ADDvantage Technologies Group Inc (AEY) 2009 Q1 法說會逐字稿

Good day and welcome to the ADDvantage first quarter 2009 and fiscal year Earnings Conference Call. All lines will be in a listen-only mode for the presentation. At the conclusion of the presentation, we will conduct a question-and-answer session.

For opening remarks and introductions, I would like to turn the conference over to Garth Russell, KCSA Strategic Communications. Please go ahead, Mr. Russell.

Thank you. Good afternoon and welcome to ADDvantage Technologies 2009 first quarter conference call.

Before we begin today's call, I would like to remind you that this conference call may contain 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 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 listed in ADDvantage Technologies' most recent report on Form 10-K on file with the Securities & Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes thereto included in the ADDvantage Technologies most recent report on Form 10-K filed December 19, 2008.

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 it will likely change, ADDvantage Technologies will not necessarily update the information as ADDvantage Technologies will only provide guidance at certain points during the year. Such information speaks only as of the date of the presentation.

With nothing further, I would now like to turn the call over to Ken Chymiak, President and Chief Executive Officer. Ken, the floor is yours.

Thank you, Garth, welcome back. Welcome to ADDvantage Technologies fiscal 2009 first quarter conference call. With me today is David Chymiak, our Chairman of the Board, Dan O'Keefe, our Chief Operating Officer, and Scott Francis, our Chief Financial Officer. First, I would like to make some comments on the quarter before I turn the call over to Scott who will provide our listeners with a review of our financials. Then David will address the overall market conditions we're currently facing that we expect to continue to face in the foreseeable future.

Despite increasing difficult market conditions the first quarter, we delivered strong operating results. Our business model which is based upon strong customer relationships continues to prove itself as it has for the past 23 years. And while our results were down on a quarter over quarter base, we still have been able to maintain solid top and bottom line results. With that said, we're continuing to look for ways to increase sales and lower costs in order to make ourselves more competitive. Every day we wake up to another company in our industry that has been negatively affected and impacted by the current economic crisis. As such, companies around the world are cutting back expenses, delaying its capital expenses, trying to get every last bit of every dollar they spend. This crisis has had the same effect on the companies in the cable industry we serve.

We first experienced the impact of the recession the first quarter of fiscal 2008 when the housing market slowed and demand for additional plant expansions declined. This decline in new housing starts was followed by the tightening of the credit market which limited our customers' ability to finance their planned bandwidth upgrades. As stated on previous calls, the decrease in demand for new products associated with new housing starts and bandwidth upgrades is also changing the competitive landscape, as our OEM partners are better managing their order backlog and in turn can deliver products much more quickly than they could in the past, effectively reducing the demand for on-demand service.

We felt the impact of the current recession during the past five quarters and continue to make difficult operating decisions needed to succeed. One product line that has experienced recent changes has been the sales of our legacy digital converter box. In the current quarter, we saw a $1.7 million decrease in sales of our boxes compared to the volume of sales last year. This drop-off is mostly attributable to the strengthen of the US dollar and the lack of supply of boxes available to refurbish. The US dollar strength in value over the past several months which increased to foreign currency price of our boxes in certain South American countries where we do business. We believe the increased price of these boxes has forced certain international customers to delay purchasing until the currency exchange rates become more stable.

In addition, domestic MSOs regional cable operators continue to refurbish and redistribute legacy boxes rather than upgrade to new equipment as part of their average demanding cost. This cost saving strategy is limited to the supply of legacy converter boxes available for us to purchase, refurbish and then resell, thereby impacting the revenue opportunities for this product line.

While the economic conditions for the foreseeable future will remain a challenge, I'm confident that our products and service will continue to meet our customers' requirements for reliable on-hand, on-demand resources. We will continue to improve our processes, reduce our cost and enhance our customer offerings to emerge from the current economic downturn a stronger and better company.

With that, I would like to turn the call over to Scott Francis, our CFO for a look at the financials. Scott?

Thanks, Ken. Net sales for the fiscal first quarter of 2009 were $12.8 million, a decline of 13% when compared to $14.7 million in the same period of fiscal 2008. For the fiscal first quarter, revenue from new equipment was down only slightly with $8.2 million in sales compared to $8.7 million in the same period last year. While refurbished equipment was down 35% at $3.1 million compared to $4.8 million in the fiscal first quarter of 2008. As Ken already discussed just recently, the decrease in refurbished equipment sales is primarily attributable to a decline in our digital converter box sales of $1.7 million. This is partially offset by an increase in revenue from our services business resulting from a higher volume of out-of-of warranty equipment failures as certain customers delay equipment upgrades.

Cost of sales for the three months ended December 31, '08 decreased 10% to $9 million from $10 million in the same quarter a year ago due primarily to a decrease in product sales during the quarter. Gross profit for the recent quarter decreased to $3.8 million from $4.7 million in fiscal 2008. Our gross margin percentage decreased to 30% from 32% in the first fiscal quarter of '08 due primarily to product line mix changes and increased price pressures from other competitors resulting from the overall decline in cable television equipment purchases. Operating selling and general administrative expenses for the quarter remained constant at $2.0 million reported in the first quarter of fiscal '09 and '08.

Income from operations for the quarter ended December 31, 2008, was $1.8 million compared to $2.7 million for the same period a year ago, a decline of approximately $0.9 million. Net income for the fiscal first quarter of 2009 was $1 million or $0.09 per basic and diluted share compared to $1.5 million or $0.14 per basic and diluted share.

This concludes the financial overview of the quarter. I will now turn the call over to Dave Chymiak, our Chairman of the Board.

Thank you, Scott. Over the past several quarters, we've seen a significant decline in our customer spending and increased competition from our OEM suppliers associated with the changes in the overall economy. And while the recession continues, we still have faith in the ability of our Company to produce solid financial results.

The strength of our business strategy which is based on strong customer relations and a reputation for having an on hand supply of equipment has been tested over the past several months and has passed with solid performance. Our sales, while down, are still strong and we continue to produce solid bottom line profits. While we're unable to predict when the economy will turn around, we're confident in our ability to compete in this environment and find opportunity wherever it exists. We still believe there are revenue opportunities for equipment sales as the analog to digital transition continues.

In addition, as many of you are probably aware, the government is planning to pass the stimulus bill as soon as this week. As it stands now, this bill contains a significant amount in spending on Internet and wireless communications technology aimed at improving the infrastructure. While there are no contracts or time frames for contracts for us to speak on this bill, it is something that we're looking forward to seeing boost the industry and possibly impact our Company.

As the market prices of ADDvantage shares continue to be pressured by the current economical environment, the Company continues to believe it is in the best interest of its shareholders to buy back shares. From October 1st, 2008 to January 31st of '09, we've purchased approximately 158,000 shares in the open market at an average price of $1.71. In addition, our management team has continued to personally invest in shares of the Company during this time frame. I believe this action speaks of the confidence we have in our Company and our intent to continue to lead ADDvantage in the right direction as we move further into the future. We appreciate the continued support of our shareholders and look forward to the opportunities that lay ahead for ADDvantage.

At this point, we would like to open up the call for any questions that anyone may have.

Today's question and answer session will be conducted electronically. (Operator Instructions) Our first question comes from Aram Fuchs with FertileMind Capital.

My first question is about the refurbished boxes. I'm a little confused by your explanations. You first say that there's declining demand but then you say there's declining supply. So, if you could just give us a little bit more color on that. Then I have another question.

Yes, this is Ken. We still haven't seen a large amount of boxes that's available. If we had an opportunity. What we're saying there is that if the opportunity was available, we would be able to buy some boxes and if the market returned, but during this time frame, there just wasn't an opportunity to sell them and we didn't have that many boxes anyway. One of the things we do have is in the last few weeks, we have made a large purchase of boxes of the newest of the legacy boxes which are HD which has a dual tuner which we think should help our revenue stream over the next few months. Dan, would you like to talk about that?

Yes, Aram, I want to elaborate a little bit more on what Ken said. For the last several quarters of fiscal 2008, we had some open purchase orders, some open-ended purchase orders to sell a lot of our digital converter boxes. During the first quarter of 2009, we saw those open purchase orders get closed because the companies in South Carolina that we were selling the boxes to struggled with the devaluation, specifically in Mexico. And because of that devaluation of their local currency, and the way we said it was the strengthening of the US dollar against their local currency, they put a halt on purchasing until they could see their local currency stabilize. And so one of the things we had was a cancellation of some of the open purchase orders that we had been filling over the past three and four quarters of fiscal 2008. It happened in the first quarter of fiscal 2009.

As Ken mentioned also, the other challenges that we had, we had some demand out there to sell boxes that we didn't have in inventory. The challenge that we faced in the first quarter of fiscal 2009 was that, again, and that trailed back into their last quarters of fiscal 2008, was there just hasn't been a supply of boxes on the market for us to purchase. And so, as a result, our inventory dwindled and the customers that did have demand for boxes, we couldn't match that with the boxes that we had in inventory during the first quarter of 2009. As Ken mentioned, at the end of his explanation, we've recently purchased a large quantity of boxes in February, early February of 2009, of some high demand, high or higher priced boxes that are more of the current boxes. These are the boxes that are the 6,000 series DVR boxes that have a recording device in them that are more of the higher demand boxes right now that we're seeing in the market place. So, we anticipate this will have some future impact on us in the upcoming quarters of fiscal 2009.

Okay. Great. That's helpful. So, basically, the boxes that you did have, the demand was temporarily canceled because of the weakness in the peso and then you couldn't buy the specific boxes that were in demand from your other customers.

Yes, and just to clarify that a little more, the boxes, several of the boxes we had just purchased, that are going through the refurbish process, as I stated, they're high definition boxes. The only difference basically is the new boxes is they don't have a cable card. So, you can see it is really current technology without the cable cards and there is a demand from the small operators domestically as well as internationally.

Okay. And then my next question is about your inventory. It seems a bit high up at 33 -- it hasn't dropped with revenue. Can you talk about that?

I'll address it first and we'll let Dave talk a little bit about that. When you get caught in this cycle and revenues go down and you haven't turned inventory, it is pretty apparent that that's exactly what's happened to us and many others in the market place. Dave, would you like to address that? Inventory is a tough one in our business. We have to have the products on the shelf, traditionally for the last 23 years has proved to be the right way. We are getting a lot more opportunities. We're being very cautious on what we're buying but we're being offered a lot of things at extremely reasonable prices. I feel the inventory is very, very well-balanced. We are looking at a strategy that we do not intend to be increasing inventory probably for the rest of the year other than replacing some inventory as we sell it, but again, our base is extremely solid. It's a question we go over daily, and all I can tell you is inventory is very good as far as I'm concerned. This is Ken again. One of the things we noticed not only in our industry but there is a lot of the reduction of inventories throughout the country, if there is a spike, and because of the lack of the OEMs wanting to produce just a few products, we think that we're in a pretty good position for just on hand products, on demand products. And the other thing that we're doing now is working with some of the other fiscal partners now as they do some larger projects, and they're coming to us as we're one of the premier fiscal partners in our part of the industry. So, that's an optimistic turn of events for us. So, over time, as Dave said, inventory build-up is not in our vision or in our window. But one of the things we have done is we've increased our refurbished a little bit because there's been one MSO out there that's been still completing their large upgrades across the country. From our visibility because each time we look at these lists, we bought these products at a very very comfortable price. As we move forward, we could do much bigger projects with refurbish that we couldn't do before, and we think it will really enhance our margins because our competitors in the secondary market have not had the funds to go out there and buy those products. So, from our visibility, we really are comfortable with the position we've taken in this refurbished gear. One thing I might make a comment about, we're selling a lot more digital products. And they're much more expensive. For example, we just have 150 pieces on inventory of one item. That cost us $400,000 each. It was our hottest selling item all last quarter. But that current inventory of 150, that's $600,000 alone just in that one and there's four or five different flavors. Plus we're handling digital products of a lot of different natures. Our inventory is broad, our refurbished gear, we've got a little bit more risk in it. We've probably got another $1 million than we had two quarters ago. But the gear is extremely well priced. And we're pulling it out. So, in that regard, we're (inaudible).

Okay, great. Great. Thanks for your time.

(Operator Instructions) Our next question comes from George Gaspar with Robert Baird.

Yes. Good morning. Question, just a little bit more on this general inventory value range. I know you had a policy of keeping that number pretty current as to its value. In terms of your current inventory, do you have any sense of what you might be looking at over the next three to six months in terms of valuation change on the inventory that you are carrying in general?

George, this is Dave. If the economy drops another 20%, 30%, that's a whole different model, and we're gearing up for that if it would happen also. I think our sales would be up there. Our inventory today, looking at it for obsolescence, we've got it pretty well taken care of today. Now, that doesn't mean the next six months, something else doesn't happen. It is going to have -- something is going to have to change otherwise our inventory is very well-balanced and it's very well priced. George, this is Ken. We had our board meeting yesterday, and the audit committee meeting with our outside auditors. This subject was brought up. One of the things they were cautioning their clients to do is not to over-react too quickly because you don't want a knee-jerk reaction on this because we think most of the gear we've been buying is either 750 or 870 which is very desirable, upgradable material in certain marketplaces. And as he said, we review it ongoingly every quarter but we really feel comfortable that there's going to be some upgrades. People have to upgrade in certain areas, and there's some funding that's available, but we're in a commanding position to give an alternative to buy new products. We're also finding that a lot of the companies are back to cutting down on not doing necessarily upgrades but they're going to keep their 750 gear and 870 which means there is a replacement market for lightning, tornadoes, everything else out there. So, as a company, we could be a little bit heavy but we're extremely pleased with what it is because the potential of the profit.

Okay. I don't know if you can do this but with what you're buying now on the HD side, how would the price compare? What percentage increase on a per unit basis would your selling price be relative to let's say if you were to look back over the last year and what your selling price was on the refurbished boxes? Can you give us a thought on what that would be?

George, this is Dan. A lot of times it depends on the type of box it is. The boxes that we sold primarily in fiscal 2008 were the DCT 2,000 series boxes. We marketed those boxes anywhere between $70 and $75 a box typically. But we also sold some of the high definition, they were just smaller quantities. That can go as high as $325 to $350 a box. There is always going to be a blend in there of different product lines.

So far in fiscal 2009, the business that we did do in the first quarter in the box business, we did about $300,000 and it was primarily the 2000 series model boxes still. We mixed in some 2500s in there as well in that $70 range. That's probably a pretty reasonable figure. The boxes that we recently purchased from Cox are a blend of both 2000 series and 6000 series but those 6000 series boxes, those high definitions, are in that $300 range. So, we're anticipating we're going to get a higher revenue per box average in fiscal 2009 than we got in 2008.

Another thing that we're in, it is very profitable for us if the mix comes in, we also are in the used modem business. And our margins on that, when we get a big enough pile together and we can sell them to somebody else, we'll either do one of two things. That's part of our e-scrap business. We either scrap them and make a small margin or we'll recycle them and refurbish them and if they turn out where they can be resold, that's a very high profit margin business. And so that's in addition. We also sell new modems, new Motorola and we sell new Cisco modems. We keep an inventory of that. That's a commodity item but needless to say the used ones do very, very well when we can find them and can accumulate enough to sell in bulk.

Okay. All right. That's a good explanation. Could I ask one question on your other facilities. As you look across the various facilities that you have, what do you look like for any kind of CapEx? I assume it is going to be relatively narrow this year. And is there anything that you really have to do on any of your facilities in terms of enhancing it or consolidations?

Your assumption is accurate, George. Right now, we don't have any significant CapEx on schedule for fiscal 2009. We did a lot of CapEx over the last couple of years. We built the facilities here in Oklahoma. We expanded our facilities in Missouri. And we consolidated our facilities in California. But in fiscal 2009, we are pretty well set for with our current facility structure. We don't have any plans at this time to consolidate anything or relieve any, or remove any of our existing facility structures.

How is your employment? Where are you on employment now, let's say versus three months and six months ago? What changes have taken place there?

We're down. Six months ago, eight months ago, with our Jones operations, we did some head count changes. We had a contract with a customer there that we were doing some recording business, and that contract expired and was canceled. So, as a result of that contract, we had a head count reduction of about eight. And then we've done some further changes with our Jones facility to reduce head count a little further. A year ago, we were probably in the 175 range. Now, we're in the mid 150. So, we've reduced head count by about 18 across the Company so far over the last four quarters.

Okay. I see. All right, thank you. And congratulations you guys. I think that the report was very good, all things considered, and I know you're really cranking it and you're working hard to get it turned around. It looks like you're making some early progress considering what's going on in the economy. I think you guys deserve a lot of credit. Thank you.

Thank you, George.

we'll take a follow-up question from Aram Fuchs with FertileMind Capital.

Yes, about the stock buyback, I'm just trying to figure out why the shares used in calculating only went down about 30,000 compared to the amount you bought back. Is that a scheduling thing or were there options granted? Thank you.

This is Scott. What that is, I assume you're talking about on the earnings per share calculation. What that is, is it is a weighting, so it is a weighted average per share. Next quarter, you'll see the full impact of that because a lot of those, it was purchased in over the quarter so that's why you're not seeing -- you're not seeing the full 142,000 we purchased through 12-31 as a reduction there. It wasn't necessarily as much as options or anything of that nature as it was just truly a weighting issue.

Okay. A follow-up to that, are you contemplating, given your illiquidity, are you contemplating any sort of dutch tender at a premium market?

This is Ken. I think that was suggested to us over the last two quarters, maybe in conference calls and others. We've locked at that. I think we have to look at our liquidity now from the Company's standpoint. And where we're at right now, I don't think -- we're still reviewing it but we're not in position we don't think at this time because you just don't know where the banks are going. At this time, we're doing fine with the banks and we don't have an excessive amount of money borrowed on our line but we sure don't want to get into a position that it would be so tight that we couldn't make opportunistic moves. It is still something we're talking about and discussing but today is probably not the right time.

Okay, great. Thank you.

We'll take a follow-up question from George Gaspar with Robert Baird.

Yes, thank you. One question on your long-term debt, or your notes payable, excuse me. What are the conditions of those? Can you relate, percent of interest you're paying and what are your markers on repayment date-wise?

Sure, George. I'll dive into that. With our long-term debt, we have two primary pieces to it. One is a $16.3 million term net that we entered into in December of 2007. And that's on a ten-year amortization schedule that matures in five years with a balloon on the remaining five. That $16.3 million piece of debt basically matures $400,000, a little over $400,000 a quarter. It is at a fixed rate because we entered into a swap transaction. So we fixed the rate just below 6%.

We also, in addition to that piece of long-term debt, we have a building note on our Oklahoma facility for about, it was originally entered into for 2.7. We have about 2.5 on it. That's floating right now at LIBOR plus 1.4%. So, it is just under 3% interest rate on that debt. So all of our debt -- and then we have some minor debt, couple hundred thousand dollars worth on a building in Pennsylvania. I won't elaborate on that because it is so small. The debt that we have on those two pieces is all below 6 and is priced we think at a very favorable rate.

We have a line of credit, as well. That's not long-term. That's short term. It has about $1 million right now on it currently. And that's at LIBOR plus 1.4% as well so it will be under 3%, as well. We feel like we're priced very effectively on our debt. That's probably also why, as Ken alluded to before, we don't want to have to go back to the bank and ask for any favors.

Right. That's true. Okay. Thank you.

With no further questions, I would like to turn the conference back over to Mr. Ken Chymiak for any additional comments.

We thank everybody for joining us today. We wish everybody well in this tumultuous time in our country and we are hopeful next time that things will change a little bit and we'll all have a much more successful report for everybody. Thank you, everyone.

That concludes today's ADDvantage Technologies conference call. Thank you for joining us and have a wonderful day.