ADDvantage Technologies Group, Inc.
Q3 2019 Earnings Call Transcript

Published: 13 Aug 2019

[Operator:]

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

[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.

[Joe Hart:]

Thank you, Elizabeth. And welcome everyone to the ADDvantage Technologies’ fiscal third quarter 2019 conference call.With me on the call today are Kevin Brown, our Chief Financial Officer; Scott Francis, Chief Accounting Officer, Don Kinison, President of the Telecom Segment; and Colby Empey President of the Wireless segment.This was a milestone quarter for ADDvantage Technologies, as we completed the sale of the Cable TV segment and turned the Company EBITDA positive for the first time since restructuring the management team and refocusing our strategy in July of 2018.For many years, our Board of Directors has thought to diversify away from our original core cable business and to expand the Company’s range of solutions in the telecom, equipment and wireless services markets. We are proud to have finalized the sale of the Cable TV segment this quarter, marking the beginning of a new chapter in the evolution of ADDvantage Technologies. This major milestone significantly advances our growth strategy, having provided us with additional funds to invest in solidifying and expanding our market position. We are excited by the opportunities this opens up for the Company to grow, providing a greater return on investment to our shareholders.As a result of this sale, the Company has reclassified its Cable TV segment as discontinued operations in the Company’s financials.For the third quarter of fiscal 2019, we reported revenues of $17.6 million, which presents a 36% increase over the second fiscal quarter of 2019 and a 129% increase over the same period in 2018. As a reminder, the Fulton transaction closed in Q2 of 2019. So, its inclusion represents a large part of the growth from the same period in 2018.We also reported positive adjusted EBITDA of $425,000 compared with losses in previous quarters including the same period of 2018. This improvement in financial performance was driven by growth in both the Wireless and the Telco segments, reflecting our increased focus on these markets. Our Wireless segment reported sales of $8.7 million in the third quarter of 2019, as we continue to integrate and to ramp up Fulton’s operations following its acquisition on January 4th of this year. We are pleased to note this represents a doubling in Fulton sales from sales the second fiscal quarter of 2019. We also saw an improvement in gross margin at Fulton of $0.8 million, a strong increase over Q2 of this year. In addition, we continue to see strong momentum in our Telecommunications segment, reporting revenue increase of $1.2 million, or 15% to $8.8 million, compared to the same period in 2018.Now, I’d like to update you on the Company’s two segments, Wireless and Telecom. Beginning with Fulton, our wireless infrastructure services business. Fulton currently provides construction services to wireless communication companies across the Southwest, Midwest and Northern Plains regions. These services mainly consist of the installation and upgrade of technology on cells cite and the construction of new small cells for 5G. We’re also looking to broaden Fulton’s suite of services by introducing additional complementary services such as engineering, site acquisition, and commissioning and integration of cell sites over the next 12 months.Fulton has a strong reputation in the market, and holds multiyear services contracts, which drove sales momentum during the quarter. As part of the acquisition, we were able to hire and retain the majority of Fulton’s existing employee base, making the integration seamless and allowing the workforce to focus on executing its contractual relationships with the four major U.S. wireless carriers, national integrators, tower companies and OEMs that support the industry.Over the next several quarters, we plan to implement several operations and project management improvements at Fulton to improve productivity, efficiency and margins. To support the scaling of the business, we are also expanding Fulton’s management talent and suite of services. We are encouraged by the opportunities we see unfolding in the industry, as wireless carriers prepare their networks and roll out 5G, including the required densification of their existing networks. This is expected to drive continued sales growth for the Wireless segment of over the upcoming years.Other market drivers include the upcoming merger of T-Mobile and Sprint as well as the addition of DISH Wireless to the industry. This will present additional opportunities as networks are rationalized and a new carrier expands its network to gain market share.We believe that Fulton will continue to provide strong revenue growth and more gradual improved margins as it executes on the growth opportunities in the market. To support the scaling of the business, we will continue to solidify our processes and position Fulton to take advantage of new growth opportunities in both its current markets as well as new ones as we determine our readiness for geographic expansion.Although there is still much more to [Technical Difficulty] at Fulton over the next several quarters, we believe that Fulton will continue to provide strong revenue growth and gradually improve margins with some seasonal and climate variability from its Northern operations.We also reported strong results in our Telco segment, from both Nave and Triton as our operational improvements contributed to revenues of $8.8 million for the three months ending June 30, 2019, compared with $7.7 million in the same period last year.Notably, the Telco segment reported positive adjusted EBITDA of over $0.5 million, compared with a loss of $0.3 million in the third quarter of 2018. This was the second quarter in a row that the Telco segment reported positive EBITDA, and we are encouraged to see the operational changes made last year at Nave are taking hold and driving sustained, improved margins.The improved adjusted EBITDA results are mainly attributable to Nave, which benefited from its new warehousing and operations location and partner, driving improved efficiencies and enabling us to offer a higher quality service to our customers. Nave also benefited from a nice improvement in its recycling business line.Looking ahead, we will continue to focus on our core business, while also ramping up our repair activities to take advantage of our new capabilities and expanded business line.The higher Telco segment sales were primarily driven by Triton’s improved performance, which we expect to continue with its upcoming move to its new facility in Pembroke Park, Florida, which begins next week. This move will enable us to streamline and improve our processes such as inventory management, shipping and receiving and the refurbishment operations. The facility is also larger than our existing one, enabling us to develop the internal systems necessary to expand our refurbishment offering, which is Triton’s highest margin segment, and also grow new equipment sales by adding additional product lines and manufacturers.This, together with our strategy to grow the brokerage business and internet sales is expected to increase results and market share at Triton. We believe that these initiatives will allow Triton to expand, capture additional market share, and develop new customers.We are encouraged by our recent progress and will continue to build on Wireless and Telecom businesses to achieve long-term sustainable growth.With that, I’ll now turn the call over to our CFO, Kevin Brown. Kevin, please go ahead.

[Kevin Brown:]

Thank you, Joe.As Joe mentioned, on May 29, 2019, at a special shareholders’ meeting, the Company shareholders voted in favor of selling the Company’s Cable TV segments to Leveling 8, Inc., which is a company controlled by David Chymiak. David Chymiak is a director and substantial shareholder of the company, and he was formally the Chief Technology Officer and President of Tulsat LLC until the closing of the sale on June 30th of this year.As a result of this sale, ADDvantage has reclassified the Cable TV segment as discontinued operations in the Company’s financials.For the fiscal third quarter of 2019, our total sales increased 129% to $17.6 million from $7.7 million for the same period of last year. The increase in sales was in the Wireless segment and Telco segment of $8.7 million and $1.2 million, respectively. The Wireless segment sales increase of $8.7 million was a result of the acquisition of Fulton Technologies, which closed on January 4, 2019.The Company did not report any revenues for the Wireless segment for the same period in fiscal 2018. The Wireless segment’s revenue increased $4.5 million, representing a quarter-over-quarter sales growth of over 100%.Sales for the Telco segment increased $1.2 million to $8.8 million for the three months ended June 30, 2019 from $7.6 million for the same period last year. The increase in sales for the Telco segment was due to an increase in equipment sales and recycling revenue of $1 million and $0.2 million, respectively.The increase in Telco equipment was due primarily to increased sales at Triton Datacom of $1 million. The increase in recycling revenue was primarily due to the timing of recycling shipments.Our consolidated gross profit increased $1.3 million to $3.3 million for the three months ended June 30, 2019 from $2 million for the same period of last year. Gross profit margin percentage decreased overall from 26% to 19%. This is due to the inclusion of our Wireless segment at 10% gross margin, while the Telco segment increased slightly to 27%.Consolidated operating, and general and administrative expenses were $3.3 million in the fiscal third quarter of 2019, compared with $2.7 million in Q3 2018. The increase in expenses was due to the addition of the Wireless segment of $1 million, partially offset by a decrease in the Telco segment of $0.4 million.Equity earnings for the three months ended June 30, 2019 were $20,000, compared with zero for the three months ended June 30, 2018. Equity earnings for the three months ended June 30, 2019, consisted of payments received from YKTG Solutions former partners related to amounts owed to the Company.Our benefit for income taxes was $42,000 for the three months ended June 30, 2019, compared with $0.4 million for the three months ended June 30, 2018.Loss from continuing operations was $58,000 for the three months that in June 30, 2019 or roughly breakeven per diluted share, compared with a loss of $0.3 million or $0.03 per diluted share for the same period of 2018.Loss from discontinued operations, net of tax was $1.4 million for the three months ended June 30, 2019. This is compared to a loss of $1.2 million for the same period last year. This activity included the operations of the Cable TV segment prior to its sale on June 30, 2019. We recognized a loss on the sale of the Cable TV segment of $1.5 million for the three months ended June 30, 2019.The Cable TV segment also recognized a goodwill impairment charge of $1.2 million for the three months ended June 30, 2018. Net loss for the three months ended June 30, 2019, which includes discontinued operations was $1.5 million or $0.14 per diluted share, compared with a net loss of $1.5 million for $0.15 per diluted share for the same period of 2018.Adjusted EBITDA for the three months ended June 30, 2019 was $0.4 million, compared with a loss of $0.3 million for the same period in June 30, 2018.Cash and cash equivalents were $2.7 million as of June 30, 2019, compared with $3.1 million as of September 30, 2018.As of June 30, 2019, the Company had inventory of $9.1 million, compared with $7.5 million as of September 30, 2018.The Company had $750,000 drown on its revolving line of credit on June 30, 2019, which it is since paid off with the proceeds of the cable transaction. As a result of the sale of the Cable TV segment to Leveling 8, Inc. level, which closed on June 30, 2019 and the sales of the three Cable TV segment facilities to David Chymiak LLC, we will receive total proceeds of $14.2 million. These processes consist of $7.1 million in cash received to-date from the facility sales, a receivable of $0.7 million which was paid immediately after closing in July and promissory note of $6.4 million to be paid over five years.This concludes the financial overview segment of our remarks. I will now turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] And we’ll hear first from George Gaspar [ph] who is a private investor.

[Unidentified Analyst:]

Yes Good morning and congratulations on getting this transition taken place here. I’d like to delve into the Fulton revenue stream if you wouldn’t, if you could elaborate on it. It was double what you did in the first quarter. But, I believe that was due to the fact that you were transitionalizing in the January quarter. Can you outline the revenue stream that Fulton produced in this past June quarter, the over $8 million number that you related? In other words, can you -- how much is say tower cell or actual equipment install versus service and other units?

[Joe Hart:]

Hi, George. This is Joe Hart. It’s so far in the, I’ll say, the formative stages of the Fulton transition. We’re exclusively performing either tower installation, so we’re upgrading and adding additional frequencies or technologies to existing cell towers. We’ve started to build a few news sites. And up in our Northern operation, based in Chicago, we also do a lot of special events like big music festivals and Indianapolis 500 race, things like that. We do a lot of temporary specialty cell towers. Many of them are mobile cell towers, affectionately called COWs for cell on wheels. But, so it’s all tower related construction services at the moment, both in the north and the south.I would characterize the growth as we got through the winter months up north. We stabilized the headcount and the employee base. We paid off bills that were past due from the prior owner. And we reestablished Fulton’s credibility in the marketplace. And then, really in Q3, our Q3, we were able to really add a lot more crews, both in-house crews, as well as subcontract crews. So, we probably grew the workforce that we were using by a factor of about 2.25x, 2.5x something like that, but that continuing now in this current quarter. So, we’ve really rebuilt the business and got it on solid footing, both north and south.

[Unidentified Analyst:]

Okay. And just further on that crew activity. When you came in and Fulton was acquired, if I recall, you had maybe but six crews or something like that. How many crews do you actually have in-house in Fulton now and how many do you use on the outside? I’m sure that’s a variable, depending upon the work that you have to do.

[Joe Hart:]

It is. That’s -- the in-house crew count doesn’t wildly. But we have -- we’ve probably doubled the number of crews in-house since we started both north and south. And our ratio of subcontract crews to in-house is probably 2 to 1. So, we always like to have a strong buffer of subcontractors, so that we’re not overinvested in in-house crews.

[Unidentified Analyst:]

I see. Okay. All right. And looking forward to what you would like to accomplish now. You’re concentrated in the Midwest and the Southwest. And how many facilities are you operating out of -- say one in Texas and one in the Midwest, is that how you got it organized?

[Joe Hart:]

Yes. We have the two facilities that were part of the acquisition. So, in Dallas proper and in suburban Chicago, in the city of Roselle, that’s our two current facilities. And then, depending upon how the work migrates, we’ll probably set up temporary facilities in Oklahoma or Minneapolis, or Indiana. You can get small locations that you can rent for 6 months, 12 months et cetera, just depends on the migratory nature of the work, and if we want to pursue it into some additional adjacent markets.

[Unidentified Analyst:]

Okay. Am I permitted to ask another question here?

[Joe Hart:]

As far as I’m concerned, you are.

[Unidentified Analyst:]

Okay. All right. Just on Nave and Triton, can you break out, in these operations, what amounts to service repair and new sales? If that’s an appropriate question to ask in that manner. I appreciate if you could -- give me some additional information on that.

[Joe Hart:]

Yes. The amount of repair services has been small this year as we’ve made the transition to move Nave down to Palco Telecom in Huntsville. But, I think, I’m got pass this one over to Don Kinison because this is what Don lives and breathes every day. So, Don, I don’t know if you want to give the splits on -- rough splits on new versus refurb.

[Don Kinison:]

So, speaking kind of in both of the organizations, both Triton as well as Nave. Triton split of new versus refurb, George, is generally similar in terms of the amount of new that we saw versus the amount of refurb. As we start ramping up Nave’s repair services division, it’s relatively small percentage as it relates to revenue today. But, we anticipate ramping that into a higher growth segment in the future.

[Unidentified Analyst:]

In terms of -- if you could just describe a little bit more now, this transition that you’re about to accomplish, starting next week in Triton, if I recall, it’s going from 90,000 square feet to 20,000. The concentration of effort graphically, is that basically still for the Florida area or are you extending it beyond there?

[Don Kinison:]

So, geographically, we service the entire United States today in terms of our customer base. So, geographically, we are not stuck to the Miami location. Now, that being said, we’re always looking at ways to improve our cost of goods with shipping and things of that nature by utilizing other facilities that we currently operate in, as an example, our facility in Alabama. So, we’re always looking at that. But, the expansion of the facility down at Miami is primarily to expand our refurbishing platforms and widen the line of equipment that we’re going to be refurbishing and reselling to the community.

[Unidentified Analyst:]

I see, okay. And the emergence of the two companies that is Nave and Triton, are they going to be kept separate, in terms of connectiveness into -- as part of h ADDvantage Technologies or maybe I’m not asking that right…

[Joe Hart:]

This is Joe again, George. I think that we’re just at the very start looking at our brand for both, Nave, Triton, Fulton, ADDvantage. We’re taking a new fresh look at all of that. And so, I’d say, it’s way too early to make any kind of prediction. But, we’re taking a hard look at it. And where it makes economic sense and would provide some pickup and some excitement around the brand name, we’ll make those changes, as we evolve here the next couple of quarters. But, at the moment, there’s not a firm plan in either direction.

[Unidentified Analyst:]

And one last thing, maybe this has to go back to Kinison there. But on Triton, what is your employment now and what is it going to be in the -- when the transition is completed in the next week or two?

[Don Kinison:]

It’s really going to stay the same, George, from an employment standpoint. It’s more about improving the efficiencies, getting into a space where we can operate with much more efficient systems and procedures and things of that nature.

[Unidentified Analyst:]

I see. Okay.

[Joe Hart:]

And set up a professional -- professionally designed workflow. Because of the way Triton started out as a company, it went from one small little suite of up and down, about -- what were they, about 2,500 square feet each or something, Don? And then, it moved into a second, a third and a fourth suite. But it’s been so cramped and just jam-packed that they haven’t been very efficient or able to grow. So, we’re moving into the new space. It’s not -- as Don said, not so much a headcount driven thing as professionally designed workflow with the space to grow and be efficient. We believe we’ll lead to better margins.

[Unidentified Analyst:]

Very good. And an overview, to Joe there, it’s very exciting situation that is emerging here at AEY. And considering that you only have approximately 10.5 million shares and the opportunity that you have to move this revenue stream up on all the various areas now that you’re operating in and with the cable out of the picture entirely, it could be very exciting. I hope that it all goes well going forward for you. Thank you.

[Joe Hart:]

Thank you, George.

[Operator:]

And with that that does conclude our question-and-answer session. I’ll turn the call back over to Mr. Joe Hart for closing remarks.

[Joe Hart:]

Thank you, operator, and thanks to everyone that joined us on the call today. I think you can hear it in our voices, but the sale of the Cable TV segment marks the turning point for the Company. And we’re excited to capitalize on the opportunity by investing in the long-term growth of Wireless and Telecom. ADDvantage now has a stronger and more efficient foundation to support both top and bottom line growth. Our growth initiatives in Triton and Nave have already led to improve results, and we can see significant room for sales growth in both of these businesses. This, combined with the major opportunity at Fulton to grow market share in the expanding wireless infrastructure services market, leaves us well-positioned to build value for you, our shareholders.With that, I’ll turn the call back to the operator to close down the call. Thank you.

[Operator:]

And ladies and gentlemen, this will conclude your conference for today. Thank you for your participation. And you may now disconnect.