ADDvantage Technologies Group, Inc.
Q4 2017 Earnings Call Transcript

Published: 14 Dec 2017

[Operator:]

Good day and welcome to the ADDvantage Technologies Fourth Quarter and Year End 2017 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 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-K 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, [Technical Difficulty] 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 fourth quarter and the year end 2017 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 performance over the past year and most recent fiscal quarter and to comment on our ongoing strategy to build value in the business. We reported strong top line growth which increased 26% of both the fiscal fourth quarter and the full year 2017 which is driven by our acquisition of Triton Datacom assets in October 2016, is part of our long-term acquisition strategy to continue diversify our business in the broader telecommunication industry. We are pleased with Triton's operating performance which expanded our product offering to the new and refurbished enterprise networking equipment and broaden our customer reach into the enterprise market, reversing the decline in the Telco significant that started to emerge at the end of fiscal 2016. We still see significant room for further growth in our Telco segment, specifically at Nave Communications subsidiary, which provide used telecommunication networking equipment. As discussed on our last earnings call, Nave has experienced challenges which have led to disappointing sales performance. We have identified the challenges faced by Nave and have directed resources into improving its sales infrastructure to drive growth in the business. This strategy is underway, driven by our new VP of Sales Don Kinison. We've already made several changes including restructuring and expanding our sales force to further penetrate our current customer base and to target a broader end user and reseller customer base. Although restructuring a sales team takes time, we are already starting to see improved results for Nave with its quarter four 2017 performance improving both on a sequential and year-over-year basis. We believe that Nave has a fundamentally sound business model and are cautiously optimistic that we will see a strengthening in this business as the impact of restructuring continues to take hold over the next few quarters. Moving on to the Cable TV segment, where we reported an overall strong and consistent performance in fiscal 2017. We are pleased with ongoing consistent earnings and cash flow generated by the Cable TV segment. However, in the fourth quarter equipment sales from the Cable TV segment declined, reflecting fluctuations to the demand that are typical of the industry. In addition, we believe that our repair revenue would decline due to losing a key customer in the first quarter of 2018. We believe that the equipment sales decline will be short term but we are also proactively working to improve operational efficiencies and maximize profitability for this segment to help offset the decline in revenue. For example, we are in the process of closing and consolidating the operations of some of our repair center locations, which are not positively contributing to our bottom line results. We have confidence that this business will continue to deliver solid return for our shareholders. With that, I'll now turn the call over to Scott to discuss the financial results for the fourth quarter and full year. Scott, please proceed.

[Scott Francis:]

Thanks David. For the fiscal fourth quarter of 2017, our total sales increased 26% to $12.3 million from $9.8 million for the same period of last year. Our sales for the Cable TV segment decreased $800,000 to $5.2 million for the three months ended September 30, 2017 from $6 million for the same period of last year. The decrease in sales was due to decrease of new equipment sales, repair sales and refurbished equipment sales of $400,000, $200,000 and $200,000. As David mentioned, this decline was primarily due to lower demand for equipment sales which we believe will turn later on fiscal 2018. Sales for the Telco segment increased $3.4 million to $7.1 million for the three months ended September 30, 2017 from $3.7 million for the same period of last year. The increase in sales for the Telco segment was due an increase in used equipment sales, new equipment sales and recycle revenue of $2.7 million, $300,000 and $400,000 respectively. The increase in Telco sales was due to $2.9 million of sales of Triton Datacom which was acquired October 2016 and higher sales of Nave Communications of $500,000. As David did mention earlier, Mr. Kinison, our VP of Sales has implemented a sales plan to restructure and expand our sales organization to improve Nave's revenue. Consolidated gross profit increased $700,000 or 24% to $3.3 million for the three months ended September 30, 2017 from $2.6 million for the same period of last year. The increase in gross profit within the Telco segment of $1.1 million partially offset by a decrease in the Cable TV segment of $400,000. The increase in gross profit in Telco segment was due primarily to Triton Datacom gross profit of $900,000. Our gross margin for the Cable TV segment was 33% for the three months ended September 30, 2017 compared to 35% for the same period of last year. And our gross profit margin for the Telco segment was 22% for the three months ended September 30, 2017 compared with 13% for the three months ended 2016. The increase in gross margin was due primarily to improved gross margins of both Nave and Triton compared with the fourth quarter of last year. Our operating, selling and general administrative expenses increased approximately $500,000 to $3.6 million for the three months ended September 30, 2017 from $3.1 million for the same period of last year. This increase in expenses was due to the Telco segment of $700,000 partially offset by a decrease in the Cable TV segment of $200,000. The increase in expenses in the Telco segment of $700,000 was due primarily to the operating expenses related to Triton Datacom acquisition. Net loss for the three months ended September 30, 2017, was $300,000, or $0.03 per share, compared with a net loss of $200,000 or $0.02 per share for the same period of last year. Our consolidated adjusted EBITDA increased $200,000 to $100,000 for the three months period ended September 30, 2017 from a loss of $200,000 for the same period of last year. The Cable TV segment adjusted EBITDA decreased to $300,000 for the three months period ended September 30, 2017 from $600,000 for the same period of last year. The Telco segment adjusted EBITDA increased $500,000 to a loss of $300,000 for the three months ended September 30, 2017 from a loss of $800,000 for the same period of last year. Now move on to the 12 months results. For the 12 months ended September 30, 2017, total sales increased 26% to $48.7 million from $38.7 million for the same period of last year. Sales for the Cable TV segment decreased $200,000 to $22.8 million for the 12 months ended September 30, 2017 from $23 million for the same period of last year. The decrease in sales was due primarily to decrease in refurbished equipment sales of $1.1 million, partially offset by an increase in new equipment sales and repair sales of $100,000 and $800,000 respectively. Sales for the Telco segment increased $10.2 million to $26 million for the 12 months ended September 30, 2017 from $15.8 million for the same period of last year. The increase in sales resulted from an increase in new equipment sales, used equipment sales and recycling revenue of $200,000, $9.4 million and $600, 000 respectively. The increase in Telco used equipment sales was due to Triton Datacom sale of [$11.7 million] which was acquired in October 2016, which offset the continued lower sales from Nave Communications for the year. Consolidated gross profit increased $2.4 or 19% to $14.8 million for 2017 from $12.4 million for 2016. The increase in gross profit was due to an increase in the Telco segment of $2.4 million. Gross margin for the Cable TV segment was relatively flat at approximately 34% for the 12 months ended September 30, 2017 in the same period of last year. Gross margin for the Telco segment was 27% for the 12 months ended September 30, 2017 and 30% for the 12 months ended September 30, 2016. The decrease in gross margin was due primarily to lower gross margin from equipment sales related to Triton Datacom, and lower gross margins from equipment sales from Nave Communications as a result of an increased percentage of sales to resellers as compared to end user customers and increased sourcing of equipment to fulfill our equipment sales. Our operating, selling and general administrative expenses increased $2.6 million or 21%, to $14.7 million for 2017 compared to $12.1 million for 2016. The increase is primarily due to increased expenses of the Telco segment of $3 million, partially offset by decrease in the Cable TV segment of $400,000. The increase in the Telco segment was due primarily to operating expenses of $2.9 million from Triton Datacom. Triton Datacom earn-out expenses of $200,000 as well as $200,000 of acquisition related expenses for Triton Datacom. Net loss for the 12 months period ended September 30, 2017 was $100,000, or $0.01 per diluted share, compared with net profit of $300,000 or $0.03 per diluted share for the same period of 2016. Our consolidated adjusted EBITDA increased $300,000 to $1.9 million for the 12 months period ended September 30, 2017 compared with $1.6 million for the 12 months period ended September 30, 2016. The Cable TV segment adjusted EBITDA increased $300,000 to $2.1 million for the 12 months period ended September 30, 2017 from $1.8 million for the same period of last year. The Telco segment adjusted EBITDA was a loss of $200,000 for both the 12 months ended September 30, 2017 and 2016. The Telco segment EBITDA does include the impact of Triton Datacom acquisition-related cost of $200,000 as well as earn-out expenses of $200,000 related to Triton as well. Cash and cash equivalents were $4 million as of September 30, 2017 compared with $4.5 million as of September 30, 2016. The decrease in cash was due to cash used in investment activities of $5.4 million, partially offset by cash provided by operations of financing activities of $3 million and $1.9 million respectively. The cash used in investing activities resulted primarily from the acquisition of Triton Datacom for $6.6 million and the final and annual installment payment related to the Nave Communications of $1 million. This was partially offset by payments received on our note to the YKTG Solutions joint venture of $2.4 million. The cash provided by financing activities was due to cash borrowing of $4 million to finance the Triton Datacom acquisition, partially offset principal payment on our notes payable of $2.1 million. As of September 30, 2017, we were not in compliance with our fixed charge ratio financial covenant with our primary financial lender under our credit and term loan agreement with them. We notified our primary financial lender of the covenant violation and on December 1, 2017, our financial lender granted a waiver of the covenant violation. This covenant violation was due primarily to lower operating results from our Telco segment in fiscal year 2017. Subsequent to September 30, 2017 the company elected to extinguish one of its term loans in December of 2017 by paying the term loan outstanding balance of $2.5 million. As a result, the company believes we'll now be in compliance with the financial covenant as of 12/31/2017. As of September 30, 2017, the Company had net inventory of $22.3 million, compared to $21.5 million, as of September 30, 2016. This concludes the financial overview section of our remarks. And I’ll now turn the call over to the operator for questions.

[Operator:]

[Operator Instructions] And we'll go first to Michael Hess with Hess.

[Michael Hess:]

Hi, guys. Thank you so much for hosting the quarterly call and passing out the numbers. I was actually just calling I noticed there was an unbelievable amount of stock of trading at our stock and stock moved a quite a bit and I was wondering if you sort of heard anything about what was going on or whether there was something in the result that I missed that was you know would cause such a huge reaction.

[Scott Francis:]

Yes, Michael, this is Scott. We saw that too. To answer your question, no. We are not aware -- you didn't miss anything. What was out there is what is out there. I actually can't comment any further on that. We have reached out to our partners at NASDAQ. But right now we are not -- there is nothing that you have missed. So we do not know the answer to that question.

[Michael Hess:]

Good. And has there been any other strategic change where were I don't know doing partial tender or I don't know anything I didn't see in the initial release.

[Scott Francis:]

No. Again, the only release we've done is the announcement of this call and the earnings release today as well as the 10-K. So that is the releases that are out there especially that would have caused a market - market flux like that, that occurred this morning as far as volume and price, there is nothing else that you -- that is out there.

[Michael Hess:]

Well, I didn't understand why the stock was in 144, so it should be higher anyway but I also didn't -- maybe it was something related to just -- maybe is related to something to that, I don't know but thank you very much, Scott.

[Operator:]

And we'll go next to George Gaspar with Private Investor.

[George Gaspar:]

Good morning to everyone. First question regarding Nave. You are 2.5 months into this quarter and you should have fixed it, you could relate something about what to expect going forward to this quarter and on out into 2018. If you could elaborate on how you get this thing, what actually has been accomplished at Nave? I know you've made some comments in your release about it but could give a sense specific to volume, how can you get this back up to reflect the value and the revenue generating stream that was expected when the operation in Baltimore was acquired?

[David Humphrey:]

George, I heard your beginning properly, I didn't hear a direct question about and we wouldn't be able to respond to that in addition to the fact that we are 2.5 months in, we've released the financial results but your second question I can relate to and I am going to turn it over Don Kinison because that's really the focus is really all about the sales and the organization structure that Don is working on. So I want to turn the question over to Don Kinison.

[Don Kinison:]

Yes. So, George, we've -- the evaluation in the sales organization as it relates to performance activity, territories on which they have been focusing on, clients that they have been particularly focusing on as all have been evaluated. That being said we have been refocusing the group as the sales organization to the areas where we see the highest benefit for both revenue and margin. We'll continue to focus in that direction as well as add additional sales folks to the organization as we see appropriate as the organization continues to be able to support that growth.

[George Gaspar:]

Okay. And is it possible to get some direction from the Miami operation in terms of what they are doing on the telecommunication side. And we are seeing that through the Nave or is there not a synergy kind of situation there.

[Don Kinison:]

Well, I mean there is always we are evaluating synergies among the organization both operationally as well as sales synergy. At this time, we are not directly evaluating synergies between Nave organization and Triton but in the future there is definitely plan to evaluate those synergies.

[George Gaspar:]

Okay. Question on cable side. It seems like with all the flooding that took place that there should have been a more demand now maybe that I can't recall that with the date all the flooding was in Texas and Florida and wherever, but it doesn't appear there is any pickup in cable requirement, amplifier replacement requirement even with all the mess that took place in the United States that you would normally think would have been a positive for the company. Can you comment on that?

[Dave Chymiak:]

George, this is Dave Chymiak. I would agree with you we've been disappointed in what we thought we would have we did get a little but a lot of the locations that were really damaged are still damaged, other still rebuild-- if it's completely wiped out they have to go back and get the infrastructure and there was some maintenance needed for people that were short on parts and everything but most of it salvageable. The main place of the head-ins of equipment was well protected and not lot of damage to those was done. So we have not been seeing anything. We are hearing and looking and quoting for things out of the country for different places the island and everything that are looking at replacing here. So that's positive factor.

[George Gaspar:]

Okay. Is there anything going in the technology that can save the cable area the general cable market in terms of how to enhance the communication via cable that would work to the advantage of ADDvantage Technologies and say regenerating its cable business.

[Dave Chymiak:]

We anticipate different things that are going on. The problem with it is the industry is a little bit confused because what they are looking for and what they want to use and everybody is trying to sell is not made or working properly yet so there has been lot of postponement going on right now, lot of the postpone to the first of the year which we are not usually used to, we don't really get that much orders that way. But right now it looks like lot of things just has been postponed.

[George Gaspar:]

Okay. And is there anything specific in technology side that giving you a shot at looking at expanding your business.

[David Humphrey:]

Well, we've been concentrating on getting ready for a lot of the node replacement that are needed and we've got good inventory on it. And we anticipate that part of the business what we call segmentation as well as the deployment of the lot of different nodes right now.

[George Gaspar:]

Okay. I see. I see. Okay. And just one general comment to all of you. I think it's time that your company applies for inclusion in Value Line's small, mid -cap publication. I hope that I know I keep bringing it up quarter-to-quarter and I think that you are missing a bit here by not having your data part of the Value Line's small, mid-cap range publication. Thank you.

[David Humphrey:]

We appreciate that comment. Thank you, George. We'll look to that. I am looking into it George.

[George Gaspar:]

Right, thank you.

[David Humphrey:]

Thank you, George. Appreciate it.

[Operator:]

And it appears there are no further questions in the queue. So at this time, I'll like to turn the call back to David Humphrey for any additional or closing remarks.

[David Humphrey:]

Thank you. Well, firstly like to thank everyone who has joined us on the call today. Before we conclude the call, I would like to reiterate that while we are not pleased with the overall performance of the company this year, we do believe we have the opportunity to generate improved results in 2018. On the Telco side, Triton performed consistently well on every quarter of fiscal 2017, we expect this to continue. Nave results were disappointing and we are not pleased with its performance. However, we are making progress with the implementation of several initiatives to turnaround the declining sales. Although we cannot expect changes overnight, we believe that over the course of fiscal 2018 we will see the improvement in this business. And our Cable TV business continues to remain consistent source of cash flow to support our growth levels. We look forward to making progress with their sales strategy to drive growth and provide sustainable profit and positive cash flow. With that I'd like to thank our shareholders for their loyalty, support and patience as we continue to build value together. Thank you all.

[Operator:]

This does conclude today's conference. We thank you for participation. You may now disconnect.