Company Overview

ADDvantage Technologies Group, Inc. (NASDAQ: AEY) is a distributor of electronics hardware for the cable television and telecommunications industries. The company also provides equipment repair services for cable operators and decommissioning services / equipment recycling for telecommunications customers. In addition to new products, ADDvantage also sells surplus-new and refurbished equipment purchased on the secondary market.

The company was originally incorporated in the 1989 and is headquartered in Broken Arrow, Oklahoma.

 

Products and Services

ADDvantage has two distinct operating segments: cable television (CATV) and telecommunications (Telco).

CATV: The CATV segment sells new, surplus, and refurbished equipment to cable television operators (also known as multiple system operators or MSOs) or other resellers that sell to these customers.

The segment consists of three subsidiaries (Tulsat, ComTech Services, NCS Industries) with a total of eight service centers located in Oklahoma, Missouri, Texas, Arizona, Pennsylvania, Nebraska, Georgia, and, Tennessee.

While most customers are based in North America, Central America, or South America, the company does operate in other geographic regions that rely on the same technology. As noted above, ADDvantage also offers repair services for cable television equipment.

The company carries products used in the delivery of video, telephone, and internet signals from most original equipment manufacturers (OEMs). These include:

Headend Products, which are used for signal acquisition, processing, and manipulation. Headends are primarily responsible for originating and communicating cable television and modem services to subscribers. These products generally consist of satellite receivers, integrated receivers/decoders, (de)modulators, antennas, amplifiers, equalizers, and processors.

Fibre Products, which are used to transmit the output of cable headend products to multiple locations using fibre-optic cable. These generally consist of optical transmitters, fiber-optic cable, receivers, couplers, splitters, and related accessories.

Access and Transport Products, which are used to transport signals from the headend to their ultimate destination. These generally consist of transmitters, receivers, line extenders, broadband amplifiers, directional taps, and splitters.

Customer Premise Equipment (CPE) consists of digital converters and modems placed inside the homes of subscribers that receive, record, and transmit video, data, and telephony signals.

Test Equipment, which is used in the set-up, testing, maintenance, and overall support of the cable network.

Telco: The Telco segment distributes new and used telecommunications networking equipment from most major manufacturers. This segment consists of two subsidiaries (Nave Communications and Triton Datacom Online, Inc.) with service centers in Jessup, Maryland, and Miami, Florida. Products include the following:

Central Office Equipment, which consists of optical, switching, and data equipment on a customer’s communication network. Optical equipment is used to transport internet traffic, switching equipment is

used for routing voice traffic, and data equipment is used to transport internet and voice over internet protocol traffic.

Customer Premise Equipment refers to integrated access devices, channel banks, and routers placed at the customer site that are used to receive the telecommunications signal from the provider.

As noted above, other services include decommissioning and recycling of obsolete and surplus hardware.

The revenue attributable to each segment and geographic region is detailed in the table below:

Source: Company Filing

Within the CATV segment, approximately 60 percent of revenue is derived from new equipment sales, with the balance coming from refurbished equipment sales and repair services. In the Telco segment, more than 80 percent of revenue is generated by the sale of refurbished products.

 

Market Overview

The telecommunications equipment industry is highly competitive. ADDvantage competes not only with other resellers, but also OEMs. Furthermore, the company has indicated that recent economic declines have reduced expenditures on telecommunications equipment.

To distinguish itself from other resellers, ADDvantage has adopted an on-hand, on-demand business model. This entails carrying a large inventory of products of new and refurbished products that can easily be customized to meet the customer’s needs. Many other resellers cannot do this due to working capital restraints.

Other unique offerings include repair services and the ability to reconfigure new and refurbished equipment.

OEMs generally offer the lowest equipment prices for large orders. However, due to its inventory management, the company holds a competitive advantage over OEM suppliers for smaller orders or items that need to be delivered quickly.

 

Second Quarter Earnings Review

Revenue for the second quarter ended March 31, 2017, increased seven percent year-over-year to $11.3 million. Sales in the CATV segment fell by approximately $1.0 million, but this decrease was offset by the acquisition of Triton Datacom in October 2016 that added revenues to the Telco segment. The gross profit margin was 35 percent for CATV, and 32 percent for Telco.

Earnings before interest, taxes, depreciation, and amortization (EBITDA) decreased 18 percent year-over-year to $0.5 million. This was attributable to declines in both the CATV and Telco segments. Despite an operating loss of $0.2 million for Telco, the company posted positive net income in the second quarter of $10,000.

Cash flows from operating activities for the six months ended March 31, 2017, totaled $1.9 million, up from $1.1 million in the same period one year ago.  At March 31, 2017, the company reported a cash balance of $3.9 million and net working capital of $25.3 million. Long-term debt totaled $5.2 million, yielding a debt-to-equity ratio of 12 percent.

 

Stock Influences

• Changes in the number of cable television subscribers;
• Seasonal impacts on telecommunications infrastructure;
• Changes in the profitability of the CATV or Telco segments; and
• Further acquisitions or divestitures.

 

Risk Factors

• The company faces competition from both telecommunications equipment resellers and OEMs;
• There have been negative long-terms trends in the cable television industry which could have a material impact on the CATV segment; and
• The company’s shares are subject to speculation.

 

 

Stock Performance

 

As of July 27, 2017, shares of ADDvantage were at $1.52, yielding a market capitalization of approximately $15 million. In the past year, the stock has fallen more than 20 percent after trading as high as $2.31 at the end of July 2016. Shares briefly traded above $2.00 in late March, but have since retreated and are now trading near the one-year low of $1.48. Daily trading volume in the past three months has averaged 15,000 shares. As of July 2017, short interest was 7,200 shares.

 

Summary

ADDvantage has developed a strong foothold in the competitive telecommunications equipment industry. By holding a large inventory of new and refurbished products, the company can fulfill certain orders more efficiently than other resellers and OEMs. ADDvantage maintains a strong balance sheet and positive operating cash flows. Furthermore, the company trades at a discount to its net current asset value.

 

 

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