Kratos Defense and Security Solutions Inc (KTOS) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wireless Facilities Incorporated second quarter earnings conference call. Your speakers for today are Dr. Masood Tayebi, Chairman and Chief Executive Officer, Mr. Tom Munro, President and Mr. Terry Ashwill, Executive Vice President and Chief Financial Officer.

At this time, all participants are in a listen only mode. After the three speakers have concluded their prepared remarks, we will conduct a question and answer session. As a reminder, this call is being recorded today, August 7th, 2002.

I will now turn the conference over to Ms. Page, assistant treasurer who will read the company's warning regarding forward-looking statements. Go ahead, Ms. Page.

Thank you for joining WFI's second quarter 2002 conference call. A reply of today's call will be made available through August 9th, 2002 by dialing 800-633-8284 using the reservation number of 20759149. Additionally, the conference is being broadcast live on our web site at www.wfinet.com. The call will be archived there for several weeks.

Our comments today contain certain forward-looking statements that involve risk and uncertainty. Words such as anticipate, expect, project, intend, plan, believe, may, will and similar expressions are intended to identify forward-looking statements and specifically include the following. That the prospects for the wireless telecom sector are better than the telecom industry in general and that our largest customers continue to move forward with their technology upgrade projects.

That our market position is improving. That we will provide additional types of services either directly or in combination with industry partners to our traditional wireless clients and to enterprise clients outside of the wireless telecom industry. That outsourcing will offer significant operational efficiencies to our clients foster the trend towards outsourcing and that we are well-positioned to take advantage of this opportunity. That about 20 percent of our head count will be composed of employees hired on a project status by year end and that good levels of employee resources are available for future projects. That offering integrated solutions including project management, material procurement, engineering and site development is a competitive advantage by offering our clients a capital efficient service model.

That operational scale has become a competitive factor fostering a trend towards larger players bidding projects jointly or in partnership and that our financial performance can continue to improve in an environment where sales cycles are longer and fewer projects are available with tighter margins. Such statements are only predictions and the company's actually results may differ materially from those anticipated.

Factors that may cause the company's results to differ include, but are not limited to changes in the scope or timing of the company's projects, continued and additional slowdowns in telecommunications infrastructure spending in the United States and globally, consolidation of loan or the loss of key customers, recruiting or retaining key employees and managers, rate of new wireless data services, potential losses arising from business transactions and the company's restructuring as the part of this new variable cost business model, changes in the company's effective income tax rate and severance related expenses and competition in the marketplace which could reduce revenues and product margins.

These and other risk factors are more fully discussed under risk factors and elsewhere in the company's readily available annual report on form 10K filed on March 19, 2002 with the Securities and Exchange Commission. In response to the SEC's regulations for disclosure, any forecast that revenue and earnings will only be provided within quarterly earnings conference calls or press releases or through specific regulatory filings.

These forecasts will be as of the date of the call, the release or the filing and will include estimates based on factual information, as well as certain assumption which management believes to be reasonable at that time. WFI assumes no obligation to update any such projections at any time. WFI will continue to provide additional company information on its Web site including press releases, conference calls, and other company information.

Our comments today will be delivered by Dr. Masood Tayebi, CEO, who will highlight our results and give an overview of industry conditions. Tom Munro, President, who will recap our operating results and Terry Ashwill, CFO, who will review the company's financial performance. I will now turn the call over to Masood Tayebi.

Thank you .

We are very pleased to report an excellent quarter. During the second quarter of 2002, WFI returned to profitability, outpacing the earnings guidance issued a quarter ago as well as the published analyst expectations. Our planning has called for sequential revenue growth of five percent and instead the company was able to deliver a 16.7 percent increase.

We generated cash from operations. We were able to access the capital markets on very favorable terms and we improved our market position. The company's results on almost every important operating metric, income statement item and balance sheet ratio showed improvement for the quarter.

Our quarterly results stand in sharp contrast to the reported state of the wireless telecom industry. This market remains a very difficult environment to operate in and is characterized by limited access to capital even for the wireless industry leaders. have carried our capital spending plans.

Over the past few quarters we have seen a series of downward to publish industry cap acts forecast and the possibilities of industry consolidation which creates an additional layer of industry uncertainty. Against this negative backdrop, we are seeing more - some positive indicators.

Our largest customers continue to move forward aggressively with their technology upgrade projects. The wireless subscriber accounts of most U.S. carriers met or exceeded forecast and carrier revenue seem to be holding out despite fierce competitive pressures.

In our domestic operation during the quarter we won and started a number of projects with our large U.S. customers. Our international operations remain steady despite the ongoing weakness in Latin America with revenue flat compared to first quarter. In Europe we have won a number of small yet important projects that have helped to grow the region.

We believe that our own positive performance in the quarter has come from a combination of factors. Our market position has improved relative to our peers and there has been a general shakeout of the smaller financially marginal competitors. Our business development efforts, particularly our strict focus on top tier carriers and vendors, has been successful and we have established ourselves as a strong supplier of quality services to the leading companies in the wireless industry.

Tactically, the changes we have made in the past quarter to our cost structure and to our operating model have paid off. We have improved our staff utilization, reduced our fixed costs and positioned our company to succeed in a volatile market.

Strategically, we continue to work to expand our business in three areas. Over the next few quarters we plan to add additional services for our traditional wireless clients and we are reviewing the needs of both carriers and vendors to ensure that we offer an appropriately comprehensive line of services, either directly or in combination with industry partners.

We also continue to energetically pursue the outsourcing model, which we believe can offer significant operational efficiencies to our clients. To that end we recently announced a strengthening of our management team by the addition of Greg Jacobson, who joined us in the newly established role of Executive Vice President and President of Outsourcing. Greg comes to us with 23 years of experience in communications, information technology and outsourcing and was most recently CEO of Encoda Systems, a global provider of software and outsourcing services to the media industry. We are confident that Greg's outsourcing experience will help define and deliver a new model of operational outsourcing for the wireless industry.

Finally, we are also exploring opportunities to make our world class network design and deployment and management capabilities available to enterprise clients outside of the wireless telecom industry.

While this was a solid quarter for WFI, despite the ongoing challenges in the economy, we continue and will continue to focus on what we can control and the results speak for themselves.

We are, of course, not satisfied at our recovery or the industry is complete. However, we remain committed to maintain the financial and operational discipline that has resulted in the company's improved situation.

We appreciate the support of those investors who have stayed the course through our transition. We believe, as they do, that wireless remains a growth industry and the trend towards outsourcing should benefit WFI.

Our gratitude extends beyond shareholders to the very core of our success, the professional women and men of WFI who daily prove that they add value in this wireless world.

I will now turn the call over to Tom Munro, our president.

Thanks, Masood.

During the second quarter our revenue growth was driven by the ramp up of our Cingular overlay project and by a number of project starts on smaller but important engagements for VoiceStream, Verizon, AT&T Wireless and others. Our partnership with Nextel has been positive and productive and we continue to see contract extensions and repeat business from our client base.

The equipment vendors remain an important source of revenue, as many of our vendor clients have outsourced their technical services activities.

During the quarter WFI executed projects with Nortel, Ericcson, Siemens, Nokia and Motorola.

In aggregate, equipment vendors were the source of 13.4 percent of second quarter revenues.

Among our business segments there was little change for the quarter: 74.8 percent of our revenues came from network design and deployment activities. Our pre-deployment consulting efforts also kept pace with our growth at a constant 3.2 percent of revenues, with continued strength from our European consulting groups, 3G business planning activities. Those deployment revenues were 22.0 percent of the total.

Our largest customer relationship for the quarter was with Cingular which represented 23.9 percent of revenues, both through our Nextel relationship and directly with the carrier. Our top customers in the quarter were AT&T Wireless at 23.5 percent, again both directly and through Nextel, at 8.1 percent, Verizon at 5.8 percent and Nortel at 4.9 percent.

Our percentage of international work dropped slightly to 23.1 percent in the second quarter from 25.9 percent in the first. While our Latin American operations reported solid second quarter revenues, overall wireless industry conditions in Mexico and Brazil are softening in an echo of the US experience that began several quarters ago. In both markets, we have downsized our staff to match only the specific contracts presently in process.

Our Europe and Middle East operations started new engineering contracts in Turkey and Israel and our European consulting group is operating at a record level of utilization.

On the staffing front, we ended the quarter with 1406 employees, down from 1509 at the end of the first quarter. A 6.8 reduction despite revenue growth of 16.7 percent. At quarter end, 8 percent of our domestic headcount was comprised of employees hired on a project status and we forecast this figure to reach about 20 percent by year end. We continue to see a large number of unsolicited resumes indicating that the great pool of talent is available for future projects.

Reviewing the challenges that face our clients, some trends emerge. Access to the capital markets is limited for many of our customers, while at the same time they face a number of competing priorities that require new capital investments. New technologies are being deployed, market coverage is being extended and many systems are operating above their designed capacity.

At the same time, our customers' organizations have become leaner and in many cases more centralized. Often they are working to actively reduce the number of supplier relationships they manage. Our response to this trend has been to emphasize our turnkey network development services. By offering an integrated solution that includes project management, materials procurement, engineering and site development, we believe we offer our customers a very capital efficient model.

Our customers are also facing acute pressures on their operating budgets. Subscribers are buying and using more minutes, but revenue per user has remained relatively constant. Our response to this challenge has been to emphasize the benefits of operational outsourcing. We believe that significant efficiencies are available from the outsourcing of recurring network management tasks, particularly in situations where multiple similar networks are being operated.

We also believe that the outsourcing concept will extend logically to those routine design and development tasks required to enhance coverage or to periodically add capacity to networks. Outsourcing has gone from a novel in telecom to an integral part of operations for all of the equipment vendors and is being evaluated by a growing number of carriers. We believe that we're well-positioned to take advantage of this trend and I'll join Masood in welcoming Greg to our executive team to help meet this need.

On the competitive front, we continue to observe the operational scale and capacity to solve a significant problem for a carrier across a national network has become an important competitive factor. The shakeout of smaller supplies in our industry has continued and it has become more common for even the larger players to bid projects jointly or in partnerships. We are facing a longer sales cycle than in the past as fewer larger projects are available and we're faced with tighter margins. The fewer projects available are more visible and the competitive environment is intense. But our financial results for the quarter suggest the longer sales cycle has been offset by the availability of larger longer term projects from better customers and our improved cost structure has helped us to remain competitive despite the pressures on gross margins.

Overall we're very pleased with the transition that the company has gone through and we feel that we're well prepared for the quarters ahead. I'll now turn the call over to Terry Ashwill, for his review of the financials.

Thank you Tom. Looking at the second quarter as an overview, WFI's financial results for the second quarter were very positive in nearly every category.

Revenues increasing. Revenue per head is increasing. Expenses are decreasing. Our net income is increasing. Our earnings per share are positive. Our cash is increasing. Our cash flow from operations is increasing. Our day sales outstanding are decreasing. And excluding capitalized lease obligations, we have not debt on our books and our equity is also increasing.

Several strategies have contributed to this significant improvement. First, our adoption of the variable cost model has successfully lowered our underutilization expense. Our preferred stock financings and emphasis on working capital management have eliminated most of our debt and interest expense in related line of credit charges.

Our credit policies, our tighter payment terms and close monitoring processes have improved our account receivable performance and reduced day sales outstanding. We have implemented across the board salary cuts. Also we have eliminated the expense related to redundant real estate.

These are just a few of the many actions we have taken to improve our financial model. Now looking at the income statement, begin with revenue. Revenue for the second quarter of 46.8 million was 6.7 million or 16.7 percent for the prior quarter. Both domestic and international operations accounted for this improvement. Gross profit, our gross profit of 11.8 million was $900,000 above the prior quarter.

As a percent of revenue, however, the second quarter was 25.2 percent, down two percentage points from the first quarter. This reflects the continuation of pricing pressure in a difficult operating environment. Looking at our SG&A expense, SG&A expense of nine million - 9.0 million, was 38.1 million below the reported number of 47.1 million for the first quarter.

Excluding the 28 million of special charges principally related to our adoption of the variable cost model recognized in the first quarter, SG&A for the second quarter was 10.1 million or 53 percent below the comparable first quarter number of 19.1 million.

Reduced underutilization expense was 3.4 million of the decline in SG&A expense from the prior quarter. Depreciation and amortization for the second quarter was 1.6 million including the 19.9 million-impairment charge related to goodwill and intangible accrued in the second quarter. The total D&A for the first quarter was 23.8 million.

Net after tax and earnings per share. Net after tax was 2.2 million for the second quarter versus a reported loss of 71.7 million for the first quarter. Excluding charges recorded in the first quarter, special charges, the loss would have been 4.1 million. Earnings per share for the second quarter was four cents per share.

Diluted shares for the quarter were 59.4 million versus 47.3 million in the first quarter. An increase of nearly 26 percent. Headcount. Headcount at the end of the second quarter was 1,406 employees, a 103 or seven percent headcount reduction from the prior quarter end.

Our revenue per average head was $133,000 for the second quarter, an increase of 23 percent from the first quarter primarily due to improved utilization.

Looking at our balance sheet, cash and debt: Total cash at the end of the second quarter of 76.1 million was 13.8 million or 22 percent higher than the first quarter. Net cash flow from operations was 8.8 million or 7.5 million ahead of the first quarter. This is the fourth consecutive quarter of positive operating cash flow.

Total debt for the second quarter was 4.5 million, which consisted entirely of capitalized lease obligations. Excluding those capitalized lease obligations of 4.5 million, the company has no debt outstanding.

Accounts receivable: Total net accounts receivable for the second quarter was 73.8 million, an increase of just $800,000 or 1 percent over the first quarter.

Our days sales outstanding decreased 22 days or 13 percent from the prior period.

Equity. In aggregate, our equity increased 46.3 million in the second quarter, of which 44.9 million related to the issuance of Series B convertible preferred stock. Total shareholders equity at the end of the second quarter was 175.1 million or about 78 percent of the total balance sheet.

Now, looking at the second half of this year, 2002, in general we have mixed feelings about the remainder of 2002. The wireless industry continues to be a financially challenging industry. Capital expenditures and expense budgets are undergoing extensive scrutiny. At the same time, however, we have never felt more confident about the financial actions we have taken to prepare WFI for the future.

As a result of the quality of our engineering and deployment work and the good relationships we have achieved with our customers our revenue is rising.

Our variable cost model and tight financial controls have allowed us to drastically reduce our expense structure.

Our working capital management and our emphasis on reducing days sales outstanding has yielded very favorable operating cash flows.

Our financing strategies have increased equity and almost totally eliminated debt.

Our utilization and revenue per average head are both continuing to improve.

As a result, we are cautiously optimistic that we can continue to provide improving financial results for the two remaining quarters of 2002.

Now we'll move to the Q&A section of the call.

We will now begin the question and answer session. If you have a question, please press the 1 followed by the 4 on your push-button phone. You will hear a three-tone prompt acknowledging your request. If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the 1 followed by the 3. If you're using a speakerphone please pick up your handset before pressing the numbers.

One moment please for the first question.

Tim Long with First Boston, please go ahead.

Thank you. A few questions, if I could: Tom, could you talk a little bit further about the gross margin activity on some of these new contracts? Do you think this Q2 level is somewhat representative or do you think this is a shorter term occurrence?

And then the second question with Cingular really rising as a percentage of your business, could you just give us a sense as to their recently announced cap-ex cuts, what impact, if any, do you think that could have on wireless facilities?

And while you're on that topic, maybe if you could talk about the potential consolidation in the U.S. market and what impact that could have?

Thank you.

Yeah, okay, Tim, three questions in the batch and I'll start with the gross margin issue. Yeah, we're down a couple points in gross margin. I think if you just sort of track back you'll see that we're well within the sort of variability that we've experienced in the past. It really has more to do with business mix and the specific contracts we're working on than any macro trend certainly. We've seen over the last four or five quarters obviously that the industry has changed and gross margin levels have shifted. I think on our last conference call we guided to, sort of, a secular increase approaching 30s over time -- approaching the 30 percent level over time. We're still of that mind. There is a very intense competitive environment and we certainly operate well at this level, but we think there is room over time as the shakeout continues.

In terms of the singular cap ex, the message there is a bit more mixed. Certainly our experience on the largest project we're working on which is the 2 and a half G technology overlay is that there's been no cut there whatsoever. That that is, if anything, deadlines have become more acute and the pressure's on to get that project done. We haven't seen either -- any relief in either deadline or in terms of budget numbers to give us any indication of slack for that at all. So, I would speculate that it's more related to the TDMA side of the business. But singular's in the better position to answer it.

In terms of the potential effect of consolidation on our business, it's a complicated question. It really depends, of course, a great deal on who consolidates with whom and as a general answer, our view has been that in the short term any consolidation's probably going to cause a little bit of a disruption as people analyze and review their plans and go through the distraction that's involved in any organization that's joining forces.

In the long run, we think the work that's available to us depends a great deal on how many subscribers there are on the network and not which brand of phone they carry. So, in the long term, there might be some modest savings for carriers in terms of capital efficiency, but most of the savings will probably come on the SG&A side and on the marketing side and in the long run our piece of it's probably not greatly impacted.

OK thank you.

Derek Godsey with JP Morgan, please go ahead with your question.

Good afternoon, guys. Congratulations, nice improvements here. I guess it's an interesting message, I mean you're obviously making good progress, but I also kind of sense a certain amount of hand wringing, you know, going forward, so I'm trying to figure out here what the balance is between the positives and the negatives and, you know, whether we've -- we're witnessing a couple of improved quarters and that's it, or whether this is, kind of, a new trend?

So, I kind of wonder if you could help us a bit with, you know, some of the leading indicators that you're tracking that we should be looking at to get, kind of, a read on the sustainability of the current trends in the business and how you would prioritize the top say two or three risks that you see in the business that could create a setback in, say, the second half of the year?

You know, Derek, if you're hearing, sort of, a mixed message from us, it's only because the macro environment remains very volatile. We have a great deal of confidence that the steps that we've taken to position ourselves to work in this environment are the right ones and that we're a lot more agile company in terms of being able to shift direction and respond to changes. So, the message is intended to be positive. The conservatism comes from, you know, just the fact that the front cover of Forbes, the front cover of Fortune, the front cover of Economist this week talk about telecom troubles and it's less true, certainly, in wireless, it's less true, certainly, for the customer base that we're working for, but we recognize that no-one's immune to it. So the caution you hear comes from, you know, for those things that we control, we feel great. For those things that no-one can control against, you know, we recognize that we're subject to those risks and just to enumerate those risks, certainly, capital budget cuts by the carriers, particularly those AT&T and Singular which are our largest customers would be, obviously, important to us and consolidation among the -- anybody in our top five causes even an near term dislocation in the capital planning is likely to be a risk factor.

But beyond that we think we're well positioned to do well and take market share and execute our way out of it.

Yes. Well thank you. I just wanted to maybe follow up here for Terry. Terry, congratulations, I know if we gave you some time here you'd get this balance sheet wrestled to the ground here. But it seems like you've made a good progress in a lot of areas, you know, one area that's still seems like there's room for improvement is in the end billed receivables.

Which, you know, while they've made a significant improvement from the high '90s space or low '90s space we're seeing a couple of quarters ago, it still seems as though you're financing quite a bit of the receivables here in the short term for your customers. I was wondering if there is something that you were doing relative to your contracting methodologies et cetera that can get that down, you know, further from here?

Yes. Actually we're very proud of the balance sheet. Our cash position is very strong and our equity position is strong. In looking specifically at DSO's in particular on unbill's, we really feel pretty good.

Our total DSO's decreased, as I mentioned, 22 days for the quarter from 166 to 144 and a significant piece of that was in unbilled. Unbilled actually declined in the quarter-to-quarter 21 days of the 22 days total improvement. And we have one particular account in Latin America with that we continue to work on and we've made extremely good progress in the beginning of the third quarter in really attacking that number and this is really related to specifically on and I think as you review our third quarter results you're going to see that the game plan for fixing that is well under control.

We've made huge progress in the last several weeks on that. So ...

Do you think you can get that back to kind of the 50, 60 day range that we were seeing about the time you went public back in, I guess it was what, late 2000?

Well if you took the 144 total days we're at now, and subtracted which is 50, we'd be at 94 days now. So we're - excluding that one account we're sub 100 now. And it wasn't long ago that we were literally pushing 200.

So we've made huge progress up to this point and the benefit of our customer concentration is we really have some very significantly improved payers on the customer side of the equation. So I don't know if we'll ever get to sub 50 in the next quarter or two, but it certainly is a reasonable target and we're going to continue to make huge progress there.

Well, congratulations. Good progress on that front. Thank you.

Thank you.

Ladies and gentlemen if there are any additional questions, please press the one followed by the four at this time. Once again, if there are any additional questions please press the one followed by the four at this time.

I'm showing no further questions. Please continue with any closing remarks.

I just wanted to take this opportunity and thank all our participants. Obviously it makes us feel very good to have a great quarter and makes it very easy. So we look forward to having another good quarter with you next quarter.

Thank you.

Ladies and gentlemen, that does conclude your conference for today. You may all disconnect and thank you for participating.