Communications Systems, Inc. Reports First Quarter Financial Results

Communications Systems, Inc. (NASDAQ: JCS) (“CSI” or the “Company”),
a global provider of enterprise network infrastructure, voice and data
communication products and services for deployments and management of IT
networks, today announced financial results for the first quarter (“Q1”)
ended March 31, 2019, including a discussion of results of operations by
segment.

First Quarter 2019 Summary

• Q1 2019 consolidated sales were $16.7 million as compared to $16.8
  million in Q1 2018, with first quarter year-over-year sales increasing
  at JDL and Net2Edge segments and declining at Suttle and Transition
  Networks.
• Q1 2019 consolidated gross profit increased by 23% to $6.4 million
  from $5.2 million in the same period of 2018. Gross margin improved to
  38.4% in Q1 2019 from 30.9% in Q1 2018 driven by a favorable mix of
  products and services.
• Q1 2019 consolidated operating income improved to $181,000 from a Q1
  2018 consolidated operating loss of $2.0 million. Of note, effective
  January 1, 2019, the Company realigned its financial reporting to
  exclude certain corporate general and administrative expenses from
  costs allocated to the business segments, which are reported as
  “Other” in the segment information in our Form 10-Q and reported
  below. The 2018 expenses reported in this press release have been
  reclassified to reflect this change.
  • Transition Networks’ operating income was $59,000 as compared to
    operating income of $461,000 in Q1 2018.
  • Suttle’s operating income improved to $743,000 from an operating
    loss of $600,000 in Q1 2018.
  • JDL Technologies’ operating income improved to $481,000 from an
    operating loss of $442,000 in Q1 2018.
  • Net2Edge’s operating loss narrowed to $527,000 from an operating
    loss of $801,000 in Q1 2018.
  • Other operating expenses totaled $585,000 as compared to $592,000
    in Q1 2018.
• Q1 2019 net income improved to $240,000, or $0.03 per diluted share,
  compared to a net loss of $1.9 million, or $(0.21) per diluted share,
  in Q1 2018.
• At March 31, 2019, cash, cash equivalents, and investments totaled
  $9.5 million and working capital was $31.2 million.

CSI’s Chief Executive Officer Roger H.D. Lacey commented, “Our Q1 2019
results reflect the initial impact of restructuring efforts to shift our
corporate focus towards higher-margin and faster-growing markets such as
IoT and network edge management. During the quarter, we continued to
invest in the development of new products, improve quality control
processes, initiate cost savings for each business unit, and streamline
our accounting processes. As a result, we improved operational
efficiencies in our business units and on a corporate level. Our efforts
resulted in significant improvement in gross margin and we are reporting
positive operating and net income in Q1 2019.”

Mr. Lacey continued, “As part of our enterprise-wide restructuring
process, in April 2019 we completed the sale of Suttle’s FutureLink™
Fiber product line for $5 million. This was a key step towards our goal
of re-focusing our operations and returning to profitability in 2019. We
are pursuing a number of other initiatives, including the further
streamlining of Suttle’s existing operations and the announced sale of
our corporate headquarters.”

Mr. Lacey concluded, “We believe CSI is now a fundamentally strong
company and we expect 2019 to be a transformational year. Although
quarterly performance may vary (due to timing of contracts and customer
projects), for FY 2019, as compared to FY 2018, we expect to improve our
top and bottom line, increase our customer base and expand in new
markets. We are working diligently to evolve from a network services and
product manufacturing company into a growing and profitable cloud-based
IoT and network edge solutions company. Our strong balance sheet
provides us with the resources for growth. At March 31, 2019, we had
cash, cash equivalents, and investments of $9.5 million, working capital
of $31.2 million, and shareholders’ equity of $42.1 million.”

Q1 2019 Segment Financial Overview

Transition Networks

Q1 2019 sales decreased by $263,000 or 3% as compared to Q1 2018. Sales
in North America decreased $731,000, or 10%, primarily due to timing of
orders from the federal government and a large carrier customer.
International sales increased $468,000, or 31%, primarily due to a
significant project with a customer in our EMEA region for media
converter products, partially offset by weakness in our ROW region.
Media converter sales increased 4% or $194,000 due to the large EMEA
project. Sales of Ethernet switches and adapters decreased 12% or
$260,000 due to timing of orders from the federal government. All other
product sales decreased 12% or $197,000 due to slower activity in our
ancillary products business.

Gross profit for Q1 2019 decreased to $3,754,000 from $3,927,000 in the
same period of 2018. Gross margin decreased to 42.2% in Q1 2019 from
42.9% in Q1 2018, primarily due to product mix related to a large
project in the EMEA region. Selling, general and administrative expenses
increased 7% to $3,695,000, or 41.6% of sales, in Q1 2019 compared to
$3,466,000, or 37.9% of sales, in Q1 2018 due to an increase in
engineering expenses related to prototype development and
employee-related expenses.

Transition Networks had operating income of $59,000 in Q1 2019 as
compared to operating income of $461,000 in Q1 2018.

Mr. Lacey commented, “We believe the Q1 2019 Transition Networks’
revenue shortfall is primarily a timing issue and the remainder of 2019
currently looks strong with several POE++ projects in process.”

Suttle

Suttle sales decreased 21% in Q1 2019 to $5,521,000 from $6,973,000 in
the same period of 2018 due to reduced spending from Tier 1
telecommunications providers, volume declines in legacy products, and a
continuing shift in purchasing decisions from Tier 1 telecommunications
suppliers to installers.

Suttle’s gross profit increased 31% in Q1 2019 to $1,801,000 from
$1,375,000 in the same period of 2018. Gross margin in Q1 2019 increased
to 32.6% from 19.7% in the same period of 2018 due to overall favorable
product mix changes, price increases at Tier 1 telecom customers,
workforce reductions made at the end of 2018, together with lower Q1
2019 inventory adjustments and increased production primarily related to
Suttle’s sale of its FutureLink™ fiber product line on April 5, 2019.
Selling, general and administrative expenses decreased 46% to
$1,058,000, or 19.2% of sales, in Q1 2019 from $1,975,000, or 28.3% of
sales, in the same period in 2018 primarily due to workforce reductions
made at the end of 2018.

Suttle reported operating income of $743,000 in Q1 2019 as compared to
an operating loss of $600,000 in Q1 2018.

As previously disclosed, on April 5, 2019, the Company sold its Suttle
FutureLink™ Fiber business line, including inventory, equipment, and
customer relationships, to PPC Broadband Inc. (“PPC”). The transaction
was structured as an Asset Purchase Agreement with a simultaneous
signing and closing. The sale price was $5.0 million in cash. Concurrent
with the closing of the transaction, Suttle and PPC entered into a
Transition Services Agreement under which Suttle will continue to
manufacture products related to the FutureLink™ Fiber business line
until September 30, 2019, to ensure seamless supply to the customer
base. Suttle’s 2018 and Q1 2019 revenues from its Fiber business were
approximately $4.9 million and $1.1 million, respectively.

Mr. Lacey commented, “While Suttle’s Q1 2019’s positive operating income
reflects the result of many restructuring actions taken in prior periods
and increased production related to the April 5, 2019 sale of the
FutureLink™ Fiber business, we expect, due to the sale of this business
and the impact on our production once we fulfill our the obligations
under Transition Services Agreement, that Suttle’s ongoing 2019
operating income will be much lower and closer to breakeven or could
return to a loss.”

JDL Technologies

JDL Technologies sales increased by 211% to $2,208,000 in Q1 2019 from
$710,000 in Q1 2018.

Revenues from the education sector increased by $1,364,000 in Q1 2019
from Q1 2018 due to the resumption of scheduled education projects
funded by the federal government that were delayed in the prior year.
Revenue from sales to small- and medium-sized commercial businesses,
which are primarily healthcare and commercial clients, increased by
$134,000, or 22%, due to ongoing efforts to expand managed services and
infrastructure sales to these markets.

Gross profit for Q1 2019 was $867,000 as compared to a loss of $18,000
in the same period in 2018 due to higher education revenue and the prior
year having certain fixed costs on lower revenue. Selling, general and
administrative expenses decreased by 11% in Q1 2019 to $376,000, or
17.0% of sales, from $424,000, or 59.7% of sales, in Q1 2018 due to
lower selling and marketing expenses.

JDL Technologies reported operating income of $491,000 in Q1 2019 as
compared to an operating loss of $442,000 in the same period of 2018.

Net2Edge

Net2Edge’s sales increased by 172% to $448,000 in Q1 2019 from $165,000
in Q1 2018, primarily due to revenue from established CSI accounts with
new products with enhanced features. Gross profit increased by 115% to
$221,000 in Q1 2019 from $103,000 in the same period of 2018, primarily
due to higher revenue. Gross margin decreased to 49.3% in Q1 2019 from
62.4% in Q1 2018 due to product mix and costs associated with expediting
raw materials. Selling, general and administrative expenses decreased by
17% in Q1 2019 to $748,000 from $904,000 in Q1 2018 due to a reduction
in selling expenses. Net2Edge’s operating loss decreased to $527,000 in
Q1 2019 from a loss of $801,000 in the same period of 2018.

Financial Condition

CSI’s balance sheet at March 31, 2019 included cash, cash equivalents,
and investments of $9.5 million, working capital of $31.2 million, and
stockholders’ equity of $42.1 million.

Form 10-Q

For further information, please see the Company’s Form 10-Q, which will
be filed on or about May 10, 2019.

About Communications Systems

Communications Systems, Inc. provides connectivity infrastructure and
services for global deployments of broadband networks. Focusing on
innovative, cost-effective solutions, CSI provides customers the ability
to deliver, manage, and optimize their broadband network services and
architecture. From the integration of fiber optics in any application
and environment to efficient home voice and data deployments to
optimization of data and application access, CSI provides tools for
maximum utilization of the network from the edge to the user. With
partners and customers in over 50 countries, CSI has built a reputation
as a reliable global innovator focusing on quality and customer service.

Forward-Looking Statements

This press release includes certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995,
including statements regarding future financial performance, future
growth and future acquisitions. These statements are based on
Communications Systems’ current expectations or beliefs and are subject
to uncertainty and changes in circumstances. Actual results may vary
materially from those expressed or implied by the statements here due to
changes in economic, business, competitive or regulatory factors, and
other risks and uncertainties affecting the operation of Communications
Systems’ business. These risks, uncertainties and contingencies are
presented in the Company’s Annual Report on Form 10-K and, from time to
time, in the Company’s other filings with the Securities and Exchange
Commission. The information set forth herein should be read in light of
such risks. Further, investors should keep in mind that the Company’s
financial results in any particular period may not be indicative of
future results. Communications Systems is under no obligation to, and
expressly disclaims any obligation to, update or alter its
forward-looking statements, whether as a result of new information,
future events, changes in assumptions or otherwise.

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