Kratos Defense and Security Solutions Inc (KTOS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wireless Facilities Incorporated first quarter 2003 earnings conference call.

Your speakers for today are Dr. Masood Tayebi, Chairman and Chief Executive Officer, and Mr. Terry Ashwill, Executive Vice President and Chief Financial Officer. At this time all participants are in a listen-only mode.

After the speakers have concluded their prepared remarks, we will conduct a question-and-answer session. As a reminder this conference is being recorded Monday, May 5, 2003.

I will now turn the conference over to Miss Gina Aven who will read the company's warning regarding forward-looking statements. Please go ahead. Ms. Aven.

Thank you for joining WFI's 2003 first quarter conference call. A replay of today's call will be made available through 3:30 P.M. Pacific time May 7, 2003 by dialing 800-633-8284 using the reservation number of 21141670.

Additionally, the conference call 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 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 in our filings with the Securities and Exchange Commission, including our annual report on form 10K filed on March 21, 2003. Copies of this report are available free of charge on our web site.

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 it's Web site, including press releases, conference calls and other company information.

The financial and statistical data to be discussed in this conference call have been posted on the investor relations section of the company's Web site at www.WFINET.com.

Our comments today will be delivered by Dr. Masood Tayebi, CEO, who will give an overview of our operating results and industry conditions, and Terry Ashwill, CFO, who will review the company's financial performance.

Now I would like to turn the call over to Masood Tayebi.

Thank you, Gina. Welcome to our conference call. We are very pleased to report the fourth consecutive quarterly increase in revenue and net income. We posted a 5.7 percent sequential increase in revenue, and a 29 percent increase in net income.

We had $5 million in cash flow from operations, our seventh consecutive quarter positive cash flow from operations, and our cash and cash equivalents increased to $102.3 million at March 31, 2003.

Our balance sheet and operating metrics continue to show improvements. During the first quarter, our increasing revenue was fueled primarily by growth in our long-standing contracts with Nortel and Ericsson, as well as continuing work with our other wireless carrier client base.

Our alliance with Bechtel (ph) continues to be productive. Overall we continue to see contract extensions and repeat business from our key customers and partners. I'm very pleased to announce that during the first quarter our enterprise solutions group has grown to represent 5.6 percent of our total revenue. Some of the services performed within this group are wireless LAN systems integration and security systems integration.

Although this is a new group for WFI, we remain positive about its outlook. Among our other business segments wireless network services comprised the majority of our work load with 94.4 percent of the fourth quarter revenue. During the first quarter our largest customer relationship was again AT&T Wireless, which represented 27.3 percent of total revenue, down slightly from the fourth quarter.

Our other top customers in the quarter were Cingular, Nortel, Verizon and Ericsson. During this quarter, 84.8 percent of our revenue came from our U.S. operations, down from 90 percent in the fourth quarter. Our Latin American operations showed significant growth reflecting the desire by wireless carriers to upgrade and change their existing technologies.

The revenue from Latin American operations accounted for 5 percent of total revenue in the first quarter. Our Europe, Middle East and Africa operations continue to show signs of growth and represented 9.6 percent of total revenue, up from 8.4 percent in the fourth quarter.

Overall, we feel very good about the company's performance in the first quarter. We believe our results reflect many of the positive changes that the company has made over the course of the past few quarters. These include, continuing the strengthening of relationships with our top tier carrier and vendor customers, retaining quartal (ph) and operational scalability which allows us to provide global quality solutions for our customers.

Third, an implementation of cost-control structure, which have improved our profit margins. The successful implementation of the enterprise solutions group and the successful implementation of the outsourcing group which recently resulted in two initial small contracts, the first ever for the newly formed outsourcing group.

As we evaluate the recent quarterly announcements from the wireless carriers in the U.S. we notice the following continuous trends. Subscriber base is rising. Churn remains an important element of cost. Network coverage, capacity and quality remain unsatisfactory, and increased focus also on the cost reduction.

The continuous increase in subscriber base, coupled with a continuous rise in minutes of use in the past several years have reduced the network quality and capacity in many geographical areas to unacceptable levels. Subsequently most of the wireless carriers in the recent announcements are indicating that they will continue to dedicate a larger percent their cap-ex to improving capacity coverage and quality.

At the same time, our customer organizations, carriers and vendors are leaner, have centralized their operations and are reducing the number of supplier relationships they manage.

Our response to this trend is to continue our emphasis on our 10 key network deployment services. Carriers continue to face acute pressures on their operating and cash budgets. Although subscribers are using more minutes, revenue per user is remaining relatively constant.

This is forcing the carriers to look at larger-scale outsourcing initiatives to further reduce costs. They have responded to this challenge by emphasizing the benefits of operational and outsourcing with WFI and outsourcing partners capabilities in this area.

We believe the significant efficiencies are available from the outsourcing of recurring network management tasks. We feel our focus over the past year on outsourcing has positioned us well within the wireless telecom industry, and are seeing a continuous increase in the number of inquiries and RFCs for these services from carriers and vendors. Strategically we are continuing to pursue opportunities in the enterprises space.

Our focus has been in the area 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, high speeds and other potential customers.

In the security area we are seeing integration of wireless LAN and other wireless technologies with traditional wire line security systems. Other results of our focus on our core competencies and strategic initiatives we expect to see three source of future revenue - wireless network services, which is our traditional business, outsourcing and enterprise solutions group.

As we look at the first half of this year, we are optimistic that our financial performance will continue to improve. We are financially healthy and our backlog of profitable projects with quality customers continue to grow. We appreciate the support of our investors throughout the quarter.

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. Looking at the first quarter for an overview, WFI's financial results for the first quarter of 2003 continue the strong momentum experienced in the last three quarters of 2002. Revenue increased for the fourth consecutive quarter.

Gross profit increased for the fourth consecutive quarter. Both operating income and net income increased for the fourth consecutive quarter. SG&A expense as a percent of revenue was about even with last quarter, which was the second-lowest nearly three year.

Diluted earnings per share was 6 cents per share, a 20 percent increase over the previous quarter. Cash increased $3.2 million to end the quarter at $102.3 million. Net cash flow from operations was $5 million, the seventh consecutive quarter of positive cash flow from operations.

Excluding $2.3 million of capitalized lease obligations, WFI continues to have no debt. Day sales outstanding registered their fifth consecutive quarterly decrease. Revenue per active employee on an annualized basis was up again at $165,000.

Equity increased to $189 million, and now represents 78.5 percent of WFI's total balance sheet. Now looking to our income statement beginning with revenue, revenue for the first quarter of $53.9 million was $2.9 million, or 5.7 percent over the prior quarter, and $13.8 million, or 34.4 percent over the same quarter last year.

An increase in international operations accounted for the improved performance. Also our newly formed Enterprise Solutions Group contributed $3 million of revenue for the quarter. Productivity continued to improve as reflected in our annualized revenue for average head.

This metric improved from 158,000 last quarter to 165,000 this quarter, a 4.3 percent increase. Gross profit. Gross profit of $14.9 million was $1.2 million, or 8.8 percent ahead of the fourth quarter, and $4 million, or 36.7 percent ahead of last year's first quarter.

As a percent of revenue, gross profit improved from 26.9 percent to 27.6 percent sequentially. SG&A. SG&A expense of $10 million was $600,000 over the fourth quarter. As a percent of revenue, SG&A was 18.6 percent, roughly even with last quarter.

Significant progress has been made in reducing this percentage in the last four quarters. For example, the lowest this percentage was on a quarterly basis in the year 2001 was 29.0 percent, 10.4 percentage points higher. Active average head count for the first quarter was 1,311.

This was up only 17 heads over 1.3 percent, or 1.3 percent, while revenue was up nearly 6 percent. Depreciation and amortization, D&A for the first quarter it was $1.7 million, a $100,000, or a 5.6 percent reduction from the fourth quarter.

Continued emphasis on reducing capital expenditures and fixed asset accounts for this decrease. Net after tax and earnings per share. Our net after tax income of $4 million was nearly $1 million higher than the net after tax of $3.1 million in the fourth quarter, an increase of 29 percent.

Diluted earnings per share for the quarters was 6 cents, an increase of 20 percent over the prior quarter. Diluted weighted average shares increased to $68.7 million, a $1.7 increase from the fourth quarter to the first quarter. Now looking at our balance sheet. Cash in debt. Total cash at the end of the first of $102.3 million was $3.2 million, or 3.2 percent over the earlier quarter.

Net cash flow from operations was $5 million. This was the seventh consecutive quarter of net positive cash flow from operations. Excluding capitalized lease obligation. WFI continues to have no debt. This compares very favorably to the $33.6 million of total debt, excluding capitalized lease obligations, in the same quarter of 2002. Accounts receivable. Total net accounts receivable for the first quarter was $65.2 million, an increase of $1.9 million from the fourth quarter.

Day sales outstanding, however, continued to decrease. First quarter days outstanding were 110 days, or three days below the 113 days recorded in the fourth quarter. This is the fifth consecutive quarterly decrease in DSOs.

Equity. For the first quarter our stockholders equity of $189 million represented 78.5 percent of WFI's total balance sheet.

Outsourcing. WFI has become an active bidder on numerous outsourcing opportunities of wireless infrastructure services currently performed by wireless operators. During the first quarter WFI was successful in winning two bids that will result in future revenue.

As we look to the future, it is conceivable that this infrastructure outsourcing could become the significant source of recurring revenue for WFI. This stems in part from WFI's growing financial strength and the strength of our partners who bid with us on various proposals.

Also, WFI's core competencies of engineering and project management should play an important role in winning future outsourcing revenue.

Enterprise solutions. WFI recently created the Enterprise Solutions Group to provide another principal source of revenue and profits. Similar to our outsourcing initiatives, the Enterprise Solutions Group also depends significantly on our engineering and project management skills.

During the first four months of this year, WFI has acquired two small but very high quality systems integrators which concentrate on security, voice and data services based in the Eastern U.S. These companies perform design installation and maintenance services for security-related systems embedded in multi-unit commercial dwellings.

Engineering and project management are key activities performed by both companies. As this emerging business line gross and becomes material to operations we will give more details on the related financial impact on our consolidated results.

Outlook. WFI continues to achieve both financial and strategic momentum in pursuit of growth plans that should yield future increases in revenue and profitability. Our financial base is strong. As we've said, we have over $100 million in cash, and excluding capitalized lease obligations, we have no debt.

Our income statement metrics, revenue, gross profit, operating income, EBITDA have all had four consecutive quarters of sequential improvement. Our new operating divisions of outsourcing and enterprise solutions are both beginning to contribute to our already strong financial results.

International operations are beginning to experience a resurgence in demand. Total aggregate revenue for Latin America and AMIA for the first quarter were up over 60 percent from the fourth quarter. Prospects for the remaining quarters of this year also look promising.

Also, we continue to attack our cost structure. Although we have had large success with our variable cost model and its contribution to reducing its SG&A expense, plans are currently underway to further lessen our costs in future quarters.

Additionally, we have dedicated significant time and resources planning the future applications of our growing cash resources. There are many opportunities for successful capital deployment. The second half of this year should see the result of this planning.

And finally, as we have stated in each of the last three quarters, we feel optimistic about continuing to produce improving financial performance. Now we will turn to the Q&A section of this call.

Thank you, sir. Ladies and gentlemen, if you would 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 would like to withdraw your registration, please press the one followed by the three.

If you're using a speaker phone, please lift your handset before entering your request. One moment please for the first question.

Our first question comes from the line of Tim Long with Credit Suisse First Boston. Please proceed with your question.

Thank you. Two questions if I could. Terry, maybe you can give us a sense of the some of the margin differences for some of the new initiatives, particularly the wireless infrastructure outsourcing, if you think that will be favorable on the gross margin side?

And then secondly, maybe if someone can talk about the Latin American strength. Is it centered around a certain country or two, or what dynamics have changed there that we're seeing such a pickup in the Latin American region? Thank you.

Beginning with the outsourcing, you know, until you reach final consummation of outsourcing projects you really never do, you really never know, but our pro forma projections call for margins, pre-tax margins ranging anywhere from a low of 10 percent to 20 percent, somewhere in that neighborhood.

We feel pretty confident that the two small ones that we engaged in the first quarter will be somewhere in that vicinity. As you get larger and larger in scale, of course, those margin percents could drop, but the absolute profit would grow. So I'll turn to Masood and let him do the Latin American.

Yeah, the Latin American operation obviously has shown a significant growth. That's primarily driven by a couple of factors. One is that that Telefonica finally made a move, bought Figaso (ph) a few quarters ago, three quarters ago, and have started to make significant amount of investment in Mexico.

Coming in from being a third player now they want to be competing to be the second or perhaps first player on which is Telco.

So there is a significant amount of momentum and excitement in that market. Obviously, they are our customer and that is changing the landscape in Mexico.

The other thing that's happening, obviously, American mobile is continuing to expand their business in all over Latin America, specifically Brazil and a couple of other countries, and throughout our relationships with one of the divisions of American Mobile, which is Tel Cell, this past several years to establish a strong relationship and now we're starting to see some of the potential benefits that relationship is taking us to other Latin American countries. So all in all, we feel good about that opportunity.

Okay. Thanks a lot.

The next question will come from the line of Dale Fau (ph), with CIBC World Markets. Please proceed with your question. Pardon me, Mr. Fau, your line is open. We will go to the next question. The next question will come from the line of Bennett Goodman with Goodman. Please proceed with your question.

Hi, could you describe a little bit in detail the nature of the contracts, not necessarily, the outsourcing contracts. Not necessarily the customers, but what exactly, what services you'll be performing?

Yes. The first contract is an outsourcing contract that we will perform one of the large six wireless operators in the U.S. and basically will be disengaging TDMA radios and re-deploying those from the sites they're presently at to other sits throughout the network to be operated and we will be doing that on an ongoing basis on a multi-year basis.

The second one is with a carrier in southern Europe, and we'll be doing all of the things we principally do in wireless, we'll be doing engineering deployment and maintenance of their wireless network. Those are the things we'll be doing for both of those.

Okay. Thank you.

Ladies and gentlemen, as a reminder, to register a question, please press the one followed by the four. Once again, ladies and gentlemen to register a question, please press the one followed by the four on your telephone.

The next question will come from the line of Sam May (ph) with Piper Jaffrey. Please proceed with your question.

Hi, Masood and Terry, this is Sam May with Piper Jaffrey. Terry, one question for you which is cap-ex expectations for Q1 in '03, and then for Masood, could you talk about your expectations for your participation in build-out of wireless LAN networks?

Do you anticipate being significantly involved in that market during 2003? Thanks.

Cap-ex for the big six wireless operators in the first quarter was around $2.4 billion, and that excludes Team Mobile, which hadn't report (inaudible) cut down from $6.3 billion in the fourth quarter, but principally that accounts generally because of the seasonality.

We typically see a drop-off from the fourth quarter to the first quarter. We anticipate that rising moderately the second and third quarter. For the full year cap-ex we believe will be somewhere in the $17 to $18 million category, down from around $20 in the prior year.

And this is primarily for U.S., obviously.

Right. With respect to wireless LAN, obviously there's a lot of buzzword in the industry, a lot of excitement, you know, we are not here to judge that any business plan or business model is the right one. Our business primarily in wireless LAN is understanding the technology and helping larger primarily enterprise or potential wireless carriers to integrate the wireless LAN technology.

So our business in the wireless LAN area is predominantly focused on the integration of that technology, and you're going to see customers such as shopping malls, you're going to see airports, large commercial buildings and all wireless carriers who wish to extend a service to their customers on a large-scale basis, we will be very much involved or we like to be involved n integrating these networks.

We, today, have had revenues in the first quarter and we're going to continue to see some revenues coming in the upcoming quarters. So we feel good about it. But it's very difficult to say how big that will be. We're just taking a step by the time. And we are there, if it happens, we'll be there.

Great. Thank you very much. Terry, if I could just ask one thing, did you give free cash flow for the quarter? I know you gave up operating cash flow. What was your free cash flow?

Cash flow for the quarter was $5 million. Let me just go through all of the categories, I'll just use the SEC classifications, that's the simplest for investing activities it was a net negative of $2.6. That included cap-ex by us of $800,000, and M&A for the purchase of the first acquisition we did of $1.8 million, which was an initial cash payment.

The third category financing activity was a positive $1.5 and that comprises of common share increase of $2.4 million through share option exercises. And that was a positive number, of course.

And the repayment of lease obligations was a net $900,000, so that nets the $2.4 positive and $900 negative back to $1.5. So the $5 million minus the $2.6 plus $1.5 was the net $3.2.

Great. Thank you very much.

Once again, ladies and gentlemen, as a reminder, to register a question please press the one followed by the four on your telephone.

Gentlemen, there are no further questions. Please continue with your presentation or any closing remarks.

I would like to take this opportunity to thank all the participants and we had a good quarter, we feel very good about the company's prospect and looking forward to seeing you all in the 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.