ADDvantage Technologies Group Inc (AEY) 2020 Q1 法說會逐字稿

Good day, and welcome to the ADDvantage Technologies First Quarter 2020 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Brett Maas, Hayden IR. Please go ahead, sir.

Thank you, operator. We're joined today by Joe Hart, President and CEO; as well as Kevin Brown, Chief Financial Officer; Scott Francis, Chief Accounting Officer; Don Kinison, President of Telecom segment; Colby Empey, the President of Wireless segment.

Before we begin today's call, I'd like to remind you 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 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 and future results or results due to varying factors, such as those contained in ADDvantage Technologies' most recent report on Form 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 those included in the company's press release issued today earlier and included in ADDvantage Technologies' most recent report 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 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 a discussion 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'd like to 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 today. We begin fiscal year 2020 as expected with solid revenue growth, and we continue to make progress with the company's transformation. We did experience seasonal challenges across all of our companies that we typically face in our first quarter related to weather, the holiday down period and our customers' budget cycles.

Our focus continues to be on growing our business by capturing a meaningful share of opportunities related to the nationwide rollout of 5G. We believe the steps we have taken in the second half of calendar 2019 to reposition our business, coupled with the expected acceleration of 5G rollout by all major U.S. carriers later this year will be the catalyst for improved top and bottom line results in the second half of our fiscal 2020.

As part of our repositioning, we launched our wireless infrastructure services business last year, with the acquisition of Fulton Technologies, which was responsible for a large portion of our growth in the first quarter of fiscal 2020. Through these acquisitions, we are building our core infrastructure, talent and range of offerings to pursue and compete aggressively for new growth opportunities in 5G. This is evidenced by the strong pipeline of opportunities that we are currently pursuing.

As a reminder, the Fulton business, more than our other businesses, is impacted by seasonality due to weather and the major carriers' fiscal calendars. While we have equipped our crews to work with comfort and optimal safety in cold conditions, efficiencies are impaired and projects are delayed from time to time. As a result, we did experience some challenges in the beginning of fiscal 2020. At Fulton, one major carrier completed its build plan ahead of schedule in the Southwestern United States, significantly reducing the backlog of sites in our Southwest region. We proactively repositioned many of our crews to the Midwestern states to mitigate the circumstances and to take advantage of the increased workload experienced in our northern region. We were able to shift resources rather seamlessly despite the process taking several weeks, which resulted in compressed margins and lost revenue. Most importantly, we do not feel that this is representative of the future business as we are looking forward to substantial growth during the business' high season in the warmer months.

Our Wireless business is positioned to be a positive contributor to fiscal year 2020. We are forecasting strong double-digit revenue growth for the full fiscal year. For reference, Fulton's revenue was $6.7 million this quarter compared to $3.8 million for the same quarter last year prior to the acquisition.

In our Telco segment, our business continues to benefit from the realignment of operations that we implemented last year. With more organized and tightly managed inventories and more streamlined order fulfillment at Nave, the Telco business is running more smoothly, and our team is better positioned to focus on growth. For the first quarter of fiscal 2020, gross margin dollars were up 20% for Nave Communications. We remain focused on optimizing operations, further building our repair services business and growing our recycle operations. We are pleased with the positive contributions Nave is making and have recently begun an inventory oversight program, allowing us to more efficiently manage our inventory levels and drive towards lower inventory volume.

At Triton, the consolidation of our warehouse and operations center into a single location last year as well as our transition to a more efficient operations team have driven increases in productivity and capacity for growth. Revenue at Triton was up 7.5% for the first quarter of fiscal 2020. There were approximately $100,000 of onetime costs related to the company's move during the quarter. We are planning to add additional manufacturers to our product lines throughout this year to increase the number of product offerings and are in the process of redesigning our website with a focus on search engine optimization.

We expect solid improvement in both our top and bottom line results for the full year as a direct result of improved operating efficiencies, better practices and the opportunities related to 5G across all of ADDvantage's businesses. We are also encouraged by the recent Sprint/T-Mobile merger decision by the Justice Department, which will stimulate activity in the industry as well as pave the way for a network build-out of a fourth entrant, DISH Network.

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

Thank you, Joe. For the first quarter of fiscal 2020, our total sales increased 105% to $14 million, up from $6.8 million for the first quarter of fiscal 2019. The increase in sales was due to an increase in sales in the Wireless segment of $6.8 million and an increase in sales at the Telco segment of $314,000.

The Wireless segment sales increase was due to the acquisition of Fulton Technologies in January of 2019. Revenue for the Wireless segment was $6.8 million in the first quarter of fiscal 2020. We did not report any revenue for this segment in the first quarter of fiscal 2019.

Sales for the Telco segment increased $314,000 to $7.2 million for the 3 months ended December 31, 2019, which is up from $6.8 million for the same period last year. The increase in sales for the Telco segment was due to year-over-year increases in equipment sales. The increase in telco equipment sales was due to increased sales at Triton Datacom of $232,000 and increased sales at Nave Communications of $83,000.

Our gross profit increased $1.9 million to $3.6 million for the 3 months ended December 31, 2019, up from $1.7 million for the same period last year. Gross profit margin as a percentage of revenue was roughly flat year-over-year at 25.7% for the first quarter of fiscal year 2020 compared to 25.2% in the year-ago quarter.

Operating expenses increased $1.4 million to $1.9 million for the 3 months ended December 31, 2019, compared with $493,000 for the same period last year. The increase in operating expenses was due to the addition of the Wireless segment of $1.2 million and an increase in the Telco segment due primarily to additional facility costs as a result of moving into Triton's new facility in the first fiscal quarter of 2020, as well as additional personnel costs.

Selling, general and administrative expenses increased $1.1 million to $3 million for the 3 months ended December 31, 2019, compared with $1.9 million for the same period last year. This was due to the addition of the Wireless segment of $1.6 million, partially offset by a decrease in expenses in the Telco segment. Other expense for the 3 months ended December 31, 2019, was $418,000 compared to $322,000 for the 3 months ended December 31, 2018. The change was due primarily to interest income related to interest earned on a promissory note from the sale of our Cable TV segment and income from an equity investment, which was partially offset by other expense related to factoring arrangements in our Wireless segment.

Interest expense remained roughly flat year-over-year. We recorded a benefit from income taxes of $15,000 for the 3 months ended December 31, 2019, compared with a provision for income taxes of $172,000 for the 3 months ended December 31, 2018. The decrease in the tax provision was due primarily to the valuation allowance, netting the deferred tax assets to 0.

Loss from continuing operations was $1.7 million or $0.17 per diluted share for the 3 months ended December 31, 2019, compared with a loss from continuing operations of $12 million or $0.12 per diluted share for the same period of 2018 -- of $1.2 million or $0.12 per diluted share, I apologize.

Adjusted EBITDA for the 3 months ended December 31, 2019, was a loss of $1.3 million compared with a loss of $655,000 for the period a year ago.

Cash and cash equivalents were $0.6 million as of December 31, 2019, compared with $1.2 million as of September 30, 2019. As of December 31, 2019, the company had inventories of $8.2 million compared with $7.6 million as of September 30, 2019. The company had $1.7 million drawn on its revolving line of credit as of December 31, 2019.

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

(Operator Instructions) And we'll take our first question from [George Gaspar].

Yes. Just a little color on the wireless area and the significance of the problem that you've entered -- or had to deal with going on shifting crews from apparently down in the South to the North. And can you equate the number of crews that you had in-house and crews that you're using outside of your internal operations? And how did those numbers compare with the previous quarter, and then, say, a year ago quarter, Fulton at that time [the team] became part of ADDvantage Technologies. That would be my first question.

Okay. George, this is Joe. The ratio of in-house to external crews is about 1/3 in-house to about 2/3 subcontractor. We try to keep that ratio in that range throughout the year. It can move around a little bit, maybe instead of 1/3, 2/3, can be 40-60. And if the overall workload were to increase, it might drop down to about 50-50. But we use a large proportion of subcontract labor. And we do that as a contingency to really protect the in-house workforce and make sure that we don't overstaff for peak periods and changes in the workload. The...

Can you post the number?

Yes. I prefer not to post a number, George, only because that's somewhat of a competitive thing between the different contractors that are out there. So I prefer not to post a number. But it's a fairly significant number of crews. But it's matched up to the number of sites that we get purchase orders from our customers. So it's not like we contract for next month for 20 crews, and we don't know what the work is going to be. So we only add and subtract crews as the purchase order flow comes in for site construction. So it's very closely managed, but the number can move around depending upon the workflow.

Can you relate the -- on a percentage basis, the amount of wireless revenue stream was, I guess, generated in, let's say, the broader Midwest versus, say, the Southwestern part of the United States and Texas, particularly where you're located? Can you give us that?

Southwestern part. Third quarter.

Yes, we have it. We'll have to pull that [folder] up to give you an exact number. So we'll do that.

I'm sorry, what are you saying?

We're pulling the number up to give you an exact figure or percentage.

I see. Okay. And can you describe when you initially started, let's say, as part of the ADDvantage Technologies that your ambition was, I guess, to work off of putting equipment on existing cell towers. How is your business growing? Is it mostly still high-rise towers that you're working on in both Central -- or in Midwest and the Southwest? Or how much are you doing on [growth base], taking signals -- to prepare to take those signals off the main tower? Can you describe a little bit about exactly what you're accomplishing in your work?

Yes. I would say, in the North, about 50% of our wireless business -- let me say, 40% of our wireless business is specialty work. So it's special events like the Super Bowl, the World Series, the Indianapolis 500, big music festivals. Right now, we're doing work for the Democratic National Convention up in Chicago. So about 40% of our northern revenue per year comes from that specialty kind of work, which tends to be temporary cell sites that are placed in high-volume pedestrian traffic kind of situations. We're very good at that and we've been doing that for about 25 years. The other 60% in the last year has been almost all macro cell or tower sites or rooftop sites. And that's also true for the southern region of our business.

We've done a little bit of small cellular. Just most recently, we were building small cells for AT&T in Fort Worth. We're about to embark on projects for small cells up in Milwaukee and in Detroit. So we expect that as 5G starts to gain momentum, the ratio of macro cell work to small cell work really starts to shift. And we'll probably see longer term, meaning 2, 3, 4 years out, we'll probably see a shift of more 50% macro, 50% small cell. Depends a little bit by carrier. But in 5G, the signal needs to be lower, and it doesn't quite have the load capacity or traffic capacity that 4G had. So the frequency and the type of cell site starts to shift as you move from 4G to 5G. And that's why we have started to build the groundwork to -- that's poor choice of words, groundwork. Small cell is groundwork, but we're going to see a shift in our workforce where we, at some point, maybe next year, we'll probably have as many ground technicians working small cell as we have tower climbing technicians today. To answer your question -- excuse me, to answer your question, the workload balance between North and South in the first quarter was about -- almost exactly 50-50. So it was $3.3 million compared to $3.5 million for that total of $6.8 million.

Okay. And I know that your area is covering the Milwaukee area and Wisconsin, of course. And a couple of things on that. You mentioned the Democratic Convention in Chicago, but the convention is in -- it's going to be in Milwaukee and Wisconsin in July this year. Are you going to be trying the cell towers there?

Yes. So yes, I stand corrected. I think of it as being in Chicago because it's worked out of our Chicago office. But you're right, it is in Milwaukee. And yes, we are deploying temporary cell sites all around that area now. We've already started to do the work. Typically, for those big events, the sites are put in place and then tested and launched anywhere from 3 to 6 months ahead of the event.

Okay. And then I understand that in Madison, Wisconsin, there's 5G, kind of, [consists] -- being already put in there, and also along local streets in Madison. Are you covering that area?

It depends what carrier. The work we're doing in Wisconsin currently is for AT&T. But I mean, look, all the carriers are announcing that they have some 5G offerings. Some are real, some are software enhancements to 4G. I think AT&T has a 5G E version that's out there at the moment. T-Mobile has used something in the 600-megahertz range. That's good for capacity -- good for coverage, not quite as good for capacity. So I mean everybody's -- every carrier is out there announcing that they have 5G. But first of all, there are hardly any handsets. So what they're doing is mostly for enhancing WiFi or business networks and things like that. It's not really impacting the actual subscribers to any extent.

Okay. And then the growth on this going forward, are there things that you haven't been doing in the past that are giving some opportunity to expand your operations, maybe through looking at making some acquisitions of other services to provide? What do you -- do you have any comments on that?

Well, I think in sort of a medium to long term, it's a good idea for us to look at ways of expanding our suite of services, maybe starting earlier on the front end with engineering and site acquisition services and network optimization, ground technicians for commissioning and integration of cell sites. So all those things are things that we're looking at from a suite of services perspective. The one thing that we have accomplished since we took over Fulton a year ago was that originally, the Chicago office worked Illinois and Wisconsin, the Texas office worked Texas and Oklahoma. We have -- are now performing services from Michigan, Indiana, Illinois, Wisconsin, Minnesota, the Dakotas, Iowa, Nebraska, Missouri, Kansas, Louisiana, Mississippi, Alabama. I mean, we have really broadened our geographic coverage, which helps us -- if there's a particular slowdown in Texas, let's say, then we've got ourselves spread wider and flatter, which helps mitigate the risk of any one market slowdown at any given time. And on the other hand, the Minnesota Northern Plains area is really booming this year. Verizon, T-Mobile, AT&T are all -- they've got quite a site expansion going on out there. So we're capitalizing on our prior presence there and working relationships with the carriers.

Okay. And if I could shift over to the telephonics side. And I know that you've now completed your expansion in -- going into a new operation, which is like 20,000 square feet in -- further North out of Miami, northwest. Can you describe if you're pretty complete now in bringing all your services together there? And if you could give us some highlight on some of the expansion that you could create to -- in terms of offering a new equipment and service work that you haven't been doing in the past.

Yes, George, if you don't mind, I'm going to pitch that one to Don Kinison. Don runs the Telecom segment, and he was personally the man on the scene with that move. So...

George, so the move has been 100% complete to this point. We've now started evaluating our operational efficiencies, which includes production of equipment, production of phones. We're continuing and always will continue to evaluate different product lines that we can run through our production facility. We're pleased so far with how the move has went to this point, and we're pleased with the overall production and the efficiencies of the group as the need was completed.

Okay. And is there anything new that you could market or the way you market in this particular expanded facility now relative to what you've been doing before?

So, I mean, we're always looking at different ways to drive revenue through different channels of revenue. So whether that's being outbound or inbound (inaudible) and things of that nature. So we're evaluating numerous different products. We'll continue to do that. We're very focused. We're a refurbishing company. That's what we do really well. And we're highly focused on becoming more efficient, reducing operating costs and improving productivity. And looking at -- always looking at relative products to what our current product line is to help complement it.

Okay. And what kind of crew are you carrying out of that facility now versus what you had before when you were spread out in several locations and that you had 9,000 square feet, if I remember. And if -- give us a mark on the total number of employees that you have in that operation.

So we've reduced number of employees that we actually were able to manage in that operation. We really can't provide you with an employee headcount number. Productivities went significantly up, which has been -- which allowed us to regain some of our headcount. It obviously helped lower our cost of goods and improved our margins. But yes, having multiple facilities was difficult and require additional headcount in order to manage those products in multiple facilities. So as we brought everybody together, is a significant improvement in efficiencies.

I see. Okay. All right. And then one final for Joe Hart there. At the last call we had, I asked you a question about whether you would be starting to get out to talk to institutional investors at conferences. And you indicated that you were hopeful of accomplishing that. Do you -- can that come about along the way here? Or is that still a distant [era]? Can you benchmark that at all?

Yes. We're still scheduling to attend conferences, potentially do a roadshow in sort of the April-May timeframe. We have an investor presentation that we're just about finished with and hope to put out in relative near future and for everyone to see and really start beating the drum and promoting the company. We really -- this has been, I would say, about an 18-month transformation from the company as we knew it over a year ago. And I would say it's January, we still have 2 more months to get through -- get our way into the sunshine and warm weather and really get Fulton booming on all cylinders. And it's January -- sorry, it's now February, still feels like January here with the weather. But we'll be in a good place here in about another 60 days. I mean, unfortunately, that's where we are. And until we can really get Fulton at a much higher plane, we'll be able, hopefully, next year to avoid the up and down cycles of weather and holidays and things like that. We'll always be there, but I think we're going to see, with the Justice Department decision and the entry of DISH potentially into wireless, we're going to see the workload expand quite nicely here. And it may take most of this calendar year to unfold. But I think we're positioned pretty well to be able to take advantage of that.

Yes. Okay. And one thing about -- you're talking about transition 18 months up. And now I assume you're pretty much out of Broken Arrow. You have your -- the people that's in the staff area that were there have moved into Texas or into the Dallas area. Is that -- am I correct on that? Is that pretty much done?

Yes.

Is there anybody left in Broken Arrow?

Well, there's a lot of people left at Tulsat. Yes. Dave Chymiak's whole crew from Tulsat is all still there. But yes, we have a couple of folks who are key contributors, Scott Francis, who's our Chief Accounting Officer. Scott's from there. Our HR leader is from there. But we have less than a handful of folks left.

(Operator Instructions) We'll hear next from [John Harrell] with [Harrell & Associates].

Look, about 1.5 months ago, you guys are down to about $608,000. And I think what real investors want to know is how much capital are you guys going to have to raise? What is going to be necessary in order to get the company to profitability? And how do you plan on raising that capital, because you are very, very low on cash right now?

Yes. So right now, we have a $4 million line of credit that we're able to use for working capital purposes. We're also, as we stated in our 10-Q, we're also exploring our options around raising additional capital because to ramp-up an operation such as Fulton with a large contract that we win, we would need, especially as George talked about, acquisitions and other things like that, there would be a need for additional capital.

But can you talk about reaching profitability? Can we hope to achieve that?

Yes. I mean, we fully expect 2020 to be a profitable year. We've been saying for a while now that starting the fiscal year going into Thanksgiving, Christmas, New Year's holidays, having the holidays fall in the middle of the week, a lot of people just took off a full 2 weeks. Some of those people are our employees, and some of those people are those that place orders on us. And then we go into the winter months when half of our wireless construction is in the northern region. So this is our downside of the year. It's pretty predictable, and you can do some things to help mitigate it, but it slows down in the cold weather and in the ice of the north. And yet, in the summer, it's absolutely gangbusters. So if you look at last year, Fulton did about $8 million in Q1, Q2. Q1, as a reminder, was not under our ownership, but we have the revenue numbers. But if you look at Q1 and Q2 last year, it was about $8 million. And then in the second half of the year, it was almost $19 million. And we have more crews in place this year than we had last year. And we expect this year to be an overall profitable year for not just Fulton, but for ADDvantage. I mean, we're focused on the EBITDA, John. Yes, we're focused on EBITDA, John, and that's what we're trying to generate. So unfortunately, we aren't big enough at the moment to get through that winter slump without it having an impact. We hope to be there next winter and be able to mitigate some of the downside of our cyclical business.

And it appears there are no further questions in the queue at this time. I'd like to turn the conference back over to our management for any additional or closing remarks.

All right. Well, this is Joe. And on behalf of the management team here and -- we'd like to thank everyone for joining on the call. And our appreciation to Brett and the folks at Hayden IR for their support and guidance. And we look forward to a good fiscal 2020. Thank you for your support and your interest.

Thank you. That does conclude today's conference. Thank you all for your participation. You may now disconnect.