ADDvantage Technologies Group Inc (AEY) 2012 Q1 法說會逐字稿

Good day, everyone, and welcome to the ADDvantage Technologies first quarter 2012 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, sir.

Thank you.

Before we begin today's call, I would like to remind you that this conference call may contain forward-looking statements which are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, statements regarding future events such as the ability of ADDvantage Technologies and its subsidiaries to maintain strategic relationships and agreements with certain original equipment manufacturers and multiple system operators, as well as the future financial performance of ADDvantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned that these forward-looking statements are only a prediction and may differ from actual future results, events, and 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 on December 15, 2011. 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'd 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 the ADDvantage Technologies' fiscal 2012 first-quarter conference call. With me today is Dave Chymiak, Chairman of the Board; and Scott Francis, our Chief Financial Officer.

I'd like to begin the call by making some general comments regarding our performance for the first quarter of fiscal 2012. I will then turn the call over to Scott, who will provide the detailed financial results for the quarter, which ended December 31, 2011. And finally, Dave will address the market condition the Company is currently facing and is expecting to face in the foreseeable future.

With that said, let's get started. The revenue for the first quarter of 2012 is relatively flat year-over-year, to approximately $9 million, as we continue to face a weak cable equipment market and an uncertain economy. Our revenue is also affected by the continuation of low investments by MSOs in order for them to conserve cash. Our sales staff has experienced a significant increase in quotes for request for product for 2012 budgets, primarily from second- and third-tier cable operators. We expect to close many of these opportunities in the coming months.

Most of the quotes have been to upgrade plants to increase bandwidth with refurbished legacy equipment. Our recent acquisition of Adams Global Communications helped keep our revenues stable by offsetting the decrease in sales in other areas of our Business. The AGC acquisition has increased our sales in the customer premise equipment market in modems and set-top boxes, and also has provided our Company another valuable OEM relationship in ARRIS.

Our operating margin decreased by approximately 5% compared to last year, due primarily to the increase in our operating, selling, general, and administrative expenses, resulting from increased personnel costs following the acquisition of Adams Global Communications. During the quarter, we also remained committed to strategically reducing our equipment inventories to levels more in line with current demand. This has effectively allowed us to carry less risk and significantly increase our cash position to approximate $12.2 million, from approximately $10.9 million, as of September 30, 2011. ADDvantage Technologies has been able to stay profitable throughout this economic downturn as we remain confident that we continue to meet these challenges with strategic adoption and a common sense vision.

We're in the process of formally reviewing our overall long-term strategy for sustainable growth in order to increase the value our of our Company for shareholders and are still early phase of these discussion with the management and our Board of Directors. As a strategy is developed, we believe our relatively strong financial position will give us a major competitive advantage in the current market and will allow us to seek strategic growth opportunities, whether organically or through acquisitions, in order to properly position our Company for long-term growth.

With that said, for more detailed financial information I'd like to turn it over to Scott, who will provide the financials.

Thank you, Ken.

As Ken mentioned earlier, our net sales for the first fiscal quarter of 2012 were $9 million. This was a decrease of 2% when compared to $9.2 million for the same period of fiscal 2010. As Ken mentioned, the overall decrease was primarily attributable to the continued economic downturn in the cable industry as our MSO customers continue to conserve cash and limit their capital expenditures; as well as the negative impact of the Cisco agreement signed in December 2010. These decreases, though, were largely offset by revenues generated from Adams Global Communications acquisition, which was acquired in May 2011.

Revenue from our new equipment sales decreased $1.3 million to $5.2 million for the three months ended December 31, 2011; compared to $6.5 million for the same period of last year. Net refurbished equipment sales increased $1.2 million to $2.6 million, compared to $1.4 million for the first fiscal quarter of 2011. The increase in our net refurbished equipment sales was primarily driven by our acquisition of AGC. And our revenue from repair services decreased $0.1 million to $1.2 million, from $1.3 million for the three months ended December 31, 2011.

Our cost of sales remain relatively flat at $6.3 million for the three months ended December 31, 2011, 2010. Our gross profit for the three months ended December 31, 2011 decreased to $2.7 million, compared to $2.9 million for the same period of fiscal 2010. This was due primarily to the overall decrease in net sales and reduced margins on our new equipment sales, largely offset by increased margins on our refurbished equipment sales. Our gross profit margins decreased to 30% for the three months ended December 31, 2011 from 31% for the same period of last year.

Our operating, selling, general, and administrative expenses increased $0.3 million to $1.8 million for the three months ended December 31, 2011, from $1.5 million for the same period in fiscal 2010. This again was primarily attributable to increased personnel costs resulting from our AGC acquisition in May of 2011. And our income from operations decreased $0.5 million to $0.9 million in the first fiscal quarter 2012, from $1.4 million for the same period of last year. Net income attributable to common stockholders for the first fiscal quarter of 2012 was $0.4 million or $0.04 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.

Our EBITDA decreased $0.5 million to $1.0 million for the first fiscal quarter of 2011, from $1.5 million for the same period of last year. Our cash and cash equivalents as of December 31, 2011 was $12.2 million, compared to $10.9 million at September 30, 2011; and our net inventory decreased $1.7 million to $24.1 million at December 31, 2011, from $25.8 million at September 30, 2011.

This concludes the financial overview for the quarter ended December 31, 2011, and I will now turn the call over to Dave.

Thank you, Scott.

Given the ongoing business climate and the uncertain global economical situation, ADDvantage will continue to take a measured approach that balances upside business opportunities with potential risk. We conservatively manage our Business to ensure that its expectations do not get ahead of where the market is today. Our Company is always impacted by major issues with our suppliers and our ability to execute, or not, on our current business. The information that we have today is based on our current opportunities and our view of the current business trends which would be above or below the actual outcomes for the industry over the next year or two. What we continue to see is that the large MSOs are still monitoring and controlling their capital expenses by combining headend. Until the MSOs face significant competition from other communication service providers, they will not rebuild or extend their plans to achieve more bandwidth. We believe that the market will move to IPTV, but the industry consensus at this time is that, that will occur over the next 5 to 10 years, or when they need more bandwidth. The transition to IPTV appears to be the next logical significant upgrade opportunity for our industry.

We have been able to maintain a healthy balance sheet while increasing cash on hand to remain flexible, and we believe we are more financially stable than most of our competitors, which would lead to opportunities for us in the future. In closing, we believe that we are well-positioned to react effectively to shifts in the industry, and are committed to exploring our options to create long-term sustainability to growth in our Business and ultimately increase the value to our shareholders.

This concludes our prepared remarks. I would now like to turn the call back over to the operator and open the call for any questions.

Thank you. (Operator Instructions)

We'll go to Aram Fuchs at Fertilemind Capital

Yes, I was wondering if you could parse out the difference the impact of the Cisco change versus the other things that are causing some tailwinds and some headwinds in your business?

Yes. Thanks for the question, Aram.

We tried to look at that and quantitatively put a number on that. We really can't tell the impact. We know we've been impacted but we can't tell, because of the downturn in the overall marketplace. So as we can glean that, whatever that is, we'll be happy to tell the marketplace. But right now, we just can't tell because what we found out is our other OEM partners are experiencing the same decline. Because we also represent a large distribution partner with Motorola and now currently with Arris and some other products.

So each one of those, if you read their public statements, are down. So at this point, we just can't do it. But we will, like I said, as those things become more evident -- and we think those things probably will be more evident go into spring markets as the budgets are released, and the opportunities are out there, we'll be able to see, add some more clarity on that.

Yes, something confused me when you mentioned that you're getting good sales leads in 2012, but the rest of the script sounded pessimistic. So, could you reconcile those?

Yes. I think the thing that we said there is, we're giving lots of quotes out on legacy equipment. In other words, refurbished gear and our gear that is no longer in production, or it could be some of the new gear. But most of the quotes are given the second- and third-tier MSOs who generally tried the most cost effective means that they can to get more bandwidth. Dave, you want to discuss that a little bit?

Yes. We're giving out a lot of quotes, but to give you an example, we can't find where we're losing a lot of orders any place. We did receive an order just to give you an example that was quoted last April. The people just have postponed until just last month. We're finding that is what's happening. It's not that it's going to be done necessarily. It's just a lot of things have been postponed.

Right. And this need for quotes from the second- and third-tier guys, is there some sort of trend? Or is this one of these random things that happens in the business sometimes? And why do they need more bandwidth and not the first-tier guys?

I think a lot -- some of them are moving to 3.0 DOCSIS but the other is that they need bandwidth because in some of the situations where the growth is in the commercial business services. I think if you read mostly our articles, that's where the growth is being and some of those are exported. Dave, what are you seeing?

We're seeing a lot increase of quotes for [arc type] customer. We're going to pick some of them up. A lot of [arc type] customer may have 40, 50, 60, 70, 80 channels of cable their system plus some digital and they need the increased bandwidth, if they're going to pick up what people want for the internet. So that is in our field and we are encouraged on it. We have a lot of that year in refurbished and it has increased in the last quarter, as we've shown. We are getting more and more quotes and we do have very good inventory. So depending when it happens, whether it happens in the next two, three months, or these orders, if they fall into next quarter after that, we just can't tell you.

But if you look at our sales for the -- we said on the balance sheet in our statement, it went from $1.4 million to almost $2.6 million, and some of that is the upgrades for the line gear and some of it is on CPE equipment. So we seen some interest there, and again, it's a very competitive market. Again, the OEMs are our biggest competitors on most of the new equipment. So they're reaching down further until the business picks up, and the large customers pick up the volume. So we've got a challenge not only from competitors in our space but also our OEM partners.

And your inventory keeps going down. And I was wondering if you're adding real estate. Last quarter, you did. Do you feel that you have an optimal amount of real estate? Or is there any excess on the balance sheet?

You're talking about real estate that we own?

Yes. Just more capacity, warehouse capacity. Do you feel like you have too much, or do you have the right amount?

Okay. I think I take that in the context of our inventories going down. Yes, I understand your question. The issue is all of the major -- our inventory space is in Broken Arrow and we have it in two buildings and we're still getting equipment in. We're buying used gear, not as much as we'd like to, not the type we'd like to buy at times. But we're getting a little space, but it's not going down dramatically, because of the margins.

But we are reducing it, and I think we've strategically made that commitment about a year and a half ago and I think we're following through on that strategy, reducing inventory and not buying back. And we do by opportunities because we are entrepreneurs. If there's an opportunity to buy CPE equipment or if there's line gear or something that really makes some sense, we buy it. But as you see, we couldn't have keep building up a stock of cash if that wasn't take place. But no, it's not taking a lot of space out of the warehouse. Wouldn't you say?

Let me make a comment there. Six months ago, to a year ago, our aisles were full. We had a lot of things packed up. We had every space full. Today, the aisles are clear just about throughout and we have a few open spaces. So we're getting back to a place that would be about what it should be. We just still do not have room to quite put everything and get it organized quite the way we would want because we are limited on a little bit of space but it's much better than it was.

Definitely no excess.

I see. So it's as if you were over 100% before, and now it's just more efficient, now that you've taken off --

Yes.

And then regarding that inventory number, it seems like the pace of inventory decline is starting to slow. Should we extrapolate that going forward? Or is this roughly where -- or do you think we should flatline it? Where would you expect it to be?

Again, as the sales volume picks up and the opportunities with particularly with refurbished gear, I think we can see that go down. But again I want to preface that, if there's opportunities that we believe that makes some money in the current market place, we'll look at them. What do you think, Dave?

I would agree with that. I do expect our inventory for totals for six months from now to continue dropping, and assuming we will be picking up in the same process, some particular channels a little more. The situation is, we have a lot of really good refurbished gear, and it's the cleanest that I've ever seen in 30 years, that's really our most current but not quite there for your large MSOs. So I expect for our sales to be increasing at a point, but again we see the opportunities, it just has not been happening quite as fast as we thought.

And your inability to sell Cisco gear in Latin, South America, has that impacted your ability to find accounts for the refurbished gear down there?

What we've found out, even when we were selling in those marketplaces, Cisco customer for new gear is going to buy new gear. The top players in that marketplace were buying new gear and were buying the latest equipment they could buy. So generally, we don't find the customer down there that wants new gear to go and buy used gear. So it's really two different markets.

Great. Thanks for your time.

Thank you.

(Operator Instructions) We'll pause again for just a moment.

And, gentlemen, at this time, there are no further questions.

Thank you very much. We appreciate everybody joining us today. Have a good day.

And that does conclude today's conference. Again, thank you for your participation.