EXHIBIT 99.2
INCENTRA SOLUTIONS INCORPORATED
FIRST QUARTER 2006 RESULTS CONFERENCE CALL
MAY 16, 2006
OPERATOR: Good morning ladies and gentlemen, my name is Denise and I will be
your conference facilitator today. At this time I would like to welcome everyone
to the Incentra Solutions First Quarter 2006 Results Conference Call. All lines
have been placed on mute to prevent any background noise and after the speakers'
remarks there'll be a question and answer period. If you would like to ask a
question during this time please press star then the number one on your
telephone keypad. If you would like to withdraw your question press the pound
key. Thank you.
It is now my pleasure to turn the floor over to your host Mr. Rene Caron of
Allen & Caron. Sir, the floor is yours.
RENE CARON: Thank you Denise and I too would like to thank you for joining us
for Incentra Solutions First Quarter 2006 Results Conference Call.
Before we start today's call there are a few items that I would like to
cover with you. First, in addition to disseminating through PR Newswire the news
release announcing the company's financial results for the first quarter ended
March 31, 2006 after the close of the market yesterday, an email copy of the
release was also sent to a large number of conference call participants. If any
of you did not receive a copy of the news release please call our California
office at 949-474-4300 after the call and we will email you a copy of the
release. Additionally a replay of the conference call will be available on the
internet via a link provided on the investor section of Incentra Solutions
website at www.incentrasolutions.com. Finally I've also been asked to make the
following statements.
Certain information discussed on this call may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 and the Federal Securities Laws. Although the company believes that the
expectations reflected in such forward looking statements are based upon
reasonable assumptions at the time made it can give no assurance that its
expectations will be achieved. Listeners are cautioned not to place undue
reliance on these forward looking statements. Forward-looking statements are
inherently subject to unpredictable and unanticipated risks, trends and
uncertainties such as the company's inability to accurately forecast its
operating results, the company's potential inability to achieve profitability or
generate positive cash flow, the availability of financing and other risks
associated with the company's business. For further information on factors which
could impact the company and the statements contained herein reference should be
made to the company's filings with the Securities and Exchange Commission
including annual reports on Form 10-KSB, quarterly reports on Form 10-QSB and
current reports on Forms 8-K. The company assumes no obligation to update or
supplement forward-looking statements that become untrue because of subsequent
events.
On the call today from Incentra Solutions we have Tom Sweeney, Chairman and
CEO, Shawn O'Grady, President and COO, Paul McKnight, Chief Financial Officer,
and Mike Knaisch President of the company's Front Porch Digital broadcast and
media services division. Management will provide a review of the results after
which there will be a question and answer period. For those participating on the
call over the internet and who wish to submit a question to
be considered for the question and answer period you can do so by clicking on
the Ask a Question button provided on the left side of your screen. Please
submit your questions as early in the call as possible. If questions sent via
email or over the internet have not been previously answered in response to an
earlier question during this morning's call they will be asked of management as
time permits.
I would now like to turn the call over to Tom. Good morning Tom.
TOM SWEENEY: Good morning Rene, thank you and to those of you joining us on the
call, thank you.
For those of you who did not see the first quarter press release I'll
provide a few brief highlights. Revenues were up significantly compared to last
years first quarter. Much of this is attributable to our acquisitions but we
also saw significant growth in our broadcast business. More importantly we saw
significant improvements in the gross margin of the companies we have acquired
for both third party products and services. Likewise we saw increased volumes of
services over the prior year period due to increased sales of professional
services and recurring revenues for First Call and Managed Services.
Costs as a percentage of revenue improved significantly over last years
first quarter. We did experience some onetime charges which Paul McKnight will
cover in his review, and we have adopted the new method for expensing stock
options. Overall we are pleased with the company's performance especially as it
relates to the realization and the synergies we expected from our acquisitions.
Now I'd like to turn the call over to Paul McKnight to review the financial
performance of the company. Paul.
PAUL MCKNIGHT: Thank you Tom, good morning. I would now like to walk you through
the company's performance for the first quarter ending March 31st, 2006.
Our revenues for the quarter were 12.9 million. This is an increase of 115%
over the previous year and as Tom said this increase is primarily due to the
impact of the two new acquisitions and also an increase in broadcast sales. Our
gross margin as a percent of revenue was 39.6% for the quarter. Now this is
slightly lower than last year due to the fact that we're now including third
party products in our sales mix.
Our operating expenses were 6.7 million for the quarter and as a percent of
revenue it was 52%. Now this is a decrease significantly from last year which
was 81% of revenue. We are now beginning to see the synergies that we expected.
This trend is expected to continue as we add additional revenues. Now I'd like
to point out that in the operating expenses for the quarter we did have onetime
charges related to the Star acquisition and we also saw increases in the
non-cash stock compensation expense due to our adoption of FFAS-123R.
Our operating loss for the quarter improved 300,000. It's now 1.6 million
versus 1.9 in the previous year. Our net loss was $3.6 million and I'd like to
point out that included in this net loss for the quarter is $2.7 million of
non-cash related charges among which are depreciation and amortization, the non
stock - the non-cash stock compensation expense and portions of our loss on
extinguishment of debt.
I'm pleased to say that our adjusted EBITDA for the quarter was $7,000. Now
I'll turn it back over to Tom.
TOM SWEENEY: Thanks Paul. I'd like Shawn O'Grady to provide an update on the
Enterprise Groups progress in the first quarter. Shawn.
SHAWN O'GRADY: Yeah thanks Tom. As you already know from our financial statement
revenue from third party product sales grew by 275% and services group by 21%
over the same period last year, this due primarily to the acquisitions. What we
did demonstrate in the latest quarter was that we have been able to produce the
synergies that we've hoped for from the acquisitions. Our stated objectives for
these businesses was to increase their overall margin by number one, shifting
their focus to higher end complex store Incentra Solutions. Number two, growing
their professional services; and number three introducing managed services into
the revenue mix. I'm pleased to report that we have produced results in all
facets of this plan so let me just spend a few seconds on the details.
Third party product margin grew from 14.1% to 19.3% as we changed our
product mix away from low end commodity like offerings and into complex systems,
particularly in the storage and data protection segments and this is an
important focus area for us because we are able to leverage the considerable
operation and technical experience we have as a company to deliver higher value
to our customers as well as distinguish ourselves from our competitors. Both of
these get reflected in the higher margin. Storage related solutions represented
over 40% of our total product volume this quarter so we're making good progress
in this area. Service margins in the acquired businesses grew from 24% to 29%
reflecting the delivery of higher value integration and consulting services and
lower volumes of staff augmentation business.
First Call and Enhanced First Call services which were only introduced in
the second quarter of last year are beginning to contribute materially to both
the revenue and the profit mix of these businesses. From the fourth quarter of
2005 to the first quarter of 2006 these offerings grew by 31% and that is
quarter-over-quarter growth and we do expect to see this rate of growth continue
as we go forward.
We've continued our geographic expansion of the business, both organically
as well as through acquisitions. As you know the acquisitions that we made last
year established operations in Seattle, Portland, the San Francisco Bay area,
Los Angeles, Orange County and San Diego. Organically we've added Boise, Las
Vegas and Dallas and all of these operations have begun to generate sales
volumes.
And finally, as I'm sure you read, we closed on the acquisition of NST in
early April which brings us presence in Chicago and the Midwest region, through
a very high quality company which is focused in the storage and networking
market. NST generated approximately $25 million in revenue last year and the
acquisition is accretive. NST brings us over 30 sales and engineering
professionals who are experienced in storage and high end network technology and
they do business with over 300 customers, all of whom are now candidates for our
managed service offerings. We do expect to move down the path with NST similar
to the previous acquisitions in terms of creating financial synergy and we're
going to be particularly focused on the introduction of our professional and
managed services portfolio in addition to our First Call and Enhanced First Call
offerings and we have launched the integration process in order to get all of
this started within NST.
Finally we have also continued our international expansion and possibly the
most significant accomplishment we made last quarter was the signing a
multi-year managed services contract with COLT who is one of the largest
providers of business communication and services in Europe. COLT owns and
operates 31 Metro Ethernet networks across the continent and the UK with direct
connectivity to over 10,000 buildings in all of the major cities. They also
operate 13 data centers on the network and support over 50,000 business
customers. Here's a quick recap of what the deal means for us.
Under the agreement we are the exclusive provider of storage and data
protection services for COLT and we'll be providing these services to their
customers, both those in their data centers as well as those on their networks.
Our contract calls for us to install our infrastructure and enable our services
in each of their data centers. As we do this we're guaranteed a minimum monthly
recurring fee at margins that are consistent with what we'd expect from the
delivery of high value storage managed services. As COLT is successful in moving
more of their customer base onto our platform our revenues will increase. During
the first quarter we installed our service infrastructure in Milan, Paris,
Frankfurt and Berlin and began to migrate customers onto the platform. As a
result we will begin to see revenue from this contractor in the first, during
the second quarter.
We're also adding sales and engineering personnel throughout Europe in
order to support the opportunity presented by the new COLT relationship. We have
also worked extensively with COLT to develop the marketing plan in order to grow
mutual business. So far to date we have defined the service, created the
necessary language translation of our GridWorks platform, created marketing
collateral and begun to roll out the program to their sales force. We're already
seeing a developing sales pipeline and do expect growth and revenue from this
new contract.
So in conclusion we're executing the growth plan that we've laid out. The
enterprise business now has geographic coverage throughout most of the western,
central and midwestern markets in the US as well as an expanded presence in
Europe. We are successfully driving our business into the areas where we have
significant intellectual property and capital and therefore are able to support
much higher profit margins and recurring revenue and as we move forward we look
to continue down the same path.
Okay Tom, let me turn it back to you.
TOM SWEENEY: Thank you Shawn. I'd now like Mike Knaisch to provide to an update
on the broadcast business, Mike.
MIKE KNAISCH: Thanks Tom.
Well during the first quarter of 2006 Front Porch Digital took many
dramatic steps to solidify our position as the global leader in digital
broadcast archive management. The division achieved record results across all
critical financial metrics including new order sign for future delivery, revenue
growth during the first quarter, EBITDA and gross margins.
As an indication of the global coverage of our business Front Porch Digital
closed 52 transactions across 26 countries worldwide and today there are now 140
DIVArchive installations in over 140, I'm sorry, 100, in 40 countries around the
world. That's more than any other broadcast archive management solution.
European and Asian sales were very strong during the first quarter.
DIVArchive remains the dominant market share leader in those regions where we
tend to win eight of every ten deals we compete for and we see continued
opportunities for growth in those regions. For instance, during the first
quarter new installations of DIVArchive were sold in emerging markets such as
Poland, Hungary, Belarus, Thailand and India. India in particular represents
great potential for growth and we'll be opening a new field sales office in
Mumbai next month.
Our American sales funnel continues to build and we see a number of signs
that our position here is strengthening. During the first quarter we signed
three new deals in Canada where DIVArchive is now used by eight of the nine
Canadian broadcasters that deploy digital archive solutions. In the United
States our sales team has uncovered many new archive projects that are now being
budgeted, planned, intended for bid by broadcasters in this country and we
believe we're very well positioned to compete for those deals thanks to strong
references with customers such as PBS, Discovery, Comcast and BOOM, the first HD
dedicated broadcast archive in North America.
We also broke into the Latin American broadcast market in Q1 with two new
installations of DIVArchive, one in Argentina and one in Venezuela. We see the
Latin American market as a rich greenfield opportunity for us with limited
competition so we are moving quickly to solidify our positions there. We signed
distribution agreements with system integrators in Brazil, Argentina, Venezuela,
Chile, and Peru to help build our momentum.
Worldwide we continue to strengthen our global distribution channels. We're
working closing with Sun Microsystems now after their acquisition of Stewarts
Tech and that gives us a much broader sales channel to partner with worldwide.
Our tight integration with Grass Valley news and video server products has
positioned Front Porch as a preferred partner of the Grass Valley sales force
and they're bringing us into new deals throughout the Americans, Europe and
Asia-Pacific.
Our growth as a company has been very well covered in the global
broadcasting trade press. During the first quarter the company received
expansive coverage in trade publications such as Broadcast Engineering, TV
Technology, Television Broadcasting and other global trade publications. Cover
stories and other articles have featured DIVArichive installations or white
papers written by members of our management team, including our CTO, Brian
Campanotti. This coverage generated by our media relations firms is virtually
unmatched by our competitors. Most importantly, the coverage has positioned
Front Porch as the opinion leader in the industry when matters of broadcast
archive management are being discussed in the broadcast trade press. And this is
a key competitive point of differentiation.
So as we look to the quarter and the year ahead, a few last points. Our
rolling six months sales funnel, the tool we use to track all of the potential
opportunities we're competing for, is worth approximately 40 percent more today
than it was at this time last year. The recent NAD show was huge for us. We had
more than 400 visitors through our booth from all over the world. Many new sales
opportunities emerged from the show, and our sales teams are working those
opportunities, which will be added to our sales funnel in the future.
And lastly, we were informed just last month that Front Porch Digital was
awarded a new patent by the US Patent Office. We believe that we are the only
Archive Management provider in the broadcast realm that has patented technology
that allows us to protect our, to protect our intellectual property and we
believe that that is a key competitive differentiator for us.
So in summary we're very pleased with the progress we've made in the first
quarter. The global market for digital broadcast archiving solutions is
increasing and our position as the global leader in this market is
strengthening. So for all these reasons we look forward to the challenges and
opportunities ahead. Tom.
TOM SWEENEY: Thank you Mike. Well as you've heard, the company's performing
well. It's made great strides in integrating companies we acquired last year. We
just closed our latest acquisition NST Incorporated in Chicago and we expect it
to be immediately accretive. The broadcast business continues to grow and we see
continued acceleration in the market adoption of digital archives. Incentra is
now in the desirable position of having incremental sales add disproportionately
to the cash flow of the business.
Our expectations for the second quarter are for revenues to be between 19
and 21 million on increases in managed services and professional services with
increased third-party product sales from our most recent acquisitions. We expect
to see increasing cash flow on an adjusted EBITDA basis for the quarter as well.
That's all for our comments. Thank you for joining the call. We'll now open
it for questions.
OPERATOR: Thank you. At this time I would like to remind everyone if you would
like to ask a question please press star, one, now on your telephone keypad. And
once again that's star, one, to ask a question.
We have our first question coming from Kevin McKenna of Mainline Capital
Management. Please go ahead sir.
KEVIN MCKENNA: Good afternoon. Thank you for taking my call. I guess, the
presentation that you put out is maybe the best I've heard the company, as a
result oriented, the quarter, but it, it seems that no one knows the story. It
seems that it's difficult to get in contact with what the story is, because
there's no one really out there. I got Chris Moore at Wall Street Advisor to
return a phone call then I got Rene to return a phone call to me. If you guys
are going to fund this business going forward you're going to have to raise the
awareness of this stock. What is being done to get the company as a public
entity? I'm glad that you're peers in the industry think that you're the lead
dog in this race, but if no one in Wall Street knows your name, that's not going
to matter.
MICHAEL KNAISCH: So, Kevin what specifically is the question?
KEVIN MCKENNA: I think that there is a lack of understanding or a lack of
marketability of the shares of this company. I don't think any one knows who you
are.
MICHAEL KNAISCH: Okay, well we certainly appreciate the feed-back but the
company has done a number of things over the past year and a half, attempted to
go ahead and build awareness in the institutional community. The biggest issue
that a company like Incentra faces though is, one, that it's on the bulletin
board and two, that the company's market CAP of course, is below the limits of
investment for many funds, so we have focused on the thing that we have the most
control over, which is continuing to operate the business from an operational
perspective and perform there and as we move into the fall, after the summer,
we'll begin a more aggressive campaign to reach out to perspective investors
with funds.
OPERATOR: Thank you. Once again ladies and gentlemen if you do have a question
please press star, one. And as a final reminder it is star, one.
Thank you. Seeing there are no further questions, I'd now like to turn the
floor back to Mr. Rene Caron who will be taking questions via e-mail.
RENE CARON: Thank Denise. We have received a number of questions via e-mail
today Tom, so I'd like to go through those with you. The first question comes
from a private investor. It says: is acquisition still a principal growth
strategy at Incentra, and if so, when do you expect to complete the next one?
TOM SWEENEY: Thanks Rene. The easiest way to answer the question is that we are
going to continue to evaluate potential acquisitions and if we can find
companies that fit the profile that we are looking for, and if we are capable of
arranging both financing as well as creating a transaction that we think works
for the company, then we'll continue to execute on those. But you know, we do as
a regular basis, look at many different types of companies that could be
potential acquisition targets. It's really a question of can we really find the
right one and at the right price. So today we have no formal plans to close
another acquisition in the near term, but that could change as we continue to do
our work.
RENE CARON: Thank you. And somewhat related question, having to do with the
geography that you'd be looking at for the next acquisition in that the company
now has a pretty much solid coverage in the Mid-West and the West, where do you
expect the company would be looking next for it's next acquisition, if and when
it does one?
ROM SWEENEY: Generally we want to complete the construction of a national
footprint as a complete solutions provider. So that means that we do need to
build a presence along the East Coast, the South East as well as in some various
cities in the Mid-West. So we'll continue to look for acquisitions to help us
fill out that foot print throughout North America, but like I said, it's
difficult to know when the right company will come along and where exactly
they're located.
RENE CARON: Okay. The next question is also acquisition related. Since
acquisition is a part of your growth strategy, what lessons have you learned
from the two that you completed last year? Has it changed your approach to due
diligence at all and have you made any adjustments in the profile of the
companies that you're targeting going forward.
TOM SWEENEY: Okay, so let me try and answer this with a couple of different
points that are important. Number one, what we have learned from the companies
we acquired last year is that we can, in fact, deliver on the synergies that we
expect in terms of improving the gross margins on the products, on the services
that those companies sell, on being able to introduce recurring revenue strains
around first call or enhanced first call or managed services. We think it
validates the model that we've been using. We would also tell you that it is
important to be able to match to each company we acquire, specifically the
integration plan for those professionals and that particular customer base.
That's probably one of the items that's most important that we've learned in the
last year.
On a broader answer in terms of due diligence, we feel pretty comfortable
that we manage a fairly thorough and rigorous due diligence process based on our
own people's experience as well as the professional support we get from our
investment bankers and outside counsel, but like always, when you're doing
transactions and merging companies together, there's always room for some
improvements in terms of how we manage that process and how we view the
contract, the representations and the documentation that's a part of that. So we
think there's still room for us to, to improve the process.
RENE CARON: Okay, thank you we now have a couple of questions related to Front
Porch Digital. You had a high rate of transactions in the first quarter. Do you
expect to see similar transaction rates going forward over the next several
quarters?
MICHAEL KNAISCH: Absolutely, we see a very robust sales funnel in the six months
and beyond time frame.
RENE CARON: The next question deals with the US market. Are US broadcasters and
cable companies beginning to increase the rate at which they are installing
Digital Studios?
MICHAEL KNAISCH: Yes, we've seen a pretty dramatic increase in the number and
value of opportunities that we're seeing arise out of the US market. There are
some very large opportunities that have been tendered in RFPs and we're pursuing
those right now.
RENE CARON: Okay and can you give us any indication of what you might expect in
the US market as far as Front Porch Digital deals over the next 12 to 18 months?
MICHAEL KNAISCH: I'm afraid that I cannot tell you the, the value of those at
this point. The main reason is because the timing of these transactions is very
hard to pin down. Generally, you know, these deals have a 12 to 18 month time
frame and we cannot predict when those deals will actually be awarded. So it's,
it's very difficult for me to tell you when they're going to close.
RENE CARON: Okay, thank you and Tom, the last question that we've received that
hasn't already been answered has to do with the balance sheet. What plans going
forward do you have in place to ensure that the company has appropriate
resources to reach break-even?
TOM SWEENEY: Well there's, there's a couple of things that are happening at the
same time. One, we have done a very good job managing our costs for operations
in relation to the revenues of the company and the gross margins it generates,
so we feel very comfortable that the company is positioned correctly from a cost
standpoint and can start to execute our entire cash flow from operations. But in
addition, we would like to add some additional working capital to the balance
sheet and we hope to be able to accomplish that sometime in the next few weeks.
RENE CARON: Okay, that you. That concludes the e-mail questions that we've
received, as I mentioned, that have not already been answered. So at this point
Tom I'd like to turn the call back over to you for any closing remarks that you
might have.
TOM SWEENEY: Great. Thanks Rene, well thank you all for joining us. Obviously
we're happy with the company's performance in the first quarter. As Mr. McKenna
noted, it's worthwhile for us to begin to emphasis the company's performance,
create a broader audience in terms of shareholders or funds that can invest in
the business, and we'll be able to accomplish that as we roll out of the summer
and into the fall. So thank you for joining us, we appreciate your time.
OPERATOR: Thank you ladies and gentlemen. That does conclude today's conference
call. You may now disconnect your lines at this time and have a wonderful day.