Wipro Ltd (WIT) 2003 Q4 法說會逐字稿

Good morning and welcome to the Infocrossing fourth quarter and year-end results conference call. At this time, all participants are on a listen-only mode. It's now my pleasure to turn this over to your host, Mr. Brett Moss (phonetic). Sir, the floor is yours.

Thank you very much. I would like to take a moment and thank everyone for joining us today for Infocrossing's fourth quarter and fiscal 2003 year-end conference call. The call will be hosted by Zach Lonstein, Infocrossing's Chairman and CEO, and William McHale, Senior Vice President of Finance. Following management's discussion, we'll 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-E of the Securities 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 regulations and policies, continued acceptance of the Company's products and services in the marketplace, competitive factors, new products, technological changes, the Company's dependence upon third party suppliers, intellectual property rights, difficulty with the integration of SMS, the previously-announced pending acquisition, 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 reporting positive earnings per share for the fourth quarter of 2003 and the solid revenue and EBITDA growth for the year. At this time, I would like to turn the call over to Zach Lonstein. Zach?

Thank you, Brett, and thank you to everyone who has joined the call today.

As Brett just mentioned, Infocrossing reported positive averages of 8 cents per diluted common share for the fourth quarter ended December 31, 2003. This marks the first time that Infocrossing has reported positive earnings per shares since the third quarter of 1999, and it is a trend that we expect to continue in 2004 and beyond. Will McHale will provide more details on the results for the quarter and the full year. But I want to take a moment to reflect on the achievements of the company in 2003.

We entered the year with solid momentum as a result of the greater scale and capabilities gained through the acquisition of AmQUEST in 2002. We focused our resources on a growing market driven by companies that wanted the financial, technology and business benefits of outsourcing without losing control over their IT operations. The market embraced our value proposition, resulting in Infocrossing adding more revenue and business in 2003 than in any other year.

Companies such as the Readers Digest Association and Sotheby's outsourced their mainframes to Infocrossing during the year, and companies such as Car Toys, and a Fortune 500 auto parts manufacturer, and New York and Company, a retailer with over 500 stores throughout the U.S., outsourced entire corporate data centers to Infocrossing in 2003. The success of our sales team in adding these and other clients resulted in Infosourcing reporting record revenue of $55.2 million for the year, and the revenue growth, together with the leverage of our data center infrastructure resulted in EBITDA growing to $10 million in 2003. The results reflect the strength of our strategic outsourcing value proposition and a greater awareness of Infocrossing in the market.

In October 2003, we took another major step in our growth strategy by raising $76.5 million in a private placement and we used the funds to restructure our balance sheet. The recapitalization eliminated $2.4 million of accretion and dividends to preferred shareholders in the fourth quarter of 2003, and increased shareholder equity by $43 million to positive $30.8 million at December 31, 2003, compared with a negative $12.2 million at December 31, 2002.

The revenue growth throughout the year, the operating leverage of our data center infrastructure, and the recapitalization enabled Infocrossing to return to positive earnings in the fourth quarter of 2003. We ended the year with record revenue, record EBITDA, increased cash flow from operation, increased shareholder equity, and in the fourth quarter, we delivered positive earnings per share.

Now, let me turn the call over to Bill McHale to provide greater detail on our financial performance for the fourth quarter and the year. Bill?

Thanks, Zach.

For the fourth quarter, Infocrossing reported revenue of $14.4 million, a 7 1/2% increase, compared to the $13.4 million recorded for the fourth quarter of 2002. The growth in revenue was the result of sales growth, new and existing customers, and continued demand for our strategic outsourcing services. EBITDA increased 24.2% to $2.8 million in the fourth quarter of 2003, compared with $2.2 million reported last year.

Net income to common stockholders was $1.2 million, or 8 cents per diluted common share, compared to a loss of $1.8 million or 34 cents per common share for the fourth quarter of 2002. The earnings for the current quarter included a credit to accretion of $.6 million or 4 cents for diluted common share, reported in connection with the redemption of our C-grade preferred stock during the fourth quarter of 2003.

The weighted average number of shares for 2003 reflects the issuance of 13,447,800 shares and equivalents of a private placement completed in October. Earnings for the fourth quarter also benefited from the elimination of $2.4 million in accretion and dividends to preferred shareholders as a result of the redemption.

For the full-year, Infocrossing reported revenue of $55.2 million, the highest in the company's history and an 8.8% increase over the $50.88 million reported for fiscal 2002. EBITDA grew to $10 million for 2003, compared with $8.8 million reported for 2002. EBITDA for 2002 included a one-time $2.8 million expense credit reported in the first quarter of last year, related to the settlement of a dispute. Excluding this nonrecurring credit, EBITDA would have been $6 million for 2002.

During the year, net cash provided by operations increased 374% to $5.9 million, compared to $1.3 million generated from operation the last year. Working capital improved from $2.1 million to $8.2 million.

We use EBITDA because we consider such information an important supplemental measure of company performance and we believe it is frequently used by security analysts, investors and other interested parties in the evaluation of companies in the comparable market capitalization for the company. Many of those use EBITDA when reporting their results. 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. For the year, we reported a net loss to common stock holders of $5.5 million, or 76 cents per common share, compared with a net loss of $8.2 million or $1.52 per common share in 2002. The net loss in 2002 includes a one-time gain of $2.8 million from the expense credits related to the settlement of the dispute.

The net loss to common stock holders includes non-cash items for accretion on redeemable preferred stock and accumulative preferred stock dividends, totaling $6.9 million, or 94 cents per share for 2003, verses $9.3 million or $1.74 per common share for the same period of 2002. Year-to-date operating costs were $36.7 million, or 66 1/2% of revenue, compared with $33.4 million in 2002, which, again, includes the $2.8 million one-time credit relating to the software settlement, or 65.6% of revenue. Excluding the nonrecurring credit, operating costs would have been $36.2 million in 2002.

SG&A costs decreased as a percentage of revenue from 17.8 % in the fourth quarter of 2002 to 15% of revenue in 2003. For the year, SG&A costs decreased from 17 1/2% of revenue in 2002 to 15 1/2% of revenue in 2003.

Turning to the balance sheet, we successfully recapitalized the Company during 2003, approving shareholders' equity from $43 million to a positive $30.8 million at December 31, 2003, compared with a negative $12.2 million at December 31, 2002. We also ended the year with over $10 million in cash and equivalents.

Certainly we are pleased with our financial growth, financial performance, including the record revenues and EBITDA, but the recapitalization efforts truly represent a key milestone in our company's development and sets the stage for improved performance in the years ahead. Moreover, as we discussed in our conference call following our third quarter, we believe that recapitalization will simplify our balance sheet going forward, and most importantly, the recapitalization enables us to eliminate $11 million in accretion and dividends in 2004 and beyond.

With that, let me turn the call back to Zach Lonstein to discuss the proposed acquisition of SMS and its benefits to the Company going forward.

Thanks, Bill. Now that we've reviewed the results for the year and the fourth quarter, I would like to take a moment to discuss the proposed acquisition of SMS, which was announced on March 4.

SMS is an IT outsourcing company headquartered in Orange County, California, that provides computing operations, business process outsourcing, and managed application services to nearly 40 clients. SMS is complementary to Infocrossing. We provide similar services to companies, primarily in the western United States.

On March 4th, we announced that we planned to acquire SMS for $36.5 million in cash and Infocrossing stock. We expect this acquisition to add approximately $33 million to our gross revenue during the first 12 months following the close of the transaction. Further, we believe this acquisition will be accretive on an earnings-per-share basis during 2004 and beyond.

This acquisition is an important step in our growth strategy. We have successfully built Infocrossing into a strong regional provider of outsourcing services by redefining how companies outsource their computing operations. With the addition of SMS, SMS's experienced leadership team, we have the infrastructure and skills to deliver improved value for our clients and shareholders, and realize our vision of becoming the recognized leader amongst providers as strategic outsourcing services in the United States.

We're really very proud of the results for the year and the steps we've taken to position the Company for continued success. The acquisition of AmQUEST in 2002, the consistent revenue growth and prudent expense management, the recapitalization of our balance sheet and the planned acquisition of SMS, have all strengthened our business and solidified our position in the outsourcing market. We look forward to leveraging successes and continuing our growth in 2003.

I'd now like to open the floor for questions.

Thank you, the floor is now open for questions. If you have questions, please press the number 1 followed by 4 on your touch-tone telephone. If at any point your question has been answered, you may remove yourself from the queue by pressing the pound key. The questions will be taken in the order they're received. We ask you pick up your handsets to provide the best sound quality. Please hold as we poll for questions. Our first questions is coming from Fred Milligan of Sanders Morris Harris.

Hey, Zach, good morning.

Good morning, Fred.

Good results.

Thank you very much.

Thank you. Talk, if you can, about the compatibility of the acquisition in terms of marketing, in terms of margins or whatever.

I can't really talk about margins. At this point, it would be inappropriate. But, from a compatibility point of view, the company looks very identical to AmQUEST, identical to Infocrossing in New Jersey. It is just a mirror image, and I could walk in there and the vendors are the same, the kinds of customers are the same, the employee mix is the same. There's a very, very high degree of compatibility and we expect this to be a very positive step for Infocrossing.

Thank you.

Thank you. Our next question is coming from James Bear of Trust Gold Capital Management (phonetic).

Hi. I'm assuming that eventually, while your customers will be comfortable having two, you know, a site also in California as another place, to, you know, a potential backup. If you had to do this as a green field without the customers and such, how much would it cost to you open up a data center? You know, without anything else going on?

Well, I don't think that we could economically do it. I think that, to expand to the west coast, which I think is important, we actually don't do any marketing on the west coast now. So this makes us really a truly national company. But the economics -- the operating losses that would be incurred, aside from the capital requirements, would be so onerous that I can't imagine we would actually do such a thing. It just would be too expensive.

Okay. Got you. Thanks.

Sure. Thank you.

Thank you, once again for any questions, it's 1 followed by 4 at this time. Thank you. Once again, for any questions, it's one followed by four at this time. Thank you. Our next question is coming from Robert Crystal of Brant Point management.

Hi, Zach. In terms of booking in the quarter, I think you normally give that. What were the bookings for the quarter?

The fourth quarter, you mean?

Yeah. Absolutely.

Well, you know, we mentioned the $22 million (inaudible) on this contract. Aside from that, we also announced a contract with Hickory Tech. There are five others we haven't previously announced. None of them sell -- none of those five additional contracts are, you know what, we would call, and not to denigrate the contracts, but home runs, but you know, singles and doubles, but there are a lot. And so we've had a successful quarter beyond what we've mentioned previously.

And the dollar amount would be?

The dollar amount of the incremental contracts on a per-month basis are somewhere over $100,000 a month. So, you know, and extend that out, extrapolate that out from a contract point of view, I really don't know the terms of all the contracts, but it's north of $100,000 a month.

Okay. Great. And what about guidance for '04?

You know, at this point in time, I'm not in a position to give guidance because of the securities laws. We're engaged in the financing--

Okay.

--As was mentioned in the press release.

Sure. Okay. Sure. Great. Thank you very much. Nice quarter.

Thank you.

Thank you. Our next question is coming from Michael Potter of Monarch Capital Group.

Hey, Zach, congratulations on a strong turnaround.

Thank you, Mike.

Don't thank me. A few more questions on the SMS acquisition. You showed $33 million in revenue last year?

No. The revenues, the run rate is $33 million, 33 million in run rate as opposed to last year. It's a little bit more complicated than that, and if you go into it in detail. Not that I'm avoiding the question, by any means. It would just be too lengthy. But suffice it to say that we're really looking at it from a going-forward point of view and the run rate is $33 million.

Okay. And can you give us some information, what are they throwing off of EBITDA?

Again, I'm afraid the attorneys are nodding their heads no, you know, because of the financing, because of the securities laws, I can't make any forward-looking projections relative to SMS. You know, we have acknowledged, though, we said that it is a, you know, it will be accretive in 2004 and beyond. And other than that, it's hard for me to go into more detail.

Okay, can you give us a little sense of their concentration with their customers? Their customers north of 10%?

None of their core customers are north of 10%, actually. They have the same kind of customers, really, well-known national names. But, again, in each case, a small slice of each company's IT processing and infrastructure. But they don't have anybody at a 10% rate at all, and so the concentration isn't a concern for us.

When do you anticipate closing the transaction?

You know, right now, we're scheduled to close sometime in April. We're looking at April 15, between April 15 and April 31. Something in that order, but certainly in April.

So, on the first quarter conference call, you think you will be able to give us a lot more information?

Yes. Once the financing is -- once our financing activities are complete, I believe we'll be in a position to-- we'll give out as much information-- Frankly, I'm happy to share information, as much as the securities laws allow me ,and the attorneys allow me. You know, I think more information is better than less.

Okay. Thanks, Zach.

Sure. Thank you, Michael.

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

Sure.

Hey, good morning, Zach.

Hi, Randy, how are you?

Good, very good. Thanks. My first question is, first, can you describe what your run-rate revenue base is now, including the contracts that you just talked about for the year?

Every head in the room is shaking no, I can't give any forward projections, again, because of the financing and securities laws.

Well, just-- not for SMS, but just for the IFOX, you know, portion of the revenue pie, you know, given the current contracts you have.?

I'm afraid not, Randy. Again, I hate to sound like I'm avoiding the questions. Believe me, I would love to answer your question, but I just can't.

You know, with the recurring revenue business, you see where we are in our fourth quarter point of view. You have the announcements of new business, so I'm afraid the sort of mathematics of that will have to be done individually.

Right. Well, just assuming, you know, $55 million run-rate revenue, you've got the $22 million Readers Digest over five years, so that's like $4.5 million.

Right. We have a new contract--

I mean, $60 million-ish, ballpark, is probably around the right area?

I can't --

Okay.

You know, you can say that, but I'm afraid I can't.

Okay, I won't press you too much harder. Can you talk at all about incremental EBITDA that you have seen on new contracts, just in terms of EBITDA margins?

You know, the business mix remains roughly the same. I mean, we have previously said that, you know, on balance, EBITDA-- it's our incremental business, and I don't want each of customers who are listening to think that their contract is more valuable than others, but anyway, on balance, is at about 50%. And, you know, that's been holding true. That's been the case.

Hey, Zach, last question I've got for you is just in terms of new-- you know, if can you talk at all about kind of the pace of the first quarter in terms of, you know, just the IFOX contract signings. Can you give us a little flavor as to how the sales force is doing, given the restructured balance sheet?

You know, again, I can't really talk about the first quarter because it's forward-looking. But, on balance, the new balance sheet has been very well-received and, you know, we were -- really, the last big contract that we actually signed, I would say, was actually delayed. We expected to sign it earlier, but because of their concerns over our balance sheet and their desire to see what happens with these refinancing or restructuring that it actually was completed, you know, there was a delay in the revenue recognition, actually. And they told us they would not have signed, would not have been able to sign with the company had we not restructured.

So, I mean, it already has had a very positive impact and we have not been getting those calls that we previously got, have gotten from our sales people , saying that the CFO of the new prospect, or prospect that was on the verge of signing, was ballking because he looked at our balance sheet and saw all the red. So, you know, without directly answering your question, I would say that it's had a very positive impact and we're very optimistic about what it means to us, as a company going forward.

Great. Okay. Thanks very much, Zach. We look forward to hearing more about that SMS acquisition.

Thanks, Randy.

Thank you. Our next question is coming from Steve Emerson from Emerson Investment Group.

Congratulations on a great quarter.

Thank you very much.

Our questions that more are to characterize your business going ahead.

Yeah.

For instance, what kind of organic growth, not with new clients, but from existing clients, are you seeing or is reasonable to look at?

I can't give you a precise percentage. One of the numbers I have in front of me is that a new client or existing clients, rather -- hello?

Yeah, I'm on.

Okay. Our existing clients have extended and in some cases expanded their contracts, and that is a part of our revenue. How much of it, I can't say. One of our largest contracts, you know, when we signed it, went up 25% within a year.

So we do experience that, and as you know, you know, our contracts call for a baseline revenue, so the growth is very favorable to us. You know, if I had to guess, I would say it's, you know, we look forward to something like 5% growth from our existing business, maybe it's 4%, but some growth from our existing business, without question.

Okay. How much of your -- can you characterize your business in terms of how much is hosting, how much is outsourcing, other services, business process, consulting. Can you characterize the services you provide, perhaps on a mix basis, and maybe, to add on to the previous question, where is the internal growth other than brand new clients?

Well, we're not really into hosting business at all to begin with, and we really report our revenues as one segment. And, again, I'm not trying to avoid the question. You know, I'll just talk about it from a business model point of view as opposed to specific numbers. We're not in the professional services business, so we really don't provide consulting services.

But, in general, you know, we're much higher up the food chain than the hosting companies, the co-location companies. That's the floor business model that I regret that we ever got involved in in 2000, but be that as it may, that's behind us. We provide what you could call managed services. We actually have a interaction. We run the operations for our company, we don't just host them or watch them.

So we're not, as I said, we're not in that business, we're not in the consulting business. We're in the IT operations outsourcing business specifically, and as I said, I can't really break down our revenues from the various segments because we report -- of course, we don't have various segments. We report just one monolithic number.

Okay. And then, finally, and I should certainly relinquish this line. Your internal growth, to what extent is it a reflection of growth in the whole IT industry, which all the surveys say is growing? In other words, are companies more inclined, perhaps, in terms of getting new contracts, to give you the business when the industry is growing or even as -- or less inclined because there's not as much pressure to save cost and more interested in growing? Is this a better environment for you than a year ago, other than balance sheet issues?

I think it's a very, very strong environment for us. I have an article in front of me from Information Week, which is dated February 19, 2004, and it reports on the Garten Group (sp?) saying that the number of outsourcing deals is expected to rise 30% this year, but that the deals will be smaller and more sharply focused. Now, that is exactly where we are.

Our deals are not these sort of overall, takeover IT, infrastructure takeover deals at EDS and IBM and the computer sciences invasion. But the selective outsourcing deals that are specific and precise, which is what we do. So, an article like this couldn't be better news, and that's what our experience is. There's a very high degree of predictability in the service offerings that we make. Where we say we're going to take a specific aspect of their IT infrastructure, process it according to a service level agreement and have them pay us a very specific price. It's exactly what is finding favor. They're hiding -- the predictability of our service offering results in -- is -- it's a very favorably view. So I would say this is an outstanding year for us, and we're looking forward to, you know, to the next year.

Thank you, gentlemen.

Thank you.

Thank you, our next question is a follow-up coming from Robert Crystal of Brant Point Management.

Zach, when did the Readers Digest contract start? Did it start at the beginning of Q1 or part of the way through Q1?

Well, we signed it January 8th. Early in January, and because we have come along so far along in terms of preparation for this, we actually started it February 1st, I believe.

Okay. Great.

Fairly early, in the first week in February.

Okay. Great. Thanks a lot.

Thank you, our next question is a follow-up coming from Fred Milligan of Sander Morris Harris.

Zach, can you talk about management now that you have a west coast operation, as the structure of management both in New Jersey and in California? And how would it function?

Well, I can, up to a certain point. We're acquiring a very good management team with SMS. These are people who have been in the business, Patrick Dolan, who is the president and CEO out there. He's been in the business 25 years and he is only 45 years old, or 46 years old. But he has previously grown the company organically from $6 million to $120 million in five years, so they know how to grow a business, and Patrick's going to become President and Chief Operating Officer of the combined companies of Infocrossing. And he's going to add to the management team. Robert Wallach is going to become Vice Chairman, so we're going to continue to get the benefit of his services.

So, the answer is we're going to expand a management team, because it's a larger company and we need to expand the management team, but with very, very strong additional leadership.

Is Patrick Dolan going to be running the California operation?

No, no. Patrick Dolan is going to be Chief Operating Officer of Infocrossing, which is New Jersey, really, the entire country, and he's going to be spending a lot of its his time traveling, as we all do, and -- certainly I do -- and a lot of his time in New Jersey here. We're going to get him a local residence and no, by no means is he going to be the president of the West Coast. He's going to be the president of the entire Infocrossing operation.

Thank you.

Thank you, I'm showing no further questions at this time. I will now turn the call back over to the speaker for any further or closing comments.

No. Thank you very much all for listening, you know, and we appreciate the interest. It's only two years since we have returned this business to its core competency, you know, from our internet detour, and I have to say that, looking back as to where we were and to where we are now, it's been really an incredible two years. It's hard to believe it's only two years. But -- and we're looking forward to the next year.

This has been a terrific turnaround time for us, and we look forward to an exciting future, and we thank you all for your support. Without your support, we could not have done this. So, thanks again and we look forward to the next conference call.

Thank you, this does conclude this morning's teleconference. You may disconnect your lines and enjoy your day.