InterCloud Systems' (ICLD) CEO Mark Munro on Q2 2016 Results - Earnings Call Transcript

| About: InterCloud Systems, (ICLD)

InterCloud Systems, Inc. (NASDAQ:ICLD)

Q2 2016 Earnings Conference Call

August 10, 2016 10:00 AM ET

Executives

Timothy Larkin - Chief Financial Officer

Mark Munro - Chairman and Chief Executive Officer

Analysts

Richard Molinsky - Max Communication

Operator

Good day, everyone, and welcome to the InterCloud’s Second Quarter 2016 Earnings Conference Call. Today’s conference is being recorded.

At this time, I’d like to turn the conference over to Tim Larkin, Chief Financial Officer. Please go ahead sir.

Timothy Larkin

Thank you for joining us for InterCloud Systems second quarter 2016 earnings conference call. I’m here with our Chairman and CEO, Mark Munro.

Before we get underway, I’d like to ask everyone to take note of the Safe Harbor paragraph that appears at the end of this morning’s news release. This paragraph states that any forward-looking statements that we may make, speaks only as of the date made and are subject to inherent risks and uncertainties including those described in the company’s most recently filed reports with the SEC.

Except as otherwise required by the Federal Securities Law, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statements contained herein, or elsewhere to reflect any change in our expectations with regards to any changes in events, conditions or circumstances on which any such statement is based.

And now, I’d like to introduce InterCloud’s Chairman and CEO, Mark Munro. Mark?

Mark Munro

Good morning, everyone. Before I turn the call back over to Tim Larkin, our CFO to review the second quarter 2016 results, I wanted to take sometime to review some of our accomplishments during Q2 and the first-half of 2016. Obviously, second quarter 2016 revenue grew at 16% year-over-year, gross profit grew by 19%, and probably one of the most important aspects of Q2 was that our Software Defined Networking and Network Function Virtualization business unit again receiving its purchase orders that ramped up considerably during Q2, and I’ll talk more about that later.

So clearly we’re pleased with the 2016 Q2 revenue results. But right now, I’ll take a few moments to discuss our markets and traction and growth sectors. And then after Tim Larkin reviews the numbers, I will close with an outline of our plan to continue to make changes in key areas of operations and our capital structure as we take steps to create more shareholder value.

Overall, 2016 is shaping up as a transition year for InterCloud in the telecom an IT industry as Software Defined Networking and Network Function Virtualization are finally being deployed in large service provider networks and large enterprise accounts. This is very exciting as InterCloud has invested heavily over the past few years in technology and the team that will allow our customers to rapidly deploy SDN and at the used cases throughout their networks.

The entire IT universe has been waiting for manufacturers of networking hardware, such as, routers, firewalls, and load balancers, et cetera, for – waiting for them to release virtualized versions of their products. This has finally been happening, but it’s been a bit slower process than most industry experts would have believed.

But I can finally and probably say that, we are seeing the benefits of our investments in our software products and our Software Defined Networking trained personnel. It’s never easy to get out in front of your market in risk capital. But we did it and now we’re seeing revenue and real future upside for InterCloud.

Our team has believed in this vision and we believe our recent second quarter purchase orders for SDN and VNF validation services had proven us to be correct. This business is still in its infancy stages over five or 10-year transition, but we are well-positioned and currently working on Software Defined Networking and NFV for some of the world’s largest service provider networks today.

SDxCentral in California predicts SDN and NFV markets to exceed $35 billion by 2018. This growth will fuel the need for VNF, Virtual Network Function orchestration, provisioning of VNF, monitoring of those Virtual Network Functions and service chaining of them, analytics, and of course, security, in addition, DevOps systems integration and software development.

Software Defined Networking and Network Function Virtualization environments are basically all software running on virtual compute. Hardware vendors and customers will and have been struggling to build the teams that understand systems integration of multiple software layers that SDN brings. It is this complexity that gives InterCloud an advantage over competitors, as we have built value-added software for rapid deployment and simplified use of SDN, as well as the properly trained SDN engineering resources on staff and knowledge to manage their transition for customers, a huge advantage.

These are all the areas of our products and professional services teams, these are all the areas that they sell in. The bottom line is, we are positioned well and we’re driving new revenues. I want all investors to remember that the SDN, Software Defined Networking and Network Function Virtualization business, in 2015 for InterCloud had no revenue.

This year we’re already in excess of $4 million annualized SDN and NFV related purchase orders and have a growing pipeline for future business, an enormous step in the right direction. In addition to the growth in the SDN and NFV markets, InterCloud plans on focusing several key metrics for the remainder of 2016 and beyond.

The first is the growth in our traditional IT and telecom services segments. Our goal is to continue to grow as we have in the first-half of 2016 with all of our business units. Today, Wi-Fi, DAS and small cell markets continue to grow at a steady pace, as enterprise and carrier customers demand greater and greater Wi-Fi capacity for mobile applications, clearly driven by smartphone technology in advances in addition to security concerns.

We do not see a slowdown in this sector for the foreseeable future, one of our important business segments. Our other traditional IT services include compute, network hardware such as routing and switching, storage, cloud voice, UC and other professional services as well. We expect to continue to focus on growing these existing lines of IT services, while the SDN applications mature and become a larger part of our revenue stream.

These opportunities did not offer the markets for the new SDN and NFV market, but they do drive profitable revenue for InterCloud service offerings today. Our teams assist our customers in managing their legacy networks, while preparing for the enhances and changes that SDN and NFV applications will bring into their companies and organization.

I’m now going to turn the call over to Tim Larkin, and I’ll get back to you after he smashed reviewing our numbers.

Timothy Larkin

Thanks, Mark. Revenue for the second quarter ended June 30, 2016 increased by $3 million, or 16% to $22.6 million. This compared to $19.6 million for the second quarter of 2015. This increase resulted from an increase in professional services segment offset by a decline in revenue from our managed services segment.

Gross profit percentage was 23% for the second quarter of 2016 compared to 22% for the comparable period in 2015. The increase in gross profit percentage was due to an increase in professional services segment, offset by decreases in our other segments. The gross profit percentage in our professional services segment was 25%.

The company had a net loss attributable to common stockholders of $13.4 million for the second quarter of 2016 compared to a net loss of $14.5 million for 2015. This decrease in net loss was due to an increase in gross profit of $800,000 and a net decrease in salaries and wages and SG&A expense of $1.8 million.

Also during the quarter, the company recorded a net decrease in non-cash losses from derivate instruments and conversions and exchanges of debt and shares totaling $1.3 million. These increases were offset by an increase in interest expense of $1.6 million.

For the six months ended, revenue for the six months ended June 30, 2016 increased by $2.4 million, or 6%, the $40.2 million. This compares to $37.8 million for 2015. This increase resulted from increases in our professional services and application and infrastructure segment, offset by a decline in our managed service segment.

Gross profit was 24% for the six months ended June 30, 2016, compared to 25% for the comparable period in 2015. Overall, the company’s gross profit percentage was relatively flat. An increase in professional services segment was offset by decline in our other operating segments.

The company had a net loss attributable to common stockholders of $17.7 million for the six months ended June 30, 2016, compared to a net loss of $24.8 million for 2015. The decrease in net loss was due to a net decrease in salary and wages and SG&A expense of $2.3 million.

Also during this period, the company recorded a net decrease of non-cash losses from derivative instruments, conversions in exchanges of debt and shares totaling $6.9 million. These increases were offset by an increase in interest expenses of $3.1 million.

And now, I’ll turn the call back to Mark. Mark?

Mark Munro

Thank you, Tim. I want to take a few moments to discuss some of our strategic initiatives that we’ve embarked on to help them value at InterCloud. Obviously and clearly, we remained focused on growth of revenue and profits, but we are also focused on other related initiatives. That’s what I’m going to review right now.

One of our key initiatives, as previously announced, in late 2015, was to analyze and review opinions with our business units. Options include future sales and business units to assist us in deleveraing the business, while building this Software Defined Networking and Network Function Virtualization business unit. We have been exploring these options and we’ll continue to do so.

Secondly, our Board has also been exploring strategic options with regard to our fast growing Software Defined Networking and Network Function Virtualization business unit. Our goal is to unlock its value for shareholders through continued growth, possible strategic partnerships that can add tremendous value, and even a possible spin-out of the asset.

This is an early stages and there was no specific decision made as of yet. It is a management’s belief that at these levels of valuation at InterCloud, it is prudent to review the alternatives for the SDN business unit. Operational changes, InterCloud has cut annual expenses in payroll and other costs by over $3 million over the past few months alone. This process will continue as they move to completely right-size our company for the opportunities that are sitting in front of us.

Strategic alliances, InterCould is in the process of a large effort to educate large system integration company, consulting firms and network equipment manufacturers about InterCloud’s products and services related to SDN and NFV.

The market shift occurring and being driven by AT&T’s push into SDN and NFV has highlighted the scale of this market opportunity. And we believe many of these firms are looking for the capabilities kit, software, products, personnel that we have built in InterCloud for this market. We’ll be selective as we manage our way through just landscape.

In closing, we began to build a solid and profitable revenue stream in the SDN and NFV space. This net change from 2015, along with intelligent operational improvements have already made in 2016, an additional strategic initiative is underway, should provide for very positive momentum in the second-half of 2016 and into 2017.

As always, we thank you for your support and look forward to our next investor call. I’ll now turn the call over to Q&A.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll first hear from Richard Molinsky of Max Communication.

Richard Molinsky

Hi, Mark, how you’re doing?

Mark Munro

Pretty well, Rich. How are you?

Richard Molinsky

Congratulations. Can you go into a little more detail about possible spin-out or the strategic partnership on the SDN or the NFV side? And a couple other questions. I’ve noticed there has been some insider buying when the windows has been opened. I’m trying to remember how many shares will Board buy, which insiders? And another question, if you can is, there has been an acquisition of NetSuite by Oracle for a close to $9.3 billion may be little less than $1 billion of revenue there, and I think $0.08 the quarterly in cash flow. I mean, it seem like there has been a lot of activity with buyouts or mergers and with the valuation that we have, when do you think it will start? What do we need to do to get the recognition that they have?

Timothy Larkin

Sure. Why don’t I start with – I’ll just start with the insider buying, I could help you with that quickly and easily. I believe now there could have been other buying, but I believe myself and Mark Durfee who is also a Board member purchased about a $100,000 worth, I think around the end of June after we had filed the K and the Q.

Richard Molinsky

Okay.

Timothy Larkin

So we did that, and I don’t remember the exact price, but also did some – both of us did buying back in December about a 100 grand as well a piece.

Richard Molinsky

Okay, great.

Timothy Larkin

So that just was started there.

Richard Molinsky

Yes.

Timothy Larkin

Why don’t I focus on – I’m going to focus on your NetSuite question before I get to…

Richard Molinsky

Okay.

Timothy Larkin

…our strategic initiatives around looking at value creation and what we’re doing with our SDN business.

Richard Molinsky

Terrific.

Timothy Larkin

There are so many more than just NetSuite right, in this space Software Defined Networking and Network Function Virtualization and security related things around that, analytics, everything in and around the SDN space, I believe, will be up for grants over the next 18 months even more than it has been.

And the reason I’d say that is, over the last three years, we saw acquisitions made by Juniper or Contrail, at the end we saw Cisco and others buying SDN related type companies to get themselves the ability to offer that as a solution set rather than just hardware. You’re going to continue to see it. But the difference in today is that, now customers are actually deploying. A year ago, two years ago, everybody was jockeying positioning themselves.

But now they’re actually seeing what’s happening in deployments like AT&T and other major carriers. And they’re getting an idea and better understanding of what’s really happening, and who the winners are and who isn’t winning, and who needs a better product set or more tools or different software to help them position themselves to be successful n this space. And I think, although it’s taken a while to mature, you’re going to see even more acquisition activity over the next 18 months for sure.

So I can’t necessarily comment exactly why they bought NetSuite for almost $10 billion. But there are going to be dozens and dozens and dozens of smaller companies that are bought by bigger firms in the next 18 months, because they just – look, you can’t build everything yourself right, people have ideas.

Richard Molinsky

Yes.

Timothy Larkin

Like we do and you build something that’s compelling and people want it. So I think there’s going to be more of that. In terms of your other question, does that help you with that?

Richard Molinsky

Yes, absolutely, it helped with that out.

Timothy Larkin

Okay. Now, in terms of what I mentioned, I mentioned several things around the SDN and NFV business unit. One was strategic partnership, obviously continued organic growth, and the last was, I mentioned, spin-out. But in general, what we’re doing is, we’re looking at the overall value of InterCloud and it’s so low that at this point that as a Board, we felt the growth of that space, the maturity of our software offering, and product offerings, all combined with our new revenue and the momentum that we have.

We have decided that it is important enough for us to consider options. And only – the only reason we would consider those options is, if it was going to create value for shareholders, it’s all about that, nothing else. So those options will be looked at, analyzed, and we will learn, I’m sure over the next several months, how that progresses and where that goes, and of course, if we have any news of any kind, we’ll always immediately discuss it with shareholders.

Richard Molinsky

Okay. And…

Timothy Larkin

It’s all about breaking out value right?

Richard Molinsky

Yes, perfect.

Timothy Larkin

The question is does it – will it create more value on its own or in a strategic partnership with somebody, or do we continue inside of InterCloud as a whole and continue to build it, and at some point its value is recognized and it breaks out and helps InterCloud as a whole in its value.

Richard Molinsky

And last question, you mentioned in the news release about the debt, you’re working on trying to restructure the debt or convert the debt. How is that coming along at this point?

Timothy Larkin

We’re in deep discussions whole time the sub debt and the senior debt side for – from what we hope to be good changes and positive changes. But I can’t comment any further than that, we’re in discussions, I don’t have anything material to disclose or I wouldn’t.

Richard Molinsky

No problem. Thank you so much. I appreciate it. Great job.

Mark Munro

Okay, Rich. Thanks so much.

Operator

[Operator Instructions] And it appears there are no further questions at this time. I’ll turn the conference back over to Tim for any additional or closing comments.

Timothy Larkin

Now, I’d just like to thank everybody for their support and look forward to speaking to you soon.

Operator

That does conclude today’s conference. Thank you all for your participation. You may now disconnect.

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