Cartesian's (CRTN) CEO Peter Woodward on Q4 2015 Results - Earnings Call Transcript

| About: Cartesian, Inc. (CRTN)

Cartesian, Inc. (NASDAQ:CRTN)

Q4 2015 Earnings Conference Call

March 31, 2016 17:00 ET

Executives

Peter Woodward - Chief Executive Officer

John Ferrara - Chief Financial Officer

Analysts

Harvey Poppel - Poptech LP

Richard Nespola - Private Investor

Bill Sutherland - Emerging Growth Equities

Operator

Good afternoon. Welcome to Cartesian’s Fourth Quarter and Full Year 2015 Earnings Conference Call. Joining us for today’s call is Cartesian’s CEO, Peter Woodward and CFO, John Ferrara. Following their remarks, we will open up the call for your questions.

And before we conclude today’s call, I will provide the necessary cautions regarding the forward-looking statements made by management during the call. I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company’s website at www.cartesian.com.

Now, I would like to turn the call over to Cartesian’s CEO, Peter Woodward. Sir, please proceed.

Peter Woodward

Welcome everyone and thank you for joining us today. After the market closed, we issued a press release announcing our results for the fourth quarter and full year ended January 2, 2016, a copy of which is available on the Investor Relations section of our website.

Let me comment generally on the fourth quarter and fiscal 2015 and then I will turn the call over to John Ferrara, our CFO, to discuss our operating and financial results. But first, I would like to address briefly the reason for us reporting our year end results later than we have done historically. Largely as a result of our July 2015 acquisition of Farncombe, the 2015 audit has taken significantly longer than originally anticipated. The integration of Farncombe has gone well from the business side of things, but we experienced delays in getting Farncombe switched to our financial system, which slowed the ability of our auditors to begin work. We expect to return to a more normalized reporting schedule going forward.

Let me also quickly comment on some of the unusual costs we experienced in the fourth quarter. Most significantly, we have determined we need to reduce the carrying value of the inventory on our balance sheet related to our partnership with Elutions. John will add some additional details, but I want to make clear the $2.1 million write-down was accounted for in our cost of sales. Based on the customer activity we are seeing in the partnership, the unpredictability of customer signing and the long sales cycle, we concluded it is no longer appropriate to carry this inventory at its purchase price. We are hopeful that there will be customer signings and that the value of the inventory may ultimately be realized, but we cannot accurately predict, if or when that will occur.

Before going into greater detail on the business, let me turn it over to John to review the financials. John?

John Ferrara

Thank you, Peter. We have talked about Farncombe several times on our last two earnings calls, but just as a brief reminder, especially for those newer to Cartesian, we completed the acquisition in July of 2015. The purchase price of $7.4 million included $2.1 million for working capital and consisted of a combination of cash, common stock and a liability for an earn-out. The results of operations from Farncombe have been included in our financial results since the acquisition date.

Now, turning to our financial results for the quarter and year ended January 2, 2016. Our revenues in the fourth quarter of 2015 increased by $3.5 million or 19% to $22.2 million from $18.7 million in the prior year period. The year-over-year increase was primarily due to revenues from Farncombe, which contributed $3.4 million in revenue during the quarter. Excluding Farncombe, our revenues in the fourth quarter increased $100,000 compared to the fourth quarter of 2014.

For the full year of 2015, our revenues increased by $6.7 million or 9% to $78.3 million from $71.7 million in 2014. The increase was primarily due to revenues from Farncombe, which contributed $6.3 million in revenue. Excluding Farncombe, revenues in 2015 increased $300,000. Our non-GAAP revenues on a constant currency basis for the fourth quarter of 2015 increased by $3.8 million or 20% to $22.5 million from $18.7 million in the fourth quarter of 2014. For the full year, our revenues on a constant currency basis increased $9.7 million or 14% to $81.4 million from $71.7 million in 2014.

Looking at our fourth quarter revenues by region, EMEA accounted for $12.3 million or 55% of total revenues and North America accounted for $9.8 million or 44% of total revenues. Breaking down our fourth quarter revenues by source, excluding Farncombe, they are as follows: execution accounted for $10.7 million, or 57%; management consulting accounted for $3.7 million, or 20%; strategy consulting accounted for $2.5 million, or 13%; and managed solutions accounted for $1.9 million, or 10%.

Now, looking at our revenues for the full year of 2015 by region. EMEA accounted for $43.8 million or 56% of total revenues. North America accounted for $34 million or 43% of total revenues. Breaking down those revenues for the full year of 2015 by source, excluding Farncombe, execution accounted for $46.4 million, or 65%; management consulting accounted for $9.5 million, or 13%; strategy consulting accounted for $7.4 million, or 10%; and managed solutions accounted for $8.7 million, or 12%. Our gross profit for the fourth quarter of 2015 was $5.9 million or 26% of total revenue. This compares to $6.8 million or 36% of total revenue in the prior year period.

As Peter mentioned, the decline in gross margin percentage was due to the inventory impairment charge of $2.1 million related to our strategic partnership with Elutions. While we continue to work with Elutions to bring in new business, there have been no new deals which would utilize this inventory since it was purchased in July of 2014, requiring us to take an impairment charge. Excluding this impairment, gross margin percentage for the fourth quarter of 2015 would have been 36% comparable to the prior year.

Gross profit for the full year 2015 was $25.7 million or 33% of total revenue. This compares to $26.6 million or 37% of total revenue last year. The decline in gross margin percentage for the full year was primarily due to the inventory impairment charge we recognized in the fourth quarter. Excluding the inventory impairment, gross margin for the full year would have been 36%.

As we mentioned on prior calls, we are transforming our business model to one that is characterized to a greater extent by longer term engagements, including technology-driven solutions. This will involve continually assessing ways we can target our sales effort on longer term project-based work with stronger margins and consistent utilization, like management consulting and technology solutions. As we further refine and optimize our revenue mix, we expect our operating margins to improve.

Our SG&A expenses in the fourth quarter of 2015 were $8.4 million compared to $7.1 million in the prior year. This increase was primarily due to expenses from Farncombe as well as increases in technology costs and higher than normal professional service fees, which we are working to manage. Excluding Farncombe, our SG&A expenses for the fourth quarter of 2015 were comparable to the prior year period.

For the full year 2015, our SG&A expenses were $31.9 million compared to $27.5 million in fiscal 2014. The increase was primarily due to higher expenses from Farncombe, incremental expenses for lease termination charges, acquisition-related expenses and severance and related costs as well as increase in salaries and related cost to support the revenue growth.

Our GAAP loss from operations in the fourth quarter of 2015 totaled $2.5 million compared to a GAAP loss from operations of $300,000 in the prior year period. For the full year of 2015, our GAAP loss from operations totaled $6.2 million compared to a GAAP loss from operations of $900,000 in 2014. Our GAAP net loss for the fourth quarter of 2015 totaled $2.8 million or $0.32 per diluted share. This compares to a GAAP net loss of $400,000 or $0.04 per fully diluted share in the prior year period. For the full year 2015, our GAAP net loss totaled $7.7 million or $0.91 per diluted share compared to GAAP net loss of $1.4 million or $0.18 per diluted share in 2014.

Now, turning to our non-GAAP financial results. Non-GAAP adjusted income from operations for the fourth quarter of 2015 was $275,000 compared to $916,000 in the prior year period. As I said previously, certain costs we experienced in the fourth quarter were not broken out as one-time, but were higher than they have been trending. Had those costs been in line with recent experience, our non-GAAP adjusted income from operations would have been more consistent with the prior year period. For the full year 2015, our non-GAAP adjusted loss from operations was $21,000 compared to a non-GAAP adjusted income from operations of $2.9 million in 2014. Our non-GAAP adjusted net loss for the quarter of – for the fourth quarter of 2015 totaled $11,000 compared to a non-GAAP adjusted net income of $655,000 or $0.08 per diluted share in the prior year period. For the full year of 2015, our non-GAAP adjusted net loss totaled $870,000 or $0.10 per diluted share compared to a non-GAAP adjusted net income of $3.8 million or $0.48 per diluted share in 2014. Please see today’s earnings release, which is posted on our website for further details, including a reconciliation of GAAP to non-GAAP results.

During the fourth quarter of 2015 under the terms of our stock repurchase program, we purchased approximately 52,000 shares of our common stock at an average price of $2.44 for a total of $127,000. During the full year of 2015, we purchased approximately 65,000 shares of our common stock for $159,000 at an average price of $2.44. Our stock repurchase program authorized the company to purchase up to $2 million of common stock through June 30, 2016.

At the end of the quarter, our cash and cash equivalents totaled $6.9 million compared to $9.1 million at the end of the third quarter. And our net working capital at the end of the quarter was $9.4 million. The sequential decrease in cash of $2.2 million in the fourth quarter of 2015 was primarily due to $2.1 million paid for working capital related to the acquisition of Farncombe and $400,000 paid to repurchase shares of our common stock, which was subject to a put option with a former executive. We are currently in discussions to obtain short-term financing to provide the option of additional liquidity for future growth opportunities and ongoing operations.

And now I will turn the call back over to Pete.

Peter Woodward

Thanks John. I joined Cartesian is the new CEO in June of last year and determined that this is a business that can deliver growth and a business that yields an improved level of profitability. For a people based organization such as ours, this process can last many months and involve many difficult decisions, especially how it relates to scaling our entire operation and positioning the company for success moving forward. We acquired Farncombe in July 2015, a recognized leader in providing consulting and advisory solutions to the digital video sector. Farncombe was an accretive and important acquisition for us and that it expanded our expertise in digital video and opened the door for us to cross-sell and up-sell to a marquee level of clients, including some of the world’s leading global service providers, broadcasters, platform operators and technology firms.

On top of this, the company underwent several management changes, which I believe has made us a stronger and more focused organization. Bill Hill, one of the original cofounders of Cartesian UK, was promoted to the role of President. His appointment followed an impressive tenure running our EMEA sales group, which included generating 14 consecutive quarters of revenue growth. Further strengthening our executive bench, we also appointed John as CFO. John has spent more than 25 years driving growth in public companies, such as our own and brings a fresh approach to optimizing our cost structure and aligning our expenses with a steadily growing revenue base, which I am proud to say has reached a new record for the company at $78.3 million of revenue recognized for the full year 2015.

Despite numerous changes and distractions, we had a solid revenue performance in the fourth quarter. Our North American business grew approximately 10% sequentially. As we previously announced, we secured a win in the third quarter with a Tier 1 North American multi-system operator. This customer needed an incentive management system to track rewards programs aimed at increasing market penetration rates in the Multi-tenant Dwelling Unit or MDU space. It’s interesting to note that this engagement, which provides us with a steady recurring revenue stream, actually began as a strategy consulting project and only later led to the development and adoption of our IMS tool.

On the analytics front, we secured the third annual renewal of our largest North American analytics engagement. This is a flagship engagement for us and is the strong testament to our analytics capabilities and the ongoing value we continued to deliver to this large customer. The most significant change to our North American revenue in the second half of 2015 was our engagement by a new customer, which we mentioned on our last two earnings calls. This engagement has been an important part of our revenue growth and represents a broad suite of services, from strategy and management consulting to technology enabled solutions. The initial projects we were contracted to deliver was centered on systems development related to the migration of millions of acquired subscribers on to the client’s network before a flash cutover date are nearing completion. For many reasons, these have been challenging programs to execute and we have invested resources and the relationships in order to build this into an ongoing post-transaction client. We expect near-term margins with this particular client to be challenged as a result, but believe it has been a prudent investment to make. The run rate of the business from current projects will be modestly lower in Q1 than Q4, but will continue into Q2, which is positive. We are currently in discussions with the client to extend our work throughout the remainder of 2016 with new projects, including some based on our new digital TV consulting and advisory offerings from Farncombe.

We had several nice wins in EMEA as well and our top line in that region grew modestly sequentially and year-over-year. We completed a proof-of-concept for our revenue and cost analytics opportunity for a leading MVNO, which has since resulted in a significant client win. We have been engaged by a traditional Farncombe client as a strategic vendor to a major network initiative in the UK. We are performing network strategy and modeling plus next-gen network architecture. This is part of a large, long-term network overhaul and this client has the potential to grow to be a significant ongoing contributor to diversify our customer concentration in EMEA. And finally, we won a management consulting engagement with an IT services company. This was a new logo for us and represents another long-term growth opportunity. In fact, as global service providers continued to make significant investments in their networks, we see tremendous opportunity to add value, particularly in addressing common industry challenges, like network migration and decommissioning, access and interconnect and software defined networking.

Looking at just the investments made by major telcos alone, one can see the vast opportunities for us to emerge as the specialized consulting and technology solution provider of choice. To illustrate, AT&T announced earlier this year that it will spend more than $20 billion in 2016 on its network, while competitors Verizon and Sprint are expected to spend $18 billion and $5 billion, respectively. However, the industry trend to improve network infrastructure is not unique to the North American market alone. As we have discussed in the most recent edition of our quarterly newsletter, consolidation and convergence among the major telcos has been major themes in the European market. This important development presents serious challenges in integrating disparate networks, technologies, infrastructures and product catalogs. Our capabilities fit into these strategic requirements perfectly.

The addition of Farncombe provided some challenges to us in the fourth quarter. From a business perspective, the teams are working well together. From a systems standpoint, bringing Farncombe on to our financial platform proves to be a more complicated than anticipated and led to the delays I spoke about at the outset of this call. Farncombe is now fully integrated into our organization and we have begun this new chapter of our company’s story on a positive foot, with everyone on both sides of the pond eager and excited to leverage the synergies inherent in our combined organization.

Turning to our strategic partnership with Elutions, while we continue to work with Elutions to bring more deals through the pipeline, we no longer have the visibility of the near-term realization or materialization of those deals. For that reason, we wrote down a sizable portion of the balance of the inventory we had on our balance sheet, which amounted to a total write-down of $2.1 million for the fourth quarter. Elutions remains a valued shareholder and partner of the company. There are no significant operating expenses directed towards the relationship and we remain open to working with Elutions to close customer opportunities.

The evaluation of our business has been extensive, with a goal of understanding our sales capabilities, offerings and cost model in both North America and EMEA. Our work to understand what is required to reach an optimal business model is ongoing, but early signs are clear that business as usual will not get us to an appropriate operating margin. We are making changes to key albeit not always highly visible ways we execute our business. As always, we are focused on cost management and expect to remain focused to aggressively bring down both operating and corporate – operating cost and corporate overhead. That said, clearly, our short-term revenues are subject to fluctuations and the early months of 2016 demonstrated that. Our top 8 clients have historically represented greater than 80% of our total revenue and in Q1 we saw some soft activity from select customers in both North America and EMEA. We expect first quarter revenue to be down modestly from Q4. Sales trends later in the quarter have significantly improved and we expect second quarter results to reflect that greater activity.

Looking ahead to the rest of the year, our focus will be on growing revenues profitably, controlling costs, improving our business processes in order to yield greater net profitability on consulting and technology projects, and investing in the areas of our business that will offer the highest operating margins. Absent the contribution from annual results from Farncombe, we expect high single-digits to low double-digit growth in both North America and EMEA.

Costs are a focus for us. In the fourth quarter, in addition to the non-recurring inventory valuation expense, we experienced higher than anticipated professional services costs, which was reflected in our SG&A. Absent these incremental costs, our adjusted EBITDA would have been approximately $750,000, still insufficient, but more in line with how the business had been trending. We do continue to invest in our business in terms of both sales and delivery capabilities in both geographic regions. Our aim moving forward is to scale our business by selling more of what we have already built, which is accretive. Our progress cannot be measured solely by how we improve our gross margin given significant operating costs line SG&A were focused on improving project yield and overall utilization leveraging the fixed cost of our business. The better we are able to do this, the higher the operating margins we will generate.

To support the execution of this refined business plan and strategy, we have created an advisory board, led by industry veterans who have the experience and insight to help with our business development, strategic planning and business operations. In fact, we announced earlier today the appointment of the first two advisory board members, former AT&T executive, Kevin Peters and former Sprint and CenturyLink executive, Dennis Huber. Both gentlemen have held various senior positions at global communications firms. We were previously customers – both were previously customers of Cartesian and can attest the quality of the output we provide. Most importantly, both have significant competing interest for their time and have chosen to work with Cartesian because of the opportunity they see for us. We are thrilled to welcome them on board and have high expectations for their contributions. We are off to a good start with both already. We will be recruiting additional advisory board members with a focus on EMEA for upcoming additions.

In summary, 2015 has been, in many ways, a year of two halves. The first half was a continuation of a long and complex reorganization to harvest Cartesian’s strategic consulting and managed solutions capabilities, while the second half reflected the major steps taken to realize that goal. Specifically, the last six months of 2015 have been punctuated by an accretive acquisition, the hiring and placement of talented individuals and their refocused strategy to prioritize our business opportunities and support the areas of our business that can directly lead to stronger revenue growth, improved margins and a pathway towards achieving sustainable profitability.

And with that, we are ready to open the call for your questions. Operator, please provide the appropriate instructions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Harvey Poppel with Poptech LP. Please state your question.

Harvey Poppel

Yes. Peter, I am trying to read between the lines of what – some of the things you said and I want to see if I am reading correctly. As it relates to the new client that you landed, you indicated that you are going to have some problems in the near-term. Is this a case of just misbidding the job or having some management problems or what is it due to?

Peter Woodward

Hi, Harvey, very challenging question to answer, it’s a very complicated situation. The customer and the work that we were doing for them are tied to an acquisition that’s closing and a systems effort to be prepared to take on customers that they are acquiring in a one-time cutover event that actually happens tomorrow. And so work has been going on for months to repair their systems for – to bring those customers over. It is a large transaction. It’s a very, very tense, difficult environment to work in. I would say, in retrospect, could we have scoped out that project better, perhaps, but I am not sure given how complicated and quickly changing the environment is. I am not sure anyone could have scoped that project out perfectly. And for whatever it’s worth we are by far the – we are far from the only vendor who is having challenges with this kind of – with this project, with this customer.

Harvey Poppel

Okay. And is this project a large reason why the first quarter of ‘16 is going to turn out soft or does it play a minor role or how does it relate to the softness that you talked about?

Peter Woodward

Certainly, the run-rate for this customer in Q1 will be lower than Q4 and the profitability, the margins on it will be lower in Q1 than they were in Q4 as we have deployed more resources to the project as its gotten closer to the deadlines. So, it has a pretty significant impact on what we are seeing in Q1 in North America.

Harvey Poppel

Okay. And despite the softness, you are still optimistic about – I would interpret what you said is an 8% to 12% sort of a growth rate in the rest of the year?

Peter Woodward

Yes, I think….

Harvey Poppel

That’s for the full year?

Peter Woodward

Yes. I still think it should be a growth year for us. Absolutely.

Harvey Poppel

Okay. Now, you haven’t talked about profitability at all in 2016, what can investors expect in terms of crossing over back into the black again after most of us as you appreciate more than anybody else, because you have heard it from more than anybody else. The investors are very tired, the ones who have been around for a while, seeing year-after-year, year-after-year of breakeven or in some cases, worse performance?

Peter Woodward

But from an EBITDA perspective, I am thinking about the run-rate leaving Q4 and going into this year, absent the sort of the higher than trending costs that we saw in Q4. Q4 would have been $750,000 in EBITDA. We would have been generating cash at that level. So, going into Q1 and expecting to see improvement as we go through the year in EBITDA, I think we will generate positive EBITDA for the year and I think we should generate some cash. And certainly, outside of the specific items about the year, the goal is to try to get the business running at a reasonable business model, at a reasonable operating margin that makes the business worth executing. And so we certainly expect that we could get to that point this year.

Harvey Poppel

Okay, thank you very much.

Peter Woodward

Sure. Thanks, Harvey.

Operator

[Operator Instructions] Our next question comes from Richard Nespola, a Private Investor. Please state your question.

Richard Nespola

Hi, guys. I have a couple of questions. They cover the gamut of Farncombe and Elutions and several other metrics. The first thing, on Farncombe, you both alluded to it during the last earnings call that Farncombe has proprietary methodology and toolsets that they utilize in a very, very specific niche and they do it very well and I agree with that assessment. I don’t know if you are aware, recent press release and on the earnings call from Akamai, and as you know, Akamai is a $2.2 billion content management company publicly traded. But during their earnings call, they indicated they will be taking 1% of revenue and pouring it into developing new toolsets for secure content delivery across many mediums. So my question becomes, if you haven’t already, do you have plans to protect the Farncombe proprietary methods and toolsets with some type of copyright protection or patent protection in the face of new competition from the well-heeled competitor?

Peter Woodward

In terms of the technical capabilities of Farncombe around content security, there is not IP protection around that now and it’s really been a developing area for them to try to automate or have a tool available to affect a security audit, the portions of security audit that can be automated. And in terms of the rest of the audit that they do, it’s really know-how. I don’t think it’s something that would be patented. It’s really sort of a collection of know-how.

Richard Nespola

Yes. But proprietary methodologies can be copyrighted and if they have any kind of unique software toolset embedded in them, they have the possibility of being patented. My suggestion, rather than protract the conversation is that you and your team take a look at building some protections for both the company and the shareholders in the face of this new announcement from Akamai, that would be my bottom line here.

Peter Woodward

Okay.

Richard Nespola

The second thing is the company used to provide operating performance metrics, specifically attrition rates, both voluntary and involuntary, yield for billable FTE, utilization rates, which are probably the most important metric, company always used to report them historically, so any reason why that’s stopped and any plans to start doing that in the future?

Peter Woodward

No. I mean now you are testing my recollection to recall if we did that during the time that I have known the company. We haven’t – it wasn’t ongoing metric that we provided when – up through the middle of last year. We were speaking earlier today about additional metrics so that we could provide, to provide more transparency to shareholders and we will go back and look at all those metrics. I am happy to chat with you offline about what the company used to provide.

Richard Nespola

Sure. I don’t mind having that conversation with you, but I think it would help investors to start to see those performance metrics and particularly in your discrete units, because they certainly would be an indicator of the health of the business by sector. And I am very pleased to see that you broke down the reporting sectors by percentage of revenue, etcetera. The one area of concern, of course as you reported discretely, is the strategy performance. As we all know, the strategy margins have historically, since the inception of the company all the way back to 2003 have been significantly higher than all the other operating margins within the company. I agree the overhead is higher, but the operating margins were always just about 15%, 20% below McKinsey, which had a high contribution margin. So I guess, with – and I believe I heard right, strategy only constituting on an annual basis, 10% of revenue. What is the status of the strategy group going forward, are you recruiting into it, are you growing it, what does the pipeline look like within the high margin strategy group?

Peter Woodward

You probably as well as anyone knows Rich, that the pipeline in the strategy group is an awfully difficult measurement to track, because it’s the shortest sales cycle of all the offering that we have and I think that’s true. And so today’s pipeline isn’t reflective of the go-forward lookup of the business because that can just change so quickly. So the status, from a headcount perspective is we are recruiting in that group. We have additions recently into the North American and the EMEA strategy group. And we continued to recruit strong talent into the group. So the pipeline, I think is difficult to measure and that it changes very quickly, but the group is in good health here.

Richard Nespola

Okay, that’s good to hear, because one of your main competitors in the UK, Analysys Mason, just landed a £1 million deal with Facebook and I would like to see you guys get positioned for that same type of alignment with forward-looking companies in the strategy group, the margins are extremely enhanced and very, very valuable. So it looks like you are recruiting there and hopefully you can do a Google or a Facebook-type relationship. The other thing is my favorite topic over the years, okay and that is Elutions. So I am glad to see you took the impairment. The one disappointment here and I have to be direct, is that you are still continuing to do business with Elutions. And that concerns me because underlying that says that if you are going to continue to list it on your webpage, which you do, okay, the historical relationship had not been beneficial for the company or the shareholders, I can’t see how you could continue to allocate any resource to something that has historically been a drag on the company’s performance to deal with highly dilutive from inception, okay and has caused nothing but negative impact on the company ever since it was effectuated in February of 2014, I would like to see this relationship just totally, totally abandoned without one piece of effort on the part of Cartesian continuing to drill dry wells.

You still have the technology, even when they had the impairment, that technology is not going to maintain its viability going forward even if a deal would have stumbled into your front porch tomorrow, the technology upgrades would have to be significantly done to the existing inventory, so I can tell you as an investor, I have been telling you for 2.5 years that this deal was absolutely terrible. Unfortunately, I was prescient and I would like to make sure that you further extricate yourself from this terrible, terrible millstone. And the last thing is cash, I heard it said, I believe, that you are going to put borrowing in place because cash is down to the lowest historical levels that I can ever imagine and that’s $6 million to $7 million range, I don’t know what you need for working capital to make payroll, okay but that is a red flag to me as an investor with cash down that low, Peter. And that’s very much concerning. But the flip of that is, I don’t know what you are – I don’t think that the receivables were addressed, so I don’t know if the receivables, day sales outstanding has improved or you are forecasting an improvement, so that cash position improves, could you address that, please?

Peter Woodward

Sure. Go ahead, John.

John Ferrara

Yes. Well, with respect to the cash, the drop in this quarter were for non-operating issues. It was a drop from $9 million to $6 million, $2.2 million. And again it was for payment of working capital of $2.1 million for the working capital related to the acquisition and $400,000 throughput. So in terms of the operating the business, there was no drop in cash flow. It is at a low level, but I will tell you that our receivables are up. And part of that is that our major customers are getting – are being a little more challenging with respect to their payment terms and so that stretches out our payment and that requires a need for us to have the flexibility to put in some working capital facility, if in fact we need it. And that is happening at some of the clients that Peter talked about earlier, which were having some challenges in getting that through. And some of the revenue is going to move from Q1 to Q2 because of – for a variety of reasons. There is also stretching out of payments on those things. So we are a small company and we need to put that in place. A second thing to be quite honest is when we are going out and bidding for a new business, we don’t want to be terribly aggressive on our payment terms, because we need the cash to work. You deal with – you are dealing with competitors like Accenture or some of other large companies, they are not concerned about cash. So we don’t want to be at a competitive disadvantage because we have to put strict payment terms because we have our fixed costs and we got to meet our payroll. So I understand what you are saying. We do watch it closely. But to protect the downside, we are going to put something in play.

Richard Nespola

Well, I am glad to hear you are putting something in place, it’s certainly – it’s a cause of concern. I think that’s a reasonable assessment by everybody on the phone that when you see cash down, whether it’s a one-off, as you articulated, we would like to see those receivables be monetized and provide the company with the cash to be competitive, I mean that’s – I hate to think you hit the nail right on the head, it’s an honest assessment. Competitors are not going away and they all have deep pockets.

Peter Woodward

Yes, thank you very much.

Richard Nespola

You are welcome. Thank you.

Operator

Our next question comes from Bill Sutherland with Emerging Growth Equities. Please state your question.

Bill Sutherland

Thanks. What is – Peter, what’s – I apologize for the background noise. The M&A fixture, as you all see it at this point, with – I guess Farncombe is not completely integrated financially, but – or maybe it is at this point, but do you have any boxes that you are looking to check off that you could do through M&A?

Peter Woodward

There certainly is a pretty cogent M&A strategy that could be deployed here. For the time being, we are not active in the M&A market. We are looking at – and making sure the business can generate a sufficient return and then we will fill the gaps in any of the delivery capability, product map etcetera as we go forward.

Bill Sutherland

And so your strategy of emphasizing the businesses that have the best margin profiles kind of how are you executing on that this year and beyond?

Peter Woodward

That’s a pretty loaded question. There is a variety of ways. It really involves a lot of discipline around the business and making sure that everything from a sales qualification process to the delivery capabilities that we build in the organization are oriented around the areas that deliver the greatest bang for the buck for us. We are certainly a small company that tries to compete in a lot of different areas and trying to make sure that we focus on these areas that make the most, that can scale, where we can differentiate and compete makes the most sense for us. And I think that’s the key, improving the business model over the long-term. So, it really involves all aspects of the business, from marketing, sales, sales qualification, end-to-end and how we think about building delivery capability and resources.

Bill Sutherland

But it seems to me that you – I think what you have been saying is that you need kind of the whole picture in place in order to kind of make it work, because without the front-end kind of consulting engagements, you may not have the opportunities for the MSO kind of opportunities or I mean that’s the way I have been reading it. But is there a way to kind of really further accentuate or put a clearer emphasis on the MSO side of the company?

Peter Woodward

I don’t think we are likely to break it down between the carriers and the MSOs. I think that there are lots of business problems and industry trends that apply to both be they on systems, network, product areas. In a lot of ways, everybody is in the videogame these days. And so I think as you – it’s not a carrier versus cable question. It’s really a sort of topical area question: systems, network, video, product, etcetera, those types of areas where we can – where we have historical qualifications, we have delivery capabilities and differentiation and making sure that we focus in and around a few of those areas to be able to drive more scalable growth. So, it’s more topical than it is sort of telco versus cable.

Bill Sutherland

Well, I guess actually, I was – I have been thinking of managed solutions when I said MSO, I ineffectively – I used the wrong acronym. So, that seems to be something that’s always kind of the direction you want to move the company and I was thinking about obviously your – what ways you can just move in that direction at an even faster pace?

Peter Woodward

Yes. So, I certainly think that the skill sets that we have and the delivery, call it, modality that we have, managed analytics, strategy consulting, management consulting, etcetera, are all relevant in a few areas. So, take network as an example. There certainly is a perfectly good way to provide technology solutions into network functions. They are – it’s a very ripe area for strategy consulting. It’s a very ripe area for data analytics. And certainly, some of the large transformative multiyear programs will involve a fair amount of both data migration, data cleansing, analytics and management consulting. So, it’s not a modality question and it’s sort of – and just to reiterate, it’s kind of not a telco/cable question, it really is topical. It’s where we need to have expertise in differentiation.

Bill Sutherland

Great. Okay, thanks much.

Peter Woodward

Sure. Thank you.

Operator

This concludes our question-and-answer session. I would now like to turn the call back over to Mr. Woodward for his closing remarks.

Peter Woodward

Thank you very much, operator. Thanks for joining us today everyone. I especially want to thank our employees, our partners and investors for their continued support and we look forward to updating you after the first quarter. Thanks.

Operator

Before we conclude today’s call, I would like to provide Cartesian’s Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. All statements made during the today’s call that do not relate to the present or historical facts are considered forward-looking statements. These include any statements regarding the company’s plan for future operations, anticipated future financial position, anticipated results of operations, business strategy, competitive position and the company’s expectations regarding opportunities for growth. These statements are based on management’s current expectations and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that could cause the company’s business and financial results to differ materially from these forward-looking statements include, but are not limited to, the company’s ability to successfully integrate the operations of Farncombe, its ability to successfully implement a strategic relationship with Elutions, conditions in the telecommunications industry, overall economic and business conditions, the level of cash and non-cash expenditures incurred by the company, its ability to protect client or Cartesian data or information systems from security breaches and cyber attacks, technological advances and competitive factors in the markets in which the company competes, foreign currency exchange rate fluctuations and the factors described in the company’s periodic reports filed with the SEC, including the section of cautionary statement regarding forward-looking information under Part 1 of it’s Annual Report on Form 10-K for the fiscal year ended January 3, 2015 and subsequent periodic reports containing updated disclosures of such risks. These filings are available at the SEC’s website at www.sec.gov. All information discussed on this call is as of today, March 31, 2016 and Cartesian does not intend and undertakes no duty to update further events or circumstances.

Further, this conference call included a discussion of non-GAAP financial measures, as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company’s financial results prepared in accordance with the GAAP are included in the earnings release, which is posted on the company’s website at www.cartesian.com.

Finally, I would like to remind everyone that a recording of today’s call will be available for replay via a link available on the Investors section of the company’s website. Thank you for joining us today for our presentation. You may now disconnect your lines.

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