The Management Network Group's (TMNG) CEO Donald Klumb on Q1 2014 Results - Earnings Call Transcript

May.12.14 | About: Cartesian, Inc. (CRTN)

The Management Network Group, Inc. (TMNG) Q1 2014 Earnings Conference Call May 12, 2014 5:00 PM ET

Executives

Corey Kinger - Brainerd Communicators, Inc.

Donald Klumb - CEO

Analysts

Orin Hirschman - AIGH Investment Partners

Lawrence Stern - Stern Capital

Operator

Good evening and welcome to the Cartesian First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions). Please note, this event is being recorded.

I would now like to turn the conference over to Ms. Corey Kinger. Please go ahead.

Corey Kinger

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 first quarter of 2014. On today's call will be Donald Klumb, Chief Executive Officer of Cartesian. The first quarter 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?

Donald Klumb

Thanks, Corey. And hello, everyone. The first quarter was a very busy quarter and we plan this to be a breakout year for the firm. We drove substantial growth in the business organically all while implementing our rebrand, reorganization and launching a promising strategic alliance with Elutions. We truly opt to a solid start in 2014 with revenue growth of 16% that is purely organic and independent of our relationship with Elutions.

In the first quarter, we also saw improved profitability while at the same time we invested R&D into our co-platform and the Elutions partnership. We view these as positive indications that we are on the right path with our reorganization and transformation plan for Cartesian.

We're hitting key milestones across our three strategic pillars, which are, one, doing better what we do; two; adding technology into the mix; and three, developing key strategic partnerships. And while we have a great deal more to accomplish we are increasingly confident that we have the right strategy and are evolving our talent & tools to change the growth trajectory and profitability of the company.

Just to reset the context before getting further into operating results and strategic process. If you recall that earlier this year, we rebranded our business under the Cartesian banner, streamlined our business units into two geographies North America and UK, Europe, and better aligned our operating structure under our new COO to consolidate and enhance delivery and maximize efficiency of the organic business. The changes were designed to enable us to operate as one firm, one team under a unified brand.

We've also aligned our go-to market and service delivery capabilities with the following key strategic goals. One, to simplify the sales structure by increasing focus on accountability on lead generation to accelerate organic growth and elevate our offerings into the marketplace. Two, to consolidate our delivery, thus enhancing project margins as we improved pricing disciplines and scope projects delivered by our teams versus placements of subject matter expertise. And three, to invest and capture and leverage intellectual property across accounts and position to support our new alliance. And then, fourth, the increase use of technology into our offerings. The end result being enhanced ROO and improved operating margins.

Also on our last call, we announced the standing of our Elutions partnership, a key strategic initiative in our effort to expand our scale and scope through alliance partnerships.

So before I review the results, I would like to note and explain the unusual non-cash charges reported as other expense and the related liability labeled liability for warrants and derivatives of approximately $1.5 million on our balance sheet in our first quarter financial statements.

And the charge arises from warrants granted in the Elutions investment being recorded as the liability versus equity on day one. The appreciation in our stock price the quarter increased the liability and the liability is always adjusted to fair value with the resulting non-cash charges being reported as other expense on our income statement.

When we signed the Elutions deal it was not intended by either party that was accounting would result -- this would be the result of the specific relevant provisions. Thus, last week on May 9, Elutions and Cartesian amended the provisions to return the warrants to equity status by removing certain anti-dilution provisions from the agreement. With the amendment, the liability will be adjusted to fair value on the amendment date, last week Thursday, which will result in the Q2 non-cash gain related to the change in our stock price during the quarter up to the amendment date and the remaining liability will be look to equity, thus reversing out the first quarter. The change is designed to simplify the accounting and our financial statements going forward. You can find additional details and explanations in this matter in our 8-K that we filed on May 9.

So sure, we have a non-cash charge that complicates our GAAP results in Q1 but has been addressed and should not be a factor or a distraction in future quarters. If anyone has further questions on this matter I'll be happy to explain it further.

So now, on to the first quarter results. Results for the quarter represent progress in the execution of the first of our strategic pillars, namely improving how we do business.

Revenue increased approximately 16% sequentially and year-over-year to $16.2 million and we drove positive operating income.

Non-GAAP operating income was at $400,000 versus approximately breakeven in the prior year.

Cash balances are up at $16.2 million associated with the recent investment by Elutions.

Accounts receivable are elevated in the quarter, somewhat tied to growth but above what I would like. This is a short term phenomena. And the quality of our receivables remains outstanding. We have a pretty good track record of bringing high accounts receivables back in the life quickly and will be focused on that during this current second quarter.

Looking at our top line trends in more detail. We saw the business come into more of a geographic balance in the quarter with approximately a 50-50 split between North America and UK, Europe. Both geographies performed well. And while North America was down compared to first quarter of 2013, both of our markets grew sequentially.

Gross margins of 36.5% for the quarter were relatively flat compared to the 36% recorded a year ago. However, we are seeing an uptick, especially in North American margin. In Q1 margins on new North American business were significantly higher than our overall gross margins demonstrating the ability -- or demonstrating the benefits as sales tilt more towards strategic and solution based engagements, including our managed analytic big data offerings.

On the European side, we are seeing deeper contraction with some of our larger clients, though a number of these new programs are still too much SME-focused with margins in line with recent historical quarters.

Overall, we are pleased with the increased in new business activity across the company which is continuing into the second quarter. As I said at the outset of my comments and repeatedly in the past, our goal is to continue to migrate our business towards higher margin, longer term offerings, including technology based solutions such as software and managed services.

Too much of our traditional consulting business is still in providing subject matter experts. And while we continue to engage in these programs as part of our account management strategies, the changes we made in our operations and our ongoing operational initiatives are focused on diversifying into higher margin, repeatable revenue sources.

I offer two examples of this from the first quarter i.e., those new opportunities that were either repeatable and/or longer term in our higher value margin solutioning. And they also our two new clients, well those are accounts for the firm. We had a very nice win in the quarter with large regional service provider helping them transform their legacy network into an IP-based network and displacing a very large global competitor. And we've also signed on for a cloud initiative with a global technology leader.

Ascertain, our software platform is a key component of our initiative to drive technology and managed service solutions to our engagements. We continue to involve the Ascertain and what it can do for clients. As previously discussed, we have a new commercial engagement supporting data storage as we have evolved our event search module surrounding big data. We also just executed a £9.9 million multiyear engagement with the tier-1 client in the UK to lead CapEx project initiatives for them. And it also includes another £900,000 Ascertain license agreement transitioning from our legacy support program with our goal of embedding our Ascertain platform into their wireless transformation initiatives.

Lastly, we are designing a platform in the cloud that will leverage both Ascertain's software platform and other complementary third party softwares to provide a managed analytic software. We're happy to share that we already have a global tier-1 client for this new offering. As we move forward with these initiatives, we are focused on the standardization and productization of our technology offerings.

Continued focus on innovating and extending our solution capabilities is important because, as I talked about, economic forces in the business continue to create challenge. These include ongoing cost, management at large clients, as well as aggressive consolidation, especially in the media and telecom sector. Our clients in this sector identify growth as challenging plus the reason for enhanced M&A and cost optimization. Interestingly, both these dynamics also drive opportunity for us. But in order for us to capitalize, we have to make sure we are aligning our talent and our unique skill sets to the tasks that are most critical to client success. We think we are doing a good job on this so far and we are focused on continuing to move emphatically and decisively.

The progress I discussed with you today is evidence of early traction in the long-term process of migrating our business to a more profitable, durable model. Our people are truly our greatest asset, and we have a wonderful customer base in our traditional business. That combination gives us a head start in the transition, a wonderful base to build off of. That said, a transformation of this magnitude does not grow overnight. I will continue to update you on our progress.

Let's now turn our strategic partnership with Elutions. Following the execution of our agreement late in the first quarter, we have been aggressive in North America and UK, European markets introducing our new operational intelligence and energy and asset optimization offering. We have developed a significant pipeline very early in this relationship and the account activities are in various stages with a number of clients. We are particularly encouraged by a specific late stage discussion. With that we hope to be our first joint client in the near term.

We continue to see great potential in this partnership and the opportunity to differentiate our energy management operational improvement offerings. This sector has significant energy spend that is growing with cloud adoption and the need of intelligence and innovation in this area. In deploying the full suite of service offerings within the smart building portfolio and utilizing the Maestro advanced analytics platform, we are ultimately investing with our customers to realize material savings that will be to our mutual benefit. It is important to understand that out go-to market strategy for the Elutions partnership is quite different than the strategy of our traditional consulting business. But its a strategy that better reflects where we want to take the firm.

In general, we pitch the solution as a multi-year managed service offering that establishes monthly recurring revenue and an attractive margin profile, which will be favorable to EBITDA. It's clear from discussions with engaged prospects that the scope of our solutions and the benefits we deliver would vary from client-to-client based on their addressable energy profile and operational needs. Some contracts may be quite large in excess of $20 million and others small but strategic.

Bottom line, we are moving the firm at the right direction as it relates to the quality pursuits, forecastable revenue and technology driven services. These services are additive to the traditional consulting value for proposition as we are now in the business of selling the benefits of our service in addition to just the service. This message is being well received by our clients and prospects in the market today.

So I'll stop there for now. But it's clear that we have a lot of exciting activity going on as we execute our transformation. The first quarter was a good quarter financially and strategically, provides sound evidence of progress on each of the three pillars, enhancing relationships with our key customers, driving solutioning opportunities, especially of the Ascertain platform, and developing alliances with partners like Elutions. We look to continue this momentum throughout 2014. The results and milestones I shared today reaffirm that we are pointed in the right direction strategically. I will close by saying we know we are just getting started and we have a lot of hard work ahead this year, but so far so good.

With that, I'll turn the call over the questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions).

And our first question will come from Orin Hirschman of AIGH Investment Partners. Please go ahead.

Orin Hirschman - AIGH Investment Partners

Hi. How are you? And congratulations on progress in Q1.

Donald Klumb

Thanks, Orin. I appreciate it.

Orin Hirschman - AIGH Investment Partners

In terms of revenue that I would directly or indirectly related, however, you want to break it out the data mining and Ascertain, particularly your custom product or bettered versions thereof, what can you tell us in terms of overall revenue versus that piece of the revenue? And how did that compare, let's say, with the year ago or quarter a two ago?

Donald Klumb

Yes, sure. So just under 20% of our mix of revenue is off of our core technology platform, the Ascertain platform. Currently, as we are just getting started with the partnership there is zero revenue in the first quarter related to the Elutions partnerships, so it is all organic. I will say that with the significant signing in the UK of a €900,000 license agreement for Ascertain it's a good first step as we want you propel that 20% towards 30% and North over the next several years. Clearly, Elutions as a partner and blending in the Maestro platform capabilities and we're going to take that we think its quite transformative, as you can see, the different sizes of those deals.

Orin Hirschman - AIGH Investment Partners

And then, UK deal was going to be a one time license?

Donald Klumb

It is a one time license, yes.

Orin Hirschman - AIGH Investment Partners

Is there an offering today that the cloud offering on Ascertain or something that's more of recurring revenue stream of some sorts, because licenses obviously, that's probably maintenance stream lies with that particular license as well?

Donald Klumb

Yes. So the answer is yes. And then, I'll answer in yes kind of so. We worked last year in -- with a number of pilots around managed analytics programs helping our clients better get their arms around big data, what it means and the type of knowledge and information they can pull from big data utilizing our smarts to apply big data. Those pilots resulted in a commercial managed analytical relationships along with still number of pilots and others that were trying to move into commercial. That is -- it is currently being offered being via sharing of data that is going right into our server farm, etc. But ultimately, we're engaging and standardizing a platform in the cloud that will then be leveraged for future commercial applications.

Orin Hirschman - AIGH Investment Partners

When do you think that's going to be ready?

Donald Klumb

Within a quarter.

Orin Hirschman - AIGH Investment Partners

Thanks. And does that include what you described in your -- and what you're speaking about these quarter that includes ability to cope together with third party applications that will run in your cloud?

Donald Klumb

Yes. Exactly right. In this case actually there is third party software that's utilized, as well as our applications, and there are also feeds in the first instances coming from third party technology partner that will then leverage itself. Our plan is anyway across multiple carriers to run the source.

Orin Hirschman - AIGH Investment Partners

Okay. And then, the last question in terms of seasonality. Actually, two last questions, if I may. In terms of seasonality in the business overall and that if you see a change coming in that? And finally, just in terms of the overall company kind of pushing with more of a focus on revenue growth which you're beginning to achieve (inaudible) versus looking for maximizing profitability?

Donald Klumb

Yes. So shoot the first question again, please?

Orin Hirschman - AIGH Investment Partners

In terms of seasonality in the business today --

Donald Klumb

Yes, right.

Orin Hirschman - AIGH Investment Partners

And how it might change?

Donald Klumb

Yes. clearly, as its primarily personnel based services organization the seasonality is greater today especially in the fourth quarter with holiday season etc as we move to more technology offerings and plus reliance on just individual we'll get I think will see some positive benefits from that seasonality.

Orin Hirschman - AIGH Investment Partners

And just now between Q1 to Q2, Q2 to Q3 and we know from Q4 to Q1?

Donald Klumb

Yes, I would say primarily in the third quarter, the August timeframe and later in the fourth quarter, calendar year is our fiscal year.

Orin Hirschman - AIGH Investment Partners

And seasonality because of Europe in Q3 you're referring to specifically?

Donald Klumb

Yes, that's right.

Orin Hirschman - AIGH Investment Partners

Seasonality in Q3 and positive seasonality in Q4.

Donald Klumb

You broke up a little bit there, one more time please.

Orin Hirschman - AIGH Investment Partners

Slower seasonality in Q3 and stronger Q4?

Donald Klumb

Yes, that's correct.

Orin Hirschman - AIGH Investment Partners

And just a last question of maximizing profitability versus investing for?

Donald Klumb

Yes, I think there is a sense of balance but clearly our number one initiative is to transform and to grow. That said, I come from a finance background so I believe in making money and at the same we're growing and making a little bit more money with a lot of it into more talent and capability for the fund to growth aspect.

Orin Hirschman - AIGH Investment Partners

All right. Okay, thank you so much.

Donald Klumb

You're welcome.

Operator

(Operator Instructions). The next question will come from Lawrence Stern of Stern Capital. Please go ahead.

Lawrence Stern - Stern Capital

Hi, Don. Nice quarter, nice to see some revenue growth. Can you talk to me about where things stand with Elutions and the roll out of solutions set both in North America and in Europe since there is yet to be announced signed deal at this point in time?

Donald Klumb

Sure. As I think I shared on the last call, we began this partnership without the actual equity ownership component of it in the latter half of 2013 and got a good chance to know each other better within the product set, and then as we're getting closer in Q1 to putting the together in parallel, we began introducing to our relationships the partnership and what it could mean. We have met with quite a number of Q1 clients prospects in both North America, UK, Europe. And as I mentioned in my notes, built a very solid pipeline which we track our pipeline in stages from stages one to six I think it is. As I mentioned also, we have several that are in stages four through six meaning getting closer and closer towards the opportunity of driving a statement at work or a contract etc and then there's obviously a significant number through our first quarter alone, introductions, discussions.

It's clearly an area as we thought, Lawrence, that there is significant spending. That spend is only growing would be at the cloud and movement of technology into a cloud, datacenter ownership by a number of our clients and unless we think the opportunity to put intelligence around that is manage it efficiently and effectively I believe with a two-way M2M tools quite powerful and we may be biased but we think our tool is best in class.

Lawrence Stern - Stern Capital

I mean, something prior to the end of the year should be on the sheets in terms of a booked transaction?

Donald Klumb

We're pushing diligently so --

Lawrence Stern - Stern Capital

Where does the company stand in regards to the buyback potential that you announced as well at the year-end? Have any shares been purchased back?

Donald Klumb

At this point, there have not been any shares purchased back. We launched the buyback and then immediately into a 10b5-1 program because coming out of the year end right into first quarter call it was a very brief window and I guess there was some fortune to it in that our stock price went up quite a bit. So the ranges that we provided in the 10b5-1 put some limitations to the buyback while through visit those again each quarter as we come out of it.

Lawrence Stern - Stern Capital

Okay. From an accounting perspective, you have a $60.6 million NOL that expires in 2033. When do you think you're going to start to put some of that NOL back on the balance sheet as announced?

Donald Klumb

Yes, real good question, Lawrence. So the small NOL on the UK, European side and we think very shortly we're beginning to use that NOL up, those assets will come back on. We'll take a hard look at that in the second quarter already. And then within on the domestic side build a longer tail to that, its usually from GAAP FASB perspective. The best way to look at it is usually like a four quarter trend and then revisiting your projections before you begin to put the assets back on the books.

Lawrence Stern - Stern Capital

And I'll get back in the queue.

Donald Klumb

Thanks, Lawrence.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Donald Klumb for any closing remarks.

Donald Klumb

Well, thank you. Like I always say, we're truly making progress and we truly have a great deal to well and I'm very fortunate to have a terrific team around me that's enabling what we're trying to accomplish for our shareholders and our clients. So thanks for taking the time today.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today’s presentation. You may now disconnect.

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