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Executives

Philip Verges - Chairman and CEO

NewMarket Technology Inc. (NMKT) Q2 2008 Earnings Call August 21, 2008 4:15 PM ET

Philip Verges

My name is Philip Verges. I am the Chief Executive Officer of NewMarket Technology Incorporated, and this is the scheduled webcast to review our second quarter 2008 financial performance year-to-date. You should have a cover slide on your screen, giving the name of the company.

Coming up on your screen, you should have a Safe Harbor statement. I encourage all of you in addition to what I will talk about here today, to also review our filings with the Securities and Exchange Commission for additional detail and disclosures.

On our overview, you will see an agenda for what I plan to discuss. As some of you maybe new, I like to do a corporate overview briefly before getting into the primary purpose, so I give a little bit of background on the company.

When we talk about the financial performance year-to-date, I would like to do that in a framework of what the company's objectives are for the year. So I will review the company's revenue and margin goals, and as well as our strategy from sales and margin improvement perspective to achieve those revenue and margin goals.

Then we will talk about the quarter and year-to-date, as well as talk in about some specifics regarding our regional operations contribution to our overall financial performance.

We will talk about our sales track record year-to-date, and see how in combination with what we have sold, but have not yet delivered on, but anticipate as an additional revenue contribution above and beyond what we have already booked this revenue today, impacts the overall 2008 outlook.

Finally, we will talk specifically about the 2008 outlook and summarize the results so far this year, as well as looking forward for what those results mean in regard to achieving our forecasted results, our forecast for the overall year from a revenue and margin perspective.

On the outlook, I will also talk about key topics in the company right now, specifically our ongoing initiative to build a mobility technology subsidiary sent around the acquisitions of Everex, and I will also talk about our ongoing capital structure strategy.

You should have up on you screen now our corporate overview slide, briefly stated as it says on the screen; NewMarket installs, customizes and maintains, establish the next generation technology solutions. The type of business we are falls under a couple of different names that you have probably heard before.

Systems Integration is a term that I frequently use to describe. Technology Services is another term that is frequently used in the industry. I think many times the best way to explain the company is by example. There are some big name companies out there that are similar to NewMarket. IBM for instance, EDS or Electronics Data Systems, Affiliated Computer Systems, [Perot]. The primary difference between NewMarket and those companies is size. Those companies are extraordinarily large.

Due essentially the same thing as NewMarket Technology by integrating, maintaining and customizing brand name technology solutions that have been accepted by the marketplace provided by companies such as Microsoft, Cisco and Sun.

Besides size, NewMarket differentiates itself by being a full lifecycle provider. While most systems integration companies focus on legacy and current technologies, NewMarket Technology also looks to the future. So, in addition to having our relationships with Microsoft, Cisco and Sun, and implementing, selling, installing and customizing their solutions, we also look to garage and kitchen table entrepreneur if that have next generation complementary solutions.

So, today approximately 70% of our overall revenue comes from the sale, maintenance, customization of brand name technologies again such as Microsoft, Cisco and Sun, and about 30% of our revenue comes from our in-house next generation technologies that we sell through our customers' relationships that have been established with the brand name technologies.

Another differentiator is; we are looking to fast growth economies. We recently put out some information that was previously published by Morgan Stanley regarding a $20 trillion plus infrastructure investment that will be made over the next decade into the emerging markets of the world. Brazil and China of course being central in those and also be in places where new market has significant operations relative to our overall revenue today.

So, we are concentrating our efforts where there is already a substantial investment being made in infrastructure development, a large percentage of that infrastructure development of course being technology.

Our final differentiator is our equity income strategy, and again I will talk more about this in the overall [2009] outlook at the end of our presentation, but essentially we are building a holding company model, where NewMarket Technology’s regional systems integration operations are independent company's owned by NewMarket Technology, operating, coordinating their operations for the various expertise that the company’s have, but being independent company's based on each of the regions that they operate in.

We have likewise built independent company structures around each of our emerging technologies. By doing this, our objective is multi fold. One we are trying to protect the overall company, as opening up a new region or investing in new technology requires just that investment, and by having independent company's and independent capital structures, that the investment can, the early stage investment can be cordoned off, if you will to be burdened upon that one operation where that investment is being dedicated.

Likewise, as these company's continue to develop and we work to independently lift each of these company's and each of these company's starts to have a tradable stock. We have the ability to create equity income, both as a dividend to our shareholders as well as a direct income for the company.

So, as the IBM's and EDS's, and other large system integrators in the world try to evaluate strategies to diversify and improve margins as margins continue to shrink in this overall marketplace because of the global labor market and the availability of technology resources in India and South East Asia. NewMarket is otherwise differentiated by creating new sources of income, equity income.

Let’s talk again briefly about what our goals are for this year. We have forecasted $120 million in profitable revenue growth, all coming from organic sales. The company has established a footprint regionally and with its base innovative technology through merger and acquisition, but has not done an acquisition over two years, as we work to establish momentum in organic sales growth.

So the growth in 2007 and the growth in 2008 and reaching our objective of $120 million in profitable revenue growth is all to be achieved from organic sales. We are also trying to mature as an overall operation and work to improve our gross margins and reduce our overall operating expense as a percentage of revenue, and in doing such, improve our working capital, moving the company more towards operational sustainability long-term.

Our strategy for doing this is centered around a managed services initiative that we have talked about in several presentations and communications earlier this year, and there is additional information much more detailed available in a webcast that you can still view from the Vcall website.

NewMarket technology has a number of recurring customers, and if you look to where we generate our revenue from every year, you see many of the same names come up every year. However, our contracts with those recurring customers are not recurring contracts. We have new contracts that we sign every year with those customers. We re-earn our business every year that makes cash flow difficult, certainly not as consistent and streamlined as we would like to have it to be when you are building on a project basis first a retain basis.

If we go back to our example of EDS and IBM and Pro Systems, you will find that most of their contracts come from managed services type relationships, where they sign three years contracts to provide the systems integration services, whereas we provide our systems integration services today largely on a project-by-project basis.

So, our managed services initiative is largely dedicated to converting our recurring customers into recurring contracts, which has many benefits to the company. Two preeminent benefits, one is an improved cash flow, because it is a more of a steady billing cycle first is the project billing cycle.

That can be extraordinarily beneficial to our overall operation. The other benefit, which I am sure everyone here online is interested in, is improved market Cap valuation. Companies that have a recurring revenue model versus the project model are generally awarded an enhanced valuation by the public markets. So we are working to improve the overall valuation by converting a larger percentage of our overall revenue to recurring through our managed services initiative. Again you can go back and look at more detail on how we are doing this.

Essentially what we have done is put together a matrix management model, where we have at our headquarters under our Managed Services' President, Bruce Noller created a dotted line reporting of all our systems integration operations. So that they can work as one operation, though each of the operations are actually owned by our regional subsidiaries.

Okay. Let's talk about our performance through the second quarter. We are pleased with the performance that we have had through the first two quarters of 2008. Particularly in that the improvements are reflecting our organic sales momentum, as well as our efforts to improve our overall margins.

As you look at some balance sheet highlights on your screen now, you see that our overall cash has increased, our working capital is continuing to improve, the total assets have increased, and our liabilities have notably decreased. Stockholders equity overall is up.

If you look at some of the highlights of our statement of operations coming up on your screen now, you will see revenue has increased more dramatically, our income from operations has substantially increased net income before currency and after currency adjustment is dramatic.

As we consider our overall movement towards our $120 million profitable revenue objective for the year, it is worthwhile to look at not just the quarter, but the year-to-date progress, and then we will subsequently look at the year-to-date progress in combination with our sales track record year-to-date, and new sales that we have signed independent of our recurring base of customers today. Our revenue has increased, and again, even more dramatically net income has increased for the year.

Looking at contributions regionally, we are having tremendous growth in North America, but we continue to have good growth in both our Chinese operations and Latin American operations. Our Chinese operations are independently listed, and trade under their own OTCBB ticker today, and reported year-to-date $19.2 million in revenue, and are notably establishing net income traction.

Our operations in China are more heavily weighted on hardware than any of our other operations, and we are working to grow a larger percentage of our revenue into services, which generally have a higher margin opportunity and we are beginning to get traction on that somewhat earlier than anticipated. We have had four quarters now of profit in four continuous quarters of profit in China.

Our Latin American operations continue to grow dramatically, both in Brazil and Chile and Venezuela, and now opening up into bit to Columbia as you may have seen in recent announcements. So we are very pleased with the continuing growth and bottom line improvements in South America.

We have a chart here that we like to continue to update quarter-to-quarter, because it is a graphical representation of the seasonality of NewMarkets' revenue. You will see there from left to right, top to bottom a revenue and income bar chart that reflects quarterly performance each year. You can see that every year, our revenue and income in the second half of the year is greater than in the first half of the year.

So as we start to move towards looking at NewMarkets' progress to achieve its $120 million revenue forecast. I think it is important to reflect upon our historical seasonal revenue where we typically have dramatic increases in the second half of the year, and anticipate this year having even more dramatic increase.

Lets talk about our year-to-date sales track record, and we have previously talked about signing new customer contracts, contracts with new customers that have not been NewMarket Technology customers in the past, that will contribute $25 million in 2008 revenue this year.

Most of that revenue has not been recognized yet, though the contracts have been signed. We have begun work on a small fraction of that overall anticipated $25 million revenue contribution we will be seeing in the second half of this year. We reasonably expect to maintain the revenue from our recurring base of customers that all total last year delivered $93 million plus in profitable revenue.

So taking into consideration what we anticipate as a base of revenue from our recurring customers being in the ballpark of the revenue that we achieved last year of $93 million or so, plus the new sales contracts that we have signed, that we anticipate delivering $25 million in sales, you can see that we are well within reach of our $120 million goal for the year.

Notably as well 10% of our overall revenue approximately is coming from recurring contracts. So in addition to signing new customers, we are signing longer term contracts. Also it is a very worthwhile to mention that the large majority of the $25 million in new sales contracts comes from North American clients.

So, while we concentrate on business in developing economic regions, it is important for us to continue to balance our presence here in North America, and we received that message from analysts, who have looked at our company in the past, and have made a concerted effort to increase sales in North America and have had stellar success so far this year with a $25 million in new contracts coming largely from North American clients.

Coming up on your screen is the outlook slide with three topics, our continued sales and margins improvements, keeping in mind our historical seasonal revenue increase in the second half of the year and anticipating an even more dramatic second half of the year than we have delivered in the past. That coming largely from adding to our base recurring customer revenue that we anticipate that from the first two quarters financial performance, we believe we are on track to achieve $93 million, if not more from those base recurring customers, but combing that with our new sales contracts getting us well within reach of the $120 million goal.

Also we are pleased with the progress that we are making from a margin improvement perspective. So, not only our sales adding to our overall revenue and making progress, but the company is maturing and improving its overall margin performance, reflected largely in our dramatically improved net income.

Mobility subsidiary, we have announced and we continue to proceed with building a mobility emerging technology subsidiary. This particular subsidiary is a little bit more substantial than our typical upstarts with garage and kitchen table entrepreneurs. We are very excited about this opportunity. We have under a Letter of Intent agreement to acquire Everex. For those of you on the phone that are not familiar with Everex, it is a brand name that has been around for sometime in the desktop, laptop, computing world.

It was acquired in the 90s by a Taiwanese organization, multibillion dollar operation that was largely used in Everex as a conduit for sales into the United States. The company has recently matured over the last few years to have some of its leading products in the mobility sector. The Cloudbook is one of the premier mobility solutions. It is been featured for instance in Oprah’s O magazine recently. So we are very excited about this transaction. It is one of the larger transactions that NewMarket has ever put together, and it is proceeding well and we anticipate providing more updates and a dedicated presentation to shareholders in the future.

I think it is also important to talk about our ongoing capital structure strategy. Again, keeping in mind that NewMarket is trying to build a holding company model, where its regional operations will be eventually all independently listed, and we will likewise independently list our upstart technologies that look to the future and differentiate it from other typical systems integration companies.

We had a number of challenges with our capital structure strategy, because of the dynamics of the overall micro-cap public environment, and I will highlight some of those challenges that we have had over the years and try not to get on my Soapbox too much, but inevitably I can not help it. I have published a paper. It is a relatively lengthy paper on small business in the United States, and in the world, and addressed in that paper some of the challenges that are faced and I will highlight just a few today. Top of mind is often, for instance, the Sarbanes-Oxley regulations. Sarbanes-Oxley puts an enormous and prejudicial burden on small issuers.

In my opinion the regulation is illegal as the financial burden was never researched. There is a requirement for any new regulation to be researched for the financial impact that it can have on the companies that it affects, and no such research was ever done on Sarbanes-Oxley.

Sarbanes-Oxley, I believe the most dramatic impact that it has is, it has driven a number of service providers necessary to public companies out of business. They have just abandoned ship. So there are fewer accountants and auditors and lawyers willing to work with small issuers today, which by supply and demand makes that much more expensive than it has been in years past and also makes a number of small companies struggle to find a limited number of providers.

There are dramatic expenses, and in combination with other rules like the three strike rule, where if you are late on filings three times, you can be delisted from the Over the Counter Bulletin Board Exchange further complicates issues. The stock shorting is an issue I do not often talk about publicly, but in light of the Securities and Exchange Commissions' recent proclamation protecting a selected number of large companies, I can not think of a greater insult to small companies that have been struggling with this issue for years.

Because of the issues associated with the micro-cap market, we frequently are dealing with the sheer dynamics of executing our overall strategy. We have never lost/resolved on our overall capital strategy to independently list subsidiary companies, nor have we lost and resolved today. We continue to think that it is a very good strategy, and we continue to move forward on that strategy. We are significantly evaluating alternatives to the United States micro-cap public markets as we move forward.

We are building an Advisory Board to help us in our valuation of alternative strategies, and you will in the near future see some announcements regarding a notable Advisory Board that is coming together to help us in building a capital structure, where we are a national exchange or a similar national type exchange in a foreign country listed at apparent level with micro-cap subsidiary listings at the subsidiary level.

In the mean time, we will continue to manage the issues and the environment that we are in. For instance, one of the issues that we have recently run into is in our ongoing effort to independently list our Latin America operations. We entered in to an agreement to acquire a majority interest in a company previously named Paragon Financial. We subsequently in combination with the sellers, renamed the company to NewMarket Latin America, and have been working to consolidate NewMarket Technology's, Latin American operations into NewMarket Latin America.

The transition has taken longer than anticipated, because some of the reasons and others that I have mentioned here in the presentation today. Primarily we are trying to work with former management to resolve reporting issues from the previous operation, so that we can put those behind us and integrate the company.

In the meantime, in the last few days, the Securities and Exchange Commission issued a temporary trading suspension of the target company where NewMarket is trying to put the operation. The move by the Securities and Exchange Commission appears to be a routine housecleaning initiative. There were five companies in total that were removed and those companies are alphabetically listed. They all begin with a PA like Paragon Financial. The trading suspension ends on the 29th, it was unfortunately a surprise to us.

It does not at all change our intent to continue. In fact, it strengthens our resolve, and in the last few days we have, we doubled our efforts in order to finish the consolidation of the NewMarket’s South American operations into the former Paragon public entity, so that we have an independently listed South American operation.

We will give you more update on that, but I think that the takeaway is here. As I talk about our capital structure strategy are, we are committed to our capital structure strategy. We have faced a number of challenges with the dynamics of the micro-cap market. We have concentrated primarily over the last two years on maturing our operations and establishing organic sales momentum growth.

I believe that we have gotten to a stage in developing our operational maturity that we can now turn our efforts in a more dedicated manner to our capital structure strategy and dealing with the issues that we face in the micro-cap public market, and our first substantial step forwards dealing with those issues is building a notable Advisory Board, and we look forward to sharing with you our steps towards our notable Advisory Board.

That is all that I have for the presentation today. I know, I spent a lot of time on the last two topics there, talking about our mobility initiative and our capital structure strategy, but I wanted to take advantage of the audience that tuned into hear about our financial performance here today, in order to provide those updates universally, as opposed to answering their questions one-on-one, if they come in through e-mail or on the phone.

So thank you very much for your attention today, and we look forward to continue to provide you updates, as we continue to grow the company towards our $120 million revenue goal for the year, improving our overall margins, executing on a exciting emerging technology subsidiary strategy with Everex and taking a dedicated look at our overall capital structure strategy and bringing in some new resources to help us in maturing that initiative.

Thank you very much.

Question-and-Answer Session

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Source: NewMarket Technology Inc. Q2 2008 Earnings Call Transcript
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