TAVA CC Q&A Part 2of 3
Scott Liolios: Yeah, okay, great. I'm sure lots of people have several question on the number and, of course, looking forward. Jason, if you're there, we'd like to open this up to questions, please.
Operator: Ladies and gentlemen, we will now begin the question and answer session. If you have a question you will need to press the 1 followed by the 4 on your push-button phone. You will hear a three-toned prompt acknowledging your request, and your questions will be polled in the order they are received.
If your question has been answered and you would like to withdraw your polling request, you may do so by pressing the 1 followed by the 3 on your push-button phone. If you're using a speakerphone please pick up your handset before pressing the numbers. One moment, please, for the first question.
Ken Trbovich from Red Chip Review, please go ahead with your question.
Ken Trbovich: John, Doug, great job. I'm pleased to see that the numbers are finally coming through. Everybody, I think, had expected this. And it's great to see that you folks are able to deliver on the results.
I'm trying to get a feeling for how- you know, obviously it's good to see that you're getting the operating leverage but how much we should expect that operating leverage to continue to flow through as your top line continues to grow throughout the rest of this year.
Doug Kelsall: I think that you would expect it to move into the 24 to 25 percent of revenue. We obviously won't have the kind of decrease that we had from Q4 to Q1 on an ongoing basis. There's some level of SG&A expense that we'll continue to maintain. But I think the estimate you know, range of 24 to 25 percent is certainly reasonable, Ken.
Ken Trbovich: Okay. One other question. I was curious about the share count issue, diluted share count increase from the fourth quarter to the first. I'm assuming there's some common stock equivalents or something of that nature. Could you describe that a little more?
Doug Kelsall: There are common stock equivalents in there. The weighted average outstanding shares that we've used on a diluted basis were 24 million 166. The total amount of fully diluted shares that we have out right now- find my notes here- are at 25 million 605. Those include all shares under options as well as the shares that we issued that are still outstanding under the renaissance debt that you recall that we did. There's about a million shares that are convert- that's a principal balance right around a million and a half dollars that's convertible into approximately a million shares, and those shares are included in that calculation.
Ken Trbovich: Okay. And then another question I had was regarding TAVA/Beck. I'm impressed with how quickly they've come to make contributions- was curious if you could give us some feelings as to what their relative size is in terms of employee count and revenues and then what their model looks like relative to yours. Because I'm assuming, at this point, they're doing a lot of inventory and assessment that doesn't have a lot of material pass-through costs so that they might have a higher margin, for example, than you have currently.
John Jenkins: Yeah, I think- Ken, let me speak to part of that. Doug, do you actually have their revenue number. I didn't- I don't think I brought it. First of all, they've done a very good job of accelerating, but in essence, you know, this is how joint ventures are- 50 percent LLCs that piggyback on the back of established strengths of the parents are supposed to behave, right. And we've gotten, you know, the kind of leverage that, I mean, frankly it's better than we expected but it's great to have and they're doing a good job with it.
Ken, to your point, they are, I would say early stage although perhaps- and I can't recite the actual mix for you, but I do know that they have some clients, LA-DWP as an example, who are just, you know, blowing right through and moving in parallel fashion rather than serial fashion across that entire complex. So it's a mixed picture. They have about, I think at last count, 140 to 150 people on staff at this point, a core of full-time employees, and they've done a very good job of training and using contract engineering resources to augment that activity.
The thing that we're engaged in right now is the planning process. I think, as I said in the press release, you know, we believe this provides great opportunity for us to extend, you know, our core competence practice into the utility market, which is a place that had not been a strong base line for TAVA prior to the Year 2000. And we're working on how to take advantage of this great market opening we have right now so that we can build an ongoing practice there. Certainly the utility needs for system integration in the industrial information arena are huge as a baseline, absent any discussion of the impact of deregulation and further asset division that's going on in that industry as we speak.
Doug Kelsall: Ken, I think another thing that's important too, from an analyst's perspective, is if you look at the way that our business relationship is structured with TAVA/Beck, our contribution into TAVA/Beck was to contribute our software technology. We put no cash into that individual entity.
And the way that the license fee revenue works is TAVA/Beck buys the license fees from TAVA at basically our production cost which is very low and then resells them at the price. So we don't see any reflection of that sale in terms of product sale of our product that's being funneled through TAVA/Beck. The only thing that you see on our income statements are our share of the earnings from it.
So if you looked at it and said, you know, between us and TAVA/Beck together what were our product and license fee revenues, they'd be significantly higher than what I'd mentioned, because, again, we're not reflecting any of the sales of the CDs into the utility market which are being passed through TAVA/Beck.
Ken Trbovich: Okay, but you can't give us any sort of a flavor as- I mean, for a business that's only six months old that just netted- this is your 50 percent share, so they just netted a million two and a quarter. What did they have to do on the top line to get to that kind of a figure on the bottom?
John Jenkins: Ken, I'm sorry. I didn't bring their statements with, but I'll hazard a guess—I think I'm reasonably accurate—that they were in the three to 3.2 million revenue line, maybe 3 and a half.
Doug Kelsall: I think it's higher than that. Ken, we're doing this call out of New York, so we don't have access to that information.
Ken Trbovich: I apologize. I was just trying to get a flavor for it to get a feeling for how profitable it is relative to your business. I've got two other questions. The last one, I guess I will save for last, the tax rate- help me out with where we should expect that to be, considering that you've now achieved a much higher level of profitability. I had, for conservative reasons, to assume fully taxed numbers, some feeling as to when you're going to run out of the NOL and start to recognize a higher effective tax rate.
Doug Kelsall: It's really- it's a very difficult question to answer. We obviously know what the NOL is, but the difficulty is, is we have annual limitations, and also some of the NOL that we have was acquired and in some of the acquisitions that we made. So it's fairly complicated to go through that analysis. But I would expect that we have in the neighborhood of six to $9 million worth of NOL that we will utilize before we start paying normal taxes.
Ken Trbovich: Okay. And then the final question, I just wanted some clarification. Based on what you said about the Y2K product sales, it looks as though they were down from the fourth quarter. Is that accurate?
John Jenkins: Yeah, they were down, Ken, because the volume was up, but what we had come through is you went back in time we had early adopter clients like Bristol-Myers Squibb that we ended up with favorable or they ended up with favorable pricing from, you know, way back early last year. And this quarter reflects, I mean, some statement of how long it takes to really, you know, execute these projects, this quarter reflected a tremendous amount of database turnover with that particular client that depressed our average item selling price.
And, as Doug was saying, you know, that's a phenomena that we don't expect to repeat as we go forward because of the- you know, we've been through that now and expect to see a return to more normal pricing averages for database hits.
Doug Kelsall: And specifically, Ken, on that individual contract, the pricing arrangement was set up where it had a break point. And once they exceeded a certain number of product reports, the future reports were delivered at a substantial discount from what the original ones were, so there was a price breakpoint. During the quarter we passed through that price breakpoint so the future reports were delivered at a much lower price than the original ones were under that contract.
Ken Trbovich: So in other words, total units of CDs and click through to your database is probably higher sequentially; it's just that from an ASP standpoint it's reduced the activity.
John Jenkins: That's right.
Doug Kelsall: Yeah, that's what I tried to mention. Our throughput on the database reports in terms of numbers of reports were actually up by around 37 percent for the quarter to quarter.
Ken Trbovich: Okay, I appreciate it. Thanks again. Sorry about the confusion.
Man: Okay.
Operator: Russ Welty from Hanifen-Imhoff, please go ahead with your question.
Russ Welty: Good quarter.
Man: Thanks, Russ.
Russ Welty: On a follow up on the database reports what's your hit rate trend doing these days? What's compliant versus not?
John Jenkins: Well the- oh, compliant versus non-compliant, I think the ((crosstalk)) the last time we looked we were in the sort of 7 to 8 percent clear and non-compliant with another 5 to 7 percent suspect. So in total, in that non-compliant suspect pile, we're running 15 to maybe 18 percent. It depends. In any given time we look at it at the amount of offshore activity that we have where information is sometimes more difficult to get early on.
As far as the actual hit rate of when client inventories come in as against what we have in the database that continues to climb. We've got, you know, in some verticals now we're running probably in excess of 90 percent and in others, I'd say the average is probably edging up towards 70, 75 percent now.
Russ Welty: Okay. Can you comment a bit more specifically on the sales pipeline of both your Y2K and your non-Y2K projects and how that's trended recently and what you expect it to go to?
John Jenkins: Gee, I guess, you know, the easy answer is that the pipeline continues to grow in overall magnitude. As far as being able to translate to total project quoted outstanding, I think the last number I looked at, and it's obviously a, you know, it's a difficult business to put a number on that in any single point means anything so you have to look at trends. But what we do track or have begun to track for the last six months is total proposal- total outstanding proposal volume weighted by various factors from, you know, probability of success, probability of us winning, probability of client funding, all that kind of thing.
So when you shake through all those kind of weighting factors I think that number in aggregate is around $100 million. And I believe that that number has stayed somewhat in that 100 to $120 million range for the last three to four months.
Russ Welty: Okay.
John Jenkins: ((Inaudible)) Russ, I think, you know, given the convenience of your background that we can sit down and walk through that so you can understand.
Doug Kelsall: Right. I think the bottom line is, you know, our sales activity continues to be very strong. We're continuing to generate new proposals at a very aggressive rate, and there's lots of activity and lots of demand for our products and services.
Russ Welty: Okay. Last question is, could you update us on where TAVA Consulting is and that area?
John Jenkins: Yeah, that is, you know, it's kind of our in-house kick off, start up that we talked about more specifically at year end and indicated then that we had a couple of projects that we'd been awarded already. We actually had- this week we had our let's say a first serious competitive effort where it was TAVA Consulting head to head against one of the Big Six and one of the nationally known IT service consultants for a project that is a multi-plant manufacturing-centric IT plan and execution. And we received word Monday that we had, in fact, been awarded that project against that competition. So, you know, our guys were, you know, obviously very proud of that.
And I think it's- aside from the hard work and solid presentation of the skills of the people involved in it, you know, is a clear testimony or affirmation of our fundamental strategy is that when people are looking at plant-centric information integration they're more comfortable dealing with people that know where that information is, know how to access it, have a history of dealing in that environment. And that, you know, was a clear distinguisher between us and the others at the table.
Russ Welty: Great quarter.
Man: Thanks, Russ.
Operator: Doug Moore from Ponte Verde. Please go ahead with your question.
Doug Moore: Yes, gentlemen, thanks and congratulations. I've been with you guys for, it seems like two years but it's probably a year plus, and just wanted to say congrats. On the Mangan, can you give us a little detail on that acquisition and update with respect to Mangan?
John Jenkins: I can't give you any detail about that price in part because the price will fluctuate according to audit results, balance sheet and, to some extent, kind of the balance of equity versus cash involved in the deal. I will say that certainly we've structured it that we expect it to be an accretive acquisition. We're on the table for a closing at the end of November. Whether we hold absolutely to that or not we don't know at this point. They're going through an audit and they have- as indicated in the initial release, they have some other asset divestiture or separate- not divestiture, separation to go through to give us the piece of the business that we're interested in.
From an operating standpoint, you know, we're, I'll say, desperately enthusiastic about getting these guys on board. We've got a lot of activity at Chevron as an example, where we can use their subject matter expertise quickly. We were in Houston at an industry trade show a couple weeks ago. We opened an office in Houston, I think, about two months ago that's done remarkably well in terms of securing opportunities, but it's a five to eight-man office down there right now and is seriously out of bandwidth already.
So, again, the Mangan resources and separate of that will give us some breathing space so that we can grow locally in Houston. So we're very excited, enthused about it. They're very good people, and, you know, so far the back and forth synergy really seems to be easily obtained and supported by both parties.
Doug Moore: Thank you, John. John, two more questions. One do you have- obviously you're working with a bunch of companies that you're not announcing. Can you address that issue? Is that at their request or what's the game plan there?
John Jenkins: Yeah, we have some clients who, you know, have just absolutely said from the minute we walked in the door that they did not want to have any information about their programs divulged. We have other clients who have said, because of their prominence, that, you know, they wanted to wait maybe a couple of months after award of contract so that when they started getting phone calls they could, you know, speak from an experience base.
And, you know, to be frank, in other cases we've kind of stopped pushing for, you know, authorization for press release because it almost seemed for a while that we getting this backlash of whenever we'd announce we'd stir up the criticism pot.
And I think also, frankly, in the early days, you know, part of the reason for announcing was to establish the, you know, the credibility of this activity as a business. And now when we can point to, you know, $26 million worth of incoming orders on Y2K alone, that need has kind of passed. And, you know, we're probably seeing more from us in the future about non-Y2K extension and expansion with these same clients, frankly.
Doug Moore: Thank you, John. The last question I had was—and it's a confusing one even to ask—can you tell us what's the timing on the Y2K business? Obviously I can see the pull through you've got with your other businesses and so forth. The Y2K doesn't stop, you know, as we hit January 1st of 2000. Can you play that out for us a little bit? How does it work? Does it last a year with these projects? Does it last six months? How does it fall through?
John Jenkins: You're right. It's not a confusing question, but it's a confusing topic or it's a difficult question to answer. You know, the fundamental answer is it varies dramatically from an industry to industry and client to client. You know, people, as we said repeatedly, many of our clients are starting very late in this. And, depending on the complexity of their systems, some will have to- we will and are engaged with them in, you know, Band-Aid strategies that will require- that will get them across the threshold and then allow for orderly conversion downstream.
In other cases it's, let's say, less of a triage effect than it is a planned effect of saying, Look, what you've shown me is that I can significantly upgrade the performance of my system but I don't need to do that in a mad rush in 12 months. Let's use the Band-Aid strategy and defer the, you know, the mad activity until after 2000, and then I can engage in a major system overhaul rather than a straight function-for-function replacement.
Other clients are, you know, well down the path of taking care of their in-house activity. So it's going to be a real mix, but I think certainly there is going to be a lot of carryover activity. There's going to be a lot of, you know, fix on failure kind of stuff that goes on as well because it's just too big of a problem for the resources that are available to support.
Doug Moore: John, one follow up, and thanks, that's a helpful answer. What is the- are there set expectations on the Street in terms of next quarter or is it fairly sort of open end? I know there are not a lot of guys following your company yet on the Street, but are expectations set? Are you comfortable with where they are or where do we stand?
Doug Kelsall: The analysts do- we do have expectations out. Both Red Chip and Russ Welty at Hanifen have reports issued on us and they have quarterly expectations. The expectations are for our earnings and EPS to be up for the quarter. And this is a policy. We generally don't comment on analyst reports in terms of our comfort level, but we certainly can see the trends in the business continuing to improve.
Doug Moore: Thank you.
Operator: Glen Marcin from Wavemark Partners. Please go ahead with your question.
Mike Kuchler: Hi, actually it's Mike Kuchler. How you doing?
Man: Good.
Mike Kuchler: A couple quick questions on the Y2K business. First, during the quarter, what percentage overall came from that portion of the business for the revenue?
Doug Kelsall: If you look at our total revenue, and again, this is difficult question to answer because of John's discussion of some of the movement and how we identify whether some of this work that we're doing is core business or Y2K business specifically in the area of remediation. And that's one of the reasons we've tended to move away from talking about this percentage of our revenue coming exclusively from Y2K. Because, again, when we do a remediation project, you know, is that Y2K or is it core business. It's what we do all the time so we consider it to be core business.
I think a general answer to your question is around 60 percent. If you look at the total labor and the product and license fee revenue for the quarter was around 60 percent from what we define as Y2K activities.
Mike Kuchler: Okay. And also, if a client wants to be completely fixed by the end of next year, when do they have to start the process with you?
John Jenkins: It depends on the client, depends on the complexity of his system, depends on how you define completely fixed. I'm not trying to be, you know, sound ((crosstalk)).
Mike Kuchler: I understand that but is there a general, say for a typical client, two quarters, three quarters, a year?
John Jenkins: I can't- no, I can't make a generality. I mean, who's the client? Is it General Motors or is it, you know, Imperial Headware? I mean, it just depends on the scope of their operation and complexity. You know, too, a refinery is a tremendously difficult challenge relative to perhaps a food processing plant, but if that food plant has a particular kind of MES platform running in it, you know, that's a more difficult arena.
I mean, the general answer would be that people who are just now starting are going to have a very difficult time- you know, if they have significant enterprise operations, they're going to have a very difficult time wading through everything that needs to be done. And, in fact, in many of our clients now we're doing sort of a parallel path of the, you know, the core methodology as we've developed it, plus on top of that some, what we call fast track which is coming in and, because of our subject matter expertise, knowing specifically where there, you know, where we know they're going to have problems and addressing those at the same time as we're doing the ground up approach.
Mike Kuchler: Are you seeing any new competition in this space—Y2K remediation and evaluation?
John Jenkins: Not on a significant or comprehensive level. We've seen some of the A&E firms are, I'll say, selling engineering services into this space. But no, certainly not on a comprehensive program basis.
Mike Kuchler: And can you comment on what your pricing strategy's going to be as the deadline gets closer and demand increases for your services?
John Jenkins: I think our pricing strategy, we're in this to make sure that- I mean, we're in this to build our- expand our client base down stream, so we have to be very careful as being seen as hold-up artists in this process. And we have no intent on doing that. That said, there are certain industries in sectors that- let's take the database as an example- where the utility of the database is very good, very high. There are not industries that we would ordinarily participant in, so you know, our database pricing for some of those industries may change as we go forward.
Mike Kuchler: Okay. Thank you.
Operator: Carl Drobnic from Venture Returns, please go ahead with your question.
Carl Drobnic: Great quarter, and congratulations.
John Jenkins: Thanks, Carl.
Carl Drobnic: Could you hit the highlights on the international operations, some of which you hit in the last conference call, and could you comment some on the Unisys agreement?
John Jenkins: Well, you know, the last conference call was only, I guess, 40 days ago, and as fast as thing change around here they haven't changed too much in that arena, although, specifically with Unisys, it appears that we're on the verge of a pretty major engagement in the oil industry in Latin America. We do have- I believe, TAVA/Beck is sending a core squad of people to China to address several utilities over there. We've had some increased European activity. Outside of the Venezuelan activity through Unisys, Karl, I'm not sure that I have anything else of major impact to put on the table.
Carl Drobnic: Okay. Thank you. |
