ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q3 2023 Earnings Call Transcript

ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q3 2023 Earnings Call Transcript November 17, 2023

Operator: Good afternoon and welcome to the ADDvantage Technologies Group Fiscal 2023 Third Quarter Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Brett Maas with Hayden IR. Please go ahead.

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 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 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 recruitment manufacturers and multiple system operators as well as future financial performance of ADDvantage Technologies.

These statements involve a number of risks and uncertainties. The participants are cautioned that these forward-looking statements are only predictions and may materially differ from actual future events and 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 including 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.

A close up of a computer server rack powering the backbone of a wireless infrastructure.

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

See also 25 Countries that Import the Most Oil in 2023 and 15 Best Fighting Games of All Time.

Q&A Session

Joseph Hart: Thank you, Brett, and thank you to everyone joining us on the call today. The environment for both our telco and wireless segments remains challenging, and we have taken positive and proactive steps to better position the company to navigate these challenges and to expand our market opportunity. To be sure, these results are not acceptable to management, and we are frustrated by current market conditions. As has been widely reported, several wireless carriers have paused CapEx investments slowing the deployment of 5G upgrades due to a higher cost of capital and economic uncertainty. Additionally, while 5G-capable handsets continue to be sold at a brisk pace, many of the apps on these devices do not yet benefit from 5G speeds, suppressing the need for expensive 5G network build-outs.

Wireless construction is expected to pick back up in 2024 as wireless data consumption and network demand continues to accelerate the need for increased bandwidth, which leads to the need for more cell sites and more cell site capacity. In response, we are carefully managing expenses and broadening our offerings to address a wider range of telecom infrastructure projects. The recent slowdown in wireless construction activity was unexpected and sudden. But those companies that can weather this lull in activity will come out the other side in 2024, better poised to take advantage of a market that has reduced competitors and a broader opportunity for growth. We have established relationships and multiyear service agreements with all of the wireless carriers, OEMs and tower companies across the country.

And in just the past four months, we have added agreements with the two largest OEMs in the optical transport network space. This will help us expand our services business to design and build fiber cable and fixed wireless networks to serve the broadband needs of underserved communities across America. The federal government has allocated some $80 billion through various funds to help new broadband network companies build out rural, tribal and underserved intercity communities. We have proven capabilities that are in demand, especially as others in the industry have struggled with quality and capacity, creating additional opportunities. We added Brian Davidson as our Chief Revenue Officer in May. Since then, we have added key personnel with deep industry experience to lead this important broadband initiative along with Brian.

In just the last four months, we have built our broadband backlog to $7 million. We remain optimistic that over the next few quarters, we can continue to expand our offerings, drive a high level of new revenue and better utilize our capabilities. Our objective is to diversify our revenue, expand our presence across wireless, broadband and fixed wireless to facilitate cross-selling and to create a major new source of revenue to Fulton Technologies. Government infrastructure spending serves as a catalyst for this initiative. The funding of the World Broadband Program or BEAD and the Rural Digital Opportunity Fund, RDOF, provides several hundred billion dollars in fiber and fixed wireless network investment over the next several years. We are aggressively pursuing opportunities to design and build fiber networks across multiple regions as a complement to our current wireless infrastructure offerings.

The situation with our telco segment has also been challenging. As we discussed last quarter, the rapid normalization of the supply chain and resolution of the chip shortage over the last nine months has significantly slowed demand for our telco business. Companies no longer needed to build inventory to account for supply chain challenges and the chip shortages and many customers had significant inventory in-house that they needed to work off before resuming purchases. As a result, orders for used and refurbished equipment in our telco segment were drastically reduced. We have just recently seen an uptick in orders for the optical transport business that give us reason to believe that things may be normalizing. We have also responded by methodically reducing our telco inventory levels in light of lower demand.

We continue to trim our operating and SG&A expenses by almost $2 million this year to position us for profitability in 2024 as revenues normalize in both the telco and wireless broadband divisions. 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 $15.6 million or 60% to $10.3 million for the third quarter from $25.9 million for the three months ended September 30, 2022. The decrease was primarily due to a decrease of $11.4 million in telco revenue and a decrease of $4.2 million in wireless revenue. Gross profit was $2.8 million or a 27% gross margin compared to gross profit of $8.5 million or a 33% gross margin for the same period last year. Operating expenses decreased $600,000 or 27% to $1.7 million, reflecting the previously announced cost reduction initiatives. Consolidated selling, general and administrative expenses include overhead, which consists of personnel, insurance, professional services, communication and other cost categories decreased $1.4 million or 31% to $3.1 million for the three months ended September 30, 2023, from $4.5 million for the same period last year.

Net loss for the quarter was $2.7 million or $0.19 per basic and diluted share compared — a $0.19 loss per basic and diluted share compared to net income of $1.5 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 $1.6 million at September 30, compared to $2.6 million at December 31, 2022. As of September 30, 2023, the company had net inventories of $7.8 million, down from $8.1 million at June 30 and $9.6 million at December 31, 2022. Reducing our inventory exposure in our telco business has been an area of focus. Our outstanding debt at September 30 was $3.6 million. This concludes the financial overview segment of our remarks. I will now turn the call back over to Joe.

Joseph Hart: Thanks, Michael. I would like to conclude with thanking everyone for their continued interest and investment in ADDvantage Technologies. We believe that the environment is beginning to improve and that broadband opportunities will provide a significant growth opportunity for AEY in 2024 as the spending patterns for both wireless and equipment sales begin to normalize. We think we have a much improved future and that the worst is behind us. But things continue to remain a challenge. So thank you and that concludes our remarks for today.

Operator: The conference has now concluded. Thank you for attending today’s presentation and you may now disconnect.

End of Q&A: