ADDvantage Technologies Group, Inc.

Good day and welcome to the Advantage Technologies Fiscal 2021 Third Quarter Financial Results Conference Call. Today's conference is being recorded. And now at this time, I'd like to turn the conference over to Mr. Brett Moss, Hayden Iyar. Please go ahead, sir.

Thank you, Operator. We are joined today by Joe Hart, President and CEO, as well as Michael Remke, the Chief Company's Interim Financial Officer. Before we begin today's call, I would like to remind you that 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 Advantage 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 Advantage Technologies. These statements involve a number of risks and uncertainties. Participants are cautioned. These forward-looking statements are only predictions, and they materially differ from the actual future events or results due to a variety of factors, such as those contained in Advantage 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 Advantage Technologies' most recent report on the Form 10-K. The guidance regarding the anticipated future results on this call is based on limited information currently available to Advantage Technologies, which is subject to change, although any such guidance and factors influencing it may change. Advantage Technologies will not necessarily update this 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 are used with these measures. In our press release and in the financial tables issued earlier today, which are located on our website, advantagetechnology.com, you will find a recommendation 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 and not instead of GAAP measures. I'd like to now turn the call to Joe Hart, President and Chief Executive Officer of Advantage Technologies. Joe, please go ahead.

Thank you, Brett. Good morning and thank you to everyone joining us on the call today. This was an encouraging quarter for us. Revenues increased by more than 40% compared to Q3 of fiscal year 2020. And gross profits were up through nine months by 7% year over year. Before talking about our wireless business and the building 5G wave, I want to give due recognition to our telecom group for a great third quarter. As we reported in our earnings release, the third fiscal quarter benefited from 65% higher revenue in our telco segment, specifically from NAVE Communications, an all-time high for name, as the ongoing chip and electronic supply chain issues for new technology drove higher demand for refurbished alternatives. The higher volumes have generally continued into our current fourth fiscal quarter, but we anticipate a leveling off of demand at some point in future quarters, albeit at a somewhat elevated level relative to the recent past. NAVE is having a really strong year and Triton Datacom has made a nice recovery from earlier COVID related softness of sales in the year. What is especially encouraging is that this revenue growth came from our telecom business where the work from home trend and the global shortage of semiconductors and electronics drove increased demand for our refurbished telephone equipment. The anticipated revenue growth from our wireless segment should be incremental to this. The long awaited 5G expansion has begun in earnest and the hard work to position our company as a key player in the development of 5G networks by our Fulton Technologies team is paying off. Over the last few months, we have won site awards to upgrade technology to 5G for over 1,000 cell sites. And we are increasing our staffing to meet this growing demand. Last year at this time, we were lucky if we had visibility to workload more than four to six weeks out in front of us, as the volume of construction across the industry was still down. Last summer, we were running with about eight crews in any given week with steady work. Currently, we are running between 25 to 30 crews on a daily basis, and we'll be ramping up from there as we move into our new fiscal year in October. In the last few months, we also added two new major tier one clients in the 5G space. We are confident that the wireless segment revenue in the second half of calendar 21, the period encompassing our fourth fiscal quarter of this year, which is the current quarter, and the first fiscal quarter of next year, which begins in October. These will gradually double the levels we reported in the first half of calendar 2021. Moreover, this represents only a portion of the total work to be done. 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. The initial awards are from multiple carriers, including both longstanding customers and two new entrants into the market. We have been awarded work in seven major markets, some of which are new for us, but all are in the greater Midwest and Southwest regions contiguous to our historical bases in Chicago and Dallas. More than 80% of the new site awards are for the installation of new 5G radios and antennas. But some also involve decommissioning and removing older technologies on the tower or rooftop to make room for new 5G installations to follow later. And in some cases, we are installing additional 4G frequencies at the site. As I've previously indicated, The 5G expansion is massive. It represents a multi-year 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 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, from Texas up to the Great Lakes. The expected incremental revenue from our wireless segment in the fourth quarter, along with the higher telco sales, should help us finish the year strong with improved margins and significant momentum heading into the new fiscal year. I'm encouraged by what this all suggests for our second half of the calendar year. We are benefiting from improved operational efficiency and with a higher volume of work driven by all four carriers now building out their networks at the same time to compete in 5G. We are well positioned for success. The recent improvement in our telecom segment gives us a stronger base from which to grow. Though we expect demand to normalize somewhat at higher levels than we have enjoyed historically, but likely not at the level that it was in the third fiscal quarter. This growth reflects progress the new leadership has made and the new customers and partners our NAVE and Triton DataCom businesses have added. With that, I'll now turn the call over to Mike Ramke, our interim CFO, to provide a more detailed review of our financial results. Mike, please go ahead.

Thank you, Joe. Sales for the third quarter of fiscal 2021 were 17 million, up 42% compared to 12 million in the third quarter of fiscal 2020. The increase of 5 million was driven by a nearly 6 million increase in the telco segment, partially offset by a nearly 1 million decrease in the wireless segment. The telco segment realized increased demand for refurbished telecommunications equipment, while delays in infrastructure spending from the major U.S. carriers contributed to the lower wireless segment results. Growth profit increased by 98,000, $4.3 million compared with $4.2 million for the same quarter last fiscal year. Growth profit margin was 25% compared to 35% for the prior year third quarter. Growth profit margins of 30% for the current fiscal quarter in the wireless segment were in line with historical levels. but margin in the third quarter last year were unusually high at 44% due to change order revenue recovery from the second quarter of 2020. Operating expenses increased by $500,000. The $2.5 million for the quarter ended June 30, 2021, compared with $2 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 by 1.1 million to 3.6 million, compared with 2.4 million for the same quarter last year. This increase was due largely to higher commissions associated with increased revenue in our telecom segment, as well as increased stock-based compensation expense. Net loss for the quarter was $2.1 million, or a loss of $0.17 per diluted share based on 12.5 million shares, compared with net income of $23,000, or earnings of $0.00 per diluted share based on 11.2 million shares for the same quarter last year. Adjusted EBITDA was a loss of $1.5 million for the third quarter of fiscal 2021, compared with an adjusted EBITDA loss of $179,000 for the same quarter last fiscal year. Turning to our balance sheet, cash and cash equivalents were $3.6 million as of June 30, 2021, compared with $8.3 million as of September 30, 2020. CASP is used primarily to fund operations. As of June 30, 2021, and September 30, 2020, the company had net inventories of 5.6 million. Outstanding debt went down by 700,000 to 7.3 million at June 30, 2021, comprised of 2.8 million of a revolving line of credit 2.9 million of notes payable, and 1.6 million of financing lease obligations, compared to 8 million as of September 30, 2020, which was comprised of 2.8 million of a revolving line of credit, 4.1 million of notes payable, and 1.1 million of financing lease obligations. At June 30, 2021, Notes payable were comprised of a 2.9 million PPP loan for which we have applied for forgiveness. 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.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star 1 if you'd like to ask a question, and we'll pause for just a few moments to allow everyone an opportunity to. And once again, that is star 1 if you'd like to ask a question. All right. We'll take our first question from William Velmer with SA Advisory. Please go ahead.

Yes, very good call. Thank you very much. Very nice. But my main question, like everybody else, is the revenue growth is there. The business is there. 5G is there. When do we get some real profit here? That's kind of my question. Where do we get some bottom line profit? That's my question. Thank you.

Yes, good morning. Hi, this is Joe. You know, it's an excellent question and it's one that we ask ourselves and our board asks us every quarter. I think we're on that brink. We have been anticipating this ramp of 5G construction for a number of quarters now. And we have built up the team and been building up the tower crews which is a bit of a slow grinding process as we hire people and train them. But we've been ramping up to meet this expected demand for construction work for a number of quarters now. We think that this current fourth quarter is that transition period, and we think we're set and we have budgeted for 2022 to have a very successful year, uh, which starts in October. Uh, there's still a little bit of carryover as we ramp, um, as I've been talking about, I think we'll be headed towards a doubling of our wireless revenue. And, uh, this is that timeframe, the next, uh, 60 to 90 days where that'll be taking place. So, uh, Can't make a promise about the fourth quarter. I think it's going to be quite a bit improved over where we've been. And we believe that the October quarter, which is first quarter for next year, will be that period where we finally break into profitability.

Thank you. And once again, that's Star 1 if you'd like to ask a question. We'll take our next question from George Casper, private investor. Please go ahead.

Yes, good morning. A question regarding the expectations on a substantial increase in volume of business expected. How are you going to handle this from a financing point of view? It appears as though you're going to need some additional capital to afford to accomplish everything that you've laid out here in terms of the momentum and the number of crews you're working and so on. How are you going to handle this requirement for capital?

Thanks, George. That's another great question. We're sitting on about $4 million of cash at the moment and some additional liquidity that's available to us. We feel that we're sufficiently capitalized for the ramp up of the business. We see next year as being quite an increase, but based on the cash flow and the positive EBITDA, which we're forecasting, uh, we believe we, uh, during this quarter, we will be stifling that cash burn, uh, that comes from that negative EBITDA and that, uh, we're, we're sufficiently capitalized to, uh, to work our way through the ramp and into, uh, quite an expanded 2022. Okay.

Um, the, the, the overview, uh, looks very positive, including your telephonic area, wireless. Do you have sufficient facilities now with what the expansion you did in north of Miami? And I believe you're in, is it Alabama or Tennessee? I can't remember which. And what are you doing? Are you going to require putting more facilities attention on that side of the equation?

No, we think we're, uh, we think we're in great shape on the facilities for both nave and Triton. Uh, Triton is located. Triton is located just North of Miami. It's an enterprise networks products, uh, company. Um, we, we probably don't see a lot of growth in that area, especially since, uh, COVID remains a part of society at the moment. So we think it'll remain stable. And then as far as NAVE communications, we relocated everything to a great national 3PL called Pelco Telecom in Huntsville, Alabama. They're a very large company and our business is a relatively smaller portion of their overall business and activities. So we're in great shape on both of those businesses as far as facilities.

I see. Okay. All right. And in terms of the overview on the install work for 5G, can you explain a little bit about how far away from TOWER George Leal, The tower work that you're obviously very involved in. George Leal, How far are you getting it to implant additional equipment away from towers can you describe how you're involved in that kind of thing.

George Leal, I would George but i'm not sure I exactly understand the question or. When you say install equipment away from the towers, are you thinking about small cell or something like that?

Yes. Just units to accept the communications coming off towers.

Yeah. There has been a fair amount of work on the small cell side. side of the business. It has somewhat slowed, and I can't tell you at a macro level if it's declined, but I can tell you that it's a bit stalled out. Crown Castle and a few others are still building their small cell programs, but the carriers right now are primarily focused on adding 5G to their macro cell sites. When we go through these generational upgrades, 3G, 4G, 5G, all the carriers have to go in and they start in the core urban areas, then go to the suburban and outlying towns and cities around the major metropolitan areas, They do the highway corridors from city to city, and then they do the rural areas. So it's about a five-year spread of the work typically, five, six years. And so right now they're all focused on building out their major metropolitan areas. And that's where the lion's share of our work is right now.

Okay. Could I ask one additional question, please? It relates to crews. Now you give us some information that you had a basic eight crews and you're at 25 to 30 crews running now. And it sounded like you actually could expand that going forward. Any thoughts? And how many in-house crews do you have and outside crews? Can you identify that? And where do you think you're going to? the top side of operations when it comes to crew development and application of those crews?

Yeah, sure. As of yesterday's crew log, you know, we had 28 productive crews and we had a couple doing some Tiger team work and some were in, a couple were in training. About 16 of those crews are in-house crews, and the rest are subcontractors. We always want to use about 50-50, 60-40, 40-60. We always want to have a blend of subcontractor crews, A, that reduces our investment a fair amount, but also it provides a layer of buffer for the ups and downs in schedule that might happen throughout a year. I think we're in an excellent position crew count wise for this current and the beginning of the next quarter. I think we'll probably peak somewhere about 40 crews and that is based on the work that we have in hand or visibility to at this particular moment. If, as we anticipate, we'll be awarded even more work as we continue through the next couple quarters, that crew count will go up based on the additional work we get awarded. So we anticipate quite a bit more work, but we already have a major increase in our hands for next year versus this past year.

Okay. Thank you. Well, it looks like there's a tremendous amount of momentum going here. And with this kind of development of the increase in crew counts that are actually in operation, I would expect that you could really – surprise us all with bottom line profitability here before very long that could be substantial on the relative modest number of shares outstanding in the company yet. Thank you.

Thank you, George.

Thank you. And we'll take a follow-up question from William Velmer.

Yeah, hi. A couple of other little points I'd like to expand on. In your last presentation, which was a year ago, I believe July, you gave some really strong revenue estimates. How do you feel about those revenue estimates going into 2021? Let's see. We'll use a calendar. Excuse me, calendar. Fiscal 2022. Fiscal 2022. So I'm interested. Are you planning to upgrade that presentation, number one? You talk about additional employees. How qualified? I mean, the way it is today finding qualified employees for much of anything is pretty impossible. So how are you able to screen these new groups that you are bringing in that aren't just wasting your money? And do you think, on the last point, you do not put out much press about contractual agreements anymore? Do you think that near term, that whenever you have received some meaningful contractual agreements, that you might start putting out more press, which might excite more investors, which might excite the stock price, which might allow you to maybe raise some additional working capital at a much higher price? You have very little participation here. You have a small volume of stock trading today. for an industry that's really in the forefront right now, telecommunications, and your following appears to be somewhat limited. So again, backlog I'm looking for, qualified employees, more presentation with the public. Thank you.

I think you're referring to the presentation that we made last at one of the micro cap conferences where we were, we were laying out what our sort of midterm sort of three to five year growth, uh, goal was. And we, we laid out about 250 million at about 10% EBITDA is where we wanted to get to. Um, that's still a realistic goal. It, the starting point for that, the real ramp, moved out almost a year as the Spring-T Mobile merger was delayed, as the DISH entry into the wireless market was delayed by that merger. And so we're probably 12 months behind the curve on getting rolling on that growth curve. But that was also intended to be a multi-year combination of organic growth and some M&A activity to get us to that point. I think we're solidly headed for that right now. We'll be updating that presentation and putting that out there probably in the near term. And then to your point about crews, yeah, we agree. I mean, the labor market across the country is tight, but Fulton Technologies, which is our wireless subsidiary, has been in the business for about 28 years. It has an excellent reputation in the wireless community for good workmanship, both quality, timeliness of performance, safety record, et cetera. And as we have been building up our workload, all these crews talk, and we have a reputation for paying our subcontractors on time in a reliable fashion, which is huge for those small contractor firms, you know, where cash is king. And so the combination of great technology, good benefits, good future, right? A lot of these guys want to be with stable companies that are really starting to grow. And so We've been able to attract quite a few experienced foremen, top-hand technicians, ground technicians. We have more than doubled the workforce. We train them in-house. We certify them for safety and rescue training, all the OSHA regulations. We put them through quite a good training program. We also have a good fleet of vehicles and we have excellent safety, personal safety equipment that, you know, that word gets around. So we're not having any trouble attracting crews. So I attribute it to the great work that people in our Fulton organization have done, both by reputation as well as backing it up with, great training and good management skills. So I think we're in quite good shape from both internal crews as well as subcontract crews. And as far as more publicity, almost all of our contracts with the carriers and the OEMs and sometimes the integrators have a clause in them that requires us to get written permission from them before we use their name in any kind of publication. Now, under typical circumstances, that's not a big deal. But if I take a new entrant like DISH, DISH is trying to roll out a brand new 5G network nationwide And it's going to take, I'll say, three to five years, typically. They have some FCC mandates as to what percentage of the nation's population they have to cover by certain dates. We're just a small fish in the big sea from their perspective. You know, if we have 10 or 20 crews doing dish work, it's a... it's a blip on the screen for them for what they've got to accomplish nationally. So it's really not appropriate for us to put press releases out saying, well, hey, we've got, you know, we've got 10 crews, we've got 20 crews working for DISH because they're trying to build, they're trying to cover a population of, you know, 300 million people. So it needs to be appropriate before we go to our clients and say, hey, we would like to put out a press release announcing the work because we already have all the multi-year master service agreements in place. There's no new information there. So if we signed a big contract that was really material, we'd ask for permission. And then that's kind of why you see me talking about existing clients versus new entrants. I'm trying to give relevant information to people who are in the space because everybody knows kind of who I'm talking about.

Can I ask you one other quick question? One more quick question. The bloated infrastructure bill that might get passed, the money we don't have, of course, uh, primarily deals with broadband that they say, how does broadband mix with what you're doing? Can you, can you attack that potential, uh, revenue flow that could generate from this broadband, uh, exercise that the government's trying to portray?

Well, I think, uh, mid to longterm, uh, it could be something that, uh, we will be able to play a role in. I think it's really talking about making sure that all the school districts are able to reach their students regardless of where they live in the district and provide it with inexpensive broadband connection. A lot of that will be fiber-based. It's also getting broadband internet connectivity out to the rural areas. And that will be both fiber-based to a great extent, and it will most likely be some kind of fixed wireless application out in the last mile. But a lot of this, to your point, a lot of this is still speculative. It seems to be heading in that direction, but it will take a few years to get some momentum. In the meantime, we are focused on what's in front of us right now, which is primarily macro cell upgrading to 5G.

Great. Thank you for your time. I really appreciate your responses. Thank you.

You're welcome.

Thank you. And we'll take a follow-up from George Casper.

Yes. An additional on what you were just talking about, but I'd like to just highlight something here. We're noticing, I'm in Milwaukee, downtown area, and I'm a block away from the national, international headquarters for Northwestern Mutual. And they have a communications, huge communications center across from them, a very substantial high-rise for a lot of their operations. And they've been, there was a cable, 5G cable being put out run under sidewalks recently. And we're noticing it up in some of the suburbs like Shorewood, north of Milwaukee proper, that there's a lot of cables going block to block underground. Can you explain that the equipment that has to be connected to underground cables when they come out to receive information communications and to move it. Can you explain a little bit of that? Will you be getting involved then with the communications that has to be connected to the underground work?

I believe what you're describing is really fiber optic cable installation that's taken place that probably hooking up a number of the buildings in that area or potentially going to other enterprise networks, which is a business that we're not currently in. The fiber business is something that's been declared dead at least four times in my career, and then it comes roaring back about every five to seven years. It's a massive business right now. It's not what we do. It's not our core competency. Okay. Fiber network construction takes some very expensive equipment. You'll see directional boring machines in the city streets. Yes. Dumb trucks, excavators, et cetera. That's not what we do currently, George, so it's not something we have a plan to go do. Okay. At the end of the day, fiber also goes to all the cell sites. So we do some work to extend that fiber from the street back to the cell site. So we touch it. We do some of that work, but it's principally related to cell site upgraded technology.

Okay. All right. Well, thanks for that explanation.

You're welcome. Thank you. And that does conclude today's question and answer session. I'd like to turn the conference back over to management for any additional closing remarks.

Well, this is Joe again. I would just like to thank everyone, a number of you. I recognize your names from the list of attendees have been with us for a while. I appreciate you sticking with us as an investor. And some of you are new to Advantage Technologies. We think we have a very bright future. It has been as painful for us as it has for you as investors to live through, you know, the losses we've incurred the last couple years. We think we're on the brink this quarter of moving away from that. And, you know, I'm using a transitional verb there. But, you know, 2022 should be an excellent year for us, and I haven't been able to say that in quite some time. So I appreciate you participating in today's call and your interest in advantage technologies. Thank you.

Thank you. That does conclude today's conference. We thank you all for your participation, and you may now disconnect.