ADDvantage Technologies Group Inc (AEY) 2012 Q4 法說會逐字稿

Good day, everyone, and welcome to the ADDvantage Technologies fourth-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, 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 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 availability 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 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 in this conference call should be considered in conjunction with the consolidated financial statements and notes hereto included in ADDvantage Technologies most recent report on Form 10-K filed December 11, 2012. 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 the Company will only provide guidance at certain points during the year. Such information speaks only as of the date of this call.

With nothing further, I would now like to turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, the floor is yours.

Thank you, Garth. By the way, I want to apologize to all our listeners. I've got a cold and I'm struggling with, but I should get through this call just fine. Thank you.

Welcome to ADDvantage Technologies fiscal 2012 fourth-quarter and year-end conference call. With me today is Dave Chymiak, our Chief Technology Officer; Scott Francis, our Chief Financial Officer; as well as Ken Chymiak, our Chairman of the Board. Before I turn the call over to Scott, who will provide the detailed financial results for the quarter and fiscal year ended September 30, 2012, I want to provide a brief overview of the Company's operations and strategy moving forward.

As we look back over our fiscal year ended September 30, 2012, it is clear that ADDvantage has maintained a solid foundation of customers that are serviced by highly technical and knowledgeable salespeople, as well as one of the broadest collections of cable television equipment inventory in the industry. As a result, though revenues have continued to decline due in large part to a lack of planned expansions and bandwidth upgrades in the cable television industry, we still remain cash flow positive. Our ability to continue to generate cash from our current operations put our Company in a position to pay off our term loan in March 2012 for $9.4 million, terminate the associated interest swap agreement for $800,000, and still maintain a healthy cash flow balance of $5.2 million as at September 30, 2012.

However, the continued decline in our total revenue is not being ignored. I believe that this decline is primarily attributable to events outside of our control, including the lack of planned expansions and bandwidth upgrades in the cable television industry, and the restructuring of our distribution agreement with Cisco in December of 2010, which changed our sales distribution model and prevented us from selling new Cisco equipment into Latin America. However, in the end, we recognize that significant moves on our part are needed to stimulate growth in new areas, both geographically and in new markets.

That said, no one single change or shift in our business will help us replace the revenue we've lost. We need to think outside of the box and be aggressive. This brings me to why I joined the Company back in April of 2012. I spoke with Ken and Dave Chymiak, other members of the management team, and the Board of Directors about the opportunities available to ADDvantage, and returned from the meeting with exciting ideas for the future ahead.

What I saw was a Company with a strong balance sheet and a good core business model, capable of supporting a more aggressive growth strategy. In the near term, I believe this growth can come from expanding our current business model, including expanding upon existing agreements with OEMs, targeting new OEMs for distribution agreements, growing our geographical footprint, as well as identifying accretive acquisitions within our current industry. The path towards implementing this new strategy has required some changes in the Organization over the past few months, and more changes will likely be required as we move forward. I believe these changes are helping us create a stronger foundation for the existing business, as well as its expansion.

While the changes that we are implementing aren't readily identifiable to those outside of our Company, we have made, and will continue to make, major steps to progress internally. The next stage will be more visible both in terms of its effects on our business and, we believe, to our revenues. The next stage will take place over the course of fiscal years 2013 and 2014.

In terms of acquisitions, our initial strategy is to look at acquisitions within our industry and expertise, which would complement our existing businesses. We have begun the process of reviewing various acquisition targets, but, as you know, we cannot predict the timing of when any transaction may take place. We believe there are acquisition opportunities in the marketplace. We just need to identify the best opportunities for us to achieve both short- and long-term growth for our Company.

I'd now like to turn it over to Scott, who will provide the financial results.

Thank you, David. As mentioned earlier, we believe that ADDvantage's financial performance has put the Company in a place to support a well-executed growth strategy. So, turning to the results for the quarter, net sales for the fourth fiscal quarter of 2012 decreased $2.8 million, or 25%, to $8.5 million, compared to $11.3 million for the same period of fiscal 2011.

Revenue from new equipment sales decreased approximately $1.8 million, or 26%, to $5.1 million for the three months ended September 30, 2012, compared to $7 million for the same period of last year. Our net refurbished equipment sales decreased $0.6 million, or 23%, to $2.2 million for the three months ended September 30, 2012, compared to $2.8 million for the same period of last year. The overall decrease in our net equipment sales was primarily due to the continued decrease in planned expansions and bandwidth upgrades that David has mentioned earlier.

Revenue from repair services declined slightly to $1.2 million for the three months ended September 30, 2012, compared to $1.5 million for the same period of 2011. Our cost of sales decreased $1.9 million, or 31%, to $6 million for the three months ended September 30, 2012, compared with $7.8 million for the same period in 2011.

Our gross profit decreased $900,000, or 24%, to $2.5 million for the three months ended September 30, 2012, compared to $3.4 million for the same period of 2011. Gross profit margins were 30% for both the three months ended September 30, 2012 and 2011. Our operating, selling, general and administrative expenses decreased slightly to $1.8 million for the three months ended September 30, 2012, from $1.9 million for the same period of last year.

Income from operations decreased $800,000, or 55%, to $700,000 for the three months ended September 30, 2012, from $1.5 million for the same period of last year. Interest expense significantly decreased to only $7,000 for the three months ended September 30, 2012, from $166,000 for the same period of last year. This decrease was primarily the result of paying off one of the term loans in March 2012, and the termination of the associated interest rate swap agreement that David mentioned earlier.

Net income was $400,000, or $0.04 per basic and diluted share for the three months ended September 30, 2012, compared to $700,000, or $0.07 per basic and diluted share for the same period of 2011. EBITDA was $800,000 for the three months ended September 30, 2012, compared to $1.6 million for the same period of last year. Our cash and cash equivalents as at September 30, 2012 was $5.2 million, compared to $10.9 million at September 30, 2011. This decrease in our cash was due to paying off one of our term loans in March 2012 for $9.4 million, and terminating an associated interest rate swap agreement for $800,000.

Although the debt payoff lowered our cash position, there were several benefits to us from paying off the debt, as we've discussed in earlier calls. This includes avoiding an interest rate increase on this term loan of 100 basis points in this past month of 2012, having to refinance the $5 million balloon portion of the term loan on November 14, and lowering our current overall interest payments. Although our cash position is down compared to last year, if you exclude the debt payoff and the termination payment of the interest rate swap, we actually would have increased our cash position $4.4 million from September 30, 2011. We expect to continue generating positive cash flow from our current operations.

In addition, we still have a $7 million line of credit in place, in case we need additional financing for any working capital requirements or to help fund our acquisition strategy. Our overall debt position decreased to $1.7 million as at September 30, 2012, compared to $12.1 million as at September 30, 2011, as a result of this debt payoff. Net inventory increased -- or, excuse me, net inventory decreased $3.1 million to $22.7 million as of September 30, 2012, from $25.8 million at September 30, 2011.

Now on to results for the year ended September 30, 2012. Total net sales decreased $2.9 million, or 8%, to $35.2 million for the year ended September 30, 2012, from $38.1 million for the year ended September 30, 2011. Net equipment sales decreased $4.7 million, or 19%, to $20.7 million for the year ended September 30, 2012, from $25.5 million for the year ended September 30, 2011. The decrease in new equipment sales was primarily due to the continued decrease in planned expansions and bandwidth upgrades, partially offset by $2 million of revenue from Adams Global Communications, which we acquired in May of 2011.

Net refurbished sales increased $2.4 million, or 32%, to $9.8 million for the year ended September 30, 2012; $7.4 million for the year ended September 30, 2011. The increase in our refurbished equipment sales is primarily due to revenues from Adams Global Communications. Our net repair service revenues decreased $0.5 million, or 10%, to $4.7 million for the year ended September 30, 2012, from $5.2 million for the same period of last year.

Cost of sales decreased $1.7 million, or 6%, to $24.9 million for the year ended September 30, 2012, from $26.5 million for the year ended September 30, 2011. The decrease in our cost of sales was primarily due to our overall lower equipment sales. Our gross profit decreased $1.2 million, or 10%, to $10.4 million for the year ended September 30, 2012, from $11.6 million for the year ended September 30, 2011. Our gross profit margins were 29% for the year ended September 30, 2012, as compared to 30% for the year ended last year.

Operating, selling, general and administrative expenses increased $600,000, or 9%, to $7.2 million for the year ended September 30, 2012, compared to $6.6 million for last year. The increase was due primarily to increased personnel costs of $0.5 million resulting primarily from the acquisition of Adams Global. Income from operations decreased $1.8 million, or 36%, to $3.1 million for the year ended September 30, 2012, from $4.9 million for the year ended September 30, 2011.

Interest expense increased $400,000 to $1.1 million for the year ended September 30, 2012, from $700,000 for the year ended September 30, 2011. The increase, as we've discussed, was due primarily to the $800,000 payment made in order to terminate the interest rate swap agreement in March 2012 in connection with paying off the term loan, partially offset by lower interest expense of around $300,000 since paying off the term loan in March 2012.

Net income attributable to common shareholders for the year ended September 30, 2012 decreased $1.3 million to $1.3 million, or $0.12 per diluted share, from $2.5 million, or $0.25 per diluted share for the year ended September 30, 2011. And our EBITDA for the year ended September 30, 2012 was $3.5 million compared to $5.3 million for last year. This concludes the financial overview for the 3- and 12-month periods ended September 30, 2012.

I'll now turn the call back over to David.

Thank you, Scott. The damage caused to MSO systems across the East Coast attributable to Hurricane Sandy was significant. We are currently experiencing an influx of business in that region. However, it is still difficult to determine exactly what type of revenue will be generated over the next couple of quarters. Outside of the storm-affected areas, and as we stated previously, we do not expect the major cable television operators in the US to perform major upgrades of their systems in the near term. However, we believe this could provide opportunities for our service and refurbished businesses to grow as the equipment will need additional repairs and replacement as it ages in the field. We also believe that there will continue to be increased demand in broadband data services, which the cable operators will need to address. Our Company is ready to assist them in those needs as well. We are also working on trying to identify new product offerings for our customers, and expand on our existing relationships.

Our inventory is still a key asset and competitive advantage. Over the year, we continued to decrease inventory levels while maintaining the proper inventory mix that we'll be able to position -- we'll be well-positioned to react effectively to shifts in the industry. We have a strong balance sheet with sufficient cash on hand, and a lot of credit available for us to execute our growth strategy. We remain committed to exploring all options to create long-term, sustainable growth in our business in order to position ADDvantage Technologies for the future, and ultimately increase value for our shareholders.

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

(Operator Instructions)

We'll go first to Doug Ruth with Lenox Financial Services.

Thank you for having the conference call. I hope you feel better, David.

Thank you.

I was wondering if you could talk a little bit, we're reading some about Google possibly selling the Motorola set-top business. Do you think that might create some opportunities for the Company?

Yes, we've also read that, and we have a strong relationship with Motorola through our NCS division up in Philadelphia where their operating headquarters are for that same division. We don't know what the outcome will be, of course, with Google. One, will it sell, and two, who the buyers are. We know two of those buyers fairly well and have good relationships with them as well. We just don't know how it would shake out. But yes, obviously there will be changes. We'll just see how we can maintain and establish even stronger relationships with Motorola.

And could you tell us, do you feel like there might be some holes in the Company's product offerings now that where there might be some opportunities for you to offer additional products?

Yes, I do. I wouldn't actually call them holes. I would say geographically, we're not every place we want to be. The key for us is becoming even more customer focused than we are right now. We're extremely responsive to customers, but our intent is to become more proactive with that customer base, and their needs are going to derive where our opportunities come from.

I would like you to find another Adams Company.

Yes, we would like to do that as well.

Okay. Would you consider doing some sort of stock buyback? The stock is so statistically inexpensive. It would create some value, but it would some of your cash, of course.

Well, that's the critical balance, is between enhancing the value of the stock through purchasing it but ultimately, we certainly want to preserve most of our cash for acquisition opportunities, which we think will be more expansive and longer term impact on our stock. But yes, we have considered doing additional stock buybacks. We are empowered to do that. We've got the line and ability through the board to make additional purchases, so we're considering that. But it won't be a significant part of our strategy.

I think you also could send a message to the investment community, if management would consider buying some stock, with the holiday season upon us, what a lovely gift for your family.

Thank you very much for that plug. I appreciate that.

Okay. Well that's the end of my questions. Thank you very much.

Thank you very much.

We'll go next to George Gaspar, private investor.

Thank you. Just an additional follow-on question from the gentleman's questions just asked. In the area of new product opportunity, is there anything surfacing in the industry that you see an opportunity to carve into directly with what you're doing now, or will it have to facilitate happening through acquisition?

Well, okay, on that front, we're talking about two different strategies. One is an acquisition opportunity that we'll look in different market opportunities, different plays, could be geography, it could be products. More than likely it's going to be a continuation of our distribution business. On new products, we're not talking necessarily -- I'm not sure if I understand your question. If you're talking about cutting edge, we don't find that as a distribution Company, I don't think cutting edge is the type of technology we're looking to play into. What we are trying to do is expand the deals we've done in the past, such as Triveni and opportunities like that where we expand our product line going to the same customer base where we simply leverage our customer base that we already have. That's where -- those are two different elements of our strategy. One is acquisition, the other one is new products to add to our customer base line.

Say anything about your relationship at this point with getting Cisco business, or what's the trend on that? I know there's been a lot of changes in marketing arrangements between the Company and Cisco products. Can you talk about that, please?

Well, the only thing I can tell you is that we continue to have a very good relationship with Cisco, not as good as it was previous to 2010, but we still have a strong relationship with them and they are one of our key suppliers as an OEM. Certainly we'll continue to try to foster and expand our relationship, both with Motorola and Cisco, as well as Aeris. That's about all I can say about it at this point in time, though.

Okay. Can you comment on your -- further on your Kansas City operation and how you view it going along, how it's -- what markers they've met and what markers you want to achieve there yet, and is there any further expansion opportunity in the operation that was acquired a couple years ago?

Well, George, I appreciate your question. As you know, we don't break out the financials for each single division. We do that by intent. There's not too much specific I can tell you, other than we're happy with the acquisition. As the previous questions were asked about -- or the comments were made, go find another Adams Global, we certainly would like to. We're pleased with the acquisition, but we can't get into specific operations in regards to Global or any of our other sub-divisions.

Okay, all right, thank you.

Thank you, George.

We will go next to [Juan Mentenso] with Mercor.

Hello. Thanks for taking the call. My first question is, why was the allowance for excess and obsolete inventory cut by almost half in the quarter? Went from $1.9 million in June to $1 million in September. It's a $900,000 difference, which is, by the way, larger than the profit for the quarter. So, there wouldn't have been a profit without the allowance charge. The question is, why so big on allowance charge?

This is Scott. Juan, thanks for the question. Basically, what we did in the quarter was, you're right, the allowance did go down. We did a write-off in the quarter of right about $1 million or so. So, we had our normal charges coming through of about $600,000 for the year and then -- which was increasing the reserve off of even last year's results of $1.5 million, and then we did a $1 million write-off, that's how you came down to the $1 million.

Okay.

That's what happened, and that is -- that's disclosed more fully in the 10-K and -- but that was just going through the normal processes of looking at our inventory and the way we buy, sell, and obviously, Dave Chymiak works with our GMs on that front.

Okay, thanks. I have a second question about buybacks. You've already said that right now you prefer to do acquisitions over buybacks. Is there a point where the price gets -- the price of the stock of ADDvantage gets so that you would prefer it the other way around? If it were $1 instead of $2, would you consider buybacks over acquisitions?

The answer is we'll continue to look at it, and if we see a significant opportunity because of the stock being significantly undervalued, we would certainly take a serious look at that. But I can't answer that question, depending -- it's a balance between what are the acquisition opportunities versus what's the buyback opportunity. Today, with the balance at $2 a share and the opportunities we've got in front of us, we're going to focus on those opportunities. Dave's got an answer as well.

One of the things --

Identify yourself.

Our volume restricts what we could actually buy. In other words, it's a percentage. It's a certain time of day. We've done this before. In other words, in this market, up until two days ago, we could probably only acquire 2,500 shares a day, if the right conditions are there. Otherwise, we would have to go to a Dutch type auction type deal. And we look at all those options for years.

It still looks strategy-wise, we're still always watching for potential acquisitions, and it's like our inventory purchases. You don't know when it's going to come up. Acquisitions come up and we look at them, and it may last two months looking at one, three months, four months, and then something comes up. The tendency is if the economy's picking up, everybody that wanted to sell before doesn't want to sell now or they want twice the money they wanted. So, it makes it difficult for acquiring anything that fits our model.

Okay. All right. Thank you.

Thank you, Juan.

(Operator Instructions)

And there are no further questions in the queue.

Very good. Well, thank you all for being with us today. We certainly appreciate your continued support as shareholders. We take our fiduciary very seriously. And so again, this is our one opportunity to connect with you on a quarterly basis, so thank you all for visiting with us and we appreciate your questions as well. Thank you.

This concludes today's conference. We thank you for your participation.