RMG Networks Fourth Quarter Earnings: Still waiting for a step in the top line
I had hoped that RMG Networks would have a blowout fourth quarter. That didn’t turn out to be the case, but I’m still optimistic about the company and am holding onto my position.
The drag continues to come from the Middle East. Overall, sales in the fourth quarter were $10.7 million, down from $11.8 million in 2015. North American sales were up substantially, increasing 25% year over year. But Middle East sales were down $2.4 million for the quarter year over year, which is just a huge number when you consider that sales for the Middle East were only $3.4 million for the entire year in 2015.
Below you can see the dynamic. North American sales have taken off while overall sales have been held back by tough year over year comps in the Middle East.
Now maybe, just maybe this headwind is starting to abate. First, comps for 2017 are going to be easier because the Middle East generated so little revenue in 2016. Second, because oil prices are stabilizing they are starting to see things pick up in that region. On the conference call they said:
I can tell you that obviously we have a plan for every quarter, for each of our geographies and our plan for Q1 for the Middle East we have already completed contractually all the sales required to hit our number for Q1 in the Middle East and that is a dramatic change from 2016
They went on to say they are negotiating another large deal, I believe for the new RMG Max product, with a new customer in the Middle East. If it closes, the deal would be the “single largest” in the quarter.
The company also provided an update on their partnerships. It sounds like the Airbus DS Communications partnership (announced in August) has gained the most traction. The partnership is expected to launch in the first quarter when Airbus releases their next gen 911 system called Vesta which RMG is integrating a display solution with. They said they had already received $100,000 of orders in advance of the launch.
The Regan partnership, of which I believe the primary motivation is to introduce RMG Networks to new customers, has allowed them to “reach more than 200 companies and have 20 active leads”.
Finally Manhattan, where the update was the least specific of the three, the comments were limited to how the two companies are holding joint webinars and sales training. Michelsen (the CEO) had said on the third quarter call that they expected to see results with Manhattan in early 2017 but there wasn’t any indication of that on the fourth quarter call. So we’ll have to watch that one closely to see how it develops.
Overall RMG Networks remains pretty positive about the impact of partnerships. In response to a question, Michelsen said that achieving 10% of 2017 sales from partnerships was “in the ballpark”. So we will have to see how 2017 unfolds and whether this forecast holds up.
Finally, the company said the pipeline of sales deals is progressing positively. The overall size is up about 20% year over year, the larger deal count is up about 1/3 and the average deal size is up 17%.
Overall it was directionally positive quarter, but we need to see this translate into sales. In my opinion, the first quarter is big. With the Middle East no longer a headwind, with Europe “improving” and with an expectation of strength in North America, there is no reason that the first quarter won’t be good. It needs to be or I’m going to start questioning why all the positive “color” is not translating into numbers. I’m hopeful I won’t have to go there.