ADDvantage Technologies Group Inc (AEY) 2017 Q4 法說會逐字稿

Good day, welcome to the ADDvantage Technologies Fourth Quarter and Year-End 2017 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Elizabeth Barker of KCSA Strategic Communications. Please go ahead.

Thank you, operator. Before we begin today's call, I would like to remind you that this conference call may contain certain forward-looking statements, which are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These future 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 predictions and may materially differ 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 included in the company's press release issued earlier today and included in ADDvantage Technologies' most recent report on Form 10-K filed earlier today. The guidance regarding anticipated future results on this call is based on limited information currently available on ADDvantage Technologies, which is subject to change.

Although any such guidance and factors influencing it may 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. During this call, we may also present certain non-GAAP financial measures such as non-GAAP net income and certain ratios that are used with these measures. In our press release and in the financial tables issued earlier today, which is located on our website at addvantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financial and the discussion why we think why these non-GAAP financial measures are relevant. These financial measures are included for the benefit of investors and should be considered in addition to and not instead of GAAP measures. With nothing further, I'd like to now turn the call over to David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, the floor is yours.

Thank you, Elizabeth. Welcome, everyone, to the ADDvantage technologies fiscal fourth quarter and the year-end 2017 conference call. With me today is: Dave Chymiak, our Chief Technology Officer; Scott Francis, our Chief Financial Officer; and Don Kinison, our Vice President of Sales. Before I turn the call over to Scott to provide the detailed financial results, I want to provide an update on our performance over the past year and most recent fiscal quarter and to comment on our ongoing strategy to build value in the business.

We reported strong top line growth which increased 26% above the fiscal fourth quarter and the full year 2017, which is driven by our acquisition of Triton Datacom's assets in October, 2016, as part of our long-term acquisition strategy to continue to diversify our business in the broader telecommunications industry. We are pleased with Triton's operating performance, which expanded our product offering to the new and refurbished enterprise networking equipment and broadened our customer reach into the enterprise market, reversing the decline in the Telco segment that had started to emerge at the end of fiscal 2016. We still see significant room for further growth in our Telco segment, specifically at our Nave Communications subsidiary, which provides used telecommunications networking equipment. As discussed on our last earnings call, Nave has experienced challenges which have led to disappointing sales performance. We've identified the challenges faced by Nave and have directed resources into improving its sales infrastructure to drive growth in the business. This strategy is underway, driven by our new VP of Sales, Don Kinison. We've already made several changes, including restructuring and expanding our sales force to further penetrate our current customer base and to target a broader end-user and reseller customer base.

Although restructuring a sales team takes time, we are already starting to see improved results from Nave, with its Quarter 4 2017 performance, improving both on a sequential and year-over-year basis.

We believe that Nave has a fundamentally sound business model and are cautiously optimistic that we will see a strengthening in this business as the impact of our restructuring continues to take hold over the next few quarters.

Moving on to the Cable TV segment, where we reported an overall strong and consistent performance in fiscal 2017.

We are pleased with the ongoing consistent earnings and cash flow generated by the Cable TV segment. However, in the fourth quarter, equipment sales from the Cable TV segment declined, reflecting fluctuations in demand that are typical for the industry. In addition, we believe that our repair revenue will decline due to losing a key customer in the first quarter 2018. We believe that the equipment sales decline will be short-term, but we are also proactively working to improve operational efficiencies and maximize profitability for this segment to help us at the decline in revenue. For example, we are in the process of closing and consolidating the operations of some of our repair center locations, which are not positively contributing to our bottom line results.

We have confidence that this business will continue to deliver solid returns for our shareholders. With that, I'll now turn the call over to Scott to discuss the financial results for the fourth quarter and full year. Scott, please proceed.

Thank you, David. For the fiscal fourth quarter of 2017, our total sales increased 26% to $12.3 million from $9.8 million for the same period of last year. Our sales for the Cable TV segment decreased $800,000 to $5.2 million for the 3 months ended September 30, 2017, from $6 million for the same period of last year. The decrease in sales is due to a decrease in new equipment sales, repair sales and refurbished equipment sales of $400,000, $200,000, and $200,000 respectively. As David mentioned, this decline was primarily due to lower demand for equipment sales, which we believe will turn later in fiscal 2018.

Sales for the Telco segment increased $3.4 million to $7.1 million for the 3 months ended September 30, 2017, from $3.7 million for the same period of last year. The increase in sales for the Telco segment was due to an increase of used equipment sales, new equipment sales and recycle revenue of $2.7 million, $300,000 and $400,000, respectively.

The increase in Telco sales is due to $2.9 million of sales of Triton Datacom, which was acquired in October of '16, and higher sales of Nave Communications of $500,000. As David did mention earlier, Mr. Kinison, our VP of Sales, is implementing a sales plan to restructure and expand our sales organization to improve Nave's revenues.

Consolidated gross profit increased $700,000, or 24% to $3.3 million for the 3 months ended September 30, '17 from $2.6 million for the same period of last year. The increase in gross profit was in the Telco segment of $1.1 million, partially offset by a decrease in the Cable TV segment of $400,000. The increase in gross profit in the Telco segment was due primarily to Triton Datacom gross profit of $900,000. Our gross margin for the Cable TV segment was 33% for the 3 months ended September 30 of '17, compared to 35% for the same period of last year.

And our gross profit margin for the Telco segment was 22% for the 3 months ended September 30, '17 compared to 13% for the 3 months ended in '16. The increase gross margin was due primarily to improved gross margins of both Nave and Triton compared with the fourth quarter of last year. Our operating, selling, and general administrative expenses increased approximately $500,000 to $3.6 million for the 3 months ended September 30, '17 from $3.1 million for the same period of last year. This increase in expenses was due to the Telco segment of $700,000 partially offset by a decrease in the Cable TV segment of $200,000. The increase in expenses in the telco segment of $700,000 was due primarily to the operating expenses related to the Triton Datacom acquisition.

Net loss for the 3 months ended September 30, '17, was $300,000 or $0.03 per share compared with a net loss of $200,000 or $0.02 per share for the same period of last year. Our consolidated adjusted EBITDA increased $200,000 to $100,000 for the 3-month period ended September 30 '17 from a loss of $200,000 for the same period of last year.

The Cable TV segment adjusted EBITDA decreased $300,000 to $300,000 for the 3 months period ended September 30, '17 from $600,000 for the same period of last year. The Telco segment adjusted EBITDA increased $500,000 to a loss of $300,000 for the 3 months ended September 30, '17, from a loss of $800,000 for the same period of last year.

Now I'll move on to the 12 months results. For the 12 months ended September 30, 2017, total sales increased 26% to $48.7 million from $38.7 million for the same period of last year. Sales for the Cable TV segment decreased $200,000 to $22.8 million for the 12 months ended September 30, 2017, from $23 million for the same period of last year. The decrease in sales is due primarily to a decrease in refurbished equipment sales of $1.1 million, partially offset by an increase in new equipment sales and repair sales of $100,000 and $800,000, respectively.

Sales for the telco segment increased $10.2 million to $26 million for the 12 months ended September 30, '17, from $15.8 million for the same period of last year. The increase in sales resulted from an increase in new equipment sales, used equipment sales and recycling revenue of $200,000, $9.4 million and $600,000, respectively.

The increase in Telco used equipment sales is due to Triton Datacom sales of $11.6 million which was acquired in October of '16, which offset the continued lower sales from Nave Communications for the year.

Consolidated gross profit increased $2.4 million or 19% to $14.8 million for 2017 from $12.4 million for '16. The increase in gross profit was due to an increase in the telco segment of $2.4 million.

Gross margin for the Cable TV segment was relatively flat at approximately 34% for the 12 months ended September 30, '17 and the same period of last year. Gross margins for the Telco segment were 27% for the 12 months ended September 30, '17, and 30% for the 12 months ended September 30, 2016.

The decrease in gross margin was due primarily to lower gross margins from equipment sales related to Triton Datacom and lower gross margins from equipment sales from Nave Communications as a result of an increased percentage of sales to resellers as compared to end-user customers, and increased sourcing of equipment to fulfill their customers -- to fulfill their equipment sales.

Our operating, selling, and general administrative expenses increased $2.6 million or 21% to $14.7 million for 2017 compared to $12.1 million for '16. The increase is primarily due to increased expenses of the Telco segment of $3 million, partially offset by a decrease in the Cable TV segment of $400,000. The increase in the Telco segment was due primarily to operating expenses of $2.9 million from Triton Datacom. Triton Datacom earn-out expenses of $200,000, as well as $200,000 of acquisition-related expenses for Triton Datacom. Net loss for the 12 months period ended September 30, 2017, was $100,000 or $0.01 per diluted share compared with net profit of $300,000 or $0.03 per diluted share for the same period of '16. Our consolidated adjusted EBITDA increased $300,000 to $1.9 million for the 12-month period ended September 30, 2017, compared with $1.6 million for the 12-month period ended September 30, 2016. The Cable TV segment adjusted EBITDA increased $300,000 to $2.1 million for the 12-month period ended September 30, '17, from $1.8 million for the same period of last year. The Telco segment adjusted EBITDA was a loss of $200,000 for both the 12 months ended September 30, '17 and '16. The Telco segment EBITDA does include the impact of Triton Datacom acquisition-related cost of $200,000 as well as earn-out expenses of $200,000 related to Triton as well. Cash and cash equivalents were $4 million as of September 30, 2017, compared with $4.5 million as of September 30 '16. The decrease in cash was due to cash used in investing activities of $5.4 million, partially offset by cash provided by operations and financing activities of $3 million and $1.9 million, respectively. The cash used in investing activities resulted primarily from the acquisition of Triton Datacom for $6.6 million and the final annual installment payment related to Nave Communications of $1 million.

This is partially offset by payments received on our note to the YKTG Solutions joint venture of $2.4 million. The cash provided by financing activities was due to cash borrowings of $4 million to finance the Triton Datacom acquisition, partially offset by principal payments on our notes payable of $2.1 million.

As of September 30, 2017, we were not in compliance with our fixed charge ratio financial covenant with our primary financial lender under our credit and term loan agreement with them. We noted our -- we notified our primary financial lender of the covenant violation and on December 1, 2017, our financial lender granted a waiver of the covenant violation. This covenant violation was due primarily to lower operating results from our Telco segment in fiscal year '17. Subsequent to September 30 of '17, the company elected to extinguish one of its term loans in December of '17 by paying the term loan's outstanding balance of $2.5 million. As a result, the company believes it will now be in compliance with the financial covenants as of 12/31 of '17. As of September 30, 2017, the company had net inventory of $22.3 million compared with $21.5 million as of September 30 of '16. This concludes the financial overview section of our remarks. I'll now turn the call over to the operator for questions.

(Operator Instructions) And we'll go first to Michael Hess with Hess.

I was actually just calling. I noticed there was an unbelievable amount of trading in our stock and the stock moved quite a bit, and was wondering if you sort of heard anything about what was going on, or whether there was something in the results that I missed that was again would cause such a huge reaction?

Yes, Michael, this is Scott. We saw that too. To answer your question, no, we're not aware of any -- you didn't miss anything. What was -- is out there is what is out there. I actually can't comment any further on that. We have reached out to our partners at NASDAQ, but right now, we are not -- there is nothing that you have missed. So we do not know the answer to that question.

And there hasn't been any other strategic change where we're, I don't know, during a partial tender or -- I don't know, anything I didn't see in the initial release?

No. Again, the only release we have done is the announcement of this call and the earnings release today as well as the 10-K. So that is the releases that are out there, especially the would've caused a market flex like that, that occurred this morning, as far as volume and price, there is nothing else that is out there.

Well, I didn't understand why the stock was at $1.44, thought it should be higher. Anyway -- I also, maybe it was something related to just -- maybe it was related to something to that.

(Operator Instructions) And we'll go next to [George Gaspar], with -- a private investor.

First question regarding Nave. You're 2.5 months into this quarter, and you should have a fix that you could relate something about what to expect in -- going forward for this quarter and out into 2018. If you could elaborate on how you get these things, what was, actually has been accomplished at Nave? And I know you've made some comments in your release about it, but could you give us some specifics of how -- how can you get this back up to reflect the value and the revenue-generating stream that was expected when the operation in Baltimore was acquired?

Yes, [George], I heard your beginning part, but I didn't hear a direct question about -- and we wouldn't be able to respond to that, in addition to the fact that we're 2.5 months in, we have released the financial results. But your second question, I can relate to, and I'm going to turn it over to Don Kinison, because that's really -- the focus is really all about the sales in the organization, the structure that Don's working on. So I'm going to turn the question over to Don Kinison.

Yes, so [George], we've -- the evaluation in the sales organization as it relates to performance activity, territories in which they've been focusing on, clients that they have been particularly focusing on, has all been evaluated. That being said, we've been refocusing the group as a sales organization to the areas where we see the highest benefit for both revenue and margin. We'll continue to focus in that direction as well as add additional sales folks to the organization as we see appropriate, as the organization continues to be able to support that growth.

Okay. And is it possible to get some direction from the Miami operation in terms of what they're doing on the telecommunications side, and working that through Nave? Or is there not a synergy kind of situation there?

Well, I mean, as always, we are evaluating the synergies among the organizations, both operationally as well as sales synergies. At this time, we're not directly evaluating synergies between the Nave organization and Triton. But in the future, there are definitely plans to evaluate those synergies.

Okay. And a question on cable side. It seems like, with all the flooding that took place, that there should have been more demand now, maybe that -- if I can't -- can't recall that, what the date of all the flooding was in Texas and Florida and wherever. But it doesn't appear as though there is any pickup in cable requirements, amplifier replacement requirements, even with all the mess that took place in the United States, that you would normally think would have been a positive for the company. Can you comment on that?

[George], this is Dave Chymiak. I would agree with you. We've been disappointed in what we thought we would have. We did get a little bit, but a lot of the locations that were really damaged are still damaged, they're still -- if it's completely wiped out, they have to go back and get the infrastructure in. There was some maintenance needed for people that were short on parts and everything, but most of it was salvageable. The main places of the head-ins of the equipment was well-protected, and not a lot of damage to those were done. But we have not been seeing anything, we are hearing and looking and quoting for things out of the country, for different places of, the islands and everything that is looking at replacing here. So that's a positive factor.

Okay. Is there anything going on in the technology that can save the cable area, the general cable market, in terms of how to enhance the communication via cable, that would work to the advantage of ADDvantage Technologies in, say regenerating its cable business?

We anticipate different things that are going on. The problem with it is, the industry's a little bit confused because what they're looking for and what they want to use, and everybody's trying to sell is not made or working properly yet. So there's been a lot of postponement going on right now, a lot of them have postponed to the first of the year, which we're not usually used to. We don't really get that much orders that way. But right now, it looks like a lot of things have just been postponed.

Okay. And is there anything specific in technology side that's giving you a shot at looking at expanding your business?

Well, we've been concentrating on getting ready for a lot of the node replacements that are needed and we've got good inventory on it and we anticipate that part of the business, of what we call segmentation as well as deployment of a lot of different nodes right now.

I see. And just 1 general comment to all of you. I think it's time that your company applies for inclusion in Value Line's small, mid-cap publication. I hope that -- I know I keep bringing it up quarter-to-quarter, and I think that you're missing a bit here by not having your data part of the Value Line small mid-cap range publication.

We appreciate that comment. Thank you, [George]. We will look into that.

I am looking into it, [George].

Thank you, [George]. Appreciate it.

And it appears there are no further questions in the queue. So at this time, I would like to turn the call back to David Humphrey for any additional or closing remarks.

Thank you. Well, first, we'd like to thank everyone who has joined us on the call today. Before we conclude the call, we'd like to reiterate that while we are not pleased with the overall performance of the company this year, we do believe we have the opportunity to generate improved results in 2018. On the Telco side, Triton performed consistently well in every quarter fiscal '17, and we expect this to continue. Nave's results were disappointing and we are not pleased with this performance. However, we are making progress for the implementation of several initiatives to turn around the declining sales, although we cannot expect changes overnight, we believe that over the course of fiscal 2018, we will see the improvements in this business and our cable TV business continues -- remains a consistent source of cash flow to support our growth efforts. We look forward to making progress with our sales strategy to drive growth and provide sustainable profit and positive cash flow. With that, I'd like to thank our shareholders for their loyalty, support and patience as we continue to build value together. Thank you, all.

This does conclude today's conference. We thank you for your participation. You may now disconnect.