ADDvantage Technologies Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 17 Dec 2020

[Operator:]

Thank you for standing by. This is the conference operator. Welcome to the ADDvantage Technologies Fiscal 2020 Fourth Quarter Financial Results Conference Call. As a reminder, all participants are in a listen-only mode and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. I would now like to turn the conference over to Brett Maas with Hayden Investor Relations. Please go ahead, sir.

[Brett Maas:]

Thank you, Operator. We are joined today by Joe Hart, President and CEO; and Jarrod Watson, Chief Financial Officer. Before we begin today’s call, I’d like to remind everyone that this conference call may contain forward-looking statements, which are made subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

[Joe Hart:]

Thank you, Brett, and thank you to everyone joining us on the call today. We’re having a brief conversation before the call started this morning. And I was thinking back to about this time last year, probably more in the February timeframe, March. News of the pandemic was really coming to the forefront, things were getting very concerning. And as we went through the last nine months, businesses around the world have been in quite a tumultuous situation. We’ve seen businesses that have gone belly up. We’ve seen businesses that have been cut back to 25%, 50% levels. We’ve seen a lot of negative things that have happened.

[Jarrod Watson:]

Thank you, Joe. Sales for the fourth quarter 2020 decreased to $12.2 million from $17.9 million in the prior year. $5.3 million of this decrease came from our Wireless segment, as the Group felt the impact of COVID-19 on its business and 5G delays and infrastructure spending from the major U.S. Carriers.

[Operator:]

Thank you. We will now begin the question-and-answer session. Our first question is from George Gaspar , a shareholder. Please go ahead.

[Unidentified Analyst:]

Yes. Good morning to everyone.

[Joe Hart:]

Good morning, George.

[Unidentified Analyst:]

Can you hear me?

[Joe Hart:]

Yes. We can hear you. Good morning.

[Unidentified Analyst:]

Okay. First question is relative to the changes overall that you made at teleco in your new facility? Can you describe the expansion in repair services and the expansion in distribution a product line that you can experience on a more positive basis going forward?

[Brett Maas:]

Hi, George. It looks like Joe may have got disconnected. Reggie, are you on the line? Can you take that question or would you like me to take it?

[Reggie Jaramillo:]

Yes, absolutely. Yes. I can take it. So, good morning, George.

[Unidentified Analyst:]

Good morning.

[Reggie Jaramillo:]

So relating to our expansion at our Fort Lauderdale, Triton facility, we were fortunate to locate a real estate space, where we could design a facility with a workflow process. It would be able to allow us to refurbish the equipment we refurbish and sell in the market. We are working on expanding our product line there as well. And then at our other telco company name, we’re continuously upgrading our repair capabilities there as well to better serve our customers in the market. So, hopefully, that answers your question. George, is there any additional questions let me know.

[Unidentified Analyst:]

Just one. The scope of the telco base are scoping your capacity to expand nation -- nationally from that base, I mean, how do you view that?

[Reggie Jaramillo:]

No. I think with the distributions that we have and the FedEx, UPS, other carriers as well, the web presence that we have, in-person presence that we have with our multiple large carriers, we are positioned to grow and to deliver across the country and we do a little bit of business internationally as indicated in our 10-K. So I think we’re positioned to handle any growth across the country, George.

[Unidentified Analyst:]

Okay. Okay. All right. And is there any -- how are your cost structure or your acquiring product line in telco? How have you been -- can you give us some thought about the cost structure on a per unit basis? How it’s going now versus, say, a year ago to acquire product?

[Reggie Jaramillo:]

Yes. Very good question, George. So, with the COVID environment, we have some opportunities, because business is slow to acquire product at prices that were more favorable than a year ago. We’re continuously searching the market and looking for different avenues to acquire equipment, so that we can be more competitive and increase our margin. So there’s great opportunity and we’re always looking for different avenues to acquire equipment. And it’s been pretty good this year versus last despite the headwinds we’re facing on COVID.

[Unidentified Analyst:]

Okay. Thank you. The question..

[Joe Hart:]

George…

[Unidentified Analyst:]

Yes.

[Joe Hart:]

I am sorry, it’s Joe. Yes, I would balance that with - Reggie, has been working very hard to make sure that we’re not growing the inventory to a level that we can’t support with sales, and historically…

[Unidentified Analyst:]

Yes.

[Joe Hart:]

… that has all -- that has always been a challenge. And as you have seen over the years, we’ll have a good year with our equipment business, a pretty good to good year and then it’ll be offset with some inventory write-down, because of either sale, aged or inventory and disrepair that was purchased in some kind of bulk fashion. So, Reggie has got a very sort of delicate balancing act between buying products that’s at good prices and yet keeping inventory at a very manageable level. So, he has been doing a really nice job since he has taken over.

[Unidentified Analyst:]

Great. Wonderful, wonderful. Okay. And now I extend this questioning to the 5G expansion probabilities and opportunities. The -- and you explained basically, in early comments here, the impact of COVID and the slowdown and -- but you’re also suggesting that 5G breakout going forward could be considerable and I’m sure very opportunistic for your company. How are you prepared now? Can you give us some commentary on your crew count and how it’s compared from, say, a year ago? And I know that it’s probably tough to keep crews together when your business is down? But if you’re going into a better period going forward, obviously, you need the crews to accomplish the effort. And can you talk more geographical also about how you view your activities going forward through the calendar year 2021?

[Joe Hart:]

Sure. So if we look at the carriers, Verizon, Verizon has historically been kind of a steady eddy, they build out, spend their CapEx on a pretty regular fashion year-after-year. And they expand their networks and upgrade to new technologies on a steady ongoing annual basis. AT&T tends to be a little more bulky, a lot of four, five years upfront, big spend and then it starts to sort of average out at a little lower level. The -- there’s a couple of things going on here. They’ve all had pilot programs with millimeter wavelength, high-band, low-band, mid-band, et cetera. But the FCC has got a big auction going on right now for C-band, which puts 300 megahertz of new spectrum out there for all the carriers. So the -- I think the bidding is up into about $7 billion, $8 billion at the moment on that spectrum. So it’s very active. The other thing is Dish. Dish must start building its new network and they’ve ordered radios from Fujitsu and CPI out of Taiwan. We expect Dish will start construction about the middle of 2021. So probably about that June, July timeframe, we’ll see Dish starting to build. And they’ve only got about three years to cover half of the U.S. population. So that’s going to be a fairly rapid buildup as they start their construction. From our perspective, you’ve heard me say on the prior couple of quarters, our business almost dried up here during the summer in the Southwest. Well, we’re very active, very busy, where we little under 20 crews working in the back in the Southwest. So we’re encouraged that are building -- our business is really rebuilding itself in the Southwest region. We are essentially an up the middle country -- company. So Southwest from Texas all the way up to the Canadian border, Illinois, Wisconsin, the Great Lakes area, as well as the plains States of Iowa, Nebraska, Minnesota, et cetera. So our bread and butter is up the middle of the country and that’s where we want to stay focused, and not be chasing business all corners of the country without a good plan and the ability to supervise it. So hopefully, I’ve answered your question. I think it’s building, but I always throw that caution that, if you watch the news, the Northeast is getting hit by tremendous blizzards and ice and snow that can happen at any time in the Midwest, as we know, and we’re entering winter. So, I just got -- I feel good about 2021 overall. It is finally happening. I know, some investors have kind of cast a wary eye and say, this guy keeps promising 5G, but it hasn’t happened yet.

[Unidentified Analyst:]

Right.

[Joe Hart:]

Right. So we’re almost there, George.

[Unidentified Analyst:]

Right. And could you comment on the revenue stream on the Wireless? If that -- if you were to divide it up this to the type of business, say, tower work, tower install, not tower install itself, but maybe the accomplishing the equipment on towers? And relative to, let’s say, the going that the work that’s necessary away from the towers, if you were to -- can you identify it in terms of percentages of how much is done on towers directly versus away from towers and can you comment on how much is necessary to accomplish for effective 5G away from that towers?

[Joe Hart:]

Well, that’s a lot to identify. But I would say this that, of all the CapEx, the CapEx is predicted -- the CapEx spend for the next four years or five years is predicted to be about $30 billion to $35 billion a year. They expect that by 2025 about 350 mobile subscript -- 350 million mobile subscriptions will be on 5G compared to about 1 million today. So in that $30 plus billion a year CapEx spend, probably half of that is spent on fiber optics technology to get signals to and from cell sites within the public switch network across town, across state, across country. Half of its on wireless and of that wireless spend about 30% is probably on the equipment itself, probably another 50% plus is on the services needed to actually upgrade the technology on existing sites. So there’s about 400,000 existing cell sites out there. They all have to be upgraded to 5G. So, the opportunity is pretty immense. I would say services for 5G, probably, about 20% will be on adding new sites, 20% to 25% could be on small cell and then the remaining will be on upgrading to 5G on existing cell sites.

[Unidentified Analyst:]

Okay. Okay. And that’s pretty -- when you describe some of these numbers, it looks like there’s room for considerable expansion, once maybe you get along here in a couple of quarters. Is it final -- finally, I’d like to just ask that you’re nearly through your first quarter now being that this is the 17th of December, is there any comments that you could make for us on how this quarter has gone?

[Joe Hart:]

That’s a bit of a tricky one, because we usually don’t comment on forward business, but…

[Unidentified Analyst:]

Yes. Okay.

[Joe Hart:]

But as I said, I think, the Wireless activity is picking up. The Telco activity reduce -- got a good operation, got a good team. So Telco is producing at sort of budget -- budgeted level. The -- we’re not out of the COVID situation. There is great hope and expectations around the vaccine. It’s not widely available yet. We still have, I’ll say, the momentarily week or two-week quarantine situations with employees. Our people are out working in the network and with the public every day. So, we do hit moments in time where a crew or a few crews get shutdown for a bit as they -- somebody they’re exposed to somebody who’s positive tested. So, it’s not perfect and we’re heading into a holiday. So this is never our best quarter of the year, George.

[Unidentified Analyst:]

Yes.

[Joe Hart:]

So -- but I think it’s going to be a strong year.

[Unidentified Analyst:]

Okay. All right. I’ll go back in the queue at this point and let someone else ask a question.

[Joe Hart:]

Okay.

[Unidentified Analyst:]

I get a couple more but I’ll wait.

[Joe Hart:]

All right. Thanks. Operator Our next question is from Bob Jensen , a shareholder. Please go ahead.

[Unidentified Analyst:]

Yes. You guys did a presentation this last summer, where your goal was to grow revenues from $50 million to 250 million. Can you comment on where you stand as far as is that still doable and basically how will you get there? Would it be through acquisition or organic growth?

[Joe Hart:]

Well, it’s some -- Bob, it’s some percentage of organic growth. I mean, we -- we’re still bullish on the ability to grow our existing operations, which are basically Dallas and Chicago centric to grow that business.

[Unidentified Analyst:]

Okay.

[Joe Hart:]

It’s -- I’ve seen this been through the 3G and the 4G cycles before with other companies where we’ve been able to grow the business from $50 million, $60 million a year to $600 million, $700 million in over a six-year, seven-year period. So it’s quite possible to do it organically but it’s also slower. And as I mentioned, the bulk of the CapEx in the 5G cycle will be spent in the first five years of that 10-year cycle. So we believe that on top of the organic growth, we need to be fairly aggressive about an M&A program. So we’re positioning ourselves to begin working with potential investors and go on a capital raise program that allows us to look at really good target companies that have both a cultural fit, as well as the technical capability and reputation to allow us to expand our geographic footprint, while we’re growing the business pretty dramatically. I feel the $50 million a year to the $250 million a year is actually quite doable and it’s something I’ve personally been done a number of times in my career. It -- we just got to have good targets and we got to have good customers and we have both of those. So I’m feeling very confident and bullish about our ability to grow the business.

[Unidentified Analyst:]

Do you currently have any acquisitions insight?

[Joe Hart:]

Sure. I mean, there’s always targets on the radar. There are a few out there that we like a lot and so we’re working our way towards, trying to make some progress in that regard.

[Unidentified Analyst:]

Okay. With any -- with those acquisitions be financed through sales and stock and you guys did a registration for a shelf offering, I believe.

[Joe Hart:]

Right. Right. The shelf offering has been out there for a number of months. It was capped at just a little bit under $14 million in the registration document. We’ve sold about $2.5 million worth of shares over the last, well, since June. Not a big amount. There are some daily limits. So you’re never going to see a big swath of shares that comes through the S-3. And so we’re looking at our options, whether it might be capital raise through an S-1, it might be through attracting large investors or private equity money to come in. There’s a lot of options about how to raise the money, whether it’s data, whether it’s equity. So I would say, we’re just in the sort of fact finding exploratory phase of that right now.

[Unidentified Analyst:]

Yes. Okay. Well, hopefully, you won’t raise money when the stock price is too low. Anyway. Okay. Thank you.

[Joe Hart:]

We are looking it all the time, right? You’re welcome. You’re welcome.

[Operator:]

Our next question is a follow up from George Gaspar, a shareholder. Please go ahead.

[Unidentified Analyst:]

Okay. Thank you. Joe, the follow-up here is, when your -- you complete work on a tower? And the -- how far away from the tower can your work go from a specific tower? I think maybe back a couple three quarters, four quarters ago, we were talking a little bit about this opportunity away from towers getting individual highways or streets or whatever. Exactly, what is the opportunity away from the tower in terms of distance to complete, let’s say, a single project in a specific area for you? Can you describe that?

[Joe Hart:]

Well, typically, for something like a 5G expansion or upgrading technology, you not only have the work that’s at the base of the tower and up the tower and the top, but you often have to bring additional fiber optic cable to that tower. And you’ve all driven around both your neighborhoods, as well as to and from other cities. So in the city towers are close to the main street. So maybe it’s 50-feet to 100-feet, 200-feet to get to the street and you’re going to take a fiber cable out to that street and it will be connected by the phone company or the wideband Carrier who will splice it into the network. If you’re out in more rural areas, those access roads to the site could be a 0.25 mile, 0.5 mile, something like that from the main road. So it’s fairly -- it’s a fairly controlled environment and it’s not like you’re building out in the middle of national forest or the mountain range or something like that, right?

[Unidentified Analyst:]

I see. Okay. All right. And there is so much discussion about the opportunity on a daily basis hearing investment commentaries about the opportunity and to find companies that are associated with 5G and in terms of what they’re doing with? The most of it at this point has been concentrated on the equipment side from the commentaries in Wall Street. And it looks like there’s a pretty interesting potential coming from the install side equipment -- install side and that’s where you come into the picture. It would -- it’s going to be interesting to see how this unfolds the commentary that you’ve made here shows a pretty dramatic opportunity going forward and if you are able to accomplish a decent amount of the potential out there, it should give you opportunity to look for some types of acquisitions of to run your revenue stream on an annual basis upside by, hopefully, what will be a very significant margin. Any comment on that?

[Joe Hart:]

Well, I think, we agree. I mean, there are very few companies in the publicly traded space that are in this business. There are a few multi-billion dollar companies, Masstech, DICOM, Quanta, to name the top three. But there are barely any in sort of small- to medium-sized companies. In other words, in the sort of $30 million to $500 million, you don’t find many. Most of them stay private or they’re one owner companies that work their way up the ladder and eventually they sell off. But so we feel that we’re in a good place. We have both the experienced team, the credentials. We’ve got a core support group that has done this before and that’s kind of critical, right? From an overhead perspective, we have a back office spine of core services provided by folks who have done this and have scaled this business up before and that’s critical to us being able to rapidly grow our business from that $50 million to the $250 million, right? You got people who know how to do it and have done it before. And we’ve got those functional leaders and project controls, contracts, subcontracts, back office, all the different services, as well as construction. And we feel we’re in a good place. As long as we pick good targets and remain disciplined, we’re going to do well in this growth curve.

[Unidentified Analyst:]

Right. Okay. And in closing comment, I would have observation, also your large substance of being in the Southwest looks very attractive from the standpoint that more companies are moving out of California and the West Coast generally and they’re moving into Texas and Arizona. And I don’t know about New Mexico potentially there too. But there’s some pretty sizable transfers being taken place -- are taking place from San Francisco South and through California to this Texas area, which would seemingly put you in a pretty dynamic position to take advantage of what is going to be a better market, Southwest?

[Joe Hart:]

We feel we’re in a good place. We agree to it.

[Unidentified Analyst:]

Okay. Okay. All right. Good luck to you guys. Thanks very much.

[Joe Hart:]

Thanks, George.

[Jarrod Watson:]

Thanks, George.

[Operator:]

There are no further questions registered at this time. I would like to turn the conference back over to management for any closing remarks.

[Joe Hart:]

Well, I just want to thank everybody again for joining us on the call today. We all wish that results were better than they had been in 2020. But given what’s taken place around the world and both in the technology space, as well as with COVID-19, we feel fortunate to be where we are. There are high percentage of businesses that haven’t made it through this pandemic and I don’t want to overplay that, but we feel that we’ve made a lot of prudent moves, trimming the fab, getting ourselves with the best people in the right positions and being able to really leapfrog from where we’ve been to where we want to get to in 2023. So thank you for your continued interest and investment in ADDvantage Technologies.

[Operator:]

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.