ADDvantage Technologies Group, Inc.
Q2 2016 Earnings Call Transcript

Published: 10 May 2016

[Operator:]

Good day, and welcome to the ADDvantage Technologies Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

[Garth Russell:]

Thank you. Before we begin today’s call, I’d 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 future events, such as the availability 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 the actual future 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 SEC. Financial information presented today on this conference call should be considered in conjunction with the consolidated financial statements and notes 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 are subject to change. Although any such forward-looking statements 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 only speaks as of this date. During this call, we may also present certain non-GAAP financial measures, in our press release presented earlier today, which is located on our website at 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. Dave, the floor is yours.

[David Humphrey:]

Thank you, Garth. Welcome everyone to the ADDvantage Technologies’ second quarter fiscal 2016 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 who will provide the detailed financial results, I want to provide an update on our recent performance and briefly comment on our expectations for the second half of fiscal year. In this quarter, we experienced a strengthening in market demand across our business compared to the previous quarter, which is in line with the expectation we discussed on our last quarterly call. Revenues for the second quarter reached $10.6 million, representing a 28% improvement compared to the first quarter. Net income also improved substantially to $146,000 in the second quarter from approximately $24,000 in the first quarter. This sequential improvement was driven by a positive change in market dynamics in the cable TV sector as well as the telco sector. In the cable TV sector, we saw improved revenues as the anticipated ongoing market consolidation materialized with Altice completing its acquisition of Suddenlink Communications and a stakeholder of capable vision now within reach. This was in line with our expectations that increased certainty surrounding pending merger agreements would lead to better visibility in the industry and enable customers to budget for upgrades to the cable television networks and planned expansions. We’re pleased to see sales increase 3% year-over-year and 20% sequentially, which we believe is an indication that the worst of the short term decline is behind us. Looking ahead, we’re still working diligently to explore opportunity to expand sales for the cable TV segment, both in products and services offered to our customers. In the telco segment, as budget and economic constraints improve for our customers, our sales team experienced greater interest in the market than we had experienced in the first quarter, which led to a 40% increase in sales as compared to the first quarter. Telco sales in the second quarter 2016 did decrease $1.2 million as compared to last year, as the second quarter of last year benefited from a large sale of $1.5 million to an end user customer. Considering this benefit in the previous year, we believe telco revenues are back on track and we are generally pleased with the direction this segment has taken. Looking ahead, we continue to grow our operational capabilities and increase our scale to drive growth in our telco segment. We have faced a number of market challenges, however, we believe we have made it through the worst of the challenges associated with general industry weakness, which impacted our performance in the first quarter. Our ability to rapidly regain customers as market conditions improve reflects the productivity of our sales team and its strong industry relationships. This ability to withstand market fluctuations in our overall operational strategy positions us to achieve steady growth in the second half of the year and beyond. We’re also excited to have announced this quarter the formation of a new strategic joint venture with ADDvantage and YKTG Solutions, LLC, which we announced previously. Through this joint venture, we will support the decommissioning work on cell tower sites across 13 states on behalf of major US wireless provider. We estimate that we will generate approximately $1 million in pretax income from this project over the next year. This joint venture opened a new opportunity in the service sector of the telecommunication industry for our company and we hope this joint venture will generate additional service projects in the future for us. Furthermore, our balance sheet remains strong and we continue to seek out acquisition opportunities in the broader telecommunications sector with a view to expand market share over the long term. 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 second fiscal quarter of 2016, total sales decreased $800,000 or 7% to $10.6 million from $11.4 million for the same period of last year. Sales for the Cable TV segment increased $200,000 to $6 million for the three months ended March 31, ‘16 from $5.8 million for the same period of last year. This increase in sales was due primarily to an increase in both refurbished equipment sales and repairs revenue. Sales to the Telco segment decreased $1.2 million to $4.6 million for the three months ended March 31, 2016 from $5.8 million for the same period of last year as a result of a decrease in used equipment sales of $1.7 million, and was partially offset by increases in the new equipment sales of $300,000 and recycling revenue of $200,000. As David mentioned previously, the second quarter 2015 did include a large equipment order of $1.5 million by an end user customer. Our consolidated gross profit decreased $600,000 or 16% to $3.6 million for the three months ended March 31, 2016 from $4.2 million for the same period of last year. The decrease in gross profit was due primarily to a decrease of $700,000 in gross profit from the Telco segment and was partially offset by an increase of $100,000 in gross profit from the Cable TV segment. Gross profit margin for the Cable TV segment increased to 32% for the three months ended March 31, 2016 compared to 31% for the same period of last year and our gross profit margin for the Telco segment decreased to 36% for the three months ended March 31, ‘16 compared to 42% for the same period of last year. Operating, selling, general and administrative expenses decreased by $500,000 or 14% to $3.3 million for the three months ended March 31, ‘16 from $3.8 million for the same period of last year. This decrease was primarily due to a $700,000 decrease in Telco segment expenses and was partially offset by an increase of $200,000 in Cable TV segment expenses. The decrease in the Telco segment included $400,000 decrease in expenses for the annual earn-out payments related to the acquisition of Nave Communications. Other income of $100,000 for the three months ended March 31, ‘16 represents our management fee for our role in the YKTG solutions decommission project that Dave mentioned earlier. In addition, we also recognized a $100,000 loss from the equity losses of this investment for the three months ended March 31, ‘16. Our net income from continuing operations for the three month period ended March 31, ‘16 was $146,000 or $0.01 per diluted share compared with $234,000 or $0.02 per diluted share for the same period of last year. EBITDA for the three months ended March 31, 2016 was $600,000 compared to $700,000 for the same period of last year. Now turning to the results for the six months ended March 31, 2016 consolidated sales decreased $3.4 million or 15% to $18.8 million for the six months ended March 31, ‘16 to $22.2 million for the six months ended March 31, 2015. Sales for the Cable TV segment decreased $1.6 million to $11 million for the six months ended March 31, 2016 from $12.6 million for the same period of last year. The decrease in net sales is due primarily to a decrease in new equipment sales of $2.3 million and was partially offset by an increase in refurbished equipment sales of $400,000 and repair revenue of $300,000. The decline in equipment sales for the Cable TV segment primarily occurred in the first quarter of fiscal year 2016. The Cable TV segment has experienced declining equipment sales over the past several years for the products that we traditionally carry due to the continued consolidation of the cable television operators and fewer upgrades of the cable television networks and plant expansion. For the first quarter of fiscal year 2016, our equipment sales decreased to the lowest level during this downturn. However, we did believe that some of the decrease in sales is due to uncertainties caused by pending merger activities and in the second quarter of fiscal '16, we did see our equipment sales increase back to levels we experienced last year. Sales for the Telco segment decreased $2 million to $7.9 million for the six months ended March 31, ‘16 from $9.9 million for the same period last year as a result of decrease in used equipment sales of $2.6 million was partially offset by increases in new equipment sales and recycling revenue of $500,000 and $100,000, respectively. Our consolidated gross profit decreased $1.8 million or 21% to $6.3 million for the six months ended March 31, ‘16 from $8.1 million for the same period of last year. The decrease in gross profit was due primarily to decrease in the Telco segment of $400,000 and a decrease in the Cable TV segment of $1.4 million. Gross margin for the Cable TV segment increased to 32% for the six months ended March 31, ‘16 from 30% for the same period of last year while the gross margin for the Telco segment decreased to 36% for the six months ended March 31, ‘16 from 43% for the same period of last year. Consolidated operating, selling, general and administrative expenses decreased $1 million or 14% to $5.9 million for the six months ended March 31, ‘16 from $6.9 million for the same period of last year. This decrease was primarily due to $1.1 million decrease in Telco segment expenses and was partially offset by a $100,000 increase in expenses in the Cable TV segment. The decrease in the total segment included $700,000 decrease in expenses for the annual earn out payments related to the acquisition of Nave Communications. Our net income from continuing operations for the six months period ended March 31, 2016 was $169,000 or $0.02 per diluted share compared to $650,000 or $0.06 per diluted share for the same period of last year. EBITDA for the six months ended March 31, 2016 was $1 million compared to $1.8 million for the same period of last year. Our cash and cash equivalents on hand was $5 million as of March 31, 2016 compared with $6.1 million as of September 30, 2015. The decrease in cash and cash equivalents included $1.2 million of payments related to the Nave acquisition and $400,000 of funding for the YKTG Solutions joint venture. As of March 31, 2016, the company had inventory of $21.8 million compared to $23.6 million as of September 30, 2015. This does conclude the financial overview for the second quarter of fiscal quarter of 2016. With that I'll now turn the call over to the operator to open up for questions.

[Operator:]

[Operator Instructions] We will give go to George Gasper, Private Investor.

[George Gasper:]

Question or looking for an overview answer if possible. Yesterday in the Wall Street Journal there was a story headlined Busting the Cable-Box Monopoly Is Overdue and I know this is an issue that's been going on for some time but do you have any thoughts as to how this situation is impacting your cable area?

[David Humphrey:]

George, thanks for the question, this is Dave Humphrey. The SEC is debating that issue right now about how they're going to set up the new regulations for cable boxes, they're trying to make it available for consumers to buy, they’ve done it in the past, they've had the cable card incidents from five or six years ago that work out very successfully. We've gotten a lot of feedback on that. However, from our business standpoint we’re not in the cable box business of course, we were with AGC acquisition we made six years ago or five years ago and so that business well over two years ago, so it really doesn't have a direct impact on us. And of course what we look for is the impact on the cable industry itself. From a logistics standpoint, I don't see it having a big impact on them, again, the cable industry is maintaining their hold on consumers even though there is still talk about cord cutting this last quarter, they actually had an increase with the Top 6 players in that industry including Comcast. So, I think they're doing a good job of retaining their customers, I don't think cable boxes are the key, it's the overall service cost that provide. And as to whether they're ultimately going to debundle that's still an issue that's being debated among the cable operators and the consumers as well and the SEC. So, I think that's a bigger issue bundling than it is for cable boxes themselves.

[George Gasper:]

And question two, regarding the joint venture that you've entered recently when you made comments on. What's the investment if any of that AEY has had to put forward to be a joint venture partner and is this something that could expand beyond one year horizon or this is just short-term deal?

[Scott Francis:]

Hey George, this is Scott, thanks for the question. As far as the initial investment that ADDvantage had to put in, it was really minimal, so it really wasn't a startup on that front as far as initial capital outlay. We are hoping to fund the joint venture from the standpoint of the decommission project that we are working with YKTG and jointly with. So that was the $400,000 that is referred in the 10-Q, may not have seen that yet, but we have funded $400,000 to-date on that and we did incur some losses just because again the project is starting and you know we just haven't had enough billings yet to overcome that yet. But that's - so mainly our investment at this point is funding of the investment not necessarily capital outlay. Beyond, your second question as far as do we hope it will expand, yes we do, not necessarily just with this one project, we are seeking other opportunities as part of the joint venture that we're doing with YKTG and utilizing the relationships in the industry that they have and we have and trying to expand that with various projects with both telco and cable players in the industry and seeking those out.

[George Gasper:]

And question three regarding Nave, in terms of being able to reach further out on the acquisition side in general? Any thoughts and trying to expand that particular side of your business, and I know that you have been searching around for some time here looking for ways of expanding, putting another formation together for the company. Can you give us any color on what your strategy is going forward on the acquisition side, particularly where communications is involved?

[David Humphrey:]

Yes, George, basically we continue to utilize our investment banker focused group, they helped to secure the Nave deal, and they are helping us look at other deals. We are in the middle of looking at deals right now, we have a number of potential attractive deals, but of course the caveat I will give you is not a deal till it’s a deal. So we are hopeful that we will be able to secure the deal in the near future, but again, I can’t comment because it’s not a deal yet. But yes, we are very committed to growing our business through acquisition as a management team and continue to focus a lot of effort and resources on that.

[George Gasper:]

Great. Just, I don’t know if there is - if I could just make a comment or a broad thought process. One of the things that’s really starting to advance is Wi-Fi being transmitted by LED, street lighting structures. I don’t know if there is possibility on the communication side of getting involved in that. There is a second project now being tested in Connecticut that’s risen with successful. If this one, second one successful, it’s going to absolutely broaden significantly the utilization. There is also in the last two weeks, a test of a similar type installation in a suburb of Chicago, where one of the large cable companies is which of course in that communication area is testing it. So there is some real technology going forward here, and also it’s going to make it into LED high bay lighting systems, there is some real progress being made on that side of it. So there is lots of different of running this new communication up the wall, so anyway just I would like to point those things up.

[David Humphrey:]

I appreciate that very much George. We are trying to track that. I think you actually may have a better pipeline than we do on information, so we appreciate your comments. Again, we think the real advantage is that the cable guys have nice big wide pipes and we are here to help them expand those pipes as people increase their demand in communications and broadband. Thank you for those comments.

[George Gasper:]

Well, hopefully, it works out and all you have got, again as I always say, ADDvantage Technologies is a solid operation and good financials and if we can just get some momentum on the revenue and earnings growth side, I am sure this stock preferments would be significantly better than where it’s sitting right now in the market.

[David Humphrey:]

Very good. Thank you, George.

[Operator:]

[Operator Instructions] There are no further questions in the queue at this time. I would like to turn the conference back over to today’s speakers for any additional or closing remarks.

[David Humphrey:]

Very good. Thank you operator. Well, I want to thank George for his questions, and I want to thank you all for joining us on the call today. I would like to reiterate that although there is still some way to go, as George mentioned, we’ve got to get the revenue up to get our stock up and that’s certainly our goal. We are pleased with the positive changes in the market and expect the market to continue to strengthen through the latter part of the year. We are also excited about our new relationship and deal with YKTG and continue to focus on acquisition opportunities to expand our operating base. I would like to thank our shareholders for their loyalty, support and patience as we continue to build value together. Thank you all.

[Operator:]

That does conclude our conference. Thank you everyone for your participation.