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Globecomm Systems, Inc. (NASDAQ:GCOM)

F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

May 7, 2009 10:00 am ET

Executives

Matthew Byron – Corporate VP, IR

David Hershberg – Chairman, CEO and President

Keith Hall – COO and SVP of Globecomm Network Services

Andrew Melfi – VP and CFO

Analysts

Steve Ferranti – Stephens Inc.

Rich Valera – Needham & Company

Dick Ryan – Dougherty & Company

Operator

Good day and welcome to today’s Globecomm Systems fiscal 2009 third quarter earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the conference over to Mr. Matthew Byron, Corporate Vice President. Please go ahead, sir.

Matthew Byron

Thank you. Good morning everyone and welcome to the Globecomm Systems fiscal 2009 third quarter earnings conference call. Joining me today from the Company are Chairman and CEO, David Hershberg; Chief Financial Officer, Andrew Melfi; and our COO and Senior VP of Globecomm Network Services, Keith Hall.

Earlier today Globecomm issued its fiscal 2009 third quarter earnings press release. In the event you have not seen a copy of the release, it is posted on the Globecomm Systems website at www.globecommsystems.com, or you can contact me at 631-457-1301 and I will send a copy to you.

Comments made during this conference call may contain projections or other forward-looking statements regarding future events or the future financial performances of Globecomm Systems. These statements are only projections and reflect the current beliefs and expectations of the Company. Actual events or results may differ materially. With that said, it is routine for internal projections and expectations to change as quarters progress. All forward-looking statements are based on information available to the Company on the date hereof and the Company assumes no obligation to update such statements.

Please refer to the documents the Company files from time to time with the SEC, specifically the Company's Annual Report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K, and the Safe Harbor language contained in the Company's press releases.

These documents contain or identify important factors that could cause the Company's actual results to differ materially from those contained in its projections or forward-looking statements, which the Company urges all investors to consider. Globecomm undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Please note that this call is being recorded on Thursday, May 7, 2009, and contains time-sensitive information, and will be available as a webcast replay for at least nine months on the Investor Relations section of the Globecomm Systems website and as a phone replay at 1-888-203-1112 for domestic callers, or 719-457-0820 for international callers with an access code of 4019651.

At this point, I'd like to turn the call over to our CEO, Dave Hershberg. Dave?

David Hershberg

Thank you, Matt. Last night, after the closing bell, Globecomm issued its fiscal 2009 third quarter financial earnings press release. Globecomm’s acquisition of Mach 6 and the Company’s record service segment revenues and operating income were the highlights of our third quarter.

During this quarter, we also shipped our first major Ku-band hub terminal and completed development of our Ku-band tactical terminals. Despite difficult economic times that continue to impact the infrastructure segment in our business, the Company recorded its twentieth [ph] consecutive profitable quarter and we expect that to continue going forward.

The shortfall in infrastructure business has not been as a result of losing contracts, but rather a primary result of deferrals and funding. With that said, proposal activity is very strong and the Company finished the third quarter with a record backlog, consisting of record backlog in the service business and about 10% shy of our record in the infrastructure side.

These factors are setting up for a better level of business in fiscal year ’10 and it is developing a lot better than we recently thought it would. The Company’s service business is strong in providing excellence stability during the current downturn and we expect this to continue. The Global Managed Services vision of the Company is set out – we set out over a decade ago is working and we are seeing lots of opportunity on this front.

Our cash position is still strong, and we continue to review complementary acquisitions in the service segment to further leverage the Company’s robust global network. The Mach 6 acquisition integration is going very well and we very excited about this maritime opportunity, and we see this as a big part of our future business. We also are continuing to invest in cellular wireless platforms and have had a significant experience in that area as noted in our recent press release.

The Company is going through a transformation as investments in the service area over the past 10 years and the coupling of our two acquisitions are paying excellent dividends. While we are somewhat disappointed by the push out in infrastructure bookings, we are confident therefore about our future, especially in the service area.

Today, we are going to have with us our Chief Operating Officer, Globecomm Network Services, our Senior Vice President, Keith Hall. He is going to into somewhat more detail on our service business. Keith?

Keith Hall

Thanks, Dave. Good morning everybody. Moving forward on these conference calls, I will attempt to provide some color to the financial metrics provided in our quarterly press release and some clarity to our focus and objectives as it relates to or services business. For reference, service business is made up of four subsidiaries, Globecomm Network Services, Globecomm Services Maryland, Crescendo, and now Mach 6, which we acquired on February 27th.

I am happy to report that despite the current economic climate and continued weakness in the commercial sector, our total service revenue grew to a record level in Q3, totaling $19.2 million or an average monthly run rate of $6.4 million. This is an increase of 21% over Q3 last year, and on a year-to-date basis our total revenue has also grown 21%. The increase in revenue was driven primarily by government related programs. We continue to focus on key existing accounts and have also been rewarded not only with renewals of existing services, but also with the expansion of these networks.

Our gross margin grew two percentage points, going from 23% in Q3 last year to 25% in Q3 this year. This increase is driven by a product mix that was more heavily weighted with business from within our life cycle support service line. Fluctuations in our gross margin numbers can be expected as our product mix changes and as we incorporate our new Mach 6 subsidiary.

With revenue and gross margin growing, our income from operations has improved to record levels in Q3, totaling $2.4 million. This is an increase of 49% over Q3 last year. Year-to-date operating income has also reached a record high of $7.1 million, a 40% increase over last year.

As we enter the final stages of fiscal 2009 and begin our planning for fiscal 2010, our focus will remain on some very specific initiatives, including military related programs with a focus on Afghanistan and our continued exploration of two key vertical segments, maritime and cellular providers. We will also continue to mature our global platform as we integrate Mach 6 and expand the reach of our managed network services offerings.

Overall, fiscal 2009 remains on plan and continues to be successful on many fronts. And despite some lack of visibility caused by the world’s current economic conditions, we remain optimistic that we can increase our revenue run rate in Q4 and in fiscal 2010.

Lastly, as noted in our press release and pointed out by Dave, the service business continues to review strategic acquisition opportunities, in particular are pursuing opportunities that further leverage our existing global network.

Thank you for your time today. And at this point I would like to hand the call over to Andrew Melfi, our CFO.

Andrew Melfi

Thank you, Keith. Revenues for the Company’s fiscal 2009 third quarter decreased by 10.9% to $38.6 million compared to $43.3 million in the same period last year. Revenues from infrastructure solution decreased 29% to $19.4 million compared to $27.5 million in the same period last year. Revenues from services increased 21.4% to a record $19.2 million as compared to $15.8 million in the same period last year.

The increase in service revenue was predominantly driven by the Company’s continued execution within the U.S. government market, which overcame the slowdown in the commercial sector.

Net income for the Company’s fiscal 2009 third quarter decreased $5000 [ph] – decreased to $5000 [ph] or $0.03 per diluted share compared to net income of $3.4 million or $0.17 per diluted share in the third quarter of fiscal 2008.

Adjusted EBITDA for the third quarter of 2009 decreased to $3 million as compared to $4.7 million in the third quarter of 2008. The decrease in net income and adjusted EBITDA was primarily caused by the low infrastructure solution revenues.

Looking at the nine months, revenues for the Company’s fiscal 2009 nine months, March 31st, decreased 13.7 million [ph] to $120.9 million, compared to $140.1 million in the same period last year. Revenues from infrastructure solutions decreased by 31% to $64.3 million compared to $93.2 million in the same period last year. Revenues from services increased 20.9% to a record $56.7 million as compared to $46.9 million in the same period last year. The factors behind these trends were the same as reflected in the third quarter results.

Net income for the Company’s first nine months of fiscal 2009 decreased to $2.3 million, or $0.11 per diluted share, compared to net income of $10.2 million, or $0.51 per diluted share in the same period last year.

Adjusted EBITDA for the Company’s first nine months of fiscal 2009 decreased to $9.1 million as compared to $14.5 million in the same period last year. The decrease in net income and adjusted EBITDA was primarily caused by lower infrastructure solution revenues and an increase in selling and marketing expenses.

As mentioned earlier, the Company continues to maintain a strong balance sheet with cash and cash equivalents of $44 million.

At this point, I would like to hand the call back to Dave.

David Hershberg

Say, well, thank you, Andy. At this time I would like to answer any of the questions you might have.

Question-and-Answer Session

Operator

(Operator instructions) And we’ll take our first question from Steve Ferranti with Stephens Inc. Please go ahead.

Steve Ferranti – Stephens Inc.

Hey, thank you and good morning. Dave, just touching on the system business revenues, you are down at a run rate of about little over $19 million a quarter now. How do you view the trajectory of this business as you move into the fourth quarter and then into fiscal year ’10? It sounds like you have some fairly material activity in the pipeline. I am just trying to get a sense for – we feel like we are bottoming out here and maybe with the potential for some growth going forward or do we flat line, any color you can give us there?

David Hershberg

Yes, one of the reasons that we were down this quarter – also, there was a $4 million shipment that we couldn’t make because the customer could not get here and buy off on that. We couldn’t get – couldn’t have the title changed. So, those things happen from quarter to quarter getting lumpy. We do expect next quarter to better. We have – I think we talked about this before. We have a number of these IDIQ contracts that we are the only person on these contracts, just three of them. And the release of new equipment against these contracts has been very slow. One is a $84 million contract, we’ve gotten about $15 million so far. Another one is $117 million contract, we’ve gotten about $5 million or $6 million so far. We have some indication that this quarter they will start ordering some equipment against that other one – against that – those contracts.

The shortfall we have has mainly been in these government areas that we – but were very – we did very well in bookings last year on them (inaudible) them in the same year and this year those bookings did not occur. We have since then bid a number of other pretty good size hardware contracts and we are hopeful we are going to be successful on one or two of them. Plus we are looking at some add-on, some – on existing contracts we have, not IDIQ, but existing contracts we have like our force tracking system that we’d expect is going to be expanded in Afghanistan.

I think the general trajectory should be up. I don’t know what the velocity is going to be of it. I think it really depends an awful lot on releasing of funds by the government in certain areas and we certainly are depending a lot on that.

The other one is there are a couple of pretty large contracts that we’ve won in the area of broadcast centers that require financing or licensing and we hope to hear some good news on those shortly. So I think the general trend is going to be up. I know the trend in the service business is going to be up and it’s certainly doing a lot to help us this year and I think that plan works out pretty well being able to combine the service revenue with the infrastructure revenue, but the crystal ball is pretty cloudy right now, but I do expect we are going to do better next quarter and that we do expect to do somewhat or a lot better in fiscal ’10.

Steve Ferranti – Stephens Inc.

So, I guess is it safe to say then if you exclude sort of this $4 million lump of business that didn’t fall into the third quarter, that most of the sort of softness and maybe lack of visibility that you have is still in the – primarily in the pre-engineered business?

David Hershberg

Yes, pre-engineered, it’s the – I think there has been a delay in ordering tactical terminals because of WGS and going to Ka-band and X-band. We now have developed those products. We are ready to sell them. We just need the customers that stopped buying some of them.

Steve Ferranti – Stephens Inc.

Okay. Would you say – I guess last one on this particular point – but would you say that in conversations that you’ve had with these particular customers, has the tone become more optimistic of late in terms of their ability to actually start placing orders on these vehicles?

David Hershberg

I think on a macro sense, yes, because I think this administration is going to put emphasis on Intel and broadband communications from the field, so we think on a macro basis, yes. On a specific basis, where that one is going to be released and how it’s going to be released and what exactly you are going to buy we – at least as of right now here I thought I had more visibility (inaudible) but right now it’s difficult to tell you about it.

Steve Ferranti – Stephens Inc.

Okay. Understand. And how much of an opportunity does Afghanistan represent for you guys going forward? I mean activity there has clearly been on the rise in terms of our presence there. I mean – does that represent an opportunity for you guys?

David Hershberg

Yes, we just bid a pretty large network over there for NATO. We’ve talked to NATO also about expanding our force tracking system with new – almost doubling the number of vehicles there. There is – our Mach 6 acquisition, it has a network that’s going to be expanded over there. So, I think the – I think it looks pretty good. What we are – we a had a country manager there that after two years left and we haven’t replaced him yet, we are looking to replace him. That country manager helps not only with running our business that we have going over there, but also helps in the marketing and business development side. We haven’t replaced him yet. We expect to replace him very shortly, but every things point to a – we think a lot more business over there right now.

Steve Ferranti – Stephens Inc.

Okay, great. And last one from me. Can you give us a sense for the contribution from Mach 6 in the quarter? I know it closed I guess in early March, so we don’t have a full quarter of contribution there, but can you give us some sense of what the revenue contribution was there?

Andrew Melfi

This is Andy. It was about $1 million and with the goodwill amortization we are sort of breakeven.

Steve Ferranti – Stephens Inc.

Okay. And that – was that going to be – was that your view that will be accretive going forward?

Andrew Melfi

Yes, we will be accretive going forward and we expect revenues to be about $3 million in Q4.

Steve Ferranti – Stephens Inc.

Great. That’s it from me guys. Thanks.

David Hershberg

Thanks.

Operator

Moving on to our next question from Rich Valera with Needham & Company.

Rich Valera – Needham & Company

Thank you. Obviously, services have continued to perform very well and just wondering how we should think about that business on a longer term growth basis, is there anything you could do to help us put some sort of ranges around how we should think of that into maybe 2010 and beyond in terms of your growth targets for that business?

David Hershberg

Well, we’ve had a – we are trying to get that business to be about 50% of our business. Unfortunately, we are close to it now, but for the wrong reasons, and – because the infrastructure business is down, but we have a lot of hopes for growing that business. That business we are – we like that business a lot obviously. It’s a – it’s very predictable. It’s got good margins and Keith’s really responsible for that. So maybe you can talk a little bit to that.

Keith Hall

Yes, from an organic perspective, we have been growing at approximately 15% to 17% growth rate organically and our goal is to continue that trend as we enter into FY10–

Rich Valera – Needham & Company

Okay. And you think that your acquisitions will also be pretty much focused around that business as well, is that correct?

Keith Hall

The acquisitions to-date have been focused around the recurring service business model and the opportunities that are in the pipeline right now are also focused around that business model as well.

Rich Valera – Needham & Company

Okay. On that note, could you give us an update on how you view your acquisition pipeline opportunity at this point?

David Hershberg

So, maybe let Matt do that because it his responsibility, so he can talk up to that a little bit.

Matthew Byron

Yes, Rich, there is plenty of opportunity. The question is can we get it for the right price. There is still over pricing out there, but there is a lot of opportunity, and what we are trying to do is break it down more vertical specific. Our global network is pretty robust and in place. So, what we are trying to do is focus on maritime, oil and gas, and the enterprise market, because they are in the early transition phases. So, the activity is high. We are busy. But we got to careful because we also have to balance out the cash levels in terms of the needs on the infrastructure side and typing up the cash. And also with the stock price where it is, we are not really looking at putting a lot of stock in these types of deals. So we are going to have to stay patient.

Rich Valera – Needham & Company

Fair enough. Then with respect to the overall results last quarter, I think you’d talked about feeling reasonably confident at that point that your second half of this fiscal year will be above your first half in both the revenue and earnings basis. I know it looks like it came up a little light in that third quarter. Would you care to revisit that? Do you still think you have a shot at being up half over half in fiscal ’09 on a revenue and/or earnings basis?

David Hershberg

I’d tell you that’s something we firmly believe that the time we said it, obviously, we missed it by a couple of cents. Looking at what we got in our backlog, it’s really going to be a question of timing, being able to turn it around in the time that we have. And a lot of times, we don’t have control over that – our customers have a lot of control over that. We got problems recently, for instance, on customers coming here, getting reasons [ph] to come here, buy off on equipment. So, it’s –- there is a lot of factors that go into that. I said earlier, our backlog is at record levels, not in the infrastructure side, maybe 10% shy of a record there. But we do have backlog and really the question is can we turn it into the timeframe the next couple of months and have a decent Q4. But the backlog is there and the pipeline is good. It’s a matter of getting those jobs and executing on them, but I am going to be hesitant to tell you yes.

Rich Valera – Needham & Company

Okay, not to cut it too fine, but would – how much risk is there, I mean it sounded like you are reasonably confident of the sequential uptick in the infrastructure business. I mean how risk is there to that assumption of being sequentially up in infrastructure?

Andrew Melfi

I think I Q – this is Andy – I think in Q4 we will be up. I think the statement revenues being up sequentially in the second half is true. I think when you talk about bottom line, in the infrastructure side we have some projects, some commercial projects, with not typical margins we’d like to see that are in the other areas. So, I think sequentially, revenue up, but the margin probably not as strong as you seen in Q3.

Rich Valera – Needham & Company

Okay. That’s helpful. And finally, just with respect to WGS, so it sound like you guys – you have your products ready to go there. Any sense of the timing of when those orders might start coming? Is it – could we think this could be a – as early as the June quarter or is this more likely a fiscal 2010 event when you start getting WGS orders?

David Hershberg

I talked last night to the guys who is responsible for that and he had no crystal ball about when this stuff will start breaking loose. We did sell overseas to a – overseas government some, Ka-band hubs and Ka-band mobile terminals, but we have not sold them to our government yet, the U.S. government yet.

Rich Valera – Needham & Company

Okay. And just one final one, if I could. It sounds like you are expecting an incremental $2 million roughly from Mach 6 in June versus March. Is that – is it fair to assume the business would be up sequentially by that amount, the overall service business?

Matthew Byron

Yes, that’s a fair statement.

Rich Valera – Needham & Company

Okay. That’s it from me. Thanks, gentlemen.

Operator

(Operator instructions) And we’ll move on to Dick Ryan with Dougherty & Company.

Dick Ryan – Dougherty & Company

So, Dave, what’s the rough breakdown in the service side between government and commercial?

David Hershberg

Keith–?

Keith Hall

It’s about I would say 55% government, 45% commercial. It’s been changing. It’s becoming more a government focus over the last 24 months.

Dick Ryan – Dougherty & Company

Okay, okay. Dave, when you just look out into the stimulus bill, there is a fairly good sized pot of money there to go after rural broadband opportunities, is that an area you are looking at or that you access? I know you’ve got a pretty good offering up in Alaska? What can you do to go after the rural broadband?

David Hershberg

Yes, we are looking after a number of different avenues to go after that $7.2 billion that you are talking about. We think we have an excellent offering. If we can combine the satellite backlog with a WiMAX type solution, especially with some of these newer use and ViaSat satellites that are coming up with relatively very low bandwidth cost, we think we have an offering that will be dynamite. And the question is to get it to the right – talk [ph] it to a couple of rural carriers to get it with the right rural carriers to find a way to attack that business. The government is a little bit hard sometimes, but we got people working on it, and we have a plan and we do have, we think, a very good offering, but the question is how do we get in there and sell this. Not only that, but we can actually go into a small village within a week or a small town within a week and get them up in service. And you can't do that with terrestrial or fiber. And we think we have – we think satellite is a very good way to go for some percentage of what they are trying to do. Don’t know what size percentage but we know there is business out there. We just have to find a way to attack it.

Dick Ryan – Dougherty & Company

What are you doing now in Alaska and how has that rolled out?

David Hershberg

We have in Alaska about 200 villages and towns that we are servicing. So far, we’ve installed, I think, 60 towns. They’ve put a stop on installation during the winter time, as you can imagine. We are shipping more systems now. And we did get an add-on in that contract for part of the satellite infrastructure to the (inaudible) facility infrastructure. We are up to about $30 million on that contract. Also, the customer has told us that the acceptance has been tremendous. They are getting about three times the amount of revenue from that service that they thought they were going to get. So, it’s going extremely well. And I think the model that we’ve got there, that we are trying to roll out into the developing world is really unique because it does a lot of things I think that allows you to become competitive with relatively small populations and that’s a market that obviously we are going after.

Dick Ryan – Dougherty & Company

Okay, great. When you look at the backlog or the proposal pipeline, can you – I know you don’t give specifics during the year, but can you give us any kind of feel for the size of those opportunities or what’s in the backlog?

David Hershberg

Well, we’ve got – in the service area, we’ve got opportunities, we’ve got one in the $35 million range for service. I think we did announce – excuse me there. And we won an IDIQ contract that we are not sure how big it’s going be, but it could be considerably larger, we don’t have anything of backlog for that right now, but it could be a very large project. We just bid a $70 million project in infrastructure that’s a combination of service and infrastructure. We’ve got some pretty good sized projects that have been in the pipeline for quite a while in the $20 million-$25 million range in the broadcast area. There is a number of new initiatives in – there is one in the $40 million-$50 million range in the Middle East in the broadcast area. So, there – yes, much – some of these are much higher than we’ve been going after before. But I think in all the ones that we are going after, we’ve got very good capability and have a good opportunity to be successful there.

Dick Ryan – Dougherty & Company

Alright. Thanks, Dave.

Operator

And there are no further questions at this time. (Operator instructions) And there are no further questions in the queue.

Matthew Byron

Okay, well, thank you very much. We are looking forward to talking to you next quarter. Thank you.

Operator

And that does conclude today’s conference. Thank you for your participation.

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