Kratos Defense and Security Solutions Inc (KTOS) 2002 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wireless Facilities, Inc. Fourth Quarter and Year-End 2002 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. At that time, if you have a question, please press the "1" followed by the "4" on your telephone. As a reminder, this conference is being recorded, Wednesday, February 12, 2003. The speakers for today are Dr. Masood Tayebi, Chairman and Chief Executive Officer; and Mr. Terry Ashwill, Executive Vice President and Chief Financial Officer. I would now like to turn the conference over to Mr. Chris Langlois, who will read the company's warning regarding forward-looking statements. Please go ahead, sir.

Thank you. Thank you for joining WFI's Fourth Quarter 2002 Conference Call. A replay of today's call will be available through 3:30 p.m. Pacific Time, February 14, 2003 by dialing 800-633-8284 using a reservation number of 2111-1191. Additionally, the conference call is being broadcast live on our website at www.wfinet.com, and will be archived there for several weeks. Our comments today contain certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. A description of those risks and uncertainties is available on our filings with Securities and Exchange Commission within our annual report on Form 10-K filed on March 19, 2002, and subsequent quarterly reports on Form 10-Q. Copies of these reports are available free of charge on the SEC's website. In response to the SEC's regulations fair disclosure, any forecast about 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 website 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 condition and highlight our operating results and Terry Ashwill, CFO will review the company's financial performance. Now I would like to turn the call over to Mr. Tayebi.

Thank you Chris. We are very pleased to report the third consecutive quarterly increase in revenue and net income. We posted a 3.9% sequential increase in revenue and 24% increase in net income. We had a record $14.6m cash flow from operations and our cash and cash equivalents increased by $16.1m from $99.1m in December 31, 2002. Our balance sheet and operating metrics continued to show improvement. During the fourth quarter, our increase in revenue was fueled primarily by ongoing growth in our longstanding contracts with AT&T Wireless and Cingular, as well as continuing work with our other wireless carrier client base. Our alliance with Bechtel continues to be very positive and productive. I would like to take this opportunity and congratulate Bechtel on their most recent contract they got from AT&T Wireless. We feel positive about the potential impact of this new era. The equipment vendors also remain an important source of revenue. As many of our vendor clients have outsourced their technical service activites.

Overall, we continued to see contract expansion and rapid business from our key customers and partners. Among our business segments, network design and deployment activities comprised the majority of our workload. In the fourth quarter revenue from this area represented 78% of total revenue for the company. Revenue from post-deployment increased slightly to 20% of total revenue, up from 18% in the third quarter. Our largest customer relationship was again AT&T Wireless, which represented 29.8% of total revenue, up slightly from the third quarter. We continued to see a significant portion of our revenue from AT&T Wireless through our Bechtel relationship. Other top customers in the quarter were Cingular, Nortel, Verizon and Ericsson. During this quarter, 90% of our revenue came from our U.S. operations, up slightly from 89% in the third quarter. Our Latin American operations continue to reflect softening overall wireless industry conditions in Mexico and Brazil and accounted for 1.6% of total revenue in the fourth quarter. Our Europe, Middle East and Africa operations however showed signs of growth and represented 8.4% of total revenue, up slightly from 8.1% in the third quarter. Overall, we feel very good about the company's performance in the fourth quarter.

We believe our results reflect many of the positive changes that the company has made over the course of the year. These include strengthening of relationships with our top-geared carriers and vendor customers as well as Bechtel, which has allowed us to increase market share relative to our peers, retaining core talent, and operational scalability, which allows us to provide global quality solutions for our customers, and the implementation of cost control structures, which have improved our profit margins. As we evaluate the most recent quarterly announcement from the wireless carriers in the U.S. we noticed the following trends. Subscribers base continues to rise, minutes of use continues to rise, [churn] remains an important element of cost. Network quality and capacity remains unsatisfactory. Coverage continues to be a problem for most carriers. An increased focus also, on their behalf on cost reduction. The increase in subscriber base of 13 million in 2002, up or with the continuous rise in the minute of use have reduced the network quality and capacity in many geographical areas on acceptable levels. In 2003, it is projected that the wireless carriers will add [10] million more subscribers, placing an even greater strain on already overloaded networks. Consequently, most of the wireless carriers in U.S. in their recent announcements are indicating that they will be dedicating a larger percentage of their CAPEX to improving the capacity, coverage and quality. Most carriers have indicated that in 2003 they will be significance in more [inaudible] sites than in 2002.

At the same time our customer organizations our e-carriers and vendors [inaudible] have centralized their operations and are reducing the number of supply relationships they manage. Our response to this trend is to continue our emphasis on our turnkey network development services. Carriers are also facing acute pressures on their operating margins, although subscribers are using more minutes, revenue per user is relatively constant. This is forcing the carriers to look at larger scale outsourcing initiatives to reduce cost. They have responded to this challenge by emphasizing the benefits of operational outsourcing and our capabilities in this area. We believe that significant efficiencies are available from the outsourcing of [inaudible] network management task. We feel our focus over the past year on turnkey network solutions on outsourcing has positioned us well within the wireless telecom industry and most recently we have seen an increase in the number of enquiries and [RfP's] for these services from carriers and vendors. Strategically, we are pursuing opportunities in the enterprises side. Our focus has been in the areas such as wireless LAN deployment and security system integration. In recent months we have seen increased activity in the wireless LAN area from wireless carriers, ISPs and other potential customers.

In the security area we are seeing the integration of wireless LAN and other wireless technologies with security systems. As a result of our focus on our core competencies and strategic initiatives, we expect to three sources of future revenue. Wireless network services, which is our traditional business. Enterprise solution, which is primarily focused on wireless LAN, deployment and security system integration, and outsourcing. As we look at the first half of this year, we are optimistic that our financial performance should continue to improve. We are financially healthy and our backlog of profitable projects with quality customers remains strong. We appreciate the support of our investors [audio gap] we believe as they do that wireless technology services remain a growth industry and the trend towards outsourcing should benefit WFI. Our gratitude also extends to our remarkable group of employees who participate so enthusiastically in the performance and success of our business. I will now turn the call over to Terry Ashwill, CFO, for his review of the financials.

Thank you Masood. WFI's financial results for the fourth quarter of 2002 continue to reflect very positive financial performance. Here are the highlights; revenue increased for the third consecutive quarter. Gross profit increased for the third consecutive quarter. Both operating income and net income increased for the third consecutive quarter. SG&A expense as a percent of revenue was the second lowest in nearly three years. Diluted EPS was 5 cents per share, a 25% increase over the previous quarter. Cash increased over $16m to $99.1m. Net cash flow from operations was extremely strong at $14.6m, and all time record performance. Excluding capital lease obligations of $2.9m, WFI has no debt. Net accounts receivable decreased $8.2m or 20 days sales outstanding, on the 4% increase in revenue. Equity increased to $182.9m and now represents over 78% of WFI's total balance sheet. Now looking at the income statement, beginning with revenue. Revenue for the fourth quarter of $51m was $1.9m or about 4% over the prior quarter. Increase in U.S. and [inaudible] operations more then offset a decrease in Latin America. Revenue per average head increased 6% from the third quarter.

This reflects continued benefit from the installation of our variable cost model from the first quarter of 2002. Gross profit of $13.7m was $1.8m or 15% ahead of the third quarter. As a percent of revenue, gross profit was 26.9%, or 2.7 percentage points above the 24.2% of the third quarter. SG&A of $9.4m was $800,000 higher than the previous quarter. As a percent of revenue SG&A was 18.4% for the fourth quarter, the second lowest percentage in nearly three years. Expense controls as well as headcount continue to be tightly monitored. Active headcount at the end of the fourth quarter was 1275, a reduction of 38 people or about 3%. Revenue per average head annualized increased from a $149,000 in the third quarter to a $158,000 in the fourth quarter. Depreciation and amortization, D&A for the fourth quarter was $1.8m or about even with the prior quarter of $1.7m. Net after tax income of $3.1m was $600,000 or 24% above the third quarter. Diluted earnings per share for the fourth quarter was 5 cents per share, an increase of 25% from the third quarter. Diluted weighted average shares increased to 67m a 1.6m increase from the third quarter to the fourth quarter.

Now looking at the balance sheet. As we said, total cash and cash equivalents at the end of the fourth quarter of $99m were $16.1m or 19.4% higher than the third quarter. And net cash flow from operations of $14.6m, is the sixth consecutive quarter of positive cash flow from operations and excluding capitalized lease obligations WFI has no debt. Capitalized lease obligations for the fourth quarter of $2.9m were down $800,000 from the $3.7m at the end of the third quarter.

Accounts receivable; total net accounts receivable for the fourth quarter was $63.3m a decrease of $8.2m from the third quarter. DSO's decreased 20 days from 133 at the end of the third quarter to 113 at the end of the fourth quarter.

Equity; in aggregate stockholders equity of a $182.9m at the end of 2002 represents 78.1% of our balance sheet.

Outlook; we continue to feel very positive about WFI's financial prospects. Our cash position of nearly $100m and no debt excluding capitalized lease obligations affords us the opportunity to pursue numerous initiatives that should yield further revenue growth in the near future.

Outsourcing activities within wireless are becoming very abundant and we are at the center of this trend with trusted and well-respected partners. Our pursuit of revenue from wireless LAN or Wi-Fi initiatives is expected to deliver new avenues of growth. We are very active in this space and have many opportunities to pursue. All of this should be consummated with the world's largest wireless operators; we have developed deep relationships with our core clients today in wireless. Also, homeland security and the ultimate convergence of wire line and wireless is yet another significant vehicle to fuel our future growth. Numerous activities are under way, both organic and non-organic, which we feel confident, can provide new sources of revenue growth.

And finally, as we look at the current first quarter of 2003, yet again we feel cautiously optimistic that we will continue to produce improving financial performance. And now we would like to open the meeting up for questions and answers.

Ladies and gentlemen, if you would like to register a question please press the "1" followed by the "4" on your telephone. You will hear a three tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration please press the "1" followed by the "3". If you are using a speakerphone please lift your handset before entering your request. One moment please for the first question. The first question is from the line Ned Zachar with Thomas Weisel Partners. Please go ahead.

Good afternoon everybody, I have a couple of questions. I'll start with first, what specific steps Masood are you taking to become more oriented towards the Bell operating company for their income statements as opposed to just working off their CAPEX. And I shouldn't really say the Bell company [inaudible] wireless as well as the independent national players? And the second question is, we've seen often lot of layoffs at some of these larger companies. At what point do you think you're going to begin to see some of the real benefits of that where people are employing WFI to take over some of the activities that were previously done internally? Thank you.

Quite good questions Ned. On the first question we are actually seeing more and more carriers are focusing on their cost cutting and much more than ever before and for the first time in the past few months we have seen them to be open for outsourcing their solutions like our service solutions where we can reduce the cost in terms of running the operation and perhaps in some cases running multiple operations at the same time. We have been discussing this with various different carriers globally and we are getting more and more reception towards these ideas and so there-- actually, in fact there are some RST's also hitting the street. We have also seen announcements by some carriers in Europe and in Australia that they are moving into this trend where they will be giving their operational network management operations to third party companies such as ourselves to maintain and manage. We are excited about that opportunity. As in terms of the timing of it, it is difficult to say precisely because this is a new area and quite often this is the time the carriers they really need to get comfortable with it and it is going to take a while before we see significant contracts in this area. However, it is moving in that direction and we are very much participating in number of fronts. So, I would say perhaps later this year some times next year we should be able to shed more lights on it.

What is the catalyst, Masood, for the telephone companies for the larger wireless operators to give up controlling -- historically they have not wanted to give up control, there are network people by definition and allowing a third party person such as yourselves to manage some decent part of the network, it's just got to be very, very tough cell within certain parts of the organization. What catalyst can you cause or affect get the Bell companies to come in, you know, get them over the hump?

They started to do that so we are really not the only ones that are pushing for this. They started to already do that in Europe as our mission in Australia. And it was the catalyst, the main catalyst is cost reduction and really the carriers are not technologies. Before every carrier used to have their own flavor of technology a specific type flavor with a particular type of technology. That's not the driver any more there, for as long as the coverage of quality is there, the subscriber does not care who is managing and maintaining it. And we are in the business also, of doing the coverage, as well as maintaining the quality. So, the subscriber when they switch on the phone they don't care who is maintaining, they want coverage, quality, and cost, they want pricing, they want better solutions for their handsets, they want content, that is where the focus is. And our business is in coverage and quality and maintaining this network that is not where the carriers focus should be and that's where they are starting to diversify from. In fact the recent announcement by some of these wireless carriers exactly indicating that they are going towards outsourcing.

Another piece of this, if I could just add in suite is, these carries can get a fixed price with a certain time for delivery from us and they can measure perfectly what their saving are, so that is a compelling reason to set the trigger...

Do you have your people, this all of a different to which you are going to start -- remarkably give the right people at the firm now and may be retrained to do these things and/or can you find them if you need them in the current job market?

In fact, you know, if you look at what that job entails is exactly what we do today, it's in the engineering side, in the design, in the deployment, and then management of the network which in 20% of our revenue today is in that area specifically, day-to-day management of the network. We are optimizing, we are testing, we are auditing, we are monitoring, that' exactly what that meets -- and absolutely quite often through outsourcing you are going to take over some of the employees of this carrier. So through that you will get some of the resources coming to you.

Terrific, I will drop by the queue and come back with more.

Ladies and gentlemen as a reminder to register for a question please press the "1" followed by the "4" at this time. The next question is from the line of Fred Levinson with [Greenwich] Capital. Please go ahead.

Hi guys. Couple of quick questions; is there any way you could quantify the dollars in '03 from the outsourcing?

Yeah, we really--

In terms of revenue for you?

Yeah, what's happening is, we've really blended our own wireless business with out tasking and outsourcing, and right now we're in the early stages of the outsourcing piece. We presently have over 30 projects that we're currently bidding on. We haven't disclosed the amount of revenue from outsourcing here to this point and to be very honest about it, it's negligible in the current quarter. We don't except it to be negligible in the next quarter and the quarter after that, but probably the significant revenues will come in, initiating in the third quarter.

Is there any -- are there any numbers for Q1 revenues out there or you are willing to speak to?

No, but the numbers that we have in aggregate, that we're bidding on are a very -- very material for the company.

No, no but you have a forecast for revenues or anything like that for the year of Q1?

We actually haven't given any quantitative guidance, but clearly we feel we haven't guidance for quite a while and clearly our guidance this quarter for the next quarter is the same as it was in last quarter, we feel very, very positive about what we think the results will be, but we haven't quantified that nor do we comfortable doing that, in terms of regulations involved.

I guess my follow question is just for Terry, you know, you seem you have sold about 80% of your holdings, could you address that I mean that seems a little bit more than simple, the usual estate planning or just diversifying my portfolio etc. Again, I am going by the numbers in the proxy where it looks like you own 306-307,000 shares and you filed to sell close to 241,000 shares, which would be about 80%. Thank you.

Actually, the number I said was 100,000 and the number of options that currently I have are 950, which leaves 850,000 options. So as you can see, it's not a very significant piece of the total. I did so for personal reasons that are real estate related. That's the reason I did. It has nothing to do with the prospects or my feelings with the Company. I think as you look at this quarter and in the forward quarters, you'll see that becomes evident.

The next question is from the line of Tim Long with Credit Suisse First Boston. Please go ahead.

Yeah actually it's Jason Bavec (ph) calling in for Tim Long. I had a quick question on the agreement between Bechtel and AT&T Wireless that that was [firm] prices for all phases of [inaudible] deployment. Could you talk about if that improves any type of visibility for you? How does that impact you? I know that they've established one of the goals there to bring the network out faster and at a lower cost. Does that change your business model? Thank you.

This is Masood. Actually we are very excited for Bechtel. And obviously we are excited about it because, Bechtel, we have a very good relationship, positive and productive relationship with Bechtel. As you know, we are partners on the Cingular project. And also a significant amount of AT&T wireless revenue in the past 12 months came through Bechtel. So we only see that as positive. We feel good about it. But I cannot quantify what that means. All I can tell you is that we feel very good about it.

Okay. Can you talk a bit about any potential prospects for Bechtel internationally? Are they pursuing telecommunications building projects or is it still here in the U.S.?

We are in conjunction. We, in some international countries, are pursuing opportunities, in some cases. In some cases, we are pursuing opportunities independently. We have not -- we are not at a stage where we can announce anything yet.

Okay. I am sorry. Just back to the AT&T agreement. Would the firm pricing give you better visibility? It seems like you kind of face down the law as to how much is going to be obeyed and the timeline. Does it have visibility?

If you think about it, the previous [inaudible] was on timely material basis, based on cost-plus. Cost-plus means that you use the lowest bidder and best quality for that particular project. And so their hands are tied specifically who they would give work to. In this case when it is fixed price for them, they have a much easier way of giving that work to whomever they wish.

Okay great thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press the "1" followed by the "4". One moment please. Once again, ladies and gentleman, if you do have a question please press the "1" followed by the "4". The next question is from the line of Rick Prentiss (ph.) with Raymond James. Please go ahead.

Yes, good afternoon guys. Let me talk a little bit also about what you see, as far as, the prospects for Wi-Fi goes. How is that going to impact the wireless carriers and what it means for people that support that entry, such as yourselves?

You know obviously there is -- Rick there is a tremendous amount of buzz [war] on the street on Wi-Fi, and a lot of activities, we are seeing everyday press releases, different [hotels], different complexes, hotspots are getting [write-ups, air force] and so forth. And, we are in business of planning, designing, and deploying and managing wireless network. So, we are very excited about, as far as, the opportunity goes and the wireless carriers have starting to show a lot interest. However, the business model as itself has yet to be, we and many other individuals I am sure are out there are still not convinced about exactly how the business model works and that [inaudible] the revenue of profitability, but for sure there is a lot of excitement, interest, and there is a lot of movement, and we are certainly very active in this space talking to the wireless carriers, obviously, because we have a good relationship with them already. As well as, with other new types of customers, we are talking and starting to implement very, very small type of projects, but all-in-all, we are excited about this phase, however, we cannot really talk about the business model yet as it has not proven itself yet.

It seems like a lot of noise and that's going out sort of getting kind of clarity. So still the noise stayed tuned, it sounds like?

Exactly.

Rick, This is Terry. One thing I would say is we-- because of the core relationships we have with the wireless carriers, the wireless carriers are obviously the people who are going to produce the large audiences and the big volume for whoever wins in this business. And more and more, we have people coming through San Diego constantly wanting us to partner with them in whatever venture they have, as a derivative in this business and as Masood said, the business models for each of these groups that come through are at this stage very unproven and none of them are at this point that we see are profitable. A lot of them have contracts sewed up with small regional or localized building owners and things like that. But the key take away here from our advantage point, we really have a very important relationship structure that a lot of these potentials partners are after. And, we are very guarded about how we use that, and we think that ultimately that will find its way in the currency of our profitability in revenue. But at this point in time, we just haven't seen any business models that are very satisfactory to us.

Let me ask you another question -- along the same lines of the topic that's getting a lot of buzz but just trying to get a sense of worth the meat is, and if you guys are involved and helping it push to talk for the CDMA and GSM carriers? What are your thoughts, as far as, where that's heading and does it have any implications for your business?

We are actually excited about it, however, again it is along the same lines of Wi-Fi with the exception of Nextel, which has dominated that market. We haven't seen-it's too early to tell and primarily driven -- the technology I am sure it would get there and will be fine tuned and will work properly, but it is the question that are carriers willing to spend the money for that specific marketing, and if they do then now again our business is primarily driven by subscriber and minute of use on their capacity. So of course if there is more subscribers and/or they use more minutes that means there is more need for our work.

Right.

And so -- of course we are excited about it.

Thanks guys.

Your next question is from the line of Ned Zachar. Please go ahead with your follow-up question.

I am following up on Wi-Fi, Masood how about on the enterprise side, in other words to what extent are you seeing interest from the hotel companies; about setting up Wi-Fi so that they are providing that amenity to their customers, those that are worrying about the hotel guest flows and worrying about whether are not they actually generate revenues per say as so many other companies are interest in?

We are seeing actually a lot of interest from a number of resources. We are seeing interest from hotel operators, we are seeing from shopping malls, we are seeing from truck stops, large buildings and what is interesting, as I mentioned on enterprise solution as far as concerns [inaudible] to our business, if you look at enterprise being driven by wireless line but also security system integration. Quite often the CIO is within this complex is our companies are making decision on the Wi-Fi plus their IT cost of telephone system and their wireless network and the security systems. They are all coming together and getting integrated and the wireless is predominantly moving very aggressively into enterprise space. And that's what we are very excited about. That is why we started enterprise solution group, and we expect to show revenue this year, significant amounts of revenue this year from this space.

And then one more question on Bechtel, when you are talking about helping to manage these networks, are you bidding on your own or you bidding with a consortium and that might be including Bechtel, how does that exactly work? And then I guess a follow up on to that is how have you changed? How you sell your products and services to try to take advantage of some of these outsourcing initiatives you talked about earlier?

On the -- the across different opportunity some opportunities -- a lot of opportunities we are bidding on our own. But there are certain opportunities that are very, very large and we are partnering with various types of companies. And yet we have -- because we have not publicly announced who those partners are, I don't feel comfortable to disclose who our partners are. But we do have different partners for different opportunities, some are based on geographics, some are based on customers, and some are just on our own. As it goes to what type of expertise -- again if you look what these outsourcing will entail, it will entail again planning, designing, building, managing these networks and that's exactly what we have been doing. Plus in an outsourcing model we will more than likely take over a lot of these employees. So they will come in those expertise on board, although we do the expertise in house ourselves, we will provide some very high level good management capability above these networks and then fine tune the staffing resources within each one of these opportunities.

Terrific. And how have you changed the sales organization?

We are very much focused on the [inaudible] focused a lot on our carriers and vendor customers where we have dedicated business development, individuals that are absolutely focused on carriers and vendor. So we understand what is their strategic move for this year and the following year, in which direction they are going and then regionally we have sales people that are focused on the regional level. Now that all of the carriers and vendors making decision at the head quarter level, we are there with them. We're exposed to the most senior levels in the carriers and vendors. And when the decision gets pushed on a local level on the execution side as well as probably in some minor project task, we also have regional sales people.

Say, you haven't had to change your focus on move more towards the CFO, CTO, CEO type sales process, as compared to what you may have been doing before, what you may been at, you know, more at the local and regional levels?

We are absolutely doing that. Actually we are -- a lot of our sales and business development focus is actually at higher levels, where it is to the EVPs and the COO, CFO, and CEO's.

And more and more that's going.

Okay, thank you.

Ladies and gentlemen if there are any additional questions at this time, please press the "1" followed by the "4". There are no further questions at this time, please continue.

We would like to thank all the participants and look forward to having you back on our next conference call. Thank you.

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