ADDvantage Technologies Group Inc (AEY) 2009 Q2 法說會逐字稿

Good day, everyone. Welcome to the ADDvantage second quarter fiscal 2009 earnings conference call. Today's call is being recorded.

For opening remarks and introductions, I'd like to turn the call over to Garth Russell of KCSA Strategic Communications. Please go ahead, Mr. Russell.

Thank you. Good afternoon everyone, and welcome to ADDvantage Technologies fiscal 2009 second quarter conference call.

Before beginning today's call, I would like to remind you 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, multiple system operators, as well as 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 results 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 Securities and Exchange Commission.

Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and other notes that are included in ADDvantage Technologies' most recent form 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 this presentation.

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

Thank you, Garth. Welcome to ADDvantage Technologies' fiscal 2009 second quarter conference call. With me today is Dan O'Keefe, our Chief Operating Officer; and Scott Francis, our Chief Financial Officer. David Chymiak, Chairman of the Board, is on jury duty today. First, I'd like to make some general comments on the quarter before turning the call over to Scott, who will provide our listeners with a review of our financials. And then Dan will address the overall market conditions we are currently facing and expect to face in the foreseeable future.

Overall, our net sales were down across-the-board including new equipment, refurbished equipment, and repair services. As the recession continues, many of our customers have delayed many of their expansion projects and bandwidth upgrades. This is due primarily to the downturn in the global economy and credit risk, which has caused our large and small MSO or cable operator customers to conserve cash as well as limit their access to affordable financing to perform upgrades. The downturn in the demand has also changed the competitive landscape on the supply side, as our OEM suppliers have become better at managing their production cycles, order backlog, and lead times. This in turn reduces the need for on hand on demand services.

Also, we have seen a drop in the volume [of] upgrade projects. We continue to expect that the growing demand for additional broadband will limit our customers' ability to put events [and installs] for extended periods of time. We also expect that as the credit crisis eases and as the financial institutions regain their ability to lend money, coupled with the expected economic stimulus package funds available for bandwidth upgrades for rural communities, our customers will begin to make their needed broadband and bandwidth upgrades and planned expansion.

We continue to be focused on maintaining our cash flow and maintaining our liquidity. In spite the recessionary market, we're still profitable and cash flow positive due to actions we have taken and continue to take to reduce operating costs and manage our operations. We continue to maintain a position to strengthen the market as the on hand supplier of equipment and we continue to monitor and evaluate our business in order to emerge from this recession in the best possible position.

With that, I'd 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 second quarter of 2009 were $10.1 million, which was a decrease of 27% when compared to $13.9 million in the same period of fiscal 2008. For the fiscal second quarter, revenue from new equipment was down 25% to $6.7 million for the three months ended March 2009 from $8.9 million for the same period last year, while refurbished equipment was down 34% at $2.3 million compared to $3.5 million in the fiscal second quarter of 2008. Revenue from repair services decreased 20% to $1.1 million for the three months ended March 31, 2009 from $1.4 million for the same period last year. As Ken previously stated, we experienced a decline in revenue across all lines of business due primarily attributable to the overall downturn in the economy and credit crisis, which did cause our large and small cable operators to continue to delay plant expansions and bandwidth upgrades as they try to conserve cash and limit their capital expenditures.

Cost of sales for the three months ended March 2009 decreased 24% to $7.1 million from $9.3 million in the same quarter a year ago, which is primarily attributable to the decreased sales in new and refurbished equipment. Our gross profit for the recent quarter decreased to $3.1 million from $4.6 million in fiscal 2008 due primarily to the overall decrease in our net sales and our gross margin percentage decreased at 30% from 33% in the fiscal second quarter of 2008. This was due primarily to product line mix changes in our revenue.

Operating, selling, general, and administrative expenses decreased to $1.7 million in the second quarter of 2009 compared to $2 million in the same quarter of 2008. Income from operations for the quarter ended March 31, 2009 was $1.3 million compared to $2.5 million for the same period a year ago, which is a decline of approximately $1.2 million or 46%, and net income for the quarter of 2009 was $0.7 million or $0.07 per basic and diluted share, compared to $1.4 million or $0.14 per basic and diluted share.

Now for our results of the six months ended March 31, 2009. For the six months, net sales were $22.9 million, which is a decline of 20% from $28.6 million for the same period of last year. New equipment sales for the first six months were $14.9 million compared with $17.6 million in the previous year, which is a decrease of 15%, while sales of out refurbished equipment decreased 35% from $8.3 million in fiscal 2008 to $5.4 million in fiscal 2009. Revenues from our repair services business during the first six months of fiscal 2009 were $2.6 million, which is relatively flat from a year earlier.

Cost of sales for the first six months of fiscal 2009 decreased by 17% to $16 million when compared to $19.3 million a year ago. This is again attributable to the overall decline in sales. Gross profit decreased 26% to $6.9 million compared to $9.3 million in the six months ended March 31, 2008, with the gross margin percentage decreasing to 30% for the six months ended March 31, 2009 compared with 33% for the same period of last year.

Operating, selling, general, and administrative expenses were $3.8 million for the first six months compared to $4.1 million in the first six months of last year. Income from operations for the six months ended March 31, 2009 was $3.1 million compared to $5.2 million for the same period last year. Net income attributable to common shareholders for the first six months ended March 31, 2009 decreased to $1.7 million or $0.16 per diluted share from $2.9 million or $0.28 per diluted share.

During the quarter, the company also continued to repurchase shares in the open market as part of the previously announced stock repurchase program. During the six months ended March 31, 2009, we acquired 161,064 shares of our company's common stock in the open market at an overall average price of $1.71 per share.

This concludes the financial overview of the quarter, and I'll now turn the call over to Dan, our Chief Operating Officer.

Thank you, Scott. This quarter, we saw a measurable decrease in customer spending across-the-board in the cable television equipment industry. This decline is in line with most industries in the US and around the world as companies have tightened their belts. For ADDvantage, I'm pleased that we have been able to cut costs and manage our business effectively, remaining cash flow positive and reporting a net income for the quarter and six months ended March 31, 2009.

We continue to be focused on maximizing our cash flow and maintaining our liquidity. Also in the quarter we were able to build our inventory of used converter boxes to refurbish, which we should have included in our sales over the next several quarters. These converter boxes are high end, high definition boxes or HD boxes with DVR capabilities and there's a strong demand for these boxes currently.

The strength of our business strategy, which is based on building strong customer relationships and a reputation for having an on hand supply of equipment, has been seriously tested over the last 12 to 18 months. However, our sales, while down, are still strong and we continue to produce solid bottom line profits and remain cash flow positive.

According to many economists, the recession has been going on for almost 18 months now and is likely to be entering its final stages. While we too would like to see the recession come to an end quickly, we are not depending on it when we look to manage our own business. As such, we are focusing our sales and other staff members on training and improving our internal operating processes to offer expanded services and support to gain market share. In addition, we expect the economic stimulus package passed by Congress will increase demand as the stimulus package contains funding for bandwidth upgrades in rural communities.

While many management teams have made similar statements, ADDvantage and its management teams have taken an extra step. As Scott discussed, ADDvantage has purchased shares in the open market over the past six months and our management team has made personal investments in the company's stock during the same period. I believe these actions speak to the confidence that we have in our business and our intent to continue to lead ADDvantage in the right direction as we move to the future.

We appreciate the continued support of our shareholders and look forward to the opportunities that lay ahead for ADDvantage. At this point, I would like to open the call up for any questions that any of our listeners may have.

(Operator Instructions). We'll go first to Aram Fuchs of Fertilemind Capital.

I was wondering if you could talk about your inventory levels. They don't seem to be declining as sales decline?

Thanks for the call. Dan, do you want to address that question?

Sure. The inventory that we've increased is directly related to opportunities that we're currently moving products on. We've done some purchasing over the last 90 days of some boxes. Those are -- and it was a large purchase of in excess of $1 million worth of high end HD high definition DVR boxes. And those boxes, which we really did not maintain many in stock before, are in high demand in the marketplace. It was a large bid that came out, and we believe that that will translate into revenues in the upcoming quarters as we're able to refurbish those boxes and present them to the marketplace. We're already getting orders that are coming across our sales team right now for those.

Other opportunities have come up during the quarter are really related to purchasing the latest and greatest products that we believe we'll be able to turn in the next three to six months. We're not buying inventory that's not turning. We're only looking at those items that are going to be fast turning over a period of a short quarter or two quarters that we think are a good opportunity. We're still in the business of maintaining an on hand supply of inventory. And so while we have aspirations of being as efficient as possible with our inventory, also part of our model is making sure that we have the products that the customers want when they need them.

This is Ken. One of the things that's happened is with our relationship with Cisco, some of the product lines that they are really focusing on and some of the opportunities we have are with some of the largest IT companies in the United States. And some of those products are $30,000 to $40,000 a unit. So it doesn't take many of those to increase your inventory. And certainly other opportunities brought to us by Cisco, where there's going to be some new programming out there and they need a specific product. And we bought that -- those items and that particular product based upon what the deployment of that in the next few months.

But the other thing we're working on and we're implementing as we talk, a disciplined purchasing strategy as we go forward over the next two years, and part of that strategy is to reduce inventory and a systematic approach based on our turn on -- particularly on the new equipment. But we still have to be cognizant of the market and what products we are selling in this current economic environment. And we continue to buy those products and meet the just in time needs, but on a limited basis.

So you're saying that it's overly simplistic to just look at the sales decline, assuming the 20% range, and think that inventories should be $6 million lower?

We look at that in a monthly and right now we're looking at a weekly basis. It would normally. But my analogy is like I was an automobile dealer for years, and some of those things that the days supply goes up as the sales go down. And that's what happens in certain of these instances. But what has happened in the last few months is that the opportunity of the converter boxes wasn't available before. And so we made the decision if we're going to be in that business to get inventory, it's the first time that amount of inventory has been available for us. There's been a little price decline on some of the older generation boxes,and we are rethinking that strategy as we go forward. But on the rest of it as we go forward, yes, we're not stocking up this month going forward. We're watching the purchases we put a freeze in place other than the normal purchase other than small refurbished opportunities, that there's great buys out there. But it's a little simplistic to think that.

Aram, you made a good point which is, is it overly simplistic in that scenario. And I think as Ken said there's some truth in that statement. It may be a little overly simplistic. Our product lines are so diverse and we have to move with the industry, and where we have a lot of inventory right now is in the line gear and in the what we call the outside plant. And that is really where the business has fallen off. We don't maintain an excessive amount of inventory in those areas, but we do have a large inventory of line gear that -- as the plant expansions and as the upgrades have really come to a declining value, I won't say to a halt but to a much reduced pace, our inventory in that is at a higher level than it should be. Ken gave the analysis of a car dealer. When you've got those cars on the lot, you can't -- if nobody is coming to buy them, you really can't just get rid of them. We do have a lot of line gear inventory. It's something that when we see the market turning back to a bandwidth expansion mode that that line gear will move. But we can't get rid of it when the market is not buying it. We don't necessarily turn that back to our OEM suppliers either. We maintain it ourselves because they offer us a good discount on buying it. We maintain the risk of holding it.

One of the other things we have to realize, as long as we're maintaining the margins that we are -- if we sell an additional $6 million worth of product, we only are really moving somewhere around $4 million. But just so everybody knows, we're not turning down any opportunities that means that we can move product but we still want to maintain the margins. But we are looking at every opportunity that we have to sell the products.

And then you mentioned that you are reducing costs in this environment. Can you be a little more specific on where in the organization or how you're doing it?

We've been aggressive across-the-board in every expense category that we've been able to trim, we've trimmed. Over the first two quarters, we cut our operating expenses a little bit over $700,000, and already in the third quarter we've made operational changes that have cut an extra 900,000 out of our operating expenses. So far, year-to-date, we've cut on an annualized basis $1.5 million, which is just around 17% or 18% of our operating cost.

And that's been done through leases, that's been done through headcount, that's been reviewing every expenditure across-the-board. So we really finetuned this, and unfortunately during this time there's personnel we've had to cut, which is the first time in our history -- but we're looking at everything.

Okay, and my last question is can you talk about the evolution of your relationship with Cisco since they bought SA?

Yes. That's a very good question. They've renewed our international and domestic contracts through January of 2010. It's ongoing. They were aggressively looking for realignment of the SA brand within the Cisco organization, but based upon the economy, they've had other issues they're more focused on. We think there's going to be some opportunities, but again, we thought some would have happened several months ago. We've had high level meetings and ongoing discussions. But again, they've put it off until later in the year if not until next year. So that's all we can talk about that because we really don't know where we are going to go with that.

Okay, thanks for your time.

Thank you, Aram.

Having no further questions in queue, I'd like to give everyone an additional opportunity. (Operator Instructions). At this time we have no further questions in queue.

We thank everybody for joining us today. We look forward to visiting with you. If anybody has any questions we're always available, and we wish you a happy Memorial Day and let's have a great summer. Thank you.

And that does conclude today's conference, ladies and gentlemen. Again, we appreciate everyone's participation today.