TSS Inc (TSSI) 2007 Q4 法說會逐字稿

Good day, everyone and welcome to the Fortress International Group's fourth quarter 2007 earnings call. Today's call is being recorded. For opening remarks and introductions I'd like to turn the call over to Mr. John McNamara.

Good morning, everyone. Welcome once again to the Fortress International Group conference call to discuss 2007 full year results. As a reminder, if you would like to view the slide show presentation, you may access it through the Investor Relations's section of the Fortress International Group website at www.theFIGI.com and fill out the registration page. It should only take you a moment or two. Joining us this morning from the management of Fortress are Harvey Weiss, Chairman of the Board; Tom Rosato, Chief Executive Officer; and Tim Dec, Chief Financial Officer.

Before we begin, as usual, we would remind you all to take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to statements made on this morning's conference call. This call will contain time sensitive information as well as forward-looking statements which are only accurate as of today, March 18, 2008. And Fortress International Group expressly disclaims any obligation to update, amend, supplement or otherwise review any information or forward-looking statement contained in this conference call or replay to reflect events or circumstances that may arrive after the date indicated. Except as otherwise required by applicable law. For a full list of the risks and uncertainties which may affect future performance please refer to the Company's periodic filings with the SEC. We'll begin the call with a brief overview of the year and then we will open up the line for questions. Now I'll turn the call over to Harvey Weiss. Go ahead, Harvey.

Thank you, John. Good morning everyone and welcome. Thank you for joining us to discuss our 2007 year results. As John mentioned, with me today are Tom Rosato, our Chief Executive Officer, and Tim Dec, our Chief Financial Officer.

2007 was a year of milestones for Fortress International. For those of you who may be new to the story, in January of 2007, we successfully merged the original spec structure with the companies that now make up Fortress International Group. We successfully transitioned from a Company whose revenues were primarily derived from a handful of government contracts to a Company that today derives 42% from government related contracts and 58% from the commercial sector. But it's important to note that 90% of the work included in our backlog at year-end was in the commercial market sector. Our go to market strategy by which we offer design, build, and facilities management services to mission critical facilities continues to fuel organic growth. And we saw the ideal manifestation of this in the fourth quarter, where an existing short-term engagement led to $118 million longer term contract.

This strategy, this go to market strategy, and the acquisitions we have made, continue to drive progress toward our goal of deriving more than 50% of our future profitability from recurring revenue sources. Since going public, we have acquired three companies that fit this strategy and our geographic footprint now extends throughout the United States. The market for our services continues to be be driven by very powerful forces that remain in place, despite the recent downturn in the credit markets. And with that I would like to turn it over to Tom Rosato.

Thanks, Harvey. On our last conference call we told you that our results continue to show quarter-to-quarter improvement and our fourth quarter results reflect an acceleration of that trend through increased realization of our backlog. Revenues in the fourth quarter increased 43% from the third quarter, to $18.2 million, and gross profit improved 84% from the third quarter to $3.5 million. Our adjusted EBITDA loss for the quarter narrowed significantly from the third quarter. After adjustments for amortization, depreciation, non-cash compensation and interest, our adjusted EBITDA loss was $462,000 versus $1.4 million in the third quarter and $1.6 million in the second quarter of 2007. This reduction of our loss reflects both the increased revenue reported as well as our strong commitment to controlling costs.

I'd like to talk a little bit about new orders. During the fourth quarter 2007, we booked $130 million worth of new business for a total of $210 million of new business booked during 2007, versus $36 million in new business from 2006. This validates our marketing strategy. Of all of our business booked in 2007, there have been no cancellation of any projects. This robust trend has continued into the first quarter with our announcement of an additional $51 million in new business in January 2008. Our new proposal activity also has been robust. New proposals issued for the last quarter totaled $164 million and proposal activity for the first two months of this year totaled $277 million, indicating that there is really strong activity out there in our marketplace.

With regard to our backlog, our backlog at the end of 2007 was a new corporate level high of $172.9 million. We anticipate that more than 50% of this backlog will be recognized as revenue in 2008. We have experienced some delays in project backlog moving forward into revenue in 2007, which had been caused by some credit issues on our larger contracts booked in the second quarter but the have subsequently resolved their issues and have released phases of their initiatives which will result in revenues for 2008. So we're confident that our backlog is very strong.

Next thing I'd like to talk a little bit is about the industry trends so you get a feel for what's going on in our industry and the demand out there. If you go to the slides, the first -- I think it's one, two, three, and four slides, we've got some highlights there with regard to market indicators, the first one data center knowledge has a list of articles in there that have recently been published regarding new projects. We talk about legacy data centers in slide two. Slide 3 refers to the impact that green initiatives have on our marketplace and slide four refers to some information that was put out there by IDC, an information technology company that tracks our market.

Let me talk specifically a little bit about the industry. Our industry continues to show signs of robust spending and growth. And I think it would be helpful for you to -- for the investors, for us to explain the industry fundamentals against the back drop of a slowing economy and credit environment. There still remains a shortage of space for data centers. One of the main drivers of growth in the industry has been the lack of available conditioned space. This is supported by recent industry reports and reports from the executives of some of of our publicly traded customers and targeted customers in their recent annual conference calls.

Tier one research reported that despite economic conditions, Internet traffic has doubled and will continue to double each year, thus driving the demand for conditioned space to handle this traffic. There's been some concern that the recent slowdown in construction spending will impact our markets. While we have seen some slowdown from financial service companies, see little slowdown from managed service providers, the data center REITs and companies providing Internet gateways and neutral Internet exchange points. As a result of our dedication to this industry, Fortress will become the beneficiary of this trend and our expertise continues to enable us to displace traditional engineering firms and contractors trying to service this market.

One example of the continuing pace of growth in the industry was a recent report that Microsoft was planning on building two dozen data centers around the world with each one covering 500,000 square feet. AT&T is reportedly spending $1 billion to expand its data center network. Digital Realty recently reported in their year end conference call that the demand for data center space remains very strong and in fact, Digital's customers report increased interest and potential cost savings and enhanced productivity from outsourcing their data center facilities. Also, because of the credit crunch we're seeing a trend from major corporations that traditionally did not outsource their data center to the outsourced model. This trend has opened up opportunities for us to provide services to them through our data center REIT customers that we have.

Recent public announcements from customers we are doing business with also support this confidence and continued growth. eBay announced they are looking to expand their data center facilities in the Southwest. Switch and Data indicated that the company would spend $165 million in CapEx this year in a March 2008 investor conference. Digital Realty stated in an article on data center knowledge that the credit crunch actually has enhanced their ability to grow because they have capital in place to provide conditioned space quickly under leasing terms and customers prefer the leasing model in this environment versus spending their own capital dollars. Another recent article in data center knowledge stated that surveys done by both APC, American Power Conversion and Digital Realty of their customers indicated over 80% of their respondents will experience a major renovation of their space in the next 24 months, and this is due to technology upgrades, green initiatives and growth.

An ATCON survey, it's an industry organization which we are members of, reported that the talent pool of qualified personnel in the data center facility marketplace by 2015 will shrink by 45%. If we continue to concentrate our business in this segment, we believe and one of our goals is to capture this talent pool to create more demand for our expertise. By 2010, the same survey indicated that 50% of all the data centers will have to relocate or outsource their facilities due to changing technology, trends, and the cost of power. The survey also said by 2010, over 70% of all data centers will implement green computing initiatives. We are very well-positioned to handle this demand. With this opportunity, we're continuing to penetrate new customers in the data center, outsourcing business, at all levels of our organization. We believe we're well-positioned to take advantage of the opportunity as evidenced by our continued success in finding new customers and projects quarter-over-quarter.

Little bit of talk about our divisions and how we've done from a booking standpoint. Our facility management revenue base continues to improve. Also, our major service contracts that we have with Geico and Comcast have renewed for the year. We continue to perform multiple service projects for other customers on the facility management side which include Home Depot, Stifel Nicolaus, FAIC, among others. We've added talented personnel through our acquisitions that we've made recently and continue to expand our in-house engineering expertise, expanding our green initiatives, our lead certification and our IT expertise.

What I'd like to do now is go back to the slide show and I think we had slides one through four were basically the industry trends. If we go to slide five, give you an idea of the total value of orders booked quarter by quarter for the year. Again, you can see in 2006 in slide number five, we closed a total of $36 million worth of work. At the end of 2006 is when we started implementing our strategic growth initiatives with adding salesperson sales personnel and you can see the success of that go to market strategy in 2007 with $210 million worth of business booked. Slide six basically breaks down our bookings by our three major divisions. Slide six shows our technology consulting group, again, orders added to backlog here, this provides us a window or a pipeline as to potential new projects that will come out as a result of the studies that we're doing for our customers. This has grown from $2.9 million to $9.7 million from 2006 to 2007.

Slide 7 shows our construction management contracts that we booked for the year. Went from $25 million in new business in 2006, to $169 million in 2007. With the large swing in the last quarter.

Slide eight shows our facility management new orders booked for the year. Went from $6.5 million in 2006 to $26 million in new orders booked in 2007, giving us a strong backlog going into 2008 for our facility management group.

Slide nine, is a slide that tracks basically our proposals issued as opposed to orders added to backlog on a quarter by quarter basis. As you can see, the trend has been that our proposal activity is continuing to grow and in the fourth quarter, we had over $160 million worth of new proposals that were issued.

Of course slide 10, that is a picture of our backlog that exists at the end of December 31, of 2007, showing the components of backlog between facility management, construction management, and technology consulting. In summary, at the end of the third quarter 2007, we told you that the transition from a government dependent regional company to a more commercially focused national organization was complete and that the Company's starting to move into its expansion mode. As we enter 2008 we feel we are ready to enter the next phase of this expansion which includes turning cash flow positive. While we are not offering specific guidance at this time, we feel that the elements we have put in place during 2006 and 2007 with our existing backlog and our growing reputation in the space that 2008 looks to be a strong year for Fortress International. With that, I'd like to turn the call over to Tim Dec our CFO who will walk you through some of the financial details.

Thanks, Tom. As Tom stated earlier, revenue for the quarter was up approximately 43% to $18.2 million, from $12.7 million in the third quarter. It was our fourth consecutive quarter with increased revenue. Our revenue breakdown for the quarter was $1.4 million in technology consulting, $13.4 million in construction management, and $3.4 million in facilities management. Our gross margin for the fourth quarter increased 410 basis points to 19.4% from $15.3 in the third quarter.

Our SG&A for the fourth quarter excluding non-cash compensation, was $4.1 million, up from 3.4 in the third quarter. The increase in SG&A during the quarter was attributable to the inclusion of our two recent acquisitions, Innovative and Rubicon costs of $315,000, and an increase in consulting, travel and professional fees relating to our year-end SOX compliance work. Our SG&A as a percentage of revenue continues to trend down and was 23% in the fourth quarter, down from 27 in the third quarter of 2007.

Our reported net loss for the fourth quarter was $1.2 million down from the 2.6 in the fourth quarter of 2007, which represents more than a 50% reduction quarter-over-quarter. Our adjusted EBITDA, our primary focal point, which excludes amortization, non-cash compensation, and depreciation, was a loss of $462,000. Down sharply from the $1.4 million reported in the third quarter.

Moving on to our year-to-date results, revenue for the year was $50.5 million, with a breakdown being $5.4 million in technology consulting and $32 million construction management, and 13.1 in facilities management. Our gross margin for the year was 16.6%. SG&A for the full year, excluding non-cash compensation, was $13.2 million, or roughly $3.3 million on average per quarter. As we have discussed in the past, the ramp-up in our sales and marketing effort as well as a required public Company costs, are a large bulk of our SG&A expenses. Our goal, as stated on our last conference call, is to have our SG&A percentage at approximately 12% of revenue by the end of 2008. We certainly understand the importance of controlling our SG&A cost as we continue to build this Company. The primary driver of our SG&A is the salary and benefits component. Since our recent acquisitions in September and November of last year, we have added only one net additional G&A employee.

Our reported loss for the year was $7.4 million. Our adjusted EBITDA for the year, which again excludes amortization, non-cash compensation, depreciation, and interest, was a loss of $4.3 million. This loss was primarily a byproduct of our decision to increase our sales, estimating and proposal teams in 2007 to achieve the strong contract signings Tom discussed earlier, as well as the cost associated with running a public Company.

In looking at our backlog at year-end, as Tom mentioned our backlog at the end of 2007 reached $172.9 million. This does not include the 51 Tom mentioned earlier that we signed in January of 2008. The year-end backlog breaks down as follows. Technology consulting at $3.9 million, construction management at $154.6 million, and facility management at $14.4 million. New proposals remain strong and we expect to continue to add to our backlog as the year progresses. At December 31, our cash balance was $13.2 million, net cash used during the quarter was $4.8 million, primarily due to the purchase of Rubicon for $4.5 million. The adjusted EBITDA loss of $462,000 was offset by our favorable working capital management in the fourth quarter. Our working capital ratio at December 31, was a solid 1.6.

As Tom mentioned, we will not be providing any guidance for 2008 on this call. We are currently working to solidify the time line for the major contract wins we received in the fourth quarter of 2007, and January of 2008. We hope to have that -- we hope to have that progress done within the next few weeks. I anticipate that we will provide guidance for 2008 on our quarterly conference call in May. I would like to thank everyone for joining us today. On our last call I stated that the Company was well-positioned with a strong balance sheet, high quality receivables, minimum debt, and a strong working capital ratio. I still feel those same factors were in place as we closed out 2007.

The key success during the quarter was the contract signings we announced in late January of 2008. This supports the go to market strategy Tom put in place long before I arrived. We continue to focus our attention on moving this Company to positive adjusted EBITDA in 2008. We have the ability to control our SG&A, which I think we have done. We do not have the same ability to control when our customers move forward on larger projects we have been awarded. Our backlog has grown from $20.6 million at the end of 2006, to $172.9 million at the end of 2007. We all realized a critical element to success for 2008 and that is converting our backlog into reportable revenue and ultimately profitability. That, along with our continued focus on prudent and accretive M&A transactions, will help drive shareholder value in 2008. I will now turn the call back to Tom.

Thank you, Tim. Right now I guess we're about ready to open it up for questions if anybody has any questions?.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Joshua Jabs from Roth Capital.

Good morning congratulations on the quarter.

Hey, Josh, how you doing.

Good. Looks like some of the projects that had been delayed in 2007 are starting to move forward. Is this what drove the strength in Q4.

That was part of it, yes. It was a pretty good sized project with regard to U.S. customs that we had had too that we moved along pretty rapidly.

And I think the two additions as well between Rubicon and Innovative contributed very nicely as well for the fourth quarter as well.

Okay. And if I look at the couple of big deals that you announced in Q4 and then another one in January, can you talk about how those deals are progressing and maybe what some of the biggest risks are to those projects moving forward this year?

The deals are all -- there's three major contracts that we signed and one in December and two in January. They're all in the -- currently in the engineering stage and the engineering phases. One of the smaller ones, which is about $10 million is very fast track. The largest one, which is about $118 million, is probably going to be let go in phases, not as quickly as we had first anticipated. We thought we were going to earn that revenue in about 14, 15 months. It may be about an 18-month project, but there's really no risk there. And then the third one is probably more of a -- from a construction standpoint, a second or third and fourth and first two quarters of next year event.

Okay. Obviously, those are some nice wins and over the last few months, based on the pipeline that you presented in the proposal on kind of what you talked to in the prepared remarks, looks like things are tracking fairly well. Have you noticed any slowdown or what are you hearing back from maybe some of your data center leasing customers on current macro conditions?

One of the things that we're seeing and that we're hearing is that the data center REIT customers that already have facilities in place are really positioned now to take advantage of the marketplace, because they have capital in place and a lot of the companies that are affected by this credit crunch are now going to them as a resource to help them with either short-term or some their longer term needs right away under leasing options. So because they have already the capital in place and they've got a model that is producing cash and some of them have just recently raised considerable amount of money in the last four, five months through some public offerings, that their activity is really, high, very high. And we're positioned -- we're in a position, hopefully, to work with them and take advantage of that.

So we're seeing a lot of the companies are holding off on their own capital expenditures, going to the outsourced data center model, talking to the REITs that are in business and tracking their business or getting their -- doing their business through the REIT. And I think we're well-positioned because we've got both the private company customers that we're calling on, and when they come to a stalling point with regard to their capital expenditures, we also have a pretty good base of REIT customers that we can bring these customers -- that we can bring our own private entity customers to. So it's kind of a win-win situation for us.

Okay. Tim, I know we talked about this previously, but can you give us an idea of what your expectations are for taxes this year?

How about if we take that offline?

Okay. Sure. And then update on, companies talked about -- or has acquisitions as part of its strategy. Can you give us an update on how that's progressing?

We have a pretty strong pipeline of acquisitions and that's about all we can say right now.

All right. And then finally on the warrants, I think on each of the previous calls you have talked about that being a focus of the Company, trying to get the cap structure cleared up. Does that remain the case? Any update there.

I think it's fair to say that that's clearly a focus of ours here.

All right. Thanks, guys.

We'll take our next question from Matthew Weiss from Maxim Group.

Hey, guys, congrats on the quarter. Sort of when I look at fourth quarter results, I'm sure you guys sort of feel the same way, sort of looks like you have reached that inflection point in your business model. I know you're not giving specific '08 guidance or necessarily 1Q guidance but on the last call you did comment that you had expected results in the fourth quarter to trend upward. I was wondering if you could maybe speak to what you're looking for in 1Q. Is there any softness there from a seasonal perspective that we should take into account and maybe just talk a little bit about your expectations there?

Well, when we spoke last time we talked about seeing some improvement and I think for the fourth quarter here there has been significant improvement in what we touched on in the script, really moving from a loss of $1.4 million down to less than $500,000. In terms of the first quarter, we're not going to provide any guidance right now. I think the key element is what Tom just touched on, some of these larger projects we're working through the engineering phase now. We're working very closely with them and understanding what's going to happen over the first quarter and the next three quarters and I just think we're not ready to really discuss the fourth quarter and we'll provide some guidance to help you guys in eight weeks here on our May call.

Okay. Also, could you -- as you give the mix of the backlog, could you give me the mix of the revenue for the quarter, the revenue breakdown?

Yes. It's technology consulting is $1.4 million, construction management is 13.4, and facilities management is 3.4.

Great. And then to the gross margins, obviously those came in nicely, nice improvement on a sequential basis. You had talked about on your last call targeting I believe 17 to 18.5 and here you came in at 19.4. Is that still your near-term goal? Do you sort of expect those to trend a little bit back down or is this a go-forward basis what we should be looking for?

No, I think that what we stated before is what you should be looking at. I think the fourth quarter we had a nice couple -- nice little bump-up here, really from the two acquisitions that we just brought in. I think in looking at a full year and some of the large contract wins, I think you should really trend based on the numbers we said before.

Okay. And then you talked about how your acquisitions to date have been pretty strong. Can you give us an idea of what those contributions were from a revenue standpoint, if material?

Yes. I don't think we can get into that detail at this point. Maybe we'll do that in May.

Okay. Fair enough. Then I noticed the receivables number had spiked a little bit sequentially. Is there anything at work there that we should be aware of?

No major concerns. Our receivables have always been very high quality and we experienced no collection issues to date.

And then lastly, cash flow from operations, what was that during the quarter? I'm not sure if you threw that number out there already.

Yes, our cash -- our net cash outlay was $4.8 million and essentially $4.5 million of that was associated with the Rubicon acquisition at the end of November.

Okay.

And really, I touched on our EBITDA loss being offset by really maintaining our working capital, looking at the receivables and payables and controlling a little bit better. So we actually showed improvement from that perspective.

Okay. And then I guess one more quick one. You had put out the $51 million in new business in January, obviously February is completed. Do you want to maybe speak to what type of bookings you saw in the last month or what you're seeing to date through February and where we are in March now?

February is kind of normalized, no big spike projects that were worth announcing due to the individual size. But activity is good and I think I indicated that we had, what, $277 million worth of proposals already put out through the end of February, just for the first two months. So we're pretty excited about some of the opportunities that we're looking to get involved in in the next couple weeks.

And that $51 million, is that, the bulk of that in construction management as well?

Yes, turnkey design, build projects.

Okay.

It's got a component of all three pieces in it. They're design, build, so there's about 4, 5% of the value is pure engineering fees, there's another 5 or 6% which are pure management, project management fees. There's a piece in there that has facility management side for commissioning and writing the management plan for the sites that we're doing. So there's actually a component of all three of our divisions in those numbers.

Okay. And then when you look at the number you threw out there that you expect to recognize about 50% of your backlog as of the end of 2007, for 2008, I mean, you view that as base case? I mean, obviously, again there's a lot of stuff out of your control, with respect to some of the items you talked about on the last call. But would you view that as a conservative estimate?

Yes, that's our base case.

Thank you very much. Congrats.

Thank you.

We'll go next to Steve Levy from [Kalarama] Corporation.

Hi, Tom, how are you.

Good.

Being third means all your questions get asked. All my questions have been asked. Congratulations on really a terrific quarter and some great metrics. Look forward to the next conference call.

Thanks, Steve.

[OPERATOR INSTRUCTIONS]. We'll go next to [Dax Williamson] from West Park Capital.

Same thing, guys. Appreciate your time. All the questions have been answered.

Thank you.

(OPERATOR INSTRUCTIONS) At this time, we have no further questions in the queue. I'll go ahead and turn the call back over to your presenters for any additional or closing remarks.

I guess we'd just like to thank everybody for listening in and we'll look forward to talking to you in the next quarter.

Okay, thank you very much.

This concludes today's conference. We thank you for your participation. You may now disconnect.