Redline Communications Reports Q1 2012 Results

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Energy Sector Drives Strong Bookings for Flagship Product Line

Redline Communications Group Inc. (TSX: RDL), a leading provider of ruggedized wireless infrastructure systems, today reported first quarter financial results for the three months ended March 31, 2012.

Financial Highlights

  • $12.5 million Total Revenue
  • $8.7 million Shipments
  • $12.1 million new Orders
  • Backlog increases to $5.0 million
  • 61 percent Gross Margin on BWI Product Shipments
  • Operating Expenses drop 10 percent Adjusted EBITDA¹, of $0.7 million
  • Non-cash FMV expense against earnings of $6.61 million due to Debenture
  • Net profit of $55 thousand excluding non-cash FMV charge

Operating Highlights

  • The Company received a contract to expand a wireless video surveillance network in the City of Cancún, México. Redline outdoor broadband wireless equipment provides machine-to-machine connectivity between cameras located throughout the city and the central automated monitoring center.
  • The Company announced that, after demonstrating successful operation in a rigorous competitive trial, Redline products were selected by GCI Industrial Telecom (“GCI”) for an arctic deployment on Alaska’s North Slope. The Company successfully demonstrated that its rugged networking infrastructure equipment operates flawlessly in temperatures as low as -40 degrees Fahrenheit.
  • The Company received and shipped a large BWI product order to complete a major expansion of its network with Shell Oil in a larger second phase of a major wireless project for Shell Oil joint venture Petroleum Development Oman LLC (PDO). This expansion follows the successful deployment of a wireless infrastructure network supporting over 2,000 of 5,000 oil wells on the PDO field. The PDO oil field covers 28,000 square miles of desert, requiring Redline’s rugged, resilient and reliable equipment.

To better assess the health and growth of the Redline’s business, the Company reports on several key metrics, including “Orders or Bookings”, “Shipped or Shipments” and “Backlog”. Definitions of these categories can be found in the Company’s Management Discussion and Analysis for the quarter ended March 31, 2012 (“Q1 2012 MD&A”), copies of which are available on SEDAR at www.sedar.com.

Strong demand for the core Broadband Wireless Infrastructure (“BWI”) product line helped the Company secure Bookings totaling $12.1 million in the quarter. These Bookings were driven primarily from sales to the energy sector, including several large oil and gas projects in the Middle East and North America. The Company’s flagship BWI product line accounted for 81 percent of new product Bookings in the quarter as the Company continued to de-emphasize its lower margin legacy RedMAX™ WiMAX business.

The Company also recorded $2.2 million in new Booked Maintenance & Support contracts, an important contributor to the Company’s goal of growing its recurring revenue. The Company finished the quarter with a Backlog of orders totaling $5.0 million.

Shipments in the quarter were $8.7 million. BWI product accounted for 77 percent of total product shipments, and Management estimates based on their knowledge of their Channel Partners’ business that over 40 percent of Shipments in the quarter went to customers in the Energy sector.

Total revenue for the first quarter of 2012 was $12.5 million, a decrease of 7.1 percent from $13.5 million in the first quarter of 2011. Included in total revenue for the reporting quarter was $4.7 million of amortized deferred revenue and current product revenue of $7.8 million, as compared to $4.7 million of amortized deferred revenue and $8.8 million of current product revenue in the first quarter of 2011. Lower current product revenue in the first quarter of 2012 was primarily a result of revenue recognition timing. Approximately $1.8 million of revenue projected for the first quarter of 2012 was shipped and recognized in the fourth quarter of 2011, and in the first quarter of 2012, $2.1 million of products were shipped in the first quarter but not recognized as they are pending final customer project acceptance.

Gross margin on shipments of the Company’s core BWI product line were 65 percent while RedMAX gross margins were 48 percent. Gross Margins for Professional Service and Other revenues were 35 percent, in-line with the industry average. This high percentage of lower margin revenue contributed to a lower overall margin of 52 percent on total revenue, which was down from 62 percent in the first quarter of 2011. Management anticipates that, based on current Bookings and Backlog, gross margins will increase in 2012.

The Company successfully delivered on its plan to reduce operating expenses, reporting a reduction of 10.2 percent from the same period last year to $6.1 million. The decrease reflects Management’s commitment to cost containment and improved operating efficiencies including the implementation of new information technology for its accounting and CRM systems.

First quarter 2012 adjusted EBITDA¹, was $0.7 million, a decrease from adjusted EBITDA of $2.0 million for the first quarter of 2011. The decrease was a direct result of less recognizable revenue in the quarter, as well as the reduced overall gross margin due to revenue mix.

“I am excited about our business and the strength of our Bookings in Q1 2012. Our high margin BWI product represented over 80 percent of total product Bookings thanks to the ongoing execution of our plan to deliver machine-to-machine solutions to the Energy sector,” said Eric Melka, Redline’s CEO. ”Looking forward, with our strong product margins, a continued shift in product mix to higher BWI product contribution, and our ongoing tight control of operating expenses, we expect cash flow and EBITDA to improve throughout 2012.”

In June 2011, the Company completed a private placement of Cdn. $8.3 million debentures. The debentures have multiple derivatives including: the remaining unconverted principal, interest payable in shares, and warrants all of which were “in-the-money” on March 31st, 2011. The fair market value (“FMV”) of the debenture including its multiple derivatives was significantly higher at the end of the first quarter largely due to the Company’s share price increasing from Cdn. $0.65 at December 31, 2011 to Cdn. $1.20 at March 31, 2012. This increase in FMV triggered a non-cash expense against earnings of $6.61 million.

At March 31, 2012, Redline held cash and short-term investments of approximately $3.4 million compared to $4.7 million for the same period last year. $12.3 million of total deferred revenue remained on the balance sheet at March 31st 2012, a decrease from $16.5 million at December 31, 2011.

All amounts reported in this press release are in US dollars unless otherwise stated. For further details on the March 31, 2012 results, see the condensed consolidated interim statement of financial position, condensed consolidated interim statement of comprehensive income, condensed consolidated interim statement of changes in equity and condensed consolidated interim statement of cash flows reproduced at the end of this press release. The selected financial information included in this release is qualified in its entirety by, and should be read together with the Condensed Consolidated Interim Financial Statements of the Company for the quarter ended March 31, 2012 and the Company’s Management Discussion and Analysis for the quarter ended March 31, 2012 (“Q1 2012 MD&A”), copies of which are available on SEDAR at www.sedar.com.

Conference Call and Webcast – May 16, 11:00 a.m. eastern

A conference call and webcast to discuss the results will be held tomorrow, May 16, 2012, at 11:00 a.m. EDT. To participate in the conference call, please dial 1-647-427-7450 or 1-888-231-8191 approximately 10 minutes before the conference call, and provide passcode 75786798.
A recording of the call will be available through May 23, 2012. Please dial 1-416-849-0833 or 1-855-859-2056 and enter passcode 75786798 to listen to the rebroadcast. A webcast of the call will also be available on Redline’s website at http://www.rdlcom.com/en/about/investors/webcasts.

For more information including links to Redline Communications financial documents visit http://www.rdlcom.com/en/about/investors/.

About Redline Communications
Redline Communications (www.rdlcom.com) is the innovator of Virtual Fiber™, a rugged broadband wireless solution used to cost-effectively deploy and extend secure networks, enable machine-to-machine (M2M) applications, connect digital oil fields and smart grids, facilitate and enhance public safety networks, and bring Internet access wherever and whenever it’s needed – regardless of terrain or remote location. For more than a decade Redline has delivered powerful, versatile and reliable wireless systems to governments, militaries, oil and gas companies and telecom service providers through its global network of certified partners.

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INVESTOR RELATIONS

Cory Pala
e.vestor Communications
Work: +1-416-657-2400

COMPANY CONTACT

Lynda Partner
Redline Communications
Work: +1-613-618-3200
Redline Communications Press Kit: http://redline.mobilitypr.com

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NOTES:

1 Adjusted EBITDA is conventionally measured as net Profit before discontinued operations, as reported in accordance with GAAP, plus interest expense, taxes, depreciation and amortization (all elements being as reported in the IFRS financial statements). Stated directly, EBITDA is the entity’s revenue less its operating costs before the costs of consuming capital assets, financing, and taxes. As such, EBITDA is a measure of Profit, specifically directed at an entity’s operating performance without the effects of its finance strategy or the recognition of certain costs for its tangible and intangible capital assets. EBITDA has application beyond financial reporting and is often the operating performance measure used in debt covenants and executive compensation plans. For a reconciliation of EBITDA to IFRS, please see the “Results of Operations” section of the 2012 MD&A.

Forward Looking Statements

Certain statements in this release may constitute forward-looking statements or forward-looking information within the meaning of applicable securities laws. In some cases, forward-looking statements can be identified by terms such as “could”, “expect”, “may”, “will”, “anticipate”, “believe”, “intend”, “estimate”, “plan”, “potential”, “project” or other expressions concerning matters that are not historical facts. Readers are cautioned not to place undue reliance upon any such forward-looking statements.

Such forward-looking statements are not promises or guarantees of future performance and involve both known and unknown risks and uncertainties that may cause the actual results, performance, achievements or developments of Redline to differ materially from the results, performance, achievements or developments expressed or implied by such forward-looking statements. Forward-looking statements, by their nature, are based on certain assumptions regarding expected growth, management’s current plans, estimates, projections, beliefs, opinions and business prospects and opportunities (collectively, the “Assumptions”). While the Company considers these Assumptions to be reasonable, based on the information currently available, they may prove to be incorrect.

Many risks, uncertainties and other factors could cause the actual results of Redline to differ materially from the results, performance, achievements or developments expressed or implied by such forward-looking statements. These risks, uncertainties and other factors include but are not limited to the following: significant competition, competitive pricing practices, cautious capital spending by customers, industry consolidations, rapidly changing technologies, evolving industry standards, frequent new product introductions, short product life cycles and other trends and industry characteristics affecting the telecommunications industry; any material, adverse affects on Redline’s performance if its expectations regarding market demand for particular products prove to be wrong; any negative developments associated with Redline’s suppliers and contract manufacturing agreements including the Company’s reliance on certain suppliers for key components; potential penalties, damages or cancelled customer contracts from failure to meet delivery and installation deadlines and any defects or errors in Redline’s current or planned products; fluctuations in foreign currency exchange rates; potential higher operational and financial risks associated with Redline’s efforts to expand internationally; a failure to protect Redline’s intellectual property rights, or any adverse judgments or settlements arising out of disputes regarding intellectual property; changes in regulation of the wireless industry or other aspects of the industry; any failure to successfully operate or integrate strategic acquisitions, or failure to consummate or succeed with strategic alliances; and Redline’s potential inability to attract or retain the personnel necessary to achieve its business objectives or to maintain an effective risk management strategy (collectively, the “Risks”). For additional information on these Risks, see Redline’s most recently filed Annual Information Form (“AIF”) and Annual MD&A, which are available on SEDAR at www.sedar.com and on the Company’s website at www.redlinecommunications.com. Redline assumes no obligation to update or revise any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as expressly required by law. All forward looking statements contained in this release are expressly qualified in their entirety by this cautionary statement.

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