CC TRANSCRIPT Part 1of3 (Non Q&A)
TAVA TECHNOLOGIES, INC
Quarterly Earnings Conference Call
Moderator: Scott Liolios
November 4, 1998
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the TAVA Technologies First Quarter Earnings Release conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session. At that time, if you have a question you will need to press the 1 followed by the 4 on your push-button phone.
As a reminder, this conference is being recorded Wednesday, November 4, 1998. I would now like to turn the conference over to Mr. Scott Liolios of Pacific Consulting. Please go ahead, sir.
Scott Liolios: Thank you, Jason. Thank you all for taking time out of your day today to listen to the TAVA first quarter earnings results. Before we get started, I would like to cover a few legal disclosures. And that is, statements made in this conference call that are not historical current facts are forward-looking statements made pursuant to the Safe Harbor provisions of the Federal Securities laws.
Forward-looking statements represent management's best judgment as to what may occur in the future but are subject to certain risks and uncertainties that could cause actual results and events to differ materially from those presently anticipated or projected. These risks and uncertainties include those discussed in the management discussion announced in the section of the company's annual report on Form 10-KSB for the fiscal year ended June 30, 1998 and any subsequent reports filed with SEC to which reference should be made.
With that being said, today we have on the call with us Doug Kelsall, CFO, and John Jenkins, CEO. Gentlemen, let me be one of the first to congratulate you on what is an excellent quarter and a welcome to the conference call.
John Jenkins: Thanks, Scott. And welcome, everyone, that's on the call. This is John Jenkins. I think we'll start. We'll just have Doug go through and review the numbers, then I've got a few general remarks before we go into Q&A. Doug?
Doug Kelsall: Good afternoon. I echo John and Scott's thank you for you all participating in the call. We know it's a busy day and appreciate you taking time to share our results with us. We are certainly very pleased with our quarterly numbers. We look forward to reviewing these and answering your specific questions over the next half an hour or so.
In terms of the first quarter numbers, we had record revenue for the quarter of 19,802,000 and earnings per diluted share of 14 cents. I think it's important to point out that this represents our third consecutive quarter of profitability and improvement in EPS. On a diluted basis, our earnings per share improved from 3 cents in our Q4 1998 to 14 cents in Q1 1999. And we improved from a loss of 4 cents if you look at our Q1 1997.
On the revenue side, as we said in the press release, we did increase from Q1 ‘97 to- I'm sorry, Q1 ‘97 to Q1 ‘98 by 75 percent and a 33 percent increase from Q4 ‘98 to Q1 1999. The revenue growth of Q4 1998 to Q1 represents 132 percent annualized growth.
I want to walk through, for a minute, and break down our revenue composition. During the quarter, revenue from our Y2K products and license fees and training was 3,411,000. We also had material resale at our cost of 2,694,000 which was down slightly from Q4 where we had material pass through at cost of 2,758,000.
Our material resale component of our revenue stream has been decreasing over the last several quarters, and that's been part of the reason that we've been able to report improving gross margins. When you take those two numbers out it leaves our labor-related revenue component of 13,697,000 which, again, is a good component resulting from labor-related sources.
I want to comment for a minute on our Y2K product and license fee revenue. This component of the revenue did decrease by approximately $700,000 from Q4. The decrease was primarily due to us processing inventories from accounts which we engaged early on in the Y2K process where we had pricing for the product reports which were at a substantial discount to our current pricing. Our production of product reports actually increased by 37 percent when you look at a number of reports from Q4 to Q1.
As these projects are completed and we cycle through these lower-priced product reports with higher-priced reports, we would certainly expect the revenue from our product and license fees business to exceed an increase in future quarters.
In the gross profit line we had gross profit of 9,792,000 or 49.4 percent of revenue. As I mentioned before, this improvement was primarily due to a change in our revenue mix with a higher component of our revenue coming from both products and labor related and less from the material resale.
Moving on to the expense side, we've been discussing with all of you over the last several quarters of our investment in SG&A to handle what we saw as an increasing wave of revenue headed in our direction. We also have mentioned that we were expecting to see some operating efficiencies on that SG&A investment as our revenues increased. These expectations are beginning to actually be realized, and our SG&A number, exclusive of amortization and depreciation was 27.8 percent of revenue for the quarter which is down from 32.8 percent and the prior quarter or fiscal Q4 ‘98. We would expect to continue to see these operating efficiencies and overhead as our revenue increases in future quarters.
SG&A expense did increase by $614,000 from Q4. During our Q1 we did elect to add to our allowance for doubtful accounts and made a provision expense of $363,000 to increase our reserve for allowance accounts. Well, we made this decision, not because of any issues with specific accounts, but due to just the overall higher level of business and higher level of accounts receivable that we're carrying as a result of the increasing revenue.
Another number that I've discussed in the past is our overall recruiting expense, and I'm pleased to say that Keith has maintained that well in balance. Our recruiting expense for the quarter was $112,000, and our total headcount, including contractors, as of September 30th increased to 560 which is an increase of around 60 people from June 30th.
Moving on to the amortization expense line, as you know, our amortization expense results from the amortization of the goodwill that we carry on the balance sheet from the acquisitions we've done as well as the capitalized software. And total amortization expense for the quarter was $912,000 which was down from $967,000 recorded in Q4. And, if you recall, we did take an additional amortization expense of $280,000 in Q4 for some write-off of some non-Y2K software, and we indicated at that time that our expectation was that the amortization expense in Q1 should be lower than it was Q4 which is, in fact, what occurred.
The amortization expense for our Y2K software in the quarter was $580,000 versus $225,000 for Q4. And, again, we've mentioned that we would expect that component of our amortization expense to continue to increase since we're writing our Y2K software off over a very short period of time so that we have a zero balance as of 12/31, 1999. In terms of our database, our total items in our compliance database now exceed 46,000 items.
Let me know make a couple of comments about our earnings before interest, taxes, depreciation and amortization, our EBITDA. Again, we had a very strong improvement in our EBITDA for the quarter, which increased to $4,938,000 for the quarter, significant improvement from Q1 of 1997 where EBITDA was $29,000. This also reflects an increase from Q4 of 1998 of 3,179,000 or 180 percent from Q4 where EBITDA was $1,759,000.
We also, in the press release, talk about our contribution from our relationship with TAVA/Beck. And I think most of your are aware, TAVA/Beck is an affiliated company which is 50 percent owned by TAVA. Since we own 50 percent and do not control the company, we account for our share of the earnings on that on the equity method. And what that means is we do not consolidate that entity revenue and expenses, but instead we reflect our share of the earnings through a separate line item on our income statement.
And, again, during the quarter our share of income from our TAVA/Beck relationship was 604,000. It's shown on our income statement as equity earnings of unconsolidated affiliate. I think we're very pleased to see this level of contribution coming from Beck. Frankly, our TAVA/Beck relationship, I think, is running clearly ahead of what I thought it would, so it's nice to see that that entity is starting to contribute to our income.
We did record an income tax provision for state income taxes of $75,000 which resulted in net income for the quarter of $3,446,000 or 14 cents per diluted share. Again, in summary, on the income statement, certainly very pleased with our financial performance for the quarter and exceeded our EPS expectations.
Let me now make several comments about our balance sheet. Our working capital remains strong. We have slightly over $20 million in working capital with a cash balance, as of 9/30, of 4.3 million. Looking at our accounts receivable, our net increase in accounts receivable was 20 percent versus a growth in revenue of 33 percent from Q4 which resulted in an improvement or a decrease in our days outstanding on average receivables to 76 days in Q1 from 79 days in Q4. So our receivable levels seem to be maintained well in balance with our sales growth and, in fact, are improving.
In the last conference call I did mention that we were in process of pursuing- establishing a senior revolving bank line to finance our continued growth in accounts receivable. We have received preliminary approval from Silicon Valley Bank for a $3 million revolving line of credit. It's very favorable terms, and I would expect that we would close that transaction within the next three weeks. John?
John Jenkins: Thanks, Doug. I guess I'd like to, again, echo, obviously our pleasure at the results, but maybe from a slightly different angle and give recognition to the entire organization that these results are, in fact, the product of a tremendous amount of hard work and good work by everyone in the organization in all functions.
I'd like to reflect for a moment, for those of you that have been around for the last 12 months of what's happened in the company in the 12-month time frame from last September where we literally hadn't even launched our CD product. We had begun some practice activity in Y2K, that kind of thing. But looking at where we are today and 12 months later, we've doubled revenue. Our EBITDA's up by a 100-fold, probably more than doubled our headcount. I don't have the accurate baseline in front of me here. We've added four offices, have some acquisition. Obviously we've announced that we have another letter of intent standing today to get back in he acquisition activity.
More fundamentally to the business, we've moved dramatically from selling projects to selling programs, and we've forged some very strong alliances and partnerships that will serve as part of our foundation on a go forward. So, from my deck, I'm very pleased to see that the Q1 results finally reflect the success of all of the activity that I just summarized, and more importantly the quality of the foundation that we built for TAVA's future.
I guess more specifically, certainly our business remains strong. We announced a couple of weeks ago our Y2K incoming orders for the September end quarter. We continue to add to headcount, as Doug said. It's a lower rate than we've been adding before but that actually is- I mean, it's good news in terms of the digestion process and it's also- we are beginning to make better use of our partners- and our alliance partners and our solution provider partners to use them more effectively on the front end of some of these projects doing the basic inventory work and that kind of thing.
So we're reserving our people as much as we can for the activity that requires more subject matter expertise.
Clients continue to move through now from inventory and assessment in Y2K on through into remediation, although, in fact, we had some clients where the typical budget cycle- their typical budget cycle is causing a stop while they go get further approval to fund the remediation projects that are coming out of the I&A side.
I'd like to take a few moments and address certainly a continuing theme of a question that around the organization which is that of how does all this Y2K activity affect our long-term business plans for the organization. And we've addressed this in prior conference calls and with many of you individually and spoken to, you know, anecdotal examples of, you know, chemical company that brought us in to do Y2K and within two weeks had us engaged in the laboratory information management system, an electronics company that brought us in for Y2K and, before the facility tour was over, was talking to us about power management and control for their data processing center. So those examples are real, and there are more of them that accumulate every day in our significantly growing client base.
I'd like to today maybe take an example of something that's really come together in the last 30 days here and talk about how our Y2K activity has actually been the catalyst for us to develop an entirely new practice- not an entirely new practice, but to take something that had been a technology available in the company but see some different opportunities for it.
Those of you that have looked at the company history and been around for a while understand that we have done, over our history, system integration projects and airport operations, DIA, LAX and others, examples being fiber optic, lighting control systems, fuel system management, those kinds of things. And, you know, that was, I think, reasonably successful practice that we probably did maybe a million to $2 million a year out of the Denver base of operations for, you know, the last three or four years.
That, frankly, gave us credibility as Y2K came along as an issue to pursue the Y2K opportunities in airports. And we've had very rapid and accelerating success. We have a number of new accounts driven by Y2K including Baltimore International, Phoenix and a number of others. In fact, as we said today, I think the number is between 8 and $10 million of Y2K-related proposals on the street.
What is important in this story is that that activity, that new account activity in the airport arena has already translated to new system integration work, fiber optic control systems, outsourcing contracts, in one major airport in California doing some, what is called, common use terminal exchange work, fairly sophisticated SI work in a couple of other airports. And on the back of that work already has generated an additional 3 to $4 million in base SI proposal activity.
Beyond that, our visibility in the airport operations community has risen to a level that we were sought out and are now in the final stages of completing an agreement with an airport operations ERP, enterprise resource planning vendor, to become their exclusive value-added reseller across the United States.
So what's happened, if we go back to this chain, that Y2K has taken us, in the airport operations arena, from being a competent project supplier that had demonstrated expertise to a position where we are now going to market with a comprehensive airport operations IT practice. And that practice includes specialized ERP solutions through common use terminal exchange where we do the database ticketing and gate control functionality, fuel system management, fiber optic conversions. And, as mentioned before, we're beginning to open up opportunities for outsourcing of IT operations support in this arena.
So as we sit and look at this thing today, in the course of about four months' time, because of the Y2K catalyst we could be looking at a practice alone that would constitute between 20 and $25 million a year of revenue if everything happens as we believe it can today. So that's my attempt today to add further meat to the skeleton or flesh on the skeleton of this whole point of how Y2K is just providing us tremendous downstream opportunities.
And I think at that stage, Doug, unless you have anything else, I'd just- let's open it up for Q&A, Scott. |
