TSS Inc (TSSI) 2010 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And thank you for standing by. Welcome to the Fortress International 2010 third quarter earnings conference call. At this time, all participants are in a listen-only mode and following the presentation, instructions will be given for the question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded November 12, 2010. I would now like to turn the call over to Lee Roth. Please go ahead.

Thank you, Operator. Good morning, everyone. And once again, thank you all for joining us on the Fortress International Group conference call to discuss our financial results for the third quarter and first nine months of 2010. Joining me this morning from Fortress management are Tom Rosato, Chief Executive Officer, and Tim Dec, our Chief Financial Officer. Before we begin the call, I would like to remind everyone to take note of the cautionary language regarding forward-looking statements contained 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, as well as in the Q&A session.

This call will contain time-sensitive information, as well as forward-looking statements, which are only accurate as of today, Friday, November 12, 2010. Fortress International Group expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made during this call, to reflect 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'll be referring to non-GAAP financial measures during this call. A reconciliation of the differences between these measures with the most directly comparable financial measures calculated in accordance with US GAAP, is included in today's press release. 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 Tom Rosato, CEO. Tom, go ahead, please.

Okay. Thank you, Lee. Good morning to everyone. And again, thank you for joining us on the call today. I'll begin with an overview of our business activity for the third quarter and the first nine months 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. We'll then open the call to questions following Tim's remarks.

In the third quarter, and throughout the first nine months of 2010, we continue to deliver strong top- and bottom-line performance, generating solid contributions from each of the three areas of our business. This was our third consecutive quarter of positive adjusted EBITDA, and our second consecutive quarter of net income from continuing operations. Our primary goals continue to be revenue growth, sustainable profitability, and improving our cash position, as well as the overall health of our balance sheet.

We believe that Fortress is very well positioned to achieve all of these. We're continuing to win new business and secure follow-on projects with existing customers. Importantly, we continue to diversify our revenue base through the expansion of our facility management business. Since July 1, we've closed $5.4 million in new facility management contracts and facility-based service projects. We continue to add more service contracts for containers, that our service partner Dell is delivering to various sites around the country. Most of these agreements are three- and five-year maintenance contracts, and as we have discussed in the past, our FM business is characterized by higher margins and recurring revenue, which provides us with the -- both stability and visibility into the future with regard to our financial performance. With that, I'd like to briefly review some of the key highlights from the third quarter and the first nine months of the year.

First, we more than doubled our third quarter revenue on a year-over-year basis to $21 million. The majority of our revenue, $17 million of this, came from our CN division, as we continue to recognize backlog into revenue, from projects that were booked in the fourth quarter 2009, and the first two quarters of 2010. Gross profit increased 53% year-over-year to $3.2 million. In addition to our strong top-line performance, our bottom-line remained strong, as we achieved net income of $500,000, and adjusted EBITDA of $700,000, compared with net and adjusted EBITDA losses in the third quarter of 2009. This performance is indicative of our successful efforts to continue to manage expenses as we grow revenue at a significant pace.

Our performance for the first nine months of the year were strong as well, as we grew revenue 55% and gross profit dollars 39% over the first nine months of last year, while achieving GAAP net income of approximately $600,000. And now we have positive adjusted EBITDA of $1.4 million for the period. Our CapEx net interest expense and debt repayments were approximately $225,000 for the nine months ended September 30, 2010, which indicates that a large majority of our EBITDA generates cash. Our cash balance as of September 30 were in excess of $11 million. And our working capital has grown to $5 million. Our backlog, however, did decline in the third quarter to $35.1 million. But we believe this is a short-term trend, as capital investment from both public and private sector customers remains strong.

Our pipeline of new business activities remains very strong. There seems to have been a little bit of restraint this past quarter from our private enterprise customers, despite having capital available to move forward on projects. We believe some of this restraint might have been related to uncertainties surrounding the recent midterm elections and possibly 2011 tax policies. We anticipate these budgeted projects to become contracts in backlog before the end of the first quarter of 2011. To give you an idea about our pipeline opportunities, the ones that exist are mainly with our recurring customer base.

It includes Dell, Equitex, SAIC, Hunt Midwest, Nuclear Regulatory Agency, Washington Post, the Government of Mauritius, IBM, Gladstone Realty, National Institutes of Health, Allegis Corp, RCN Corp, and the Army Corps of Engineers, all top rated customers and companies. The opportunities now in front of us total about $74 million in potential projects, and it spans all three divisions, broken down as follows. We've got -- we're looking at approximately $4 million worth of technology consulting work, about $62 million in potential CM work, and about $8 million in service contracts and service projects that we anticipate to close before the end of the first quarter 2011.

One of the things to share the confidence that we have in our business, is that we've recently launched a revival of our previous marketing initiatives, aimed at building awareness of Fortress and our value-added service offerings. In the third quarter and into the fourth quarter, we've added two strategic hires within our sales force. In addition, we've begun an industry search for a Senior Vice President of Business Development, to enable us to expand our reach into certain targeted vertical markets.

We're also increasing the Fortress' presence at industry events and trade shows. And we're actively approaching potential partners regarding potential teaming opportunities, that will allow us to pursue larger projects that could benefit from an integrated multi-vendor solution. These teaming opportunities enable Fortress to pursue projects on a scale that previously we were unable to pursue on our own. And I believe that they can provide us with significant opportunity in the upcoming years. On the trade show front, the most recent event we attended was AFCOM's Data Center World in Las Vegas. Attendance at the event this year was at an all-time high, which shows that current growth and opportunities that exist -- that reflects the current growth and opportunities that exist in the current data center market. As a result of our participation in the event, we received a number of very promising leads. And our sales force is already on the road working to turn these leads into projects.

These initiatives have already generated a great deal of activity and interest, and we believe will strengthen our competitive position in the marketplace even further. On top of that, we are currently engaged in a number of technology studies with developers, which we expect to become full-scale projects in 2011. These projects are substantially larger than the typical projects we have won in the past. And some have required us to team with larger CM firms, with substantial bonding capacity, as well as larger engineering firms that can provide the manpower to perform production drawings and personnel, based on some of the quick time frames under which these projects are expected to run once the financing is in place. This will enable us to ramp up quickly if a sudden surge in business occurs. These projects span across the country. We have projects in Northern Virginia, New Jersey, Minnesota, and North Carolina that we're looking at right now. We continue to make progress on the international front as well.

Our customer in Mauritius has secured initial infrastructure funding for that project, and we expect to begin programming work later this month. This will be a three-year project to develop a 150,000 square-foot, state of the art energy efficient data center. As I mentioned before, that particular data center will have an unusual sea water cooling system which will provide very low cost energy for the operation of that center. And we're on the forefront of helping them develop that.

In addition to the individual customer wins, I'm pleased to report that IBM has again awarded us a master services agreement, to provide construction management and design build services for their global services divisions. And we got this in all regions across the United States. IBM went through a requalification process for this relationship. They selected five companies nationwide to support them in their efforts, selling these facility-related services. We competed against a number of firms, including many that were significantly larger than Fortress for this distinction. This selection, we believe, is proof of our vast capabilities, our expertise, and the overall quality of our team. And I'm really proud of them for this particular accomplishment.

Under this relationship, previously we performed about $6 million worth of work over the last two and a half years. We expect the program to deliver new revenue opportunities that are equal to or greater than the levels of work we performed for IBM in the past. As we talked last time, we told you about a government task order award that we received. And this continues to generate consulting opportunities and projects for us in Washington, DC, Colorado, and Utah. These projects are very large, and are creating long-term opportunities for us to provide staffing and other support to the government for the management of these projects.

In summary, we remain very pleased with what we've accomplished, and are excited about what we expect to accomplish in the months to come. Our business remains strong operationally and financially, and our outlook is bright. I'm confident that we will achieve positive adjusted EBITDA for the next quarter and the full year, as we continue working to position Fortress for long-term success. With that said, I'd like to turn the call now over to Tim Dec, our CFO, and he'll go in depth with the financial review.

Thanks, Tom. As a reminder, we completed the sale of our Rubicon professional service division during 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. For the third quarter, we reported $21 million in revenue. This represents a 108% over sales of $10.1 million in the third quarter of 2009, and a 7.5% decrease compared to $22.7 million in the second quarter of 2010. The sequential decline in revenue was primarily the result of a $3.2 million equipment-only sale, recognized during the second quarter.

Our revenue breakdown for the third quarter of 2010 was technology consulting, $800,000, as compared to $1.9 million in the second quarter, construction management, $17.1 million, as compared to $17.5 million in the second quarter, and facilities management, $3.1 million, as compared to $3.3 million in the second quarter. As Tom mentioned, gross profit totaled $3.2 million for the third quarter of 2010, an increase of 53% over $2.1 million in the third quarter, and relatively flat with the second quarter of 2010. Gross margin percentage was 15.5% in the third quarter of 2010, within our targeted range of 14% to 18%. This compares with 14.1% in the second quarter, and 21% in the third quarter of 2009.

The year-over-year decline in gross profit, year-over-year, was related to a shift in the revenue mix for the quarter, as our construction management business accounted for larger percentage of total revenue in the current period than the third quarter of 2009. Our SG&A for the third quarter, excluding stock-based compensation, totaled approximately $2.6 million. This compares with $2.6 million in the second quarter, and $2.5 million in the third quarter of 2009. As mentioned on our prior calls, our total SG&A cost component is tightly controlled, and we will continue to closely monitor the SG&A as we move forward. Net income from continuing operations for the third quarter was $500,000, or $0.03 per share. Our adjusted EBITDA from continuing operations for the quarter, which excludes interest, taxes, depreciation, amortization, and non-cash comp, was $700,000. This compares with an adjusted EBITDA of $800,000 in the second quarter, and a loss of $100,000 in the third quarter of 2009.

For the nine months ended September 30, 2010, we reported $60.8 million in revenue. This represents an increase of 55% over revenue of $39.1million for the first nine months of 2009. Our revenue breakdown for the nine months was technology consulting, $3.6 million, as compared to $3.1 million for the same period in 2009. Construction management, $46.9 million, as compared to $26.1million in 2009, and facility management, $10.3 million, as compared to $9.9 million in 2009. Gross profit totaled $8.9 million for the first nine months of 2010, as compared to $6.4 million for the nine months ended September 30, a 39% increase. Gross margin for the period was 14.6%, as compared with 16.4% in the first nine months of 2009. Again, decline in gross margin was related to a significant increase in our construction management business.

Our SG&A for the nine months ended September 30, excluding stock-based comp, totaled approximately $7.5 million. This compares with $9.3 million for the same period last year. Net income from continuing operations for the nine months ended September 30, was $600,000, or $0.05 per share, and $0.04 per diluted share. Our adjusted EBITDA from continuing operations for the period, which excludes interest, taxes, depreciation, amortization of non-cash, was $1.4 million. This compares with an adjusted EBITDA loss of $1.7 million, for the nine months ended September 30, 2009. Certainly, with the businesses, it's turned very favorably on our side.

Our backlog as of September 30 was $35.1 million. The breakdown by division was technology consulting, $10.5 million, construction management, $13 million, and facility management, $11.6 million. Quickly, turning to the balance sheet, we ended the quarter with a cash balance of $11.2 million, up from $9.5 million at June 30, and significantly up from December 31, when the balance was $2.3 million. As mentioned before, our total short-term debt is only $300,000.

In summary, we have made significant strategic, operational, and financial progress in the third quarter, and through the first nine months of this year. Our business is continuing to grow, and although we remain focused on controlling our expenses, we are making strategic investments to support the growth of the Company, both now and in the future. We continue to improve our financial position, along with our operating results. And we are confident that Fortress is well positioned for ongoing success as we approach the end of this year, and into 2011. That concludes my remarks. I'll now open the call up for question-and-answer.

Thank you. (Operator Instructions) And our first question does come from the line of David Horn with Kieran Advisors. Please go ahead.

Good morning, guys. Thanks for taking my question. Congrats on a good quarter. Profitability did what you said you were going to do. Strong balance sheet, we've really come a long way from where we were a year ago, so it's nice to see. Tom, you mentioned -- I just wanted to clarify. You had mentioned, I guess, potential business to sign before the end of Q1, and it was $4 million, I guess, of technology, consulting, and $62 of construction management. Can you just reiterate what you had said there?

Yes, basically we look at our pipeline of opportunities, which are open proposals, or projects where we've done some type of preliminary engineering and budgeting for customers, that we know are planning on going ahead with those projects. So, we classify them as our, I guess A pipeline opportunities. And it's anticipated that we will have most of those projects closed prior to the end of the first quarter of 2011.

Okay, and just -- can you give me the numbers again?

Okay. Wait a minute. Yes, it was $4 million in technology consulting work, $62 million in construction management work.

Yes.

And $8 million in combination of service contracts and service-related projects for the facility management division.

Okay. And then what sort of -- tell me again what sort of gross margin we get on the facility management business?

It's averaging between 28% and 32%, somewhere around there. It depends on the type of project that we're doing, but they're pretty healthy margins. And that continues to layer -- when we say $8 million in new business, some of that is service contracts, which continue to layer on top of existing service contracts. So, we're continually building up that recurring revenue base of, you know, our monthly, quarterly, semi-annual, and annual maintenance needs that our customers have. And then in addition to that, they generate additional small projects, upgrades, adds, moves, and changes and so forth.

So, we can get the facility management up to, say, $25 to $30 million. I mean, at some point that will start to basically cover our SG&A for the year, because --

Yes. That's our goal. I mean, our goal is to continue to build that end of the business up. And we're really having a lot of success, particularly in the container service opportunities that we're getting through our service partner, Dell, on that.

Great. And then just out of curiosity, I know you were at a conference not too long ago. Do you see any other -- because the story's really becoming a great story to tell. You know, good portion of your market cap is actually in cash, and, you know, we're profitable and clearly, you know, the story has some sex appeal. Is there -- do you know of any other additional opportunities over the next year to sort of tell the story and get the word out?

You're talking about opportunities with regard to investment?

Investments, yes, investors.

Yes, yes. I think we're well positioned now. You know, we'd like to get the fourth quarter behind us, and get good solid results for 2010. And I think we've got a really good story. We went up to New York to one conference, and that was in I guess September, which was prior to our September quarter results. So, we do have -- I think we've got some interesting things to talk to investors about.

Okay, great. And you're confident that Q4, we can continue to be profitable?

Yes.

Okay, great. All right. Thanks, guys.

Yes, thank you, David.

(Operator Instructions) Management, at this time, there are no questions. I'd like to turn it back for any closing comments.

As there are no further questions, I'd like to thank everyone for their participation this morning. Our recent accomplishments, we feel, are very significant, and it's what we expect to achieve going forward. And this has us truly excited, and we look forward to speaking to you guys after the end of the year. And If we have any major contract wins that occur between now and then, we will be sure to put them out in press releases going forward. Thank you.

Thank you.

Thank you. Ladies and gentlemen, this does conclude the Fortress International 2010 third quarter earnings conference call. If you would like to listen to a replay of this conference, you may do so by dialing either 303-590-3030, or 1-800-406-7325. You will need to enter the access code of 4380324. Those telephone numbers once again, are 303-590-3030, or 1-800-406-7325 with the access code of 4380324. Again, we thank you for your participation on today's call. You may now disconnect your lines at this time.