ADDvantage Technologies Group, Inc.
Q1 2015 Earnings Call Transcript

Published: 10 Feb 2015

[Operator:]

Good day, and welcome to this ADDvantage Technologies’ First Quarter 2015 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 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 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 differ materially from actual 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 with the SEC. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies to which are subject to change. Although any such guidance and factors influencing it will likely 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 presentation. With nothing further, I would 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 to ADDvantage Technologies’ fiscal 2015 first 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, I want to offer a brief update on the company’s operations and strategy. We witnessed solid operational performance across both the cable TV and telco segments reporting a 77% increase in total sales year-over-year as we started to see the impact of our growth initiatives. As we have discussed previously, the cable TV segment has faced negative market trends over the past several years, mostly driven by a shrinking capital equipment market. Therefore, we revised our commercial strategy to reverse this trend and support organic growth. These shifts on our strategy include the expansion of our product offerings with our broad range of OEM partners and realigning and increasing our sales force to focus on growing our market share in the cable equipment market. We believe these changes have started to take effect based on our results over the last few quarters as we are no longer seeing the declines in our equipment sales that we have experienced over the last several years. Although the first quarter results were very good and we are pleased with the results of organic growth strategy so far, we are not done as we still plan to further penetrate the cable TV equipment sales and repair market by continue to strengthen and expand our sales force and ultimately capture additional market share. We also continue to reinvest in the business by maintaining a solid inventory position in both the cable TV and telco segments, which enables our sales force to fulfill orders quickly and efficiently. This helps us maintain excellent relationships with our new and existing customers to maintain and grow our position in the market. We have also had a good quarter in the telco segment of our business due to the performance of Nave Communications, which we acquired in February last year. This acquisition performed well again this quarter and has now been operating in line with expectations for two consecutive quarters. We are confident that its broad range of inventory, diverse selection of manufacturer systems and components and experienced sales support team differentiates the company and sets it apart from its competition and we expect this to continue to perform well in the future. Now, that we have had time to adjust to the acquisition of Nave Communications, we are actively looking for possible acquisitions within the broader telecommunications market that will further diversify our commercial offerings and enable us to increase our market share. To summarize, we view the sales and EBITDA results of the first quarter 2015 as an indication that we are on the right track and in a good position to take advantage of the opportunities in front of us. And we remain cautiously optimistic about the future and our strategy. Now I would like to turn it over to Scott who will provide the financial results.

[Scott Francis:]

Thank you, David. For the first quarter of 2015, total sales increased $4.7 million or 77% to $10.8 million compared with $6.1 million for the same period of last year. Sales for the Cable TV segment increased to $6.8 million for the three months ended December 31, 2014 from $6.1 million for the same period of last year. The increase in sales was due primarily to increase in new equipment sales of $900,000, partially offset by a decrease in repair revenue of $200,000. Our sales for the Telco segment were $4 million for the first quarter ended December 31, 2014 and zero for the same period of last year as a result of our acquisition of Nave Communications. Sales for the Telco segment consisted of $3.7 million of used equipment sales and $300,000 of recycling revenue. Our consolidated gross profit increased $1.9 million or 106% to $3.8 million for the three months ended December 31, 2014 from $1.9 million for the same period of last year. The increase in gross profit was due primarily to gross profit from the Telco segment of $1.8 million as a result of the Nave Communications acquisition, while gross profit from the Cable TV segment increased $100,000 for the three months ended December 31, 2014. Our operating, selling, general and administrative expenses increased by $1.5 million or 89% to $3.1 million for the three months ended December 31, 2014 form $1.6 million for the same period of last year. This increase was primarily due to the Telco segment of $1.7 million again as a result of the Nave Communications acquisition partially offset by a decrease in the Cable TV segment of $200,000. Our net income from continuing operations for the three months period ended December 31, ’14 was $400,000 or $0.04 per diluted share compared with net income from continuing operations of $100,000 or $0.01 per diluted share for the same period of last year. Our discontinued operations are $26,000 for the three months ended December 31, 2013 included the operations of Adams Global Communications prior to its sale on January 31, 2014. Our EBITDA increased $800,000 to $1.1 million for the three months period ended December 31, 2014 compared with $300,000 for the same period of last year. Our cash and cash equivalents on hand were $6.5 million as of December 31, ’14 compared with $5.3 million as of September 30, 2014. As of December 31, 2014, we had inventory of $23.1 million compared with $22.8 million as of September 30, 2014. The increase in inventory was primarily due to used inventory purchases by the Telco segment. Again this concludes the financial overview for the first fiscal quarter 2015 ended December 31, 2014. I will now turn the call back over to David.

[David Humphrey:]

Thank you, Scott. I would like to once again reiterate that we have entered 2015 on a positive note as indicated by our EBITDA numbers which show a healthy year-over-year increase for both segments of our business. We believe that our organic growth strategy for the Cable TV segment I have previously outlined will help to reverse the downward trend that we have experienced and that the performance of Nave Communications will continue to meet our expectations. In addition, we are actively looking for acquisition opportunities in the broader telecommunications market to further diversify and expand our business. We appreciate your continued support as we continue to implement these strategic changes. This concludes our prepared remarks. We would now like to turn it back over to the Operator and open the call for any questions. Operator?

[Operator:]

Thank you, sir. [Operator Instructions] And we will take our first question from Doug Ruth with Lenox Financial Services.

[Doug Ruth:]

Congratulations, this was a very solid report. I can see the hard work that the organization put into achieving these numbers.

[David Humphrey:]

Thank you, Doug.

[Doug Ruth:]

Could you tell us some about where the demand is coming from the new equipment?

[David Humphrey:]

New equipment, are you – of course you are telling about on the cable side?

[Doug Ruth:]

Yes.

[David Humphrey:]

David?

[Dave Chymiak:]

Regular customers, we have got a lot of people out there that are upgrading their systems to be able to get faster speed for the internet. A lot of it is the mid-sized Telco type people as well as small cable companies plus there is a shortage of the equipment, backlog is running anywhere from 3 weeks to 4 weeks all the way up to 105 days we have recorded on some products yesterday.

[Doug Ruth:]

And what explains the backlog?

[Dave Chymiak:]

Sorry, it’s just plain demand?

[David Humphrey:]

Well, I mean the OEMs by nature don’t try to inventory their products on new equipment sales. That’s one of our advantages that we do inventory of their product either as a distributor or a reseller of their equipment. So that’s one of the advantage we have in the marketplace. And we are seeing that probably some of those delays are getting more extensive or longer simply because of the increase – either because of increased demand overall or again their natural tendency to not want to inventory that product.

[Dave Chymiak:]

Yes. That’s back orders all the way back to the end of September right now.

[David Humphrey:]

Which is a little unusual for us.

[Doug Ruth:]

Okay. Can you comment – can you tell us how many people are in the Cable TV sales force currently?

[David Humphrey:]

I don’t have an exact number. I mean we have been probably in excess of 10 people total in sales.

[Doug Ruth:]

And how many additional people are you looking to hire?

[David Humphrey:]

I don’t have a specific number in mind yet Doug, but I would estimate probably 2 to 3 additional people. And I can’t give you a timeline on that either that whether that’s in the next year or the next 6 months. We are simply – we are intent on overall expanding our business line and doing that through our sales organization. But yes, I would say at least a couple of people.

[Doug Ruth:]

Is there anybody that the hiring would happen fairly quickly at this point?

[David Humphrey:]

I can’t say it right now?

[Dave Chymiak:]

Doug, this is David Chymiak. One of things on salesmen in our field that are knowledgeable they only come along so often. So we had one come along last fall and we hired him in within weeks, that’s one of the bigger factors involved too.

[Doug Ruth:]

Okay. And then could you talk about the products – some of the new products that you are having success with, maybe offer a little commentary there?

[David Humphrey:]

Well, one of the products that we still classify as somewhat new is the Triveni product. Triveni while we have been marketing their products for about 4 years, now they come out with a new product about a year ago. And we are selling that product. We continuously work with Harris and Cisco, our two largest OEMs, but also with Blonder Tongue and Aurora and so on. David, any other comment you want to make about some of that?

[Dave Chymiak:]

That covers that pretty well.

[Doug Ruth:]

And so was new product introductions at the marketplace is accepting readily?

[Dave Chymiak:]

We have got new things that have been talked about for years that are starting to come into play that we think will have potential down the road, but still a lot of them are down the road, 6 months to a year from now.

[Doug Ruth:]

Anything in particular that we are the most excited about right now?

[Dave Chymiak:]

Nothing that really that we can talk about I mean we can talk about a lot of different things. We are watching all of the things that are happening in the broadband space with the SBC requirements all of that and seeing where that fits in our future.

[David Humphrey:]

I think what you are getting at Doug is where are we seeing the growth, is it more on new products or is it more on better penetration, I think it is more in regards to hiring more sales people and trying to get deeper into the marketplace and add to our customer base more than new products, but we are seeing trends in the industry dwell from the standpoint of broadband. I mean, the broadband, the demand increases over time, but we think it’s going to cause some increased product demand from an equipment standpoint. But as Dave said that always seems to be on the forefront, but it never quite happens yet, eventually it will. So, we are more focused on the sales front and with our sales people than we are specifically in any particular one type of product from a new equipment standpoint.

[Doug Ruth:]

Okay. Well, can you offer some commentary about the acquisition environment? Is there – are there opportunities, how is the pricing, how close might it be with anything?

[David Humphrey:]

Okay. So, from the standpoint of overall market, we think the overall market is fairly open. There are opportunities out there. We don’t have any – that we are currently having a serious look at, but that could change quickly. We do have some things on a list that we are pursuing, but nothing in the forefront right now that we are going to – that we will be closing on in the near future.

[Doug Ruth:]

Are you considering the possibility of bringing in an investment banker again to help identify some opportunities?

[David Humphrey:]

We will do that. We are committed to doing that. We held off after the Nave acquisition, because we wanted to focus on integrating Nave and that’s where the management’s resources have been committed to. We are now prepared to step back out, hire an investment banker and go full force towards an acquisition opportunity.

[Doug Ruth:]

Would we see possibly the investment banker hired in the first half of say calendar 2015 will offer that kind of commentary?

[David Humphrey:]

I’m sorry, Scott.

[Scott Francis:]

Yes, Doug, this is Scott. Yes, we will – we will probably – we will pursue something like that as David already said. So, I think you will be able to see that by the time we do our release next time that you will have further information on that. So – and then pursuing that strategy like we have in the past.

[Doug Ruth:]

That’s helpful. Thank you for that. And then what about the state of the industry, can you offer any commentary as far how much it might expand in 2015?

[David Humphrey:]

Which industry you are talking about?

[Doug Ruth:]

I would say more of the cable industry, could they expand 5% or 10% for this year?

[David Humphrey:]

Well, I guess, it’s hard to answer that question in that. If you are talking about – there is two elements. So, there is the element of the overall market and I don’t see the overall market itself expanding as far as number of subscribers or things like that. The U.S. economy while it’s turning on better footing, we are not seeing a whole lot of drive towards new housing developments that help drive our industry for the last 25 or 30 years. We are not seeing a whole lot of that. And a lot of that’s going towards fiber, which – so and then the next step, you really want to know the equipment market, which is where we play as a distributor of new and used equipment. I don’t know how to answer that question overall other than we continue to sell into the market and we think the broadband is going to be the biggest driver of our market, because it has been for the last 3 to 5 years after the market went towards digitization of the video signal, the biggest movement right now and our biggest growth engine of the cable industry is the broadband sales. It’s a little bit of telephony and they continue to decrease or lose video customers to the satellite guys, to the telco guys and then some just like disconnecting, but I think that’s starting to slowdown, but I can’t speak to the overall trend.

[Doug Ruth:]

Okay. While you have been pretty candid and I am grateful for the commentary and I feel that the market is not giving you folks credit for these improved results and I am grateful that you are there and doing what you are doing and thank you for answering my questions.

[David Humphrey:]

Great. Thank you, Doug. Again, we appreciate your support.

[Operator:]

And we will move to our next question from George Gaffer with Private Investor.

[George Gaffer:]

Yes, thank you. Good morning. Nice quarter. Question regarding Nave, can you give us any color, David, on how you might see the quarter-to-quarter growth expectation now that it’s – you have got the company in place and it’s starting to come along, what kind of annual growth expectations might we look forward to and you are cranking out of the acquisition?

[David Humphrey:]

Look, I guess I will speak in towards the past and that is that for the first quarter of owning Nave, we were disappointed in the performance and for the last two quarters, we have been pleased. They are meeting our expectations. George, you know that we don’t make forward-looking statements and so I am reticent to kind of respond to that question as to my expectation is they will continue to perform at our expectations and we hope that they will generate some growth. That’s certainly one of the reasons we did the acquisition, but as to percentages or actual growth numbers I can’t speak to that.

[George Gaffer:]

Well, can you – is there anything going on at Nave, in terms of product development or innovation that may be can brighten your market penetration? Are you doing anything on the technology side to broaden the distribution opportunity?

[David Humphrey:]

George, fundamentally, Nave is a very sound company with good salespeople. They are looking at expanding their sales organization similar to what we are looking at on the cable side. If they do that, we anticipate that will generate additional revenue just as we anticipate to continue to generate some additional revenue on the cable side, which is why we are looking to grow. Outside of that, there are potential acquisitions that may dovetail with Nave as to whether they become not part of Nave or if they are a separate off-shoot we haven’t determined that, because again we don’t have anything specifically in the mill right now that we are looking at.

[George Gaffer:]

Alright, okay. And on the cable side, if broadband commentary that you have related in previous questions from the incoming caller, how do you see the company’s opportunity in this potential amplifier replacement market going forward? Is there any sense of the amplifier – the renovation of amplifiers on the part of [indiscernible] starting to show some opportunity or is it still early?

[David Humphrey:]

Well, I guess from an overall standpoint that’s the basis of our business is that we sell a new equipment. When they want to do an upgrade, we maintain their existing equipment through repairs and we will sell on used equipment if they don’t want to go to a brand new upgrade, but they want to do an intermediate upgrade. So, we are capable of filling all those needs that they have got and that’s historically what our business has always been about. As far as you are trying to look for trends and again we think that over time we will see a potential expansion in the overall market demand, but as to which one of those three segments gets the biggest play right now it’s repair has the biggest growth opportunity, because they are not upgrading a lot of that equipment right now, because of digitization that occurred about 5 or 6 years ago where we got a little pop in our revenue that year. But as far as where it’s going to go, yes, I believe that Dave and I and Scott all believe that there is a potential for growth in the market, but the win has always been the question and Dave is the one that is probably the best sounding borders is that win is always on the forefront, but it just always seems to be a couple of years away. Dave, anything else to add to that?

[Dave Chymiak:]

No, see again the amplifier market is picking up, this is where the backorders are and this is what our business model is. We have inventory and we have good inventory and the backorders as they started developing out here, it doesn’t take long to go from 3 weeks backlog up to 9 weeks real quick. And if that happens we sell more and more of our products. So, we continue – we should continue selling our product.

[George Gaffer:]

Okay. And just one additional question along this cable business line and I think I have asked this before, but in terms of cable field repair, is there any – do you see any opportunity or has anything changed that might encourage you to get into the actual field cable repair area and maybe takeover some of that opportunity if the cable companies themselves would release it to somebody like yourselves in spite of doing it themselves?

[David Humphrey:]

Well, first of all, we do field cable repair and that’s what we do today, that is I mean where we are repairing equipment, you talked about, I mean, not in the field, but we do it on locations. And George, you are asking the question, will we basically – would we take over and basically outsource a cable company and going to pull the equipment and basically fixing it and then putting it back? Is that what you are asking?

[George Gaffer:]

Correct, yes. That’s what I am asking.

[David Humphrey:]

Okay. I don’t know, I don’t – first of all, our core competency is actually the repair and the equipment knowledge going up on the pull, so I don’t know that, that would be something that we would look at, but from a growth standpoint, we really look at any kind of opportunity. So, I mean, if there is a reason for us to buy into that marketplace, we very well could find ourselves doing that, but again there is nothing in the wings as that’s what we are going to do, but we would like to do more and more repair work over time, so….

[George Gaffer:]

Right, okay. Just overview thought, you are doing well here post the acquisition and you are getting some momentum based on your revenue stream in the last quarter, I mean, you have correct, you got over $40 million hopefully and in annualized basis move towards $45 million to $50 million. And it looks like you have got the capacity here to really step up and get another leg on the stool and build that revenue forward at a faster pace through another acquisition? Thank you.

[David Humphrey:]

Thank you, George. We appreciate your questions and your support as well.

[Operator:]

[Operator Instructions] And we will move next to Steve Ruder with USIP.

[Steve Ruder:]

Hi. First off, congrats on Nave, it’s pretty impressive, quick, profitable turnaround, so it’s encouraging for the company that for all of us frankly that you are able to do an acquisition and make it profitable so quickly, so kudos on that. Can you explain for me a bit on cable, I have heard you talk about the order rate or backlog orders and I am just wondering how that would translate, I guess, I can see how it translate into volume, but how does it translate into volume and then margins?

[David Humphrey:]

Well, Dave mentioned about that fact that we have backorders of equipment, but where we see is a strength that plays our inventory positions that we take on product. And when the OEMs get behind on orders, we do get some of their customer base to come to us, because they need the equipment expediently. So, that creates an opportunity for us. And usually, it generates higher margins as well when the equipment gets delayed from the OEMs. Outside of that, I am not sure did I answer your question, Steve or not?

[Steve Ruder:]

I guess, what I am getting to you is can we begin to see incrementally better margins now because of this backorder situation?

[David Humphrey:]

Well, first of all, we have already seen that. Yes, so I mean to answer your question, we have always seen and we have always taken advantage of those types of opportunities for the last 25 years. That’s why we carry the inventory that we do on new equipment. On the used, of course, we carry a high inventory of used equipment, because we sell it all over the country and we sell to all three tiers, the Tier 1, 2 and 3 which are the smaller guys. So, that’s the advantage that we carry into marketplace. Our inventory and our knowledge of the equipment have always been our core competency and our strength, but I would say – I have historically been higher than our competitors for that reason and we will continue to be.

[Steve Ruder:]

Okay. And what I am getting to is on this issue of – it sounds like we have a changing market dynamic and is it a changing market dynamic therefore going to turn to our margins are better in the next quarter than in the prior quarter, because we know frankly we have more demand?

[David Humphrey:]

No. I would have to answer that slightly differently and I may apologize if I miss both. I think we are going to see it continuing the way the market is evolving. I mean, it continues to – and let me say differently, it historically has done it and we will continue to do that and we will continue to generate the higher margins than many of our competitors do, because of these continuing trends. Now, it’s the same trend that we have seen for 25 years. Now, the other trend that we are hopeful that we will see is a result of this broadband demand, which is the third leg of our cable customers and the telcos both I mean – both industries are out-solacing the triple play which is telephony and video and broadband. But the biggest growth opportunity on the cable side has been on broadband. And that may ultimately generate additional opportunities and cause a change and an adjustment in the trends and could create growth opportunities for us. So I am saying two things. One, the lack of or the delays that Dave is talking about is a continuing episode in the industry that we have seen over the last 25 years. So we have always been able to take advantage of it because of our inventory position. Then the second one is the broadband demand is it continues to increase. We could see unique opportunities that play into our company. But again that’s always a matter of timing, when are they going to…

[Steve Ruder:]

Okay. I was getting to whether we are getting pricing, because of the…?

[David Humphrey:]

No, Dave is going to answer that.

[Dave Chymiak:]

This is Dave. We will not get better margins, but we should – our revenues should increase which would give us more revenue at the bottom line, but we don’t increase our margins out there per se. The factory sells at one price and then we have to have a price that’s above that because we stock it, hold it and get a margin because of being a distributor. But the tendencies have been over the years, it usually goes in 7-year cycles. Everything last year the factory can deliver in 1 week, 2 weeks, 3 weeks 80% of the product. Now when the backlogs have come up, we get the calls now people that have been buying from the factory call us because they need the product now. And that’s where we fit in. Our margins generally don’t increase at that point, but our profits stood at the bottom line, revenue does as well as the profit at the bottom.

[Steve Ruder:]

Okay, got it. And that’s the clarification. Thanks. The second part is I know that at the end of Q4 we were pretty pleased with how we bought – we did a big inventory buy and based on the press release we are pretty pleased that our pricing on that. And I am wondering if our new inventory is at better prices than our old inventory?

[David Humphrey:]

I don’t think so overall, we have more of it. And certainly on Nave’s we were clearly close to $5 million – we have $5 million of inventory. And we didn’t have that at the time we acquired them. Because of our cash position we have allowed Nave to take larger positions on inventory. And we think as Dave said it they think they are well set up for the future because of that. So I think there more of it, but I wouldn’t necessarily say that some of those deals were done at better pricing because of unique positions in the marketplace. And some of that’s already played out. But I would say they are well positioned because of the increase in inventory. But not necessarily the overall inventory is going to be at a better margin as well.

[Steve Ruder:]

Got it, okay. So really from a global perspective, where at least are the way the markets lined up at this moment, we will see top line growth, steady margins, potentially increasing demand from a broadband and then if we apply the same vigorous principles we did on the Nave acquisition we can see accretive growth on our next acquisition is it kind of the best scenario?

[David Humphrey:]

I would say it’s a really good summary, I appreciate that Steve.

[Steve Ruder:]

Okay, alright. Thanks very much. And again thanks for your hard work.

[David Humphrey:]

Thank you and we appreciate your support.

[Operator:]

And ladies and gentlemen, there are no further questions in the queue. I would like to turn the conference back over to management for closing remarks.

[David Humphrey:]

Thank you, Operator. Again, we summarized it twice and I will do it the third time. Basically we are pleased with the quarter that just occurred. We are hopeful that both the telco and the cable space will continue to perform well. And we are looking forward to getting back and looking at additional acquisition opportunities and ultimately adding something to ADDvantage Technologies’ operations from an acquisition standpoint. And we do appreciate the continued support of our investors. We hope as Doug mentioned that maybe the market will start to recognize the things we are doing and we get the increase in pricing that we are all hoping for. So, that concludes our comments. And thank you, Operator. And thank you all for being on our call today.

[Operator:]

Ladies and gentlemen that does conclude today’s conference. We do thank you for your participation. You may now disconnect. Have a great rest of your day.