StableX Technologies Inc (SBLX) 2009 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. Thank you for standing by. Welcome to the WPCS International Incorporated fiscal year 2009 third quarter investor conference call. Your host for today's call is Andy Hidalgo Chairman and CEO of WPCS International Incorporated. Before I turn the call over to Mr. Hidalgo, 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 the statements about 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 from expected results. In reflecting subsequent events or circumstances the Company under takes no obligation to update forward-looking statements.

I will now like to turn the call over to Mr. Hidalgo.

Thank you, Maggie, and good afternoon ladies and gentleman and welcome to our fiscal year 2009 third quarter investor conference call. The agenda for today's call will include a discussion of our third quarter financial results and our fourth quarter financial expectation. In addition, I will discuss market conditions and conclude with a review of our strategic initiative.

First of all I would like to discuss the third quarter financial results. For the fiscal year 2009 third quarter ended January 31st, 2009, WPCS generated approximately $25.3 million in revenue which represents a 2% increase compared to the same period a year ago. From an earnings perspective the Company achieved $178,000 in net income or $0.03s per diluted share. The consolidated third quarter gross margin improved 1%, from the proceeding quarter to 27%. Our SG&A represented 23% of revenue. And the specialty communication systems sector generated 91% of our revenue, with the wireless infrastructure generating the other 9%.

The Company continues to maintain a strong balance sheet. With $28.3 million in working capital, $7.6 million in credit line borrowing and approximately $10 million in cash. In addition, our credit line borrowing to working capital ratio remains favorably low at 27%. This ratio is an important indication of our financial strength as our Company's not depending on credit to finance our operations. Accounts receivable collections remained stable with DSO's averaging 68 days.

For the nine months of fiscal year 2009, ended January 31st, 2009, WPCS generated $82.4 million in revenue which represents a 10% increase compared to the same period a year ago, from earnings perspective the Company's achieved $1.4 million in net income or $0.19 per diluted share. The consolidated gross margin for the first nine months of fiscal year 2009 is 27%. And our SG&A is 22%. As of January 31st, 2009, WPCS International has a backlog of $41 million and a bid list of $136 million.

Now the third quarter combined with the second quarter for fiscal year 2009 has been challenging quarters for WPCS International. Although as a Company we are generating profits with a respectable gross margin and maintaining a strong balance sheet during these difficult economic times, the results are still not satisfactory. For the third quarter, WPCS projected $27.2 million in revenue and we achieved $25.3 million in revenue. Due to the short fall in revenue, there was really no year-over-year organic growth for the third quarter. This revenue shortfall contributed to the lower than expected earnings per diluted share and the higher SG&A cost due to non-billable labor.

The primary reason behind the third quarter revenue shortfall is the pull back in bid solicitations in the public services sector of our business. In general local government and education held back on expenditures until it became clear what funding would be made available through the legislation of the stimulus package. The positive news for WPCS is that the stimulus package was passed through legislation in February, and an allocation of approximately $90 billion has been set aside for public services which includes transportation, education, and communications infrastructure. Although the funds will not be dispersed for a few months, we are already beginning to see an increase in bid solicitations based on the certainty of federal government funding support.

Although there was funding uncertainty in the public services sector these past few quarters, the demand for upgrading infrastructure remains high. WPCS International is very experienced and maintains a stellar reputation in the local government and education sector, which should result in an active bidding cycle in the months ahead. Due to the pull back in public services expenditures and the delays cause in converting bids to backlog, WPCS had no choice but to revise its guidance projections for fiscal year 2009. As discussed in the second quarter investor conference call, the expectation for fiscal year 2009 was a range of $0.38 to $0.44 in earnings per diluted share. However, after reviewing our projected backlog recognition for the upcoming fourth quarter, we now estimate that the fiscal year 2009 will produce $0.25 in earnings per diluted share. Again this was caused primarily by the temporary slowdown in public services spending.

However, we want to emphasize that with the stimulus package in place, which by the way adds another $32 billion of spending in energy infrastructure and $20 billion in spending in health care infrastructure, our other two primary markets we believe that fiscal year 2010 will be a healthy year for earnings. If we can begin to see economic recovery in the the next 12 months, we believe that it will further enhance our earnings capability. We hope to provide fiscal year 2010 guidance parameters in the May 2009 time frame.

Let's turn our attention to the backlog and bid list. For at the end of the third quarter, WPCS had a $41 million backlog which is down from the $48 million backlog reported in the proceeding quarter. However, our bid activity at the end of the third quarter remains stable at $136 million, indicating that there are still many opportunities to pursue. Currently, of the backlog of contracts awarded and in process, approximately 70% are public services projects and 15% are health care projects, 5% are energy projects with a balance in corporate enterprise work.

An important point to highlight is that although a slow down of public services bids occurred these past few quarters, public services still represents a large part of continue contracts awarded. This continues to be a positive indication that products infrastructure services are in high demand and opportunities to capture more backlog will only improve with additional funding support from the newly enacted stimulus package.

In regards to current bids, approximately 60% of public services projects, 12% are health care projects, 5% are energy projects and the remainder are corporate enterprise projects. Besides the expected growth in bid activity in the public services sector due to the fiscal stimulus, we believe that the health care and energy markets are poised for growth over the next several years. In addition, our international sector, although representing only 6% of total revenues year to date remains strong. We are very encouraged in particular with the China economy and its prospects for growth.

Now obviously the performance of the stock has been disappointing. Part of the reason is our inability to achieve the previously established earnings per diluted share targets through these difficult economic times. However, also contributing to the low valuation is the lack of investor confidence in the markets overall. There has been a flight to quality intertwined with an occasion flight to safety that brought the market to new lows recently. We believe the indecisiveness of the new Presidential Administration in regards to specific recovery plans for the banking sector has also played a role in this less than optimistic environment.

It's been several months and banks are still grappling with the toxicity and mark to market issues of some of the assets on their balance sheets. This continues to impair the flow of credit. The difficulty in the credit markets combined with a lack of consumption leading to unemployment and obviously negative GDP has adversely impacted most companies including WPCS.

However from a valuation perspective, our Company trades at one times cash and close to a third of our net tangible asset value. We believe we are heavily discounted and for this reason we'll remain buyers of our own stock. Since we initiated the stock repurchase program in December of 2008, the Company has acquired over 300,000 shares. Our Company is well established, financially strong and in growth markets that show tremendous promise. We will continue with the stock repurchase program in the future and of course we will work towards delivering improved results.

Lastly I would like to update everyone on the 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 customer base, we are not looking to make major acquisitions at this point.

The most important initiative we have launched in is the branding initiative or the branding strategy that's close to being complete. The branding strategy will bring all the individual subsidiaries under the WPCS name. And the purpose of course is to increase revenue opportunities through national and global account programs and also reduce cost of sales through volume purchasing. We are anticipating that the branding will be completed by May 2009.

In conclusion, the WPCS management team is not discouraged during these economic times. We see ample opportunity for our Company to establish itself as the premier design build engineering firm for communications infrastructure. The economy will rebound and we believe that the markets we serve both domestically and internationally will allow our Company to opportunity to grow and build shareholder value.

So with that, I would like to now turn the call back over to Maggie to begin the question-and-answer session.

We will now begin the question and answer session. (Operator Instructions). We do have a few questions in the question queue. Our first question comes from the line of [John Jung] with [Trial Head Asset]. Please proceed with your question.

Hi, Andy. Glad to see things are starting to look up a little bit. Question that I had, could you tell me what -- on the balance sheet is, you got a due to shareholders? Of about $3 million. $3.3 million.

Yes, John, I'm going to let Joe Heater our CFO who is here answer that question, John.

Yes. That's the balance that's due from our China joint venture to our joint venture partner, Taian Gas Group.

So, John in other words we own 60% of the China company and the other 40% minority owned position is owned by the shareholders in China.

Okay. That has grown by about 50% over the last year, does that liability continue to increase? What's that based on?

Well, it's -- I mean the liability grows, as our partner provides working capital for the joint venture, and then it gets paid back through collections of receivables. I mean it is a -- with the growth in the business they need capital. So -- and also from currency translation adjustments. So that balance is going to grow.

Okay. Can you give us a little more color about how that -- you've also got some Australian businesses I recall, can you give us a bit of color as to what you see happening over there in China and Australia markets.

Yes. In Australia we own 100% of the companies that we acquired there. We have to deal with currency translations and of course you know that the Australian dollar is down against the US dollar. But in regards to the markets, China of course was -- was primarily an exporter. And they had turned their attention recently to their internal infrastructure, bridges, highways, roads, transportation and communication. And the investment they are making in their country right now is obviously one that they can afford and was also enhanced by a stimulus package that they passed for $600 billion in December. So we see a lot of work increasing, in fact a lot more bid solicitations coming from China because of their emphasis on their own infrastructure. While they are waiting for the export markets to regain some momentum in the future with an economic improvement.

In regards to Australia, Australia has also offered stimulus packages and also reduced their interest rates. Their infrastructure is still antiquated and needs to be upgraded, so we are seeing consistent bid activity from Australia. Both combined, Australia and China represent or are projected to represent 2% to 6% GDP growth rates over the next six quarters. So we feel strong that our opportunities to provide infrastructure work for both these countries will remain very high.

Can you give us an idea of how that business is coming in terms of profits and how much negative cash flow or investment you continue to put into those markets?

Yes, on a consolidated basis, we don't report individually on these subsidiaries, but on a consolidated basis for Australia, we are profitable. And on a consolidated -- or actually an individual because there is only one company in China, we are also quite profitable. Keep in mind though, it only represents 6% of our revenue year to date. So it's not very large operations. But they both countries are very profitable.

Terrific. And I could ask one other unrelated question, can you tell me what your plans are with regard to stock buy backs?

We are going to aggressively pursue stock buy backs, John. In fact the lower the stock price goes, we are as aggressive as we can be. We are going to purchase on the open market, as we have done. We are going to consider block transactions that come available. We feel at this point in time the stock is heavily discounted. And if we have an opportunity to reduce the outstanding shares, the fully diluted outstanding shares and improve our earnings, we feel that that combination will eventually build the kind of shareholder value we would like to see.

So we are going to continue through this process. Originally when we set aside or set the shareholder repurchase plan we allocated an amount of two million shares that we would buy back. So just at over 300,000 shares repurchased we still have a ways to go. But we are going to continue to be very aggressive, John.

Terrific. Okay. Thank you.

Thank you. We will take the next question, now, Maggie.

Our next question comes from the line of [Matt Rossi with Link Capital]. Please proceed with your question.

Hello, Andy, how are you?

Good, Matt.

I have a brief question regarding projections that the Company has made in the past as well as the current projections. One of the reasons that you mentioned accounts for the decline in the fair price has to do with the flexibility of the management with regards to its past projections. And that sort of goes beyond the last two quarters. In fact, to the best of my recollection as I've been a shareholder for several years, it goes back to almost five quarters ago where the management had to come back and adjust downwards its projections at that time.

Now, it is much easier to lose confidence than to gain it. But given the fact that we all are aware of the economic situation, are you confident about the projections that you currently are making with regards to fourth quarter of this year? And has that affected the way you guys are planning to give future guidance for 2010 and beyond?

Well, Matt it's a fair question, and there is no question that we have done a lousy job managing investor expectation. We have projected -- we try to be as accurate as possible for shareholders. We continue to provide guidance as we feel it's only fair for our shareholders to know what we are expecting. But we haven't done a good job and the economy has affected us. So we go directly to our end users when we look at bids and backlog and we ask our end users and our end users in public services felt strong that their budgets wouldn't be compromised. But they were.

So we are in a situation that we didn't achieve the revenue levels that we had and obviously impacted our earnings per share. However, if we look at our earnings projections and again we try to be accurate. We are not a company that says okay, we think we are going to do $0.30, so let's say we're going to do $0.20. We don't like to necessarily try to play with the numbers that way. We try to be as accurate as possible. For the fourth quarter it's estimated that we are going to do about $0.06. And we are half way through the fourth quarter, so we feel confident that we are going to achieve our objectives. And we had to revise obviously that from our expectations in the second quarter.

For fiscal year 2010, we didn't we had not yet guided for the year but there is a lot of things in your favor that lend itself to a very successful 2010 mainly the stimulus package is impacting our business from a positive point of view. And we feel from an economic perspective we have certainly have seen two of the least productive quarters this Company has produced. Over a number of years. So we are going to look at fiscal year 2010. We are going to try to be as accurate and conservative as possible, but we look to improve our earnings per share significantly over the next year. But again, we have not done a good job. We're not satisfied with our inability to project guidance affectively and intend to change that going forward, Matt.

Well, thank you, Andy. Another question referring to the comment you made about the infrastructure buildout and what is expected to be spent by the government. My understanding was that a lot of this money is actually not going be spent within the next 12 months. Maybe I'm wrong about that. But isn't this sort of a back end loaded program? Aren't we talking about majority of this money coming in 18 months down the road?

That's another very good question. It depends on what specific component of products infrastructure you're talking about. There is several components of the infrastructure spending. You've heard about the bridges, highways and roads. That component is a component that has never been a top five budget expenditure for state and local municipalities over the last several years. So this upgrading of bridges, highways and roads is a new budget expenditure that's being allocated now or being planned for by state and local municipalities. So that money that is allocated for the bridges, highways and roads aspect of the infrastructure spending, will not be really will not be dispersed for quite a while. Because these projects are very very major specific projects and they do take a lot of planning and a lot of solicitation requirements.

So however, communications infrastructure and I'm talking about the police, fire, emergency, public utilities, military and education, the communications infrastructure for voice, data, and video and convergence of analog to digital systems, that has been a top five budget expenditure for state and local municipalities over the last five years. So those projects have been bolstered by the economic stimulus and those projects have been planned all along and they will continue to be solicited. So you will see dispersements in that part of the infrastructure package a lot sooner than you will see for bridges, highways and roads.

So you're absolutely correct. It really depends on what section of the infrastructure is being taken care of. And that will really dictate the allocation of expenses.

And my last question has to do with the Company's priorities at the moment. You talked a little bit about opportunities that you're seeing in the marketplace with regards to potential acquisitions and the fact that deals have become in fact more attractive. Now WPCS is a Company with a -- for its size at least, with a large number of subsidiaries, I think at last count it was about a dozen or so. Now, how do you -- how do you reconcile that idea which is okay, there are a lot of good deals potentially and we can go out there and take advantage of them with the fact that today and maybe to focus on what you have already acquired, and turn those in to better entities and more efficient and profitable entities might be a better use of our time and other resources. Is this something that you have somewhere in the list of priorities as opposed to looking for -- I understand that again last week you guys closed another deal -- so is this something that we are going to see continue or are we going to see a pause perhaps in that area?

Matt, what we are not -- we are not priority for us is not major acquisitions. The acquisition we made last week was a very small tuck in acquisition for $400,000 that we did off the balance sheet. And that acquisition was strategic for us because we wanted to be in the Portland, Oregon marketplace, the Midway Electric has a terrific reputation with Armstrong World Industries, which is a large company that we we wanted to expands our services for. So that's a tuck in acquisition.

Now in regards to your question, we absolutely have a priority on organic growth. And not large acquisitions at this point in time. Our large acquisitions , there is really no way to make a large acquisition happen for the benefit of our shareholders because our stock price is too low. And we don't want to leverage the Company because we have done a great job in building our balance sheet strong, that a balance sheet that could really go through these economic times. So we don't want to do a large acquisition, well, there is none that make any sense whatsoever.

So we are focused on organic growth. We are doing the branding strategically to take and actually the number is 17 acquisitions that we have. We're taking the branding strategy to take all 17 and put them under one name so we can emphasize organic growth through major account programs and also through cost savings for cost of sales on a volume discount purchase point of view. So, in answer to your question you are absolutely you've absolutely identified our priorities which is to focus on organic growth going forward.

Well, again, thank you for taking the time for my questions and I understand these are trying times for just about everyone out there. You guys are doing a great job. Again good luck to you and well done.

Thank you very much, Matt.

You're welcome.

Okay, Maggie, we will take the next question.

Our next question comes from the line of [Jeremy Savanne] an Independent Investor.

Good afternoon, Andy. Thanks for making my call. I was curious just trying to get a little color on your Q4 backlog conversion. What percentage of backlog do you expect to convert in Q4?

Hold on one second. We will do the calculation for you.

We have -- we are projecting $26 million in revenue.

So $26 million of recognized backlog.

Approximately 60%.

About 60%. Would you say that's typical of your backlog conversion ratio? In any given quarter?

We replaced backlog, we replace backlog with bid solicitation so it's a constant circle, or cycle. SO we will recognize $26 million of revenue over the next or in the fourth quarter, that's what we are projecting. But of course that $26 million will be replaced by a percentage of the bid list that you see. So the bid list percentage that gets converted into backlog, that will be a certain percentage. We typically are around 20% of the bid list activity converted to backlog. But it's all different times. So of the existing backlog, $26 million will be recognized by the end of the fourth quarter, but that 26 of 41 will be replaced by another even hopefully higher than $26 million number. So that at the end of the fourth quarter our backlog is larger than the $41 million.

All right. Great. I was wondering also if you could help me out, as a percentage of revenue do you guys have any idea what your Sarb-Ox expense is looking like?

Well I will let Joe Heater answer that, our CFO.

We are still a -- we are not an accelerated filer for Sarbanes-Oxley, but our expenses this year expect to be $150,000.

All right. And then looking at share outstanding, I know you guys have been working through this buy back, how would you view the buy back in light of the illiquidity we see in the shock. I mean 1,400 shares traded today. Is there anything being done to improve the liquidity specially with the buy back proceeding? You're reducing share count but we are really not seeing any large investors step in here.

Well, I mean certainly we have no control over the volume. We can certainly purchase in our share repurchase program, we are governed by the parameters established by the SEC which means we can't open the bid. So if no one buys stock that day we can't buy any stock and our last trade has to conclude a half hour before the market closes. We can only buy an average -- the average amount of what has been traded for the last 30 days. Now that's on the open market.

In regards to private block transactions we can buy any number of shares on a block transaction. And we look to obviously purchase in block transactions. But we have a lot of our larger funds that are shareholders are friendly favorable funds to WPCS and believe in the future growth. So it's hard to acquire significant amounts of blocks available in the open market, but we are buyers. So we are limited because of our volume and certainly I would today at this price, I wish we were trading at 100,000 shares a day, because that is exactly how many we would be buying if we could. But, unfortunately we are subjected to the regulations of the SEC in terms of stock repurchase program.

So in terms of liquidity going forward. I think if we can show some consistent results, if we can come out with good fiscal year 2010 guidance parameters that we feel confident about and that are realistic and that certainly reflect the bid activity that we have and the backlog that we we'll present, hopefully we will able to see an increase in investor in investor interest.

I'm not -- I'm got going to kid you it's very difficult to attract investors to a small cap stock these days, when large cap are trading at 52-week lows. There it's just a very difficult scenario for investors that moved to a flight to quality and gone after higher quality obviously dividend paying large caps. But we believe that there is still tremendous value in WPCS and we are going to work as hard as we can to extract that value in the coming months.

Following up on the same vein, have you guys looked at your strategic options? Not sure if you've looked at a go private transaction. Especially with cash one to one with share price.

Well, certainly we want to do what's best for shareholder value. So whatever that amounts to, that's where what we are focused on. So our plan is to grow the business, build earnings per share, if there is a Company that wants to acquire WPCS we have an obligation to listen to what they want to offer. And if it's fair to shareholders it has to be presented.

But both on the private equity front and acquisition front as of today no companies have presented any offers for WPCS. But again, our focus is to deliver improved earnings per share and build on this opportunity that we have ahead of ourselves regarding this stimulus activity and stimulus package focused on infrastructure spending. We feel we can build a very successful 2010 model and in the interim again we will be open to what ever is best for our shareholders.

Terrific. Andy, Joe, thanks for taking the call and I will continue watching you guys grow, appreciate it.

Thank you, Jeremy. Maggie, we will take the next call, our next question rather, I'm sorry.

No further questions in queue at this time. I would like to thank all of the participants on today's WPCS International Incorporated fiscal year 2009 third 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 402-220-2946 and using 80444 pound as the pass code. This will conclude the call.