Andrew Hidalgo - Chairman, Chief Executive Officer, President and Secretary
John Young - Wilson HTM
[Dean Mitchell - Unidentified Firm]
WPCS International Incorporated (WPCS) F1Q10 Earnings Call September 14, 2009 5:00 PM ET
Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to WPCS International Incorporated fiscal year 2010 first quarter investor conference call.
Your host for today's call is Andy Hidalgo, Chairman and CEO of WPCS International Incorporated. (Operator Instructions)
In addition, we would like to note that statements about the company's future expectations, including future revenue and earnings and all other investments made during this investor's conference call other than historical facts are forward-looking statements and are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve risks and uncertainties and are subject to change at any time. The company's actual results could differ materially from expected results. In reflecting subsequent events or circumstances, the company undertakes no obligation to update forward-looking statements.
I will now turn the call over to Mr. Hidalgo.
Thank you, [Dawn]. Good afternoon, ladies and gentlemen, and welcome to our fiscal year 2010 first quarter investor conference call.
The agenda for today's call will include a discussion of our first quarter financial results and our fiscal year 2010 financial expectations. In addition, I'll discuss market conditions and concludes with a review of our strategic development.
During our fiscal year 2010 first quarter ended July 31, 2009, WPCS reported net income of $435,000 or earnings of $0.06 per diluted share compared to net income of $293,000 or $0.04 per diluted share during the fourth quarter ended April 30, 2009 and also compared to net income of $838,000 or earnings of $0.12 per diluted share during the same period last year.
Revenue during the first quarter was $25.3 million compared to $24.7 million during the fourth quarter ended April 30, 2009 and compared to $28.3 million during last year's first quarter. For the first quarter the revenue segmentation was 28% wireless communication, 14% specialty construction, and 58% electrical power.
Consolidated gross margin during the first quarter was 28% compared to 29% during the same period last year; however, sequentially our gross margin improved from 26% to 28%.
SG&A expense as a percent of revenue was approximately 23% compared to 21% last year. Actual SG&A expenses are down year-over-year; however, the lower first quarter revenue production explains the increase in SG&A as a percentage of revenue.
In regard to our balance sheet, WPCS continues to maintain a strong position, with $8.6 million in cash, $21.6 million in working capital, and $5.6 million of credit line borrowing. Our credit line borrowing to working capital ratio remains favorably low at 26%. We continue to view this ratio as an important indicator of our financial strength and ability to finance our growth from our operations.
Accounts receivable collections remain stable, with DSOs averaging 69 days, which is within our expectation.
As of July 31, 2009, WPCS had a backlog of $32 million and a bid list of $161 million.
Most importantly, WPCS generated $2.8 million in cash from operations during the first quarter.
Overall, we're pleased with the first quarter results as we saw a sequential increase in our revenue, gross margins and earnings.
WPCS is reaffirming its guidance for fiscal year 2010 of $112 million in revenue, $2.2 million to $2.4 million in net income, and $0.31 to $0.34 in fully diluted earnings per share. We believe the company is operating efficiently and is poised for earnings growth with the anticipated higher revenue in the quarters ahead.
In the public services sector, which remains our largest sector, representing 58% of our current backlog, the fiscal stimulus package enacted in February 2009 continues to be slow in developing due to the statement government administrative efforts required in identifying projects, applying for funding and allocating proper staff to disburse and monitor funds.
It has been estimated as of August 31, 2009 only 16% of the $800 billion in fiscal stimulus has actually been distributed. This will explain our lower sequential backlog as the conversion of bid to backlog is progressing at a slower pace.
Even though there is a protracted disbursement of fiscal stimulus funds, WPCS is still maintaining a healthy financial position. In addition, the bid activity remains very high, which indicates to us that an increase in expenditures is forthcoming. Therefore, we believe that we are in a position to accelerate earnings as the fiscal stimulus package increases its disbursement over the next several months.
Looking at the composition of the backlog, approximately 58% is comprised of public services, 24% in health care projects, 3% in energy projects and 15% in corporate enterprise projects. In regards to bids, 60% are public services projects, 20% are health care projects, 2% are energy projects, and 18% are corporate enterprise projects. We believe the company is recognizing a [inaudible] in backlog, and we are anticipating an increase of backlog activity in the quarters ahead.
In the health care, corporate enterprise and international sectors we're seeing a respectable level of bid activity for communications' infrastructure services relative to the economic conditions. The increase in corporate enterprise activity is encouraging and is used by our management team as a sign of economic improvement.
At the moment, due to the uncertainty in health care reform legislation, the health care infrastructure market is experiencing moderate growth. There no question that infrastructure is required due to the aging population, but many health care networks are trying to determine what governmental incentive for infrastructure may exist in the near future. The bid activity in health care is respectable, but it has the potential to expand rapidly once there is legislative certainty.
The same legislative uncertainty is affecting the energy infrastructure market and it revolves around the proposals regarding cap-and-trade policy; however, unlike the health care infrastructure market, where oftentimes there's no choice but to invest in infrastructure due to the demands of the aging population, the energy infrastructure market does not have the pressure to build alternative energy infrastructure because it can revert back to basic energy production provided oil prices remain stable. In addition, the capital expenditures for infrastructure and its return on investment remain protracted due to the moderate price of oil.
This doesn't change the fact that the need for alternative energy industry in the future is significant and it can be triggered in the quarters ahead by inflationary pressure and a weaker dollar leading to a higher oil price. At the moment there's a lot of wait and see in the energy infrastructure market but, again, it is a market that has tremendous potential.
We believe that WPCS is positioned very well to take advantage of the opportunities that lay ahead in health care and energy because these markets just cannot avoid the future demand for infrastructure. WPCS has a great reputation in these markets which could translate into earnings growth for shareholders.
In regards to our strategic development, WPCS is focused on organic growth opportunities and market development. We're considering some acquisitions that will enhance our engineering capability, expand our customer base and broaden our geographic coverage. Any current acquisitions will be funded through cash from operations.
In conclusion, the WPCS management team continues to feel confident that fiscal year 2010 will be a year of opportunity and improved earnings. WPCS is building a foundation of consistent profitability and efficiency as we plan for a higher level of earnings growth while expanding our design build engineering services for communications and infrastructure on a global scale.
I'd like to turn the call over to the operator to begin the question-and-answer session.
(Operator Instructions) Your first question comes from John Young - Wilson HTM.
John Young - Wilson HTM
I wonder if you could give us a little bit of information about how your operations in Australia and China are working and what you see for potential growth in those two markets?
Well, although they represent, John, a smaller part of our revenue production at the moment, both countries are doing very well from an expansion point of view.
In China they're still estimating a 6% gross domestic product in the next quarter, and they have created stimulus for funding their infrastructure. So we see a lot of potential for infrastructure projects down the road.
The problem we have in China is that we really can't find any good quality additional acquisition candidates, so our revenue production from that country remains relatively low compared to our overall revenue production. So we're looking diligently in China to see if we can expand our operation, but the operation that we have there is healthy and has tremendous potential going forward.
In Australia the GDP levels are a little bit lower, in the 1% to 2% range, but their exporting activities in ire ore remains very heavy from India and China, and their need to upgrade antiquated infrastructure continues to be a top priority for that country.
In Australia we feel that there's great opportunity to grow revenue. We have identified some acquisition candidates that look very good as part of our portfolio of companies, and we're going to continue to focus on building in that country as the GDP appears to continue to be very promising going forward.
Our focus on international remains a priority and we look forward to it really yielding even better results in the quarters ahead.
Your next question comes from [Dean Mitchell - Unidentified Firm].
Dean Mitchell - Unidentified Firm
I'd like to know what percentage of expected earnings per share you expect to come from cell tower, construction and maintenance, and also what percentage of power transmission involves wind and solar?
Well, Dean, in terms of the first question, wireless infrastructure for the cellular market has diminished due to demand, so it is less than 10% of our revenue at the moment. We probably see that market continuing to be flat for the next couple of years as the infrastructure build-out demand is not there for wireless cellular work. However, we continue to compete in that market sector, and we have very strong relationships with commercial wireless carriers.
In regard to your second question in terms of wind and solar, the alternative energy infrastructure project that we have is a very heavy content of electrical power associated with both wind and solar. The infrastructure that's required includes structured cabling and electrical low-voltage power, a lot of data transmission. So it does represent a significant component of a wind or solar project, and it looks like it will continue to remain a big component of our alternative energy team going forward.
Dean Mitchell - Unidentified Firm
My question was what percentage of expected earnings per share you expect wind and solar power transmission to account for, for example, in the next four or eight quarters?
Well, our alternative energy business, we classify that in our special deconstruction, and as I had mentioned, that represents from a breakdown - let me just check my notes here - from the breakdown it represented 14% of our revenue for the quarter. So from an earnings perspective, we haven't broken it down specifically but I would say energy, alternative energy, would probably represent in that range of 12% to 14% of earnings per share as a breakdown, but growing.
As there are no further questions, I would like to thank all of the participants on today's WPCS International Incorporated fiscal year 2009 first quarter investor conference call.
Please keep in mind that a replay of this investor conference call will be available for a period of five days by dialing 402-220-2946 and using 81647# as the passcode.
This will conclude the call.
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