Zanett: Red Chip Conference Presentation Transcript

| About: Zanett, Inc. (ZANE)
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Zanett, Inc. (OTC:ZANE)

Red Chip Conference

February 12, 2007 10:30 am ET

Executives

Jack Rapport - President

Claudio Guazzoni - CEO

Presentation

Jack Rapport

Good morning everyone. Thanks very much for taking the time to hear our story this morning. Once again, our name is Zanett, Inc., and our stock symbol is ZANE on the NASDAQ capital market. In the next few minutes, I'd like to talk a little bit about what we do, where we've been, where we are, and where we are going. Then, I'll summarize a little bit, and then I will give you some things to think about, as you contemplate an investment in our company.

First, the obligatory legal disclaimer. Some of what I will be talking about today will, in fact, be subject to the Safe Harbor provisions of this disclaimer. So I do urge you to look at as it is the usual fine print, but nonetheless it's important.

Let's talk a little bit, first, about what it is we do. Very simply, we are a technology solutions company. We are consultants, engineers and project managers for hire. Now, there are lots of companies that do this, of course, but we focus on the kind of high-end mission-critical problems and solutions that cannot easily be outsourced to places like India and elsewhere.

For corporations, that means helping them select, install, customize, integrate, upgrade and maintain so-called ERP systems. Now, ERP, one of our terms that stands for Enterprise Resource Planning. That's just a fancy way of describing core business systems, like accounting systems and human resource systems, and client relationship management systems, and all of the various software and hardware combinations that run shop floors and manufacturing facilities and all of that.

Now, to our knowledge we're the only small cap company that has deep expertise in the whole Oracle suite of ERP applications. And I presume you all know who Oracle is. That includes, nowadays, PeopleSoft, JD Edwards and the Siebel platforms, software platforms as well.

But we also have a team of highly qualified engineers who are able to work behind the door in classified environments for the Department of Homeland Defense -- I'm sorry -- Homeland Security and the Department of Defense, and I'll go into more detail about that a little bit later.

First, a little bit of our history. And this timeline pretty much sums up where we've been as a company. We were found in the late 2000, when we tendered for and acquired a NASDAQ company that was in the foodservices business. If you look at some of our old filings, you will see the name "BAB Holdings." That stood for Big Apple Bagels.

There are two other brands that you might have seen if you've flown through midway in the last in a while, Brewster's Coffee and My Favorite Muffin, both simply good. That Brewster's Coffee, in particular, is sort of like poor man's Starbucks chain, if you will.

Now, our original thinking was to capitalize on the boom in Internet cafes. And we planned to wire the retail shops for these franchises with Internet drops and wireless hubs. As it turned out, we decided to shed the foodservice business, and we spun them out in an extraordinary dividend. BAB still does trade on the bulletin board today, and many of their original shareholders are still the shareholders in Zanett.

Now, our thesis back in 2001 -- sorry -- was that we would expect that the bubble was going to burst. I mean, we were sitting there in 2000 and we knew that something was going to happen, and we just didn't know when it was going to happen.

But we figured that there were going to be, once the bubble did burst, a group of profitable small companies that will not only have survived the bursting of the bubble but would have thrived in it as well. And we were particularly interested in IT services companies.

We wanted to be in a position to acquire and to aggregate them into a public company that would specialize in the kinds of services that are mission-critical to corporations and government entities and that also would command top dollar in the marketplace. Now, we were interested in companies that were for sale. That was a clear tip-off that they were either hurting or had insufficient marketing pipelines or whatever.

We were very much interested, on the other hand, in those companies that were not and that were still run by good management teams, great professional staffs, great clients, and that were already making money. In addition, they had to have the desire to stick around. We weren't interested in people that were ready to go and sit on the beach.

Now, we examined literally hundreds of -- you know, I'm going to see if I can just fix this. I don't want to end the show. So this is when the technology doesn't work. Stanford, could you hit the "Escape" key on that? Thanks. I'll still use this like this.

But back in that first year, 2001, we really -- we went through hundreds and hundreds of companies trying to find one -- let's go back up, there you go, thank you -- find the ones that were gems that we wanted to buy. The first one we finally closed -- the first acquisition we made was in December of 2001. That was Back Bay Technologies. We actually would have acquired that and closed that earlier but for not for 9/11, which, of course, occurred in that timeframe.

Back Bay was a high-end, specialty consulting shop that did application development. In other words, they built software programs for companies and they did digital strategy. What are you going to do with the digital future kind of stuff? It’s led by two Andersen consulting guys. It was a real archetype for the kind of company we wanted to acquire. All right.

The second company we bought, it was in May 2002, called Brandywine Computer Corporation. It was a JD Edwards consultancy. JD Edwards being a very notable and well known software platform primarily for the manufacturing world in those days. It was based in Cincinnati and this acquisition moved to squaring to that so called ERP, Enterprise Resource Planning space.

Now when we formulated our business model back in 2000, it was always our intention to buy a defense company. Well, as we believe the margins in the commercial business were going to be probably larger, we knew that that business will be cyclical. On the other hand, we knew that in the defense business while the margins might be a little bit slimmer, you have long-term contracts, recurring revenues, and royal voyage. It’s a great kind of business to be in for steadying out the ups and downs, the ebbs and flows of the commercial business.

We had a number of discussions underway back here when 9/11 occurred and it took us a while to close our first acquisition, but in January 2003, with actually December just spilled over in January, we closed our first defense acquisition that’s Paragon Dynamics, it’s headquartered in Denver and I’ll be talking more about what they do a little bit later.

Now from acquiring Paragon, we leaped over -- we forged over to Southern California and in December of 2003, at the end of that year, we bought a data communications company called Delta Data. Now if you look down this timeline, you will see that we sold that company in March 2006, about a year and half later. Simply it wasn’t performing to standards and I think the Delta acquisition of divestiture demonstrates that we are very committed to operating performance and we are not afraid to make changes when necessary in either management or in our assets slate when called for.

Well, we heard through the great line around the beginning of 2003 here that PeopleSoft and Oracle were going to get in a bidding war and were both willing to buy the JD Edwards shop. We placed our bet on PeopleSoft and of course, we ended up buying the company called INRANGE Consulting, which was headquartered in Indianapolis and that was a premier PeopleSoft consultancy. I’ll pause just to mention that, if we go to buy a company in a market, we are always going after either the first or the second top player in that market. We are really not interested in the other folks and, like I said before, they're not for sale.

So we closed on the PeopleSoft transaction, INRANGE Consulting Company in April 2004. PeopleSoft in the meantime had bought JD Edwards just a few months prior to that. But even while we were looking at INRANGE, we heard rumors that Oracle wasn't going to sit idly by while PeopleSoft bought up JD Edwards. They lost that bidding war.

And so we immediately started looking for an Oracle shop as well. And we entered into negotiations to buy a company based in Boston, a premier Oracle consultancy called Whitbread Technology Partners. And just after Oracle bought PeopleSoft, we managed to close on the acquisition of Whitbread's. So we're always just, you know, one step behind or one step in front, foreseeing that this consolidation was going to occur.

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And finally, when PeopleSoft -- I'm sorry, Oracle also bought Siebel Systems -- Siebel is the customer relationship management software that's very, very popular for Fortune 500 Companies -- we essentially had that inherent in both INRANGE and Whitbread already. So here we go. We've got Oracle who's bought up a good hunk of the ERP marketplace and all these different software platforms.

Now that's good news, because this sort of level the -- some of the plain field out there. And it also made Oracle very competitive with the other big 500 pound gorilla in the marketplace, which is SAP Software, the German company. But it was a pain for us because, frankly, everybody who had either a JD Edwards platform or PeopleSoft platform said, timeout, we've got to wait and see what it is that Oracle's going to do. I mean are you going to emerge this code, what you're going to do with stuff, right?

So while we were biting our time, waiting for Oracle to make their announcements, we decided to add a Managed Services component to our quiver of commercial companies. Now, Managed Services -- and the company we bought was called Data Road down in Jacksonville, Florida -- basically remotely monitors and administers systems for our clients performance, data base updates.

Essentially, if you didn't want to make an investment in whole Oracle system, which would be pretty pricy, these guys will basically host that whole thing for you, and you just log on and use the software as if it was your own. That's basically what they do. And they do it on a 24/7 365 basis. So instead of -- just sort of sitting around and waiting to see what Oracle was going to do, we said let's add a services component to our business, which also provide us with some continuing recurring revenues.

Now as Oracle's plans for how they were going to assimilate their various acquisitions unfolded, we pretty much had to follow suite with what they were doing. So for example, once Oracle got their act together they decided they were going to have one sales force selling the whole suite of Oracle applications. Well, of course, it made sense for us to do the same, and so we followed suite.

We spent the better part of 2006 as a result consolidating -- as you see this red sort of line here -- our commercial enterprises into one entity called Zanett Commercial Solutions. And I think it's fair to say that now we're pretty well done with all of that. We're operating smoothly on all cylinders and really what amounts to a national practice model for our commercial business.

So from a growth perspective over the five years -- excuse me -- over the five years, we’ve been at this. We’ve grown from about $0 to around 45 million in revenues through 2006 and spread ourselves geographically across the country, as I mentioned earlier, Boston, New York, Jacksonville, Cincinnati, Indianapolis, Detroit, that’s Denver and in Los Angeles as well.

What’s more significant the net rate that we grew is that we did sell without significant dilution in the shareholders. From 2001 through 2006, our primary shares only grew from around 25 million to 29 million --sorry again. I’ll get this technology to figure it out. Yeah -- which represents a compound annual growth rate of around 4%.

Meanwhile our compound annual growth rate or CAGR on revenues grew at 165%. That’s a very steep curve. Even if you take out the first couple of years here and it’s called -- you know, those are getting-started years. Over a four-year period, our CAGR on revenues is around 44, 45%. Compare that with the 4% growth in shares outstanding, that’s a very, very favorable ratio.

So that takes us to where we are today. Today, we’re operating two business segments, the Commercial Solutions segment and the Defense and Security Solutions segment. Our commercial business represents around 80% of our revenues and the balance is in defense.

As I mentioned previously, our Commercial Solutions Group is comprised of the former JD Edwards, PeopleSoft and Oracle practices that we acquired. Today, it’s around $36 million focused on providing solutions connected with that entire Oracle suite of ERP applications.

A typical engagement for us is a three to six-month project, running a few hundred thousand dollars. As you can imagine, when you first buy a software package like Oracle Financials, it’s not like we’re opening up the latest version of Internet Explorer on your laptop, which remind me of a Bill Gates story.

So Bill Gates dies regrettably and goes to the purgatory and he is told that he is -- St. Peter and God are in face with a real dilemma. The dilemma is they’re not sure whether they send him to heaven or they send him to hell. On the one hand, God says to Bill, you know, you created an amazing technology and you basically put a desktop or a computer on the desk of every home in America.

On the other hand, you know, you created that awful Windows 95 and various other discretions. So you know, we really aren’t sure about what we should do. So Bill says what’s the difference between heaven and hell anyway? And he says, you know, I’ll tell you what I’m going to do. I’m going to let you sample each so you can make up your own mind and decide where you want to go. Bill says that’s great. God says where do you want to go first? He said I’ll go to hell first.

So flash a light and all of a sudden Bill finds himself in hell. He looks around, he sees pristine water, mountains, warm sun and, you know, lovely women frolicking around. And he thinks, hey, this isn’t bad. And he says I want to -- you know, if this is hell, by the way, what heaven is like.

Another flash, and of course, he finds himself in heaven. Here he is above the clouds. There are all these angels and people with, you know, harp singing in beautiful choruses and everything else. Yeah, very nice, but nowhere near as enticing as hell. So he sure calls up and he says I’ll take hell. So Bill is sentenced to hell for eternity.

Well, a few months later God decides he’s going to check on Bill. And so he goes down there and sure enough he finds Bill in a cave, chained to a wall with demons, you know, just taunting him and flames licking at him and he is burning in his misery. And Bill -- and God says, “Hey, how is it going?” And Bill says, “Jesus, God, what -- I can’t believe this, what is going on here. This is nothing like the place I first saw. You know, when I first went and visited hell." And God said, "Oh! Bill, that was just a demo."

Anyhow, the point is that you just go and look at the demo of an Oracle installation or anything like that. And it's now quite the same. So we do, in fact, spend a lot of time making that stuff work the way it's supposed to.

Now, rather than being what we call in the IT services businesses are drive by shooter, where you sort of going -- build a website for a company and then you leave, we are try to develop long, standing, trusted relationships with our clients. We call that core status, which is means consulting of record. And what does is it -- lets us take those few $1000 engagements and turn them into multi-million dollar engagements.

Essentially we want to be the digital strategist and the guys who help you make your mission critical stuff work. And so for example, we have an example about in our -- you know we're very prominent in the State of Indiana, helping them revamp their human resource systems. We've been there for couple of years already. We'll probably be there for sometime to come. And we certainly turn that that engagement into a multi-million dollar engagement. That's a kind of thing that we try to do with our clients.

As you can see some of them are household names. It's really fun to do -- to deal with Papa John's. We never find ourselves on Friday afternoons without something to eat. But also some of the other entities you can see as smatter -- or it's a smattering of industries and a bunch of different people.

Again, as I mentioned earlier, we consolidated these entities that we have into Zanett Commercial Solutions, but we still operate under the brands that are part of the original companies we bought. So with Red Technologies, which is the Boston based business, DataRoad, which is the Jacksonville Managed Services Company INRANGE Consulting, or PeopleSoft in the Annapolis.

Now, let's talk about the Defense and Security side of the house. As I mentioned earlier, we provide services. I'd say the great majority of them in the classified world to the Department of Defense and Department of Homeland Security. They are involved in what we called "DExARC4." One of our wonderful terms of our figure of develop -- dealt with a defense system, you know, that they love their acronym. I'll explain that a little bit more in the next slide.

But they are a -- our company headquarter at Denver, headquarter in Denver but let us just say that they are deployed to all those garden spots that you'd never want to go. And that's again, part of the classified work that they do. But these guys are all extraordinarily dedicated to their thorough mission, which is helping to protect our country.

To give you a little bit of an idea of what it is, they do. DExARC4 stands for Data Exploitation Analysis Representation and C4 as a common term stands for Command, Control, Communications and Computing. Now, you see why we call it DExARC4.

Essentially, that’s everything having to do with slicing, dicing of data, getting it to the right place at the right time. I flippantly said, last night that we make Jack Bauer’s PDA work and that’s kind of true. A lot of what you see on SC and CTU and at on that show 24 is real. Computers aren’t quite that fast but they nonetheless are doing a lot of that overlaying of signal intelligence and imaginary intelligence all those things on one another.

What we do at Paragon Dynamics, is we work on the systems that do that kind of stuff. Now, we don’t handle the data but in a very, very classified behind the door world, we work on the engineering and the project management that deals with those kinds of systems.

And there are bunch of different hints in the Intelligence Community, Signals Intelligence, Imagery Intelligence, Electronic Intelligence, OSINT’s Open-Source Intelligence when we get off the Internet, there are tons of this stuff.

And the whole business today is about getting it all together, putting it in front of the right person at the right time maybe on Jack Bauer. But in any event making sure that when somebody pushes the button that time a [hot news] comes in on the right target. And that’s the kind of stuff that the Paragon guys do.

Now, we see Homeland Security and Homeland Defense, its two separate markets. Serving in department of homeland security means serving first responders like police and fire departments, the INS, the ATF, etcetera.

The major purchasing vehicle for the department of homeland security is a so called EAGLE contract. It is what is known as an IDIQ contract in other words those acronyms I’m afraid. That stands for Indefinite Duration Indefinite Quantity.

The maximum declared sealing declared that the Department of Homeland Security expect to spend on this contract over the next five to seven years is $45 billion, which will be spread out among a lot of different people.

Now, recently we announced that the team which we are on, one which includes very prominent and far better known companies then ours but which I cannot reveal. Again, because of the classified nature of it. I was approved -- we were approved and awarded the opportunity to render development and management support services under that contract.

Now, I cannot enroll, not speculate on what this will mean in revenue dollar terms presented. But it is noted in our press release, we anticipate same work from this contract beginning in the latter part of this year and beyond. We refer again to this segment dealing with DHS as the home game.

Now, DHS is just getting underway. So we are habitually or we typically been working with the department of defense and members of the intelligence community up till now.

That basically means getting them before they get us in foreign theaters.

Our primary credit customers therefore, our DDO themselves in various elements, air force etcetera. And the intelligence community, which actually comprises 15 organizations, three rate agencies like, the CIA and then the people like that.

Once again, we were involved in the engineering technologies to gather in slicing and dicing, securing, disseminating, representing, storing and turning data into information, information into insight and creating systems that permit a button push to bring in that (inaudible) missile on target.

Just to be clear again, even though our people are cleared way about the top secret, we don’t actually hand over the data, we just work on those engineering systems. Talk a little bit about where we’re going, on the commercial side of the house, we plan to continue growing both organically, and with selected acquisitions that add to our Oracle's full suite of capabilities and also broaden our geographic footprints.

Oracle having announced that their future will be based what’s called service oriented architecture or SOA. And that the fusion of their various acquired platforms will be served to what’s called middle way, that’s just a fancy black pots that makes some impact to one another. We’re following suit and we’ll be stepping up our SOA capabilities for both existing as well as new customers.

On the government side, we’re moving towards becoming a prime contractor on projects rather than just a sub-contractor. And also plan to grow organically, by presenting innovating solutions for problems we encounter during our other work. The shake ups being going on the department of defense and intelligence community, that’s actually in the new era of collaboration and interest in finding better ways of doing things.

Though last year we established we called a Paragon Engineering center, which is our strong quotes for developing innovative solutions that can make a difference and things to be done in a classified role. We’re already started to see some traction with this initiative and count on the Toronto’s new business from existing customers and new business from new customers in the months and years ahead.

In addition, as I mentioned earlier, given the outward development of resources and dollars in the inlay game, we have opened up engineering offices in some platform locations, and I’m afraid I can’t disclose. I’m surprised to say that we’re going to where the action is and that bodes well for Paragon’s growth this year and beyond as well.

Number four, I change the slide. I want to reiterate and disclaim it, but I cited at the beginning of my own remarks. We’re about to show is not representing guidance on our part. Rather the growth rates shown are nearly targeted minimum rates that we use internally to meet our own goals. Our mileage on organic growth of course depending upon how we drive.

As you can see, we’re targeting the minimum organic revenue growth rate of 15% to 25% per annum, which grows roughly towards our own historical growth rate. Similarly we’re targeting a minimum total growth rate of 45% and balance being coming from acquisitions again, those are minimal.

Finally, we are predicting year gap bottomline profitability by the end of Q1. And hopefully this will give you an idea of where we’re going.

So in summary, we're a $45 million to $47 million run rate company today with around 44% compound annual growth. 80% of our revenues are derived from commercial IT and 20% from defense contracting.

We'll continue to focus on the kinds of problems that shouldn't be outsourced, or can't be outsourced to India and elsewhere. We still remain an acquisitive shop, and have a strong pipeline of candidates. We’ve always got discussions going on and we ask you to stay tuned.

As we move further into 2007, we are excited about the growth prospects for our business. To wrap it up, let me just give you few things to consider, as you contemplate an investment in ZANE. To say that we have large and growing markets is an understatement, they are huge.

We are a rapidly growing company. We'll continue to grow rapidly. We know how to make acquisitions, and we've got an attractive acquisition pipeline. We've got a scalable model and last but not least, and probably maybe the most important is we got a high-caliber team that can get the job done for you.

And with that, we'll be happy to answer any questions you might have.

Question-and-Answer-Session

Jack Rapport

Yes.

Unidentified Audience Member

Are you having any difficulty getting people with appropriate clearances?

Jack Rapport

Yes. Everybody is. About a year ago, the defense Security Services Group that actually manages all the clearance process was moved to the office of personnel management at the Department of Defense. And by the way, it's not just a Department of Defense because a lot different -- and agencies have their own clearance processes and there was a huge backlog in that, Jim. That is now starting to get washed out, and so it's getting better.

We're getting clearances through for people much more quickly, but it is still a sellers, if you will, market in that regard. People with the kind of conserve security clearance that we're talking about, which is well above top secret or hard to come by. We think on the other hand that we have some real attractive attributes for our people.

A lot of our people came out of the classified were working for larger companies. You know they're really pretty thrilled and excited to work for us. And so we've been able to track the people we need, when we need them.

Unidentified Audience Member

Thanks guys. Thank you.

Unidentified Audience Member

I wanted to ask that the rest of the questions hold until you get to the booth or breakout room. Okay?

Jack Rapport

Thank you very much.

TRANSCRIPT SPONSOR

RedChip Companies, Inc., is a well-established source of independent research and information on the small-cap market. Dedicated to "discovering tomorrow's blue chips today(tm)," its analysts seek out up-and-coming and undiscovered small-cap companies before they show up on Wall Street's radar screen. Through RedChip Review(tm), the Company's flagship publication, analysts provide a unique breadth of coverage and depth of research on relatively unknown small-cap companies. RedChip Visibility(tm) provides publicly-traded small-cap companies an opportunity to present their business to institutional and individual investors by holding investor conferences across the country. For an investor kit click here or call 1-800-REDCHIP.

Read all Red Chip Conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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