Fortress International Group Q4 2007 Earnings Call Transcript

Transcripts

Fortress International Group Inc. (OTCPK:FIGI) Q4 2007 Earnings Call March 18, 2008 8:30 AM ET

Executives

Harvey Weiss - Chairman of the Board
Tom Rosato - Chief Executive Officer
Tim Dec - Chief Financial Officer
John McNamara – Unidentified Company Representative.

Analysts

Dex Williamson - West Park Capital
Steve Levi - Tolarama Corporation
Mathew Weiss - Maxim Group
Joshua Jabs - Roth Capital

Operator

Good day everyone and welcome to the Fortress International Groups fourth quarter, 2007 earnings call. Today’s call is being recorded. For opening remarks and introduction I would like to turn the call over to Mr. John McNamara, please go ahead sir.

John McNamara

Thank you and good morning everyone. Welcome once again to the fortress international group conference call to discuss 2007 full year results. As a reminder if you would like to view the slide show presentation you may access it through the Investor Relations section of the Fortress International Group website at www.thefigi.com and fill out the registration page, it should only take you a moment or two.

Joining us this morning from the management of Fortress are Harvey Weiss, Chairman of the board, Tom Rosato Chief Executive Officer and Tim Dec, Chief Financial Officer. Before we begin as usual we would remind you all to take note of the cautionary language regarding forward-looking statements contained in the press release. That same language applies to statements made on this mornings conference call. This call will contain time sensitive information as well as forward-looking statements which are only accurate as of today March 18, 2008 and Fortress International Group expressly disclaims any obligation to update, amend, supplement or otherwise review any information or forward-looking statement contained in this conference call or replay to reflect events or circumstances that may arrive after the date indicated except as otherwise required by applicable law. For a full list of the risks and uncertainties which may affect future performance, please refer to the Company’s periodic filings with the SEC.

We will begin the call with a brief overview of the year and then we will open up the line for questions and now I will turn the call over to Harvey Weiss. Go ahead Harvey.

Harvey Weiss

Thank you, John. Good morning everyone and welcome. Thank you for joining us to discuss our 2007 year results. As John mentioned, with me today are Tom Rosato, our Chief Executive Officer and Tim Dec, our Chief Financial Officer.

2007 was a year of milestones for Fortress International. For those of you who may be new to the story, in January of 2007 we successfully merged the original spec structure with the companies that now make up Fortress International Group.

We successfully transitioned from a Company whose revenues were primarily derived from a handful of government contracts to a Company that today derives 42% from government related contracts and 58% from the commercial sector. But it’s important to note that 90% of the work included in our backlog at year-end was in the commercial market sector.

Our go-to-market strategy by which we offer design, build and facilities of the management services, to mission-critical facilities continues to fuel organic growth and we saw the ideal manifestation of this in the fourth quarter with an existing short-term engagement led to a $118 million longer term contract. This strategy, this go-to-market strategy and the acquisitions we have made continue to drive progress toward our goal of deriving more than 50% of our future profitability from recurring revenue sources.

Since going public we have acquired three companies that fit this strategy and our geographic footprint now extends throughout the United States. The market for our services continues to be driven by very powerful forces that remain in place despite the recent downturn in the credit markets.

And with that, I would like to turn it over to Tom Rosato.

Thomas Rosato

Thanks Harvey. On our last conference call we told you that our results continue to show quarter-to-quarter improvement and our fourth quarter results reflect an acceleration of that trend through increased realization of our backlog. Revenues in the fourth quarter increased 43% from the third quarter to $18.2 million and gross profit improved 84% from the third quarter to $3.5 million.

Our adjusted EBITDA loss for the quarter narrowed significantly from the third quarter. After adjustments for amortization, depreciation, non-cash compensation and interest our adjusted EBITDA loss was $462,000 versus $1.4 million in the third quarter and $1.6 million in the second quarter of 2007. This reduction of our loss reflects both the increased revenue reported as well as our strong commitment to controlling costs.

Now to talk a little bit about new orders; during the fourth quarter of 2007 we booked a $130 million worth of new business for a total of $210 million of new business book during 2007 versus $36 million of new business in 2006. This validates our marketing strategy. Of all of our business books in 2007 there are no cancellation of any projects. This robust trend had continued into the first quarter with our announcement of an addition $51 million in new business in January 2008.

Our new proposal activity has also has been robust. New proposals issued for the last quarter totaled $164 million, the proposal activity for the first two months of this year totaled $277 million indicating that there is really strong activity out there in our market place. With regard to our backlog, our backlog at the end of 2007 was a new corporate level high of $172.9 million. We anticipate that more than 50% of this backlog will be recognized as revenue in 2008.

We had experienced some delays in project backlog moving forward into revenue in 2007 which had been caused by some credit issues on our larger contracts booked in the second quarter but they subsequently resolved their issues and have released phases of their initiatives which will result in revenues for 2008. So we are confident that our backlog is very strong.

Actually I like to talk a little bit about the industry trends so you get a feel for what’s going in our industry and the demand out there. If you go to the slides, the first -- I think it’s one, two, three, and four slides we have got some highlights there with regard to market indicators, the first one data center knowledge has a list of articles in there that have recently been published regarding new projects. We talked about legacy data centers in slide two. Slide three refers to the impact that green initiatives have on our marketplace and slide four refers to some information that was put out there by IDC, an information technology company that tracks our market.

Let me talk specifically a little bit about the industry. Our industry continues to show signs of robust spending and growth and I think it will be helpful for the investors -- for us to explain the industry fundamentals as the backdrop of a slowing economy and credit environment. There still remains a shortage of space for data centers. One of the main drivers of growth in the industry has been the lack of available conditioned space. This is supported by recent industry reports and reports from the executives of some of our publicly traded customers and targeted customers in their recent annual conference calls. Tier 1 Research reported that despite economic conditions, Internet traffic has doubled and will continue to double each year. That’s driving the demand for conditioned space to handle this traffic.

There has been some concern that the recent slowdown in construction spending that will impact our markets. While we have seen some slowdown from financial service companies we see little slowdown from managed service providers, the data center reach and companies providing Internet gateways and neutral Internet exchange points. As a result of our dedication to this industry, Fortress will become the beneficiary of this trend and our expertise continues to enable us to displace traditional engineering firms and contractors trying to service this market.

One example of the continuing pace of growth in the industry was a recent report that Microsoft is planning on building two dozen data centers around the world with each one covering 500,000 square feet. AT&T is reportedly spending $1 billion to expand its data center network. Digital Realty recently reported in their year-end conference call that the demand for data center space remains very strong and in fact Digital’s customers report increased interest in potential cost savings and enhanced productivity from outsourcing their data center facilities.

Also because of the credit crunch we are seeing a trend from major corporations that traditionally did not outsource their data center to the outsourced model. This trend has opened up opportunities for us to provide services to them through our data center reaped customers that we have.

Recent public announcements from customers we are doing business with also support this confidence in continued growth. eBay announced that they are looking to expand their data center facilities in the Southwest. Switch and Data indicated that the company would spend a $165 million in CapEx this year in their March 2008 investor conference. Digital World stated in an article of data center knowledge that the credit crunch actually has enhanced their ability to grow because they have capital in place to provide conditions base quickly under leasing terms and customers prefer the leasing model in this environment versus spending their own capital dollars.

Another recent article in data center knowledge stated that surveys done by both APC, American Power Conversion and Digital Realty of their customers indicated over 80% of their respondents will experience a major renovation of their space in the next 24 months and this is due to technology upgrades, green initiatives and growth. An outcome survey, it’s an industry organization which we are members of -- we put it at the talent pool of qualified personnel in the data center facility market place by 2015 will shrink by 45%. If we continue to concentrate our business in this segment we believe and one of our goals is to capture this talent pool to create more demands for our expertise.

By 2010 the same survey indicated that 50% of all the data centers will have to relocate or outsource their facilities due to changing technology trends in the cost of power. The survey also said by 2010 over 70% of all date centers will implement green computing initiatives. We are very well positioned to handle this demand. With this opportunity we are continuing to penetrate new customers in the data center outsourcing business at all levels of our organization. We believe we are well positioned to take advantage of the opportunity as evidenced by our continuous success in finding new customers and projects quarter-over-quarter.

Little bit of talk about our divisions and how we’ve done from the booking stand point. Our facility manager revenue base continues to improve. Also our major service contracts that we have with GEICO and Comcast have renewed for the year. We continue to pull multiple service projects for other customers, our main facility management side, which includes Home Depot, Stephen Nicholas, SAIC among others. We’ve added talent personnel through our acquisitions that we have made recently and continue to expand our in house engineering expertise expending our green initiatives, our lead certification and our IT expertise.

What I would like to do now is go back to the slide show and quickly at slides one through four or basically the industry trends. If we go to slide five it will give you an idea of the total value of orders booked quarter-by-quarter for the year. Again you can see in 2006 in the slide number five we closed a total of $36 million for the work. At the end of 2006 is when we started implementing our strategic growth initiatives with adding sales personnel and you see the results of the success of that go to market strategy in 2007 with $210 million worth of business growth.

Slide six too basically breaks down our bookings by our three major divisions. Slide six shows our technology consulting group, again orders added to backlog here. This provides us say window or a pipeline as to potential new projects that will come out as a result of the studies that we are doing for our customers. It’s grown from $2.9 million to $9.7 million from 2006 to 2007.

Slide seven shows our construction management contracts that we booked for the year going from $25 million in new business of 2006 to a $169 million in 2007 with the large swing in the last quarter. Slide eight shows our facility management, new orders booked for the year -- went from $6.5 million in 2006 to $26 million in new orders booked in 2007 giving us a strong backlog going into 2008 for our facility management group.

Slide nine; this is the slide that tracks basically our proposals issued as opposed the orders added to backlog on a quarter-by-quarter basis. As you can see the trend has been that our proposal activity is continuing to grow and in the fourth quarter we had over a $116 million worth of new proposals that were issued and of course slide 10; that is a picture of our backlog that exist at the end of December 31, 2007 showing the components of backlog between facility management, construction management and technology consulting.

In summary at the en d of the third quarter of 2007 we told you that the transition from a government dependant regional company to a more commercially focused national organization was complete and that the Company is starting to move into it’s expansion mode. As we enter 2008 we feel that we are ready to enter the next phase of this expansion which includes turning cash flow positive.

While we are not offering specific guidance of at this time, we feel that the elements we have put in place during 2006 and 2007 with our existing backlog and our growing reputation in the space that 2008 looks to be a strong year for Fortress International. With that I would like to turn the call over to Tim Dec, our CFO who will walk through some of the financial details.

Tim Dec

Thanks Tom. As Tom said it earlier revenue for the quarter was up approximately 43% to $18.2 million and $12.7 million in the third quarter. It was our fourth consecutive quarter with increased revenue. Our revenue break down for the quarter was $1.4 million in technology consulting, $13.4 million in construction management and $3.4 million in facilities management. Our gross margin for the fourth quarter increased 410 basis points to 19.4% from 15.3% in the third quarter.

Our SG&A for the fourth quarter excluding non-cash compensation was $4.1 million up from $3.4 in the third quarter. The increase in SG&A during the quarter was attributable to the inclusion of our two recent acquisitions innovative in Rubicon cost of 315,000 and an increase in consulting, travel and professional fees relating to our year end socks compliance work.

Our SG&A as a percentage of revenue continues to trend down and was 23% in the fourth quarter down from 27 in the third quarter of 2007. Our reported net loss for the fourth quarter was $1.2 million down from the $2.6 in the fourth quarter of 2007 which represents more than a 50% reduction quarter-over-quarter. Our adjusted EBITDA, our primary focal point which excludes amortization, non-cash compensation and depreciation was a loss of 462,000 down sharply from the $1.4 million reported in the third quarter.

Moving on to our year-to-date results; revenue for the year was $15.5 million with the break down being $5.4 million in technology consulting, $32 million in construction management and $13.1 in facilities management. Our gross margin for the year was 16.6%. SG&A for the full year excluding non-cash compensation was $13.2 million or roughly $3.3 million on average per quarter.

As we have discussed in the past, the ramp up in our sales and marketing efforts as well as the required public company costs are large bulk of our SG&A expenses. Our goal as stated on our last conference call is to have our SG&A percentage at approximately 12% of revenue by the end of 2008. We certainly understand the importance of controlling our SG&A cost as we continue to build this Company. The primary driver of our SG&A is the salary and benefits component. Since our recent acquisitions in September and November of last year we have added only one net additional G&A employee.

Our reported loss for the year was $7.4 million. Our adjusted EBITDA for the year which again excludes amortization, non-cash compensation, depreciation and interest was a loss of $4.3 million. This loss was primarily byproduct of our decision to increase our sales estimating and proposal teams in 2007 to achieve the strong contract signs Tom discussed earlier as well as the cost associated with running a public company.

In looking at our backlog at year end; as Tom mentioned our backlog at the end of 2007 reached $172.9 million. This does not include the 51 Tom mentioned earlier that we signed in January of 2008. The year end backlog breaks down as follows: technology consulting at $3.9 million, construction management at $154.6 million and facility management at $14.4 million. New proposals remain strong and we expect to continue to add to our backlog as the year progresses.

At December 31, our cash balance was $13.2 million. Net cash used during the quarter was $4.8 million, primarily due to the purchase of Rubicon for $4.5 million. The adjusted EBITDA loss of $462,000 was offset by our favorable working capital management in the fourth quarter. Our working capital ratio at December 31, was a solid 1.6.

As Tom mentioned we will not be providing any guidance for 2008 on this call. We are currently working to solidify the time line for the major contract wins we received in the fourth quarter of 2007 and January of 2008. We hope to have that progress done within the next few weeks. I anticipate that we will provide guidance for 2008 on our quarterly conference call in May.

I would like to thank everyone for joining us today. On our last call I stated that the Company was well positioned with a strong balance sheet, high quality receivables, minimum debt and a strong working capital ratio. I still feel those same factors were in place as we closed down 2007. The key success during the quarter was the contract signings we announced in late January of 2008. This supports the go-to-market strategy Tom put in place long before I arrived. We continue to focus our attention on moving this Company to positive adjusted EBITDA in 2008.

We have the ability to control our SG&A which I think we have done. We do not have the same ability to control when our customers move forward on the larger projects we have been awarded.

Our backlog has grown from $20.6 million at the end of 2006 to $172.9 million at the end of 2007. We all realize the critical element of success for 2008 and that is converting our backlog into reportable revenue and ultimately profitability. That along with our continued focus on prudent and accretive M&A transactions will help draw shareholder value in 2008.

I will now turn the call back to John.

John McNamara

Thanks Tim. Right now I guess we are ready to open up for questions if anyone has any questions.

Question-and-Answer Session

Operator

Thank you. The question-and-answer session will be conducted electronically today. (Operator Instructions) And we will take our first question from Joshua Jabs from Roth Capital.

Joshua Jabs - Roth Capital

Hey good morning, congratulations on the quarter.

Tom Rosato

Hi Josh, how are you doing?

Joshua Jabs - Roth Capital

Good. It looks like some of the projects that had been delayed earlier in 2007 are starting to move forward. Is this what drove the strength in Q4?

Tom Rosato

That was part of it, yes. It was a pretty good sized project with regard to those customs that we had to that we moved along pretty rapidly.

Tim Dec

And I think the two additions as well between Rubicon and Innovative contributed very nicely as well for the fourth quarter as well.

Joshua Jabs - Roth Capital

Okay. And -- you know if I looked at the couple of big deals that you announced in Q4 and then another one in January. Can you talk about how those deals are progressing and maybe what some of the biggest risks are to those projects moving forward this year?

Tom Rosato

The deals are all -- there was three major contracts that we signed; one in December and two in January, they are all currently in the engineering stage and the engineering phases. A smaller one which is about $10 million is very fast-track, the largest one which is about $118 million is probably going to be -- let go in phases, not as quickly as we first anticipated, we probably are going to earn that revenue at about 14, 15 months and maybe about an 18 month project but there is really no risk there and then the third one is probably more of a -- from a construction standpoint, a second, our third and fourth and first two quarters in next year event.

Joshua Jabs - Roth Capital

Okay. Obviously those are some nice wins in over the last few months. Based on that pipeline, you presented and proposed and kind of what you talked to in the prepared remarks, looks like things are tracking fairly well. Have you noticed any slowdown or -- what are you hearing back from maybe some of your data center leasing customers on growing macro conditions?

Tom Rosato

One of the things that we are seeing and that we are hearing is that the data center reap customers that already have facilities in place are really positioned now to take advantage of the marketplace because they have capital in place and a lot of the companies that are affected by this credit crunch are now going to them as a resource to help them with either short term or with some of their longer term needs right away under the leasing options. So because they have already the capital in place and they’ve got a model that is producing cash and some of them have just recently raised considerable amount of money in the last four or five months through some public offerings. That their activity is really very high and we are in a position hopefully to work with them and take advantage of that. So, we are seeing a lot of the companies are holding off from their own capital expenditures, going to outsource the date center model, talking to the reaps that are in business and attracting your business or getting their -- doing your business through the reap and I think we are well positioned because we’ve got both the private company customers that we are pulling on and when they come to a spilling point with regard to their capital expenditures, we also have a pretty good base of reap customers that we can bring these customers -- that we can bring our own private entity customers too. So it’s kind of a win-win situation for us.

Joshua Jabs - Roth Capital

Okay Tim I know we’ve already talked about this previously but can you give us an idea what your expectations are for taxes this year.

Tim Dec

How about if we take that offline?

Joshua Jabs - Roth Capital

Okay sure and then update on the Company’s stock -- where it has acquisitions as part of its strategy. Can you give us an update on how that’s progressing?

Tim Dec

We have a pretty strong pipeline of acquisitions and that’s about all we can say right now.

Joshua Jabs - Roth Capital

Alright and then finally on the warrants, where they can -- each of the previous calls you talked about that being a focus of the Company trying to get the Cap structure cleared up. Is that -- does that remain the case? Any update there?

Tom Rosato

I think it’s fair to say that it’s clearly a focus of ours here.

Joshua Jabs - Roth Capital

Okay, alright. Thanks guys.

Operator

And we will take our question from Mathew Weiss from Maxim Group.