TSS Inc (TSSI) 2012 Q1 法說會逐字稿

Welcome to the Fortress International first-quarter financial results 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 also being recorded today, Thursday, May 10 of 2012.

I would now like to turn the conference over to our host for today, Ms. Brandi Floberg. Please go ahead, ma'am.

Thank you, operator, and good afternoon, everyone. Thank you for joining us on Fortress International Group's conference call to discuss its first-quarter 2012 financial results. Joining us this afternoon from the management of Fortress are Anthony Angelini, Chief Executive Officer; and Tim Dec, 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 we issued 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, May 10, 2012. 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 replace or reflect events or circumstances that may arise after the date indicated, except as otherwise required by applicable law. For a list of the risks and uncertainties which may affect future performance, please refer to the Company's periodic filings with the SEC.

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

I will now turn the call over to Anthony Angelini, Chief Executive Officer. Anthony?

Thank you, Brandi, and thank you all for attending this call. I would like to update you on the activities we have been driving since I came on board in January, as well as the results I believe we are yielding.

Six weeks ago, we delivered our report on the fourth quarter of last year, and at the time I said we were not satisfied with the results. We also briefly discussed some of the changes underway. Today, I am going to focus my comments in a few areas that I believe are important for you to know for our near-term and longer-term success. They are centered on a progression of phases that we are implementing that build upon each other in a sequential and somewhat overlapping path forward. We believe that each of these phases are all important to develop the necessary foundation upon which to build and represent a launching pad for future growth.

It is also important to understand that a number of the things we are doing are foundational and they may not appear publicly in our near-term results. It is also very critical to our success that operating performance to our customers serves as a keystone that we build new business upon. Let me go through what we are doing.

First, we have right-sized the business and are adjusting the culture. Second, we are driving operational performance and, finally, we are building our growth initiatives. Let me start with right-sizing and cultural alignment. During the first quarter, we executed on the process of right-sizing and aligning the cost structure of the Company to our near-term business mix. In this phase, we implemented a number of changes, including reductions in staff and other cost savings initiatives that totaled nearly $3 million on an annualized basis. These actions will be more visible in our financial results beginning in the second quarter.

Just the early impact of these changes affected G1 positively. When you exclude the cost of restructuring and other charges, it represents an adjusted EBITDA loss of $500,000, an improvement of $600,000 over Q4. We expect to see continued impact from these changes in Q2 and the balance of the year. We believe this will drive our annualized adjusted EBITDA breakeven level to under $9 million of annualized gross profit. We measure our performance on achievement of gross profit levels, not gross revenue.

We are certainly working to improve our margins and are diligently focused on areas where we can drive improvement through cost containment, efficiencies and revenue enhancements. Importantly, we have made considerable efforts to enhance the culture of the Company to one that is based on increased accountability and customer service. It is critical our people understand that we must perform today's tasks well to get the opportunity to participate in future projects. This is not visible in our current financial results, but a bedrock to drive future growth.

This leads to the second phase, operational performance. When I discuss this area, I am speaking about performance across all areas of the Company, including sales, support functions and those tasked with delivering our services to our customers. We are driving a number of improvements across the business, including increased focus on visibility in our day-to-day performance with enhanced reporting tools and measurements. Institutionalizing new processes takes time and we are rebuilding both our internal and external credibility regarding performance and better measuring results.

As an example, we now have significantly better visibility into our pipeline in these results. While our backlog was down in the quarter, we are better measuring the results by each service and each individual.

We continue to evaluate the performance within all areas of the organization and are making further adjustments to improve our efficiency and scalability. The combination of the cost measures we've taken and the process improvement I just discussed leads me to expect the second quarter to continue to show improvement in adjusted EBITDA, excluding the charges we mentioned, over the first quarter of the year. I believe that our continued focus on performance will drive further improvement throughout the balance of the year.

Although consistency remains an issue within our bookings, our monthly bookings have improved from the performance we saw in Q4 and early Q1. While we can't predict all the bumps in the road that may occur, I believe we are much better positioned to address near-term obstacles should they occur and make adjustments quickly along our path.

Finally, I can't stress enough we are very focused on growth initiatives. We continue to believe in the growth opportunities in front of us and have initiated a number of projects to better position us in our core markets and test adjacent market opportunities. While this is an area that may take some time to fully surface, we will approach them in a disciplined fashion and an eye on return on investment and risk management.

Without providing much detail at this stage, we are working on some strategic projects that can significantly leverage our core competencies in a number of areas that provide longer-term and enhanced recurring streams of revenue and profit. Further, we are looking at leveraging our sales efforts through a number of partnerships that will increase our access to new customers and broaden our geographic reach. This will enhance our sales efforts by developing these relationships and exponentially growing the number of people selling our services.

We are also actively recruiting new talent to enhance the areas that we feel are vital for us in the future. We continue to be bullish on our opportunity within the data center markets that we support as well as our ability to revitalize the Company and its performance to capture them.

In summary, we are executing along a path to success and we have made adjustments that we believe will deliver longer-term success, including improved adjusted EBITDA, growth in the gross profit of the backlog of our core businesses, and new and exciting high-growth opportunities.

I will now turn the call over to Tim Dec to walk through the numbers.

Thanks, Anthony. I will be presenting our first quarter 2012 results, along with both sequentially core comparisons.

We reported $14.3 million in revenue for the first quarter of 2012 as compared to $9 million in the fourth quarter of 2011 and $9.6 million for the first quarter of 2011. Our revenue breakdown for the first quarter in 2012 was technology consulting, $400,000 as compared to $500,000 in the fourth quarter of 2011; construction management, $8.7 million as compared to $4.8 million in the fourth quarter of 2011; and facility management, $5.2 million as compared to $3.7 million in the fourth quarter of 2011.

Gross profit totaled $2.1 million for the first quarter of 2012 compared with $1.5 million in the fourth quarter of 2011, a 40% sequential increase. Gross margin percentage was 14.4% in the first quarter compared with 16.3% in the fourth quarter of 2011. This decline in margin was reflective of a greater mix of revenue in our construction management division in the first quarter.

Our SG&A for the first quarter totaled $2.8 million, which included approximately $300,000 in restructuring costs, $200,000 in other items, which included severance, consulting and other related legal charges; and $85,000 in stock-based compensation. This compares with $2.70 in the fourth quarter of 2011, which included $64,000 in stock-based compensation and bad debt of $24,000.

Net loss for the first quarter of 2012 was $1.3 million or $0.09 per basic and diluted share compared with a net loss of $1.3 million or $0.09 per basic and diluted share in the fourth quarter of 2011. Our adjusted EBITDA loss for the quarter, which excludes interest, taxes, depreciation, amortization, stock-based compensation, provision for bad debt, and other income, was $1 million. This compares with adjusted EBITDA loss of $1.1 million in the fourth quarter of 2011 and a positive adjusted EBIT of $1.3 million in the first quarter of last year. In the first quarter of 2012, we incurred approximately $500,000 of restructuring and other charges I just discussed. Excluding those charges, our adjusted EBITDA loss for the first quarter of 2012 would have been $500,000.

Our backlog as of March 31 was $23.5 million compared with $35.3 million on December 31, 2011. The breakdown by division was technology consulting, $8 million compared to $8.5 billion on December 31; construction management, $9.3 million compared with $19.3 million on December 31; and facility management, $5.7 million compared to $7.5 million on December 31, 2011. This backlog includes approximately $8 million of backlog that we expect to realize in 2013 and beyond, and it also excludes any facility management contract renewals.

Turning to the balance sheet, we ended the quarter with a cash balance of $6 million and working capital of $5.6 million. We continue to carefully monitor our cash and working capital balances to ensure our maximum financial liquidity.

Before we conclude, I would like to spend a moment to remind you of some of the specific actions we took in the first quarter of this year to reduce expenses, right-sizing the organization, and position Fortress for long-term success. Among the changes we implemented were the consolidation of specific client-related roles, the reduction of 21 people within the Company, and the reduction in SG&A and other variable costs.

These actions resulted in annual savings of $2.8 million, of which roughly half will impact the SG&A line, with the initial benefits of these efforts to be seen in the second quarter and beyond. We will now open the call up for questions.

(Operator instructions). Bill Sutherland, Northland Capital Markets.

Thanks for taking the question. Curious about the marketing strategy as you reconfigure things there, which of the -- how you're positioning the business from the segment perspective and also from a vertical perspective. Thanks.

Sure. Well, first off, as we review our full line of services and we've discussed this with customers and so forth, the broad range of services that we provide in the way of consulting, design, build and maintain is very well-received by our customer base, and particularly when we are focused primarily on the data center space.

So, in regard to our go to market, we initiated some projects related to improving some of our marketing material and so forth. So we can enhance that messaging. But in general, we think we are positioned very well to take advantage of our core capabilities, and we think our overall capabilities resonate very well with our customers.

In respect to the verticals, we are definitely -- with some of the sales tools and visibility that we have, we are aligning work closely with some of the verticals that we believe will reap the most benefit for us. And we've begun a process of more carefully segmenting that group -- those verticals and defining various tools as we go to market that resonate more clearly with the verticals, be it the healthcare providers or enterprise data centers or other data cloud providers, etc. So that is part of the projects that we are underway on, but we've begun that process and will be pushing it forward very hard.

How do you find the competitive landscape as far as your capabilities? You're relatively small. Are you -- how do you go toe to toe with these guys?

Well, I think we touched on that a little bit before in our -- as it relates particularly to our construction management business. Many of the players in the construction management industry are very large players. And that has affected some of our near-term impact on that business. However, we believe that when we do the full suite of services in which we consult, design, build and maintain a facility, we offer our customers a single entity that they can go and utilize.

Now, again, on the construction management side, what has happened is as companies, the large construction companies have reinvigorated their mission-critical business lines, after the dot-com bust, we've seen that they have been very aggressive in the margin levels that they are willing to achieve to drive that business.

So as we look at that business, we look at it in a place where we can gain an advantage because we are providing a full suite of services. By just on the commodity level, just being a huge build company on some of these guys are willing to take deals that I don't think is a good use of our assets.

So the FM Group is still a primary focus as it began to be a year or two ago?

Absolutely. Our FM service business for a number of reasons -- it's a recurring stream of business for us. We are seeing growth both in brick-and-mortar facilities management, as well as modular data centers. We've begun to implement a deploy MDC strategy and product offering that takes advantage of both pre-deployment, deployment and post-deployment areas of modular data centers, modular containerized data centers. So we believe that our FM business line is very strategic for us going forward.

And the other big thing about it is, it's not as project-based. It's a recurring stream of business. So as we work through and do the arduous task of capturing new business, when we capture FM contracts, they tend to be -- while annual contracts, they tend to be multi-year in length, whereas some of the other services we provide, like construction management, tend to be very project-based. So you may work on an opportunity for a year and then in May last year and so you've spent all this time and energy developing that opportunity, but you don't get that recurring stream.

So we are very much looking at how can we extend the stickiness of our service business, and as I mentioned as well, we are also looking at some projects that I alluded to that are will allow us to even extend the service lives of both what we are doing from a facility management and consulting standpoint and the development of a deeper relationship in the container and modular side. So we think foundationally growing on a recurring stream of business and we believe it's there and the opportunities there is very important to us.

And then last, I was wondering about obviously the burn-off of the construction backlog is going to lead to a lower revenue number, I would think, for Q2, but not necessarily a downtick in gross profit quarter over quarter?

Yes, well, we don't provide specific guidance into the forward quarter. We are very much focused on the quality of the gross profit within our backlog. And we feel like we've made some improvements in our bookings level over what was happening sort of the prior five months at the end of Q4 and the beginning of Q1 to offset now some of the gross margin dollars that we've been booking the past couple of months.

Okay. Thank you.

(Operator instructions).

Okay. Well, it appears that we don't have any more questions this afternoon. So I would like to thank everyone for your participation in this call. We are making headway against our efforts to build a stronger organization, and we look forward to what the future holds for our Company. Thank you very much.

Ladies and gentlemen, this does conclude the Fortress International first quarter financial results conference call. Thank you again for your participation, and you may now disconnect.