ADDvantage Technologies Group Inc (AEY) 2013 Q1 法說會逐字稿

Good day, everyone and welcome to the ADDvantage Technologies fiscal first-quarter 2013 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. Please go ahead, sir.

Thank you. Before we begin today's call, I'd 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 the 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 predictions and may differ materially from the 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 results and notes hereto included in ADDvantage Technologies' most recent report on Form 10-K filed December 11, 2012.

The guidance regarding anticipated future results in 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 the Company. David, the floor is yours.

Thank you, Garth. Welcome to ADDvantage Technologies' fiscal 2013 first-quarter 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 ended December 31, 2012, I want to provide a brief overview of the Company's operations and strategy moving forward.

We achieved revenue growth in the first quarter of 2013 of 7% with revenues increasing to $9.6 million from $9 million last year. This increase in sales was primarily a result of the extreme weather conditions affecting the Northeast and mid-Atlantic regions in October. During the quarter, we were able to satisfy our customers' urgent equipment needs with our inventory of onhand equipment for which the original equipment manufacturer was unable to deliver in a timely manner. Although we do not anticipate this particular situation to provide much additional revenue, these types of situations will continue to provide us with opportunities to take advantage of our inventory position.

While our growth in revenues for the quarter was a positive event, it was not due to a fundamental change in the marketplace. As such, we will continue to do our part to counter the effects of deficiencies in plant expansions and bandwidth upgrades by MSOs by investing in our business. Specifically, we are focused on our previously announced growth strategy, which is to expand upon existing OEM agreements, entering agreements with new OEMs, expanding our geographical footprint and identifying accretive acquisitions within our industry. We see a great deal of opportunity for our business to capitalize on the current market conditions as we capitalize on the scale of our operations. We believe there are several OEMs that would benefit from our distribution network, knowledgeable sales staff and customer contacts. The next step is executing agreements with the OEMs we have identified as priorities. This process is expected to take time and will require terms that are beneficial to ADDvantage, however the benefit to both sides would be measurable.

We also plan to hire additional salespeople to strengthen our position in the market tapping into new geographical regions and generating new leads. Along with these goals, we are hoping to identify a potential acquisition within the next six months that would be accretive to our existing business. We'll keep our investors apprised of any developments pertaining to these parts of our growth strategy.

And I think it's important to mention that our ability to implement this growth strategy is possible because of the health of our overall business. While this is important to fund these activities, it is also critical because it attracts the best OEM candidates and acquisition targets. For instance, as a result of the positive operating activity in the first quarter, we added approximately $2 million in cash and cash equivalents to the balance sheet for a total of $7.3 million as of December 31, 2013. This is in addition to the $7 million bank line of credit we have available and only $1.6 million of long-term debt on our balance sheet. As a result, we are well-capitalized to fund our working capital leads and potential acquisitions. And this is despite the economy and a sluggish industry.

It is also important to note that we continue to have a solid foundation supporting our business through our partnerships with leading manufacturers, including Cisco, Motorola, Air Solutions, Fujitsu, and Triveni Digital. This allows us to provide the broadest supply of equipment in the industry. All the while, we are maintaining our commitment to decreasing our overall inventory and watching for opportunities to purchase new and refurbished equipment at significant discounts. And over the next few months, we will strive towards increasing deals, enhancing contracts, and building our core business. We've already begun the process of executing on all these fronts, but recognize that it needs to be a steady and calculated process, which will take time to fully integrate. As a distributor in the cable equipment industry, we have learned to adapt to the ever-changing businesses of our partners in finding a way to grow with them collectively. In addition to our internal growth strategy, we hope to find an acquisition that will strengthen our business on all growth fronts and allow us to continue leading in the cable equipment distribution industry for years to come. I'd now like to turn it over to Scott, who will provide the financial results.

Thank you, David. Turning to the results for the quarter, net sales for the first fiscal quarter of 2013 increased $600,000, or 7%, to $9.6 million compared to $9 million for the same period of last year. Revenue from new equipment sales increased $300,000 or 5% to $5.6 million for the three months ended December 31, 2012 compared to $5.3 million for the same period of last year. Net refurbished equipment sales increased $400,000 or 16% to $3 million for the three months ended December 31, 2012 compared to $2.6 million for the same period of last year. As David mentioned earlier, the overall increase in our net equipment sales is primarily due to an opportunity our Company had as a result of the recent extreme weather conditions that hit the Northeast and the Mid-Atlantic states. Our revenue from repair services decreased to $1 million for the three months ended December 31, 2012 compared to $1.1 million for the same period of 2011.

Our cost of sales increased $200,000, or 3%, to $6.5 million for the three months ended December 31, 2012 compared to $6.3 million for the same period of last year and our cost of sales as a percent of revenue was 67% for the three months ended December 31, 2012 as compared to 70% for the same period of last year. The decrease in our cost of sales as a percent of revenue was due primarily to significantly lower costs on certain refurbished equipment sold during the three months ended December 31, 2012.

Our gross profit increased $400,000 or 15% to $3.1 million for the three months ended December 31, 2012 from $2.7 million for the same period of last year and our gross profit margins increased to 33% for the three months ended December 31, 2012 compared to 30% for the same period of last year. As I mentioned earlier, in our cost of sales, this increase is primarily attributable to the higher-margin sales of certain refurbished equipment that had been originally purchased at significant discounts.

Operating selling, general and administrative expenses remained flat at $1.8 million for the three months ended December 31, 2012 and 2011. Our income from operations increased $400,000 or 45% to $1.3 million for the three months ended December 31, 2012 from $900,000 for the same period of last year. Our interest expense decreased $200,000 or 96% to $7000 for the three months ended December 31, 2012 from $200,000 for the same period of last year. This was the result of paying off an outstanding $9.4 million balance on one of our term loans in March 2012, as well as the termination of the associated interest rate swap agreement.

Net income was $800,000 or $0.08 per basic and diluted share for the three months ended December 31, 2012 compared to $400,000 or $0.04 per basic and diluted share for the same period of last year. Our cash and cash equivalents as of December 31, 2012 was $7.3 million compared to $5.2 million at September 30, 2012. The increase in our cash position is due mostly to our current positive cash flow from operations as we generated $2.3 million for the first quarter of 2013. Our overall debt position was $1.6 million as of December 31, 2012 compared to $1.7 million as of September 30, 2012 and our net inventory decreased $1 million to $21.6 million as of December 31, 2012 from $22.7 million at September 30, 2012.

Our Company is also purchasing our common stock on the open market. We've purchased over 170,000 shares since December of 2012 as we believe our stock is a very good value. The stock purchases notwithstanding, though, as David mentioned earlier, we are still committed to our growth strategy and we believe that our cash on hand, $7 million line of credit, our additional long-term debt capacity and our overall strong balance sheet position is more than adequate to finance those growth strategies that he discussed earlier. This concludes the financial overview for the three-month period ended December 31, 2012. I will now turn the call back over to David.

Thank you, Scott. We are always working towards identifying new product offerings for our customers and expanding our existing relationships. Also, our inventory remains a key asset of our business, though we have taken the necessary steps to decrease inventory levels so that we are in line with current demand. As a result, we continue to remain poised to react to any unexpected event as was the case this past October when hurricane Sandy struck the East Coast. This has helped us further strengthen our cash position. Combined with our credit facility and limited debt, our healthy financial status will be important as we look to execute our growth strategy and expand our support of our existing OEMs and attract new OEM partners.

We remain committed to serving our OEM partners, MSOs and other vendors of cable equipment as we increase our opportunity in the industry, elevate our market valuation and position our Company to a level of sustained growth. 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.

(Operator Instructions). Douglas Ruth, Lenox Financial Services.

Good morning to the management team and congratulations on a very nice report. Do you feel like there are some distinctive holes in your product offerings currently?

I wouldn't necessarily say that we have holes, but we do think there are some additional opportunities that we should be able to take advantage of in the marketplace extending our productline, but we are -- the Company has got a 20 plus year history in this space selling the headend equipment and the line gear equipment, fiber equipment that the industry has historically needed. With the acquisition of the Adams Global Group a little -- about 1.5 years ago, that put CPE equipment in our line as well. But I think there are still opportunities that we can take advantage of.

And now are the companies that you've been talking to, are they receptive to you distributing their products?

Yes, they are.

And are these fairly significant opportunities? Do you -- can you quantify how big some of these opportunities might be?

I'm not at liberty to discuss the size. I will just tell you that they come in various sizes. Some are going to be small opportunities that are going to be advantageous for us to place into the market. Some have the potential to be significant, but I can't describe exactly what significant means.

Okay. And do you feel that it would be beneficial to consider hiring somebody to help you with acquisitions?

I guess -- I'm not sure how to answer that question. In regards to what?

As regards to finding opportunities that might be out there, somebody who is a specialist in the industry above and beyond your own capabilities.

I think the answer to that is yes and we're making strides to do that. We're not going to probably bring somebody on staff, but we will probably look to utilize capabilities within the industry itself or within the -- we'll say within the investment banking community.

Have you made some inquiries with investment bankers or is that something that's on the agenda?

Again, I can't go into that detail, but thank you for the question. I appreciate it.

Okay. Can I keep going? Or do you want me to get back in the queue there? I've got a couple more.

Your fine, Doug. Keep rolling. You're great.

All right. How hard do you think it might be or have you identified some sales people that you are hoping to hire?

Yes, we have.

And will they be coming on staff fairly quickly, do you think or are we a ways away from that happening?

We would hope so. We can't speculate again, but, no, we've identified some solid candidates and we're moving forward.

Are these veteran people for the most part?

Yes, we're not looking to hire new graduates.

Yes. And does management have the ability to buy stock at this point? Or is there a blackout period because of all the things that are happening?

This is Scott. Right now, we have our policy and our blackout periods. Basically it says those three days after an earnings release and unless there's significant events that we are aware of. So right now, we are in a blackout period because we are -- we have -- we're not beyond the three days of the earnings release. So -- but, as you know, management always has things that we know about, so, right now, we anticipate that we would probably live that blackout still beyond the three days unless something arises.

Okay. Could you give us a little bit about the state of the industry and what you think is happening currently?

This is Dave. We've got a lot of -- quite a bit of interest in the marketplace right now. There are still upgrades to be done out there. We are -- the inquiries are out there. A lot of things take three to six months to get orders anymore. It's a little bit different than it has been in the past. But the industry looks like it's stabilizing.

Are we starting to see some money being spent on CapEx?

We are always seeing that with the smaller guys than the medium-sized folks, the telcos. The large operators are only upgrading that we [see] make sure they are headends. Most of them are not any indication of upgrading their plant. They're going to try to maintain it, we are finding.

But a lot of those large players are not our primary customer base as well. But they're the easiest ones to read the trends out of and as Dave mentioned, they are showing less and less CapEx at least on the infrastructure end, which is, of course, key to us because we are -- being in the equipment distribution business. So again, I want to emphasize that's not our primary customer base. We generally work with what we refer to as the second and third tier players. That's who Dave has spent 20 plus years building relationships with in the marketplace.

Well, I want to thank you folks for your discipline and that you're being very careful and I think you're being good stewards of the shareholders' capital and we are excited to see what you might do in the future. So thank you for answering my questions.

Doug, thank you for participating in the call and for your questions as well. We very much appreciate it.

You're welcome.

[Warren McKenzie], [Mercor].

Thank you for the buybacks. I really appreciate them, but also note that you're still thinking about an acquisition. And on that issue, you might remember that on the last earnings call, Scott replied to a question I asked by saying acquisitions and buybacks should be put on the balance to see from which [two] could get more value and I completely agree with that and with this question today, I want to understand what you are putting on both sides of the balance because you guys are a very intelligent allocator for capital. You've made some very good acquisitions in the past and you own the majority of the Company. So in all probability, you have thought about this exercise carefully. But if I do the exercise, the balancing exercise, on the one hand, we have a possible acquisition that, as Dave mentioned when responding to my question in the last call, it's difficult to do now for cheap because prices have gone up as the economy has improved. And so it would seem difficult to find a company that fits your business model and that is selling at a discount.

On the other hand, we have the possibility of doing a Dutch tender buyback of your own Company and your Company is selling at a 60% of book value and 34% of the value of the forint assets minus all the liabilities. It's a profitable business with a long history of being profitable. It used to have excellent return on capital. Now that hasn't been lately as good as it used to be, but it might eventually get there if housing comes back or companies -- cable companies start spending again.

So it seems to me the Company should be worth at least book value, if book value can -- if the numbers in the balance sheet can at all be trusted and possibly a lot more. So my question is this. Where am I getting this balancing exercise wrong? Do you think I'm wrong in thinking ADDvantage is selling for at least a 40% discount or do you think I'm wrong in thinking it would be very difficult for you to find a lot of companies to buy at a greater than a 40% discount?

I'll address it. Dave probably has some input as well on this. To answer your first question, the market is the market. I can't control the market. It's all a matter of buyers and sellers trying to determine what they determine the value of our Company is. Certainly, as management, our goal is to see if we -- do everything in our power to enhance that value to the shareholders, ultimately getting the share price up on behalf of all shareholders of the Company, including our two large owners that are sitting in the room, as you already mentioned. So that's certainly our goal.

As you mentioned, the Company historically has had a history of making very solid and good acquisitions that have been accretive to the business and that is our current strategy right now. Dave's comment notwithstanding, yes, values will go up. It's a matter of where we can find synergies, i.e. where they bring additional value beyond their current operation, which means we'll be able to afford to pay those multiples and still bring value-added to the Company and that's ultimately what our goal is just as they historically have done. And so I think our primary strategy continues to be grow the base business through looking for additional opportunities with existing OEMs, as well as additional OEM products that would enhance the value, as Doug had already questioned previously and that's still our strategy to do that and then look for these accretive acquisitions.

And absolutely, we're not going to overpay. We can't afford to do that. But yet we think there will be value-added and therefore, the value will be there in the acquisition or we won't complete the transaction. If we're not successful, then we'll reconsider what else we should be doing and certainly Dutch auctions are on the table. We are willing to consider those. We just don't happen to believe that that's the greatest value-added we can bring to our shareholders at this point in time. Dave, is there anything you wanted to add to that?

No. I think you pretty well covered it there. All those options are always discussed at almost every meeting we have whether it's with the Board or amongst ourselves. So believe me, we've looked at it many, many times over the years and we continue.

I will answer a question you may not have asked. Are we -- what is this buyback strategy we are employing? Well, it's a very minimalist one. We see our value of the stock is undervalued, as you already mentioned. We believe that and therefore, we believe we will ultimately -- our goal will be and we hope and we plan to be successful, that we will increase the value of those shares. Therefore, as an undervalued share, that was worthwhile to make some purchases today. But we're still going to preserve most of our cash for acquisitions at this point in time.

Okay, thank you.

I want to thank you for your questions.

Seth Barkett, Groveland Capital.

Congratulations on a very nice quarter. I have a few questions, and I guess I'll go ahead and ask the first two and then hop back in the queue. Can you help me better understand how ARRIS' acquisition of Motorola home business will affect the industry landscape, particularly your competitive position?

Okay, and what's your second question or did you want us to answer that one first?

Yes, why don't you answer that one first and then I'll go to the next one.

We've been through the fiscal Scientific-Atlanta model change and that took almost four years to get it implemented. It would be impossible from us sitting at our position to have any idea. The employees don't know that we talk to -- no one knows what's going to happen, so we really couldn't help you in that regards at all. We just know what has happened in the past. Ken wants to --.

Yes, this is Ken. One thing that, in our acquisition of Adams Global, we do have a relationship with ARRIS there on some of the products. So we looked at that when we bought it. That was a consideration because we could see that -- the three largest players are Cisco, Motorola and ARRIS in that respect and particularly on CPE products, ARRIS is generally pretty -- leading the charge. So we have relations with all three of them and as Dave said, we don't know where it goes because even the people internally didn't even know this ARRIS deal was coming down, so we just have no idea. We are waiting to see. We are meeting with them. I think Dave has been up to meet with them to see if there's any opportunities that we can broaden our relationship with existing Motorola and perhaps in the future.

As Ken mentioned, we have relationships with both companies. As Dave said, we can't predict the outcome, but what we can do is keep apprised of both companies, keep relationships going, maintain contact and see -- as they hear about things, hopefully we'll hear about them in short order and just adjust the Company like we've always done for this last 25 years of history in this industry. The one thing you can count on in this industry is constant change. And so that's all we can do is just adjust as it occurs.

Okay. My next question, you've more recently in public filings discussed growth through acquisition. As your MSO customer base consolidates, what opportunity do you see for acquisitions?

I guess I'm confused by the question. The industry is consolidated. It has been for over 10 years now. But we're not looking to buy MSOs. We service those MSO customers.

Right. No, I guess in terms of -- are you looking to grow the business by acquiring smaller niche distributors? Are you looking to buy niche manufacturers? Is there a preference?

I guess the answer is anything is on the table. If we think we can accretably add value to the organization, we will take a serious look at various acquisition opportunities in distribution, potentially manufacturing, although that might be a bit of a stretch. That's not really a core competency of the existing business. So I think it's going to be more distribution-related. That's the initial play, but, no, we would take serious looks at companies that are in manufacturing.

Now keep in mind, the way manufacturing predominantly works in this industry, it is usually through contract manufacturers. There aren't a whole lot of people that make their own stuff today anyway without looking to a Foxconn or some other major or even minor manufacturer whether it's in China or Vietnam or in the US or in Mexico. That's where a lot of the equipment is made that we do distribute on behalf of our OEMs. So, yes, we would take a look at that.

Okay. Yes, I guess my question -- I'm trying to better understand from a competitive standpoint, as MSOs consolidate, and really as OEMs consolidate, is there going to be -- is there going to be a significant opportunity to gain a foothold in the distribution landscape by acquiring smaller distributors to service these Tier 2, Tier 3 MSOs or if you don't go about that strategy, will your market disappear essentially?

Yes, as it stands, that's where we do service now anyways and yes, we'll look for potentially small acquisitions that could be niche players. They may distribute a unique product that we currently don't have as part of our portfolio that we could add to our customer base. Although we may go directly to the supplier of that product as well. We may look at larger distribution companies that dovetail with what we're doing as well. The consolidation has been a continuous play in this space that the management before I got here that both Ken and Dave and Scott have had to deal with and we will continue to have to.

The consolidation play does not take away the infrastructure requirements though. It does -- it has, however, affected the headend, as Dave and Ken have mentioned in previous calls and we've talked about over the last three calls I've been involved in, is headend consolidation has reduced the play on the headend side, but on the line gear, that infrastructure still exists even when it's consolidated. They still have to serve the customers where they exist in the field and so we still have that significant opportunity play that we continue to exploit, both on new equipment and refurbished equipment. Dave, is there anything else you want to add to that?

No, we are a player that fills in for niches. In our past history, I'll go on past history, we've been able to go in and pick up lines that may be out there needed for the next five years and the manufacturer really cannot afford to keep manufacturing it. We go in and we buy up a large group and have certain buybacks. We keep looking at those. We are still a very small player in this very large business. I mean the pie could get smaller, but as long as we get a larger piece of the pie, that's been our model as it decreases.

I guess my concern is more if ARRIS, Cisco -- if they are servicing the Tier 1s, you're servicing the Tier 2s and Tier 3s, and the Tier 2s and Tier 3s are consolidating or the Tier 1s are buying the Tier 2s and Tier 3s, will there be less Tier 2s and Tier 3s for you to service now essentially your market is being cannibalized?

This is Dave. I guess we misled you a little bit. We service Tier 2s, 3s, 4s, 5s, 6s, wherever you want to go to, and we pick a large percentage of those smaller ones and when you get in the whole bucket of things for what we do -- and they will still be around. A lot of the cable equipment is going to be -- Comcast is wanting repair quotes to be able to keep their gear out in the field another 10 years. No one knows how long it's going to be out there and what the changes are, but it takes a lot of time to change infrastructure and to maintain it. So we're in that model. We are not -- the headend is going to become -- we're going to become -- the cable company is going to become basically an IT type -- some type of service to be able to service whatever is out there or whatever the people want. They will be able to provide Internet. They'll be able to provide everything that they've got and it will just increase that direction.

Yes, in addition to that, I very much appreciate your question. It's central to what we're trying to figure out here as to where is the market? Where is it going? Where is our play in that market? Keep in mind that we have three offerings to the marketplace. One is new equipment, which involves the OEMs and yes, the large players can go directly to the OEMs when they've got infrastructure changeouts. We don't see a lot of that business and never have. As Dave mentioned, we are a $35 million player in a multibillion dollar industry and a lot of those big guys can go direct on those major changeouts, which has now been indicated to us there is going to be a lot less of those, at least by the big guys. So those smaller guys are still continuing to do the changeout, which Dave has already answered as well.

Second to that is we are a refurb shop. We sell equipment into those smaller players and larger players to help maintain the infrastructure they already have as opposed to changing it out and then, even before that, we service it, which means we don't even take title to it. If they want to repair their equipment, which is their first option, we will repair it for them. If they can't repair it, and they need to change it out with like equipment, then that's generally refurbished equipment. We sell that. And if they can't find that refurb equipment by us or anyone else in that marketplace and they need to buy something new, we can service that as well. Or if they are going to do an upgrade and go to more -- newer vintage equipment, if they are small enough, we'll be able to get that business because the big OEMs don't particularly want to service the smaller customers even on those upgrades.

But if they are the bigger players, yes, they do go direct, as you already mentioned, on those purchases. But we service Comcast on the service side. We sell Comcast refurbished equipment. We just don't sell them a whole lot of new equipment because they have that main line to go direct. Same thing with Cox. Same thing with Time Warner and then after that, we may service all three aspects of those business to those Tier 2 and Tier 3 and 4, 5 and 6.

This is Dave again, one thing to make it simpler to understand. Sandy -- all of the major rebuild will be ordered in time. They have time to order it, they have time to negotiate prices. They have time to work out delivery schedules. When -- we don't fit that part -- we take care of -- for example, their -- tornadoes they had in Mississippi, when the smaller lines get down, they need parts, they need connectors, they need amplifiers, that's our model. If it wipes out the entire town and has to be new construction, we only fit when they can't find enough parts in the supply chain. That's our model as far as our operation.

This is Ken. Let's put everything in perspective. When Dave and I got into the business, started 25 years ago, the only thing we worried about was video, cable TV. Then we morphed into Internet. Now we're into the cable cut reserve for products. They are in the telephone, they also offer cell phones and some of them are offering security systems. So there's all kind of niches that we can look at to go into. We're just not quite sure where it's at, but we are very susceptible to any of them.

Okay, great. Thank you. I'll hop back in the queue.

Well, again, thank you for your question, Seth. It is a very good and fundamental question that we're trying to answer here.

George Gaspar.

First question, maybe you covered this, but what do you have in your stock buyback position to do yet in terms of size dollarwise?

Basically where we're at right now is, give or take, we are about $150,000 less or so underneath the previously approved Board plan that we're running under right now, George. It doesn't mean that we couldn't -- if something came up and we wanted to do something, we can obviously go to the Board for that, but right now that's what we have left.

Okay. And then in terms of being able to acquire used equipment that you can rehab for the market, how do you see your opportunity to acquire equipment to keep the cycle going?

George, the last two months has picked up as far as having availability as far as our -- not that there is so much more out there, but we're finding quite a few deals and they are not large like they used to. We would have $100,000 deals, $1 million deals. Most of them are $10,000, $20,000, $30,000, $50,000 deals. But we are finding more of the later good gear and we're one of the prime purchasers out there. So we're finding the gear out there, very limited though.

But, of course, we have a significant inventory to still work off and Dave manages that very, very efficiently.

Okay. Yes, well, you did a great job in the quarter and the fundamentals of the Company look to continue to strengthen. And when you look back and view the pre-debt repayment and your cash position and what you have generated since then, and even with your stock buyback, you continue to do a wonderful job and the fundamentals here, just as other gentlemen have indicated, looks pretty good. Hopefully you can find the right opportunities to build your business from this $40 million range.

Thank you, George.

Aram Fuchs, Fertilemind Capital.

I was wondering first if you can talk about the two quotes in the press release. You mentioned Sandy and then you mentioned good gross margins. And I believe they were separate, right? The Sandy issue is just the increase, a windfall of an increase in sales and some of the other elements were good purchasing that occurred. My question is did it occur this quarter, the purchasing, or is it -- did you just happen to sell off some low-cost high-value inventory?

I guess I'm not sure if I completely understood the question, but I'll try to address what you actually said first and one, they are two separate events. Sandy did not help drive the margin on the bottom line. It helped more with the top line because this was new equipment that doesn't carry the same margin that our refurb equipment does. The margin was driven by more refurb equipment, which has higher margin and yes, that was an exceptionally higher margin because it had an exceptionally low cost from that standpoint. So did that answer the question or did you have some follow-up?

Yes, maybe I can follow up from there. So what -- inventory is such a huge portion of your book value and of course, understanding the real value of an inventory position is more art than science, especially from the outside. So is this something -- was it just one or two purchases from customers that would not be repeated or is it where we think we can get gross margins into the low 30%s going forward?

This is Dave. We had a good sale on a good product. We had it in stock and we have a lot of it. We're not short of that product, type products. But one thing might help you understand our business. We sell a lot of the high-volume items at 6, 8, 10, 12 points. We sell a lot of the other items for 80%, 90% profits also. So when you figure out an average of 30% to 33%, the low items really generate some money, but that's not the core (technical difficulty) sales of dollars and we had a particular sale that was quite good. Did I answer (multiple speakers)?

Got it. Yes, I think so. I mean I think the answer would be that it was just a good quarter, a good sale that goosed the gross margins.

Yes, and we get those. I mean that's part of our natural order of business. This one was maybe a little bit of a spike. That's why we wouldn't necessarily claim that we've now got a trend going that we're going to continuously see these increases in gross margins on a quarterly basis. But we certainly hope to, we hope to see a continued increase in those margins.

Aram, this is Ken. This is one of those outliers that just happened to take place, but it goes back to our core business, what Dave was talking about. This is product that we accumulated over a period of time. A lot of our competitors had already gotten rid of the product. Maybe thought it may be obsolete in the future. We had the ability to refurbish it. We had it in inventory and met a need when it was needed. So that's who we've been for 25 years.

Right. And then a related question, this is more for Scott. On the inventory reserve calculations, looking back over your filings, it seems like you do $100,000, $200,000 a quarter. Is that something that you feel confident in that that would continue or is there some sort of insight that you could give us buyside guys who can only look at your filings once a quarter of the specifics of that calculation?

Aram, I think it's -- I would say right now, am I comfortable with it? Yes, I am. I'm comfortable with the count. It is -- as you know, within our business, it's fuzzy math at best at times. We have to go through and look at what's going on in the industry, what new products are coming out, what's moving around on the supply side, what does Dave have in inventory. What's good today may not be good tomorrow? And so that's what we're going through constantly and trying to work through that. It's not a -- we're not in the business of a traditional distributor from the perspective of if I don't turn it 12 times a year, well, I need to get rid of it. That's not who we are and that's why it becomes a little challenging. But I do believe that the amount that you are seeing right now is, notwithstanding a change, that's probably what you'll see for the remainder of the year. Did that help?

Yes, that does help. And then, Dave, a question for you. This Company has been cobbled together through a series of acquisitions, first Tulsat and then the last one Adams. Just curious, is there a way to consolidate the businesses under one umbrella or is it better for the customer and better for shareholders to keep it more dispersed?

Which David were you asking?

You, sorry.

I don't have an answer to that question yet, but, yes, it is something we continue to loosely look at as to what creates the greatest value from a market standpoint therefore creates the greatest shareholder value, whether it's consolidation or separation. I'll tell you right now though that Dave has gotten more involved in the other businesses and in essence, that is somewhat of a consolidation. There is more of a team effort that's going on inside the Company than historically has been. I would ask Dave whether he would agree with that or not, but he's the one who is helping drive that. And so I think there is an element of consolidation that exists in the Company today. Even though we haven't fundamentally consolidated them, they still have independent operations people that are general managers running those divisions, but Dave has taken it on himself to go and try to create this team. Dave, do you want to kind of address that as well?

There is reasons to keep the different brands apart traditionally. It would be hard to bring everybody in. We've got people seasoned. People -- customers are used to where they're at. A lot of our employees would not want to move -- to get moved to one central type location. It's working quite well in my opinion. We're getting closer together. We're getting purchasing to operate a little bit more efficient. There is more communications going on, so it's better every month, every year.

As Dave pointed out, NCS is a Motorola shop. When we need to talk to Motorola, that's who we go through. Dave is the Cisco shop. When we need to get Cisco equipment, Dave is the one whose organization places those orders, even though the salesmen may be in a different division selling those. I will tell you though, from a consolidation standpoint, for the first time, we went to a show and all four groups actually were in one central location under the ADDvantage umbrella for the first time at a show we went to in Orlando and that is -- the operation will continue going forward is that we want to be more representative within the industry, so on the sales front, we want to be more unified. But from an OEM front, we'll probably continue to be fragmented simply because Cisco and Motorola don't necessarily see eye to eye on everything and so they want one contact and we'll continue to give them that one and those are two different contact points.

Great, that's helpful. And then so my last one point is -- I second the previous caller. I love these share buybacks. I just wanted you to know that and if you want to get aggressive on that and move it to a Dutch, you've got my thumbs up. Thanks a lot for your time.

This is Dave. It's very difficult to acquire very many shares in the marketplace. There is so many rules. There is a packet of about 12, 14 pages and we can't solicit business. We could do only what the rules are. People could come to us on the outside, but we cannot solicit whatsoever and there's things there and we've always talked about a Dutch offering. It is not a cheap venture, but it's -- if there's nothing going on, we would definitely take a look at it at the right pricing.

Yes, Aram, a couple years ago somebody came to us and I think we bought 100,000 shares outside of the market. I mean he came to the market, but it was an outside purchase. It was something we didn't solicit, so we thought at that time somebody needed to move their position for certain reasons and so we were accommodative and it was mutually agreed upon. I think Dave and Scott and all of us have agreed that, the same as most of the people that's been buying, is that the stock is undervalued and based upon book value. And that's not all we can go on and potential revenues that we can acquire and make a profit. So it's something that the Board looks at and again just echoing what everybody else says, we addressed it a couple weeks ago or last week when we met and we'll address it again in another month or so. And the other thing, we would invite everybody. Our annual meeting is going to be on the 6th and you're always welcome to come and visit us at Broken Arrow.

6th of March.

6th of March, yes.

Very good.

Great, thanks. I'm not sure if I'm going to make the annual meeting this year, but I do enjoy them when I do come.

Did you get any snow up there?

Yes, we had enough here. We had enough in New York. All right, thanks a lot.

Thank you very much. Appreciate it, Aram.

(Operator Instructions). Seth Barkett, Groveland Capital.

Thanks for taking my third question. I appreciate it. You mentioned building an internal sales team. When will this begin to be reflected on the income statement and how significant of an impact should we expect it to be?

I don't know exactly when, and I don't know how much. We hope it's significant and it certainly part of our strategy is to -- we're committed to increasing our penetration into the market by utilizing additional salespeople.

I guess my question is more on the cost side of things, but I understand if you can't provide any clarity. I guess I'm just trying to get a better sense of the impact of the building of that team.

Yes, Seth, I think one thing -- you could look at it this way. It's definitely -- there will definitely be -- obviously, with any employee that you bring on, there is a cost associated with that, but it's definitely not -- our intention is to have these -- have our costs more than offset by incremental sales volume and that's obviously the whole idea here. So when you're trying to build it, we're not looking to try to just build overhead. This is a domestic and an international approach so that's what we're trying to look at.

This is no different than acquisitions. We are looking for something that's accretive.

Yes, and again, as Scott indicated, the added value on the top line, but obviously it's got to be at the bottom line. So the cost has to be offset by net profitability from those enhanced sales revenues or the [equation] (multiple speakers).

So you don't think there's going to be like a ramp-up period where for a quarter or two or three it's affecting the cost side more than the revenue side?

Yes, I do. I do expect a rampup and I do expect to have costs inherent in advance of any revenue generation and ultimate gain. Without -- again, I can't be too specific, but let's just say -- I'll do a quick math with you. We're not hiring 10 people all at one time. We're not doing that. We couldn't take that on if we wanted to. So we're not looking at those kind of numbers. So you can work your way down from there and it will be a progression; it will not be an all-at-once as well. So that's what I see.

Got it. Thank you very much.

Yes, but we do want to do it as reasonably as possible and in addition, as quickly as possible. But the key word is possible. We're not just going to go out and buy it -- take on a whole bunch of extra people and throw them against the wall and see if they stick. So --.

That is all the questions we have at this time. I'd like to turn the call back over to David Humphrey for any additional or closing remarks.

Thank you, operator. Again, we very much appreciate everybody's attendance. We do very much appreciate the questions. Many of the questions you're asking are the same questions we are asking ourselves. It's important for us to connect with our shareholders to understand your concerns. We -- again, I can't say it enough how much we do appreciate your continued support as an investor, your participation in this call and your questions. We anticipate them and appreciate them.

Just as a closing remark, we did have a very good and very positive quarter. We hope to continue to be -- and progress as a company. We don't necessarily believe we can automatically replicate what we accomplished this last quarter because we did have a couple of exceptional items and we've made note of that, but it's certainly our intent to continue to grow, to continue to progress in the marketplace, grow through sales, growth through additional OEM relationships and grow through ultimately acquisition.

And so with that said, thanks again for the continued support and look forward to meeting you either at our annual meeting, as Ken already mentioned, March 6 here in Tulsa, Oklahoma or on our next call. With that, I'm complete with all my comments. Thank you, operator.

And that will conclude today's conference call. Thank you, everyone, for your participation.