Black Box's CEO Discusses F4Q2013 Results - Earnings Call Transcript

| About: Black Box (BBOX)

Black Box Corporation (NASDAQ:BBOX)

F4Q2013 Earnings Call

May 09, 2013 05:00 PM ET


Gary Doyle - VP of IR

Mike McAndrew - President and CEO

Tim Huffmyer - VP and CFO

Ken Davis - EVP of North American Commercial Services


Greg Burns - Sidoti and Company

Brian Horey - Aurelian Management


Ladies and gentlemen, thank you for standing by. Welcome to the Fourth Quarter Fiscal 2013 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be given at that time. (Operator Instructions) As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Mr. Gary Doyle, Vice President of Investor relations. Please go ahead sir.

Gary Doyle

Thank you. Good evening and welcome to Black Box Corporation's fourth quarter of fiscal 2013 earnings conference call. With us today are Mike McAndrew, President and CEO of Black Box Corporation. Tim Huffmyer, our Vice President and Chief Financial Officer, and Ken Davis, our Executive Vice President of North American Commercial Services.

Earlier today, we announced our fourth quarter fiscal 2013 results by issuing a press release and furnishing it to the securities and exchange commission on form 8-K. We also posted this press release on our website at We have a new format that we are introducing for our earnings call today. In addition to commentary from our executive team, we have a brief slide presentation supplementing the call.

The slides are available for download on the new IR section of our website at For those of you who are accessing the website, the slides are present on your screen. We will begin today's call with comments from Mike, followed by a summary of our financial results from Tim. Mike will then provide an overview of our strategy and the markets (reserve). Our team will then take your questions.

Before we begin, and as a reminder, matters discussed in this call may contain forward-looking statements that involve risks and uncertainties concerning Black Box's expected financial performance. Actual results may differ materially from expected results, and reported results should not be considered as an indication of future performance. Potential factors that could affect our business and financial results include changes in economic conditions in our end markets and the general market at large. Additional factors are included in our most recent Form 10-K and today's press release.

On this call, and as presented in today's press release, we will discuss some financial information that includes non-GAAP financial measures, including operating net income, operating earnings per share, free cash flow, EBITDA, adjusted EBITDA, and organic or same-office revenue comparisons. We will limit any non-GAAP financial discussions today to the specific measures in our press release.

As I said earlier, our press release was filed with the SEC and posted to our website prior to this call. Please refer to the schedules that accompany the press release for a reconciliation of non-GAAP financial measurements to the most directly comparable GAAP financial measurement and other supplemental information.

Now I’d like to turn the call over to Mr. Mike McAndrew.

Mike McAndrew

Thanks Gary. Welcome and thank you for joining us today to discuss the fourth quarter of fiscal 2013 results for Black box Corporation. This is my first earnings call as CEO of Black Box, and I’m very excited about the progress we have made in the last several months.

Our team is focused and we are investing in programs that will leverage our products and service platforms to drive organic growth within our business. More about that in a few moments. First I would like to review our fourth quarter fiscal 2013 results which reflect both the challenges and opportunities in the markets we serve. We continue to expand top line revenue pressure. However, pricing has stabilized and our business model continues to generate significant positive operating cash flow.

For the quarter ended March 31, our revenue was $238 million. Our operating earnings per share was $0.67. And we generated $13 million of free cash flow. We invested $4 million of our cash flow to repurchase nearly 167,000 shares of Black Box stock and paid over $1 million in dividends.

For the quarter, we outperformed our guidance on the revenue and gross profit margin fronts. This enabled us to demonstrate the earnings power that we have created through our cost containment and stock repurchase programs over the last year, resulting in a strong performance in our operating earnings per share relative to guidance.

Over the course of this call, Tim and I will describe in detail, some of the positive aspects of our team’s accomplishments over the last several months. We have made many changes strategically, organizationally and financially. I believe these changes are having a profound impact on the trajectory of our business. You will see from our results that many of our financial metrics have stabilized. I view this as a very positive and important to our future growth.

Over the last two years, we have experienced inconsistency in our forecasted financial performance. We’ll describe why we believe our near terms table outlook positions us to forecast organic revenue growth for black Box in fiscal 2014. I'm also pleased to announce that our board has expressed their confidence in our ability to continue to generate significant positive cash flow by increasing our dividends by 12.5%. This marks the third consecutive year that we have increased our dividend to shareholders by over 10%.

I’d like to turn the call over to Tim now for discussions of our financial results.

Tim Huffmyer

Thanks Mike. In the fourth quarter, we posted revenue of $238 million, down $18 million or 7% from $256 million reported for the same period last year. Excluding the fourth quarter revenue contribution from acquisitions and the impact from foreign currency, same office revenues for the fourth quarter is down $19 million or 8% from the same quarter last year.

Although it is down year-over-year, our revenue outperformed our guidance expectations for the quarter. The outperformance was driven by an increase in activity in North America services. Our maintenance revenue which was derived primarily from long term agreements with our service client was $47 million or 20% of our revenues for the fourth quarter. Our six month old back log now stands at $201 million, compared to $188 million at the end of the third quarter. We view the increase in back log as a positive near term sign of stabilization in our business. We believe that our revenue in the fourth quarter represents the low point in quarterly revenue performance at least through fiscal 2014.

Our gross margins for the quarter was 33.2%, up from last quarter’s 32.4% and last year's fourth quarter of 32.3%. The improvement in gross margin is primarily the result of change orders on a large federal project that closed in the fourth quarter along with revenue mix in our product business. Our gross margins over the prior five quarters have stabilized around 32%. While we analyze our gross margins on a rolling four quarter basis, there is a clear change in the trajectory beginning last year. We viewed it as a stabilization of pricing in the markets 4.29 (reserve).

We will continue to monitor the markets for competitive pricing changes. But we are confident that our gross margins will generally remain between 32% and 32.5% for the remainder of fiscal 2014. In the fourth quarter, our SG&A was $62.8 million, which included $3 million of restructuring expenses. Our SG&A for the third quarter was $60.5 million which included $1.4 million of restructuring expenses.

Last year's fourth quarter SG&A was $62.8 million. Over the last four quarters, our restructuring activity has reduced our projected SG&A 0.18 an annual run rate of approximately $12 million. As noted last quarter, the savings generated from our restructuring activity will be invested in new growth programs.

We do not anticipate any additional material costs 0.32 9alignment) in fiscal 2014. However, we will continue to evaluate all of our operating costs and investments to ensure an efficient and effective use of our resources. Our adjusted operating margins for the fourth quarter was 8%, down from last quarter’s 9%, and up from last year's fourth quarter of 7.8%. We believe that our revenue grows; our efficient financial model has the power to deliver strong, adjusted operating margins. This continues to be our primary metric upon which we measure our business.

Our fourth quarter operating earnings per share was $0.67, down $0.12 from our last quarter’s $0.79, and up $0.02 from last year’s $0.65. Fourth quarter pre cash flow was $13 million, compared to $ 20 million last year. As Mike said earlier, strong pre cash flow is the primary focus of our business. We will continue to deploy it to balance investments, supporting the long term growth of the business, while providing tangible returns to our shareholders.

When we review our deployment of approximately $100 million of pre cash flow for the last two fiscal years in the aggregate, we see that approximately 60% has been allocated as dividends for stock repurchases, and 40% has been allocated to mergers and acquisitions activity. Our net debt position for two year period is essentially unchanged.

Our aggregate DSOs inclusive of cost in excess of billings and billings in excess of cost for the fourth quarter were 90 days, up from our third quarter aggregate DSOs of 87 days, and above our fiscal 2013 goal of 80 days. The increase in aggregate DSOs is primarily driven by the difference between revenue recognition timings for certain federal projects and billing milestone achievements.

In fiscal 2013, Black Box was awarded a number of federal contracts that contained milestone billing provisions. The provisions are part of the normal course of business, and do not impair the collectability of amounts due. Our target aggregate DSOs for fiscal 2014 is 85 days. At the end of the fourth quarter, we had cash and cash equivalents of $31 million and total debt of $188 million. Our net debt stands position stands at a $157 million. This is a $6 million from a net debt position of $163 million at the end of the third quarter.

Currently, our incremental borrowing rate is approximately 1.5%, and our leverage ratio is 2.3 times. I’m comfortable with these debt levels, based on our ability to generate pre cash flow. Our historical range for our leverage ratio is 1.5 to 2.6 times. Total availability under our line of credit which expires in March of 2017 is $400 million. At the end of the fourth quarter, the unused portion of the line was approximately $212 million.

As Mike mentioned earlier, during the fourth quarter, we had repurchased approximately 167,000 shares or approximately 1% of the outstanding shares of Black Box common stocks for approximately $4 million. We currently have authorization to purchase approximately 840,000 additional shares. Over the last eight quarters, we have invested over $50 million to repurchase 2.1 million shares, or approximately 11% of our shares outstanding. Repurchases may continue to occur from time to time depending on factors such as our cash flows, share price, other potential uses of cash, and general market conditions.

While we may continue to repurchase shares for the foreseeable future, there can be no assurance that for the timing or amount of such purchases.

Now I would like to provide guidance for the first quarter and the full year of fiscal 2014. For the first quarter, we are targeting reported revenues at $238 million to $243 million. Our operating EPS range is $0.53 to $0.58, this operating EPS range includes expected pre-tax amortization of stock-based compensation of approximately $2.7 million, and interest expense will be approximately $1.2 million. Our expected income tax rate will be 39.5%; the increase in our expected income tax rate is primarily the result of the change in the mix of our income in North America.

We expect capital expenditures of approximately $1 million. Our expected weighted average shares outstanding is approximately $15.3 million. Our first quarter guidance includes in approximately 3 to 4% decrease in organic revenue from the same period last year.

For the full year fiscal 2014, we are targeting reported revenues of $1 billion to $1.02 billion; our operating EPS range is $2.70 to $2.90. This operating EPS range includes expected pre-tax amortization of stock-based compensation expense of approximately $7.5 million. Interest expense will be approximately $4.8 million. Our expected tax rate is 39.5%, we expect capital expenditures of approximately $5 million to $6 million. Our expected weighted average shares outstanding is approximately $15.3 million for the full year.

Our annual guidance projects an approximately 1% to 2% increase in our organic revenue from fiscal 2013. Our ability to deliver organic growth is significant given our past two years of organic decline. We attribute the change to the stabilization in our markets and the expected impact of the growth programs that Mike will discuss shortly.

As a reminder, this guidance includes the expected results from all acquisitions now today. Also this guidance excludes intangible amortization and the impacts of changes in the fair market value of interest rate swaps and its supporting a merger and acquisition activity that has not been announced.

As a final note, I believe that the initiatives we have undertaken over the last year I had addressed some of the concerns that the market has expressed about our business. Specifically, we have executed on an executive transition and leadership free organization. Stabilized growth margins, we had demonstrated that we have the ability to contain costs and generate profits and positive cash flow while continuing to serve our clients.

The point capital that creates value for shareholders while maintaining flexibilities for investment in the business and we have created focus programs that will drive organic revenue growth. We believe that organic revenue growth programs are the key to unlocking the values that we had built at our product and service platforms.

Now I would like to turn the call back to Mike for discussion of these initiatives.

Mike McAndrew

Thank you, Tim. I'm proud of what our team has accomplished in fiscal 2013 in the face of the top market while the companies in our space saw similar decreases in revenue. We continue to deliver innovative solutions to our customers for remaining profitable and cash flow positive. We also successfully executed on a leadership transition and internal reorganization, the result of that work is a team that are committed and prepared to aggressively look forward to execute on the strategy that I had presented in our last two earnings calls.

The four key pillars what strategy include strengthening and expanding our portfolio of communications solutions, leveraging centralized expertise with local skills and relationships, realigning our organizational structure and incentive and if we maintain a consistent and comprehensive go-to-market approach.

Our company has tremendous assets in place across our platforms including a blue-chip client base, key relationships with leading technology partners, a broad geographic footprint, world-class technical and engineering talent with (on face) and more capabilities. Over 300 direct sales people worldwide in a strong corporate financial position.

Our objective is to utilize these assets to deliver integrated communications solutions to our global client base including emerging technologies such as unified communication offerings related to collaborations video and voice, mobility, wired and wireless infrastructure to support BYOD and managed services around remote monitoring and onsite support.

As we work through the leadership transitions in our business and evaluated our capabilities and opportunities. I have examined our business drivers and our approach to the markets we serve. I have concluded that we operate in four primary segments; service segments in both North America and internationally and then product segment in North America and internationally. We will begin to report overall new segments beginning with the first quarter of fiscal 2014. Reporting with any segments from revenue through operating income will provide better visibility and transparency into our operations, our business drivers and the value of our enterprise.

We intend to file an 8-K with historical financial information on these segments prior to our next earnings call. And our first quarter filings will also reflect in these segments. By aligning our resources within these segments, we have been able to analyze competitive advantages that we have built into our product and service platform ad design programs to leverage those platforms.

I would like to start by discussing our product business. Since our founding in 1976, we drove a robust platform that allows us to identify customer needs and then design, manufacture, deliver and support the appropriate solutions. The product business has historically had high margin, strong cash flow and moderate growth attributes.

Our go-to-market approach has been primarily through direct marketing and advanced technical support. We've recently reorganized our product offerings into four main categories: infrastructure products, high-performance KVM, AV multimedia and digital signage in specialty networking. Each of these product categories has unique growth attributes and go-to-market approaches.

Onto our reorganization of global product management and sales teams are aligned and accountable for growth in each category. The primary program investment required to achieve this growth is the addition of approximately 40 direct sales positions worldwide. Our test of the direct sales model over the last year has indicated that this approach expands that region to new and existing customers and increases our average order size. We expect the ramp for our expanded product sales team to be 90 to a 120 days with measurable impact beginning in our third quarter.

Our services segment provides technical service offerings through our global platform of onsite and remote engineers and technicians and include what we used to call our voice and data businesses, because of the convergence of technology and the way we share resources to address these markets, it is appropriate for us to pull our voice and data into our new services segment.

The key to growth in our services business is to deliver more solutions to our customers through existing platforms. However, we know that we cannot build out comprehensive expertise and capabilities at each of our nearly 200 locations. Through our reorganization we have created solution practices in our high growth areas to centralize our expertise and enable delivery of innovative solutions to our field office and in turn to our clients.

Two, the highest growth opportunities that we've liked to have applied are wireless solutions and Cisco solutions. First, the in-building wireless market forecasted to grow at approximately 14% annually over the next 5 years. It’s currently estimated to be a $1 billion market. Our previous investment and a premier distributed antenna business provides us with a base to expand our position in this fast growing market. We will make addition investments as needed to increase the capabilities in our sales and engineering teams.

The second high growth program that I would like to discuss focuses on Cisco. Cisco collaboration solutions represent nearly 30% of seat licenses shift and generated approximately $4 billion in revenue for Cisco in calendar 2012. Cisco currently represents a much smaller percentage of our revenue. As you know Black Box acquired a regional Cisco practice two years ago. And we have invested additional resources to expand our system capabilities outside of that region. These investments will allow it to increase our penetrations into the Cisco space and better align our revenue with the market opportunities.

In the aggregate, we estimate that these two solution practices will go approximately 20% fiscal 2014. Another high growth area that we have discussed in the past is hosted voice or unified communications as a service. Our experience has been that our customers continue to make enquiries and all those primarily have been adopted at the SMB level, larger enterprises are considering the alternative structure or does as part of a hybrid communication structure where the disaster recover alternative.

Although the market is still developing and relatively small, the growth rates are in excess of 30%. Analysts indicate that (Ukash), the (Ukash) opportunity will be in excess of $2 billion within a few years. And we are actively developing programs with our key partners to ensure that our products will be able to choose from a portfolio of hosted offerings from Black Box. We will announce some of those partnerships in the coming weeks.

The programs that I mentioned are operational at this time and are creating positive momentum within the business. These have been generated and sales cycles are active. With these programs in place, our team is evaluating additional programs to lay it on top of our platforms. Additional programs on top of those platforms are value to building an enterprise at a sustainable for the long haul leveraging scalable structure that will adapt to a rapidly changing communications environment.

As we entered fiscal 2014, I'm very confident that the programs that we are putting in place will allow us to grow share in our existing markets more profitably expanding its new markets. Through execution of these programs I expect Black Box to deliver organic revenue growth while continuing to generate significant operating cash flow in the upcoming fiscal year.

Now I’d like to open up the call for your questions.

Question-and-Answer Session


(Operator Instructions). We have a question from the line of Greg Burns with Sidoti and Company. Please go ahead.

Greg Burns - Sidoti and Company

First question about what are you going to do this year in terms of revenue. Could you just break it out and what has been more color in terms of where I shook out in terms of the declines in the federal versus the commercial space and what you are seeing in those markets.

Mike McAndrew

I’d say relative to our guidance as Tim mentioned we actually came in about 5 million higher than our net point, that was really all under services side and it was a mix of some federal orders that we got in. We are able to execute, it actually influenced our GP in a positive way. They were higher than typical gross margin opportunities that we were able to conclude it in the fourth quarter and then some strength on the commercial services side as well.

Relative to the quarter, we had about 9% down year-to-year on the federal side. So that’s the fourth quarter is a standalone, Greg. And 7% for everything else so it’s what we're calling commercial.

Greg Burns - Sidoti and Company

When we look at those markets, are you seeing like the federal space kind of bottoming out or are you seeing marginal improvements for doing the federal side and also any kind of color you have in the commercial space will be helpful.

Mike McAndrew

On the federal side I think one of the reasons we've been able to hit our guidance over the last couple of quarters is we were clearly missing it on the federal side. And we have seen that stabilize our run rate on the federal side has been much more consistent over the last several quarters as we look into FY14 across the year. And we feel confident that, that stability will continue through the first half of the year. The key is we are going to need to win some projects here and generally the mid-summer time frame coming into the September fiscal year end for the government is when we need to win some more opportunities to refill that backlog.

So looking out, we stabilize that revenue stream on the federal side and part of that’s been around capturing projects as we did in Korea, which is fundamentally professional services contract. We've also want a couple additional managed service contract for support on places. So that mix of project and maintenance for a more stable revenue stream is actually favorable to us as we move into FY14.

Commercially, I had to tell you that we continue to see strength in the medical vertical as Tim mentioned, we think this is a low point quarter for us as we move into next year. And you kind of dissect our guidance a little bit, the first quarter is down, just take the midpoint about 3%. We're looking to get 1%, if you look at the midpoint for the full year so hoping to get momentum stabilization on the commercial side and momentum around the programs that I touched on a little bit earlier relative to driving returns in the second half of the year.

Greg Burns - Sidoti and Company

When we look at that guidance, what are you seeing now because you are confident we're going to hit that 1% to 2%. Like you said, in the past, you know, the guidance has been hitting the guidance has been (spotty). What are you seeing now out of those programs or some or the other things going on with the business that kind of gives you confidence in next year’s guidance.

Mike McAndrew

I would say that there is couple of factors in here. Clearly, we are going to have easier comps than we did last year. It’s just a reality and as I mentioned having better predictability if you will at least on that 20% of revenue that is coming from the federal side, feeling confident about that as we move in to the first quarter. And then stability relative to activity levels on the commercial side. So we feel like we are in a good spot clearly our near term guidance or Q1 guidance is the stepping stone into the year and ultimately the programs that we kicked off and so they have been operational the solution practices for 6 to 8 weeks and with Ken here. I can actually give him the floor here to give a little color on how those are going and really its contingent on success around those programs Greg, really to answer your question the short way.

Ken Davis

So Greg, what we have seen, we kick these programs off in the past 6 weeks, we've seen programs have generated a bunch of leads for us. And again what we're doing is, we are mining our commercial client bases, that is out there across North America. These leads are coming from all our Black Box locations across North America, get qualified by our solution practice experts which in turn become a bid on an opportunity which then gets presented to the client out in all those PNLs that we have. These bids to date have generated something north of $10 million already early on which is a very positive sign to us and it’s a good indicator as these programs continue to mature. We will see some definite improvement in our numbers in the back end of the year. We've seen 50% or 65% of our field offices already participate in putting leads through these programs. So the process is working very well, the communication is working very well, the teams are engaged together to put our experts in front of our existing client base. And we are also seeing a lot of new opportunities as well as we have enabled our sales teams out there to rely in our experts to sell solutions we are in the path, they effectively did not have the expertise to do. So we have some really good indicators here in the beginning of our fiscal year, it gives us confidence that we can grow the business.


And our next question from the line of Brian Horey with Aurelian Management, please go ahead.

Brian Horey - Aurelian Management

Can you give me the head count at the end of the quarter?

Mike McAndrew

Yeah, hi Brian. Headcount was I think 3900 team members worldwide. It's presented on the back, last page of our earning’s release.

Brian Horey - Aurelian Management

And in terms of the wireless and Cisco segments on the server side that you talked about, how big are they now, kind of what percent of the revenue stream do they represent?

Mike McAndrew

Yeah, they are, in aggregate two of them make up just shy of $100 million of our revenue. And that would all be on the services side of the business.

Brian Horey - Aurelian Management

And then what kind of revenue run rate do you see for the rest of the services businesses apart from them this year?

Tim Huffmyer

Yeah, I think if you dissect that and you do the math, the $100 million with the 20 relatively flat year-to-year so all the growth, if you dissect it that way, it's really on these particular programs.


And we have a question from the line of Joel Garner with Emerald Advisors. Please go ahead.

Joe Garner - Emerald Advisors

You’ll have to pardon me. I joined the call a few minutes late. So I may ask you some things that you may have already addressed. A little bit in terms of the outlook, it sounds like you are more confident, and you mentioned earlier, you do have some easier comps coming up here. But you are more confident in seeing organic growth in the coming year. First quarter revenue guidance looks a little bit below where you were last year. So is that something where you expect to see that momentum building as the year goes on? How do you expect that to kind of unfold? And maybe a little bit more in terms of how the pipeline is looking to you on those lines.

Tim Huffmyer

You said you joined us a couple of minutes earlier, so we did kind of go through that. But, you know, fundamentally, as we talked about it a little earlier, take midpoint, our first quarter guidance would be down about 3% from last year, the full year’s 1% growth. So, no, you modeled that in couple of different ways, but essentially we are going to be looking for, you know, mid-single digit growth, thereabouts in the back half of the year. And, Brian, the previous caller went in a little bit around, or Greg went into the programs that we are talking about, the growth expectations there and how that's working, and you know, we are seeing some early signs. Now clearly, it's in pipeline, so, you know, we need to turn the pipeline into bookings and ultimately to revenue. But it's encouraging that we have identified a number of opportunities around these practices that otherwise we would not have pursued. And the confidence that we are putting in the sales person’s tool bag relative to being able to reach out for that kind of expertise both on the sales side and the engineering and deployment side, is enabling them to reach out with a broader set of offerings to their existing clients, and also an opportunity to engage in a conversation with new clients.

Joe Garner - Emerald Advisors

One of the areas that you have talked about in the past has been a particularly strong point in your product offerings is the Das area. Can you talk a little bit about what you have been seeing in terms of performance out of that particular business line?

Mike McAndrew

Yeah, absolutely. We are very enthusiastic about the Das business, or ultimately recalling our wireless solutions practice. And we are seeing a lot of opportunities, in particular, around hospitals, but also in hospitality and some other areas. I mean, clearly, the proliferation of wireless devices and the data requirements and the capacity issues that the carriers are facing, those are real drivers that aren’t going to go away, right. And having the capability to use your portable device within an infrastructure, whether it be a hospital, or a casino, or whatever, and on top of that, occupancies, requirements in certain new building construction where wireless is required, 911 wireless access. So we are really excited about that. That is one of the practices that’s driving this incremental opportunity that Ken mentioned earlier and I just talked about, you know, north of $10 million of qualified “opportunities” that we have sent to customers just in the last couple of months.

Joe Garner - Emerald Advisors

And one of the other areas that you’ve talked about is kind of having the model with centralized expertise in the local sales and relationships. How has that implementation gone and are you starting to see kind of the strategic benefits of that type of a structure?

Mike McAndrew

Yeah, well that's exactly what I was describing there with wireless. That is one of our solutions practices where we have actually made some investments in specialized sales. For additional sales posts specializing in Das, sales teams. And also expanding our capacity in being able to respond to opportunities that are identified with our 200 plus direct sale folks in the field.

Joe Garner - Emerald Advisors

And thoughts on acquisitions, is that something that factored very heavily into your thinking for the coming year, would you expect much there?

Tim Huffmyer

Well I would say that we are still looking for opportunities as we mentioned. We are very confident that the solution practice framework we put in place is replicable. We will look to add other capabilities on. We may build them internally, but you know, we can get there faster with some scale through M&A. I would say, our focus on M&A is similar to what has been, you know, we have been quiet the last year or two, but you know, relative to potential markets, we look at improving our capabilities in the data center as still a primary on the list. But we continue to look for opportunities to add what we believe to be high growth solutions in technologies, lay them on the platform and then generate an overly or a solutions practice to tap into that client base that we have out in the field.

Joe Garner - Emerald Advisors

And the other thing is in terms of, kind of pulling up the balance sheet information here. It looks like inventory turns down a little bit in the fourth quarter and where they were last year. What you kind of take I there, do you feel like we are kind of at the right size for the environment where it is right now I thought somewhere you go from here.

Tim Huffmyer

We are down slightly but I think we had a 9 term target for this year. So clearly from where we were three or four years ago when we were running around 6 or 7 we made some great stride. Most of that inventories clearly around our products business or TPS business and we're comfortable in 8.5 or 9 is probably a good range for us looking forward into the next fiscal year.


(Operator Instructions). We’ll go to Greg Burns, Sidoti and Company, please go ahead.

Greg Burns - Sidoti and Company

A question on OpEx going forward, I know you’ve talked about kind of layering in some additional sales and marketing and as I look at the head count lowest I've seen it, they are looking back most of the years. So I’m just trying to get a sense of organic sales kind of recover, sales book recovers. How variable is your cost structure and should we expect, how much we expect OpEx as far as increase going forward?

Tim Huffmyer

I think I touched on some of the sales position on the TPS side for you there. I’d say when you look at our solutions practices that probably in additional 10, 15 types folks between engineering and sales. So folks from here Greg, look for $5 million to $6 million increase gradually over the first, it’s an annual number. Over the next couple of quarters around that particular aspect of the business so as Tim mentioned we don’t foresee or anticipate any material additional restructuring as we move into next year, it’s basically a reinvestment of some of the saving that we are able to enjoy as we did the right thing on the cost structure with our revenues being down 8% to 9%.

Greg Burns - Sidoti and Company

I am part of that when we think about the cost structure of the business your variable versus best part is the market starts to recover. I'm just trying to get a sense of how much of the savings you generated from the cost side come back on line, you sales kind of reaccelerate

Tim Huffmyer

So if you go back to a year ago period right and see what our run rate was on OpEx or SG&A was around 63 million, we got it down to 59 to 60. We kind of layer back in $4 million to $6 million, your back up to 61 to 62 range.


And I will now turn it back to our speakers for closing remarks.

Mike McAndrew

Thank you for joining us for our call today. As a reminder, our press release has been filed on Form 8-K and on our On the IR calendar Tim will be presenting at the upcoming three part advisors IDEAS conference in Boston on My 15. In addition Mike and Tim, will be on the road visiting with many of our investors in the coming weeks. Thank you again and this does conclude today’s conference call.


Thank you ladies and gentlemen. This conference call will be made available for replay that begins today at 6:00 p.m. eastern time. The replay of the conference runs through May 23 at midnight eastern. You may access the AT&T teleconference replay system by dialing area 320-365-3844. Please the replay access code 287111. That number again, area code 320-365-3844 and the replay access code 287111. That will conclude our conference call for today. We thank you for your participation and for using AT&T’s executive teleconference service. You may now disconnect.

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