ADDvantage Technologies Group Inc (AEY) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the ADDvantage Technologies first quarter fiscal 2011 conference call. Today's conference is being recorded. For opening remarks and introductions, it is my pleasure to turn the conference over to your moderator, Mr. 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 it 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 there to, including ADDvantage Technologies' most recent report on Form 10-K, filed December 14, 2010. 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 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 2011first quarter conference call. With me today is David Chymiak, Chairman of the Board, and Scott Francis, our Chief Financial Officer.

First, I would like to make some general comments regarding our performance during the quarter. I will then turn the call over to Scott, who will provide the financial results for the first quarter which ended December 31, 2010. Finally, Dave will address our new integrator reseller agreement with Cisco, and the market conditions our Company is currently facing, and expect to face in the foreseeable future.

As indicated in our press release this morning, for the first quarter of 2011, we reported net income of approximately $0.07 per basic and diluted share, and a further improved balance sheet of cash and cash equivalent of $10.4 million. While the results for the quarter were down slightly on a year-over-year basis, they represent a solid performance by the entire team given the current economic conditions.

For the quarter, our total sales were down 10% for the same period last year. This decline is primarily due to a significant decrease in the sales refurbish digital converter boxes, compared to last year. Fluctuations in demand for certain types of equipment are part of the nature of our business, and really depend on market supply and customer demand at any given time.

However, we saw the decline in demand for digital converter boxes last year and significantly reduced our inventory in this category the past nine months or so. While we would historically expect the decrease in demand from one category to be offset by the increase in another category, the MSOs and the large cable companies continue to put off most of their non-essential equipment spending as new housing starts and consumer spending is still down. This has resulted in the major fluctuation demand from year-to-year, and even quarter to quarter, as I have discussed on previous calls.

On a more positive note, our sales team has closed some significant opportunities as many MSOs are making plans and establishing budgets for network and overall equipment upgrades in 2011, which could get us on the path towards a more predictable marketplace. We are closely monitoring their plans, and our salespeople are in regular contact with the people at the MSOs in charge of planning what upgrades would be made in the short and long-term.

Our overall strategy still remains to reduce our inventory. However, we did increase the inventory this quarter compared to the end of last fiscal year. The reason is that we ramped up supplies of certain new equipment products in anticipation of potential disruptions, or equipment shortages, in the supply-chain for Motorola, following the split of Motorola's operation into two separate businesses.

For those of you that don't know already, Motorola split its consumer oriented side, which makes cell phones and cable set top boxes, and line gear, from the professional business of selling police radios and barcode scanners and network equipment to government agencies and large companies. The new companies are called Motorola Mobility and Motorola Solution. This took place by the 4th of January.

From an operational standpoint, our strategy is to continue reduce our inventory and maintain a more nimble business has worked in our favor from a cost perspective and customer service perspective. As such, we continue to look for news ways to reduce cost and operate more effectively wherever possible.

Most recently, we made the strategic decision to close our Tulsat-West facility in Oceanside, California, since our lease was due. As a result of these efforts, our SG&A costs decreased by 13% for the quarter ended December 31, 2010, compared to last year. While we are proud of this effort to reduce costs, our main focus is on increasing sales.

Everyday, everyone in ADDvantage, from the sales team to Dave and myself, is working to generate new market opportunities for the business, and grow our customer base to our alliance partnerships and international relationships. We continue to believe that as the economy improves, and consumer spending levels inch their way back up to the pre-2008 level, it will lead to increased demand for additional bandwidth of advanced data, cable operators begin to make the required upgrades in their networks to support the additional usage.

As an aside note, as many of you have read, I will give you the weather forecast. Tulsa had 18 inches of snow last week, more projected today, and that, most likely, will be a new record. We are still open for business, and yesterday we shipped 80 boxes, so that was really good. I would now like to turn the call over to Scott Francis, the CFO, for a look at the financials. Scott?

Thanks, Ken. As Ken mentioned earlier, net sales for the fiscal first quarter of 2011were $9.2 million, which is a decrease of 10% when compared to $10.2 million for the same period of fiscal 2010.

This decrease is primarily attributable to lower revenue from refurbished equipment sales, which was down 38% to $1.4 million, compared to $2.3 million for the first quarter of fiscal 2010. The decrease in refurbished equipment sales is primarily due to a decrease in the sales of digital converter boxes of $0.6 million, as Ken mentioned just a minute ago.

Revenue for new equipment was relatively flat at $6.5 million, for the three months ended December 31, 2010, compared to $6.6 million for the same period of last year. Revenue from repair services was also relatively steady at $1.3 million for the three months ended December 31, 2010, compared to $1.4 million for the same period last year.

The slight decline in revenue from our repair service business, was primarily attributable to the closure of our Tulsat-West facility during the quarter. Cost of sales for the three month ended December 31, 2010, decreased 8% to $6.3 million, or $6.9 million in the same quarter a year ago, primarily attributable to the overall decrease in sales of refurbished equipment for the period.

The cost of sales was also impacted by the decrease in the provision for excess and obsolete inventory of $0.1 million to $2.1 million for the three months ended December 31, 2010, from $0.2 million for the same period last year. Gross profit for the three months ended December 31, 2010, decreased to $2.9 million, compared to $3.3 million for the same period of fiscal 2010. This is due primarily to the overall decline in the net sales, and slightly reduced margins on our new equipment sales.

This is partially offset by the impact of the $0.1 million decrease in the provision for excess and obsolete inventory for the quarter. Gross profit margin decreased to 31% for the three month ended December 31, 2010, from 33% for the three months ended December 30, 2009.

Operating, selling, general and administrative expenses decreased $0.2 million, or 13%, to $1.5 million for the three months ended December 31, 2010, compared to $1.7 million for the same period of fiscal 2010. The decrease is due primarily to reduced costs of $0.1 million resulting from the closure of the Tulsat-West facility in the first quarter of fiscal 2011.

Income from operations in the first quarter of fiscal 2011 was $1.4 million, compared to $1.6 million for the same period of last year. Net income attributable to common stockholders for the first quarter of 2010 was $0.7 million, or $0.07 per basic and diluted share, compared to $0.9 million, or $0.08 per basic and diluted share for the same period of last year. And EBITDA for the first quarter of fiscal 2011 was $1.5 million, compared to $1.7 million for the same period of last year.

Cash and cash equivalent,s as of December 31, 2010, was $10.4 million, compared to $8.7 million at September 30, 2010, which was the end of our last fiscal year. This concludes now the financial overview of the quarter ended December 31, 2010. I will turn the call over to Dave.

Thank you, Scott. First, I want to address our new agreement with Cisco. At the end of the first quarter, fiscal 2011, our subsidiary, Tulsat, entered into a new systems integrator reseller agreement with Cisco, which will enable it to sell both IT and Service Provider Video Technology Group, or SPVTG, related products in the United States.

This agreement replaces Tulsat's prior distributor agreements with Cisco, that expired December 20th of 2010. Under the terms of the new agreement, Tulsat will purchase the majority of its new Cisco product inventory through a primary stocking distributor, as opposed to purchasing directly from Cisco, as it did under the prior agreement.

Also, SPVTG products purchased through Cisco are the primary stocking distributor will only be able to be sold to domestic end users of these products. While this new agreement will change parts of our distribution model, we are looking forward to fully implementing an effective and efficient distribution process with Cisco's primary stocking distributor in order to ensure our customer's equipment needs are met.

While this new model will result in slightly higher product costs, one of the benefits of the new model is that it should continue to reduce our inventory levels required for Cisco equipment, which will decrease our costs associated with carrying inventory and increase our liquidity position.

As part of the agreement, Tulsat was to become a Cisco Premier Partner by January 31, 2011. Tulsat did meet this deadline by, and among other things, obtaining the required Cisco certifications. As a Cisco Premier Partner, Tulsat can sell both IT and SPVTG related products, as compared to only the SPVTG products.

The total impact of this new agreement are still yet to be seen. However, it is important to note, that although this agreement was just signed, many of the changes in Cisco's distribution model were being implemented by Cisco over the past year. As such we have overcome most of the hurdles related to the new agreement already.

As Ken mentioned earlier, despite the lower revenues reported for the first quarter, we are in a very healthy position moving forward into 2011. So far, we have begun to see a few major MSOs report strong revenues, as a result of increased consumer spending in subscriptions and cable packages. This has led to early commitments by these MSOs of investing more money and upgrades for their programming and production equipment.

Although we continue to remain cautiously optimistic, we will be watching, very closely, as these early investor adjustments are made, making sure we are ready to capitalize on our relationships with the MSOs as demand for equipment begins to build.

Looking ahead, we maintain a steady focus on our long-term goals for monitoring cost, achieving long-term profitability, and being prepared to emerge from the current economical trends in a greater position of strength. This concludes our prepared remarks. Operator, we would like to open the call up for any questions, please.

Thank you, sir. Today's question and answer session will be conducted electronically.

(Operator Instructions)

Our first question comes from the line of George Gaspar, private investor.

Yes, good morning to everyone.

Good morning.

Good morning.

Hope you keep the shovels handy out over there.

We are using some muscles we have not used in a long time.

A question, how do you see the opportunity to broaden the business with this new agreement with Cisco? Does this give you opportunity, or does this encourage you to just look broader at the business that you are generating and try to be able break out of this revenue generating pattern that you are in at the present time?

Thanks for the question. I think it is too early for us to tell. We've been working, as Dave suggested, under many of the elements of this new agreement. One of the opportunities that we can do, and we have to get the right people in place and educate ourselves, is on the IT side.

Now, the reason why the revenues are where they are at is, and I talked to a leading OEM representative yesterday, is the MSOs, particularly the larger ones, are really concentrating on the commercial telephone customers. They found out that's the place they could really generate some additional income, where the consumers are, in some instances, cutting back on hard lines, and some of it, it helps their cell phones, but they are also cutting back on their programming for cable.

Until the market increases for the consumers, until we put more people back to work, we are in the mode of maintaining systems with these cable companies. We are looking at new opportunities where there have been some transactions, where some of the smaller systems have been sold off, and they need upgrades. Dave, are you looking at some of those opportunities?

We're quoting out a lot of gear. Again, most of it, the larger MSOs are just ordering things to replace, and, as the slowdown occurred, our main competitors, which are the suppliers, the factories themselves, the lead times have been cut down, again. That always influences our sales .

Okay. All right. A question, now, you improved your cash position relative to the previous quarter. Your note payables drifted downward, it looks like, $400,000. I guess this is in comparison with December 31, of a year ago. At least the payables are down.

Your cash position has improved. It looks like it's almost $1.00 a share, at this point in time. Your inventory has not really changed by very much, if I am reading this right. How do you see your cash position moving through the remainder of the year? And, where do you see your inventory level going forward, considering the new agreement, where do you see inventory level being versus what it was in this past quarter?

This is Ken. I think we have done a good job. We made a statement a year ago, that we look to increase our cash position. If you look at it based upon the sale, we have done a great job that way. The increase is due to two fundamental reasons, as we've talked about. We took advantage of an opportunity to purchase some equipment that the original Motorola still had in inventory prior to moving their production to a third-party.

We have seen some opportunity because they're ramping up that new process, because this is a brand-new process. Motorola no longer has employees making the line gear and the fiber-optics gear that we sell at our NCS location.

You must remember, that our Motorola division is, we are told, the largest distributor they have in the broadband industry. That means line gear and some of that type of equipment. We are working with the factory on some orders because we do have the inventory. So, that's why that increased.

I think we will find that, that's been a very good move as there are shortages and as they try to get this new process of manufacturing online. That is a positive. The other one, we didn't talk about. We are in the Fujitsu encoder business, and we had a very successful first quarter in that, for the broadcasters, and we look forward to build that industry. We have only been in that particular market for less than a year.

Dave, what do you think on the Motorola side? I will address that over the next 6, 12 months, that inventory should go down because of the things we have in the works, and as the process of ordering, the lead times may shrink on the Motorola side once they get all their processes in place. What about Cisco, Dave, what do you see in that area?

George, you brought up a point, that our inventory did not drop that much in the quarter, but yet our cash did. I will make a plug for our inventory. Everybody always asks why we have all the inventory. We have been reducing inventory, but we have not been taking offers on any. We have been selling, making good margins.

The inventory will not go down very quickly, but the cash will go up. In the next four or five months, it is still our goal to generate as much cash as we can. We are looking at all deals anymore. We have always looked at them, but we are not losing a lot of deals that I can see. There's a lot of inquiries out there.

There will be some of the TARP money available out there, shortly. It's just coming in to the market place. A lot of people are putting out orders. But, a lot of the most desirable gears, our lead time is almost six months right now. We have had some on order for four months, that I still have not seen come in the door yet.

I think the thing that's important, most of the cash generation for this last quarter, is because our receivables are about the amount that we've increased. Isn't that right, Scott?

Yes, George, when you look at it, our cash position is exactly what you are talking about, from the perspective especially over the past year, the increase has primarily been reduction of revenue -- excuse me, reduction of inventory. Our receivable collections have also stayed in check. We have improved that, which, given the economy, our collection folks have done a great job.

You have really got that going on in this quarter as well, what Dave was talking about with the reduction of inventory -- or, excuse me, selling. We have had good margins on that. So, therefore, cash generation, because we are not having to replace that equipment. Number two, it is just an overall good collection on the AR.

Okay, it looks like the Company is in pretty good financial shape to expand its business. When you look at the book value being, I calculate, [$3.34], I believe, based on current shares out and cash availability, you ought to be able to broaden this business. Lastly, on the comments on Motorola, how are you sensing the division breakout in Motorola, which took place recently? How do you see that, overall, in the game plan for your operation?

I think now, you would say it's confusion, because--.

Okay.

I think that would be what we would expect. I think what we hear -- I think they've -- in the same vein they are reducing staff all the time. From our perspective, it looks like more and more of the traditional orders that we like, the 10, 15, 20, maybe 50 or 100 pieces, is going to go through traditional distribution. There are very limited players in that market.

It is a positive for us. Motorola, again, in the conversations, I think they don't know yet. This is somewhere new for them to be. One of Motorola's biggest drivers, and I think if you look at Cisco's conference call last quarter, it was the biggest driver for them on our part of the business, is the set top boxes. That has been very very flat for both of them.

Because I think as the consumer demand is down, and they are turning off their cable, their cable services, the boxes come in, the modems come in and then the rest of them, they are waiting for other advances that have been presented in the marketplace that will take place in IPTV and other things. We are in a good position with them.

We are close to their headquarters, where they work out of and do the engineering for the broadband. We are about 15 miles away in Pennsylvania, and we have had an over 30 year relationship with them. I think it is a good partnership. We are waiting and looking for more opportunities, so we can help them as long as it is a win/win for both of us.

Okay, good. Thanks for the explanation.

(Operator Instructions)

Our next question comes from the line of Keith Gill with Debris Publishing, Inc.

Hi guys, how are you doing today?

We are here ready for a snowstorm.

I am over in New Hampshire and I have had the same issue, it's increased dramatically recently.

That is one of the few times that we can say we sympathize, because we know what it feels like.

It is rough, it is rough. I had a question. A year ago, you had anticipated increasing your cash position, and you have done a fantastic job on that, so, congratulations. I am curious, what are you planning on doing with that cash?

That is a good question. We ask it all the time. I will let Scott discuss. We have a financial instrument in place. We have to pay, what you would call, a prepayment penalty if we pay it off ahead of time.

Scott, do you want to talk about that? It is one of the reasons why we have not done anything with that cash, as far as paying down debt. There's other things that we are looking at, we always look at ways to grow the business through the right acquisition.

One of the opportunities might be in the IT field, or we might expand our service business, we're not looking to expand the inventory, something that requires a lot of inventory. You want to talk about that, Scott?

Yes. Basically, Keith, what we are looking at with the cash, and one the reasons we have not paid down the debt, is we do have a financial swap in place with our largest term note. With that, even if we did pay down the principle, we would still, it goes without saying, have the swap in place.

It's not necessarily a penalty, but just the market value of that swap to terminate is about $1 million right now, and we are not ready to swallow that kind of a lump yet. What we have done is we have left the cash on the books, so that way as Ken was saying, if an opportunity does come our way to grow the business, we do not have to take out more debt. We would have the cash on the books.

The swap itself is still not a bad interest-rate, it's, give or take, around 6%. That is why we have not paid down the debt, from that perspective, and still trying to grow that cash. It lets us be a little more flexible and not have to draw into the note -- into the line of credit, either.

As we note, there is a line of credit we have not had any money borrowed on the line of credit for some time. We just had a slight increase on that. It's in the 3 range, is that correct?

Yes.

We still have a -- what is our billing at right now, still at the old swap rate?

No, the billing, no, it's at a floating LIBOR plus 1.4%. We have got good rates. Right now, it is not really to our advantage to necessarily pay off the mortgage. We could, but, really, the one if we could have, would have probably been the bigger one, with the swap there, it did not make a lot of sense.

Got you.

Does that answer your question, Keith?

That does. That is great. Thank you. One other thing. I am curious. I am still trying to familiarize myself with the type of inventory that you have. What is the typical replacement cycle on your equipment?

Again, it goes back to our model. When Dave and I started the Company, we bought it through bankruptcy in 1985, we were focused on growing the business. Part of that is, we just left the money in the business, we let it retain earnings there, and we could not find a better thing to do with the earnings for years.

And then we found it is best to put the money in inventory, because, over a period of time, we were able to monetize that and make some decent margins. Our average turn is less than 1% -- 1 times. In certain product lines that's 7, 8 times. Dave, do you want to talk about that? He will talk about the Cisco part, because Dave runs the Cisco part.

I work more on the Motorola part. The Motorola part turns inventory and some of the other equipment turns more, but there are a few products that Dave discussed, in particular, some of the line gear. When that business slowed down, it got slower, but there are other products on the head end and encoders that are much faster. Dave?

Keith, we have had the opportunity over the years in the past to buy a lot of inventory at a good discount. We take advantage of those. If you'll notice, our gross profit dropped 2%, I believe, on the quarter.

One reason for that is a lot of the items that make 7% to 10% to 12%, actually sold a large part of volume, but our profit on a lot of the items that we have had for a long time make a good percentage of our profit and bring that percentage up pretty good. We sell a lot of items that we make 70%, 80%, 90% on.

There is still maintenance on systems that have 40 channels out there, 50 AV channels. A lot of them are adding the Internet, even on those smaller systems. They make their way to us to buy equipment that has been on our shelves for 10 years, 15 years, at times.

Part of the thing is, a lot of the equipment we have, and we are diligent about the obsolescence, we watch it very closely, is when you get to needing an older product, like our replacement product, it is about, do you have it? That is why we are able to still maintain attractive margins on those products. As Dave said, on some of the fast turning margins, at the Motorola and at the Cisco level, and the current production items which they need for components, that turns much faster, but much more competitive to the lower margins.

One thing I might make a comment. Very little of our inventory has software in it. Software is what makes a lot of products go obsolete. So, someone that has a system that's got a gear out there 20 years old, can still order, someone that needs something from five years ago that the factory no longer makes, they call us, and we have a lot of it in stock, and we are still able to provide a large amount of inventory that way. It just works.

You got to realize one thing in particular over the last two years, as the economy is trying to find its way out of where it is at, and cable companies, just like us, curtail their cap expenditures, as the volume goes down, our turns will be less.

That is a great point on the amount of software that is in the inventory. I was not familiar with that. I did not realize it was mostly hardware. Thanks for that.

Even in electronics. The electronics do not include software as far as, a lot of -- 90% of what we stock and sell.

Right. I just have another, just a broad brush question. You guys have had some very consistent gross margins, net margins, and, actually, you've had fantastic returns on equity despite this economic downturn. Your revenues per share have been quite consistent.

Your return on equity, they have declined since the pre-2008 levels, but certainly not that bad in the latest fiscal year, at about 15%. Pre-2008 levels, you were at about a 47%, and it's dropped quite a bit down to 14%, but that's up from 2009. I'm just curious, how do you anticipate profitability will be in the upcoming years? I know it is hard to predict when the economy will turn around.Do you still anticipate maybe above a 10% return on equity?

That has always been our goal. Again, you said it right. It depends on what happens in the economy, it depends on if there is a national disaster that requires fast service. We are one of the few in the country, there are two or three of us that have that equipment.

We have been blessed with, other than the snow, we haven't had any tornadoes and a lot of ice damage, and things like that, that would make our business increase. I think, going forward, we always have our eyes on the ball. The one thing I say quite consistently, and all of us in management will tell you, historically, since 1985, we have chased profits, we have not chased revenue. We have not taken our eye off the ball is what I'm trying to tell you.

Okay. Just got one final question. Your primary competitors are just the suppliers themselves? Is that right, like the Cisco type?

In the new world, there are several other people that are premier. Everybody says, to get the best discount, you had to be a premier partner with Cisco. There are a few more players out there that gets the best pricing. There are a couple other. There is one other distributor of line gear, former distributor, now they are a reseller, he did have some inventory.

Going forward, there is probably 10, 12 people in the industry. Most of them concentrate in certain areas. We go back 25, 26 years. We got a client base and people, if they ask you about Tulsat, they'll say Tulsat may not be the most economical, but they provide great service, they stand behind what they sell and, they most likely have it.

Can you get Tulsat over here into New Hampshire to give me some cable products? Is that possible? I am just kidding.

Prepay your bill and we will do it, okay?

Thanks so much for your time, guys. I appreciate your input.

Appreciate it.

Gentlemen, there are no further questions in the queue at this time.

Thank you, very much. We thank everybody for joining us today, and we look forward to you joining us next quarter. We are getting ready to go out and get our shovels ready. We are expecting 4 to 10 inches of snow, again. Have a good day.

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation.