ADDvantage Technologies Group, Inc.
Q4 2013 Earnings Call Transcript

Published: 10 Dec 2013

[Operator:]

Please stand by. Good day, everyone. Welcome to today's ADDvantage Technologies’ Fiscal Fourth Quarter 2013 Earnings Conference Call. Today’s conference is being recorded. Now, at this time, I'd like to turn the conference over to Mr. Garth Russell of KCSA Strategic Communications. Please go ahead.

[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 it’s subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers, and multi-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 differ materially 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 the 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 thereto included in ADDvantage Technologies’ most recent report on Form 10-K filed today December 10, 2013. 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 will likely change, ADDvantage Technologies will not necessarily update the information as ADDvantage Technologies will only provide guidance at certain points during the year. Such information speaks only as of the date of this presentation. With nothing further, I’d now like to turn over the call to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. Dave, the floor is yours.

[David Humphrey:]

Thank you, Garth. Welcome to ADDvantage Technologies’ fiscal 2013 fourth quarter conference call. With me today is Dave Chymiak, our Chief Technical Officer; Scott Francis, our Chief Financial Officer; as well as Ken Chymiak, our Chairman of the Board. Before I turn the call over to Scott who will provide the detailed financial results for the quarter and fiscal year ended September 30, 2013, I want to offer a brief overview of the company's operations and strategy moving forward. Total sales declined to $33.4 million for 2013 from $35.2 million for 2012. The decline we experienced in the general market was partially offset in the early part of year as we saw an increase in revenue associated with demand following Hurricane Sandy. In order to align our business with current market, we have made an effort to keep our operating expenses down and remain profitable. In fact, personnel cost decreased by $400,000 for the year and interest expense decreased by $1.1 million as a result of our diligent repayment on our loan agreement in fiscal 2012. This has allowed us to remain a healthy -- we maintain a healthy balance sheet and generate earnings per share of $0.17 per share for 2013. Currently, we have an $8.4 million of cash as well as a $7 million credit line to sustain our working capital needs. We believe our current financial position is sufficient to support implementing our growth strategy, both organically and through acquisitions. As previously reported, we engaged an investment banker earlier in the year to help us identify a strategic acquisition. All our past acquisitions have mainly contributed toward current cable equipment reselling business. The acquisitions we are currently pursuing will allow us to expand the scope of our business into the broader telecommunication space. We'll keep you updated on our progress on this front as we review prospective companies. In regards to growing our current business, we believe the company can increase revenues in the following ways; expand our product offering among existing OEM vendors such as Cisco, ARRIS and Triveni, add additional venders to our product offering mix and expand our sales force. We have seen some positive results from the expansion of our product offerings among our existing customers and OEM vendors. During the fourth quarter net sales of new equipment increased 6% to $5.5 million. While this is still in its early stages, it is yet to be a steady trend; we believe it is a good sign for the business long term. Also we expect the three new industry veterans recently added to our sales team in September 2013, will help us increase our market share among new and existing customers. The vast experience in the cable television equipment market and well-established network will enable us to add additional vendors to our product offering mix. Lastly, ARRIS Group acquired Motorola Home last quarter. So, we have been working on a revised ARRIS Motorola distributor contract to allow us to expand sales of cable television product offerings of ARRIS Group. In the meantime, we are functioning under our existing distributor contracts with ARRIS and Motorola Home. As you can see, we work to stabilize our core business. In addition, we continue to focus on implementing out growth strategies, which we hope will further enhance our business in 2014. It is important to note that implementing and closing on these activities takes time, and in many cases the full effects won't be immediately seen in our financial performance. However, as I mentioned earlier, our ability to remain profitable on our strong balance sheet offers us confidence in the long term opportunity for the business following the implementation of our overall strategy. I'd now like to turn over to Scott who will provide the financial results.

[Scott Francis:]

Thank you, David. Turning to the results for the quarter; total net sales for the fourth fiscal quarter of 2013 decreased $0.1 million or 1% to $8.4 million compared to $8.5 million for the same period of last year. Revenue from new equipment sales increased $0.3 million or 6% to $5.5 million for the three months ended September 30, 2013, compared to $5.2 million for the same period of last year. And sales of new product -- excuse me, sales of new product for the quarter increased primarily as a result of our expanded product offering, as David mentioned. Net refurbished sales decreased $0.4 million or 19% to $1.8 million for the three months ended September 30, 2013, compared to $2.2 million for the same period of last year. Our sales of refurbished equipment continue to be negatively impacted by several factors including the continued decrease and planned expansions and bandwidth upgrades in the overall cable television industry. Service revenue was relatively flat at $1.1 million for the three month period ended September 30, 2013 and the same period of last year. Cost of sales increased $0.1 million or 2% to $6.1 million for the three months ended September 30, 2013, compared to $6 million for the same period in 2012. Cost of sales was negatively impacted by an increase in the provision of excess and obsolete inventory of $0.3 million to $0.5 million for the three months ended September 30, 2013, from $0.2 million for the same period of last year. Our gross profit decreased $0.2 million or 10% to $2.3 million for the three months ended September 30, 2013, from $2.5 million for the three months ended September 30, 2012. Our gross profit margins were 27% for the three months ended September 30, 2013, as compared to 30% for the same period of last year. The decrease in gross margin is due primarily to the increase in the provision of excess and obsolete inventory for the three months ended September 30, 2013, as compared to last year. Our operating, selling, general and administrative expenses decreased $0.1 million or 9% to $1.7 million for the three months ended September 30, 2013, compared to $1.8 million for the same period of last year. Our income from operations decreased $0.1 million or 14% to $0.6 million for the three months ended September 30, 2013, from $0.7 million for the same period of last year due to the reasons I just described. Our net income was $0.3 million or $0.03 per basis and diluted share for the three months ended September 30, 2013, compared to a net income of $0.4 million or $0.04 per basic and diluted share for the same period of last year. Cash and cash equivalent as of September 30, 2013 was $8.4 million, compared to $5.2 million as of September 30, 2012 and also as of September 30, 2013, there continues to be no balance under our $7 million line of credit. Our net inventory decreased $2 million to $20.7 million as of September 30, 2013, from $22.7 million as of September 30, 2012. Now, for our results for the full fiscal year ended September 30, 2013. Our total net sales decreased $1.8 million or 5% to $33.4 million for 2013 from $35.2 million for 2012. The decrease in equipment sales was primarily due to the continued decrease in planned expansions and bandwidth upgrades in the cable television industry, partially offset by increased equipment sales as a result of Hurricane Sandy. Our new equipment sales decreased $0.8 million or 4% to $20.3 million for 2013 from $21.1 million for 2012. Our net refurbished sales decreased $0.8 million or 8% to $9 million for 2013 from $9.8 million in 2012. And our net repair service revenues decreased $0.3 million or 8% to $4.0 million for 2013 from $4.3 million for 2012. Our cost of sales decreased $1.1 million or 4% to $23.8 million for 2013 from $24.9 million for 2012. The decrease in cost of sales was primarily due to lower overall net sales, but cost of sales was also impacted by an increase in the provision for excesses and obsolete inventory of $0.4 million to $1.0 million for 2013 from $0.6 million for 2012. Our gross profit decreased $0.8 million or 8% to $9.6 million for 2013 from $10.4 million for 2012. Our gross profit margins were 29% for 2013 and 2012. Operating, selling, general and administrative expenses decreased $0.4 million or 4% to $6.8 million for 2013, compared to $7.2 million for 2012. The decrease was primarily due to decreased personnel cost of $0.4 million. Our income from operations decreased $0.4 million or 13% to $2.7 million for 2013 from $3.1 million for 2012. Interest expense decreased $1.1 million to $26,000 for 2013 from $1.1 million for the same period of last year. This decrease was due primarily to lower interest expense as a result of the March 2012 payoff of the outstanding amount of our $9.4 million under our second term loan under our revolving credit and term loan agreement, and a $0.8 million payment made in order to terminate the associated interest rate swap agreement. Net income attributable to common shareholders for 2013 was $1.7 million or $0.17 per diluted share, compared $1.3 million or $0.12 per diluted share for the same period of last year. This concludes the overall -- excuse me, this concludes the financial overview for the quarter and fiscal year ended September 30, 2013, and I'll now turn the call back over to David.

[David Humphrey:]

Thank you, Scott. While we are experiencing challenges in the cable television market, we feel that our steady operations and growth strategy for our current business will help increase revenues going forward. Additionally, our acquisition strategy will allow us to look beyond our current business and venture further into the telecommunications market. We appreciate your continued support as we make these necessary improvements in our business operations. This concludes our prepared remarks. We'd now like to turn it back over to the operator and open the call for any questions. Operator?

[Operator:]

Thank you. (Operator Instructions) We'll go to Doug Ruth with Lenox Financial Services.

[Doug Ruth:]

Thank you for hosting the call and giving us the candid update. Could you give us a little bit more color as what's happening on the acquisition front? What you are seeing? Is it reasonable for something to happen in fiscal 2014?

[Scott Francis:]

Doug, of course it's difficult to predict the deal. As I like to say when I was a venture capitalist, the deal is not a deal till it's done. So we haven't done a deal yet. But yes, I feel confident that we'll be able to accomplish an acquisition in 2014. We've looked at a large number of potential opportunities and again, I think I'll just follow-up with that answer, yes, feel very confident.

[Doug Ruth:]

Okay. Can we say, how about the first half of 2014 there?

[Scott Francis:]

How about I'll stick with that. That will get down in 2014, and certainly sooner than later [i.e.] is what our hope and expectations are.

[Doug Ruth:]

Okay. And what about -- you hired the three Motorola executives late in the fourth quarter. Are we seeing the number of inquiries going up based on them being on Board? I know it takes some time for them to get acclimated to your way of doing business.

[Scott Francis:]

Yes. I think that's a fair comment, Doug. I think -- and that's the important thing we need to emphasize is that it’s a very big shift from them to go from an OEM or manufacturer to going to a distributor relationship. And while they have solid relationships with a number of customers, which is why we brought them in, I think it will take some time to ramp up and take a different tact with their customer base. So yes, I feel confident that we will see increased revenues over time with them or we wouldn't have hired them. But I don't think we've seen a whole lot of impact from them at this point in time.

[Doug Ruth:]

Okay. We're watching the ARRIS stock and the stock has been doing pretty well. You'd mentioned briefly that there could be some opportunity. Do you think that the opportunity is -- could just be positive for AEY for what we've seen happen so far?

[David Humphrey:]

We've not seen any impact on it yet. Again, as we mentioned on our prepared comments, we're still working off the old agreements both with ARRIS through our Adams Global Group in Kansas City and then on the Motorola side with our NCS Group in Philadelphia. But we are hopeful that; one, we'll get a new agreement; and two, that we'll be able to expand our relationship with Motorola/ARRIS on a number of fronts. But we get to see that new agreement and ultimately what it's going to shape it -- what it's going to look like. So we are in discussions with ARRIS and had a couple of meetings with them.

[Doug Ruth:]

Okay. And the -- could you may be give us a little bit more color as far as where you are having success with these new product offerings?

[David Humphrey:]

Dave, you want to talk about that briefly?

[Dave Chymiak:]

Well, the main part is we have taken on a test equipment company, Triveni, and we're having increases there. Different groups are just adding up, there's nothing particular otherwise. It just runs in [spurts] between all the different things that we handle. We can handle a large group of items. That's about all I could say on it.

[Doug Ruth:]

Okay.

[Scott Francis:]

Yes. I think Triveni is the biggest impact, bigger single impact that we've seen. We have increased the sales of Triveni and look forward to expanding our relationship and our sales of Triveni in the future as well.

[Doug Ruth:]

And that everybody is happy with everybody with that relationship?

[Scott Francis:]

Yes, very much so.

[Doug Ruth:]

Yes, okay. And what about the state of the industry? We talked about it. You're not spending money upgrading the system. Do you feel like we're getting closer to the point where money would have to be spent to upgrade some of these systems?

[David Humphrey:]

I guess, let me modify your statement. What we're not seeing is the significant upgrades that we've historically seen in the industry because of the digitalization that occurred about three or four years ago. It continued to solely migrate through the smaller players, but the bigger players are 80% of the overall market in our space. So they're not -- the need to doing these big upgrades aren't out there, but the needs to continue to maintain the systems, repair them, which is our repair business; maintain the existing infrastructure with used equipment, which is our used sales; and buying new equipment when the other two alternatives aren't available still exist in the market and that's why we're still -- we still have a significant sales volume in that marketplace, although it continues to decline which is what we're trying to stem that tight. So does that kind of answer your question? I mean they are still maintaining those systems because they've got to deliver that content to customers. And, of course, their growth engine is broadband, not video anymore. They're looking to, that's where their growth is from a customer standpoint on a revenue base, it's on the broadband and that creates new -- different challenges for that existing infrastructure.

[Doug Ruth:]

Okay. Overall, are you happy with the investment banker that you're working with?

[David Humphrey:]

Very much so.

[Doug Ruth:]

Okay. Okay. Again, I want to thank you for the -- for answering the questions and hosting the conference call. That's the end of my questions.

[David Humphrey:]

Doug, thank you. Doug, thank you for your participation and your continued support. We very much appreciate it.

[Doug Ruth:]

You're welcome.

[Operator:]

(Operator Instructions) And we'll go to [George Gunther].

[Unidentified Analyst:]

Yes. Good morning.

[David Humphrey:]

Good morning.

[Unidentified Analyst:]

A question here, looking at your revenue stream for the quarter $8.4 million, it was up about $1.3 million from the June quarter, which is a nice improvement. Now, my question relates to here we are, it's the 10 of December. You've been through more than two months of your first quarter ending December. Last year you did $9.6 million in that quarter. In fact, that was up from the previous quarter. And it was pretty good quarter. Can you give us some color on how you view the current quarter? Can you get close to that number that you did last year?

[Scott Francis:]

George, I'll go and answer your question. We will not approach that number. We reported last year Hurricane Sandy was a significant impact. We had an outlier sale as well. So I would tell you that we kind of viewed last -- a year ago's quarter more like $8 million -- well, maybe $8 million to $8.5 million quarter. So that's how we equilibrated back to our consistent operation. We had a couple outlier sales we took advantage of. We don't necessarily -- we don't anticipate seeing that this year, so we will not approach $9.6 million.

[Unidentified Analyst:]

Okay. All right. And a little more follow on the quarter, looking at operating income versus the previous quarter which was up about $160,000 or so versus the previous quarter, and the revenue increase which I related to earlier here of about $1.3 million. So it looks like that's going better. Can you highlight anything within the revenue stream that you're seeing opportunity on the margin, opportunity for increased margin?

[Scott Francis:]

Okay. Well, as we mentioned earlier, Triveni, we saw an increase in sales there. And we have a reasonable level of margin with Triveni and a very good relationship with them. Outside of that it's our normal sale statement. Dave, is there any response you'd have for that? Dave Chymiak?

[Dave Chymiak:]

Now the refurbished gear, even all the volume was down, our refurbished gear kicked our margins up. The news [there being near] as high if there it wasn’t for the refurbished gear. And we keep moving that product and we still have a large inventory of good, clean refurbished gear.

[Unidentified Analyst:]

Okay. And then I have a question on inventory. You're somewhat slightly over $20.7 million. How do you view your inventory level at this point related to trying to pick up the sales volume from this $8.4 million range? Is your inventory balanced with how you see the revenue stream coming in, or do you envision some changes one way or the other there?

[David Humphrey:]

Well, I'll answer, but I think Dave probably has -- have better insight on that. First of all, I think our inventory continues to be well balanced. We will increase our inventory requirements by the end of the year, so we will convert some cash into inventory on new equipment sales -- for new equipment sales to promote that side; one on Triveni we mentioned earlier, as well as with ARRIS, Motorola and Cisco on all those fronts. So we'll increase some level of inventory. But ultimately, I think our inventory is well positioned. And, as Dave said, I think we'll continue to de-inventory and convert the cash over time as we convert that refurbished equipment into sales and ultimately cash. Dave, anything to add to that?

[Dave Chymiak:]

Not really. The market is very thin on excess inventory and refurbished gear coming out. So there's still a good demand and we feel it's going to -- it has the potential of being on the good demand next year because there's not a lot of used product out there. As far as our normal business model, we have sufficient inventory to cover it.

[Unidentified Analyst:]

Okay. And then, if I could, one last question on this acquisition search. I think there was some reference to in general, trying to broaden the perspective of the communications network business. Is there -- can you relate where you might see yourself going to try to broaden your market -- marketing opportunity from where you are?

[David Humphrey:]

I can a little bit. Again, I can't predict what deal we're going to get into, but I will tell you that as we -- again, as our stated comments were historically our acquisitions, with a number of years ago with NCS and ComTech and then most recently with our Adams Global acquisition. Those were added to our existing operating base, very similar business lines, focused exclusively on the cable TV industry. In broadening, we've got into the broader telecommunications market. We're now looking exclusively at cable TV distribution companies. And I think we've mentioned that in our previous comments as well on previous calls. Outside that I can't elucidate any more.

[Unidentified Analyst:]

Okay. All right. Thank you.

[Scott Francis:]

Thank you, George.

[Operator:]

(Operator Instructions) And we do have Mr. Gunther in the queue for any -- for a follow-up.

[Unidentified Analyst:]

Yes. Thank you. A question on strategy and terms of this acquisition thought process. Does that preclude you from looking at any buybacks at all in terms of your common stock?

[David Humphrey:]

Yes. This time the Board has made a decision, (inaudible) on acquisition strategies and there is no buyback plan at this point in time.

[Unidentified Analyst:]

I see. Okay. All right. Thank you.

[David Humphrey:]

Thank you.

[Operator:]

And gentlemen, we have no further questions in the queue.

[David Humphrey:]

Well, very good. I want to thank everybody for attending our call today. Again, we very much appreciate our investors. They are the key to our success. And we do focus on the results of our company on behalf of our investors. So, once again, thank you all for your participation and we look forward to visiting you in February. Thank you all.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. Thank you all for joining.