ADDvantage Technologies Group Inc. (AEY)
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Technologies Group in a niche market as a Value Added Reseller of Scientific-Atlanta
Motorola broadband equipment
Mr. Chymiak: On September 30, 1999, my brother David and I the former owners of TULSAT assumed control of ADDvantage Media Group through a reverse merger to become a public company trading on the Bulletin Board. The name of the company was changed to ADDvantage Technologies Group. ADDvantage Media Group business had been installing calculators in Wal-Mart Super Centers on their shopping carts. When Wal-Mart did not renew their contract in 1998 the company had to remove their calculators. The company could not rebound from this set back so their Board of Directors merged with TULSAT. We had purchased TULSAT from a company in Chapter 11 bankruptcy in 1985. The company was a distributor of products for back yard satellite dish owners. We later changed our focus and became a service center specializing in the repair of Motorola (MOT) VideoCiphers® and other equipment used in the cable industry. As the transition continued, we became a distributor of new products and one of the largest distributors of used distribution and headend equipment in the industry. We relocated a few times to larger facilities and moved to our present location in 1994. Today, we have nine buildings with 130,000 square feet located in Broken Arrow, Oklahoma.
During the past four years we have acquired LEE
Enterprise, NCS Industries, Comtech Services and opened TULSAT-Texas and
TULSAT-Atlanta. Today, we have facilities in six states with 140 employees.
In November 2003 our stock began trading on the American Stock Exchange under the symbol AEY.
CEOCFOinterviews: Will you tell us about the cable industry in general, and the need for what you are selling them?
Mr. Chymiak: The television and cable industry grew from the early 1970s to where it is today, which is a much more sophisticated industry. The technology changes continue with the demand for more channels, internet and telephony. The cable television industry is made up of 6000 or more systems throughout the United States. Over the past three or four years there has been a consolidation with companies such as Comcast Corporation (CMCSA), Time Warner Corporation (TWX), Cox Communications (COX), Charter (CHTR) and Cablevision Systems Corp. acquiring many of the larger markets. There are still several thousand small and mid-size cable companies operating in second tier and smaller markets. Our companies supply a comprehensive line of electronics and hardware used to acquire, distribute and protect the broad range of communications signals carried on fiber optic, coaxial cable and wireless distribution systems. Our products are sold to customers such as Disney, Universal Studios, apartments, institutions such as hospitals, prisons, universities, schools, cruise ships and others providing an array of communications services including television, high-speed data (Internet) and telephony.
CEOCFOinterviews: Are the larger cable companies able to deal directly with the manufacturers or is it done through a third party?
Mr. Chymiak: Due to the large volume of equipment the larger multiple system operators (MSOs) require for new construction or upgrades OEMs are the only source for this amount of volume. The manufacturers require purchase orders placed many months in advance so they can plan their production schedules. Our companies are a secondary source provider of equipment to the larger MSOs and primary supplier to many small and mid-size cable companies that cannot purchase the larger quantities required to get the best pricing. As a Value Added Reseller for Scientific-Atlanta and Motorola with our large inventories of their products provides many opportunities to supply the MSOs with emergency and smaller volume products. SA and Motorola provide our companies with referrals to meet these immediate needs that we can fill and deliver within a short time period. With our partnerships we can meet their customers immediate needs without the delay of waiting for products to be produced by Scientific-Atlanta (SFA) and Motorola (MOT). TULSAT has one of the largest inventories of SA products in the industry. In many instances TULSAT will be the only distributor to have the product in the country. Our companies maintain an inventory of many new and refurbished products produced by several OEMs.
CEOCFOinterviews: Who is using refurbished equipment, and how big a part of your business is that?
Mr. Chymiak: At one point, it was a very large part of our business. Today we have twenty two million dollars of inventory at cost, with sixteen million dollars of our inventory now new, predominantly Motorola (MOT) and Scientific-Atlanta (SFA) with the balance being refurbished. At some point all cable companies must purchase refurbished equipment due to the shortage of selected products or to replace existing allied equipment that has failed. The largest MSOs with sufficient budgets continually upgrade their distribution and headend equipment to meet the growing demand for additional channels and services with new equipment. The wreck out equipment is then sold, refurbished and resold to smaller or mid-size cable companies that need to upgrade their systems. The ability to acquire refurbished equipment enables these systems to upgrade by reducing their capital expenditures. Then their equipment may be recycled to an even smaller system or sold to an international customer.
CEOCFOinterviews: Explain your role as an exclusive distributor for Scientific-Atlantas Legacy products,
Mr. Chymiak: Scientific-Atlantas Legacy products are headend or distribution equipment that has been in production and used for many years. The legacy equipment has been in use for several years with a good reputation in the industry. Unless a cable system has completely rebuilt their distribution and headends they most likely still have these products in use. Scientific-Atlanta has determined that they could put their resources and production lines to better use with new products. TULSAT has entered into a contractual agreement to continue supporting the legacy agreement with service and product for several more years. TULSAT purchased SAs inventory of these items and is the exclusive source for these products. Scientific-Atlanta refers all inquiries on these products to our sales staff to provide technical and sales information. We have had to go back to SA and place another order for one of the lines because of the demand for the product. Most cable technicians prefer to maintain the same products if additional equipment is needed to add channels, services or replace a defective unit.
CEOCFOinterviews: How much of your business is repair?
Mr. Chymiak: Our repair revenues in our six repair centers are about 15% of our revenue. Throughout the industry, there has been a big change and a lot of the major systems have rebuilt their distribution plants over the last three to five years. These products are now coming out of warranty. We believe this should provide an opportunity to increase our service revenues. The other area where we are strong is high-end technical repairs which require factory trained technicians and expensive test equipment. In some instances our companies have become third party authorized repair centers for selected products manufactured by Scientific-Atlanta (SFA) and Motorola (MOT). Our technicians test, repair and set the equipment to factory specifications before it is returned to our customers. We have an advantage over the OEM service centers because of our lower costs and prompt turn around. A cable company cant afford a piece of equipment that costs five to ten thousand dollars to be tied up for an extended period of time waiting to be repaired.
CEOCFOinterviews: You are the leader in the industry; do you need to do much marketing?
Mr. Chymiak: Our marketing has changed dramatically. For the last eighteen years, we have aggressively used print ads to continuously put our name in front of the cable companies. NCS, one of our subsidiaries located in the Philadelphia area has been in business for 29 years and three of our other companies have been in business for eighteen years. Being a Scientific-Atlanta (SFA) Master Distributor and exclusive distributor for selected products has changed our mix of customers. Today, we are selling more products to the larger cable companies because of their ability to raise capital with their cash flows or through financing. This business is built on relationships and the ability to provide timely or immediate delivery from our inventory. TULSAT and NCS receive referrals from their customers and Scientific-Atlanta (SFA) and Motorola (MOT). Each of our subsidiaries has a client base that has been earned by meeting their expectations. Our sales staff technical expertise can provide more than one solution to a problem because of their vast knowledge of products manufactured by several OEMs. As a Value-Added-Reseller for Scientific-Atlanta (SFA) and Motorola (MOT) our sales staff can provide valuable assistance to smaller and mid-size cable companies who do not have an engineering staff.
CEOCFOinterviews: Are there manufacturers that you are not doing business with that you would like to represent?
Mr. Chymiak: We are always looking for solutions to solve our customers problems. The majority of the products sold in the broadband industry are purchased directly from the OEM; but some of the smaller manufacturing companies use organizations like ours to sell their products. We know that on large projects the OEM has the advantage; but we market our companies as a secondary source for new and refurbished equipment to the large MSOs. Even though our revenues increased 31% to $33.3 million in fiscal year 2003 we are still a small company in the broadband industry. ADDvantage is the largest Company providing service, and sales of new and refurbished equipment. Most companies sell new products, operate service centers or sell refurbished equipment. Our companies maintain one of the largest inventories of new and refurbished equipment which gives us the advantage of having the product available and ready to deliver.
We represent other manufacturers such as RL Drake Company, Blonder-Tongue Laboratories, Inc. (AMEX: BDR), Quintech Electronics and Communications Inc., Videotek, Inc., Standard and Corning-Gilbert Inc. (NYSE: GLW). We are always looking for partnerships to provide niche equipment to solve specific problems. The larger OEM cannot manufacture these products in mass because of the limited demand; but there is an opportunity to sell these high margin solutions. ADDvantage Technologies with its strong balance sheet is in position to add product lines and sales personnel to meet these demands.
CEOCFOinterviews: Do you see acquisitions in the future?
Mr. Chymiak: That is part of our growth strategy; but we want to continue to grow organically. As I mentioned ADDvantage had a 31% increase in revenue in fiscal year 2003 in a difficult year for the communications industry due to the hard work of our employees, our relationships with Scientific-Atlanta (SFA) and Motorola (MOT) and our large inventory. We are targeting specific geographic areas where we have limited representation so that our sales staff can develop personal relationships in these areas. We look for well known companies in our segment with a trained sales staff that can benefit because of our financial strength and inventory and our relationships with OEMs. It makes it much easier if potential acquisitions are profitable and have relationships that will compliment our group.
CEOCFOinterviews: Do cable companies buy on an item-by-item basis or do they have contracts with you for service?
Mr. Chymiak: We never know what size of order we will get because of the range of products we have in inventory. We sell items from less than $1 to over $20,000. Our new Scientific-Atlanta (SFA) and Motorola (MOT) orders generally are higher because of the amount of products we provide. We maintain an inventory with over ten thousand part numbers giving us the ability to sell many different products manufactured by several OEMs. We have the ability to deliver the same day we receive a purchase order in most cases. In a large company, by the time they receive a purchase order and get it shipped, it may take several days because of their processes. We are large enough to meet the needs and small enough to take care of emergencies.
CEOCFOinterviews: In closing, why should potential investors be interested and what should they know that they may not realize when they first look at the company?
Mr. Chymiak: I think the important thing for potential investors to know is that in todays economic environment, investors are looking for a company that is profitable with increased revenues. ADDvantage Technologies Group achieved many milestones in fiscal year 2003 with revenues of $33.3 million with net earnings of $3.3 million, or $0.33 per basic share compared to fiscal year 2002 revenues of $25.4 million and net earnings of $961,208, or $0.10 per share. Our public exposure and shareholder liquidity were enhanced when ADDvantage stock began trading on the American Stock Exchange in November 2003. We have strengthened our role as a Master Distributor for several of Scientific-Atlantas (SFA) legacy products and as a distributor of their other product lines. We have also increased our sales of Motorola (MOT) products. Our financial strength, low debt and significant inventory allow us to respond to changes in our industry. We are able to provide timely delivery from our inventory for our many customers, thus reducing the lead time they would have if they went through OEM supply channels. Management continues to review possible acquisition targets within our industry that will complement our core businesses in specific geographic markets. We are optimistic that ADDvantage can continue growing revenues and net earning in fiscal year 2004. Key statistics for fiscal year 2003 included gross margins of 41%, a net profit margin of 13.2% and a 20.38% five year average return on equity. ADDvantage Technologies has weathered the telecommunications downturn over the past several years with record revenues and profits. Im optimistic the best is yet to come.
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TECHNOLOGIES GROUP, INC.
Posted: 5/12/04 - CEOCFOinterviews.com
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