Executives
Matthew Byron – Corporate VP, IR
David Hershberg – Chairman, CEO
Keith Hall – President, COO
Andrew Melfi – VP and CFO
Analysts
Jim McIlree – Collins Stewart
Mark Jordan – Noble Financial
Rich Valera – Needham & Company
Dick Ryan – Dougherty & Company
Globecomm Systems, Inc. (GCOM) F4Q09 Earnings Call September 10, 2009 10:00 AM ET
Operator
Welcome to today’s Globecomm Systems fiscal 2009 fourth quarter earnings conference call. Today’s call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Matthew Byron, Corporate Vice President. Please go ahead, Mr. Byron.
Matthew Byron
Thank you. Good morning everyone and welcome to the Globecomm Systems fiscal 2009 fourth quarter and full year earnings conference call. Joining me today from the Company are Chairman and CEO, David Hershberg; President and Chief Operating Officer, Keith Hall and our Chief Financial Officer, Andrew Melfi.
Last night after the closing bell, Globecomm issued its fiscal 2009 fourth 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 performance 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 and 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, September 10, 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 6660794.
At this point, I'd like to turn the call over to our CEO, Dave Hershberg. Dave?
David Hershberg
Thank you Matt. Good morning everybody. Welcome to our fiscal 2009 fourth quarter and full year earnings conference call. Last night after the closing bell Globecomm issued its fiscal 2009 fourth quarter and full year financial earnings press release. Andrew Melfi, our CFO, will review the details of this release in a few minutes.
While fiscal 2009 presented a number of challenges on the infrastructure segment of our business we did book some important programs including a $27 million program to build a new generation of military mobile terminals. We continued to book business in the media area including a $5.7 million contract in the Far East and our Force Tracking contract was increased by $7.3 million to $34.8 million and we expect additional add-ons in fiscal 2010.
We installed the first systems in Alaska for GCI’s network under a contract that now totals approximately $30 million and developed some new x-band and KU band tactical satellite terminals. The service business continues to grow. All existing government contracts received funding as expected and in many cases these contracts were expanded. We have also been busy integrating our two new acquisitions plus our new professional services business company, Cachendo.
We are very proud of the perseverance and sacrifices of our employees. As the company remained profitable in each of our four quarters we completed two key acquisitions. We started a new professional services company and we named a new President and Chief Operating Officer. We reorganized our management team and positioned our company for record revenue and record EBITDA in fiscal 2010.
Fiscal 2009 was impacted by costs associated with acquisitions including $800,000 of amortization. The company anticipates revenue of $215-225 million and $0.30 to $0.35 per diluted share earnings in fiscal 2010. These include costs related to the two acquisitions of additional acquisition based amortization of $1.3 million and while we continue to face challenges on the infrastructure segment of the business in light of the current economic background the service segment of our business is thriving and providing the company with sufficient visibility to reinstate guidance for fiscal 2010 ahead of anticipated service revenue of approximately $125 million.
Our company new President and Chief Operating Officer, Keith Hall, will now give an overview of the business outlook.
Keith Hall
Thanks Dave. Good morning everyone. To start today’s discussion I would like to provide an update on our internal and external growth strategies and how the two are evolving. Globecomm launched our managed service business in 2002 to create a more scalable, predictable and higher gross margin business model. Our transformation from a pure systems integrator to an end-to-end managed service provider is going well. Being standalone systems integrator can be a difficult business model to maintain but the innovation we have created is unquestionable and it is a capability we must maintain and continue to develop.
Ultimately, our goal is to continue to develop a scalable business model that leverages our end-to-end value proposition and enables us to better manage the fluctuations that are inherent in the infrastructure business. We will also continue to develop value in our global network and specifically within our network core. In the next couple of years you will see us take this value proposition to specific vertical markets where we can leverage our hosting capabilities and our global network.
One of these vertical markets is the maritime communications business which we entered through two acquisitions this year. We will also continue to develop our life cycle support services and our professional engineering offerings across all verticals. These product lines enable a true service customer care capability and provide the long-term relationship with customers that we value. On future calls I will provide updates on the development of these products and verticals.
From an external growth perspective the acquisition of Global Sat in 2007 set the trend. They expanded our managed network services and life cycle offerings further within government agencies and in the military and opened a new consulting services product line. Two years later it continues to make healthy contributions to both revenues and operating income. The Mach6 acquisition further expanded our customer base within our managed services product set and expanded our global network with solutions to handle maritime applications. In acquiring Telaurus, we gained a company that already provided software and services to reduce the communication costs of thousands of ships at sea and which we expect to be a market channel for higher bandwidth services in the future.
All three acquisitions met a strict acquisition profile that we will continue to execute on. Also important to note, cross functional teams have been set up internally to support the efficient integration of our new entities into Globecomm. We are very excited about the synergies that both our internal and external strategies bring to the market and we will continue to update all on our progress.
In closing, FY09 was overshadowed by a tough economic climate which resulted in a substantial decrease in our revenues and impacted our infrastructure business significantly. Despite these negative metrics we feel our overall strategy is taking hold and is highlighted by the fact that we remain profitable and our service based revenues and bottom line profits grew to record levels. As we look forward to FY10 we believe these high level turns will continue. The infrastructure business has hurdles to overcome but we expect slow and steady improvement as we look to capitalize on an improving economy and find ways to better control internal costs.
We are very excited about our value proposition and the market opportunities that are opening up for us. Moving forward on these quarterly conference calls I will continue to provide color to the financial metrics associated with our growth strategy and some clarity to our focus and objectives of the overall business. Lastly, I look forward to working closely with Dave and the management team at Globecomm on my new position to execute on our guidance and our strategy.
Andrew Melfi, our CFO, will now take you through our year-over-year financial results.
Andrew Melfi
Thank you Keith. Good morning. Revenues for the company’s fiscal 2009 fourth quarter decreased 12.8% to $49.2 million compared to $56.4 million in the same period last year. Revenues from services increased 54% to a record $24.7 million compared to $16 million in the same period last year. The increase in service revenue was primarily driven by the company’s acquisitions of Mach6 and Telaurus which combined contributed $4.8 million coupled with an increase in life cycle support services.
Revenues from infrastructure solutions decreased 39% to $24 million compared to $40.4 million in the same period last year. Net income for the company’s fiscal 2009 fourth quarter decreased to $1 million or $0.05 per diluted share compared to net income of $16.9 million or $0.82 per diluted share which includes the positive effect of $0.62 per diluted share related to non-cash reduction in a deferred asset valuation allowance in the fourth quarter of 2008.
Adjusted EBITDA for the fourth quarter of 2009 decreased to $3.2 million as compared to $5.4 million in the fourth quarter of 2008. This decrease in net income and adjusted EBITDA was primarily caused by lower infrastructure solutions revenues.
Revenues for the company’s fiscal year ended June 30, 2009 decreased 13.4% to $170.2 million compared to $196 million last year. Revenues from services increased by 29% to a record $81.3 million which included $5.8 million from Mach6 and Telaurus compared to $62.9 million last year. The increase in service revenues was primarily driven by an increase in life cycle support services.
Revenues from infrastructure solutions decreased 33% to $88.8 million as compared to $133.6 million last year. Net income for the company’s fiscal year ended June 30, 2009 decreased to $3.3 million or $0.16 per diluted share compared to net income of $27 million or $1.34 per diluted share which included a positive effect of $0.62 related to the non-cash reduction in deferred tax asset valuation allowance.
Adjusted EBITDA for the company’s fiscal year ended June 30, 2009 decreased to $12.2 million compared to $19.9 million last year. The decrease in net income and adjusted EBITDA was primarily caused by the lower infrastructure solution revenues.
As stated before, Globecomm currently expects the following financial results for fiscal 2010. Consolidated revenues to be between $215-225 million; Service segment revenues to be approximately $125 million; GAAP earnings per diluted share to be between $0.30 to $0.35 and adjusted EBITDA to be approximately $20 million.
At this point I would like to turn the call back over to Dave.
David Hershberg
Thank you Andy. At this time we would like to answer any questions you may have.
Question-and-Answer Session
Operator
(Operator Instructions) The first question comes from the line of Jim McIlree – Collins Stewart.
Jim McIlree – Collins Stewart
The services guidance for fiscal 2010 is $31.25 million per quarter which is a big step up from what you did in the June quarter. Where is that extra coming from? Where is that extra $5-6 million coming from? Is that a contract that is signed or is that just something you are pretty confident about that is going to hit during the year.
Keith Hall
The combination of a full quarter of one of our new acquisitions, Telaurus, and some incremental organic growth of the core business.
Jim McIlree – Collins Stewart
Are most of the contracts then for, let me say it a different way, do you have any major contracts you need to resign in fiscal 2010 in order to hit that 125?
Keith Hall
There are renewal contracts that we have come up yearly with the government that we have had great success. I will say in the last couple of years in paying those renewals and even in expanding those contracts during those renewal periods.
Jim McIlree – Collins Stewart
On the infrastructure side, can you give an indication of how much of the infrastructure was military in fiscal 2009? Let me say government instead of military, and that would include U.S. as well as international governments as well as the UN and what you think it will be in fiscal 2010, again total government as a percent of that $90-100 million number?
Keith Hall
In fiscal 2009 it was approximately 66% and fiscal 2010 we are looking at approximately 60%.
Jim McIlree – Collins Stewart
So a slight, but not dramatic, increase in economic activity driving the commercial business. Is that a fair way to look at it?
David Hershberg
Some of the contracts we have been facing for a long time we have got some indication they are finally going to come mainly in the media area.
Operator
The next question comes from the line of Mark Jordan – Noble Financial.
Mark Jordan – Noble Financial
Back in November 2008 you announced a $27 million multi-national organization infrastructure contract. At that time you said you didn’t expect visibility of revenue in the fiscal year which was fiscal 2009. What is the status of that contract and has that now become more visible? Number two, could you talk about the overall pipeline you see on the commercial infrastructure side?
David Hershberg
That was a little distorted. You mentioned the $117 million contract in November 2008?
Mark Jordan – Noble Financial
$27 million contract November 4, 2008.
David Hershberg
That contract, we are still working that contract. That is for mobile vehicles. That contract the way it works we are not going to get revenue out of that contract until we actually ship. That is just the way the contract reads. We don’t expect any revenue this year out of that contract either or very little anyway. We expect it early next year. We will get some out of it probably at the end of this fiscal year but most of it will be next fiscal year.
Mark Jordan – Noble Financial
Can you talk about the pipeline that you have of opportunities? Has it grown? How would you characterize the visibility of the $90 million plus that you are looking for this year versus the start of the year last year?
David Hershberg
I think we are in pretty good shape with the backlog we have now to get that kind of number. I think we are a little conservative there hopefully. We do have a number of very large contract bids out that we are hoping to hear about shortly. I think at this point we have got probably more from a dollar standpoint in the pipeline as far as bids outstanding than we have ever had before. They are mostly in the government area.
Mark Jordan – Noble Financial
You talk about obviously your forecast is for significant growth on the services side. The implication is up 54%. What is organic versus acquired growth in achieving your estimate for this year?
Andrew Melfi
The service organic growth in 2009 was 20%. Moving forward to 2010 it is in the 15-18% range.
Mark Jordan – Noble Financial
Relative to tax benefits, obviously you have got $11 million for the tax benefit on your books. Are there any additional off balance sheet tax benefits that have not flown through the P&L yet?
Andrew Melfi
No. Actually we utilized an R&D tax credit that we took into the P&L on our taxes in fiscal 2009 and we will continue using that.
Operator
The next question comes from the line of Rich Valera – Needham & Company.
Rich Valera – Needham & Company
Could you give me the backlog number at the end of this past year and what it was at the end of the prior year?
Andrew Melfi
Typically that will come out in the 10K. The backlog at the end of June 2009 was approximately 10% greater than June 2008. One thing to remember when in the context of the new companies we acquired, specifically Telaurus, Mach6 and to some extent GSM, they have a lot of book and turn. So they get contracts and we don’t book the total contract. We book it on a month-to-month basis so it is a little misleading when you see our backlog now reported versus the past where it was a lot of infrastructure so a pretty sound number. A lot of backlog is month-to-month. Does that help you?
Rich Valera – Needham & Company
Just trying to get a feel for visibility on the infrastructure side into F10. Obviously you had a certain set of expectations heading into F09 which were derailed by the overall downturn there. How do you feel your visibility is for this number you have given in fiscal 2010? What are the key risks there and how are they comparable or not comparable to risks entering last year?
David Hershberg
I think last year we were a little bit blindsided based on how well we did the year before especially in the September quarter. We were expecting similar type of bookings which did not materialize. This September we did a little better. I think also we have a lot of these IDIQ contracts, the biggest one being a $117 million IDIQ which we have not really developed a lot of business out of that contract and we have not really depended on a lot of it going forward. We are being a little more conservative on some of those contracts.
What we have in the backlog are three major IDIQ contracts. Actually four, a couple more that aren’t so large but they are IDIQ in definite delivery and definite quantities. It is very, very hard for us to try to find out what our customers have in mind about releasing funds against those contracts. So we have been sort of conservative in what we have done in those. Other contracts, a couple we have won that we are waiting to get funded, we have confidence they will get funded. Other than that we do have a tremendous pipeline of bids outstanding right now and we are working very hard to bring those in. I feel pretty good about the numbers we have now at this point with our backlog based on where we are going forward. Obviously we hope to do better.
Rich Valera – Needham & Company
With respect to the expense levels in 2010 obviously going up quite a bit year-over-year. Can you say how much of that is acquisition based versus your growth in organic expenses? Any sense of how much your organic expense growth will be in fiscal 2010?
David Hershberg
Andy will give you some numbers. In general we maintain our base G&A and marketing expenses relatively flat. I think we have done a good job there. I would say almost all of that is based on the G&A and selling expenses coming from our acquisitions. Andy can you give some numbers there?
Andrew Melfi
Probably about $8.7 million a quarter total marketing G&A and out of that approximately $2.5 million a quarter related to acquisitions. So that means really we were pretty flat then.
Rich Valera – Needham & Company
In your guidance for fiscal 2010 a couple of bookkeeping things here. Can you say how much depreciation and amortization is assumed in your $20 million EBITDA number and what your GAAP tax rate is you are assuming in the GAAP EPS number?
Andrew Melfi
Adjusted EBITDA is approximately $19 million with depreciation of approximately $5.8 million.
Rich Valera – Needham & Company
This is for fiscal 2010?
Andrew Melfi
Yes.
Rich Valera – Needham & Company
I thought you said $20 million in the release.
Andrew Melfi
It is about $20 million.
Rich Valera – Needham & Company
You think $5.8 million of D&A there?
Andrew Melfi
Depreciation and amortization, I’m sorry it is about 7.6.
Rich Valera – Needham & Company
The tax rate for the EPS?
Andrew Melfi
I think it is 36% but we reduced it slightly with the R&D credit maybe $0.02 to $0.03 so now it would be about 33%.
Operator
The next question comes from the line of Jim McIlree – Collins Stewart.
Jim McIlree – Collins Stewart
There has been a great deal of uncertainty about the government ordering patterns. I am just wondering what your take on that is. Is it similar to what it has been the past three months or a little bit looser or about the same? Can you just comment about government ordering patterns right now?
David Hershberg
I can tell you there isn’t the kind of visibility we used to have on them. I think it is getting a little bit better. I think we had a little better first quarter and I think looking forward we are pretty hopeful on a couple of contracts we have with the government and we are hoping they are going to start ordering against some of those IDIQ contracts. So I would like to give you a better answer there but I can’t give you a better answer as far as the government is concerned.
We have some pretty good visibility on some relatively large service based contracts. They do have a hardware component in them. So those we feel pretty good about. As far as additional infrastructure on this one $27 million contract we have got we are hopeful that they are going to buy six more units there and add another $4-5 million there. We have heard on some of this IDIQ we have outstanding the government is getting some budget together for us.
We also understand that on some of the contracts we have been into WWSS that they are looking for bigger budgets for those. I would like to give you a better answer but that is about the best I can do.
Jim McIlree – Collins Stewart
I understand the visibility is limited but is it your understanding they need the fiscal 2010 budget to pass or is this something that could possibly come out of the fiscal 2009 or fiscal 2009 supplemental that has passed?
David Hershberg
We are hoping some of it is coming out of year-end money from 2009 in this quarter. We still have another three weeks to go and actually some of it goes into October so we are thinking some is going to come out of this year-end money. I don’t think there is going to be any real issues going into next year with the kind of work that we do as far as we understand it. There will be money in the budget for what we are doing.
Operator
The next question comes from the line of Dick Ryan – Dougherty & Company.
Dick Ryan – Dougherty & Company
Previously you talked about an opportunity under the stimulus for remote connectivity. Can you provide an update there what you see or how you are trying to attack that?
David Hershberg
We have tried to attack it from different areas. We have talked to a number of rural carriers. Our approach to it is that we can provide in rural areas very quick and relatively inexpensive access to internet by satellite. We are estimating that 5-10% of what people are planning can be satellite provided for. They don’t need to use microwave or fiber. Satellite really makes a lot of sense. When you talk about rural communities that are very isolated, trying to run microwave links or fiber does not make a lot of sense.
That being said, you don’t get a lot of major stimulus where you don’t get a lot of people being paid for providing satellite business. There is some for installation. When you talk about digging trenches and putting fiber in you get a lot more bang for your buck I guess when you talk about using terrestrial.
So we have talked to a couple of rural carriers about providing it. They seem interested in it. We have talked to a major U.S. supplier of microwave and what they are talking about with the government is to add a satellite component in it. We are working on possibly putting an application in for ourselves although we didn’t meet the first date to put it in. Of course it requires an awful lot of research and a lot of money is involved in putting in applications for these things.
We are still thinking about doing it. We are working on it. I can’t tell you exactly what is going to happen on that either. There is a lot of money involved. I don’t think there is a real good plan on how to they are going to dole that money out. We are also talking to New York State about the possibility of the money that they have got. We are involved in a project within Long Island that I think part of that money coming from the stimulus package. It is with Long Island for technology. We do have a contract there and we expect to try to expand that. I don’t have a lot of visibility in what is going to happen on the stimulus money. We think we have a very good value proposition for both providing internet services and actually providing G4 cellular service using satellite back [off].
We think it makes a lot of sense but I can’t tell you how that is going to go. I’m not sure anybody can right now.
Operator
The next question comes from the line of Rich Valera – Needham & Company.
Rich Valera – Needham & Company
A follow-up to a prior question about growth of the services business next year. It looks like you need roughly $36-37 million of revenue from your two recent acquisitions to hit your $125 million target. I was wondering if you could compare that to what those two businesses did in fiscal 2009. How much growth does that represent?
Keith Hall
The growth between, expanded growth between 2009 and 2010 between Mach6 and Telaurus is approximately 10%.
Rich Valera – Needham & Company
So those businesses combined did over $30 million in 2009?
Andrew Melfi
That is approximately correct. I don’t have the exact number in front of me but that sounds about right.
Rich Valera – Needham & Company
I know you don’t like to give quarterly guidance but since this quarter you are pretty exceptionally far into your September ending quarter I was wondering if you could give any color at all on your expectations for the quarter maybe relative to where you were in the fourth quarter in terms of revenue or earnings.
Andrew Melfi
Basically on the revenue side slightly down in the first quarter compared to the fourth quarter and bottom line up a few cents.
Rich Valera – Needham & Company
Your cash from operations for the fourth quarter, do you have that number?
Andrew Melfi
It is probably negative because of the acquisition of Telaurus so we probably had between that probably negative about $4 million or so.
Rich Valera – Needham & Company
The acquisition part, which would really be investing. I am just talking about from operations excluding acquisitions.
Andrew Melfi
It was neutral.
Operator
The next question comes from the line of Mark Jordan – Noble Financial.
Mark Jordan – Noble Financial
I would like to talk for just a second about R&D expense. It really built pretty meaningfully through the year. I would assume that in part was related to the development work you have on some of the newer other bands of satellite terminals. Could you talk about what we should expect in terms of R&D investment through fiscal 2010?
David Hershberg
I think it is going to be relatively the same. We have some projections on it. There is an element of software development under Telaurus which is going to add in there. There is R&D in the other acquisitions too. I think from a Globecomm perspective for our base business we should be pretty flat. But it will go up a little bit based on some developments being done at Telaurus.
Mark Jordan – Noble Financial
My question also would relate to you if you look at the first quarter last year $311,936 in the fourth quarter. How should we look at that being spread out over the year? Is this more level loaded or will there be peaks and valleys as existed in 2009?
Keith Hall
More level in 2010.
Operator
Gentlemen it appears we have no further questions at this time.
David Hershberg
Thank you for joining us today. Keep looking at the press releases. We hope to be having some soon. We will talk to you next quarter. Thank you.
Operator
This does conclude today’s Globecomm Systems fiscal 2009 fourth quarter earnings conference call. Thank you for joining us and have a wonderful day.
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