ADDvantage Technologies Group, Inc.
Q1 2018 Earnings Call Transcript

Published: 13 Feb 2018

[Operator:]

Good day ladies and gentlemen and welcome to today's ADDvantage Technologies First Quarter 2018 Earnings Call. As a reminder, today’s conference is being recorded; and at this time, I would like to turn the floor over to Elizabeth Barker of KCSA Strategic Communications. Please go ahead.

[Elizabeth Barker:]

Thank you, Greg. Before we begin today’s call, I would 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 the 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 filed earlier today. 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 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, addvantagetechnologies.com, you’ll find a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures and a discussion of 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’d now like to turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, the floor is yours.

[David Humphrey:]

Thank you, Elizabeth. Welcome everyone to the ADDvantage Technologies fiscal first quarter 2018 conference call. With me today is Dave Chymiak, our Chief Technology Officer; Scott Francis, our Chief Financial Officer; and Don Kinison our Vice President of Sales. Before I turn the call over to Scott to provide detailed financial results, I will provide a brief update on our performance over the most recent fiscal quarter and comment on our outlook for the rest of the year. Revenues for the first fiscal quarter of 2018 relatively flat compared with the same period in the prior year, the result of lower sales in the Cable TV segment which offset improved Telco segment sales. On the Telco side, we are pleased with the overall direction that the segment is moving as it generated improved year over year sales across all our product lines. The increased sales driven by Triton, which also led to improved gross margins in the Telco segment on a year over year basis. As discussed on our last earnings call, Nave Communications has experienced challenges which have impacted Telco segment results over the past several quarters. We are pleased to report that we have started to see improved results from Nave driven by the improved sales strategy and sales organization restructuring implemented in late fiscal 2017. We have made some headway with our strategy with further penetrate our current customer base and to target a broader end user and reseller customer base. Although, there is still more work to be done, we have confidence in Nave’s business model and we believe that we will see improved top line and bottom line results from Nave over the next few quarters as our growth strategy continues to take effect. Moving on to the Cable TV segment, sales from the Cable TV segment were down in the first fiscal quarter of 2018, resulting from lower equipment sales as well as a loss of one significant customer in the repair business. Customers loss in the repair business does not significantly impact margins, however, our gross margin rose this quarter due to a high volume of equipment sales at lower than usual margins to a single customer. Since the Cable TV segment continues to face market challenges as evidenced by this quarter's results, we have consolidated some of our repair facilities and are making further operational enhancements that we believe will support the efficient running of this business over the longer term. With that, I’d now turn the call over to Scott to discuss the financial results for the first fiscal quarter. Scott, please proceed.

[Scott Francis:]

Thank you, David. For the fiscal first quarter of 2018, our total sales increased 2% to $12.3 million from $12.1 million for the same period of last year. Sales for the Cable TV segment decreased $800,000 to $5.8 million compared to $6.6 million for the same period of last year. The decrease in sales was due to decrease in new refurbished equipment sales and repair service revenue of $500,000 each, partially offset by an increase of new equipment revenue of $200,000. The decrease in the refurbished equipment sales is due primarily to an overall decrease in demand for the three months ended December 31, 2017, as compared to the same period in the prior year. The decrease in the repair service revenue was due primarily the loss of the significant repair customer in this past quarter. Sales for the Telco segment increased $1 million to $6.5 million compared to $5.5 million for the same period of last year. The increase in sales for our Telco segment was primarily due to an increase in equipment sales and recycling revenue of $700,000 and $300,000 respectively. The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower equipment sales from Nave Communication. Our consolidated gross profit decreased by $600,000 or 16% to $3.4 million for the three months ended December 31, 2017 from $4 million for the same period of last year. The decrease in gross profit is mostly attributable to the Cable TV segment of $1.1 million, partially offset by an increase in the Telco segment of $500,000. Gross profit for the Cable TV segment decreased to 21% for the three months ended December 31, 2017 from 37% for the same period of last year. The decrease on gross profit margin was due primarily to the significant decrease in -- excuse me, significant increase in volume for new equipment sales customer with lower margin. Our gross profit margin for the Telco segment increased to 34% for the three months ended December 31, 2017 from 29% for the same period of last year. The increase in gross margin was due primarily to the higher gross margins from equipment sales to end user customers and our recycling program. Our operating, selling and general administrative expenses remained flat at $3.6 million for both the three months ended December 31, 2017 and 2016. This is due to an increase of $100,000 from Telco segment, including earn out expenses of $100,000 related to the Triton Miami acquisition, offset by decrease in Cable TV segment expenses. The provision for income taxes was $300,000 for the three months ended December 31, 2017 compared to provision for income taxes of $100,000 for the same period of '16. The increase in the tax provision was due primarily to the Tax Cuts and Jobs Act enacted on December 22, 2017. One of the provisions of this legislation was to reduce the corporate income tax rate effective January 1, 2018. As a result of the reduced corporate income tax rate, we re-measured our deferred tax assets as the reduced corporate income tax rate, which resulted in income tax expense of $400,000. We estimate that our effective income tax rate for the remaining quarters of fiscal year 2018 will be approximately 27% as a result of this legislation. Our net loss for the three months ended December 31, 2017 was $700,000 or $0.07 per share compared with a net income of $200,000 or $0.02 per share for the same period of last year. Our consolidated adjusted EBITDA decreased $700,000 to $0.1 million for the three month period ended December 31, 2017 from an adjusted EBITDA of $800,000 for the same period of last year. The Cable TV segment adjusted EBITDA decreased 1.1 million to a loss of a $100,000 for the three month period ended December 31, 2017 from $1 million for the same period of last year, while the Telco segment adjusted EBITDA increased $400,000 to $300,000 for the three month period in December 31, 2017 from a loss of $100,000 in the same period of last year. Our cash and cash equivalent were a $400,000 as of December 31, 2017 compared to $4 million as of September 30, 2017. As part of our overall plan to become complaint with our financial covenants of our primary financial lender we extinguished one of our term loans in December '17 by paying the outstanding balance of $2.7 million. As a result, we were in compliance of the financial covenant of December 31, 2017. In addition, we also paid the first annual guarantee payment of $700,000 related to the acquisition of Triton Miami, Inc. in the past quarter. As of December 31, 2017, the Company had inventory of 22.4 million compared to 22.3 million as of September 30, 2017. This now concludes the financial overview for the fiscal quarter of -- first fiscal quarter of 2018. I'll now turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] All right, first we'll hear from George Gaspar, please go ahead.

[Unidentified Analyst:]

First question on the cable side, can you give us a little thought on why the customer backed away on the cable repair side any particular reason that led to that?

[David Humphrey:]

George, that was a big process that they put out for national bid, we were a large supplier of theirs. They loved the work we did. But we -- the work we do is at the local level, it was a corporate decision we ultimately lost the bid.

[Unidentified Analyst:]

I see, so, it was over a bidding process where somebody else underbid what your bid was.

[David Humphrey:]

I can't tell what their bid was. I think ours was a very competitive bid and certainly the quality of our work wasn't ever questioned by that. But that customer of ours, they very much like the quality of the service we provided.

[Unidentified Analyst:]

And if consolidation that's going on that was referred to in the release, your repair services area is geographically speaking. Where are you pulling out of and then how you consolidating to from where to where?

[David Humphrey:]

We have shut down two facilities, our Nebraska and Arizona operation, and we've reduced the staff size in our Texas operation to support in time. And we’re looking at things and things teams for Tennessee.

[Unidentified Analyst:]

I see. So, that’s going to just filter back into, Tulsa, Oklahoma then, is that it?

[David Humphrey:]

Some of that business will some that will be lost, but it's on profitable, we can’t maintain the operations.

[Unidentified Analyst:]

Is there anything that is being worked on try to turn this cable area around as far as the services that you can provide?

[Dave Chymiak:]

George, this is Dave. We’re continuing on everything that we're doing. We’ve got the sales from south. We’re looking at all opportunities. We’re just working on it.

[Unidentified Analyst:]

Okay, all right. And overall, on the other side of the business, any comments on new product development focus to broaden what you're all doing?

[Dave Chymiak:]

We're going to broaden the product lines within those operations. I don't know that essentially new products, but…

[Unidentified Analyst:]

Okay.

[Dave Chymiak:]

It’s just going to continue to broaden the customer base and broaden the lines of products that we offer on the Telco side.

[David Humphrey:]

George, we're always looking for complimentary services as well as products that relate to those two business lines.

[Unidentified Analyst:]

Okay.

[David Humphrey:]

And we'll evaluate that.

[Unidentified Analyst:]

And I’ve got a question on the financial side. The payment of the debt repayment, was that to also execute a new debt payment agreement? Do you not have to have a new debt requirement setup as you done that?

[Scott Francis:]

George, this is Scott. No, we didn't have to do that. All of our debt -- all of our term loans are underneath our master credit agreement. So all we effectively did was, we paid off one of our term loan. And so, there was not a new agreement executed. We just extinguished one of the distinct term loans. We have three, now, we now -- now we're down to two. That is all underneath the master credit agreement that we have with our primary bank.

[Unidentified Analyst:]

Right, okay. And then if I could just go back to question on Nave, it sounds like, it’s potentially may be able to get into the bottom line positive situation going forward. Is that there we are proceeding it through the current quarter and going ahead?

[David Humphrey:]

I want to talk to the current quarter, George, but I’ll answer your question as, yes, we anticipate Nave continuing to improve and getting into the black.

[Unidentified Analyst:]

Okay. And then just on the Telco, the $700,000 that was uptick, is that going to be a quarterly payment going forward, for how long?

[David Humphrey:]

Yes, this is an annual payment, George.

[Unidentified Analyst:]

On annual, excuse me. Okay.

[David Humphrey:]

Yes. That was on annual. So, it's on the anniversary date of the acquisition. So, there is three of them in total.

[Unidentified Analyst:]

Three, okay. So, there is two more to go then beyond what you accomplished there.

[David Humphrey:]

That is correct.

[Operator:]

[Operator Instructions] And it looks like we'll move back to George Gaspar for some follow-up questions.

[Unidentified Analyst:]

Yes just additional question. I noticed in your annual report filing and so on that. There's a considerable decline in share count by Ken Chymiak, looks like there was a execution over the quarter to sell about 800,000 shares or something like that. Any comments you can make on that, I know that is a percentage of interest in the Company is considerably below where it originally was now. I am not sure you can or but if you got any comment to make on that appreciate it?

[David Humphrey:]

We really can't. I mean you know that he's no longer our executive chairman anymore. What he chooses to do with his stock is certainly is, his business and Dave probably knows some since it’s his brother, but he's never at liberty to talk about this as well, but I appreciate your question.

[Unidentified Analyst:]

Okay, alright well, I assume that he's totally out of the Company basically other than the stock ownership.

[David Humphrey:]

I think that's fair to say. He's still an insider because of his brother's ownership and his ownership, but he's not part of the management team for the executive staff, correct.

[Operator:]

And it looks like that does conclude the question-and-answer portion of the call. I'd like to turn the floor back to Mr. David Humphrey for any additional or closing remarks.

[David Humphrey:]

Well, thank you to everyone who has joined us today and for your continued support of ADDvantage Technologies. While the Cable TV segment has faced market challenges this quarter, we're encouraged by the improving results from our Telco segment and believe we'll be able to deliver on our overall growth strategy. Triton continues to perform well. We are cautiously optimistic. They're seeing early signs of improvement at Nave. Looking ahead, we will continue to review our operations to optimize our performance across both the Cable TV and Telco segment, as we seek to leverage the market opportunities and gain additional market share. With that, I'd like to thank our shareholders for their support and patience as we continue to implement our strategic growth plan and build value for shareholders. That concludes our call. Thank you.

[Operator:]

Once again, ladies and gentlemen that concludes our program for today. Thanks for joining. You may now disconnect.