Wipro Ltd (WIT) 2003 Q3 法說會逐字稿

Good afternoon, and welcome to the Infocrossing third quarter 2003 earnings conference call. At this time all lines have been placed on a listen-only mode and the floor will be open for questions following the presentation. At this time it is my pleasure to turn the floor over to your host, Mr. Matt Hayden. Sir, you may begin.

Thank you very much. I'd like to take a moment to thank everyone for joining us today for Infocrossing's 2003 fiscal third quarter conference call. The call will be hosted by Zach Lonstein, Infocrossing's Chairman and CEO, as well as William McHale, Senior Vice President of Finance. Following management's discussion we will open the call to questions. Before we get started I'm going to review the Safe Harbor statement. This conference call today contains forward-looking statements within the meaning of section 21-A of the Securities and Exchange Act of 1934 as amended.

As such, final results could differ from estimates or expectations due to risks and uncertainties, including but not limited to incomplete or preliminary information, changes in government regulation and policies, continued acceptance of the company's products and services in the marketplace, competitive factors, technological changes, the company's dependence upon third-party suppliers, intellectual property rights and other risks. For any of these factors the company claims the protection of the Safe Harbor and forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.

Now let me be the first to congratulate the company on another solid quarter of growth and revenue, EBITDA, which is earnings before interest, taxes, depreciation, and amortization, and net income. And especially on closing a $76.5 million private placement and recapitalization of the company's balance sheet. Congratulation on your success, gentlemen. At this time I'd like to turn the call over to Zach Lonstein. Zach, go ahead.

Thank you, Matt, and thank to you everyone who has joined the call today. If you have joined us for previous calls, you know that the redeemable preferred stock and its effects on our balance sheet and earnings have been an ongoing discussion with our shareholders. We're pleased to have closed the $76.5 million private placement and subsequent redemption of the preferred stock on October 21st. I'm sure that you're eager to hear more about these transaction and I'll discuss the benefits in more detail later in the call, but first I'd like to review our results for the third quarter and nine months ended September 30, 2003. I'm very pleased to report that the company delivered another strong quarter of growth in our key performance measures including revenue, EBITDA, and net income.

Revenue for the quarter increased 9.4% to 14.1 million compared to 12.9 million for the same quarter last year. EBITDA increased 50% to 2.7 million for the third quarter of 2003 from 1.8 million for the same quarter last year excluding a 0.3 million reversal of accrued expenses related to closing costs of certain facilities that was recorded in the third quarter of 2002. Further, net income also increased significantly for the third quarter to 451,000 compared with a net loss of 320,000 during the third quarter of 2002, excluding the 0.3 million in accrued expense reversal. Our performance for the first nine months of the year was equally impressive.

EBITDA during the period increased 112% to 7.4 million from 3.5 million during the first nine months of 2002. EBITDA for the first nine months of 2003 excludes 0.3 million of nonrecurring professional fee expenses recorded in the second quarter of 2003 related to strategic corporate activities. EBITDA for 2002 excludes 2.8 million of expense credits recorded in the first quarter of last year related to the settlement of a dispute with a software licenser as well as the $3 million reversal of accrued expenses related to the closing cost of certain facilities. Our revenue for the nine months reached 40.8 million representing a $9.2 million increase over the first nine months of 2002. Additionally we reported net income of 1.1 million for the first three-quarters of 2003 compared with the net loss of 2.5 million for the same period in 2002.

Again excluding the nonrecurring items noted above. Net cash provided by operations was 3.8 million for the first nine months of 2003 compared with net cash used in operations of 0.8 million during the same period last year, a $4.6 million improvement. Increased revenues, strong operating leverage, and productivity gains were the principal reasons for the solid improvement. As mentioned in previous calls we believe EBITDA, a common financial metric as a measure of the company's ability to generate cash from operations. The reconciliation of net income to EBITDA is available in the press release posted to our website. With the closing of the private placement and recapitalization we look forward to reporting earnings per share in the future. I'd like to now turn the call over to Bill McHale who will provide more detail on the results for the third quarter and first nine months of 2003.

Thanks, Zach. As Zach had indicated revenue for the third quarter ending September 30, 2003, increased 9.4% to 14.1 million compared to the same quarter of last year. Year to date revenue increased 9.2% to 40.8 million compared to the same period of last year. Before we run through some of the specific line items on the income statement, I believe it's important to note that both our operating and SG&A costs remained relatively flat third quarter versus third quarter a year ago, while revenue increased over $1 million. Our third quarter operating costs were 8.9 million, or 62.8% of revenue compared with 8.6 million, or 66.9% of revenue in the third quarter 2002.

Year to date operating costs were 25.8 million, or 63.3% of revenue, compared with 26 million, excluding the 2.8 million dollar credit relating to the settlement of the dispute with a software vendor, or 69.6% of revenue for the same period last year. SG&A costs decreased as a percentage of revenue from 19.2% in the third quarter 2002 to 18.2% of revenue in 2003. On a year-to-date basis SG&A costs decreased from 21% of revenue in 2002 to 18.6% of revenue in 2003, excluding the 0.3 million of nonrecurring expenses for professional fees. For the third quarter we reported a net loss to common shareholders of $2.1 million or 39 cents per share, an improvement from the loss of 2.4 million and 44 cents per share in 2003.

The net loss of 2002 includes the benefit of a 0.3 million reversal of accrued expenses related to the closing cost of certain facilities. The net loss to common shareholders includes non-cash items for accretion on redeemable preferred stock and a cumulative preferred stock dividends totaling 2.6 million or 47 cents per common share for the third quarter 2003 versus 2.3 million or 44 cents per common share for the same quarter of 2002. For the nine months ended September 30, 2003 we reported a net loss to common stockholders of $6.7 million, or $1.24 per common share compared with a net loss of 6.3 million or $1.18 per common share in 2002. The net loss in 2003 includes non-recurring expenses for professional fees of 0.3 million.

The net loss in 2002 includes the benefit of 3.1 million from the expense credits related to the settlement of the dispute with the software licensor and a reversal of 0.3 million of accrued expenses related to the closing of certain facilities. The net loss to common stockholders includes noncash items for accretion on redeemable preferred stock and accumulated preferred stock dividends totaling 7.5 million or $1.39 per common share for the first nine months of 2003 versus 6.9 million or $1.29 per common share for the same period in 2002. With that let me turn the call back to Zach Lonstein to discuss the private placement and recapitalization.

Thanks, Bill. Now that we've reviewed the results for third quarter and first nine months of the year, I'd like to take a moment to discuss the private placement and recapitalization completed on October 21st and what it means for our shareholders and the overall growth in our business. As you may know, in 1999/2000 we decided to enter the Internet data center market and subsequently raised $60 million by issuing preferred stock and warrants to DB Capital and Stanley Capital. While the money funded the expansion of our infrastructure the Internet business model didn't generate significant revenue growth.

In 2001 we refocused our attention to our core market of IT and business process outsourcing, restructured the management team, and began the process of rebuilding the business by refocusing on the fundamentals of revenue growth, profitability, and earnings per share. Since we returned to our outsourcing business plan in 2001 revenue has more than doubled through strong organic growth and a strategic acquisition and we've realized sufficient leverage on our incremental revenue to return to EBITDA profitability and positive cash flow from operations. However, our financial statements were adversely affected by noncash charges for accretion and accrued dividends with respect to preferred stock. On October 21 we successfully completed a $76.5 million private placement of 9,739,111 shares of common stock and warrants to purchase 3,408,689 shares of common stock at 7.86 per share.

The proceeds of this private placement will be used to recapitalize the company's balance sheet. The company used 55 million of these proceeds and issued 25 million of new 9% five-year notes in exchange for all the outstanding series A cumulative convertible participating preferred stock through 2008 and series A warrants exercisable for 2.8 million shares of common stock. The company also repaid all 11.9 million in aggregate principal amount outstanding of its 12% senior subordinated debentures due 2005 and cancelled 937,500 warrants to purchase common stock originally issued to the debenture holders. This recapitalization greatly improved our balance sheet by converting a shareholders deficit of 16.7 million to positive shareholder equity of 30.7 million on a pro forma basis as of June 30, 2003, an improvement of 47.4 million. These adjustments are detailed in our 8-K filed on October 22, 2003.

Further, this recapitalization will simplify our income statement by eliminating the reductions to net income related to accretion on the preferred stock and accumulating preferred stock dividends beginning in fourth quarter of 2003. As a result, we expect to have positive earnings per share in the fourth quarter of 2003 and in fiscal 2004. In our Form 10-Q which we expect to file tomorrow, we will provide more details about the benefit of the recapitalization. The success of this transaction not only benefits our shareholders but provides Infocrossing with a stronger position for future growth. In 2002 we signed 22 million new contracts.

Through October of 2003, we have received new revenue commitments exceeding 37 million over contract terms ranging from 2 to 7 years including 11 million in commitments added since the end of the second quarter. With the success of the recapitalization, we expect to add significantly to these commitments, thereby accelerating our growth in the fourth quarter so that we may begin 2004 with strong momentum. Now before taking any questions, I just would like to remind everyone that the company has a registration statement in process covering the stock, and the stock issuable upon the exercise of the warrants acquired by the investors in the recent private placement. Accordingly, it may not be appropriate for us to answer certain types of questions. If you ask them, I apologize in advance if I can't answer them. Thank you for your cooperation and understanding, and now I'd like to open the call for questions.

Thank you. The floor is now open for questions. If you have a question please press the number 1 followed by 4 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the pound key. Questions will be taken in the order they're received. We do ask that while you pose your question that you pick up your handset to provide the best sound quality. Please hold while we poll for questions. Thank you. Once again that's 1 followed by 4 for any questions at this time. Thank you. Our first question is coming from Willard Brown of spectrum investment. Your line is live.

Hey, Zach.

Hey, Willard, how are you?

Good. Let me ask you a question that kind of skirts, okay, you knew I was going to do this, but let's just take the quarter that you just announced, okay, the 14 million in revenues, and your income from operations was 1.1 million. Going back to prior calls, I'm sure you recall this, you were talking about incremental revenue having operating margins in the area of 40 to 50%. I believe I'm remembering correctly.

Right.

Is that correct?

Right.

Let's just take 50%, because it's easy.

It's simple.

Now, this is hypothetically, and I'm just trying to get an arithmetical model here, but, in fact, you 16 million, would that have meant that you might have reported something like two million in income from operations? I mean, is that the kind of leverage we're dealing with here?

Well, Willard, I think what I said, I'm pretty clear, was that we would have 50% margin on EBITDA, from an EBITDA point of view. So if, hypothetically, we did 16 million versus 14 million we would have generated, I believe, another million dollars in EBITDA for the quarter. So that's the kind of numbers we're talking about.

Well, yeah, I mean, the only difference, before depreciation and amortization, but actually the depreciation and amortization is already there, so, I mean, I think it's apples to apples, is it not?

I believe you're correct, Willard.

The second thing is, one of my colleagues talked about an article in Barrons on IBM. I'm sure you've answered this question several times already, but it appears that IBM is getting into different areas of computer outsourcing business. I think one of the things was in employee services, that does have a computer aspect to it.

Right.

Is, in fact, IBM getting into the same business that you're in?

You mean the outsourcing business?

Yes.

Just plain operations management?

Yes.

Actually they've always been in that.

I'm really talking about the size.

You mean moving downstream?

Yes.

We don't see IBM at all from a competitive point of view. There's no contracts that we've bid on this year that I'm aware of where IBM put in a competitive bid, or even a non-competitive bid.

Who are your major competitors here? In fact, are there any national competitors like yourself in this particular market?

We pretty much have the niche. I wouldn't say, I hate to be so precise, but when we talk about half million to $3 million a year contracts, there is no one that we see consistently. We see west coast companies sometimes, middle American companies sometimes, but primarily it's usually, we're often the sole vendor, and the question is can we come up with a compelling enough value proposition to win the business and now that, in the past, I think corporate viability has been a tremendous negative against us, and now with the recapitalization we've eliminated that. So if any of our salesmen are listening, there's no more excuses for not closing any account.

Gotcha. Thank you.

Thank you, Willard.

Our next question is coming from Patrick Walker of Walker Smith Capital.

Hey, Zach, how are y'all?

Okay, Patrick. How are you?

Doing well, thank you. Looks like a great quarter.

Thank you very much.

I guess if you could comment on what the top line looks like and how that is versus your expectation and if there was any affect caused by the transaction in terms of delaying anything or obviously adding 11 million this quarter is a good number, especially compared to 2002, and 2003 verse 2002 looks like a lay-down, but at the same time I guess, quarter to quarter it looks like maybe it wasn't as strong as the first two quarters, and I just wanted to hear you characterize the pipeline as it stands now.

Well, we thought the third quarter was actually pretty good from a revenue commitment point of view. And we're optimistic that the fourth quarter is going to meet our expectations overall, which would probably make it the best quarter of the year. Our revenue pipeline remains very strong. So we think with the, I don't want to just keep repeating this, but with the corporate viability issue eliminated, it should even accelerate our ability to close business, because traditionally, typically, just at the point of where we've gotten to close a situation, someone's brought up the issue of corporate viability, and often we got by it, but it usually delays the close by a couple of weeks, a month, and sometimes indefinitely. So we've already started to get some positive feedback on that, or the absence of feedback on that issue.

All right. I bet that's a nice thing to not hear.

It's a very nice thing. Sometimes silence can be great.

How many different clients were represented by the 11 million and or any change in the average deal size or price or terms in that?

I don't know how to answer that question specifically. The clients have ranged from half a million dollars a year, again, to a million and change a year. Yeah, to a million and change a year. Very typical in the third quarter.

So it wasn't driven by any small number of big deals, it was kind of your bread and butter.

It was pretty, right in our sweet spot.

Well, thanks a lot, and congratulation again.

Thanks again, Patrick.

Thank you. Our next question is coming from Paul Connelly of Southwell Partners.

Good afternoon.

Hi, Paul.

You had previously put out guidance in 8-K where you thought revenue for the full year of '03 was going to be in the range of 57 to 60 million and that EBITDA was going to be somewhere in the range of 10.5 to $12 million with net income being roughly 1.9 to 3.4. Do you still feel comfortable with that guidance?

I just want to correct you about one thing. The EBITDA guidance was 10.3 million, a minor point, but not 10.5 to 12 million. And the answer is yes, we're standing by our guidance for the full year.

Following up on Patrick's question regarding the pipeline, the $11 million that was added in the quarter, what percent, if any, represents existing clients who have just renewed contracts versus new customers altogether?

Yeah, Paul, that's one of those questions that we haven't been asked or answered in the past, so we've just been given the wave not to create any new ground at this point in time. I don't know why it's such a big deal, I don't think it's a big deal at all to answer that question. But we haven't answered that in the past

It's fair to assume then that it is a mix of both existing clients rolling over contracts and new clients?

No, it's, if the attorneys get me for this, but it's all new business. It's not renewal of old business at all. Renewal of old business we consider other. So it's all new business.

Okay. And could you just comment just quickly regarding what the fully diluted share count is as of 9/30, post-financial transaction?

Yeah. The fully diluted share count is going to be 16,355,000, post-transaction. Is this the case? Yeah, that's based on $10 share price.

Okay. Great. Thank you very much. I appreciate it.

Sure.

Thank you. Our next question is coming from Randy Gwertman of Baron Capital.

Hey, guys. Good quarter. I just wanted to try to get some color on how you look at the pipeline going forward, how your sales force has changed their tactics given the refi and whether you see, you talked about some acceleration but can you give a little description?

Actually, the one thing I will say, as I said before, our revenue pipeline remains very strong. We are optimistic that there is a fair amount of additional business coming in this quarter, this being the fourth quarter. The pipe just closed October 21st, about three weeks ago. We did get positive feedback from a couple of prospect, more than positive feedback, that our new financial viability encouraged them to either give us the positive indication or actually a commitment that they would not have been able to give us previously. But in this short period of time, there hasn't been a rush through the door. It's not that kind of business. On the other hand I'm very optimistic that this is going to have a very material impact on our growth going forward. In a number of ways, but not the least of which is from new prospects, who will view us, I think, with heightened respect and confidence.

Zach, is there a way to kind of balance the market opportunity for the kind of client size that you have in terms of annualized revenue for those types of potential customers?

I'm not sure I understand what you mean.

In terms of total, all the companies, I assume you've done some market research in terms of the companies of the size that you're targeting and the types of projects that they have and just getting a sense of the overall market size that you could address.

The companies that we target literally the largest companies in the country, and within the range of reasonableness, I don't think that there is a limiter on the amount of business in the near future. If we were a $10 billion company and needed to sign $2 billion in new business maybe there would be a limit, but I think almost every company can outsource some aspect, we could, of their IT processing and save money and have a benefit. And I saw a CIO magazine poll said that 87% of CIO's expect to outsource some aspect of the processing over the next three years. So I think the market is very, very large, certainly in context to our overall size. I don't think there's a limitation in the near future.

Great. Thank you.

A practical limitation.

Thank you very much.

Thank you.

Thank you. Our next question is coming from Jonathan Art of Kaufmann Fund.

Hi, Zach, my question is related to the pipeline. I think you've answered them.

Thank you, Jon.

Thank you. Our next question is coming from Fred Milligan of Sanders Morris Harris.

Zach, how are you this

Okay, Fred. How are you?

Good. Since you've now gotten heightened respect and confidence, are you going to be adding new people, particularly in sales?

The answer is, we've budgeted to expand our sales force and we expect to increase it over time. We're not going to add ten new salesmen at one time because, as I may have mentioned in the past, a salesman is not really effective in the near term because there's a relatively long lead time to new sales and so we want to make sure that we don't expend a lot of money in the near term and damage our earnings per share growth. But the answer is yes. The short answer is, yeah, we expect to continue to build our sales force. We think direct sales and channel sales are very important, organic sales are very important part of our growth strategy.

Another thing, beginning in the next quarter, I guess it would be a good time to do it, would you be reporting on a pro forma basis so that you're comparing apples to apples?

Pro forma basis being what?

Meaning that the old preferred stock, adjusting it for the new common and whatever.

If the accountants tell to us do that, but I think we'd like to just report it simply. Now that we've cleared the weeds out, so to speak, we just want to report as clearly and as completely as we can.

That's the point.

I think you'll see the revenue growth and the earnings growth will be obvious, straightforward.

Okay.

I'm not sure, again, Fred, that's begging the question.

No, I understand.

What accretion would have been?

Yeah, exactly, what it would have been if the circumstances were similar in both instances.

All right. If it helps to clarify the situation, and they allow us to do it, but I think really the question is what are the numbers now.

Okay. I realize that. Okay. Thank you.

Sure.

Thank you. Once again that's 1 followed by 4 for any questions at this time . I'm showing no further questions at this time. I'll now turn the call back over to management for any further or closing comments.

The only closing comments I have are for all of those investors who invested with us in the past and currently, I thank you all for your confidence, and we expect to reward you, and ourselves. Thank you again for listening in.

Thank you. That does conclude this afternoon's teleconference. You may disconnect your lines and have a wonderful day.