ModusLink Global Solutions, Inc. (MLNK)
Q3 2010 Earnings Call
June 8, 2010 5:00 PM ET
Joseph Lawler – Chairman, President and CEO
Steven Crane – Chief Financial Officer
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Hello. And welcome to the ModusLink Global Solutions Third Quarter 2010 Operating Results Conference Call. At the company’s request, this conference is being recorded. Please note that all lines will be in a listen-only mode until the question-and-answer portion of today’s conference call. (Operator Instructions)
Now, I will like to turn the call over to Mr. Joseph Lawler, Chairman, President and CEO; and to Mr. Steven Crane, Chief Financial Officer. Please go ahead, Mr. Crane.
Thank you, Tracy. Good afternoon, everyone. And thank you for joining us for ModusLink Global Solutions fiscal 2010 third quarter conference call. I’m Steve Crane, CFO and I’m joined today by Joe Lawler, Chairman, President and CEO.
In just a few moments, Joe will share his thoughts and 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’ll review in more detail our fiscal 2010 third quarter results, which we released earlier today. Before we start, I want to remind you this call is being broadcast as a live webcast from our website at www.moduslink.com.
Please also note that the information we’re 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’ll 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 measure 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 Investor section of our website.
I’d now like to turn this call over to Joe Lawler. After our formal remarks, we’ll be happy to take your questions. Joe?
Thanks, Steve, and good afternoon. Overall, the third quarter was a difficult one for us. As we anticipated, financial results for the third quarter reflect lower revenue from new engagements compared with the third quarter of fiscal 2009, which was a record year for revenues from new business.
However, revenues for the third quarter were below our expectations as we continued to see the effects from the time it’s taking to start up new programs and bring them to the point they’re generating significant revenue. We also experienced lower than anticipated unit volumes from certain programs, caution from clients about building inventory levels in the supply chain and the effects of some client’s cost reduction programs.
That said, we are encouraged that over the past couple of quarters, we’ve seen signs of stabilization in our business. Revenues from base business in the third quarter were about flat, compared with the third quarter last year, which is much better than the year-over-year declines we experienced in five of the past six quarters.
And despite lower revenue in the quarter, we continue to generate positive free cash flow from operations with our reduced cost structure and ongoing cost management focus we have a strong cash generating business and have positioned ourselves to perform well in the future. Before handing the call back over to Steve for detailed financial review, there are a few additional observations regarding our operating results for the third quarter.
Starting with revenues, I’ll comment on both base business, which are programs we’ve been executing for 12 months or more and new business which are new programs we’ve been executing for less than 12 months.
Revenues from base business in the third quarter were approximately flat compared to last year and we saw higher unit volumes in some of our engagements which is encouraging. However, many of the products we handled are sold through retail stores and we continue to see clients being very cautious and waiting until there’s a clear demand signal before adding inventories to the supply chain.
We see this dynamic supported by data issued by the U.S. Department of Commerce, which indicates that the ratio of inventories to sales in the retail sector has trended lower, which is an indication that retail supply chains are leaner relative to sales at this stage of the economic recovery.
We’re very encouraged by the reported increase in consumer spending in the U.S. and we’re seeing the positive effects in some of our client’s engagements. An offset to that positive has been our client’s focus on less inventory and lower cost, which has negative near-term effects on our revenue.
For example, pricing pressure has been more significant than we’ve seen in recent quarters, especially surrounding the program renewal process. This requires us to remain focused on pricing our services at levels that meet our criteria for profitability while enabling clients to meet their cost objectives.