Black Box Network Services (NASDAQ:BBOX)
F2Q2011 Earnings Call
November 2, 2010 5:00 p.m. ET
Gary Doyle - Director of Investor Relations
Terry Blakemore - President and Chief Executive Officer
Michael McAndrew - Vice President and Chief Financial Officer
Ken Davis - Vice President and Executive Officer
Greg Burns - Sidoti & Company
Jeff Beach - Stifel Nicolaus
Josh Overholt - ICM
Joseph Gardner - [inaudible] Advisors
Ladies and gentlemen, thank you for standing by. Welcome to the Second Quarter Fiscal 2011 Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The instructions will be given at that time. [Operator Instructions.] As a reminder this conference is being recorded. I would now like to turn the conference over to our host, Director of Investor Relations Gary Doyle. Please go ahead.
Thank you. Good evening and welcome to Black Box Corporation's second quarter of fiscal 2011 earnings conference call. My name is Gary Doyle and I'm the Director of Investor Relations for Black Box. With us today are Terry Blakemore, President and CEO of Black Box Corporation; Mike McAndrew, our Executive Vice President and Chief Financial Officer; and Ken Davis, who will join us today in his new role as an executive officer of the company.
Earlier today, we announced our second quarter fiscal 2011 results by issuing a press release and furnishing it to the Securities and Exchange Commission on Form 8-K. We also posted this press release on our website at blackbox.com.
We will start today's call with an overview of our results from Terry Blakemore, followed by a more detailed discussion from Mike and Terry. Following this we will field questions as time allows.
Before we begin, and as a reminder, matters discussed in this call may contain forward-looking statements that involve risks and uncertainties concerning Black Box's expected financial performance. Actual results may differ materially from expected results, and reported results should not be considered as an indication of future performance. Potential factors that could affect our business and financial results include changes in economic conditions in our end markets and the general market at large. Additional factors are included in our most recent Form 10-K and today's press release.
On this call, and as presented in today's press release, we will discuss some financial information that includes non-GAAP financial measures, including operating net income, operating earnings per share, free cash flow, EBITDA, adjusted EBITDA, and organic or same-store revenue comparisons. We will limit any non-GAAP financial discussions today to the specific measures in our press release.
As I said earlier, our press release was filed with the SEC and posted to our website prior to this call. Please refer to the schedules that accompany the press release for a reconciliation of non-GAAP financial measurements to the most directly comparable GAAP financial measurement and other supplemental information.
Coming up on the IR calendar, we will present at the SunTrust Robinson Humphrey Unconference in New York City on November 4, the Sidoti Third-Annual New York Conference on November 16, and the NASDAQ 25th-Annual Investor Program in London on December 8. In addition, Terry will host our annual investor day here in Pittsburgh on December 10. More details will be announced in a press release later this month.
Now, I'd like to turn the call over to Mr. Terry Blakemore.
Thanks Gary. I am pleased to report strong financial results for the second quarter of fiscal 2011, including record quarterly revenues, year-over-year organic revenue growth, and improved financial guidance for fiscal 2011.
Revenues for the second quarter were$273 million, which is an 18% increase over last year's $232 million and a 4% increase over last quarter's $264 million. This is our highest quarterly revenue since the company was founded back in 1976. I want to congratulate and thank everyone on our team for this terrific effort.
Year-to-date revenues were $537 million, a 15% increase from last year's $467 million. Our second quarter operating earnings per share were $0.86, up $0.14 from last year's $0.72, and up $0.02 from last quarter's $0.84.
Year-to-date operating earnings per share were $1.70 compared to $1.43 for the same period last year. Second quarter free cash flow was $7 million, compared to $14 million last year. Free cash flow for the year stands at $8 million versus $30 million for the same period last year. The decrease in cash flow is a result of business growth factors, which Mike will describe shortly.
We used our cash primarily to decrease our outstanding debt and to pay dividends. I'll turn it over to Mike now for a more detailed discussion of our financial results.
Thanks Terry. As Terry just mentioned, we posted record quarterly revenues of $273 million, an increase of $41 million over the $232 million reported for the same period last year.
Excluding $7 million of incremental revenue contribution in the second quarter related to acquisitions over the last $2 years, and the $1 million negative impact from foreign currency, same-office revenues for the second quarter were up $34 million, representing 15% organic growth over the same quarter last year.
On a sequential basis, revenue was up $9 million, from $264 million in the first quarter of fiscal 2011, and when you exclude the $1 million positive impact from foreign currency, same-office revenues were up 3% sequentially. The sequential increase was primarily attributable to the early completion of a project from our Q1 backlog that was originally scheduled to be complete in Q3.
On a year-to-date basis, total revenues were $537 million, up $70 million from last year's $467 million. Excluding the $15 million of revenue contribution for the first six months related to acquisitions over the last two years, and a negative $1 million impact from foreign currency, same-office revenues for the first six months were up $55 million, or 12%, from the prior fiscal year.
We believe the increase in same-office revenues, both on a year-over-year and a sequential basis reflect a macro improvement in certain of our end markets, specifically an increase in capital investments in IT infrastructure.
Looking more deeply at our revenue for the two segments that we report, the highlights are as follows. Initially, from a service side segment perspective, our second quarter revenues were comprised of 63% of voice services, 20% of data services, and 17% of hotline products. Secondly, from a geographic segment perspective, our second quarter revenues were made up of 88% from North America, 8% from Europe, and 4% from what we call "all other" which is primarily the Pacific Rim and Latin America.
Our gross margin for the quarter was 33.0%, down from last quarter's 34.0%. Our gross margin continues to run lower than historical rates, and we attribute this decrease primarily to continued pricing pressures from our competitors and competitive environment. Also, the primary component of our revenue growth in the second quarter was an increase in the amount of project work in our voice and data segments. Project work typically runs at a lower margin than [mac] or maintenance, and that kind of work that we perform. It's also a leading indicator of potential downstream maintenance revenue.
Before we discuss EPS, I'd like to remind you that we have, and will continue to discuss, some financial information here today that includes non-GAAP financial measures. Please refer to today's press release for a reconciliation of any GAAP to non-GAAP financial measures.
Our second quarter operating earnings per share were $0.86. This is up $0.14 from last year's $0.72, and up $0.02 from last quarter's $0.84. The total reconciling items excluded from our operating earnings per share represented $0.09 per share for the second quarter of fiscal 2011 compared to $0.25 per share for the same period last year.
Reconciling items represented $0.19 and $0.52 per share for the first six months of fiscal 2011 and fiscal 2010 respectively. I'd like to note that all reconciling items in the current year are non-cash in nature.
GAAP diluted earnings per share for the second quarter were $0.77, a $0.30 increase from last year's $0.47 and a $0.02 from last quarter's $0.75. GAAP diluted EPS for the first six months of fiscal 2011 were $1.51, a 66% increase from last year's $0.91.
GAAP cash provided by operating activities for the quarter were $7 million, down from $14 million for the same period last year. Looking at that sequentially, first quarter cash provided by operating activities was $1 million. For the fiscal year to date, cash provided by operating activities was $8 million versus $31 million for the same period last year.
Second quarter free cash flow was $7 million compared to $14 million last year, and on a sequential comparison basis free cash flow was $200,000 in the first quarter of fiscal '11. Free cash flow for the full fiscal year-to-date was $8 million compared to $30 million for the same period last year.
The decrease in cash provided by operating activities was primarily driven by the consumption of working capital related to continued sequential revenue growth that we're experiencing. This resulted in an increase in our accounts receivable and cost in excess of billings on uncompleted contracts, partially offset by an increase in billings in excess of costs.
The increase in costs in excess of billings reflects additional large contracts where contract billing terms did not necessarily coincide with our percentage of completion revenue recognition. It should be noted that the increase in this account represents revenue growth in those sectors and did not impact our DSOs, which I'll discuss shortly.
EBITDA for the second quarter was $28 million compared to $20 million for the same period last year, and on a sequential comparison basis first quarter EBITDA was $28 million. EBITDA for the first six months was $56 million compared to $40 million for the same period last year.
Adjusted EBITDA for the second quarter was $31 million, which compares to $21 million for the same period last year, and looking at that sequentially first quarter adjusted EBITDA was $31 million. From a year-to-date standpoint, adjusted EBITDA for the first six months was $61 million, compared to $44 million for the same period last year.
Turning to some of our other key metrics, at the end of the second quarter we had cash and cash equivalents of $20 million and total debt of $208 million for a net debt position of $188 million. This is a $6 million decrease from a net debt position from $194 million at the end of the first quarter.
Currently, our incremental borrowing rate is 1.3%. Total availability under our line of credit is $350 million, and as of September 3, the unused portion of the line was approximately $140 million. And as a reminder, our credit facility expires in January of 2013.
Company-wide DSOs were 48 days. This is up 1 day from the first quarter DSOs of 47 days. Having reached our established fiscal 2011 goal of 50 days, we'll continue to focus on maintaining this metric at approximately 50 days for the remainder of the fiscal year.
Internally, we also track our aggregate DSOs, inclusive of cost in excess of billings and billings in excess of cost. As our government business has grown, and these items have become a larger piece of our working capital, we'll continue to discuss aggregate DSOs on our quarterly call.
Aggregate DSOs for the second quarter were 76 days, a 1-day improvement from the first quarter aggregate DSOs of 77days and a 3-day improvement from the 80 days in the same period of the prior year. As noted earlier, the increase in our working capital items has not adversely impacted our DSOs.
Accounts receivable reserve was $7.5 million, or 4.6% of the gross AR balance. This compares to the first quarter AR reserve of $8.6 million, or 5.5% of the gross AR balance. The decrease in the reserve in the quarter was primarily driven by the write-off of previously reserved accounts.
Moving on to inventory, our net inventory was $53.5 million, with inventory turns of 10.1 times, or 36 days. This compares to first quarter net inventory of $53.4 million, or 9.5 turns. Having reached our established fiscal 2011 goal of 9 turns, we'll focus on maintaining this metric at over 9 turns for the remainder of the year.
Inventory reserves were $20.0 million, or 27.2% of gross inventory. This compares to the first quarter inventory reserves of $19.7 million, or 27.0% of gross inventory.
For the second quarter, new capital expenditures were approximately $1 million. This brings our year-to-date cap ex to approximately $2 million.
Interest expense for the second quarter was $2.1 million, or 0.8% of revenues, and this amount does exclude a non-cash gain of approximately $300,000 attributable to the interest swaps discussed in today's press release.
This compares to first quarter interest expense of $2.2 million, or 0.8% of revenues, excluding a non-cash gain of approximately $500,000 attributable to those swaps.
Our six-month order backlog now stands at $213 million, which compares to $229 million at the end of the first quarter. The reduction in backlog is attributable to large projects which we completed ahead of schedule, as we touched on a little bit earlier. As a reminder, backlog represents expected revenue related to executed client purchase orders or contracts that we estimate to be complete within 180 days of quarter end.
Turning to maintenance revenue, which is derived primarily from long-term agreements with our voice clients, it stands at $54 million, or 20% of our revenue for the second quarter. Revenue under these agreements is recognized ratably over the term of the agreement, which is typically 1 to 3 years for our commercial clients and 3 to 5 years for our government clients. I'd also like to point out that this recurring maintenance revenue amount is a subset of the backlog number that we disclosed.
At the end of September, our team member staffing stood at 4376, and while our team moves between data, voice, and hotline somewhat, for perspective our Black Box team breaks down approximately as follows: 2600 are mostly voice, 1200 are mostly data, and 600 are mostly hotline.
As of the end of the second quarter, the basic weighted average common and common-equivalent shares stood at $17.607 million.
I'd like to now take a moment here to provide guidance for the upcoming quarter and an update for the full-year fiscal 2011. For the third quarter of fiscal 2011, we're targeting reported revenues of $260 million to $265 million. This represents approximately 3% year-over-year organic growth. You may recall that our third fiscal quarter of last year included approximately $11 million of federal revenue that accelerated into the quarter.
Our operating EPS range is $0.76 to $0.81, and this operating EPS range does include expected pre-tax amortization of stock-based comp. expense of approximately $2.5 million. Our expected income tax rate remains at 38.0%, and we expect capital expenditures of approximately $1 million within the quarter.
Turning to the full year of fiscal 2011, we're going to raise our guidance. We're now targeting reported revenues of $1.060 billion to $1.070 billion. This represents an approximate 3% increase over our previously issued guidance for the full fiscal year and represents approximately 9% organic growth over fiscal 2010.
Our revised operating EPS range is $3.30 to $3.40. This operating EPS range includes expected pre-tax amortization of stock-based compensation expense of approximately $11 million. Again, we expect our tax rate to remain at 38.0% for the full year.
From a cap ex standpoint, we're expecting cap ex for the year to be between $4 million and $5 million, and finally our expected weighted average shares outstanding stands about 18 million.
As a reminder, this guidance includes the expected results from all acquisitions announced to date, including our recently announced acquisition of Logos Communications Systems. Also, this guidance excludes acquisition related expense and the impact of changes in the fair market value of our interest rate swaps, and as before, any new mergers and acquisition activity that has not been announced.
I'd like to now turn the call back to Terry.
Thanks Mike. Last quarter we discussed pockets of strength emerging across our client base. In our second quarter, we continued to see discrete examples of clients' willingness to invest in their communications infrastructure. Growth has been primarily focused where there are large national accounts, our system integrator relationships, and our government clients.
At Black Box, we strive to provide our clients with the appropriate solutions to fill their communications needs. That solution may include complex design, sourcing, installation, and ongoing maintenance. We believe that our complete offering and deep client relationships differentiates us and positions us well when spending returns to the normal cycle.
We work hard to build and maintain those relationships, and I am very proud that during the quarter our team was recognized with a number of awards that demonstrate our commitment to the highest levels of client support.
We were named the 2010 top partner of the year by AVST, which is based on sales of AVST unified communications products. Also, Black Box was recognized by ShoreTel for outstanding customer service based on a survey of ShoreTel customers. And finally, the Black Box catalog was awarded a multi-channel merchant award for the 15th consecutive year, which is based on creativity, content, merchandising, and customer service.
Mike mentioned earlier that we are seeing a change in our revenue mix, with an increase in project revenue in our voice and data segments. As we have discussed, there are short-term challenges associated with this change in mix, primarily a compression in our gross margins. However, we view an increase in project revenue very positively. Initially, it is an indication that our clients are prepared to begin investing in their communications infrastructure.
As the economy slowly improves, increased investment in projects is often a catalyst for other spending. Secondly, our clients look to Black Box to provide ongoing maintenance after their project installations are operational. This creates a downstream revenue opportunity for Black Box and positions us as a trusted partner on future infrastructure projects.
Black Box is committed to continue to provide world-class technical service to our clients and provide them with a broad selection of technology choices that will ensure the right product to meet their unique needs. We believe the change in revenue mix is part of the business recovery cycle. Our management team will continue to focus on revenue growth while maintaining our emphasis on profitability and positive cash flow.
I am also very happy to report a recent strategic acquisition. We have discussed our desire to deepen our capabilities to deliver Cisco communications and infrastructure solutions. Black Box is a Cisco Gold Certified Partner, and we believe that expanding our Cisco resources will allow us to better serve our clients who are interested in Cisco solutions.
Last week we announced the acquisition of Logos Communications Systems. The Logos team brings an active client base and additional advanced capabilities in unified communications, wireless LAN, routing and switching, and security to the Black Box offering. We are excited to welcome the Logos team members to our team and look forward to serving our combined client base.
I'd also like to introduce Ken Davis, who has been appointed vice president and executive officer of the company. Ken has served in a number of operating roles within the company over the past 13 years. Most recently Ken was the vice president and general manager of the northeast region, Europe, and also our Latin American region.
The growth of our business into new markets and geographies creates the opportunity to drive additional value for our clients and shareholders. Over the years, Ken has demonstrated the ability to coordinate our technical and operational resources to provide solutions to our clients.
In this new role, Ken will be directly responsible for approximately $500 million of Black Box revenues, and will play a direct role in driving the overall operations of the company. I am very excited to have Ken in this new leadership role.
In summary, I'm very pleased with our revenue growth this quarter and our improved financial guidance for the year. We continue to build on our capabilities to provide our clients with a broad portfolio of solutions and world-class technical expertise. We look forward to improvements in the global economy and the opportunity to serve our clients as they invest in their communications infrastructure.
We will now open up the call for your questions.
[Operator Instructions.] Our first question comes from the line of Greg Burns from Sidoti. Please go ahead.
Greg Burns - Sidoti & Company
Question about the business that closed early in this quarter. How much of an impact was that on this quarter? And then maybe on the guidance, given what you're looking for for the third quarter and what you gave for the fourth quarter, kind of implies a pretty strong close to the year. So just how should we think about that?
We provided guidance on the quarter of $2.60 to $2.65 and if you recall our backlog jumped up pretty substantially. I think we were at around $2.05 million or thereabouts and it went up to $230 million. We had secured a couple of large contracts domestically and we expected that to spread over a couple of quarters. We got a good part of it in this quarter by executing the work quicker than anticipated.
So roughly $10 million there Greg? We talked last quarter also about seeing growth in different verticals. That's continuing and as we're putting actuals behind us and securing more business we're raising our guidance. I think our top end went up by $30 million from last quarter's annual guidance. Clearly we got $13 million more than we thought this quarter. Some of it's shifting. So [a ton of] business is consistent and we're happy to be putting up these kinds of growth numbers. Backlog where it is today is a good place for us. It will shift around but it's in the neighborhood of the guidance we provided.
And on the last call you gave some incremental color on Avaya. Could you just give us a little update there as far as the building blocks you put in place and how that segment of the market is shaping up for you?
As you know, last November we signed on with Avaya in a Silver Partner status. We're now Platinum Partner status with Avaya. We knew it would take us quite a while to build up all the technical expertise, both in sales and in training, to get ramped up on the Avaya product. We didn't get a book of business that came with that partnership. So we've had a tremendous amount of training all around over a hundred offices within Black Box. A lot of Boot Camp training for sales and marketing, technical training. We're really close to certifying our NOC or Network Operations Center, which will be coming online next month and working with the Avaya folks.
So we've made a lot of headway there. The Avaya portfolio, the largest content of that today is the Nortel product, but we are making very good headway and getting positioned for the Avaya [Red] product.
Can you just remind me what percent of Cisco is your business, and maybe what percent of the market overall that they make up?
If you look at lines shipped, which is a common measurement, they're 20%ish, 25%, something like that. Cisco wasn't traditionally in this voice space 10 years ago, so they're a leader in new installations - about 25% market share. The Avaya Nortel combo pack is right there with them. The two of those make up 50% of lines being shipped.
Our revenue with Cisco traditionally has run in the $25 million to $30 million range. If you look at Logos, who we bought, we had an announcement last week, their run rate historically, last 12 months anyway, was around $14 million or so. But I think the key here is the capabilities that come along with that acquisition and balancing that with our organic resources we had in front of that. We really have a powerful technical support group for the broader Cisco solution.
Next we'll go to the line of Jeff Beach from Stifel Nicolaus. Please go ahead.
Jeff Beach - Stifel Nicolaus
Start with Europe. Profitability took a little dip, which may be temporary, but can you talk about the tone of the market in Europe? Is there signs of increasing activity like you're seeing in North America? I can't remember you acquiring something in Europe for quite a while, if you ever have. Can you just expand on what's happening in Europe?
Let me just touch base on the acquisition side and then I'll turn it over to Ken Davis who's been running that part of the world for us for a number of years. We did have a number of acquisitions over in Europe. I think our last one was probably in 2002 when we were expanding our data services operation. I would say probably 30% of our revenues in Europe are data services, 70% or thereabouts is hotline. So it's really a hotline data service environment for us there. So it's been a number of years and it was really in those two services where we're providing core resources. Relative to the European market and profitability, Ken do you want to -
Year-over-year revenues are essentially flat in Europe. We continue to see business activity soft and competition for our projects have been very strong. However, we're strategically pricing to maintain our customer relationships, and although short-term profitability is historically lower than what we've seen, we believe this approach is in our best interest until the economy starts to improve. So in general we're still seeing quite a bit of softness in the European countries.
And is the network overall pretty healthy? I think it was maybe three years ago you did a lot of consolidation?
We continue to manage our costs. We've done some consolidation in some of the countries to operate a little bit better from an efficiency standpoint. But hopefully the economies start to turn, but there are challenges that exist throughout Europe, and the competition for the limited opportunity that's out there makes pricing very difficult. But we've done a good job maintaining our cost base and we continue to look for opportunities every day to leverage our service and product capabilities throughout the European region.
Second area I'd like to just have you expand a little bit on is the project activity. You picked up some nice projects. Is there any way to describe to us the bidding activity out there versus 3-5 months ago? Whether it's more things that are attractive to bid on right now?
First of all, the larger projects that we're currently working on, and a lot of bid activity on, is federal related. We have a number of bases that we are upgrading, are either putting in new technology platforms. Currently there's a lot of infrastructure behind that as far as data services. Most of these large bases come with not only the new switch and all the wireless and security equipment, but also the copper and fiber infrastructure behind that. So that's the largest projects we have.
Having said that, we have seen in this quarter some large opportunities that we're working on and actually have in process with some financial institutions. We're certainly welcoming that. We haven't seen any large multi-million dollar projects in the financial vertical in four or five quarters, and we're starting to see some of those free up larger capital expenditure projects that have been on hold for some time.
Also we're seeing a little bit of activity, not anything massive, but we are seeing an upbeat in the retail market in the vertical that we have. We're doing some store refreshes and upgrades, both on data side and the voice side, in some of the retailers that we support across the country.
And the last vertical is the medical, or the healthcare vertical, which continues to be strong. It's actually been very active throughout the recession and continues to show signs of encouragement. We have a lot of bid activity around the healthcare, not only bid activity but we have literally millions of dollars of projects underway there.
That was pretty thorough. Last thing, on the acquisition outlook just looking back over the last two, three, four years, you continue to find a stream of smaller tuck-ins that add capability such as this last one you just made to give you a much bigger presence in Cisco. Are there still lots of - I don't even know if they're tuck-in - strategic acquisitions out there that you've identified that enhance your product offering or market position, that this could continue on for some time?
Certainly. That's the case. Last 12-18 months we've had numerous opportunities within our M&A division looking at companies. Quite candidly, a lot of these companies were very challenged in many different areas. So we were really selective in who we engaged with. Now we saw some really good companies that wanted to hold out. They didn't want any purchase activity going on with the market as low as it was. Our M&A pipeline is at an all-time high right now and there's a lot of really great opportunities out there that we're working on. So you'll probably see some more activity in that area from Black Box over the next couple of quarters.
Next we'll go to the line of Josh Overholt from ICM.
Josh Overholt - ICM
If you look going forward, we talked a little bit about acquisitions, do you see acquisitions internationally as we go forward? It's been a little bit since you've done one internationally, as you talked about earlier. Are you seeing opportunities with the weakness in Europe?
Actually we've seen opportunities but they're certainly a lot more pricy than the acquisitions we've seen here in North America. We continue to be focused on expanding our voice service offerings and data service offerings in Europe and Latin America, but we've engaged in a lot of discussions. We just haven't been able to close any of those deals for various reasons. But that's certainly a priority of ours going forward. It's all of our technology partners. We have a number of our top 5 technology partners and we're not specifically looking at any certain one technology. We're looking at all the partnerships that we have and a way to increase our customer base and increase our capabilities with good, quality M&A candidates to bring into the family. So we'll continue to do that and we certainly hope to do that in the European countries sometime soon.
And then as far as the government strength that you're seeing, is that BRAC-related, or is that more upgrade-related of existing networks?
It's really a combo. There is some BRAC-related work going on out there. We have a really huge project that we've been involved in at Fort Bragg where that's Pope and Bragg are coming together there and going to have about 150,000 military personnel on that base when this project is completed. There's other BRAC projects that we're working on as well, but we're seeing a number of opportunities to increase the current platform in the DOD. Nortel had a really big footprint within that area of the Department of Defense, and we're working on a number of - not only here in North America, but international upgrades for that Avaya Nortel base. So it's really a combo of both.
And then I guess one final question. When you look at the business as far as breaking it down by product, whether it be Avaya, Nortel, Cisco, you talked a little bit about gross margin degradation from larger contracts. Is there any degradation related to whether it's a Cisco-oriented deal or an Avaya-oriented deal related to the gross margin?
Yes, there is. There's a little more compression on the Cisco-related projects because there's a lot of really high quality Cisco VARs out there and we certainly compete with a number of them. But the situation - Cisco's in very high demand, and on the federal side we don't run into Cisco that much. It's more of an Avaya Siemens show in that area. Some Alcatel-Lucent. But there is more compression on the margins with Cisco-related projects. Having said that, there's a lot more opportunities out there on the enterprise and the commercial side with Cisco that clients that dictate and want Cisco equipment. We'll continue to participate on all those projects.
Other traditional manufacturers are all of similar profiles relative to profitability?
[Operator Instructions.] We'll go to the line of Joseph Gardner from [inaudible] Advisors. Please go ahead.
Joseph Gardner - [inaudible] Advisors
A few questions for you. Number one, you talked a good bit about your end markets and what you're seeing there. I'm wondering if there's any color that you can give in terms of particular areas of interest within the customer base in terms of technology. For example, last week we heard from ShoreTel that they seem to be seeing a significant increase in demand from large enterprise customers for their voice over IP technology. I'm wondering if there are any particular technologies or areas of interest that you see driving demand.
Not really. It's across the board. We have a lot of IP. We're quoting and doing proposals on a lot of IP projects. We're aligned with the top five OEM partners that provide unified communications. Having said that, most of the TDM bases either going IP or looking at UC and it's not any one particular technology or any one particular vertical customer. We're seeing it pretty much across the board.
And from a financial perspective, just looking at the SG&A expenses, if I'm reading this correctly, were actually down year over year despite the growth in revenues? I'm wondering if you could talk a little bit about what's going on in that particular line item, how you've been successful in controlling those expenses and what we should expect to see going forward.
I think what you're looking at there on the face of the financials is as you know we were doing cost reductions last year where we had basically 13% organic decline in FY09 to FY10. And our GAAP numbers include some items that we called out - severance expense. And in particular we closed up some of our outstanding litigation related to our stock options and derivative class action. So in effect we had about $5 million of expense last year that I would say was non-operational, if you will. So if you rationalize that, our expenses are up year to year, about $4 million, and no different than as we were taking costs out on the way down. As we're seeing this growth occur we're making investments in appropriate SG&A areas to support that revenue. So it all comes down to the matching principle with us. Hopefully we can get a little bit of leverage on the way up if we continue to grow, but fundamentally the costs that we took out are really necessary for revenues we're going to be servicing moving forward.
What's your thoughts at this point in terms of headcount increases? Are you looking at investing in headcount now that you're seeing demand develop?
I think as we entered this year we actually came out of the gates looking for organic growth. We made investments in a number of areas. Terry touched on some of our investments on what we made on the Avaya front relative to certifications and training and so on. But I think we had budgeted 30 or 40 additional sales folks - it could be higher throughout the year, at the beginning of the year. So that's really where the action is for us. At the end of the day our field resources and our back office resources tie into the revenue, and so our investments in headcount really from a discretionary standpoint let's say, looking forward in a growth environment, is really making investments in our sales teams and some of our marketing efforts.
So that is kind of an independent view because our P&L leaders and our management team is really good at making sure we get the right level of utilization out of our field resources and the right efficiencies in the back office. So that's what it really comes to and we felt coming into this year that the time was right for us to do that. It feels really good to put up these kinds of numbers and actually reaping some of the rewards of this. Clearly the macro environment has timed out right for us, at least at this point in North America. Ken touched on some of the sluggishness we're still seeing over in Europe. Our operation team is very good at managing headcount and making sure we're getting the right leverage out of the resources we have on the team.
That 30-40 person increase in sales force, can you put that in context? How many sales people did you have at the beginning of the year? What type of percentage increase would that be?
Our data and voice services groups - actually it's a direct sales model - our hotline conversely is more of a direct marketing, e-marketing kind of approach. So coming into the year I believe our headcount on sales folks was about 300, maybe a little bit more. So you can kind of put that in context of about a 10% increase that we were looking to do this year.
And then on the balance sheet, I noticed the accounts receivable reserve was down somewhat significantly year-over-year and quarter to quarter basis. Should I take this as a sign that the health of the customer base and the quality of the receivables are continuing to improve? Do you feel good in that area?
Yeah, I'd say that it hasn't been weak. We happened to write off two fairly large receivables. They've been reserved for over time over the last couple of years. We concluded that we had effectively gotten what we could out of that and wrote those off. So you saw the reserve go down but the net AR that we've been representing is very solid. Of course we have a churn there but if you look at our DSOs we're at some pretty sporty levels for us on collection days even if you go back five ten years. So we haven't had any significant write-offs during the downturn. These two in particular were chipped away at over the last couple of years, and then we fundamentally wrote them off this quarter.
And receivable DSOs down nicely year-over-year, inventory turns up pretty nicely. In fact I can't remember the last time I saw a 10 times number on the turns.
Me either. I think you have to go back at least 10 years with that. It really comes down to planning and especially we saw it on the way down they did a tremendous job at managing our inventories and I will say that we have not sacrificed our service levels along the way. It's primarily hotline inventory, and we're still delivering 95% plus same day. So the team did a really spectacular job, not just this year but over the last couple of years in really getting their arms around the products that we're selling and at what levels.
That was our last question of the day. If you'd like to conclude?
Okay. We thank you for your time today and as a reminder our press release has been filed on Form 8-K and on our website at blackbox.com. As Gary mentioned earlier, we will present at a number of conferences this quarter, and I will host our annual investor day here in Pittsburgh on December 10. Please see our press releases describing these events in more detail. Again, thanks for joining us tonight and this concludes the conference call.