ADDvantage's CEO Discusses F3Q 2013 Results - Earnings Call Transcript

Aug.13.13 | About: ADDvantage Technologies (AEY)

ADDvantage Technologies Group Inc. (NASDAQ:AEY)

F3Q 2013 Results Earnings Call

August 13, 2013 12:00 PM ET

Executives

Garth Russell - KCSA Strategic Communications, IR

David Humphrey - President and CEO

Dave Chymiak - Chief Technical Officer

Scott Francis - Chief Financial Officer

Ken Chymiak - Chairman

Analysts

Doug Ruth - Lenox Financial

Nick Ghattas - GT Investments

Operator

Good day, ladies and gentlemen. Welcome to the ADDvantage Technologies’ Fiscal Third Quarter 2013 Earnings Call. Today’s call is being recorded. At this time, I would like to hand things 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 ADDvantage Technologies’ most recent report on Form 10-Q and 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-Q filed August 13, 2013.

This guidance regarding anticipated future results on this call is based on limited information currently available by ADDvantage Technologies which is subject to change. Although, any such guidance and factors influencing 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’d now like to turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. Dave, the floor is yours.

David Humphrey

Thank you, Garth. Welcome to ADDvantage Technologies’ fiscal 2013 third quarter conference call. With me today is Dave Chymiak, our Chief Technical 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 the detailed financial results for the quarter ended June 30, 2013, I want to offer a brief overview of the company's operations and strategy moving forward.

During the quarter, we continue to face challenges due to the trending slowdown in the cable television industry as the decline of planned expansions and bandwidth upgrade continues to affect our business operations.

Additionally, one of our largest OEM partners, Motorola Mobility and its Group Home was acquired by Arris Group which while potentially favorable in the long term caused a slight disruption for us during the quarter.

These factors affected our overall equipment sales resulting in a decrease of total revenue for the three months ended June 30, 2013 of 16% to $7.2 million compared to $8.5 million last year. While this decline in sales is not favorable from a revenue standpoint, we still achieved positive net income and cash flow for the quarter.

In addition, we are also seeking an uptick in customer demand in the current quarter. We are also -- we actually receiving that an uptick. We are also implementing a strategy to return things around internally.

First, we are in the process of expanding our sales force by hiring three highly experienced better sales people formally with one our large OEM partners. All these individuals have begun to lay the groundwork for the future sales success by working with us on a temporary basis.

All three are scheduled to officially join our team by the end of August. We expect these new hirers to apply their extensive market knowledge to help reinvigorate our sales approach and cultivate their existing relationships with some of the large MSOs.

We are also making progress on the acquisition front and are continuing to work with our investor banker to evaluate several companies with distribution businesses at the CATV and telecommunications equipment markets. While it is too early to put an exact timeframe on when we might expect to close on such transactions we are still optimistic that we will be able to identify and execute a strategic execution.

Along with identifying the appropriate acquisition targets would help to diversify our business, extend our distribution reach and identifying new customers in some of our existing OEM partners, Cisco, Arris, Motorola and Triveni.

We feel these initiatives will put us on the right track towards growth. We have solid relationships with our OEM and reseller partners, and expect to develop new relationships once our new sales people get fully ramped up. Once we identify key acquisition target we will be properly positioned towards achieving sustainable growth.

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

Scott Francis

Thank you, David. First, I will start with the results for the quarter. Our total net sales for the third fiscal quarter of 2013 decreased $1.3 million or 16% to $7.2 million, compared to $8.5 million for the same period of last year. The overall decrease in equipment sales is primarily due to the continued decrease in plant expansions and bandwidth upgrades in the cable industry.

Revenue from new equipment sales decreased $400,000 or 9% to $4.3 million for the three months ended June 30, 2013, compared to $4.7 million for the same period of last year.

Our net refurbished sales decreased to $800,000 or 30% to $1.9 million for the three months ended June 30, 2013, compared to $2.7 million for the same period of last year and our revenue from repair services decreased to $100,000 or 11% to $1 million for the three months ended June 30, 2013 from $1.1 million for the same period of 2012.

Our cost of sales decreased to $800,000 or 13% to $5.1 million for the three months ended June 30, 2013, compared to $5.9 million for the same period of last year. The decrease in our cost of sales was due primarily to the decrease in net sales. Our cost of sales as a percentage of revenue was 73% for the three months ended June 30, 2013, as compared to 70% for the same period of last year.

Our gross profit decreased $600,000 or 22% to $2 million for the three months ended June 30, 2013, from $2.6 million for the three months ended June 30, 2012, and our gross profit margins were 28% for the three months ended June 30, 2013, as compared to 30% for the same period of last year.

Our operating, selling, general and administrative expenses decreased $200,000 or 10% to $1.6 million for the three months ended June 30, 2013, compared to $1.8 million for the same period of last year. And our income from operations decreased $400,000 or 49% to $4, excuse me, to $0.4 million for the three months ended June 30, 2013 from $0.8 million for the same period of last year due to the reasons I just described.

Net income was $0.2 million or $0.02 per basis and diluted share for the three months ended June 30, 2013, compared to a net income of $0.5 million or $0.05 per basic and diluted share for the same period of last year cash.

Cash and cash equivalent as of June 30, 2013 was $8.2 million, compared to $5.2 million as of September 30, 2012, and also as of June 30, 2013 there continues to be no balance outstanding on our $7 million line of credit.

Our net inventory decreased $1.3 million to $21.4 million as of June 30, 2013 from $22.7 million as of September 30, 2012.

Now onto the results for the nine months ended June 30, 2013. Our total net sales decreased $1.7 million or 6% to $25 million for the nine months ended June 30, 2013 from $26.7 million for the nine months ended June 30, 2012. The decrease in our net sales was primarily due to the continued decrease in plant expansions and bandwidth upgrades in the cable industry, largely offset by increased equipment sales as a result of Hurricane Sandy.

Our new equipment sales decreased $1.1 million or 7% to $14.8 million for the nine months ended June 30, 2013 from $15.9 million for the same period of last year. Net refurbished sales decreased $300,000 or 5% to $7.3 million for the nine months ended June 30, 2013 from $7.6 million for the same period of last year.

Net refur, excuse me, net repair service revenues decreased $300,000 or 9% to $2.9 million for the nine months ended June 30, 2013 from $3.2 million for the same period of last year.

Cost of sales decreased $1.2 million or 6% to $17.7 million for the nine months ended June 30, 2013 from $18.9 million for the nine months ended June 30, 2012. The decrease in our cost of sales was primarily due to lower net sales and our cost of sales as a percent of revenue was 71% from both the nine months ended June 30, 2013 and 2012.

Our gross profit decreased $600,000 or 7% to $7.3 million for the nine months ended June 30, 2013 from $7.9 million for the nine months ended June 30, 2012. Again, our gross profit margins were 29% for both the nine months ended June 30, 2013 and 2012.

Our operating, selling, general and administrative expenses decreased $200,000 or 4% to $5.2 million for the nine months ended June 30, 2013, compared to $5.4 million for the same period of last year. This decrease in operating, selling, general and administrative expenses was primarily due to reduced personnel costs.

And our income from operations decreased $300,000 or 12% to $2.2 million for the nine months ended June 30, 2013 from $2.5 million for the same period of last year for the reasons I just described.

Our interest expense decreased $1.1 million to $20,000 for the nine months ended June 30, 2013 from $1.1 million for the same period of last year. This decrease is due to the March 2012 payoff of the outstanding amount of our $9.4 million under the second term loan under our credit and term loan agreement, and an $800,000 payment made in order to terminate the associated interest rate swap agreement, that swap termination payment was recorded as interest expense.

Net income attributable to common shareholders for the nine months ended June 30, 2013 was $1.3 million or $0.13 per diluted share, compared $800,000 or $0.08 per diluted share for the same period of last year.

This concludes the financial overview for the quarter ended June 30, 2013, and I'll now turn the call back over to David.

David Humphrey

Thank you, Scott. While the CATV market might be in a state of flux, we are confident in our strategy to expand our current business operations through efficiencies and enhanced sales tactics. Also, we are excited to have potential acquisition targets introduced in order to help grow our revenue and diversify our operations.

We appreciate your continued support as we make these necessary improvements in our business operations. This concludes our prepared remarks. I’d 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 first to [George Gaspar].

Unidentified Analyst

Yeah. Good morning. Obviously, and we are hoping for better results to understand the explanation, if you could just indicate a little bit brighter your outlook, you were -- there were some brief comments made on it in the current quarter and going forward on that? And then, could you talk a little bit about where you're focusing your acquisition search and how that's going?

David Humphrey

George, in the quarter we did have nice bounce back in the month of July, but one month does not make a quarter, so we will certainly have to hold off and making any comments about when we review our final quarter review for the fourth quarter of 2013.

In regards to acquisitions, I believe we stated in past, but we are glad to repeat that, we are looking at acquisitions both in the cable space and broad telecommunication space, looking at distribution companies and even some manufacturing opportunities.

So we've got a number of candidates that we’ve -- that we are looking at and of course, I’ll use the old adage that we use to have a venture capital that is a deal -- not a deal that deal has done, we haven’t done a deal yet, so we are looking forward.

Unidentified Analyst

Okay.

David Humphrey

Thank George. Any other questions.

Operator

Yeah.

Unidentified Analyst

Yeah. I have an additional question, if you don’t mind, the cash position, for the quarter, quarter-to-quarter was that up about a $1 million or from previous year compares to that, you have in your release, it goes back to 2012 nine months. The $8.2 million, was that up about a $1 million from the previous quarter and is that up about $3 million or close to it, since you bought -- you paid your debt off, and what your initial cash position was after that of that payout, can you identify those please?

Scott Francis

Yeah. George, this is Scott. Yeah, actually are -- you are close on your compared to last quarter we were actually about $700,000 up so from last quarter. As far as from when we paid off our debt at the end of March 31st of last year, when we paid off the debt we were, we closed that fiscal quarter were $2.1 million on the books.

So, we've been up right at $6, little over $6 million since then, and as David said earlier, in his intro comment, again the results, we love to see the revenues uptick, but we are still did playing our positive cash flows and doing a good job on that front. So that’s we’re focused on, trying to this, making sure we’re keeping those cash flows positive.

Unidentified Analyst

And in cash post the debt repayment schedule, correct?

Scott Francis

You cut on that a little bit there, what did you said, George?

Unidentified Analyst

Okay. I said you reflected that you had about $2.1 million for cash post the debt repayment?

Scott Francis

That’s correct.

Unidentified Analyst

Okay. So, and then now you have in the range of $8.2 million, which is pretty good increase in cash in that interim period. I don't, I know you’ve been improving, reducing your inventory, but it looks like overall your cash position has improved quite dramatically relative to the other, if you interrogate your financial report, can you cite where that cash build up came, because you're, it wasn't basically reflected in the earning side?

David Humphrey

Yeah. George, I mean, it’s really two things, one is, it is our, obviously our net income to fall into the bottom line, net event and the other side is what you’re seeing there is really is the reduction of inventory that we’ve been doing overtime…

Unidentified Analyst

Okay.

David Humphrey

… over the last, again now what I would say 15-month. And then just this also the timing of how we do our inventory payment of the case may go. There is some timing involved in that. Don’t know whether is Motorola or Cisco.

So you’re seeing some flexes in our cash position related to that but that’s affected -- they can affect it us too have many demand in dollars in a given quarter depending on the timing of those payments. But really is the combination of those factors. It’s really net income following to the bottom line and the continued work on trying to reduce our inventory balance.

Unidentified Analyst

Okay. All right. Thank you.

David Humphrey

Sure.

Operator

Have next it Doug Ruth with Lenox Financial.

Doug Ruth - Lenox Financial

Hi. I appreciate the candid comments. I was curious, could you gives us, who is doing it wide in the industry, who is having success at this point, do you think?

Ken Chymiak

Yeah. This is Ken. I tried to stay on top of all those -- all the manufactured OEM. I just – when they called me my attention in the last week or so comps goal is that as an IPO that, I think the [Carswell Group own some and named] one of the headlines in their filing was that they did say the broadband industry was off this year. So we look at that. And we also look at the public filing. It’s very difficult.

Most of the people in our industry, for example, Arris or Cisco or others, they have different segments. And they really don’t report it by segment. So it’s difficult for us to really understand that. But we from our competition -- what they are doing basically based on phone call, Dave what you say, my brother Dave?

Dave Chymiak

It’s hard to tell. Back orders are starting to develop which is good for our business. June was just terrible. I mean there is no if, ands, or, buts to it. And overall, we’re seeing that there’s been an uptick in business. Cisco has been doing better on the plastic side, which is routers and switches and that type of thing. Arris, we can't really tell they came out with the half way decent quarter. So we don’t have any particular answer to our competitors or about the things we are one week until our last.

Doug Ruth - Lenox Financial

We folks are doing a great job under very difficult circumstances. You’re managing the balance sheet and that’s up. What about the Motorola, is now that debt has been taken over, is there uptick there at all or things better for you?

Scott Francis

Right now, Doug, we haven’t since any change in the Motorola relationship -- Motorola/Arris. We have relationships with both houses that are house now, that’s now combined. We’re hopeful that we will be one of the guys standing under distribution side with Motorola nearest both as we move forward. We’ve got the discussion through them along that front and very comfortable that will be one of those players that will -- be one of those continuing distributors with both ads of Motorola and Arris.

But that you have to be determined and there is still work through that. It’s -- it was a very disruptive change. The Motorola organization started on this (inaudible) that became General Instrument, then became Motorola and Google bottom it. And now it’s Arris. But there were those other buyers who are not a predominant player to cable space but Arris is their direct competitor of Motorola.

And when they first took over, it was a 13% layoff in both organizations. They didn’t just lay off Motorola people, they actually laid off Arris people as well when they first -- within a week of taking it over. And I think there's been at least one more layoff since then and maybe more to follow. So it’s been disruptive within their own organizations company and disruptive within the industry as well. Ultimately, we think it maybe good for us as a distributor of both Motorola and Arris products.

Ken Chymiak

Now, this is Ken. One more to comment, I would like make on that is we do look at CapEx spending by larger MSOs, kind of gauge but their next year budget that are going to that process now. But I think if you look at a lot of the CapEx over the last three years it’s been in the enterprise and the telephone side, the businesses and also cable box. That was a big part of Motorola’s business.

And the other thing that’s interesting, I think if you follow the cable stock, with all the cash flow that they have, they are really a dollar in our Wall Street from the standpoint of that positive schedule for years. They had dollar depreciation. They kept making the spending on upgrades and we have not seen that upgrades but an uptick over -- where they’ve been over the last two or three years on the broadband side which is -- but we really excel on that part of the business.

So, we do see some uptick on some of the smaller cable systems that they are trying to keep current on some of the equipment they have out there. But the big guys I don’t think until they expand their lines as far as the pipe, in other words, you get more bandwidth, it’s -- we don’t see that coming out in the last year. So we’ll wait the next year budget to see what that does.

Doug Ruth - Lenox Financial

Okay. [Could you offer] a little commentary or color if it is possible on the manager you’re bringing in?

David Humphrey

I don’t know how much more color I can give you. We haven’t hired it yet. When we will do it, we put it in our press release probably by the end of this month or within a month from now. So just keep apprise to the wire, you’ll get a better description, their names, past experience as well. So we’ll give you a full update at that point of time.

Doug Ruth - Lenox Financial

Okay. Well, I’m grateful for you hosting the conference call and your candid comments and we’re looking forward to some -- to the next quarter.

David Humphrey

Great. Thank you, Doug.

Operator

Our next question will come from Nick Ghattas, GT Investments.

Nick Ghattas - GT Investments

Hi guys. How are you doing?

David Humphrey

Good.

Scott Francis

Very good.

Nick Ghattas - GT Investments

Thanks for taking my question. I was wondering if there was any way you could quantify how much of an impact the Arris and Motorola combination might have had?

Scott Francis

I don’t. We really can’t. It literally hasn’t had much impact on relationship side. We did see a little bit of [babble] in the market. As Dave mentioned we didn’t have a very good June that was right after the acquisition we completed some of the last that occurred and it wasn’t just us. One of the things that Dave is very good at as well as all of our General Managers, they’re very tapped in to the market, not just with our direct customers but also with brokers. And we saw a decline we believe in the entire industry at least within our segment of the market as Ken already mentioned.

If you look at Cisco, you’re going to see a lot of Cisco classic routers and switches. So it’s hard to pull out their cable side. Arris is much more cable present but their biggest play is on what we call CP or customer premise equipment that’s a predominance of their sales. And we’re not as nearly as bigger player on that side of the business.

So it’s difficult to identify with our other players that most of our other competitors are private. So it’s difficult for us to assess exactly how they’re doing based on their financials. But from rating the [T list] able to tell you, it appears the entire industry was slowed down for whatever reason in June and so you had a bit of a bounce back in July.

Nick Ghattas - GT Investments

All right. Great. Thank you. And then I was also wondering if you guys have any idea of what your optimal inventory level is or maybe over the next 6 to 12 months. And if you could give us kind of a sense of any discounts or incentives that you’ve been give to customers to churn inventory and keep churning cash flow?

David Humphrey

This is Dave. We -- one reason that cash keeps falling along our bottom line, we invest a lot of money in inventory over the years. We had $34 million about two years ago. It was well-rounded inventory. We still have a very rounded inventory. We’re not finding holes since we’re dropping very much.

So the inventory also won’t be dropping even though our profits are going up because we’ve got a lot of inventory at this pricing. We’re not dropping prices. We’re being competitive. So we see difference between the two. We don’t try to lose any deals on pricing and we can’t see where we really are. I mean there is not a lot them that we’ve actually lost and a lot of them are coming out of -- we’re seeing a lot of things that was priced six months ago just starting to come in. So there is no bring the right -- our deal is supply of today, tomorrow. We don’t have back orders usually. We have the product we deliver.

Scott Francis

I’m sorry, Ken. In addition, Nick, I mean we’ve always -- and it’s proven out that our inventory is one of our key sources of competitive advantage. It’s created a lot of opportunities for us in the marketplace where many of our competitors end up running out of products and we take advantage of those unique market opportunities that’s what Dave is alluding to.

So we’re not big price discounters. We basically buy the right inventory, hold that right inventory, and have it ready for the customer when they need it. And there’s still a lot of ADDvantage evidence still operating out in the marketplace that needs our inventory to back them up.

Ken Chymiak

And this is Ken. One comment that we always like to make we’re entrepreneurs and one of the things that we cannot do is go out and create used equipment. And used equipment is really our forte where we really do the gross margins. As long as there is not new bandwidth, in other words where they’re taking old equipment out on that side of the business we can’t buy it.

So that’s the business we really enjoy and really are good at from that perspective. So to say that our inventory is going to be at $21 million is the right number. We can’t say that if an opportunity comes our way. Would you agree Dave?

David Humphrey

Yeah. I would say realistic to give you answer, inventory could drop $2 million to $3 million in one year from now but you have to look at what we buy in the meantime. If the good deals come along way, I mean realistically but $5 million deal came along which make sense, we buy it.

Nick Ghattas - GT Investments

Right.

David Humphrey

There is not lot of deals out there and we do have good inventory. I mean it’s not like it’s getting staggered with something really bad in one corner and you’ve got two good pieces. Our inventory is well-rounded.

Ken Chymiak

I guess I’ll make one statement to see if Dave will agree. I mean we’ll probably more than likely continue to decrease our used inventory as Dave continues to sell it off. We maybe adding additional new inventories, they’ll get to play the inventory position, especially with these premium sales people we bring.

And we believe they’ll push incremental new sales as well as some of our used products. But again as Dave said if a big opportunity comes available to pick up some used inventory, he won’t pass it by. He believes that there is ultimately equipment we can put into our stock and sell.

Nick Ghattas - GT Investments

Great. And I know you guys had an opportunity like that maybe a year or two ago with some of the set top boxes you just kind of swoop in and buy them up, fix them, and sell them at high margins. But yeah I know that’s good. I was wondering if you could clarify most of your inventory is new or is considered new, right?

David Humphrey

No, I would say…

Scott Francis

Well, the [real shopping] is 60% to 70% of our inventory of dollars would be in that area of new.

Nick Ghattas - GT Investments

Yeah, right. Well, yeah, that’s what I -- okay, that’s what I thought. Great. And then I guess you guys think that you benefited all from like 4K and when that upgrade cycle kind of comes through?

David Humphrey

I didn’t understand that.

Scott Francis

Yeah. That’s what we’re talking -- that’s far beyond the telco side of the business and our side of the business most likely.

Nick Ghattas - GT Investments

Okay. All right. Great. All right. Thanks guys. I appreciate it.

Scott Francis

Appreciate it, Nick.

David Humphrey

Thank you, Nick.

Operator

(Operator Instructions) We have a follow up from [George Gaspar].

Unidentified Analyst

Yeah. Thank you. Could you identify the amount of revenue stream that came out in the quarter from Kansas City operation?

David Humphrey

We don’t give that. I’m sorry George. We don’t bring those out.

Unidentified Analyst

Okay. And can you make a general comment about how that operation did in the quarter relatively speaking?

David Humphrey

No, I’m afraid we can’t George but I appreciate the question.

Unidentified Analyst

All right. And then did you do any stock purchases in the quarter?

David Humphrey

I know we did not.

Unidentified Analyst

Did not, okay. And in terms of the personnel that you’re looking to hire, what’s the increment on that relative to what kind of sales staff do you have now, where is it located geographically. What are you trying to do in terms of bringing the three personnel that you’re talking about wanting to add geographically. Can you talk a little bit more about all this?

David Humphrey

I apologize I’ll be a little vague. These three people that we’re talking about are located in the east coast, west coast, and somewhat centrally located. So they’re at three different locations. And our sales staff today is we’ve got west coast, to the east coast, but we’re predominantly in the Midwest but most of us are sales people.

Unidentified Analyst

Okay.

David Humphrey

Other than I can say that some people up in our Philadelphia operation as well but are sales people up there.

Unidentified Analyst

Could you identify how many personnel are associated with you in sales currently?

David Humphrey

Around 10.

Unidentified Analyst

Around 10, okay. All right. And I think that’s pretty much it. Thank you.

David Humphrey

Thank you, George.

Operator

And everyone, there are no further questions. I'll turn the conference back to our speakers for any additional or closing remarks.

David Humphrey

Well, again I want to thank everybody for being with us today. It was a disappointing quarter for us. We’re hopeful that we’re confident about that we’ll bounce back but we don’t know that. We won’t know until the end of the next quarter and look forward to seeing you all and visiting with you in December.

Ken Chymiak

One other comment, this is Ken, I think that our management team actually go to ring the bell at NASDAQ, Dave, what day is it?

David Humphrey

Actually we will be at NASDAQ on the 29th of August to ring the bell.

Ken Chymiak

The closing bell, right?

David Humphrey

Yeah, we’ll be ringing the closing bell just before the long weekend.

Ken Chymiak

So if you want to see Dave, I think they broadcast that on live on internet. So one of the channels you can -- you can look at him, okay.

David Humphrey

All three of us would be there Dave Chymiak, myself and Scott. And with that I think we’re done, Operator.

Operator

Thank you. And ladies and gentlemen, again that does conclude today's conference. Thank you for your participation today.

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