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Executives

Elmer Baldwin – President and CEO

Walter Michels – Interim CFO and Assistant Treasurer

Analysts

Ron McGraw [ph] – Athena Fund

Rick D'Auteuil – Columbia Management

Craig Ostrem – Van Clemens

Steve Rud – USIP

Ed Griganavicius – TSI

Analysts International Corporation (ANLY) Q2 2008 Earnings Call Transcript July 29, 2008 10:00 AM ET

Operator

Good morning, my name is Jennifer and I will be your conference facilitator for today. At this time, I would like to welcome everyone to Analysts International Corporation second quarter conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator instructions)

This conference will contain forward-looking statements within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. In some cases, forward-looking statements can be identified by words such as believe, expect, anticipate, plan, potential, continue, or similar expressions. Forward-looking statements also include assumptions underlying any of these statements. Such forward-looking statements include or relate to our expectations concerning quarterly and annual operating results, working capital, expected need for and uses of cash, implementation of our business plan, achieving or exceeding our business objectives ahead of plan and improving our gross margin and overall performance. These forward-looking statements are based upon current expectations and belief, and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the statements.

For more information concerning the risk associated with our business and the economics of business, competitive and/or regulatory factors affecting our business generally, refer to the company's filing with the SEC including its annual report on Form 10-K or its most recent fiscal year, especially in the management discussion and analysis section, its most recent quarterly report on Form 10-Q and its current reports on Form 8-K.

All forward-looking statements included in the conference call are based on information available to the company on the date of our earnings conference call. The company undertakes no obligation and expressly disclaims any such obligation to update forward-looking statements made in this transcript to reflect events or circumstances after the date of this conference call or to update reasons why actual results would differ from those anticipated in such forward-looking statements.

In addition, in this call, management will review financial measures such as EBITDA that do not conform to the generally accepted accounting principles. For a reconciliation of these measures and the generally accepted accounting principles, participants are directed to the company's press release which is posted on its website at www.analysts.com. As a reminder, today's conference is being recorded.

I'll now turn the call over to Mr. Elmer Baldwin. Please go ahead sir.

Elmer Baldwin

Thanks. Good morning everyone and thank you for joining us today. During today's call Mic Michels will recap the financials and I will highlight a few of our accomplishments during the second quarter. I will conclude by commenting on what we see as we look forward into the second half of 2008 and discussing priorities of our business going forward. Mic?

Walter Michels

Thank you, Elmer. As we stated in our press release earlier this morning, during the second quarter of 2008, our total revenue was $82 million, down from $89.2 million in the second quarter of 2007. At the bottom line, our second quarter resulted in a net loss of $984,000 or $0.04 per diluted share. This loss includes restructuring, severance and other consulting costs of $909,000 or $0.04 per diluted share. This compares to a net loss of $723,000 or $0.03 per diluted share in the second quarter of 2007 which included restructuring, severance and other consulting costs of $600,000 or $0.02 per diluted share.

Year-over-year second quarter revenue declined 8% with 5 percentage point of the overall decrease resulting from a decline in product sales. During the second quarter of 2008, product sales were $9.6 million compared to $14 million in the second quarter of 2007. Direct services revenue was $58.2 million in the second quarter of 2008 compared to $60.4 million in the second quarter of 2007 contributing 2 percentage points to our overall revenue decline of 8%.

As we have reduced the placement of third parties to fulfill our largest client staffing need, we continue to see a corresponding decline in our sub-supplier revenue. Second quarter sub-supplier revenue was $14.2 million compared to $14.8 million in the comparable quarter of 2007 contributing 1 percentage point to the overall second quarter year-over-year decline in revenue.

Our overall gross margin was 15.8% of revenue for the second quarter of 2008 which is the same as what we reported in the second quarter of 2007. Our average bill rates during the quarter of 2008 increased by nearly 1% when compared to the first quarter of 2008 and by nearly 6% when compared to the second quarter of 2007. Continued pressure in sub-supplier margins offset the rate benefit attained through the reduction of low margin product revenue while margins generated from direct services remained stable.

At the end of the second quarter of 2008, excluding consultants billing through us as sub-suppliers and nurses billing through our medical staffing business, total company headcount was 2,180 compared to 2,505 at the end of the second quarter of 2007. Billable headcount continues to represent approximately 86% of our entire staff.

Our second quarter SG&A expense which excludes restructuring and severance charges was $12.9 million, a $1.2 million or 8% reduction over second quarter expenses in 2007. The decrease in our SG&A expense is the result of realized deficiencies in the centralization of our administrative functions as well as other reductions in operating cost. As we have previously discussed, our new business plan calls for us to eliminate over $6 million of SG&A on an annualized basis.

We expect to begin to see the benefits of these reductions in the third quarter of 2008. Adjusting for the $909,000 of restructuring, severance and other consulting charges in the second quarter of 2008, we reported adjusted EBITDA of $762,000. This compared to adjusted EBITDA of $644,000 during the second quarter of 2007. From a balance sheet perspective, accounts receivable totaled $59 million at the end of the second quarter of 2008, down $500,000 when compared to the end of the first quarter of 2008 and down $4.3 million from the end of the second quarter of 2007.

This decline is a result of lower revenue and continued improvement in our days sales outstanding. At the end of the second quarter of 2008, our days sales outstanding were 67 compared to 71 in the first quarter of 2008 and 73 days in the fourth quarter of 2007. We continue to focus our efforts on managing our DSO to as low of a level as practical. Working capital was $23.9 million for the second quarter of 2008, was down from $24.4 million at the end of the first quarter of 2008 and $24.8 million at the end of the fourth quarter of 2007.

We finished the quarter with $1.3 million of outstanding debt, down from $3.5 million at the end of the first quarter and down from $1.6 million in the fourth quarter of 2007. This decrease in outstanding debt between the first and second quarters was due primarily to the timing of our biweekly payroll. The second and fourth quarters have similar payroll timing.

Our credit facility had total availability of $31.7 million at the end of the quarter, leaving us with unused capacity of approximately $30.4 million. The level of available borrowings under this facility will continue to fluctuate as our receivables collateral base fluctuates. This line of credit is available for our use as growth in other business opportunities call for working capital and other investments. We believe our unused credit facility will more than adequately continue to support the operating needs of our company.

With that, I will turn the call back over to Elmer.

Elmer Baldwin

Thanks Mic. The first half of 2008 has been all about restructuring and refocusing the company. We remain steadily focused on day-to-day execution of our plan to transform AIC into a value-driven IT services company. As we look at what the company has been able to accomplish over the course of the first two quarters of 2008, we are reminded of the work that lies ahead and the challenge to build a better more balanced business.

We have completed the majority of the planned restructuring required to get our cost structure in line with the business. We've exited some of our lowest margin, the non-core line of service and we've made important investments required to position AIC for future success.

As result of some of these changes, we expect to see a reduction of more than $60 million in annualized revenue. Our gross margin run rate, however, is expected to improve by about 3 to 4 points by the end of the year. We should begin to see the benefits of these changes in the second half of 2008.

In the first half of the year, we established a high-caliber leadership team, enhanced our sales and recruiting teams, and built out our Microsoft practices in key metro markets across the US. The investments we have made to date have been in our people.

While we have reduced our SG&A expense, we have hired many new talented people to help move this company forward. Over 20% of our SG&A staff is new since November 2007. We have provided our people with more communication and training and elicited more feedback than AIP has had in many years. We are hiring great consultants and deploying them on new projects, which is critical in an industry where talent wins.

Selling more premium staffing and project-based work requires us to establish new relationships within accounts, some of it differently than we have in the past and manage a longer sales cycle. In June, we held a national sales meeting for all our sales representatives and recruiting leads with a focus on adopting a more solutions-focused sales methodology, institutionalizing our sales process across the business and educating our market-facing teams on the offerings that are core to our business today and will be core to our business moving forward.

As a result of that event, we are beginning to see an increase in the number of opportunities to provide premium staffing, high value-add solutions, project-oriented services and manage teams to our clients. This transition in our business is going to take some time as we shift our attention to selling higher margin services to new buyers within and outside of our existing accounts.

Let me now take a moment to highlight for you a few of the noteworthy wins from second quarter 2008. In May, we announced a new project to deploy a criminal records index for the state of Alabama's criminal justice information center. To improve the speed, breadth, depth and quality of searching and reporting crime information across the state, we partnered with the University of Alabama and VisionWare to create a new Criminal Records Index master.

The new CRI master aligned with Alabama's Microsoft architecture leverages VisionWare's proven tool to create a single view of their data by matching and collecting records from different business systems. The Alabama Criminal Justice Information Center sees a direct correlation between efficiency and effectiveness of justice and the quality of crime data and chose AIC and its partners to deliver its solution.

Last week, we issued a press release announcing a win with the Las Vegas Metropolitan Police Department. AIC has been selected as the prime to lead this important project and will be working in partnership with Microsoft and RiverGlass Inc. to deploy an intelligent Web monitoring and analytics solution. This solution will enable the Las Vegas Police Department and the Southern Nevada Counter-Terrorism Center to better leverage information to prevent an act of terrorism, solve a crime, identify trends and better deploy its resources. We continue to see expanding opportunities in the state and local government industry protocol and are well equipped to help these organizations protect the safety of the people throughout their communities and across the nation.

In the second quarter, we also won a Web site enhancement project for one of the world's largest real estate networks that is seeking a better supportive agent, decrease costs, and improve the effectiveness of its online presence with more up-to-date technology. We will be using Microsoft Office SharePoint Server, better known as Moss, to create a site that's more flexible and can scale to meet the needs of more than 100,000 agents throughout the world.

And finally, we are working with a financial products company to upgrade its current IT environment so that it can scale to support the projected growth of its business. AIC analyzed and evaluated its current environment including servers, desktops, software licenses, website and domain controllers. We then helped design and implement the infrastructure they would need to support their growth and future business plans. Once we have upgraded the environment, we will provide them with the hosting services to improve the availability, security, and scalability of their systems.

Before we open the call to questions, let me close by saying, we are proud of what we have accomplished over the past six months, but we still have a lot more work to do. Whereas the first half of 2008 has been about addressing the financial model of our business, the second half of 2008 will be focused on execution and delivering results. Our priorities include sales and business development, recruiting and retention, business process improvements, continued work on our core infrastructure of the company, and lastly, employee alignment around our plan for AIC.

That concludes our prepared remarks. We now have time to take any questions and we will like to open up the call for Q&A.

Question-and-Answer Session

Operator

 

Thank you. (Operator instructions) We will pause for a moment. Our first question comes from Ron McGraw [ph] with the Athena Fund.

Ron McGrawAthena Fund

Hi Elmer, how are you?

Elmer Baldwin

 

Good morning, Ron.

Ron McGrawAthena Fund

 

I just want to let you know that good work on turning the business around and obviously now it's time to start broadening the audience and try seeking improvement on the stock performance.

Elmer Baldwin

 

I agree.

Ron McGrawAthena Fund

All right. Thank you.

Elmer Baldwin

Well, I think when it comes to turning the business around, we've still got work to do, but we're following our plan and when it comes broadening the stock performance, we need to get the word out. And as we continue to move forward, I think our first, the highest priority has been executing on our plan and getting in touch with our shareholders. We picked up some new shareholders, but we are certainly a long way away from becoming a relevant and socialized story out in the marketplace, but I think that that is going to come because we are going to put the focus on it.

Ron McGrawAthena Fund

Good, I am glad to hear that. Thank you very much.

Operator

Our next question comes from Rick D'Auteuil with Columbia Management.

Rick D'Auteuil – Columbia Management

Good morning.

Elmer Baldwin

Hi Rick.

Rick D'Auteuil – Columbia Management

 

A couple of questions. The poor margin revenues you have eliminated, I think you said $50 million run rate, are you finished with – or $60 million I guess, are you finished with those eliminations or is there more to come on that front?

Elmer Baldwin

 

Well, we certainly did complete those two which account for approximately $60 million, a little over $60 million in run rate. I think we will see additional revenue reductions as we continue to incrementally reduce our sub supplier business. So, Rick, I think you – We have not seen the end of revenue reductions of poor margin business, but the surgical removing of large pieces that we had planned to do is effectively behind us. One thing that we will not continue to do is sign up for low margin, no margin transactions with clients who are slow in paying their bills.

Rick D'Auteuil – Columbia Management

Okay.

Elmer Baldwin

 

Essentially, the staffing industry get stuck in this payrolling scenarios and that is not just good business for us, and there might be a big client that demand it, but we are looking for ways for us to seek, ways for us to deliver value, and that's not the best way for us to do that. And so there are some, and we continue to not pursue those very low margin staffing opportunities. However, we will continue to provide staffing services and it is like a lot – especially with our longstanding annuity accounts, these are great clients. They have been with Analysts a long time and we will continue – and we can make money on them and deliver value. So, we will continue to do that but the low margin stuff, we are still trying to get it identified and figure out a way out of it but the big chunks, Rick, are behind us.

Rick D'Auteuil – Columbia Management

 

Okay. Of the $60 million that you gave up, I think in an earlier release, there was almost no contribution margin to that. Is that correct or –?

Elmer Baldwin

In the earlier release, we identified that of that $60 million in business, they generated $3 million in gross margins to which nearly $2.3 million of that were operating expense directly attributed. So on $60 million, we had a contribution of about $700,000 and you can imagine the cost of the company in infrastructure to support that $60 million worth of transaction business. And frankly, we would go out and borrow money to fund those receivables, which there are additional fees, as you can imagine. So, that business did not contribute to the bottom line of the company.

Rick D'Auteuil – Columbia Management

Has the $2.3 million in operating expenses been eliminated related to that?

Elmer Baldwin

Yes, it has, and I think we also identified in the release that we eliminated permanently 30 positions in the second quarter. Those eliminations were done late in the quarter, in June.

Rick D'Auteuil – Columbia Management

And just so I understand whether I am double-counting or not, but the $6 million annualized SG&A savings, is the $2.3 million or the 30 positions eliminated, is that in addition to or incorporated in the $6 million that was originally contemplated, the $6 million annualized SG&A savings?

Elmer Baldwin

Some of it was contemplated in that and some of it is additional.

Rick D'Auteuil – Columbia Management

Okay.

Elmer Baldwin

And some of that, Rick, because we carried some of that payroll through the quarter and in the beginning of the third quarter, so we will really start to see the benefit this fiscal year show up in the latter part of Q3 and into Q4.

Rick D'Auteuil – Columbia Management

Okay. And then at the same time of these expense costs you have been investing in more productive revenue-producing personnel. Can you give us any detail on the contribution from that and I guess the pipeline that is developing around those assets?

 

Elmer Baldwin

Yes. So, the number of transactions in our pipeline has increased. I will have better information for you guys in the future as our pipeline stabilizes. In fact, we now have a managed opportunity pipeline across the entire company and this is the first time for Analysts International to have that. And as it stabilizes and I feel that data has a high quality factor, then I will share it with you as a metric that you can measure like the size of our pipeline, size of our backlog.

We are not there yet, Rick. But I can tell you that, for example, one of these deals in the real estate transaction that I announced was originated, organized, sold, closed, and staffed by a team of people who are new since I have joined the company and this is a sizable project.

And so, that's evidence that we are getting traction. These are complex sales. For example, also the VisionWare deal that I talked about with Alabama, VisionWare is a fantastic tool that comes out of the United Kingdom and we were introduced to that through one of our Microsoft Managed Partner representatives and they worked with us together in Alabama and we sold that gig, and it is also a very sizable transaction that will lead to downstream businesses. All of that activity is directly resulting from the investments that we have made since November.

So, these deals are – I mean selling more complicated deals takes time. The margins on them are good and the number of transactions in our pipeline has increased. And so since the meeting we had in June, one of the things that we have started to do is track new leads that directly resulted from the training that we have, that we conducted in June. So, we actually have a centralized group where all the leads are going into that group and they are managed through the life cycle, the leads are tracked through the life cycle. And so, they are keeping records for us so that I can come back to you with some good hard numbers. Right now, you are just going to get me talking anecdotally about it. And as we improve our tracking, I will be able to give you better information.

Rick D'Auteuil – Columbia Management

In your release, you have separated the restructuring charges and in there, you also I think referenced consulting costs. What are those for and are they ongoing?

Elmer Baldwin

We have tried to eliminate most all of the consultants inside the business. We still have a lingering – I am not talking about consultants that are helping us transform the business. We had – unfortunately, we had to get out and hire some help to manage through our recent unsolicited proposal. I think we have talked in the past about what the expense was of that. If they continue to go up through the quarter, we had to hire some folks to help us. That and hire or at least solicit a new Board of Directors. We had Alliance Management, a consulting firm that was hired by the company prior to my coming onboard, they were retained to help us on capital structure and then a number of putting our plans together and then actually, they had a guy that was really good. We kept him on to help us do our facilities restructuring and that was a very effective thing. The significant amount of those consulting activities is behind us.

Rick D'Auteuil – Columbia Management

Okay. What is the status of the CFO search?

Elmer Baldwin

We put everything on pause through the shareholder meeting and then after the sales event we conducted in early June, I put the process back online. I pressed play and processed – interviewed some great candidates and we are down to a very, very small group and I should have something to announce before too long and when – and I feel good about it and as soon as we have word on that, I will make an announcement.

Rick D'Auteuil – Columbia Management

Okay.

Elmer Baldwin

We are making good progress.

Rick D'Auteuil – Columbia Management

And then my last question is when will we see a clean quarter with no restructuring broken out or some of these other items broken out? Is that Q3, Q4?

Elmer Baldwin

Well, Q3 will have some of the lingering transaction because we actually closed on those deals in the first week of July. So we have – at this moment, I have no planned restructuring for the fourth quarter.

Rick D'Auteuil – Columbia Management

Okay. Thank you.

Elmer Baldwin

And by the way, I would say Rick, part of the reason the CFO search was – we were able to put it on pause is that Mic Michels, our interim Chief Financial Officer, has been doing a really good job. So, he is sitting here next to me. I just wanted to complement him while he is here on the phone.

And so, we really have and we have got a new audit committee with some very, very strong members of the Board that have done a great job along with the rest of our finance team. And so, I know some of you are listening. Thank you very much. You have done a good job. We are going to move forward with bringing a permanent CFO as soon as possible.

Rick D'Auteuil – Columbia Management

Okay. Thanks.

 

Operator

We'll move on to Craig Ostrem of Van Clemens.

Craig Ostrem – Van Clemens

 

Good morning, Mic. Good morning, Elmer. Congratulations on your continued success. I want to thank you for articulating your vision in the nuances of the improvements that are occurring at the company. I appreciate this open dialogue.

I have two quick questions. Will you share with us the value or the worth of this symmetry sale and the second thing is how is the relationship with Koosharem which became a shareholder and who made an offer back this winter?

Elmer Baldwin

Okay. So, we have not disclosed the value of the symmetry sale. Unfortunately, I do not think we are going to – let me just say it. We did not get a significant amount of money for it but we have got enough money to cover our costs and we will have a downstream pickup based on an earn-out performance agreement that we have with COMSYS. But let me just, and so, I am sorry I cannot give you the – I will not give you the specific numbers Craig but let me just say something about COMSYS.

They have been a really good partner in this thing and they have immediately jumped in and provided great quality of service to our fund. We had a handful of clients, like three client, and these three clients acted as a part of a seed in the new business that they are investing in and we are happy to be an early partner with them in that. It is the conflict for us inside the Analysts International to be both the gatekeeper and the barbarian. We want to go out and break those (inaudible) so work and the fact is there is a conflict in that. I think I have talked about it in prior calls.

COMSYS has been a really good partner and to date we have been able to introduce them to some new opportunity to some of our clients and they have actually been working with us to get on the list as a preferred vendor for some of their manage services clients. So, I think that the possibility that we will indeed receive downstream earn out from COMSYS is high. So, at this early in the relationship, we feel good about the fact that we will have some upside pickup downstream from our transaction. But the size of the transaction was not material. It has covered our costs and will give us some downstream bottom line pickup because of the earn out.

The other question you had was on Koosharem relationship. But honestly I see them as a shareholder. They own a lot of stock in our company and I get up every single day and go to work for them like I go to work for you and the rest. Other than the fact that they are a shareholder and how they aggressively had an interest in a transaction, I have had no further conversations with Koosharem since the annual shareholders' meeting. But I will tell you as long they own our stock I will be working for them.

Craig Ostrem – Van Clemens

And again, congratulations on your success.

Elmer Baldwin

 

Well, thanks Craig.

Operator

 

(Operator instructions) We will move on to Steve Rud with USIP.

Steve Rud – USIP

 

Hi Elmer, first thanks for working as hard as you do and it is clear you are executing on your vision so I am not much – who knows obviously there is a way to go. I just want to cut through to where you are. It sounds like we are going to be a bit better in Q3 but maybe not GAAP profitable even excluding one-time charges which I guess there are not going to be any at this point until Q4. Is that about right?

 

Elmer Baldwin

I think you are – Let me rephrase your question.

Steve Rud – USIP

 

Sure.

Elmer Baldwin

Let me help you understand it. You were asking about kind of like where we are and that we may see some charges in Q3 but we do not anticipate seeing any restructuring charges in Q4.

Steve Rud – USIP

Right and that is just summarizing what you said earlier but I am taking one step further saying it sounds to me like we will not be GAAP profitable even in excluding the one-time charges in Q3 but we probably should be by Q4.

Elmer Baldwin

Well, I will tell you that the number one objective of the management team and it is written into their performance objectives and their comp plan is to make this a profitable company on a sustainable basis. We gave guidance that we would turn profitable the second half of this year and we are all still very focused on that and we are all incented on that process as outlined in our comp plans if you can find them on the web.

That is just part – that is a significant part of the culture of the company and if it changes the behavior of the management team, and we are all tied to that knot if we all have it together. So, really at the first half of this year we really wanted to do some cleanup work and I would tell you at the guidance of the board. We had a strategy meeting with the board in January and they encouraged us to go even faster. And so where I had planned to take the full year to get some of these transactions completed, we actually completed them significantly earlier than planned and while that might be good from a cultural standpoint and from a turnaround standpoint to get a lot of that kind of restructuring behind us so we can now refocus. It does have a bit of – post a challenge to the management team because it was just like Britney [ph] would point out to me on a regular basis. There is a $700,000 contribution there. But the honest truth is it was hiding or masking the good work that we have inside this business where we can do business – we are doing business at higher margins. So, and you know, if you look at our peer group we are just not valued in line with what we believe our performance should indicate and it starts with profits.

Now, as the second part of this year, as we look at what we are going it is really about getting out and like I said in our priorities, developing business, selling work, retaining consultants and gaining a greater sense of alignment with employees, because we got a couple of thousand people. Every one of those people wake up everyday caring about our company and so right after this call, here about lunch time, we are going to have a brown bag employee call where they got to ask questions and we get to deal with the issues that you guys are dealing with now and actually the work ahead of us. That means we – and so let us get all these restructuring behind us. Let us establish a financial model where my vision is that every month we make money, every month we make money. And I do not want to have to keep selling off and restructuring.

I cannot say that it is gone forever. I mean we are in a business that is constantly changing and adapting to the demands in the market place. But and we still have some lingering clients in here that see us as a commodity staffing company. We can change their minds and we can sell them new work and we are and I am looking forward to it. But, so it really is a time now where we are, as a management team we have been reflecting on what we have accomplished but now we are setting a new game plan for what we got to do in this next stop, second half of the year, and then we will have a new three-year plan to be published to the board this fall and we have a working session with the board on strategy in the future in October, and we are looking forward to that because we think at that point we will really be able to focus on where are we going with this thing and what can we expect to look like in the future. When I have that then I can give you guys some milestones or some measures that hold us accountable to.

Steve Rud – USIP

Okay, and I guess the folks you brought on, it sounds like the higher margin business has somewhat longer lead-time. We do not fully have a handle on – we have a handle that we have more the pipeline, not fully a handle on the probability ratios adjacent to each of those opportunities at this point.

Elmer Baldwin

 

Well no, I would say part of putting it in the pipeline is we actually do have a solution selling methodology that we are subscribing to. And they do have strict probability guidelines in measurements and what takes time is salespeople adapting that methodology and being really strict about it.

Anybody that is going to a sales organization would know that you have all different levels of quality in those opportunities. Some of them the dates are not correct, the amounts are not correct, the probabilities are not correct and that is the art of selling. It is knowing how that opportunity is tracking through from lead to close and then on to revenue. And so, what I do not have a handle on yet is the total pipeline quality, but every single opportunity in our pipeline we do actually measure probability and with some pretty strict observable criteria. But it just takes time for that to become institutionalized and a way of doing business at a company, especially one where you have got this many people, over a hundred people involved in business development at this company. We had that good training session in June and we anticipate having another one in the first quarter of 2009 and it is just a regular process for us.

Steve Rud – USIP

Okay.

Elmer Baldwin

 

We are not really and there are longer sale cycles for more complex transactions. But we hope to enjoy significantly better margins. We have practices within our business that are operating with margins that are in the 30's. We want to scale those businesses so that our blended margin continues to go up and you will see our margins improve as we have indicated when we get out of some of the single digit margins.

Steve Rud – USIP

Okay. Well, you clearly are on top of it and again, we appreciate the shareholder and what we have been accumulating but we appreciate what you have been doing, so just keep at it and keep reducing your sleep hours, it will be great.

Elmer Baldwin

 

Thanks a lot Steve.

Steve Rud – USIP

 

Okay, take care. Thank you also.

Operator

(Operator instructions) We will move next to Ed Griganavicius with TSI.

Ed Griganavicius – TSI

How are you doing, Elmer?

Elmer Baldwin

 

Hi, Ed.

Ed Griganavicius – TSI

 

Just a couple of quick questions, one to follow up with the – so, bottom line that we are saying that in the second quarter we would not be profitable? I mean, in the second half of the year we would not be profitable.

Elmer Baldwin

 

Okay. So I think you are asking me, will we be profitable at the second half of the year? Is that your question?

Ed Griganavicius – TSI

Correct.

Elmer Baldwin

Our plan is to be profitable in the second half of the year.

Ed Griganavicius – TSI

 

Would that be then? Okay. And then a follow-up question in regards to what Rick was talking about in terms of the amount of revenues that was exited. The majority has been done. As far as the remaining, is it $10 million? Is it $20 million? I just want to get a sense of what is still remaining.

Elmer Baldwin

Yes. You know, I cannot – Let me just take a quick look. It is hard for me to break it out right now, Ed, but I would say it could be as much as $10 million.

Ed Griganavicius – TSI

All right then.

Elmer Baldwin

It could exceed that depending on the speed at which we address some of the problems. But, there still could be a range of $10 million to $20 million inside the business that is still is. We are either going to fix it or fire it.

Ed Griganavicius – TSI

 

Okay.

Elmer Baldwin

And – but it is not and we will continue to seek ways to run the company leaner. You know, many, many, many of the cuts that we have made were very hard for our company. You know these – we reduced over a hundred people from SG&A positions since I have been here and these are people we really liked. These are people we worked with. These are people, many of them have been with Analysts International for many years and with the –

You know what, Ed, without a lot of formal process relationships drive the way you do business. So, we are rebuilding process from the front end to the back end of the business to accommodate a loss of some of these important relationships. And so, I am saying to not only you, but to the employees on this call, we have an obligation to now deliver a profitable company, and those cuts were coming from our core centralized functions. You cannot cut the field and think that you are going to make this business better.

And it does not escape me for a minute that there are two drivers to shareholder value. The first one is profits. The second one is growth and we are not ready to get out and grow this company until we have really fixed the model. But we have got to continue to see growth in segments of our business and we know that we need to report to you and the rest of the shareholders more information about our segment performance and we are looking at ways to do that, and our audit committee has also been at the board level was talking to me about it and I am going to look for ways to give you information to hold us accountable and to know what we are actually doing inside this company.

But, you know, we still got work to do on some of that low margin business and we wanna get this restructuring business behind us. You are not going to turn this company around by cutting it. We have got to turn it on by putting power to it. And so, that is what the investment and sales and leadership is all about.

And so, I think in some ways also, I will be honest with all of you. I think we might have been going a little slow incrementalizing and we have got to make some bigger bets for business development standpoint. I want to increase my sales headcount in the field. And so, some of these reductions that we have made, I will look for ways to invest that money in the right places in our field organization so that we can grow this business.

Ed Griganavicius – TSI

Okay. As far as the economy goes, how are you guys fairing up? What do you see for impacts to your existing clients? Overall it still seems like the IT professional services market is doing well. I mean they are hiring. I do not see any significant slow down.

Elmer Baldwin

Yes, I think – I think that is a good – if someone was to say, Elmer, how do you feel about the IT services economy? I would say, hey, we are hiring. But I think demand is flat. It is not like there is any gale force wind out there where there is a revolution. It is blocking and tackling. It is staying in tight alignment with certain technologies and certain markets and finding your niches and, you know, I would not say Analysts International was much of a niche player today. But, we are seeking to find our niches and those niches could be regional. They could be by industry and by subject matter expertise and by partner expertise that we are seeking to find those.

I think that they have been – there are some good strong niches, and I would tell you something. We need to – one of the things that I talked about being a company in balance. We have got to have a good balance between our government business and our commercial business, to our public sector and our private sector business.

We have some good balance between those and we are seeking to expand our government business especially in those areas where the government will continue to spend money. And I tell you right now, they will continue to spend money to secure this security safety of the citizens of the United States.

So, we know that. We know that there is good funding out of federal government. They have been – the federal government helps fund some of the local initiatives, state initiatives. These are integrated opportunities. That is why we are going to continue to bet on.

Later on this week, I am going to be meeting with some police officers and some chiefs of police in Southern California. California is a huge market. We have not barely tapped it yet with this criminal justice opportunity. And so, we are seeking to continue to expand. And some of the work that we are doing in that government space is a direct crossover to opportunity for us to provide services to the commercial marketplace.

A lot of big companies, utility companies, big industrial companies have security issues every single day and they want the tools in their hands to protect their corporate assets. And what we do in the integration of systems, and now our ability to provide analytics to law enforcement is there is a direct opportunity to cross over and sell that type of work into the commercial space.

So, you know, I think we have got to find our niches. The economy, it is anyone's guess, what is going to happen. The big tech companies have all had pretty good earnings, but the US was their weakest market. If you look at IBM, IBM is a global company. Most of their performances are coming from outside of the United States. So, you know, with the dollar down, the US IT labor market is pretty attractive.

So, that is why I am trying to tell my people make sure that the work that we are focused on is work that has hard payback. It is not justified on soft dollars, and we look for niches and areas where we can add value and those are the things that continue to be in demand.

I think some of the biggest high volume labor or staffing clients we have, those are getting tougher and tougher, screwing down even tougher rule, additional discounts, reduced hours for work days, reduced rates for redeployment. That is a really, really tough market. It is a tough industry. So the biggest are looking to screw down even tighter, but there are lots of opportunities out there in the marketplace to define your niches and that is what we are trying to do.

Ed Griganavicius – TSI

One last question. As far as, you know, again I appreciate everything that you are doing, what Analysts is doing to get us to the point of profitability. What do you see is your strategy for getting institutional interest in just a more of a retail market interest?

Elmer Baldwin

You know, up to today, we really have not – we have kind of put the whole investor relation as part of our game plan on hold. In fact, we had to re-divert some of our operating budget to the unsolicited proposal from Koosharem. But, with that behind us, I think that we have been getting lots of good advice from some of our boards. Some of the new board members have hands-on experience in investor relations. It is a high – it was a high degree of interest in the interviews I have had with CFO's. I really want to get my CFO on board and on the ground. And then, I am also interviewing – I have three IR firms as candidates to assist us with the process.

But we are – I think you will see that we will increase the amount of conversation we have with those folks that provide cell site coverage and hopefully somebody will come along with some interest and think that we have got a story to tell and believe in what we are saying and we have got to get somebody to pay attention to us.

Right now, I think I remember talking to one of the Analysts International shareholders early in the game and I think his quote to me was, you know, from a stock standpoint or market standpoint, from investor standpoint, you guys are irrelevant. I mean we have – you have to almost make a reservation to buy stock in the company. Our volume is still very low.

I think we are, you know, when you look at our peer group, we are valued at the lowest and we have got to get our story out there and we have got to get us – and we have got to show that we are executing to our plan and that is the most important thing that I have focused on this year.

But I think that we know the names of all the folks that are providing cell site coverage in our marketplace. So, I would hope that they listen to our story and keep a watch on us, and my commitment is we will continue to report progress against our plan. And I think when those two things come together we will be on the right track to building, you know, more liquidity in this stock and maybe see our enterprise value get more in line with peer group.

Ed Griganavicius – TSI

I appreciate your time.

Elmer Baldwin

Is that –

Operator

(Operator instructions) We have no further questions in the queue at this point. I would like to turn the conference back to our presenters for any closing or additional remarks.

Elmer Baldwin

Well, I appreciate you guys joining us on the call this morning. Thank you very much. We have had a pretty – I can see online that we have probably one of the most popular calls we have had in a while. So, there is quite a few on the line and I want to thank you very much for your time. I want to thank the employees of Analysts International for the hard work, and I look forward to talking to you all again in the future as we make progress in our plan and when we have news, I will announce it to the marketplace and continue to be as open as possible with you on these calls.

Thank you all very much for your time. Take care.

Operator

That does conclude our conference for today. Thank you all for your participation and have a great day.

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Source: Analysts International Corporation Q2 2008 Earnings Call Transcript
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