ADDvantage Technologies Group Inc (AEY) 2011 Q3 法說會逐字稿

Good day, everyone. And welcome to the ADDvantage Technologies fiscal 2011 third-quarter earnings conference call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Zach Brown, of KCSA Strategic Communications. Please go ahead, Mr. Brown.

Thank you, Melissa. 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 the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties.

Participants are cautioned that those 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 anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is subject to change.

Although any such guidance and the factors influencing it will likely change, ADDvantage Technologies will not necessarily update the information, as ADDvantage Technologies will only provide guidance at certain points during the year. Such information speaks only as of the date of this presentation. With nothing further, I would now like to turn the call over to Mr. Ken Chymiak, President and Chief Executive Officer. Ken, the floor is yours.

Thank you, Zach. Welcome, everybody, today to ADDvantage Technologies' fiscal 2011 third-quarter conference call. With me today is my brother, Dave Chymiak, Chairman of the Board; and Scott Francis, Chief Financial Officer. I would like to begin today's call by making some general comments regarding our performance during the quarter. I will then turn the call over to Scott, who will provide the detailed financial results for the third quarter ended June 30, 2011. Finally, Dave will address the market conditions our Company is currently facing and would expect to face in the foreseeable future. To begin, our third-quarter results were in line with our expectations. And despite the ongoing economic uncertainty surrounding the cable television industry, we continue to believe we are positioned for long-term profitable growth. For the third quarter of fiscal 2011, we reported net income of $0.05 per basic and diluted share, with total sales of $8.7 million for the quarter, with gross margins of 30%. This does reflect a 35% decline in total sales compared to the third quarter of last year. However, total sales are nearly flat compared to the second quarter of fiscal 2011, reflecting the continuation of the trends we discussed on last quarter's call.

As I've discussed on the last several calls, our Company is still being impacted by the economic downturn, the uncertainty in the markets. The cable television industry is not immune to this downturn, and our large and small MSO customers continue to display capital expenditures on both plant expansion projects and bandwidth product upgrades, in this effort to conserve cash. This decline in spending is a [relatively] significant decrease in the sale of our new and refurbished products. We cannot protect when these MSO customers will begin to increase their capital expenditures or to return to pre-recession levels. But until this happens, we do not anticipate revenue growth in our equipment sales business.

Another factor that affected our business during the quarter was Tulsat's reseller contract with Cisco, which was assigned during the first quarter of 2011. This agreement reflects Cisco's revised distribution model, which Tulsat must now purchase its products through a primary stock and distributor. In addition, Tulsat cannot sell current products -- production -- Cisco products to other resellers or brokers, nor can sell these Cisco products outside of the United States, as we had done in the past. We do not expect to be able to fully assess the full impact this contract is having on our business until the end of fiscal 2011. Despite these obstacles in our business, we remain focused on our core business strategy, which is to provide customers with the highest quality service possible and offering a robust inventory of on-hand, on-demand equipment from several OEMs. We've continued these high standards while adjusting our operations, in order to stay in line with lower market demand, which has allowed us to sustain our overall profit margins. Part of this realignment includes adapting the size of our inventory. These efforts are resulting in another quarter of positive cash flow and a stronger balance sheet, with cash and cash equivalents of $12 million as of June 30, 2011 -- up from $8.7 million at the beginning of our [physical] year 2011.

Looking ahead, we remain confident that our strategy to reduce our inventory to maintain a more nimble business has positioned us to remain profitable. But we also know that the market we are in is changing, and we must adapt to this change in order to survive and grow. Part of this change is to identify and pursue various opportunities as strategy. It is believed the current economic condition provide opportunity for us to grow our business in the long term. One of these strategies is to look at potential strategic acquisitions that merely add scale to our business, provide us with customer relations with OEM relationships.

I am pleased to say that in May, we closed on such a acquisition, with Adams Global Communications, referred to as AGC. AGC purchases and sells cable television access and transport equipment, digital converter boxes, and modems in the United States, Canada, and Latin American markets. Just one of the main product lines of AGC is digital converter boxes. We started marketing our BRI subsidiary as AGC, as well, effective with the close of the acquisition. Though AGC was not a large acquisition, at about $550,000 net of cash acquired, we believe it will be neatly accretive and will provide strategic advantages for our business over the long term. This includes potential growth opportunities through access to new customers and OEM partners we did not previously have. AGC has a reseller agreement with Arris Solutions, which is one of the nation's largest OEMs of cable television equipment, to sell Arris products in the United States. Also, in October 2011, we are planning to relocate AGC's operations to a 26,000-square-foot facility that ADDvantage purchased in Lenexa, Kansas for $1.475 million in cash. AGC leases this current property on a month-to-month basis. Now, with that, some more detailed financial information, I would like to turn it over to Scott, who will provide the financials.

Thank you, Ken. As Ken mentioned earlier, our net sales for the fiscal third quarter of 2011 were $8.7 million, which was a decrease of 35% when compared to $13.3 million for the same period of fiscal 2010; and nearly flat compared to the fiscal second quarter of 2011. As Ken also mentioned, the decrease is primarily attributable to the continued economic downturn in the cable industry, as our MSO customers do continue to conserve cash and limit their capital expenditures, as well as the negative impact of the Cisco agreement signed during the first quarter of 2011.

Revenue from new equipment sales decreased to $5.6 million for the three months ended June 30, 2011, compared to $9.4 million for the same period of last year. Net refurbished equipment sales decreased 23%, to $1.9 million, compared to $2.5 million for the third quarter of fiscal 2010. The decrease in refurbished equipment sales is primarily due to the factors I just discussed, plus the decrease in the sales of our digital converter boxes of [$0.2] million. And our revenue from repair services decreased 15%, to $1.2 million for the three months ended June 30, 2011, compared to $1.4 million for the same period of last year. The decline in revenue from our repair service business is primarily attributable to the closure of our Tulsat-West facility during the first fiscal quarter of 2011.

Cost of sales for the three months ended June 30, 2011 decreased 33%, to $6.1 million from $9.1 million in the same quarter a year ago, which is primarily attributable to the overall decrease in equipment sales for the period. The cost of sales was also impacted by a decrease in the provision for excess and obsolete inventory, at $0.1million, which was $0.1million for the three months ended June 30, 2011, from $0.2million from the same period of last year. And gross profit for the three months ended June 30, 2011 decreased to $2.6 million, compared to $4.2 million for the same period of fiscal 2010, due primarily to the overall decline in net sales. And our gross profit margins were 30% for the three months ended June 30, 2011, compared to 32% for the same period of last year.

Our operating selling, general, and administrative expenses decreased 6%, to $1.6 million, for the three months ended June 30, 2011, compared to $1.8 million for the same period of fiscal 2010. The decrease is due primarily to the decrease in management bonus expense of $0.1million in the three months ended June 30, 2011, as compared to the same period of last year; and reduced costs of $0.1million resulting from the closure of our Tulsat-West facility. This is partially offset by increased payroll-related cost of about $0.1million, resulting from the recent AGC acquisition in the second quarter of fiscal 2011. Income from operations in the third quarter of 2011 was $0.9million, compared to $2.4 million for the same period of last year.

Our net income attributable to common stockholders for the third quarter of 2011 was $0.5million, or $0.05 per basic and diluted shares, compared to $1.4 million, or $0.14, per basic and diluted share for the same period of last year. And our EBITDA for the second quarter of fiscal 2011 was $1 million, compared to $2.6 million for the same period of last year. And our cash and cash equivalents at June 30, 2011 was $12 million, compared to $8.7 million at September 30, 2010; and our net inventory deceased $0.7million, to $26.7 million, at June 30, 2011, compared to $27.4 million at September 30, 2010, reflecting our overall strategy to continue to reduce our inventory. Keep in mind that our overall inventory still decreased, even after considering the impact of recording $0.7million of inventory resulting from the AGC acquisition.

Now, on to results for the nine months ended June 30, 2011. For the nine months ended June 30, 2011, net sales were $26.8 million, a decline of 25% from $35.6 million for the same period of last year. The decline in equipment sales for the period was due to the factors I discussed earlier, as well as severe weather conditions in the second fiscal quarter of 2011. New equipment sales for the nine months ended June 30, 2011 were $18.5 million, compared with $23.7 million in the previous year, which was a decrease of 22%; while sales of our refurbished equipment decreased 39% to $4.6 million for the third quarter of fiscal 2011, compared to $7.6 million for the same period in fiscal '10. In addition to the factors discussed earlier, the decrease in refurbished equipment sales has also reflected a decrease in the sales of digital converter boxes of $1.7 million. Revenues from our repair service business during the first nine months of fiscal '11 were $3.7 million, which is a decrease of 12%, from $4.2 million, for the same period of last year. This repair service decline for the nine months ended 2011 was primarily attributable to the closure of our Tulsat-West facility.

Cost of sales for the first nine months of fiscal '11 decreased by 23%, to $18.7 million, when compared to $24.4 million a year ago, which is primarily attributable to the overall decrease in equipment sales. Our cost of sales was also impacted by the decrease in a provision for excess and obsolete inventory of $0.3million, to $0.3million for the nine months ended June 30, 2011, from $0.6million for the same period of last year. Our gross profit decreased by 27%, to $8.1 million, for the nine months ended June 30, 2011, compared to $11.2 million for the nine months ended June 30, 2010. Our gross profit margins were 30% for the nine months ended June 30, 2011, as compared to 31% for the same period of last year. Our operating selling, general, and administrative expenses decreased 9%, to $4.7 million, for the first nine months of fiscal 2011, compared with $5.2 million for the first nine months of fiscal 2010. The decrease is due primarily to reduced costs of $0.2million resulting from the closure of our Tulsat-West facility. Income from operations for the nine months ended June 30, 2011 was $3.4 million, compared with $6 million for the same period of fiscal '10, which is a decrease of 43%.

And our net income attributable to common shareholders for the nine months ended June 30, 2011 decreased to $1.8 million, or $0.18 per diluted share, from $3.3 million, or $0.33 per diluted share, in the same period a year ago. Our EBITDA for the nine months ended June 30, 2011 was $3.7 million, compared to $6.3 million for the same period of last year. This concludes the financial overview of the quarter ended June 30, 2011. I'll now turn the call over to Dave.

Thank you, Scott. As Ken discussed earlier, the market conditions remain difficult. However, we are constantly monitoring the actions of our large MSO customers for signs that they will re-institute network upgrades and expansions. As such, we remain flexible and ready to capitalize on our relationship with these MSOs, should their demand for equipment begin to build. A positive sign we continue to hear from some of the MSOs we track is that their quarter results are strong. And this strength is based on increases in revenue from business service subscribers for voice and high-speed data, plus higher residential ARP use, which is annual revenues per user. However, the continued [lull] in the housing markets, combined with slow recovery rate of the economy as a whole, has kept many of these MSOs from making any significant investments in their systems or any changes in technology that require head-in upgrades. This has had a negative impact on our business over the last couple of quarters.

And as Ken has previously discussed, we believe we are well-positioned for our long-term profitability growth, both from acquisitions and by remaining focused on our strategy of reducing inventory to be more in-line with current market demands, while maintaining a cash position that allows us to react effectively to shifts in the industry. As of today, we believe the Company has the necessary inventory on hand, as well as additional inventory available to us via our supply chains, to meet our customers' demands once they begin to increase with their capital expenditures -- expenses. And in the meantime, we remain the leading broadband access network stocking distributor for Motorola, as well as the master distributor for (inaudible) encoders, decoders, and media solution products to the US. We are constantly working to expand our relation with these OEMs, in addition to the relationships we build through our acquisition with AGC subsidiary.

In closing, we are continually evaluating and working to build up our relationships with both our partners and customers, as we continue to explore various strategies that will help grow our business and increase the value for our shareholders. This concludes our prepared remarks.

Operator, we're ready for any calls.

(Operator Instructions) George Gaspar, Private Investor.

Questions -- first 1, just an overview on Cisco change-outs taking place, reduction of personnel, and what's the impact for AEY on this, near term? And are there positives and negatives, or how do you assess the situation?

George, I think we're like you. If you have any insight, let us know. It's still a work in progress. I mean, we know there's been some of our relationship people at Cisco that took the early retirement. And we don't know any more than we read in the newspapers because as we've suggested, a lot of our orders now are going through the other distributors. So, we do have contact, we do have some relationships there but again, I think it's still a matter of flux. Dave, what do you see in that relationship?

George, it has some positives. It has some negatives. 1 thing in our favor -- our knowledge and our base. A lot of the people that are leaving Cisco are people that are in our type business. The technology people that were there are no longer there. So, I feel a lot of the people will be contacting us for information, which will lead to possibly more sales. So, in that regard, I see it as a plus, because this technology that we're into is still going to be there for years to come. And as long as the sources aren't there for it, they still need the product, they will be calling us.

Okay. All right. And secondly, the Adams Global Communications acquisition -- can you cite sales volume that came with that on an annualized basis? And what the cost of the acquisition was, how you are taking care of that?

Yes, George. We've been familiar with this company for many, many years. We've done business with them through our subsidiaries, and we've looked at the acquisition 3 times. Volume has gone off a little bit in their business. But we believe the business model should be -- I suggest in the $6 million range or more, depending on the opportunities with the Arris arrangement and if the market picks up on converter boxes. Their real strength in the market is converter boxes. They really were one of the larger converter suppliers, at one time, to the second-tier markets and to Latin America.

They have their overhead down to a [conservative] -- it's not a real high-cost operation. And with their new facility, it's going to put us in a much better position, because with our new facility, we've been able to knock some of the overhead down as we go forward. We didn't mention it, here but we have the facility rented now for another 3 months. So, we have considerable more income coming in on a rental than we did in the bank. So, that's a positive.

Now, where is this located? Maybe you mentioned that earlier. But have you integrated this right into your Tulsat location there, or is this located somewhere else?

It's in the Kansas City region. The existing business -- Overland Park, Kansas -- well, Lenexa's a suburb of them. But what we have done is, we moved our BRI inventory, which was really our box business and our modem business, to Adams Global in that market. So, they're going to handle all of that. And what we did, we bought some -- we got some expertise with the purchase to handle that operation. So, now, we've taken that inventory from the Tulsa area and back into Overland Park. So, that's kind of moved that inventory around.

And what kind of facility are you operating out of there? A rental?

Yes, George. Right now, it's a facility that at this time is much too large. It's about a 60,000-square-foot building with low ceilings. And what we've bought is a much more functionable building for us. And we'll own it for considerably less than they were paying rent before the new agreement. So, we're going into a very nice situation in a industrial area, and we've demonstrated by the rental at this time that it has a high demand for rentals. We think it's a good acquisition, both the property and the company. Should be beneficial to the Company.

I see. Well, that sounds good. The debt payment situation, repayment -- and as I recall, we've talked about this quarterly. But when is your next payment due, or when will you be paying -- making payments against the debt? Or is that not until 2012 plus?

Yes, we make a quarterly payment. We'll let Scott address that.

George, basically, we made payments, as Ken said, every quarter on the larger debt, the mortgage -- the smaller debt is a monthly mortgage payment. But the larger debt is basically a $400,000 plus payment every quarter. It's not on the quarter-ends. The next 1 will be, actually, in August and then we'll have another one in November. So, it's every 3 months on that time schedule.

Already noted at the end of the quarter. We've really, guys, we've done a significant job on that. And I think it speaks well of the Management team and the collections and our receivables department. What's our note payment on this? It's less than $11 million now, I think?

We're right at $11 million, right now.

We started at $16.7 million, I believe. So, you can see we've done quite a job with that. In addition to that, of which is really positive, we had $12 million in the bank at the end of the quarter.

Yes, okay. That's positive. And your book value has to be, what? About $345 million, $350 million?

It's over $350 million.

It's over $350 million. Okay. All right. Thank you, I'll queue back.

Nick [Gavitch], Private Investor.

First of all, really nice quarter in a tough environment. And you guys did a great job of generating cash and improving the balance sheet, despite all the headwinds. I have a couple of questions. The first is about the AGC acquisition. You said you paid $550,000 net of cash for that?

That's correct.

Okay. Are there any material earnouts that are going to come down the line, or was this kind of a troubled company that needed an exit?

It was a fortuitous purchase for us at this time. The situation was that there were some investors, they wanted out of the business, and we just happened to have a long-standing relation with the people. And we were excited to partner with this company.

Okay. All right. And the second question is around the Cisco agreement. You noted that it's been hurting your sales. Can you remind me how the Company benefits from this, exactly?

If you're asking how the agreement, the new agreement benefits us -- well, we don't think it's not as good as agreement as we had before, but it wasn't in our decision. They changed the entire model for all the people involved, to make it more in line with Cisco's traditional model of having 1 or 2 strategic distributors. And that's what they've done. They appointed 1 for this segment of their market. It's affected us, but we're looking at that also, because we're also the largest band distributor, we're told, for Motorola. And that business is off as much as the Cisco part of our business. That's why we always say, we really can't tell -- is it the economy? Is it the lack of purchasing in our sector? It appears to be all of the 3, because when we look at all of it, they're both the same -- basically, in the same type of decrease in revenues for this time period.

Right. Okay. Thank you. And also, can you tell me when that difficult top-line comparison is coming up from the Cisco agreement anniversary?

We're going to know -- the agreement took place at the end of December, first of January. But we'll have a better impact on it. We've only been operating under the new agreement for 6 months. We'll have a better impact on it at the end of this fiscal year, which our fiscal year ends the end of September, and really, at the end of the first year, the anniversary, which will be December 31. But again, the big question is, there hasn't been a lot of shortages, because there hasn't been a lot of demand. I think that's going to be the true test for the new distribution model for Cisco.

All right, great. Thanks a bunch. I really appreciate it. Take care.

(Operator Instructions) We'll go to a follow-up question from George Gaspar.

Question on your inventory situation. It looks like a modest decline, marginal decline. Has the makeup of the inventory changed by any measure in the past quarter? And how do you view, based on your current sales range, in this $8.5 million, $9 million a quarter range? Have you set your sights on being able to take the inventory down by any significant measure? Or is -- because the acquisition you've made, is it going to steady the inventory at -- in and around what it is currently?

George, as Scott mentioned, we had a $700,000 increase because of the acquisition. So, we've really -- if you took that out of the equation, we really reduced it. And we had a little uptick in the quarter in some [Fujitsu] inventory, because they got a few new product lines. But Scott, do you want to address that a little bit, where we are in inventory?

Yes, basically, we're -- I may not have said it real well in the prepared remarks, George. But basically we dropped about $400,000 from September 30 to March 31, right now. And where we have done -- from September 30 to now, we've done several different purchases from -- as Ken already said, with Motorola, with Fujitsu, and also with some Cisco purchases before the new contract came into play. So, we increased inventory in some of the those areas, and now we're starting to whittle it back down. So, with the AGC acquisition, there's a $700,000 add-on from this past quarter.

So, we really have been whittling it down. And to your question of how fast will it go down, and so forth. As we try to bring down some of the inventory and we sell down some of the surplus, obviously, some of the margins are pretty good. If you're sitting there, we're averaging that 30%, it takes a little bit to start bringing that down.

And again, that's a function of the market. If the volume picks up significantly, we can see that reduced considerably over the next quarter, over the next 6 months. Because the issue is, we buy most of the -- we still have the [good] inventory of Cisco product, to answer another one of your questions; and Motorola and Fujitsu inventory, along with used gear. And the used gear -- we love used equipment, because that's our best margin product that we have. So, we're very optimistic on where we're at in our inventory position. And if the business ticks up, and if we don't have any opportunities on the used side of the business in the next 3 months, maybe we'll see that go down further.

Okay. And then, a question on the residue of the Motorola separation in their operations. Now, that's -- I know that hasn't been a long period of separation at this point in time yet. But how do you find the mechanics of working with the organization that you have to work with there? Do you see opportunity that could come from that divisional breakup that took place there? Or what's your sense on that?

I think we're in a real good position. I've met with them, along with their manager, at our location in the Philadelphia area, which is real close to their broadband headquarters. Right now, for example, our manager is going with one of their salespeople do an on-site visit with a large customer. So, what we're finding out in that market, they have had some downturn as well as Cisco in personnel, and some of the smaller opportunities they need to fill immediately, they bring it to us. We value that relationship, [along with Cisco and our Fujitsu] relationship, and look forward to building our Arris relationship with the AGC team.

I see. Well, that sounds positive. And 1 last -- on just, I know 3 months is not a long time, but do you see anything unusual or happening in the technology side of your market environment that would give you some new added opportunity?

Dave, you have any thoughts? I mean, the only thing -- George, what we do, we read what you do, and a lot of it's smoke and mirrors, because a lot of it's PR out there before the product comes out. It may be several years before it all is implemented, and by time the budgets are done. So, we look at that and we look at new products all the time, and we look at where it fits our customers. Dave, do you see anything in that area?

No. George, one comment I'd make -- it's really difficult for us to tell where we really fit in the whole situation here, as far as our income and everything. I do not feel that we are losing any market share. The market is down. The economy's down. This business is down. I don't find that we're losing any deals. It's just there's not as many deals out there to be made right now. So, it's a hard one to really tell what -- how well or not how well we're doing, either way. But everything I see is that we're staying -- we're holding our own, for market share. What's available.

Okay. Well, that's good. And well -- again, you guys are hanging in there pretty well on this reduced volume. And it's nice to see that you can still bring a reasonable margin to the bottom line. Thank you.

Thanks for your comments.

(Operator Instructions)

If there's no other comments, we appreciate everybody joining us. We look forward to having a positive report in another 3 months. Have a good day.

That does conclude our conference for today. Thank you for your participation.