ADDvantage Technologies Group, Inc.
Q1 2020 Earnings Call Transcript

Published: 15 Feb 2020

[Operator:]

Good day and welcome to the ADDvantage Technologies First Quarter 2020 Earnings Conference Call. Today’s conference is being recorded.At this time, I’d like to turn the conference over to Mr. Brett Maas, Hayden IR. Please go ahead, sir.

[Brett Maas:]

Thank you, operator. We’re joined today by; Joe Hart, President and CEO; as well as Kevin Brown, Chief Financial Officer; Scott Francis, Chief Accounting Officer; and Don Kinison, President of Telecom segment; Colby Empey, the President of Wireless segment.Before beginning today’s call, I would like to remind you this conference call may contain forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.These Forward-looking statements include, among other things, statements regarding future events, such as ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers, and multiple system operators as well as future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties.Participants are cautioned these forward-looking statements are only predictions and may materially differ from the actual and future results or results due to varying factors, such as those contained in ADDvantage Technologies most recent report on Form 10-K and 10-Q on file with the Securities and Exchange Commission.Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and those included in the company’s press release issued today earlier, and included in ADDvantage Technologies most recent report on Form 10-K and 10-Q.The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is subject to change. Although any such guidance and factors influencing it may change, ADDvantage Technologies will not necessarily update the information as the company will only provide guidance at certain points during the year. Such information speaks only as of the date of this call.During the call, we may also present certain non-GAAP financial measures such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website at addvantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials, and a discussion as to why we believe these non-GAAP financial measures are relevant. The financial measures are included for the benefit of investors and should be considered in addition to, and not instead of, GAAP measures.I would like to now turn the call over to Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.

[Joe Hart:]

Thank you, Brett and thank you to everyone joining us today. We began fiscal year 2020 as expected with solid revenue growth and we continue to make progress with the company’s transformation.We did experience seasonal challenges across all of our companies that we typically face in our first quarter related to weather, the holiday down period and our customers’ budget cycles. Our focus continues to be on growing our business, by capturing a meaningful share of opportunities related to the nationwide rollout of 5G.We believe the steps we have taken in the second half of calendar 2019 to reposition our business, coupled with the expected acceleration of 5G rollout by all major US carriers later this year, will be the catalyst for improved top and bottom line results in the second half of our fiscal 2020.As part of our repositioning, we launched our wireless infrastructure services business last year with the acquisition of Fulton Technologies, which was responsible for a large portion of our growth in the first quarter of fiscal 2020. Through these acquisitions, we are building our core infrastructure, talent and range of offerings to pursue and compete aggressively for new growth opportunities in 5G. This is evidenced by the strong pipeline of opportunities that we are currently pursuing.As a reminder, the Fulton business more than our other businesses is impacted by seasonality due to weather and the major carriers’ fiscal calendars. While we have equipped our crews to work with comfort and optimal safety and cold conditions, efficiencies are impaired and projects are delayed from time to time.As a result, we did experience some challenges in the beginning of fiscal 2020. At Fulton, one major carrier completed its build plan ahead of schedule in the Southwestern United States, significantly reducing the backlog of sites in our Southwest region.We proactively repositioned many of our crews to the Midwestern states to mitigate the circumstances and to take advantage of the increased workload experienced in our Northern region. We were able to shift resources rather seamlessly, despite the process taking several weeks, which resulted in compressed margins and lost revenue. Most importantly, we do not feel that this is representative of the future business, as we are looking forward to substantial growth during the business’ high season in the warmer months.Our wireless business is positioned to be a positive contributor to fiscal year 2020. We are forecasting strong double-digit revenue growth for the full fiscal year. For reference, Fulton’s revenue was $6.7 million this quarter, compared to $3.8 million for the same quarter last year prior to the acquisition.In our Telco segment, our business continues to benefit from the realignment of operations that we implemented last year, with more organized and tightly managed inventories, and more streamlined order fulfillment at Nave, the Telco business is running more smoothly then our team is better positioned to focus on growth.For the first quarter of fiscal 2020 gross margin dollars were up 20% for Nave Communications. We remain focused on optimizing operations, further building our repair services business and growing our recycled operations.We are pleased with the positive contributions Nave is making and have recently begun an inventory oversight program, allowing us to more efficiently manage our inventory levels and drive towards lower inventory volume.At Triton, the consolidation of our Warehouse and Operations Center into a single location last year as well as our transition to a more efficient operations team have driven increases in productivity and capacity for growth.Revenue at Triton was up 7.5% for the first quarter of fiscal 2020. There were approximately $100,000 of one-time costs related to the company’s move during the quarter. We are planning to add additional manufacturers to our product lines throughout this year to increase the number of product offerings and are in the process of redesigning our website with a focus on search engine optimization.We expect solid improvement in both our top and bottom line results for the third year as a direct result of improved operating efficiencies, better practices and the opportunities related to 5G across all of ADDvantage’s businesses.We are also encouraged by the recent Sprint-T-Mobile merger decision by the Justice Department, which will stimulate activity in the industry as well as pave the way for a network build out of a fourth entrant DISH Networks.With that, I’ll now turn the call over to our CFO, Kevin Brown for a more detailed review of our financial results. Kevin, please go ahead.

[Kevin Brown:]

Thank you, Joe. For the first quarter of fiscal 2020, our total sales increased 105% to $14 million, up from $6.8 million for the first quarter of fiscal 2019. The increase in sales was due to an increase in sales in the Wireless segment with $6.8 million and an increase in sales of the Telco segment of $314,000.The Wireless segment sales increase was due to the acquisition of Fulton Technologies in January of 2019. Revenue for the Wireless segment was $6.8 million in the first quarter of fiscal 2012, we did not report in revenue for this segment in the first quarter of fiscal 2019.Sales for the Telco segment increased $314,000 to $7.2 million for the three months ended December 31st, 2019, which is up from $6.8 million for the same period last year. The increase in sales for the Telco segment was due to year-over-year increases in equipment sales. The increase in Telco equipment sales was due to increased sales at Triton Datacom of $232,000 and increased sales at Nave communications of $83,000.Our gross profit increased $1.9 billion to $3.6 million for the three months ended December 31st, 2019, up from $1.7 million for the same period last year. Gross profit margin as a percentage of revenue was roughly flat year-over-year at 25.7% for the first quarter of fiscal year 2020, compared to 25.2% in the year ago quarter.Our operating expenses increased $1.4 million to $1.9 million for the three months ended December 31st, 2019, compared with $493,000 for the same period last year. The increase in operating expenses was due to the addition of the Wireless segment of $1.2 million and an increase in the Telco segment, due primarily to additional facility costs as a result of moving into Triton’s new facility in the first fiscal quarter of 2020, as well as additional personnel costs.Selling, general and administrative expenses increased $1.1 million to $3 million for the three months ended December 31st, 2019, compared with $1.9 million for the same period last year. This was due to the addition of the Wireless segment of $1.6 million, partially offset by a decrease in expenses in the Telco segment.Other expense for the three months ended December 31st, 2019 was $418,000 compared to $322,000 for the three months ended December 31st, 2018. The change was due primarily to interest income related to interest earned on a promissory note from the sale of our Cable TV segment and income from an equity investment which was partially offset by other expense related to factoring arrangements in a Wireless segment. Interest expense remain roughly flat year-over-year.We recorded a benefit from income taxes of $15,000 for the three months into December 31st, 2019, compared with the provision for income taxes of $172,000 for the three months ended December 31st, 2018. The decrease in the tax provision was due primarily to the valuation allowance netting the deferred tax assets to zero.Loss from continuing operations was $1.7 million or $0.17 per diluted share for the three months ended December 31st, 2019, compared with a loss from continuing operations of $12 million or $0.12 per diluted share for the same period of 2018 - $1.2 million or $0.12 per diluted share, I apologize.Adjusted EBITDA for the three months ended December 31st, 2019 was a loss of $1.3 million compared with a loss of $655,000 for the period a year ago. Cash and cash equivalents were $0.6 million as of December 31st, 2019, compared with $1.2 million as of September 30th, 2019. As of December 31st, 2019, the company had inventories of $8.2 million, compared with $7.6 million as of September 30th, 2019. The company had $1.7 million drawn on its revolving line of credit as of December 31st, 2019.This concludes the financial overview segment of our remarks. I will now turn the call over to the operator to facilitate any questions.

[Operator:]

Thank you. [Operator Instructions] And we’ll take our first question from George Gaspar. Please go ahead.

[George Gaspar:]

Yes. Good afternoon. Just a little color on the Wireless area and the significance of the problem that you entered there had to deal with shifting crew from apparently from the south to the north. And can you equate the number of crews that you have in-house and crews that you’re using outside of your internal operations and how those numbers compare with the previous quarter and then say, a year ago for you at that time that team when it became part of ADDvantage Technologies, that would be my first question.

[Joe Hart:]

Okay. Hi, George this is Joe. The ratio of in-house to external crews is about one-third in-house to about two-thirds subcontractor. We try to keep that ratio in that range throughout the year, it can move around a little bit, maybe instead of one-third, two-thirds can be 40

[George Gaspar:]

What’s the number –

[Joe Hart:]

Yeah?

[George Gaspar:]

Okay, go ahead. I’m sorry.

[Joe Hart:]

Yeah. I prefer not to post on a number, George only because that’s somewhat of a comparative thing between the different contractors that are out there. So I prefer not to post the number, but it’s a fairly significant number of crews.

[George Gaspar:]

Okay.

[Joe Hart:]

But it’s matched up to the number of sites that we get purchase orders from our customers. So it’s not like we contract for next month for 20 crews, and we don’t know what the work is going to be. So we only add and subtract crews as the purchase order flow comes in for a site construction. So it’s very closely managed, but the number to move around, depending upon the workflow.

[George Gaspar:]

Can you relate the kind of percentage basis, the amount of Wireless revenue stream was generated in, let’s say, the broader Midwest versus the Southwestern part of the United States and Texas, particularly where you’re located? Can you give us that?

[Joe Hart:]

South versus North for the quarter?

[Kevin Brown:]

Yeah, that we’ll have to pull that to give you an exact number, so we’ll do that.

[George Gaspar:]

I’m sorry, what were you saying?

[Kevin Brown:]

We’re pulling the number up.

[George Gaspar:]

Okay.

[Kevin Brown:]

To give you an exact figure or percentage.

[George Gaspar:]

I see, okay. And can you describe when you initially started, let’s say, as part of the ADDvantage Technologies, your invention was, I guess, to work off of putting equipment on existing cell tower. How is your business growing? Is it mostly still high rise towers that you’re working on? And in both Central and Midwest and the Southwest or how much are you doing on roadways to prepare to take those signals off the main tower. Can you describe a little bit about exactly what they’re accomplishing in your work?

[Joe Hart:]

Yes, I would say in the north, about 50% of our Wireless business, let me say 40% of our Wireless business is specialty work. So it’s special events like the Super Bowl, the World Series, The Indianapolis 500, Big Music Festivals. Right now we’re doing work with the Democratic National Convention up in Chicago. So, you know, about 40% of our northern revenue per year comes from that specialty kind of work which tends to be temporary cell sites that are placed in high volume, you know, pedestrian traffic kind of situations.We’re very good at that and been doing that for about 25 years. The other 60% in the last year has been almost all macro cellular or tower sites or rooftop sites. And that’s also true for the southern region of our business. We’ve done a little bit of small cellular. This, most recently, we were building small cells for AT&T in Fort Worth. We’re about to embark on projects for small cells up in Milwaukee and in Detroit.So, we expect that as 5G starts to gain momentum, the ratio of macro cellular to small cellular really starts to shift. And we now probably see longer-term meaning, of 2,3,4 years out, we’ll probably see a shift of more 50% macro, 50% small cell depends a little bit by carrier, but you know, in 5G, the signal needs to be lower and, you know, it doesn’t quite have the load capacity or traffic capacity that 4G had.So, you know the frequency and the type of cell site starts to shift as you move from 4G to 5G. And that’s why, you know, we have started to build the groundwork to for a chase of words, groundwork. Small cell is groundwork, but, you know, we’re going to see a shift in our workforce, where we, at some point maybe next year, we’ll probably have as many ground technicians working small cell as we have tower climbing technicians today.Can I answer your question – excuse me, can I answer your question? The workload balance between North and South in the first quarter was about, it’s almost exactly 50

[George Gaspar:]

Okay. And I know that your areas covering the Milwaukee area in the Wisconsin of course, and a couple of things on that. You mentioned the Democratic Convention in Chicago, but the convention is in – it’s going to be in Milwaukee, Wisconsin in July this year. Are you going to [indiscernible] cell towers there?

[Joe Hart:]

So yes, I stand corrected. I think of it as being in Chicago, because it’s worked out of our Chicago office. But you’re right, it is in Milwaukee. And yes, we are deploying temporary cell sites all around that area now.

[George Gaspar:]

Thank you. Yeah, go ahead.

[Joe Hart:]

We’ve already started to do the work. Typically for those big events, the sites are put in place and then tested and launched anywhere from three months to six months ahead of the event.

[George Gaspar:]

Okay. And then I understand that in Madison, Wisconsin, there’s a 5G assist being already put in there and also around local streets in Madison, are you covering that area?

[Joe Hart:]

It depends what carrier. The work we’re doing in Wisconsin currently is for AT&T, not, I mean, look, all the carriers are announcing that they have some 5G offerings, some are real, some are software enhancements to 4G. They, you know, the AT&T has a 5Ge version that’s out there at the moment.T-Mobile has used something in the 600 megahertz range. That’s good for capacity – good for coverage, not quite as good for capacity. So I mean, every carrier is out there announcing that they have 5G, but first of all, there are hardly any handsets. So what they’re doing is mostly for enhancing Wi-Fi or business networks and things like that. It’s not really impacting the actual subscribers to any extent.

[George Gaspar:]

Okay. And then the growth on this going forward, are there things that you haven’t been doing in the past that are giving us an opportunity to expand your operations and maybe through looking at, making some acquisitions of other services to provide? What do you – do you have any comments on that?

[Joe Hart:]

Well, I think in sort of a medium to long-term, it’s a good idea for us to look at ways of expanding our suite of services, maybe starting earlier on the front end with engineering and site acquisition services and network optimization, ground technicians for commissioning and integration of cell sites. So, all those things are things that we’re looking at from a suite of services perspective.The one thing that we have accomplished since we took over Fulton a year ago is that, originally the Chicago Office worked Illinois and Wisconsin, the Texas office worked, Texas and Oklahoma. We have now performing services from, you know, Michigan, Indiana, Illinois, Wisconsin, Minnesota, the Dakotas, Iowa, Nebraska, Missouri, Kansas, Louisiana, Mississippi, Alabama.I mean, we have really broadened our geographic coverage, which helps us if there’s a particular slowdown in Texas, let’s say then, you know, we’ve got ourselves spread wider and flatter, which helps mitigate the risk of any one market slow down at any given time.And on the other hand, the Minnesota Northern Plains area is really booming this year with Verizon, T-Mobile, AT&T, are all they’ve got quite a site expansion going on out there. So we’re capitalizing on our private presence there and working relationships with the carriers.

[George Gaspar:]

Okay. And if I could shift over to the telephonics side and I know that you’ve got completed your expansion and going into a new operation, which is what 20,000 square feet in further north out of Miami, North West. Can you describe if you’re pretty complete now and bringing all your services together there? And then if you could give us some highlight on some of the expansion that you could create to, in terms of offerings, a new equipment in service where that you haven’t been doing in the past?

[Joe Hart:]

Yes, George, if you don’t mind, I’m going to pitch that one to Don Kinison, Don runs the Telephone segment. And he was personally the man on the scene with that move so.

[Don Kinison:]

Hey, George. So the move has been 100% complete to this point. We’ve now started evaluating our operational efficiencies, which includes production of equipment, production of phones, we’re continuing and always will continue to evaluate different product lines that we can run through our production facility. We’re pleased so far with how the move has meant to this point. And we’re pleased with the overall production and the efficiencies of the group as the move was completed.

[George Gaspar:]

Okay. And is there anything new that you could market or the way you market in this particular expanded facility now relative to what you’ve been doing before?

[Don Kinison:]

So I mean, we’re always looking at different ways to drive revenue through different channels of revenue. So you know, whether that be outbound or inbound, the SEO and things of that nature. So we’re evaluating numerous different products. And we always will continue to do that. We’re very focused refurbishing company, that’s what we do really well. And we’re highly focused on becoming more efficient, reducing operating costs and improving productivity and looking –always looking at relative products to what our current product line is to help complement.

[George Gaspar:]

Yeah. Okay, and what kind of crews are you carrying out of that facility now versus what you had before when you were spread out in several locations and you had 9,000 square feet if I remember. And this give us a mark and then the total number of employees that you have in that operation?

[Kevin Brown:]

So, we reduced the number of employees that we actually are able to manage in that operation. Really can’t provide you with an employee headcount numbers. Productivities went significantly up which has been – which has allowed us to reduce some of our headcount. It obviously helps lower our cost of goods and improved our margins. We are having multiple facilities was difficult and required additional headcount in order to manage those products in multiple facilities. So as we brought everybody together it’s a significant improvement in efficiencies.

[George Gaspar:]

I see. I see. Okay, all right. And then one final for Joe Hart there. At the last call you had, I asked you a question about whether you would be starting to get out to talk to institutional investors at conferences and you indicated that you were hopeful of that like addressing that. Do you – can that come about along the way here or is that still hesitant to giving a benchmark there at all?

[Joe Hart:]

Yeah, we’re still scheduling to, you know, attend conferences, potentially do a roadshow in sort of the April-May timeframe. We have an Investor Presentation that we’re just about finished with and hope to put out in relative near future and for everyone to see and, you know, really start, you know, beating the drum and, you know, promoting the company.You know, we really – you know, this has been, I would say, about an 18 month transformation from the company as we knew it over a year ago. And, you know, I would say, January, we still have two more months to get through and get our way into the sunshine and warm weather and really get Fulton, you know booming on all cylinders.And, you know, it’s January well I’m sorry, it’s now February, still feels like January here with the weather. But, you know, we’ll be in a good place here in about another 60 days. I mean, unfortunately, that’s where we are, and until we can really get Fulton at a much higher plane, you know, will be able hopefully next year to avoid the up and down cycles of weather and holidays and things like that. We’ll always be there.But I think we’re going to see what the Justice Department’s decision and the entry ofDISH potentially into Wireless, we’re going to see the workload expand quite nicely here. And it may take most of this calendar year to unfold, but I think you know, we’re positioned pretty well to be able to take advantage of that.

[George Gaspar:]

Yes. Okay. And one thing you’re talking about transition, 18 months. Now, I assume you’re pretty much out of Broken Arrow. You have your – the people that in the staff area that were there that moved into Texas or into the Dallas area. Is that – am I correct on that? That pretty much done?

[Joe Hart:]

Yes.

[George Gaspar:]

Is there anybody left in Broken Arrow?

[Joe Hart:]

Well, there’s a lot of people left at Tulsat. Yeah you know, Dave Chymiak’s whole crew from Tulsat all still there. But yes, we have a couple of folks who are our key contributors. You know, Scott Francis, who’s our Chief Accounting Officer, Scott’s from there, our HR leaders from there, but, you know, we have less than a handful of folks there.

[George Gaspar:]

I see. I see. Okay, all right. Thank you from here.

[Joe Hart:]

You’re welcome, George.

[Operator:]

Thank you. [Operator Instructions] We’ll hear next from John Harrell with Harrell & Associates. Please go ahead.

[John Harrell:]

Hey, thanks for taking the call. Just a quick note of advice. I think I would probably limit calls in the future to no more than two questions and then, at that time, choose to get back in line. Look as about a month and a half ago, you guys are down to about $608,000. And I think what real investors want to know is, how much capital are you guys going to have to raise, what is going to be necessary in order to get the company to profitability? And how do you plan on raising that capital, because you are very, very low on cash right now? Thank you.

[Kevin Brown:]

Yeah. So right now we have $4 million line of credit that we’re able to use for working capital purposes. We’re also – as we stayed in our 10-Q, we’re also exploring our options around raising additional capital, because to ramp up an operation such as Fulton with a large contract that we’d win, we would need especially as George talked about acquisitions and other things like that, there would be a need for additional capital.

[John Harrell:]

Well can you talk about reaching profitability and you’d hope to achieve that?

[Joe Hart:]

Yeah, I mean we fully expect 2020 to be a profitable year. We’ve been saying for a while now that, you know, starting the fiscal year going into, you know, Thanksgiving, Christmas, New Year holidays, having the holidays fall in the middle of the week, a lot of people just took off for two weeks. Some of those people are employees, and some of those people are those could placeholders on us.And then, you know, we go into the winter months when half of our Wireless construction is in the northern region. So, you know, this is our downside of the year. It’s pretty predictable and that you can do some things to help mitigate it, but it slows down in the cold weather and then the ice of the North.And, you know, and yet in the summer, it’s absolutely gangbusters. So if you look at last year, Fulton did about $8 million in Q1, Q2. Q1, as a reminder was not under our ownership, but we have the revenue numbers. But if you look at Q1 and Q2 last year, it was about $8 million. And then in the second half of the year, it was almost $19 million. And we have more crews in place this year than we had last year. And we expect this year to be an overall profitable year for not to have spoken, but for ADDvantage.I mean, we’re focused on the EBITDA – yeah, we’re focused on EBITDA, John, you know, and that’s what we’re trying to generate. So, unfortunately, we aren’t big enough at the moment to get through that winter slump without it having an impact. We hope to be there next winner, and be able to mitigate some of the downside of our cyclical business.

[John Harrell:]

Okay, I appreciate it. Thanks and good luck to you guys.

[Joe Hart:]

Thank you very much, John. Thanks for your question.

[Operator:]

And it appears there are no further questions in the queue. At this time, I’d like to turn the conference back over to management for any additional or closing remarks.

[Joe Hart:]

All right, well this is Joe and on behalf of the management team here and we’d like to thank everyone for joining on the call. And our appreciation to Brett and folks at Hayden IR for their support and guidance. And we look forward to a good fiscal 2020. Thank you for your support and your interest.

[Operator:]

Thank you. That does conclude today’s conference. Thank you all for your participation. You may now disconnect.