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ADDvantage Technologies Group, Inc. (NASDAQ:AEY)

Q3 2014 Earnings Conference Call

August 12, 2014 12:00 PM ET

Executives

Garth Russell - KCSA Strategic Communications

Dave Humphrey - President & CEO

Scott Francis - CFO

Dave Chymiak - Chief Technical Officer

Ken Chymiak - Chairman of the Board

Analysts

Doug Ruth - Lenox Financial Services

Operator

Good day, and welcome to ADDvantage Technologies' Fiscal Third Quarter 2014 Earnings Conference Call. Today’s conference is being recorded. At this time, I'd like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead.

Garth Russell

Thank you. Before we begin today's call, I would like to remind you that this conference call may contain certain forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include among other things statements regarding future events such as the ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers, and multi-system operators, as well as the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties.

Participants are cautioned that these forward-looking statements are only predictions and may differ materially from actual future events or results due to a variety of factors such as those contained in ADDvantage Technologies most recent report on Form 10-K on file with the Securities and Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes thereto included in ADDvantage Technologies most recent report on Form 10-Q filed August 12, 2014 and 10-K/A filed December 16, 2013.

The guidance regarding anticipated future results in 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, ADDvantage Technologies will not necessarily update the information as ADDvantage Technologies will only provide guidance at certain periods during the year. Such information speaks only as of the date of this presentation.

With nothing further, I’d now like to turn over the call to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. Dave, the floor is yours.

Dave Humphrey

Thank you, Garth. Welcome to ADDvantage Technologies’ fiscal 2014 third quarter conference call. With me today is Dave Chymiak, our Chief Technical Officer; Scott Francis, our Chief Financial Officer; and 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 and nine months ended June 30, 2014, I want to offer a brief update on the Company’s operations and strategy.

We reported a significant increase in net sales for the fiscal third quarter of 2014 as a result of our acquisition of Nave Communications earlier in the year. The majority of Nave Communications sales were from its refurbished equipment and recycling operations. While we are pleased with the revenue that this acquisition has contributed thus far, we expect both refurbished telco equipment sales and recycle revenue to increase in future quarters. This most recent quarter was negatively impacted by disruption in market by major telecommunications company that put a temporary hold on the purchasing of new equipment. While this company is not a major new customer, negative impacts of their activity rippled throughout the market.

We believe suppliers have already adjusted accordingly the manual rebound over the next few months. To-date, Nave’s recycle revenue has been negatively impacted by transitions associated with the acquisition. However, we expect Nave’s recycle revenue to increase next quarter as we will have a more consistent stream of monthly revenue. As a result, we expect the fiscal fourth quarter of 2014 to dramatically improve in this segment. As we work through these events in the Telco segment, we feel that Nave’s foothold in the market will allow this business to grow in the coming quarters and beyond. We remained excited by the telco space and continue to look for additional acquisitions that will further diversify our business in the broader telecommunications market.

With that said, we are noticing the initial signs of recovery for our CATV business. We’ve been continuing to work on restructuring our sales team in order to grow our customer base as well as expand sales to our existing customers. Our sales team is focused on our customers’ needs and providing solutions utilizing our broad inventory of new and refurbished inventory as well as our partnerships with our many OEM suppliers. It takes time to cultivate these relationships but we believe we are starting to see some success in our efforts based on the slight increase in equipment sales this quarter compared to last year.

During the quarter, we sold a facility formerly used by Adams Global Communications which resulted in net settlement proceeds of $1.4 million. As previously disclosed, we reported the financials associated with this divestiture of Adams Global as discontinued operations. In closing, we have made considerable progress during the quarter and are seeing the benefit from our acquisition of Nave. We are also actively looking for new opportunities to work with additional MSOs in the cable side. As a result, we expect to continue growing net sales and EBITDA in the fourth quarter and beyond.

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

Scott Francis

Thank you, David. For the third fiscal quarter of 2014, our total net sales increased $2.9 million or 46% to $9.3 million compared with a $6.4 million for the same period of last year. Net sales for the Cable TV segment increased $0.1 million or 2% to $6.5 million for the three months ended June 30, ‘14 from $6.4 million for the same period of last year. The increase in sales is due primarily to an increase in new equipment sales of 200,000 partially offset by decrease in refurbished equipment sales of 100,000.

Net sales for the Telco segment were $2.8 million for the third quarter ended June 30, ‘14 and were zero for the same period of last year as a result of our acquisition of Nave. Net sales for the Telco segment consisted of $2.4 million of refurbished equipment sales and $0.4 million of recycling revenue.

Consolidated gross profit increased $1.3 million or 74% to $3.2 million for the three months ended June 30, 2014 from $1.9 million for the same period of last year. The increase in gross profit was due primarily to the gross profit from the Telco segment as a result of the Nave Communications acquisition. Our gross profit from the Cable TV segment was relatively flat compared to last year.

Our operating, selling, general and administrative expenses increased $1.5 million or 105%, to $2.9 million for the three months ended June 30, 2014 from $1.4 million for the same period of last year. This increase was primarily due to increased expenses in the Cable TV segment of 100,000 and increased expenses in the Telco segment of $1.4 million as a result of the Nave acquisition.

Our net income from continuing operations for the three month period ended June 30, 2014 was $0.2 million or $0.02 per diluted share compared with net income from continuing operations of $0.3 million, or $0.03 per diluted share for the same period of last year. The total discontinued operations loss of $0.1 million for the three months ended June 30, 2014, was due primarily to the company selling the Adams Global Communications facility on June 30, 2014. The Company sold the facility for $1.5 million with net settlement proceeds of $1.4 million which was received on July 1 of 2014.

The discontinued operations net of tax loss of 34,000 for the three months ended June 30, 2013, included the operations of Adams Global Communications prior to the sale on January of 14. EBITDA for the three month period ended June 30, 2014 was $0.7 million compared to $0.5 million for the same period of last year. Now on to the results for the nine months ended June 30, 2014, our consolidated net sales increased $2.8 million or 13% to $23.8 million for the nine months ended June 30, 2014, from $21 million for the nine months ended June 30, 2013.

Our net sales for the Cable TV segment decreased $1.1 million to $19.9 million for the nine months ended June 30, 2014 from $21 million for the same period of last year. The decrease in sales was due primarily to the decrease in refurbished equipment sales of 900,000 while new equipment sales decreased $0.1 million. The decrease in overall equipment sales was due primarily to the decrease in plant expansions and bandwidth upgrades we are seeing in the cable television industry and the absence of equipment sales as a result of Hurricane Sandy for the three months ended December 31, 2012. This was partially offset by supplying a major MSO equipment for certain projects this year.

Sales for the Telco segment were $3.9 million for the nine months ended June 30, 2014 and zero for the same period of last year as a result of the acquisition of Nave. Our net sales for the Telco segment consisted of $3.4 million of refurbished equipment sales and $0.5 million of recycling revenue. Consolidated gross profit increased $1 million or 15% to 7.3 million for the nine months ended June 30, 2014 from $3 million for the same period of last year. The increase in gross profit was due primarily to an increase in the Telco segment of $1.7 million, a result of the Nave acquisition partially offset by a decrease in the Cable TV segment of 0.7 million.

Our operating, selling, general and administrative expenses increased $2.9 million or 65%, to $7.2 million for the nine months ended June 30, 2014 from $4.3 million for the same period of last year. This increase was primarily due to increased expenses of the Cable TV segment of $0.4 million and the Telco segment of 2.4 million as a result of the Nave acquisition.

It should also be noted that the Telco segment expenses included 600,000 of direct costs in connection with the acquisition of Nave. Net income from continuing operations for the nine month period ended June 30, 2014, was 40,000 or zero cents per diluted share compared with a net income from continuing operations of $1.2 million or $0.12 per diluted share for the same period of last year. The decrease is primarily the result of the acquisition related expenses of 600,000 on Telco segment especially with the acquisition of Nave and decreased operating income of $1.1 million from the Cable TV segment.

The incremental loss from discontinued operations net of tax included the operations of Adams Global Communications prior to the sale on January 31, 2014. For the nine months ended June 30, 2014, this loss of 36,000 compared to an income $0.1 million for the same period of last year. The loss on sales from discontinued operations net of tax of 600,000 consisted of a pretax loss of $0.9 million from the sale of the net assets of Adams Global Communications for $2 million in cash and a pretax loss of $0.1 million from the sale of the Adams Global Communications facility which is in other words for $1.5 million in cash.

EBITDA for the nine month period ended June 30, 2014 was $0.7 million compared with $2.2 million for the same period of last year. Our cash and cash equivalents were $4 million as of June 30, 2014 compared with $8.5 million as of September 30, 2013. Our cash and cash equivalents decreased due primarily to the acquisition of Nave and purchases of new cable equipment inventory this year partially offset by the sale of Adams Global.

The net settlement proceeds of $1.4 million from the sale of the Adams Global facility was not in our cash and cash equivalents balance as of June 30, 2014 as we mentioned because the proceeds were not received until July 1st. As of June 30, 2014, we had inventory of $23.7 million compared with $18 million as of September 30, 2013. The increase in our inventory is due primarily to the acquisition of Nave and new cable equipment inventory purchases with certain manufacturing incentives.

This concludes the financial overview for the quarter and nine months ended June 30, 2014. I’ll now turn the call back over to David.

Dave Humphrey

Thank you, Scott. Given the activity in both the telco business and the CATV business, we feel that our growth strategy is working effectively. We appreciate your continued support as we will continue to find the innovative ways to improve our business and grow our operations. This concludes our prepared remarks. I would now like to turn it back over to the operator and open the call for any questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And we’ll go first to Doug Ruth with Lenox Financial Services.

Doug Ruth - Lenox Financial Services

Thank you for hosting the call and congratulations on the large increase in revenue. Of course we’re all looking forward to the day that some of that drops to the bottom-line. What would you say is the best opportunities for the telco division?

Dave Humphrey

I am not sure if I understood, are you talking specifically about Nave or the entire telco space?

Doug Ruth - Lenox Financial Services

Well, how about Nave, where is the best opportunity for you, do you think?

Dave Humphrey

Well, I think Nave has two growth opportunities that we mentioned in the call and that is their revenues were down versus what we and Nave expected in the beginning and the identifier was a fact that one of the major players in that space had curtailed out significant portion of their purchases specially on the used side of equipment where Nave is focused. So, we think we’ll get some increased revenue on that side and a portion of that will flow to the bottom-line and probably the bigger impact will be on the recycle side. And those were some transitional effects as a result of the acquisition just occurring four months ago. I think we will see more consistent recycle business flowing through the P&L and that has even bigger impact flowing to the bottom line with a higher margin on it.

Doug Ruth - Lenox Financial Services

Where the recycle revenue from Nave coming from, is there a certain customer group that’s bringing that revenue in?

Dave Humphrey

No, Nave has recycle business kind of like, it’s basically an end of life product and so they’ve purchased product on both purchases similar to what Dave Chymiak does and a portion of that ultimately goes into recycle. In addition, they can make specific purchases of recycle equipment that’s end of life and generate higher margins than some other players were, because they actually have a recycle operation. So, I think they both specifically purchase as well as take portions of their lots. And some of their sales are consignment sales with some of that product has also converted into recycle on end of life product.

Doug Ruth - Lenox Financial Services

Okay. We have a lot of moving pieces. Is there any way for you to give us a little bit more taste of what kind of growth we might expect in the fourth quarter?

Dave Humphrey

We don’t generally make those forward statements, Doug, so I don’t think we will do that at this time either.

Operator

And we’ll go next to George Gasper with Private Investor.

Unidentified Analyst

Thank you. Just continuing on the Nave operation and what’s your strategy in really trying to broaden the company’s operation, that division’s operation to generate a considerable new increment of revenue stream possibility relative to where it is now. Can you highlight that at all?

Dave Humphrey

Yes, I think I’ll answer it in reverse order than I did with Doug but it’s going to be a very similar answer. One, we anticipate they are going to increase the recycle revenue which has a big impact on the bottom-line. More importantly on the sales side, I think the impact that we can have as organization is utilizing our balance sheet to their benefit. They were so much cash constrained as most entrepreneurial businesses are, whatever cash they generated is distributed out to their owners.

We have a deeper balance sheet that we can provide them some access to increase their inventory. But of course we don’t want to tie up cash needlessly so it’s got to have a significant return opportunity which is what we’re doing with Nave right now is evaluating increased purchases for inventory. But they also flipped their inventory at a higher rate than our cable side has. Nave has as a little bit longer profile. So, I think that’s the biggest impact we can have on their operation, George, is evaluating opportunities with them and utilizing our balance sheet in their support.

Unidentified Analyst

Okay and how is the personnel situation there? How has it changed in the last three months and what you’re looking at going forward?

Dave Humphrey

Hasn’t changed at all. Our five top managers that, at the time of acquisition are still aboard, they are very committed. The structure that we put in place with the earn-out gives them a strong encouragement to drive the bottom line. As Doug mentioned, we’re anticipating an increased bottom and so are they and they have strong ascent to generate that. We have hired additional recycle people as we see increased recycle business, so that the employment is pretty stable.

Unidentified Analyst

Okay, all right. And on the cable side of the business, what’s the flavor outlook? There was an impression given on the call here that you’re seeing some appearance of initial signs of recovery on that side of the business. Is there anything new in the cable area that gives you some expansion opportunity?

Dave Humphrey

Basically, we see in two quarters now where we’ve done better than we did the year before, so that’s certainly encouraging. I don’t think we’re prepared to predict that the entire market is turned around yet as we continue to hope it will, but I will also turn it over to Dave and kind of give his flavor because he’s got a better insight on the overall market.

Dave Chymiak

George, we’re finding that we’re getting more enquires and betting in the process and there is a lot of channel changes that are occurring as we speak this month and some last quarter that the different cable companies are having to buy different pieces of equipment. So, we’re seeing it at least being steady and not upticking.

Unidentified Analyst

Okay. From the standpoint of strategies in the cable industry, are things more stable, say looking at where you are right now versus three to six months ago, so is there any changing events that you can equate to and identify that would have some influence one way or the other on your operations?

Dave Chymiak

We’re seeing an increase, like I said on the satellite receiver business so in other words in the headends where they have to add channels or for example the ESPN is adding the Southeast Conference as well as Longhorn, Football and a Fusion channel. All of those are going in effect at this month, so a lot of sales are going into that area. The line here is picking up a little bit meaning that equipment out on the poles, the repairs are little more or picking up as weather gets harder, but nothing real dramatic, but we do see an increase of quotes going now.

Unidentified Analyst

Okay, all right. And I know you don’t want to be too specific, but I mean you came through here with a revenue stream for the quarter that was in this $9.3 million range, of course helped very much by the acquisition. Do you feel uncomfortable to even suggest or answer to my commentary that you are going to be able to shoot pass 10 million for the quarter?

Dave Humphrey

Yes, I understand the question, I am hopeful that we’ll generate and see that number but I won’t make prediction on it.

Unidentified Analyst

Great, okay. And combinationally the Company has been peeling off in the two, three years in terms of revenue stream. You got it reverse with the acquisition. I would hope that there is some confidence within the organization that you cannot just get over 40 million going forward in the next fiscal year but into that 45 million to 50 million range, you probably don’t want to comment on that.

Dave Humphrey

For an answer on that one or not George but we certainly hope that we continue to grow the business in both the telco and the cable side. But I think we will see more growth on the telco side and certainly we’re going to continue to look for acquisition opportunities in both cable and telco as well as we have previously.

Unidentified Analyst

Right, okay and then on the cash availability side. You had about 4 million now you’ve got the conclusion of the sale in Kansas City facility, as you look further into this quarter and looking forward beyond September. Do you see your cash availability being sufficient or do you have to reach out on the debt side?

Scott Francis

George, this is Scott. I believe right now our cash position is in good shape with what we know now and what we have on the horizon of the current businesses that we have. With as David already alluded to, trying to look at the Nave opportunities and different things, so we’re in good shape there. That’s not necessarily addressing the fact that we find an acquisition or those types of things in the next periods whether or not we would have enough cash to handle that or we’ll have to go outside or within our current business. We’re doing okay right now and we still have our 7 million line of credit but we don’t have anything under right at the moment.

Operator

(Operator Instructions). And we have no further questions.

Dave Humphrey

Very good. Thank you, operator. Well, again we want to thank all of our investors for attending the call today. Again, we’re very optimistic even though we don’t want to make forward projections and estimates as to where the business is going. We still anticipate that the Nave acquisition will continue to grow in both revenue and profitability. We just can’t exactly predict where that will end up. The cable side of the business is stabilizing but two quarters is not a trend made but we’re still hopeful that we will continue to ease some stabilization in that market as well. But again the key is that we want to thank all of our inventors for their continued support and look forward to the next call. Thank you again.

Operator

And this concludes today’s conference. Thank you for your participation.

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