ADDvantage Technologies Group, Inc.
Q2 2017 Earnings Call Transcript

Published: 15 May 2017

[Operator:]

Good day and welcome to the ADDvantage Technologies’ Second Quarter 2017 Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

[Garth Russell:]

Thank you. 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 Manufacture's 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 results or events 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 as well. The guidance regarding anticipated future results on this call is based on limited information currently available on the Company, which are subject to change; although, any such guidance and factors influencing may change. ADDvantage Technologies expressly its claims an intent or obligation to update 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 will also present certain non-GAAP financial measures such as non-GAAP net income and certain ratios that are used with these measures. And our press release and in the financial tables issued earlier today, which is located on our Web site, ADDvantageTechnologies.com., you’ll find a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures 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, the floor is yours.

[David Humphrey:]

Thank you, Garth. Welcome everyone to the ADDvantage Technologies fiscal second quarter 2017 conference call. With me today is Dave Chymiak, our Chief Technology Officer and Scott Francis, our Chief Financial Officer. 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. Our sales in the second quarter of fiscal 2017 increased 7% compared to last year, which include sales from our new subsidiary, Triton Datacom, which offset sales decline for the remaining Telco business and our Cable TV business. Sales from our Cable TV segment decreased $1 million to $5 million for the second quarter compared to the same period last year. While the Cable TV segment had several consecutive quarters of consistent sales performance, the overall market continues to face certain headwinds, which could impact our results from time-to-time. However, this segment continue to generate solid operating results and positive cash flows for our Company, we will continue to work with our sales team to gain greater market penetration within the Cable TV market for both equipment sales and repairs. Turning to our Telco segment, the Triton business is comprised of the assets we required in October 2016, with sales new and refurbished enterprise network products, including white desktop phones, enterprise switches and wireless routers. These assets generated steady growth ahead of the acquisition, which we expect to continue as part of ADDvantage. Thus far, we have been pleased with Triton's operating results. The remaining portion of Telco segment, Nave Communication, has experienced lower sales over the last few quarters and the operating results of this business are performing below our expectations. As I’ve discussed over the last few calls, we're working on several fronts to improve the top line results and overall operating results of this business. To help lead this effort, we recently hired Don Kinison, as VP of Sales for our Company. Don has tremendous telecommunications sales experience, and we believe he will be a great asset helping Nave improve its operating results. Although, Don's initial focus will be to help Nave improve its sales performance, Don will also have responsibility for directing the sales team across all of our businesses. We expect Don to be a valuable resource as we continue to execute our growth strategy. To summarize the second quarter, the Triton Datacom acquisition continues to deliver sales growth to our top line and we believe it will be a source of solid growth for the remainder of fiscal 2017. We remain focused on supporting the remaining Telco segment in effort to significantly improve the recent disappointing sales performance. Our new VP of Sales has taken on this effort, which will be his core near term focus. Although, sales for the Cable TV segment were disappointing this quarter, it continues to be consistently profitable for us. In addition, we continue to work on organically growing top line revenue in this segment and we believe Don will be a key contributor to achieve this growth. With that, I will 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 2017, total sales increased 7% to $11.3 million from $10.6 million for the same period of last year. Sales for the Cable TV segment decreased $1 million to $5 million for the three months ended March 31, 2017 from $6 million for the same period of last year. The decrease in sales was due primarily to a decrease in new and refurbished equipment sales of $1.1 million and $0.2 million respectively as a result of the softening demand in the past quarter. The decrease was partially offset by an increase in repair sales of 300,000. Sales for the Telco segment increased $1.8 million to $6.4 million for the three months ended March 31, 2017 from $4.6 million for the same period of last year. The increase in sales for the Telco segment was due to an increase in used equipment sales and recycling revenue of $1.7 million and $100,000 respectively. The increase in Telco used equipment sales was primarily due to Triton Datacom, which offset the continued lower sales for the remaining portion of this segment. The Company is continuing to address the lower sales in this segment by expanding the sales force, targeting the broader end user customer base, expanding the capacity of our recycling program, and testing the used equipment inventory prior to sales to our end user customer base. In addition, as David discussed earlier, Don Kinison will initially be focused on this segment to help improve the overall sales performance and market strategy. Our consolidated gross profit increased $200,000 or 5% to $3.8 million for the three months ended March 31, 2017 from $3.6 million for the same period of last year. The increase in gross profit was primarily due an increase in the Telco segment of $300,000 offset by a decrease in the Cable TV segment of $100,000. Our gross margin for the Cable TV segment was 35% for the three months ended March 31, 2017 compared to 32% for the same period of last year. And our gross profit margin for the Telco segment decreased to 32% for the three months ended March 31, 2017 from 36% for the same period of last year. This decrease is due primarily to lower gross margin from equipment sales related to Triton Datacom, as well as lower gross margin for used equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to resellers, which traditionally have lower gross margins as compared to our end user customer base. Our operating, selling and general administrative expenses increased $400,000 to $3.7 million for the three months ended March 31, 2017 from $3.3 million for the same period of last year. This increase in expenses was due primarily to increased expenses in the Telco segment, resulting from increased operating expenses of $500,000 related to Triton Datacom, as well as Triton Datacom earn out expenses of $100,000. These increases were partially offset by the absence of earn out expenses of $200,000 which were recorded in the three months ended March 31, 2016 related to Nave Communications. Our net income for the three months ended March 31, 2017 was $11,000 compared with the net income of $146,000 or $0.01 per share for the same period of last year. Our consolidated EBITDA decreased by $100,000 to $500,000 for the three months period ended March 31, 2017 from EBITDA of $600,000 for the same period of last year. The Cable TV segment EBITDA decreased to $100,000 to $300,000 for the three months period ended March 31, 2017 from $400,000 for the same period of last year. The Telco segment EBITDA remained relatively flat at $200,000 for both the three months ended March 31, 2017 and '16. For the six month ended March 31, 2017 our total sales increased 24% to $23.4 million from $18.8 million for the same period of last year. Sales for the Cable TV segment increased $600,000 to $11.6 million for the six months ended March 31, 2017 from $11 million for the same period of last year. The increase in sales was due to an increase in new equipment sales and repair sales of $300,000 and $700,000 respectively, partially offset by decrease in refurbished equipment revenue of $400,000. The increase in new equipment sales was due primarily to increased sales to a few of our customers in the first quarter of '17, partially offset by a general decrease in demand in the second quarter. The increase in repair sales was due primarily to expanding our repair sales with one of our major customers. Sales for the Telco segment increased $4 million to $11.9 million for the six months ended March 31, 2017 from $7.9 million for the same period of last year. The increase in sales for the Telco segment was due an increase in used equipment sales and recycling revenue of $3.8 million and $400,000 respectively, partially offset by a decrease of new equipment sales of $200,000. The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower sales for the remaining portion of this segment. We did recognize revenues from Triton Datacom starting on October 14, 2016, which was the date of that acquisition. Consolidated gross profit increased $1.5 million or 23% to $7.8 million for the six months ended March 31, 2017 from $6.3 million for the same period of last year. The increase in gross profit was in both the Cable TV and Telco segment of $700,000 and $800,000 respectively. Gross profit margin for the Cable TV segment was 36% for the six months ended March 31, 2017 compared to 32% for the same period of last year. The increase in gross profit margin was due primarily to higher margin sales on certain refurbished equipment sales. Our gross profit margin for the Telco segment decreased to 31% for the six months ended March 31, 2016 from 36% for the same period of last year. The decrease in gross margin was primarily due to lower growth margins from equivalent sales related to Triton Datacom and lower gross margins for refurbished equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to our retailers, which again traditionally have lower growth margins as compared to our end user customer. Our operating selling and general administrative expenses increased $1.4 million or 23% to $7.3 million for the six months ended March 31, 2017 from $5.9 million for the same period of last year. This increase in expenses was due to the Telco segment of $1.4 million, while the Cable TV segment remained relatively flat. The increase in the Telco segment was due primarily to operating expenses of $1 million from Triton Datacom, acquisition related costs of $200,000 and Triton Datacom earn-out expenses of $100,000. These increases were partially offset by the absence of earn-out expenses of $200,000, which were recorded in the six months ended March 31, 2016 related to the Nave Communications acquisition. Net income for the six months period ended March 31, 2017 was $228,000 or $0.02 per diluted share compared with $170,000 or $0.02 per diluted share for the same period of last year. Our consolidated EBITDA increased $400,000 to $1.4 million for the six months period ended March 31, 2017 from an EBITDA of $1 million for the same period of last year. The Cable TV segment EBITDA increased $700,000 to $1.3 million for the six months period ended March 31, '17 from $600,000 for the same period of last year. The Telco segment EBITDA decreased almost $400,000 to $50,000 for the six months ended March 31, 2017 from $430,000 for the same period of last year. The Telco segment EBITDA includes the impact of the Triton Datacom acquisition related cost of $200,000, as well as Triton Datacom earn-out expenses of 100,000. Cash and cash equivalents were $3.9 million as of March 31, 2017 compared to $4.5 million as of September 30, 2016. The decrease in cash was due to cash used in investing activities of $5.5 million offset by cash provided by operations of financing activities of $1.9 million and $3 million respectively. The cash used in investing activities resulted primarily from the acquisition of Triton Datacom to $6.6 million and the first annual installment related to -- and the final annual installment related to the Nave Communications acquisition of $1 million. This was partially offset by payments received on our note to the YKTG Solutions Joint Venture of $2.2 million. The cash provided by financing activities was due to cash borrowings of $4 million to finance the Triton Datacom acquisition, partially offset by principal payments on our notes of $1 million. As of March 31, 2017, the Company had net inventory of $22.1 million, compared with $21.5 million as of September 30, 2016. Earlier this year, YKTG solutions elected to spend their project with U.S. wireless provider and therefore started to wind down this project. At March 31, 2017, the Company had an investment amongst the YKTG Solutions of $200,000 after considering payments we have received of $2.2 million for the six months ended March 31, '17. We still believe that the $400,000 is collectible based on our outstanding billings owed from this wireless provider plus any vendor payments to load under this project. This concludes the financial overview spectrum of our remarks. And I’ll now turn the call over to the operator for questions.

[Operator:]

Thank you, sir [Operator Instruction]. And we'll go to George Gasper.

[Unidentified Analyst:]

First, let's talk about the Cable area, this decline in volume. How does it look going forward in this quarter and do you see some turnaround out there, or is this going to be a continuing situation that could stay in the focus the rest of the year?

[Dave Chymiak:]

It's been a little bit of a turmoil right at the moment try and decide which way they're going to go. We're starting to see orders starting to coming in and back orders starting to go out. I do not expect it to continue for the, by any mean, six month. We're seeing an increase in business a little bit right now, but we won't know how that is for the next three-four months total.

[Unidentified Analyst:]

Is there anything different going on in the industry that -- where do you see the negatives in terms of the environment and where is the positive?

[Dave Chymiak:]

There's discussions all the time out there of different ways the cable company to go; some of them are talking about putting all nodes out there and lining amplifiers, problem with that is there's a big shortage of fiber right now; and on top of that there's a shortage of figures that they would be using. This usually leads to helping us but we're seeing less-and-less used gear on the market right at the moment.

[Unidentified Analyst:]

And then question on the Triton Datacom, the actual state of generated in the quarter for that operation were how much again?

[David Humphrey:]

George we don't report those separately. But we'll point out the reason we're making a distinction between the two because the Triton is so new and it's having such a significant impact on our financials. But it's currently not our intention to differentiate between the two operating companies within that division.

[Unidentified Analyst:]

And can you talk about this, in other words some unusuals in the quarter associated with Triton, I would assume. And what part of that disappears in the current quarter, going forward and also going forward in terms of cost structure? Is it, am I right on that there's going to be a reduction or is there going to be an increase in unusual charges?

[Scott Francis:]

When we're talking about the unusual activity or the -- those are the primarily acquisition related costs; those will not occur anymore, because the acquisition is completed; those were primarily done in our October-December timeframe when we did the acquisition. Now the earn-out expenses will continue and actually we hope they will, right because more they make the more the earn out, which is all good everyone. So I wouldn't necessarily characterize it as those unusual, we always pull those out just to give the investors the idea of after the three year period how much do we think EBITDA would increase. Does that help?

[Unidentified Analyst:]

Yes. And now I understand that the pay-outs on the Nave side are over, correct?

[Scott Francis:]

That is correct.

[Unidentified Analyst:]

So there was, what is it $200,000 in this past quarter?

[Scott Francis:]

No, that was until -- what we were -- what I was describing in there was there was $200,000 was last year, so that was basically effectively caused an increase for this year because there was $200,000 expense reported last year.

[Unidentified Analyst:]

And can you talk a little bit more about the joint venture going forward process. Now there is the commissioning, or decommissioning I assume underway anymore at this point in time. But what's your target for getting out from under so that do you have prospects for breaking even with the target on it or don’t you have?

[Scott Francis:]

So what we have recorded right now is left over is a $400,000 for which we are pretty comfortable that that's going be able to be collected. Now, as far as the remaining balance, I mean I haven’t gotten to see the Q yet, we have a total out there little over $1 million. The way we have this recorded right now, though, we're in good shape with no -- unfortunately no positive but also no negative impact to us in the year 2017, at this point. Last year, we actually did record a positive income related to YKTG in total. So at the end of the day, it's just not going to make us nearly as much as we were hoping but at least it won't be a negative for us. And the good news is on our balance sheet right now, we believe the way we have recorded is not going to -- again it's not going to turnout the way we were all hoping, but it won't yield a negative on our income statement and we’re seeing the cash come in. And so I think it will take us still next -- it won't be all collected this next quarter just because of the way the payments stream is working. But it should, I am hoping by 930 have almost all of that in.

[Unidentified Analyst:]

And do I assume that there is no probability that the stock and the decommissioning, tower decommissioning is not going to reverse in terms of where you’re standing on this joint venture. Correct?

[Scott Francis:]

I would tell you right now that with what we know, at this point, I don’t anticipate us taking a back in. But don’t mean that people don’t have a change of heart with the way things are assigned. But unless that is changed, we will not get back into the game.

[Unidentified Analyst:]

And then if I could go back on telecom side. What do you see for Nave, going forward, from where you are now? And is there anything positive to be looking for out of that situation?

[David Humphrey:]

Yes, I think, so George. It's got solid inventory. We talked in the past about now we’re testing equipment, which enhances both the revenue and the probability of selling some of that equipment; we weren’t doing that in the past; we've added a shredder to their operations to see if they can process more scrap. So I think we've got a number of positive. And of course we mentioned on the call twice we've added a new VP of Sales and the primary focus will be on Nave Communications initially.

[Unidentified Analyst:]

And in terms of the, going forward, you’ve got enough on your plate now with the acquisition that you made of the Triton, Miami. So I assume that the emphasis within the Company by management is to concentrate on what you have internally and your composition of your operating areas and not to look any further at acquisitions, at this point?

[David Humphrey:]

The answer to your question is that it's absolutely true. Our focus is on the two divisions, three operating companies, if you will, that we have under the fold, right now; continue to push Triton to continue its growth model that it had at the time of the acquisition; it may turnaround, Dave is going to keep doing the things he does and we’ll try to give him some extra opportunities to sell additional products beyond the product line he has today. Again, he has got a solid inventory to sell lot of long term. Of course, our goal is still to continue our acquisition strategy. The people in this room, the three here, we’ll all focused on add as well on our new addition we Don. But for the short term, we’re absolutely focused on the three -- on the two operating divisions.

[Unidentified Analyst:]

And I am not sure I mentioned this in the previous call, but I strongly recommend that you all talk to value line about getting your data into the small cap composition at value line runs. Your Company in terms of revenue stream is basically quite some of the companies that are listed in that small cap outlay that they use. And it's very -- it's an excellent outline, I am really kind of surprised that ADDvantage Technologies is in it. So somebody there might just have some conversation with them and see what it takes to be included in it.

[David Humphrey:]

That’s very good. Thank you, appreciate that George.

[Operator:]

Thank you. We have no further questions, at this time. I would like to turn the conference back over for any additional or closing remarks.

[David Humphrey:]

Thank you, Operator. Before we conclude the call, I would like to reiterate that we are making strategic investments in the business, including the hiring of VP of Sales and supporting his efforts to enhance the capabilities of our sales team. We have a solid infrastructure in place and the team is very capable. In particular, the changes that the Nave Communications business basis will not be overcome by just one hire nor they will diminished overnight; however, the market opportunity is there and we will bring together the people and infrastructure needed for it to succeed. I would like to thank our shareholders for their loyalty, support and patients as we continue to build value together. Thank you all.

[Operator:]

Thank you for your participation. That does conclude today's conference. You may now disconnect.