StableX Technologies Inc (SBLX) 2011 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the WPCS International Incorporatedfiscal year 2011 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 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, andwelcome to our fiscal year 2011 third quarter investor conference call. The agenda for today's call will include a discussion of our third quarter financial results. In addition, I will discuss market conditions and conclude with a review of our development plans.

Fiscal year 2011 has been a transition year for WPCS. This year, we have experienced unfavorable economic conditions that made markets more competitive, causing lower gross margin contributions. In addition, as discussed in a previous call, three major projects at two of our operations centers had cost over runs that negatively affected our financial performance. However, it is important to keep in mind that the year-to-date weaker financial results emanated primarily from only two of our ten operation centers. The other operation centers continued to perform well year-to-date. In fact, the eight other operation centers have generated $64.7 million in revenue and $3.8 million in EBITDA through the nine months ended January 31, 2011.

The positive news is that we have made significant strides in turning around the performance. Through the third quarter we have contained the losses from these three major projects and have installed a new management team and procedures at these two operations centers in order to mitigate future risk. In the second quarter of fiscal year 2011 we reported an EBITDA loss net of any non-cash and one-time charges of $1.1 million. In the third quarter of fiscal year 2011 we have reported $428,000 in EBITDA loss net of any non-cash and one-time charges, which equates to a reduction of $670,000 in EBITDA loss. Again, we continue to make progress in transitioning back to profitability. In the third quarter we expected even better performance, but we were adversely affected by the flooding in Australia. However, the future from a revenue perspective is very encouraging for WPCS due to the rebuilding that has commenced in Australia.

There is more positive news for WPCS. The economic conditions are improving, and we are seeing more potential bid activity. In public services, fiscal stimulus funding is helping launch many new projects, as evidenced by our recent press releases announcing new contract awards. The demand for advanced communications infrastructure in state and local municipalities for police, fire, emergency services, education, and transportation continues to be a key driver. Now, funding for these projects is becoming more and more available. In fact, state and local municipalities are finding ways to generate revenue and save expense through the implementation of new communications infrastructure by implementing, for example, advanced traffic violation systems and video surveillance in high crime areas to accommodate a budgetary reduction of police officers. WPCS can provide these solutions, and with our extensive customer base of state and local municipalities, we see a very prosperous year ahead.

In healthcare, hospitals continue to renovate and expand to accommodate the growing baby boomer population. Many of our new recent contract awards are in the healthcare market. Our renewable energy sector in solar and wind has also become bid active due to the recent increase in oil prices. WPCS maintains an extensive base of satisfied customers that continues to grow. This is the key for us in returning to the profitability in earnings level that we expect for our shareholders and our employees.

As of the end of the third quarter, the Company had approximately $32 million in backlog and a bid list of $171 million. However, since the end of the third quarter, the backlog has grown with recent announcements of new contract awards including the Camden County Improvement Authority contract award for $13.7 million. In regards to revenue, for the third quarter ended January 31, 2011, WPCS generated $23.4 million in revenue, compared to $27 million for the same period one year ago. The decrease in year-over-year revenue is due to current project delays and delays in bid awards. Through the nine months of fiscal year 2011 ended January 31, 2011, WPCS generated $79 million in revenue, compared to $76.6 million in revenue for the same period one year ago, which represents a year-over-year increase of approximately 3%. The revenue segmentation for the nine months of this fiscal year was approximately 28% wireless communication, 14% specialty construction, and 58% electrical power.

For the third quarter ended January 31, 2011, WPCS generated an EBITDA loss of approximately $428,000 and a net loss of $3.5 million or $0.50 per diluted share, which includes all non-cash and one-time charges. For the nine months ended January 31, WPCS generated an EBITDA loss of $1.3 million and a net loss of $9.8 million or $1.41 per diluted share, which also includes all non-cash and one-time charges. Due to the weaker financial results from one of our ten operations centers, in the second quarter the Company incurred an estimated non-cash goodwill impairment charge against its Sioux Sun City operation of $4.3 million. In the third quarter, a valuation for the Sioux Sun City operation goodwill impairment was concluded, and the final impairment charge to date was $6.9 million in total. Therefore, WPCS has incurred an additional non-cash goodwill impairment charge for the Sioux Sun City operation of $2.6 million for the third quarter. I would like to emphasize that this goodwill charge is a non-cash charge and has no impact on our operations or cash flows.

As of the end of the third quarter the net tangible asset value of WPCS stands at $21.7 million or $3.13 per diluted share. The WPCS book value stands at $51.8 million or $7.44 per diluted share. For the third quarter, WPCS also incurred one-time charges of $205,000 that are associated with seeking strategic alternatives, including the possible sale of the Company. In addition, WPCS incurred a non-cash charge of $42,000 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 operation in the third quarter, as well as the one-time charges and non-cash charges, WPCS did generate $203,000 in positive EBITDA for the third quarter. Consolidated gross margin during the third quarter was 21% compared to 24% during the same period last year, and compared to 18% in the previous quarter. The quarter-over-quarter improvement is certainly very encouraging. The Company continues to focus on gross margin improvement. Overall, the generally lower margin contribution reflects additional cost over runs related to the two Sioux Sun City operation projects, as well as the continued competitive nature of the project awards that were completed this past quarter. Again, it is important to keep in mind that some operations centers are doing better from a gross margin perspective, and as the economy improves, we should see higher margin contributions in the future.

For the third quarter, WPCS continues to maintain a healthy balance sheet, with approximately $5.6 million in cash, $19.4 million in working capital, and $6.7 million of credit line borrowings. Due to the year-to-date losses, certain financial covenants under our bank credit facility remain unattainable. Accordingly, the Company is currently negotiating and expects to complete the terms of an amendment to the forbearance agreement with Bank of America not to demand payment on the credit line until September 30, 2011. In the meantime, we'll be working towards establishing a new credit facility for the Company. In any event, due to the strength of our balance sheet, the Company expects to be able to finance our growth internally and meet all of our short-term liquidity needs.

In regards to our strategic development, our focus is on profitable growth within our current operations. As most of you 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 continues to progress. Within our fiduciary responsibilities, the Company will inform the public of any developments at the appropriate time. I would also like to reemphasize that in regards to the possible sale of the Company, WPCS and its directors will consider any offers that are fair to our shareholders. WPCS is a valuable Company. We have a leadership position and communications infrastructure, an exceptional customer base in high growth markets, an international presence, a healthy balance sheet and significant future 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 operations center is positioned for earnings growth in the near future. I would like to now turn over the call to Diane to begin the question and answer session.

We will now begin our question and answer session. (Operator Instructions) The first question is from [Eric Appell].

Yes, Andrew, how are you doing?

Good, Eric. Thank you.

I have a question on the Sioux Sun operation. I am going trying to look back through the Qs, what was paid for that operation. Was that an acquisition? Obviously, it was. There is goodwill and intangibles on the balance sheet.

Yes, the acquisition was made in January or -- I am sorry, December 2002 for approximately $5.8 million. And we had since consolidated two other operations, two other acquisitions that we made into the Sioux Sun City operation, so it represents two Sioux Sun City, the Sacramento operation that we had, and also the Auburn, California, operation that we had.

Okay, so the rollup actually is why the goodwill intangible is actually higher than the original 2002 purchase price?

That is correct. It is $7.6 million of goodwill we had on the books.

Right.

For all three.

Okay. Well, then it might not impact cash flow as of today, which is a non-cash charge. And it somehow did impact cash flow throughout the -- since 2002, and obviously, more recently. Is that a fair assessment?

Well, from a performance point of view, it certainly did.

Right. Okay.

There were two major projects that were -- that had experienced significant cost overruns, so it absolutely affected the financial performance of the Company on a consolidated basis.

Okay. Help me reconcile this. The backlog and the bid list are both down sequentially, but you're still confident about achieving profitability on a go-forward basis. How do you -- how has your confidence increased even though those two metrics are actually down sequentially?

Well, the bid list is not down substantially. I think the bid list in the third quarter was like 178. It is now 171, so that's not a big swing. In regards to backlog, there was certainly a timing issue. After we did the backlog as of January 31, shortly after that we added another $20 million of announced contracts, so the backlog actually is much higher than -- I mean, that was done two weeks after we closed. Of course, we're reporting through January 31, so we have since then added significant contract value to the backlog.

Okay. On this strategic process, here is my concern. My concern is that it has been ongoing for a while and it is a distraction to management. Why not just accelerate the process, shut it down, or allow the sale of the Company so that you can get back to doing what you do best, which is trying to win more projects and achieve that profitability? Why take so long?

Well, the process is not too long. Keep in mind that the independent directors' contract with Lincoln International in November, so it has been four months. That process takes a while because we have to review every strategic alternative that's presented to the Company, and we have to be fair to the shareholders. But I do want to emphasize that the independent directors have been sequestered, and have hired Lincoln International and their own separate legal counsel, and they're the ones working on the process of seeking the strategic alternatives, including the possible sale of the company.

Our operations team, myself, our CFO, our executive vice presidents, and our subsidiary presidents are not focused on this process. We are focused on the operations of the business whole heartedly, because you never know how these things tend to happen. It may happen. It may not happen, who knows. One thing that's certain is that our operations, we need to focus on the improvement of our operations, getting back to the profitability levels that we're accustomed to. So, this process is going to continue until -- it is not going to continue forever. It is going to continue to a point where something is defined, and then we will report accordingly to the investment community.

Okay. Just one last question. Can you talk to me about cancellations? When you have -- is that even -- I know it is in the 10-Q, but are cancellations really a significant part of backlog and backlog reductions?

No. Cancellations are not an issue, but what is an issue are delays. The issue revolving around delays, Eric, has to do with the fact that, as a communications infrastructure provider, if we're doing the security or electrical contracting or low voltage or any kind of wireless communication, we have to wait until the structure is at a certain level of construction. So, that process is what pushes us back. We're ready to go in many cases, but the building is not ready. So that is an issue, and we've experienced an excessive amount of delays this past quarter, and delays that are pushing contracts out to fiscal year 2012, which begins May 1. But obviously, the good news is that it is not canceled. It is just delayed. The bad news is that we're not able to recognize it as quickly as we want it -- as we want to, sorry.

On the Sioux Sun, is it management's expectation, now that you have written down the goodwill, are we to believe that you're going to shut that operation down, you're going to consolidate it and make it less meaningful? What's the plan there?

For Sioux Sun City, we feel we have a valid business. And again, we have -- they're sitting, for example, right now part of their backlog they have $31 million of -- I am sorry, of bids of the $171 million reported, so Sioux Sun City has a very functional business. What hurt them this year was the projects that had the cost overruns.

Okay. So, why would you and your accountants decide that it was necessary to take such a big hit in Q2, Q3 on the goodwill, on the impairment charge?

Well, it was--.

If it's performing -- or it is expected to perform well in the future,why such a big hit?

It is a calculation that's made. There is a lot of factors that go into goodwill impairment issues, and they experience a significant loss. And by our accounting procedures, by our accounting standards, they went through a valuation, and the valuation based on several factors came up with the conclusion that a goodwill impairment charge was assessable. So, we just have to follow procedure, and again, it is a complex process that they have to go through, but the only one that really was affected was the Sioux Sun City operation.

Okay. Fair enough. Thanks.

Thank you, Eric.

Our next question is from Max Thomas.

Good afternoon, Andy. How are you?

Good. Thank you, Max.

A question regarding the impairment charges. I can just assume that these charges were made as a result of some type of miscalculation at the onsets of perhaps estimating the costs, which subsequently became larger than the Company anticipated. Now, what has the Company done to make sure that these kind of losses do not occur again, and has anyone who's responsible for these snafus been removed or disciplined? Or, I just want to really know what has the management done to deal and rectify this problem?

Well, Max, one of the first things we did was, we did replace management there, so management was replaced. We put in some of our best executives, one of our best executives to oversee the operation, put in a new subsidiary president, and we put in new project management procedures for double checking every estimate that goes in. We had that procedure in place, but it was a management -- it was lack of management effectiveness that allowed those bids to experience the backlog -- actually to experience cost overruns. So, we have made the changes. We have put in disciplined procedures right now. Although there is never a guarantee that you're not going to lose money on a future project, we feel we have put in the procedures that will allow us to mitigate any risk in the future.

Understand that this operation, this specific operation, Sioux Sun City, generated anywhere from $1.5 million to $2 million of EBITDA for five or six years. They were successful, but management got sloppy. We are responsible for that. We made the changes necessary.

Andy, I think you will agree that the investors in WPCS have been disappointed for several years now, and I really want to know, is management aware of that? I mean, there is a lot that goes on that I think is within control of management, and there is a lot that's perhaps not as much as controllable, but I think at the end, the buck stops with the management. And we were sitting with a $9 of $10 or $12 stock several years ago, and now it been stuck in the $2, $2.50 range, sometimes if you get lucky maybe $3, but not often enough. If your assertion is that WPCS is worth anywhere between $3 and $7 depending on how you look at it, and the market values it at $2.50, what does that tell you?

Well, are you saying in terms of -- well, I think it is certainly under valued, the stock. The performance, Max, there is no question that the performance when we did -- four fiscal years ago we did $0.72, and then $0.52, and then $0.23 in earnings per share, and $0.12 last year. There is no question there has been a -- certainly a degradation of earnings, and it has affected all of us, obviously. We're all significantly focused on turning this situation around, and we have certainly had issues that were out of our control, but there is issues that we need to focus on to make this a better Company. There is no question that we are -- we want to be back where we were when we were generating $0.72 in earnings per share. There is not anyone in this company that would disagree with that.

Sure.

And, you know, it is very frustrating to have to contend with the issues that is we've had to contend with.

Right, and I think it is understandable that you are telling the investors in your Company that you appreciate their frustration. I think the question that an investor would have is, does the management see a way out of this? Are we hanging onto something that's simply a hope somewhere out there on the horizon, or are really in a Company that realistically is going to some day again deliver? Because, ultimately, you only want to be a part of a Company that the management has their hands on the wheel and is driving to a better place than where we are now. And for the last several years, that hasn't been the experience of the investors.

Now, the management is a different story, because the management gets paid their salary whether the stock is $2 or at $20, but investors have to make a choice. And I think it really becomes a question of credibility with the management, and there are long-term investors in this Company who are only here because they believe in what you tell them, and they believe in your ability to turn this thing around. The last several years it has been, obviously, going in the wrong direction, but I really want to think, or know, what is your -- is there a conviction on your part that you guys do have a handle on the issues of the past and that we really are turning the corner?

Well, Max, we really believe in the future. We absolutely believe in the future. You're justified in your frustration. I am not doubting that one bit. I am still a significant shareholder. I believe in this Company, and I believe in the future of this Company. When I look -- when I go out in the field and I visit our operations centers and I look at customers that we have, when I look at state and local municipalities that are putting in video surveillance cameras in crime deterrent areas, and the saturation is so low for this technology. When I look at police cruisers that are putting in video surveillance for their cars, the increase in communications, even traffic violations, traffic violation, e-ticketing systems that are going generate revenue, desperate revenue for these state and local municipalities. These are the things that we do.

I talk to these users. I talk to these customers. They tell us how much they need to implement this technology to be able to improve -- not only improve public services, but also create revenue-producing opportunities that are so desperate in these state and local municipalities because of tax revenue impairment issues. I go to healthcare, and I talk to our healthcare customers, and they tell me that they can't accommodate the baby boomer population that exists, and maybe even issues about new healthcare legislation that will add newly insured to a hospital system that already is maxed out. They need communications infrastructure desperately to reduce the cost of delivering healthcare.

And then we look at energy, and again we have been waiting and waiting and waiting for that solar and wind and renewable energy. Even biofuel, biomass, different types of renewable energy opportunities that exist. We know it is going to be here. We don't know when, and we know the cost is still high to convert to renewable energy, but there are projects that are so encouraging that show the new face of what this country and other countries we compete in will be. So there is tremendous opportunities for us, so I am a believer in the future, and I believe with those opportunities we'll deliver the earnings that will get investors back to a point where they can be really satisfied about the appreciation of this stock. Right now it isn't happening, and I realize that, and it is incredibly frustrating for all of us. But we're committed to making that happen--.

I appreciate your reply. I think there is very little argument with regards to the industry you're in. In fact, I think most investors would agree that this is one of the best industries to be in, especially the diversity of services that WPCS offers and the geographic diversity that the Company is in. So really, the question points back to the management again. It is not that we are in an industry that is in decline and that's why the Company is not performing. So are you confident, Andy, with regards to the Company's ability to take advantage of these opportunities? Because the last several years, that hasn't happened.

Well, there is no question it hasn't happened, Max, to the degree that we wanted to see. But in answer to your question, we are absolutely committed, and we are absolutely focused on and believe in the fact that we can make this Company very successful and very profitable, and we're going to commit to doing that. Obviously, we need to show the results. We need to make those happen.

But we have to take a look at the trends and see where the trends are, where the turn around is occurring, and although we had to suffer through these losses these last three quarters, if you look at the trends now from quarter to quarter, we're seeing an improvement in the losses that we posted in the third quarter over the second quarter. And we hope to see even more improvement in the fourth quarter, and we hope to have a 2012 that gets us back on track again to the profitability levels that we are used to delivering. But again, I know we're trying investor patience, and I too am a shareholder and want to see success for the Company. So, all I can tell you, Max, is that we believe in this Company. We know with the markets and the way they're shaping up that we can get back to that level of profitability that generated this Company -- that vaulted this Company into a higher stock price.

I appreciate your time and best of luck.

Thank you, Max.

Thank you.

Next question comes from the line of Eric Appell.

Just one other question, Andrew. The only thing I can see that might stop you from successfully growing the business would be your bank lines of credit. And I know there has been a continuous forbearance by the Bank of America, but what happens in September, for example, if they are no longer willing to push out and demand immediate payment on those notes?

Right now, we're sitting with $20 million of working capital, and so we don't have -- we have enough on our balance sheet to fund through these difficult times. Obviously, we can't continue to lose money. That's not something that's acceptable. So, we are talking to Bank of America and, certainly, we are entertaining other opportunities with other banks as well. We've gotten some tentative commitments from other banks, too. But it is all based on performance and, Eric, we have to perform, period. That's the bottom line, and if we continue to perform, we're not going to have an issue. Luckily, we have the balance sheet that we have today to be able to absorb three poor performing quarters that we have had. But we have to perform now, Eric, and we certainly are taking every opportunity to make sure that our credit facility, bank lines, and our balance sheet remain strong.

Okay. It's still a risk, though, and I just wondered, within the context of it being a risk, does that play any part in whether the Company decides to remain independent, the fact there is that risk on the table?

You mean in terms of whether the Company would be sold or not?

Yes. Obviously, the risk disappears if the Company is sold.

No. I mean, those are two separate issues. Whether some other entity puts forth an offer that shareholders accept, that's totally separate than the operations of the business. The operations -- we're focused on continuing to make our Company successful regardless of what happens in the strategic alternatives realm, so it is separate.

Actually, it might be separate for you, but from a shareholder standpoint, it is not separate. It is actually very much intertwined, because we're accepting the risk as shareholders that you will be able to continuously extend that line of credit. I know you have the working capital, but it is going to -- if you had to use all of your cash in order to pay down that note, that would -- that's going to create problems for you as far as trying to grow the business. So, they're very intimately intertwined, and I don't see how they're not. So, we as shareholders have a risk there in front of us, and in fact it is in the 10-Q as a risk. But you're saying that it really is independent and it doesn't play a role in whether the Board thinks that maybe because that risk is there, a reasonable offer is -- for the Company is different than if you had absolutely no bank debt on the balance sheet? Does that make sense? Do you understand what I am trying to say?

Eric, whether -- again, the shareholders can decide whether there is value for this Company that they want to accept. I mean, that's a decision the shareholders have to make. In regards to our operations, when we look at our operations, and looking at our balance sheet, we have to be successful. We have to generate profit. That's what we intend to do. We don't intend to get to September and continue to lose money. Yes, there is a risk if the Company continues to decline, but we don't expect the Company to decline.

So, from an operations point of view, we're going to make this the best possible Company we can make right now. We're going to focus on being efficient, focus on generating profitability, and if it means it is worth X today and X tomorrow, then that's what it is. So, again, the directors are not deciding that they have to do something. It is not -- it doesn't work that way. We'll continue with the strategic alternatives, and we'll figure out what that represents for our shareholders. And if it is fair, fine, but that doesn't deter us from focusing on improving the operations of the business. I don't know how else to answer that.

So it doesn't play -- in the minds of the sequestered Board members, it doesn't play any role, the idea that there's this risk out there as far as line of credit? It doesn't play any role whatsoever?

We don't see it as a risk right now.

Okay. Fair enough.

We don't look at it as a risk. This is not September 15, and we've had several quarters of losses. We're sitting with a Company with $21 million of working capital, $6 million of cash roughly, and a Company that has to get its profitability act together. That's what we intend to do.

Fair enough. Thanks, Andrew.

You bet. Thank you, Eric.

There are no more questions in queue at this time.

Okay, Diane, you can move to close the meeting. I want to thank everybody that was on the call, and also the questioners, as well.

Since there are no further questions I would like to thank all the participants on today's WPCS International Incorporatedfiscal year 2011 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. That's 402-220-2946, and entering 63665-pound as the program identification number. This will conclude the call.