ADDvantage Technologies Group Inc (AEY) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ADDvantage Technologies Group third quarter fiscal 2010 earnings conference call. One note, that today's call is being recorded. For opening remarks and introductions I would like to turn the conference over to Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

Thank you. 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 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 & Exchange Commission. Financial information presented on this conference call should be considered in conjunction with the consolidated financial statements and notes that are to include in ADDvantage Technology's most recent report on Form 10-K filed December 17, 2009.

The guidance regarding anticipated future results on this call, 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 third quarter conference call. With me today is the Dave Chymiak, our Chairman of the Board, and Scott Francis, our Chief Financial Officer.

First I would like to make some general comments regarding our performance over the past quarter. I will then turn the call over to Scott who will provide the financial results for the quarter ended June 30, 2010, and finally Dave will address the market conditions our Company is currently facing, and we expect to face in the foreseeable future. To start, our third quarter results were in line with our expectations. Despite the ongoing economic uncertainty, we continue to believe we're well positioned for long-term profitable growth.

Our net sales for the third quarter increased 45% to $13.3 million from $9.1 million for the same period last year, primarily due to the following factors. The demand for headend equipment continues to remain strong. This is a result of our customers improving their headend sites in order to add more channels to their systems, and to convert their systems from analog to digital and to add HD programming. However, our large and small domestic cable customers continue to delay significant plan expansion and bandwidth upgrades in order to limit their capital expenditures and conserve cash.

These delays negatively impact our sales access and transport equipment. There is an overall equipment supply shortage in the market due to the OEMs not producing as many products during this economic downturn. This has allowed our Company to meet customers' products needs utilizing our On Hand, On Demand business model. We also saw an increase in sales to our international customers, either directly or indirectly through alliance partners.

We continue to believe there is a lot of potential for growth for the Company in the Latin America markets to receive these customers upgrade and expand their systems. New equipment sales for the quarter also benefited from our new master distribution agreement with Fujitsu, which started to generate sales in the third quarter. We've been excited to launch this new distribution agreement through our wholly-owned subsidiary, NCS Industries. The increased sales translated to an increase in net income attributed to common share holders to $1.4 million, or $0.04 (sic - see Press Release) per diluted share as compared to $700,000 or $0.06 per diluted share in the same period last year. We intend to focus our efforts on building our customer base through our sales and distribution channels and alliance partnerships in order to grow our top line revenue, while we continue to manage our inventory and cost structure. 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 third quarter of 2010 were $13.3 million, an increase of 45% when compared to $9.1 million for the same period of fiscal 2009. The overall increase in net sales was due primarily to an increase in new and refurbished sales of $4.1 million. For the fiscal third quarter, revenue from new equipment was up 57% to $9.4 million for the three months ended June 30, 2010, from $6 million for the same period last year. While refurbished equipment was up 39% at $2.5 million, compared to $1.8 million for the fiscal third quarter of fiscal 2009. Revenue from repair services remained relatively flat at $1.4 million for the three months ended June 30, 2010, and 2009.

Cost of sales for the three months ended June 30, 2010, increased 47% to $9.1 million from $6.2 million in the same quarter a year ago, primarily attributable to the overall increase in net sales for the period. Gross profit for the recent quarter increased to $4.2 million compared to $3.0 million in fiscal 2009, due primarily to the overall increase in net sales. Gross profit margin was 32% for the three months ended June 30, 2010, and 33% for the three months ended June 30, 2009. Our operating, selling and general and administrative expenses remained relatively flat at $1.8 million in the third quarter of 2010, compared to $1.7 million for the three months ended June 30, 2009.

Income from operations in the third quarter of 2010 was $2.4 million compared to $1.3 million for the same period last year. Net income attributable to common stockholders for the third quarter 2010 was $1.4 million or $0.14 per basic and diluted share compared to $700,000 or $0.06 per basic and diluted share for the same period of last year. Our EBITDA, which is earnings before interest, income taxes, depreciation, and amortization for the third quarter 2010 was $2.6 million compared to $1.4 million for the same period last year. Also, our cash and cash equivalents at June 30, 2010, was $6.3 million compared to $700,000 at September 30, 2009. In addition, our gross inventory at June 30, 2010, was $31.1 million compared to $35.4 million at September 30th. The increase in cash was due primarily to our continuing efforts to reduce inventory and continued strong cash flow positive performance.

Now onto results for the nine months ended June 30, 2010. For the nine months ended June 30, 2010, net sales were $35.6 million, an increase of 11% from $32.1 million for the same period of last year. New equipment sales for the first nine months in fiscal 2010 were $23.7 million compared to $20.9 million in the previous year, which was an increase of 14%, while sales of our refurbed equipment increased 6% to $7.6 million in fiscal 2010 from $7.2 million in fiscal 2009. Revenues from our repair services business during the first nine months of fiscal 2010 were $4.2 million, an increase of 5% from $4 million a year earlier. Cost of sales for the first nine months in fiscal 2010 increased by 10% to $24.4 million when compared to $22.2 million a year ago which again is primarily attributable to the overall increase in net sales. Gross profit was $11.2 million compared to $9.9 million in the nine months ended June 30, 2009, with the gross margin percentage remaining at 31% for both the nine months ended June 30, 2010, and 2009.

Operating, selling and general and administrative expenses were $5.2 million for the first nine months of fiscal 2010, compared with $5.5 million in the first nine months of the previous fiscal year. The decrease is primarily attributable to decreases in personnel costs of $0.1 million, resulting primarily from head count reductions taken in fiscal 2009 and a $0.1 million reduction in bad debt expense for the nine months ended June 30, 2010, as compared to the same period of last year. Income from operations for the nine months ended 2010 was $6 million compared with $4.4 million for the same period of fiscal 2009, which was an increase of 36%.

Net income attributable to common shareholders for the nine months ended June 30, 2010, increased to $3.3 million or $0.33 per diluted share from $2.3 million or $0.23 per diluted share in the same period a year ago. This now concludes the financial overview of the quarter and the first nine months and I will now turn the call over to Dave.

Thank you, Scott. As we have discussed, our sales continue to be strong for the third quarter. Much of our increase in sales this quarter was in headend and international equipment sales.

We still have not seen a significant increase in spending for planned expansions or bandwidth upgrades for the domestic MSOs as they continue to conserve cash and focus on making improvements to their headend sites for the analog to digital conversion and adding channels to their system. We believe these plant expansions and bandwidth upgrades will still happen. We just do not know the timing at this point.

As noted in the 10-Q filing this morning, our distributor agreement with Cisco, which was originally set to expire January of 2010, this agreement has been extended to September 30th, as we continue negotiations with Cisco on our contract. We continue to carry one of the most comprehensive mixes of new, surplus new, and refurbished inventory of any reseller or distributor in the industry. This allows our on hand, on demand business model to work very well and gives us a competitive advantage in the marketplace over the OEMs, as the OEMs do not have much inventory on hand as evidenced by their inventory lead times growing.

In closing, our results for the quarter confirm that our strategy is continuing to work. From our approach to sales to cost controls and inventory management, we continue to manage our business appropriately for the current economical environment, and we remain well-positioned to achieve long-term profitability in the future. This concludes our prepared remarks. Operator, we'd like to open the call up for any questions.

Thank you. (Operator Instructions). We'll go first to Tom Henderson with JBH Capital.

Hi, good morning. I just have a couple questions for you. Good afternoon, rather. Sorry about that. Regarding the gross margins, I was wondering in the past history, how high have they gotten, and in the future how high could they get?

Thank you for the question. The margins generally stay between 30% and 33%, 34%. It always depends on the mix of the product line and in, for example, depends on the service volume, depends on the used and new surplus, and of course, the margins are less on the current production items. So we have been consistent as a public company for approximately 11 years.

Okay. So in the 30%s, low 30%s is where you have been. Okay. And one other question regarding the losses that you carry over, when do you think you are going to burn through them as far as the tax carry forwards?

Let me -- you must be relatively new to our company. The losses on there were from an original merger that we did with an existing company, and they had -- those are the loss carry overs on that particular balance sheet, so we only have -- Scott, how much were we able to use a quarter or year, 200,000 and some odd.

It is around $200,000 and some odd, we can use a year and those of course, on carry forwards will expire at varying times over the next several years, so it is related to the merger that took place in 1999 on the reverse merger that we did. So tt's not an ADDvantage Technology Group loss carry forward. It is from that ADDvantage Media, excuse me.

I see. And how much of those are about left? I know you only can take what $200,000 a year you just said so --.

Yes. It is something we can take, and it is a benefit, but it is also not necessarily a driving force in the tax reduction there.

Gotcha.

Another point on that one is, Tulsat was established in 1985. We did the merger to become a public company in 1999, and from the onset of 1985 to now, Tulsat, the original Tulsat and ADDvantage since we've been combined has never lost money.

Gotcha. That helps a lot. That's my questions for the day. Thank you very much.

Thank you.

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

Hi. I was wondering if you can talk a little bit about your inventory reduction, and what areas are you reducing inventory, and potentially if you could look forward, how low do you think inventory can go? Thanks.

Thanks for the question. We have been continuing across the Company's reduced inventory. Part of it is, I think we have done a great job in consideration that the market has been very weak and we've been very diligent and very prudent in how we have purchased. The reduction will continue. It depends on the result of the Cisco negotiations.

Our model may change a little bit, it may give us bigger opportunities. We don't know. So I think between now and the end of the year, we'll be able to answer that a little further, there is a lot of equipment, particularly on the used side of the business that's not available any more. As long as there is no significant upgrades by the larger MSOs, there is very little used, particular transport and [access] gear, that's available. So don't you agree, Dave, we continue to see that inventory dwindling as we go forward depending on those comments I already made.

Yes. Refurbished gear, we have the cleanest gear we have ever had. A lot of the older, older stuff is going away, and we're looking for it as that's where some of the shortages are occurring. Plus our new gear, depending on how the model works, will not require us to keep two years of inventory of a lot of product. It will hopefully stand where we can do some turns on it and things like that, but our model in the past has always required us to buy large volume of gear, keep it for a period of time and sell it out, and right now we're selling a lot of gear that we're not replacing, so it is 100% cash in the bank.

Right. A follow-up question. If you are building cash, then what do you do with that? It is obviously a good problem. Usual options are either dividend, share buyback, debt buyback or I guess buy another firm. Maybe you could just go over those options.

Okay. Good. Yes. From September 2009 we had $700,000 in the bank and those have followed the Company for some time, you know we normally have little or no cash because it all went against the line of credit. At the end of this quarter, we had $6.3 million, which is a significant difference in our philosophy and what's based upon the inventory reduction and our profitability.

We look at all of these options all the time. Some of the things I would like to reiterate is we have some outstanding debt on a term debt with our bank, there are significant covenants on that, and in this particular economic environment, most banks aren't willing to reduce the covenants. So there is limitation on stock buyback. There is limitations on dividends. There is limits on acquisitions, so we're monitoring that.

We're negotiating with the bank. If something comes up, but at this point and as far as paying the debt back, we have a financial swap that mirrors our debt, and there is, if you look at the balance sheet, we right now have a significant prepayment penalty that we're -- don't want to pay because we may need the money. As we review the Cisco opportunity and other opportunities in the normal course of business.

My last question, if you can give us a little more specifics on your Cisco negotiations, that would be helpful.

Dave will address that, it is ongoing. The thing about Cisco, their business has picked up a little bit I believe, and it is just new people in place, and Dave, can you elaborate a little bit?

We don't really know. It has changed, it's been going on for two years for a change to occur, and it hasn't. Our contracts historically have all not renewed on the due date. They had always be two, three, four, five months later, so we're on a continued month to month extension. Right now a two-month extension to the end of September. I do feel it is going to be very close on this next time by September 30 that it will be resolved to a large percentage.

Great. Thanks for your time.

Next we'll hear from Madhu Kodali with Yaksha Capital.

Thanks for taking my question. Dave, I think it was curious to listen to comments you just made in the beginning comments I think, about OEMs not running their production lines or not shipping enough product so you had an opportunity to actually ship product. It wasn't the case I think a quarter or two quarters ago where you were actually having inventory and able to ship, so I was just curious to learn how are these OEMs acting or reacting to current economic trends, and why are they not producing when there is demand?

The problem is, it is not just their product. There is a worldwide demand on certain products, capacitors, power supply products, so any one part holds up the scheme of things, plus there is a lot of parts manufacturers. I know specifically one that the transformers that were needed for the new product was sourced to them and they filed bankruptcy. It has been real hard on the parts manufacturers, so the demand is there.

Fortunately for us we have had good inventory, and we continue reducing it. That's just been our model. But I just was looking before this call started at our backlogs, and a lot of things are out 60 days and 90 days on back order right now, so that's just the way the model is working right now. The demand is higher, especially out of the country for a lot of the products than it is in country, too.

Right, and this backlog, is it backlog from your suppliers to you or from you to your customers?

We have almost nothing going to our customers' backlog because our inventory is so large. It is the factory to us for the backlog.

Right. And what do you expect in the near term, in the next six months in terms of inventory? Do you need to build your inventory or do you think you have an opportunity to continue to reduce it?

We can't really answer that or I can't because it has potentials both directions. We can either reduce dramatically or we could also increase depending on what our contract with Cisco develops for one. The other thing is the weather has not been a factor in our business, and it usually is. I mean yesterday I sold a large group of equipment because a gentleman had lightning damage, but we're used to a lot of lightning, a lot of weather situations and that, and we're just not seeing that this year or last year for that matter of fact to be of any significant volume, and it could be. It could be that way within a month.

Okay. One last question. You seem to have some good edge on buying up old inventory lots, how is that going currently?

There is very scarce. We have not been on a -- that's the other thing why inventory is going down. We're not spending very large amounts of money on gear. We had a flurry of things a week ago or two weeks ago for the month of July, but it still was less than $100,000 worth of purchases, so that's insignificant in the model of our normal one. We're not seeing very many lists. We're not seeing very many upgrades that are being done. If they are upgrades, it is taking out gear that no one wants. It goes to the dumpsters.

Gotcha. Thank you. That's it for me.

And from Monarch Capital Group, Michael Potter.

Hi, guys. Congratulations on another solid quarter.

Thank you.

You mentioned the international demand was very strong. Can you quantify that and compare that to Q3 last year?

I think I would encourage you to read Arris and Cisco and Motorola and some of the other vendors in our market, and they're all expressing generally the same tone along with CommScope is they're seeing a significant larger opportunities in South America and Latin America. And I think that those opportunities, in some instances there are some shortages, where if it is a large project, the factory, the people may buy the initial volume from us or if there's shortage in the supply chain along the way, we get some of that business, so we're just tagging along as we always do. We're on hand, on demand as there is immediate need, we're there to respond to it. And so that's kind of what we're seeing, and it is generally in the, we're doing some in the headend gear but a lot of transport and access property, and it is just continuing to go that way. So I mean we really follow the market if there is a significant uptick from the OEMs, we're right there with them.

All right. So it is not really being driven, it's being driven by demand, not necessarily from increase in our marketing or distribution in these countries?

No, that's correct. The demand, there has to be opportunity, and most of the players in that that we're doing some business with, we have some alliance partners in that market, and they have the relationships. In other words, they also are integrators and they provide the financing for these larger opportunities, and we do very few small opportunities because of the credit situation in those markets.

Okay. We're approximately halfway through Q4. Do you have any visibility into Q4 so far?

We normally never discuss that, but we really don't. We would like to be able to think we could do as an average for each quarter, but again, anything can happen in our business because we don't -- as Dave suggested, we don't have a lot of backlog, so we're always waiting for the next phone call, the next opportunity, Michael.

But we didn't see any sort of drop off in demand from Q3?

I think it is pretty consistent, but again it is, to say there is a big spike or not, we just don't know for the whole quarter.

No, no, I am just asking for so far what we have seen versus Q3. We're halfway through the quarter, so we at least have a good idea if the phone has been ringing for the past six weeks.

We have been relatively busy. It is consistent.

Okay. And then on the communications side, and the Company has done great. We have weathered the recession very, very well, and the numbers so far have been very good. What are you guys doing on the investor relations side to get this Company visible again, and a more fair valuation?

That's always an objective goal for all of us. We work with KCSA and others, and we check on opportunities there. We're kind of waiting to get through this period, and it has been relatively successful, so we have been happy with, so we're working with our strategic partner there, KCSA, and we're looking at opportunities to maybe come to New York and go to other places in the marketplace. So time will tell as those opportunities develop.

This is Dave. We have to get the fiscal agreement in place before we could actually go out and start saying anything.

Okay. All right. Thanks, guys. Keep up the good work.

Next we'll hear from [Mike Schillinger], private investor.

Nice quarter. Regarding the equipment supply shortage, I understand it is driven by semiconductors to a great extent. Do you have some visibility into how long you think that's going to go in your particular markets?

I think what Dave was suggesting is there are some components, because Cisco is a -- they have to buy the majority of their products external. The factory's always been aggressive. If they see there is going to be an ongoing demand, they'll rev up. But we don't know from their production standpoint any more than that. Do you, Dave?

All I can tell you is the backorders, I am looking at backorders now that were placed in July or anywhere from September, last part of September all the way to December backlog right now.

Is that across the line or are they just specific?

Across the line is about 45 to 60 days, and specifics are out -- that normally might be 60 days are out to 90.

And another thing that everybody needs to know, we also have our NCS, not only are there [Fujitsu] broadcaster's master distributor, but we are also a Motorola distributor on the broadband side of the business there. And we do keep a significant inventory of Motorola gear, and we have been seeing particular -- there was some shortages developing in that because as well aware of Cisco, I mean Motorola is going through a situation where they're going to be splitting up the Company, so we're looking at some more opportunity potentially there if there is an OEM shortage because of the split up.

Okay, thank you, that's my question.

Moving on to [George Gasper, The Gasper Reports].

Thank you. Good morning. Nice quarter. Congratulations on that. A little more highlight on the inventory trend. Can you give us a thought as to what you would expect between now and the end of the quarter in terms of inventory? Do you see it peeling off from where you are, or do you see yourselves rebuilding for the year going forward?

George, this is Dave. We can't honestly give you -- it could go either way. On the table, we have opportunities. One way would require quite a bit more inventory possibly, but more opportunities. The other would require less inventory and still different type opportunities. Right now, I personally think the inventory will be dropping as it has been probably at the same rate for another six months.

And another thing is George, with the lead time extended, there is not much chance we're going to have an opportunity if an opportunity was available to build up that inventory during this quarter.

Okay. All right. And then a question on cash position, which is pretty decent. You indicated the fact that you got some prepayment penalties that are sizable if you would try to pay it down, so at this point in time, you're maintaining higher than normal cash flow or excuse me, cash position. And is there anything special you might be trying to do at that, considering it is higher than it has been in the past?

Hi, George, this is Scott. Let me just recharacterize a little bit when we call it a prepayment penalty, what it is what Ken was referring to on our larger term note, we had put into place when we put that in a 2007, a swap transaction, basic swap, LIBOR for margin, and that swap right now, as most swaps would be, during that time, are under water. So that $1.2 million that is on our books, under the liabilities, is the fair value if we were to terminate that swap in connection with, let's say, a prepayment of debt, so it is not necessarily a penalty. It is just more the issue of how much it would cost us to, if we prepaid debt, there would be a payment that would be required in order to proportionately reduce the swap as well, otherwise you're really not gaining any interest savings. You would be prepaying debt but not getting the interest savings on it. That's really what that relates to.

As far as other cash opportunities, we're looking at different things, but unfortunately the prepayment of debt doesn't give us much bang for our buck as what we would normally hope in normal circumstances, that's the first place you go to. As far as the payment of dividends and/or other things, again, not that the bank wouldn't approve of it, but we do have to get approvals for those things, and that's what Ken is referring to. We can't just go do those things. The bank has to look at everything and have those approvals because of our credit agreements.

That's where we're really at. And right now everything that Dave and Ken were talking about on inventory with the contracts and so forth, we are trying to also monitor that to make sure we don't get ourselves in a position where we need the cash and wish we had it again. So we're really trying to -- we're in this position for the first time in this three-month period, or six-month period, and we're really trying to make sure where everything is at, and there is going to be a lot of things happening over the next three to six months with the different things we're looking at.

Okay. And then just ongoing from that last comment you made, back on Cisco, in terms of this negotiation, the ongoing negotiation, and what you have accomplished through Cisco in the past, relative to what you might be looking at going forward, is there anything happening in terms of your relationship that is going to broaden your capacity to do business via Cisco, or to represent them in a broader way. Or is this HD business you were referring to early on as having a positive impact, is that where the continued momentum is going to come from, or is there something else that you could be doing here?

I think, again, until that negotiation is done, there has been a lot of options put on the table, and we're not really privileged to discuss those at this time. And as Dave has suggested, and we don't know what the final outcome is, we know what we would like to have done, but it is a negotiation. There may be some opportunities that we have done in the past where there may be some end of life products that we can support. We have done that with both Motorola at times and have done that with Cisco, and that's something we do a very good job with. There may be new opportunities. We don't know. So we really can't talk about something we don't know about because until those things, those negotiations are completed, when they are, there will be time to make sure the market is aware of what's going on, but at this time we're just in negotiations. All we can say.

Okay. All right. Thank you.

(Operator Instructions). We'll move onto Tom Herrenberg with Carl M. Henning

Yes. Good quarter, fellows. I am not in the office, so I don't have access to the Q2 release, but it seemed to me, if memory serves me, that you talked about the momentum going forward in Q3. Can you talk about is the momentum still going forward in Q4?

The calls are good. I mean, to be specific, I mean, it is not down. It is not up. Actually for our division at Tulsat, it has been pretty flat for about six months, which is on the good side. We've got several different divisions. There is orders pending, large ones. I mean, the calls look good, and again the weather is a big factor for the next three months also.

The other thing is, we have been looking at some large opportunities, but again, guys it's getting towards budget time for the larger players, until they -- the budgets are released, we don't know.

Okay. Thank you.

Gentlemen, there are no further questions at this time. I will turn the conference back over to you for any additional or closing comments.

We appreciate everybody's interest in our Company. We continue to talk to you into the next quarter. Thank you very much.

That does conclude our conference today. We thank you for your participation.