NCI, Inc. (NASDAQ:NCIT)
Q1 2016 Results Earnings Conference Call
April 27, 2016, 04:30 PM ET
Joelle Shreves - Director of Marketing and Corporate Communications
Brian Clark - President and CEO
Lucas Narel - CFO
Marco de Vito - COO
Larry Delaney - IR Counsel
Lucy Guo - Cowen and Company
Ray - SunTrust
Bill Loomis - Stifel, Nicolaus
Good day, ladies and gentlemen and welcome to the NCI Incorporated First Quarter 2016 Earnings Conference Call. My name is Catherine and I'll be your conference operator today. This call is being recorded.
I’d now like to turn the conference over to your host for today's call, Ms. Joelle Shreves, Vice President of Marketing and Corporate Communications for NCI. Please go ahead Ms. Shreves.
Good evening and thank you for participating in NCI's conference call today. By now, you should have a copy of the press releases we issued a short time ago. If not, it is available on our Website at www.nciinc.com.
With us are our President and CEO, Brian Clark; and our Chief Financial Officer, Lucas Narel, both of whom will deliver prepared remarks. Our Chief Operating Officer, Marco de Vito; and Investor Relations Counsel, Larry Delaney are here to participate on the Q&A portion of the call.
Before we begin our discussion, it is important we remind you that on this call we will make statements that do not address historical facts and are thus forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and included the risks and uncertainties identified in our earnings press release under the caption forward-looking statement.
For a full discussion of these factors and other risks and uncertainties, please refer to the section titled Risk Factors in NCI's Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. Also, we undertake no obligation to update any of the forward-looking statements made on this call.
I’ll turn the call over now to Brian Clark.
Okay. Thanks, Joelle. I will begin with an overview of first quarter results and then hand it over to Lucas to provide more detail on the numbers and issue updated guidance. I will then come back online and provide additional color around our outlook, what we're seeing in the marketplace and how our business development efforts are positioning us to respond to opportunities we see today.
First quarter revenue exceeded the midpoint of our guidance by approximately $1 million and $83.7 million and was up by 3.3% or $2.7 million over the same period a year ago. This increase is mostly due to higher revenue derived under our expanded PEO Soldier program and growth in our Cyber Network Operations and Security Support or CNOSS contract and support of the U.S. Army's Network Enterprise Technology Command.
NCI’s PEO Soldier program accounted for $13.2 million, or 15.8% of revenue, in the first quarter of 2016, and that's up $4.8 million from the first quarter of last year.
In addition, NCI’s CNOSS contract accounted for approximately $8.5 million or 10.1% of revenue for the three months ended March 31, 2016, which is up $2.7 million from the first quarter of last year.
The increase in revenue under the CNOSS program was a result of new task orders that came online over the past several months. We also benefitted from bookings in the fourth quarter of last year specifically under our T3 Vehicle.
EBIT and EBITDA margins were also strong at 6.9% and 9.0% respectively. Q1 earnings per share was $0.24, which exceeded the high end of guidance by a $0.01. EPS was higher than forecast as a result of increased direct labor and better positioning, better operating performance across our contract base.
After a strong fourth quarter and full year 2015 bookings, Q1 bookings were lighter as expected and we maintain the book-to-bill of 3.1 to 1 or 1.3 to 1 for the trailing 12 months.
We continue to weigh decisions on several $50 million plus bids during the remainder of 2016, several which could come in the next quarter or two. I'll give more color on our pipeline and bids outstanding shortly.
And with that, I'll turn the call over to Lucas.
Our thanks Brian and good evening. The first quarter of 2016, NCI reported revenue of $83.7 million compared with $81 million in the first quarter of 2015, an increase of 3.3%. This organic revenue growth was primarily attributable to higher revenues derived on the expanded PEO Soldier and CNOSS programs and other new awards.
Contracts where NCI is the prime contractor accounted for 94% of revenue, up two percentage points sequentially and up three percentage points year-over-year.
DoD and Intel contracts made up 63% of revenue in the fourth quarter while federal civilian contracts comprised 37%. The share of DoD and Intel contract was unchanged sequentially and up three percentage points year-over-year.
The DoD and Intel share increased year-over-year because of the growth in our PEO Soldier program and additional task orders awarded under our CNOSS contract.
Fixed price contracts accounted for 24% of revenue, down one percentage point sequentially and down seven percentage points year-over-year. Time-and-material contracts were 17% of revenue, down four percentage point sequentially and down seven percentage points from the first quarter of last year.
Cost plus fee contracts accounted for 59% of revenue, up five percentage point sequentially and up 14 percentage points year-over-year. The increase in the cost plus fee percentage is primarily a result of the new large PEO Soldier and the growth in our CNOSS contract.
EBITDA for the quarter was $7.5 million or 9% of revenue, compared with $6.5 million or 8% of revenue for the first quarter of last year. EBITDA and EBITDA margin increased primarily because of the greater proportion of revenue derived from direct labor and lower G&A cost.
Operating income for the quarter was $5.7 million, compared with $4.4 million for the first quarter of 2015. Operating margin was 6.9% compared with 5.5% for the first quarter of last year. Operating income and margin increased as a result of the factors affecting EBITDA and EBITDA margins as well as lower amortization expense from purchase intangibles and lower acquisition, integration cost as compared with the same period last year.
Net income for the quarter was $3.3 million compared with $2.4 million for the first quarter of last year. Net income increased due to the factors affecting operating income, partially offset by a higher provision for income taxes. Diluted EPS was $0.24 compared with $0.18 for the first quarter of 2015.
Day sales outstanding or DSO was 75 days at March 31, 2016, compared with 66 days at December 31, 2015. The increase in DSO was primarily the result of the timing of invoice payments as we transition to the new PEO Soldier contract. We have substantial resolved these issues with our customer and we expect our DSO to be normalized by the end of the second quarter.
Net cash used by operating activities was $8.2 million for the first quarter of 2016 and was used to finance operations primarily the increase in the accounts receivable. We expect the end of the year with cash flow from operations of nearly two times net income. We also distributed approximately $2 million for a special one-time cash dividend of $0.15 per share to shareholder on March 18.
NCIs total backlog at March 31, 2016, was $501 million of which $147 million was funded. This compares with total backlog at December 31, 2015, of $552 million of which $147 million was funded. Net bookings for the first quarter were $33, equating to 0.4 times revenue.
And now moving on to guidance, for the second quarter of 2016, we expect revenues to be approximately $80 million to $86 million and diluted earnings per share to be $0.22 to $0.24 on a weighted average diluted share count of 13.9 million shares.
We now expect full year 2016 revenue to be in the range of $333 million to $351 million. We've raised the midpoint of EPS guidance by $0.03 and now expect full year diluted EPS to be $0.91 to $1.01 on a weighted average diluted share count of 13.9 million shares. We expect interest expense for the second quarter to be approximately $200,000 and $700,000 for the full year.
Depreciation and amortization is expected to be $1.8 million for the second quarter and $7.2 million for the full year. Stock comp expense is expected to be approximately $250,000 in the second quarter and about $1.1 million for the full year and we're forecasting an annual effective income tax rate of approximately 39.5%.
As usual, we'll update everybody as events and circumstances warrant and will now turn the call back over to Brian.
Okay. I want to start with some more detail on our FY '16 guidance. As Lucas said we raised the bottom end of the revenue guidance range and lowered the top end by $3 million each giving us new range of $333 million to $351 million with the midpoint remaining unchanged to $342 million.
The raising of the lower end represents our confidence of the expected new task order wins as well as extensions and plus ups to existing contracts will show up the low end of the range.
Reduction of the top end is due to slippage in award timeframes making the realization of revenue in 2016 more challenging at the higher levels. As of today, our full year 2016 revenue midpoint assumes approximately 82% coming from existing contracts, 10% from re-competes and 8% from new business orders.
In addition to the new business revenue and contract extensions to hit our midpoint, other variables could factor into the formula outlined above, including potential higher revenue from our PEO Soldier, CNOSS and other existing programs.
As I mentioned last quarter, the T3 contract, which is a key vehicle under which provide engineering and integration services has been extended to 2020 and we’re seeing an increase in expected task orders compared to last year. The limited competition and quick turnarounds in RFPs and awards this is an important vehicle for us this year.
As for EPS, the midpoint of our 2016 annual guidance is now $0.96, which is $0.03 higher than the previous guidance range -- guidance midpoint of $0.93. Our new FY '16 EPS midpoint number implies EBITDA of more than $30 million or 8.8% of revenue.
The timing of the awarded new contracts and task orders will drive scale, operating leverage and ultimately margin performance, especially in the second half of 2016.
Now to our business development efforts, we're seeing some favorable trends both in producing new awards that could generate revenue this year and in pursuing larger awards that could yield bookings in 2016 and revenue next year.
First in terms of potential near-term awards, our growing relationship with the centers for Medicare and Medicaid services or CMS in the areas of program integrity and fraud detection is encouraging. As we mentioned last quarter CMS is transitioning to a new jurisdiction based structure with expanded scope.
We expect to see the first new award made in the second quarter of this year and we're confident regarding our prospectus in these new procurements of the contractor with the largest footprint in this area of program integrity for CMS.
As of today's call, we have over $600 million of bids submitted and are awaiting award. We continue to be encouraged by new RFPs we're seeing across all business areas and we're on track to submit bids aggregating over $1.5 billion during 2016.
Our overall pipeline now stands at $11 billion and we significantly increased the qualified portion first quarter. We'll continue to qualify and advance opportunities that allow us to pursue bids that give us the greatest chance to win and generate bookings and future revenue.
A recent win was the GSA agile services BPA with a $25 million ceiling value. NCIs winning bid included an onsite demonstration of coded software, built using agile pools and methodologies the company currently leverages for its federal customers.
We believe we’re well positioned to extend the benefit of this approach more broadly across the federal government through GSA’s innovative BPA and other like it that we expect to see in the future.
As we told you, we continue to pursue IDIQs with both existing as well as new clients. NCIs position on 17 major IDIQs and government-wide acquisition contracts or GWACs is a major comparative advantage for a company of our size and federal IT and professional services space. These vehicles are key to winning task orders that provide swift access and support to both new and existing clients.
And approximately three quarters of our revenues come from task orders issued under these IDIQ vehicles. Other area NCI is pursuing includes enterprise IT and datacenter operations for DoD customers and agile services and Big Data opportunities and federal civilian agencies.
To sum up, we're optimistic about NCIs chances to win a number of meaningful awards during the remainder of this year and revenue from these, from these new potential wins as well as potential growth in our PEO Soldier and CNOSS programs will produce meaningful organic growth going forward.
Our bid and proposal shop continues to mine NCI's IDIQ and GWAC vehicles to bid and win quick turnaround task orders that could add revenue in 2016 to help us meet or exceed our guidance. In addition bookings in Q3 and Q4 would strengthen our positioned as we head into 2017.
And with that operator, we'll open the call up to questions.
Thank you. [Operator Instructions] And we will go first to Gautam Khanna with Cowen and Company.
This is Lucy Guo for Gautam. Good afternoon or good evening. I was wondering if you can talk about your booking environment, you talked about the CMS fraud detection, potential award in Q2, can you help us size that what type of contract is it and the potential margins you can book on it.
And then maybe talk about it sounds like maybe some bookings were pushed out from Q1 into Q2, how much was that and your potential for better than one-time book-to-bill in the second and third quarter.
Okay. Lucy, this is Brian. I'll start and Marco or Lucas can chime in as well. As far as -- yeah we did have some and part of the reason for our lowering the top end of our revenue guidance range we just did some things that we hope to see either sneak the way into the end of the first quarter or at some point here certainly before this call.
And they've just not happened yet. So the awards that have been made that we lost were just awards that haven't been made. And given that revenue has not started to generate on those programs, that’s why we've lowered the top and down a little bit.
As far as the CMS work is concerned, this is a re-compete of all of the program integrity work that we currently do for CMS but it's being I think we've given some color on this in the past. Its currently done under contracts where that could be the countries divided up into seven zones.
The new Umbrella contract is going to divide the country up and now it's going to be called jurisdictions and there will be five of those. So, given that we're going from seven to five, naturally each new jurisdiction will be larger in size, but also the scope of work that has been just contemplated on those awards has grown. So they will be fair amount larger as each one comes out.
So the first what we're expecting here in CMS on that front is an award of the let's call an Umbrella contract I think that like the multiple award contract and at the same time, the award of the first jurisdiction under that contract, which is one that we've been on and feel we're very well positioned on.
So that’s expected any day. We hope that, that will be awarded within this quarter hopefully sooner than later. And I think as far as the rest of your question on, we think we have a number of scenarios we’ve got in terms of we have a pretty healthy submitted bid pipeline right now with over $600 million we've got a number of things lined up to bid through the summer and into the later part of the year.
So we think all those things taken together, give us the chance to get significant bookings again and certainly up over one to one for the year.
Would the CMS bookings to be over $100 million or at least the first chunk and also how many of those were $100 million plus type opportunities you have still to come?
Yeah Lucy, I can’t comment on specific bid values I think for obvious reasons. So I will have to pass on that one.
And then on the PEO Soldier, you talked about previously the run rate is more like $10 million. This quarter you booked 13 now again your revenue is back to the new run rate.
Yes Lucy this is Lucas. Yeah, I'll speak to that, this is Lucas. This quarter experienced higher than expected revenues primarily because this is the quarter where much of the transition occurred.
So we did reap the benefits of some of transition activities there to pull in the fall of the contracts. So, it’s a little higher than what we expected. We’d expect the run rate to be somewhat less than that and closer to what we had described before and more in the $11 million range by quarter.
$11 million okay. And one other question before I pass it on is it sounds like you have some new contract picking up here and then potentially new awards, more new awards in the second half. So, given the puts and takes in your revenue, how does that translate into margin tailwind or headwind as you go forward here?
Yeah, I guess I’m trying to understand the question. Obviously there is a constant flux inflow of contracts that are completed and new ones that start, task quarters that are growing, task quarters that are awarded.
I don’t really anticipate a significant shift in the overall margin profile. As you can see from the guidance we provided both for the quarter and for the year, we expect to maintain higher levels of EBITDA north of 8.5% to 9%. So we do expect the margin profile by contract to remain where it is at the levels they are right now.
All right, some of your peers talked about we can be seeing price out and margins are slightly better on the incumbent contract versus the next follow-on contracts, so just wondering if you're seeing some of that as well?
Yeah, I think it depends on what contracts they are. Certainly cost plus fee contracts you might not see that. Some other contracts that might be switching from a cost plus to a fixed price or teamed under fixed price you might see something else.
It really just depends on the contract, the competition around the re-compete and the nature of the work. Like I said at the outset, we're not really seeing any significant changes anticipated at this point from where we are right now.
Thanks very much.
Thank you. Our next question comes from Tobey Sommer with SunTrust.
Hey guys this is Ray [Long] filling in for Tobey. Just curious can you give us an update on your M&A pipeline? I’m not asking for any specifics obviously, but are you seeing a lot of potential targets out there of larger more needle-moving side that you previously described and also outside of size any color you can provide about the companies you're looking at would be great?
Sure well of course we wouldn’t comment on any specific companies by name or anything like you're looking at there. I can tell you we've looked at things a broad spectrum of candidate companies whether it be smaller tuck-ins that may bring high degree of strategic value to us, things that are larger and more needle-moving transformational which we've talked about as being more of our focus.
I think given that we've not made any announcements on that front, that tells you we haven’t had a whole lot of luck in terms of finding things that really made a whole lot of sense for us.
I think in terms of trends in what we've seen is that generally, the things that are call it more easily done that might be tuck-ins on that we’re finding that in almost all cases they are very significant concentrations of small business set aside work in those companies and we're seeing that even on things companies that are $100 million in revenue, which is really becomes problematic trying to get those transactions done.
Obviously you can structure around those things, but there is also a fair amount of disruptions that comes when you're trying to integrate companies and potentially losing a significant portion of the revenue base, even if you got some more financial protection around it.
On a larger side there is a number of things we’ve looked at. We’ve engaged in a lot of discussions and things we've been interested in, some we're not interested in. I think it’s fair to say we're just not down, the right fit or the right situation for us, but we continue to look.
Got it. And in terms of contract mix, are there any changes you see to the work you're bidding or expect a bit for in 2016?
Yeah, this is Lucas. We have seen the uptick in cost plus as I indicated earlier. I think we are seeing a shift kind of overall more towards fixed price contracts and away from Cost Plus and T&M.
So, we certainly see that in our pipeline and things that we bid. So I think as we go through the year, we might see our revenue percentage per cost plus shift down a tick, as those things are awarded and obviously depending on the timing of those awards, but I think that's the general trend we're seeing as more fixed price in T or T&M and Cost Plus.
Okay. Thanks. That’s it from me.
Thank you. [Operator Instructions] And we'll now go to Bill Loomis with Stifel, Nicolaus.
Hi, thank you. Good evening, good results. Can you talk about just on the margin trend when I look at the gross margins just the trend, modest trend downward, is that just because of the cost type PEOs the new programs and CNOSS ramping up as a bigger percentage of revenue?
I think so. We talked about the deal concentration. With that comes the fringe benefits associated with that. So we are seeing some additional costs in there. Overall, I think the margins as we indicated are positive and up from a contract perspective naturally with the allocations of our indirect cost, things get allocated differently based on how the revenue base is made up of either sub cost, materials and direct labor, but overall I think we’re pleased and I think that's primarily the reason.
Marco de Vito
This is Marco, I would add to that that as we start to see more of this fixed price contracts becoming a reality, we'll have some more flexibility around margins and where we can do.
Okay. Great. And then just staying with margins, SG&A dropped as a percent of revenue and also dollars more than run rate you've had over the last couple of years. Is that the new sustainable rate and where did most of that reduction come from?
Yes, again I think it really speaks to allocations, the way this is set up is we have a level of fixed cost and corporate department cost, back office cost that are allocated across both. So we'll look at those as a combined entity.
I think from a run rate perspective it has dipped down a little bit in Q1. I think overall for the year, we would expect it to be right around $25 million, which is some timing of different cost coming in at different points in time in the year, but overall I think we're on a pretty good track.
Okay. Great and then just one question on the CMS, so of the restructured from seven to five, in the new way it's formed with the five jurisdictions, how many of those do you have now and how many are you bidding?
Marco de Vito
This is Marco. So we have three zones that we have today that cover 31 states. The mapping on jurisdictions is a little complex but it's largely covered by three jurisdictions and then there is the expanded scope, which is work we're not currently doing that has to do with program integrity in the Medicaid space. So that's additive to what we're doing today.
Okay. Are you just bidding those three again or are you going to go for all five?
Marco de Vito
We might go for six. We're going to without being too specific, we're going to be very aggressive in pursuing this work.
Okay. Great. And then just what was the reason for the -- you mentioned some delays in the orders and reducing the topline. Was there any specific reasons that you're seeing for that, or is it just kind of spread out across customers?
Bill, I think it's just little bit more the same old right and some of the things we've factored in were things where we were -- we gave guidance earlier, couple of months ago for the first quarter. We had a number of things we're looking like they were -- the word was they were going to get awarded on a faster time table and then here we find ourselves yet again haven't been awarded.
So and the bad news is they haven't been awarded stretch now to wait time on. The good news is it's not -- we're still there and we still expect we're positioned well and then win our fair share of those things and in some cases all those things are very high probability wins for us and things like that. So it's just the way in when the revenue streams will start to come in.
Okay. Understand. Thank you.
Thank you. And ladies and gentlemen, that does conclude the question-and-answer session. I would like to turn the floor back over to Mr. Brian Clark. Please go ahead.
Okay. Thanks everybody for taking the time to join us this afternoon for our quarterly call. If you have any unanswered questions or things that you would like to follow-up on, please don't hesitate to get in touch with Larry Delaney and we'll get back to you as quickly as possible with responses. Thanks again.
Thank you. And ladies and gentlemen, that does conclude today's conference. Thank you all again for your participation.
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