ADDvantage Technologies Group Inc (AEY) 2020 Q3 法說會逐字稿

Thank you for standing by. This is the conference operator. Welcome to the ADDvantage Technologies Third Quarter 2020 Earnings Conference Call. (Operator Instructions) And the conference is being recorded. (Operator Instructions) I would now like to turn the conference over to Mr. Brett Maas of Hayden IR. Please go ahead, sir.

Thank you, operator. We are joined today by Joe Hart, President and CEO; and Jarrod Watson, Chief Financial Officer. Before we begin today's call, I would like to remind everyone that this conference call may contain forward-looking statements which are subject to the safe harbor provision 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 the actual results or results due to varying factors such as those contained in ADDvantage Technologies' most recent report on 10-K and 10-Q 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 reports on Form 10-K and 10-Q. 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 this 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 net income -- GAAP -- 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 the non-GAAP financial measures with the closest GAAP financials and as discussed as to 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 would now like to 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, everyone, joining us today. I hope that everyone is healthy and safe as COVID-19 and the uncertainty surrounding it continues to impact our lives. The health and safety of our employees and customers continues to be a top priority and a key pillar of our culture. We have taken a variety of steps to ensure we are doing as much as we can to protect everyone while continuing to operate, including requiring work-from-home arrangements for a large portion of our workforce, restricting travel and practicing social distancing. Our tower crews are considered essential workers, and we have invested in PPE and taken other precautions to protect them as they do their important work.

The recent pandemic and disruptions it caused reinforce the need for 5G now more than ever before. More of our lives have moved online, with work, shopping, dining and entertainment all requiring some component of network connectivity. The promise of higher-quality and faster speeds make 5G an eventual necessity and the shift in our lifestyles may make it a must-have sooner rather than later.

Economic uncertainty and the shaky business climate have caused several of the large wireless providers to temporarily press pause on large investments and upgrades to 5G in 2020. And that is having a direct impact on our near-term revenues. However, it is our view and that of some of the biggest OEMs and integrators in the industry, that this is a temporary phenomenon that is creating pent-up demand and will soon be corrected as the business climate stabilizes.

T-Mobile, following its merger with Sprint, is expected to be the biggest player in the near term, with a significant list of sites to upgrade for 5G and thousands of Sprint sites that need to be either integrated or decommissioned. Our understanding is that the real estate and permitting work is well underway, and much of the equipment is being purchased. The industry consensus is that much of this work may start in calendar Q4 of 2020. Other providers have significant quantities of work as well. And we expect these to begin to be released between now and early 2021.

We have not missed out on any meaningful projects today. The 5G initiative is just delayed, partly due to COVID, partly due to the economy and lastly, due to critical architecture decisions and OEM negotiations on equipment supply by the carriers.

A recent study in June of this year from Ericsson Mobility, one of the 3 largest wireless manufacturers in the world, shows that there were 390 million mobile subscriptions in North America in 2019, of which 310 million were smartphones. Those numbers are forecasted to grow to 440 million and 360 million, respectively, by 2025. Of the 390 million mobile subscriptions in 2019, 350 million were using 4G, and less than 1 million were using 5G.

By 2025, the number of 5G subscriptions in North America will grow to 320 million as 4G declines to 110 million. During this time, the amount of data traffic per smartphone will increase 5x driven heavily by video applications and usage. And the total amount of mobile data traffic will increase 6x. All of this spells tremendous demand for increased bandwidth and capacity across all wireless networks in the U.S., but also throughout the fiber optic backhaul network. While some of the carriers are announcing 5G availability this year, it is limited in coverage and scale in the initial stages. The lion's share of the work to upgrade these networks is just beginning and will last the next 5 to 7 years.

Meanwhile, our business strategy remains unchanged, and we continue to be optimistic about long-term growth opportunities. As our revenue has faced recent headwinds due to the economy and the delayed 5G rollout, we have taken steps to reduce our overhead expenses. Year-over-year, we have reduced our quarterly SG&A expenses by 15%. In addition, we have taken steps to improve our gross margin. In the third fiscal quarter, we booked change order revenue for which expenses had already been incurred, and this revenue benefited our gross margin. In addition, our wireless services segment enjoyed a more favorable sales mix in the quarter, and we began to see the impact of the new leadership in this segment on our margin.

While we are very happy with the gross margins achieved in Q3, we do not see them as being sustainable at that high of a level. However, we are targeting 30-plus percent margins in this segment at reasonable revenue levels, and this quarter shows that we are moving in that direction. We expect wireless revenues to expand favorably, starting in Q2 of fiscal '21 as the major carriers roll out their respective build plans. U.S. wireless industry CapEx spending is expected to reach $37 billion for the combined wireless carriers in 2022, and that does not include spending by the major tower infrastructure owners. CapEx spend is forecasted to stay in the mid-$30 billion throughout the rest of the decade, according to Deutsche Bank Research.

The steps we have taken to reposition the company put us in a stronger position to capture a meaningful share of market opportunities when activity inevitably resumes. We have built a core infrastructure in a range of offerings. There were a series of acquisitions that equipped us to compete effectively for new business. We are positioning not only for growth, but for profitable growth, by continuing to improve our existing operations and personnel and further refining our inventory management practices.

The result of these efforts are becoming apparent in our financial results. On a consolidated basis, our third quarter gross margin improved to 34.7%, up from 26.1% in the year ago quarter, a nearly 900 basis point improvement year-over-year despite the 32% decline in revenue. As I mentioned, this improvement was due to the contribution of our wireless services group.

Our Telco segment was also impacted by the overhang from the pandemic. Sales were lower at Triton in Q3, as many of its customers were closed for business and spending on telecom equipment for office environments nearly came to a standstill during the second quarter. Conversely, sales at May were up slightly as demand for used core network equipment remained strong. We expect that Triton sales will improve during Q4 as the office environment starts to reopen.

We are now in a stronger financial position with more than $10 million in cash, which is a sufficient backstop to support our operations until the wireless construction activity and volume picks up late in calendar 2020 and hits a high level in 2021 and beyond. Our balance sheet is noteworthy as we have effectively doubled our net cash over the last 9 months. Jarrod will provide additional details with regards to our balance sheet momentarily, but we expect that our cash will be approximately twice our debt by fiscal year-end.

Part of improving our operations also includes corporate functions such as cash management. We continuously evaluate our cash flows and access to capital and believe we are sufficiently capitalized for a range of potential best-case, worst-case and most-likely scenarios. I remain confident that we have sufficient capital resources and a balance sheet that will support the execution of our plans to be a recognized participant in the massive 5G opportunity.

Subsequent to the end of the quarter, we announced several key management changes that elevate our team and give us the expertise and leadership to execute our strategy. Jarrod Watson, who you will hear from in just a few minutes, was appointed as our Chief Financial Officer. Jarrod comes to us with more than 20 years of corporate financial leadership, including multiple Fortune 500 organizations. He has led large teams and has demonstrated his ability to apply analytics to support strategic decision-making, which will be critical as we move forward with our business development plans.

In July, Reginald Jaramillo was promoted to President of our Telecoms segment, and Jimmy Taylor was affirmed as the permanent President of our Wireless segment. Jimmy initially came in from outside our organization to serve as President of our Wireless segment on an interim basis in March. He is a 35-year industry veteran, with extensive experience in operations, business development and strategic transactions. He has a deep understanding of the wireless services industry and where it is headed, along with a comprehensive knowledge of the particulars of our business. In addition, he has a wide network of wireless service industry contacts that will help us as we expand our customer relationships, build our backlog and pursue opportunities in the 5G space. Jimmy and I have worked together multiple times in the last 20 years. We are both quite familiar with what it takes to substantially grow a services company in the wireless industry.

Reggie's institutional knowledge, combined with his financial services and telecommunications background, will be extraordinarily beneficial in his new role. Reggie not only understands the numbers, but he has experiential knowledge of how communication networks are put together and how the equipment that we sell fits within a network architecture. He comes with 15 years of broadband network experience.

With that, I will now turn the call over to our Chief Financial Officer, Jarrod Watson, for a more detailed review of our financial results. Jarrod, welcome to the company, and please go ahead.

Thank you, Joe. It's an honor to be here, and I look forward to seeing some of you on this call when business travel returns to normal. For the third quarter of fiscal 2020, our total sales were $12 million. This is down 32% from $17.6 million for the third quarter of fiscal 2019. The decrease in sales was primarily due to delays in infrastructure spending from the major U.S. carriers and lower equipment sales to our enterprise customers, whose offices were closed or had limited occupancy during the quarter. Both of these were a result of the pandemic.

Sales for the wireless segment were $5.1 million in the third quarter of fiscal 2020, a decrease of $3.6 million compared to $8.7 million for the same quarter a year ago. Sales for the Telco segment were $6.9 million for the 3 months that ended June 30, 2020, which was down from $8.8 million for the same period last fiscal year. The decrease in sales for the Telco segment was primarily due to a $2.2 million decline in sales at Triton, which was partially offset by a $300,000 increase in sales at Nave.

Our gross profit decreased $417,000 to $4.2 million for the third quarter of fiscal 2020 compared to $4.6 million in the same quarter a year ago. The decline in gross profit was due to our Telco segment as the gross profit in the wireless segment was essentially flat year-over-year. What is of note is that our gross profit margin increased by nearly 900 basis points year-over-year to 34.7%, up from 26.1% in the same quarter a year ago for the reasons Joe already mentioned. While we are very pleased with this performance, and we continue to focus heavily on gross margin improvement, sustaining margins at this level will be difficult in the near future, but we are focused on margin improvement.

Operating expenses increased $386,000 to $2.0 million for the 3 months that ended June 30, 2020 compared with $1.6 million for the same period last year. Selling, general and administrative expenses decreased $426,000 to $2.4 million for the third quarter of fiscal 2020 compared to $2.8 million for the same period last year. This was primarily due to a decrease in personnel expenses in the Telco segment, which was partially offset by an increase in expenses in the wireless segment, largely as a result of the acquisition of Fulton.

Other income and expense for the 3 months that ended June 30, 2020 was essentially 0 as compared to $0.2 million for the same period last year. The income for the 3 months that ended June 30, 2019 is primarily related to a sale of assets, gain and loss of a sale of assets of $0.3 million, partially offset by our factoring arrangement on our wireless division.

We had 2 nonrecurring events in the quarter. First, we recorded a $660,000 impairment charge related to the right-of-use asset. This involves the facility in Baltimore, which previously housed our Telco segment. We had -- we have moved Nave's entire inventory and order component operations from the facility in Jessup, Maryland, to Palco Telecom, a third-party reverse logistics provider in Huntsville, Alabama. Following this, we subleased the Jessup facility. With the tenant vacated and under GAAP, we were required to impair the asset. However, this impairment was more than offset by a $1.2 million tax benefit from the CARES Act as we were able to look further back to recoup taxes paid against net operating losses.

Inclusive of these charges, income from continuing operations was a positive $23,000 or less than $0.01 per diluted share for the third quarter of fiscal 2020, compare this with a loss from continuing operations of $58,000 or approximately $0.01 per diluted share for the same period a year ago. Adjusted EBITDA for the 3 months that ended June 30, 2020 was a loss of $187,000 compared with a positive adjusted EBITDA of $176,000 for a year ago, the same period.

Turning to the balance sheet. Cash and cash equivalents were up $9.2 million to $10.4 million as of June 30, 2020 compared with $1.2 million as of September 30, 2019. As of June 30, 2020, the company had net inventories of $6 million compared to $7.6 million as of September 30, 2019. The company had $2.8 million drawn on its revolving line of credit as of June 30, 2020 and $4.8 million outstanding on notes payable, for a total debt of $7.6 million. This compares to no bank debt as of September 30, 2019. As Joe discussed, we continue to believe we are sufficiently capitalized with appropriate backstops to support our business until normal 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) The first question comes from [George Gaspar], a private investor.

Could you please, Joe and any others, comment about your internal growth expectations on crews? Or how many crews do you have now relative to, let's say, you had at 3 months ago and maybe back at the beginning of this current fiscal year? And how you're viewing the crew count going forward, can you give us some color on that?

Well, crew count, it fluctuates with the amount of backlog and work in hand, [George]. And so we've been able to maintain our internal crews, both in the north and the south and keep them busy with plenty of work. And we use our subcontractor crews as the flex that allows us to vary up and down with the workload changes throughout any year. We're obviously in a lower total crew state at this particular point, but we're starting to see it creep back up. We've got activity with the various recruiting agencies to start bringing in additional internal resources and we have our contracts group continuing to work with all the various tower subcontractors out there in the marketplace, so they're ready to flex up when we get the purchase orders for the new work.

So I would say, crew count were probably a little under half of what we started the year with. But I would say that we expect, by sometime in the first calendar quarter of 2021, that we would probably be up to double what we currently have and headed towards 3x of that crew count as we progress into our Q3, which is sort of that spring time, right, when the warm weather starts hitting. So I'm deliberately trying to stay away from exact numbers, George , because we talk about this every quarter.

All right. And then just a follow-on question on the -- this particular part of your business. As you move forward, and it sounds like the momentum is someplace, into, hopefully, early 2021. There's -- are you going to have more crews associated with 5G activity away from tower work directly, but to take -- and take your crews into setting up at distances away from towers in cities? And can you explain a little bit of that, please?

Okay. With that last part, were you referring to like small cells compared to big towers?

Yes. Yes, I was.

Okay. Well, the first part of your question, I believe, that by the end of this calendar year, we'll be, by and large, finished up with any remaining 4G expansion or frequency upgrades. And that next year will be exclusively 5G-related, along with maybe a little bit of decommissioning work of the Sprint sites, hopefully, on behalf of T-Mobile. So AT&T and Verizon kind of continue to build and are beginning to grow their 5G expansion into next year. T-Mobile is probably the near-term big player given the consolidation with Sprint and just sort of reconciling which sites they will keep and which sites they will decommission. But the bulk of that work is going to be 5G-related. And then most of, I'll say, the market analysts are predicting that DISH Wireless will start sometime in calendar 2021 to build their new network as well. So that will all be 5G-related work.

Now from time to time, we may be hired to go build a new tower for somebody that will be the initial tenant. And we'll probably put a multitude of technologies on that tower for them, but the small cell work itself, depending upon which carrier you're talking about. Verizon has been building small cells probably for 7 or 8 years now. At a pretty steady state, that pace continues. AT&T, kind of up and down on the volume of small cells. I see small cell percentage of the total pie growing, but it will probably be most of 2021 before the ratio of small cells to macro cells starts to get anywhere close to even. And there's plenty of literature to read on that, with people probably better informed than I. But we continue to keep our eye on small cell, and it's something that's attractive to us.

(Operator Instructions) The next question comes from [Al Aise], a private investor.

I have a couple of questions for you. One of them is because of the COVID situation, this could possibly extend for another 6 to 9 months, depending on the vaccine. How are you going to mitigate the risk and possibilities of people working from home and enterprises could be still shut down over the next few months? In a sense, what would you think as, possibly, to do differently in that you have experienced over the last few months? And the second question is are you planning to extend your business abroad to Middle East or Asian countries at the same time to increase your appearance in the 5G networks?

Okay. Thank you, [Al]. So really, almost from the beginning, in regards to precautions around COVID-19, probably 80% of our office and sales staff in any of our entities are working from home or working in a voluntary flex office environment. They can come use the office if they need to from a home living or a family situation, or they can work from home. So we've been used to Zoom and Microsoft Teams. We've found that our business has continued to operate at full speed regardless of where people are located. Our Miami operation is a hands-on technical staff, and we do temperature checks, hand sanitizers, we sanitize the facility multiple times a day, and we've had quite a success there.

Our tower crews, they work remote wherever the towers are, and they have masks and gloves and hand sanitizers and everything else. And to the greatest extent possible, we're trying to protect them. So never say never, but we've been quite fortunate here, almost 5 months or more into the pandemic, that we've been without incident or a stoppage in our work. So hopefully, that will continue. There isn't any precaution that we have read about or know of that we aren't already taking. So we'll see how that goes. So we don't see any impact to our business over the next 6 to 9 months from that. So I think we're okay there.

As far as expansion plans for international work, we do a little bit of selling of some of our products, but -- that go overseas, but those are through brokers and broker websites, things like that. But we have no plans, from a services perspective in wireless, to go outside the U.S. in the near future.

Okay. And are you planning to possibly extend your services beyond 5G and provide services, including the cloud-based services?

That's something that we're always looking at. I mean I wouldn't say cloud-specific, but we -- on the wireless services side, we're principally a construction services company, either of big towers or small cells. We need to look into expanding our services portfolio more on the front end of engineering, site acquisition, permitting and maybe some network design as well as on the back end to do cell site integration and commissioning work on the ground at the cell sites. So we're looking at how to expand our portfolio. But I would say that the cloud -- working in the cloud, other than using it for storage, that's not our core competency.

(Operator Instructions) There are no more questions on the phone. This concludes the question-and-answer session. I would now like to turn the conference back over to Mr. Joe Hart for any closing remarks.

Thank you, operator. I'll just close by thanking everyone that joined us today and your interest in ADDvantage Technologies. We continue to work very hard to improve our results and to make this an investment worth your while. So we appreciate it and wish you well and hope that you stay safe in the coming months. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.