TSS Inc (TSSI) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the Fortress International 2010 second-quarter earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions).

This conference is being recorded today, Wednesday, the 11th of August, 2010. I would now like to turn the conference over to Lee Roth. Please go ahead.

Thank you, Lou, and good morning, everyone. Once again, thank you all for joining us today on Fortress International Group's conference call to discuss its financial results for second quarter and first half 2010.

Joining me this morning from Fortress management are Tom Rosato, Chief Executive Officer; Tim Dec, Chief Financial Officer; and Jerry Gallagher, President and Chief Operating Officer.

Before we begin the call, I would like to remind everyone to take note of the cautionary language regarding forward-looking statements that came in the press release that we issued earlier this morning. That same language applies to the comments and statements made during today's conference call.

This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, Wednesday, August 11, 2010. Fortress International Group expressly disclaims any obligation to update and then supplement or otherwise review any of the information or forward-looking statements made during today's conference call or the subsequent replay to reflect events or circumstances that may arise after the date indicated, except as otherwise required by applicable law.

For a full list of the risks and uncertainties which may affect our future performance, please refer to the Company's periodic filings with the US Securities and Exchange Commission.

In addition, we will be referring to non-GAAP financial measures during the call. A reconciliation of the difference between these measures with the most directly comparable financial measures calculated in accordance with GAAP is included in today's press release.

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

Thank you, Lee, and good morning to everyone and thank you for joining us on the call today. Hopefully, most of you have had a chance to read our press release that was issued this morning at 7 a.m. We have good news with regard to the results for the second quarter.

I will begin with an overview of our business activity for the second quarter and the first half of the year, as well as a discussion of other recent developments, before turning the call over to Tim Dec, our CFO, for a review of the financials. Then we will open the call to questions following Tim's remarks.

For the last several quarters, we shared with you the improvement we are seeing in our industry, as well as a marked increase in customer activity that is driving us towards reaching our goal of sustainable growth and profitability. The progress we've made since this time last year and even since the end of 2009 is encouraging. As we talk to you today about our second-quarter results and look ahead to the second half of 2010, we are even more optimistic about our business, proud of our accomplishments to date and we're excited by our momentum, given the Fortress prospects for the rest of the year.

Our performance in the second quarter was solid across all of our key metrics, and reflects the success our team has had in executing on our strategic and operational initiatives. Our pipeline activity is continuing to accelerate, and I'm really proud of the level of business that we are winning. All these factors together help set the stage for what I expect to be a strong second half of the year.

I would like to briefly review some of the key highlights from the second quarter. First, our revenue for the quarter jumped to $22.7 million. This represents an increase of 32.7% over the first quarter and 87.6% over the second quarter of last year.

Our performance through the first six months of the year was just as strong, as we grew revenue 37%, and gross profit dollars, more importantly, 32% over the first half of last year.

For the second quarter, we achieved GAAP net income of $434,000, and our adjusted EBITDA of $750,000, which is our second consecutive quarter of positive EBITDA. Our Technology, Consulting and Construction Management projects were the main drivers behind the significant growth in revenue for the quarter and for the six months ended June 30.

Our TC services -- I refer to TC -- it is our Technology Consulting group -- more than doubled over Q1. This is a strong indicator that provides us a window of potential future projects for our CM and FM groups. If consulting money and design money is being spent, then that eventually leads to a capital project.

Under our sales strategy, we position ourselves with our customer to negotiate the follow-on work.

The lineup of customers that we had in our Technology Consulting group whom we are currently performing work for include, among others, Maxim Healthcare, Social Security Administration, SAIC, Stifel Nicolaus, Northrop Grumman, the US Department of Homeland Security, ServerVault, Carpathia, Gladstone Properties, Equinix, the University of Oklahoma, Dell and IBM. As you can see, it is a pretty good cross-reference of customers, both customers that are in the managed hosting services business, REITs, as well as IT service providers.

Our CM group saw revenue coming in from Equinix, Harris Communications, Army Corps of Engineers and Home Depot, among others.

Now let me talk about our Facility Management group. Our Facility Management services continued to be an important contributor to our growth, as it accounted for approximately 40% of the total gross profit dollars earned during the first six months of this year. Additionally, we received verbal commitments from two of our Facility Management customers for additional, large-scale service-based work.

One of the projects involves commissioning and maintenance on 10 containerized data center modules. We have developed this skill over the last two years in anticipation of this growing trend in data center design, and our efforts seem to be paying off. Upon formal receipt of this order, we will have a total of 42 such containers on multiyear service agreements with various customers throughout the United States.

We also received verbal commitments for adds, moves and changes on our recurring customer base, which should enable us to achieve what our goal has been set as 50% of our gross profit dollars being earned from our recurring contracts and our new FM customers, which we continue to add to our backlog.

In tandem with our strong top-line performance, we continue to carefully manage our expenses. This prudence enabled us to achieve positive net income of over $400,000 and adjusted EBITDA of over $750,000 in the second quarter, both of which represent our strongest bottom-line performance of some time.

As strong as our performance was during the first half of the year, our bookings and backlog give us more confidence that the second half of the year will also be strong. Bookings through the first six months of 2010 were $44 million, almost triple the level we saw during the first half of 2009, and we closed the quarter with a strong backlog of $51.5 million. Based on this data and the pipeline of new business opportunities that we believe will close during the second half of the year, we expect that Fortress will remain profitable on an EBITDA basis during the balance of 2010 as our business continues to grow.

Another area where we see great opportunity impacting our market is cloud computing. The migration toward cloud-based systems is creating a significant need for data center operators to expand the amount of available floor space in order to house cloud equipment, both for themselves and their customers. Given the depth and the diversity of our team's expertise, we believe that we are optimally positioned to address the growing needs of this emerging segment of the market.

Finally, and one of the things that I am really proud of, is a recent project we completed in the Southeast for a major client. Last month, I had the opportunity to visit the site of this project, which we've been working on for the last six months. This project was 100% designed and construction-managed by our team. It included 43,600 square feet of raised floor space and equipment room areas. It has 10 megawatts of roof-mounted generating capacity, a DC powerplant and a complex chiller piping system to deliver chilled water to computer equipment that we installed at this facility. The building was in a high-traffic downtown location that made logistics somewhat of a challenge. The structural component alone of this project was equally challenging, requiring reinforced steel in the floors to support the [UPS] chillers and switchgear.

I was very impressed by the magnitude of what our team accomplished during this phase one of this project, on time and on budget, and was nothing short of incredible. And it speaks to the quality of the work that our team can deliver to clients on a daily basis.

We are currently working on the second phase of this project, which calls for an additional 27,000 square feet of data center ready space, with a fully completed standby generating plant when done rated at 13.5 megawatts, to be completed sometime during the first and second quarters of 2011.

In summary, I am more confident in the health of our business now than I have been at any point in the last year. The work that began in the middle of 2009 to rightsize our business continues to pay dividends, and despite being a smaller organization than we were at this time in 2009, we have proven our ability to win and service new business with the same commitment to excellence that Fortress has always had.

We are pleased with our accomplishments to date, enthusiastic about what the future holds, and we look forward to sharing these future accomplishments with you as the year progresses.

So with that said, I am going to turn the call over to Tim Dec now, who is going to review the financials.

Thanks, Tom. As a reminder, we completed the sale of our Rubicon Professional Service division during the fourth quarter of 2009. As a result, comparative sales and operations from Rubicon have been reclassified as discontinued operations and will not be part of my discussion.

As Tom mentioned, we reported revenue of $22.7 million in the second quarter of 2010. This represents an increase of 87.6% over sales of $12.1 million in the second quarter of 2009 and a 32.7% increase over $17.1 million in the first quarter of this year.

Our revenue breakdown for the second quarter of 2010 was as follows. Technology Consulting more than doubled to $1.9 million as compared to $900,000 in the first quarter. Construction Management, $17.5 million as compared to $12.3 million in the first quarter. And Facilities Management, $3.3 million as compared to $3.9 million in the first quarter.

I would like to note that although our Facilities Management saw a slight decline in revenue quarter-over-quarter, the gross profit dollars from that division were essentially the same as Q1.

Gross profit totaled $3.2 million for the second quarter of 2010, an increase of 28% over $2.5 million in the first quarter and 128% over $1.4 million in the second quarter of 2009.

Gross margin was 14.1% in the second quarter. This compares with 14.6% in the first quarter and 12% in the second quarter of 2009. The sequential decline in gross margin for the second quarter was related to a $3.2 million equipment-only sale that was included in the quarter's Construction Management revenue, as equipment sales carry lower gross margins than our core service business. We expect gross margin to improve next quarter due to a more normalized revenue mix. And you should continue to expect that margins will remain in the 14% to 18% range going forward.

Our SG&A for the second quarter, excluding stock-based compensation, totaled $2.5 million. This compares with $2.5 million in the first quarter and $3.9 million in the second quarter of 2009, a decrease of 36% year-over-year. As mentioned on our previous calls, our total SG&A cost component is tightly controlled, and we will continue to closely monitor those dollars as we move forward.

Net income from continued operations for the second quarter of 2010 was $400,000 or $0.03 per share. Our adjusted EBITDA from continued operations for the quarter, which excludes interest, taxes, depreciation, amortization, was approximately $800,000. This compares with adjusted EBITDA from continuing operations of $20,000 in the first quarter and a loss of $1.3 million in the second quarter of 2009.

Our adjusted EBIT has improved dramatically. And as Tom said earlier, we expect to maintain positive adjusted EBITDA during the balance of 2010.

For the six months ended June 30, we reported $39.8 million in revenue. This represents a 37.1% increase over sales of $29 million for the first six months of 2009.

Our revenue breakdown for the period was Technology Consulting, $2.8 million as compared to $2.4 million in 2009; Construction Management, $29.8 million as compared to $20.2 million in 2009; and Facilities Management, $7.2 million as compared to $6.4 million in 2009. As Tom mentioned, each of the various groups' revenue has increased during the period.

Gross profit totaled $5.7 million for the first half of 2010 as compared to $4.3 million in the first six months of 2009, a 33% increase. Gross margin for the period was $14.2 million as compared to $14.8 million in the first half of 2009. Again, the decline in the gross margin compared to the first six months of 2009 was primarily attributable to the aforementioned $3.2 million equipment sale in the second quarter of 2010.

Our SG&A for the six months ended June 30, 2010, excluding stock-based compensation, totaled $5 million. This compares with $7.1 million for the six months ended June 30, 2009, a decrease of 30% compared to last year.

Net income from continuing operations for the six months ended June 30 was $100,000 or $0.01 per share.

Our adjusted EBITDA from continued operations for this period, which excludes interest, taxes, depreciation, was approximately $800,000. This compares with an adjusted EBITDA loss of $1.6 million for the six months ended June 30, 2009.

Our backlog as of June 30 was $51.5 million. The breakdown by group was Technology Consulting, $11 million; Construction Management, $28.5 million; and Facilities Management, $12 million.

Quickly turning to the balance sheet, we ended the quarter with a cash balance of $9.5 million, up from $2.3 million on December 31, 2009. Total short-term debt as of June 30 was only $300,000. We believe we are well-capitalized to fund the continued growth of the business.

In conclusion, we have made tremendous progress over the last 12 months, both strategically and operationally. The second half of 2009 was notable for the work we did to position the Company, not only to survive the weakness in our industry, but to prosper as the market recovered.

The first half of 2010 has been notable for our execution, as the markets in which we operate have shown signs of strength and we have been there to seize the opportunities.

Although we remain cognizant of our expenses, we will continue to maintain tight spending controls. However, we are in the early stages of reevaluating our sales and marketing efforts, and are considering the possibility of strategic personnel additions to bolster our sales force later this year and into 2011. While we believe we have sufficient resources to manage our current business, we feel the time is now right to begin taking steps to position Fortress to reach the next level of its growth, while continuing to build shareholder value.

That concludes my remarks. We will now open it up for questions.

Before we do that, too -- never mind. Questions first.

(Operator Instructions) Bill Sutherland, Boenning & Scattergood.

Tom, can you give us a sense of the percentage of revenue with the largest client coming in the second quarter? Or do you have that? I can wait for the Q on that if you don't.

Yes, it will be in our Q tomorrow, but I think it is about 65% from our one largest customer.

Okay, and given the significance, can you discuss with us kind of how things are going, in that there will be some transition, I assume.

Yes. We have -- if you look at our pipeline and where we are going with future closures in the next six months, we feel that we will be in a good position to replace a large majority of that. However, that customer, that one large customer that we have, we also are in the process of looking at multiple projects for them around the country.

So we realize there is a concentration issue there, but also this is a customer that appears to have quite a bit of capital available to spend for projects over the next 2 to 2.5 years. So we are going to continue to service and do as much work as we can for them, but we do feel pretty confident that if for some reason we were not successful in obtaining new projects with them that we won't see a significant change in our revenue opportunities.

I was encouraged to see under TC bookings Equinix.

Yes. Well, Equinix recently acquired Switch and Data, and we did quite a bit of work for Switch and Data, and we've had Equinix involved in reviewing the work that we've done with them. They appear to be happy, and so hopefully, we will see some continued new business coming from Equinix.

Now, Tim, when you were running through the backlog, I was trying to keep up. TC is -- what is the number for TC at 6/30?

$11 million.

$11 million. That's a huge jump.

Yes, the big piece of that was the task order contract for $10 million that we were awarded in the -- essentially in the second quarter. I think we announced it in our last earnings call.

What it is, it is -- we are teamed with a large engineering firm, and it's through the federal government to do work on a lot of their classified projects. And we are already seeing a number of task orders that have been issued to us under that particular contract already.

And it's a combination of both design and engineering work, as well as we are doing some specialty work with some of our Construction Management capabilities on a consulting role, providing personnel on projects, as well as estimating services, validating estimates and cost components for projects that they are planning on performing.

So that flows through your P&L over what rough time period, do you think, Tom?

We originally said, I think, three to five years. But based on what we are hearing now, it sounds like it is going to probably go a lot quicker than that.

The overall task order contract was a $100 million contract. We are teamed with a large engineering firm. They initially authorized $10 million that they would be spending with us, but we've got a commitment that we will get $25 million of that $100 million. And we from what we see in our pipeline right now, there is an awful lot of work coming through the government user for these projects.

So the $25 million would be all TC for you?

It would be a combination of TC and CM.

Okay. Roughly where are you now as far as your mix in terms of public versus private sector?

It is probably 65% private and 35% public. That's a guess.

Okay. Which direction is it sort of moving, do you think?

It is going to fluctuate, but I don't think it is going to get difference between 50-50 --

Okay.

-- balance. You know, we've got public projects that are done through private companies, also.

Tim, I didn't -- I got pulled away for a second when you were doing the three revenue lines. Do you mind, for the quarter, just the quarter?

Yes. Technology Consulting was $1.9 million as compared to $900,000 the previous year. CM was $17.5 million compared to $12.3 million. And FM was $3.3 million compared to $3.9 million.

John Sturges, Oppenheimer & Company.

Tom, you mentioned two verbal commitments. Do you have a timeline as to when they are likely to be more formalized?

We are hoping that we are going to get that before the end of the month.

And I'm just curious, the $50 million plus backlog, is that still roughly 12-month completion for that (multiple speakers)?

Other than that task order contract in the Technology Consulting, yes.

Okay, good. Thank you.

(Operator Instructions) [David Horn, Kieran Advisors.]

Nice to see the profitability. I'm curious, how many projects -- or what sort of percentage of revenue do you guys get that you really just turn around very quickly, it doesn't even make it into backlog? Because I see we've built up the backlog over the last quarter, and we've also put up a nice revenue number. I mean, I realize most of the $50 million in backlog you expect to do over the next 12 months, but I suspect, at least in the rate that we are going, that revenues will be higher than that. So tell me a little bit about that process.

One of the -- the biggest, the fastest turn area, really, is our Facility Management group. So far through this year, we've booked probably around $11 million in business in that area. And some of that is -- when I am looking here at our sales report, there is probably 400 projects that are included in that. They range anywhere from $1000 time and material jobs to small upgrades or replacements of equipment that are $20,000, $30,000, $40,000 projects. And a lot of those turn within the quarter.

So if we've got an unused piece of that where we've booked it toward the end of the quarter, it will show up in backlog. But we do have a couple million dollars, $2 million to $3 million, I think, every quarter that probably comes in and out of our financial statements, without having to hit backlog.

Okay. Then you said that the Facility Management revenue, it dropped sequentially, but it is the same gross profit dollars. How did that work?

It depends on the mix of -- there are two things. One thing, we have -- one of our acquisitions is a company that specializes in just doing work for APC and supporting APC with their government clients. And their work seasonally drops off in the second and third quarters of calendar year, typically. And then as they get an onslaught of orders in the last month of September for the government fiscal year-end, they pick up.

So we saw their revenue drop off. And they are not a big component of it. They do about -- close to $1 million a quarter in revenue. But they've had a pretty significant drop-off that affected that.

When you look at the balance of what we had as far as our mix, we are continuing to add more and more recurring service contracts. They have higher margins. And the service projects that we had during the second quarter generated higher margins.

Okay, great (multiple speakers). And then last question, the $9.5 million of cash, is that outside of operations? Are there any working capital adjustments we should expect to see, either up or down, for the next quarter? Or is that sort of -- like a real number?

That's a good question. We actually -- at the end of June, we probably collected about $3.5 million to $4 million worth of cash that went out subsequent to quarter-end.

But other than that, when you see our Q filed tomorrow, you can take a look at the cash flow, and there is very minimal dollars going out for anything like CapEx or anything else. I mean, we are tightly monitoring our working capital.

So you guys feel a heck of a lot better than you did a year ago?

Absolutely. I think we should all feel a lot stronger and I think the financial results are starting to show that.

They definitely do. All right. Thanks, guys.

Tom McMillen, Homeland Security.

Tom, great quarter. Give us an update on your international projects.

Basically -- I think I talked about them last time -- we've got two projects. One was in Germany, that was the recommissioning of a NATO bunker. And another one is in the island of -- off the island of Mauritius, which is a highly energy-efficient project, that both of them are in early development stages right now.

What's interesting is the developer who was the lead in the German project has taken an interest in the Mauritius project, and he has basically combined those two to go after his main funding.

We are told -- both Jerry and I traveled over to Germany about two weeks ago, in light of trying to kick off some of the preliminary planning work that we wanted to do on the project. We were told that they have a preliminary commitment for funding. So we were there to kind of get a feel for that, send them a proposal on what we were going to do in the first phases.

And we are hoping to hear that -- by the end of August, early September that they have their funding for both projects finalized. Now they are very large projects. Jerry, square footage-wise, what are we talking about?

Over 100,000 square feet each (inaudible).

Yes. And we also -- the original project we had in Russia, that has gone through some reiterations, with new investors looking at that. There is a possibility it could be combined with the developer from Germany, because he sees that in his strategic planning. So we are kind of still dabbling in that particular arena also. But we expect something positive to come through on those projects sometime in early fall.

Thanks.

(Operator Instructions) Bill Sutherland, Boenning & Scattergood.

Just one quick one. You all alluded to a -- well, I'm curious if you think this revenue run rate that you are at at Q2, does that feel sustainable? What do you guys think about just the direction of things at this point, given the bookings and the backlog?

Based on the backlog, we think it's sustainable through the balance of the year. But you've got to look again at the mix in revenue that we are putting into our financials. And it could bounce up -- top-line revenue could bounce up and down because of getting large CM projects that have a tendency to kind of jump that revenue line around.

Again, I think it is the sustainability in the gross profit line. We are continuing to add more and more Facility Management business that continues to contribute to that. The TC business, we are getting a lot of repeat business back from our existing customer base that we've built up. So we believe that gross profit line, the more we can get contribution out of our FM and TC group towards making up the larger percentage of that, that the gross profit dollars are sustainable.

Yes, that's good perspective, Tom. So this run rate of TC in Q2 is small and sustainable?

Yes.

Okay, that's great. Thanks.

Management, there are no further questions in the queue. Please proceed with any closing remarks.

As there are no further questions, I would like to thank everyone for their participation this morning. We feel our recent accomplishments are significant, and it's what we expect to achieve hopefully going forward that has really got us excited.

I would also like to note that both Tim and I, we are going to be in New York, participating in the Rodman and Renshaw Global Investment Conference from September 13th through the 15th. Please contact our IR team at The Piacente Group for more details. We should be up there. We feel we have a lot better story to deliver to both prospective investors and our existing investors.

And we look forward to speaking with you again after the third quarter. Thank you.

Ladies and gentlemen, this concludes the Fortress International 2010 second-quarter earnings conference call. If you would like to listen to a replay of today's conference, please dial 303-590-3030 or 800-406-7325 and enter the access code 433-1118.

Thank you for your participation. You may now disconnect.