StableX Technologies Inc (SBLX) 2012 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 2012 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, and good afternoon, ladies and gentlemen. And welcome to our fiscal year 2012 second-quarter investor conference call. The agenda for today's call will include a discussion of our second-quarter financial results, a review of our market conditions, and an update regarding our strategic development efforts.

Let me begin by stating that WPCS is pleased to announce that we achieved a consecutive quarter of EBITDA profitability. This recent performance continues to reaffirm that we are focused on returning to profitability levels we have generated historically prior to a difficult fiscal year 2011. Going forward, we continue to see a strong level of bid activity for WPCS in public services, healthcare, and energy. In public services, the emphasis has been on video surveillance to deter crime and the consolidation of county-wide 911 dispatch systems for cost savings. In healthcare, renovation and new construction of hospitals to accommodate the aging population continues. And in energy, we're seeing more and more bids for solar being driven by the lower costs of solar panels produced in China.

Both our domestic and international operation centers are performing very well. Although the economy has not fully recovered, the specific markets we serve are continuing to offer ample opportunities for growth. As reported in the last quarter, we divested two of our underperforming operations. Accordingly, the financial results discussed herein refer to our results from continuing operations.

We remain encouraged that fiscal year 2012 will be a financially successful year. Our executive team continues to implement cost efficiencies, as well as emphasizing the improvement of gross margins. The gross margins through six months of this fiscal year improved to 21%, compared to 18% for the same period a year ago. WPCS has also expanded its sales and marketing efforts recently with programs designed to grow our customer base. Our reputation remains strong as a premier design-build engineering firm for communications infrastructure and renewable energy, as evidenced by new contract announcements that show a high level of repeat business.

At the end of the second quarter, WPCS is pleased to announce that we have a backlog of $30 million, and a bid list of $163 million. The Company has been able to keep the backlog and bid activity at healthy levels, even after the divestiture of two operations centers. In regards to revenue, for the second quarter of fiscal year 2012 ended October 31, 2011, WPCS generated $28.2 million compared to $23.2 million for the same period a year ago, which represents an increase of 21%. Again, I'd like to emphasize that these results are after the divestiture of two operations centers. For the six-month period of fiscal year 2012, ended October 31, 2011, WPCS generated $51.7 million compared to $46.5 million for the same period a year ago, which represents an increase of 11%.

In regards to EBITDA, for the second quarter of fiscal year 2012, WPCS generated $371,000 in EBITDA, compared to an EBITDA loss of $1.3 million for the same period a year ago. For the six-month period of fiscal year 2012, WPCS generated $1.5 million in EBITDA, compared to an EBITDA loss of $1.6 million for the same period a year ago. As you can see, this turnaround in performance is very encouraging. WPCS defines EBITDA in the traditional sense of earnings before interest, income taxes, depreciation and amortization. But in addition, WPCS has incurred one-time charges from the loss of discontinued operations, and a strategic alternatives effort, as well as non-cash charges from acquisition-related earn-out costs and goodwill impairments. These charges are also excluded from the EBITDA calculation so that we can provide a more meaningful perspective on the improved results for our continuing operations.

For the second quarter, WPCS reported a net loss of $1.7 million or $0.24 per diluted share, compared to a net loss of $6 million or $0.86 per diluted share for the same period a year ago. For the first six months of fiscal year 2012, ended of course October 31, 2011, WPCS reported a net loss of $1.7 million, or $0.24 per diluted share, compared to a net loss of $6.3 million or $0.91 per diluted share for the same period a year ago. This is a considerable improvement from last year, and I'd like to emphasize that the net income loss of $1.7 million for the first six months of this fiscal year includes one-time charges of $1.3 million related to the loss from discontinued operations, and in addition, $141,000 related to the ongoing strategic alternatives effort. The revenue segmentation for the six-month period was approximately 22% wireless communication, 7% specialty construction, and 71% electrical power.

For the second quarter, consolidated gross margin was 18% compared to 17% for the same period one year ago. It was a cost overrun on a larger project that affected the consolidated gross margin for the second quarter. However, the project is near completion, and all costs have been recognized. In addition, we have change orders and delay claims with the general contractor that will help offset the cost overruns in the quarters ahead. More encouraging is that through the first six months ended October 31, 2011, the consolidated gross margin was 21%, compared to 18% for the same period one year ago.

As of October 31, 2011, WPCS continues to maintain a healthy balance sheet with approximately $5.2 million in cash and $14.6 million in working capital. Our net tangible asset value is $20.9 million, or $3.01 per diluted share. Due to the relative strength of our balance sheet, the Company continues to finance our growth internally and meet our short-term liquidity needs. In regards to our credit facility with Bank of America, as of December 14, 2011, we have further reduced our debt obligation to approximately $2.4 million from the $3.5 million reported on the October 31, 2011 balance sheet.

WPCS is renegotiating our forbearance agreement in order to give us some time to conclude the arrangements for a credit facility with a new senior lender. The Company has received term sheets from several senior lenders, and we expect to finalize terms soon. The reason it's taken a while for a new credit facility is that senior lenders were looking for a couple of quarters of EBITDA performance, which we have now accomplished.

As previously reported on September 1, 2011, WPCS sold two operation centers to Multiband Corporation. In addition, WPCS extended a deadline of February 1, 2012 for Multiband Corporation to put forth a definitive merger agreement, with a financing commitment for their proposed acquisition of WPCS at $3.20 per share. As of today, that has not yet occurred. We wish we could provide more information on the status, but we do not have any more information at this point. However, if Multiband puts forth a definitive agreement to acquire WPCS, along with a financing commitment, our Directors will confer and announce their recommendation to our shareholders. As most of you are aware, the proposal from Multiband is part of the strategic alternatives effort that's been underway since September 2010.

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 near future. We believe 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 earnings growth potential. Our Company remains committed to building shareholder value in the short term and long term. Having said that, I'd like to turn the call over to Diane, the operator, to begin the question-and-answer session.

(Operator Instructions). Our first question comes from the line of [Shawn Laydell].

I had some questions, maybe related to the Multiband situation. Just by listening in on their most recent call, they talked about -- well, they may purchase a couple more centers from WPCS before the end of the next term date on the letter of intent, and I guess they seem to be portraying that they're just going to keep taking chunks of this as they've done with previous acquisitions, and then eventually get to the end. I guess I'm not necessarily comfortable with the way they're representing how things are going to go and it seems like we're in the middle of a turnaround here, maybe without them. How much longer are we going to be paying for strategic alternatives, and can there be a point where maybe we can get that off the table and just try to continue with the turnaround on our own?

Well, those are all very good questions, Shawn. Let me try to answer them as completely as I can. I knew that Multiband's conference call indicated that they may, in fact, propose to acquire some additional subsidiaries, but we haven't heard anything definitive from that perspective. So we have to wait to see what they have in mind, if that is the strategy they want to take.

However, having said that, our commitment is to WPCS shareholders. We are in a turnaround. We are planning to have a successful year, and our operation centers are performing well. So I'm not sure if a proposal could be worked out where we would sell more operation centers, because it would compromise our EBITDA production for the year, unless it was some ridiculous offer that boded well for our shareholders. But of course, we don't see. We're just speculating right now.

So we have to look at it from an overall perspective, and if in fact, they want to make a proposal for acquisition, the acquisition of subsidiaries, we'll have to measure that in terms of our performance and our capability and what our shareholders are expecting us to deliver from an EBITDA and revenue perspective for this fiscal year. So by no means is there any indication that any deal is considered or contemplated or done. By no means is anything accepted or acceptable or without consideration to our shareholders. And honestly, again, going forward, we want to wait for Multiband's definitive response in terms of what they would like to do. They have until February 1.

But in answer to your question, Shawn, that once we get a definitive action from Multiband, we will be terminating the strategic alternatives effort, as we have fulfilled our obligation to solicit other offers for the business. So we will be terminating that, as it's been a very expensive proposition for us and for our shareholders over this past year. So --

That's kind of what I was getting at. It's been over a year now that we've been incurring costs for the strategic alternatives, and just, I think it's either maybe time to wind it down, because it seems like we could turn around and go at it on our own, or get something done.

We absolutely agree with you, Shawn. We want to terminate the process once we hear from Multiband definitively on what they would like to propose. So we're at December 14th now, and their exclusivity terminates February 1. So I'm sure Multiband and WPCS will have some conversations between now and then to figure out what the best strategy is. So we'll just wait to hear. But we intend to, once that's done, we intend after February 1st, for all intents and purposes to terminate the strategic alternatives effort, and we hope to do that effectively soon.

Okay. Maybe one more question.

Sure.

If you don't mind.

Not at all.

Having to deal with the loan that I think is owed to The Pride Group, the joint venture, every indication that's going to be kind of rolled over as it has in the past or --?

Well, the money that's due to Pride is an earn-out. It's compensation for their Company, based on their performance. They had to achieve $1.2 million of EBIT, which is earnings before interest and taxes, in the 12-month period that ended November 30th, which we're now auditing. But it looks like they will achieve their goals, so we will owe them an earn-out in the January, February time frame. I don't know the exact dates. But we have ample enough cash to settle our earn-out obligations with Pride and we intend to have a new banking facility in place by then anyway. You may be referring to the debt obligation we have with China.

Yes, I think I might be confusing the two, yes.

Yes. The 60/40 joint venture in China, there's debt on the balance sheet there, but we own 60% of that debt, not 100% of that debt. The other debtor, the financier there is the other 40% partner which is the utility company in Tian, China. We made the decision that -- and they're doing well, by the way, China. And they're paying down their debt obligations. And we made the decision that we want to continue to support the operation, and have them continue to pay down their debt obligation. They are going to roll over the debt to another 12 months. And the reality is that as they continue to prosper, they should be able to make their loan obligation repayments successfully.

Now, if anything ever were to occur where we had a problem with that operation center, then we would dissolve the operation center, and there is enough net tangible asset value that's even -- it's higher than the debt that's due the operation. So we're not really at risk in that debt obligation. It's something that we worked out between our China partner and us, and it's because we are partners. So that's not a debt obligation to be concerned about. The only really debt obligation is the under $2.4 million that we owe Bank of America, and the Pride earn-out, as you can see as of the end of the quarter, we had $5.2 million in cash.

We have $14 million in working -- almost $15 million in working capital, so we have ample enough capital to pay our debt obligations. The only reason why we haven't settled the debt obligation yet is because we want to get our new banking facility in place. And we want to remain liquid as we continue to grow or sponsor our growth in the next quarters ahead. So hopefully, everything will be more definitive for our shareholders in the month ahead.

Well, that sounds good. Sounds like things are on the up-swing, and nice work, and I appreciate your time.

Next question comes from the line of [Ben Rosenzweig].

It's [Ben Privetts]. I want to ask about the backlog. I heard you guys say that currently it's at about $30 million. Looks like it's down maybe $10 million or so from the end of the year. And so we'll call it that maybe $10 million of the $50 million in revenue for the six-month period came from the backlog. Is that relatively representative of how you view the business going forward, maybe 20% backlog and 80% that just never enters the backlog?

Yes, that's correct. We had a higher revenue producing quarter, Ben, at $28 million, so we burned through some of the backlog, as you can see, from a revenue producing point of view. So we have to replace and plus we had the backlog removed from the two operation centers that we divested. So we have $163 million of bids. We usually have a 20% success rate. So we're looking to refill that backlog through the next quarter or so. But that's correct, the higher revenue recognition ate into the backlog a bit, but we have more bids now that we have to replenish the backlog with.

So what percentage of that $30 million backlog do you expect to get recognized in the next six months?

Well, I don't have the exact numbers in front of me. I mean, some of the projects are longer than six months. I would say right now, let's see, we've recognized $52 million, I think or $53 million through six months. Through the next six months, we feel confident that we'll recognize -- we'll get to the $100 million mark. So we're going to recognize all of that, if not more, obviously. You can't tie it up specifically, because some of that backlog is longer than six months, but it will be replaced by bids that will be recognized within six months.

No, no, but I understand what you're saying but I think I was asking a different question. Of the $30 million that's currently in backlog, what number of that $30 million will be in the next six months?

Probably I would say about 70%, 75% of it.

Okay. So -- okay. So say like $22 million and that's representative of maybe only -- I'm getting a pretty big revenue number for the back half of the year, if a good number of your sales don't flow through backlog. Am I looking at that correctly or --? (multiple speaker)

All the revenue recognition primarily goes through backlog with the exception of the business that we recognize within 30 days. We have projects that are under $50,000 that never make the backlog.

Okay.

Because they're started and completed within 30 days.

Okay.

So there's a whole section of revenue that really isn't recognizable through the backlog process but it exists from order to conclusion.

Right. But I'm just trying to predict what the back half of the year looks like using the current backlog, historical conversion rates and what typically you sell that doesn't go into backlog.

We have $163 million of bids. Usually, a 20% hit rate. That's about probably 75% of the existing backlog recognized, that's about $23 million. So you add that to the $53 million we've already done through six months, then that gives you a little bit of scope in terms of what revenue production we expect for this fiscal year.

Okay. And then on the margin front, you had said 18% this quarter, 21% through the first six months, but that includes some major cost overruns on one project. If you could, can you say what the margins have been, ex that one project and whether that would be more representative of what we would expect in the back half?

Yes, it would have been 22% for this quarter, not 18. The margin cost overruns are one major project. It's roughly just under $8 million. And there were weather delays in New Jersey. There were weather delays and general contractor delays, because I think, Ben, you know that when we get in to do our particular service, the building has to be up and the walls have to be up, so there were delays from the general contractor and weather delays.

The project was scheduled to be completed January 30th. Because of the delays and it was about a 30 day delay window, we had to double, sometimes triple labor to get the completion done by January 30th for this customer. It will get done by January 30th but because we had to increase labor, we had cost overruns. Now, we have change orders and we also have delay claims that we'll put in after this project is done which we feel will help recoup a lot of that cost overrun. So we should be able to see the changes in the -- before the end of our current fiscal year.

Okay. So not only -- just not counting some of the costs you'll be able to recoup from that project, just looking forward on a go forward basis, you're thinking 22% is a good way to look at your margin profile for the next six months?

Yes, that's what we planned like a 23% gross margin for the year when we did our projections initially.

Okay.

So we're tracking near there, except for this slight cost overrun which -- this cost overrun, which we hope to recoup before the end of the fiscal year.

Okay. Fair enough. And then if I'm just looking at just the flowing down the income statement with 22% gross margins, just a slight pickup in back half sales because of the increase in the bid list and where the backlog is at, you think G&A should be relatively constant in the back half?

Absolutely, yes.

Okay.

We hope to shed the strategic alternatives cost by February 1, and it's been wound down, by the way. There's really no activity going on right now. We're just waiting for Multiband to decide exactly what they'd like to do. So there hasn't been any incurred costs, nowhere near the level of incurred costs we had previously, and we've spent probably around $1.2 million this past year in strategic alternatives costs, which has been a big hit for the Company. It's just been very expensive.

How much? Sorry, say that number again.

$1.2 million, roughly.

That's all baked into your G&A?

Correct.

Okay. So even keeping it there, saying it's reduced in half, I mean, I'm still -- with that 22% gross margin, I'm still getting a relatively conservative back-half EBITDA of somewhere in the high 2s, maybe low 3s, if you add that to the 1.5, is there any reason to be surprised by a mid-4s EBITDA number for the whole year here?

We haven't guided, Ben. Your projections are -- $3 million to $4 million of EBITDA is -- that's where its tracking, considering where we're at today. But we haven't guided. We're not really providing guidance.

Okay. I wanted to see if I had any numbers that were wrong.

You're certainly on the right track.

Fair enough. I'll move on.

Thanks, Ben.

Yep. And just wanted to circle back up on the Multiband, obviously beating the dead horse, I don't want to keep harping on it but it's a pretty major transaction for the Company. Obviously, they have exclusivity until February. I understand there's not a whole lot that we can be doing until that time, other than just taking what comes your way and what's offered to you and evaluating it and seeing if it's in the best interest of shareholders. What would it take to extend that exclusivity with what you've seen so far? Would you consider doing that or would it be best to move on, if we had not gotten something that you would take to the Board of Directors at that time?

Well, I think it would be best to move on. But the independent directors have to make that decision. But I think we've gone long number this has been a year that we've gone through this process and we can't continue to be in this mode, because it's costing our shareholders a lot of money. We need to move on. We've certainly fulfilled our obligation of fiduciary responsibilities regarding strategic alternatives.

The Company has turned around. We look forward to a successful year. So I think February 1 is really kind of where we're at and we need just to move on. It's a very disruptive process for our operations and -- although our executive team has been brilliant in focusing on the operational issues and challenges we've had this past year, and we do focus on making sure we make this the best Company possible for our shareholders, our WPCS shareholders. So, but February 1 is -- it has to be decided upon, but I cannot see any justification of continuing beyond there.

Okay. And so when you say continuing beyond there, you're not necessarily just alluding to Multiband and their exclusivity, you're more speaking to the act of soliciting strategic alternatives and spending money on looking at other options, besides remaining a going concern in this current form?

Well, remaining a going concern, remaining a Company that's focused on certainly delivering better shareholder value, but we're talking about the relationship, the strategic alternatives effort as it stands right now with Multiband, our only solicited proposal at this point. After February 1, we're a public Company. If somebody feels that this company, WPCS, is attractive and worth X amount per share for someone else, then absolutely, every offer would be considered. So we don't have to be in strategic alternatives mode with a legal team and independent evaluation to not look at a specific offer.

Now, if another offer comes through we absolutely will take a look at it. That's the nature of the business. But this particular window of strategic alternatives effort has to conclude, because it's just too expensive. So -- but again, whatever's best for shareholders going forward and we hope that our results this year would give the inclination that the Company's worth more than $3.20 per share. So I mean, that's our challenge as an operations team to make this Company very successful, and that's what we're going to be focused on.

Okay. Great. And just to kind of sum it all up, not to expect any more sales of the Company piece-meal, unless it's something that just completely knocks our socks off, and then by the time of the exclusivity expires, we should expect to have a relatively binary outcome, whether we're sold or whether we're continuing to operate?

That's correct, Ben. Again, as I mentioned earlier to Shawn, selling two operation centers is compromising our EBITDA. So unless you can replace that EBITDA, I don't know if you can replace it that quickly through acquisition, or so, it would have to be through acquisition, it's a very difficult decision to make, because we are on track to have a successful year. So we want to be able to ensure that's the most important outcome right now for WPCS shareholders, unless there's something of an offer that needs to be considered. We'll certainly look at the issues, but we are only concerned about WPCS shareholders.

Got it. Well, that's all I have. Thanks he very much, guys.

Thank you, Ben.

(Operator Instructions). If there are no further questions, I would like to thank all the participants on today's WPCS International Incorporated fiscal year 2012 -- there is one more question from [Edwin Morgan]. Just one moment, please. Go ahead, Mr. Morgan.

Hello. Mr. Hidalgo, thanks for taking my call. I'm on a bad connection so hopefully I won't get cut off. I'm a bit more prosaic than the other callers and I'm a bit nervous about basically how the last two divisions were sold off without shareholder approval. My opinion was that this was under devious circumstances. It wasn't dire straits, from what I could see. How do we know we're not just going to wake up in a month and find out that two more divisions were hacked off at well under the $3.20 offer price?

Well, Ed, I mean we sold two underperforming divisions that lost $500,000 for the first four months of this fiscal year. I'm a shareholder. I'm still a significant shareholder. I care about WPCS. All our shareholders are the most important facet of our business. I had no idea what motivation we would ever have to destroy the value of WPCS and its shareholders. If we have momentum from an EBITDA perspective and from a revenue-producing perspective, then I have no reason to say why.

We don't work for Multiband. We don't work for any other Company. We work for just WPCS. So we're looking for the best shareholder value we can deliver for our shareholders, which I'm one significant shareholder. So again, what we sold, we sold because it was good for shareholders and I still stand by the fact that it was a very good transaction for our shareholders. But in the future, since our operation centers are performing very well, I don't know if it's in the best interest of our shareholders to sell any of our operation centers at this point in time. So that's where we stand.

I was a bit -- one of the things that -- a negative that I did notice, by giving Multiband two of those operations, you give them a large part of what they wanted. They only operate within the United States. So I imagine they wouldn't have an interest in your overseas operations, so I saw that as kind of letting them off the hook and giving them something at half price. Kind of make me nervous.

You're breaking up a little bit, Ed. Did you say giving them something at half price, did you say?

Yes, and also letting them -- I don't think they have an interest in WPCS's overseas operations, so you gave them a large portion of what they would like within the United States.

I don't know what you define as a large portion. It was $13 million of revenue for a Company that does over $100 million of revenue. So I don't know if you consider that a large portion. But again, whether Multiband has an interest in all the Company or some of the other operating entities, we don't know. We have to wait until Multiband decides what they want to propose. So -- and we will make a decision based on what's right and what's best for WPCS shareholders.

I don't think it would be best at all for you to sell anything less than the entire Company in one piece for the offer price. I cannot conceive of a reason why you would give Multiband another piece of the Company and I just -- I'm having -- it's possible. This makes me nervous, that it was done without shareholder approval.

You mean going forward, you are saying? Going forward, or what we sold prior?

Going forward. I would strongly object to selling pieces of the Company again. Can you just reiterate that is not part of your prerogative?

I would object if it's not a good deal for shareholders as well. So I'm on your side, Ed.

What do you mean by good deal?

Well, I don't know.

Shareholders know what's a good deal, so I don't think you should be doing anything without our approval, as far as selling off pieces of the Company.

I understand your point, Ed. I understand your point. We've made our point. I mean, I don't know what else I can tell you. So -- do you have another question?

No, I think -- no, no more questions.

Okay. All right, Diane, then I'll move over to you, see if there's any other questions.

Sir, there is no further questions. I would just like to thank everyone for attending today's WPCS International Incorporated fiscal year 2012 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 45830, 45830, and the pound key, as the program identification number. This will conclude the call.