The Management Network Group, Inc. (TMNG) Q4 2013 Earnings Conference Call February 27, 2014 5:00 PM ET
Corey Kinger - Investor Relations
Donald Klumb - Chief Executive Officer
Lawrence Stern - Stern Capital
Good evening and welcome to the Cartesian Fourth Quarter 2013 Earnings Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) Please note, this evening is being recorded.
I would now like to turn the conference over to Corey Kinger, Investor Relations for Cartesian. Please go ahead.
Thank you, Denise. Good afternoon everyone. Thank you for joining us for Cartesian’s conference call to discuss the company’s financial results for the fourth quarter and full year 2013. On today’s call will be Donald Klumb, Chief Executive Officer of Cartesian. The fourth quarter and full year earnings release is available for your reference on Cartesian’s website at www.cartesian.com.
Before turning the call over to Don a couple of quick reminders. A live version, as well as a replay of the call, will be broadcast on the Investor Relations portion of Cartesian’s website for 90 days. Also, a short Q&A session will follow the prepared remarks.
I would like to caution all participants that our call may contain forward-looking statements reflecting management’s beliefs and assumptions regarding future events based on the best available information. Listeners are therefore cautioned not to put undue reliance on forward-looking statements as they are not a guarantee of future performance and remain subject to a number of uncertainties and other factors that could cause actual results to differ materially from forecasts. A more detailed description of these uncertainties and risk factors are provided in today’s earnings release and in our filings with the Securities and Exchange Commission, which I encourage each of you to review.
With that, I will now turn the call over to Donald Klumb, CEO of Cartesian. Don?
Thanks, Corey. Good afternoon everyone. Along with fourth quarter results, we have made a number of announcements since I last spoke with investors during the fourth quarter of 2013, including our company’s reorganization, the re-branding of the firm as Cartesian, a stock buyback program and the announcement of Elutions as our investor and our key strategic alliance partner. So there is a lot to cover today in providing more color to what it all means for the company and the shareholders.
So we entered 2014 at a key juncture in our history. Over the past year plus, our team has worked hard to define and implement a transformative strategy that both improves our near-term performance while changing our growth trajectory for the future. Our efforts have been convinced into a three-pronged strategy that includes; one, improving how our incumbent business operates; secondly, expanding our technical offerings in order to drive more technology-based solutions; and third, building our offering through strategic partnerships. Through most of 2013, we made solid, but really not highly visible progress in many of these areas. That progress sets the table for more highly visible actions taken recently that I will let you know more about today including the Elutions partnership that I will describe in detail shortly.
The goals of our strategy are to accelerate growth and evolve our business model toward higher margin and stickier client engagements. The first pillar of our strategy enhancing relationships with our key customers are what I always call doing what we do better. While we are increasing our focus on software solutioning, our foundation lies in professional services and it will continue to historically providing subject matter expertise when the critical element of what we did as a company and core to the value that we deliver for our clients.
Our goal is to migrate from subject matter expertise to professional service solutioning, maintaining, and leveraging the extensive and deep intellectual property of the firm in a business model, where we are paid less to provide bodies and more to provide answers. Fixed price engagements enable us to provide a blend of our many talents in helping our clients. In other words, we staff the job rather than the client. This requires a heightened focus on delivery and is a key element of our reorganization. This model was adopted early by our London office and our EMEA team, and we have demonstrated results from it.
You’ve heard me speak previously about the importance of the firm building a common culture and our team is working more closely together working down the silos between the business units. We formalized these efforts in early 2014 with a reorganization that collapsed the business unit structure. We are now operating as one firm, one team, with a better alignment of our go-to-market strategy and service delivery capabilities. We are now organized around our two key markets, North America and EMEA with our teams focusing on client accounts, designed around a matrix approach to sales and delivery. The new structure further increases focus, accountability, and our ability to maximize opportunities advancing the progress we made over the past year. Susan Simmons who previously led our CSMG strategy practice has been named as COO of Cartesian. She is responsible for leading the global consulting and delivery teams. Susan is a highly knowledgeable and very proven effective leader with deep industry expertise, which makes her perfectly suited for the role of COO.
Another key element of the reorganization of the company is the consolidation of our offerings under one unified brand, Cartesian, which has been the name of our EMEA operating and software solutions business unit since we acquired it in 2007. We chose Cartesian because it truly defines what we do for our clients and reflects our business approach across strategy, execution in managed solutions that names signifies intelligent and creative thinking and (indiscernible) of problem solving, and technical expertise. As we transform the business and increase our focus on solutioning, it was time to unify our brand and approach to market under a name that is representative of our future. I am pleased to say that the rebranding and the reorganization had both been very well received both inside the company and by our clients, and entire organization is looking forward to attacking the opportunities ahead under the Cartesian banner.
Important to note, we are transforming the business at a time when traditional consulting models are challenged. Economic forces continue to lead clients to squeeze the number of vendors their engage with. Consolidation across industries, especially in the media and telecom area creates added pressure. They will also present opportunity for us given our depth of expertise and unique skill sets in areas like systems and product integration and rationalization. We think these industry conditions are going to continue to present challenge, maybe accelerate the challenges for the foreseeable future, but with that said, we believe our transformation strategy is the right one in light of the industry direction. Our job is to move emphatically and decisively.
Our second strategic pillar is expanding our managed solutions offerings. At the core of our offering is our Ascertain technology platform. Ascertain has over 15 years of intellectual property invested in it, and we are refining and reinventing in R&D to meet the needs of our customers not only for today’s challenges but for the future. To-date, we have invested further in defining our go-to-market offerings that are built with technology at the core and drive sustainability and predictability into our financial model. A clear byproduct of this shift was both monthly recurring revenue and higher margins. To this end, our new organizational structure is now more aligned to that of a firm that can implement a SaaS model.
We will continue to invest in our technology and we made significant progress developing and deploying pre-built offerings that leverage our common technology core. To that extent, we have successfully now engaged with both the Tier 1 service provider and the Tier 1 MSO where we are leveraging ours and third-party technology platforms to deploy a managed solution model in support of the customers’ own analytics initiative. We will continue to harvest the power of Ascertain to complement big data initiatives and overlay prebuilt solutions that will allow our customers to unlock the value of their data in real time. Further, we will be leveraging and understanding of analytics and extending into the smart billing space with our new defined partnership with the Elutions, and I will come to that in a moment. We are excited about utilizing our technology assets combined with our deep understanding of the industry and believe this approach revolutionizes traditional consulting models.
To our third pillar, it focuses and is about developing alliances with strategic business partners and we have some very exciting news on that front. Yesterday, we announced an agreement related to the formation of the strategic partnership with Elutions and the planned investment in Cartesian by Elutions. Elutions is an established firm that’s a leading provider of smart billing and smart asset solutions for energy management. The Elution relationship evolved out of strong ties that were created in past client and prior colleague relationships of mine in the firm. Both sides have spent months getting to know each other deeper and testing the market before announcing this agreement.
The Elutions has a highly complementary skill set to ours, and we believe the partnership creates a highly compelling financial model and opportunity for us as well as for our customers as we look to sell and solution their offerings into our global client base. So, Elutioins is a best in class partner in the emerging high growth space that we believe is a focus for our clients and that is commercial energy management. We have strong client relationships and industry expertise, and we can augment Elutions Technology and we can operationally help them to address this large market opportunity. Elutions’ uniquely combined technology and expertise to enable an M2M automated control and optimization of commercial and technical sites in the way that can deliver significant energy savings with existing building infrastructure by optimizing use. Elutions’ end-to-end solution includes web-enabled application software, wireless and wireline networking hardware, energy management bureau services, and engineering and integration services. Cartesian will work with the Elutions to deliver our joint solution as the managed service with contracts that are typically seven years in duration and have the potential to lead to sizable revenue backlog.
In the TMT sector that we primarily serve, energy consumption is a large and often sub-optimized component of operating costs at an area that continues to escalate as service providers invest in areas like datacenters. Together with Elutions, our joint value proposition is compelling. Energy savings combined with operational intelligence and improvement all from a capital-light investment with a rapid payback. Based on our early market testing together with several of our Cartesian clients, we feel confident that packaging Elutions proven offering with our solutioning capability can create a compelling opportunity for Cartesian. So we will be an exclusive partner to the TMT sector in North America for Elutions and also plan to have activity in the UK and European markets.
Initially in the partnership, Cartesian will provide lead generation through Elutions, assist with the sales and marketing activities, prime contracts for Elutions with our clients, program manage the solution and work with Elutions to deliver additional energy savings and operational benefits through the term of each customer managed service contract. Ultimately, Cartesian and Elutions intend to work jointly on evolving the product, developing the ways to drive operational improvement on our clients, leveraging ours and Elutions solution and assisting the company in this global expansion. This relationship creates a new growth avenue for Cartesian that is closely adjacent to our skill sets and leverages our existing relationship. We think it has the potential to drive substantial volume and EBITDA. Deal sizes may vary, but could be very large and obviously being large, they have longer lead times. That said we are very enthusiastic about the initial response received from potential customers that we have shown the Elutions offering to. I expect Elutions relationship to contribute revenue and profits in 2014.
So in addition to the commercial relationship, Elutions is purchasing via a private placement of 7% stake in Cartesian at $3.28 a share, a premium to our recent stock price demonstrating their firm commitment to the partnership and to our business. Elutions will also make an additional upfront investment of $3.3 million via note which is tied to warrants exercised also at $3.28 per share. The note looks and acts like a convertible note and its values reduced as the related warrants are exercised. The note provides Elutions some optionality to the upfront investment, the support and given their willingness to further invest in our company at a premium. Between the private placement and the warrants, Elutions will be able to obtain just over 16% ownership interest in Cartesian.
In the future, subject to shareholder approval as we achieved certain business performance targets, there are provisions for staged additional investments by Elutions to be made through incentive warrants tied to revenue achievement. The stock prices of the incentive warrants escalate beginning at $3.85 a share to $4.85 a share and they are earned at a rate of 4% of partnership revenue thus maxing out at $85 million of revenue volume to Cartesian. There is more details on the structure that are made available in our SEC filings.
Elutions can ultimately over the next five years obtain 38.5% ownership of Cartesian shares if all of the revenue goals are reached. In that situation, Cartesian shareholders should benefit considerably in many ways. From a financial perspective, if we deliver the working capital from the investment along with returns from the operations will drive about $30 million into the company or about $2.30 on a fully diluted share basis. Another great side benefit from the structure is because it’s tiered and we have substantial NOL, the usage of those NOLs will not be limited and will not trigger any IRS issues.
Today, we also announced a 2 million share repurchase program. One significant impact of the Elutions relationship is that it provides great clarity into our growth strategy therefore allows us to better understand our working capital needs going forward. As with any growing business, we expect we may have working capital needs, but we believe the profitability generated in our lines and further progress of our core business should give us a greater financial flexibility. In essence we are getting ourselves the flexibility to purchase at a low share price if the market doesn’t value the deal as much as we do.
Turning now to our financial results, I would open by saying 2013 did demonstrate continued progress towards building strategic pillars we outlined at the outset of the year. However, we missed achievement on some of our financial goals and we do not find that acceptable. Revenue increased 4.5% year-over-year to $55 million. We narrowed our GAAP net loss and we swung to a GAAP – to GAAP profitability for the full year. Q4 also showed good performance and what is usually a seasonal quarter with revenue up 7.7% on a year-over-year basis and we carried very good growth momentum into the first quarter of 2014.
If we peel back the onion it is important to note that our international business has now doubled in size over the past two years. Many of the key features of our strategic plan at the organization that I just discussed surround the model early adopted by our EMEA team. Our balance sheet continues to be healthy, cash position is at highest level it’s been in two years at $13.8 million, accounts receivable in terrific shape.
So in closing we delivered solid results in 2013, but as the industry environment indicates we need to do better. Our three pillars are on the right path to achieving our targets and we are hitting key milestones including first the improvement of our core service offerings through the reorganization and separation of our sales and delivery teams across the organization which better aligns with our new business approach to the market projected to enhance growth and relationship with key customers. Secondly, we currently have about 17% of our business that surrounds our Ascertain platform we have both pilots and commercial programs underway expanding our technical solution offerings and further leveraging Ascertain. And third, our alliance with the Elutions, represent a very exciting opportunity to accelerate growth and further transform our business for the future. We made good progress on our strategy to return Cartesian to growth and sustainability. We will continue pushing on these strategic pillars through 2014. Our focus is on both improving business performance in the near-term whilst driving to build long-term shareholder value.
I want to thank you for joining us today. We look forward to sharing more with our investors this year about our strategic initiatives and progress. And that – with that said I will open it up the call for questions.
Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Lawrence Stern of Stern Capital. Please go ahead.
Lawrence Stern - Stern Capital
Don, how are you?
Good. Lawrence, how are you?
Lawrence Stern - Stern Capital
Good. Can you help explain why a debt free company is paying 7.825% interest on this convertible note back to Elutions?
Sure. So again the note was part of the original investment – in the original investment and the dialogue with Elutions our investor as we went through the negotiation discussion, there was a desire to have some optionality in the front end of that investment. We – I think we also believe that at the inflexion of where we are at, Lawrence, there is an opportunity now of the foundations we are putting together organically as well as with Elutions an opportunity for significant growth and the type of deal structure Lawrence of the energy management solution that we are taking to market is quite significant. I will give you an example, recently as we are moving and visiting with clients at the same time we transacted the deal, spent time with the Tier 1 player, have about $100 million spend in energy for which we have demonstrated under a compelling model that we can drive about $50 million out of the cost of that spend over a 7-year window, that relationship with us, it is a self amortized relationship and would be a $50 million relationship also. So you can get the feel of the magnitude of the deals and the additional working capital requirement that would come with potential growth.
Lawrence Stern - Stern Capital
Who are some of their clients since a quick web search doesn’t show many of Elutions’ clients?
Yes. I shouldn’t name names obviously, but I will tell you that they have already multiple Tier 1 carriers in both sides of the pond as clients, introduced a little bit of background individuals from their executive teams, some come from these clients, some adopted the platform, learned about it, and then through the consolidation world, right, these individuals fell in love with the platform, so to speak, and join the Elutions team. They were my client. That’s how we got to know them as well as further transitioning certain executives that were colleagues of mine. And so, we have got to know, but they are – it’s just a long answer (inaudible) to say they are in – a multiple Tier 1 players in the TMT sector, multiple or at least I know one large Tier 1 in financial sector. I think their platforms are now deployed in like 5,000 different sites globally. It’s quite compelling.
Lawrence Stern - Stern Capital
So they get paid from each one of these 5,000 sites producing revenue back to Elutions?
So that is correct. They are focused thus far as they protected a very unique product, very differentiated in the marketplace. You can imagine, energy management is being looked at by a lot of different players, and so we kind of assessed the competitive landscape, looked at the larger players that provide the equipment like the Johnson Controls, etcetera, and looked at the differentiation of their offering and their product. And it’s both very differentiated and it operates in a very diverse environment and brings a consolidated view about energy management, but it can do a lot more than that. We see its potential to measure bandwidth into a number of things as we bought the product. So yes, correct, so ultimately the offering is the installation of their various devices in facilities for energy management and then utilizing a SaaS cloud environment to do so. Our involvement in that will be to lead that, to become their Tier 1 provider priming deals, driving the solution program managing it, help managed service, helping evolving the product. So as they have grown, they have had significant vouchers. They haven’t had the focus yet on a sector by sector basis and believe their executive team realized it’s time to attack the sectors hard and the TMT sector is a powerful metric to attack right now, and we think we are a perfect partner to help them to get aggressive and we think their product is best in the market.
Lawrence Stern - Stern Capital
From your strategic vision, you are going to have a TMT business and an energy consulting business with overlap or fully independently staffed organizations?
Yes, good question. We will begin by first building out the energy component of the business to support it, to support the program management of it, to support evolution of the product etcetera. We will then look at both their technical offerings as well as our Ascertain solutions and find best-in-class best way to integrate and evaluate next steps. The ultimate goal in a consolidating industry right now, Lawrence, is the opportunity to grab within the consolidated space areas that our clients don’t have the expertise, haven’t invested, so in the wireless (inaudible) as an example. Billions and billions are being spent on network, but the tracking of the cost associated with running that -- the energy cost is not an expertise, us being trusted advisors to our clients and the sector and the ability now to take on an area for them in a self amortizing way that positions us beyond being a pure consultancy, but a solution provider sticky and then evolving that into other areas of operational excellence is what this is all about.
Lawrence Stern - Stern Capital
Okay. So focusing on the old business for a minute, where does this leave the telecom consulting business of which you started the Ascertain with and which you put out on your press release last year in terms of entering the Guinness Book of World Records with Sprint, what’s going on on that front? Well, it’s very nice to talk about the brand new, let’s go back and review about where the business is.
It’s good question too and it’s important. The organic side of the business is very important. This isn’t about a transformation to do just energy, it’s about the opportunity to take a consolidating sector and be a niche player that dominates in that sector and does significant things at the highest level of the positioning. It’s very important right now of what’s happening in the sector. So in our organic sector, as I shared, some growth 2013 not acceptable to me, not acceptable to management team, seeing some elevated growth as we are launching 2014. So it is an important component. It will continue to be an important component, a key element and it’s a great value to me and the announcement of Susan as my COO. Number of people in the industry knows Susan, brilliant ability to help me take this to the next step and operationally look at us not in the silos we were on business unit by business unit, so our MSO team has a sales team and a delivery team and then our carrier team has a sales and delivery team and get sub-optimization everywhere, but to have markets client focused and then a global delivery team, which is full oversight, an ability to drive far more efficiency, far more intellectual property, etcetera, and elevate us as I have shared from being what historically the firm was, which is very much a firm driving subject matter expertise in the industry through elevating and providing more solutions to our team members that drove strategic thinking and other team members that drove product rationalization system change of coming together in teams now to transform and drive solutions that position us at a higher level. So we expect growth in that, Lawrence, and we also backed in one of the areas I know Susan will help me in is operational improvement. We have got to lift their margins. We are worth more than the pricing we are getting. And to do that, we have got to move from subject matter expertise into providing real solutions for our client and we will do that with our teams coming together as talent sets are compelling.
Lawrence Stern - Stern Capital
Last question and then I will get back in the queue so based upon all of this were you projecting the business to do in calendar year ’14 since you got $55 million in calendar year 2013?
Yes, so I am not providing guidance at this time. I will share that the relationship with Elutions that was announced is a relationship that started both from an investment discussion many months ago, summer time of 2013 as well as us beginning to look into the market as well as our team is getting to know each other as well as the Elutions team further enhancing and bringing in some talented people including individuals that I mentioned and referenced into the relationship. So we got to jump start in the market and we feel good about the jump start. I have given you a feeling for the magnitude of the offerings that can come from this partnership. Our reorganization and the excitement created in our firm has elevated us organically. So I would tell you obviously we are growing – we are growing more than we did this year, but at this point (indiscernible) providing guidance.
And this will conclude our question-and-answer session. I would like to turn the conference back over to Donald Klumb for any closing remarks.
Well, thank you. A significant number of announcements very excited about them. I will be hitting the road visiting with shareholders and excited about meeting new shareholders much more actively in the immediate term as well as on a more consistent basis throughout 2014. One point I do want to highlight was reflecting on that I had mentioned before and then our buyback program is $2 million of buyback not 2 million shares just I misspoke on that front. Other than that thanks everybody for joining us today.
Ladies and gentlemen, the conference has now concluded we thank you for attending today’s presentation. You may now disconnect your lines.
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