We are in the thick of the calendar Q2 earnings season. This 2022 quarter in particular is a bit of an anxious one since we want to see many of the companies we cover start to follow through with hopeful statements they might have made several quarters back while covid disrupted business operations across the board.
Investors are getting weary, and as some larger cap companies are leading the way in what seems to be a stealthy market recovery, it could be an indication that this success is a macrocosm of things to come across the board.
A great example of a company that came to bat for us on an assumption that their fiscal Q3 2022 results would be one to prove that hopeful statements can come true is Addvantage Technologies Group, (NASDAQ:AEY). We covered this in a prior fiscal Q1 2022 earnings update, specifically noting this to a tee:
“As we mentioned after the Q4 release, despite the strong revenue growth, until the company reaches profitability, investors will remain extremely cautious as the company’s liquidity position remains an issue. The path to profitability has been pushed back over the last several quarters, originally slated for this quarter, and now it seems like a possible Q3 2022 event.”
On Thursday after market hours, AEY posted another record quarter in terms of revenue. But this time around, its bottom line flourished unlike a slew of previous quarters that failed to come through with any substantive profit milestones.
After AEY’s great fiscal Q3 earnings release, we were able to leverage our good relationship with the company to schedule an exclusive Morning Management Briefing with executives of the company on very short notice, the replay of which you can see here.This was the second Briefing that we had with AEY, with the first one taking place shortly after their Q2 results. Prior to that, in 2019, we sat down with AEY management via a live (unrecorded) Fireside Chat as part of our due diligence into the company.
At one point during last weeks briefing call, Maj Suggested that supply chain bottlenecks were helping the company’s telecom division that sells used and refurbished equipment, but was wondering if the new $50 billion semiconductor bill just passed by Congress will start filling the supply chain gap and slow down the growth of the division. The company’s CEO, Joe Hart, responded and actually downplayed the supply chain growth-catalyst-assumption and pivoted to what he thought were the 2 real reasons for the strength in the telecom business and the transformational quarter:
The long term growth tailwinds in some of the markets it’s telecom business targets (optical and fiber networks), and to whom they are selling.
The flexibility on the financial side of things after the company paid and closed down a $3 million line of credit that was hampering the ability of the company to grow and put a new individual in charge of the telecom division to implement more effective ways to finance the business.
Joe Hart, along with his CFO, Michael Rutledge, can be seen/heard elaborating on this point in the following clip.
Needless to say, although it’s currently a loss for us, we are happy that the stock is still on our Faves list, where it did actually peak at a 188% gain during its current tenure in the Model Portfolio.
We had lost a little conviction in the stock due to its inability to perform for us, along with some other factors that were talked about in our June 2022 Open Forum, but now we are wondering if the company has just set a new EPS run rate that can either be sustained or improved upon.
After all, their intentions are to move forward with what they’ve now shown is achievable on the bottom line, especially at any revenue number:
“If I could, we’re trying to make sure that we’re positive net income at a lower revenue number. So we wouldn’t want to have to have the victory quarter all the time. Right? Where it’s another record, it’s another record quarter…We’ve got to be able to make money at the steady state levels, without the ramps up in revenue. So that’s our goal, right? Metrics are all based around a lower revenue level.”
We view these as smart management comments. It’s obvious that they are growing revenue, and an intention to improve profitability only shows us that when/if they do report another record quarter, we could be in for a longer term runup in stock price, at the same time presented with downside protection if the company can maintain meaningful profitability.