TSS Inc (TSSI) 2008 Q4 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to the Fortress International Group's Fourth Quarter 2008 earnings call. Today's call is being recorded. For opening remarks and introductions, I would now like to turn the call over to Mr. John McNamara. Please go ahead, sir.

  • John McNamara - IR

  • Thank you and good morning, everyone. Welcome again to the Fortress International Group's conference call to discuss 2008 full year financial results. Joining us this morning from the management of Fortress are John Morton, 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 comments and statements made on today's conference call.

  • This call will contain time sensitive information as well as forward looking statements which are only accurate as of today, March 26th, 2009 and Fortress International 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 acquired by applicable law.

  • For a full list of the risks and uncertainties which may affect future performance, please refer to the company's period filings with the SEC. We'll begin the call with a brief overview of the quarter and the full year and then we will open up the line for questions. And with that, I'll turn the call over to Tom Rosato. Go ahead, Tom

  • Tom Rosato - CEO

  • Thanks a lot, John. Good morning and thank you for joining us to review the fourth quarter and year end results for Fortress International Group. Revenue in the fourth quarter surged to $37.2 million versus $18.2 million in the fourth quarter ended December 31st, 2007. Although the revenue surge is a positive indicator of continued growth for our company, we'd like to say that it's more important to focus on the increase in our gross profit dollar amount quarter over quarter and year over year.

  • As I have said on past calls, because our top line includes construction management and pass through revenues that can be lumpy, we believe the key indicator to focus on is growth and gross profit contribution.

  • I'm also very pleased to report that the fourth quarter for Fortress International produced positive adjusted EBITDA of $1.95 million. In addition to improved positive adjusted EBITDA for the quarter, we increased revenue for the eighth straight quarter to $37.2 million, bringing our total annual revenue to $102.5 million for the year ended December 31st 2008.

  • Year to date, the company's adjusted EBITDA was approximately a loss of $830,000, however included in that loss was the write off of one time acquisition costs associated with two potential deals of $1.2 million, which if excluded would have us reporting a positive adjusted EBITDA of approximately $300,000 for the year ended December 31st 2008.

  • When comparing organic revenue growth versus revenue generated from acquisitions, the original companies acquired by Fortress generated $78.8 million in revenue for the year ended 2008 versus $48.9 million for the year ended 2007.

  • Recent acquisitions accounted for $23.7 million of revenue in 2008 versus $1.6 million in -- December 31st 2007. This 61% organic growth reflects that our strategy to expand into this market is working and our acquisitions continue to enhance and provide solid profitable growth for the company.

  • Gross profit contribution for the year ended December 31st 2008 was $15.8 million versus $8.4 million for the year ended 2007. As our mix of revenues fluctuates quarter over quarter we may see some unusual increases or decreases in revenue as projects proceed in and out of the construction management phase. But our true goal is to increase gross profit year over year and continue to reduce and control our SG&A costs as a percentage of gross profit.

  • Tim will touch on the various divisional growth rates achieved during 2008 shortly, but I still want to highlight the growth in our facility management division. Our [FM] revenue year over year increased 42% and the anticipation is that growth in this division will continue in 2009 as more of our major projects transition from our construction management business to our facility management business. This reflects growth in recurring revenue generated mostly from existing customers as well as from service contracts sold on data centers that we had designed and built.

  • Now, I'd like to take a few minutes to talk about the economy, its impact on us as a business and what we're doing to counter the negative aspects and capitalize on the positives. First some good news, the demand for improved high quality mission critical facility data center capacity is greater than the supply.

  • Supporting this premise is the fact that lease rates per square foot of existing data center facilities continues to increase because of the shortage of completed space. This is projected to continue over the next couple years because it takes anywhere from 12 to 24 months to increase capacity once a capital project begins.

  • This is also supported by reports we get from our data center market research consultants and reports from recent surveys performed by our own customers providing space in this market. This demand is based on technology changes in computer architecture that are driving facility renovations, the need to reduce costs and energy consumption in the data center and demands put on companies by government regulation for record retention and availability of data.

  • Offsetting the good news is the current economy. The lack of capital manifested is either too expensive or not available to our customer base has created delays and cancellations of various capital intensive phases of new data center capacity development.

  • As it relates to us, we are experiencing a reduction of proposal activity for capital intensive projects which began to drop in late 2008 and early 2009. This slow down may impact our growth temporarily. The capital crunch has also impacted one of our major customer's decisions to move forward on some previously awarded projects that were originally in our backlog. I will discuss this in detail later in my presentation.

  • We also are seeing more competition because of the impact this credit crunch has put on the traditional design built construction companies who are migrating into this market segment because of lack of construction activity in the traditional commercial markets. This is putting some pressure on construction pricing.

  • On the positive front, we believe that our industry will be impacted directly by stimulus funding related to IT and data center initiatives within the federal government. Our industry research consultants have identified about $3.5 billion will be spent by the government alone. These initiatives are focused on automation of health records, security, government internal programs, and energy saving retrofits of federal data centers.

  • To take advantage of this opportunity, we have recently gotten our services listed on GSA procurement schedules, we are pursuing various task order initiatives that we hope could be awarded in the next few quarters and we continue to maintain our current status as a clear contractor with key employees who carry top secret clearances, which should enhance our ability to capitalize on this spending as it relates to sensitive and secure government agencies.

  • Additionally, we have taken our expertise and experience and created initiatives that we anticipate will induce private enterprise customer spending. We are helping customers focus on capital expenditures which provide a direct payback in savings because of energy reductions and energy rebates promulgated by both electricity providers as well as government green initiatives.

  • These services -- this menu of services that we've created include IT consulting services which enable customers to upgrade hardware, decrease space and increase energy efficiency. Real estate consulting solutions, enabling customers to evaluate mission critical space needs as well as excess space to gain the most return of their investment in these specialized assets.

  • Green energy consulting initiatives which enable customers to save considerable money related to supply side, electrical savings and demand side initiatives to bring the cost of operations down considerably in the data center, and capital solutions, which bring to our customers companies that are financing institutions that are wiling to invest in the form of both debt and equity in mission critical facility, infrastructure and equipment.

  • These new services were recently announced by us to the 2009 data center expo in Las Vegas along with a branding campaign to utilize Fortress as the single trade name to go to market to our customers.

  • If you have time, please visit our website at www.thefigi.com to get a preview of these newly highlight service capabilities. These services are already creating a significant impact with our existing customers as well as attracting new customers who look to us as partners in their business assisting them in these difficult periods.

  • We recently were successful in bringing financing to two co-location providers for infrastructure equipment on projects in the north east. We're currently working with other customers on specialized financing arrangements through third party lenders for both debt and equity to enable them to continue forward on their projects. Because of our uniqueness and understanding nuances of mission critical equipment facilities, we were able to bridge the confidence gap between lenders and data center owners with regards to the assets that are mortgaged to these projects.

  • On the energy front, we are building a team of world class energy experts to deliver a more focused marketing and sales effort to allow customers to take advantage of federal, state and local government initiatives as well as utility funded programs to save energy.

  • We have the ability to implement supply side savings as well as demand side savings initiatives for the customers. We recently developed joint capabilities with Dell to deliver a menu of services that combine their software and hardware services with our facility knowledge, energy initiatives and services to bring to their customers and we are creating joint business together.

  • Excuse me. Now about back log. In previous quarters, we reported the addition of new contracts out at the backlog. Our policy is to only add those contracts into backlog that are signed, that are for a specific project, cost or estimated, a detailed scope of work as agreed upon with the customer and the customer indicates the projects are ready to proceed.

  • In particular, two significant contracts which were added to backlog in December of 2007 and January of 2008 totaling approximately $145 million were recently removed from our backlog reporting this quarter, we realize that this is a significant reduction of backlog as previously reported, bringing our overall backlog down to $63 million at December 31st, 2008.

  • It should be noted, however, that our reported backlog at December 31st 2007 was $173 million, but the dollar contract signed in December of 2007 of approximately $117 million was excluded at that time, our backlog to start the year would have been approximately $56 million. If we revisit our backlog in March 31st, 2008. It would have been $62 million at June 30th of 2008, $79 million end of September 30th, 2008, $73 million.

  • Under the contracts that were removed, we provided initial engineering services, but were subsequently put on hold by our customer in late 2008 due to the ongoing reexamination of geographic priority for their capital spending and their concern over the cost of available capital to proceed with their initial spending plans.

  • During recent conversations with this customer we were informed that the likelihood of these projects, beginning in 2009 is minimal. Although the contracts have not been formally terminated with this customer, based on the knowledge we currently have regarding the likelihood of them proceeding within the next 12 months and the current age of the contracts, we felt it was prudent to remove them from backlog at this time.

  • We continue to perform work in other geographic regions for this customer and we are confident that we will engage in additional significant work with this customer in the future. At this point, we are not going to provide guidance for 2009 due to the uncertainty in predicting the speed with which our customers will put many of their projects we are working on into their capital spending budgets.

  • As I have stated, our reported backlog of active projects is $63 million at December 31st, 2008. Through March 25th, 2008, we've booked an additional $14 million in new projects. We have set a target to generate positive cash flow in 2009. We believe that our ability to control our SG&A costs in these unpredictable times and our current pipeline of approximately $124 million of potential projects of which 77% of these projects are slated with existing customers will enable us to stay on this target.

  • With regard to the play blind, it consists of 76 individual projects expected to close this year. It does not include the projects recently removed from backlog and the largest project is approximately $53 million and no other single project accounts for more than 10% of this pipeline opportunity. With that, I'd like to turn the call over to Tim Dec to discus the numbers in detail.

  • Tim Dec - CFO

  • Thanks Tom. We reported $37.2 million in revenue for the quarter, as compared to $25.8 million in the third quarter of this year, a 44% increase quarter over quarter. We reported $18.2 million for the fourth quarter of 2007, a 104% increase this quarter over the same quarter of last year. Again, revenue was up for the eighth straight quarter.

  • Our revenue breakdown for the quarter was $2.4 million in technology consulting as compared to $1.6 million in the third quarter, a 50% increase quarter over quarter. Our construction management revenue was $30.5 million as compared to $18.5 million in the third quarter, a 65% increase, quarter over quarter.

  • And our facilities management revenue was $4.2 million, as compared to $5.7 million in the third quarter, a 26% reduction in quarter over quarter. Our reported gross margin for the fourth quarter was 15%, which is inline with our expected gross profit levels.

  • Our SG&A for the quarter, excluding non-cash compensation of approximately $472,000 was $3.5 million. As compared to $4 million in the third quarter and $4.4 million in the second quarter of 2008. A significant reduction previously discussed on our prior calls.

  • During the quarter we had a good will impairment charge of $16.4 million and a write down of our trade names of $5.4 million, which I will discuss in further detail shortly. Our reported net loss for the quarter was $21.4 million, our reported earnings per share loss for the three months was $1.70 per share. Our adjusted EBITDA for the fourth quarter, which excludes interest taxes, depreciation, amortization, non-cash comp and impairment charges was a positive $1.9 million.

  • Revenue for the year was $102.5 million as compared to $50.5 million for 2007. A 103% increase year over year. Our year to date revenue breakdown was $7 million in technology consulting as compared to $5.3 million in 2007, a 32% increase year over year. Our construction management revenue was $76.9 million as compared to $32.1 million in 2007, a 140% increase year over year. And our facilities management revenue was $18.6 million as compared to $13.1 million in 2007, a 42% increase year over year.

  • Our gross margin for the year was $15.8 million, or 15.4% as compared to $8.4 million or 16.6% for 2007. An increase in gross margin dollars of $7.4 million. In 2008, gross margin is in line with our expected margin performance. SG&A for the year, excluding non-cash compensation of $1.6 million and the write off of the one time acquisition cost of $1.2 million was $16.5 million as compared to $13.2 million in 2007.

  • As you may remember, we took the necessary steps last year to right size the business by reducing our SG&A annual spend by $4 million. This reduction was instrumental in reversing the previous negative adjusted EBITDA results we experienced in the first two quarters of 2008. If you annualized our fourth quarter SG&A of $3.5 million, that would equate to $14 million for the year, or essentially the same level as our 2007 on increased revenues of 103%.

  • We have and will continue to monitor our SG&A expenses on a monthly basis. One item that affected our reported results for the year was the write down of good will and the write off of the value assigned to the trade names of the various acquired companies. For the year, the good will impairment charge was $20.6 million and the write off of the trade name intangible was $5.4 million, combined that represents a charge of $26 million for the year.

  • As mentioned before, it is our responsibility to review the carrying value of our intangibles. If there is an indication that may impairment and it is more likely than not, it is required to be tested. Based on the recent market conditions, it was determined that an impairment had occurred at year end, we hired an independent valuation company to assist us in determining the property amount of that loss.

  • As for the reduction in the value of our trade name intangibles, we incurred that $5.4 million charge this past quarter. Tom mentioned earlier the new branding and marketing efforts. Our increased focus on integration and our increased efficiency in our day to day operations. With those overall objectives in mind, we have elected to market the company under the name of Fortress International Group, rather than the legacy names of the companies we acquired in 2007 and early 2008.

  • Due to this change, we are required to write off the value assigned to the trade names on our balance sheet. We expect to implement this change over the next few months in order to avoid any confusion among our existing and potential customers. Our reported loss for the year was $32.9 million, our reported earnings per share loss for the year was $2.68 per share.

  • However, our adjusted EBITDA, which again excludes interest, taxes, depreciation, amortization, non-cash comp and impairment charges was a loss of $800,000. Excluding the write off of the acquisition cost we incurred in Q2 and Q3 of 2008, our adjusted EBITDA would have been a positive $300,000. A significant improvement and reversal over our reported adjusted EBITDA loss in 2007 of $4.3 million.

  • Our backlog at the end of the year was $63.1 million. The breakdown by division was technology consulting $4 million, construction management $48.7 million, and facilities management of $10.4 million.

  • As Tom mentioned earlier, we made a decision to remove from backlog approximately $145 million. We have internal procedures to monitor the accuracy of our backlog and as contract amounts start to age we assess the probability of conversion into reportable revenue. Due to the current economic environment, the cost and lack of capital for expansion and the general unease of some of our customers, we felt carrying these amounts in backlog would be incorrect.

  • Throughout the year we have been working very closely with the majority of our customers and have had detailed discussions about their business models for 2009 and we felt it was prudent to remove this from our backlog discussions and disclosures that will be shown in all public documents.

  • At the end of the year our cash balance was $12.4 million. The net change during the year was $700,000. The use of cash during the year was primarily due to the purchase of SNLB of $2 million, the payment on the Rubicon seller's notes of $2 million, and the adjusted EBITDA loss that I spoke of 800,000.

  • These uses of cash were offset by favorable working capital management of approximately $4 million. You should expect to see a reversal of a portion of that favorable cash management in the first half of 2009.

  • On our last call we reiterated our guidance for the full year of $100 million to $110 million in revenue and mentioned that we would recover our adjusted EBITDA loss for the first two quarters of 2008. I believe we have met that guidance with our revenue of $102 million and our adjusted EBITDA after exclusion of the acquisition costs at a positive $300,000.

  • As Tom mentioned earlier, due to the uncertainty of the economic environment, we will not be providing guidance for 2009 at this point. In conclusion, I would like to focus on the positive accomplishments we have made during 2008.

  • First, we took the necessary steps in August to right size the business and demonstrate the financial discipline required to achieve positive adjusted EBITDA results. We successfully completed the integration of three businesses we acquired in 2007 and 2008.

  • We have maintained our financial discipline over SG&A as the company has doubled its size in reportable revenue. We have maintained our gross profit margin levels during difficult financial times and increased competition.

  • But most importantly, we have reversed the negative results of 2007 where we reported an adjusted EBITDA loss of $4.3 million and that of the first half of 2008 in which we reported a negative adjusted EBITDA loss of $3.6 million. We turned the full year of 2008 into essentially a break even situation. And finally, if we do see a downward trend in our business, we will not hesitate to make the necessary adjustments to continue the momentum we have now achieved.

  • The fact that we have now achieved positive adjusted EBITDA during the latter half of 2008 does not forego our responsibility to adhere to strict financial discipline and cost controls across all business units.

  • And finally, we have not lost sight of expanding the company via acquisition or joint venture opportunity. We have and will continue to focus on prudent and accretive M&A transactions that will help drive shareholder value. I'll now turn the call back to John for Q&A.

  • John McNamara - IR

  • Operator, we'll (inaudible) now.

  • Operator

  • Thank you. (Operator Instructions) And we'll take our first question from [David Horn] of [Karan Advisors].

  • David Horn - Analyst

  • Good morning, guys.

  • Tom Rosato - CEO

  • Hi, David.

  • Tim Dec - CFO

  • Good morning.

  • David Horn - Analyst

  • First off look, you had a very strong quarter, it was nice to see the positive EBITDA. Clearly some of the revenue that we did have in backlog started to kick in. You guys got SG&A down. A lot of the things you said you were going to do, the balance sheet looks strong. So that's all very encouraging. I want to know could you talk a bit again about the pipeline, the projects that we have sort of in queue, not only just the $63 million in backlog, I guess Tom you mentioned the pipeline on the call earlier.

  • Tom Rosato - CEO

  • Yes, we got about $124 million sitting there of which indicated about 77% of that was with customers we'd already done some previous work for. It shows that number one the stickiness of our services and the fact that customers, once we get involved with them on initial projects, they're coming back to us for more.

  • A lot of it is in our technology consulting division, we're very busy doing a lot of as is, or what if scenarios for our customers right now which we of course get paid for where they might have had a larger scale project anticipated and now they're looking at how they can phase their investment over a period of time as their own growth opportunities occur.

  • We've got, like I said, one large project in there that we're fairly confident will come to fruition sometime this year. And the rest of them are -- it's a lot of projects between the size of the $200,000 to $3 million. So that's good from our standpoint, it doesn't show that we're totally reliant on any one or two major projects that are going to make or break 2009 for us.

  • David Horn - Analyst

  • So that's good, and so the backlog is not in the pipeline for the year?

  • Unidentified Corporate Representative

  • No.

  • Unidentified Corporate Representative

  • No.

  • Unidentified Corporate Representative

  • No.

  • Unidentified Corporate Representative

  • No.

  • David Horn - Analyst

  • Okay, okay there.

  • Unidentified Corporate Representative

  • Pipeline is different than the -- pipeline are open proposals, budgets that have been put out there where we're negotiating with customers on final scope.

  • David Horn - Analyst

  • Okay, you know it's interesting, you guys had this $145 or so million in backlog, the thing we cancelled -- it's been sitting there for a bout a year and it really, I think may have led to a misunderstanding of the business because it looked like you had this huge backlog that we were never realizing and it was because the rest of the backlog was sort of dwarfed by this one project that to date hasn't come from fruition it sounds like so the right move to pull it out.

  • But you had $72 million in backlog at the end of the 930 quarter and we actually realized more than half of that in revenue in the fourth quarter. I mean when we look at the $63 million, are these projects -- is that a -- what's the turn over like? It seems like backlog turns over a lot faster than I at least initially understood.

  • Tom Rosato - CEO

  • Yes, we're finding a lot of our projects are, right now, because they're smaller size, they're three to four month projects. We've got a pretty substantial. I mean I think our largest project right now that we're working on is about a $14 million project up in north Jersey and the customer wants instillation in 90 days.

  • So we're starting to turn backlog over fairly quickly, we've got another project that we just closed here in the last two weeks that's down in Atlanta, and gain, it's probably about a four month time frame on a $4.5 million project. So we're seeing a lot of quick turn, there's a lot of activity, so it is a lot quicker than some of these larger big projects that we originally had negotiated.

  • David Horn - Analyst

  • Okay, good. And it's nice that you got SG&A down, and it clearly seems like the business is a bit unpredictable right now and lumpy. I mean what's your degree of confidence that you guys can stay at least EBITDA positive? I know you're not giving guidance, but more -- is the business such that if we had to pull back the reigns a little bit later in the year that you could do so and stay EBITDA positive?

  • Tom Rosato - CEO

  • Yes, I think we're very confident that's why we said it. we said that's our target and we're --w e wouldn't have said it if we didn't have confidence in our ability to do that because we can -- we can adjust SG&A to levels of activity that we do in our business. So there's -- there's movement there.

  • David Horn - Analyst

  • Okay. Good. Only two other things. I know you personally bought stock at 750 less than whatever, half a year ago, and for whatever reason, liquidation by distressed sellers or for whatever reason the stock has gotten in my opinion ridiculously cheap. I know we have a strong balance sheet and I know you guys don't want to waste that balance sheet, but at what price does the company come in and say this is getting out of hand and at least lean up some of the excess selling that we have at this level? I mean have you thought about that as a use of cash?

  • Tim Dec - CFO

  • You know we've -- we've talked about that for a number of quarters, both internally and with our board and we really feel comfortable that we think the comfort level is our cash balance should be between $8 million and $10 million. With the contract delays and the lumpiness that Tom had mentioned, I think to kind of drift below that number at this point in time is probably not wise. But we're certainly aware of that, we're certainly factoring it in and we'll keep you updated on that.

  • David Horn - Analyst

  • Okay, thank you. and then my only last point being, you mentioned acquisitions at the end, I mean there's only three ways to finance acquisitions, I guess, it's cash on hand, it's stock, and it's debt and I can't see -- I'm curios under what scenarios you'd want to use any of those three things to buy someone else when if we really do want to make things more accretive, we would just by our own stock, and you just told me that -- we really want to hold on to our cash for that. So I'm curious how you think about acquisitions and under what scenario would you buy something.

  • Tim Dec - CFO

  • No, I'm glad you brought that up so we can kind of clarify my thoughts. You know there -- in the past we've looked at some kind of larger companies to kind of really do a major transformation in the business. What we've been looking at recently is really some of the smaller companies that we could kind of bring into the fold. Companies that do $5 million, $10 million, $15 million worth of revenue. Almost like when we brought in innovative into the mix. Innovative was a $3 million company that throws off about $1 million worth of EBITDA.

  • So, we're looking at maybe a combination of a number of small companies that can really ad value to the FM side or the sticky side of the business. So your specific question was how are we going to pay for those? Well, there's a lot of opportunities where with minimum cash and sellers notes and potentially earn outs associated with some of these smaller companies, you can really kind of bring them into the family. So I think that there are some -- there are some nice opportunities we're looking at rather than kind of the homerun. More of kind of the signals to kind of add to the mix.

  • David Horn - Analyst

  • Okay great. And one last thing -- I lied, I have one more thing. You know I see things come across the wire, Dell has plans to move more into the data center market. There's clearly a buzz about your industry, so I hope you guys will -- getting our name out there a little bit more, at least in the investing community couldn't be a bad thing. So if you could look into ways of doing that as well, maybe that'd generate some more interest. Thanks for answering the questions this morning.

  • Unidentified Corporate Representative

  • Thank you.

  • Unidentified Corporate Representative

  • Thank you, David.

  • Operator

  • (Operator Instructions). And it appears we have no further questions at this time. I'll turn the conference back over to you, Mr. McNamara.

  • John McNamara - IR

  • Go ahead, Tom. You can wrap it up.

  • Tom Rosato - CEO

  • Yes, I just want tot hank everybody for joining us this morning and look forward to talking to you in probably another month and a half I guess to talk about the first quarter. Thank you again for your confidence and we'll talk to you.

  • Unidentified Corporate Representative

  • Thank you.

  • Operator

  • And this concludes the Fortress International Group Fourth Quarter Earnings Conference. Have a wonderful day.