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1Q00 Analyst Conference Call
Thursday, April 27, 2000 --FINAL--
10:00 AM CDT
FRB OPERATOR INTRODUCES PETER DAMERIS AS CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER AND READS SAFE HARBOR STATEMENT.
INTRO COMMENTS (PTD)
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Good morning, ladies and gentlemen. Thank you for joining us today for the
Metamor conference call on our first quarter results.
With me is Mr. Edward Pierce--Our Chief Financial Officer.
In just a few minutes, Ed will review our financial results. Then, we are going
to provide an overview of our first quarter operational highlights and an update
on our proposed merger with PSINet.
To begin, we are very pleased with our first quarter results. On a consolidated
basis, we demonstrated significant year-over-year growth as well as growth over
the fourth quarter of 1999. These results reflect the repositioning of the
company, significant investments in sales and marketing, and increasingly strong
demand for our services. The market for our core services continues to improve
each month, which is translating into a growing backlog of business.
ED PIERCE WILL NOW PROVIDE A REVIEW OF THE RESULTS.
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REVIEW OF 1ST QUARTER OPERATING RESULTS (ELP'S REMARKS)
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1. Thanks Peter. For the current quarter, the company reported revenues of
$158.4 million, an increase of 30 percent over the first quarter of 1999
and a 7 percent increase over the preceding quarter.
2. This quarter marks our first sequential quarterly increase in revenues
since the second quarter of 1999. On a business unit basis, this reflected
a 26 percent sequential growth rate for Xpedior, up from 8 percent for the
fourth quarter of 1999, and a return to revenue growth in the latter part
of the quarter for our other business units, which we are referring to
herein as the "Core Business".
3. For the current quarter, the Core Business generated revenues of $107.4
million, or 68 percent of consolidated revenues. We were able to achieve
our revenue target for the first quarter, despite a more difficult than
expected operating environment as customers were slow to lift their system
lockdowns and to focus on new project work. Revenues for the quarter were
also negatively affected by foreign currency translation losses of $1.3
million.
4. Revenues in the Core Business through February were below our expectations
and rebounded in March as a result of improving customer demand and
traction from our sales and marketing initiatives. Sales activity is
improving dramatically and we believe that this momentum will build over
the course of the year. We therefore believe we will meet our full year
revenue growth targets and that our ability to exceed those targets should
be enhanced as we penetrate PSINet's over 90,000 middle-market customers.
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5. For the current quarter, Xpedior reported revenues of $51.0 million, or
32 percent of consolidated revenues. This reflected a sequential quarterly
growth rate of 26 percent, which was more than three times the sequential
growth rate for the preceding quarter. Demand for Xpedior's services
remains at extremely high levels and supports the prospects for continued
high growth.
6. The consolidated gross margin was down from the fourth quarter due
primarily to lower utilization in the Core Business related to Y2K runoff
and system lockdowns and to a change from a 40 to a 35-hour workweek in
France. The effects of the lower utilization and the workweek reduction
were partially offset by margin expansion in Xpedior of over 100 basis
points.
7. We are beginning to see improvement in the utilization rates for the Core
Business. We believe that we will return to normal utilization rates of 70
to 75 percent by the third quarter.
8. For the quarter, the company generated a consolidated loss of $5.7 million,
or $0.16 per share. Adjusting for the after-tax effects of goodwill
amortization and non-cash stock compensation, the loss per share was $0.04.
This loss principally was the result of: (i) heavy spending in Xpedior on
sales, marketing and recruiting to accommodate its high rate of growth
(SG&A of Xpedior was up approximately $7.0 million over the fourth quarter
of 1999), (ii) approximately $3.0 million in investments by the Core
Business to enhance its sales and marketing capabilities in order to drive
higher revenue growth, (iii) the effects of lower utilization in the Core
Business, (iv) non-recurring legal expenses of $2.5 million related to
prosecution of claims against former officers and principals of an acquired
business, (v) a $1.4 million non-cash stock compensation charge of Xpedior,
and (vi) a $1.3 million foreign currency translation loss related to our
European operations.
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9. Excluding non-recurring expenses, we believe that the Core Business should
achieve its earnings target for the full year. Our ability to exceed our
earnings targets will be enhanced as a result of the proposed PSINet
combination. Based on current sales trends and an evaluation of the sales
pipeline, Xpedior is expecting to become EBITDA positive in the third
quarter, a quarter ahead of schedule, and, on a consolidated basis, we
expect to return to profitability in that quarter. We also expect Xpedior
to report higher than expected EBITDA and profitability for the full year.
10. DSO's for the quarter were above 100 days, slightly up from year end
levels. We are beginning to see improvements in DSO's as a result of
process improvements that accelerate the timeliness and accuracy of
customer billings and the hiring of additional personnel to focus on
improving collections. Our target is to report lower DSO's by the end of
the next quarter and achieve a DSO level of 70 to 80 days by the end of the
year.
11. As of the end of the quarter, we had cash and cash equivalents of $31
million and borrowings of $10 million under our senior credit facility. We
are in the process of securing a $50 million credit line for Xpedior that
we expect to have in place by the end of May. We believe that our credit
lines and improving EBITDA will be more than sufficient to meet the cash
requirements of growing the business.
PETER.
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OUTLOOK AND OPERATIONAL REVIEW (PTD)
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Thanks, Ed.
With many of our clients lifting their Year 2000 lockdowns in January, we saw
sales activity rise sequentially each month as the quarter passed. This trend
resulted in sequential and year-over-year growth rates that are in line with and
in many instances exceed our peers' performance.
The sales activity continues to increase in all of our business units. In the
first quarter, we built a strong sales pipeline with increasingly larger sized
opportunities. We expect to see continued growth in our pipeline in the second
quarter and further activity in more significant deals. As for our sales force,
we are seeing the results of our recent recruiting and training initiatives. We
added more than 20 seasoned sales and marketing professionals to our team in the
first quarter. These efforts combined with the improving operating environment
contributed to our strengthened sales pipeline.
We are supporting rapid acceleration and sequential growth in several new
practice areas. Late in the quarter, we expanded our Oracle capabilities with
the acquisition of NextLinx Services, an Oracle solutions provider headquartered
in the Washington, DC area. We continue to build our Oracle, JD Edwards, Great
Plains, i2 and Ariba practices while evaluating other strategic acquisition
opportunities in the eBusiness, supply chain management and customer
relationship management arenas.
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We also completed or extended several key alliances in the first quarter and
continue to forge relationships with formidable partners. Metamor has aligned
with such industry leaders as Silknet, HAHT, iManage, CASEwise and Great Plains,
allowing us the opportunities to expand our capabilities in leading-edge
technologies to better serve our expanding client base. We are also exploring
opportunities to further expand our relationships with best-of-breed enterprise
application integration development companies to support our vertical market
strategy.
I'd like to take a few minutes to highlight several examples of recent wins and
successes that will give you a sense for the greatest areas of demand we are
seeing in the Core Business. Our expertise and the high quality of services we
consistently deliver have contributed to our ability to triumph in highly
competitive situations and secure highly sought-after projects.
o Our desire and ability to forge long-term strategic relationships with our
clients is evidenced by the 27-month, 9.6 million-dollar contract extension
with transportation giant CSX that we were recently awarded to provide
maintenance, enhancement and system support for 57 mission-critical
systems. This contract extends the services that Metamor has provided to
CSX since 1995.
o We are also working to grow the scope of these long-term relationships. A
good example of Metamor moving towards that goal is the contract we signed
with a national financial services company guaranteeing two years of Web
and legacy services in a deal worth $12 million. We are engaged in the
maintenance and support of the client's core servicing systems and are also
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involved in its global UK Division and strategic ventures, including the
support of new systems and eBusiness development.
o We continue to aggressively target new business in this highly competitive
market. Metamor unseated one of the Big 5 providers to win a Chicago-based
law firm's 3-year, multi-million dollar contract for total IT management
services.
o The need to improve operating efficiencies has fueled the demand for both
customer relationship management and supply chain management solutions -
areas where Metamor is investing heavily.
- An example in the CRM arena is a recently begun project to re-engineer
the existing order management systems for an international food
manufacturer.
- In the supply chain arena, we were recently awarded a contract to
enhance the supply chain systems for the nation's largest, independent
direct marketer of business products and office supplies.
- We are also having success selling SCM solutions in tandem with ERP
package implementations. An example is a supply chain management system
we are currently installing in connection with an SAP R/3 implementation
for a global food company that is the largest producer of tortillas in
the world.
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o As I mentioned earlier, we are also expanding in the JD Edwards arena. A
recent win has Metamor providing JD Edwards services for one of the largest
global suppliers of technologically advanced aerospace and industrial
products.
o Metamor continues to have success leveraging industry expertise to
implement IT solutions that are specific to each of our clients' needs. One
of our targeted industry verticals is the federal, state and local
government arena. As in each of our targeted industries, we are looking for
opportunities to leverage the latest eBusiness innovations in new ways for
government agencies. Recent successes include:
- the development of the first Web-based child welfare system in the
country for the Florida Department of Children; and
- a mobile computing system for Fairfax County in Virginia where Metamor
is developing a handheld eBusiness application that has an Internet
component to allow the county's citizens to access their building permit
status, and make appointments for inspections, via the Web.
o We continue to have success selling our full suite of enterprise solutions.
Recent wins include:
- the implementation of a Web-enabled SAP solution for an eCommerce
distribution business where we are also providing the end user training
for the client;
- two client engagements to provide end user training and documentation,
one for the world's largest provider of products and services to the
petroleum and energy industries, and the other for the second largest
computer company in the world - both multi-million dollar projects.
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o Another area in the Enterprise group where we are seeing good activity is
in SAP 4.6 upgrades. As previously announced, we recently completed the
nation's first successful upgrade for our client Harman Music.
o Lastly, our relationship with GE Capital continues to move forward at a
rapid pace and with great success. We are experiencing significant
increases in related GE engagements, with more than 4 million dollars of
business closed in March alone. We are seeing similar new business
opportunities within the second quarter. New Metamor projects at GE include
a legacy Web-enablement project; an Oracle implementation engagement; an
SAP maintenance opportunity; and the extension of the Web-enablement of an
internal HR system.
Turning now to other recent news:
As you know, Metamor recently entered into a merger agreement with PSINet, a
powerhouse in the Internet and eCommerce solutions marketplace. We believe that
the proposed strategic merger with PSINet will allow Metamor to reach more
clients globally, offer more comprehensive IT solutions, broaden our sales
channels, open new market areas and rapidly build out our Application Service
Provider model.
As part of PSINet, Metamor would have the ability to leverage PSINet's global
network of hosting centers and worldwide infrastructure to deliver the broadest
array of services to all of the top business markets in the world. Together,
PSINet and Metamor would be a full service provider with the ability to offer a
uniquely
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bundled array of access, hosting, business-to-business and eCommerce solutions,
communications, IT consulting, outsourcing, and system integration services.
Completion of the proposed merger would also provide incredible new
cross-selling opportunities for the combined service offerings. PSINet currently
has more than 90,000 enterprise clients, of which only about 5,000 are
completely "Web-centric." This presents a vast new area of opportunity for
Metamor to sell and deliver our services.
Since the announcement of the proposed merger with PSINet, we have received
numerous client calls and incoming requests for proposals and additional
information about the combined service offerings. Metamor and PSINet are jointly
pursuing a significant number of cross-selling opportunities, leveraging the
powerful strengths of our combined solutions and services. Currently, we are
pursuing network and application outsourcing and hosting opportunities with the
US Coast Guard, GE, Penske Leasing and many others. We are also in the early
stages of bidding on a large portion of a 40 million-dollar contract for a major
computer manufacturer to provide application outsourcing and hosting services.
Also on the horizon is a promising state government network and application
hosting award that is a 20 to 25 million-dollar opportunity.
These cross-selling opportunities help demonstrate the power of the proposed
merger with PSINet. The client demand in the marketplace for these outsourcing
and hosting services supports our goal of being the best full service
Application Service Provider in the industry, and the merger complements our
internal hosting and ASP strategy. We have made significant progress in further
developing our model and offering these services to our clients. For example, we
recently
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announced the application hosting and management project for The Honeybaked Ham
Company to streamline its ERP operations. With the extended capabilities the
proposed merger with PSINet would afford, we plan to aggressively expand our ASP
and hosting service offerings.
We strongly believe that this transaction presents an excellent strategic fit
for Metamor. It will serve as a powerful catalyst to further drive our
leadership position in the IT solutions industry. The merger will produce
tremendous opportunities for both companies to leverage technical and industry
expertise, client relationships and employee talent.
It is important to note that this merger will not alter or diminish the
importance and validity of Metamor's strategic direction. In fact, the proposed
merger will allow us to move more quickly in the execution of our long-term
strategy and accelerate our plans for expansion through organic growth,
strategic alliances and acquisitions.
PSINet's product set, infrastructure, geographic footprint and middle market
focus support the three critical elements of our business strategy:
o First - Focusing our sales efforts on Selected Industry Verticals. We
currently target the Telecommunications, Government, Financial Services,
Manufacturing and Transportation industries. PSINet has significant
exposure to many of the areas, and where PSINet does not have much
penetration, we are working to bring them into our engagements.
o Second - Offering those Horizontal Capabilities that are in high demand
with our clients. We will continue to build our core competencies in
eBusiness,
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ERP, CRM, SCM, EAI, custom application development, knowledge management
and application outsourcing through smart acquisitions, organic growth and
strategic alliances. In addition, we will further leverage PSINet's product
set to expand our hosting and ASP capabilities.
o and Third - Targeting the Middle Market. This segment is experiencing rapid
growth in IT spending and has high demand for eEnabled end-to-end
solutions. PSINet will offer Metamor expanded geographic reach and sales
opportunities with links to PSINet's expansive list of middle market ISP
customers. Our combined IT service offerings will create a new breed of
end-to-end delivery capabilities that will provide a complete eBusiness
solution for middle market clients.
In summary, this is an exciting time for Metamor as we execute upon our strategy
for long term growth and prepare for the proposed merger with PSINet. Having
successfully completed our strategic repositioning initiatives, we are now
solely focused on executing against our business plan and look forward to
greater success in what is proving to be a much improved operating environment
in 2000.
I know that many of you may have questions concerning our pending merger with
PSINet. Although the proxy materials and registration statement relating to the
merger have been filed with the SEC, they have not yet been finalized. As a
result, I unfortunately will not be addressing all of your questions about the
merger today, but I am looking forward to that opportunity once the proxy
materials have been mailed. I can say, however, that we are continuing to
actively pursue the transaction's closing, and I still believe in the strategic
benefits that this transaction can bring to Metamor.
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At this time, I'll open the call up to your questions.
[Q&A]
FINAL REMARKS AFTER Q&A (PTD)
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Thank you again for joining us for our first quarter call. We are committed to
continuing to grow this business to be the premier full service provider in the
industry. We believe our strategic direction and proposed merger with PSINet
will afford us greater opportunities and wins. We appreciate your time and
support this morning. Thank you.