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Edited Transcript of AEY earnings conference call or presentation 15-May-17 4:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 ADDvantage Technologies Group Inc Earnings Call

BROKEN ARROW May 22, 2017 (Thomson StreetEvents) -- Edited Transcript of ADDvantage Technologies Group Inc earnings conference call or presentation Monday, May 15, 2017 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David E. Chymiak

ADDvantage Technologies Group, Inc. - Chairman of the Board, CTO, VP, President of Tulsat Corp and Director of Tulsat Corp

* David L. Humphrey

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

* Garth Russell

Kanan, Corbin, Schupak & Aronow, Inc. - MD of the IR Team

* Scott A. Francis

ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary

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Presentation

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Operator [1]

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Good day, and welcome to the ADDvantage Technologies Second Quarter 2017 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over the Garth Russell of KCSA Strategic Communications. Please go ahead, sir.

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Garth Russell, Kanan, Corbin, Schupak & Aronow, Inc. - MD of the IR Team [2]

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Thank you. 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 results or events 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 filed earlier today as well. The guidance regarding anticipated future results on this call is based on limited information currently available on the company, which is subject to change. Although any such guidance and factors influencing it may change, ADDvantage Technologies expressly disclaims any intent or obligation to 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, addvantagetechnologies.com, you'll find a reconciliation of these non-GAAP financial measures with the closest GAAP financial measures 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'd now like to turn the call over to Mr. David Humphrey, President and Chief Executive Officer of ADDvantage Technologies. David, the floor is yours.

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [3]

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Thank you, Garth. Welcome, everyone, to the ADDvantage Technologies Fiscal Second Quarter 2017 Conference Call. With me today is Dave Chymiak, our Chief Technology Officer; and Scott Francis, our Chief Financial Officer. Before I turn the call over to Scott to provide the detailed financial results, I want to provide an update on our recent performance and briefly comment on our ongoing strategic initiatives.

Our sales in the second quarter fiscal 2017 increased 7% compared to last year, which include sales from our new subsidiary, Triton Datacom, which offset sales declines for the remaining Telco business and our Cable TV business. Sales from our Cable TV segment decreased $1 million to $5 million for the second quarter compared to the same period last year. While the Cable TV segment has had several consecutive quarters of consistent sales performance, the overall market continues to face certain headwinds which can impact our results from time to time. However, this segment continues to generate solid operating results and positive cash flows for our company and we will continue to work with our sales team to gain greater market penetration within the Cable TV market for both equipment sales and repairs.

Turning to our Telco segment. The Triton business is comprised of the assets we acquired in October of 2016, which sells new and refurbished enterprise network products, including white desktop phones, enterprise switches and wireless routers. These assets generated steady growth ahead of the acquisition, which we expect to continue as part of ADDvantage. Thus far, we have been pleased with Triton's operating results. The remaining portion of the Telco segment, Nave Communications, has experienced lower sales over the last few quarters and the operating results of this business are performing below our expectations. As I've discussed over the last few calls, we're working on several fronts to improve the top line results and overall operating results of this business. To help lead this effort, we recently hired Don Kinison as VP of Sales for our company. Don has tremendous telecommunications sales experience, and we believe he will be a great asset helping Nave improve its operating results. Although Don's initial focus will be to help Nave improve its sales performance, Don will also have responsibility for directing the sales teams across all of our businesses. We expect Don to be a valuable resource as we continue to execute our growth strategy.

To summarize the second quarter, the Triton Datacom acquisition continues to deliver sales growth to our top line and we believe it will be a source of solid growth for the remainder of fiscal 2017. We remain focused on supporting the remaining Telco segment in an effort to significantly improve the recent disappointing sales performance. Our new VP of Sales has taken on this effort, which will be his core near-term focus. Although sales for the Cable TV segment were disappointing this quarter, it continues to be consistently profitable for us. In addition, we continue to work on organically growing top line revenue in this segment and we believe Don will be a key contributor to achieve this growth.

With that, I will now turn the call over to Scott Francis, our Chief Financial Officer, who will take you through the financial results in more detail.

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [4]

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Thank you, David. For the first -- for the fiscal second quarter of 2017, total sales increased 7% to $11.3 million from $10.6 million for the same period of last year. Sales for the Cable TV segment decreased $1 million to $5.0 million for the 3 months ended March 31, 2017, from $6 million for the same period of last year. The decrease in sales was due primarily to a decrease in new and refurbished equipment sales of $1.1 million and $0.2 million, respectively, as a result of softening demand in the past quarter. The decrease was partially offset by an increase in repair sales of $300,000.

Sales for the Telco segment increased $1.8 million to $6.4 million for the 3 months ended March 31, 2017, from $4.6 million for the same period of last year. The increase in sales for the Telco segment was due to an increase in used equipment sales and recycling revenue of $1.7 million and $100,000, respectively. The increase in Telco used equipment sales was primarily due to Triton Datacom, which offset the continued lower sales from the remaining portion of this segment. The company is continuing to address the lower sales in this segment by expanding its sales force, targeting a broader end-user customer base, expanding the capacity of our recycling program and testing the used equipment inventory prior to sale to our end-user customer base. In addition, as David discussed earlier, Don Kinison will initially be focused on this segment to help improve their overall sales performance and market strategy.

Our consolidated gross profit increased $200,000 or 5% to $3.8 million for the 3 months ended March 31, 2017, from $3.6 million for the same period of last year. The increase in gross profit was primarily due to an increase in the Telco segment of $300,000, offset by a decrease in the Cable TV segment of $100,000. Our gross margin in the Cable TV segment was 35% for the 3 months ended March 31, '17, compared to 32% for the same period of last year. Our gross profit margin for the Telco segment decreased to 32% for the 3 months ended March 31, '17, from 36% for the same period of last year. This decrease was due primarily to lower gross margins from equipment sales related to Triton Datacom as well as lower gross margins for used equipment sales for the remaining portion of this segment as a result of an increased percentage of sales to resellers, which traditionally have lower gross margin as compared to our end-user customer base.

Our operating, selling, general administrative expenses increased $400,000 to $3.7 million for the 3 months ended March 31, '17, from $3.3 million for the same period of last year. This increase in expenses was due primarily to increased expenses in the Telco segment, resulting from increased operating expenses of $500,000 related to Triton Datacom as well as Triton Datacom earn out expenses of $100,000. These increases were partially offset by the absence of earn out expenses of $200,000, which were recorded in the 3 months ended March 31, 2016, related to Nave Communications. Our net income for the 3 months ended March 31, 2017, was $11,000 compared with a net income of $146,000 or $0.01 per share for the same period of last year. Our consolidated EBITDA decreased $100,000 to $500,000 for the 3 months period ended March 31, '17, from EBITDA of $600,000 for the same period of last year. The Cable TV segment EBITDA decreased $100,000 to $300,000 for the 3-month period ended March 31, '17, from $400,000 for the same period of last year.

The Telco segment EBITDA remained relatively flat at $200,000 for both the 3 months ended March 31, '17, and '16. For the 6 months ended March 31, 2017, our total sales increased 24% to $23.4 million from $18.8 million for the same period of last year.

Sales for the Cable TV segment increased $600,000 to $11.6 million for the 6 months ended March 31, '17, from $11 million for the same period of last year. The increase in sales was due to an increase in new equipment sales and repair sales of $300,000 and $700,000, respectively, partially offset by a decrease in refurbished equipment revenue of $400,000. The increase in new equipment sales was due primarily to increased sales to a few of our customers in the first quarter of '17, partially offset by a general decrease in demand in the second quarter. The increase in repair sales was due primarily to expanding our repair sales with one of our major customers.

Sales for the Telco segment increased $4 million to $11.9 million for the 6 months ended March 31, '17, from $7.9 million for same period of last year. The increase in sales for the Telco segment was due to an increase in used equipment sales and recycling revenue of $3.8 million and $400,000, respectively, partially offset by a decrease of new equipment sales of $200,000. The increase in Telco equipment sales was primarily due to Triton Datacom, which offset the continued lower sales from the remaining portion of the segment. We did recognize revenues from Triton Datacom starting on October 14, 2016, which was the date of that acquisition.

Consolidated gross profit increased $1.5 million or 23% to $7.8 million for the 6 months ended March 31, '17, from $6.3 million for the same period of last year. The increase in gross profit was in both the Cable TV and Telco segment of $700,000 and $800,000, respectively. Gross profit margin for the Cable TV segment was 36% for the 6 months ended March 31, '17, compared to 32% for the same period of last year. The increase in gross profit margin was due primarily to higher margin sales on certain refurbished equipment sales. Our gross profit margin for the Telco segment decreased to 31% for the 6 months ended March 31, '16, from 36% for the same period of last year. The decrease in gross margin was primarily due to lower gross margins from equipment sales related to Triton Datacom and lower gross margin for refurbished equipment sales from the remaining portion of this segment as a result of an increased percentage of sales to our resellers, which, again, traditionally have lower gross margins as compared to our end-user customers.

Our operating, selling, and general administrative expenses increased $1.4 million or 23% to $7.3 million for the 6 months ended March 31, 2017, from $5.9 million for the same period of last year. This increase in expenses was due to the Telco segment of $1.4 million while the Cable TV segment remained relatively flat. The increase in the Telco segment is due primarily to operating expenses of $1 million from Triton Datacom, acquisition related cost of $200,000 and Trident Datacom earn out expenses of $100,000. These increases were partially offset by the absence of earn out expenses of $200,000, which were recorded in the 6 months ended March 31, '16, related to the Nave Communications acquisition.

Net income for the 6-month period ended March 31, '17, was $228,000 or $0.02 per diluted share compared with $170,000 or $0.02 per diluted share for the same period of last year. Our consolidated EBITDA increased $400,000 to $1.4 million for the 6 months period ended March 31, '17, from EBITDA of $1 million for the same period of last year. The Cable TV segment EBITDA increased $700,000 to $1.3 million for the 6-month period ended March 31, '17, from $600,000 for the same period of last year. The Telco segment EBITDA decreased almost $400,000 to $50,000 for the same -- for the 6 months ended March 31, 2017, from $430,000 for the same period of last year. The Telco segment EBITDA includes the impact of Triton Datacom acquisition related cost of $200,000 as well as Triton Datacom earn out expenses of $100,000.

Cash and cash equivalents were $3.9 million as of March 31, '17, compared with $4.5 million as of September 30, 2016. The decrease in cash was due to cash used in investing activities of $5.5 million, offset by cash provided by operations and financing activities of $1.9 million and $3 million, respectively. The cash used in investing activities resulted primarily from the acquisition of Triton Datacom for $6.6 million and the first annual installment related to -- excuse me, and the final annual installment related to the Nave Communications acquisition of $1 million. This was partially offset by payments received on our note to the YKTG Solutions joint venture of $2.2 million. The cash provided by financing activities was due to cash borrowings of $4 million to finance the Triton Datacom acquisition, partially offset by principal payments on our notes of $1 million. As of March 31, 2017, the company had net inventory of $22.1 million compared with $21.5 million as of September 30, 2016. Earlier this year, YKTG Solutions elected to suspend their project with a U.S. wireless provider and therefore started to wind down this project. In March 31, '17, the company had an investment in and loans to YKTG Solutions of $400,000. After considering payments, we have received $2.2 million for the 6 months ended March 31, '17. We still believe that the $400,000 is collectable based on our outstanding billings owed from this wireless provider [less] any vendor payments still owed under this project.

This concludes the financial overview section of our remarks. And I'll 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'll go to [George Gaspar.]

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Unidentified Analyst, [2]

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First, let's talk about the Cable area, this decline in volume. How does it look going forward in this quarter? And do you see some turnaround out there, or is this going to be a continuing situation that could stay in the focus the rest of the year?

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David E. Chymiak, ADDvantage Technologies Group, Inc. - Chairman of the Board, CTO, VP, President of Tulsat Corp and Director of Tulsat Corp [3]

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[George], this is David Chymiak. The business is in a little bit of a turmoil right at the moment trying to decide which way they're going to go. We're starting to see orders starting and coming on, and back orders starting to go out. I do not expect it to continue for the year by any means (inaudible) 6 months. We are seeing an increase in business a little bit right now, but we won't know how that is for the next 3, 4 months total.

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Unidentified Analyst, [4]

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Okay. Okay. Is there anything different going on in the industry that -- where do you see the negatives in terms of the environment, and where's the positive?

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David E. Chymiak, ADDvantage Technologies Group, Inc. - Chairman of the Board, CTO, VP, President of Tulsat Corp and Director of Tulsat Corp [5]

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There's discussions all the time out there of different ways the cable companies could go. Some of them are talking about putting all nodes out there and [lessening] up the fires. Problem with that is there's a big shortage of fiber right now. And on top of that, there is a shortage of the gear that they would be using. This usually leads to helping us, but we're seeing less and less used here on the market right at the moment.

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Unidentified Analyst, [6]

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I see. Okay. Right. And then a question on the Triton Datacom. The actual sales generated in the quarter for that operation were how much again?

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [7]

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George, we don't report those separately, but we'll point out the reason we're making a distinction between the 2 because the Triton to so new and it's having such a significant impact on our financials. But it's really not our intention to differentiate between the 2 operating companies within that division.

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Unidentified Analyst, [8]

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Okay. And can you talk about this? Now there were some unusuals in the quarter associated with Triton, I would assume. And what part of that disappears in the current quarter going forward and also, going forward in terms of cost structure? Is it -- am I right on that, that there's going to be a reduction or is there going to be an increase in unusual charges?

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [9]

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George, this is Scott. When we're talking about the unusual activity or the -- those are the primary acquisition-related cost. Those will not occur anymore because the acquisition is completed. Those are primarily done in October to December time frame when we did the acquisition. Now the earn out expenses will continue and actually we hope they will, right, because the more they make, the more the earn out, which is all good for everyone, right? So I wouldn't necessarily characterize those as unusual. We always pull those out just to give the investors the idea of, after the 3-year period, how much do we think EBITDA will then increase, right? Does that help?

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Unidentified Analyst, [10]

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Yes. And now I understand that the payouts on the Nave side are over, correct?

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [11]

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That is correct.

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Unidentified Analyst, [12]

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Okay. So what was it? $200,000 in this past quarter?

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [13]

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No, that was in -- so what we were -- what was described in there was it was $200,000 was last year. So that was basically -- effectively caused an increase for this year because there was a $200,000 expense recorded last year.

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Unidentified Analyst, [14]

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I see, I see. Okay. And can you talk a little bit more about the joint venture going-forward process? Now there isn't any decommissioning -- tower decommissioning, I assume, underway anymore at this point in time. But what's your target for getting out from under so that -- do you have prospects for breaking even with the target on it or don't you have?

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [15]

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So what we have recorded right now is left over is $400,000 for which we are pretty comfortable that that's going to be able to be collected. Now as far as the remaining balance, I mean, I haven't gotten to see the Q yet, we have a total out there of a little over $1 million. The way we have this recorded right now, though, we're in good shape with no -- unfortunately no positive but also no negative impact to us in the year 2017 at this point. Last year, we actually did record positive income related to YKTG in total. So at the end of the day, it's just not going make it nearly as much as we were hoping but at least won't be a negative for us. And the good news is on our balance sheet right now, we believe the way we have it recorded is not going to -- again, it's not turning out the way we're all hoping but it won't yield a negative on our income statement and we're seeing the cash come in, it will -- and so I think it will take us still next -- it won't be all collected this next quarter just because of the way the payment stream is working. But it should. I'm hoping by 9/30 have almost all of that in.

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Unidentified Analyst, [16]

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Okay. And do -- can I -- do I assume that there's no probability that the stop and the decommissioning -- tower decommissioning is not going to reverse in terms of where you're standing on this joint venture, correct?

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Scott A. Francis, ADDvantage Technologies Group, Inc. - CFO, CAO, VP and Secretary [17]

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I would tell you right now that with what we know at this point, I don't anticipate us kicking it back in. But it doesn't mean that people won't have change of hearts with the way things are assigned. Unless that is changed, we will not get back into the game.

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Unidentified Analyst, [18]

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I see. Okay. And then if I could go back on telecom side. What do you see for Nave going forward from where you are now? And is there anything positive to be looking for out of that situation?

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [19]

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Yes, I think so, George. Nave's got solid inventory. We've talked in the past about now we're testing equipment, which enhances both the revenue and the probability of selling some of that equipment. We weren't doing that in the past. We've added a shredder to their operations, which means they can process more scrap. So I think we've got a number of positives. Of course, we mentioned on the call twice, we've added a new VP of Sales. We -- and their primary focus will be on Nave Communications initially.

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Unidentified Analyst, [20]

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I see. Okay. And in terms of going forward, you've got enough on your plate now with the acquisition that you made of the Triton Miami. So I assume that the emphasis within the company by management is to concentrate on what you have internally. And your -- the composition of your operating areas and not to look any further at acquisitions at this point.

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [21]

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Yes. I'll qualify that. Your answer -- the answer to your question is that is absolutely true. Our focus is on the 2 divisions, 3 operating companies, if you will, that we have under the fold right now. Continue to push out Triton to continue its growth model that it had at the time of the acquisition. Get Nave turned around. Dave, he's just going to keep doing the things he does and we'll try to give him some extra opportunities to sell additional products beyond the product line he has today. And again, he's got a solid inventory to sell out of. Long term, of course, our goal is still to continue our acquisition strategy. The people in this room, the 3 here will all focus on that as will our new addition with Don. But for the short term, absolutely focus on the 3 -- on the 2 operating divisions.

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Unidentified Analyst, [22]

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Okay. And one -- and I'm not sure I mentioned this on the previous call, but I strongly recommend that you all talk to Value Line about getting your data into the small cap composition that Value Line runs. There are -- your company, in terms of revenue stream, is basically twice some of the companies that are listed in that small cap outline that they use and it's very -- it's an excellent outline. I'm really kind of surprised that ADDvantage Technologies isn't in it. So somebody there might just have some conversation with them and see what it takes to be included in it.

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [23]

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Very good. Thank you. Appreciate that, [George].

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Operator [24]

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We have no further questions at this time. I'd like to turn the conference back over for any additional or closing remarks.

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David L. Humphrey, ADDvantage Technologies Group, Inc. - CEO, President and Director [25]

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Thank you, operator. Before we conclude the call, I would like to reiterate that we are making strategic investments in the business, including the hiring of VP of Sales and supporting his efforts to enhance the capabilities of our sales teams. We have a solid infrastructure in place and the team is very capable. In particular, the changes that the Nave Communication business faces will not be overcome by just one hire nor will they be diminished overnight. However, the market opportunity is there and we will bring together the people and infrastructure needed for it to succeed. I'd like to thank our shareholders for their loyalty, support, and patience as we continue to build value together. Thank you, all.

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Operator [26]

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Thank you for your participation. That does conclude today's conference. You may now disconnect.