Technology Solutions Company Q4 2007 Earnings Call Transcript

Technology Solutions Company (TSCC)

Q4 2007 Earnings Call

March 12, 2008 9:00 am ET

Executives

Gene Marbach – Investor Relations

Milton G. Silva-Craig - CEO, President

Timothy Rogers - CFO

Analysts

John Deysher - Pinnacle

Presentation

Operator

Good day, and welcome to the Technology Solutions Company fourth quarter 2007 financial results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to your host, Mr. Gene Marbach. Please go ahead.

Gene Marbach

Good morning everyone. Leading our call today will be Milton Silva-Craig, CEO of Technology Solutions Company. Also joining us on the call will be TSC's CFO, Tim Rogers.

During this call we plan to make remarks regarding our expectations, plans and prospects. These remarks may constitute forward-looking statements under federal security law. Actual results may differ materially from the statements as a result of various factors. These factors are discussed in our SEC filing, which we strong encourage you to read. The forward-looking statements included in this call represent the company's views on March 12, 2008. The company disclaims any obligation to update the statements to reflect future events or circumstances.

Thank you for joining us on today's call, and I would now like to turn the call over to Milton SilvaCraig, if you're ready to begin, sir.

Milton G. Silva-Craig

Thank you, Gene, and good morning, everyone. Thank you for joining our call this morning. We appreciate your participation and your support as shareholders.

In our call today, Tim will begin by providing a summary review on fourth quarter results then I'll spend a brief moment discussing the progress on our efforts, after which we will open it up for Q&A.

Let's start, then, by having Tim provide some details on our fourth quarter results.

Timothy Rogers

Thank you, Milton, and good morning, everyone.

With respect to fourth quarter results, revenues before reimbursements were $5.3 million for the fourth quarter of 2007 compared with $7.9 million for the fourth quarter of 2006. Revenue before reimbursements for the fourth quarter of 2007 declined by $200,000 over the third quarter of 2007 or 4% even though there were 13% less billable days in the fourth quarter than the third as a result of the holiday season.

The net loss for the fourth quarter declined to $300,000 or $0.12 versus a net loss of $5.3 million or $2.10 per share in the fourth quarter of 2006 for an overall improvement of $1.98 or 94%. In addition, the net loss per share improved by $0.77 or 87% from the loss per share realized in the third quarter of 2007. The $0.12 loss per share is the lowest quarterly loss per share for the company in over 16 quarters.

In terms of fourth quarter revenue concentration, our top three clients accounted for 44% of revenues and our top five clients accounted for 58% of revenues. This compares with 47% and 60% respectively in the third quarter of 2007 as we continue to expand our client base and work to reduce our reliance on several key clients.

Utilization for the fourth quarter was 71% as compared to 69% in the third quarter of 2007, a pickup of 2 percentage points as we continue to more effectively manage our billable staff. Our average hourly billing rate was $167 in the fourth quarter as compared to $153 in the fourth quarter of 2006, an increase of $14 per hour or 8%. Our billing rate also increased from the $146 rate for the third quarter of 2007 as our revenue mix realized in the fourth quarter was more heavily weighted towards higher-margin business than in the third quarter of 2007.

Days sales outstanding were 54 days at December 31, 2007 as compared to 71 days at September 30, 2007. Our DSO declined by 17 days or 24% as we collected receivables faster than previously and more within our payment terms than we had in the prior quarters.

As a result of the reduction in DSO for the increases in cash collections, our cash, cash equivalents and short-term investment balance at 12/31/07 was $11 million or an increase of $0.3 million or 3% from the balance at the end of the third quarter of 2007. The cash increase was also $1.9 million better than the burn or decrease in cash of $1.6 million spent during the third quarter of 2007.

I would now hand the call back to Milton. Milton?

Milton G. Silva-Craig

Thank you, Tim.

In a moment I will comment about the financial progress we have been making, but I would first like to begin by reflecting on several of the initiatives we have put in place throughout 2007 which are beginning to show signs of progress.

As discussed on previous calls, one key element of our strategy was to invest in a re-branding effort. This past quarter represented an exciting stage for the company as we launched our new brand, Exogen, which is a subsidiary of TSC focused on our health care business.

The brand, one which brings a unique outside approach to helping health care organizations identify, realize and sustain value through innovative products and services and offers guaranteed results is receiving positive market feedback and represents a new and fresh platform upon which to focus our growth efforts. Several Exogen brand awareness efforts are well under way, and we expect continued positive reception to our efforts as we further penetrate the brand into the health care market.

Another key element of our strategy was to build out a product platform to diversify our revenue base and grow high margin, high value intellectual property. In the fourth quarter we signed our first product-related contract with the sale of our data migration application to Long Island Jewish Hospital. This was an important step relative to our product development strategy as it validates our ability to identify a market opportunity, apply innovation, sell and capture revenue from those efforts. With this first customer site, we are now better able to market this application to other potential customers and have begun several direct marketing and lead generation campaigns.

Further in the area of product development, [Blue Ocean], our real-time performance visualization application, is in process of being implemented at our first pilot site, and we expect another site to come online shortly. We will provide more details on those sites as the pilot process progresses.

With respect to the financial information previously shared with you by Tim, I would like to add some additional comments. In general we are very pleased with the improved financial performance over previous quarters. A significant amount of time and energy has been spent in improving the operational management of the business, and this has manifested in some early indications of progress as evidenced by the significant decline in net losses, positive cash flow and decrease in DSO.

Although we do expect a decline in cash for Q1 primarily related to payments for conversion of group health insurance, annual 401(k) match and general insurance renewals, we anticipate that net income will be near breakeven for the coming quarter.

All in all, we are pleased with our progress and continue to work diligently to restore the company to profitability.

With that, it's time to take your questions. Operator?

Questions-and-Answer Session

Operator

Thank you. (Operator Instructions) And we'll take our first question from **John Deysher with Pinnacle.

John Deysher - Pinnacle

Hi, Milton.

Milton G. Silva-Craig

Hi. Good morning, John. How are you?

John Deysher - Pinnacle

Good. Yourself?

Milton G. Silva-Craig

Fine, thank you.

John Deysher - Pinnacle

You're making solid progress, which we're delighted to see. A couple questions. One, in terms of the revenues, do you think the current quarter is indicative of the run rate going forward, or are there chunks of business, legacy business, that are going to fall off as we proceed through 2008?

Milton G. Silva-Craig

Yeah. No, as a matter of fact, I don't think that it is indicative in the sense that, although as Tim mentioned we had a decline in Q4 from Q3, when you net it out for less billable days due to holiday we actually had a slight increase.

But as we're looking at Q1, John, things look very positive, and we expect to see revenue growth from Q4 to Q1.

So relative to indicative behavior, I think the trend is going upwards. And we have pretty good confidence looking at Q1 and a little bit - outlook into Q2 that things are trending in the right direction.

John Deysher - Pinnacle

Okay, so no legacy chunks of business that are going to fall away?

Milton G. Silva-Craig

No.

John Deysher - Pinnacle

Okay. And on the cost side, is the fourth quarter really kind of where we are in costs? I know you've made major inroads there, but is there anything more that can be done on the cost side, I mean, in a major way, or is this kind of where we're going to be going forward?

Milton G. Silva-Craig

I would generally say there is always opportunities to manage costs better, so starting with that as a premise, the majority of the cost savings efforts dealt both on the infrastructure, both labor and nonlabor infrastructure costs, as well as matching expense on the delivery side to the revenue model. So a lot of our energy in 2007, frankly, in the first three quarters was spent getting that balanced out.

I would say, John, that the last area that Tim and I have spent considerable time looking at is the infrastructure itself, and we've just actually had a Board discussion yesterday talking about some opportunities where we see initiatives that we can put in place that will help lower some further infrastructure costs.

I would say, though, I mean, for the purpose of this discussion, there are not going to be radical changes but there will be continued incremental improvements to lower those infrastructure costs.

John Deysher - Pinnacle

Okay. Good to hear. And finally, in terms of the contract you signed with Long Island Jewish Hospital for data migration product application, could you flesh that out a little bit more in terms of what you're doing for them, what the duration of the program is, and how you get paid for it?

Milton G. Silva-Craig

Sure. So there's essentially two elements to the deliverables. One is the services - well, actually let me take it a step back, John.

The application, what it does is it helps legacy medical imaging systems move their legacy data into a new enterprise application. What's happening in the market today is the enterprise market for digital imaging is experiencing about a 60% replacement cycle, so you have first and second generation systems that are now being upgraded to an enterprise solution.

And so what happens in that replacement cycle is that you want to move your legacy data into your new enterprise environment because ultimately that legacy data provides a lot of value to you relative to your ongoing operations. So we built an application that allows that information to easily transfer between legacy and new environment. And further, the application cleans the legacy data and puts it into the appropriate new standard format.

So what we do relative to our overall offering, which is a package service, is we will come in, we will provide professional services, identifying their current state of affairs, helping them design a strategy to move that information from the legacy unit to the new enterprise system, and then our application comes into play to actually do that work. And then ultimately it concludes with the last information being transferred into the new environment.

That kind of delivery model or that overall solution is priced based on how much data is going to be moved. So if it's, you know, 30,000 exams versus 300,000 exam, obviously the 300,000 exams are going to have a higher price point.

And then the way that we recognize revenue, John, is that it's based on the overall amount of data moved. And so over that period of time - let's say it takes two months - we'll be recognizing revenue as we're progressing that data from legacy system to the new enterprise system.

John Deysher - Pinnacle

Okay, so you arrive at agreed-upon price with the client, however many hundreds of thousand dollars it might be, and that's for the whole souptonuts program?

Milton G. Silva-Craig

That's correct. And, I mean, I can get a little bit more detailed. Some of the revenue, we'll recognize a portion of that revenue up front as a result of some of the professional services that we deliver, and then when the data migration actually begins then it's the sequential recognition of that revenue as the data moves.

John Deysher - Pinnacle

Okay. And you said two months. Is that the approximate time?

Milton G. Silva-Craig

It is completely dependent on how much data is being asked to move. So small sites can be, you know, weeks to a month; a large site could potentially be a half a year. It just depends how much data is in their legacy system.

John Deysher - Pinnacle

Okay, for this particular application, how long do you think it'll take?

Milton G. Silva-Craig

In the case of Long Island Jewish, we had estimated about a three-month on the tail end, if you will, on the more conservative side.

John Deysher - Pinnacle

Okay. And you actually have people on site there who, you know, people can see the brand and interact with them and so forth? It's not done from the home office?

Milton G. Silva-Craig

It's a bit of a combination, John. What we'll do is you'll see Exogen resources on the front end. They'll engage with the customer. The application will be deployed. We will start the migration process. And then we are able to manage the actual movement of image data remotely, and then we have periodic updates with the customer, showing them the progress of that data.

So it's a little bit more people intensive on the front end than the data application working - managing that remotely. And then we come in periodically and towards the tail end, and they see us again.

John Deysher - Pinnacle

Okay, good. And one final question. You gave the example of 30,000 exams versus 300,000 exams. An exam is what, an Xray document?

Milton G. Silva-Craig

That would be - let's take an example. If you twisted your ankle and went into the emergency room and had a couple Xrays taken of your ankle, that would constitute an exam.

John Deysher - Pinnacle

Okay, so it might be multiple documents.

Milton G. Silva-Craig

Yeah. For instance if you have an oncology patient, someone with cancer, you'll have multiple exams based on the progress of their treatment of care.

John Deysher - Pinnacle

Okay. Do you think you're going to make any money on this, or is this kind of like the marquee client that you've been looking for and you'll really do your best here, maybe you'll break even, but you can hold it out there as an example to others?

Milton G. Silva-Craig

No, no. In this case we're going to make money, so it's a nice profitable opportunity. We absolutely intend to market this as validation of our capabilities.

So no, we are making money on it, and it's a good margin and we expect to sell many more of these.

John Deysher - Pinnacle

And generally speaking, the contract price - I know it depends on what you do - but the contract price might range from - give us a range of what you might price these agreements at.

Milton G. Silva-Craig

Well, so in the case of LIJ it's in excess of $300,000. We've quoted some engagements up to $800,000. There have been smaller engagements which have been in the, you know, low hundred thousand depending on how much data is being, again, how much data is being moved.

John Deysher - Pinnacle

And how many proposals do you have in the pipeline right now?

Milton G. Silva-Craig

I think actively right now - and I'm giving you an educated guess here because I don't have my pipeline right in front of me - we have four to five engagements. And one of them in particular is a multi-site environment that could be potentially up to 10 individual data migrations.

John Deysher - Pinnacle

Okay, so it's a lumpy type business but, I mean, it could be quite profitable for you. I mean, the margins on this type of business are what would you guess?

Milton G. Silva-Craig

In the excess of 60%.

John Deysher - Pinnacle

60% gross?

Milton G. Silva-Craig

Yeah.

John Deysher - Pinnacle

Okay. All right. Good.

Milton G. Silva-Craig

Yeah. No, it's a - I mean, we built the application, John - just a little history, John - we built the application because after three years of working with customers, watching other people apply their innovation, we felt there was a better opportunity, so we built the application, and are validating right now at LIJ.

John Deysher - Pinnacle

Good. It sounds encouraging. Keep up the good work.

Milton G. Silva-Craig

Thank you, John.

Timothy Rogers

Thank you, John.

John Deysher - Pinnacle

Yep.

Operator

Thank you. (Operator Instructions) And there appears to be no further questions at this time. I would like to turn the conference back over to management for any additional or closing remarks.

Milton G. Silva-Craig

Thank you, Operator, and thank you all for participating in our call today. We continue to work diligently and with a sense of urgency to return the company to profitability and a handsome shareholder value. We appreciate your continued interest in the company. Thank you.

Operator

Thank you, and that does conclude today's conference. Thank you for your participation. You may now disconnect.

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