ADDvantage Technologies Group, Inc.
Q2 2018 Earnings Call Transcript

Published: 15 May 2018

[Operator:]

Good day, and welcome to the ADDvantage Technologies’ Second Quarter 2018 Earnings Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Elizabeth Barker of KCSA Strategic Communications. Please go ahead.

[Elizabeth Barker:]

Thank you, operator. 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 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 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 addvantagetechnologies.com, you’ll 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’d now like to turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, please go ahead.

[David Humphrey:]

Thank you, Elizabeth. Welcome, everyone, to the ADDvantage Technologies’ Fiscal Second 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 the detailed financial results, I want to provide an update on our recent performance and briefly comment on our ongoing strategic initiatives. Revenues for the second fiscal quarter of 2018 increased 3% compared with the same period in the prior year, as stronger Telco segment sales offset declines in the Cable TV segment. In the Telco side, we’re pleased to see Nave Communication sales performance improved after facing challenges in previous quarters. The impact of our new sales strategy and restructuring initiatives drove high equipment sales and contributed to our top line growth. Looking ahead, we expect these initiatives continue to strengthen sales made by targeting a broader end-user customer base, increasing sales to the reseller markets and expanding the capacity of our recycling program. At Triton Datacom, we continue to be pleased with their sales performance, despite reporting slightly reduced equipment sales as a result of lower demand in the market earlier in the quarter. We remain confident in Triton’s sales strategy and its product offerings and expect improved market demand to drive solid revenue generation going forward. Despite experiencing topline growth this quarter, our operating loss in the Telco segment increased primarily due to lower revenues from our Telco recycling business this quarter, which was driven by timing of shipments and lower-margin generated from our equipment sales. Now moving onto the Cable TV segment. Sales in the Cable TV segment continue to be impacted by the same market weakness that we discussed in our first fiscal quarter earnings call, which led to lower refurbished equipment sales. Loss of one large repair customer, which we also disclosed on last quarter’s call further contribute total revenues. They’ve implemented several initiatives to adapt to declining revenues in the segment, including continued operational process improvements and rightsizing the company's cost structure. This lead to an improvement in operating income of 13 percentage points compared to last year in the Cable TV segment. Our results the quarter also include equity losses of $300,000 for a legal settlement with a subcontractor related to the YKTG Solutions, LLC wireless cell tower decommissioning project and the associated legal expenses. Looking ahead, we believe we now have the framework in place to drive strong top line results in our Telco segment, and we’ve the initiatives in place to improve the margins on our equipment sales, which will improve our bottom line results. In addition, we are anticipating that our recycle revenue will return back to normal levels next quarter, and we’re not anticipating any further expenses on the YKTG Solutions’ investment. We remain confident in the opportunities to grow market share and build value for shareholders. With that, I’ll now turn the call over to Scott Francis, our Chief Financial Officer, who will take you through the financial results in more detail.

[Scott Francis:]

Thank you, David. For the fiscal second quarter of 2018, our total sales increased 3% to $11.6 million from $11.3 million for the same period of last year. Our sales for the Cable TV segment decreased $0.4 million to $4.6 million for the three months ended March 31, 2018 from $5 million for the same period of last year. The decrease in sales was due to a decrease in refurbished equipment sales of $200,000 as a result of softening demand in the past quarter and a decrease in our repair service revenue of $800,000, due primarily to the loss of a large repair business customer in the first quarter of fiscal year 2018. The decrease was partially offset by an increase in equipment revenue of $600,000. Sales for the Telco segment increased $700,000 to $7 million compared to $6.3 million for the same period of last year. The increase in sales for the Telco segment was due to an increase in equipment sales of $1.2 million, partially offset by a decrease in recycling revenue of $500,000. The increase in the Telco equipment sales is due primarily to increase sales at Nave Communication of $1.4 million, partially offset by lower equipment sales at Triton Datacom of $200,000. The increase in sales at Nave Communications can be attributed in part to the company addressing the lower equipment sales that have been experiencing over the past several quarters at Nave by restructuring a sales force and implementing a new sale strategy there. Consolidated gross profit decreased $500,000 or 11% to $3.3 million for the three months ended March 31, 2018, from $3.8 million for the same period of last year. The decrease in the gross profit was in the Cable TV segment and Telco segment of $300,000 and $200,000, respectively. Gross margin for the Cable TV segment was 33% for the three months ended March 31, ’18, compared to the 35% for the same period of last year, due primarily to decreased margins on equipment sales, partially offset by lower expenses related to the allowance for obsolete and excess inventory. Our gross profit margin for the Telco segment decreased to 26% for the three months ended March 31, ’18, from 32% for the same period of last year. This decrease was due primarily to lower gross margins from Nave Communications equipment sales, due primarily to an increased percentage of sales to resellers as compared to our end-user customers. In addition, the decrease recycling revenue for the three months ended March 31, ’18, resulted in lower gross margins due primarily to the fixed costs incurred within this product line. Our operating, selling and general administrative expenses decreased $300,000 to $3.4 million for the three months ended March 31, 2018, from $3.7 million for the same period of last year. This decrease in expenses was due primarily to the Cable segment of $300,000, while the Telco segment was relatively flat. Our other income and expense primarily consist of activity related to our investment in YKTG Solutions, including any equity earnings or losses. Equity losses for the three months ended March 31, 2018, were $300,000 and 0 for the three months ended March 31, 2017. The equity losses for the three months ended March 31, 2018, consisted primarily the legal settlement with a subcontractor in a YKTG Solutions’ wireless cell tower decommissioning project and the associated legal expenses with them. Net loss for the three months ended March 31, 2018, was $260,000 or a loss of $0.03 per share compared with net income of $11,000 or $0.00 per share for the same period of last year. Our adjusted EBITDA decreased $202,000 to $328,000 for the three-month period ended March 31, 2018, from an adjusted EBITDA of $530,000 for the same period of last year. The Cable TV segment adjusted EBITDA increased $25,000 to $363,000 for the three months period March 31, 2018, from $338,000 for the same period of last year. In the Telco segment, EBITDA decreased $227,000 to a loss of $35,000 from a profit of $192,000 in the prior year. Now moving on to the six-month results. For the six months ended March 31, 2018, our total sales increased 2% to $23.9 million from $23.4 million for the same period of last year. Sales of the Cable TV segment decreased $1.1 million to $10.5 million for the six months ended March 31, 2018, from $11.6 million for the same period of last year. The decrease in sales was due to a decrease in refurbished equipment sales and repair service revenue of $700,000 and $1.3 million, partially offset by an increase in new equipment revenue of $900,000. The decrease in the refurbished equipment sales was due primarily to an overall decrease in demand for the six months ended March 31, ‘18 as compared to last year. The decrease in repair service revenue was due primarily to the loss of the large repair business customer in the first quarter of fiscal year 2018, as David did mentioned earlier. Sales for the Telco segment increased $1.6 million to $13.5 million for the six months ended March 31, 2018, from $11.9 million for the same period of last year. The increase in sales for the Telco segment was due to an increase in equipment sales of $1.8 million, driven by both Nave communications and Triton Datacom was partially offset by a decrease in recycling revenue at $200,000. Consolidated gross profit decreased $1.1 million or 14% to $6.7 million for the six months ended March 31 '18 from $7.8 million for the same period of last year. The decrease in gross profit within the Cable TV segment of $1.4 million, partially offset by an increase in the Telco segment of 300,000. Gross profit margin for the Cable TV segment was 26% for the six months ended March 31, '18 compared to 36% for the same period of last year. The decrease in gross margin was due primarily to a significant increase in volume for a new equipment sales customer with lower margins in an overall decrease in margins on equipment sales, partially offset by lower expenses related to allowance for obsolete and excess inventory. Gross profit margin for the Telco segment was 30% for the six months ended March 31, '18, and 31% for the six months ended March 31, '17. Our consolidated operating, selling, and general, administrative expenses decreased $200,000, or 3%, to $7.1 million for the six months ended March 31, ‘18, from $7.3 million in the same period of last year. This decrease in expenses was due to the Cable TV segment of 400,000, partially offset by an increase in the Telco segment of $200,000. We also reported equity losses for the six months ended March 31, ’18 of $300,000 related to our investment in YKTG Solutions compared with zero for the six months ended March 31, 2017. As I’ve mentioned earlier, their equity loss is consisted primarily the legal settlement with a subcontractor on the YKTG Solutions wireless cell tower decommissioning project and the associated legal expenses. The provision for income taxes was 200,000 for the six months ended March 31, 2018, compared to a provision for income taxes of 100,000 for the same period of 2017. The increase in the tax provision was due primarily to the Tax Cuts and Jobs Act enacted on December 22, 2017. And one of the provisions of this legislation was to reduce the corporate income tax rates effective -- beginning January 1st of ’18. As a result of the reduced corporate income tax rate, the Company remeasured its deferred tax balances at the reduced corporate rate, which we resulted in income tax expense of $400,000. The Company estimates that its effective tax rate for the remaining quarters of fiscal year 2018 will be approximately 30% as a result of the legislation. Our net loss for the six-month period ended March 31, 2018, was $1 million or a loss of $0.09 per diluted share, compared with net income of $200,000, or $0.02 per diluted share, for the same period of last year Our adjusted EBITDA decreased $900,000 to $0.5 million for the six-month period ended March 31, 2018, from adjusted EBITDA of $1.4 million for the same period of last year. The Cable TV segment adjusted EBITDA decreased $1.1 million to $200,000 for the six month period ended March 31, 2018, from $1.3 million for the same period of last year. The Telco segment adjusted EBITDA decreased $100,000 to $200,000 for the six months ended March 31, '18, from $100,000 for the same period of last year. Cash and cash equivalents were $900,000 as of March 31, 2018, compared with 4 million as of September 30, 2017. The decrease in cash was due primarily to the extinguishment of one of the company's term loans in December ‘17 by paying the outstanding balance of $2.7 million and the first annual guaranteed payment of $700,000 related to the acquisition of Triton Miami. As of March 31, 2018, the company had inventory of 22.3 million, which is relatively unchanged compared to $22.3 million as of September 30, 2017. This concludes the financial overview section of the remarks, and I'll now turn the call over to the operator for questions.

[David Humphrey:]

Thank you, operator. And thank you to everyone who has joined us on the call today. We are starting to see the positive impacts in our top line revenue results from Telco segment as the effects of our sales strategy and restriction initiatives began to take shape. We believe that there is market opportunity to grow the Telco's segment. Our Cable TV segment revenues are down. We are pleased with our progress towards creating a more streamlined and efficient business model that is better placed to adapt to headwind and their marketplace. With that, I'd like to thank our shareholders for their loyalty, support and patience as we work to build value together. Thank you, all.

[Operator:]

This concludes today's call. Thank you for your participation. You may now disconnect.