ADDvantage Technologies Group, Inc.
Q2 2015 Earnings Call Transcript

Published: 12 May 2015

[Operator:]

Good day, and welcome to the ADDvantage Technologies’ Second Quarter of 2015 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead.

[Garth Russell:]

Thanks Tracy. 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 availability or 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 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 hereto included in ADDvantage Technologies’ most recent report on Form 10-Q filed earlier today on May 12, 2015. 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 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 call. During this call, we will also present certain non-GAAP financial measures. And our press release with the financial tables issued earlier today, which is located on our website at addvantgetechnolgoies.com. You will find a reconciliation of these non-GAAP financial measures with the closest GAAP measures and a discussion about why we think these non-GAAP measures are relevant due to financial measures or included for the benefit of investors and should be considered and in addition to and not instead of GAAP measures. With nothing further, I would 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 to ADDvantage Technologies’ fiscal 2015 second quarter conference call. With me today is Dave Chymiak, our Chief Technical 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 into company’s operations and strengths. Our sales for the second quarter increased 37% when compared to last year, driven mostly by another good performance of our Telco segment resulting from our strategic acquisition of Nave Communications in February of 2014. Our Cable TV segment experienced a decrease in revenue this quarter but its gross profit remained relatively flat quarter-over-quarter. Although we are not pleased with sales results with Cable TV segment, this segment continues to generate strong positive cash flows for our business. Cable television market continues to be challenging for us as there is still a general decline of capital equipment demand. We still see opportunities for us to expand our sales presence and capture additional market share in both equipment sales and the service business. Our Telco segment generated strong revenue growth again this quarter and is performing in line with our expectations. Our sales team expanded its customer relationships in the telecommunications market which were boosted by a particularly large sale toward the end of the second quarter. We’re encouraged by these positive directions that Nave Communication continues to take, which we see an indicative of longer term trend and are planning to add to our sales team in the coming months. Our low cost, high quality offering of used telecommunications equipment, network equipment and the efficient and flexible service we provide to our customers combined with its broad range of inventory and diverse selection of manufacturer systems and components puts us in a strong position to grow the Telco segment throughout 2015 and beyond. We are pleased with the success of this acquisition to-date. As a result of Nave’s solid performance, we made approximately $750,000 in earn-out payments during the second quarter as per the acquisition agreement. We anticipate making earn-out payments in 2016 and ‘17 that Nave continues to grow online with our expectation. As I’ve previously stated, our growth strategy is to utilize a strong foundation of our Cable TV segment in order to acquire businesses in the broader telecommunications industry. Our acquisition last year of Nave Communications was the first step in this strategy. We are pleased with the results that it’s produced so far and its long term growth opportunity. With that said, we are moving forward with our acquisition strategy and engaged an investment banker to assist us in identifying and evaluating acquisition targets within the telecommunication industry that have the potential to add value to our existing portfolio of businesses. I’d like to turn it over to Scott who will provide the financial results.

[Scott Francis:]

Thank you, David. For the second fiscal quarter of 2015, total sales increased $3.1 million or 37% to $11.4 million from $8.3 million for the same period of last year. Sales for the Cable TV segment decreased $1.4 million to $5.8 million for the three months ended March 31, 2015 from $7.2 million for the same period of last year. This decrease in sales was due primarily to decrease in new equipment sales for this segment. Sales for the Telco segment increased $4.7 million to $5.8 million for the three months ended March 31, 2015 from $1.1 million for the same period last year, as a result of the acquisition of Nave Communications on February 28th of ‘14. The increase in our Telco sales reflected an increase in used equipment sales and recycling revenues of $4.4 million and $0.3 million respectively. The in our used equipment sales also reflects a $1.5 million equipment sales to an end user customer in the second quarter of 2015. Our consolidated gross profit increased $2 million or 90% to $4.2 million for the three months ended March 31, 2015 from $2.2 million for the same period of last year. The increase in gross profit was due primarily to gross profit from the Telco segment or gross profit from the Cable TV segment only decreased $0.1 million compared to the same period last year, despite the lower equipment sales in this quarter. Gross profit margin for the Cable TV segment increased to 31% for the three months ended March 31, 2015 compared with 26% for the same period of last year. And our gross profit margin for the Telco segment increased to 44% for the three months ended March 31, 2015 compared with 36% for the same period of last year. Our operating, selling, general and administrative expenses increased by $1.1 million or 43% to $3.8 million for the three months ended March 31 ‘15 from $2.7 million for the same period of last year. The increase in expenses was due primarily to Telco segment and includes $0.5 million of expenses for the three months ended March 31 ‘15 and zero for the same period last year to improve for the annual earn-out payments related to the Nave Communications acquisition. At March 2015, we made our first three earn-out payments for $0.7 million which is equal to 70% at Nave Communications’ annual adjusted EBITDA in excess of $2 million for the year. We expect to make earn-out payments at March 2016 and ‘17 which we estimate to be between $1 million and $1.5 million. Also in the prior year period, the Telco segment incurred $0.6 million of direct acquisition costs related to the Nave acquisition. The increase in expenses at the Telco segment was partially offset by a decrease in the Cable TV segment of $0.2 million. Our net income from continuing operations for the three months period ended March 31, 2015 was $0.2 million or $0.02 per diluted share compared with a net loss from continuing operations of $0.3 million or $0.03 per diluted share for the same period of last year. Discontinuing operations for the three months ended March 31, 2014 included the operations of Adams Global Communications prior to the sale on January 31, 2014. Our consolidated EBITDA increased $1 million to $0.7 million for the three months period ended March 31 ‘15 compared with a loss of $300,000 for the same period in 2014. The Cable TV segment EBITDA increased $0.1 million to $0.4 million from 300,000 last year, while the Telco segment EBITDA increased $900,000 to $0.3 million from a loss of $0.6 million last year. Turning to the results for the six months ended March 31, ‘15. Consolidated sales increased $7.8 million or 54% to $22.2 million for the six months ended March 31, ‘15 from $14.4 million for the six months ended March 31, ‘14. Sales for the Cable TV segment decreased $800,000 to $12.6 million for the six months ended March 31, ‘15 from $13.4 million for the same period last year. The decrease in net sales is due primarily to decrease in new equipment sales, refurbished equipments sales and service revenue of $300,000, $200,000, and $300,000 respectively. Sales for the Telco segment increased v8.8 million to $9.9 million for the six months ended March 31, ‘15 from $1.1 million for the same period of last year, again as a result of the acquisition of Nave Communications. The increase in net sales reflected an increase in used equipment sales of $8.2 million and recycling revenues of $600,000. Our consolidated gross profit increased $4 million or 97% to $8.1 million for the six months ended March 31, ‘15 from $4.1 million for the same period of last year. The increase in gross profit was due primarily to an increase in the Telco segment of $4 million and an increase in the Cable TV segment of $1 million. Gross margin for the Cable TV segment decreased to 30% for the six months ended March 31, ‘15 from 28% for the same period of last year while the gross margin for the Telco segment increased to 43% for the six months ended March 31, ‘15 from 36% for the same period of last year. Our consolidated operating, selling and general and administrative expenses increased $2.6 million or 60% to $6.9 million for the six months ended March 31, 2015 from $4.3 million for the same period of last year. This increase was primarily due to increased expenses of the Telco segment of $3 million partially offset by decreased expenses of the Telco segment -- excuse me, of the Cable TV segment of 300,000. The Telco segment included expenses of $700,000 for the six months ended March 31, ‘15 and zero for the same period last year to accrue for the annual earn-out payments related to the Nave acquisition. The Telco segment also included $600,000 of direct acquisition costs for the six months ended March 31, ‘14. Our net income from continuing operations for the six months periods ended March 31, ‘15 was $700,000 or $0.06 per diluted share compared with a net loss from continuing operations of $100,000 or one penny per diluted share for the same period of ‘14. Our cash and cash equivalents on hand were $4.8 million as of March 31, ‘15 compared with $5.3 million as of September 30, ‘14. The decrease in cash and cash equivalents included $1.8 million of acquisition related payments to the former Nave owner as well as an increase in our inventory position of $2 million. As of March 31, 2015, the company had inventory of $24.8 million compared with $22.8 million as of September 30, ‘14. The increase in our inventory position was primarily due to used inventory purchases by our Telco segment. This concludes the financial overview for the second fiscal quarter of ‘15, ended March 31, ‘15. I’ll now turn the call back over to David.

[David Humphrey:]

Thank you, Scott. I’d like once again reiterate that we remain cautiously optimistic about the future. Although sales from the Cable TV segment were down, this segment still generates solid profit and cash flow and we believe that our organic growth strategy for the Cable TV segment will help to reverse the downward trend and as the performance of our Telco segment will continue to meet our expectations. In addition as part of our overall growth strategy, we’re actively looking for acquisition opportunities in a broader telecommunications market to further diversify and expand our business and have engaged with investment banker to assist with these efforts. We appreciate your continued support. 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]. And we’ll go first to Doug Ruth from Lenox Financial Services.

[Doug Ruth:]

Could you talk some about the inventory buildup and specifically in the refurbished cable, is there strategy here?

[David Humphrey:]

On the refurbished cable, I’ll ask Dave to kind of talk about that. Most of the inventory increase was on the Telco side.

[Dave Chymiak:]

And Doug, just real quick to make sure it was clear on our comments that the actual Cable segment on the refurbished equipment actually went down slightly. Most of the increase in inventory position from September 30th to now has actually occurred in the Telco segment in the used equipment on the Telco side, not on Cable side.

[Doug Ruth:]

Our inventory is up here recently, is there -- are you building inventory for any particular reason?

[David Humphrey:]

On the Telco side specifically, we had a number of opportunities in the marketplace because of adjustments on one of our customers that are competitors were offering what we would refer to as probably fire sale of inventory if we took some positions those. And as part of the explanation why our margins are up on the Telco space as well, we supply products one of two ways to our customer base, either we have the inventory or we go out and purchase it at the time of the sale. And when we come out of inventory, we generally have higher margins. So, I believe a greater percentage of our sales or inventory base is utilized in the opportunity of these purchases that we’ve made.

[Doug Ruth:]

That’s smart, and I am impressed with what you’ve been able to -- the improvement in the margins were was pretty good. And I thought I should…

[David Humphrey:]

I am sorry to interrupt, I’ll answer another half of -- the other half of your question, you haven’t asked and that is that we don’t anticipate to continue to increase that inventory in our Telco operation. I think we’ve reached the level that we think is probably equal to or little bit in excess compared to their revenue base right now. So, I think we’ll see a slight decline or at least the leveling off of their inventories. So, we don’t anticipate any additional growth.

[Doug Ruth:]

Would we expect to see some decrease in the Telco inventory in the next quarter?

[David Humphrey:]

Potentially yes, it will either be flat or it will be down slightly and that will convert to cash obviously.

[Doug Ruth:]

With some of the things that are happening with Arris is that creating an opportunity for ADDvantage?

[David Humphrey:]

Well, the Arris you’re talking about with pace?

[Doug Ruth:]

Yes.

[David Humphrey:]

Go ahead Dave, I’ll let you address that one.

[Dave Chymiak:]

Most of the dealers with the converter boxes and at the moment the CMTS which we don’t get involved with, so it’s not affecting us. That amount is very much just some products we expect that they will be dropping and we haven’t stopped possibly; it will help but overall, it’s just where we’re at.

[Doug Ruth:]

Could you talk about some of the -- both the headwinds and the opportunities in the Cable TV segment?

[Dave Chymiak:]

Well, the headwinds is just changing back and forth that people don’t really know what’s going on. We’re seeing more inquiries from the middle size companies because there is a lot of talk of acquisitions and who is going to buy who and what’s the combinations are going there. So we are seeing more growth going out. The businesses should continue on. I mean they still have plan on keeping the amplifiers or grid buildings or a lot of things going on. So, our segmentation looks like it will be increasing here before too long because also there is just a lot more building going on and as more buildings are held on subdivisions adding, there is more need for equipment.

[David Humphrey:]

Doug, as split our business between new and used equipment, our new sales are predominantly driven by the smaller guys, the large guys go straight to the OEMs to make their purchases. The used equipment is utilized by both large and small players’ base. And the next steps also are higher margin business. And those are based on maintaining the infrastructure they already have or any upgrades that they’re ultimately making on some of those systems that they have. Those systems still exist whether they’re owned by one party or the other. So, I don’t think the consolidation at least of large players is going to have a significant impact on our business that’s just changing seats on the deck. If there is a large consolidation of smaller players, that ultimately could affect certainly on our new sales business but I think again our used business is based on us having the inventory and the knowledge to support the operations out there.

[Operator:]

And we’ll take our next question from George Gaffer, [ph] a Private Investor.

[Unidentified Analyst:]

Question on the inventory, total inventory, I know it’s been discussed here in terms of the increase. Can you break out the inventory that related for Cable and the inventory for Telco?

[Scott Francis:]

I can’t but I’d also tell you we have filed our 10-Q at this point as well, so it is in our 10-Q but just for -- let me get to the page here just so you have it; it’s in footnote two for your reference in the future. But on the cable segment, the new part is $17.3 million in the refurbish used is $3.7 million; the Telco is all used so it’s $6.2 million. That’s what we have right now as at March 31st.

[Unidentified Analyst:]

Again 6.2 for Telco is that what you’re saying?

[Scott Francis:]

Yes. And that’s before any reserves or applied.

[Unidentified Analyst:]

And the 17 relates to Cable?

[Scott Francis:]

Yes, the 17 and the 17.3 and the 3.7 are cable related that we used respectively.

[Unidentified Analyst:]

And in terms of looking forward again on Cable side, any further color on is it looking forward supposedly a broad opportunity in amplifier change out and cable side going towards the end of the year or into 2016; is that still a reasonable observation and ahs anything changed on that that would alter the bandwidth requirement change out?

[Dave Chymiak:]

No, it’s constant talk, lectures everything with the new but we’ve got 3.1 of changes of equipment through the lineup of amplifiers and everything. We are seeing some interest we are actually quite seeing some orders but they’re not significant. We’re looking at it as a future potential watching it very closely, have been watching it for the last two years very closely.

[Unidentified Analyst:]

And you mentioned there was a reference comment that some of the opportunity going forward relates to construction of new residential areas, how impactful is that in terms of the build out from where you have opportunity?

[Dave Chymiak:]

This time when everybody is building and adding the amplifiers and there is a shortage of care, we are seeing shortage of products out there running anywhere from two extra weeks to five to six extra weeks right now. But it is selected, if there is some is products that are readily available off the shelf would be originally people can buy or customers can buy directly from the manufacturer but we are starting to see it pick up in the demand for both and equipment.

[Unidentified Analyst:]

It’s interesting observation and comment that you made because I’m back in Wisconsin but I am just absolutely overwhelmed with what’s going on in southeast Florida and other parts of Florida, the expansion is absolutely I would consider it sort of like you could quote out of control, it’s still vast, it’s unbelievable. And I keep thinking the infrastructure that’s going to be necessary, power lines and communications going into these many areas that are I think victorious and all of the sudden they’re getting turned over. And it’s going to be vast annexure if not just Florida but that’s happening, on that side. And then a question on the acquisition, your comments on acquisitions front. Assume that the concentration effort would be to try to broaden the activity that way Nave is involved in, would that be primarily emphasis that you would be looking for specifically or would that be it be something else?

[David Humphrey:]

First of all, we’re very pleased with Nave and I believe it will continue to grow over time, both on revenue and profitability. As far as acquisitions, we’ll continue to look both in the Cable space and the broader Telco space. And so either they’ll dovetail into our existing operations or similar to Nave, it will be a completely new area of opportunity for us to continue to diversify. So either it’ll be a expansion of the base or diversification, one or the other but it will be in a broad telecom market that we’ll focus on.

[Operator:]

[Operator Instructions]. We’ll go next to Steve Rod from Blackwell. [Ph]

[Unidentified Analyst:]

This is for Dave Chymiak. I am just looking at this from a detached investor point of view. So, we’ve got about $21 million in inventory in the Cable TV business -- I am sorry, in cable business. And probably if you breakout on total assets, it’s probably a $30 million more in that business which per share comes out more than our current share price. So, I mean this is a completely different way of looking at your company. So, it’s the joke if you do this without stretching, pulling nothing. But from a shareholder maximization point of view, I am wondering if Dave would consider significantly reducing that investment using the proceeds through buyback or very meaningful number of share and then redeploy the assets to more profitable businesses. Quite frankly, some of that to be done in pretty short quarter and the return to shareholders would be very easily well in excess of 100% and we have a very profitable official company. Now that’s a lot to think of all at once and very different than what you’ve done for the last 30 years. But I am wondering if you would give us some thought and think about this better use of our very, very good assets and to claim them in a better way and use of share. So any initial thoughts on that and then maybe a commitment to really give us an art job? [Ph]

[Dave Chymiak:]

Well, I guess Steve, off hand, I’ll tell you that we certainly faced that decision two to three years ago of which way we’re going to go as a company. We’re a value stock and therefore as performance continues to decline, we either have to perform as the value stock and liquidate our assets and ultimately turn them over to the shareholders or convert ourselves back into a growth stock through acquisitions; we chose the letter that we are going to utilize to cash flow from the existing operation; acquire businesses that are accretive to our existing operating base and also growth potential. And we found our first in Nave a year ago and now we are going to look for the next one or two or three or five as result of that. And so, we've actually chosen the alternative path of the one you are suggesting what we just stated a couple of years ago.

[Unidentified Analyst:]

No, I don’t mean to keep this as a binary choice. Actually what I -- and I apologize I didn’t explain this well enough. I don’t think that my -- the plan that I just described to liquidate and return the money over to the shelf. What I'm saying is like we have this massive investment in the cable business and the massiveness of its is in excess of our current share price. And it’s at best sustainable possible and a very difficult business with headwinds. And so that situation is existing and continues to exist. And as I mentioned, we enjoy the business, being in the business in all three years. Sometimes it's good to do things differently. Now, you definitely did take a different direction and hats off on that. But I think what I'm looking for is to say, let’s liquidate or significantly reduce that business and redeploy those assets and because as a shareholder and I’ll analyze it on two bases. One is if you can take a dollar of cash and return it back to as a cable business, we know that it's going to -- and has been yielding a very little. If we buy back a share we know immediately that our yield is higher because we’ve reduced a number of shares by that dollar. And you can work through the numbers but your shares by 50% and kept our earnings sustained, given that we have a flat return on that cash in cable business, well that is very powerful investment with no risk in fact. Secondly, of course to buy all the shares other than take the company private, whatever reason you like to be public, I'm not sure it’s the best route. But take whatever other cash is around because I am talking about, a lot of cash, $21 million, $30 million roughly and redeploy it to these better investments. So, we have a historical commitment to cable, it’s closing comfortable for us. This is a very uncomfortable path that I am describing. But from an investor point of view, the deployment of that cash and those assets would be better from a return on investments buying back shares because we know what we are getting for, we are getting profitable, more profitable business. Every dollar we take out of cable and we buy back a share, it’s like buying the other businesses that are quite profitable. And then secondarily because we probably still have a good deal of cash left over, let's not put it back into cable, but rather deploy it to these other businesses that Dave has done a good job and you guys have done a very good job of bringing on board. So, it's not wind up and liquidate and give rest of the share. I know that's not happening and maybe it shouldn't but rather let's really look at this form an inventor point of view and you’re the biggest investor here but with an emotional historical tie to the cable business that I don't think is the best way to deploy our asset. That is fair to look at that in -- and that will be exciting too quite frankly. I think you’ll enjoy it as you go forward. If you would just really look at that hard, elaborate on that more offline, but I know as an investor point of view, it's just swam, you will see a shift right there, double, triple within very short period of time.

[David Humphrey:]

That’s certainly something we will take a look at and be glad to discuss with you in more deeper Steve, so I appreciate your comments.

[Operator:]

And we'll take a follow-up from Doug Ruth from Lenox Financial Services.

[Doug Ruth:]

The investment banker that the Company has hired; is this the banker that you've worked with before or is this the new investment banker?

[Dave Chymiak:]

At this time right now Doug, it's the same investment banker that we utilized last acquisition and we figured that ultimately over time are going to shift to investment banker, either way that is well. So that's how we kind of see it right now. I think we've got one more shot as well with him and maybe two, but most likely one and then we'll look to change and go into somebody else to shift and go look for the next stage of investment opportunity.

[Doug Ruth:]

So just how long that you want another Nave?

[Dave Chymiak:]

We certainly want in similar size and looking performance, they underperformed at the beginning but they're doing well now. I think we want something similar.

[Doug Ruth:]

Yes, so are week looking at something in similar type of sales in profits or is there any kind of the size defined?

[Dave Chymiak:]

The size will be similar and it's same criteria that we utilized we did the Nave acquisition. It's broad, we're looking for a couple of million dollars EBITDA and you can do the multiples of that to see what kind of value we're looking at. We may do some smaller acquisitions that actually don't even involve these investment bankers but we're looking at a few smaller deals but those won't be nearly material as what the kind of deals we're looking at.

[Doug Ruth:]

Dave, you're doing really a good job for the shareholders and I am grateful that you're there.

[Dave Chymiak:]

Thank you, Doug. I appreciate it.

[Operator:]

We’ll take another follow-up from George Gaffer, a Private Investor. [Ph]

[Unidentified Analyst:]

Just looking at the overall geographic horizon domestically, any insight as to maybe an usual opportunity for the company to get involved in the Cuba situation with apparent shift taking place between -- relationship between United States and Cuba?

[Dave Chymiak:]

We sell product into the Caribbean, right now. We sell little bit of product into South America, we had our large plan that five, six years ago. So we wouldn’t overlook any opportunity but it’s probably not something we’ve actually directly marketed. But we sell through other brokers that sell into those markets and are more familiar with. But we do have a plan that’s based well. I don’t see anything on the horizon right now on Cuba, I don’t know how that’s going to shake out or it’s going to look like cable spend. Do you have any idea what that infrastructure looks like?

[David Humphrey:]

No, I really don’t.

[Operator:]

It appears there are no further questions at this time. I’d like to turn the conference back to our speakers for any additional or closing remarks.

[David Humphrey:]

Thank you, operator. Again, we very much appreciate the continued investment and support of our investors. We appreciate the feedback we’ve received in today’s call. We look forward to an exciting future and look forward to next quarter being more profitable and better than this quarter was. So that’s certainly our goal as a management team and I appreciate you all. Thank you very much.

[Operator:]

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