StableX Technologies Inc (SBLX) 2008 Q4 法說會逐字稿

Welcome to the WPCS Fourth Quarter and Fiscal Year End 2008 Earnings Conference Call. Your host for the call is Andy Hidalgo, CEO of WPCS International, Incorporated. For the benefit of our conference call participants there will be a question and answer session after Mr. Hidalgo's overview. I will now turn the call over to [Gus Oakwool] of [DRCNE].

Good afternoon, everyone. Thank you for joining us for the WPCS International Fourth Quarter and Fiscal Year 2008 Conference Call. Joining me today on the call will be the Chairman and CEO of WPCS International, Andy Hidalgo, and the CFO, Joe Heater. Andy will discuss the WPCS fourth quarter and fiscal year 2008 financial results, as well as discuss the fiscal year 2009 guidance. In addition, he will provide an operational and economic overview for the company. A question and answer session will be held at the conclusion of Andy's comments.

WPCS issued a press release earlier today providing details of the company's financial and operating results for the fourth quarter and fiscal year 2008 year-end. There will be a replay of today's call available one hour at the completion of this call. The replay will be available through Sunday, August 3. The replay can be accessed by dialing 800-355-2355. The access code to the replay is 51651#. Please note that information reported on this call speaks only as of today, July 29, 2008, and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay.

I should also mention that our comments today contain forward-looking statements within the meanings of the Private Securities Litigation Reform Act of 1995. Our use of words, such as "anticipate," "expects," "intends," "plans," "believes," "may," "will," and other similar expressions are intended to identify forward-looking statements. Forward-looking statements include by way of example revenue and margin expectations or projections and various references to trends in the industry and to WPCS's business. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties and other factors, some of which are beyond our control, that could cause the company's actual results to differ materially from those anticipate in these forward-looking statements.

There are many risks, uncertainties and other factors that can prevent the company from achieving its goals or cause the company's actual results to differ materially from those expressed or implied by the forward-looking statements contained in our comments today. These factors and others are more fully discussed in the risk factors which are located in the WPCS Form 10-K and 10-Q as filed with the SEC.

I would now like to turn the call over to Andy Hidalgo.

Thank you, Gus. Good afternoon, ladies and gentlemen, and thank you for joining us for our fourth quarter and fiscal year 2008 earnings call. The agenda for today's call will include a review of our financial results for the fourth quarter and for fiscal year 2008. Also, we'll provide an operational and economic overview of the business, which will include guidance for fiscal year 2009.

In the fourth quarter ended April 30, 2008, WPCS generated approximately $27 million in total revenue, representing year-over-year growth of 51% from the $17.7 million reported in the corresponding period in 2007. From an earnings perspective, the company achieved $921,000 in net income or $0.13 per diluted share. The consolidated fourth quarter gross margin was 28% and our SG&A represented 19% of revenue.

During the fourth quarter of fiscal year 2008, our specialty communication systems sector accounted for approximately 90% of the company's revenue, while the remaining 10% was derived from our wireless infrastructure sector. As reported at the end of the fourth quarter, the company continues to maintain a strong balance sheet with approximately $7.4 million in cash, $4.4 million in long-term debt, and $26 million in working capital.

For fiscal year 2008 ended April 30, 2008, WPCS reported record revenue of 101.4 million, representing an increase of 45% from the previous fiscal year. The company's gross margin for fiscal year 2008 was 28% as planned, and SG&A expenses represented 19% of revenue.

From an earnings perspective, the company achieved 4.1 million in net income, or $0.52 per diluted share, compared to $4.6 million in net income, or $0.72 per diluted share, for the previous fiscal year. The primary reason for our lower than anticipated results for the 2008 fiscal year was a lower organic growth percentage than originally planned.

For 2008, the company anticipated a 17% consolidated organic growth rate. In actuality, the specialty communications sector experienced a 9% organic growth rate and the wireless infrastructure sector experienced a negative 28% growth rate. This means that our consolidated organic growth rate for fiscal year 2008 was 3%.

Obviously, the negative growth in the wireless infrastructure sector contributed significantly to the lower consolidated organic growth rate. There are a few reasons for this performance. First, we experienced a downturn in our Sprint/Nextel business at the end of the third quarter when the wireless carrier, due to mounting losses and financial restructuring, announced that limited bids would be awarded in the WPCS fourth quarter. This was the primary reason that WPCS reissued guidance for fiscal year 2008. After WPCS reissued guidance, Sprint/Nextel announced during the fourth quarter that it would also temporarily suspend the current work in process or progress, or as we refer to it as backlog.

WPCS did not anticipate that the backlog would be temporarily suspended and it affected earnings for the quarter by approximately $0.06 per diluted share. The suspended backlog has not lost business and WPCS expects to recognize the suspended backlog in fiscal year 2009. In regards to our specialty communication systems sector, we experienced a 9% organic growth rate for 2008, but again, it was less than anticipated. The less than expected growth rate was due primarily to project delays.

As reported at the end of fiscal year 2008, WPCS is still maintaining a strong backlog valued at $60 million, and a strong bid list valued at $145 million. Both the backlog and the bid list are maintaining margin integrity with estimated gross margins anywhere from 25 to 35% depending on the project. WPCS remains encouraged by the level of backlog and bid activity, but we also have a goal to grow both the backlog and bid list in the year ahead, as well as improve our gross margins by focusing on higher margin opportunities in the specialty communications sector.

Although we did not meet our original expectations for fiscal year 2008, WPCS did report record revenue, maintained consistent profitability, maintained a strong balance sheet, and maintained a strong backlog and bid list. All of this was accomplished despite challenging economic environments for many companies. The markets we serve continue to be high growth sectors with significant market opportunities.

WPCS has established an exceptional reputation as a design build engineering company with an extensive customer base. We believe the fact that we maintain a consistent backlog and bid list with solid gross margins demonstrates that there is demand for our services. We also believe that being able to provide our customers a complete design build capability, including wireless connectivity, electrical contracting, and construction, enables us to compete effectively not only in the domestic market, but in China and Australia where we have successfully established operations. The vertical markets we choose to pursue remain high growth and are displaying a resiliency to less than favorable economic conditions.

For example, in public safety, which includes police/fire emergency communication systems, asset tracking, video surveillance, and transportation infrastructure, the market remains well funded and politically supported. Advanced communication systems for security, voice, data, and video remains a priority for local state and federal legislators. Consequently, there continues to be a movement towards converting older analog communication systems with limited communication capacity to new digital wireless systems with increased capacity for voice, data, and video.

In healthcare, there continues to be new hospital construction and renovation projects, which creates opportunities for WPCS to deploy wireless solutions for asset tracking, patient records, and medical campus communication systems for voice, data, and video applications.

In gaming, there are new casinos under construction and renovations of existing properties underway and all are deploying advanced security platforms featuring wireless networks for two-way radio communication, video surveillance, and asset tracking. WPCS has established a significant customer base in the gaming industry and our reputation for quality design build capabilities continues to serve us well.

In fiscal year 2008, we made significant progress in the energy sector, one of our developing markets. As we all know, the energy sector is experiencing significant growth and many energy companies are deploying their capital towards upgrading their communication networks. WPCS maintains strong customer relationships with a number of domestic and international energy companies. In addition, we've seen a growing and global interest in alternative energy and associated infrastructure in response to high oil costs. As we experienced in the energy sector, many of the companies operating within the alternative energy sector are planning to deploy advanced communication networks.

As a result, WPCS is focused on providing design build engineering services for the wind and solar energy market. Specifically in the wind energy market, WPCS has recently been awarded several wind energy infrastructure projects that involve the deployment of wireless meteorological towers that measure wind capacity. Also, we just concluded the acquisition of Lincoln Wind, which adds to our engineering expertise and project capacity, as well as adding important customers, such as British Petroleum, Global Energy Concepts, Clipper Wind, and Infinity Wind Power.

Our goal is to expand our capabilities to provide additional wind energy design build engineering services, both domestically and internationally, as we anticipate an active wind energy market over the next few years. With respect to guidance for fiscal year 2009, we project that we'll achieve approximately $125 million in revenue and $5.6 million in net income, which should generate earnings of $0.74 per diluted share.

The guidance was prepared based on a thorough budget preparation process for each of our 14 operating subsidiaries taking into account their existing backlog, bid list, vertical penetration, and anticipated market conditions. We plan for a 10% consolidated organic growth rate in fiscal year 2009, which we feel is realistic and achievable.

In summary, we believe that WPCS has established itself as one of the leading design build engineering firms for specialty communication systems and wireless infrastructure. Our reputation is built on offering the highest quality of service. With another year of operating history behind us, we believe that we are well positioned for future growth and look forward to capitalizing on the positive global trends occurring in our vertical market.

Although we will continue to prudently evaluate and consider non-dilutive acquisitions, our primary focus for fiscal year 2009 will be to maximize the performance of our existing subsidiaries in order to stimulate organic growth and profitability.

So this concludes the formal presentation and we can open the call for questions and answers. So, Dawn, I'll turn it over to you.

(OPERATOR INSTRUCTIONS.) We have a question from Seth Potter.

Good afternoon. Just a few questions, Andy. Can you talk about your guidance and your budget process versus your organic growth assumptions of 10%? And any more detail in terms of how you went through that and if there was any difference between what you actually thought you could do versus what your organic growth rate is? And also, in regards to your guidance, the wireless infrastructure percentage for fiscal year '09, how much is implied in the 125 million and how do you get comfortable with what you think you could do in that business? Thanks.

Okay. Great, Seth. We'll answer the organic growth rate first. We made a number of acquisitions last fiscal year. So we took the budget planning process--we took the full year value of each of the subsidiaries that we acquired midyear--took their performance historically and we added a 10% organic growth rate based on what we saw in regards to our backlog and bid list in the markets that we were serving. It was a quantitative analysis to figure out the budget. Obviously, it's qualitative projection in terms of what we felt we can do from a growth perspective.

The specialty communications sector grew 9% last year organically, so we felt confident that we can grow that business again close to that--obviously, just a little more than that 9% to 10%. But we felt with our bid list, with our expansion into these vertical sectors, especially public safety, and the alternative energy business that we have, we felt confident that a 10% organic growth value was achievable.

In regards to wireless infrastructure, we're anticipating it representing--.

--About 12% (inaudible) this year--.

--12% of revenue. So 12% of $125 million. We're planning for the business to generate $15 million, which is 3 million more than we generated in fiscal year 2008. Of the 15 million, what we were able to do successfully last fiscal year was diversify our base of wireless infrastructure customers with less dependence on Sprint/Nextel. The Sprint/Nextel business for fiscal year 2009 is expected to achieve only $3 million. The rest of the wireless infrastructure business that we have projected--and these are based on maintenance contracts--expected maintenance contracts, expected rebanding and optimization contracts are expected to come from customers such as AT&T, also T-Mobile, also--who are some of the other carriers, Joe?

Cricket.

Cricket, Clearwire, and--who's the last one that [Jim Hines] has as a customer?

CrownCastle.

Right. So, CrownCastle. That's the diverse set of wireless infrastructure customers we have going into fiscal year 2009. Does that answer your question, Seth? Dawn, are you still there?

Yes, I'm still here. Actually, Seth is back in the regular call. He heard what you said. He's just not there to respond now. We do have a second question now from a Kevin Goldstein.

Hey, gentlemen.

Hello, Kevin.

I've got a couple of questions for you. Maybe I should ask them all just because I may also be dropped. The first question is just on the Sprint commentary. You said that this backlog was pushed back rather than it being lost. Is there any indication that this work will happen in '09? Has Sprint told you anything about restarting some of those orders? My second question--okay.

Here's--let me answer the first question for you, Kevin. There's no--there's obviously no guarantees, but we have commenced work on some of the projects that had been suspended in the fourth quarter. These projects are rebanding optimization, equipment swap projects that need to get done. The maintenance--that falls under the maintenance category and it needs to get done by someone. So I don't see Sprint not getting that work done. They just have obviously financial difficulties and stopped the expenditures in the fourth quarter with their vendors. But we anticipate that roughly the $3 million--in fact, that's all we're anticipating that we do with Sprint/Nextel in fiscal year 2009. We're not counting much on their extended business or expanding that business. But we intend to realize that or recognize that business in fiscal year 2009.

My next question is that--you said that heading into fiscal year '08 you were expecting 17% organic growth. And this was at a time when your backlog entering the year was around 35 million on trailing revenues of 70 million. So fast forward to this most recent quarter. You have a backlog of 60 million on trailing revenues of in the 90s. So I guess just kind of I wanted to follow-up on the first question of getting an understanding of your guidance. It seems like your backlog--if you felt you could do 17% growth a year ago, your backlog seems stronger this year than it did last year, yet your guidance is for less organic growth. I was just hoping you could reconcile that.

You mean our organic growth rate is less--you mean more conservative this year--.

--It seems like you're being quite--yes, it seems like you're being quite conservative given the level of backlog that you have in the pipeline.

Well, we are. I mean, to be honest with you, we are being conservative because we have a credibility issue of missing our number last year. So we wanted to take the budgets that we had, figure out exactly where we needed to be, and then take into account maybe some of the issues that caused us to miss our numbers last year. So we feel that we're being conservative, but, again, we need to be able to establish a number that we feel is achievable and something that can reestablish our consistency of hitting that guidance. We've guided for three years. We've hit two of the three years, but last year we did not hit our guidance. And there are some issues regarding economic uncertainty, but we took those into account as best we could. And it's--again, it's a qualitative projection that we feel we can achieve. So we feel the business is there, the markets we serve are there, the opportunities exist, but we're just taking a more conservative approach.

Okay. I just have one last question, which is can you comment on the DSOs? I know it looks like they jumped a little bit.

Yes.

And any color on anything that happened since the quarter's end.

Yes. The DSOs are at 79 days, which are I think four days beyond what we posted last quarter. 79 days is not our most ideal situation. We'd like to be able to get that number down. I think the reason why it jumped is that we made six acquisitions in the last year and we inherited companies that were third tier contractors that had longer DSOs. So on average, it extended our DSO rate by those four days. That's something we need to work on and something we need to bring down. Ideally, we'd like to target the 60 to 65-day range as a goal for us. But we do have cash. We're not cash strapped, but again, our DSOs need to come down.

Okay. Well, good luck in the next year.

Thank you, Kevin.

We have Seth Potter back on the line.

Hey. Thank you. Just following up on Kevin's question. What does your cash balance look like as of today given that this is almost three months ago? Have you collected any receivables? And has your capital structure changed in any way? And then, also, just looking at your capital structure it looks like you have about a little over 6.5 million in total debt, 2 million of which is short-term, due to shareholders - a little over 2 million. And how do you look at your capital structure going forward and what's the optimal structure for the company in your view?

Well, we can only base it on what we reported at the end of the year--our working capital position. There hasn't been a dramatic shift at all in working capital. Are you driving at the point maybe to eliminate our debt obligations and work on a positive cash balance, Seth? Is that really the question or--?

--Well, it's just is this the optimal structure? And I guess as you said, the capital structure didn't really change, the AR balance hasn't really changed, or has it changed in any way since the end--since April?

Well, I mean, we don't have--certainly I guess in answer to your question, no, it hasn't. It hasn't--.

--What--let me. I guess first of all, Seth, I mean, we ended the year with 7.5 million in cash. Through the first two months of this quarter we've certainly collected receivables. I mean, we continue to bill. At the same time, we've paid an earn-out related to Voacolo, so--but I don't anticipate any drastic changes in our total working capital composition. We may have more or less cash depending on how much we collect offset by what we paid out for the earn-out.

Well, that's fair. And then, just so I can tie it out, your fiscal '09 guidance, what's the EBITDA level that that implies or about the EBITDA level that that would generate?

$12.5 million.

Okay. Okay, great. And then, one last question is on the alternative energy side of the business, are there any other markets that the company can target to I guess further increase your growth rate, or is the wind market pretty much the predominant market you're focusing on right now?

Well, right now, we're focused on the solar and wind infrastructure markets, and they do have good expected high growth capacity. There is a possibility with legislation being passed that you'll have coal gasification as a possibility and nuclear construction as a possibility. We won't know until after the election, but both candidates seem to be emphasizing the alternative energy in the infrastructure sector. So there's a possibility that we can get involved in providing communication infrastructure for those other sources of alternative energy, but right now there isn't a build out yet planned in nuclear or coal gasification. So we are focused on wind energy and solar.

Wind seems to be a very appealing process now for us - very opportunistic, higher gross margin. And they have definitive build-out plans, and I'm talking about companies such as Florida Power and Light, NRG, companies like Iberdrola, who is the Spanish company that's come here to the States to build-out, and Duke Energy, Alliant Energy. So companies--these companies have definitive build-out plans for wind energy or wind farms, which of course, entail the wireless meteorological towers that we're getting involved with.

So there seems to be enough opportunity in wind and solar right now for us to expand significantly into that vertical sector. But I think in the future there could be additional alternative infrastructure opportunities depending on how legislation goes after the election year.

Great. And two quick--I appreciate it. Two quick follow-ups. First, Joe, I don't know if you have the percentage of Sprint in fiscal year '08. And then, also, any--want to make clear the first quarter of '09, which ends in a few days, that on your SG&A side--how should we look at the first quarter given audit and other expenses that may come in in that quarter? Thanks, again.

You're welcome. We don't--.

--I guess to answer his first question, the Sprint business, Seth, we did about 4 million in Sprint business in 2008, so that's about 4% of our total revenue.

And then, in regards to--the second question was--.

--With regard to our SG&A percentage.

Yes, the SG&A percentage for the first quarter. We--.

--We budgeted--.

--What did you budget for the first quarter?

We budgeted 19%.

We budgeted 19%, Seth. We did 19% total SG&A in 2007 and we did another 19% in 2008. There's potential room to improve on the SG&A number possibly down to an 18% range. But I think we're--where we may have the benefit of increasing profitability would be on the gross margin line. So there is some inflationary pressure in terms of--inflationary expense cost of doing business issues that have kept us in the 19% range. So we'll see how it progresses through the year. But we feel that--we feel we have a good handle on SG&A expense at the moment through the first quarter as well.

Okay. Thanks, again.

You bet, Seth.

We have no other questions in queue at this time.

Ladies and gentlemen, as a reminder, this call will be available for replay beginning an hour after the call has ended, and can be accessed until Sunday, August 3, by dialing 800-355-2355. The access code for the replay will be 51651#. On behalf of the WPCS management team, we would like to thank you all for participating on this call.