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ADDvantage Technologies Group, Inc. (NASDAQ:AEY)

Q2 2013 Earnings Call

May 14, 2013, 12:00 pm ET

Executives

Garth Russell - KCSA Strategic Communications

David Humphrey - President & CEO

Scott Francis - CFO

Analysts

Doug Ruth - Lenox Financial Services

Operator

Good day and welcome to the ADDvantage Technologies’ Fiscal Second Quarter 2013 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. You may begin.

Garth Russell

Thank you. Before we begin today’s call, I would like to remind you that this conference call may contain forward-looking statements, which is subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act 1995. These forward-looking statements include among other things statements regarding future events such as the ability of ADDvantage Technologies and it’s subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers and 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 the ADDvantage Technologies most recent Form 10-Q and most risk 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 also recent Form 10-Q filed May 14, 2013.

The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies which is subject to change. Although, any such guidance and factors influencing will likely change and ADDvantage Technologies will not necessarily update the information and ADDvantage Technologies will only provide guidance at certain points during the year. Such information speaks only as of the date of this presentation.

And I would be further acknowledged to give the call to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. Dave, the floor is yours.

David Humphrey

Thank you, Garth. Welcome to ADDvantage Technologies fiscal 2013 second quarter conference call. With me today is Dave Chymiak our Chief Technology Officer, Scott Francis, our Chief Financial Officer, as well as Ken Chymiak our Chairman of the Board. Before I turn the call over to Scott who will provide detailed financial results of the quarter ended March 31, 2013, I want to provide a brief overview of the company's operations and strategy moving forward.

During this quarter, we continue to face ongoing constraints in the market as the cable equipment industry continues to face challenges due to the prolong decrease in plant expansions and bandwidth upgrades. These delays have had a direct impact on our equipment sales resulting in a decrease in total revenue for the three months ended March 31, 2013 of 11% to $8.2 million compared to $9.2 million last year. While this decline in sales is disappointing, we are still able to generate a net income of $0.3 million for the quarter to remain cash flow positive by managing costs and keeping our operations in line with current market demand.

While a positive point in a disappointing quarter, we recognized that just focusing on cost management is not a sustainable long-term plan for our business. Instead we are implementing a strategy which focuses on growing, diversifying our business. This strategy consists of several parts including signing new and expanded agreements with our OEM partners, expanding our geographic footprint in the US, Canada and the Latin America, strengthening our sales team and finally executing strategic acquisitions.

As part of the strategy, where we are restructuring our sales operation with the objective of greater integration and cooperation between our subsidiary groups and expansion of the sales footprint. To that end, in April we hired Rick Anderson as our new Vice President of Sales and Marketing to oversee this change. With 20 of his 28 years of sales management experience within the CATV equipment industry, Rick has a solid foothold in the market. In his latest role, he was responsible for government sales and the National Cable Television Cooperative at WESCO distribution which owns TVC Communications, an industry peer. Before TVC Communications was acquired by WESCO Rick was the VP of Sales for second tier cable MSOs and increased TVC’s revenues in that area by over 150%. We are confident that we have hired the right candidate for this leadership role to take our company to the next level and strategically develop our business despite the challenging cable distribution and selling environment.

In connection with restructuring our sales team, we are working with our current OEM partners such as Cisco, Motorola Arris, Triveni and Fujitsu as well as pursuing new OEM relationships to enhance our product offerings for our sales team to market to the CATV segment as well as expand our geographic footprint in the US, Canada and Latin America. There are also opportunities to expand beyond the CATV segment into other markets such as the telecommunications equipment market.

While much of this strategy can be achieved organically, we are also ramping up our efforts to expand the company through strategic acquisitions. On this front, we have engaged an investment banker to assist us in identifying and executing a transaction with the distribution, service, and manufacturing company within the CATV and telecommunications equipment markets. These new initiatives coupled with our continued focus on selling to existing and new customers will help us become a well positioned distributor and reseller fully equipped to sustain the challenges of today's markets. We are taking an aggressive approach with expansion into new key markets which will help us achieve positive revenue growth in the long term.

I would now like to turn it over to Scott who will provide the financial results.

Scott Francis

Thank you, David. Turning to the results for the quarter, net sales for the second fiscal quarter of 2013 decreased $1 million or 11% to $8.2 million compared to $9.2 million for the same period of last year. Revenue from new equipment sales decreased $900,000 or 16% of $4.9 million for the three months ended March 31, 2013 compared to $5.9 million for the same period of last year. The decrease in new equipment sales was primarily due to the continued decrease in plant expansion and bandwidth upgrades in the cable industry.

Net refurbished sales remained flat at $2.4 million for the three months ended March 31, 2013 and 2012 and repair from repair services decreased $100,000 or 6% to $2.9 million for the three months ended March 31, 2013 from $1 million for the same period of 2012.

Cost of sales decreased $600,000 or 9% to $6.1 million for the three months ended March 31, 2013 compared to $6.7 million for the same period in 2012. The decrease in our cost of sales as a percent of revenue was due primarily to a decrease in net sales and our cost of sales as a percent of revenue was 74% for the three months ended March 31, 2013 as compared to 73% for the same period of last year.

Our gross profit decreased $400,000 or 15% to $3.1 million for the three months ended March 31, 2013, from $2.5 million for the three months ended March 31, 2012. The decrease in our gross profit was due again primarily to decrease in net sales and our gross profit margins were similar at 26% for the three months ended March 31, 2013, as compared to 27% for the same period of last year.

Our operating, selling, general and administrative expenses remain relatively flat at $1.7 million for the three months ended March 31, 2013 and 2012 and our income from operations decreased $300,000 or 40% to $0.5 million for the three months ended March 31, 2013 from $800,000 for the same period of last year.

Interest expense decreased $900,000 to (inaudible) for the three months ended March 31, 2013 from $900,000 for the same period of last year. This decrease was due to the March 2012 pay-off of the outstanding amount of our $9.4 million under the second term loan, second term loan under the credit and term loan agreement and $800,000 payment made in order to terminate the associated interest rate swap agreement. The swap termination payment was recorded as interest expense.

Net income was $300,000 or $0.03 per basic and diluted share for the three months ended March 31, 2013 compared to a net loss of $76,000 or $0.01 per basic and diluted share for the same period of last year. Cash and cash equivalent as of March 31, 2013 was $7.5 million compared to $5.2 million at September 30, 2012, and on March 31, 2013, there continues to be no balance outstanding under our new [LIBOR] 7 million line of credit.

Our overall debt position was $1.6 million as of March 31, 2013, compared to $1.7 million as of September 30, 2012 and our net inventory decreased $1.2 million to $21.5 million as of March 31, 2013 from $22.7 million at September 30, 2012.

During the second quarter of fiscal 2013, the company also purchased 190,261 shares of its common stock outstanding at an average price per share of $2.16 under its share repurchase program. These most recent purchases completed the approved program which allows the company to purchase up to $1 million of outstanding shares in common stock.

The Board of Directors has elected to not extend this program at this time since the company has actively pursuing strategic acquisitions as David discussed earlier.

Now onto results for the six months ended March 31, 2013, our net sales decreased $400,000 or 2% to $17.8 million for the six months ended March 31, 2013 from $18.2 million for the six months ended March 31, 2012. The decrease in net sales was primarily due to the continued decrease on planned expansions than with upgrades in the cable industry, largely offset by increased equipment sales as a result of Hurricane Sandy last quarter.

New equipment sales decreased $700,000 or 6% on $10.5 million for the six months ended March 31, 2013 from $11.2 million for the same period of last year, and our net refurbished sales increased $400,000 or 9% to $5.4 million for the six months ended March 31, 2013 from $5 million for the same period of last year.

Net repair service revenues decreased $200,000 or 8% to $1.9 million for the six months ended March 31, 2013 from $2.1 million for the same period of last year. Cost of sales decreased $400,000 or 3% to $12.5 million for the six months ended March 31, 2013 from $13 million for the six months ended March 31, 2012.

The decrease in cost of sales was primarily due to lower net sales. Our cost of sales, as a percent of revenue, was 70% for the six months ended March 31, 2013 and 71% for the same period of last year. Gross profit was $5.3 million for both the six months ended March 31, 2013 and 2012.

Gross profit margins were 30% for the six months ended March 31, 2013 as compared to 29% for the same period of last year. Our operating, selling, general and administrative expenses remain relatively flat at $3.5 million for the six months ended March 31, 2013 compared to $3.6 million for the six months ended March 31, 2012. And our income from operations increased $100,000 or 4% or $1.8 million for the six months ended March 31, 2013 from $1.7 million for the same period of last year for the reasons I have described above.

Our interest expense decreased $1 million to $13,000 for the six months ended March 31, 2013 from $1.1 million for the same period of last year. This decrease is again due to the March 2012 payoff of outstanding amount of our $9.4 million in the second term loan and $800,000 payment made in order to terminate that industry swap agreement and again that interest for swap payment was recorded as interest expense.

Net income attributable to common shareholders for the six months ended March 31, 2013 increased $1.1 million or $0.11 per diluted share from $400,000 or $0.04 per diluted share for the same period of last year.

This concludes the financial overview for the quarter ended March 31, 2013 and I will now turn the call back over to David.

David Humphrey

Thank you, Scott. Our executive management team is in place and we are committed to growing our company both in top line revenue and bottom line earnings by implementing the strategy I discussed earlier. By focusing both on organic growth and strategic acquisitions, we believe we will be successful in achieving this growth. This is going to be an exciting period for ADDvantage as we execute this strategy and move the company back into a period of sustainable growth once again.

This concludes our prepared remarks. I would now like to turn it back over to the operator and open the call for any questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go ahead and take our first question from [George Casper] who is a private investor.

Unidentified Analyst

David, if you could just highlight a little bit more about some of the strategy that you are looking at on around the industry to try to create a broader environment to you. Additionally my question is, is there any area outside of the direct peripheral area to what you are doing that would be attractive, is that part of your strategy or is it more designated to stay close in on CATV equipment market?

David Humphrey

The answer to your question is, George, we are looking at -- we are a distribution company, we are looking at distribution, reselling service business similar to what we are doing as well, but we are also looking at potentially manufacturing operations. We are also going outside the CATV space and looking at some telecommunication equipment type businesses in those same three lines. So yes, we are trying to expand the envelope beyond just CATV and looking at multiple opportunities in those areas.

Unidentified Analyst

You have a great balance sheet doing this with the very nice pay down that took place quarters ago, now a couple of quarters ago at least and you said that you got a good current ratio. Is there some type of size you are looking at, I mean do you want -- can you say anything on what you would feel comfortable doing in terms of structuring, would it be both cash and stock under certain conditions or is it and are we talking something that could be of sizeable and comparable as the revenue stream that you have currently or is that too heavy for you to consider on the front end?

David Humphrey

Well, certainly I can't talk about any specific opportunities we are looking at this time. From a size standpoint, I guess I will answer it this way. Say yes, we are certainly looking at cash acquisitions, we may potential look at stock acquisitions and we may take on additional debt. We've got debt borrowing capacity as well, but of course anything we take on it could be accretive, so it should add enough value that ultimately it add value to all the shareholders as a result of the acquisition.

Unidentified Analyst

And then question on just how you -- as you are getting now further into this current quarter, are there any markers that are looking more positive to you versus the last quarter, are you seeing any coming off the sidelines by your customers or is it still tentative?

David Humphrey

Well, it certainly is early in our next quarter and we certainly don't want to be making any forward-looking statements. I would say, it's continuing to operate the way the markets have been operating for the last number of years. We continue to be profitable. We continue to execute on our plan. We've added a VP of Sales which we believe will overtime add value both on the top and the bottom line to our organization and our profitability.

Unidentified Analyst

Okay. And one question on your inventory level and I see that you again reduce that. Is there an inventory level which you think that in order to operate your business, that you can’t go below. Are you close to that at where you are currently or can you still take that inventory down to build your cash position a little bit more?

Scott Francis

We have two components of inventory. We have got new equipment that promotes sales. We have got used equipment that legacy, that both of those elements enhance our value and are one of our key differentiated from our competitors. The fact that we have it and we're prepared to sell it and get it delivered on time. I will let Dave address the overarching question about overall quantities.

David Humphrey

Hey George this is Dave. We're comfortable on our inventory. We do have room that we can still generate some cash. We do have some inventory we would like to move over the next year or two if that will increase cash, but at the same time we will probably using some of that to sure up some of our new inventory if the market starts picking up on product that moves consistently. But I am real comfortable on the inventory.

Unidentified Analyst

Okay. And in terms of that, the change in inventory or your relationships with your customers, how do you -- how are you finding the ability to acquire equipment in the field for your inventory, for reuse, is the market getting skinny or are you capable of finding inventory to bring in-house?

Dave Humphrey

We are always bringing in inventory, but it’s probably been reduced to 80% from what it was two years ago, there is not a lot of product out there, there is not a lot of bid product in volume, we buy a lot of small packages anymore there is not any large hundreds of thousands of dollars of packages available.

Scott Francis

Yeah. George we are certainly, we are tapped into that market and when product becomes available, we certainly take serious look at whether it will enhance the value of the company. As Dave mentioned there is a lot less of that, in reading some of the comments that the CEO varies as a result of this Motorola purchases is anticipating may be there is some adjustments up in the market that would be great for us, we certainly help his right but we will continue to operate within the market we operate in today.

Operator

And we will take our next question from Doug Ruth with Lenox Financial Services.

Doug Ruth - Lenox Financial Services

Hi, good morning. I appreciate your comments n everything that you are saying, I feel like you are very concerned about the shareholders.

David Humphrey

Thank you, Doug. We absolutely are.

Doug Ruth - Lenox Financial Services

We recently heard news about Amazon and getting into the set top box business, could you offer some commentary or thoughts about that?

David Humphrey

I obviously don't know a whole lot about Amazon’s position, I know other players have talked about getting into it as well, even Google and Apple TV is got a set top model as well. Keep in mind that those are significant portions of our business, those are significant portions of our business, those are new products and set tops we don't sell lot of new product set top business we have got a refer business that we operate out of our AGC operation. And most of our main line operations are around headend and line gear versus what we called -- the industry call CP or customer premise equipment. So we certainly sell it, but it’s not a significant portion of our business, the new set top business.

Doug Ruth - Lenox Financial Services

Okay. And you know from time – with ARIES buying the Motorola business, how is the company's relationship now with them and what you have mention briefly that ARIES is been saying some maybe positive things about the industry as they could you offer little commentary about that?

David Humphrey

Sure, I mean we got very good relationship with Motorola and has for a number of years, as we continue to have a good relations with Cisco those who are two main suppliers. We have got a good relationship with ARIES as well through our AGC division. The acquisition you said a little time -- sometime is transfer but it’s very little time and we have seen some of the outcome of that from our relationship, we still got a solid relationship with both Motorola and ARIES and we just kind of adjusted as changes go through the organization.

Doug Ruth - Lenox Financial Services

Okay. What about the investment banker is there a certain timeframe investors might expect, the past before we would hear some sort of news from them?

David Humphrey

Well we certainly hope sooner than later, we are anxious to get a deal done, but we can't predict when a deal will get done.

Doug Ruth - Lenox Financial Services

And what about the pricing of the opportunities that are out there, how do you feel they are at this point?

David Humphrey

I can't speak to that, sorry Doug.

Doug Ruth - Lenox Financial Services

Okay. And when would we expect a, I thought that you made a really good decision of the new sales manager, when they're going to start selling.

Scott Francis

I appreciate that question Doug, you know right now it is, I'm making them go a little slower, he'd love to hit the ground running and really what I want him to do is get to know the people we've got within the organization, we've got a number of sales people that are highly confident, well qualified who understand our technology and make this company very successful. He being the new guy on the block I'm really getting him to focus and he wants to get to know his people first and ultimately he is already starting to develop strategies around how to utilize the people we've got more effectively than we have in the past.

Doug Ruth - Lenox Financial Services

Okay. Well Thank you for answering the questions, I feel like you've got the position -- the company positioned well and we're excited about the future.

Operator

(Operator Instructions) We will go next to [Juan Martinezo of Mercor Investment Corp].

Unidentified Analyst

Hello. Thank you very much for the buybacks. I think at this price that's made us all richer. And I hope you guys consider a new repurchase program, that's all I have to say, thank you.

Scott Francis

Oh, thank you, [Juan].

Operator

(Operator Instructions)

And we do not have any further questions in queue at this time. Actually we do have another question that just came up from [George Gasper].

Unidentified Analyst

Could you give a little follow-on on how you're doing in Kansas City relative to say the last couple of quarters and previously do you see these to expand that operation beyond which you have it at right now and can you give us any color on that.

Scott Francis

Well so the Kansas City operation we've owned it for two years now. It's been a successful acquisition. We're really pleased with the acquisition. It is adding profitability to the company and so we've added inventory to their product lines, we've put cash into their business which has enhanced their profitability beyond that I can't really speak to whether there's expansion opportunities within ATC or not at this time.

Operator

And we do not have any further questions in queue. I'll turn the call back over to the speakers for any closing remarks.

Scott Francis

Well, once again I appreciate the questions we received. We also appreciate our investors as Doug mentioned. We are concerned about our investors and the company, also of our investors including the two of our largest investors that were on the call today and we appreciate your continued support and look forward to continuing to operate this business on your behalf. That will end our comments today. Thank you, again.

Operator

And that does conclude today's conference. We thank you for your participation.

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