ModusLink Global Solutions, Inc. (MLNK)
F3Q09 Earnings Call
June 9, 2009 5:00 pm ET
Joseph C. Lawler - Chairman of the Board, President, Chief Executive Officer, Director
Steven G. Crane - Chief Financial Officer
Ryan Gaines - Springhouse
Larry Smith - Private Investor
Mark Breuer - Private Investor
Allan Young - Analyst
Tom Price - Halogen
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Steven G. Crane
Thank you, Lamont. Good afternoon, everyone and thank you for joining us for ModusLink Global Solutions fiscal 2009 third quarter conference call. I am Steve Crane, CFO and I am joined today by Joe Lawler, Chairman, President and CEO. In just a few moments, Joe will share his thoughts on the company’s financial performance and the market environment over the past quarter and provide an update on our strategic initiatives. After Joe’s comments, I will review in more detail our fiscal 2009 third quarter results which we released earlier today.
Before we start, I want to remind you that this call is being broadcast as a live webcast from our website at www.moduslink.com.
Please also note that the information we are about to discuss includes forward-looking statements for purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995. Such statements involve risks and uncertainties. The company’s actual results could differ materially from those discussed herein. Factors that could contribute to such differences include, but are not limited to, those items noted and included in the company’s SEC filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q. The forward-looking information that is provided by the company in this call represents the company’s outlook as of today and we do not undertake any obligation to update forward-looking statements made by us. Subsequent events and developments may cause the company’s outlook to change. During this call, we will be referring to non-GAAP measures. These non-GAAP measures are not prepared in accordance with generally accepted accounting principles. A reconciliation of non-GAAP financial measures to the most directly comparable GAAP measure can be found in our earnings release issued earlier today, a copy of which is posted in the investors section of our website.
I would now like to turn this call over to Joe Lawler. After our formal remarks, we will be happy to take your questions. Joe.
Joseph C. Lawler
Thank you, Steve and good afternoon. There are several key points that I would like to cover during today’s call. First, we continue to be in the midst of the worst economic environment we have experienced. As a result, we continue to see lower unit volumes moving through the supply chain compared with this time last year.
Second, despite this market environment, we remain confident in our business model and value proposition. Revenue growth from new engagements was strong in the quarter, supported by a robust pipeline of new opportunities as our clients have an ongoing need to realize savings and efficiencies in their supply chains.
Third, the actions initiated in the fall to right-size the company had a positive impact on our financial results this quarter. Primarily due to our cost cutting initiatives, we saw improvement in gross margin percentage and a reduction in selling, general, and administrative costs, compared with the third quarter last year. In fact, over the past three quarters, we’ve made good progress improving gross margin from 9.6% in Q1 to 12.4% in Q2 and now 14% in Q3.
In addition, selling, general and administrative costs were $31 million in Q1, $26 million in Q2, and now $22 million in Q3. We are pleased with this progress and these actions have contributed to improving operating income.
Fourth, we maintained a strong balance sheet despite the weak economic conditions and cash increased by $32 million to $167 million at the end of Q3. I want to cover each of these four points in some detail.
As our investors know, ModusLink and its clients are operating in unprecedented market conditions with softness in the economy and a pull-back in consumer spending being felt globally. When demand for our client’s products slows, it in turn results in lower volumes moving through the supply chain, which translates to lower production and assembly volumes as our clients work to minimize inventory risk. This dynamic is resulting in lower base volume from existing clients and therefore lower revenue in the third quarter when compared to the same quarter last year.
When the economy eventually recovers, we expect to see increases in our base business volumes. Despite these lower volumes, we continued to see significant revenue growth from new engagements in the quarter, which increased approximately $16 million, or 61% over last year’s Q3.
Revenue from new engagements was 18% of total revenue compared with 11% of total revenue in the third quarter of last year. As I mentioned earlier, we view revenue from new engagements as an important indicator of the strength of our value proposition and the effectiveness of our sales and marketing efforts. Our pipeline of new opportunities continues to be robust as we move into our fiscal fourth quarter. We expect that new business revenue will continue to be strong in the fourth quarter; however, we expect it to be below the unusually high new business revenue reported in the fourth quarter of the prior year.