ADDvantage Technologies Group, Inc. (NASDAQ:AEY) Q3 2022 Earnings Conference Call August 11, 2022 5:00 PM ET
Brett Maas - Hayden-Investor Relations
Joe Hart - President & Chief Executive Officer
Michael Rutledge - Chief Financial Officer
Conference Call Participants
Kurt Caramanidis - Carl M. Hennig
Good day, and welcome to the ADDvantage Technologies Fiscal 2022 Third Quarter Financial Results 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 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 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 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 today's 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 the 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 the benefit of investors and should be considered in addition to not instead of GAAP measures.
With that out of the way, 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 on the call today. This was another record quarter for us with positive net income of $875,000 and a 63% increase in revenue compared to last year, and 17% over the previous quarter.
To put our improved financial performance into context through nine months of fiscal 2022, we have surpassed revenue for all 12 months of fiscal 2021 by more than $8 million or about 13%. Perhaps more importantly, we achieved GAAP profitability in the quarter with earnings per share of $0.07 per share. This was the fourth quarter in a row with wireless revenue over $7 million and continued growth in 5G tower work for our wireless division.
We also benefited from continued strong growth in our telco business reflecting continued demand for our optical transport, switch, router and enterprise network offerings. Both sides of our business are performing well with double-digit revenue growth and increasing gross margins. The result is total company revenue of nearly $28 million for the quarter more than we generated in the first two quarters last year and up 63% year-over-year.
Our Telco segment delivered a historical record for both revenue and margin for the quarter. Nave Communications reported almost as much revenues this quarter as they did for all of fiscal year 2020. Triton Datacom's revenues for Q3 were almost half of last year's total revenue. We expect this encouraging revenue trend to continue for some time into fiscal 2023.
Telco has been helped somewhat by the global supply chain and chip shortage issues that continue. But more importantly, the shift in focus to optical and wireless products and change in business unit leadership has driven the success in telco.
The wireless cost reduction initiatives we introduced during the second fiscal quarter and that continued into the third fiscal quarter drove a significant improvement in gross margins and lower expenses helped lead to GAAP profitability in the third quarter. This contributed to our first quarter of GAAP profitability since the third quarter of fiscal 2020.
We have targeted approximately $2.4 million in reduced wireless expenses on an annual basis and we are on track to see those annual savings over the next several quarters. Wireless revenue related to tower work and other aspects of the 5G rollout has already increased by 61% year-to-date compared to last year. Year-over-year, we expect that it will continue to grow throughout this fiscal year and into fiscal 2023.
Our growth continues to be broad-based involving all four carriers; including both long-standing customers and new players in the market. The work touches all the regions we service, spread across the center of the United States.
Our pipeline of new projects, meaning work we have been awarded where we are waiting for purchase orders as permitting is complete, gives us significant confidence that the growth will continue in the near term.
The 5G opportunity represents a multiyear growth opportunity for tower work, across all four of the major wireless carriers. Each of those carriers are investing billions of dollars in the expansion and the CapEx plans of carriers are public and widely discussed.
Our Telco segment had a great quarter and while the global supply chain and chipsets issues were the original catalyst for the growth in our Nave and Triton businesses, the revenues and margin growth primarily have been caused by a pivot and focus by the new leaders of those business units, more heavily towards the optical transport switch router and enterprise network offerings to the optical fiber network providers.
This was the fifth consecutive quarter of revenue over $11 million for Telco. And in fact, the $21 million in Q3 for the Telco segment was an all-time record the second quarterly record in a row. Our Telco segment continues to generate solid and positive contribution margins to our company. There may be a leveling off of demand at some point in future quarters, albeit at a somewhat elevated level relative to the recent past, but we really believe that the change in focus on product strategy and the change in business unit leadership has positioned this segment nicely for continued success.
I would like to close my remarks by giving a shout out to all of our management and staff for all of their hard work and long hours in keeping our customers happy and delivering a great quarter to our shareholders. I would also like to thank those investors that have remained with us through these past few years. We appreciate your support.
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.
Thank you, Joe. Consolidated sales increased $10.8 million or 63% to $27.8 million for the third fiscal quarter, up from $17 million for the three months ended June 30 2021. The increase in sales was due to increase in wireless sales of $3.1 million and telco sales of $7.7 million.
Consolidated gross profit increased $3.8 million to $8.1 million for the quarter compared to $4.3 million for the same period last year. The increase was due to an increase in the Telco segment of $3.1 million and $743,000 increase in gross profit from the wireless segment, due to both increased revenues and stronger margins.
Consolidated selling, general and administrative expenses include overhead which consists of personnel, insurance, professional services, communication and other cost categories increased $550,000 or 16% to $4.1 million for the three months ended June 30, 2022 up from $3.6 million for the same period. The increase in SG&A relates primarily to increased selling and commission expenses to support higher revenues.
Net income for the quarter was $875,000 or $0.07 per diluted share based on 13.2 million shares compared with a net loss of $2.1 million or a loss of $0.17 per diluted share on 0.5 million shares for the same quarter last year. This represents our first quarter reported net income excluding the quarter we received our forgiveness notice for our PPP loan since the quarter ended June 30, 2020.
Turning to our balance sheet. Cash and cash equivalents were $4.2 million at June 30 compared to $2.6 million as of September 30, 2021. We've generated over $5 million in cash from operations year-to-date. As of June 30, 2022 the company had net inventories of $7.6 million. We continue to believe we are sufficiently capitalized with appropriate backstops to support near-term business conditions.
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] We'll take our first question from Kurt Caramanidis with Carl M. Hennig. Please go ahead.
Hi guys, congratulations on the quarter. Just wondering like on the cadence did things build steam month by month? And is that carrying into the next quarter or how did the quarter kind of go and how are things looking?
I mean I would say that revenue has been building quarter-over-quarter for probably the last five quarters. The wireless team grew about 70% these last three, four quarters in a row compared to last year. The Telco segment has been doubling or tripling and that's been kind of a steady drumbeat ramp up over the last, almost 24 months. So the margin growth has gone along with that. We've picked up about four points of margin over the last year steadily increasing and improving. And I would say our focus on controlling our expenses on the wireless side and reducing our COGS has contributed to that margin improvement. And so I would say just the gelling of the management team overall and a very clear focus on cost and expense control to improve profitability is what's been driving this.
Okay. Great. And maybe I missed this again, I'm a minute or two late. So your outlook is still pretty strong, or how are you feeling about the outlook?
I mean, you can never truly predict it month-by-month quarter-by-quarter. We're not in that kind of business. But we see nothing that indicates that it's going to fall off or change in any dramatic fashion. We try real hard not to give guidance and I would just say we're on a good path.
Great. Congrats on the quarter. Thanks a lot.
Thank you. [Operator Instructions] We'll take our next question from George Gaspar [ph] a Private Investor.
Thank you. Congratulations on the quarter. Very impressive. To Joe Hart there, can you give us a little further outline of changes in the wireless operation? What kind of crew count do you have? And has it changed in-house versus using outside crews? Can you explain that for us? And can you explain a little bit about what your activities are in terms -- are they still strictly or mostly on the tower install work, or are you getting away from the tower and trying to expand your activities there?
No. We're -- the wireless segment we focused on tower work. And for those that might be new to the call, we're not building towers. We're upgrading the technology that goes on those towers. So that's clearly our focus on the wireless segment. Crew count is always in a fluctuation I would say quarter-over-quarter. And as a matter of fact, we did a lot of work here probably in the amount of hundreds of sites that we upgraded to 5G for one of the new carriers these last 12 months. That was a simpler scope of work. So we're actually reconfiguring the crews as we go after more work with AT&T and Verizon and T-Mobile. That requires a little bigger tower crew than the previous work, so I would say that the amount of people focused on that business remain the same. Crew counts can fluctuate.
As far as our blend of subcontractor work to in-house work, I mean, George, that kind of goes up and down all the time. I mean, one of the benefits of using subcontractor crews is that it can help you with fluctuations in the overall workload. So that remains very strong both in the North and South region. So I would say you can tell by the revenue four quarters in a row. It's steady as she goes and we just continue to try to widen our footprint with all four major carriers.
And Joe does -- are you able to pick up activity away from the tower install work? Is there -- that opportunity for you?
Yeah. I mean, I would say generically there's opportunity for integration work and engineering work and maintenance work. But quite honestly, George, we want to stay focused on what we're good at and getting that in a nicely profitable fashion. So we're trying not to be distracted from our mission right now.
And you mentioned originally that the center part of the United States is an important area of your activity. Are you trying to expand the footprint of where you're operating at this point in time on the wireless area?
I mean we can always be convinced by a carrier or a tower company to move into a new geography. But right now we're trying to maintain discipline and reduce our costs, improve our margins. One of the reasons – one of the contributing factors in getting to net positive income was that we decided to be more disciplined and focused with our wireless geographic expansion and get our overhead expenses and our COGS in the right place.
So I think the combination of telco just knocked it in out of the park this quarter and injecting some discipline and focus in the wireless division has allowed us to turn to positive net income. So we'd like to keep that trend rolling in that direction. We don't want to be distracted. We don't want to be distracted right now with going off on some new adventure.
Okay. And then a question on just the telephonic area in general. You're still basically north of outside Miami from the standpoint of your operation there and you're working is it out of Alabama? And are you – have you come up with new opportunities to add to your product activity and repair activity? Because it looks like you've really taken off and you must be gaining momentum and responsibility for what you're doing and there's got to be your customers have got to appreciate very much what you've been able to accomplish in the last say three or four quarters relative to some of the problems that the industry is having.
Yes. I mean I said it a couple of times in my remarks. I think Michael and I made the decision that Mike Burch for Nave Communications and Damon Slacker in Triton Datacom were the key players and were the right guys to put in charge of those businesses. They've done an excellent job. They've been able to pivot us into some new product areas. And essentially, we are trying to build the telco business, which is following the fiber optic cable, massive expansion that's happening across the United States.
So when I refer to optical transport products, routers, switches things like that it's to follow that wave of fiber construction that's taking place across the US. So I think both of those guys have done a great job. But at the same time, our wireless team has been probably in a less desirable mode and trying to get cost and expense under control and has been doing a really nice job of bringing that into the mode of profitability. So we've still got more work to do but I think we're in a good place.
That's right. It's the quarter represents how well you're coming along in both areas of activity, primary areas of activity. And it looks like you're having some real opportunity to grow on the telecom side with the changes that are taking place in the market area. So it looks like you've got a combination of two areas of activity here that you can really accomplish broadly going forward. And we certainly hope that, you can continue to show that in the next quarter and obviously the next fiscal year should be a real breakout -- could be a real breakout for you overall too. Thanks.
Thank you, George.
Thank you. [Operator Instructions] We'll take our next question from Bob Jensen, Private Investor.
Yeah. Congratulations on a good quarter. Yeah. Recently heard this, there was some concern over Chinese cell towers. It might cause us some vulnerability since our relations with China are not too good. Have you guys heard anything?
I think you might be referring to the whole press about Huawei. Huawei is a Chinese manufacturer that installed wireless networks for a lot of customers. And there's been press about they installed their Chinese-made equipment on a lot of cell towers in the Midwest and near strategic Air Force bases et cetera, et cetera, et cetera right? I'm not the authority on that, but I think that's what you're referring to.
And the federal government has really banned that equipment from being in the network and has a massive multibillion-dollar rip and replace program that it is funding to subsidize the replacement of that Chinese manufactured equipment by those rural carriers, who were using them. Most of the big four don't use them, but I think that's what you're referring to Bob. If it doesn't sound like it, point me in another direction.
Yeah. No I think that's probably correct. So I was just curious as to whether that opened up any kind of additional opportunities for you guys.
Well, I think,…
It sounds like probably you are not.
…somebody is going to have to do the physical work of taking out that old equipment and replacing it with new equipment, depending upon who is manufactured by the new equipment. It's radio, so it will be Ericsson, Nokia, Samsung.
It'll be one of the usual OEMs in the world in the wireless space. So we'll be looking for opportunities in that space. But as I said to George, we're not going to chase it outside of our strong geographic areas, where we've got a lot of confidence.
Yeah. Okay, okay. Thanks for the response.
Welcome. You're welcome.
Thank you. [Operator Instructions] We have no additional questions in the queue. I'd like to turn the conference back over to management for any additional or closing remarks.
Hi. This is Joe. I'd just like to close by thanking all of you that have called in, for your interest and those that listen to it later by recording. We appreciate investor interest in ADDvantage Technologies Group. We think we have a bright future. And we ask for your support. And thank you for it. That's all. Thank you, Operator.
Thank you. That does conclude today's conference. We thank you all for your participation. You may now disconnect.