RF Industries, Ltd. (RFIL) Earnings

Management highlights

- Overall Financial Results • Q2 fiscal 2026 total revenue hit $20.7 million, a 9% increase year-over-year and 9% increase sequentially from the prior quarter. • Gross profit margin expanded 360 basis points year-over-year to 35.1%, while adjusted EBITDA nearly doubled year-over-year to $2 million. • Consolidated GAAP net income was positive at $879,000 ($0.08 per diluted share), compared to a net loss of $245,000 in Q2 fiscal 2025. • Q2 bookings reached $26.3 million, the strongest quarterly booking level in many years, driving end-of-quarter backlog to $20 million (up $5.6 million quarter-over-quarter), with backlog growing slightly to $20.1 million as of the call date. - Strategic Progress • The company's strategy to diversify end markets and transition from a component supplier to a solutions provider is delivering tangible results, with increased customer engagement in target markets including aerospace, data center infrastructure, venues, and transportation. • The company will be added to the Russell 3000 index starting June 26, which management expects will expand institutional investor visibility, improve liquidity, and broaden the company's shareholder base. • New product development is on schedule, with new launches in thermal cooling and RF passives completed in Q2, and newly released products from the first half of the fiscal year have already generated strong bookings and shipments. - Operational Updates • The company maintains a scalable, US-based multi-site manufacturing footprint with a deliberately diversified supply chain, enabling flexible response to demand shifts and avoiding disruptions. • Ongoing cost reduction programs delivered strong results in the first half of the fiscal year, driven by supplier negotiations, operational transformation, and tariff management via supply source relocation. • Inventory rose slightly quarter-over-quarter to $14.4 million due to timing of customer shipment delays that pushed completed orders from Q2 into Q3; management expects inventory turns and working capital metrics to improve once these delayed shipments are fulfilled. • Working capital management is a priority, with the company targeting net debt reduction to an immaterial level relative to its balance sheet as positive cash flow continues.

Guidance

- Management expects fiscal third quarter total sales to increase sequentially from Q2 fiscal 2026's $20.7 million level. - Integrated systems activity is expected to accelerate in the second half of fiscal 2026, as temporary delayed small cell orders resume and ship. - The margin and earnings expansion demonstrated in Q2 is expected to be sustainable for the second half of the fiscal year, supported by accelerating bookings and a built-up backlog. - DAC systems are expected to deliver steady growth over the next 1 to 2 years and beyond, expanding into new edge data center applications.

Segment performance

1. Custom Cabling: It was the leading revenue contributor in Q2 fiscal 2026, delivering strong results, with near-peak historical demand driven by repeat mission-critical orders from major aerospace and industrial manufacturing clients. It accounted for the majority of quarterly revenue, with a large aerospace customer alone contributing 14% of total consolidated revenue in the quarter. 2. Interconnect: Posted solid combined financial results and continues to build a healthy backlog of orders. 3. Integrated Systems: The segment underperformed internal expectations in Q2, driven by temporary delays in small cell deployments related to customer M&A and restructuring activity. However, it achieved strong bookings during the quarter, growing its backlog ahead of the second half of the fiscal year, and management expects it to resume growth as delayed orders ship later in 2026. 4. Direct Air Cooling (DAC) Systems: DAC adoption is expanding across new use cases, with ongoing customer trials advancing, and the product is positioned as a strong long-term growth driver focused on edge data center applications.

Risks & headwinds

- Forward-looking financial and operational results are subject to inherent uncertainties, and actual outcomes may differ materially from management expectations due to risk factors outlined in the company's SEC filings, including Form 10-K and Form 10-Q. - The tariff environment remains uncertain, with key policy decisions scheduled for July, though management notes diversified supply chains and ongoing strategic sourcing position the company to adapt to any changes. - Backlog levels can fluctuate based on order timing and fulfillment, so increases do not guarantee equivalent future revenue growth. - Large potential multi-site integrated system opportunities have not yet been awarded, and there is no guarantee these opportunities will convert to revenue.

Analyst Q&A

• Q: Custom cabling is now the company's largest product line. Is this the permanent new business mix, or will integrated systems grow to rebalance the product portfolio? /

  A: Integrated systems underperformed Q2 expectations due to temporary small cell deployment delays tied to customer M&A and restructuring, with shipments pushed to later in the year. Management expects integrated systems to continue growing as a key part of the business, while custom cabling will also remain a strong growth engine. The diversified product mix is intentional, allowing the business to deliver steady results even when one segment faces temporary timing pressures.

• Q: A large aerospace and defense customer now contributes 14% of revenue, up from 10% last quarter. How will this customer's contribution trend through Q3, and what is a realistic long-term run rate? /

  A: This is a relatively new customer that the company began doing material business with last year, and performance has been strong to date. The revenue level from this customer depends entirely on the customer's own scheduling needs, so management does not attempt to predict exact future run rates. As long as the company continues meeting performance requirements, it expects this customer to remain a consistent part of the custom cabling business.

• Q: How does RF Industries' DAC solution fit into the data center and AI cooling market, especially relative to liquid cooling, and how will this opportunity evolve over the next 12 to 24 months? /

  A: DAC is positioned for edge data center applications, not the large hyperscale data centers that are a major current market focus. As large hyperscale projects face permitting delays and are sited further from end users, demand grows for edge capacity close to users, which is where DAC adds the most value. DAC is up to 75% more cost-effective than traditional HVAC for edge deployments, and liquid cooling complements rather than replaces DAC in this market segment. Management expects a strong growth trajectory for DAC over the next 1 to 2 years and beyond.

• Q: Working capital absorbed cash in the first half of the fiscal year. How will drivers of cash usage change in the second half, and what should be expected for free cash flow conversion? /

  A: The cash balance decline primarily came from paying down the revolving credit facility to reduce interest expenses, and core operating cash flow remains positive after excluding this debt paydown. The company plans to continue paying down the credit line to the minimum required balance, after which cash balances will begin to build.