ADDvantage Technologies Group, Inc.
Q4 2014 Earnings Call Transcript

Published: 9 Dec 2014

[Operator:]

Good day, and welcome to the ADDvantage Technologies' Fourth Quarter Fiscal 2014 Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to 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 future results – 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 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 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 earlier today on December 9, 2014. The guidance regarding anticipated future results in this call is based on limited information currently available on ADDvantage Technologies which are 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.

[Dave Humphrey:]

Thank you, Garth. Welcome to ADDvantage Technologies’ fiscal 2014 fourth quarter 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 for the quarter and fiscal year ended September 30, 2014, I want to offer a brief update on the company’s operations and strategy. We have seen the initial impact of our growth strategy take hold in fiscal 2014 as we reported a significant increase in net sales for the period. The majority of this positive momentum is the result of our acquisition of Nave Communications earlier in the year. As expected with any acquisition, there was an early transition period that impacted Nave's overall performance. By the end of the fourth quarter though Nave demonstrated improved results both in top line revenue and EBITDA bringing it more inline with our expectations. We believe that Nave is well positioned in the telco market to continue this improved performance in fiscal 2015, as they differentiate themselves in the marketplace by having a broad range of used inventory and stock and experienced sales support team with strong customer relationships and the ISO and telecommunication certifications in place hit many of the telco providers to acquire of their equipment vendors. Our Cable TV business has experienced top line revenue declines since 2008 due to decrease plan expansions and bandwidth upgrades as a result of lower new housing developments and an overall lower cable television subscriber base. Therefore our strategy is been primarily focused on organic growth to gain market share in a shrinking capital equipment market, by expanding our product offerings with our broad range of OEM partners and realigning our sales force to more effectively reach our customer base. During 2014, although we still experienced an overall top line revenue decline, we did see our top line revenue stabilize in the later half of the year as a result of this strategy. In addition, it bears mentioning that despite our top line revenue decline the segment has been and still remains profitable. We believe that the overall telecommunication industry still has good opportunities as the industry is working to meet the ever increasing demand for Internet services, as well as continuing to provide quality voice and video to their customers. In order to accomplish this, the communication service providers will need to upgrade their networks to meet this demand and we are well positioned to provide their equipment needs for both the Cable TV and telco providers. In addition, after completion of the integration of Nave Communications into our business, we will continue to evaluate companies to acquire in the broader telecommunications market, to help us grow our business and take advantage of the opportunities in this industry. We made considerable progress on our growth strategy during 2014 by restructuring our Cable TV business through selling Adams Global in January and expanding our sales force, as well as completing the Nave acquisition, which allowed us to expand in the Telco industry. As a result, we believe our net sales and EBITDA will grow in fiscal 2015 and beyond. I'd now like to turn it over to Scott who will provide the financial results.

[Scott Francis:]

Thank you, David. For the fourth fiscal quarter of 2014, total net sales increased $4.5 million or 59% to $12.1 million compared with a $7.6 million for the same period of last year. Net sales for the Cable TV segment decreased slightly to $7.3 million for the three months ended September 30, 2014 from $7.6 million for the same period of last year. The decrease in net sales was due primarily to a decrease in new equipment sales of $0.6 million, which was partially offset by an increase in refurbished equipment sales of $0.4 million. Our net sales for the Telco segment were $4.8 million for the fourth quarter ended September 30, 2014 and zero for the same period of last year as a result of our acquisition of Nave Communications. Net sales for the Telco segment consisted of $4.1 million of used equipment sales and $0.7 million of recycling revenue. Our consolidated gross profit increased $1.9 million or 81% to $4.3 million for the three months ended September 30, 2014 from $2.4 million for the same period of last year. The increase in gross profit was due primarily to gross profit from the Telco segment of $2.1 million as a result of the Nave Communications acquisition. Our gross profit from the Cable TV segment decreased slightly to $2.2 million for the three months ended September 30, 2014 from $2.4 million for the same period of last year. Our operating, selling, general and administrative expenses increased by $1.8 million or 125% to $3.3 million for the three months ended September 30, 2014 from $1.5 million for the same period of last year. This increase was primarily due to $1.8 million in Telco segment expenses as a result of the Nave Communications acquisition. Our net income from continuing operations for the three months period ended September 30, 2014 was $0.6 million, or $0.06 per diluted share, compared with net income from continuing operations of $1.5 million, or $0.05 per diluted share, for the same period of last year. Discontinued operations for the three months ended September 30, 2013 included the operations of Adams Global Communications prior to the sale on January 31, 2014, excuse me. Our EBITDA for the three month period ended September 30, 2014 was $1.2 million compared with $1 million for the same period in 2013. Now for the results for fiscal year ended September 30, 2104. Our consolidated net sales increased $7.2 million or 25% to $35.9 million for the fiscal year ended September 30, 2014 from $28.7 million for the fiscal year ended September 30, 2013. The increase in net sales was primarily attributable to $8.7 million in net sales from the Telco segment as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $1.5 million. Net sales for the Telco segment consisted of $7.5 million of used equipment and sales of $1.2 million of recycling revenue. Our net sales for the Cable TV segment decreased $1.5 million to $27.2 million for the fiscal year ended September 30, 2014 from $28.7 million for the previous fiscal year. This decrease is primarily due to decreases in new equipment and refurbished sales of $0.7 million and $0.6 million. The decrease in overall equipment sales was due primarily to the continued decrease in plant expansions and bandwidth upgrades in the cable television industry and the absence of equipment sales as a result of Hurricane Sandy in fiscal year 2013, partially offset by supplying a major MSO equipment for certain projects this year. Consolidate gross profit increased to $2.9 million or 33% to $11.6 million for the fiscal year ended September 30, 2014 from $8.7 million for the fiscal year ended September 30, 2013. The increase in gross profit was due primarily to an increase in the Telco segment of $3.8 million as a result of the Nave Communications acquisition, partially offset by a decrease in the Cable TV segment of $0.9 million, primarily as a result of lower net sales. Our operating, selling, general and administrative expenses increased $4.7 million or 81% to $10.5 million for the fiscal year ended September 30, 2014 from $5.8 million for the previous fiscal year. This increase is primarily due to increased expenses of the Cable TV segment of $0.5 million and the Telco segment of $4.2 million as a result of the Nave Communications acquisition. The Telco segment expenses also included $0.6 million of direct cost in connection with the acquisition of Nave. Net income from continuing operations for the fiscal year ended September 30, 2014, was $0.7 million or $0.07 per diluted share compared with a net income from continuing operations of $1.8 million or $0.18 per diluted share for fiscal year 2013. The decrease is primarily the result of acquisition related expenses of $0.6 million in the Telco segment associated with the acquisition of Nave Communications and decreased operating income of $1.4 million from the Cable TV segment. The loss from discontinued operations included the operations of Adams Global Communications prior to the sale on January 31, 2014. For the fiscal year ended September 30, 2014, this loss was 36,000 compared to 102,000 for fiscal 2013. The loss from sale of discontinued operations net of tax of 600,000 for fiscal year 2014 consisted of a pretax loss of 900,000 from the sale of the net assets of Adams Global for $2 million in cash and a pretax loss of 100,000 from the sale of Adams Global facility for $1.5 million in cash. EBITDA for the fiscal year ended September 30, 2014 was $1.9 million compared with $3.2 million for fiscal year 2013. Our cash and cash equivalents on hand were $5.3 million as of September 30, 2014 compared with $8.5 million as of September 30, 2013. Our cash and cash equivalents decreased due primarily to the acquisition of Nave Communications and the purchases of inventory, partially offset by the sale of Adams Global Communications and the associated facility. As of September 30, 2014, we had inventory of $22.8 million compared with $18 million as of September 30, 2013. The increase in inventory was due primarily to the acquisition of Nave and new cable equipment inventory purchases with certain manufacturer incentives. This concludes the financial overview for the quarter and fiscal year ended September 30, 2014. I’ll now turn the call back over to David.

[Dave Humphrey:]

Thank you, Scott. In 2015 we'll build upon the changes we implemented in 2014. This will be achieved by expanding our product offerings and customer base in the cable side. In the telco side, our focus would be to further expand our customer base internationally and to increase services we provide to our customers. In addition, we will continue to look for acquisition opportunities in the broader telecommunications market. We appreciate your continued support, as we will continue to find innovative ways to improve our business and grow our operations. This concludes our prepared remarks. I would 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 take our first question from Doug Ruth with Lenox Financial Services.

[Doug Ruth:]

Hi, congratulations. That was a really nice report.

[Dave Chymiak:]

Thank you, Doug.

[Doug Ruth:]

Could you give us some detail or little color on how you plan to realign the Cable TV segment? It seems like there is still a struggle there?

[Dave Chymiak:]

Well, if there is Doug, we will continue to see the decline in revenue. But we believe that the – the way we can organically grow this business, we can grab a creative portion share – our portion of the market share is through hiring additional sales people at the local level. And that we can, we'll see increased sales both on new equipment and our used equipment. We'll also see if we can get our sales people to focus more on service side as we can expand our repair business as well. And that’s our greatest opportunity, as well as looking for other products that we can add to our portfolio of sales to our customer base. David, any other follow up comments on that?

[Dave Humphrey:]

No.

[Dave Chymiak:]

Okay.

[Doug Ruth:]

Are we close to hiring any additional people at this point in sales?

[Dave Chymiak:]

We just completed a hiring about a month ago.

[Doug Ruth:]

Okay.

[Dave Chymiak:]

And we'll continue…

[Doug Ruth:]

I was impressed…

[Dave Chymiak:]

And we'll continue to look for additional candidates, Doug.

[Doug Ruth:]

Okay. I was impressed with the growth of the international sales. Could you offer some color on how you're able to achieve what you've been achieving?

[Scott Francis:]

Yes. This is Scott, Doug. Some of that was from our Telco segment where we have been able to increase some of the international front. As you know telco is – can be more of worldwide acceptance of the same type of technology, as compared to cable is a little more limited. And so the Nave acquisition, the Nave sales people already had some business in that and we're trying to expand a little bit in that European market. And that’s what we're hoping can be something that we can hope to build upon on into 2015. But that was a lot of a driver.

[Doug Ruth:]

Okay. That’s a significant achievement. Could you offer, the products offerings for your expanding, could you give us a little color as far as what you think is missing from the portfolio currently?

[Scott Francis:]

Well, Doug, about couple years ago we added some Fujitsu equipment in our NCS operations and that added revenue and profitability, although that line is been diminished in the cable space as they – as Fujitsu looks for other product lines in other markets. We picked up the Triveni line about 3 or 4 years ago and that’s added revenue every year for the last 3 years. So those types of product lines is what we'll pick up. As you know we've already got a breadth of opportunity with other products. But I think the greatest opportunity right now maybe in the fiber space, and we're going to look for additional fiber opportunities for equipment sales. But again, the key for us is that we need to understand the equipment that is in our customer base, because that’s what they generally look for us to do, is to be their expert on the equipment and its implementation which is where Dave's probably where strength of his – of himself and his organization is always been. Anything else you want to add Dave…

[Doug Ruth:]

Okay…

[Dave Humphrey:]

No.

[Scott Francis:]

Okay.

[Doug Ruth:]

How close are we to an additional acquisition or what can you give us on that front?

[Scott Francis:]

Yes. I can't really comment on that Doug, other than we – we're not as aggressively looking right now as we try to complete the integration of Nave. But we've looked at a few deals here and there and we'll probably try to reactivate and be much more aggressive for that certainly in 2015 as our strategy moving forward.

[Doug Ruth:]

And the margin should – could go higher in the next fiscal year with the integration of Nave. We could expect a margin expansion, is that a reasonable goal?

[Scott Francis:]

Well, we certainly want to expand our revenue base that may or may not. I don’t necessarily anticipate an increase in margin base as a result of that as we continue to expand our sales.

[Dave Chymiak:]

Just to clarify Doug, when we're saying integration of Nave what we're saying is, we're trying to get them into our processes, into the fold if you will. That’s not necessary a synergistic operation as much as it is trying to get them into our Sarbanes-Oxley, our audit, everything we've been trying to do under our ledger systems. That’s where we've been working with them on. So it’s not necessarily a synergy operation, as much it is trying to make sure we're all on kind of beating the same drum here.

[Scott Francis:]

Well, in addition to that, I spent a lot of time with Dave try to get to understand their business and also see how ADDvantage Technologies is going to assist their business. One of the way we're trying to do that is give them access to our capital and allow them to expand our inventory, also understanding though that inventory ties up cash and that’s certainly not our goal. But we want to provide them with unique opportunities to take positions where they might not have taken them in the past.

[Doug Ruth:]

So, all right. Well, all in all my congratulations to the management team. You've got the company operating at a higher lever and I am grateful for what you're doing here for the shareholders.

[Scott Francis:]

Thank you, Doug.

[Operator:]

[Operator Instructions] We'll take our next question from George Gaffer with Private Investor.

[Unidentified Analyst:]

Yes, good morning. Yes, very good quarter, congratulations. First question would be relative to the revenue outlook; you're pretty far along here now in the first quarter being the 9th December. Is there anything that you could say about your revenue trend versus the – I think you're going to be up again $6.9 million last year. Can you get close in the first quarter to your, the $1 2 million one that you accomplished in September that is for the December 31 quarter?

[Scott Francis:]

George, I very much appreciate your question. Its something we historically not really responded to. I will tell you though, we are hopeful as we are always hopeful that we'll be able to continue to grow the business over time.

[Unidentified Analyst:]

Okay. Was there anything in the quarter from the standpoint of integrating the Nave and that was unusual in terms of volume that wouldn’t necessarily be there in the current quarter?

[Scott Francis:]

No, I don’t see anything particularly unusual.

[Unidentified Analyst:]

No. Okay. All right. And then and a technical question back on the cable side of the business. And if you made any comment about this apparent problem in terms of bandwidth on cable lines in the United States and the need to maybe do a lot of upgrading of amplifier equipment that saw in cable lines and how you might integrate into that segment of the business, can you give us any color on that?

[Scott Francis:]

Yes. Actually George, we countered certainly an important aspect of a growth opportunity for us. There is really three different ways people can take and expand that capacity. The firs one is to simply go all fiber, and the all fiber play is something that we maybe able to have a plan, but it’s not the heart of our business. But – and that’s also the most expensive change, gaining to the most capacity. The second opportunity is replace the existing equipment with new equipment and we certainly can provide new equipment sales. And the third one is one that Dave is particularly focused on that was – and that’s where the upgrade the existing amp systems, I'll turn it over to Dave to kind of talk a little bit about that.

[Dave Humphrey:]

Yes. George, we've been watching this for some time and it looks like most of the people have started asking questions in the last 90 days, most of them are looking it for in their budgets towards the end of 2015. 2016, it looks like there is going to be a lot of upgrades. There is still the best week until out there between 10 and 12 maybe even more amplifiers out there in the country that will…

[Scott Francis:]

10 to 12 million…

[Dave Humphrey:]

12 million amplifiers still out there in the country that may need an upgrading and or replaced.

[Unidentified Analyst:]

Okay. And that’s something that would tend to be more than – you're also now, but revealing just the same?

[Dave Humphrey:]

In fairness, we're seeing request for the product now, I mean, daily.

[Unidentified Analyst:]

I see. Okay. All right.

[Dave Humphrey:]

For budget purposes.

[Unidentified Analyst:]

All right.

[Scott Francis:]

System-by-system, you know, questions that Dave gets, sometimes its system wide for companies, most of the time its local systems, about changing this one or upgrading that.

[Unidentified Analyst:]

Right. As this becomes an apparent problem, which sounds pretty significant and it obviously could get worse. I mean, obviously the cable guys are trying to push more data out over their systems and retrieve data coming back in larger volumes. What does this possibly offer for AEY in terms of becoming more of a field service provider? In other words, just actually getting direct into the field work on the cable lines? If it was let say, if this was structured where city to city had to make a major change or where it would cost the cable companies to look away from themselves or somebody to do the service work, is that any possibility for expansion for the company?

[Scott Francis:]

It is a possibility, as these change out systems go beyond with the – and our selves, themselves can handle. They have to maintain their systems and we'll have to continue to do that. So many of the changes are going to acquire them to go to third parties and do these change out. We're not experts on, one logistics, nor on going up on the line and actually pulling those amps. Where our confidences is actually changing out those amps and doing it quickly and doing it on a good quality job which is where our core confidences plays. So we'll be a major player on a good portion of that project work. I don’t necessarily see us, but it’s still a possibility, its going actually doing some of the field work as well.

[Unidentified Analyst:]

Okay. All right. And then just a follow up comment on the previous questioner and complementing the company. I think that this – your company is really in a very unique position. If you look at your size and you look at the financial strength of the company and the retained earnings that the company has. There's very few companies in your market category that would stable to reflect to retain earnings capacity that AEY has and the share – and the book value capacity relative to current price. So hopefully that puts you in a pretty good position to look to broaden your participation in the market and list this company well beyond $50 million a year of possibility on the revenue side?

[Scott Francis:]

That’s certainly, one of our objectives is to again, since I've been here, the goal and chances I've been given by the board is to again find a organic growth opportunity within our existing cable business. Dave and I worked very closely on and then ultimately look for additional acquisition to utilizing the cash flow of the base cable business and Nave was the first step, but we don’t anticipate that’s the last one. So we agree with you, we think we are in a very unique position from a size standpoint to have a significant impact on our overall stock price, but again we can't predict that.

[Unidentified Analyst:]

Right. Okay. All right. And then one last on the comparison that’s coming up for the first quarter. This past year the revenue was reported at 6 point, close to $6.9 million are there any adjustments downward or upward in that revenue stream. I mean, I am just looking at naturally when Nave became effective or will the comparison be against that $6.9 million what ever do you report for the quarter ending December?

[Scott Francis:]

George, and I don’t have that number right here in front of me and I apologize. The one thing we would potentially adjust depending on which one you're looking at is, we do pull out the Adam Global Communication sale…

[Unidentified Analyst:]

Okay, right…

[Scott Francis:]

So just be aware of that, but other than that, there is no adjustments for Nave per se…

[Unidentified Analyst:]

Okay.

[Scott Francis:]

That will just be added on top, but you would need to pull out and we will be pulling out Adams Global. That’s reflected in our 10-K and the quarterly numbers there.

[Unidentified Analyst:]

Okay.

[Scott Francis:]

Okay. But other than that, yes, that’s where we'd be at.

[Unidentified Analyst:]

Okay. All right. Well, that’s good. I appreciate it. Thanks, very much.

[Scott Francis:]

You're welcome.

[Dave Humphrey:]

Thank you, very much George. Appreciate your support.

[Unidentified Analyst:]

Okay.

[Operator:]

At this time there are no additional questions in the queue. I'd like to turn it back over to our speakers for any additional or closing remarks. End of Q&A

[Dave Humphrey:]

Very good. Thank you, operator. Well, again on behalf of ADDvantage Technologies, I want to thank all of our investors that continue to support our stock and continue to support us on this call as well. Again, we understand the goal is to continue to grow the business and we're very focused on that, on both the existing business that we now own in both sectors. Our goal is try to help grow our cable base, as well as try to figure out how to expand and grow Nave and then also continue to look for additional acquisitions. So, that’s where our focus will continue to be on and we agree with George, we think we're in a unique position to try to move this company along growth from an operational and profitability standpoint, hopefully ultimately on the stock value of the company. So thank you all again. I appreciate your continued support. That ends our comments, operator.

[Operator:]

That concludes today’s conference. We appreciate your participation.