ADDvantage Technologies Group, Inc.
Q2 2019 Earnings Call Transcript

Published: 14 May 2019

[Operator:]

Good day, and welcome to the ADDvantage Technologies’ Second Quarter 2019 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Ms. Elizabeth Barker of KCSA Strategic Communications. Please go ahead, ma’am

[Elizabeth Barker:]

Thank you, operator. Before we begin today’s call, I’d like to remind you that this conference call may contain certain 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 the future events, such as the 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 the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned that these forward-looking statements are only predictions and may materially differ from actual future events or results due to a variety of factors, such as those contained in ADDvantage Technologies’ most recent report on Form 10-K 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 notes included in the company’s press release issued earlier today and included in ADDvantage Technologies’ most recent report on Form 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 this 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 is 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 about why we think these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. With nothing further, I would now like to turn the call over to, Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.

[Joseph Hart:]

Thank you, Elizabeth. Welcome everyone to the ADDvantage Technologies’ fiscal second quarter 2019 conference call. With me today are Dave Chymiak, Chief Technology Officer; Kevin Brown, Chief Financial Officer and Scott Francis, our Chief Financial Officer. Also joining us on the call remotely are Don Kinison, President of the Telecom Division, Colby Empey, President of the Wireless Services Division. For the second quarter of fiscal 2019 we reported revenues of $17.3 million, an increase of 48% as compared with the second quarter of 2018 and 53% compared with the first quarter of 2019. This meaningful improvement was primarily driven by the acquisition Fulton Technologies in January of 2019 which contributed $4.2 million of revenue for the quarter. In addition, we continue to see strong momentum in our Telecom segment, where we are pleased to report a revenue increase of $1.7 million or 24% compared to the same period in 2018. As mentioned on our recent earnings calls, we are affecting major changes in all areas of our business. These initiatives are enabling us to pivot away from our original core cable TV business and expand our range of solutions in the telecom and wireless services markets. Our objective is to establish a stronger, more efficient foundation that will support financial stability and generate a higher return on investment for our stockholders. During the second fiscal quarter we made significant progress toward our goals, including completing our milestone acquisition of Fulton Technologies which launched our new wireless infrastructure services offering. We also reported strong results from our telco segment as our operational improvements contributed to higher sales. We are very pleased with this progress, which we believe will set us on the path to near and long-term revenue growth, as well as improve bottom line results starting in the third quarter of fiscal 2019. On today's call I am first going to discuss the acquisition of Fulton, which launched our wireless infrastructure services business before updating you on the recent progress made in both our telco and cable TV segments. This was our first quarter with revenue from Fulton, which operates as a wholly owned subsidiary of ADDvantage Technologies and is now reported in our new wireless infrastructure services segment. Revenues from Fulton were $4.2 million for the quarter, which is in line with our expectations for their first quarter with the company. To ensure continuity in its operations and a smooth integration, we appointed Colby Empey, who previously served as Chief Operating Officer at Fulton to the new position of President of our Wireless Infrastructure Services Segment overseeing Fulton's operations. We are pleased to have rapidly assimilated Fulton under the ADDvantage Technologies umbrella. Although Fulton incurred operating losses of $1.1 million in its inaugural quarter with the company, this was due in large part to $0.4 million of non-recurring costs associated with the integration and ramp up of Fulton and the seasonality of the business. We believe that it is on the path to provide a positive contribution to the bottom line during the fiscal third quarter. Furthermore as 5G is rolled out through the US over the next several years, we will see significant growth in this segment, as demand for wireless infrastructure services ramps up. We are confident in Fulton's ability to leverage this market momentum to achieve scale. Fulton already has a strong reputation in the industry, as well as existing contractual relationships with the four major U.S. wireless carriers, the national integrators and the original equipment manufacturers or OEMs that support these wireless carriers. The Telecom segment reported sales of $8.7 million, which is an increase of 24% as compared to the second quarter of 2018 and an increase of 27% compared to the first quarter of 2019. This was driven by strong sales momentum at both Nave Communications and Triton Datacom both of which have undergone several recent initiatives to improve operational efficiencies, generate new revenue streams and achieve sustainable long-term growth at the company. These initiatives have been led by Don Kinison, who was recently promoted to President over the Telco segment. A milestone was reached in the telecom segment this quarter by reporting positive EBITDA of $0.3 million, a vast improvement over previous quarters. This further validates our growth strategy and demonstrates the success of the operational improvements in both Nave and Triton. We are pleased to be reporting these material improvements that are direct result of the strategic initiatives we began implementing late last year. Most notably Nave grew revenue by 39% as compared to the first quarter of 2019, while simultaneously reducing operating costs. This significant improvement was largely due to its new warehousing and operations locations at Palco Telecom, our world class third party reverse logistics partner, which enables Nave to operate more efficiently. These efficiency improvements led to both reduced operating costs and a higher quality service being offered to our customers. Nave is now a healthier business than it was six months ago and in a better position to grow its top and bottom line results. The new location at Palco allows it to serve an expanded geographic customer base. Nave has also completed its initial investment in repair and testing equipment at the Palco facility in order to expand the repair and testing capabilities of our own inventory. In addition, we are now marketing this service to our customers as an additional line of business. We are encouraged by these opportunities to further increase sales at Nave and we'll continue to provide regular updates to our shareholders on these initiatives. Similarly at Triton, we are implementing a two-pronged strategy that is centered on both operational improvements and broadening our total addressable market to grow sales. We had originally planned to move out of our existing Miami facility and into a newly constructed facility in nearby Pembroke Park, Florida in May. The move was temporarily delayed until July due to an ownership change at the new facility, hindering Triton’s growth expectations and thus contributing to the company's loss this quarter. While we are disappointed with this short term hurdle, we continue to believe the new facility will give us the additional capacity to expand our equipment refurbishment operations by adding additional products and manufacturers. Equipment refurbishment is our highest margin segment of Triton. So we are excited to complete this facility move and become fully operational with the additional product offerings to offer our customers. The expanded capacity will also support our plans to sell our equipment products and fit into the telephone carrier market. In order to capture additional market share, we have also increased our focus on the brokerage business and Internet sales to secure additional online distribution channels for our products. We are encouraged by our growth strategies at both Nave and Triton and we'll continue to invest in our telco businesses to achieve long-term sustainable growth. To support our strategies, we are raising capital through the sale of our cable TV segment with the objective of reinvesting the proceeds into our telecom and wireless infrastructure services markets. In the second fiscal quarter of 2019 we made meaningful progress towards this divestment strategy in the cable TV segment. As a reminder, this strategy has been in the works for several years. It has long been evident to the Board of Directors that the cable TV market is experiencing a general decline which is something we have talked about extensively on previous earnings calls. This industry wide decline directly impacted sales at our own cable TV business and we believe our resources can be better directed elsewhere. In April 2019 we distributed a proxy statement to our stockholders which announced a special meeting of stockholders on May 29 of 2019 to vote on the proposed sale of the cable TV businesses to levelling 8 Inc., which is controlled by David Chymiak. Mr. Chymiak is the Chief Technology Officer of ADDvantage, President of Tulsat, a member of the Board of Directors of the company and a substantial stockholder of the company. If the sale is approved by the stockholders, we anticipate that we will receive approximately $3.9 million in cash, which includes the funds received from the Sedalia, Missouri building sale of $1.35 million completed in March; and $6.4 million promissory note payable over five years that is personally guaranteed by Mr. Chymiak. With that, I will now turn the call over to Kevin Brown, our new CFO as of March 1st. Kevin is a seasoned financial executive with extensive experience in the telecom industry and we are delighted that he has chosen to join us ADDvantage Technologies. His expertise includes M&A and private equity, as well as serving in various senior management roles of several companies. He is adept at identifying and analyzing strong growth opportunities in the telecom infrastructure and services markets. We are taking it as a very good sign that he has chosen to join the team at ADDvantage during this re rebirth period of our company. Scott Francis who has been our CFO for the past decade has been an invaluable asset to ADDvantage Technologies during this time. He helped lead the company as it negotiated the decline in the cable TV segment and guided the company as it entered the telco market through several successful M&A transactions most notably the acquisitions of Triton and Nave. He has taken on a new role as Chief Accounting Officer and will continue to lead the accounting and public reporting roles in the business. Scott is also on today's call to answer any questions on the financials. So Kevin please go ahead.

[Kevin Brown:]

Thank you, Joe. It's a pleasure to be here to speak with our shareholders today. I do believe ADDvantage Technologies is an undervalued business opportunity with the potential to expand its services, secure new customers and grow both its top and bottom line. I'm looking forward to using my experience in telecom in the services sector to work alongside the board and the executive team to implement the company's strategic vision as we continue to solidify, enhance and expand our wireless and telco segment operations. The recent acquisition of Fulton Technologies represents a significant milestone, which coupled with divesting the cable TV segment is expected to create a stronger company with improved growth prospects. Now, I will further discuss the financials for the quarter. For the fiscal second quarter of 2019 our total sales increased 48% to $17.3 million from $12.3 million for the same period of last year. The increase in sales was due to the new wireless segment of $4.2 million and the telco segment growth of $1.7 million. This was partially offset by a decrease in the cable TV segment of $0.2 million. Our revenue grew 53% to 17.3% from $11.3 million in the fourth quarter of 2019, the $6 million increase was driven by the added revenue from the Fulton Technologies acquisition and almost $2 million in growth from our telco segment. As Joe mentioned, the new wireless segment sales of $4.2 million were a result of the net asset acquisition of Fulton and Mill City which closed on January 4th 2019. The company did not report any revenues for the wireless segment during the same period in fiscal 2018. Sales from the telco segment increased $1.7 million to a total of $8.7 million for the quarter ended March 31 2019. This is from $7 million for the same period last year. The increase in sales for the telco segment was due to an increase in equipment sales of $1.5 million and an increase in recycling revenue of $0.2 million. The increase in telco equipment sales was due to the growth at Nave Communications of $1 million and the growth at Triton Datacom of $0.5 million. The increase in recycling revenue was due primarily to the timing of recycling shipments. Our sales for the cable TV segment decreased $0.2 million to $4.4 million for the three months ended March 31 2019 from $4.6 million for the same period last year. The decrease in sales was due to a decrease in both equipment sales of $0.1 million and repair service revenue of $0.1 million. The decrease in equipment sales was due primarily to an overall decrease in demand during the quarter, as compared to last year. The decrease in repair service revenue was due primarily to the closing of a repair facility in April of 2018. Our consolidated gross profit increased just over $200,000 or 7% to $3.6 million for the three months ended March 31 2019. This is from $3.3 million for the same period of last year. Our gross profit increase was in the telco segments of $0.4 million and the wireless segment of $0.1 million. This increase was partially offset by a decrease in the cable TV segment of $0.2 million. To further highlight the company's improvement this quarter, our gross profit increased 700,000 when compared to the first quarter of 2019. This was driven primarily by improved results from our telco segment. Consolidated operating and general administrative expenses were $4.8 million in the fiscal second quarter of 2019 compared with $3.4 million in the second quarter of 2018. This increase was due largely to the acquisition of Fulton and Mill City. In addition, our expenses in the second quarter included $0.5 million of expenses associated with the acquisition, integration and ramp up of Fulton, as well as the cost related to the pending sale of the cable TV segment. Equity earnings for the three months ended March 31 2019 were $0.1 million compared with equity losses of $0.3 million for the three months ended March 31 2018. Our provision for income taxes was $4000 for the three months ended March 31 2019 compared to a benefit for income taxes of 129,000 for the same quarter last year. Net loss for the three months ended March 31 2019 was $1.2 million or $0.12 per diluted share, as compared to a net loss of $0.3 million or $0.03 per diluted share during the same period of 2018. As Joe mentioned, this loss was largely due to losses from both in this quarter as we integrated and ramped up the business during its inaugural quarter for the company. Cash and cash equivalents were $1.4 million as of March 31 2019 compared with $3.1 million as of September 30 2018. As of March 31 2019 the company had inventory of $19.4 million compared with $22.3 million as of September 30 2018. As Joe mentioned, we're excited about the opportunities for growth in our new wireless segment and our progress in implementing our operational improvements in the telco segment. Our revenue grew $6 million this quarter compared to the first quarter and almost $2 million if you exclude the Fulton acquisition. This concludes the financial overview section of our remarks. I will now turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] We'll take our first question from George Gaspar [ph]

[Unidentified Analyst:]

Yes. Good morning. Thank you. A little bit further on Fulton's operations for the quarter you have reflected that is about $4.3 million. I assume that the weather was a problem in the first quarter also. So that may have even potentially slowed your activity and you can comment on that. I'd like to also ask you about the type of contracts are these MSA that you generated this revenue or is this just a normal day to day work, week to week workload outside MSAs? And could you comment on the MSA that you have?

[Joseph Hart:]

Yes. Good morning, George. This is Joe Hart. Yes, certainly in January and February the weather - the weather is an impediment in greater Chicago and the state of Illinois and Wisconsin. It affects us a little bit from day to day, as you can imagine, but in the other half of our businesses in Texas and Oklahoma, so we can't blame that one on the weather. So I think it's just a slow start with a business that's 50% located in the Midwest. To your question about MSA. Yes, they're all multi-year. MSA is typically three year periods with multiple opportunities for extensions. The work comes to us in the form of purchase orders per site, per cell site. And so it just comes across week in week out and it comes in you know under the terms of the umbrella MSA that we might have with AT&T or Verizon or Sprint or anyone else. So long term contracts that really frame up all the terms and then you know weekly sets of purchase orders come across week in week out.

[Unidentified Analyst:]

Okay. And in terms of - could you describe some of your initial work that you accomplished, what type of field work was it, so we could get a little better idea of where you're involved in installation?

[Joseph Hart:]

Yeah. So most of the wireless carriers, the Big Four, AT&T, Verizon, T-Mobile, Sprint are continuing to do upgrades or change out the antenna technologies on their cell sites as they continue to expand their frequencies. As for 4G while they are starting to groom those outside networks for the upcoming 5G. So it's typically going out to a cell site and upgrading technology both at the bottom and the top of the tower. We also do a lot of work probably 50% of our work up in the Chicago area is for specialty sites, where they're going to paint a water tower or they're going to - there's going to be a special event, music festivals and you know Indy 500, car race, we build a lot of temporary big capacity sites for these special events and Fulton has just an excellent reputation industry wide for their expertise and technical approach to do and that kind of work. So it's a big uplift for us in that area.

[Unidentified Analyst:]

Yes. Well then it sounds very much like you have some revenue generating momentum on a quarter to quarter basis, going forward that potentially is going to exceed what you accomplished in the first quarter. Is that a reasonable assumption on my part?

[Joseph Hart:]

Yeah, I think that's reasonable. Typically in an outdoor construction environment you know, your winter months in the north are typically your slowest. And as you move into you know this spring and summer those are relatively speaking your you know your boom periods.

[Unidentified Analyst:]

Yes. Okay. And if I could ask another question, on Nave very impressed to see the progress that is being made there after the previous years of historical negatives that came out and obviously the decision to move out of Baltimore and Alabama, correct Huntsville [ph] And yet far in a different menu there are, where would you see for the potential from where you are now in terms of really getting this spread out in a broader way in terms of the type of marketing and where you're going to do?

[Joseph Hart:]

Well, I think as s we've mentioned on a few calls the move from the East Coast in Baltimore to a more central U.S. location gives Don and his sales team access and delivery capabilities that are more appealing to customers. We also - now Don's been instituting the repair and test capabilities and really preparing us to bolt on a new line of business with repair and test for other customers, as well as ourselves internally. Don I would throw this one to you to ask if there is something else that you'd like to talk about with the you know just what you're doing with the sales team.

[Don Kinison:]

You know, I think I think you've hit the nail on the head Joe. Nave's facility in Maryland was really forcing them to suffocate with the amount of inventory they had and how they were managing it, allowing that inventory to be managed by a third party logistics company this is what they do day in day out, has dramatically relieve the stress off of the sales organization and subsequently has allowed us to really focus on hunting for new business, on top of that having the ability to test our products more efficiently has improved our reputation with our customers because of our new relationship with telco and Huntsville, Alabama, improving that relationship and the quality and delivery of our equipment is subsequently increased customers confidence and additional orders have come our way because of it. And lastly, we've also seen a nice reduction in our RNAs [ph] our returns from products that were failing when they hit the field. So all in all I think that's where we'll see more improvement and continue to write to our sales guys hunt. And as Joe also mentioned we're going to continue to put heavy focus on repair and service work in our industry a place - side and side with what we're doing on the equipment sale side. And it makes sense to bolt that on heavily onto our model.

[Unidentified Analyst:]

I see. Okay well very good. Thank you. It's pretty exciting to hear what's going on. I'll get back in queue. Thank you.

[Operator:]

[Operator Instructions] And with no further questions in queue Mr. Hart, I'd like to turn it back to you for any additional or closing remarks sir.

[Joseph Hart:]

Thank you, operator and thank you to everyone who joined us on the call today. We continue to report strong momentum in the second quarter of fiscal ‘19 with the closing of the Fulton acquisition. We're also pleased with the positive impact of the process improvements implemented at Nave and Triton which are expected to continue to yield positive results over the next several years. Upon completion of the sale of the cable TV segment we'll be in an even stronger position to invest in the long term growth of our telecom and wireless businesses in order to build a stronger more efficient foundation to support revenue growth and financial stability. We thank you for your attendance on this morning's call. And with that I'll turn the call back to the operator to close the lines.

[Operator:]

Please gentlemen this does conclude today's conference. We thank you for your participation you may now disconnect.