TSS Inc (TSSI) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen. Thank you for standing by. Welcome to the Fortress International fourth-quarter and full-year 2011 earnings conference call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions). This conference is being recorded today, Wednesday March 28, 2012. I would now like to turn the conference over to Lee Roth. Please go ahead.

Thanks Alicia, and once again, good morning everyone. Thank you for joining us for the Fortress International Group's conference call to discuss fourth-quarter and full-year 2011 financial results. Joining me this morning from Fortress management are Mr. Anthony Angelini, Chief Executive Officer, and Tim Dec, Chief Financial Officer. In addition, Jerry Gallagher, President and Chief Operating Officer will be available for the Q&A session.

Before we begin the call, I would like to remind everyone to please take note of the cautionary language regarding forward-looking statements contained in the press release that we issued earlier this morning. The cautionary language applies to comments and statements made during today's conference call, and 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, March 28, 2012. Fortress International Group expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made during this call or the 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 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 by Anthony, and then a review of the financial results by Tim. Followed by a wrap up by Anthony before we open the line for your questions. With that said, I'd now like to turn the call over to Anthony Angelini, Fortress CEO. Anthony?

Thank you, Lee. Good morning everyone, and again thank you for joining our call today. I want to begin the call by saying that I'm excited about the opportunities ahead of us at Fortress International. I believe we have a tremendous opportunity to expand and enhance our business, as well as assess potential new service offerings that augment our business model and support significant growth, over both the mid- and long-term. What we are seeing in the data storage market is an increasing need for data management, data access, and capacity, and greater demand among data center operators for integrated relationships and contracts for full-service solutions.

The shift in the market, with an emphasis on full-service solutions is being driven by intensive end-user bandwidth needs to support consumer services such a social media, mobility, and digital video, as well as enterprise-level services. We have a unique chance to take advantage of the exciting growth and dynamic changes that are occurring around the world to meet this demand. By exploring the areas that complement our traditional suite of services, we can become better aligned with our partners and more effectively meet our customers' changing needs. Our experience, current core competencies, and the high regard in which our primary operating entity, Total Site Solutions, is held, give us a to solid foundation to build upon.

Despite this excitement and promise, there is work that must be done to position Fortress in a way that will allow the Company to realize its potential. When I first engaged with the Company as a consultant late last year, it was apparent there was great opportunity, but there were also some challenges that needed to be addressed. As you can see from the fourth-quarter results, several large contracts that drove a significant portion of our profitability earlier in the year were completed, but had not been replaced with new business. During the fourth quarter, some opportunities were lost and some projects were delayed. But the visibility into the day-to-day operations of the Company needed improvement.

Suffice it to say, I am not satisfied with our fourth-quarter performance. Nevertheless, we had a profitable year, significantly improved our working capital position, and strengthened the quality of our backlog. Since January, we have worked diligently and as quickly as possible to enhance visibility into our business, and gained greater control over our pipeline while examining our current and future market opportunities. We are also conducting a thorough analysis of the profitability of the core areas within our business today. We have taken specific actions to reduce our cost structure to better align it with the current mix of business, while we work to build and realize our pipeline with a focus on the most profitable areas of our service portfolio.

We are evaluating and enhancing our go-to-market approach, and the structure of our sales and support teams. The goal of these restructuring effort has been to increase the value-add for our customers, drive greater integration between sales, service, support and customer relationship management, to ensure we build a sustainable, profitable-higher growth business. These changes and the development of new business will not happen overnight, and therefore, we see 2012 as a transformational and transitional year for our business. As in rebuilding any franchise, we need to retain the best talent we can while adding new talent that will drive further positive advancements within the business. We are working through executing these changes.

I'm going to turn the call over to our CFO, Tim Dec, to review in more detail in financial results of the fourth quarter and fiscal year. I'll be back on for a wrap up before we open the call for questions. Tim?

Thanks Anthony. I will start with our results for fourth quarter and then review the full year of 2011. My discussion of the fourth-quarter results will focus on sequential comparison. We reported $9 million in revenue for the fourth quarter of 2011, as compared to $7.7 million in the third quarter of 2011. Our revenue breakdown for the fourth quarter of 2011 was technology consulting, $500,000 as compared to $1 million in the third quarter, construction management, $4.8 million as compared to $2.2 million in the third quarter, and facility management, $3.7 million as compared to $4.5 million in the third quarter.

Gross profit totaled $1.5 million for the fourth quarter of 2011 as compared to $3 million in the third quarter of 2011. The decline in gross profit was primarily attributable to the shift in revenue mix, with a higher percentage of gross profit derived from our lower margin construction management business. Gross margin was 16.3% in the fourth quarter of 2011, compared to 38.6% in the third quarter. Gross margin in the third quarter benefited from close out of a large construction project, which carried a higher margin than typically realized.

Our SG&A for the fourth quarter totaled $2.7 million, which included $64,000 in stock-based compensation and $24,000 in bad debt. This was essentially flat with $2.8 million, which included stock-based comp expenses of $75,000 and no bad debt in the third quarter of 2011. Net loss for the fourth quarter of 2011 was $1.3 million or $0.09 per basic and diluted share, compared with net income for the third quarter of $113,000 or $0.01 per basic and diluted share.

Our adjusted EBITDA for the quarter, which excludes interest, taxes, depreciation, amortization, impairment, stock-based comp and bad debt was a negative $1.1 million. This compares with adjusted EBITDA of $287,000 in the third quarter of 2011. The reduction in gross margin, as I mentioned just a few minutes ago was the primary factor that influenced the decline in adjusted EBITDA in the fourth quarter.

Turning to the year, for the 12 months ended December 31, 2011 we reported $36.9 million in revenue. This compares to $74.9 million for the year ended December 31, 2010. The decrease was primarily related to the decrease in our construction management revenue. Our revenue breakdown for the year was technology consulting, $3.1 million as compared to $4.1 million in 2010, construction management, $16.1 million as compared to $56 million in 2010, and facility management, $17.7 million as compared to $14.8 million for the year ended December 31, 2010.

Gross profit totaled $12.5 million for the 12 months ended December 31, 2011 as compared to $12 million in 2010. Gross margin for the full year 2011 increased to 33.9% as compared to 16% in 2010. This increase in gross margin percentage was primarily attributable to the resolution of disputed change orders, which we touched on during the prior call. That drove the higher gross profit during the first nine months of the year. Our SG&A for the year-ended December 31, 2011 totaled $11.2 million, which included $402,000 in stock-based comp and $115,000 in bad debt expense. This compared with $10.6 million, which included $555,000 in stock-based comp expense, and no bad debt in 2010.

Net income for the year totaled approximately $1.8 million or $0.14 per basic and $0.13 per diluted share. This compares to net income of $851,000 or $0.06 per basic and diluted share for the 12 months ended December 31, 2010. Our adjusted EBITDA for the year, which again excludes interest, taxes, depreciation, amortization, impairment, stock-based comp and bad debt was $1.8 million. This compares with adjusted EBITDA of $1.9 million for last year.

Moving to backlog, our backlog at December 31 was $35.3 million as compared to $35.9 million at the end of September, 2011. The breakdown by division was technology consulting, $8.5 million at year-end compared to $9.2 million at the end of September, construction management, $19.3 million at year-end as compared to $18.6 million, and facility management, $7.5 million compared to $8.1 million at the end of September. Turning to the balance sheet, we ended the quarter with a cash balance of $6.7 million. However, our working capital increased to $8.4 million from $7 million at the end of last year. We continue to focus on our cash and working capital balance as a key asset of our business, that will allow us to continue pursuing future opportunities.

Before I conclude, and turn it over to Anthony, I would like to spend a few minutes to discuss some of the specific actions we've taken in the first quarter of 2012. As Anthony mentioned earlier, we have taken actions to revise our cost structure to more closely align expenses with near-term business expectations. Among the changes we implemented are a consolidation of certain functions, which include sales, service, customer support, and relationship management to create a more seamless customer experience, centered around a smaller number of highly accountable employees. This resulted in the elimination of approximately 18 positions within the Company.

Additionally, we have taken actions on a number of other cost, including a significant reduction in our lease expense and other SG&A and variable costs. The combined benefit of these changes is expected to reduce by more than $2.7 million on an annualized basis. We will continue with the heightened attention to managing and controlling our expenses as we go forward. I'll now turn it back over to Anthony for some closing remarks before we open it up for Q&A.

Thanks, Tim. As Tim mentioned, we're working to drive efficiencies throughout the business and better position the Company for the future. The near-term actions we have taken better align our costs with the current levels of business. However, it is important that we continue to reinvest in the Company's future. Therefore, we plan to make certain strategic hires and add new personnel to align with the opportunities in front of us. We are also enhancing our systems and processes to drive efficiency and scalability.

It is important to emphasize that while we are making the near-term cost corrections in the business, we are intently focused on driving higher growth. As I mentioned in my opening remarks, I am extremely excited about the opportunities that lie ahead. Going forward, we expect to further leverage our capabilities to deliver a suite of services that will provide greater balance within our revenue base between one-time projects and recurring revenue opportunities. This suite of services will take advantage of the Company's core competencies and deliver tangible value to our customers. Our ability to consult, design, build, and maintain data centers and other mission-critical facilities for our customers, as their trusted advisor and operator, will be the key elements to our success and increased shareholder value.

The hybrid digitization of the world economy, driven by the growth in cloud computing, social networks, mobile device proliferation, and the continued shift to IP traffic is expected to drive demand for data center capacity many-X fold over the next decade. We expect to be an active participant in that X factor growth. Finally, I'd like to congratulate Peter Woodward on being appointed Chairman of our Board of Directors, effective today. I'd also like to thank Tom Rosato, our former CEO, who has resigned as Chairman and from the Board. With that, we will open the call to questions.

(Operator Instructions). Our first question is from the line of Paul Sonkin with Hummingbird Value Fund. Please go ahead.

One is that in the first quarter, will you be taking any charges for severance or Tom leaving? Lease expense, getting out of the lease?

Hi Paul. We will be taking a charge, but they are relatively minor. They will probably be in the $200,000 to $300,000 range. It will not be a significant charge.

Okay. Everything will be in the first quarter? Is anything going to be in the second quarter?

No, we have taken care of everything in the first quarter.

When do anticipate getting back to profitability?

Paul, this is Anthony. We are clearly working on driving to that. Obviously, the fourth-quarter results are along a trend line that we are working to reverse through this restructuring. Obviously a big part of the puzzle is realizing our significant opportunities that are in our backlog and managing our pipeline more closely. We are not right now, giving any guidance to breakeven, but trust that we are diligently working hard and that's why we made some adjustments very quickly in our cost model to get ourselves back to breakeven and above. And I think the opportunities in front of the Company are significant. We've just got to get on a much harder path and ensuring we execute and deliver to those.

And can you also highlight some of the opportunities that you're seeing there some of the good stuff in the pipeline?

As I think we have talked about before, certainly our facility management and consulting businesses, we see driving higher margin and more recurring revenue. So we are continuing to see a number of opportunities that are coming forward in both of those areas. In addition, we are exploring some new models that will allow us to become deeper with our customers, and I use the example that we are -- when we go and build a site, and go through that process, that we don't get left at the end of that build. That we continue to better manage and integrate into various supply chains and ongoing involvement in the operation of the data centers. And we believe there is a gap in the marketplace that we can fill as we develop, build, and work with the owners of both brick-and-mortar and modular and containerized centers. So, we are exploring a number of projects to get us more deeply integrated into that process as opposed to being a build and leave it performer.

Thank you very much.

Thank you ladies and gentlemen. (Operator Instructions). I am currently showing no further questions at this time. I will turn it back over to Management.

Okay. Thank you, everyone, that participated in this call this morning. We are certainly taking action to reposition the Company, and are confident in our ability to build a more efficient, scalable, and profitable growth Company in the future. We will look forward to continue to update you on our progress as we move through the year, and I thank you for your continued support and I will look forward to the future.

Thank you.

Ladies and gentlemen, this does conclude the conference call. If you would like to listen to a replay of today's conference, please dial 1-800-406-7325, or 303-590-3030. And enter in the access code 4524156. Thank you for your participation. You may now disconnect.