StableX Technologies Inc (SBLX) 2011 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the WPCS International Incorporated fiscal year 2011 second-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 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.

Thank you, Diane. Good afternoon, ladies and gentlemen, and welcome to our fiscal year 2011 second-quarter investor conference call. The agenda for today's call will include a discussion of our second-quarter results. In addition, I will discuss market conditions and conclude with a review of our development plans.

As you are aware, WPCS has 10 operation centers that have evolved from the 19 acquisitions we have made over the years. In the second quarter, we continue to experience performance issues with two of our 10 operation centers. The two weaker performing operation centers have affected the overall performance of the Company as a whole. However, it's important to isolate the issues at these two operation centers, as the majority of our operation centers are performing well.

If you consider the results for eight of our 10 operation centers on a consolidated basis for the second quarter, these eight operation centers generated $22 million in revenue and $1.4 million of EBITDA. The two operation centers not performing, namely the Sioux Sun City operations in California and the Portland operations in Oregon, generated $4.7 million of revenue and an EBITDA loss of $1.5 million. The losses were primarily related to three projects that experienced cost overruns. We have been able to contain the cost overruns for these three projects and we have accrued the total losses. We expect these projects to be completed in the third quarter.

Looking back, in our last conference call, we were dealing with competitive bidding in the Florida and California markets. In Florida, we've been able to turn things around due to market diversification and cost reductions. However, in Sioux Sun City, two projects started this quarter, we're experiencing cost overruns. In addition, there have been cost overruns at one specific project in Portland.

In the case of the Portland operations, it's a smaller operation center that's expected to lose approximately $400,000 in EBITDA on revenue of approximately $3 million for the current fiscal year, which ends April 30, 2011. In the case of the Sioux Sun City operations, the loss will be more significant. For the current fiscal year ending April 30, 2011, the Sioux Sun City operations is expected to lose approximately $1.4 million in EBITDA on revenue of approximately $20 million.

The remaining eight operation centers are expected to achieve approximately $89 million in revenue and a positive $7.3 million in EBITDA. And that again, of course, is for the current fiscal year ending April 30, 2011.

From a corporate perspective, we're anticipating costs for the fiscal year to be approximately $4.5 million, which includes an additional $1.3 million in one-time charges associated with seeking strategic alternatives, including the possible sale of the Company.

Since the other eight operation centers are performing well, our attention has been focused on addressing the issues at the two non-performing operation centers. There has been a change in management and staff reductions. The new management team has done an outstanding job of identifying the issues and putting action items in place to return to acceptable profitability levels over the next few quarters.

Overall, the Company has approximately $37 million in backlog and a bid list of $176 million. The opportunities to grow earnings are encouraging. WPCS is pleased to announce that we have been awarded our first major wind project for the design and deployment of an eight-turbine wind farm in Illinois. We continue to bid on other renewable energy projects.

Infrastructure opportunities in healthcare and public services continue to develop. As evidenced by the performance of the majority of our operation centers, the Company has a plan to expand in the high-growth areas of energy, healthcare, and public services. In addition, our international business continues to perform well.

In regards to revenue for the second quarter ended October 31, 2010, WPCS generated $26.7 million in revenue compared to $24.3 million for the same period one year ago, which represents a year-over-year increase of approximately 10%. Through the six months of fiscal year 2011 ended October 31, 2010, WPCS generated $55.6 million in revenue compared to $49.6 million for the same period one year ago, which represents a year-over-year increase of approximately 12%. The revenue segmentation for the six months ended October 31, 2010 was approximately 26% wireless communication; 15% specialty construction; and 59% electrical power.

For the second quarter ended October 31, 2010, WPCS generated an EBITDA loss of approximately $1.1 million and a net loss of $6 million or $0.86 per diluted share, which includes all non-cash and one-time charges. For the six months ended October 31, 2010, WPCS generated an EBITDA loss of $860,000 and a net loss of $6.3 million or $0.91 per diluted share, which also, again, includes all non-cash and one-time charges.

For the second quarter ended October 31, 2010, the Company has incurred an estimated goodwill impairment charge of $4.3 million for its Sioux Sun City operations, based on the estimated impairment of book value for this particular operation center. I'd like to emphasize that this goodwill charge is a non-cash charge and has no impact on our operations or cash flows. The net tangible asset value of WPCS as of the end of the second quarter stands at $22.4 million or $3.22 per diluted share.

For the second quarter ended October 31, 2010, WPCS also incurred one-time charges of $276,000 that are associated with seeking strategic alternatives, including the possible sale of the Company. In addition, WPCS incurred non-cash charges of $74,000 related to the contingent earn-out obligation for the Pride Group acquisition that was concluded in November 2009. Excluding the performance of the Sioux Sun City and Portland operations in the second quarter, as well as the one-time charges -- non-cash charges in corporate operating expenses, WPCS generated $1.4 million in positive EBITDA.

Consolidated gross margin during the second quarter was 18% compared to 31% during the same period last year and compared to 21% in the previous quarter. These lower margins reflect the additional cost overruns related to the two Sioux Sun City projects, the Portland project, as well as the competitive nature of project awards that are being completed this past quarter. Again, it's important to keep in mind that some operation centers are doing very well from a gross margin perspective. We also have the opportunity to improve consolidated gross margins based on bids in higher-margin markets.

Overall, SG&A expense on an unadjusted basis as a percent of revenue for the second quarter was approximately 23% compared to 26% for the same period last year. On an adjusted basis, excluding the one-time and non-cash charges, SG&A expense as a percent of revenue for the second quarter was approximately 21.8%. Despite the one-time cost, SG&A expense as a percentage of revenue was lower due to cost containment measures.

WPCS continues to maintain a healthy balance sheet with approximately $5.8 million in cash; $19.9 million in working capital; and $7.6 million of credit line borrowings.

Due to the loss in the second quarter, certain financial covenants under our bank credit facility were not met. Accordingly, the Company is currently negotiating, and expects to complete the terms of a forbearance agreement with Bank of America, not to demand payment on the credit line balance until February 2011. In the meantime, we'll continue to work towards establishing a revised credit facility with Bank of America.

In any event, due to the strength of our balance sheet, the Company expects to be able to finance our growth internally and meet our short-term liquidity needs. The line of credit has been reclassified on the balance sheet from long-term to short-term liability, which explains the decrease in working capital compared to the previous quarter.

In regards to our strategic development, our focus is on profitable growth within our current operations. There were no acquisitions under consideration at the moment. As most are aware, the Company hired Lincoln International to explore strategic alternatives, including the possible sale of the Company. Although we cannot comment specifically on this process, we can state that this effort is progressing.

In regards to a possible sale, WPCS and its directors will consider any offers that are fair to our shareholders. WPCS is a valuable company. We have a leadership position in communications infrastructure; an exceptional customer base in high-growth markets; an international presence; a healthy balance sheet; and significant earnings potential. Our Company remains committed to building shareholder value in the short-term and long-term.

In conclusion, the management team will continue to focus on improving our financial performance and making sure that each operation center is positioned for earnings growth in the future.

I'd like to now turn the call over to the Operator to begin the question-and-answer session. Diane?

(Operator Instructions). There are no questions.

Okay. Diane, you can move to conclude the conference call, then. Thank you.

One just came in, Mr. Hidalgo. Do you want to take it?

Okay. Yes, please.

From [Tom Nordone]. Go ahead, Mr. Nordone.

I just have a question about the talks that you had earlier with Reilly Investment. Is that still ongoing?

Again, the answer to that is yes. And we can't comment on the progress or the process; but, yes, discussions with Mr. Reilly's investment group are ongoing.

Okay. That's all I needed to know. Thank you.

The next question is from [Eric Apout].

Eric?

Yes, can you hear me? (multiple speakers) Simply -- it's a simple question but it's one we ask a lot of our companies these days, small-cap companies that have low liquidity on the market and low valuations. Don't know what's going to happen in the strategic alternative process, but from your perspective, what would the advantage of remaining a public company be, given the low liquidity level for traders and for hedge funds, and the low valuations?

Well, you know, Eric, certainly one of the alternatives could be privatization of the Company; but right now at this point in time, we feel our future looks very promising. There's earnings potential for our Company; we have projections that we feel that are realistic and achievable, and that can return us to the kind of earnings per share we were used to achieving a few fiscal years ago.

But in terms of commenting specifically whether we would consider entertain being private or continuing on our path of being a public corporation, again, that's something that we're not prepared to discuss at this moment. But again, we're focused on increasing our earnings potential, building our shareholder value, and extracting that shareholder value for our investors.

Okay. Fair enough. I appreciate it.

The next question is from [Lawrence Brooks].

Yes, I'm wondering in reference to those two problems that you talked about with those two divisions, how does something like that come about? Is that something that just comes up in a few days? Or is that something that has been -- you've been seeing for the last few years or months? Because in prior calls, nothing like this has come up. So how did this -- how did you see this problem?

Well, Lawrence, in terms of how it comes up, we certainly are awarded a bid. We begin construction on a particular project, and every 30 days, we look at the materials and labor that's associated with that and compare it to estimate to complete. Then we determine whether we're underbid or overbid on a particular project, or on target. So, in this particular instance, these two projects surfaced as being underbid in the second quarter. Now, how does it happen?

Well, there's a lot of issues. There's management issues, where an estimator doesn't do an accurate job in bidding. But even more on a macro sense, in this competitive environment that we have to bid, because of these economic conditions, you tend to take more of a chance on projects. Because every project that you bid, that we used to bid when we were generating significant earnings, we'd have maybe five or six competitors involved. Today, that number could usefully be 20 competitors involved in bidding because of the economic conditions.

In that situation, there's going to be a lower margin that will win that contract. So you take more chances. When we were bidding contracts at 28%, if we were to lose 6% on that project because of materials or labor miscalculations, you're still generating a relatively decent margin. But when you bid something at 22% and lose those 6 points, then you become -- then it becomes a project that's in the red.

Certainly, many of our operation centers are performing on lower margins through these economic conditions and are managing their jobs effectively to profitability. But in this particular instance for Sioux Sun City, the management team didn't do the job effectively. So we ended up having two projects in Sioux Sun City and one project in Portland, Oregon that was experiencing cost overlap.

Now we hope with improved economic conditions that we get back to higher margins, because this is a supply and demand business. If there's more supply than demand, the margins go down; if there's more demand than supply, the margins go up. And we feel with the communications infrastructure market as it's heading the demand, especially in healthcare and energy, and public services, which is stimulated by the federal funds, we feel that the opportunity to start bidding higher margins, start seeing more increased demand and funding, will come in the next year or so.

So we'll have a little bit more of a buffer; but right now, obviously, with the lower margin, we're trying to be very competitive -- you have to be a very, very fine-tuned, very effective and efficient project manager. And we have that throughout the organization. We do thousands of projects. But these three projects burned the Company for this quarter. That's as easily as I can put it.

Does that answer your question?

Yes, I guess from an investor standpoint, I'd much prefer, like all of us, to see less revenues and more profitable. What kind of safeguards or what kind of assurance does one have that this may not happen in the future? Have you hired someone to review these bids? I mean, is it something where you need someone to review it if it's over a x-dollar amount, like over $2 million or $5 million, or whatever you think? Because all of a sudden, what's to stop it from happening again and again? That's -- that would be my concern. So what safeguards have you provided?

Well, Lawrence, that's a perfectly valid question. Now, in all our operation centers, we have a double-check system on estimates that are over $100,000. So, we have that system in place. And it's worked efficiently except at Sioux Sun City, where the two people that were the failsafe failed. And they're no longer with the Company.

But both of them were supposed to be checking and they both allowed this to happen. There's never any guarantee that we're going to not lose money on a particular project; but obviously, you want to make a lot of money on projects as well, so that the consolidated results give shareholders the earnings that they feel comfortable with. But there's no question that we have these failsafes in place in every one of our operation centers, but we had to replace these failsafes specifically in Sioux Sun City.

The 10 operation centers, although they're involved in communication structure -- infrastructure, are independent economic centers in their own right. They have their own markets and they have their own customers. They don't rely on each other for anything more than cross-subsidiary selling opportunities. So, we have to make sure that the management teams are in place in each operation center to be able to review every bid that's out there that's over $100,000, typically.

So, we feel -- in changing the management team at Sioux Sun City, we feel we put a very effective team in place that now can help us ensure that we mitigate any kind of problems like this in the future.

Yes, just to make a comment that you said the failsafe system was in place. It apparently was not in place, or else this wouldn't have happened, is my impression there.

We had the two people in place in Sioux Sun City and it was a case of mismanagement.

I see. Was this a case where maybe there was fraud that was involved? Or was this just an honest mistake? Or how does that happen?

It was an underbid situation. It wasn't fraudulent; it was an underbid situation. The two people involved, and I can't be specific, but they were performers for six years for that organization. But it happens where at times you fall asleep at the switch. And in this situation, it cost us on two significant projects -- for the same customer, in fact. But we're going to -- I mean, we've contained the costs and we certainly are completing the project, but it's not a pleasant experience to obviously lose that kind of money on a project.

So you can't go back to the company that you're doing the work for and saying, oh, by the way, this is a little higher price -- you have to honor that commitment?

Well, we certainly have to honor that commitment, but we are going back to that customer and discussing change orders that were done; discussing other work that can be billed. But as a company, as a public company as of October 31, we have to state what the facts are. We don't have these change orders in hand. And if we're successful in being able to obtain these, some of these change orders that we're requesting, then, yes, it will mitigate that loss and you'll see a pickup in the third quarter. But we can't guarantee that we're going to be able to obtain any change orders on this particular project.

I see. Okay. Well, I guess as far as the failsafe, I would continue to work on that to improve that, would be my comment. And then, as I said earlier, I would much prefer less in revenues and more profits. And I would like to see a continued discussion with this other group that has an interest in looking at the Company. So those would be my comments and (multiple speakers) --

Okay.

-- sounds good. Thank you.

Thank you, Lawrence. Diane, we'll take another question.

There are no further questions in queue.

Okay, Diane, then you can move to close the conference call.

Okay, since there are no further questions, I would like to thank all the participants on today's WPCS International Incorporated fiscal year 2011 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. That's 402-220-2946, and entering the pass code 73045 -- 73045.

That will conclude the call. Thank you.