ADDvantage Technologies Group, Inc. (AEY) on Q4 2021 Results - Earnings Call Transcript
Operator: Good day, and welcome to the ADDvantage Technologies Fiscal 2021 Fourth Quarter and Year-End Financial Results Conference Call. Today's conference is being recorded. At this time, I would 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'd like to remind you this conference call may contain forward-looking statements, which are subject to 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 early 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 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 financial tables issued earlier today, which are located on our website at addvantagetechnologies.com. You'll find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and discussion about why we believe these non-GAAP financial measures are relevant. These financial measures are included for both the benefit of investors and should be considered in addition to and not instead of GAAP measures. I'd now like to turn the call over to Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.
Joseph Hart: Thank you, Brett, and thank you to everyone joining us on the call today. The fourth quarter finally showed the momentum we have been discussing for some time now. Wireless segment revenue jumped from $4.1 million in the third quarter to $7 million in the fourth quarter. And we are confident that over the next 6 to 9 months, Wireless revenue related to tower work and other aspects of the 5G rollout will double again. This growth has been broad-based. It involves several carriers, not just 1 customer, including both longstanding customers and 1 new entrant to the market, DISH Wireless. The work touches all the regions we service and our pipeline of new projects, meaning work we have been awarded where we either have purchase orders in hand or are waiting for purchase orders as permitting is complete gives us significant confidence that the long-rated 5G surge will occur in 2022. The significant uptick in our fourth fiscal quarter validates this expectation. We already have purchase orders in hand for fiscal year 2022 construction services that exceed the total value of our fiscal year 2021 total Wireless revenue. Simultaneously, our Telco segment continued to deliver strong results. The ongoing chip shortages and electronic supply chain issues made new accruals more expensive and harder to source. This makes the refurbished alternatives sold by Nave and Triton more attractive, especially for work-from-home folks looking for affordable options. We continue to anticipate a leveling off of demand at some point in future quarters, albeit at a somewhat elevated level relative to the recent past. The result of all this was that our Nave business had a really strong year with revenue up 45% and Triton Datacom has made a nice recovery from a COVID-related softness in sales earlier in the year. Overall, we delivered 62% revenue growth and positive earnings per share for the quarter. Now much of the profit was related to the one-time benefit on the extinguishment of debt related to the forgiveness of our PPP loan. Gross margin dropped from 36% to 26% quarter-over-quarter. The 36% margin on Q4 of fiscal year 2020 benefited from the recovery of change order revenues from its previous Q2 of '20 and was a one-time event. Margins during the recent Q4 '21 were at 26%. Those have been impacted due to the mobilization and material costs related to starting up multiple new markets. This is expected to carry over into our current Q1 but should normalize over the rest of our fiscal year 2022. We expect as workloads in the new markets increase and as we move through fiscal 2022, we will benefit from better economies of scale making that segment of our business significantly more profitable. Over the last few months, we have won site awards to upgrade technology to 5G for over 600 cell sites, and we have increased our staffing to meet this growing demand. In fact, staffing is the most challenging part of this growth in this tight labor market. Currently, we are running between 35 to 40 tower crews, up from 25 crews a few months ago, and we will be ramping up considerably from there during our Q2 of fiscal year 2022 to meet even greater expansion in the second half of this fiscal year 2022. As I previously said, the 5G network expansion will be massive, especially now that AT&T and Verizon are starting to build out their C-block spectrum. You are just starting to see the opportunity manifest in our results reported yesterday. This opportunity represents a multiyear secular trend not just for tower work but for data centers, technology providers, handset manufacturers, and wireless carriers. The capital expenditure plans of wireless carriers are public information and often discussed. Tower work is just one piece of this effort, and we are strategically positioned to capture a meaningful portion of this work due to our established relationships and experienced crews under Fulton Technologies in key markets across the very center of the United States. With that, I'll now turn the call over to Michael Rutledge, our new CFO, to provide a more detailed review of our financial results. Michael, please go ahead.
Michael Rutledge: Thank you, Joe. Sales for the fourth quarter of fiscal 2021 were $19.7 million, up 61% compared to $12.2 million in the fourth quarter of fiscal 2020. This increase of $7.5 million was driven by nearly $5.3 million increase in the Telco segment and a $2.2 million increase in the Wireless segment. Gross profit increased by nearly $700,000 to $5.0 million, our highest level of gross profit in more than 2 years compared with $4.4 million for the same quarter last fiscal year. Gross profit margin was 26% compared to 36% for the prior year fourth quarter. Gross profit margins were 27% for the current fiscal quarter in the Wireless segment due to the costs associated with new markets, as Joe mentioned. Our operating expenses increased by $0.7 million to $2.6 million for the quarter ended September 30, 2021, compared with $1.9 million for the same quarter last year, which was due primarily to increased personnel-related costs in our Wireless segment as we ramp for the anticipated tower services work. Selling, general, and administrative expenses for the quarter increased $1.2 million to $4.4 million compared with $3.2 million for the same quarter last year. This increase was due largely to higher commissions associated with increased revenue in our Telco segment as well as personnel costs associated with supporting the company's growth. Finally, net income for the quarter was $0.6 million or $0.05 per diluted share based on 12 million shares compared with a net loss of $1 million or a loss of $0.09 per diluted share based on 11.2 million shares for the same quarter last year. Included in the fourth quarter net income was a non-recurring gain of extinguishment of debt of $3 million related to the forgiveness of our PPP loan. For the year, sales were $62.2 million, up 24% compared to $50.2 million last year. Our Telco segment increased by $12.6 million, offsetting a $0.6 million decline in the Wireless segment. Our gross profit increased by more than $5 million to $16.1 million compared with $11.7 million last year. Gross profit margin was 26% compared to 23% last year. Operating expenses increased by $1.1 million to $9.3 million for the year compared with $8.2 million last year. Selling, general, and administrative expenses for the year increased by $3.6 million to $14.9 million compared with $11.2 million last year. Net loss for the year was $6.5 million or a loss of $0.52 per diluted share based on 12.4 million shares compared with a net loss of $17.3 million or a loss of $1.55 per diluted share based on 11.2 million shares last year. Now turning to our balance sheet. Cash and cash equivalents were $2.6 million as of September 30, 2021, compared with $8.3 million as of September 30, 2020. Cash was used primarily to fund operations. And at September 30, 2021, the company had net inventories of $5.9 million. Our outstanding debt decreased during the year ended September 30, 2021, by $3.9 million to $4.1 million, which is comprised of $2.1 million on a revolving line of credit and $2.0 million in financing leases. At September 30, 2021, outstanding debt was $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: . We'll go ahead and take our first question from William Velmer from S.A. Advisory.
William Velmer: A couple of quick questions. For fiscal -- for the year just ending $62 million in revenue, did you give any -- I didn't hear if you gave guidance for upcoming year for total revenue anticipated? That's first question.
Joseph Hart: Yes. Thank you for your call. This is Joe Hart. No, we didn't give guidance. We have not traditionally given guidance.
William Velmer: Okay. Your presentation that was put out last summer kind of stale, you were looking for $277 million in potential revenue, and a positive but huge EBITDA ending 2023. Do you anticipate updating that presentation, so it's more believable than stale?
Joseph Hart: Yes, we do. That presentation was -- we were intending to raise capital in order to go on an aggressive M&A program. We were doing that right in the height of the start of COVID. That was -- that effort to raise capital was frankly pretty disappointing, but totally understandable given our recent 3-, 4-year history of losses. So, we believe that the best way to turn the company around was to completely get focused on organic growth, which we have done and which the shareholders will see evidence of now and during 2022. And once we're healthy and profitable again this year, then we will look at potentially raising capital to do something with M&A, but for right now we've been focused on organic.
William Velmer: Okay. And a minor question. You noticed the airlines are kind of all paranoid about 5G and they want the Fed to slow down the rollout. What is the major -- do you see a major problem there? Is there really a problem or is it just the paranoia of the major airlines?
Joseph Hart: Well, I'm certainly not a radio frequency expert, but I read everything that I possibly can read about this particular subject. And we've also seen in some recent earnings releases from the big carriers and some of the big construction companies like MasTec and Dycom and others. First of all, the FCC didn't put this frequency up for auction before about 5 years of study on this particular subject and the sensitivity for airlines. Secondly, this C-block is used widely around the world with no impact on the airlines or aircraft communication. Lastly, the carriers have just spent, I don't know, a total of $50 billion, $60 billion to buy this frequency. So, they are proceeding with building out the network using this C-block spectrum. Now what they have agreed to do is not turn on sites that are in the airport glide path anywhere near an airport. They'll leave those sites muted until the politics of this all get flushed out. But for right now, everybody is building but not necessarily turning on that spectrum for the sites. So, it hasn't affected construction at all.
William Velmer: Okay. One more question for you. The numbers are all over the place, but from what I could tell, you would be considered an infrastructure play. And I saw in 2021 was estimated in the U.S. alone infrastructure with respect to 5G was about $19 billion. Worldwide, the numbers range from the next couple of years up to $80 billion to $111 billion. It's just they're all over the place. I really hope that the company is really able to capitalize on this money that is being spent on this industry. And I hope that -- I hope your numbers can be -- expand more than you think they were or planning to tell us because there is so much work out there. It's just amazing. So that's kind of my last comment.
Joseph Hart: Yes. We would agree with you wholeheartedly, so thank you for that comment.
Operator: And we'll go ahead and move on to our next question from George Gaspar].
Unidentified Analyst: Yes. First, I'd like to talk a little bit more about this crew number that you related to on Wireless. You indicated, I think it was 35 to 40 crew that you have expose in the market now?
Joseph Hart: Yes, that's correct. That's what I said.
Unidentified Analyst: Okay. And how many of those crews are in-house crews versus outside?
Joseph Hart: So, the good news is, you're consistent with your questioning, George. So, I'm always prepared for it, I think. So what I've said for a long time, and based on my years and years of experience with this work is, you always want to be at least 50% subcontract. And in case like this, where you're in rapid growth, I'd like to go to about 2/3 subcontract and 1/3 in-house. And you use that subcontractor buffer to protect you from sort of the ebbs and flows, the ups and downs in the construction workload. So, we're about 2/3 subcontract at the moment.
Unidentified Analyst: I got you. Okay. And just to give us a level of the tremendous progress in crew count exposure. If I remember, 2 years ago, it was about maybe 12 to 14 crews. And then this past year, it rose; a year ago, it was maybe about 18 to 20. And so, can you describe how fast this crew count has gone up to the 35 to 40 range?
Joseph Hart: Well, I mean it's all about building the backlog. Over the last couple of years, really 2020 and 2021, the Wireless Infrastructure business has been plagued with a really all-time low of construction activity. You have the delay in the T-Mobile Sprint merger, DISH wasn't even approved, let alone building anything. And then you had AT&T in its debt paydown at the global corporate level. So, a lot of things really impacted it. So there just wasn't the volume of work. And you've heard me say quarter after quarter, look, it hasn't happened yet, but it is coming. Well, now AT&T and Verizon are really starting to build strong again. T-Mobile has been consistently constructing, you know in the last 6 to 12 months. And then you have DISH that has FCC mandates to cover 70% of the population here by 2023. So, it's all come together simultaneously at last. It took a little bit longer than the 3G and 4G cycles, but this current cycle is definitely on a very swift and steep ramp. And we're trying to be prudent. You saw that our operating expenses increased. And some of that is the onboarding and training, a couple of weeks of training and then some OJT with these tower crews. That's an expense. Mobilizing to new markets and setting up cross-docks and other logistics facilities in Detroit, St. Louis, Austin, San Antonio, Houston, Arkansas, I mean, these new markets that we've been talking about adding. each of those take some incremental expense to get started. But then as the volume builds up in those markets, the payoff is there, you cross over into acceptable and target level of profitability. So it's a bit of a slow-moving process. We have a team made up of very seasoned veterans who have been through this kind of ramp before. So I think it's all finally coming together nicely.
Unidentified Analyst: I see, okay. This is specifically on crew count. Can you relate in the first quarter, since it's now the 28th of December, what's your -- what would be your average crew count for this first quarter ending this month relative to the fourth quarter of your past fiscal year? Can you give us those numbers?
Joseph Hart: Yes, I would say the crew counts increased by about I mean, 10 or so, like so when I compare 35 to 40 to 25, a few months ago, that was real-time information. So that -- we have been running 35 to 40 the last couple of months. We reported that we were at 25 in August. So that was the last quarterly conference call we had with you, right? So during this quarter -- I hesitate to give guidance, but we're on the same plane in Q1 as Q4. And then we're going to see a drastic ramp-up as we move into Q2 and through the rest of the year. Second half of '22 should be quite active, as I said in my remarks.
Unidentified Analyst: Yes. And Joe, just also in terms of the magnitude of where you're generating your revenues from, it's not just putting something on a tower, but it's the additional that's required away from the tower in terms of this 5G build-out?
Joseph Hart: Well, for us it's mostly work on the cell site. So there is groundwork, groundwork to add platforms and equipment. In some cases, we are bringing fiber optic cable in from the property line or out at the right of way. We bring the fiber into the cell site, especially for somebody new like DISH who is going on to existing cell sites for the first time. So there is some ground level infrastructure work that is part of the revenue stream from each cell site.
Unidentified Analyst: Okay. All right. And could I reach into the Telco side? I just -- congratulations on the significant build-out of the new facility in Florida. Obviously, that helped Telco get moving up. And I know you're in Alabama now. Your revenue stream has really moved forward on a payer basis. And is this giving you some technology thoughts on continuing to try to drive forward what Telco is all about in the near term, in the longer term? Can you describe any of that?
Joseph Hart: I am grateful and obviously pleased that the Triton Datacom revenue stream returned. During COVID that revenue stream was cut in half on a monthly basis. So it came back to normal, and the team has done a nice job of building that up a little bit beyond what used to be normal. Nave has somewhat unpredictably taken off very nicely this past year and continues so in this current quarter. What we don't know, George, is how long that will last. I mean all of you see the pictures of ships in the Los Angeles port, all the supply chain articles that are out there. I mean it's got an impact, especially on chips for the core Telco network. The question is how long will it last? And that we don't have a crystal ball on. So we're optimistic that it will be a good to decent year for the Telco event. We just have no way of knowing for sure.
Unidentified Analyst: I see. Okay. And then lastly, on the number of shares outstanding in the company, at this point, it's about 12.4 million, if I recall. That's a very modest number of shares by all contents in the stock market today for companies that are out there really growing. And the shareholders, they've got to be pleased that you only have that many shares out and you’re into this huge expansion program now in the Wireless area. So the question is basically, how do you view the need for getting some additional capital through stock sales or through acquisition? And that brings up the point. I know that I think you've made some comments in the past about maybe trying to make an acquisition or 2 to expand this, operations. Can you share any thoughts on this?
Joseph Hart: Well, I think as I said to our first caller, we took a run at trying to raise capital about 1.5 years ago or so. And in that environment at that time, it just -- it didn't make sense. And quite frankly, I think everybody that's an investor and is on the call knows that we have not had a good financial performance history. Our job and our pledge really is to get that turned around here in 2022. So we believe we're being very sober about this that we need to have that get to breakeven quarter followed by a couple of strong quarters of profitability. And then we'll look at trying to raise capital in a significant way to do some more aggressive M&A. But for right now, our focus is on getting this company profitable.
Unidentified Analyst: Okay. And Joe, that's a very nice approach you just related to everyone on this call. And I appreciate everything you're really trying to do. And it's absolutely amazing the momentum that you have going and that you've been able to do it, holding things together the way you have. And we're all looking forward to something very substantial going forward by the end of this current fiscal year. Take care.
Joseph Hart: Thanks, George.
Operator: . And we'll move on to our next question from .
Unidentified Analyst: Yes. I was the original underwriter in the company and also raised money for them privately, always back, but was a different company. But I see you have -- I understand there, you have a registration with the SEC. Is that correct?
Joseph Hart: Yes. Are you referring to the S-3 registration that we did about a year, 1.5 years ago?
Unidentified Analyst: I'm not sure. I'm just -- in one of your recent releases you indicated an SEC registration. It's not like it was something you could sell shares along the way at your discretion.
Joseph Hart: Yes. That's the S-3 registration that we filed about 1.5 years ago, and it is still current. We have not been selling shares, I mean, to any substantive way due to the share price and the performance, the kind of the combination of those things. So it is still available to us. You're correct. It was originally about $13 million, $13.3 million or $13.4 million and about a year ago, we sold about 1 million shares that raised the float and it raised the total outstanding by about 1 million shares. We did that sort of in progress sort of thing.
Unidentified Analyst: And what price was that in?
Joseph Hart: Those were at about average. So I mean, the share price just hasn't been where it makes any sense to be selling, so...
Unidentified Analyst: Well, you certainly are making a sizable turnaround here.
Joseph Hart: No, we hope so. I mean all of our effort is focused on that. So we're headed in the right direction. We'll take a quarter. Yes. Thanks.
Operator: And we'll go ahead and move on to our next question from Kurt Caramanidis from, Carl M Hennig.
Kurt Caramanidis : You alluded to strong top and bottom line growth in '22. And I think you've kind of mentioned this while I was in queue. But do you see profitability ramping like each quarter in your backlog book, meaning Q1 whatever that's going to be, and then getting better per quarter as the year kind of goes out, not so much seasonality as much as just building out all the backlog?
Joseph Hart: I know the answer to your question. I'm trying to decide how much of that I want to give because I've always tried to stay away from specific guidance. I think that this current quarter is still one of the ramping. So it's some of the material costs to get started in these new markets, you make an upfront investment to get the material, you make an upfront investment in a couple of people per market and the upfront investment in setting up the logistics and cross-docks and things like that. So that -- and we've had some training costs for tower crews during this current quarter. So this quarter started back in October. So it's been part of the ramp process for really a calendar 2022 take off of growth. So without trying to be impolite, at the same time, not go into too much more detail, hopefully, you get the picture. I mean so we're just about at the tail end of that. We're going through the Christmas break. And then we see calendar '22 as an exciting year for us on the Wireless side and continued growth on the Telco side.
Operator: And with that, we have no further questions. I would now like to hand the call back over to management for any additional or closing remarks
Joseph Hart: Thank you, operator. So I would say to those folks that have been investors for a long time and those folks that have just recently joined as investors in AEY that it's been a long pull. It's been a long transition here in the last couple of years. We’ve put both of our Telco equipment operations into new facilities in Florida and a 3PL location in Huntsville, Alabama. That's been reported for the last couple of years. It really paid off this last year in 2021 on the equipment side of our business. On the Wireless side of our business, we bought Fulton back in early 2019. We were off to a good start in 2019. And then the construction growth just kind of went flat in '20 and 2021. We've seen a ramp-up in the Q4 of our fiscal year '21, which we reported on today. I had described a situation where we are clearly in a steep ramp kind of environment as we go into calendar 2022. We know that our obligation is to get this company turned around and profitable again. And everybody in the company is focused on that. It's not going to be an immediate, like we had this call and suddenly we're going to be profitable, but we are within reach of that over the next few months. So we think this is going to be the year that AEY starts to deliver for its shareholders. And we are pledged to make that happen. So thank you for your continued investment and we hope we can return the confidence. Thank you very much.
Operator: And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.
