GlobalOptions Group, Inc. Q3 2008 Earnings Call Transcript

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GlobalOptions Group, Inc. (GLOI) Q3 2008 Earnings Call Transcript November 11, 2008 10:00 AM ET


Jody Burfening – IR, Lippert/Heilshorn & Associates

Harvey Schiller – Chairman and CEO

Jeff Nyweide - CFO and EVP of Corporate Development


Brian Ruttenbur - Morgan, Keegan & Company


Welcome to the Global Options Group third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following management’s prepared remarks, we will hold a Q&A session. (Operator instructions) As a reminder, this conference is being recorded Tuesday, November 11, 2008. I would now like to turn the conference over to Jody Burfening. Please go ahead ma’am.

Jody Burfening

Thank you Ashley and thank you everyone for joining us this morning for the GlobalOptions third quarter earnings conference call. With us from management are Dr. Harvey Schiller, Chairman and Chief Executive Officer; and Jeff Nyweide, Chief Financial Officer. The company issued its third quarter earnings press release yesterday afternoon and it is also posted at the company’s Web site at If you have any questions after the call or would like additional information, please contact Lippert/Heilshorn at area code 212-838-3777.

Before turning the call over to Dr. Schiller, I’d like to point out that management will comment on EBITDA, a non-GAAP measure, on today’s conference call. This non-GAAP measure is supplemental to the company's GAAP results. For a reconciliation of EBITDA to the comparable GAAP measure, investors are invited to review the schedule that accompanies the third quarter earnings release. Also, I’d like to remind everyone that statements about GlobalOptions’ future expectations including future revenues and earnings and all other statements in this conference call other than historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934, as that term is defined in the Private Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties and are subject to change at any time and actual results could differ materially from expected results. GlobalOptions undertakes no obligation to update forward-looking statements to reflect subsequently occurring events or circumstances.

With that, I would now like to turn the call over to Dr. Schiller. Good morning Dr. Schiller.

Harvey Schiller

Good morning and thank you Jody. Before we get started let’s remember that today is Veterans Day and it is a day to honor all our service men and women that have given so much to secure America on a day-to-day basis.

Thank you for joining us today for the GlobalOptions third quarter earnings conference call. I will start by giving an overview of the quarter after which Jeff will again review the company’s financial performance in more detail.

GlobalOptions continues to perform to plan and our improved results are increasing demonstrating the earnings potential of our business model. For the third quarter, revenue reached $29.5 million, an increase of 37% over last year. Most of the year-to-year increase came from our organic growth. The combination of revenue growth and ongoing operational efficiencies brought EBITDA into the black, a natural progression after reporting positive EBITDAs last quarter. And with the modest GAAP net loss of $400,000, we are on track to achieve positive EPS in the fourth quarter.

Revenue growth was led by our emergency preparedness unit. We are currently supporting six active disaster recovery projects in Louisiana, Iowa and Indiana. Indiana along with Iowa was severely damaged by last summer’s floods. We have been awarded a contract during the quarter to provide the state with recovery support services. In Indiana, we are also implementing a Hazard Mitigation Grant Program which provides the state with the resources to reduce further risks of disasters and accompanying losses. Furthermore, we are working within communities in Texas and in the United States Virgin Islands assisting with the recovery efforts from the recent hurricanes. In anticipation of potential future damages from natural disasters, four states Rhode Island, New York, Virginia and Louisiana along with the United States Virgin Islands have standby contracts with Global. Our fraud and SIU unit continues to add new clients and broaden our existing client relationships while enhancing our reputation for SIU and surveillance services. We are building upon our track record of successfully working with major insurance companies, third party administrators and self insurers to identify, track, and resolve insurance fraud cases nationwide.

Standing out this quarter was the award we received from SUA Insurance Company. Under a three-year contract, we have been retained on an exclusive basis to provide SIU and surveillance services and to provide additional expertise that will help to expose and reduce insurance fraud. We also just signed a large contract with a leading insurance company to perform surveillance and related investigations further expanding and growing our market share within the insurance industry. Insurance fraud, as we all know, is an escalating problem and one we believe will become more acute in a weakening economy. We believe annually insurance fraud now exceed the $80 billion mark with insurance carriers having to devote more resources to managing these increasing fraud claims. Many insurers have created special fraud busting units to combat the problem while seeking to find more efficient solutions. Against this backdrop and demand for fraud related services, we are supporting almost all aspects of an insurance company’s fraud fighting efforts from fuel case management using our GlobalTrack platform to the facilitation of fraud-related compliance matters with state and local authorities.

In a larger sense, we are gaining increasing recognition among insurance companies for the full complement of services. From real-time tracking and monitoring of claims to identifying and conducting investigations and resolving fraud cases which we provide on a nationwide basis. As evidence of our Fraud & SIU success, in September of this year, we reached the $1 million milestone in restitution for our clients and our work has led to the arrest of 93 perpetrators resulting in 69 convictions. Along with building a track record of success we are emerging as the market leader for fraud and SIU services in the insurance industry.

Our Bode technology unit is attracting increased interest in its DNA identification services. This quarter Bode was awarded four grants from the National Institute for Justice to process convicted offender DNA samples. We are currently processing a backlog of over 44,000 samples coming from four states, Mississippi, Nevada, Rhode Island and Utah building on the work we have completed in the past year during which we have generated over 100,000 DNA profiles from each states. We expect that over 10,000 of these samples will be processed before year end.

Turning to our Security Consulting and Investigations unit, we had another good quarter adding new clients and continuing to expand our contract building security work with leading healthcare and higher education institutions. The unit’s technology, design, and consulting practice was awarded the contract by the University of California San Francisco Mission Bay Campus project to design and implement a comprehensive security arrangement at the University’s new Mission Bay Medical Center. We are also providing security and technology consulting services for statewide telemedicine project for the University of California San Francisco. We have several new assignments with Kaiser Foundation Hospitals expanding our relationship with Kaiser Permanente. Under these contracts we are providing technical consulting services that cover security, fire alarm and technology systems for planned hospital facilities in Oakland, Redwood City, San Leandro and Anaheim in California. As these awards suggest, our technology, design and consulting practices are the gold standard for optimizing security at large and complex medical centers.

With one quarter remaining in our fiscal year, we now have the capability to refine our revenue estimate for the year. We are expecting a solid fourth quarter with revenues slightly below the third quarter level. Added to our year-to-date results, this will bring full-year revenue into the $105 million range. And it is our expectation that with these revenues we will be able to deliver a positive EPS for the fourth quarter providing us a firm base upon which we will be able to achieve profitability for the year 2009.

As we look into 2009 and the challenge of a weakening economy, we continue to believe we will be able to grow our topline by around 10% to 15% without adding fixed costs. Staying local governments will face significant budget squeezes while still having to provide disaster recovery services and plan for disasters whether man-made or natural. We expect that more and more government agencies will outsource this work to emergency preparedness service providers such as ourselves. We believe we are the best in the field to fill these essential needs. We strongly believe insurance fraud is also likely to rise particularly in the areas of unemployment and health insurance while insurance companies focus more intently on reducing fraud to protect their bottom lines. And the insurance companies under pressure to cut costs and operate more efficiently are going to step up the pace of shifting their SIU work from their internal departments to comprehensive services providers like GlobalOptions. That is the topline. In terms of costs, we continue to look for ways to trim expenses and improve operational efficiencies so that we can achieve our fourth quarter goal of profitability on a GAAP basis.

Now, I will turn the call over to Jeff who will take you through the financial results. Jeff?

Jeff Nyweide

Thanks Harvey. For the quarter ended September 30, 2008 GlobalOptions grew reported revenue of $29.5 million versus $21.6 million in the third quarter of 2007 representing a 37% increase. Selling and marketing expenses for the quarter were $3.2 million compared to $1.4 million last year reflecting increased sales and marketing activities and this year’s addition of First Advantage Investigative Services.

G&A expenses were $9.8 million for the quarter compared to $13.1 million last year reflecting our ongoing efforts to streamline back office operations and the absence of accounting and legal fees associated with last year’s capital transactions. Included in our selling and G&A costs for the third quarter of 2008 were stock-based compensation expense of $0.8 million, $0.4 million in depreciation and amortization expense of property and equipment, and $0.8 million of amortization of intangible assets. As a result, we reported a quarterly operating loss of $300,000 compared to an operating loss of $4.4 million last year.

During the third quarter, the company continued to streamline operations and centralize back office activities. Specific actions included reducing administrative headcount, rollout of IT solutions that will facilitate more efficient case management at our FSIU division and further enhancing the capabilities of the company’s integrated financial system.

Net loss for the third quarter was $400,000 or $0.04 per share versus a net loss of $4.9 million or $1.45 per share for the same period last year. The company’s weighted average common shares outstanding rose to 9.7 million for the third quarter of 2008 versus 3.4 million last year reflecting principally the shares issued in our 2007 equity restructuring and secondary public offering.

From a balance sheet standpoint, our cash and cash equivalents at the end of the quarter stood at $3 million. We ended the quarter with $6 million drawn under our $20 million line of credit. Accounts receivable was $31.3 million primarily reflecting our revenue growth and a short-term lengthening of collections from government agencies related to our work in Louisiana.

That concludes our prepared remarks and now we would like to open the call to the questions. Operator?

Question-and-Answer Session


(Operator instructions) Our first question comes from the line of Brian Ruttenbur with Morgan, Keegan & Company.

Brian Ruttenbur - Morgan, Keegan & Company

Thank you very much. Can you give us a breakdown first of all on the quarter by fraud, crisis and risk management?

Harvey Schiller

Yes we can Brian. The Preparedness unit approximately $11.8 million, the Fraud & SIU division did $8.7 million and the Security and Consulting group did about $9 million for a total of $29.5 million.

Brian Ruttenbur - Morgan, Keegan & Company

Okay and the weak fourth quarter or the weaker than you anticipated fourth quarter is due to just the general economy and weakness, is there anything that you can point to that is a specific program out there or is it just the overall weakness in the economy?

Harvey Schiller

First of all, as you know, we are entering the holiday season, Thanksgiving, Christmas which is normally slightly lower in terms of the number of days available for work. We are just trying to be realistic about what is happening overall. We have nothing that is indicating to us any definitive weakness but I guess it is just the sense of the general feeling that is going on in the economy but we can’t put our finger on anything specifically. The only thing that we do know is typically there are fewer days available in November and December.

Brian Ruttenbur - Morgan, Keegan & Company

The reason that you are so sure that you are going to have 10% to 15% growth in ’09 is because you have a lot of long-term contracts that are not tied to the economy, what gives you such assurance that you are going to have that strong a growth year over year?

Harvey Schiller

First of all, yes (inaudible) time to our long-term contracts. Secondly, the way we have worked with our operating units in terms of their forecast based upon the incoming business that they see having been talking to those folks this quarter, so our anticipation will be that there will be more government spending in these particular areas to take over in the disaster area to take over some of the day-to-day duties that states and other communities cannot afford to do. Just in general about our forecast on the fraud and then finally some of the anticipated growth we see in the security area as well.

Brian Ruttenbur - Morgan, Keegan & Company

Great. Thank you very much.


(Operator instructions) I am showing that there are no further questions at this time.

Harvey Schiller

Okay. Thank you everyone for taking the time on this call. I know it is Veterans Day for many but we appreciate your interest in the company and we continue to move forward and we have been very positive in the way we look at 2009. Thanks again.


Ladies and gentlemen that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your line.

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