Kratos Defense and Security Solutions Inc (KTOS) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Wireless Facilities, Incorporated third quarter earnings conference call.

Present today is 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 now in a listen-only mode. After the three speakers have concluded their remarks, we will conduct a question and answer session. At that time, if you have a question, please press the one, followed by the four on your telephone.

As a reminder, this conference call is being recorded today, November 6th, 2002.

I will now turn the conference over to Karina Page, Assistant Treasurer, who will read the company's warnings regarding forward-looking statements. Please go ahead, Ms. Page.

Thank you.

Thank you joining WFI's third quarter 2002 conference call. A replay of today's call will be made available through 3:30pm Pacific time November 8th, 2002 by dialing 800-633-8284, using the reservation number 20951975.

Additionally, the conference is being broadcast live on our website at www.wfinet.com. The call will be archived there for several weeks.

Our comments today contain certain forward-looking statements and involve risks and uncertainties. Words such as anticipates, expects, projects, intends, plans, believes, 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 then 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, fostering a trend towards outsourcing, and that we are well positioned to take advantage of this opportunity; that our headcount increasingly will be comprised of employees hired on a project basis, and that good levels of employee resources are available for future projects; that offering integrative solutions, including project management, materials 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, partners jointly or in partnerships; and that our financial performance can continue to improve in an environment where sales cycles are longer, and fewer projects are available.

Such statements are only predictions, and the company's actual 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, slow-downs in telecommunications infrastructure spending in the United States and globally, consolidation among or the loss of key customers, recruiting or retaining key employees and managers, the adoption rate of new wireless data services, potential losses arising from business transactions, changes in the company's effective income tax rate, and severance-related expenses, and competition in the market place which could reduce revenues and profit 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 10-K filed on March 19, 2002 and in other filings made with the Securities and Exchange Commission.

In response to the SEC's Regulation Fair Disclosure, any forecast of WFI's 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 assumptions 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 give an overview of industry conditions and highlight our operating results, and Terry Ashwill, CFO, who will review the Company's financial performance. I would like to turn the call over to Masood Tayebi.

Thank you, Karina.

We are very pleased to report a solid third quarter. WFI delivered the second sequential quarter of bottom-line GAAP profitability, as well as a five percent sequential revenue growth. We again generated cash from operations totaling 8.3 million for the third quarter. The Company's results on almost every reported operating metric income statement item and balance sheet ratio showed improvement from the previous quarter and the prior year.

During the third quarter, our revenue growth was fueled by a continued increase in AT&T Wireless revenues, the ongoing ramp-up of our Cingular overlay project, and by a number of new projects for Nortel, Verizon, Ericsson, and others. Our alliance with has been positive and productive, and we continue to see contract extensions on 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 service activities. As a group, equipment vendors were the source of 17 percent of third quarter revenues.

Among our business segments, 79 percent of our revenue came from network design and deployment activities compared to 75 percent in the second quarter. Our pre-deployment consulting efforts kept pace with our growth at a constant three percent of revenues with continued strength from our European consulting groups . Post-deployment revenues were 18 percent of total revenues.

Our largest customer relationship for the quarter was with AT&T Wireless, both directly and indirectly through , followed by Cingular again, both directly and through , Nortel, Verizon, and Ericsson. Our percentage of work in the U.S. increased to 89 percent in the third quarter from 77 percent in the second, reflecting the completion of a number of international projects.

Our Latin American operations reflected softening overall wireless industry conditions in Mexico and Brazil, although we began new contracts in Ecuador and the Caribbean. Our European operations started new engineering contracts in the U.K. and in Portugal.

Revenue per average headcount was up from 133,000 to 148,000. On the staffing front, we ended the quarter with 1374 employees, down slightly from 1406 at the end of the second quarter. At quarter end, 12 percent of our total headcount was comprised of employees hired on a project basis, and we expect this figure to continue to increase.

One of our analysts recently coined a phrase describing the results in the wireless industry as "better than feared" and we would certainly agree with that observation. Indications are that the acceptance of wireless data is growing faster than may forecast. Our largest customers continue to move forward with their technology upgrade projects. revenues seem to be holding up, despite fierce competitive pressures, and minutes of use are also increasing.

We believe that our quality performance in the quarter has come from a combination of factors. Our market condition has improved relative to our peers. We continue our business development forecast on top tier carriers and vendors, as many smaller players have exited the industry. The remaining established customers need solutions that are based -- broad in scale and scope, which matches WFI's capabilities.

Strategically, we are working to extend our business in three areas. We continue to gain the confidence of our customers with our quality , yielding repeat business and growing relationships, we consider to energetically pursue the outsourcing models, which aligns well with the long-term objectives of carriers and vendors. And there we are seeing increased activity.

Finally, we are also exploring opportunities to make our world-class network design and management capability available to enterprise clients in areas such as wireless LAN deployment, as well as cyber-networks design and integration of complementary technologies such as electronics securities systems integration. Due to our extensive experience in wireless applications, systems and engineering, and information technology, we believe that WFI is uniquely qualified to lead the evolution of migrating the electronics securities systems integration from stand-alone capabilities into an integrated network solutions for our future clients. Undoubtedly implementing technologies such as will play a major role in reducing future infrastructure cost in this area.

On the competitive front, we continue to observe that operational scale, the capacity to solve a significant problem for a carrier across a national network has become an important competitive factor. It is difficult for the smaller suppliers to compete in this environment, and it has become more common for even the larger payers to bid projects jointly or in partnerships. Our scale and our strong industry relationships are excellent assets for us in this environment.

While we are not in a position to declare that the telecom industry is in recovery, or even that the tough times for wireless have bottomed out, we are increasingly positive. We are now able to see an increasing backlog of good, profitable projects with quality customers. We feel that we will continue to earn a growing market share measured against our peers and competitors. And we continue to grow that portion of our business that has traditionally been done in-house by customers. As a result, we look at the final quarter of 2002 and the first half of next year, we are optimistic that our financial performance will continue to improve.

We appreciate the support of our investors through the quarter. We believe, as they do, that wireless technology applications remain a growth industry and the trend toward outsourcing should benefit WFI. Our gratitude also extends to our remarkable group of employees who participated so enthusiastically in the performance and success of our enterprise. I'll now turn the call over to Terry Ashwill, CFO for review of the financials.

Thank you, Masood. WFI's financial results for the third quarter continued the positive results posted in the prior quarter.

Revenue increased for the second quarter -- the second consecutive quarter. Revenue per head also increased another consecutive quarter. SG&A expense decreased in both total dollars and as a percent of revenue from the prior quarter. Both operating income and net income increased for the second consecutive quarter.

Diluted earnings per share was 4 cents per share. Even with the prior quarter, despite an increase in net income due to 6 million additional weighted average shares outstanding resulting from the Series B Convertible Preferred Stock issuance in the second quarter.

Cash increased nearly 7 million to $83 million. Cash flow from operations was also strongly positive at 8.3 million. The fifth consecutive positive quarter. Excluding capitalized lease obligations, WFI has no debt on its books. Our net accounts receivable declined by 2.3 million or 11 days on a 5 percent increase in revenue. Equity increased to 177.3 million and now accounts for 77 percent of WFI's total balance sheet.

Looking at our financial strategies, we continue to pursue aggressive action plans to improve our financial model during this challenging period in the wireless industry. Adoption of the variable cost model has significantly lowered our expense structure. SG&A for the third quarter was 17.5 percent of revenue. The lowest percentage since the first quarter of 1999.

Under-utilization expense for the third quarter was 1.5 million. A 25 percent reduction from the prior quarter. Day sales outstanding continue to decline significantly as a result of intense collection programs. Both domestic and foreign days decreased from the prior quarter.

Head count decreased 2.3 percent at the end of the third quarter from the preceding quarter. Billable head count was 87 percent of the total compared to 85 percent one year ago. Also, roughly 12 percent of the current billable workforce are now classified as project based employees whose employment coincides with the projects for which they're assigned.

Looking at our income statement, revenue -- revenue for the third quarter of 49.1 million was 2.3 million or 4.9 percent over the prior quarter. Increases in the US and the operations revenue more than offset a decrease in Latin America. Revenue per average head increased 11 percent in the third quarter versus the second quarter.

Gross profit. Gross profit of 11.9 million increased slightly from the 11.8 million of the earlier quarter. As a percent of revenue, however, the third quarter was 24.2 percent or 1 percentage point below the 25.2 percent of the second quarter. This reflects the wrap up of a profitable project and the delayed start of a follow on GSM project.

SG&A expense. SG&A of 8.6 million was 400,000 below the 9 million of the second quarter. As a percent of revenue the 17.5 percent in the third quarter compares favorably to the 19.2 percent in the second quarter and the 29 percent of the same quarter of the prior year.

Several factors account for this including additional savings from the variable cost model, reduced under-utilization and tight monitoring of line item expenses.

Depreciation and amortization. D&A for the third quarter was 1.7 million or about even with the prior quarter of 1.6 million. Rigid controls on capital spending should allow future declines in this element of our expense structure.

Now looking at NAT, or net after tax income and earnings per share -- our net after tax income of 2.5 million was 300,000, or 14 percent above the second quarter. Earnings per share for the third quarter at four cents per share was even with the second quarter, due principally to an increase of the six million shares from the series B preferred stock issuance.

Headcount -- productivity metrics related to our continued to improve on a quarterly basis. As a result, headcount at the end of the third quarter was 1,374 -- a decrease of 32 people, or two percent from the prior quarter end.

Now looking at the balance sheet, our cash and debt -- total cash at the end of the third quarter of 83 million, was 6.9 million, or nine percent higher from the second quarter. Net cash flow from operations was 8.3 million. This is the fifth consecutive quarter of positive cash flow from operations.

Excluding capitalized lease obligations, as we mentioned earlier, WFI has no debt. Our capitalized lease obligations for the third quarter of 3.7 million were down 800,000 from the 4.5 million at the end of the second quarter.

Accounts receivable -- our total net accounts receivable for the third quarter was 71.5 million -- a decrease of 2.3 million from the second quarter.

decreased 11 days, or eight percent from the prior period, and 33 days, or 20 percent from the year earlier period.

Equity -- in aggregate equities -- shareholders equity of 177 million now represents 77 percent of the balance sheet.

Now, I'd like to talk about our outlook. In general, we feel very positive about WFI's financial prospects. For the key operating elements and financial metrics that we control, we see measurable signs of significant progress. Our operating discipline and quality controls are working. Our financial performance and strategies are clearly improving from quarter to quarter.

The wireless infrastructure services market is a very challenging environment. We believe WFI is uniquely positioned to compete in this environment. Operators today require very competitive pricing, and tight operating metrics by the service provider to win new revenue contracts. As a result, WFI's progressively lower cost structure and quality programs compare favorably in this environment. Our global scale and technology independence further our position as a principal partner in leading wireless operators.

Now, as we look at the final quarter of 2002, we are experiencing improved visibility of our future results. Our backlog is growing. Our gross margins are also expected to increase in both absolute terms, as well as a percent of revenue. Our costs remain under tight control, and underutilization continues to decrease.

We believe our fourth quarter financial results will compare favorably to the third quarter. Overall, this is clearly the best we have felt about our near-term financial outlook in two years.

Now, we'll turn to the Q&A part of the program.

Thank you.

Ladies and gentlemen, if you'd like to register a question, please press the one, followed by the four on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one, followed by the three. If you are using a speakerphone, please lift your handset before entering your request.

One moment, please, for our first question.

Our first question comes from the line of with CS First Boston. Please go ahead.

Yeah. This is calling in for .

I had a question about what kind of - I saw you had 12 percent of your employees on the variable cost method. Was hoping that you could give me a target timeframe and if you could quantify what type of dollar value benefits you would achieve or percentage of revenue, that would be great, as well. Thanks.

Well, the answer to your first question is that we're actually targeting for 20 percent of the workforce to be on the project-based employees as a percent of the total workforce by year-end. I think we have a decent shot at making that.

The savings are really significant and they're probably best expressed if you looked at our underutilization line, our underutilization for the quarter was 1.5 million versus two million in the prior quarter. So, we're down 25 percent as I mentioned in the speech, and that principally is attributable to the installation of the variable cost model.

OK, great. Thanks.

How are some of your employees reacting to a change in the model? Are they - are they - are you having a hard time getting people to move onto this system or, you know, what are the gives and takes of moving and shifting employees from kind of a set employment to a more variable employment?

Actually, we've been pretty careful in the new employees we hire are generally comprise most all of the project-based employees.

OK.

We have not - we've not taken any existing employees and moved them to a variable basis.

OK. And is that - will that continue going forward? Or ...

Yes.

OK. Great.

Absolutely.

Thanks. Thank you.

Ladies and gentlemen, as a reminder, to register for a question, please press the one, four on your telephone.

As a reminder, to register for a question, please press the one, four at this time.

Our next question comes from the line of with . Please go ahead.

Hi. Congratulations on the latest results. They're very pleasing.

My - I just noticed the improvement in your Days Sales Outstanding, and I just didn't actually catch the quote you may have said as for what the actual figure was for Q3 and whether you had any breakdown of that.

Yes, the breakdown is we went from 144 to 133 days or a decrease of 11 days, which is down considerably from about a year ago when we were in the 200 days outstanding neighborhood. The breakdown is the decrease of 11 consists principally of an increase of four days on the billed sector and a decrease of 13 days on unbilled and pass-through decrease of two days. So, that principally makes us the variance.

Great, thank you.

Our next question comes from the line of with UBS Warburg. Please go ahead.

Hi, thank you. A couple questions - was wondering if you could split out your customer share among your top five customers and if you could speak a little bit to how you see wireless cap ex progress in the U.S. in the fourth quarter just based upon what the operators are still guiding to and how much they have left to spend to reach those estimates. It seems like we're going to get a very, very material boost from third quarter to fourth quarter, and just wondering what your personal views are on whether all of that will get , thank you?

Well, let me take the first part of it. Maybe Masood will chime in on the second part. Our break down for the top five is AT&T at 30 percent, Cingular 26 percent, Nortel 10 percent, Verizon six percent, at six percent. And as we look at cap ex, cap ex was up marginally for the top five carriers. I don't have the T-Mobile numbers yet, but we're up marginally about one percent from the second quarter to the third, and looking at cap ex in general, it was 25 million for 2000, 23 million for 2001 -- 2002, excuse me. And the ranges for next year, anywhere from 19 to 17. Masood?

Yes, in terms of the cap ex as it is related to our type of services, if you look at the amount of those as Terry mentioned, for example, this year the cap ex around 22 billion or so. If you look at our revenue as compared to that cap ex, you get a very, very small piece of that cap ex. Really, we don't see the cap ex being the primary driver of our business, because we clearly have a very, very small piece of it. And there is a significant amount of business still out there that we don't touch.

So that is why you are seeing our revenue growing despite the cap ex being reduced. Also, if you look at Q4, some of our major customers, most of their cap ex they haven't even spent it up to end of Q3, so there is anticipation that cap ex is going to be spent, a large portion of it in Q4, and perhaps, early next year. So, all in all, we don't -- we still see a significant amount of business out there that we don't have today.

And overall -- and also, what this indicates is that our market share is increasing, because we're taking business from other companies, other competitors. But still, nevertheless they have a long way to go.

Thank you.

Ladies and gentlemen, if you would like to ask a question, please press one, four at this time. As a reminder, to register for a question, please press one, four on your telephone. Our next question comes from the line of Richard with Partners. Please go ahead.

Good afternoon. What were the total outstanding shares at the end of the quarter?

Total outstanding shares on the marketplace were 48.2 million. The common share equivalence was 65.4.

Thank you very much.

Ladies and gentlemen, as a reminder, to register for a question, please press one, four on your telephone. Our next question comes from the line of with CS First Boston. Please proceed with your follow up.

Yes, just had another quick question for you here on the competitive landscape. You had mentioned that some of the smaller competitors you were competing well against them. I was wondering with the equipment market shrinking if you're seeing more competition from some of the larger OEMs globally, looking for new avenues of revenue growth, and just how you compete against them? Thank you.

Jason, this is Tom Munro. We really don't see the OEMs as competitors at all. In fact, 17 percent of our revenue comes directly from those folks, so we've -- it's actually very much a trend going the other way in terms of their I'm sorry. Is that better? Can you hear me?

Little bit better.

Sorry about that. Little -- little irony there for a telecom company to have telecom problems. Sorry about that. Your question was, are we seeing increased competition from -- from the OEMs and the answer is no, just the opposite. In fact, about 17 percent of our revenues from the quarter came from the OEM side ...

Right.

... and they're an important partner for us in the channel and important source of business for us and, for the most part, many of those folks have cutback on the number of folks internal to their organizations who do the type of work we do.

Great. Thanks.

I am showing no further questions at this time. Please proceed with your presentation or any closing remarks.

At this time, I'd like to thank all the participants and shareholders and employees and analysts for listening to our call. We had a great quarter and we look forward to having you on our next conference call. Thank you.

Ladies and gentlemen, that does conclude your conference call for today. We thank you for your participation and ask that you please disconnect your lines.