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Edited Transcript of AEY earnings conference call or presentation 13-Aug-19 4:00pm GMT

Q3 2019 ADDvantage Technologies Group Inc Earnings Call

BROKEN ARROW Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of ADDvantage Technologies Group Inc earnings conference call or presentation Tuesday, August 13, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald E. Kinison

ADDvantage Technologies Group, Inc. - President of the Telecommunications Segment

* Joseph E. Hart

ADDvantage Technologies Group, Inc. - President, CEO & Director

* Kevin D. Brown

ADDvantage Technologies Group, Inc. - CFO

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Conference Call Participants

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* Elizabeth Barker

Kanan, Corbin, Schupak & Aronow, Inc. - Account Director of IR

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Presentation

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Operator [1]

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Good day, and welcome to the ADDvantage Technologies Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded.

Now at this time, I would like to turn the call over to Elizabeth Barker of KCSA Strategic Communications. Please go ahead.

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Elizabeth Barker, Kanan, Corbin, Schupak & Aronow, Inc. - Account Director of IR [2]

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Thank you, operator. Before we begin today's call, I would like to remind you that this conference call may contain certain 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 the 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 the 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 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-Q. 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 the financial tables issued earlier today, which is located on our website at addvantagetechnologies.com, you will find a reconciliation of these non-GAAP financial measures with the closest GAAP financials and a discussion about why we think 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.

With nothing further, I would now like to turn the call over to Joe Hart, President and Chief Executive Officer of ADDvantage Technologies. Joe, please go ahead.

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [3]

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Thank you, Elizabeth, and welcome, everyone, to the ADDvantage Technologies Fiscal Third Quarter 2019 Conference Call. With me on the call today are Kevin Brown, our Chief Financial Officer; Scott Francis, Chief Accounting Officer; Don Kinison, President of the Telecom Segment; and Colby Empey, President of the Wireless segment.

This was a milestone quarter for ADDvantage Technologies as we completed the sale of the cable TV segment and turned the company EBITDA positive for the first time since restructuring the management team and refocusing our strategy in July of 2018.

For many years, our Board of Directors has sought to diversify away from our original core cable business and expand the company's range of solutions into telecom equipment and wireless services markets.

We are proud to have finalized the sale of the cable TV segment this quarter, marking the beginning of a new chapter in the evolution of ADDvantage Technologies.

This major milestone significantly advances our growth strategy, having provided us with additional funds to invest in solidifying and expanding our market positions. We are excited by the opportunities this opens up for the company to grow, providing a greater return on investment for our shareholders. As a result of this sale, the company has reclassified its cable TV segment as discontinued operations in the company's financials.

For the third quarter of fiscal 2019, we reported revenues of $17.6 million, which represents a 36% increase over the second fiscal quarter of 2019 and a 129% increase over the same period in 2018. As a reminder, the Fulton transaction closed in Q2 of 2019, so its inclusion represents a large part of the growth from the same period in 2018.

We also reported positive adjusted EBITDA of $425,000 compared with losses in previous quarters, including the same period of 2018. This improvement in financial performance was driven by growth in both the wireless and the Telco segments, reflecting our increased focus on these markets.

Our wireless segment reported sales of $8.7 million in the third quarter of 2019, as we continue to integrate and to ramp up Fulton's operations following its acquisition on January 4 of this year. We are pleased to note this represents a doubling in Fulton sales from the second fiscal quarter of 2019. We also saw an improvement in gross margin at Fulton of $0.8 million, a strong increase over Q2 of this year.

In addition, we continue to see strong momentum in our telecommunications segment, reporting a revenue increase of $1.2 million or 15% to $8.8 million compared to the same period in 2018.

Now I'd like to update you on the company's 2 segments: wireless and telecom. Beginning at Fulton, our wireless infrastructure services business, Fulton currently provides construction services to wireless communication companies across the southwest, midwest and northern plains regions. These services mainly consist of the installation and upgrade of technology on cell sites and the construction of new small cells for 5G.

We're also looking to broaden Fulton's suite of services by introducing additional complementary services such as engineering, site acquisition and commissioning and integration of cell sites over the next 12 months.

Fulton has a strong reputation in the market and holds multi-year services contracts, which drove sales momentum during the quarter. As part of the acquisition, we were able to hire and retain the majority of Fulton's existing employee base, making the integration seamless and allowing the workforce to focus on executing its contractual relationships with the 4 major U.S. wireless carriers, national integrators, tower companies and OEMs that support the industry.

Over the next several quarters, we plan to implement several operations and project management improvements at Fulton to improve productivity, efficiency and margins. To support the scaling of the business, we are also expanding Fulton's management talent and suite of services.

We are encouraged by the opportunities we see unfolding in the industry as wireless carriers prepare their networks and roll out 5G, including the required densification of their existing networks. This is expected to drive continued sales growth for the wireless segment over the upcoming years. Other market drivers include the upcoming merger of T-Mobile and Sprint, as well as the addition of DISH Wireless to the industry. This will present additional opportunities as networks are rationalized and a new carrier expands its network to gain market share.

We believe that Fulton will continue to provide strong revenue growth and more gradual improved margins as it executes on the growth opportunities in the market. To support the scaling of the business, we will continue to solidify our processes and position Fulton to take advantage of new growth opportunities in both its current markets as well as new ones as we determine our readiness for geographic expansion. Although there is still much [work to do by Fulton] over the next several quarters, we believe that Fulton will continue to provide strong revenue growth and gradually improve margins with some seasonal and climate variability from its northern operations.

We also reported strong results in our Telco segment from both Nave and Triton as our operational improvements contributed to revenues of $8.8 million for the 3 months ending June 30, 2019, compared with $7.7 million in the same period last year.

Notably, the Telco segment reported positive adjusted EBITDA of over $0.5 million compared with a loss of $0.3 million in the third quarter of 2018. This was the second quarter in a row that the Telco segment reported positive EBITDA, and we are encouraged to see the operational changes made last year at Nave are taking hold and driving sustained, improved margins.

The improved adjusted EBITDA results are mainly attributable to Nave, which benefited from its new warehousing and operations location and partner, driving improved efficiencies and enabling us to offer a higher-quality service to our customers. Nave also benefited from a nice improvement in its recycling business line.

Looking ahead, we will continue to focus on our core business, while also ramping up our repair activities, to take advantage of our new capabilities and expanded business lines. The higher Telco segment sales were primarily driven by Triton's improved performance, which we expect to continue with its upcoming move to its new facility in Pembroke Park, Florida, which begins next week. This move will enable us to streamline and improve our processes such as inventory management, shipping and receiving and refurbishment operations.

The facility is also larger than our existing one, enabling us to develop the internal systems necessary to expand our refurbishment offering, which is Triton's highest margin segment, and also grow new equipment sales by adding additional product lines and manufacturers.

This, together with our strategy to grow the brokerage business and internet sales, is expected to increase results and market share at Triton. We believe that these initiatives will allow Triton to expand, capture additional market share and develop new customers. We are encouraged by our recent progress, and we'll continue to build our wireless and telecom businesses to achieve long-term sustainable growth.

With that, I will now turn the call over to our CFO, Kevin Brown. Kevin, please go ahead.

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Kevin D. Brown, ADDvantage Technologies Group, Inc. - CFO [4]

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Thank you, Joe. As Joe mentioned, on May 29, 2019, at a special shareholders meeting, the company's shareholders voted in favor of selling the company's cable TV segment to Leveling 8 Inc. which is a company controlled by David Chymiak. David Chymiak is a Director and substantial shareholder of the company and was formerly the Chief Technology Officer and President of Tulsat (inaudible) until the closing of sale on June 30 of this year. As a result of the sale, ADDvantage has reclassified the cable TV segment as discontinued operations in the company's financials.

For the fiscal third quarter of 2019, our total sales increased 129% to $17.6 million from $7.7 million for the same period of last year. The increase in sales was in the wireless segment and Telco segment of $8.7 million and $1.2 million, respectively.

The wireless segment sales increase of $8.7 million was a result of the acquisition of Fulton Technologies, which closed on January 4, 2019. The company did not report any revenues for the Wireless segment for the same period in fiscal 2018.

The Wireless segment's revenue increased $4.5 million, representing a quarter-over-quarter sales growth of over 100%. Sales for the Telco segment increased $1.2 million to $8.8 million for the 3 months ended June 30, 2019, from $7.6 million from the same period last year. The increase in sales for the Telco segment was due to an increase in equipment sales and recycling revenue of $1 million and $0.2 million, respectively. The increase in Telco equipment is due primarily to increased sales at Triton Datacom of $1 million. The increase in recycling revenue was primarily due to the timing of recycling shipments.

Our consolidated gross profit increased $1.3 million to $3.3 million for the 3 months ended June 30, 2019, from $2 million for the same period of last year. Gross profit margin percentage decreased overall from 26% to 19%. This is due to the inclusion of our wireless segment at 10% gross margin, while the Telco segment increased slightly to 27%.

Consolidated operating and general administrative expenses were $3.3 million in the fiscal third quarter of 2019 compared with $2.7 million in Q3, 2018. The increase in expenses was due to the addition of the wireless segment of $1 million, partially offset by a decrease in the Telco segment of $0.4 million.

Equity earnings for the 3 months ended June 30, 2019, were $20,000 compared with 0 for the 3 months ended June 30, 2018. Equity earnings for the 3 months ended June 30, 2019, consisted of payments received from the YKTG Solutions, former partners, related to amounts owed to the company. Our benefit for income taxes was $42,000 for the 3 months ended June 30, 2019, compared with $0.4 million for the 3 months ended June 30, 2018. Loss from continuing operations was $58,000 for the 3 months ended June 30, 2019, or roughly breakeven per diluted share compared with a loss of $0.3 million or $0.03 per diluted share for the same period of 2018.

Loss from discontinued operations net of tax was $1.4 million for the 3 months ended June 30, 2019. This is compared to a loss of $1.2 million for the same period last year. This activity included the operations of the cable TV segment prior to its sale on June 30, 2019. We've recognized a loss on the sale of the cable TV segment of $1.5 million for the 3 months ended June 30, 2019.

The cable TV segment also recognized a goodwill impairment charge of $1.2 million for the 3 months ended June 30, 2018. Net loss for the 3 months ended June 30, 2019, which includes discontinued operations, was $1.5 million or $0.14 per diluted share compared with a net loss of $1.5 million or $0.15 per diluted share for the same period of 2018.

Adjusted EBITDA for the 3 months ended June 30, 2019 was $0.4 million compared with a loss of $0.3 million for the same period ended June 30, 2018. Cash and cash equivalents were $2.7 million as of June 30, 2019, compared with $3.1 million (sic) [$3.2 million] as of September 30, 2018. As of June 30, 2019, the company had inventory of $9.1 million compared with $7.5 million as of September 30, 2018.

The company had $750,000 drawn on its revolving line of credit on June 30, 2019, which it has since paid off with the proceeds of the cable transaction. As a result of the sale of the cable TV segment to Leveling 8 Inc. which closed June 30, 2019, and the sales of 3 cable TV segment facilities to David Chymiak LLC, we will receive total proceeds of $14.2 million. These proceeds consist of $7.1 million in cash received to date from the facility sales; a receivable of $0.7 million, which was paid immediately after closing in July; and a promissory note of $6.4 million to be paid over 5 years.

This concludes the financial overview [segment] of our remarks. I will now turn the call over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we will hear first from [George Gaspar], who's a private investor.

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Unidentified Participant, [2]

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Congratulations on getting this transition taking place here. I'd like to delve into the Fulton revenue stream, if you wouldn't mind. If you could elaborate on it. It was double what you did in the first quarter, but I believe that was due to the fact that you were transitionalizing in the January quarter.

The -- can you outline the revenue stream that Fulton had produced in this past June quarter over -- the over $8 million number that you related? In other words, can you -- how much is, say, tower install or actual equipment install versus service on other units?

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [3]

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[George], this is Joe Hart. It's -- so far in the, I'll say, the formative stages of the Fulton transition, we're exclusively performing either tower installation, so we're upgrading and adding additional frequencies or technologies to existing cell towers. We've started to build a few new sites. And up in our northern operation based in Chicago, we also do a lot of special events, like big music festivals and Indianapolis 500 race, things like that. We do a lot of temporary specialty cell towers. Many of them are mobile cell towers, affectionally called COWs, for cell on wheels.

But -- so it's all tower-related construction services at the moment, both in the North and the South. I would characterize the growth as we got through the winter months up North, we stabilized the headcount in the employee base, we paid off bills that were past due from the prior owner and we reestablished Fulton's credibility in the marketplace. And then really in Q3, our Q3, we were able to really add a lot more crews, both in-house crews as well as subcontract crews. So we probably grew the workforce that we were using by a factor of about 2.25x, 2.5x, something like that, but that's continuing now in this current quarter. So we've really rebuilt the business and got it on solid footing, both North and South.

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Unidentified Participant, [4]

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Okay. And just a little further on that crew activity. When you came in and Fulton was acquired, if I recall, you had maybe about 6 crews or something like that. How many crews do you actually have in-house in Fulton now? And how many do you use on the outside? Or I'm sure that's a variable depending on the work that you have to do.

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [5]

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It is. That -- the in-house crew count doesn't change wildly. But we've probably doubled the number of crews in-house since we started, both North and South. And our ratio of subcontract crews to in-house is probably 2:1. So we always like to have a strong buffer of subcontractors so that we're not overinvested in in-house crews.

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Unidentified Participant, [6]

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I see. Okay. All right. And looking forward to what you would like to accomplish now, you're concentrated in the midwest and then the southwest. And how many facilities are you operating out of? One in -- say, one in Texas and one in the Midwest, is that how you got it organized?

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [7]

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Yes. We have the 2 facilities that were part of the acquisition. So in Dallas proper and in suburban Chicago in the city of Roselle. That's our 2 current facilities.

And then depending upon how the work migrates, we'll probably set up temporary facilities in Oklahoma or Minneapolis or Indiana where you can get small locations that you can rent for 6 months, 12 months, et cetera. It just depends on the migratory nature of the work and if we want to pursue it into some additional adjacent markets.

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Unidentified Participant, [8]

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Got you. Okay. Am I permitted to ask another question here?

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [9]

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As far as I'm concerned, you are.

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Unidentified Participant, [10]

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Okay. All right. This -- on Nave and Triton, can you break out in these 2 operations what amounts to service repair and new sales? If that's an appropriate question to ask in that manner. I appreciate if you could -- let me -- give me some additional information on that?

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [11]

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Yes. The amount of repair services has been small this year as we've made the transition through -- to move Nave down to Palco Telecom in Huntsville.

But I think I'm going to pass this one over to Don Kinison because this is what Don lives and breathes every day. So Don, why don't you want to give the splits on -- rough splits on new versus refurb?

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Donald E. Kinison, ADDvantage Technologies Group, Inc. - President of the Telecommunications Segment [12]

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So speaking kind of in both of the organizations, Triton as well as Nave, Triton's split of new versus refurb, [George], is generally similar in terms of the amount of new that we sell versus the amount of refurb. As we start ramping up Nave's repair services division, it's relatively small percentage as it relates to revenue today. But we anticipate ramping that into a higher growth segment in the future.

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Unidentified Participant, [13]

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In terms of -- if you could just describe a little bit more now, this transition that you're about to accomplish starting next week in Triton. Your -- if I recall, it's going from 9,000 square feet to 20,000. The concentration of effort, geographically, is that basically still for the Florida area? Or is it going to -- or are you extending it beyond there?

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Donald E. Kinison, ADDvantage Technologies Group, Inc. - President of the Telecommunications Segment [14]

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So geographically, we service the entire United States today in terms of our customer base. So geographically, we're not stuck to the Miami location. Now that being said, we're always looking at ways to improve our cost of goods with shipping and things of that nature by utilizing other facilities that we currently operate in. As an example, our facility in Alabama. So we're always looking at that. But the expansion of the facility down in Miami is primarily to expand our refurbishing platforms and widening line of equipment that we're going to be refurbishing and reselling to the community.

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Unidentified Participant, [15]

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I see. I see. Okay. And the emergence of the 2 companies, that is Nave and Triton, are they going to be kept separate in terms of connectiveness into -- as part of ADDvantage Technologies? Or maybe I'm not asking that right.

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [16]

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This is Joe again, [George]. I think that we're just at the very start of looking at our brand for both Nave, Triton, Fulton, ADDvantage. We're taking a new fresh look at all of that. And so I would say it's way too early to make any kind of prediction, but we're taking a hard look at it. And where it makes economic sense and would provide some pickup and some excitement around the brand name, we'll make those changes as we evolve here in the next couple of quarters. But at the moment, there is not a firm plan in either direction.

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Unidentified Participant, [17]

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Got it. Okay. And one last thing. Maybe this has to go back to [Kinison] there. But on Triton, what was your -- what is your employment now? And what is it going to be when the transition is completed in the next week or 2?

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Donald E. Kinison, ADDvantage Technologies Group, Inc. - President of the Telecommunications Segment [18]

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It is really going to stay the same, [George], from the employment standpoint. It's more about improving efficiencies, getting into a space where we can operate with much more efficient systems and procedures (inaudible).

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [19]

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And setup a professionally designed workflow. We -- because of the way Triton started out as a company, it went from 1 small little suite of, up and down, about -- what were they? About 2,500 square feet each or something, Don? And then it moved into a second, a third and a fourth suite, but it's been so cramped and just jampacked that they haven't been very efficient or able to grow. So we're moving into the new space. It's not -- as Don said, not so much a headcount-driven thing as a professionally designed workflow with the space to grow and be efficient. Which we believe will lead to better margins.

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Unidentified Participant, [20]

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And then overview to Joe there. Just -- it's a very exciting situation that is emerging here [at AEY] and considering that you only have 10 and -- well, approximately 10.5 million shares. And the opportunity that you have to move this revenue stream up on all the various areas now that you're operating in, and with cable out of the picture entirely, it could be very exciting. I hope that it all goes well, going forward for you.

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Operator [21]

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And with that, that does conclude our question and answer session. I'll turn the call back over to Mr. Joe Hart for closing remarks.

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Joseph E. Hart, ADDvantage Technologies Group, Inc. - President, CEO & Director [22]

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Thank you, operator, and thanks to everyone that joined us on the call today. I think you can hear it in our voices, but the sale of the cable TV segment marks a turning point for the company, and we're excited to capitalize on the opportunity by investing in the long-term growth of wireless and telecom.

ADDvantage now has a stronger and more efficient foundation to support both top and bottom line growth. Our growth initiatives in Triton and Nave have already led to improved results, and we can see significant room for sales growth in both of these businesses.

This, combined with the major opportunity at Fulton to grow market share in the expanding wireless infrastructure services market, leaves us well positioned to build value for you, our shareholders.

With that, I'll turn the call back to the operator to close down the call.

Thank you.

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Operator [23]

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And ladies and gentlemen, this will conclude your conference for today.

Thank you for your participation, and you may now disconnect.