ADDvantage Technologies Group Inc (AEY) 2010 Q1 法說會逐字稿

Welcome to the ADDvantage first quarter fiscal 2010 earnings conference call. Today's call is being recorded. For opening remarks and introductions I would like to turn the call over to Garth Russell. Please go ahead.

Thank you. Before we begin today's call, I would like to remind you that this conference call may contain certain forward-looking statements which are subject to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding the future events such as the ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and the 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 the actual future events or results due to a variety of factors such as those contained in ADDvantage Technologies' most recent report on Form 10-K on file with the Securities and Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes thereto included in ADDvantage Technologies' most recent report on Form 10-K filed December 17, 2009.

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 the 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 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 to ADDvantage Technologies' fiscal 2010 first quarter conference call. With me today is Scott Francis, our Chief Financial Officer.

First, I'd like to make some general comments regarding our performance over the past quarter and address the overall market conditions we are currently facing and expect to face in the foreseeable future. I will then turn the call over to Scott, who will provide the financial results for the quarter ended December 31, 2009.

In the first quarter we reported net income of approximately $0.08 per basic and diluted share and continue to have positive cash flows. despite lower revenues in each of our business segments, as we anticipated. Our results for the quarter represent a solid performance as we execute our strategic operational financial plans and we continue to manage our business in order to achieve long-term profitable growth and to keep our financial position strong.

As stated -- started out in fiscal 2010 our goal for the quarter was to maintain the cost controls implemented last year in order to maintain a healthy, profitable business. Overall, these measures, along with our goal to continue to reduce inventory have helped us maintain our profitability and positive cash flow position despite lower revenues resulting from the overall downturn in the economy. While the economists generally believe that the economy is on the verge of or is already in the early stage of recovery, we believe demand for our products will be flat or slightly down for fiscal 2010.

We have based this expectation on our MSO or customers' decision to maintain their current budgets or cut spending even further than in 2009 on all nonessential investments in equipment and services. This outlook also takes into the fact that the major economic trends which historically affect our business have not materially changed much over the past quarter, including the housing market, consumer confidence and unemployment. These trends each have a direct impact on our business and the cable industry as a whole.

The surge in new home construction in 2005, 2006 and 2007 created a need for MSOs to expand and invest in their networks to service the millions of new homes being built each year. As the development of new subdivision multifamily housing developments rapidly declined in 2008 and 2009, so did the sales for the cable equipment that supported it.

Secondly, high unemployment in the United States has impacted the MSO's forecasts and budgets in 2009, which continued in 2010. It started with the [MS's] being concerned that the cost-conscious customers reduced their [seats or] cable television, Internet or phone services. As a result, the MSOs delayed plan expansions and bandwidth upgrades in order to limit capital expenditures and conserve their cash. Though most of the large MSO's have actually reported steady customer retention, they are still careful managing their budgets and expect to do so until the unemployment numbers improve.

As we have discussed in previous calls, lower demand for equipment and services has also affected the competitive landscape in which we operate. We have to compete more often with original equipment manufacturers in the current environment than we had previously. This is primarily because the OEM suppliers' order backlog and lead times have decreased due to decreased demand. This, in turn, has reduced the need for our on-hand, on-demand service to some extent. We expect that, as the economy improves and the credit crisis eases, our customers begin to increase their capital expenditures for their necessary bandwidth upgrades and plant expansions. We have made and continue to make changes to our business model to enable us to continue to be successful. From a competitive standpoint, we still remain the leading provider of on-hand, on-demand equipment in the market. Even though we are actively working to reduce our overall inventory on hand, we have not abandoned our on-hand, on-demand philosophy of maintaining the inventory.

We still have a comprehensive mix of new and used on-hand inventory that satisfies our customers' needs. It remains our goal to emerge from this recession a stronger, more efficient Company by proactively reacting to the circumstances presented to us and not passively standing by waiting for a quick economic recovery. I believe we're on the right path to achieve this goal.

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

Net sales for the fiscal first quarter of 2010 were $10.2 million, which was a decrease of 20% when compared to $12.8 million for the same period of fiscal 2009. For the fiscal first quarter, revenue from new equipment was down 20% to $6.6 million for the three months ended December 31, 2009, from $8.2 million for the same period last year while refurbished equipment was down 27% at $2.3 million compared to $3.1 million for the fiscal first quarter of fiscal 2009.

Revenue from repair services declined slightly to $1.4 million for the three months ended December 31, 2009, compared to $1.5 million 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, which did cause our large and small MSO customers to continue to delay their plant expansion and bandwidth upgrades as part of their efforts to conserve their cash and limit their capital expenditures they incur.

Cost of sales for the three months ended December 31, 2009 decreased 23% to $6.9 million from $9 million in the same quarter a year ago, primarily attributable to the increased sales of new and refurbished equipment. Gross profit for the recent quarter decreased to $3.3 million compared to $3.8 million in fiscal 2009, due primarily to the overall decrease in the net sales.

However, our gross profit margin increased to 33% compared to 30% of the fiscal first quarter of 2009, due primarily to sales of higher-margin products and higher-margin headend repairs. Our operating, selling, general and administrative expenses decreased to $1.7 million in the first quarter of fiscal 2010 compared to $2.0 million in the same quarter of fiscal '09. This decrease is due primarily to headcount reductions we performed in fiscal 2009.

Income from operations in the first quarter of 2010 was $1.6 million compared to $1.8 million for the same period last year and then net income attributable to our common stockholders for the first quarter of 2010 was to $0.9 million or $0.08 per basic and diluted share compared to $1 million or $0.09 per basic and diluted share last year.

Our EBITDA, which would be earnings before interest, income taxes, depreciation and amortization, for the first quarter of 2010, was $1.7 million compared to $1.9 million for the same period of last year. In addition, our cash and cash equivalents at December 31, 2009 was $3.2 million compared to $700,000 as of September 30, 2009, which was our fiscal year-end of last year. This increase in cash was due primarily to our continuing efforts to reduce our inventory and the continuing impacts of our cost-saving measures we have put into place.

This concludes the financial overview of the quarter, and I will now turn the call back over to Ken.

Thank you, Scott. In closing, or bottom-line results for the quarter continue to be positive as we continue to successfully manage costs during this difficult economic period. And while our expectation for sales in fiscal 2010 are flat, we are focused on our long-term goals and we will be prepared to emerge from the current economic trends in a position of strength.

This said, things could turn around very quickly, and demand for equipment service may rebound in 2010. And we'll be prepared if that happens. One of the most comprehensive mixes of inventory of any reseller, we are well prepared to meet our customers' needs now or in the future.

This concludes our prepared remarks. Operator, we'd like to open the call now for any questions.

(Operator instructions) Chris Sansone, Sansone Partners.

Is Dave with us today?

Yes; he's in Atlanta -- snowbound, perhaps. They've been down there for training with Cisco.

Okay, that's good to hear. With respect to the cash build on the balance sheet, what should we expect to see going forward? Do you think we'll have opportunities to grow the cash balance and continue to reduce inventories? And then also, what are, potentially, some uses that you've potentially earmarked that cash for?

Today I'll just put it this way. Our balance is higher than it was at the end of the quarter. But we continually pay down debt. We are working aggressively to reduce inventory. We're watching our buying. We've had a few buying opportunities in the products we bought, and we sold them. We did it very quickly. Then, that particular thing was some converter boxes, lately.

But we're looking to -- our stated goal is we'd like to reduce it every month going forward. But again, we are entrepreneurs and we take advantage of some -- if it's an opportunity we think will make significant profit margin for us. Otherwise, we are watching it very closely. But as we go forward, we do have some covenants with the bank, and we are very cognizant of those. And so what we'd like to see is cash grow and, over the next six to 12 months, have significantly more money in the bank.

Madhu Kodali, [Yorkshire] Capital.

A question on the inventory. I was expecting further reduction in inventory. Based on $10 million sales you were able to achieve only 1.5, so -- 1.2, I guess. Can you maybe talk a bit about what's going on with inventory, please?

Yes. We're watching our sales, but we had some -- coming into the last of the '09 fiscal year we still had some commitments on some inventory that had not been delivered to us yet. So we don't have much out there going forward other than, generally, items that we have pre-sold. But, we are looking at that as we go forward. But no; we are not actively pursuing new inventory. But again, as you've got to remember, when the inventory -- when you are doing a run rate of $10 million and you got out of that $1.2 million in service, and then part of it's used or refurbished, and you're running a 25%-30% margin, you're not going to reduce it that significantly in any given quarter.

And how is cable customers generally looking at this current -- what people are calling a great recession? Do you see them not even doing maintenance projects, they are delaying those as well? That's the first question on that.

And the second question is, some of them continue to compete with these telcos, adding more cables in the digital, and so on. So there must be some CapEx. Can you tell us what you are seeing in those two areas, please?

Sure. We read all the public statements from the large MSOs and all the OEM providers, and what we're looking at, a lot of the larger ones are spending their CapEx in commercial services because they feel that's their growth area because their residential customer is either flat or just holding their own in there. So they're not out there spending money in that market, is, at least, what their stated goals are.

Now, we are having some smaller regional customers that's looking to enhance and increase their bandwidth, but they are doing maintenance. Our service has remained pretty steady; I mean, it's flat, but it's remaining steady in this so you can see that they aren't reducing the maintenance on it as far as the repairs that we do. But they are not -- most of the MSOs that we talk about, now, they are doing their budgets right now for 2010. And we haven't had access to those, but you've got to realize, as a secondary provider, our OEM partners, which are Cisco and Motorola, had the first insight on that. And as we said, at Motorola and Cisco and other OEMs are pretty aggressive on their pricing, too, in order to keep their volume up and keep their inventory down.

But if it turns around very quickly and there is increased demand, we're going to be in a pretty good position, we believe, based on past experience because the factories -- you just don't turn around on a dime and start building that equipment.

So it just takes a little while to work through inventory when you've got the levels we did when we were looking at this $55 million to $65 million run rate.

So that slight optimism you have, if a quick turnaround happens, is that primarily driven by what you think is pent-up demand?

I think, again, if you go back -- and I would encourage you to read the Time Warners, the Comcasts and the Cablevisions, and there's other OEM suppliers out there, or manufacturers, and see what they believe. And they believe that the next generation of products they are working on it -- which we are not a manufacturer, so we just have to sell what they build. But there's optimism that there's some opportunities out there, and they're going to have to do something sooner or later.

Yes, there is some competition in the marketplace with some of these telcos that are having competition. But if you go back and read the national telcos, they've reduced their CapEx and their expectation quite a bit, what I read, because I read those, too, as a barometer, where they're coming in, in these marketplaces.

But I think there is -- and if you read the OEM reports also, they are looking at some substantial growth. They are targeting the Latin American countries in South America, which kind of surprised me, because they seem to have a harder time raising the money with the devaluation of the peso and other currencies down there. But we've been selling some product in that market, and there's been lots of activity. And we look at our website, and we see where the traffic is coming from. And it's amazing how much traffic we are getting on our website from that region. But two of the -- three of the -- two and three of the larger OEMs that have reported lately, they were talking about the growth in Mexico and Brazil and Argentina and the opportunities there.

So we are in that area because we can react much quicker than the OEMs supplying product.

Sure, okay thank you. It was good quarter, given the current economic headwinds. Keep it up. Thank you.

(Operator instructions). There are no further questions.

We appreciate everybody joining us today, and we look forward to the next quarter's earnings and I hope that it can be more robust. Have a good day.

That concludes today's conference call. We thank you for your participation.