StableX Technologies Inc (SBLX) 2010 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to the WPCS International Incorporated fiscal year 2010 second quarter investor conference call. Your host for today's call is Andy Hidalgo, Chairman and CEO of WPCS International Incorporated.

(Operator Instructions). In addition, we would like to note that the 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 fact, are forward-looking statements and 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 any forward-looking statements. I will now turn the call over to Mr. Hidalgo.

Good afternoon, ladies and gentlemen, and welcome to our fiscal year 2010 second quarter investor conference call. The agenda for today's call will include a discussion of our second quarter financial results, and our fiscal year 2010 financial expectations. In addition, I'll discuss market conditions and conclude with a review of our strategic development. During our fiscal year 2010 second quarter, ended October 31, 2009, WPCS reported net income of $337,000 or earnings of $0.05 per diluted share, compared to net income of $362,000 or $0.05 per diluted share during the same period last year. For the first six months of fiscal year 2010 ending October 31, 2009, WPCS reported net income of $772,000 for earnings of $0.11 per diluted share, compared to net income of $1.2 million or earnings of $0.17 per diluted share during the same period last year.

Revenue for the second quarter was $24.3 million, compared to $28.8 million, during last year's second quarter. Revenue for the first six months of fiscal year 2010 was $49.6 million, compared to $57 million during the same period last year. The revenue segmentation during second quarter was 31% wireless communication, 7% specialty construction, and 62% electrical power. WPCS is reaffirming its guidance for fiscal year 2010 of $112.million in revenue, $2.2 million to $2.4 million in net income, and $0.31 to $0.34 in fully diluted earnings per share. When we issued guidance for fiscal year 2010, we anticipated that the higher earnings per share contribution would come from the second half of the year, due to the protracted project awards in the fiscal stimulus services public services sector. Therefore we feel confident that our guidance can be achieved.

Consolidated gross margin during the second quarter was 31%, compared to 26% during the same period last year. Through the first six months of fiscal year 2010, the consolidated gross margin has averaged 30%. The increase in gross margin is a very positive sign for our Company. SG&A expense as a percent of revenue for the second quarter was approximately 26%, compared to 21% last year, and 25%, compared to 21% for the first six months of fiscal year 2010. However, the increase in SG&A as a percentage of revenue is due primarily to lower revenue production. In regards to our balance sheet, WPCS continues to maintain a strong position with $8.5 million in cash, $22.3 million in working capital, and $5.6 million of credit line borrowings. Our credit line borrowing to working capital ratio remains favorably low at 25%. We continue to view this ratio as an important indicator of our financial strength and ability to finance our growth from operations. WPCS generated $3 million of cash from operations for the first six months of fiscal year 2010 ended October 31, 2009.

Accounts receivable collections remains stable with DSOs averaging 70 days, which is within our expectations. As of October 31, 2009, WPCS had a backlog of approximately $28 million, and a bid list of $245 million. We're not completely satisfied with our current backlog level. And the time it's taking to convert our bid activity to backlog, however, our bid activity is at a record level. As a result of this increased bid activity, we expect our backlog will grow accordingly over the next few quarters. The primary delay in converting bids to backlog remains the allocation of fiscal stimulus funds for public service projects. Most states have been allocated their percentage of fiscal stimulus, and now the determination is being made by each state as to which projects receive approvals. It has been a long and arduous process, but one that is beginning to manifest. WPCS feels confident that we will receive our fair share of project awards in the near future, which in our opinion should have a positive effect on our revenue production in the quarters ahead.

Overall, we're pleased with the second quarter results. WPCS continues to generate profitability through these economic times. Our strategy of focusing on the public services, health care, energy, and international markets, combined with continued cost efficiencies from our operations, is proving to be our foundation for solid financial performance. We see growth opportunities ahead and the chance of building earnings per share. No one is exactly sure when we'll see a full economic recovery, but WPCS is positioning itself well for the future.

Looking at the market in general, communication systems for voice, data and video remain a critical backbone of global economic expansion. New communications technology is being introduced each year for wireless and land line systems. Communication networks need to be upgraded. and in many areas new technology needs to be implemented. Someone has to design and build the infrastructure to support this communications technology, as it is a blend of many different products, and requires a diverse set of skills and certifications. Companies that offer complete high-level communication infrastructure services are unique and in demand. WPCS's has positioned itself as one of those companies. We maintain an outstanding reputation for delivering the highest quality of services.

Our customer base continues to expand, and the market is anticipating significant growth over the next several years. With 12 operation centers on three continents, WPCS is positioned well to take advantage of this growth and generate earnings while building shareholder value. In regards to our strategic development, WPCS is focused on organic growth opportunities, but is also looking for acquisitions that can strengthen our engineering capability, add to our customer base, and expand our geographic skill. As a Company we successfully acquired and assimilated and branded 19 companies in the last seven years. In regards to future acquisitions, we're particularly interested in China and Australia, as markets in both countries are generating positive GDP growth rates with a strong currency and a strong market for our services.

We just announced acquisition of the Pride group of Queensland, Australia, which is a leading communication infrastructure company for that country. With acquisition of the Pride Group, our international sales have reached $14 million on an annual run rate basis. In conclusion, WPCS is building a foundation of consistent profitability and efficiency as we plan for a higher level of earnings growth, while expanding our design build engineering services for communication infrastructure on a global scale. The WPCS management team feels confident that the future will continue to bring opportunity and improved earnings for our shareholders. I would now like to turn the call back over to the operator to begin the question-and-answer session.

(Operator Instructions). Our first question comes from the line of Rick Grubbs. Your line is live.

Yes, good evening, everyone, Rick Grubbs with RedChip Companies. I wonder if you could talk about your bid list and looks like it grew -- like you mentioned $245 million, which is up substantially from last quarter. Let's kind of talk about the segmentation there, I mean what part of that would be public service, health care and energy, and so forth, And your thoughts on how more specifically you can translate that into backlog, and then further into revenues.

Well, Rick, the -- the bid list has grown substantially from quarter-over-quarter. And it's being driven primarily by public services in the fiscal stimulus package. We see right now from a percentage roughly -- it's roughly 50% public services, 25% health care. We have corporate enterprise of about 15% of that bid activity, and the rest is in energy, 5% in energy. But it's clearly being driven by the public services sector. And this has been a longer time coming. As I mentioned in my notes, it was an arduous process trying to convert bid activity from public services into backlog.

But we're starting to see that happen now with fiscal stimulus money actually being allocated. So our goal over the next couple of quarters, is to convert that bid activity, certainly a percentage of that bid activity, as we don't get all of it, obviously, but a percentage of that bid activity into backlog, and having that backlog recognized as revenue. The process is pretty straightforward for WPCS. We need the bid activity to increase the backlog. And we need the backlog to recognize the revenue. So it's very -- it's very encouraging to see this level of bid activity. It's been a little discouraging to see that backlog hasn't been converted, but we think that our backlog will be impacted over the next few quarters.

Thank you. Great. And while we're talking about this , I guess, the backlog and conversion into revenue, I was just thinking about margins as we -- kind of look at the Company. And now I was wondering if you could give us some color on the margins going forward, as you see it -- your segments and specialty communications, wireless infrastructure, and energy. And sort of how you look at at that going forward in the sense of margins, but also considering the fact that a large portion of your bid list is -- is in the public services sector, and just kind of wonder if you can give us some color on the margins, given that it's so much in public services, if that's a good thing, or something you have to watch very closely.

Well, that's a very good question, Rick. And basically we've always been in a change of 28% to 32% in terms of bids. The 31% gross margin realization in the second quarter, was -- it was a combination of things, but project management efficiency is on the top of the list, and also a blend of business in terms of business that yields a better margin, certain markets. And the public services is fitting into that category. And the reason why is, because the demand, it's a supply and demand type project mentality. So if the demand increases, there are fewer contractors bidding the work, which means that the margins will have an opportunity to increase on the bid.

Conversely, if there is fewer projects and a lot of contractors bidding that project, you'll see a reduction of gross margin contributions. So our gross margin performance is a good indication that we're seeing the demand for our services increase. And we feel that -- obviously we feel that we can achieve a higher gross margin contribution with the -- with the bid activity that we have in the backlog that we're awarded. So we're focused on that, and in public services, because of the demand, it tends to be a positive note for WPCS at this point.

All right. And then in general, if you are doing work in this public services sector, then if I'm hearing you correctly, then the margins there are generally better than in either health care or in corporate, or so forth.

Well, the margins range, again, from -- usually on a bid basis from 28 to 32, so they all fit in that category.

Okay.

They're -- public services, health care and energy fit in that category, and sometimes corporate enterprise. But it really depends on the project -- the project's focus. But, generally speaking we try to land in that category. So there isn't any one particular market that can't yield a high gross margin, or, conversely a lower gross margin, depending upon the circumstances. But, again, as we mentioned, and stated, public services, because of the increase demand, is giving us flexibility in term of being able to bid higher-margin work.

I understand that. I appreciate that. I wanted to move on to, if I could ask another question, just ask about in your acquisitions, that you mentioned you completed 19 over the past seven years, and I know the Pride acquisition just closed in Australia. I was just wondering if there are other acquisitions that are in the works that have been announced, but not yet closed. And also, just your thoughts on 2010, and the likelihood of reasonable acquisitions becoming available, in particularly China and Australia, and if so, your thoughts on how to finance those.

In regards to acquisitions, there are none -- that we have announced, that are pending. So the last acquisition we made, the Pride Group is one we concluded November 1st. We do have acquisition candidates. We usually have a half a dozen different opportunities that we would be looking at, at any one point in time. We do have a particular emphasis on Australia and China, because of the favorable currency. And also because of their positive GDP expectations over the next four quarters. With regards to financing these acquisitions, we still want to be -- we still want to be in our format or template is always to be accretive. So we really don't want to do anything that would take us backwards from a earnings per share perspective.

We look to do acquisitions with cash, and earn-out. And in terms of stock right now, it isn't really a favorable stock price to be able to do an accretive acquisition. It is a little bit too dilutive to use stock. So we're focused on the cash. We're generating cash from operations as I mentioned, generating $3 million for the first six months of the year. We have a good bank line, and we haven't taken on much debt. And the opportunities that we're looking at are -- are all within our realm of being able to finance them through cash off of our balance sheet. So that -- we are acquisitive by nature, and we believe there will be more acquisitions to come, provided they are the right ones for our shareholders, bring value to the table.

Thanks for that. Kind of sticking with the acquisition theme for a moment, can you give us your thoughts on fill-ins, if you will, or acquisitions that would make sense for you, and in the states. And also just kind of another question there, just if you would give us your thoughts on the status of the stimulus money, perhaps even the second round of that, and where that fits in to your markets in terms of creating market demand.

In the first part of your question, Rick, in regards to acquisitions, there are geographic areas here in the United States, obviously that we could fill in from a coverage perspective, the Southwest, Midwest, are areas that come to mind. However, our acquisition strategy has always been to buy the best Company that's available. So we view a number of acquisition candidates on a monthly basis. And if there was an acquisition that was successful, financially successful, and close to an existing operations center, we would more likely make that acquisition, than try to force an acquisition in the Southwest or the Midwest that may not have the financial performance or the geographic scope for the engineering capabilities that we want. So we do -- we are aware that there is some geographic voids, and we do look for acquisition candidates in that area. And we'll continue to throughout the year.

In regards to the second round of stimulus as proposed, not legislated yet, but as proposed, there is another percentage of funds. I believe it's a $250 billion stimulus second round, and of that approximately $30 billion was allocated for state and local municipalities. It is a little bit unclear as to what kind of fiscal support that is going to represent. It isn't sure whether it is going to be transportation, infrastructure, communications infrastructure, or just help with law enforcement or education. So it is unclear as to how it's going to be actually allocated. But keep in mind that the first round legislated in February was $30 billion of communications infrastructure for state and local municipalities, which is a significant amount. And certainly very sufficient not only to achieve our EPS expectations, but also to grow earnings in the years ahead. So we're unclear as to what's going be allocated in the state, local support or help from the second stimulus package, but we will certainly, as soon as we find out if there is added benefit, it can only help us at this point in time. So we look forward to getting more definition on that from the Federal government.

Yes, absolutely. And we've all got our ears open, I guess, to see what's going to come out of Washington on any fronts nowadays. But I was just wondering your bid list, if I have it correct, was around $161 million at the end of July, your first fiscal quarter and now it is around 245. Does that argue that there is some final demand building out there, perhaps due to the prior stimulus funds and those monies are just now working through the system, and that --is your bid actually up do you think primarily because of that?

I think it is absolutely is up, because of the more clarity that the state, local municipalities have regarding the projects they have. Many of the states got their fiscal allocation,s and then made a decision as to where the money was going to be spent, and it created a flurry of bid activity for us quarter-over-quarter as reported. So we are seeing now more of these projects available, and again based on our historical performance in getting and capturing a percentage of these bids, in all likelihood, you'll see the backlog number increase over the next -- over the next couple of quarters. So the answer is -- public services has played a significant role in this increase.

Great. Thank you. And, Andy , there's -- if I'm also right I just want to ask about seasonality in your business, because there's the -- is there much of that? It looks like the revenues are fairly straightforward, quarter-over-quarter?

Yes, there is not much seasonality. I mean, it used to be -- it used to be more in the past, when we had a blend of acquisitions that we had a fewer number of acquisitions, and a number of them did work outside. So the winter months weren't particularly beneficial. But the company is now grown to 19 acquisitions that are all assimilated, so we have the majority of our workers got indoor, and then warmer weather climates. So it isn't as impacting.

Great. And in your revenue guidance, is I think around $112 million for fiscal year-and ending in April 2010. And it looks like, if my math is correct, you are around $50 million so far, leaving you just over half of that to make for the next two quarters. So I wanted to ask about again kind of your visibility into -- considering your very large bid list, and your visibility into converting that into revenue, and your comfort in your guidance that is out there right now.

Well, obviously we have to have some pretty good quarters going ahead to have that kind of revenue production. I mean, it is achievable. We'll have to see. We're re-affirming our guidance at this point in time. But we also have the Pride acquisition that was made November 1st, which will be added into the equation. We haven't yet done the -- done the budgeting, the assimilations of the budgets yet, but we will. So we do have some factors in our favor. But we do have to have some pretty aggressive quarters over the next two quarters, to be able to achieve our revenue goal for the year. So we shall see, but we feel confident right now enough to say, that we're going to reaffirm that guidance.

Okay. And I got just one last question, and I'll turn it over to somebody else. There is about $32 million or so in goodwill in the balance sheet at quarter-end. And I was just wondering if you could give us some idea of kind of where that stands in terms of impairment tests, or if that test is coming up soon, or just completed? Or kind of your thoughts on president goodwill that's there today?

The $32 million in goodwill was tested for our annual 10-K of the year-end April 30th, which was fiscal year 2009. So we just had completed our audit, and the 10-K was filed at the end of July. So the goodwill was tested, and none of it was found to be impaired. And we still feel confident going forward that none of it will be impaired. So we take it obviously a year at a time as our obligations have it, so but we feel confident that we're not going to have any impairments, or at least today we feel, there is not going to be any impairments going forward.

Great. Thank you. And nice job on -- nice job on the bid list, and let's hope we can translate that onto backlog, and then on to the revenue line. So that's all my questions and thanks very much for your answers.

Thank you, Rick.

Our next question comes from the line of [Max Tong]. Your line is live.

Hi, Andy, can you hear me?

Yes, I can, Max.

Couple of quick questions. First one is about a year ago you guys announced the share buy-back when the stock was at the same levels, actually a little bit higher. I recall on our last conversation that you mentioned that those purchases were discontinued, due more or less to the economic situation that we had a year ago. First question is, does the Company have any intention of reinstating those purchases? And, second question, is has got to do with the competition that you guys face with regards to your actual bid activities? Do you compete with companies more or less the same size of yourselves? Or do you compete with companies of much greater scale in terms of the revenues and earnings? Those are my first two questions.

Okay. Max, on the share buy buy-back, we had issued the share buy-back last December, and it was for a year. So it has expired. We ended up buying back 300,000 shares around the $2.00 range. And the Company would absolutely reinstate a share buy-back program if the stock were to -- were to diminish in value. Right now, we're trading around the low $3.00 range. We felt we wanted to use our capital more effectively to make some acquisitions, and to build shareholder value that way from an earnings per share, from an accretive earnings per share perspective. We are prepared to buy back shares if the stock price were to diminish. So we'll have to see it, see how it progresses, but we feel -- we feel that it's an important part of shareholder value, but also obviously increasing earnings per share will be as well.

In regards to bid activity, we compete with sizeable organizations that are here in the States, companies like DICOM and companies like Quanta, Tetra Tech, Black Box. These are larger national organizations that we compete with. And we have different strengths, and they have different strengths. We all are in the wireless communications specialty construction electrical power market. We're stronger in certain segments than others. We are international, and they're not. But they are large organizations, very successful organizations. Most of our competition comes from regional private companies in different quadrants of the United States. So there are smaller companies anywhere from $5 million to $10 million to $15 million dollars in revenue, and they tend to be more of a competitor face-to-face, than we see on the national scale.

Those are the companies that you've targeted as potential -- companies that you would like to acquire domestically. Correct?

That is correct. Yes, and also internationally as well. We have of the 19 acquisitions we made they have been in private regional companies. That has been our particular niche for acquisitions, and they work well for us and they're very easily -- they can be assimilated a lot easier than larger organizations.

And on the question of the share buy-backs, those shares that were acquired last year, were they retired or those shares were used for compensation of some kind?

No, those -- every time you have a buy-back, those shares have to be retired.

Okay.

So they're removed from the shares outstanding.

And currently stands at right around 7 million.

Yes. 6.9 2 5, something like that.

Can you tell me whether or not the current valuation of the company, which at that price is around $21million, for a company that's been around for $100 million revenues, and some where around, perhaps $0.30 this year. How do you reconcile those facts? That seems to -- there seems to be some kind of disconnect about why would a Company of your size with this revenue, and book value in excess of the share price, has it been something that you have been actually to make any sense of? Or do you see this as a result of smaller risk aversion to smaller stocks?

Well certainly -- certainly the evaluation is subjective. We certainly believe we're undervalued as a stock . I think the fundamentals show that. The stock where it is trading at, it's a question that there is no finite answer to. It could be a combination of things. We are a small cap. We have -- we are semi-liquid. We trade 20,000 shares a day, so if you have big investment funds involved in a stock, and they had to liquidate their position, not because of anything we have done as an organization, but because they want it to become liquid, it is hard to be able to absorb that kind of stock in the marketplace.

So there are a lot of factors involved, when you look at a small cap company. But again we feel the only thing that we can look at, is that we feel that we're undervalued. The only thing we can focus on is to be able to deliver earnings per share. And I think if this Company can deliver the earnings per share that we project, then as a Company we'll be recognized. And when we see more activity in small caps, I think WPCS will be recognized as the value that it is. But again it's very subjective.

With regards to Merriman, Curran, Ford when they had the research report, was that an independent research report, or was that something that was paid for?

That is totally independent. That wasn't paid for by WPCS. It was totally independent on Merriman, Curran, Ford's part.

Right. Best of luck, Andy. Hopefully we'll see much better quarters ahead. And, again, good job.

Thank you, Max. Appreciate it.

You're welcome.

(Operator Instructions). If there are no further questions, I would like to thank all the participants of the WPCS International Incorporated fiscal year 2010 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 402-220-2946 and entering 12354, followed by the pound sign as the program identification number. This will conclude the call.