Exhibit 99.1
HALIFAX CORPORATION
Moderator: Charles McNew
August 11, 2004
11:00 am CT
Operator: Welcome to the Halifax Corporation First Quarter
Conference Call.
During the presentation, all participants will be in a
listen-only mode. Afterwards, we will conduct a question
and answer session.
At that time, if you have a question, please press the 1
followed by the 4 on your telephone.
As a reminder, this conference is being recorded today,
Wednesday, August 11, 2004.
I would now like to turn the conference over to Chuck
McNew, President and Chief Executive Officer.
Please go ahead, sir.
Charles McNew: Thank you.
Good morning and welcome everyone to the Halifax First
Quarter Conference Call that's (entitled), "Halifax: The
Enterprise Maintenance Solutions Company."
We're going to begin this morning with our financial
overview which will be presented by our CFO, Joe Sciacca
followed by a discussion of our operational highlights for
the quarter, and then, lastly a discussion of our longer
term strategy.
We'll follow that up at the end to the extent if there are
any questions with a Q&A period, and then we'll conclude.
So, let's begin as we always do with our financial
presentation from Joe Sciacca, Chief Financial Officer of
Halifax.
Joe?
Joseph Sciacca: Hi. Good morning, everybody.
Let me start by reading a statement.
We are required by our lawyers to make the following
statement. Certain information discussed at this
conference call may contain forward-looking statements as
this term is defined in the Securities and Exchange Act of
1934 and regulations there under, including without
limitations to statements as to the company's financial
condition, results of operation, and liquidity, and
capital resources, and statements of the management's
belief, expectations, or options.
Such forward-looking statements are subject to risks and
uncertainties and may affect - and may be affected by
various factors which may cause actual results to differ
materially from those in forward-looking statements.
(Some) of these risks and uncertainties and other factors
as and when (applicable) are discussed in our company's
filings with the Securities and Exchange Commission
including its most recent 10K; a copy which may be
obtained from the company upon request and without charge.
That being said, let me go right quickly into our numbers
for the first quarter.
For the three months ending June 30, revenue was $13.4
million compared to $10.6 million last year, an increase
of 26%.
Operating income for the three months ended June 30 was
$286,000 compared to $199,000 in 2003, which represents a
44% increase. Net income was $91,000 compared to net
income of $51,000 last year.
Earnings per share was 3 cents basic and diluted this year
and 2 cents basic and diluted last year.
The approximate number of shares outstanding was 2.91
million basic and 2.95 million diluted for 2004, and 2.18
million basic and diluted in 2003.
With that, I will turn it back to Mr. McNew.
Charles McNew: Thank you, Joe.
And I would presume that it's a pleasure when you can
discuss those sort of numbers at these conferences.
Joseph Sciacca: Yes, it is.
Charles McNew: Well, we had a revenue growth of 26% quarter-on-
quarter, and actually 3% growth quarter-on-quarter from
the fourth quarter of fiscal year `04 to the first quarter
of `05.
The growth was across the board for us, by the way, in
that 26% number. We had increases in our high
availability maintenance business. That's really a
function of the new business that has been launched and
some growth from some existing accounts.
We've had better order for our - in our technology
deployment and integration group principally from the
Virginia Department of Transportation in the seat
management program that we're engaged in with that
valuable client.
And then, of course, in the secured network services area
where we're providing the cleared personnel on the full
project for communications integration, that's been going
very well also and had grown.
So, all three groups are up; and it would appear going
forward that there's potential for that trend to continue.
The net income growth for the period was 78% which is a
high number. But I wanted to discuss one item in there
just so you'll understand this.
We made - we had a yearend adjustment in fiscal year `04
that related to our net operating loss carry-forward which
was booked because the expectation of its realized
ability. The ratifications of that here in the fiscal
year `05 are - but now when reported numbers for the first
time, we're also looking a tax provision as opposed to
netting, I guess, sort of a net operating loss as this -
as has been the practice in the past.
So, that means that all of our earnings now are reduced
by, let's say, approximately 35% general plus or minus a
couple of points depending on circumstances.
Is that about right?
Joseph Sciacca: That's about correct.
Charles McNew: Yeah.
And that also impacted this quarter, so to really compare
it fairly going forward from this point, you just got to
bear in mind that our historical numbers for the last
several years have been - have not really contained a full
provision tax obligation, whereas, that is the case now;
and that despite that our net income is up significantly.
It is our 13th consecutive quarter of profitability, and I
love saying that. I certainly hope we can continue to
repeat that mantra going forward; no reason to believe
that we can't.
The balance sheet is just, you know, it continues to
strengthen and obviously shareholders' equity is growing
once again by virtue of the earnings. We've got solid
working capital at historical highs for the last several
years.
Our debt to equity ratios are strong and of course there's
a fair amount of operating leverage in there which we're
going to begin to utilize. So, we're very excited about
that.
We're having a strong balance sheet, particularly, with
the scale of opportunities that Halifax is pursuing these
days is - it's something that's really worthwhile for us.
And that Joe and his team, in fact, all of us have - had
worked very hard to make sure that this balance sheet is
what it is today, quite (fabulous).
From a new business standpoint, in the current quarter -
as we sit here today, when I say the current quarter I
mean the quarter ended June 30 -- first quarter of '05.
We've have had - we've had a couple of new awards in both
the commercial and public sector with our partners. We
had announced those as they rolled out. Probably, notable
among those was a sizeable nationwide car rental agency
with over 2,300 locations which began really late - at the
end of last fiscal year. This is the first full quarter
for that business.
We've had some nice little upticks also with some existing
POS -- that's point of sales -- customers that we have
with a couple of our partners on a nationwide basis. This
one particular customer is actively expanding and
upgrading several of their stores around the US, and we
have participated in that as well. And that has enhanced
installation revenue and also provided some interest in
longer term maintenance and support opportunities.
We also announced just recently a $10-million renewal of a
contract with a major aerospace and defense contractor.
This is a legacy account, the business has been with us
for quite some time. But we're always, you know, thrilled
that we can renew contracts with such important customers
like that.
It has -- in this renewal form -- a lot of additional
potential for growth that frankly probably didn't exist in
the prior arrangement, and thus, driving the sales team -
as you could well imagine are actively working that
account. So, we believe they have more to say about that
in the not too distant future as well.
From a services standpoint, as I said, all the - all the
guns are firing quite actively right now and we are
witnessing growth in high availability maintenance,
technology deployment, and integration in secured network
services.
I'll say one of the principal things that's keeping us
awake at night is the availability of cleared personnel
which (unintelligible) a shared number of services. So,
we're not having any trouble at all finding people -
finding capable and qualified people nationally to move
into the commercial side.
And certainly our headcount has been growing actively. It
is approaching 500 as we speak which is another nice
milestone for Halifax. But we're still struggling a bit
with the retention and the hiring of the - of personnel
that does relatively typically very high (clearance)
(unintelligible) because of the environments that we're
working in. So, we're a victim slained in that regard.
You know, we're also - it's interesting, we're approaching
one year, but we've now had the Microserv acquisition.
That has been benefiting Halifax now for 11 months. It's
turned out to be a really good acquisition as I've
mentioned to you in the past.
It certainly has enhanced our partnership positioning in
the global service provider community, strengthened our
management team, and our board of directors; and has
really - has enhanced our visibility as a true national
player. It certainly had given us a viable West Coast
location with a lot more dots in the map out there which
had served their purpose quite well in our discussions
with the global service providers on the national council
(facility).
I want to remind what our rationale was when we negotiated
and then completed that acquisition last fall, and it was
(unintelligible). And obviously, over the top of all that
was the intent that the acquisition being accretive.
But we were looking for an acquisition that would expand
the breadth of our products service delivery capability;
and that could be horizontal or vertical with (a lot of it
being) that we're trying to make ourselves even more
valuable to the partners that we're serving. So, we
wanted to look at an acquisition that would strengthen our
customer base, bring us either additional new partners or
certainly enhance the existing relationships with partners
that we've building on, and then, lastly the third point
would be to bolster our geographic presence.
And as I've indicated to you on a couple of occasions,
Microserv satisfied all of those quite well. I mean
they're - you know, we're quite pleased with that. It was
a fluid integration. We turned out to be pretty good at
that, and it complemented us in numerous ways.
So, (we're coming) up (with) the first anniversary, I just
wanted to remind how satisfied we are with that particular
step.
To touch on our backlog for a second; backlog is growing
once again, that's what a backlog should be doing. It
went up by $10 million this month as a result of the (con)
- of the renewal award that we garnered from our defense
and aerospace contractor account.
And one of the reasons that we really feel good about the
pipeline - and I think, with some degree of confidence we
can characterize an expectation that we believe it will
continue to grow by virtue of what we're seeing in our
sales pipeline.
We've begun - it's different from the backlog, but the
pipeline is - is the visibility we have on potential deals
are slow some of which we often had really come close to
business and, you know, we'll be booked in the form of a
backlog. So, pipeline is - that's a horizon of
opportunities that the sales force is currently pursuing.
Again, as we've discuss in the past, we're really now
using our Web-based CRM tool which is the salesforce.com
product to manage our pipeline -- that sales horizon of
opportunities. And I can tell that the quality and the
value of the deals that we're looking at is unprecedented,
you know?
And I believe I used those same words last quarter, but
it's even larger now than it was back then.
And John and his team have - you know, when you're looking
at a pipeline you use a weighting mechanism, so that
you're not unduly influenced by deals that have probably
very limited chance of success. But the ones that are
weighted more heavily are really what drives the numbers
that you look at and there's the heavily-weighted - the
more heavily-weighted deals right now are quickly (making)
their way to the top, so.
In fact, at our sales kick-off meeting this year, the
fiscal year '05 year - this is sales force jargon, but I
think it's faulty. And what's characterized is the year
of the big deal.
I've actually - I could put a plural on that and call it
"The Year of the Big Deal," but we'll see where that winds
up. We certainly are facing our fair share of them, and
that's a direct function of the positive model that we put
in place. And then, that is why we're able to chase
those; and I'm going to touch on that in a second -- just
to reinforce that point.
Looking at our - you know, looking ahead here, and
certainly we are prevented for obvious reasons from giving
a formal forecast. But let's just talk about our core
marketplace for a minute, you know?
And our core marketplace really is enterprise maintenance
solutions, primarily, high availability, and technology
deployment and integration. That is - that's the 7x24
multi-vendor of anyone's product maintenance and support,
all right? On the nationwide basis, again, and the
environment, so typically associated with demanding SLA.
That's our niche market; that's what we specialize at.
And that's what we expect most of our growth to come from.
There's an ongoing consolidation in that marketplace.
All levels have sort of - the tendency of the awards - and
this what we're seeing in our salesforce.com product, all
right? It's trending towards larger nationwide awards
with the - with high-level demanding an ever-increasing
SLA -- the service level agreement requirement.
It is not uncommon today; in fact, an awful lot of the
business is being awarded particularly through the global
service providers. It's from the Fortune 1000 in large
governmental and state agencies that are bundling entire
fleet of services together.
So, as you'll recall as we've discussed in the past, it's
not - it's almost very typical now for a Fortune 1000
company to go out and buy - purchase just enterprise
maintenance services as a stand-alone component. They're
really looking for a broader bundled fleet of services for
a total IT solution of which we are a component; and
that's the beauty of our model.
By working with depositors who were really landing the
large IT outsourcing of bundled service deals, we're able
to come in and pursue transactions than we'll never get on
our own, by being the cost-effective quality service
delivery mechanism that our partners need. And that's
what's exactly driving the large numbers that we're seeing
in our sales pipeline.
Sales force is frankly not spending much time at all in -
(it's not with us all) - it would have been medium-sized
deals to us even a couple of years ago. They are chasing
the large scale multi-million, multi-year type of
situations. And of course, the sales cycle
(unintelligible) just a bit on those, but except pipeline
is (replete) with these sort of situations.
We have positioned ourselves really to offer broad arrays
of services. We'd like to broaden that service, we simply
we can. But that's what's enabling us to participate in
these larger sale opportunities.
It's - by strict adherence to our partner model strategy,
which is obviously paying dividends, we really are today
the - a very cost effective and certainly high-quality
solutions provider this side of the enterprise maintenance
solutions marketplace.
We're taking additional steps all the time involving and
enhancing our systems, so that few retouches are required
directed towards field force automation. We're certainly
taking a lot of steps in the area of DDI, which is red-hot
right now, out in the marketplace and really Web-based
tracking and contact with the customer on your work orders
and your status of where every thing stands; quite
sophisticated in that regard.
That's all being done because of the growth mandate that
we've got here at Halifax. We have an internal growth
mandate basically that says - and is bearing some fruit
that we're going to grow through participation on multiple
year, larger sales that ultimately become awards, all
right, with our carefully crafted relationships with the
global service provider community and certain - and other
large scale partners.
That's in itself is very exciting. It certainly is paying
some dividends.
We're also beginning to get very active once again on
external growth opportunities, and really looking at a
couple of other situations that could sit right into the
part of motto and accelerate the growth for both the - of
the acquired targets and the combined entity going
forward.
We've already defined earlier about the acquisition
criteria there, but we'll see where that goes. There's
nothing to announce at the moment, but I could just assure
you that we're spending a fair amount of time in that
area.
One of the comments that we made in the press release --
and I think, it kind of sums up our feeling right now at
the management team -- that is that we are optimistic
about our future prospects.
We are optimistic about our future prospects for a variety
of reasons that we have. And we've mastered the ability
to keep ourselves profitable 13 consecutive quarters,
growing backlog, rapidly evolving pipeline, model that
demonstratively delivers and work, all right?
This is - with a part of the community, real strong solid
management team in every discipline that is needed. And
finally, you know, an economy that will tier, okay? And
certainly, the chairman of Federal (unintelligible) I
think he seems to echo the same thing. Well, it's an
economy that is improving, all right? Which is certainly
a nice place to be particularly with the opportunities and
the prospects that we have.
So, we do feel quite optimistic about our future
prospects, and, you know, hope to have a lot of additional
interesting things to say about that in the not too
distant future including the potential for some large
scale type of announcements which I know you've all been
patiently waiting for; so have we. We expect to find an
(unintelligible) it takes time, but certainly the
potential is out there.
So, I think with that - and just - to focus on the
positive note, again, we feel very good; and we're really
excited about where things appear to be headed.
And with that overview, I think, we'll turn it now to
discuss - if there are any questions, let's open it up to
questions and answer.
The way this works is - you know, is that you're allowed,
I think, it's one question and a follow-up question or so,
then we'll go back into the queue if there are other
questions behind you.
So, with, that let me turn it back to our moderator.
Operator: Thank you.
Ladies and gentlemen, if you would like to register for a
question, please press the 1 followed by the 4 on your
telephone. You will hear a three-tone prompt to
acknowledge your request.
If your question has been answered and you would like to
withdraw your question, please press the 1 followed by the
3.
If you are using a speakerphone, please lift your handset
before you request.
One moment please for the first question.
Our first question comes from the line of (Sheldon Catman)
from Morgan Stanley.
Please proceed with your question.
(Sheldon Catman):Yeah, good morning.
Can you hear me?
Charles McNew: Sure, (Sheldon). Go ahead.
(Sheldon Catman):Good.
I just want to congratulate you. You sound very
enthusiastic, and you sound a lot more brilliant this
morning than you did the last time and I'm really very
happy to hear that.
Charles McNew: Well, there are probably sound reasons for that.
(Sheldon Catman):I'm glad, I'm glad.
I'm just curious about Microserv -- the company out in
California -- whether they also were an enterprise
solutions and maintenance type of operation? Or can you
give me a little example or a little idea of what they did
originally?
Charles McNew: They were a - they were a - just a smaller version of
Halifax, frankly. They were in the high availability
maintenance services business. We competed with them. We
got to know them pretty well by virtue of a lot things
we've done with IBM Global Services.
We got to know their executives and we've worked together
with them for a couple of years.
But they had a model that was very similar to ours. They
were very much enamored. They were pursuing a partner
strategy similar to ours and they also had a - and this is
(health desk) - they had a broad network of indirect
employees and subcontractors in areas in the industry
which is known as white space. So, this was sort of the
underutilized or underpopulated areas in the US which
really helped us (plug) some holes.
And of course, they had a nice concentration of business
on the West Coast which - you know, which brought up, you
know, an additional presence out there and has benefited
(them) since that time. They were a perfect fit, and the
integration really bore that out, it was quite smooth.
(Sheldon Catman):Joe, how long had they been in business before you
acquired them?
Can you hear me?
Joseph Sciacca: I believe about 18 years.
(Sheldon Catman):I see.
Hey, thank you, kindly.
Thank you.
Joseph Sciacca: Sure.
Operator: As a reminder, if you would like to register for a
question, press the 1 followed by the 4.
Our next question comes from the line of (Mike Arnold)
from Merrill Lynch.
Please proceed with your question.
(Mike Arnold): Good morning.
Charles McNew: Good morning, (Mike).
(Mike Arnold): How are you?
Charles McNew: Just fine. Yourself?
(Mike Arnold): Good. Just a question here, maybe it's a two-part.
The gross margin, you know, just quickly figuring it out
is 2.1%, which is I'm sure way below what you would like
it to be. First of all, were there any
one-time charges in there as it were in the fourth quarter
or is that - you know, claimed this time? And is that -
can you answer that?
Charles McNew: Yes.
No, there were not any one-time charges in this quarter.
What we have - what we have, (Mike), is a - is just a the
six base of cost, really in the G&A and the sales and
marketing line that as revenue grows -- and we had a
revenue growth of 3% from the fourth quarter of fiscal
year '04. It's up significantly from the prior year. But
our fixed cost base isn't going to move this revenue
growth.
And what you'll see is - assuming we can grow revenues,
then profitability should flow to the bottom line a lot
more rapidly than the revenue growth.
Did I answer that right, Joe?
(Mike Arnold): Yeah, you've - yeah, okay. But if you get one of
these big contracts in the order of $5 million or $6
million dollars a year, what does that do to that gross
margin?
Charles McNew: Oh, that's.
(Mike Arnold): Can you quantify that at all?
Charles McNew: Well, what will it do to the gross margin? Look at
it this way, just think of all the fixed costs that are
built into that gross margin line right now -- the
national service operation, the call or dispatch center,
the logistics group, et cetera. When this new contract
comes in - if any - if a new contract were to come in
those are also fixed cost elements in the service delivery
model. So, it falls through at the - you know, at a much
more robust rate.
(Mike Arnold): Okay.
Okay, thank you.
Charles McNew: Okay.
Operator: Ladies and gentlemen, as a reminder, to register for a
question, press the 1 followed by the 4.
Mr. McNew, at this time, I'm sure there are no further
questions.
Charles McNew: Okay. Well, I want to thank everyone for joining us
for the first quarter conference. It's been a pleasure
discussing our results with you. We look forward to your
phone calls in the interim. At any contact we'll answer
any questions that we're allowed to answer.
And of course, we'll be back together again with our
second quarter conference probably the latter part of
September.
What do you say, Joe?
Joseph Sciacca: Yeah.
Charles McNew: Oh, I want to say, it's latter part of October - the
latter part of October.
Thank you once again and we look forward to talking to you
- with you in the not too distant future.
Operator: Ladies and gentlemen, that does conclude the conference
call for today. We thank you for your participation, and
ask that you please disconnect your line.
END