ADDvantage Technologies Group Inc (AEY) 2010 Q2 法說會逐字稿

Good day, everyone and welcome to the ADDvantage technologies second 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 of KCSA Strategic Communications. Please go ahead, Mr. Russell..

Thank you, before we begin today's call, I'd like to remind you today's conference call may contain certain forward-looking statements which were 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 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 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 there to included in ADDvantage Technologies most report on Form 10-K filed December 17, 2009. The guidance regarding anticipated future results on this call based on limited information currently available to 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 of 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'd 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 second quarter conference call. With me today is Dave Chymiak, our Chairman of the Board and Scott Francis, our Chief Financial Officer.

First, I'd like to make general comments concerning our performance over the past quarter and then I will turnover the call to Scott who will provide the financial results for the quarter that ended March 31, 2010 and then Dave will then address the market conditions our Company is facing and expect to face in the foreseeable future. To start, in the second quarter reported a 19% increase in net sales with net income attributed to common shareholders of approximately $0.11 per basic and diluted share. With this being our best bottom line performance in over two years, our results for the quarter confirm that our strategy is working.

From our approach to sales to cost controls to inventory management we continue to manage our business appropriately for the current economic environment and to achieve long term profitable growth. In terms of growing revenue, as I discussed in our last conference call, while things have improved in the general economy, we still haven't seen many of our large and small MSO customers start to invest in their networks that we would have hoped to. However, other customers are becoming more active and there's a general feeling of optimism throughout the industry that the cable equipment industry is on the path towards its own recovery.

I share in this optimism believe that we're in the process of climbing out of the bottom of this recession. So it's important to note there's still stiff competition to mark this place as everybody looks to some of the revenue lost over the past two years. Specifically, there has been a fundamental change in the market as certain OEM's now compete with distributors and service providers such as ADDvantage.

Until these OEM's are able to build up a backlog of orders as they were accustomed to pre-recession, they will continue to have an impact on sales. This is all part of the recovery for a market and we believe we have planned accordingly and will continue to monitor of spending to manage our inventory.

Yesterday, we announced that one of our subsidiaries, NCS Industries signed an agreement to be a master distributer for United States Distribution of Fontech North American encoders, decoders and multimedia solution products. This relationship will not only provide us with another productline but it will also enlarge our customer base as the products are primarily marketed to the broadcast industry and just a source of revenue that will allow us to grow as the recovery continues. I would like to note that as a result of this new agreement we have made an investment in inventory of approximately $1 million which offsets some of the reduction in inventory we've made as part of an initiative to manage cost. As of March 31, 2010, we reported inventory of $31.4 million compared to $33.2 million at September 30, 2009.

So excluding the [Fiditu] inventory we actually reduced inventory by $2.7 million since September 30, 2009 even in a down market. I would now like to turn the call over to Scott Francis, our CFO, for a look at the financials. Scott?

Thank you, Ken. As Ken mentioned earlier, net sales for the fiscal second quarter of 2010 were $12.1 million, an increase of 19% when compared to $10.1 million for the same period of fiscal 2009. The overall increase in net sales is due primarily to an increase in sales of new and refurbished equipment of $1.6 million. For the fiscal second quarter, revenue from new equipment was up 17% to $7.8 million for the three months ended March 31, 2010, from $6.7 million for the same period last year.

While refurbished equipment was up 24% at $2.9 million compared to $2.3 million for the fiscal second quarter of fiscal 2009. The increase in equipment sales consisted mostly of head and equipment needed by our customers to add challenge to their cable system or upgrade their equipment in order to provide High Def programming on their cable system. However as Ken pointed out, our large and small MSO customers continued to delay significant plan expansions and band width upgrades as part of their efforts to conserve their cash and limit capital expenditures in this economy.

In addition, refurbished equipment sales was also impacted by a $0.4 million increase in sales of our converter boxes this fiscal quarter. Revenue from repair services increased to $1.4 million for the three months ended March 31, 2010, which was an increase of 23% compared to $1.1 million for the same period last year.

This repair revenue increase for the three months ended March 31, 2010, was primarily due to our continued efforts to promote and expand this line of business. Cost of sales for the three months ended March 31, 2010, increased 20% to $8.4 million from $7.1 million for the same quarter a year ago. This is primarily attributable to the overall increase in net sales for the period. And then gross profit for the recent quarter increased to $3.6 million compared to $3.1 million for the same period last year which is due primarily to the overall increase in the net sales as well.

Gross margin percentage remained at 30% for both fiscal second quarters of 2010 and 2009. Our operating, selling, general administrative expenses remained flat at $1.7 million for both second quarters of fiscal 2010 and 2009 and income from operations in the second quarter of 2010 was then $1.9 million compared to $1.3 million for the same period last year. And then net income attributable to common stockholders for the second quarter of 2010 was $1.1 million or $0.11 per basic and diluted share which is compared to $.7 million or $0.07 per basic and diluted share for the period last year, and then EBITDA which is earnings before interest, income taxes, depreciation and amortization for the second quarter of 2010 was $2.0 million compared to $1.4 million for the same period last year, and then in addition, cash and cash equivalents at March 31, 2010, was $3.5 million compared to $700,000 at September 30, 2009 which was the end of our last fiscal year. This increase in cash was due primarily to our continued efforts to reduce inventory and the continued impact of cost saving measures we have put into place.

Now on to results for the six months ended March 31, 2010. For the six months ended March 31, 2010, net sales were $22.3 million which was a decline of 3% from $22.9 million for the same period last year.

New equipment sales for the first six months of fiscal 2010, were $14.4 million compared with $14.9 million in the previous year. Which is a decrease of 4%, while sales of our refurbished equipment decreased 5% to $5.1 million in fiscal 2010 from $5.4 million in fiscal 2009 and then revenues from repair services business during the first six months of fiscal 2010 were $2.8 million, an increase of 6% from $2.6 million a year earlier. Cost of sales for the first six months of fiscal 2010, decreased by 4% to $15.3 million compared to $16 million a year ago. This decrease was primarily attributable to the overall decline in the net sales for the period.

And then our gross profit was $7 million compared to $6.9 million in the six months ended March 31, 2009, with the gross margin percentage increasing to 31% for the six months ended March 31, 2010 compared with 30% for the same period last year. Operating, selling and general administrative expenses were $3.4 million for the first six months of fiscal 2010 compared with $3.8 million for the same period last year. This decrease is primarily attributable to decreases in personnel costs of $0.2 million resulting primarily from headcount reductions taken in fiscal year 2009 and then income from operations for the six months ended March 2010 was $3.5 million compared to $3.1 million for the same period of fiscal 2009 which was an increase of 13%.

Net income attributable to common shareholders for the six months ended March 31, 2010, increased to $1.9 million or $0.19 per basic and diluted share from $1.6 million or $0.16 per basic and diluted share in the same period last year. And this concludes the financial overview of the quarter and the first six months and I will now turn the call over to Dave Chymiak.

Thank you, Scott. As we have discussed, our sales strengthening as we move through the second quarter was previously discussed much of our increase in sales this quarter was in head in equipment versus significant plant expansions or bandwidth upgrades and was stated earlier we haven't seen the large and small MSO's increase their spending just yet. As expected these customers have continued to put on hold plant expansions and bandwidth upgrades in an effort to conserve cash.

The purchases they are making are mostly targeted to maximizing their returns in areas with the most potential for growth. Through the spending freezes have been going on for some time we believe the demand is growing for these upgrades to happen. However until we hear concrete plans for these customers to move forward, we will continue to remain conservative as we manage our cost. It remains our goal to emerge from this recession a stronger more efficient Company. Though our efforts we believe have and will continue to implement the necessary actions to achieve the goal.

We continue to carry one of the most comprehensive mixes of new, surplus new and refurbished inventory any reseller or distributer in the industry has. We still believe that our mix of inventory gives us a competitive advantage in the marketplace, so as activity increases in the market we believe we are well prepared to meet our customer needs. This concludes our remarks. Operator, would you like to open the call up for any questions please?

Thank you, (Operator Instructions) We'll take the first question from George Gasper. Please go ahead.

Yes, good morning. A question on the size of the market that is involved in this new productline distribution agreement that you signed. What does that market look like in the United States and how many, is this an exclusive agreement that you have and if not, what's the competitive situation for you getting involved in it?

Thanks for the question, George. This is not an exclusive but at this time we are the master distributer. We're working not only with Fudishu and there are other resellers that would buy through us generally. What this product is used for is generally at the CBS level and the television stations and one of the things that Fudishu has that puts them at the leader is the latency. In other words when there's a remote broadcast and a question is asked of the studio, sometimes there's a time delay which costs them money from the standpoint of time they could be selling for advertising. A lot of this product and a majority of the product is going into trucks and to broadcast trucks, so it is a brand new market for us. We looked at it for many months. We feel very comfortable, Fudishu is a $50 billion Company worldwide and this puts us into a new market where we're looking for other products to compliment this. We just went to the National Association of Broadcasters show in Vegas a month ago and it's been very successful for us and what we bring to the table is we have product on the shelf which has always been a problem when somebody needs the product, Fudishu may not have had the product or there maybe a delay bringing it in from Japan. This gives us the opportunity to work with us and other resellers where if they need it and they have an opportunity they can get it immediately so we're very optimistic on this opportunity.

Okay, and then a question on your general business outlook. Where do you see the framework within the business atmosphere that you're involved in? Are there some mechanics under way, some technical innovation that is going to set a larger platform for you to penetrate the market?

Remembering that we really are a distributer of select products, primarily we represent a good part of the product is Cisco, the other one is Motorola plus some other OEM partners. We generally are not at the forefront of that. We generally meet the demand as the OEM has products that creates a demand in the marketplace. We are one of our expertise is we have the intellectual property to configure and to sell different products to get them offered different solutions either if it's current production or legacy product which is is important to us. One of the areas that I think Cisco is looking at and most of the people in our industry is looking at in addition to the United States they are looking at the South America Rim and that we've been relatively successful in that marketplace because when they haven't needed a product, they want it today. They don't have time to wait for it. Dave, what's the new lead time on most of the products you've seen some I'm talking some of the other OEM's who represent they are talking as much as 90 days.

Yeah, four to 12 weeks right at the moment.

So George, what that means is if you got to wait 12 weeks for your product and you have an immediate need or want to get the project done, our on hand On Demand is the key and that's where we really fit into the marketplace.

I see, okay. And just a clarification on the inventory that was taken down for the new productline distribution. Even with that $1 million, is that $1 million in your inventory level for the quarter or did that emerge after the quarter? In other words, I know you made some progress in reducing inventory. You've explained that but again just to highlight, is the $1 million of inventory that you took on part of the inventory that you had at the end of the quarter or did that come close to the end of the quarter?

Scott, that was in the inventory correct.

Yes it was in the inventory at the end of the quarter.

Okay, thank you.

(Operator Instructions) We'll take a question from Madhu Kodali with Yorkshire Capital.

Hi, just one quick question. Wondering how the distribution relationship with Cisco is progressing in terms of I guess in the past there were some discussions about them going direct to tech data kind of deals so if you can talk what's going on there, that would be helpful, thank you.

Thanks for the question. As another in our industry that has a distributer agreement, our particular Cisco distributer agreement was extended for another 30 days and this has happened for several months as Cisco starts to try to adapt the traditional Cisco reseller distributer model but at this time, we are operating under an extension as we have throughout the year and negotiations are ongoing.

Okay, thank you. That was a good quarter.

Thank you.

Next we'll go to Michael Potter with Monarch Capital.

Hi guys. Congratulations on continued improving results in a difficult environment. I wanted to, it seems like we kind of based out here on the business and we're certainly showing signs of it slowly ticking up. Ken, are you going to get anymore focused on getting out there and telling the story to potential shareholders and being more I guess visible at conferences?

Yeah, thanks for the question. Yeah, we've been talking about that of course in the last year, year and a half, it wouldn't have done as much good as it did here because we looked at others that were doing it that were taking accounts of our IR relation with KCSA to direct us in that way and we are taking calls and we've been making some outgoing calls and as we go through the Spring and Summer and that market and the people are looking to have us visit them, we do look forward to doing that but at times, we reached out to them we haven't had much interest because most of them is trying to keep things going for themselves but we're proactive that when the opportunity exists.

But do we have I guess a proactive plan on getting out there? I mean it's conference season now. Are you scheduled to attend any of the upcoming conferences?

Not at this time because we're putting our plans together for the rest of the year now but we haven't had any opportunity. The ones that we've looked at some of the conferences, most of them in the past has always wanted us to pay them pretty good money to attend and we didn't think that was in the best interest of the shareholders, but we're still looking at that, Michael. We hear you. We just got to get all of the plans, the thing we've been really concentrating on the last year is just keeping the Company profitable, keep moving forward and looking at new distribution opportunities and now as the market starts to get some daylight, we look forward to be able to make those overtures.

Okay, terrific. Well hopefully you'll be in New York soon and we'll see you in the next few months.

Thank you, Michael.

Thanks.

We'll take a follow-up question from George Gasper.

Yes, this is regarding facilities US wide. Can you just talk about the status of your various locations and operating changes personnel wise that have come about in the last say three, six months, a years time?

George, as far as facilities we haven't had any changes. We have a one location where we keep our converters in Jamesburg, Pennsylvania. Our lease comes up and we're moving that operation into Tulsa to lower our costs and our managed have moved on to another opportunity several months ago so we've been running that other than the fulfillment out of Tulsa already so that will reduce our expenses by quite a bit each year and we're looking at some other opportunities to reduce other facility costs. Manpower, we've generally stayed about the same, particularly over the last six or 12 months. Tulsa did hire a new operation person to work with Dave on the Tulsa side and seems to be working very well and so as he gets more familiar with our model and our productline we look for hip to help Dave more as we go forward.

Okay, and so in terms of your broken arrow Oklahoma operation where you're located, that's the main focus and how is that operation in terms of square footage? Do you have enough room to expand your operations from there without stepping to the outside?

Yeah, we have no intentions at all to expand. The one thing about it is we reduced inventory and that reduces the need for more facilities and we do have a plan in place, if we stated it just depends on the revenue sources and the business model is opportunities exist if we can reduce our inventory half a million dollars a month, that's our goal. It doesn't always happen because opportunities come our way but if we can continue that we will needless space, so we're in pretty good shape on that. Our buildings are full but we are going through the inventory and looking at it and some items we are not replacing so that's the good.

Okay, and then a question on your cash. Cash is up significantly over previous levels, everything being relative. Did you buy any stock in the quarter or do you have a stock buyback plan in place? I don't recall what the status on that is.

Well, we still have some availability but we've been conserving cash. Where are we at at the end of the quarter, Scott, on cash?

Right now, our cash position is a little over $3 million. We're actually at $3.5 million at the end of the quarter and to answer your question as far as the stock buyback, as Ken said, yes, we do have a plan that we can buy but we have not bought any shares in several quarters now.

I see, okay. All right, thank you.

Thank you.

(Operator Instructions) We have no further questions at this time. I would like to turn it back over to our speakers for any additional or closing remarks.

Thank you. We at ADDvantage Technologies appreciate everybody that attended today to our web conference. We look forward to seeing you next quarter and wish you a good day.

This does conclude today's conference. We do thank you for joining us.