InterCloud Systems Inc (NASDAQ:ICLD)
Q2 2014 Earnings Conference Call
August 15, 2014 10:00 AM ET
Jon Cunningham – Investor Relations
Mark Munro – Chief Executive Officer
Dan Sullivan – Chief Financial Officer
Thomas Pfister – RedChip Companies
Good day and welcome to the InterCloud Systems Incorporated Second Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time I’d like to turn the conference over to Mr. Jon Cunningham, Vice President of RedChip Companies. Please go ahead sir.
Thank you for joining us for InterCloud Systems second quarter 2014 earnings conference call. On the call today we have Chairman and CEO, Mark Munro and CFO, Dan Sullivan.
Before we get underway I would like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of yesterday’s news release detailing InterCloud’s second quarter financial results. This paragraph states that any forward-looking statements that we make speak as of the date made are subject to inherent risks and uncertainties including those described in the Company’s most recently filed reports with the SEC.
Except as otherwise required by Federal Securities Law, we disclaim any obligation or undertaking to publically release any updates or revisions to any forward-looking statements contained herein or elsewhere to reflect any change in our expectations with regard to any changes in events, conditions or circumstances on which any such statement is based.
It's now my pleasure to introduce InterCloud’s CEO, Mark Munro. Mark, please go ahead.
Thank you and Good morning all. Good morning, before I turn the call over to Dan Sullivan, our CFO to review our second quarter financial results, I wanted to remind people of guidance provided during our last call and take a moment to provide people with the summary of our second quarter results and continued outlook for the rest of 2014.
During our last conference call, we stated that we believed our annual revenues for 2014 can reach $80 million or higher. We continue to have confidence in these numbers. Our second quarter gross revenue was $17.8 million showed an increase by almost 30% over our first quarter gross revenues and 30% – 34% over the same period of last year. This growth was a result of higher sales through existing customers and addition of new clients as well. In addition, we also strengthened our balance sheet, through the elimination of approximately $6 million of long-term debt.
As we continue to scale over $100 million over the next 12 months, we can expect to see earnings in the 12% to 14% range as corporate expenses become a smaller percentage of the overall expense to gross revenue. InterCloud continues to show steady growth, we made a point of advising shareholders and incentive to utilize cash flow from operations to hire strategic sales teams and we have done just that in the last quarter and in the first quarter as well.
In the first seven months of 2014, we’ve hired 12 new enterprise and service provider sales and support personnel. The average yearly quarter for new sales executive is approximately $4 million a year of new revenue each. We intend on hiring another six to seven additional sales personnel through the end of 2014 in addition to those we’ve already hired. We mention this objective – we mentioned this objective in Q1 on the conference call, we wanted to clarify that we are executing on our plan as outlined.
It’s very important for our shareholders to know that we are focused on executing on our plans and strategy. Our ability to higher successful industry sales executives from companies like VMware is due to our robust Cloud-centric services and solutions portfolio.
We’re at the forefront of the IT market disruption and all the sales people that have joined recently, obviously recognized the value of our capabilities and what that brings to their ability to succeed, but they wouldn’t have come here. It’s also very important to know that sales teams that all of our sales teams having experience to navigate through this market expansion.
InterCloud will continue to expand and capture as much of this new cloud market as possible. We’ll do so with our expanded organic growth plan. From a go to market perspective organically we’re hiring a number of geographies across the US including the Northeast, Southeast, the Midwest, Southwest and the West Coast.
These hires will encompass talent from both our macro markets. The service provider segment as well as the enterprise and globally these two markets have $63.6 trillion of annual IT spend. We’ll continue to stay aggressive and higher and expand ahead of our competitors and others looking to enter these markets. We believe this strategy can create tremendous shareholder value with InterCloud.
As I mentioned our second quarter numbers reflecting increased in growth revenues year-over-year and increasing gross profit year-over-year and an increase in our gross margins. We continue to move in a right direction. Our second quarter corporate expenses reflect the beginning of reduction in overhead as we integrate our recent acquisitions. We expect the reduction in annual accounting and legal fees moving forward as well as one time expenses associated with integration costs.
We’re focused on managing expenses in creating a culture of total accountability throughout the entire organization. Moving forward we’re very excited and bullish about our opportunities. We’re in a unique position at the IT industry transition from the legacy networks, the proprietary hardware and software, to the new flexible open market texture cloud solutions and software defined networking. Our partnerships with entities such as VMware, Juniper Network and Ciena and others will complement our cloud portfolio and provide us the opportunity to become a major player in this marketplace.
As I mentioned earlier in each of our three reporting segments, cloud managed services, professional services and applications and infrastructure. Our sales pipeline and forecast are growing tremendously. We’re seeing more and more customers in the enterprise and service provider markets their CIOs and CTOs embracing cloud solutions and moving to the new solution sets.
From a professional services perspective we continue to add resources that will give us accretive revenue expansion through new customers that includes some of the largest OEM’s in the world. In addition we have expanded our engineering capabilities geographically and in emerging areas of technology. These key growth areas include small cell networks, software defined networks or SDN and network function virtualization or NFV. We believe our positioning is years ahead of those trying to duplicate we’ve already developed. We are confident that our aggressive strategy for organic growth has begun to show its province and revenue expansion. I am now going to take a minute to review our VaultLogix acquisition plans, we’ve extended our closing date for VaultLogix acquisition as our perspective lender completes the due diligence in final terms.
We continue to be very excited about the prospects of that entity and whatever means for InterCloud. VaultLogix brings InterCloud intellectual property has it's own software and unique capabilities like deduplication and common file elimination among other unique features. That will continue to further or differentiation from other cloud service providers that do not have our full bundled cloud solution set.
At this point I’m going to turn the call over to Dan Sullivan for more deeper review of our financial results picture.
Thank you, Mark. I’m going to provide some highlights of our reported financial results. The full data is contained in our 10-Q that we filed yesterday. Revenue for the second quarter ended June 30, 2014 increased $4.5 million or 34% to $17.8 million as compared to $13.3 million for the second quarter of 2013. This was primarily the result of an increase in cloud and managed services segment revenue driven by our acquisitions which begin in the first quarter.
Gross profit percentage was 32% for the second quarter ended June 30, 2014, as compared to 28% for the comparable period in 2013. The overall increase in gross profit percentage was due to additional margin provided by recent acquisitions, which was partially offset by declining margins within the company's applications and infrastructure segment.
Net loss attributable to common stockholders of $10 million for the second quarter ended June 30, 2014, as compared to net loss attributable to common stockholders of $1.3 million for the three months ended June 30, 2013. The increase in net loss was due to increased operating expenses within our cloud and managed services segments of $2.3 million, $1.1 million related to stock compensation expense, increases in interest expense of $2.6 million due to additional debt financing, and losses incurred on converting and extinguishing debt of $5.9 million related to the MidMarket loan and 12% convertible debentures. These changes are offset by increases with gross margin of $1.9 million and gains on derivative liabilities of $1.8 million.
We continue to report in three segments cloud and managed services, applications and infrastructure and professional services. Gross profit for the period ended June 30, 2013 totaled $5.7 million, compared to $3.8 million for the same period last year. Earnings per share – our loss per share was $0.83 as compared to $33 during the same period last year.
Now I’ll turn the call back to Mark Munro.
Thank you, Dan. I will now review several additional subjects before wrapping up. Earlier further to this year, we had an obligation to file an S-1 Resale Registration Statement. Registering the shares underlying the $11.625 million convertible debentures we use to close integration or IPC-New York last January 1 that registration statement after a few turns addressing comments from the SEC when effective in early July of 2014.
Some other debentures have been regained or converted and $3.9 million remains – $3.9 million of principle remains of the $11.625 million original debenture amounts that’s been reduced tremendously, over the past eight months. During this time, we saw an opportunity to raise additional capital to fuel organic growth by filing an S-1 shortly after that registration went effective. We offer to register a certain number of shares in order to secure that additional growth capital. We had a limited number of shares we were willing to offer, but needless to say we choose not to move forward with that S-1 offering this time.
Now, I would like to take a moment to update information relating to the class action last year. There have been no new developments since the last quarter. There has been no class certification, no lead plaintiff appointed and no opportunities for InterCloud’s [indiscernible]. We remain confident in our position and we will vigorously defend ourselves.
Before I close, I wanted to review a few of InterCloud’s key accomplishments since our uplift in NASDAQ last October 31, 2013, which is just short eight months ago. We eliminated all our preferred stock. We eliminated $12 million of senior debt to midmarket capital. We produced our convertible debentures from a $11.6 million to $3.9 million of principle. We close the IPC-New York and RentVM acquisitions in early 2014. We were working diligently to close the VaultLogix acquisition with our new debt partners. We’ve executed on building our platform over the last two years and are now on a position to execute and build on our organic growth plans which I talked great deal about today.
Our management team is focused and as a leadership abilities to build InterCloud brands and financial success is going forward. I think it’s always critical and important for shareholders to understand in the recent of our duties these accomplishments, it’s important to know that we are sticking to our plans and our strategy and we’re executing on that.
At this point, I would like to open it up to Q&A.
Thank you, Mr. Munro. (Operator Instructions) We’ll take our first question from Thomas Pfister with RedChip Company.
Thomas Pfister – RedChip Companies
Hey, Mark, hey, Dan, great to see the continue progress here in InterCloud Systems. I just have a few questions for you guys today. My first question is could you go for what partnerships with energy such as VMware, Juniper and Ciena mean for InterCloud?
Sure, I will take that this is Mark. It’s obviously very important when you’re dealing in the service provider and the enterprise market segments to have the right partnerships and have the right, in order to provide a right cloud solution set, we had the partner with certain entities and bring the right quality of services to the table for our cloud. So, in other words rather doing a white label with someone who have black box or someone that has no brand, all the enterprise and carriers know these vendors, they worked with them in the past, they have trust in them. So, when we’re talking about them being in our cloud and working within our cloud it makes a big difference in our creditability to our client base and that’s really the most important aspect of it. Creditability, reliability and trust from the clients – trust factor.
Thomas Pfister – RedChip Companies
Great, thanks for the color Mark. My next question do you expect the topline growth that were showing in the second quarter to continue throughout 2014 as well as into 2015?
I think one of things I was trying to focus on the call today was how we’re building organic growth plans. And obviously when you’re adding the number of successful enterprise and careers sales people that we’ve been hiring and we’ll continue to hire. We believe we will continue to get results out of those individuals, which will fuel a lot of growth.
So, on a long – in the short lift way I guess, I’m saying yes, we do believe we can do that and I wanted everybody to know that we’re executing on and as I said in Q1 we’re going to hire these people we have been doing that we’ve been successful with it. Our pipeline is growing tremendously our pipeline is probably five times when it was this time last year it was announced over the last months some tremendous contracts with very reputable and big customers. And I think it shows creditability for what services we’re providing and how we’re performing in the marketplace. Booked our backlog is higher than it’s ever been we announced just approximately $25 million, I think about a week ago. And that continues to grow it has been growing weekly – we’re seeing tremendous success out of our growth strategy.
And I got to tell you it’s a tribute to our management team, our President Frank Jadevaia, our VP of Sales Scott Davis. And I like to mention some of these guys get fully (indiscernible) everyday working very hard they are doing a great job. So, we appreciate what they are doing for us. So, I hopefully that answers your question.
Thomas Pfister – RedChip Companies
Yes, it does. Thank you very much and just my last question here. Will the increase in net losses shown on the 10-Q slow your anticipated growth?
No, because you look at the – if you paid attention to the detail in a net losses in Q2. On an operating basis, we lost about $2.3 million around that $2.3 million of operating losses right around $2 million of that was domination of stock.comp compensation and depreciation. So, on an operating basis, you lost about $300,000 for the quarter, $350,000 or so.
So, the $10 million number that you see is mostly one time expenses related to the extinguishment of the mid market debt and some other factors that we described in the queue. So now that will not slow us down at all, we are moving forward our plans and we don’t see anything in front of us that’s going to stop us to doing that.
Thomas Pfister – RedChip Companies
Okay, great. Thanks Mark and Dan for taking my questions there, I really appreciate it. And it’s very exciting to see the development going on your company right now.
Yes, thank you. Appreciate it. In closing I just want to thank our shareholders for their continued support in investment, and we look forward to going a very dynamic and profitable InterCloud. That concludes our call.
That concludes today’s conference call. Thank you for your participation.
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