compares to $0.3 million in fiscal year 2022.
With that, I will turn the call back to Sandip.
Sandip Mukerjee
Thank you, Aric. Before we open the call to questions, I want to reiterate some of the highlights from this quarter. Our Q2 revenues totaled a record $121 million, up 11% year-over-year. Strong performance by both our carrier and commercial sales teams while maintaining high sales backlog. Our focus on driving profitable growth yielded a $2.5 million year-over-year improvement in adjusted EBITDA and a $2.4 million improvement in net income.
We expect our new ERP to launch in our fourth fiscal quarter and to begin realizing meaningful benefits in fiscal year 2024. We are on pace to meet our guidance ranges, and most importantly, our turnaround strategy continues to produce solid results, improving efficiencies and driving growth and profitability across our business.
With that, we will now open the call to questions.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question comes from the line of Jesse Wilson from William Blair. Your line is open.
Unidentified Analyst
Hi, thank you. This is Jesse on for Maggie. Congrats on the nice results this quarter. I wanted to ask about Tessco Observer, so does the expectation for revenues to ramp in the second half still hold true? What’s kind of informing your expectations and how do you think about the cadence of those wins ramping out?
Sandip Mukerjee
Hey, good morning, Jesse. Thanks for joining. Thanks for the question. Yes, we repeat that we expect these revenues to ramp through the remainder of this year and into fiscal 2024. We have a number of customers using the service and paying for it. We haven’t broken out those numbers. They are small. But as we said earlier and as you repeated, we expect the revenues to ramp.
Unidentified Analyst
Got it. And then one quick follow up from me. It’s helpful that you began to break out SG&A by variable and fixed. On that variable component, has it historically been 50% freight and what would that look like in normalized times?
Aric Spitulnik
Thanks Jesse. It’s Aric. Certainly in the freight numbers this, the last couple of quarters have been higher than they have been in the past. I would say it’s probably a little bit less than 50% if you go back two, three years before the supply chain issues really impacted us because really the other stuff, the compensation related to labor in the warehouse and sales commissions would be relatively consistent. So it’s going to be a little bit less in prior years, but I wouldn’t say dramatically less, but certainly less.
Unidentified Analyst
Got it. Thank you for taking our questions.
Sandip Mukerjee
Thanks, Jesse.
Operator
[Operator Instructions] Your next question comes from the line of Stephen Cole from Mangrove. Your line is open.
Unidentified Analyst
Hi, good morning, guys. Now I had a few questions. Let me talk a little bit about the ERP conversion. I just want to make sure I’m understanding. So we spent $39 million capitalized, and I think you said, Aric, you’re expecting a strong return on that investment or maybe Sandip mentioned that. Can you explain what a strong return looks like? And I know you talked about a lot of different areas that you’re expecting to get some benefits from that, but what does the cadence look like of that? And I know obviously it’s been a bigger project than we’d expect, but we’re obviously looking forward to it being turned on as well.
Aric Spitulnik
Yes, thanks Steve, good morning. As we go live with the system next quarter, we’ll start to see the benefits from it beginning in FY 2024. Those benefits will ramp over time for sure. We’re looking at, we’re not saying exactly what the amounts are, but we expect them to be several million dollars over on an annualized basis starting with those benefits starting to show up in the early part of FY 2024.
Sandip Mukerjee
Yes, Steve, this is Sandip, thanks for the question and good early morning to you. Just to amplify a couple of things that Aric said, we are very pleased that we are finally going to launch this and excited about it. Some of the items we mentioned during the call, we expect benefits and overall OpEx reduction better inventory management, which will help us on our income statement and better freight management as well. So it’s multifaceted, plus we expect some revenue benefits as well. But as Eric said, and to underscore, we expect several million on an annualized basis beginning with fiscal 2024.
Unidentified Analyst
Right. And just flipping to the backlog for a minute, obviously you guys have seen a nice pickup in margin which is encouraging on the growth side. How is some of the efforts with Ventev and tessco.com, I think a great quarter it looks like here too. How much of that backlog is shifting? So can you give us a sense, is it more skewed towards commercial if we looked at the theoretical booked in margin or how would you look at that today?
Aric Spitulnik
I think, Steve, if you go back to the call, we actually gave the absolute numbers, the breakdown, it’s roughly $52 million on the commercial side and the remainder of the $98 million is on the carrier side. In terms of the turns we are seeing in backlog, perhaps the following statement will help. If you look at the quality of our backlog, which we stress test pretty routinely, 80 plus percent of the backlog is less than 120 days old. So our backlog is turning and given the bookings that our team is generating, we are creating more backlog.
Unidentified Analyst
That helps.
Sandip Mukerjee
Yes, Steve, one other point on, yes, one other point on the backlog. If you go back a year when backlog was around $54 million, the carrier revenues were backlog was a little bit higher than the commercials. So that’s shifted in the past year and that will help us, given the commercial margins are so much higher than the carrier margins.
Unidentified Analyst
So you guys, obviously, and this is a bigger picture, when you look, I don’t think Sandip I’ve ever, I think this is the first time that you said everything is up across every conceivable KPI that you have, right? And you’ve got a lot of them. I’m sure it’s not lost on you that our sure place continues to languish a bit more than it’s not exactly great environment for smaller cat names, but curious on what do you see when you look at how the company is performing and how the stock is reflecting that performance number one, and what do you see changing that might accord the company a better valuation going forward?
Sandip Mukerjee
Steve thanks for the question. Obviously a very meaty subject for the company. I mean, from a company perspective, we focus on the fundamentals. So if you think of where we are investing, we are investing in growth markets, right? 5G, wireless, 5G-related accessories in the commercial segment, and that growth is helping us from a revenue perspective.
Second, through better service, better bundling with Ventev, Observer, better operating discipline, we are driving gross margin improvement. And you noted that and thanks for that, Steve. From an expense perspective, we are growing revenue faster than we are growing, we are needing to grow expenses that is giving us operating leverage. So we are fairly confident that as the market improves and grows and the supply chain issues even out, we will not only be able to grow revenue, but be able to grow EBITDA faster than revenue. I mean, that’s our value proposition and that’s what we will, we are committing to delivering and we expect the situation to be improved once we get our new ERP in place.
Unidentified Analyst
Right. So when we look, and I know it’s a little early given we’re only halfway through FY 2023, but from a bigger macro side to Sandip and Aric, how do you look at FY 2024 without getting into specific numbers, I mean are you still looking at pretty strong top line growth and then again, better operating leverage and a favorable mix, so how do you see just in general 2024 looking at this point?
Sandip Mukerjee
Yes, we’ll get a chance, Steve, at the end of the next quarter or so to give more precise guidance. But at this point at the risk of being repetitive, right? For fiscal 2024 we see markets growing, right? We see five — more investment in 5G. We see more investment in private LTE. So we will continue to hunker down on the growth markets. Focus on gross margin improvement will be a continuum. We have demonstrated that we can move the needle, with the diversification across vendors. We’re confident we can maintain or grow that, and then our focus will be on creating and exploiting that operating leverage to grow EBITDA.
Unidentified Analyst
Right. Thank you guys very much. I’ll get back in the queue and give folks a chance to hop in. Thank you. Very good quarter.
Sandip Mukerjee
Thank you, Steve.
Aric Spitulnik
Thanks, Steve.
Operator
Your next question comes from a line of Bill Dezellem from Tieton Capital. Your line is open.
Bill Dezellem
Thank you and a nice quarter. I have a group of questions. Let me start and just say in general, if we are hearing you correctly, that you feel like the business is gaining momentum. Is that in essence the message you are trying to convey?
Sandip Mukerjee
Bill correct. We are very pleased with the quarter. You’ve heard me over the last four quarters, I think, of continuous improvement and very, very pleased with how the team performed and how we executed this quarter.
Bill Dezellem
That’s helpful and I’d like to use that as a segue into my next question, which really relates to your guidance. And if we look at the net income guidance and the EBITDA guidance and compare that full year number relative to what you have already contributed in the first half, it seems that the guidance is certainly conservative and at the low end is probably just way conservative at this point, unless the business were to in fact turn around and start to deteriorate, which is really the opposite from what you are seeing and what the markets are indicating. What are we missing in our thought process here?
Aric Spitulnik
I’ll take each of those, EBITDA you have to look at it a little bit differently than net income. So the net income issue is really the depreciation on the new system. So you recall $39 million we’ll be depreciating that over seven years. So that’s a big chunk of expense that will hit our income statement in the fourth quarter. So that will have an impact, a negative impact on us. The net income one is certainly on the, we think we will certainly be on the high side or the good side of that one.
On EBITDA, I think we’re at 2.8 now. That’s a 5.6 or so, run rate. The guidance is 4 to 7. Yes, we’re very confident in the second half of the year being very strong. And hopefully next quarter we’re going to be in a place where we might, might be able to increase that. But yes for now we’re very confident in the guidance in hitting the numbers that we’ve laid out.
Sandip Mukerjee
Yes, Bill, just to underscore a couple of things, Aric said, we’re obviously very pleased, as I said at the, and at the risk of being repetitive with our performance in the first half. We’re bullish about the second half. The supply chain issues continue though, right? If you go back to the remarks we made earlier, we are seeing some improvement in some product categories. The remainder, especially the more integrated circuit dependent, electronics dependent products, those are still constrained, right? So we need to take that into effect, but we are confident about the guidance. And based on your question, if you are, if we were to say more towards the higher end, we’re happy to say that. I mean, that’s where we are focusing.
Bill Dezellem
That is helpful. And so if the business continues, there is a chance to be certainly maybe even better than that, more at the higher end but it sounds like you are incorporating in at some reality that the supply chain issue still exists.
Aric Spitulnik
That’s right.
Sandip Mukerjee
You’re correct.
Bill Dezellem
Okay. That is helpful and helps connect those dots. Thank you. And let me shift now to next year, if I may, relative to the turf contractors saying that next year is going to be strong and given the supply chain issues, the question that I have is, does that imply that although revenue will likely go up in the carrier segment, that your backlog will also go up because the strength that they think they are seeing, this will be hard to fully capture given the supply chain challenges or do you see it unfolding in some different way?
Aric Spitulnik
It’s a pretty dynamic nature in the supply chain. Bill it has been difficult to predict. I’ll stay away from that. But from a fundamental perspective, I mean these markets are growing and our emphasis has been to maintain inventory, drive investment towards the growth markets. And what we said about turf contractors is one evidence of that. So these markets are growing and we want to grow with it, and we are going to be relentlessly focused on maintaining the right inventory, very determined to get the ERP to go live fourth quarter and just build upon the operating leverage that we are creating.
Bill Dezellem
Thank you. And then so kind of continuing on that, are the turf contractors willing or maybe even just able to give you orders now so that you can, that you can be working on getting the product in hand so that you can supply them what they need? Or are they being more cautious and therefore it does create more of a challenge with that supply chain?
Aric Spitulnik
Yes, the turf contractors are just one part of our business. Bill. If you were, if you had made the statement you made in general and at large, I would have agreed. The turf contractors specifically are driven by the bills that the carrier they serve provide. So they have contracts with the carrier they serve, and that drives their business and how far out they look. But overall, if you back away and look at our customer base at large, people are planning on a longer horizon. They’re planning with us, which is a good thing for TESSCO on a longer horizon and we are being able to do the kinds of things you’re alluding to.
Bill Dezellem
Great, thank you. And relative to Observer or Tessco Observer, what is the commentary that you are hearing from your customers or the VARs relative to the options that they have versus Observer and how Observer is working relative to kind of what they would like now that you’re rolling out commercially and out of data?
Aric Spitulnik
We’re encouraged by the feedback. I mean, there is a need in the market that Observer is being able to fill. It’s a value-add that our customers, specifically the VARs can bring to their customers. And as is the case with software, very good feedback that we are incorporating into our roadmap going forward.
Bill Dezellem
And my impression and like your feedback on this, and I’ll — I think I’ll make this my last question, will be is are the VARs basically finding this to be a pretty easy sale and one that they want to make, meaning that their custom, the VARs customers want to know what’s happening with their network and they really don’t have a way to do that very well. But Observer accomplishes that and the VAR and it’s on a relatively inexpensive basis since it’s done as a SaaS and the VARs like it because they almost have zero work to do and are able to collect a monthly fee. And when there is work to do, they generate additional revenue from any time that there is something that’s gone wrong with the customers network. Is there anything about that we’ve learned that’s inaccurate?
Aric Spitulnik
You are generally correct. There is a need in the market for our VARs customers to manage critical components of their network. The VARs would like to sell this. It’s a new capability for them and so we expect these things to ramp over time as opposed to spike. But we are pleased with where we are, Bill.
Bill Dezellem
Great. Well, thank you all for taking my many questions.
Aric Spitulnik
Thanks, Bill.
Operator
And there are no further questions at this time. I will turn the call back over to the management team for some closing remarks.
Sandip Mukerjee
Thank you, Rob and thanks again everyone for joining us today. We appreciate your support of TESSCO, and thank you to the TESSCO team members for all their hard work and dedication that makes these results possible. We look forward to speaking with all of you again next quarter. This concludes our earnings call. Have a nice day.
Operator
This concludes today’s conference call. Thank you for your participation. You may now disconnect.
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