StableX Technologies Inc (SBLX) 2008 Q2 法說會逐字稿

Welcome to the WPCS second quarter fiscal year 2008 earnings conference call. Your host for the call is Andy Hidalgo, CEO of WPCS International Incorporated. For the benefit of our conference all call participants there will be a question-and-answer session after Mr. Hidalgo's overview.

(technical issues) 58% from the same period a year ago. From an earnings perspective, we achieved $1.5 million in net income or $0.19 per diluted share. This represents a net income increase of 41% from the same period a year ago. For the second quarter, the revenue achieved was well above analyst expectations, and the earnings per share achieved met analyst expectations. Our consolidated gross margin was 27%, which was down 3% from the previous quarter. The drop in gross margin percentage is attributable to the revenue blend from our subsidiaries. Also we experienced modest gross margin pressure in the second quarter from an increase in general contractors competing for nonwireless projects and bidding down prices. I'll discuss this further in my economic outlook. It's important to note that we project our guidance based on a 28% consolidated gross margin contribution. So year-to-date we're on target and expect margins to remain on target for the balance of this fiscal year.

Our SG&A expense expenses were 16%, which is down almost 3% from the previous quarter. This improvement in SG&A expense is attributable to increased operational efficiencies gained through the assimilation of our acquisitions. The specialty communications systems sector represented 89% of our revenue and wireless infrastructure sector represented the other 11%. For the second quarter, our organic growth rate in the specialty communications sector was 18%. Our consolidated organic growth rate including the wireless infrastructure sector was 12% for the quarter.

Even with recent acquisitions concluded in cash and the settlement of most of our long term debt obligations, the company maintains a strong balance sheet with approximately $11 million in remaining cash and $28 million in working capital. Through the first two quarters ended October 31st, 2007, WPCS achieved approximately $50 million in revenue and $0.35 in earnings per share. Overall the first and second quarters for fiscal year 2008 have been a success. From an economic outlook overall, we continue to see a strong market for our services in both domestic and international sectors. Traditionally the backlog in the bid lists are the two indicators we use to measure the next eight to 12 months of revenue production. Currently our backlog is at approximately $36 million, which is an all time high even after producing a record breaking revenue quarter. In addition, our bid list is at $125 million, with margin integrity which is also at an all time high. The bid list is typically recycled every 60 days and we have been closing approximately 20% of our bids.

As mentioned earlier, we experienced modest gross margin pressure in the second quarter. The pressure has come from the subprime credit issues and the lack of residential housing projects for general contractors. These contractors have now begun to bid against WPCS in state contracts that are awarded to the lowest bidder on a mandatory basis. The bids are being submitted at low margins causing us to lose bid opportunities. However, it's important to know that the bids we're losing are for nonwireless services such as electrical contracting and construction. These types of bidders do not compete in wireless projects because of their inexperience. The extent of our bids that are nonwireless state contracts is very low, and will continue to represent a very small portion of our business. Our focus continues to be specialty communication systems and each subsidiary is developing its ability to provide complete services in this regard. Other than the modest pressures building in the nonwireless low bidder market, we maintain a competitive advantage in the market and continue to see demand for our specialty engineering services.

The second quarter included two new acquisitions closed in August, 2007, both Major Electric and Max Engineering have been successfully assimilated and are expected to contribute positively for the remainder of the year. For the upcoming third quarter, WPCS has added Empire Electric of West Sacramento, California, which was closed on November 1st and James Design of Brisbane, Australia, which was closed on December 1st. In the next month or so we'll assess the contributions anticipated by our two latest acquisitions combined with any budget revisions to determine what our EPS target should be for fiscal year 2008. At this point, we're confident in achieving a higher revenue target and at least the $0.88 in earnings per share targeted currently established. However, any changes in guidance will be officially announced.

Our expansion into Australia with the acquisition of James Design which is based in Brisbane is an important milestone for the company. James Design is a well recognized design engineering firm specializing in low voltage and security systems, and they're looking to expand their expertise in wireless systems. Australia is experiencing significant growth from their raw material mining exports to India and China, which is expected to continue at a fast pace for the next five years. This economic expansion has caused the need for Australia to upgrade its communications infrastructure and we want to capitalize on that opportunity.

From a strategic initiatives perspective, we want to continue to increase earnings per share and the net tangible asset value for the company. We'll do this by sponsoring organic growth as our existing subsidiaries are working together more and more with an expansive customer base to achieve enhanced results. In addition, we'll continue to search for accretive acquisitions that will add to our service capability and increase the size of our customer base. As a priority, we'll continue to expand our business internationally into markets that can yield substantial revenue and profit. Currently, we're focused on building our presence in China and Australia. As stated in our last conference call, our goal is to generate a substantial amount of our revenue from the international market in the future. WPCS is evaluating additional domestic and international acquisition candidates at moment.

In summary, the management team at WPCS is confident in achieving the goals established for the fiscal year, we remain encouraged about the economy and the specific market opportunities for our company. At this point, I'll open up the conference call to any questions, so Diane, I'll turn it over to you.

(OPERATOR INSTRUCTIONS). And the first question we have is from Amit Dayal.

Thank you. Good afternoon, Andy.

Hi, Amit. How are you?

Very good. Thanks so much. Just on the acquisition front, could you talk a little about your effort in China? You had said in your previous call about, you had some candidates lined up and in addition to that, if you could address, has there been any changes to how you think your acquisitions are going forward? Is that in terms of size or any other criteria that you may have added or taken away from what you are looking at right now?

In China specifically, we have a couple of acquisition candidates and we have one that is -- we're very close to finalizing a transaction with. So we haven't announced anything yet. We're still in the process of finalizing and completing everything, but we're very encouraged that we'll have our second China company possibly announced soon. So in terms of criteria, our criteria hasn't changed. We're still looking at companies that offer some sort of specialty communication services complementary to what we do, that are financially successful that have a great management team that want to stay on board and, of course, have a strong customer base.

Regarding revenue size, they vary. Typically in China and Australia, we've seen companies that are smaller from a revenue producing point of view. We are looking for companies that are larger. We are capable of making a larger acquisition but right now it doesn't seem that there are a lot of companies that are large from a revenue producing point of view. We're still internationally in the 3 to $8 million range in terms of prospects from an annual revenue perspective, and domestically, they're from 8 to about $15 million a year in revenue.

Great. Thanks so much. And just one more question. You talked about revenue blend from acquisitions kind of impacting margins at least in the near term. I mean were there any costs related to integration, et cetera that came into play this quarter that might have, put the pressure on margin or is it just business mix right now?

You're talking specifically about the gross margin, Amit?

Yes.

Yes. We had -- as I mentioned, we had a 27% gross average. We lost one percentage point based on the subprime general contracting issues that are focused on specifically one subsidiary in northern California, Clayborn Contracting that has a large percentage of their business emanating from state bids that are mandatory low bid awards and those are for non-wireless services. So that -- chasing that margin cost us probably one percentage point, but we have planned for 28% on an annual basis, and we're on track to be able to -- we're on track at 28% right now through two quarters and we anticipate being on track for the remainder of the year. In regards to the housing market or the subprime issues faced with these general contractors, we see that -- we see it consistently being a problem for the next four to six quarters because of the housing slump, but fortunately it represents a very small part of our overall revenue production.

Great. So just to follow up on that, Andy, in terms of your -- the outlook from a general perspective, a lot of talk about slowdown in terms of technology spend, et cetera. I mean are you confident that the solutions you are providing is going to be a strong demand for them at least for the next three or four quarters?

Again I think the only way we can measure that is based on the bids that we've responded to and the backlog that we have and our bid list is at an all time high at $125 million, and it has margin integrity meaning the bids are anywhere from 28% to 32% gross margin. Well, some are a little bit less, but in that general range, and that's indicative of the next eight to 12 months and in the specialty communications sector, especially public safety, healthcare and alternative energy and gaming, in those sectors, there needs for upgrading their communications infrastructure is still in demand. So we see for the next eight to 12 months we see a lot of revenue producing capability for our company.

Beyond that, we still see the market being strong for all specialty communications sector. We feel that the wireless infrastructure sector is a little soft and in 2009, our fiscal year 2009 planning period, we may have to ratchet down our projections in wireless infrastructure, but again, that only represents 11% of our overall revenue and our focus still clearly is on specialty communications business. So we remain very bullish even through some general technology downturns that overall market may be experiencing.

So we can assume that the bid mix is more towards specialty communications opportunities?

Absolutely.

Great. Thank you so much, Andy.

You bet.

Our next question is from Seth Potter.

Hi. Good afternoon. A few questions. First on your minority interest, it looks like that amount you paid out has increased about 10 or so times and trying to get a better sense of the dynamics in your tax subsidiary which is what that's related to, profitability, so forth.

Okay. Seth, I'll have Joe Heater, our CFO, address that issue regarding our minority interest.

Hey, Seth, how you doing? For the quarter, tax generated about $150,000 in net income. We took 60% of that, so the other 40% is reflected in that minority interest. As far as the overall business goes, they're expected to be on target for the year. They've started out somewhat slow the first six months, but it looks like from November through April that business will be strong. So we're encouraged by that subsidiary for the balance of this fiscal year.

Great. And then just in general on the margin expectation going forward, I suppose you expect to be in your 28 to 32% range as you mentioned. Is there on the operating mr engine line in terms of SG&A on an absolute basis the expectation to remain in this $4.5 million or so range? How should we look at that for the remainder of the year?

Well, Seth, this is Andy again. As far as our gross margin target, it's targeted at 28%, and just to address that point real quickly, we did 30% for the first quarter, but that had to do primarily with a blend of business. Some subsidiaries are doing specialty communications work at 35%, some at 25%, so it really depends on the blend, and which one does more business on a quarterly basis, and that really impacts our consolidated gross margin, but we feel strongly it will be maintained at least at 28% for the rest of the fiscal year. In regards to SG&A costs, we did -- we had a substantial reduction, we believe, in SG&A costs, and we feel that for the remainder of this fiscal year, that we'll be able to maintain that 16, 17% SG&A range which will give us a good delta between gross margin and SG&A. That will hopefully allow to us achieve what our expected guidance is for this fiscal year.

Thanks. Just a few more things. Given that we're about halfway through your next quarter, what are you seeing to date in terms of any changes and then also what's available under your line of credit? Thanks.

Well, the first part of the question, what are we seeing in term of changes, you mean from an economic perspective?

Well, has anything changed? You mentioned four to six quarters. I guess the issue on the state business. Are you seeing anything, that easing up any at all in terms of, your other businesses. Do trends remain the same, any changes you've seen, to date given that we're halfway through the quarter?

Yes. Well, that business is -- we're experiencing some difficulty in that little piece of a business, that state low bid award nonwireless services, but we've been transitioning these subsidiaries into a more complete wireless specialty communications offering, and that transition is going very well. So the slowdown that we have in that small piece of our business is being made up significantly by the other subsidiaries in terms of specialty communication systems business opportunities, and the specific subsidiary we're talking about, Clayborn Contracting is, in fact, making a transition into specialty communication systems, wireless systems, and they've been making that transition for the last 12 months, and they've been very successful to date. So we will lose a little bit of revenue projection from that one subsidiary, but it will be made up by other subsidiaries that are actually outperforming their budget. In regard to our credit facility, we have a credit facility with Banc of America, it's $12 million it's still relatively unused.

$12 million available.

We still have $12 million available, so --

Okay. Plenty of room to make other acquisitions?

Absolutely. And I think going forward we need to look at what the right blend of cash, maybe debt. We really have never introduced debt into acquisitions, but in terms of looking to maximize our earnings per share on an accretive basis, we might want to look at debt as a mechanism for future acquisitions. Keep in mind we've done six acquisitions in calendar year 2007, which is the most acquisitions we have ever done, and we've assimilated them accordingly, but , we've been very busy on that front and I think want to continue to be prudent as we expand and grow to the acquisition front while not compromising our emphasis on organic growth.

Okay. Great. Thanks a lot.

You bet, Seth.

We have a question from Kevin Greenberg.

[Kevin Greenberg, KSO]. How are you?

Good, Kevin.

Kevin, Kevin Greenberg. There we go. We got it right. Okay. I wanted to get an idea of distribution there at the country on deals and whether it was stronger in any part of the country or weaker in any part of the country.

In terms of our representation from an engineering services point of view?

In terms of a revenue and earnings view, if any region was stronger than you anticipated or anything showing any growing weaknesses on the coasts because of the real estate situations here?

No. I mean we had some softness in northern California, but a lot of strength in the Pacific northwest, a lot of strength in our eastern Mid-Atlantic corridor between Boston and Washington D.C. There's -- we don't have operations in the southwest part of the United States like the Phoenix, San Diego, that area. So we don't have any revenue representation there, but we're looking to expand and grow and hopefully we'll be able to find some domestic acquisitions that can fit that geographic area for us.

Okay. Also wondered if there's any acquisition that you've -- you said you've made six more acquisitions in the past calendar year. What size is too small for you to acquire at this point? Is there a size that doesn't make sense or is it a matter of filling out geographic or filling out a product a bunch of times?

Well, when we look at companies domestically we like to look at larger organizations and the only reason why we do something maybe around a $2 million revenue range or at the $2 million revenue range in the case of Max Engineering in Houston Texas which was one of our smallest acquisitions, the reason why we did that is because of their involvement in the alternative energy market space which was very important for us as a market to enter into and they were profitable. They're profitable and successful, but they're small. So if we look at smaller acquisitions, it's because they may be in a particular market or they may have a particular customer that we want, but typically we're looking at larger organizations in America. Internationally there may be, getting into a country getting established operationally may require us to look at companies that are lower in revenue producing dollars, still profitable, but lower in revenue producing dollars.

Okay. Thanks a lot.

You bet. Thank you, Kevin.

And [Dee Rosenberg] has a question.

Hello. Hey, you guys, it's Andrew from Footprints. I just had a quick question. You kind of hit on this Andy, but on the backlog in your bid list, what percentage of that is in specialty and what percent is wireless?

On the backlog we have of the 125 -- I'm sorry, of the $125 million bid list we have approximately 80%, 85% specialty communication. On the backlog, that number is closer to 90% specialty communications.

Okay. And then I want to ask you quick on the alternative energy being kind of a new market for you, can you talk a little bit about the gross margin in that specific vertical and maybe project size and competition that you see within that specific industry.

It's really fragmented at this point, Andrew, because we're just starting out, but it's high gross margin type business and it's specifically telemetry applications meaning networks that are used to measure the conversion of wind to electricity, electricity to hydrogen, things of that nature. So we're just starting out. There's not a lot of competitors. The competitors tend to be regional private companies that have pursued this business for the last few years, but it's very promising but I want to make sure that everyone knows that we're just starting out in that sector and we're just getting involved with bids and opportunities in that sector. It's very promising, very high margin producing and we feel it's going to be a very important market for us, but we're just starting out.

Okay. Is there any area of the country that you see more activity within that sector?

In alternative energy?

Yes.

Yes. Florida and Texas are the two areas that -- the two states that have the most bid activity.

Okay. And then can you talk a little bit about strength in healthcare? Is that something, too, that you're seeing, more strength, less strength than you have in the past?

Healthcare still remains very robust for us and still being driven by accurate patient information that's required from the insurance companies. It's still, we've counted less than 200 hospitals that have the electronic patient medical systems in America and we feel there's a large market to pursue. We see a lot of bid activity. It remains very robust for us.

In that vertical do you act as a subcontractor for, you know, like the Siemens, some of the other large companies out there, that maybe win bids and then go in and do the actual work?

Primarily we act as a primary contractor, but we do do work for companies such as McKesson or Cisco that is involved in healthcare that is providing their hardware technology and also for Johnson Controls, that does a lot of building automation. So we do do work for the general contractors, but we do have contracts directly with hospitals as well.

Yeah. Okay. Thanks a lot. Thanks for taking my questions.

You bet, Andrew. Thank you.

We have no further questions in queue at this time.

Okay. Then I would like to thank all the participants on today's call and I encourage you to call me directly at 610-903-0400 extension 101 or e-mail me at Andy_Hidalgo@WPCS.com if you have any additional questions. This concludes our call. Thank you once again.