Transcript of conference call 11/14/97 nearly verbatim
INTRODUCTION
(excerpted out of order, this is included later in the transcript)
John Jenkins, CEO
To the underlying question as to whether this(Y2K Plant problems) is real or not.(laughs) Our database has 4500 items in it, a total of 30 to 40 per cent are either clearly non-compliant, or suspect. There are some people who are still in denial. Bluntly said, we're not spending a whole lot of time with those people, they'll wake up at some point along the line. There are other people who take this VERY seriously. Of the examples I used in the past in the food industry is that if your plant shuts down that is probably the preferred alternative. The other alternative is that you have some little wrinkle in there that isn't discernible and the fat content in your cheese product goes from a tenth of a percent to 0.5 percent and you don't know about it until you've got the line full. Utilities are another concern that is in an early state of awareness. They're are apocryphal jokes about the concern that, when the lighted ball comes down in Times Square, it won't still be lit when it gets to the bottom. There is a much greater awareness than there was 30 days
ago and people are taking it seriously.
Start of transcript:
Doug's part, financial:
Revenue $11,319,000 up 42% from 1996
12-14 engineers removed from revenue on prod develop Y2K, otherwise would have been $700,000 to 1,000,000 higher per quarter.
Revenue breakdown: 60% engineer service to 40% equipment resales.
Gross Margins: Total 34% Engineer 52% Equip Resales 10%
G&A Expenses increased due to training, recruiting, and travel for PlantY2KOne marketing and work.
EBITDA were $42,000 for the quarter
Net loss -575,000; 604,000 with preferred dividend payments =(0.04) per share.
Balance sheet
Working Capital just over 4,000,000
Continue to reduce debt, convertible debenture conversion mentioned.
John Jenkins part:
Reason for taking 14 engineers out, to have demo product done for marketing before clients' 1998 budget year and meet CD deadline.
Have had $6,000,000 orders for base business in past two weeks, one big sale from Chicago office, using technology resident in Denver is Proof that acquisitions and expansion have not slowed base business execution. (the following is out of order but moved here for clarity) They think that, because many of these integrated systems are modular in nature and could be partly replaced rather than fixed, they will see continued growth in the base business as some Y2K-driven replacement rather than fixing of system modules occurs.
PlantOneY2K
100% RFP or orders following presentations. No turn downs to date. Has been as low as two week cycle from presentation to order. This is the extreme short time, not the average.
Pipeline Sheet (Daily 11-14-97), in front of him, has 41 Accounts with total plant coverage embedded in those accounts of over 3,500. 80% of these accounts are new to the company. 100% are at a new level of sales i.e.. multi-plant rather than single facility as had been the past experience. These are for assessment stage only, expected to roll into remediation as well. These have mostly been from internal marketing efforts but do include some referrals from IT Y2K alliances. Only accounts named in the press release were by permission of the companies. (i.e. 4 out of 41). There has been some ramp up in engineer billing rates from usual of 75-90/hr. Some new business priced at over 160/hr. The upcoming 20,000 CD release is on schedule, a "number" of those will go out through the Wonderware chain which has not yet been "turned on".
Questions and Answers:
First Caller:
Q: With new sales so soon, will revenue be recognized in the second quarter (Oct-Dec) as opposed to third quarter (Jan-Mar)?
A: (Doug) Majority by the end of February, starting now and over the next 90 days.
(John) Definitely seeing revenues "pullback" from original third quarter projections into second quarter now.
Q: Will margins, at conversion stage, remain the same or change?
A: If TAVA is doing the remediation work then margins stay the
same because the bulk of the job will be in engineering service sales with a little tool sales on front end. If the client is doing the remediation themselves then the isolated front end tool sale would be "obviously higher margin."
Q: Do you expect your core business to diminish as TAVA focuses more on Y2K remediation work?
A: It won't be a question of TAVA focus. TAVA is "working real hard to make sure that the base business continues to be attended to." Right now clients are focused on Y2K issues. Absent Y2K they would have (and are having) an increase in base business. The real
Question yet to be determined is, "Will clients take new base projects capital commitments off the table until they see what Y2K will cost them?" This is OK by TAVA as they will get the Y2K business now and then the other projects will come back on the table later as people get through the assessment phase and determine a conversion plan and budget.
Second Caller:
Q: Is there any Performance Bond for large contracts?
A: Bonding required for certain contracts in base business, particularly municipal. No bonding for Y2K but they are having some source code escrow requirements, a minimal cost.
Third Caller:
Q: What do you see in revenue for the future on your CD?
A: (John) The "Opportunity" in our Front end Tools CD which includes the methodology and several support tools costs $4,000. Then to switch on and have access to the Vendor Compliance Database is $5,000 "per Site" (the CD price is "per Seat") And then $200 per Vendor Compliance Report for each device. Average number of Devices per site is 100. If we add in some training we have a model with $30-35,000 average basis revenues per individual facility. The total facility count out there, conservatively, is between 70-100,000 facilities that have to address this problem. There may be some discounting because of volume i.e.. someone who has 600 facilities won't pay as much so TAVA is working with a model of about $20,000 average per facility. No reason to alter it now. Again this is for front end assessment work only. (Doug) There is a wide "bandwidth" that they are seeing, so they are collecting the data and adjusting the projection model as warranted
Q: What are you doing to enhance the marketing on this product?
A: (John) 1. Direct efforts with multi-plant clients.
2. Wonderware will take us into somewhere between 15-20,000 new accounts in the next 90 days through the release of their Factory Suite2000(includes the TAVA CD). Wonderware is getting one call per hour regarding Y2K compliance in the Wonderware software, callers are are all told they must look at ALL software in the facility. These contacts are then turned over to TAVA for follow-up.
3. Meeting on 11-17 with Square-D to open up a channel to their strategic accounts which include such names as IBM, MARS, Coke, and others.
4. Developing a "pseudo-franchise model", a network of other system integrators who will be trained and licensed to resell TAVA tools in other geographic areas which TAVA does not have access to.
Fourth Caller:
Q: What will the hire of Ken Owen mean?
A: (John) Ken Owen has two tasks:
1. Develop formal relationships with some of the Y2K IT service providing companies for joint proposal activity.
2. Will drive the"pseudo-franchise model" supervise training and monitoring as that develops. Also, because of his extensive background and contacts in major corps he may open pathways there.
Q: What do you expect from AON?
A: (John) They will be a source of leads, as they are asking their client about Y2K issues and rewriting policies (presumably to exclude losses due to Y2K induced failures).
Non-exclusive but will not approach other competitors of AON.
Fifth Caller:
Q: Alliance with PacificCorp update?
A: (John) Alliance is active and have one project so far, 600k revenues. PacifiCorp backed off of jointly developing a wide project for other utilities, so TAVA is working with someone else (to whom they were referred by Pacificorp) to develop a product that will work in other utilities.
Q: What is the status of Litigation over A/R with Marshall-Hyman?
A: Claim is still 3.9 Million, have filed a lien against the project.
Q: What is your cash situation?
A: Have about one million in cash, tighter than we would like to be. Considering alternatives.
Sixth Caller:
Q: How much Y2K revenue is reported in the 1st quarter (Jul-Sep) report?
A: About $100,000.
Q: What are the margins on materials as opposed to engineering services?
A: About 10% gross margins. Not split out in bids but we calculate it as 10% markup on materials and margins of about 52% on engineering services.
Q: How many engineers do you have and how many of those are allocated to Y2K
business?
A: We have added 12 since June 30 and total head count is a little over 330 Engineers and 280 technical people. No breakdown between Y2K and base business.
Q: Are you going to maximize growth here or try to manage your growth as the Y2K work proceeds?
A: We are going to widely distribute the CD tools and try to have everyone using the TAVA tools as the incremental cost of pressing CD's is "peanuts." We could increase our staff size three-fold but we don't want to do that because of "all sorts of problems associated with that" unless it is through an acquisition as a single step. We plan to add about 150 people over the next six to nine months and hold at that level. We will sub out some work to smaller System Integrators and focus our efforts on the accounts that we know we want to stay in after the year 2000. Aside comment here,(Doug) that we do have other software products, like PlantOne, that are being received well and adding to the base business at present.
Seventh Caller:
Q: Were the four companies in the press release developed clients from internal marketing efforts?
A: Yes, except IVAX which was a referral from a business relationship with a regular business service IT company.
Q: What is the size of the pipeline again; 3,500 potential plant sites times $20,000?
A: (John) I have the page in front of me with a larger number but we have to define a plant. Some organizations may have 800 sites, not all of which will spend $20,000 on tools. So we have developed a "plant equivalency" model and that accounts for the 3,500
figure which is an updated number from the 3,000 given in the press release this AM.
(Doug) John's comments refer only to the plants in OUR current pipeline. The potential total market is bigger.
(John) Well if we go back to that I have a slide in my presentation
that shows 70-100,000 plants that are very real. Beyond that, there are utility substations, oil refineries, gas plants and such. Again, I think the total opportunity for tools is using that $20,000 average for tools against that 70-100,000 band width. Services is a different issue, I've used an average of maybe a $300,000 total cost for a typical plant to go from assessment through remediation, I have no reason to back away from that at this point.
Q: What was Mr. Owen's reason for coming to you?
A: I should have addressed this in the beginning. Fluor-Daniels started out as a very positive alliance and for whatever reason they have decided that they are not going to emphasize Y2K. So that alliance is not particularly valuable to us. We thought that was
going to be important in the beginning, in order to access corporate clients with multi-plant site opportunities. It's turned out that we don't need that, word-of-mouth and our own direct selling of the product is getting us there as fast or faster than working with Fluor.
Ken Owens decision to join us, he sees it as a huge opportunity, he's frustrated by the Fluor position and lack of responsiveness, and wants to come to work for an organization that has its sights set on what he sees as a very real business.
(the following section is reproduced above as the Introduction)
To the underlying question as to whether this(Y2K Plant problems) is real or not.(laughs) Our database has 4500 items in it, a total of 30 to 40 per cent are either clearly non-compliant, or suspect. There are some people who are still in denial. Bluntly said, we're not spending a whole lot of time with those people, they'll wake up at some point along the line. There are other people who take this VERY seriously. Of the examples I used in the past in the food industry is that if your plant shuts down that is probably the preferred alternative. The other alternative is that you have some little wrinkle in there that isn't discernible and the fat content in your cheese product goes from a tenth of a percent to 0.5 percent and you don't know about it until you've got the line full. Utilities
are another concern that is in an early state of awareness. They're are apocryphal jokes about the concern that, when the lighted ball comes down in Times Square, it won't still be lit when it gets to the bottom. There is a much greater awareness than there was 30 days ago and people are taking it seriously.
Q: Forgetting your base business for a second, will there still be active Y2K business after 1/1/2000
A: Yes, there is a triage process going on of, what has to be fixed, what can I Bandaid to limp across the line and fix later on. Also, due to the forcing function of Y2K is that the business system people will become aware of the value of the information that is
available at the shop floor level. Bringing that information up into the business systems is a theme we've been pounding on for years and it hasn't been well received. The whole Y2K experience is going to open that up dramatically as well.
Eighth Caller
Q: Any other competition with the CD-ROM product?
A: No CD's out there. There is one large engineering firm that is not pursuing this from a tool standpoint but as a typical A&E approach on the project level. They could develop a CD but, looking at what it took, the effort to pull this together, they are six months away. And showing up six months from now with a tool would be a little bit late. |
