ADDvantage Technologies Group Inc (AEY) 2010 Q4 法說會逐字稿

Good day, everyone, and welcome to the ADDvantage Technologies fourth quarter and year-end 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 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 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 14, 2010. The guidance regarding any 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 the 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 fourth quarter and year-end conference call. With me today is David 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 during fiscal 2010. I would then turn the call over to Scott, who will provide the financial results for the fourth quarter and year ended September 30, 2010. Finally, Dave will address the market conditions our Company is currently facing, and expect to face in the foreseeable future.

To start, over the past few quarters, we saw a positive swing in our business with a general stabilization among our customers' spending. As such, we are proud to report that after nine straight quarters of declining revenues due to the recession, we have now reported three consecutive quarters of year-over-year revenue and net income growth. For the fourth quarter, our total net sales increased 15% to $11.7 million compared to $10.2 million for the same period last year. And our total net sales for the year ended September 30, 2010, increased 12% to $47.3 million compared to $42.2 million for the same period last year.

While this difficult economic environment is still materially affecting our business, cable operators continue to invest and maintain their cable networks to compete with satellite and wireline carriers to residential commercial video, data and voice services. We continue to manage our business more effectively and reduce inventory levels to be more in line with current and expected short-term demands.

Our fiscal 2010 sales also benefited from increased demand in certain product categories. This includes greater demand for head end equipment from MSOs as they continue to add channels to the systems, and upgrade equipment to provide HD programming. As a result, there are longer lead times for certain product lines, but not all, which I'm pleased to say. We were able to take advantage by selling from our current inventory. This activity helped boost our sales for new equipment, which increased by 19% compared to last year.

We do continue to see fluctuations in our end-user market, as cable companies are still under pressure due in part to new housing starts and consumer spending still being down compared to pre-2008 levels. Our refurbish sales for the fourth quarter were lower than 2009, due to the timing of several large orders that all hit in the fourth quarter of 2009. Comparing the year-over-year performance, refurbished equipment sales were down only 3%, which is in line with expectation given fluctuation in demand for equipment we have in inventory in certain periods of time. As such, we continue to maintain what we feel is a well balanced inventory, both new, surplus, and refurbished inventory, even though we have reduced our inventory by $5.8 million during this year.

In addition, our fiscal 2010 results benefiting from expansion to new product lines as we ramped up sales under the master distribution agreement we announced with Fujitsu back in May. This agreement will allow us to serve new customers in the broadcast industry. Overall, we are pleased with the results for the fourth quarter and year-end financial results.

The on-hand, on-demand business model continued in 2010 to serve us well, and allows us to remain an industry leader. We are simultaneously working to generate new market opportunities for our business. To do this, we have grown our current customer base in certain sales and distribution channels, as well as by entering new alliance partnerships and international relationships. We are also exploring additional vendors through strategic relationships to help expand our customer base.

A large reason for improved bottom line performance over the past year has been due to our commitment to implement cost reduction measures, such as strict controls in our SG&A costs and inventory levels. These cost reduction measures helped increase our operating margins, and were a driver behind the net income for the year and the fourth quarter increasing by 39% and 19%, respectively, compared to last year.

Now, moving into fiscal 2011, we continue to be cautiously optimistic that as the economy is improving, it will lead to an increased demand for additional bandwidth, as advanced data cable operators begin to make the required upgrades to their network to support the added uses. Also, we have an extension for a Cisco distributor agreement through December 20, and expect to sign a Cisco SBVTG and Cisco classic special purpose systems integrated agreement before the end of the calendar year. Once the agreement is finalized, we'll be in position to discuss it in terms publicly.

I would now like to turn the call over to Scott Francis, our CFO, for a look at the financials. Scott?

Thanks, Ken. As Ken mentioned earlier, net sales for the fiscal fourth quarter of 2010 were $11.7 million, which was an increase of 15% when compared to $10.2 million for the same period of fiscal 2009. The overall increase in net sales was due primarily to an increase in new equipment sales of $2.2 million. For the fiscal 2010 fourth quarter, revenue from new equipment was up 35% to $8.4 million for the three months ended September 30, 2010, from $6.2 million for the same period last year.

While refurbished equipment was down 26%, at $1.8 million compared to $2.5 million for the fiscal fourth quarter of 2009, revenue from repair service remained relatively unchanged at $1.5 million for the three months ended September 30, 2010, and 2009. Cost of sales for the three months ended September 30, 2010, increased 18% to $8.4 million, from $7.1 million in the same quarter a year ago, primarily attributable to the overall increase in our net sales for the period.

Our gross profit for the recent quarter increased to $3.3 million compared to $3 million in fiscal 2009 due primarily to the overall increase in net sales. And gross profit margin was 28% for the three months ended September 30, 2010, and 30% for the three months ended September 30, 2009. Our operating, selling, general, and administrative expenses remained relatively flat at $1.7 million for both the fourth quarter of 2010 and 2009, and our income from operations in the fourth quarter of 2010 was $1.6 million compared to $1.4 million for the same period of last year.

Our net income attributable to common stockholders for the fourth quarter of 2010 was $0.8 million, or $0.08 per basic and diluted share, compared to $0.7 million, or $0.07 per basic and diluted share for the same period of last year. And our EBITDA for the fourth quarter of 2010 was $1.7 million compared to $1.5 million for the same period of last year.

Our cash and cash equivalents at September 30, 2010, has grown to $8.7 million compared to $0.7 million at September 30, 2009. In addition, our gross inventory at September 30 of 2010, was $30 million compared to $35.4 million of last year. The increase in cash was due primarily to our continuing efforts to reduce our inventory, and continued strong cash flow of positive performance.

And now on to results for the year ended September 30, 2010. For the year ended September 30, 2010, our net sales were $47.3 million, which was an increase of 12% from $42.2 million for the same period of last year. New equipment sales for the fiscal 2010 were $32.1 million compared with $27.1 million in the previous year, which was an increase of 19%, while our sales of refurbished equipment decreased 3% to $9.4 million in fiscal 2010, from $9.7 million in fiscal 2009. Revenues from our repair service business for fiscal 2010 were $5.8 million, which was an increase of 5% from $5.5 million a year earlier.

Our cost of sales for the year ended September 30, 2010, increased by 12% to $32.9 million, when compared to $29.3 million a year ago. Again, which is primarily attributable to the overall increase in sales for the period. Our gross profit was $14.5 million compared to $12.9 million for the year ended September 30, 2009, with a gross margin percentage remaining at 31% for both the years ended September 30, 2010, and 2009.

Operating, selling, general, and administrative expenses were $6.9 million for fiscal 2010 compared with $7.2 million in the previous fiscal year. This decrease was primarily due to a $0.1 million reduction in our bad debt expense, with the remaining decrease due to reductions in our rent, business insurance, and advertising expenses. Income from operations for the year ended September 30, 2010, was $7.6 million compared with $5.8 million for the same period of fiscal 2009, which was an increase of 31%.

Our net income attributable to common shareholders for the year ended September 30, 2010, increased to $4.2 million, or $0.41 per diluted share, from $3 million, or $0.30 per diluted share in the same period of a year ago. Our EBITDA for fiscal year 2010 was $8.0 million compared to $6.2 million for the same period of last year.

This concludes the financial review of the quarter and the year ended September 30, 2010. I'll now turn the call over to Dave.

Thank you, Scott. While our sales for the year and quarter reflected signs of steady improvement, the overall market recovery is still relatively weak, and we will be monitoring it closely. The triggers that will show the cable market is moving towards a full swing recovery will include MSOs making significant upgrades, investments to their systems, increased new housing builds, and changes in technology that will require head end upgrades. As Ken discussed earlier, the MSOs have made other smaller investments into their systems, which have generated sales for our business, and will support this higher demand in the future.

Before we turn the call over for questions, as was noted in the 10-K filed this morning, our distributor agreement with Cisco was originally set to expire in January of 2010. This agreement has been extended several times during the year to December 20, 2010, for the United States as we continue negotiation with Cisco on our contract. As Ken stated earlier, we anticipated having our new agreements with Cisco by the calendar year-end. Also, we are in negotiations with Cisco for continuing to sell Cisco products in Latin America markets since the latest extension received excluded the market.

In closing, our results for the quarter confirmed that our strategy is continuing to work, from our approach to sales, 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 growth in the future.

This concludes our prepared remarks. Operator, would you like to open the call for any questions?

Absolutely. (Operator Instructions). And we'll take our first question from a private investor, George Gaspar.

Yes, good morning to everyone there.

Good morning.

First question is regarding your -- can you give us any flavor? We're almost through two and a half months of your first quarter. Is there anything that you could give to us as far as color on how you're doing this quarter that might be different than the fourth quarter?

George, I think Dave said it pretty well when he said our sales for the quarter, year and the quarter reflect signs of steady improvement. But the overall market recovery is still relatively weak, as we are monitoring it. That's about all we can say at this time.

Okay. On this expansion with Fujitsu, if I pronounce it correctly, can you give us a little bit more info on exactly what you're supplying to them, and how broad a market opportunity is this for you?

Yes, George. Our Fujitsu is generally concentrated in one product line, it's called Encoders, and our market is a complete different market than we've been in. It is to the broadcast industry. For example, television stations, vendors that put trucks out there to the broadcast industry. So it's that type of product that we're selling.

But it's generally one line. But it's -- there's a lot of deferred CapEx in that market. And we had a very successful year with -- really working on the product for six months. So, it's given us awareness of the product, and I think going forward, Fujitsu will have some more products that we'll be able to sell that should enhance that division.

From a competitive point of view with them, are you a key supplier on this Encoder situation, or are you one of several that they are using? Can you give us an idea of what the opportunity penetration with them is for you?

Yes, there's a lot of competition in that market, but we are their master stocking distributor in the United States. So in other words, we have channel partners and resellers that buy through us at our NCS location. So, we are, at this point, we are the distribution for them in the United States on that product.

Okay, all right. And then one other, on the financial side, your cash position, how do you see your cash position build up? Do you have any particular target you're looking for by the end of the current fiscal year? And is your strategy to continue to build this cash position as opposed to paying debt off, or what's your thought on that?

At the end of the year, we said we had $8.7 million. That's significant, it's $8 million more than we had at the end of last year. And as we sell down our inventory, and as we adjust it to the current market conditions as we discussed, yes, we anticipate our cash flow to be enhanced, and that we'll be able to accumulate more cash.

But we're very optimistic -- entrepreneurial, and we're looking for more relationships similar to Cisco relations, the Cisco and the Motorola and Fujitsu relationships that we can be a commanding force in the marketplace. And again, we -- as long as we have some debt on the book, which is around, a little less than $14 million. And another key point is, for last year, we paid down $2 million in debt. We must understand, this has been a very difficult market, and our team has done a great job making the margins, and still being very, very profitable compared to most of the people in the United States. So we had a real good year. Until we, an opportunity may come to us we're not aware of today. So we have a lot of dry powder, so we're just kind of sitting on the sideline, waiting to see what happens.

Okay, all right. I'll go back into queue. I have more, but I'll go back in the queue.

Okay, thank you.

(Operator Instructions). We'll now go to Aram Fuchs from FertileMind Capital.

Hi, I was wondering if you could give a little more detail on inventories. You've obviously done a good job of reducing it, and now sales are increasing slightly. Maybe you can talk about where you think inventory is going to be 12 months out, if we see this nice gentle slope of increased sales.

Thank you. The Fujitsu, we're pretty stable where we're at with that. The Motorola may increase. As many of you are aware, the two divisions of Motorola, there will be two new public companies. One will be Motorola Mobility. The other one will be Motorola Solutions. And as they are split up in the first part of 2011, we beefed up our inventory a little bit because when they split up, they will have some new OEM partnerships as far as their manufacturing. So, we believe there's going to be some opportunities there.

Dave, what do you think about the other inventory?

I see the inventory reducing probably within the next six months another $2 million to $3 million, unless we pick up any other lines. It could even be -- that could be higher than that. We're looking at all opportunities, as we always do. In this environment, we're even looking a little harder.

And, again, our line of credit is paid off to zero, and when people first look at this, you would think, well, why not just pay off our long-term debt? We have covenants, and we have some offsetting investments -- not investments, but swaps involved on that. So it really doesn't give us any leverage to pay off that amounts to anything. We're talking fractions of points. So at this point, we're keeping cash.

Yes, because right now, we all would agree that cash is king. If you look at the marketplace, we think that really gives us a really strong position as, if an opportunity comes our way, if there's an acquisition, if there's inventory, if there's new product line, we would rather have the cash and not leverage the Company anymore at this time.

Okay, and you mentioned in the K that the Pennsylvania consolidation has occurred, and I think you said the California one is ongoing. Is there any other consolidation that you could affect that would bring back some of the inventory into Oklahoma, and leverage your real estate in Oklahoma?

Yes, our lease had expired in California, and we had a contract to provide some recording at the Company -- the country changed their method of doing it. It was an opportune time to move it. As we looked at that, it was the smaller one of our operations. Our operation in -- at our BRI location in Chambersburg, Pennsylvania -- it just made sense because we had some space here.

So we've been able to reduce our overhead significantly in those two operations, and we're running them all, all those operations currently out of Tulsa. We just closed the California operation in December. So moving forward, we look forward to being able to continue to look for ways to cut our overhead, and better utilize our facilities.

Okay, and you didn't mention anything about the ARRA stimulus money. I've heard that it's really starting to flow now. Can you just give a couple comments on that?

Yes, Dave has more input on that because he talks to a lot of the customers. Dave, what are you seeing there?

We're finding most of the money did not go to actual cable companies. It went to Telcos to a large extent, and we're seeing a lot of folks and things like that going on. I anticipate for that to kick in in late January to February. We've been giving quotes out for the last 60 days, and we're selling some product. People are gearing up, and doing small parts of their project. But a lot of them haven't actually received their money yet.

We had one gentleman in here this last week, and I think they have been awarded $40 million, but they are still working with the consultants, and as you said, we're going to take the money, but we have to find out all the rules and regulations, like RSU. They really don't know yet, so they haven't got any of the money at all. That's one we keep our pulse on.

And with everything -- this will be my last question. With everything moving to being transported by IP, does it make sense to dig more into these [outlets] compared to your cable-based MSOs?

Okay, this is Dave. I've been in this business 35, 40 years, and I've been hearing all this stuff and waiting for the little dish to come along and everything. A lot of people are not doing the IP stuff. You're reading it and you're hearing it.

It has its place, but the amount of converter boxes and things that could go in there, you'll find some manufacturers have quit making some of the products and putting to (inaudible). It will happen. There's no question, but the internet has strong chances to jam up just like it did with people signing up this last week to several websites. There's not enough room out there to run proper video without complete new facilities, new fiber hook-ups that are closed. It's going to run into a jam, and it's still a ways away.

I read an article that I think in Cisco's, one of their top people in technology, one of the trade magazines, that it's going to happen, but in six to 10 years. That was his projection. Cisco is geared up to IPTV. I think some of the rest of them are, too. But again, as long the infrastructure is not there, I think we all know what's happened with the content with NetFlix and on the video side.

And I think it's going to be good for the cable companies who are our primary customers because somehow they have to get rewarded. In other words, get some money, for all this additional transmission up and down their lines that affects their smaller customers that are using it for the video stream. So I think that's going to be an interesting diatribe when we get to the FCC, and figure out what's going to happen. But everything I read, it should be a very good plus for the cable companies, and should give them some opportunity to get some more revenue, so they can go out and build this infrastructure that's going to be required.

Great, thanks for your time.

(Operator Instructions). And we do have a follow-up question from private investor, George Gaspar.

Yes, thank you. Back on your conversation on facilities and -- so could you just relate at this point your employment situation in Tulsa and elsewhere? How many do you have in each location, and how are the other facilities operating exclusive of this shutdown in California, both in -- that would be Missouri and Philadelphia and so on? Can you give us something on that?

Sure, George. Total employment is in the range of 120. We have approximately 50 people in Tulsa, and the rest of them, we have 20-plus in Pennsylvania, 20-plus in Missouri, and we have 10 or 12 in Nebraska, 10 or 12 in Texas, eight to 10 in Atlanta.

So, and we have some outside sales people, too. So we're pretty -- we haven't had any fluctuation in that area. So we're real steady. I think the question is, will the California closure bring some opportunities to the other facilities? We're getting some business. We don't look to get a lot of it because of costs of transportation. But what we really key in on those areas, particularly in our service centers, we key on the local market, and we key on higher value income-producing repairs, where we do have that expertise.

So right now we're in pretty good shape facility-wise. We're utilizing everything we have other than we still have a little space in Tulsa. We don't -- as we deplete our inventories, we sell it. It gives us more space. We continue to purge our inventory to make sure it's good quality inventory. We think we have the ability to sell it over the next year or two. So in that essence, yes, we're in pretty good shape. We just look at the opportunities that come our way.

Okay, and then, again, back on inventory relative to what you have now, and can you break down your inventory at all as to what is new and what is rerun product, refurbished product?

You're talking refurbished? You have that number, Scott? Scott has it here for you, I believe.

Yes, basically it's in our 10-K there, George. But I know you haven't had a chance to review it yet. But basically at the end of the year, we had $21.8 million of new, and about $8.2 million, $8.1 million of refurbished/surplus, new inventory. That's where you get to the gross number, a little over, right at $30 million at year-end.

I see, okay.

$22 million to $8 million.

Okay, and this business about opportunity in Latin America, or how do you see your outside sales opportunity going forward? Whether you're looking at Latin America, Central America, I guess isn't really that important for you. But is there anything exterior of Latin America that could be coming into the fold for you? Are you really going to concentrate more on the Latin America market, and do you see that percentage-wise being something significant going forward?

George, the thing in Latin America, and we do quite a bit in Central America. Both Motorola and Cisco. So we had a good year in Motorola, selling to other vendors that, the end product we're not quite sure where it goes. But those opportunities are there. It depends on the cash that's available, and the line of credit.

We're not really aggressive in extending a line of credit, because if you pay attention to our receivable allowance, we've done a great job. I can commend our people on the AR side for doing such a great job. We've done -- we had our auditors in yesterday, and they were commending how -- in this very difficult environment, how well they had done. Tomorrow, the shoe can fit -- could hit the ground somewhere else, but we've done a good job.

But we explore every opportunity we can -- and the thing that's important to understand about our Company, we chase profits and we don't chase revenue. Just for the sake of selling something, that's not who we are or have been. We have always concentrated on, does this make sense, and does it make money, and can we collect the money? So that's the important thing to understand about our Company.

Okay, all right. And back on the Encoder area, that market appears as though there's some changes coming about in transmission delays with like ESPN and so on, and trying to be reduced by milliseconds or whatever from point to point. Can you explain how this fits together?

I'll talk about the Fujitsu line, and Dave can talk about the rest, relates to the Encoder. What Fujitsu's strong point is the latency. In other words, if they have a person, an anchor in a studio talking to somebody out in the field, Fujitsu has one of the best, if not the best product in latency, or otherwise the delay between the time they hear it and the time they respond. So that part of the business, that's always going to be evolution. It's a technical product, and there are always going to be changes in that. I think one of the things they are looking at is 3D. So yes, there are changes going on, but Fujitsu is, just so you know, is about a $50 billion Company worldwide. They are very, very strong, and we're happy to be working with them on this.

Dave, what about the rest of the Encoder business?

On the Cisco side, they are coming out with a new Encoder here that's due any time. They are shipping it after the first of the year. We have one sale that will probably be, one or two of them will be one of the first sales to the end users that we're making. So, we're working at all different angles on it, and there's going to be a lot of changes in it. People, when they get a better product, especially in the broadcast industry, a lot of it require changes be made immediately. So it's going to be a little bit to our bottom line.

Competition is going to dictate this. For example, on the broadcast side, if somebody has a better latency out there in the field, they are monitoring the competition. So yes, that's one thing going on in the broadcast. They have kind of set on their CapEx to some degree, but if competition and also in our other sides of business, it's competition going to dictate a lot of the potentials of the future sales.

Okay, and then one question, and I don't know if I can make sense of this, but in the cable area, talking about the amount of data that's being executed into the market bandwidth-wise, and some of the potential restrictions because of the amount of data coming in. And the cable guys seem to be wanting to become more aggressive on what they want to carry and handle. It would seem to me, and tell me where I'm wrong on this, or what the opportunity is, but if that's really the case and the cable people are going to try to bring more information across their systems, would it not be possible for a requirement to upscale their field equipment, their remote field equipment in order to carry signals and enhance the amount of video that they are trying to transport. And wouldn't that require enhancing your opportunity to provide equipment?

I think, yes, I think that's a fair statement. I think the biggest thing is CapEx. What I do every quarter, gentlemen, is I read the CapEx of the largest manufacturing OEMs in the industry, and try to figure out what they are saying, and all of them are saying, as you know, that's going to happen.

And if you read the latest information coming out of the FCC and the press releases of large companies, I think they are waiting to do it, but the market -- let's face it, these guys are finally making some money on paper, and until they start spending it again, they are going to have to see the opportunity and return of their investment. They want to be paid for using their systems. Right now, the internet providers are not paying them any money to speak of. So I mean, other than the guy at the home or the guy at the business. They want some money for that additional use. That's what I've been reading.

Don't you see it that way, Dave?

Yes.

And if that happens, then they have to build something, there has to be a market and there has to be a financial model that works. Time will tell.

Okay, all right. And so, as we're looking forward here in the December quarter, last year you did $10.2 million in revenue stream, and produced $860,000, of which is obviously close to what you reported for the past quarter. I guess I know you're not going to say what you're going to do, but we certainly hope you can get up over that to give us a positive comparison.

Well, if -- George, if you could tell us what the economy is going to do and which companies have money, we'll be able to give you better guidance. But up to now, like I said, we don't have any long-term contracts with anybody, because we're a on-hand, on-demand type of operation. We always get some residual. If the business picks up, because let's face it, most of the OEMs do not have product. And so that's a great opportunity. If there's a spike in business, it's good for us in the initial time when that spike takes place. We're like you. We look forward to seeing that.

Okay, thank you.

And it appears there are no further questions, so I will turn the conference back over to our presenters for any additional or closing remarks.

We appreciate everybody joining us today. We wish everybody a Merry Christmas and a Happy New Year.

This concludes today's presentation. Thank you for your participation.