StableX Technologies Inc (SBLX) 2009 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the WPCS International Inc. fiscal year 2009 second quarter investor conference call. Your host for today's call is Andy Hidalgo, Chairman and CEO of WPCS International Inc. Before I turn the call over please be advised that the participants on today's call will be in a listen-only mode until Mr. Hidalgo has concluded his opening remarks. Upon conclusion of the opening remarks, there will be a question-and-answer session.

In addition, we would like to note that statements about the Company's future expectations, including future revenue and earnings and all other statements made during this investor conference call other than historical facts are forward-looking statements and are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties and are subject to change at any time. The Company's actual results could differ materially from expected results. In reflecting subsequent events or circumstances, the Company undertakes no obligation to update forward-looking statements. I will now turn the call over to Mr. Hidalgo.

Good afternoon, ladies and gentlemen, and welcome to our fiscal year 2009 second quarter investor conference call. The agenda for today's call will include a discussion of our financial result, as well as a review of our guidance, expectations for the current fiscal year. In addition, I will discuss the state of the economy as it pertains to WPCS, the markets we are serving, and I will conclude with a review of our strategic initiative.

First, we will discuss our financial results. For the fiscal year, 2009 second quarter ended October 31, 2008, WPCS generated approximately $29 million in revenue, which represents a 2% increase compared to the same period a year ago. From an earnings perspective, the Company achieved $362,000 in net income or $0.05 per diluted share. The consolidated second quarter gross margin was 26%, and our SG&A represented 21% of revenue. The specialty communications systems sector generated 89% of our revenue, with wireless infrastructure generating the other 11%.

The Company continues to maintain a strong balance sheet with $29 million in working capital, $7.6 million in credit line borrowing, and $13 million in cash. The increase in cash has come primarily from improved receivables collection. In addition, our credit line borrowing to working capital ratio remains favorably low at 26%. This ratio is an important indication of our financial strength as a Company, I'm sorry as our Company does does not have a dependence on credit.

For the six months of fiscal year 2009 ended October 31, 2008, WPCS generated $57 million in revenue which represents a 14% increase compared to the same period a year ago. From an earnings perspective, the Company has achieved $1.2 million in net income or $0.17 per diluted share. The consolidated gross margin for the first six months of fiscal year 2009 is 27%, and our SG&A is 21%. As of October 31, 2008, WPCS has a backlog of $48 million a bid list of $137 million.

Turning our attention to guidance, the initial fiscal year 2009 guidance provided by WPCS which was announced in July 2008 outlined a revenue projection of $125 million, net income of $5.6 million, and $0.74 in earnings per diluted share. Due to these challenging times in our economy, we have revised our expectations for fiscal year 2009, we are now projecting for the current fiscal year, a range of $112 million to $115 million in revenue, $2.7 million to $3.1 million in net income, and $0.38 to $0.44 in earnings per diluted share.

In our domestic, specialty communication systems segment, the consolidated gross margin dropped for the second quarter. We expected higher margins on higher revenue and achieved lower margins on lower revenue which explains the reduction in earnings per diluted share. One of the key factors in gross margin reduction for the second quarter was deflationary economic pressure. However, we believe that the margins can improve going forward based on our specific market focus, and based on an anticipated improving economic environment. Our SG&A will also improve with better revenue production in the coming quarters.

Our new earnings per diluted share range estimate of $0.38 to $0.44 takes into account a conservative projection of shares to be repurchased and retired by WPCS for the current fiscal year. The earnings per diluted share can increase if the Company is able to repurchase more shares than projected. Our projection is approximately 500,000 shares repurchased and retired for this fiscal year which ends of course April 2009. So far, the Company has repurchased approximately 200,000 shares.

In addition our revised guidance is based on conservative revenue production estimates. These do not take into account the new stimulus package that is targeted in early 2009 by the new Presidential administration for public service, infrastructure projects. It is possible that we can can recognize more revenue from the conversion of bids to backlog if the stimulus package passes legislation. However, that will depend on how quickly we can begin some of these projects.

I would now like to discuss economic conditions as it pertains to WPCS. Obviously, the recessionary economy has adversely affected businesses in general, and it has caused WPCS to revise our expectations. From our perspective, the headlines, news stories and indicators pertaining to the global economy have been troubling these past few months. However, WPCS is seeing positive signs. As everyone is aware, policy makers are pouring money into the economic system and although these funds have not yet fully found its way into the economy, we believe it is just a matter of time when banks will look to generate a higher rate of return. We are seeing a thaw in previously frozen credit markets that is expected to help our customers finance new projects going forward.

Turning our attention to the markets we serve, in the specialty communications systems segment of our business, WPCS operates in five sectors. These sectors include public services, health care, energy, corporate enterprise, and gaming. We have seen a significant slow down in corporate enterprise and gaming. We have also seen a slowdown in public services, but not as significant. The slowdown has caused us to miss our original revenue projections.

We believe that the corporate enterprise and gaming sectors will remain flat this fiscal year. However, we feel very encouraged that our focus on public ser services, health care, and energy is not only the right focus but will continue to provide the opportunities we need to build shareholder value. In the public services sector, although general spending is down at the state and local government level, due to a decrease in tax revenue, and credit impediments, the budgets for communications infrastructure for the most part remain intact. This is due primarily to the emphasis on public safety and security. In addition, as discussed, there has been a pledge by the new Presidential administration to federally fund public services for the development of infrastructure for highways, bridges, roads and communications. It is planned that this public services sector will be a source for new job creation here in the US.

The indication from our customers and public services is that spending for communications infrastructure will continue going forward, and will be bolstered by the stimulus package once enacted. We believe that WPCS is in an excellent position to take advantage of the potential market expansion in public services due to our outstanding reputation in this sector.

In the health care sector, the primary drivers continue to be the need to provide health care infrastructure for our aging population and to cut costs through health care reform. The implementation of technology not only improves productivity but continues to be a labor cost cutting measure for hospitals. We continue to receive bids for security systems, paging systems and wireless networks that can support mobile devices to keep track of hospital data.

In the energy sector, oil, gas, water, and electric utility companies continue to upgrade their infrastructure and implement wireless technology solutions for improving their operations and managing their assets. These energy companies are well funded and continue to request bids. In alternative energy, the development of wind and solar has accelerated and WPCS has successfully positioned itself as a competent provider of design build engineering services for this market. We see strong growth and bid activity in this sector. Particularly in the wind energy sector, as Congress recently approved a bill to extend the renewable energy production tax credit through the end of 2009. The potential within these three sectors continues to be validated through an analysis of our backlog and bids. The $48 million in approximate backlog ended October 31, 2008, represents 65% of public service projects which includes education and federal government work. In addition, 17% is represented by health care projects and 6% is represented by energy projects.

In regards to our bids, the $137 million in approximate bids ended October 31, 2008, represents 59% of public service projects which have, again includes education and federal government work. In addition, 14% is represented by health care projects, and 12% is represented by energy projects. The remaining percentage of backlog and bid list activity is focused on wireless infrastructure, corporate enterprise, and gaming projects.

As you can see, in the percentage break down, the public services, health care and energy sectors are displaying strong growth potential for WPCS. And by focusing on these growth sectors we can improve our gross margins.

Internationally, our two primary markets China and Australia from an infrastructure perspective have not been as impacted by the global economic slowdown. Although our international segment only represents 6% of the total revenue for WPCS, we see the promise of growth and expansion in both China and Australia even through these economic times. China is well funded for expansion, and last month, approved a $600 billion stimulus package targeted at improving the country's transportation and energy infrastructure. To measure the magnitude, this represents a stimulus package equal to 25% of their gross domestic product. Through our China subsidiary, WPCS is currently focused on the energy infrastructure sector with key customers such as Guangzhou Gas, and China National Petroleum. Our goal is to continue building our energy infrastructure business in China, however, we are also looking to expand into China's transportation infrastructure sector by training our existing China subsidiary and preparing them to pursue the same type of opportunities we pursue here in the US.

In Australia, the Reserve Bank has recently reduced the policy interest rate 75 basis points to 5.25%. Which has helped inject capital for continued infrastructure expansion. Through our two Australian subsidiaries, WPCS is primarily focused on the corporate enterprise sector. Although this sector remains active, we want to diversify our engineering capability to include energy infrastructure by providing the same type of wireless solutions that has generated good returns for us here in the US. At the present time, there is a demand in Australia for wireless technology in the energy infrastructure sector. This initiative is underway and includes technical training for our existing subsidiaries while working with our global technology partners to pursue specific opportunities in Australia. So as far as China and Australia, most economists estimate that both countries are expected to have positive GDP growth rates of 2 to 6% over the next four quarters. WPCS remains on target with our international revenue expectations for the fiscal year, and relative to our revenue expectations, we are maintaining a solid backlog in bid listed activity in those countries.

Lastly, I would like to update everyone on strategic initiatives. WPCS continues to develop and implement strategic initiatives that strengthen our Company for the future. At the present time, our focus is on organic growth through customer and market development. Although we are considering smaller acquisitions that enhance our engineering capability, and will expand our customer base, we are not looking to make any major acquisitions at this point. We believe there is significant earnings growth that can occur within our existing operations.

One important initiative that we have launched is a branding strategy that will bring all of the individual subsidiaries under the WPCS name. The principle purpose of this initiative is to position the Company so that we can pursue national account contracts with our existing customers which is difficult to do today under so many brands. Also, we want to attain national purchasing power by combining all subsidiaries as one purchasing source. If we are successful in achieving these two objectives, we will see an increase in revenue, a reduction in cost of sales, and a reduction in SG&A costs. The branding initiative will be done cost effectively, and should be completed in six to eight months.

To summarize this investor conference call, we recognize that our shareholder value is diminished these past several months and we know that the economic slowdown, credit crisis, and site to safety has impacted the value. However our management team is dedicated and encouraged about our future. The five key points that investors need to understand include WPCS has established itself as an organization with an outstanding reputation for the highest quality of design build engineering services. WPCS has been consistently profitable even though or even through these challenging economic times. Also, WPCS has built a strong balance sheet that does not depend on credit. And WPCS has a management team that understands its market opportunities.

Lastly, WPCS focuses on public services, health care and energy infrastructure which is a markets that are expected to yield significant growth in the years to come. We'll continue to focus on building shareholder value for our investors and most importantly we're confident that we'll deliver these results. I'd like to now turn the call over to the operator to begin the question-and-answer session. So I'll turn it back to you.

(Operator Instructions) We have a question from [Elaina Cheng].

Yes, Elaina. Go right ahead.

Hi. Forgive me. I came into the call a little late. I was wondering what kind of IR plans you currently have and what IR plans you have going forward?

We don't have, we haven't engaged the services of investor relations firm as of right now, but we are waiting for the turn of the new year and we anticipate that we will be actively, we will be actively in the investor relations segment of our business in the first quarter of 2009. Most likely we will select a firm at that point in time.

And you also mentioned with the five sectors that you guys covered, the public service, energy and gaming health care, et cetera can you possibly provide any guidance maybe on the numbers going forward. It seems like public service might be an area that was going to have great potential and as you noted you might obviously be taking advantage of the fact the incoming President is going to be, not heavily, but obviously investing in infrastructure growth and creating jobs. I was just wondering if you can give us or elaborate on the sectors and where you see the greatest growth coming?

We think that the, certainly, from a consolidated point of view we feel we are going to add another $0.21 to our initial guidance that we have achieved through the first six months of this fiscal year. However, we feel fiscal year 2010 can be a very exceptional earnings year for us because of these three market sectors that we serve. We are in public services. So that represents 65% of our backlog and 59% of our bid list activity right now. So we have established ourselves significantly in this market sector and we feel very well positioned if in fact a stimulus package is legislated in early 2009. But we do believe that we are going to continue to succeed in the communications infrastructure aspect of public services with or without a stimulus package. So that tends to be our foundation sector right now.

In health care, and in energy those two sectors are very promising, very encouraging from a bid activity point of view but they represent a smaller portion of our business right now. But I think global health care and energy have the potential to grow substantially over the next few quarters especially in the energy sector where we are seeing and more bids in alternative energy. Was that your last question, Elaina? I the turn it over to you for more questions.

We have a question from [Max Riabi].

Hello?

Yes, Max, go right ahead.

Yes, hi, Andy, a couple of questions regarding the share buyback program. I know this program was just recently announced, and the Company has repurchased about 200,000 shares. Can you elaborate on the -- are these shares being purchased from private parties in private transactions? What is the average cost that the Company has paid so far for the common shares? And secondly, with the stock where it is right now and even with the reduced guidance, it is trading at fairly low market pulse, but I have not seen much participation by management even at the $1.60 level. Could you please tell me where the management stands in regards to its own plans for buying shares as well as if the Company has bought 200,000 shares so far it does not appear they have been purchased in the open market. Could you please elaborate on that?

Certainly. On the share repurchase program, we work, we are working under the parameters of 10-B-18 which is an SEC regulation that states we can buy up to 25% of our volume on a daily basis. Our volume has been low. So, our purchase parameters are probably in the 4,000 share range right now. The 200,000 shares that were purchased in fact, let me step back. The ceiling that we have established for repurchasing is $2.50 a share. These are all stipulated in the filings that we have made. We have purchased about 4,000 to 6,000 shares on the open market, but we purchased 200,000 shares on a block that was a private transaction. We are able to make any block purchases that are made available that are over certain threshold from a financial point of view. So we gained most of our repurchase right now from a buyback or a private block transaction and will continue to do that as we do through this repurchase program when they're made available.

So would you say that the average cost on this 200,000 shares is in the what $2.50 range.

Yes, it was between $2.45 and $2.50.

Okay. And there is a level at which point the Company may not be willing to pay higher for the rest of the shares which you expect to be about 0.5 million shares between now and the end of March. Now, that is entirely on where the stock is going to be trading and at what blocks it will be available. So you may or may not reach the 500,000 share threshold. Am I right?

Well, that is correct, but we can, we can can readjust our target price at any time. So, the target price is established originally at $2.50 a share, but that number can go up depending on where the stock is trading. But, it is flexible, and we do have a sincere interest in repurchasing shares at this price. So we will have to judge where the stock price trades at and make adjustments accordingly.

In terms of managements own intentions.

Well, management, management has, as you know I personally bought shares back in September.

Yes.

We had a quite period that we had to deal with up until this December 15, earnings announcement. There are from the executive officers point of view, there are intentions of some to purchase shares in the future. I can't elaborate as to how much and who. But there are managers and there are employees that do purchase stock back that are not, that do not have to file a Form 4, only the executive officers do, and they were subjected to the quiet period up through the earnings announcement day today.

Right.

But there is a feeling that this is a very attractive stock price right now, that is very lowly valued. And that's why the Company has decided and that's why employees will decide to continue to purchase stock on the open market.

Andy, one more question, unrelated to the share purchase program. With regards to the acquisitions that the Company has made over the last year and a half, is there any intention to bring the physical location of a number of those offices under one roof, to reduce SG&A costs as well as perhaps be a bit more focused with regards to management of the staff, the executives of those companies or is it not possible to do because of the logistics problem or the issues with regards to the physical location of those companies?

Well, in some instances, there's an opportunity to consolidate costs and that's with this branding strategy we intend to brand all of the subsidiaries under one name and take advantage of anything we can in regards to purchasing and national account sales activity. We are spread out from a locations point of view. So there's only a few subsidiaries that are located close together and that's primarily in Sacramento. But these operations are very functional and are property staffed at each location. And there is no logistical benefit and there's no, there's no way that it would be effective for the employees to operate out of one location in a certain city. So, our locations are spread out. They're effective, cost effective wise, but we do in fact look to increase some operational efficiencies by establishing and concluding this branding strategy.

Thank you, Andy, and the last question is regarding the head count, do you feel that within this fiscal year it is going to remain fairly consistent?

Well, we have reduced our head count accordingly through these economic times. It hasn't been a major cut back. And we feel at this point in time we are sufficiently staffed to be able to achieve the EPS objectives for this fiscal year and an increased, obviously an increased effort in fiscal year 2010.

All right. Thank you very much.

You're very welcome.

Good luck.

Thank you.

(Operator Instructions) We have a question from [Keith Gill].

Andy, Happy Holidays, to all.

Thank you, Keith.

A question, two questions if I may, one regarding your subsidiaries, are you expecting all of your subsidiaries to be profitable for the current fiscal year?

The answer to that question is yes, Keith.

Okay. And second question, which you have touched on a couple of times but is it possible for you to supply a little bit more detail in how you're your branding strategy will actually increase your revenue opportunity and reduce costs of sales?

Yes, Keith. In regards to the branding strategy, right now, it is very difficult for us to provide a national account program for major account, major multinationals that are customers of WPCS, and I am talking about companies like General Electric and Lockheed Martin, Federal Express, UPS, a lot of these companies have requirements on a national and global basis. But with many different subsidiaries tying into one national account program, it is very difficult to manage. So we believe that going out to these special relationships that we have and tying them, tying them together with one sort of pricing strategy and product services offering will create opportunities for all our subsidiaries under one brand name. So we believe we are going to have revenue upside in this relationship in this branding relationship or branding strategy.

The second component is that we buy, we have 13 different operating subsidiaries that are purchasing many times from the same source, same supplier source, and we are not maximizing our purchasing ability to be able to get under one contract that gives us quantity discounts, volume discounts. And we feel that that specifically can reduce our cost of doing business. So, the combination of the two will have what we feel a very positive effect on our income statement, and essentially give us an opportunity to maximize earning potential.

And how quickly do you think you might be able to begin to realize this? I know you mentioned six to eight months earlier but that was in full implementation I believe.

Yes, I believe realistic expectation is to be able to see something occurring in the beginning of fiscal year 2010 which is our May 1, 2009 start date.

Thank you.

Thank you, Keith.

Our next question is from [Art Ballinger].

Hello, Andy.

Hello. How are you?

Good. You have outlined the cash position as improving pretty considerably from quarter to quarter. Has there been any reduction in the DSOs, and is that a continuing trend?

Yes, there was a significant reduction in the DSOs or days sales outstanding. It went from 93 days at the end of the first quarter to 64 days at the end of the second quarter. So we did a, we did an excellent job collecting receivables and really it did improve our cash position substantially. We feel our comfort zone for DSOs will be 70 to 72 days, and we established that goal in the first quarter, we wanted to target the 70 to 72 days as an objective for the end of the second quarter and we actually surpassed our expectation, but we feel the 70 to 72 days is going to be a likely, is going to be a likely range for our DSOs going forward.

Excellent. Good luck.

Thank you. Are there any other questions?

No, there are not. So if there are no further questions I would like to thank all of the participants on today's WPCS International Inc. fiscal year 2009 second quarter investor conference call. Please keep in mind that a replay of this investor conference call will be available for a period of five days by dialing area code 402-220-2946. 402-220-2946, and using the playback pass code 81553 followed by the pound sign. That is 81553 followed by the pound sign. This will conclude the call. Thank you.