ADDvantage Technologies Group Inc (AEY) 2022 Q2 法說會逐字稿

Good evening ladies and gentlemen, and welcome to The ADDvantage Technologies Fiscal Year 2022, Second Quarter Financial Results Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Brett Maas. Please go ahead, sir.

Thank you, operator. We are joined today by Joe Hart, President and CEO; as well as Michael Rutledge, the coming Chief Financial Officer.

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 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.

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 the 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 are located on our website at addvantagetechnologies.com. You will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and the discussion about why we believe 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.

I now turn the call over to Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.

Thank you, Brett, and thank you to everyone joining us on the call today. This was a record quarter for us. For some time, we've been expecting a surge in 5G tower work, and that has clearly occurred. Encouragingly, it happened simultaneous with a boom for our Telco segment as well. The result is revenue of nearly $24 million, up nearly 90% year over year. We expect this encouraging revenue trend to continue, based on site awards and a growing pipeline of war. The progress is not as evident on our bottom line yet, but we have implemented significant cost reduction initiatives to address this.

As the 5G work surged, we move quickly to meet the demand. Now that we have more visibility into the schedule, our customers expect over the next few months, we have strategically reallocated resources to meet near term demand and have scale back our back-end support infrastructure. The result is approximately $2.4 million in reduced expenses on an annual basis, and we should see the initial benefits of these cuts in the current quarter, our third fiscal quarter which ends in June.

I would note that most of the personnel reductions were achieved through natural attrition. So there are no restructuring or severance costs associated with this initiative. Investors should expect margin expansion and material improvement in our operating and net losses beginning in the current quarter. We are clearly focused on improving bottom line profitability and not just top line growth. Wireless revenue related to tower work and other aspects of the 5G rollout has already increased by 55% year-to-date compared to last year year-over-year. We expect that it will continue to grow throughout this fiscal year. In fact, all last year, we generated approximately $21 million in wireless revenue and we've generated almost $15 million in just the first six months this year. Our growth continues to be broad-based, involving several carriers, including both long-standing customers and new players in the market. The work touches all the regions we service, spread across the center of the United States.

We are the leading vendor in several large metropolitan areas. Our pipeline of new projects, meaning work we have been awarded where we are waiting for purchase orders as permitting is complete, gives us significant confidence that the growth will continue in the near term. The 5G opportunity represents a multiyear secular trend, not just for tower, but for data centers, technology providers, handset manufacturers, and wireless carriers. Each of the carriers are investing tens of millions of dollars in the expansion, and the CapEx plans of carriers are public and widely discussed. As this Wireless segment quickly expands, we are simultaneously benefiting from other secular trends that are driving strong results in our Telco segment. Global supply chain issues and chip shortages continue to impact the market for new telco equipment.

In addition, many people are working from home, requiring an expansion of the telco infrastructure to facilitate a remote workforce. Offices are closing, either because of challenges related to the pandemic or often because their workforce is now remote, creating a market for office equipment for us to purchase at attractive prices to refurbish and to resell. All of these factors make our refurbished equipment sold by Nave and Triton a more compelling and viable option, and the year-to-date performance supports this. This was the fourth consecutive quarter of revenue over $11 million dollars. And in fact, the nearly $16 million in Telco segment revenue was an all-time record high. The second quarter Telco revenue alone exceeded the revenue for the first six months of last year, and our Telco segment is contributing solid and positive contribution margin to our company.

We continue to anticipate a leveling off of demand at some point in future quarters as the global supply issues and chip shortages subside. Albeit at a somewhat elevated level relative to the recent past. The CEO of Intel was quoted recently as predicting that the global chip shortage may last into 2024.

Overall, we delivered 88% revenue growth in the quarter. Our Wireless margins and overall profitability were impacted by the increased spending to ramp up crews and capabilities in advance of the coming demand, but we believe that will improve in the current quarter with further margin expansion as we move through the year as our business reaches the necessary inflection points, where volume is able to offset fixed costs. At the same time as we are reducing our fixed costs by $2.4 million annually or $600,000 per quarter, we are committed to delivering a bottom line net profit in the coming quarters.

With that, I'll now turn the call over to Michael Rutledge, our CFO, to provide a more detailed review of our financial results. Michael, please go ahead.

Thank you, Joe. Consolidated sales increased $11.1 million or 88% to $23.8 million for second quarter from $12.7 million for the three month ended March 31, 2021. The increase in sales is due to increases in Wireless sales of $3.4 million and increased Telco cells of $7.7 million. Consolidated gross profit increased $2.6 million to $5.8 million for the quarter compared to $3.2 million for the same period last year. The increase was due to an increase in our Telco segment of $2.6 million and a slight increase in gross profit from the Wireless segment. As Joe mentioned, we expect margin expansion, particularly in our Wireless segment, in the second half of the fiscal year related to our cost reductions. Operating expenses increased $600,000 to $2.8 million for the quarter compared to $2.2 million for the same period last year. The increase reflects the company's investment in its regional growth strategy related to expected 5G infrastructure growth.

Tolling general and administrative expenses increased $93,000 or 2% to $3.9 million for the second quarter from $3.8 million for the same period last year. The increase in SG&A relates primarily to increased selling and commissions expenses, expenses to support higher revenues. I think it is important to note that the SG&A increased less than $100,000 while revenue increased more than $11 million.

Net loss for the quarter was $1.4 million or a loss of $0.11 per diluted share based on 13.1 million shares compared with a net loss of $3.1 million or a loss of $0.25 per diluted share based on 12.4 million shares for the same quarter last year. Turning to our balance sheet. Cash and cash equivalents were $3.9 million at March 31 compared to $1.8 million as of December 31, 2021. Cash was used primarily to fund operations. As of December 31 -- March 31, 2021, the company had net inventories of $5.8 million. We continue to believe we are sufficiently capitalized with appropriate backstops to support near-term business conditions until more normalized business conditions return.

This concludes the financial overview segment of our remarks. I will now turn the call over to the operator to facilitate any questions.

(Operator Instructions) We take our first question from [George Gaspar] with private investor.

Can you hear me?

Yes, George.

Just to start out here, this margin expansion potential. Are you pretty much through your wireless backlog that you might have been completing with higher costs associated with them and your going through process would be much improved because that's over? Or can you highlight us a little bit more on that?

Sure. This is Joe. We launched business in seven geographic markets with a new wireless carrier about nine months ago. And the premise for that was that we would get sufficient volume in each market to warrant the investment of two to three head count to oversee the work in those geographies. The volume didn't actually come through in a couple of those markets. So we decided that we needed to pull back on that investment and really that's the crux of it. Overall, it hasn't affected our backlog. Our backlog for the second half of the year is larger than the backlog for the first half of the year on the fulsome side of the business. So, we feel that we're at a more steady, profitable equilibrium state, and that allowed us to then trim the back office support that we had set up for a large wave of work to come suddenly. So, we've trimmed the expenses. It was a fair bit of head count, but also, involves fleet expenses, fuel, per diems, things like that.

So it -- both at the direct margin level, we made improvements in our cost of goods sold, and at the same time, the back-office support, we consolidated, centralized and made it more efficient. We're in good standing with the customers and we're bringing on additional carrier work by the other big three. So, I feel like we're in a more stable, manageable, profitable structure at the moment. So I think we're in a much better condition. We had to focus on deploying to lots of markets simultaneously. That is always a bit challenging, and we got that back under control. And now we're focused on profitable work at both the gross margin level as well as the operating margin level.

Got you.. Okay. And what was impressive is that you were -- this past quarter with -- this nice improvement was accomplished with some pretty tough weather across the Midwest and Southwest. And I think that that would be in your favor going forward from -- in terms of this third quarter that you're in now. My additional question on wireless. Can you break down the amount of your volume, revenue volume that's associated with direct on-tower work versus land work?

It's all on the tower.

It's all on the tower. Okay. So I think there was a comment earlier in the opening comments about breaking out and developing more business in terms of other types of work associated with wireless. How long before that kind of work develops?

I mean it tends to come in waves depending upon what the carriers are doing. So as the carriers are going on to new sites or new sites for them, there could be some fiber backhaul and electrical work that goes along with that that's on the ground to bring either backhaul into the cell site or power into the cell site. So that just kind of comes hand in glove with really the installation of, say, an AT&T or a Verizon on a site that they haven't previously been located on. But -- so right now, we're sticking to what we're good at and what we're already widely deployed at. Future kinds of work will be something that we'll put in a strategy document that we put out and put it on the website.

I see. Okay. And one last on expanding your business activity. It appears as though there's a lot of concern about moving electricity throughout United States on a broader basis that there's shortages starting to show. Is there a possibility that you could end up doing some work in the wireless connection along the way? Or is that not a thought on your part?

I don't believe so, George, I think that would be something that the carriers -- their own strategy and risk management departments would be dealing with something like that, that down at our level in the food chain, I don't think that's going to impact us at all because I mean we can actually stand up and build the sites using generators. We don't need permanent power to get a site built. So I think for at least in the next 12 months, barring some unforeseen macro political event, right, it's not going to have an impact on our business.

Right. Okay. And a question on the Telco side. Are there areas of activity that you could potentially look at expanding your base of operations? I know that this chip shortage has been an opportunity for a repair of existing equipment. Are there areas in that telco area that you could add to do in the future? Have you thought about that?

Sure. I think different -- representing different OEM equipment, some different types of equipment. And Nave Communications tends to deal in the public switched network and transport networks and Triton Datacom deals with enterprise networks or office communication products. Both of those Presidents, Mike Burch and Damon Slachter, are looking at ways of expanding both in product lines as well as with different OEMs and with new customers. One of the, I'll say, previous issues we had was that, with restricted cash resources, we were basically inhibiting any rapid growth for both of those companies. But when Michael Rutledge was able to convert our banking facility with a vast bank out of Oklahoma, we have $19 million worth of capacity. So, we're in a different situation now. And he and the fellows running Nave and Triton are really now able to approach it with a much more aggressive mindset. So, we feel very bullish about our ability to continue to grow the Telco segment while we're going through this wireless growth period with 5G. So, I think we're in a good spot. And now really the job for Michael and I is to get this business on a profitable standing right now in this current quarter and moving forward, and that's what Michael and I are focused on.

And in closing, just an observation, the revenue stream of the past quarter and what you've got -- the momentum you've got going here in this existing quarter, you're going to be reaching toward, hopefully, being able to deliver $100 million in revenue stream on an annual basis going forward as you build out. A that's pretty impressive with a company with, what, 13 million shares out and selling at a little more than $1 a share. If you get this bottom line built up, the shareholders should be able to enjoy something they've been waiting for for a long time at the bottom line.

Thank you, George.

(Operator Instructions) It appears, there are no further question at this time. I'd like -- I'm so sorry, we do have one question in the queue, Kurt Caramanidis with Carl M. Hennig, Inc.

I apologize. I'm a little late in case this has been gone over. But your Telco segment, did you have a buildup of inventory to enable you to have this kind of sales or can you keep that up? Do you have the ability to get inventory to move it? Or are you selling it down to where you won't have the inventory as the quarters go by here?

We did not add to inventory. We did buy products that were available on the market. In some ways, we sell from inventory. Other ways, we're a bit of a broker. And we'll find the need from a client and then go find the source for the product, and then we'll match those two things together and make the sale. So, we really focused on not building inventory that has been a problem in past years, and I'll say, three to five years ago that was a problem. We've worked hard collectively as a management team to get that in control. So, I don't see anything inhibiting us from growing the Telco business in a very strong fashion for the next couple years. Now I am not in charge of the global chip shortage or supply chain issues from Asia or anything like that, but both of those events actually help our business for Nave and Triton.

Yeah, exactly. So I assume you'd have a lot higher margin on selling your inventory than being a broker?

Yes, we would.

(Operator Instructions) It appears there are no further question at this time, I would like to turn the call back to management for any additional or closing remarks.

Thank you, operator. This is Joe again. We're clearly focused on getting this company in a profitable situation and doing it this year and quickly. The $2.4 million cost reduction is the beginning of it. We'll continue to shape and trim the back office and support structure to both enable the growth of our business, but at the same time, not be overspending or overcommitting on that. So, I consider it a work in progress. But it has -- Michael and myself, that is our total focus, to get this in a positive net income perspective on a quarter-over-quarter basis moving forward. Those actions are in place already. We finished Q2 strong, and had an excellent March and an even better April. We feel that the trends are in place and the metrics are in place to make this a place worth investing in once again.

So thank you for your continued interest and your support, and we feel a strong obligation to return that support to you. Thank you again.

Thank you. And that concludes today's call. Thank you for your participation. You may now disconnect.