ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q1 2023 Earnings Call Transcript May 15, 2023

Operator: Greetings, ladies and gentlemen .And welcome to the ADDvantage Technologies Group’s Fiscal 2023 First Quarter Financial Results. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Brett Maas with Hayden IR. Please go ahead sir.

Brett Maas: Thank you, operator. We are joined today by Joe Hart, President and CEO; as well as Michael Rutledge, the company’s Chief Financial Officer. Before we begin today’s call, I’d 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 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 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 as only 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 table issued earlier today, which are located at our website at addvantagetechnologies.com. You’ll find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a 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 not instead of GAAP measures.

I’d now like to turn the call over to Joe Hart, President and CEO of ADDvantage Technologies. Joe, please go ahead.

Joe Hart: Thank you, Brett. And thank you to everyone joining us on the call today. This was a challenging quarter. The March quarter is always a challenge for our wireless segment due largely to winter weather in the Midwest, it is typically our slowest quarter. But compounding that was the sudden and precipitous decline in demand for our Telco segment. For the last two years, our Telco segment has been delivering robust growth benefiting from several pandemic related trends, such as the disrupted supply chain, the global chip shortage, and the remote workforce. Simply put, enterprises needed more Telco equipment, from office phones to optical switches to better support a workforce that was more distributed than ever. But the chip shortage, supply chain constraints, and high cost to borrow made it difficult and in some cases impossible to buy new equipment.

Last year, this led to a large demand curve for used and refurbished network components. The result was over buying in 2022 from network operators concerned that they wouldn’t be able to get critical parts or spares for their network. Now that the OEMs have improved delivery intervals for the new equipment, the operators have focused on burning off the excess inventory that they had built up of spares, which has had a significant impact on our business. We expect that inventory buildup will burn off at some point in the next few months and that our equipment business will normalize back to more historic levels during the second half of this year. In the meantime, our wireless segment continues to perform at normal levels with a slight decline in January due to winter weather.

As the weather improves, we are highly confident that our wireless revenue will accelerate significantly this year. We think we’ve only scratched the surface of the wireless opportunity. We continue to add experienced talent to our team, broadening our opportunities and improving our competitive position. Moreover, the wireless industry is facing unprecedented upheaval. Some of the largest service integrators who had served large carriers in many areas of the country are struggling. Some have had service issues and one has failed. This has created greenfield opportunities for reliable partners, and we believe we will capture a meaningful share of the near term CapEx spend. The overall opportunity is massive and the new additions to our team bring established relationships and significant experience.

The continuing 5G opportunity represents a multiyear growth opportunity for tower work as the carriers are less than halfway complete with their initial 5G deployments. Although, some of the carriers are announcing a brief pause or slowdown in their expansion plans, they continue to invest billions of dollars in their networks as they must deliver the capacity and coverage required by the ever demanding wireless subscriber population. On the bright side, we benefited from the cost reduction initiatives we put in place last year. We again lowered our SG&A expenses and we are poised for solid profitability as revenues normalize in the Telco segment and increase in the wireless division in the second half of this year. While consolidated revenues decreased 38% from the same quarter a year ago, gross margins remained essentially flat and our operating expenses decreased by $0.8 million.

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.

Michael Rutledge : Thank you, Joe. Consolidated sales decreased $9.1 million, or 38%, to $14.7 million for the first quarter from $23.8 million for the three months ended March 31, 2022. The decrease was primarily due to a decrease of $7.9 million, or 49% in Telco revenue and a decrease of $1.2 million, or 15% in wireless revenue. Gross profit was $3.4 million, with a 23% gross margin, compared to a gross profit of $5.8 million, or 24% gross margin, for the same period last year. Operating expenses decreased approximately $800,000 or 29% to $2.0 million, reflecting the previously announced cost reduction initiatives. Consolidated selling, general and administrative or SG&A expenses include overhead, which consist of personnel, insurance, professional services, communication and other cost categories, decreased approximately $200,000 or 6% to $3.6 million for the three months ended March 31, 2023, from $3.9 million for the same period last year.

Net loss for the quarter was $2.7 million, or $0.21 per basic and diluted share, compared to a net loss of $1.4 million, or $0.11 per basic and diluted share, for the same quarter last year. Turning to our balance sheet, cash and cash equivalents were $2.6 million at March 31, essentially unchanged from December 31, 2022. In April, we entered into a securities purchase agreement issuing 13% secured promissory notes in the aggregate principal amount of $3.0 million convertible into shares of the common stock of the Company, raising net proceeds of $2.9 million. As of March 31, 2023, the company had net inventories of $8.5 million. Outstanding debt as of March 31 was $1.7 million consisting of vehicle financing leases. This concludes the financial overview segment of our remarks.

I will now turn the call over to the operator to facilitate any questions.

Q&A Session

Operator: [Operator Instructions] The first question comes from George Kasmar, who’s a private investor.

Operator: Ladies and gentlemen, we seem to have reached the end of the question-and-answer session. I’ll now turn the call back over to Joe Hart for closing remarks.

Operator: Apologies, sir. Can I interrupt you there for a moment? I do apologize. We do have another question in the queue.

Operator: The next question comes from Richard McGlynn, who’s a private investor.

Operator: Thanks you very much, sir. Ladies and gentlemen, we have now reached the end of the question- and-answer session. I will now turn the call back over to Joe Hart for close remarks. Thank you, sir.

Joe Hart: Thanks, operator. Yes. As I started to say earlier, we thank you for your interest and your investment in ADDvantage Technologies. We feel that we have a bright future. We’re feeling that we’re in a rough patch at the moment, but this too, shall pass. We know the cause of it and we know the cure for it. So we feel that we’re going to be headed in the right direction here over these next few months. And we’ll hit full stride here as we hit June, July and move into the summer months. It’s always our biggest time of the year, and it’s also our most profitable so. And then we’ll go into next year on a different growth trajectory. So thank you for joining the call today. And that concludes our remarks.

Operator: Thank you, sir. Ladies and gentlemen, that concludes today’s event. Thank you for attending. And you may now disconnect your line.