ADDvantage Technologies Group's (AEY) CEO David Humphrey on Q3 2016 Results - Earnings Call Transcript

| About: ADDvantage Technologies (AEY)
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ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q3 2016 Earnings Conference Call August 9, 2016 12:00 PM ET

Executives

Garth Russell – Investor Relations

David Humphrey – President & Chief Executive Officer

Scott Francis – Chief Financial Officer

Dave Chymiak – Chief Trading Officer

Analysts

Doug Ruth – Lenox Financial Services

George Gasper – Private Investor

Operator

Good day everyone, and welcome to the ADDvantage Technologies' Third Quarter Fiscal 2016 Earnings Conference Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

Garth Russell

Thank you. Before we begin today's call, I'd like to remind you that this conference call may contain certain forward-looking statements, which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events, such as the availability or 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 materially differ from the 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 included in the Company's press release issued earlier today and included in ADDvantage Technologies most recent report on Form 10-Q filed earlier today.

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 may 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'll also present certain non-GAAP financial measures, in our press release financial table issued earlier today, which is located on our website at addvantagetechnologies.com. In this release, you'll find a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures and a discussion about why we think these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures.

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

David Humphrey

Thank you, Garth. Welcome everyone to ADDvantage Technologies third quarter fiscal 2016 conference call. With me today is Dave Chymiak, our Chief Technology Officer and Scott Francis, our Chief Financial Officer.

Before I turn the call over to Scott, who will provide the detailed financial results, I want to provide an update on our recent performance and briefly comment on our ongoing strategic initiatives.

Our results for the third quarter – for our fiscal third quarter reflect a 5% decline in revenues compared to sequential quarter. These top-line financial results continue to reflect broader industry pressures and are below our internal expectations for the quarter. In order to offset these market trends, we are in the process the implementing several operational and structural changes that are expected to expand sales opportunities and drive long-term growth.

Turning to our Cable TV segment, sales and new and refurbished equipment were down slightly, although within our expectation to given the natural or fluctuations and demand that this segment typically experiences. Although sales for TV equipment were lower year-over-year, we have proactively managed costs which has allowed us to keep margins relatively flat despite the lower sales. As discussed on previous conference calls, Cable TV equipment market has faced a trend of slowly declining demand.

That said, there are certain equipment and service segments in the market that are faring better than others. We are in a process of making strategic new hires that will enable us to sell a more diverse selection of these products and services. These adjustments allow us to sell higher valued product starting in the next several quarters.

The financial performance for our Telco segment is disappointing for the quarter as it did not meet our internal expectations. The year-over-year quarterly decline is partially attributable to the nature of lumpy sales as we have recorded large equipment sales to an end-user customer in the third quarter of fiscal 2015. This was compounded by certain other challenges facing this segment that we have been addressing in order to be more competitive and grow market share in order to boost revenues.

This includes enhancing the quality controls for our used products and improving our packaging and shipping method, in order to better cater to end-users. We are also offering a more diverse range of used products and increasing our sales of new product lines. I am pleased to say that while our focus continues to be on used equipment, the sales team has made a lot of progress in selling new product, which we started just a year ago as a new source of revenue.

Furthermore, we believe Telco segment's recycling program given its response for recycling are to certification has the potential to be a larger revenue source following some modest investments. In order to capitalize in this opportunity, we have purchased a large shredded with a conveyor belt system, which will increase our throughput capabilities to process scrap.

We believe that focusing on these successful executions on each of these initiatives across the business segments will maximize sales opportunities and drive revenue growth in fiscal year 2017. Also maintaining a reputation for quality and reliability is key to our long-term success, so we are taking all the necessary steps to mold our Telco segment into an unreliable business that can proactively cater to the evolving needs in the industry. From a costs perspective, these initiatives have required modest investments across our business lines. In terms of the impact on our bottom-line, we continue to target increasing overall profitability.

I would now like to move to our YKTG Solutions joint venture, which was announced in the second fiscal quarter. YKTG Solutions continues to provide decommissioning work on cell tower sites on behalf of major U.S. wireless provider in the third quarter is expected to ramp up activity in the fourth quarter. In addition the joint venture completed another project this quarter with a different leading telecommunication provider. These projects provided us with $163,000 in pre-tax income for the period. We are pleased with the progress we have made as it has allowed us to leverage our balance sheet and is expected to generate an excess of $1 million in pre-tax income by the end of the third quarter of fiscal 2017. We will continue to seek out additional revenue generating projects with YKTG.

Finally, our growth strategy still involves acquiring additional businesses in the telecommunication space, if and when accretive value-added opportunities arise. This [indiscernible] to expand our product line and enabled us to access a broader customer base. Our balance sheet is strong. We have demonstrated a consistent ability to responsively manage our cash position that we could move quickly to acquire a company.

With that, I will now turn the call over to Scott Francis our Chief Financial Officer who will take you through the financial results in more detail.

Scott Francis

Thank you, David. For the fiscal third quarter of 2016, our total sales decreased $1.8 million or 15% to $10.1 million from $11.9 million for the same period of last year. Sales for the Cable TV segment decreased $800,000 to $5.9 million for the three months ended June 30, 2016 from $6.7 million for the same period of last year. This decrease in sales is due primarily the decrease in new equipment sales of $900,000.

Sales from the Telco segment decreased $1.1 million to $4.1 million for the three months ended June 30, 2016 from $5.2 million for the same period of last year. The decrease in sales primarily resulted from a decrease in used equipment sales of $1.8 million, partially offset by an increase in new equipment sales and recycling revenue at $300,000 and $400,000, respectively. Sales for the Telco segment in the third quarter of fiscal 2015 benefited from large used equipment sales of $800,000 to an end-user customer.

Our consolidated gross profit decreased $600,000 or 16% to $3.5 million for the three months ended June 30, 2016 from $4.1 million for the same period of last year. The decrease in gross profit was due primarily to a decrease in gross profit from both the Cable TV and our Telco segment of $200,000 and $400,000, respectively.

Gross profit margin for the Cable TV segment increased to 36% for the three months ended June 30, 2016 from 35% for the same period of last year, and our gross profit margin for the Telco segment decreased to 32% for the three months ended June 30, 2016 from 33% for the same period of last year.

Our operating, selling, general and administrative expenses decreased $100,000 to $3.1 million for the three months ended June 30, 2016 from $3.2 million for the same period of last year. Total other income and expense which includes the investment activity for our YKTG Solutions joint venture and interest expense was $100,000 as income for the three months ended June 30, 2016 compared to $100,000 of expense for the same period of last year. The increase in income from other income and expense was due to our joint venture with YKTG Solutions, which yielded income of $200,000 for the three months ended June 30, 2016, resulting from two projects with two different U.S. telecommunications provider.

Net income for the three months ended June 30, 2016 was $300,000 or $0.03 per share, compared with $600,000 or $0.06 per share for the same period of last year. Our consolidated EBITDA decreased $500,000 to $700,000 for the three months period ended June 30, 2016 from $1.2 million for the same period of last year.

The Cable TV segment EBITDA decreased $300,000 to $600,000 for the three months period ended June 30, 2016 from $900,000 for the same period of last year. The Telco segment EBITDA decreased $200,000 to $100,000 for the three months period ended June 30, 2016 from $300,000 for the same period of last year.

Now, turning to the results for the nine months ended June 30, 2016. Our total sales decreased $5.2 million or 15% to $28.9 million for the nine months ended June 30, 2016 from $34.1 million for the same period of last year. Sales for the Cable TV segment decreased $2.4 million to $17 million for the nine months ended June 30, 2016 from $19.4 million for the same period of last year. The decrease in sales is due primarily to a decrease in new equipment sales of $3.2 million partially offset by an increase of $400,000 in both refurbished equipment sales and repair revenue.

The decline in equipment sales for the Cable TV segment primarily occurred in the first quarter of fiscal year 2016. The Cable TV segment has experienced decline in sales – equipment sales over the past several years for the products that we traditionally carry due to the continued consolidation of the cable television operators and fewer upgrades of the cable television networks and plant expansion.

For the first quarter of fiscal 2016, our equipment sales decreased to the lowest level during this downturn. However, we believe some of that decrease in sales is due to uncertainties caused by pending merger activities during that time period, and the second and third quarter of fiscal year 2016, we saw our equipment sales increase back to similar levels we experienced last year.

Sales for the Telco segment decreased $3 million to $12.1 million for the nine months ended June 30, 2016 from $15.1 million for the same period of last year. The Telco segment decrease in sales was primarily due to the absence of $2.3 million in equipment sales to an end-user customer in the second and third quarters of 2015.

In addition, in the first quarter of fiscal year 2016, we believe that the decrease sales volume was due largely the delays in capital expenditures from our major customers due to weaker economic conditions and budgetary constraints of our customers. Sales from the Telco segment did increased in the second and third quarters of fiscal year 2016 as compared to first quarter, as we saw those conditions improve.

Our consolidated gross profit decreased $2.4 million or 20% to $9.8 million for the nine months ended June 30, 2016 from $12.2 million for the same period of last year. The decrease in gross profit was due to a decrease in the Telco segment of $1.8 million and a decrease in the Cable Television segment of $600,000.

Gross profit margin for the Cable TV segment increased to 33% for the nine months ended June 30, 2016 from 32% for the same period of last year. Profit gross margin from the Telco segment decreased to 35% for the nine months ended June 30, 2016 from 40% from the same period of last year.

Our consolidated operating, selling, general and administrative expenses decreased $1.1 million or 11% to $9 million for the nine months ended June 30, 2016 from $10.1 million for the same period of last year. This decrease was primarily due to $1.4 million in Telco segment expenses, which was partially offset by a $300,000 increase in expenses for the Cable TV segment. The decrease in expenses for the Telco segment included $900,000 decrease in expenses for the annual earn-out payments related to the acquisition of Nave Communications, and a $300,000 decrease in personnel costs.

Total other income and expense which includes the investment activity from our YKTG Solutions pension [ph] and interest expense of $50,000 of expense for the three months ended June 30, 2016 compared to $200,000 of expense for the same period of last year. The decreased in expense in other income and expense was due primarily to our joint venture with YKTG Solutions which yielded income of $100,000 for the three months ended June 30, 2016 resulting from the two projects we mentioned earlier.

Net income from the nine months ended June 30, 2016 was $500,000 or $0.05 per share compared with $1.3 million or $0.13 per share for the same period of last year. Our consolidated EBITDA decreased $1.3 million to $1.8 million for the nine months ended June 30, 2016 from $3.1 million for the same period in 2015.

The Cable TV segment EBITDA decreased $800,000 to $1.2 million for the nine months ended June 30, 2016 from $2 million for the same period of last year. While the Telco segment EBITDA decreased $500,000 for the nine months June 30, 2016 from $1 million for the same period of last year.

Our cash and cash equivalents on hand was $5.1 million as of June 30, 2016, compared to $6.1 million as of September 30, 2015. The Company generated $2.7 million of cash from operations for the nine months ended June 30, 2016. This was more than offset by $1.6 million of advances under our revolving line of credit with YKTG Solutions joint venture, $1 million of deferred consideration payments related to Nave Communications acquisition and $700,000 of principal payments on the Company's notes payable. As of June 30, 2016, the Company had inventory of $21.7 million compared with $23.6 million as of September 30, 2015.

This concludes the financial overview for the third fiscal quarter of 2016. I'll now turn the call over to the operator for any questions.

Question-and-Answer Session

Operator

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

Doug Ruth

Hi. Good morning. I find the people of ADDvantage to be very likable and very accommodating. But when I looking to your stock in comparison to Arris, I look at the five-year trend, you know the stock really hasn't performed. I was wondering if you think that you might consider to bringing in somebody else to help with to merchandise that you are selling. It appears that while what you are selling makes a little bit of profit, it really isn't enough.

David Humphrey

Dave, do you want to kind of address that for Doug?

Dave Chymiak

Doug, we have the opportunity if we want to increase our inventory and everything to increase our sales probably quite a bit. But the margins of profit, the manufacturers offer even for stocking is not very much. It just would not be very attractive. We are looking at things. We've tried things and we are also open to take offers. In fact, we've got meeting this afternoon on that. I am not in position to be adding a lot of inventory.

David Humphrey

I mean, as I appreciate your comparison of Arris, and they certainly are a key player in our market space. They've grown through acquisition. We're attempting to continue to grow through acquisition with one similarity. But of course they are manufacturer/distribution and they achieve higher margins on their product sales than we're able to as a distributor, especially on the new equipment from Arris and from Cisco/Scientific-Atlanta. Most of our margin is based on our used equipment as you know, and that's where Dave really makes most of our profits as the inventory used to acquire on the used equipment. So I appreciate the analogy, Doug, but they are very different business and we are even though we're in the same space. I will tell you though that Dave, as we mentioned in some of our comments, we are trying to expand our portfolio of equipment with Arris and Cisco on the new equipment side, and Dave is taking initiatives on that front.

Doug Ruth

Okay. If you could maybe comment a little bit about how you mentioned some strategic hires? Could you maybe talk a little bit about that?

David Humphrey

We've hired an additional couple of sales people. Those sales people have knowledge and experience in some of this new equipment and we are hopeful that they're going to help us to expand our sales on that new equipment and increase our overall dollars of margin, if not the percent margin.

Doug Ruth

Our temptation to really believe in the company and I like to see you thrive and like to see the shareholders thrive, and I guess I would encourage you to just keep trying what you're doing and I'm just going to patience and wait, because I believe that the value is there in this particular stock.

David Humphrey

I appreciate you both your patience and your questions, Doug, and I think they are fair and I think we are challenging ourselves to try to reach out a little further into our market space, and try to increase our overall product sales and our revenue and ultimately our profitability.

Doug Ruth

Okay. Well, thank you for answering the questions. We'll look forward to the next report.

David Humphrey

Great. Thank you, Doug.

Operator

And at this time, there is one name remaining on the roster. [Operator Instructions] And we'll go to George Gasper who is a Private Investor. Please go ahead.

George Gasper

Good morning.

David Humphrey

Good morning, George.

George Gasper

First question is a follow-up on with discussion that you're engaged in over the last – almost two years now about the amplifier replacement area in that line cable business. What are the prospects? Is there are some indication of an upshift there or what's going on? Can you give us a little color on that?

David Humphrey

Thank you, George. I'll turn it over to Dave.

Dave Chymiak

George, we're seeing a constant requests, we've seen at all the shows constant seminars, but most of the people are putting it off till next year. They are looking it for budgets of 2017. I thought a lot of that would be occurring in 2016. It still looks like it's going to occur, both manufacturers field that is both Cisco and Arris. They are gearing up for it, but again they are waiting, they are finding the same things we are. It's not a real strong business at the moment. People are budgeting by test the equipment for it and it's in the process.

David Humphrey

I'll make a comment little bit to Doug's questions too. Arris has been very strong at not having distribution. They are looking at more and more and have just announced that distribution is the key factor, they are looking at for expansion here in the state, and we of course are looking at that. A lot of the manufacturers wants us to make 5% to 7%, and George, we just can't do it in our model and offer our services that we do on 5% to 7% to make any money on the bottom line.

George Gasper

Okay. Just like to bring to attention, I think I have other question. There's an interesting story headlining the market [indiscernible] this morning about the broadband speed flagging. It goes on to talk about Wisconsin is 28.59 megabit per second and compared to 54 megabit per second, the national average Wisconsin being the highest, Hawaii and Texas and Wisconsin way down the line, second from the bottom. It talks about the pickup that then taking place, so obviously there is a lot of works being done in the industry as there is an indication that this has risen, overall by 40% since July 2015. You've got any comments on that?

David Humphrey

Yeah. Basically, both of our segments the Telco and the Cable industry as a whole are trying to drive fiber deeper into their networks to increase the broadband capacities. You've got outliers like Google, who are trying to come into the market and offering fiber capabilities. Verizon did with their FiOS system four-five years ago, spent almost $30 billion. There is a continuing effort to expand overall broadband capacity, which will then ultimately play back into the very question you asked about the reverse path, which will become the weak link as people continue to deliver increased capacity, digitization, feed up a lot of forward capacity on their signals, but it didn't free up anything on the reverse path, which is everybody is so called upload speed versus their download speed. So I think, you have heard us talk about in the past, we are still believe that it's a large opportunity for us, but we've got to wait for the MSOs on the cable side to make that decision.

George Gasper

Okay. And then on the Nave payout, you did report that the payout was down relative to the decline in revenue stream and so on. How long did the payouts go on in Nave? Is that an extended time period yet going forward or will it always be there or is that coming to an end?

David Humphrey

No. It's coming to an end, George. It was three-year transaction done, two years and a number of months go back at the end of February. So by the end of February 2017, those payments will be completed.

George Gasper

December 2017?

David Humphrey

No, no February – end of February or beginning of March.

George Gasper

Oh. Start of next year. Okay.

David Humphrey

Of next year, yeah. So we are just – whatever that math is, there is seven months away from the termination of those payments.

George Gasper

Okay. And then question on the inventory decline, what product line was that mostly in the cable area? It looks like it was like about $2 million or$1.5 million?

Scott Francis

It was mainly a drop on the Cable side, so not as much in the Telco. It was mainly on the Cable side.

George Gasper

Oaky. All right. And question on expansion. You've talked about that and you're out there hunting for trying to broaden your base. As you get into this joint venture area a little deeper as the quarters go forward, are you encouraged maybe to look at most services oriented operations that can build your volume?

David Humphrey

We absolutely are. We are looking for new opportunities from the service standpoint, leveraging off both our Telco and Cable customers.

George Gasper

Okay. All right. In terms of the overview of where you think your business is relative to the industry. Are there any particular recent events or something that you're looking at that you think could really we encourage – re-engage the revenue stream on the current business activities that you're involved in?

David Humphrey

Dave?

Dave Chymiak

We're seeing an increase in business overall. We're just not seen as many of the large, large orders that we are used to. We are actually working harder for every dollar today than we were two years ago.

George Gasper

Okay. I noticed that you mentioned Cisco and maybe trying to get in to do more business with them. I hope you can parallel GSI Technology, this quarter had an uptick off of a much lesser volume with Cisco and in the SRAM area, and they seem to be a more optimistic across the board in the SRAM market in cloud computing and there is some really special things going on in that area. It would appear as though, hopefully your connection with Cisco can offer you some additional opportunity?

David Humphrey

That was a question?

George Gasper

Yes.

David Humphrey

Okay. I mean Cisco of course is a huge, huge company. They are what we prefer and they do is the class side where their routers and switches and large data transmission is really driven by. Of course they bought Scientific-Atlanta, I guess almost now, like maybe six-seven years ago, which put them into our space and we'll had a tight relationship with Scientific-Atlanta. We continue to maintain a strong relationship with Cisco, though not as strong as it was with SA. So, on cable side, they are nearly – as a matter of fact, they've recently sold off their set-top business to Technicolor. So, they are actually a smaller company on the cable side, but we are not in that space with the set-tops and modem. We found those to be a very low margin, not a sustainable business, certainly especially from the used side.

So, I don't know how to address the question in comparison to GSI and cloud computing. Now we are the guys that are helping those cable guys to run their pipes on the cable side, and on the Telco side, we are helping them on their infrastructure as well, and it's those pipes that ultimately allow you to do cloud computing. But the actual cloud computing infrastructure is not something we are necessary involved with.

Involved in server farms and things like that that ultimately facilitate cloud computing, but as far as the pipe is concern, there we do provide services and support to the MSOs and the Telcos.

George Gasper

Okay. All right. And just closing, you're in pretty good financial condition equity versus your debt structure and cash. I hope we come up with some new ways here to expand the base of the business and attract new investors to your stack here, which has underperformed, obviously. But started too, but it kind of got short-circuit here recently. Thank you.

David Humphrey

Thank you, George. We appreciate your support too.

George Gasper

Okay.

Operator

[Operator Instructions] And it appears there are no further questions. So I'd like to turn it back to David Humphrey for any additional or closing remarks.

David Humphrey

Thank you, operator. Before we conclude the call, I'd like to reiterate that we do see many opportunities in telecommunications market and we have several ongoing initiatives to build out of our business including YKTG, service opportunities that was questioned on this call as well as our two base businesses, and ultimately our acquisition strategy, to help us achieve steady revenue growth. I'd like to thank our shareholders for their loyalty, support and patience as we continue to build value together. Thank you all.

Operator

Thank you very much. That does conclude our conference for today. I'd like to thank everyone for your participation.

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