TSS Inc (TSSI) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Fortress International second-quarter earnings conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for your questions. (Operator Instructions). Today's conference is being recorded August 14, 2012. I would now like to turn the conference over to Lee Roth. Please go ahead.

Thanks, Alicia, and once again, good afternoon, everyone. Thank you for joining us on Fortress International Group's conference call to discuss second-quarter 2012 financial results. Joining me this afternoon from management of Fortress are Anthony Angelini, Chief Executive Officer; and Tim Dec, Chief Financial Officer.

Before we begin the call, I like to remind everyone to take note of the cautionary language regarding forward-looking statements contained in the press release we issued following the close of trading today. That same language applies to comments and statements made on today's conference call and during the Q&A session.

This call will contain time-sensitive information as well as forward-looking statements, which are only accurate as of today, August 14, 2012. Fortress International Group expressly disclaims any obligation to update, amend, supplement, or otherwise review any information or forward-looking statements made during this conference call to 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 our future performance, please refer to the Company's periodic filings with the US Securities and Exchange Commission.

In addition, during this call 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 US GAAP is included in today's press release.

With that, it's now my pleasure to turn the call over to Anthony Angelini, Chief Executive Officer. Anthony, go ahead, please.

Thank you, Lee, and thank you all for attending this call. We'll use our time today to update you on the status of some of the elements of our turnaround plan that was implemented at the beginning of the year, and I will give you my thoughts on how we are positioning Fortress for the future.

In the first and second quarters we introduced a number of initiatives aimed at refining our business model, improving our cost structure, and gaining greater visibility into our day-to-day performance. While we continue to strive to improve in each of the areas mentioned, and the work is not complete, I am happy to say that our improved performance in the second quarter demonstrates the early effectiveness of these initiatives and the initial benefits of our turnaround program.

In the second quarter we achieved positive adjusted EBITDA, representing a significant improvement over the prior two quarters. Our expectation is that over the next couple of quarters we'll see results ranging from a moderate, adjusted EBITDA loss to around breakeven. This is based on the timing of closure of opportunities within our pipeline, our continued investment in new initiatives, as well as the realization of cost efficiencies within our operations.

We continue to focus on gross margin maximization and building on more profitable and recurring business lines. Our plan of consists of multiple phases and collectively establishes a foundation for sustainable long-term growth and profitability. The plan is based on stabilizing the core business and developing new models to extend our reach in the marketplace. While I am certainly pleased with our Q2 performance and believe we have stabilized the business while demonstrating a pretty significant turnaround compared to six months ago, we still have work to do in order to realize a consistent and scalable process going forward.

As a point, we are wrapping up a large Construction Management project in the third quarter, and the wind-down of that project will have an impact on sequential revenue and gross profit in the coming quarters. However, we have also captured the facility management business at this location. This will provide an ongoing stream of revenue for this site within our business.

I will note that while we continue to shift to more recurring streams of revenue, we do believe that Construction Management business provides a platform toward those future streams and the overall lifecycle of data centers. We continue to focus on the core business of consulting, designing, building, and maintaining data centers. We are working diligently to improve these offerings and ensure our customers get world-class performance when they engage with us. We continue to monitor our pipeline closely, and there are a number of large opportunities that we are hopeful to win over the next several months.

Our summer bookings levels were not as robust as we saw in the spring, but still, as we move into September and the Fall, much of this can improve, with several opportunities that we feel we have a higher probability of winning. We continue to develop the organization and its capabilities to seek additional talent as we redevelop this core asset of the Company. We are a people business, and our success is dependent on retaining and acquiring the best talent possible.

We have several strategic initiatives underway that are focused on extending our core competencies into new relationships that will transform our business over time. I will say that these initiatives are taking a little longer than I would have initially thought but are progressing nicely.

First, we are working on developing sales channels that allow our partners to sell our service offering more broadly. We feel that with then expanded channel of representation, we will maximize our market reach in the most efficient method possible. We anticipate utilizing a number of partners as we roll this out.

Next, we are looking at a number of areas to develop our broader reach into the management of data centers. These opportunities will require longer-term commitments of resources on our part but will also represent longer-term revenue streams. In this area we have focused on both traditional centers as well as modular solutions.

We made a great deal of progress in the first half of 2012, and we believe that our strategy and cost structure improvements position Fortress for growth as we continue to progress our initiatives and at driving long-term, sustainable profitability. I continue to be very excited about the future prospects for this business and our ability to build this organization into a much larger enterprise.

Finally, as we announced earlier today, I would like to welcome Dan Phelps to our Board of Directors. Dan brings a wealth of experience to the Company and will be a great addition to our Board as we move forward on our strategy and scaling the business.

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

Thanks, Anthony. I will be presenting our second-quarter and first half of 2012 results, along with sequential comparisons. We reported $15.5 million in revenue for the second quarter of 2012 as compared to $14.3 million in the first quarter of 2012, and $10.5 million in the second quarter of 2011.

Our revenue breakdown for the second quarter of 2012 was Technology Consulting, $400,000 as compared to $400,000 in the first quarter of 2012; Construction Management, $9.5 million as compared to $8.7 million in the first quarter of 2012; and Facility Management, $5.6 million as compared to $5.2 million in the first quarter of 2012.

Our gross profit totaled $2.3 million in the second quarter of 2012 compared with $2.1 million in the first quarter of 2012, a 10% sequential increase. Gross margin was 14.8% in the second quarter compared with 14.4% in the first quarter of 2012. This improvement in gross margin was reflective of a slight shift in our quarter's revenue mix, which saw a higher percentage of total revenue generated from our FM business.

Our SG&A for the second quarter totaled $2.8 million, which included $55,000 in bad debt expense and $58,000 in stock-based compensation. This compares with $2.8 million in the first quarter of 2012, which included approximately $279,000 in restructuring costs; $135,000 of other one-time items; and $85,000 in stock-based compensation.

In the second quarter we recognized a non-cash impairment loss on goodwill and other intangibles of $2.1 million. This impairment -- following an evaluation of the fair value of our goodwill, with a significant weighting placed on the market value of our equity.

Net loss for the second quarter 2012 was $2.3 million, or $0.16 per basic and diluted share, compared with a net loss of $1.3 million or $0.09 per basic and diluted share in the first quarter of 2012. Our net loss for the second quarter of 2012 included the effect of the non-cash impairment charge I just mentioned, with no such charge recognized in the first quarter.

Our adjusted EBITDA for the quarter, which excludes interest, taxes, depreciation, amortization, impairment, stock-based comp, bad debt, and other income, was a positive $55,000. In the second quarter of 2012 we incurred approximately $96,000 in other one-time charges.

Excluding these charges, our adjusted EBITDA for the second quarter would have been $150,000. This compares with adjusted EBITDA loss of $500,000 in the first quarter of 2012 and a positive adjusted EBITDA of $1.3 million in the second quarter of last year.

We reported $29.9 million in revenue for the first six months of 2012 as compared to $20 million in the first six months of 2011. Our revenue breakdown for the first half of 2012 was Technology Consulting, $900,000 as compared to $1.6 million in the first half of 2011; Construction Management, $18.2 million as compared to $9.1 million in the first half of 2011; and Facility Management, $10.7 million as compared to $9.4 million in the first half of 2011.

Gross profit totaled $4.4 million in the six months ended June 30, 2012, compared with $8 million in the six months ended June 30, 2011. Gross margin was 14.7% in the first half of 2012 compared with 39.8% in the first half of 2011. Our gross margin in the first six months of 2011 was driven by a higher-margin CM project, which we completed last year.

Our SG&A for the six months ended June 30, 2012, totaled $5.3 million, which included $55,000 in bad debt; $135,000 in severance; $279,000 in restructuring costs; and $146,000 in stock-based compensation. This compares with $5.8 million in the six months ended June 30, 2011, which included approximately $90,000 in bad debt; and $292,000 in stock-based compensation. Our results for the six months ended June 30 also included the effects of the $2.1 million non-cash impairment loss on goodwill and other intangibles that I just discussed.

Net loss for the six months ended June 30, 2012, was $3.5 million or $0.25 per basic and diluted share, compared with net income of $3 million or $0.22 per basic and $0.21 per diluted share in the six months ended June 30, 2011. Our adjusted EBITDA for the six-month period, which excludes interest, taxes, depreciation, amortization, impairment, stock-based comp, lease exit costs, bad debt, and other income was a loss of $970,000.

In the first six months of 2012 we incurred approximately $600,000 in restructuring and other one-time charges. Excluding those charges, our adjusted EBITDA loss for the six months of 2012 would have been $700,000 -- excuse me, $400,000. This compares with adjusted EBITDA of $2.6 million in the six months ended June 30, 2011. Our backlog as of June 30 was $19.1 million compared with $23.5 million on March 31, 2012.

Briefly turning to the balance sheet, we ended the quarter with cash balance of $5.7 million and working capital of $5.6 million. We continue to carefully monitor our cash and working capital balances to ensure maximum financial liquidity.

Before we conclude, I'd like to remind you that the actions we took in the first half of 2012 to reduce expenses, right-size the organization, and position Fortress for long-term success have resulted in cost savings of approximately $2.8 million on an annualized basis. Roughly half of these cost reductions impacted the SG&A line, and we saw the initial benefit of these efforts in the second quarter, as evidenced by our positive adjusted EBITDA.

With that, I will open the call up for questions.

(Operator Instructions). And I'm showing no questions in the queue at this time. I like to turn the conference back to management.

Okay. Well, thank you very much. I want to thank everyone again for your participation this afternoon. We are making progress in our efforts to build a stronger organization. We're pleased with our second-quarter accomplishments, and we look forward to what the future holds. Again, thank you, and with that, we'll sign off.

Ladies and gentlemen, that does conclude our conference for today. If you would like to listen to a replay of today's conference, you may do so by dialing 1-800-406-7325 or 303-590-3030 and entering the access code of 4558417 followed by the pound sign. Thank you for your participation. You may now disconnect.