GlobalOptions Group, Inc. Q2 2008 Earnings Call Transcript

Sep.23.08 | About: Walker Innovation (WLKR)

GlobalOptions Group, Inc. (GLOI) Q2 2008 Earnings Call August 12, 2008 10:00 AM ET

Executives

Jody Burfening

Harvey Schiller - Chairman and Chief Executive Officer

Jeffrey Nyweide - Chief Financial Officer

Analysts

Brian Ruttenbur - Morgan Keegan & Company, Inc.

Joshua Jabs - Roth Capital

Operator

Welcome to the Global Options Group second quarter 2008 earnings conference call. (Operator Instructions) I would know like to turn the conference over to Ms. Jody Burfening.

Jody Burfening

Thank you [Regina] and thank you everyone for joining us this morning for the Global Options second quarter earnings conference call. With us from management are Harvey Schiller, Chairman and Chief Executive Officer, and Jeff Nyweide, Chief Financial Officer. The company issued its second quarter earnings press release earlier today and if anyone has not yet received a copy, you can find it on the company’s investor relations section of the website at www.globaloptions.com.

If you have any questions after the call or would like additional information about the company, please contact Lippert/Heilshorn at 212-838-3777. Before turning the call over to Dr. Schiller, I’d like to point out that management will comment on EBITDA, a non-GAAP measure, on today’s conference call.

This non-GAAP measure is supplemental to the company's GAAP results. For a reconciliation of EBITDA to the the comparable GAAP measures, investors are invited to review the schedule that accompanies the second quarter earnings release.

Also, I’d like to remind everyone that statements about Global Options’ future expectations including future revenues and earnings and all other statements in this conference call other than historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities and Exchange Act of 1934, and as that term is defined in the Private Litigation Reform Act of 1995. Such forward-looking statements involve risk and uncertainties and are subject to change at any time. Actual results cold differ materially from expected results, and Global Options undertakes no obligation to update forward-looking statements to reflect subsequently occurring events or circumstances. With that, I would now like to turn the call over to Dr. Schiller. Dr. Schiller?

Harvey Schiller

Thank you, Jody. Good morning and thank you for joining us today for the Global Options second quarter earnings conference call. I’ll start by giving an overview of the quarter after which Jeff will review the company’s financial performance in more detail.

With our second quarter results we have accomplished a significant financial milestone, that of crossing over into EBITDA positive territory for the first time in Global Options' history. As planned, revenue increased sequentially by 22% to $26.3 million reflecting organic growth and integration of the First Advantage Investigative Services acquisition completed this past quarter.

Compared to last year’s second quarter, revenue grew by 17%. This revenue growth, along with the cost reduction actions implemented last quarter, produced EBITDA of forward earnings before interest, taxes, depreciation, amortization and stock-based compensation of $407,000.

Through various business development activities we are broadening the awareness of the full scope of Global Options' capabilities across all business units and are expanding our presence among new prospects in our primary target markets: insurance, transportation, education, medical and the public sector.

As a result of those developmental efforts we have won a number of contracts that carry a relatively small dollar value but open the door to contract expansions, cross-selling opportunities and repeat business.

I would also like to share a few noteworthy achievements. First our preparedness service unit was retained by the Port Authority of New York and New Jersey to provide professional Emergency Management and Preparedness Services for the Authority's transportation infrastructure in the Tri-State Area.

This contract encompasses reviewing, analyzing and providing recommendations to improve the Port Authority’s response, recovery and mitigation capabilities within its emergency preparedness plans.

Second, our preparedness service unit won a contract in Iowa to provide disaster recovery services to municipalities hurt by the massive floods in that recently hit the Midwest. We currently have staff on the ground implementing the first phase of this support with an option to extend the contract once Federal funding becomes available. In addition to Iowa, we continue to hold discussions and are actively seeking opportunities with other communities impacted by the flooding and associated damage.

The services we are performing under the Iowa Municipal contract illustrate a trend in meeting the budgetary needs of State and Local Governments that hold a great deal of promise for Global Options. We believe state and local governments that are under pressure to cut budgets as current economic conditions shrink tax revenue.

As a result they are less able to afford the carrying cost associated with full-time disaster preparedness and recovery staff. Against this backdrop we offer an outsource solution providing state and local governments with a reserve of disaster preparedness and recovery experts to be activated when disaster strikes.

We have a strong reputation for providing disaster relief assistance. As one of only a handful of companies in the United States with a requisite broad scale set to provide front end disaster preparedness and planning services as well as post disaster recovery and relief services, we are ideally positioned to capitalize on this trend.

Already we have on-call contracts with three states to step in and provide disaster recovery services in the event of a disaster, be it man made or natural. In addition we have strong relationships with authorities in states located in the hurricane belt.

Last month I’m sure you’ve read in the news about our Bode unit and its role in the JonBenet Ramsey murder case in Boulder, CO. Bode is one of the largest, private forensic labs in the country not affiliated with a federal agency, state or city. Bode is a pioneer in the development and use of new and advanced tools such as touch DNA that expands the capability of DNA science as a forensic tool in the investigation of homicide cases and other heinous crimes.

In fact, after the disclosure of Bode’s role in using touch DNA in the JonBenet Ramsey case, Bode has received a significant number of inquiries from crime labs across the country and has been invited to speak to both private and public audiences on the topic.

Bode also continues to service many local, State and Federal law enforcement agencies providing DNA sampling analysis that helps to alleviate the nationwide backlog and help solve cold cases.

Turning now to our sales and marketing activities, through internal communications our units are cross selling more and ensuring prospective leads reach across all business units.

To advance the awareness of services and target industries, we are forming dedicated practice areas in each of the business units. For instance we now have a practice area for focusing on the higher education market, a group that is sensitive to security disaster preparedness and recovery planning.

To date we have worked with approximately 20 colleges and universities designing programs that cover everything from student safety to business continuity and disaster response.

Our preparedness services unit has a long-term relationship with the California State University system. The university, recognizing the disaster risk in California such as earthquakes and fires, continues to renew its contract for the implementation of a preparedness and recovery plan; one of the most comprehensive adopted by any university.

We provide for both ongoing readiness preparations, such as student safety training and exercises as well as annual comprehensive modifications and updates of their continuity plans.

We have grown our list of clients who are under master service agreements and continue to pursue new leads that we hope will mature into additional master service programs.

Finally we are making full use of indirect channels of distribution. Our strategic business alliance partnership with First Advantage is going well. A number of joint proposals have been submitted and we have assigned our salespeople to manage those relationships.

Turning now to operations, we completed the integration of the First Advantage Investigative Services acquisition ahead of schedule. We closed this acquisition in April.

Since then we have reduced headcount, consolidated back office operations and eliminated back office operations. Furthermore, we have completed the transition of First Advantage Investigative Services customers to our propriety software platform, GlobalTrack. As a reminder, First Advantage Investigative Services provide surveillance and investigative services for the detection of workmen’s compensation, disability and liability insurance fraud.

With the second quarter behind us, we are collectively turning our attention to delivering our goals for the second half of 2008 of growing revenue to be between $105 million to $115 million and reaching positive GAAP EPS in the fourth quarter.

We’re executing according to plan, increasing revenue and expanding sales activity in industries where we have a differentiated expertise and realizing the opportunity leverage of an integrated, streamlined model.

The business unit leaders we have in place are second to none. The talents and expertise of our experienced employees, advisors and consultants are well-placed and our go-to-market strategy of clerk selling services is working well.

All in all we are very very optimistic about the future. With that, I’d like to turn the call over to Jeff Nyweide to review our financial performance. Jeff?

Jeffrey Nyweide

Thanks Harvey. For the quarter ending June 30, 2008, Global Options Group reported revenue of $26.3 million versus $22.5 million in the second quarter of 2007. Selling and marketing expenses for the quarter were $2.7 million compared to $8.5 million last year.

G&A expenses were $10.3 million for the quarter compared to $12.2 million last year. Included in our selling and G&A costs for the second quarter of 2008 were stock-based compensation expense of $1.2 million, $346,000 in depreciation and amortization expense of property and equipment, and $767,000 of amortization of intangible assets. As a result we reported a quarterly operating loss of $1.9 million compared to an operating loss of $10.8 million last year.

During the second quarter, the company continued to streamline operations and centralize back office activities. Specific actions included reducing administrative headcount, consolidating three offices and further enhancing the capabilities of the company’s integrated financial system.

Net loss for the second quarter was $2.0 million or $0.20 per share versus a net loss of $11 million or $3.87 per share for the same period last year. The company’s weighted average common shares outstanding rose to 9.7 million for the second quarter of 2008 versus 2.8 million last year reflecting principally the shares issued in our 2007 equity restructuring and secondary public offering.

From a balance sheet standpoint our cash and cash equivalents at the end of the quarter stood at $4.9 million. Accounts receivable improved during the quarter to $23.2 million due to improved processes and strong collection efforts, and we ended the quarter with a debt outstanding of approximately $4.1 million, consisting principally of our draw against our line of credit.

That concludes our prepared remarks and now we like to open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question is from Joshua Jabs - Roth Capital. Please go ahead with your question.

Joshua Jabs- Roth Capital

Morning. Say on the – Jeff, can we get a segment breakout?

Jeffrey Nyweide

Sure, we’ll be releasing that, Josh, the formal Q at the end of the day today, but in terms of the breakout for the segments, that each unit had an improvement over the prior quarter with preparedness doing around $8 million, our SSIU doing approximately $9 million and our security and consulting also doing around $9 million total. That includes Bode for a total $26.3 million.

Joshua Jabs - Roth Capital

Okay, and then Harvey can you give us some color on the Port Authority and Iowa contracts? Maybe some sort of dollar value and time frame?

Harvey Schiller

Well, without respect to the dollar value, these are both brand new agreements and the Port Authority, as you probably know, we have experience in that particular area of analysis and evaluation. The timing of both contracts effectively, we hope, will be on one year and the exact dollar amount; we’re not at liberty to release that at this point.

Joshua Jabs - Roth Capital

Would you expect revenue from those contracts this year?

Harvey Schiller

Jeff?

Jeffrey Nyweide

Yes we would, Josh.

Joshua Jabs - Roth Capital

Okay, and then Jeff, going back to the cost saving efforts, how much of the $4 million in annualized savings was built into the [Highrock] fine this quarter? And how does that trend then for the rest of the year, specifically on the G&A line?

Jeffrey Nyweide

We’re really pleased with the progress of that we’ve made in that Josh. At the end of the last quarter we said that we had essentially been contracting the back office operations, specifically the headcount, due to the integrated financial systems that we put in and also finishing up with the audits and activities.

That activity flowed into this past quarter, I’d say in in the range of about a million dollars in terms of what we had anticipated. We did have a little bit of a pickup in our G&A with regards to the First Advantage acquisition that we did, that we completed in April but in terms of the continued cost savings, I think we’ll see a continued rationalization of that G&A and we’ll see that staying at or probably moving a little bit down from what it’s current level is.

Joshua Jabs - Roth Capital

Will that be on an absolute basis?

Jeffrey Nyweide

Yes.

Harvey Schiller

This is Harvey; and just some comments about our optimism about just about the whole company itself but more importantly about some of these cuts. In the fraud and SIU area we are moving more and more toward centralization in that area, which will result in fewer offices and taking advantage of modern communications wherever we can, to support the people out in the field, and you’re going to see, over the next 12 months or so, you’re going see significant changes in our company as a leader and how we do that kind of business.

Joshua Jabs - Roth Capital

Okay. Gross margins came in. They’re roughly in line, about 42%. Should we expect gross margins to improve sort of as the Bode and JLWA businesses – well, I guess with Bode as new stuff comes online, then JLWA has their contract backup?

Jeffrey Nyweide

I think you’re right, Josh. It will improve. I think that on the Bode side you know, you have essentially fixed nut that you cover and that incremental revenue as that increases has a greater flow-through so we’ll see some improvement there, and I think in the same way as we build additional scale into the organization I think you’ll see additional improvement over time with the gross margin.

Joshua Jabs - Roth Capital

And how about on the JLWA? You know, as Louisiana ramps back up do you – does that impact your margin?

Jeffrey Nyweide

When we renegotiated the contract last year, we did provide them with certain cost benefits for having a longer-term contract. At the same time though we also translated a number of resources that we had in a consulting capacity into employment capacities, therefore hopefully increasing their productivity as a result of their costs, so there was a bit of trade-off on both of those.

I think as we see increased activities, in not just Louisiana but also in these other states, we’ll see a margin improvement over time.

Joshua Jabs - Roth Capital

Okay, and then the last one here. Can we get a quick – in regards to the First Advantage relationship, did that contribute to the quarter? If so, roughly how much?

Jeffrey Nyweide

It did contribute to the quarter. We don’t – we’re not disclosing the exact amounts, but I can say that that the key to that effort was really the efforts to get that integrated on a very quick basis and get the existing – get those clients integrated into our underlying systems. Some of those clients were already clients of ours. Some of them were brand new, but I think the key element for us is that we were able to integrate them all and bring them on together, and that provided some of the improvement that we saw going from preparedness in Q1 to the preparedness in Q2.

Joshua Jabs - Roth Capital

All right. I will, congratulations on the quarter and and it’s nice to see the margin improvements moving along.

Harvey Schiller

Thanks, Josh.

Operator

Our next question comes from Brian Ruttenbur – Morgan Keegan. Please go ahead with your question.

Brian Ruttenbur – Morgan Keegan and Company

Yes, thank you very much. The questions I have – acquisition plans. What kind of acquisition plans do you have, and do you have the capital to execute on additional acquisitions?

Harvey Schiller

This is Harvey. I think that what we’ve tried to have shown is the promise we made when we we’re doing the recapitalization of being EBITDA profitable and as we’ve said in this call moving forward to EBITDA and EPS, but I do want to say that we have – we continue to have a listing of potential acquisitions. We want to be very, very careful over the next few months that it doesn’t interfere with some of the cost cutting and other things that we’re doing to grow organically.

In terms of the capital, there – people on this call know better than us. There’s capital available. There’s other means, of course, for acquisitions. We’re very optimistic about some of the things that we have in the pipeline but there – it’s not appropriate to speak of those at this time.

Brian Ruttenbur – Morgan Keegan and Company

Okay. Would those additional acquisitions then fit into your three main groups, or would there be a fourth or fifth area?

Harvey Schiller

There are, as you know when we started this company, we said that we would not be involved in the basic guard work business and that we would move slowly in technology. The Bode acquisition of course was our first that people would say is aligned with modern technology.

There are other opportunities that we are looking at that could be in the comps, either in the what I would call technology or in the training area; both of those we think could be very profitable.

Brian Ruttenbur – Morgan Keegan and Company

Okay. Thank you very much.

Operator

(Operator Instructions). At this time there are no further questions. I will turn the call back over to management for any closing remarks.

Harvey Schiller

Well this is Harvey. I just want to thank the people on the call. We’re very optimistic about the company. We’re executing well. We’re wining contract awards, large and small and we’re cross-selling which we’ve promised to do.

We are now working with master contracts in a number of areas, we’re going to finish this year we believe in a strong way. We’re looking to $105 million to $115 million of revenue and we’re very, very positive about the future.

We thank you all for being here.

Operator

This concludes today’s conference call. Thank you for participating. You may now disconnect.

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