ADDvantage Technologies Group Inc (AEY) 2009 Q3 法說會逐字稿

Good day, everyone, and welcome to the ADDvantage Technologies fiscal third quarter conference call. Today's call is being recorded. (Operator Instructions). For the opening remarks and introductions, I would like to turn the call over to Garth Russell, KCSA Strategic Communications. Please go ahead, Mr. Russell.

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

Before we begin, I'd like to begin today's call and remind you that the 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 systems 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 the 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 and Exchange Commission.

Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes, hereto included on Advantage Technologies' most recent report on Form 10-K filed December 10, 2008.

The guidance required 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 now like to turn the call over to Ken Chymiak, President and Chief Executive Officer. Ken, the floor is yours.

Thank you, Garth. Welcome to ADDvantage Technologies fiscal 2009 third 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'd like to make some general comments on the quarter before turning the call over to Scott, who will provide the financial information and a review of our financials. Then Dave will address the overall market conditions we are currently facing and expect to face in the foreseeable future.

Since the start of the downturn in the economy early last year, we have made several strategic adjustments to our business in order to ensure our success. The main focus throughout this period has been to maximize cash flow and maintain acceptable levels of profitability. I'm pleased to say that we've been able meet these goals during the one of the harshest economies any of us have seen in a long time, and have remained in compliance with all of our debt covenants.

Our focus on cash flow has not only allowed to us make our normal debt maturity payments totaling 1.4 million, but we also have paid down our line of credit by 2.3 million during fiscal 2009. This level of debt reduction shows the strength of our Company and its ability to continue to generate positive cash flows even during the most difficult times. I believe this also speaks to the health of our business, the vitality of the strategic edge we have in place, and our management's ability to keep costs in line with demand.

In order to meet our internal goals and objectives, many difficult decisions have been made along the way to reduce costs, including reducing our workforce. These actions, while difficult to make, have been good for the Company and its long-term health. We expect these cost reductions to reduce our expenses on an annualized basis by approximately $1 million.

From a competitive standpoint, ADDvantage Technologies Group remains the leading provider of on-hand, on-demand new equipment in the market, and is weathering the storm. It is my personal goal and the goal of each ADDvantage employee to emerge from this recession a stronger, more efficient Company.

Turning to the sales activity for the quarter, we've seen a net sales decrease for both new and refurbished equipment, while revenue for repair services remain steady, consisting of the service revenues attributed to customers choosing to fix their existing equipment instead of replacing it as they might have done in the past, as well as our increased marketing efforts related to these services.

Regarding the drop in new and used equipment sales, as we've mentioned in the past, the recession has caused a large number of our customers to delay many of their expansion projects and bandwidth upgrades. This is due primarily to the downturn in the global economy and credit market crisis, which has caused our large and small MSO customers to conserve cash and limit their access to affordable financing options to perform upgrades.

The downturn in the demand has also changed the competitive landscape on the supply side, as our OEM suppliers have been better at managing the production cycles, order backlog and lead times. This in turn reduces the need for on-hand, on-demand services.

Although we have seen a drop in the volume of upgraded projects, we expect the growing demand for additional bandwidth will limit our customers' ability to put these investments off for an extended period of time. We also believe that as the credit crisis eases and financial institutions regain their ability to lend money, coupled with the U.S. Government's economic stimulus package funding becoming available for bandwidth upgrades for rural communities, our customers are beginning to make their needed bandwidth upgrades and plant expansions. As I mentioned earlier, our employees have worked very hard to ensure that ADDvantage Technologies will emerge from the recession in a position of strength, and believe we are on the right path to accomplishing that goal.

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 third quarter of 2009 were 9.1 million, which was a decrease of 31% when compared to 13.2 million for the same period of fiscal '08. For the fiscal third quarter, revenue from new equipment was down 27% to 6 million for the three months ended June 30, 2009, from 8.2 million for the same period last year; while refurbished equipment was down 51% at 1.8 million compared to 3.6 million for the fiscal third quarter of '08. Revenue from repair services held steady at 1.4 million for the three months ended June 30, 2009, compared to same amounts for the same period last year.

As Ken previously stated, we experienced a decline in new and refurbished equipment sales due primarily to the downturn in the economy and the credit market crisis which caused our large and small MSO customers to continue to delay plant expansions and bandwidth upgrades as part of their efforts to conserve cash and limit their capital expenditures.

Process sales for the three months ended June 30, 2009 decreased 37% to 6.2 million from 9.9 million in the same quarter a year ago, primarily attributable to the decreased sales of new and refurbished equipment. Gross profit for the recent quarter decreased to 3.0 million from 3.4 million in fiscal 2008, due primarily to the overall decrease in net sales. Our gross margin percentage increased to 33% from 25% in the fiscal third quarter of '08, due primarily to product line mix changes.

Our operating selling and general administrated expenses decreased to 1.7 million in the third quarter of 2009 compared to 2.1 million in the same quarter of '08.

As of June 30, '09, we have reduced our headcount by approximately 15% as compared to our headcount as of June 30, 2008. As Ken mentioned earlier, we expect these reductions, along with other cost savings measures we have taken, these should reduce our expenses on an annualized basis by approximately $1 million. Income from operations remained flat at 1.3 million for the three months ended June 30, '09 and '08, and net income for the third quarter of 2009 was $0.7 million or $0.06 per basic and diluted share compared to $0.6 million or $0.06 per basic and diluted share last year.

Now on to results for the nine months ended June 30, '09. For the nine months ended June 30, 2009, net sales were 32.1 million, a decline of 23%, from 41.8 million for the same period of last year.

New equipment sales for the first nine months of fiscal 2009 were 20.9 million, compared with 25.8 million in the previous year, which was a decrease of 19%; while sales of our refurbished equipment decreased 40% from 12 million in fiscal '08 to 7.2 million in fiscal 2009. Revenues from our repair service business during the first nine months of fiscal '09 were 4 million, relatively flat from 4.1 million a year earlier.

Cost of sales for the first nine months of fiscal 2009 decreased by 24% to 22.2 million when compared to 29.1 million a year ago, which is primarily attributable to the overall decline in net sales. And gross profit decreased 22% to 9.9 million compared to 12.7 million for the nine months ended June 30, 2008, with the gross margin percentage decreasing to 31% for the nine months ended '09 compared with 30% for the same period of last year.

Our operating, selling and general administrative expenses were 5.5 million for the first nine months of 2009 compared with 6.2 million in the first nine months of the previous fiscal year. And income from operations for the nine months ended June 30, 2009 was 4.4 million compared with 6.5 million for the same period of last year, which is a decline of 32%.

Net income attributable to common shareholders for the nine months ended June 30, 2009 decreased to 2.3 million or $0.23 per diluted share from 3.5 million or $0.34 per diluted share in the same period a year ago. And during the nine months ended June 30, 2009, we have acquired 162,864 shares of our Company's common stock on the open market at an average price of $1.72 per share.

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

Thank you, Scott. As Ken mentioned in his earlier comments, we have seen a very challenging market during the first three quarters of the fiscal 2009 year. We have seen large and small customers cancel upgrade projects, postpone upgrades and even eliminate their capital expenditure budgets for the year. These customer decisions are being made with the short-term goal of conserving cash. And while we have definitely seen the impact of these decisions on our topline, we have adjusted our own business activities and expenses to remain successful. We currently believe our industry and the market has hit bottom, and we are looking forward to an increase in activity in the upcoming quarters.

One area of our business we are seeing an increase is in quoting activity for new projects. In addition, the first wave of stimulus funding associated with the increased broadband access in rural communities is expected to be released in September 2009. This funding, coupled with the stabilization in the banking industry ,should offer several larger and smaller MSOs access to the capital they need to continue to upgrade their equipment and remain competitive.

I believe one of the most important competitive strength ADDvantage has is our inventory. We have continued to invest our excess cash in current inventory, including head-end equipment and converter boxes. These recent investments in our current high demand inventory, as well as our broad-base of on-hand, on-demand inventory not only allow to us maintain a base of current business, but also position us for growth when our customers restart their upgrade activities.

In closing, we appreciate the continued support of our employees, customers, manufacturing partners and shareholders. We look forward to the opportunities that look ahead for ADDvantage. This concludes our prepared remarks. Now we'd like to ask the operator if he would open up the call for any questions that you might have.

Thank you. (Operator Instructions). We will take our first question from Aram Fuchs with Fertilemind Capital.

Yes, I was wondering if you could talk a little bit more about your inventories. I noticed that first tick down in a few quarters, and I was wondering what specifically do you worry about in there, and how are you adjusting to this constantly changing environment? And then after you answer that, I will have a follow-up.

Okay, yes. This is Ken. As we always say, we always review that on a quarterly basis, and as we've been having some buying opportunities on some new surplus and used surplus equipment the last few quarters, we noticed most of our competitors don't have the cash flow to handle these opportunities, that we are lowering our cost of our inventory, making it -- we think puts us in a good position to go forward. Dave, you want to address the new side of the business with Cisco?

There's a lot of new products, and they run a lot -- the cost per item is higher. I'm very, very, very comfortable with our inventory. It's better in my opinion than it was one year ago today. We are in the position that if the turnaround comes, and when it comes around, our inventory -- that's when we do well. We have a good rounded inventory. We are not heavy in any one place that I can make a specific suggestion of. Our warehouses are full. We have got the cleanest used inventory I've ever seen. We are in position if and when any large orders come along that the profit margin will be good.

Dan, you want to talk about the converters?

Yes. Aram, you've raised a good question, which was the down tick in the inventory. I think that if we were to go through the inventory and dissect it and say what's turned up and what's turn down, we've actually had increases in our inventory in some of the faster moving product lines, which is primarily our head-end products. These are the products that receive, channelize and then transmit the cable signals from the MSOs to the actual recipients, which are the consumers.

As Dave mentioned, our head-end products -- the products that we are moving right now are, on a per-unit basis, a much higher cost product than some of the product lines that we've carried in the past -- some of the encoders that we are buying now are much more expensive. The receivers, the power view receivers, and transcoders that transcode signal from an MPEG-4 to an MPEG-2, those are much more expensive products today than they were with -- they were simpler products in the past as well, so they weren't as expensive.

So what we're seeing is we're seeing probably some investments, as Dave said, in some higher end inventory, which is our head-end. And then where we are reducing inventory is we are not replacing necessarily the quantities that we've had in the past of our line gear inventory, our transmission inventory. We are continuing to work down those inventory levels that we had high quantities in; and we are not replacing those as we work those down, so it's more of a mix transition.

On the box side of the business, we've actually increased our inventory as well over the last year by about $1 million. We've added -- the majority of the boxes that we've added in the past three quarters have been the 6400 Series, which are the high-end DVR digital converter boxes. These handle HD signals. They also handle what we call dual tuners, that you can watch one video stream and record a different channel all at the same time.

We believe that these -- and these boxes cost considerably more than the lower end digital converters that we've carried in the past years; but we believe that these are the boxes that are in high demand today and also will be in high demand in the upcoming months. So hopefully that explains some of the transition in our inventory over the past nine months, and I'll be happy to field another question on that if you have anything else, Aram.

Yes, I guess if you're content with inventories right now, if we do see sales pick up, we should see inventories pick up as well? Because what's happened over the last year or so, is sales -- your inventory to sales ratio has changed dramatically.

I don't think that's -- optimistically, it could go the other way, because we won't have a necessity to buy inventory unless there's a large, large uptick in demand; because right now, we think we can beat many of the -- particularly the transmission side or upgrades of the plant -- that we can meet many of those opportunities with the equipment we have, because -- Dave, wouldn't you agree? You have a lot of the equipment that's the latest equipment out there that we bought a year ago or so with the thoughts that that's where the market was going, but then all of a sudden the cash flow was diminished by the large MSOs and there wasn't the demand. Would you agree with that?

Yes. Our mix has changed dramatically to our good; meaning, we have been moving product or not replacing it, and we have been buying the latest and greatest product at a discounted price, of course, whenever we buy it if we buy it right. And like I said, I feel it's very rounded. We've got extremely good inventory. I'm very pleased.

Aram, and to further David and Ken's comments -- this is Dan -- and I will reiterate Ken's comment. We believe we have got a sufficient inventory for our revenue base today. We do not necessarily see inventory increasing as our revenue increased, unless we add different product lines to our existing mix. We would, in fact, think that as the market turns, we will actually be working down our inventory from our current position because there is a lot of -- as Dave said, there is a lot of product lines that we will not be building back up to the historical inventory levels that we have maintained in the past and currently maintain.

We are not being offered product either. I usually bid on a lot of lists. The used gear coming out, the upgrades aren't there. We have bought everything we could possibly afford that would make sense, but there's just not very much gear coming out. So I don't anticipate a lot of used gear, because everybody is going to have to cycle up and order new gear before they can sell used gear.

We've covered quite a time and are going in a circle here, but we are very comfortable with our inventory.

Okay. And then last quarter, you had mentioned that you were looking into expanding your rural phone company client list. This quarter in the script you didn't talk about it. Is that still something of interest?

Well, we think that -- if you read the stimulus objectives for the rural broadband -- or in other words, you have an Internet that's relatively available in the rural markets, that money has not been released yet. I don't think it's intended to be released until September, October, then there's going to be a rev-up time. So I don't think anybody has a clue on that yet.

We do business with smaller telcos all the time, because they have to be in this industry as well as the cables now in their spectrum. So we see that competition; but I think everybody is sitting on the hands right now, said what are the details, where is the money going to be funded at and how are we going to have an opportunity to get it? So I don't think you see any purchases of any significant products yet from the stimulus.

Great. Thanks for your time.

(Operator Instructions). We will take our next question from Michael Potter with Monarch Capital.

Hey, guys, just -- I guess just a little update. I know it's not as material; but where are we with those converter boxes that were purchased, I guess, a year and a half ago?

Dan has talked about those numbers. Again, one thing that we all must understand, it's surprising that there hasn't been more boxes available from the large MSOs out there. We really -- we have a good, round mix on them, particularly on the Motorola boxes which is where the demand is. But one of the things that's happening in South America, there is no money available, and what they are is a difficult to get or able to get out of the country because of the currency. So that's been a null issue there.

But we think we are in real good shape as far as being able to be responsive to the competition in that market where we are getting very aggressive. But, again, the funds aren't readily available. It's been a little difficult there. Dan, you want to talk about the mix?

Yes, the boxes that we currently have in inventory, Michael, really aren't the boxes from a year and a half ago. We are continuously buying and selling converter boxes. A lot of the boxes we have right now are boxes that we've acquired in 2009. We've done a couple of large purchases this year through auctions, and the majority of our inventory rests in the new 6,000 Series -- not -- the newer 6,000 Series boxes of Motorola, which are the dual trigger DVR boxes. So that's really where the majority of our dollars in inventory on our converter boxes lie.

We still carry a large number of the older DCT-2000 Series boxes, which are the highest demand boxes right now in Latin America. But that's not where the majority of our dollars are. Our dollars are actually now more in the 6000 Series boxes.

Okay. And Ken, can you give us an update on the current IR strategy? Is the Company going to be presenting at any conferences coming up in September?

We are working with that with Garth with KCSA. We would welcome some suggestions, if you guys can give us an idea where we can get the biggest bang for our bucks. We've been a little hesitant as we've looked at some of those if it's just a way to get our money or if we can do some good for the shareholders and for the -- but we haven't come up with that. Michael, I know you are in New York there and you can probably give Garth and I some -- off-air -- you can probably give us some recommendations, because Garth and I have been talking about one or two of these in the last few weeks.

Okay, I'll be happy to. Thanks, guys.

Thank you, Michael.

Our next question comes from George Gaspar with Independent Analysts.

Yes, thank you; and first of all, just -- not just -- but congratulations on your performance in a difficult market environment. Your margins look pretty good on a relative basis considering the revenue decline. Could you -- and maybe you mentioned this, but how did your employment change in the last quarter? And then also so far this fiscal year?

Garth, this is Dan. We started addressing -- or pardon me, I'm sorry, George -- George, we started addressing our employment issues throughout the year starting in the first quarter. And as we saw the business activity continue to drop over a six-month period, we had an employment reduction really across every individual subsidiary in our Company and adjusted the headcount in each location to its business volumes. Overall, we reduced our staff right around 20 -- 20 persons -- FTEs, full time equivalents, throughout the Company, so that represented about a 15% drop in our total employment. Not -- just to let our listeners know, that was the first headcount reduction we've ever done in our 22 years of business. So we've been in business many, many, many years; but that kind of shows you -- shows us -- the unique business environment we operate in today.

One of the things, George, that we have that is of concern to us that we are so thin, if we miss one or two people at any one location for any length of time, we have to really scurry to -- that's where other employees are picking up the slack, and we just want to commend them for their work on our behalf.

Okay, so if I understand that now, that 20% decline is over the nine-month period?

15% -- he was talking 20 people.

20 people. Okay. All right. And then in set box area converter markets, are there -- do you see any technology changes that are coming into the market that could broaden business for you? Can you make any comments on the technology that's moving forward here in general?

I think -- this is Ken -- there's always a lot of ideas out there. There's a lot of press out there, as Dave and I have seen over the years in the industry; and most of the time it takes a long time to get from the conception to the reality phase of it, then it gets down to the cost of the technologies.

There's some -- everybody is talking about IPTV and they are looking at other options out there; and that's where the telcos are looking at because it seems to be a lower cost way entry into the market. But on what we see, the MSOs are reluctant to spend money; and in one of the publications in our industry, Communication Technologies, there was an article, and one of the large MSOs had bought 2 million boxes in '08. But as they said in the article, MSOs are reluctant to spend money for hardware because they have got to conserve it; and that was mandated with the cable card issue or the security issue the little cards in the back of the box, but it really hurt the small MSOs and the mid-size MSOs. It just took their cash flow, their inability to do some necessary other upgrades because of the necessity of buying these newer boxes.

So we have not seen a large availability of some of these legacy boxes out there. So it tells us even though they are buying that many boxes and spending large amount of money, there is no rush to do it. One of the things that's failed for the FCC mandate is consumers aren't buying their own boxes -- it doesn't make any sense. It's been a total failure from that standpoint, that you don't see a rush to do that; because why would anybody want to spend for the latest technology -- around $500 -- and find it obsolete a year later, and who are they going to get to repair it?

Okay. And then lastly, any thoughts of -- I don't know if you've mentioned anything about stock buyback. Any further intentions based on price and based on your book value and your EPS range right now?

We have looked at that again and again. We've been pretty well locked out of the market because of the rules; and unless the trading volume is up there, it's just very, very difficult to get in there. So do we monitor? Yes. Are we always reviewing it? Yes. Do we still have some availability from our resolution, what have we've already announced, that we had the ability to buy $1 million worth over a certain period of time, and we haven't come anywhere close to that. About $300,000?

We have $700,000.

Yes, we spent about $300,000. And the thing that's different from us today going forward, even at the end of the quarter, historically we always pay down our debt on a line of credit.

Right.

Today on our operating line of credit, we have no debt and we have about 700,000 in the bank. So -- but we are trying to conserve that, and that shows we are watching our purchasing; but we always have Uncle Sam lurking out there for some more taxes -- no payment due. But we are really in good shape there. We reduced that down to zero; but at times it will fluctuate up and down, but we are trying to keep that as close to zero as we can.

Okay. All right. Thanks for the explanations.

And due to no further questions in the queue, that will conclude today's question and answer session. I would now like to turn the call back over to management for any closing remarks. Mr. Chymiak?

Thank you. We thank everybody for joining us today; and if you have any additional questions, always -- you can always get a hold of myself or Dan or Dave or Scott, because we are open to questions, suggestions and ideas. Have a good day.

That does conclude today's conference. Thank you for your participation.