TSS Inc (TSSI) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Fortress International 2009 fourth quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference conference will be opened for questions. (Operator Instructions). The conference is being recorded today, March 30, 2010.

I would now like to turn the conference over to our host, Mr. Lee Roth. Please go ahead, sir.

Thank you, Camille. Good morning, everyone and thank you for joining us on Fortress International Group's conference call to discuss its results for the fourth quarter and full year 2009. Joining me this morning from management of Fortress are Tom Rosato, Chief Executive Officer and Tim Dec, Chief Financial Officer.

Before we begin the call, I'd like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release we issued earlier this morning. 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, Tuesday, March 30th, 2010, and Fortress International expressly disclaims any obligation to update, amend, supplement or otherwise review any information or forward-looking statements made on this conference call or its replay to reflect any events or circumstances that may arrive after the date indicated, except as otherwise required by applicable you 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 US Securities and Exchange Commission.

We'll begin the call with a brief overview of the quarter's performance and then open the line for your questions. With that said, it's now my pleasure to turn the call over to Mr. Tom Rosato, CEO. Good morning, Tom.

Thank you, Lee. Good morning to everyone, and again thank you for joining us on the call today. I'm going to begin with an overview of our business activity for the fourth quarter and the year and then a discussion of some other recent developments, before turning the call over to Tim Dec, our CFO, for a review of the financial statements. We'll open the call to questions following Tim's remarks.

2009 was a difficult period for our industry, our customers and consequently for our business. Our efforts over the past year, I believe, are best characterized by management's streamlining of the organization in order to survive this protracted downturn without sacrificing Fortress' ability to effectively service our existing customers and win new business. We concentrated on simplifying our management structure, down-sizing, correcting any operations that would not generate cash, and I can safely say that since June 30th of 2009, we did not utilize cash to fund operations. I think the truest reflection of our business, our progress, and our prospects are most accurately depicted by the second half of the year, which in fact positions Fortress well for growth into 2010.

To this end, I'd like to focus on some of our accomplishments and the proactive steps we've taken in 2009 and recent accomplishments made in 2010, so that you might join in my optimism as I looked back at 2009 and look forward to 2010. We closed 2009 with a well-funded backlog of $47 million. In the fourth quarter, we closed $34 million in new work, all fully funded, and currently generating revenue in 2010. We significantly reduced our overhead and cost structure, creating a leaner organization without sacrificing our ability to effectively service clients and actually win new business. We added new customers, while continuing to solidify our relationships with the existing key accounts, including Dell, SAIC, Araloft, IBM and Switch and Data.

The divestiture of Rubicon gave us an infusion of $1 million in cash, eliminated existing earn-out debt, future earn-out debt, and employment agreement obligations that were coming due in 2010, provided us with cash and interest payments from a $650,000 note, as well as potential earn-out payments we will receive on the group's project backlog and pipeline they acquired in both 2010 and 2011. It's important to note that the sale did not reduce the breadth of our service offering in any way. The sale also eliminated significant SG&A costs from our cost structure going forward, related to the Rubicon entity.

We continued ramping up activity in our facility management division. We had 37 current contracts in place with annual guaranteed contract revenues of $7 million, and an additional $6.3 million in backlog related to adds, moves and changes from our service contract customer, as of December 31st, 2009. The growth of our facility management division is a real important element of our go-forward strategy, as this business is characterized by recurring revenue, which adds stability and predictability to our business. We anticipate that over 50% of our gross profit earned in 2010 will come from the FM division.

Another important element, we eliminated cash burn from operations as I stated over the last six months, with a goal of positive operating cash flow in 2010. We eliminated this year the warrant overhang on our stock, simplifying our capital structure. We also were successful in reducing the Board from nine to six, with currently three independent Board members. We ended the year with a healthy balance sheet, and during the first quarter, we had some favorable events occur, as well as planned steps to further solidify our financial position. During the first quarter of 2010, I could say our cash balances have ranged between $3.5 million to as high as $4.5 million, for the first three months of this year.

It's also been almost five months since we've spoken with you and there have been several important developments since that time that I would like to share with you. Some have been disclosed in 8-Ks and in press releases while some are very recent and have not been disclosed yet. These include on February 28th we announced we restructured our President Jerry Gallagher's note which improved our current ratio in the fourth quarter and will improve our tangible equity for the $1.25 million of the note he converted in February at $2 a share.

On March 12th, this is important, we finalized the full recovery and settlement of a previously written off bad debt in the amount of $1 million, plus interest, plus other project related receivables were selected of approximately $650,000. This was a result of the owner selling the data center property to a Fortune 500 Company. Additionally, the buyer had committed to purchasing $3 million of additional electrical equipment under a previous contract with the seller, which remains in our backlog for 2009, and we believe will be earned during the first six months of this year.

Also, the Company teamed with a large international engineering firm to pursue a government RFP task order contract to perform consulting and construction projects for various Homeland Security agencies. On February 18th, we were notified that our team has been selected, subject to minor contract items currently being negotiated, and we anticipate that a final contract and task orders to be issued for work beginning in the second quarter of 2010. The total contract value over a five-year life span is $100 million.

Although we cannot predict the value of the work we will receive under this contract, we are aware of significant data center and mission critical projects that are in the planning stages with these agencies. Our role in this team was to provide the data center design, construction and consulting expertise for which Fortress is known. Additionally, the team was required to carry facility clearances and have technical positions available with clearances. This was a perfect fit for where we have positioned ourselves in the government arena.

Another major event, on March 10th, the Company signed an agreement with a developer in the island of Mauritius and is currently negotiating agreement with a developer in Germany, to become the lead consultant for the development of their state-of-the-art data centers, each one planned over 150,000 square feet. Although these projects are in the early stages of raising capital, the developers have selected their team and they have potential to generate significant consulting revenue for us, as the designer and engineer of record for these sites over the next two years. On March 10th, we announced our decision to voluntarily delist Fortress common stock from the NASDAQ capital market and move to the OTC bulletin board. After a great deal of deliberation among management and the members of our Board, it was determined that the benefits of remaining a NASDAQ listed Company no longer outweighed the cost associated with maintaining a NASDAQ listing. In addition to the legal, accounting, and administrative expenses involved, regulatory and compliance related matters required a great deal of management attention, which we believe could be better directed at our ongoing efforts to grow the business as our end markets continue to show gradual signs of improvement.

Finally, I'm really extremely pleased to note that we have closed a total of $29.5 million in new business during the first quarter of 2010. This includes $18 million of work recently awarded to us this past Friday, for the second phase of an existing $30 million design built contract we closed in the fourth quarter of 2009. Additionally, our largest facilities management customer recently signed a second new tenant, increasing the value of its staffing and maintenance contract to $3 million from $2 million in 2009. This represents a total of $63 million booked in the last six months of fully funded active backlog. Although 2009 was a difficult year for Fortress and for the industry as a whole, we feel that we've effectively weathered the storm and are excited about what the future holds.

In summary, we ended 2009 a leaner, more efficient, and more focused Company than we were when we began the year. We took important steps to right-size the organization, which have not only allowed us to survive this tough year, but have helped us position the Company to succeed as the markets continue to pick up. Looking at Fortress in the first quarter of 2010, I truly believe that we are positioned for the long term, more now than we have ever been in quite some time, and we are confident that the Company's results will be cash flow positive for the upcoming year.

This concludes my prepared remarks, and I'd like to turn the call over to Tim for review of the financials for the quarter and the year. Tim?

Thanks, Tom.

As Tom mentioned earlier, during the fourth quarter, we completed the sale of our Rubicon Professional Services division. Rubicon sales and operating results are now classified as discontinued operations in our financial statements for each of the respective periods. We reported $9 million in revenue from continuing operations for the fourth quarter of 2009, as compared to $10.1 million in the third quarter, and $26.5 million in the fourth quarter of 2008.

Our revenue breakdown for the fourth quarter of 2009 was as follows. Technology, consulting, $800,000, as compared to $700,000 in the third quarter. Construction management, $4.4 million, as compared to $4.9 million in the third quarter. And facilities management, $3.8 million, as compared to $4.5 million in the third quarter. Gross profit from continuing operations was $1.5 million for the fourth quarter of 2009, as compared to $2.1 million in the third quarter, and $3.6 million in the fourth quarter of 2008.

Gross margin was 16.7% in the fourth quarter of 2009, as compared to 20.8% in the third quarter and 13.6% in the fourth quarter of 2008. Increase in gross margin in the third quarter of 2009 was primarily due to the completion of a large scale construction management project, as well as increased profitability in our facilities management division. Fourth quarter gross margin was within our previously projected range of 14 to 18%. Our SG&A for the fourth quarter, excluding stock-based compensation and the reversal of the previously written off bad debt Tom just touched on, totaling $1.4 million, and the effect of the discontinued operations, our net SG&A was $2.1 million for the quarter. This compares with SG&A of $2.3 million in the third quarter, and approximately $3.5 million in the fourth quarter of 2008.

Net loss from continuing operations for the fourth quarter was $700,000, or $0.06 per share. Total loss including the loss from discontinued operations was $1 million or $0.08 per share. Our adjusted EBITDA loss for the quarter from continuing operations for the quarter which excludes interest, taxes, depreciation, amortization, and non-cash comp, was $900,000.

Switching to the 12 month results. For the 12 months ended December 31st, 2009, we reported $48.1 million in revenue from continued operations, compared with revenue from continued operations of $86.7 million for 2008. Our revenue breakdown for the year was as follows.

Technology consulting was $3.9 million as compared to $7 million in 2008. Construction management revenue was $29.6 million as compared to $61.1 million. Facilities management was $14.7 million as compared to $18.6 million for the year ended December 31st, 2008. Our gross profit from continuing operations for the year was $7.9 million, as compared to $12.9 million for 2008. Gross margin increased in 2009 to 16.4%, as compared to 14.9% for 2008. Our SG&A expenses for the full year, excluding stock-based compensation, and again, the reversal of the previously written off bad debt of $2.5 million, and the effect of the discontinued operations, was a net $12.3 million compared with $17.6 million in 2008, a 30% reduction year-over-year. This dramatic reduction in SG&A is a strong indication of the effectiveness of the expense reduction measures we implemented throughout last year, as Tom briefly touched on.

Net loss from continuing operations for the 12 months ended December 31st was $16.2 million, or $1.28 per share. Our adjusted EBITDA from continuing operations which excludes interest, tax, depreciation, amortization and non-cash compensation, was a loss of $2.6 million. Total net loss and adjusted EBITDA loss including the loss from discontinued operations, was $18.8 million, and a loss of $1.4 million respectively.

Our backlog at December 31st was $47.1 million. Breakdown by division was technology consulting, $1.4 million. Construction management, $32.4 million. And facilities management, $13.3 million. As Tom mentioned earlier, this represents an increase of roughly 33% over mid-year and 28% year-over-year, excluding our discontinued operations and a one-time adjustment.

Turning to the balance sheet, we ended the year with a cash balance of $2.3 million. Following the close of the quarter, we finalized the collection of a $1 million accounts receivable item that had been written off in the second quarter of 2009. This collection will be reflected on our balance sheet when we close the first quarter of 2010.

This was undoubtedly a difficult year but we believe that we have made the necessary adjustments to right-size our business going forward into 2010. We will continue to carefully monitor our expenses with the goal of maintaining 2009 SG&A levels, even as we start to see our revenue begin to ramp. Based on our December 31 backlog level and the addition of the new $29.5 million of work that Tom touched on in the first quarter, we are very excited about the future for Fortress.

This concludes my prepared remarks, I will open up the call for questions and answers at this time.

Thank you, sir. Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions). One moment, please, for our first question. And our first question is from the line of Matt Larson with Morgan Stanley. Please go ahead.

Hi. Good morning, guys.

Hi, Matt.

Hi. Congratulations. Sounds like things are coming together. And I'm sorry, I'm on kind of a remote -- I'm on vacation, got some family here, so I hope it doesn't interfere. Very quickly, you mentioned you have between $3.5 million and $4 million in cash bouncing around the first quarter which sounds very liquid. How many short-term obligations do you have offsetting that that would restrict that?

Currently, as Tom mentioned, the real main short-term obligation was Jerry Gallagher's note, which we've converted, so at this point in time we probably have less than $0.5 million of obligation. We have an earnout on one of the companies we acquired of about $200,000, and we have some note payments of a couple hundred. Beside that, we have no short-term obligations.

So basically the small market cap of the Company's are not much more than two times cash, is that appropriate?

That's correct.

Okay. Wonderful. Now, it sounds like you're signing up business, that big close of a deal last Friday, sounds wonderful, if you just annualize that, you're going to be pretty happy, I would assume. But I want to just learn more about this five-year potential $100 million project that you guys are in on. Of the $100 million, what would normally be your percentage of the revenues? Assuming it works out.

It's hard to tell. What it is, it's a task order contract. We are not the prime contractor under it. There's ourselves, one other architectural firm along with this international engineering firm. I don't want to name the names because it's not been publicly announced yet.

Basically, we are of the understanding that the money has been set aside and will be mainly used for technology and mission critical related projects. There's quite a few that are -- that we know are in the planning stages right now, some of them we're working on as a direct consultant for the Department of Homeland Security, in some cases we're not. But like I said, it's hard to predict what the value of that's going to be, but we know that we'll get a substantial chunk of it, at least -- I don't want to give any percentage. We just know there's going to be a lot of work there because this is a prior customer of ours. If you remember back in 2006, we had a pretty heavy customer concentration and it was all with this one Federal Government agency. They know us very well, and we believe that we will get our fair share of revenue out of that contract.

Well, without nailing you down, is it like 10% or is it 50% or something? Is it a fraction of it or is it a healthy slice of it?

Maybe 20 to 25%.

Got you. Okay. So it's a nice number, of whatever. It's a piece of business over five years. I think that's about it.

I mean, and as far as the move off the NASDAQ, I don't think you get any benefit from the NASDAQ now. You're so far below the radar, it's a nonevent. From my perch here at Morgan Stanley, I mean, I don't differentiate much between companies that are trading at $1, whether they're on NASDAQ or Bulletin Board, and if for a Company your size you're going to save hundreds of thousands of dollars, in management time, by just delisting, I think it's a very smart thing to do and if you grow your business back up, you can always look at other exchanges going forward so I think that's a good move, guys. All right, thanks a lot.

Thanks, Matt.

Thank you. And our next question is from the line of David Horn with Kiron Advisors. Please go ahead.

Good morning, guys, thanks for taking my call. First, I just want to work through the backlog a little bit. Was there backlog associated with Rubicon?

Yes, there was backlog and that's excluded from our discussion. That's excluded already from the 47.1.

Right. Okay. That's good. And then I guess the only reason for my question, I was just walking through -- we had 40 at the end of Q3, if I noted it properly and then we did 9 in sales and I think we added 34 in Q4. Did that 34 of new work, did that all enter backlog or does that not all enter backlog because it's not official? How does that work, I guess?

That is added to backlog. But in terms of the percentages I quoted before, I did subtract out what Rubicon's backlog was at September as well.

Okay.

That's maybe the number you're missing.

That's probably it, the variable there. Okay. So we have 47 at the end of the year, and then we've added another 30 in Q1, less whatever revenue we did, so basically -- okay. All right. I think I have those numbers understood. The SG&A, we did $2 million in Q4 and I guess all the other numbers you did, you sort of adjusted for Rubicon; is that true?

Yes. They -- all the numbers have been pushed down towards the bottom of the P&L where you'll see the discontinued operations. So the numbers -- the $2 million you're looking at is just purely the Company going forward.

Okay. And then are we going to -- we're going to take another 25% haircut off that?

No, no, no. I think it's -- I think that the 25% I referred to was really coming off the 12.5 from last year.

Okay.

So we think we should be able to stabilize around that fourth quarter, slightly maybe a little bit higher, but not much.

Okay. So basically we're looking at if we do about 50 in revenue and we did 15 gross margin or maybe 16, that's -- and that's $8 million in SG&A, we're basically breakeven there. That's the -- is that the idea? And any business on top of that, it's profitable?

I think it's fair to say your math is pretty accurate.

Okay. And then when you say we're-flow -- when you're cash flow positive for the year, you're talking about EBITDA, not necessarily operating income?

Well, our -- just to interject a thought there. Our financial statements now, with pretty much the elimination of all of our intangibles, other than some depreciation, our financial statements should relatively mirror our EBITDA calculation.

Okay. And then, okay, so cash, $3.5 million to $4.5 million by the end of Q1, I guess we'll see that on the new balance sheet. And the $7 million of facility management revenue that we sort of have locked in going forward, what's the margin on that?

That's averaging right now about 30 to 33%.

30 to 33. Okay. All right, guys. Thank you for answering questions and keep up the good work and look forward to hearing you I guess in another 45 days.

Okay, David, thank you.

Thank you.

Thank you. (Operator Instructions). And our next question is from the line of John Sturges with Oppenheimer and Company. Please go ahead.

Gentlemen, I want to congratulate you for coming through a horrendous year and doing it actually quite well considering what you had to deal with.

Thank you.

Can you tell us what the current backlog would be, what the increase is from the end of the fourth quarter? Is that possible?

We're not providing guidance at this point but I think the previous caller kind of provided the numbers.

Okay.

We had 47 at the end of the year, we've added 30, that's roughly 77, and then you can kind of make your own estimate as to what we'll do in the first quarter. We'll let you know in 45 days.

Okay. Terrific. I'm just curious about -- I would sort of guess the way I would look, having followed you, that the last -- since your history of being public, you actually haven't had what I would call a calm run rate of gross margin, and I'm just curious, do you have a target of gross margin down the road that you would like to achieve?

Well, we continually strive to improve it. I think we're looking hopefully at 17 to 18% this year.

But is that where you think that would be a proper run rate for you down, say, three or four years from now in a calmer marketplace?

It may even go up because our goal is to continue to increase the facility management, current revenue piece of our business, and as we continue to ramp that up and that becomes a larger percentage of our business, it will stabilize our gross margins hopefully.

At much higher level.

Slightly higher rates, yes.

John, I will add that when building our model and looking at the business and our overhead structure that we have, we build it based on a 15% margin such that when we achieve the numbers that Tom said, that's all straight money to the bottom line.

Right.

So we're trying to insist on the financial discipline that breakeven is at 15% and anything we can achieve above that is for us.

That's very good guidance. And I hear the more difficult projection because right now there's not much equity around, are we going forward, is there a target in mind, what you would like to achieve? This is just a way of me thinking -- are you hitting the numbers that you thought you would like to hit say three or four or five years down the road.

I'm sorry. You -- we didn't get your whole message there. Could you repeat the middle part?

Okay. There's not a lot of current equity so -- but what would be your return on equity expectation three years into the future? What would be your target that you would like to reach?

15, 20%, somewhere around there.

Okay. All right. That's fine. I'm all set. Good job. Thank you.

Thanks.

Thank you. (Operator Instructions). One moment, please. And I'm showing no further questions at this time. Please continue.

Okay. Thank you for joining our call today and we will probably be talking to you in another 45 days to talk about the results of the first quarter. Thank you again.

Thank you very much.

Ladies and gentlemen, this concludes the Fortress International 2009 fourth quarter earnings conference call. If you would like to listen to a replay of today's conference call, please dial 1-800-406-7325, or 303-590-3030, with the pass code 4262366. Once again, if you would like to listen to a replay of today's conference call, please dial 1-800-406-7325, or 303-590-3030, with the pass code 4262366. You may now disconnect.