Thomas Group, Inc. Q3 2009 Earnings Call Transcript

Thomas Group, Inc. (TGIS)

Q3 2009 Earnings Call

November 10, 2009 11:00 am ET

Executives

Michael McGrath – Executive Chairman

Frank Tilley – VP & Interim CFO

Earle Steinberg – President & CEO

Analysts

Mark Jordan – Noble Financial

John [Francona – Investment Management]

Presentation

Operator

(Operator Instructions) It is now my pleasure to turn this morning’s conference over to Frank Tilley. You may begin, Sir.

Frank Tilley

Thank you. Good morning. This is Frank Tilley, Interim CFO and Vice President of Thomas Group. Welcome to the third quarter 2009 earnings conference call for Thomas Group of Irving, Texas. Representing Thomas Group today are Michael McGrath, Executive Chairman; Earle Steinberg, Chief Executive Officer and President and myself. Thank you for your interest in Thomas Group.

Following management's comments, there will be a question-and-answer session. Thomas Group's third quarter 2009 earnings announcement was released late yesterday. If you did not receive this release, please call our offices at 1-800-826-2057, extension 4438, and we will fax or e-mail you a copy of the release.

Before we begin management's comments, let me remind you that while Thomas Group does not provide projections, management may discuss forward-looking information. Any statements in this discussion that are not strictly historical statements about our beliefs and expectations are forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995.

These forward-looking statements involve certain risk and uncertainty that could cause actual results to differ materially from those expressed or implied by these statements including general economic and business conditions that may impact clients’ and the company's revenues, timing and the awarding of customer contracts, revenue recognition, competition and cost factors, as well as other factors detailed from time-to-time in the company's filings with the SEC, including the company's Form 10-K for the year ended December 31, 2008.

These forward-looking statements may be identified by words such as anticipate, expect, suggest, plan, believe, intent, estimates, targets, projects, could, should, may, would, continue, forecast and other similar expressions. These forward-looking statements speak only as of the date of this discussion. Except as required by law, the company expressly disclaims any obligation or undertaking to disseminate any updates or revisions to the forward-looking statements contained in this discussion to reflect any change in the company's expectations with regard to such statements or any change of events, conditions, or circumstances, upon which any such statement is based.

At this time, I would like to introduce Michael McGrath, Executive Chairman.

Michael McGrath

Thank you Frank. Good morning to all and thank you for joining us on today’s call. I want to spend a few minutes bringing you up to date on our strategy and vision for Thomas Group and then Frank will review the results in more detail. Following that Earle will review our progress.

Our commitment to you, our shareholders, as well as our employees and clients, continues to be to grow a strong, successful and growing consulting firm on the foundation of the excellent reputation Thomas Group has built over the last 30 years by delivering great results to its many clients. In a few minutes Earle will discuss his continuing efforts to reposition Thomas Group. As can be seen on comparisons this quarter on our financials, we have aggressively reduced SG&A costs over the last four quarters by 40%. For the last several quarters we have devoted relatively significant resources to our business development efforts. We feel that we have made significant progress in rebuilding our pipeline of potential business.

However, until the company can translate this improved pipeline into actual additional revenues we do not expect to be profitable. We have seen some evidence of success but unfortunately it is not yet a sustained level of new business that will return us to profitability. Fortunately we still have a good cash position and we have no short-term or long-term debt.

At the end of the second quarter we had $6.5 million in cash and cash equivalents or about $0.60 per share. Since it is now probable we will have a loss for the full year of 2009 we anticipate a tax refund by mid-2010 for a portion of our tax loss. This tax refund will provide additional cash resources for us in 2010. The amount of the tax refund will depend on our final tax loss for the year.

We recognize our resources are not unlimited, however, and thus we must continue to try to minimize our costs while continuing to work to build the revenue that is necessary for our return to profitability.

As previously announced, we have continued to repurchase stock under rule 10B51 plan we began on April 7, 2008. In October 2008 the board of directors increased the authorized repurchase limit by an additional 300,000 shares to a total of 805,450 shares. As of September 30, 2009 we had repurchased 676,900 shares at a total cost of $1.127 million. For the third quarter 2009 we repurchased 48,294 shares at a total cost of $41,102 or an average of $0.85 per share. We are continuing to repurchase stock in November.

Under the 10B51 plan the broker is authorized to repurchase the maximum number of shares permitted by regulations or by market trading each day if that is lower than the number of shares permitted by regulations. Trading rules set a limit each week for daily purchases under this type of plan based on 25% of the average daily volume for the previous four weeks. Although our broker has the capability of purchasing blocks in excess of the maximum daily limits under the plan and subject to applicable regulations, we rarely have been able to execute trades for this additional volume.

Since the company is repurchasing the maximum permissible number of shares each day, the key officers and employees cannot purchase stock during this repurchase program because they are subject to the same overall limitations on daily purchases that the company is using for its repurchases.

As previously announced, on September 16^th, the company received two NASDAQ staff deficiency letters indicating that the company no longer complies with the listing requirements for the NASDAQ Global Market. The first letter related to the requirement to maintain a minimum closing bid price of $1.00 per share for 10 consecutive days. We have until March 15, 2010 to regain compliance with this rule.

The second letter related to the requirement to maintain a minimum market value of $5 million for our publicly held shares excluding shares held by directors and officers. We have until December 15, 2009 to regain compliance with this rule. If we fail to regain and maintain the minimum market value by December 15, 2009 we may apply for listing on the NASDAQ Capital Market which has lower market value requirements. However, in order to maintain our listing on the NASDAQ Capital Market we will still need to maintain an average minimum closing bid price of $1.00 per share by March 15, 2010. Failure to comply with this requirement could result in our delisting from NASDAQ.

Let me turn our discussion over to Frank. Frank?

Frank Tilley

Thank you Michael. Revenue for the third quarter of 2009 was $2.1 million compared to $3.8 million for the third quarter of 2008. Consulting revenue from U.S. government clients represented by our government practice was $0.5 million or 23% of revenue in the third quarter 2009 compared with $0.7 million or 18% of revenue in the third quarter of 2008. Consulting revenue from commercial clients represented by our aerospace and defense, healthcare, transportation and logistics and European practices was $1.3 million or 62% of revenue in the third quarter of 2009 compared to $2.7 million or 71% of revenue in the third quarter of 2008.

Reimbursement of expenses was $0.3 million or 15% of revenue in the third quarter of 2009 compared to $0.4 million or 11% of revenue in the third quarter of 2008. This decline is primarily related to the lower travel required per lower revenue in 2009.

Gross profit margins for the third quarter of 2009 were 34% compared to 29% for the third quarter of 2008. The increase in the quarterly gross margin is mainly related to a decrease in payroll under our variable cost model and a decrease in unreimbursed travel related to expenses in the third quarter of 2009.

SG&A costs for the third quarter of 2009 were $2.6 million compared to $4.4 million in the third quarter of 2008. The $1.8 million decrease is primarily related to a $0.2 million decrease in stock based compensation during the third quarter of 2009, a $0.6 million decrease in sales commissions and executive bonus, a $0.5 million decrease in payroll costs due to a decline in the number of consultants employed, a $0.1 million decrease in travel related costs and a $0.4 million decrease in other costs due to decline in activities compared to the same period in 2008.

During the quarter we wrote off a bad debt in the amount of $68,000 although we continue to pursue collection of this amount. Other income for the third quarter of 2009 included a collection of a $0.2 million bad debt written off in 2008. We also received credits for audit adjustments on the insurance premium of $0.1 million. Both of these items were included in other income.

Working capital decreased from $13.2 million at December 31, 2008 to $9.4 million at September 30, 2009 due primarily to our operating loss for the first nine months of 2009. We continue to have a relatively strong balance sheet and no long-term or short-term debt. We anticipate receiving a tax refund for our 2009 loss by mid-2010. At the present time we estimate that our working capital combined with our anticipated tax refund in 2010 will be sufficient to fund our operations until we are able to return to profitability. We continue to assess the situation on an ongoing basis.

In addition to previously announced efforts we continue to seek additional ways to reduce costs. As of September 30, 2009 we had 23 consultants on furlough. These furloughed consultants will be offered the opportunity to return to the payroll if and when we develop client engagements that require their individual skill sets. In addition to these reductions in payroll costs we have aggressively worked to reduce other costs wherever possible.

Now I will turn the call over to Earle who will discuss our plans for Thomas Group. Earle?

Earle Steinberg

Thank you Frank. As we have discussed previously the deterioration of the economic situation in the fourth quarter of 2008 and continuing into 2009 has made the challenges of our recovery more difficult. We continue to believe that our unique set of expertise and capabilities positions us to be able to provide real and tangible results for clients by improving their profits and reducing their costs more quickly and more effectively than they are able to do without our help.

Our prospect list and pipeline is significantly improved in both quantity and quality. Over the last couple of quarters we have focused much of our business development efforts on developing strategic relationships with other firms that have the ability to deliver large, complex solutions to clients but who do not have our expertise in organizational change management and process improvement.

In the current economy the sales cycle can be extended and require more levels of approval for new projects of the type we are now pursuing. We feel that in many cases this has delayed booking new business.

In late October, subsequent to quarter end, we announced that Harrison Goldman has been appointed Transportation Practice Leader. Harrison has over 25 years of senior management experience and is an expert in managing and implementing business process improvement solutions. His most recent experience with Thomas Group includes overseeing the delivery of large implementation projects including the creation and implementation of complete operational and financial solutions for our clients.

Also in late October we announced the results of our TG report survey entitled “Hospital Physician Alignment, a Model for Success” which demonstrates the positive financial impact of alignment. The survey shows that when close alignment exists between physicians and healthcare leaders they share a common understanding of mission and vision and agreement on key goals and objectives, a consensus on critical priorities, adaptive culture and a willingness to focus energy on these priorities. This survey is the cornerstone of our efforts over the next few months as we market our healthcare practice to both hospital and physician practice groups who are coping with the many changes both actual and proposed to healthcare delivery in the U.S.

As Michael and Frank have discussed, we have continued to work hard to reduce our fixed costs both by the furlough of consultants not actively working on client engagements and focusing on expense reduction throughout the organization. Given the current period of stress in the economies worldwide we believe our emphasis on product and service offerings designed to improve our clients’ operating margins positions us well in this recovery phase of our renewal strategy and on into the growth phase.

It is not easy and will not occur quickly but we are confident we are on the right course to achieve the end results we as your management team and you as our shareholders expect. We will continue to leverage our process value management expertise but we will have also introduced new client value propositions. These new consulting offerings address what we believe are the major concerns of many of our potential industrial clients in these difficult times; cost reduction, capital expenditure avoidance or delay and improvements in gross margin.

We are also emphasizing our ability to help drive sustainable results in a fairly short time that justifies the investment in our services even in this difficult economy. We believe we have an aggressive but reasonable plan to rebuild Thomas Group and the financial resources to execute it in a manner that will enable long-term success. We are committed as we implement our plan to address the issues that have resulted in previous cycles of boom and bust in our company. We are creating a new culture at Thomas Group around focus teams that create and deliver increased value for clients in new and innovative ways.

This provides us the opportunity to build on the reputation and past success of Thomas Group while expanding the future opportunities for us in the market. We appreciate your support in this period and look forward to future calls when we can report on our progress. Now I will turn our call over to our moderator for any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Mark Jordan – Noble Financial.

Mark Jordan – Noble Financial

Two quick questions. Number one can tell us if you have a sense if your revenue base has stabilized? Secondly, any sense on do you have a target of what time you would hope to reach the kind of breakeven run rate?

Question two, what would be the size and the timing of the tax refund?

Michael McGrath

We are hoping our revenue is stabilized. It is tough to tell right now and we don’t want to predict when we will increase that revenue base. We have a strong pipeline but the conversion of that pipeline into a consistent revenue stream is still something we have to make happen. That is on those first questions.

On the second question on the tax refund it is going to depend on the loss for 2009. Our thinking right now it will be about $2 million approximately but that will be finalized when we have closed the books for 2009.

Mark Jordan – Noble Financial

What month should that be expected?

Michael McGrath

Probably by mid-year. Maybe June.

Operator

The next question comes from the line of John [Francona – Investment Management].

John [Francona – Investment Management]

If you look at the progress you have made in terms of SG&A over the past year, you seem to keep on cutting your expenses but your revenues are declining at a faster rate obviously. Looking at the fact you have about $2.6 million of SG&A this past quarter it begs the question of what sort of revenue would that support? In other words when you were at a normal run rate your SG&A was running at 25% or 30% of your revenue it would almost say that you have infrastructure in place to support $10 million of quarterly revenue.

Is there any hope of achieving that any time soon? Because I don’t want to answer the question for you but it would either seem you would have to continue to cut SG&A dramatically or you are looking at some sort of big multiple in terms of revenue exploding over the next several quarters if your pipeline comes through. Can you comment on which one of those things might happen? Further declines in SG&A or finally a big increase in revenue?

Michael McGrath

We are giving our priority to increasing revenue. That is the first thing that needs to happen. We reluctantly continue to cut expenses as we are disappointed in the results of converting our pipeline into revenue. I don’t know if I would characterize it as exploding at one point in time in revenue but we still remain confident we have a pipeline that can produce a turnaround in revenue and stop the decline in revenue. We are, as I said, cutting SG&A expenses reluctantly as a result of disappointments in the timing of revenue conversion. We don’t have a timeline for that. I wish that we did.

John [Francona – Investment Management]

In terms of the pipeline, one might say well if you are carrying that sort of SG&A base you are really looking for the potential of a large increase. When everything fell apart with the government work and that was 85% of your business, your revenue dropped off a cliff. Do you have any large projects out there where you could actually double your revenue in a quarter or triple your revenue? Or basically are we looking at small incremental increases because you are just not bidding the types of projects you had before? If we see this grow will it be a 10-20% per quarter and there is no hope of seeing a one-large contract. In other words, if you could describe your pipeline I guess.

Michael McGrath

The pipeline is pretty good mixture of small entry level projects we hope will develop long-term relationships as well as some large contracts we are working on as Earle mentioned with third parties for a large portion of a very large contract. So it is a mixture. The larger projects take a lot longer to close, particularly in today’s economy, and that is one of our frustrations. It is a mixture. We are continuing to set our objective to return Thomas Group to be a much larger company. To do that we have to focus on not just small, kind of hand to mouth projects, but also large contracts that will give us a consistent revenue stream over a long period of time either through a large contract or through what we expect would be a continuing series of contracts over time. Our goal is to grow revenue back to a good size, not just grow it slightly but it is taking more time to do that.

Operator

At this time we have no further questions in the queue.

Frank Tilley

Thank you operator. Management at Thomas Group appreciates your participation in the call today. If you need additional information please do not hesitate to get in touch with us. If you missed any part of this call or have an associate who was not able to listen to the call a replay line will be available by 5:00 p.m. CT today and will run for 60 days. U.S. callers may call 877-919-4059 and international callers may call 334-323-7226. The conference call replay passcode is 93298766#. Have a great day and thank you.

Operator

Thank you. Ladies and gentlemen at this time this conference has now ended. You may disconnect your phone lines and have a great rest of the week.

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