UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): May 9, 2017
NCI, INC.
(Exact name of registrant as specified in its charter)
Delaware | 000-51579 | 20-3211574 | ||
(State or other jurisdiction of incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) |
11730 Plaza American Drive, Reston, VA | 20190 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: (703) 707-6900
N/A
(Former Name or Former Address, if Changed Since Last Report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Item 2.02. | Results of Operations and Financial Condition. |
On May 9, 2017, NCI, Inc. (the Company) announced its first quarter 2017 financial and operating results. A copy of the Companys press release is attached hereto as Exhibit 99.1. A copy of the Companys May 9, 2017 earnings call transcript is attached hereto as Exhibit 99.2.
Item 7.01. | Regulation FD Disclosure. |
Item 2.02 is incorporated herein by reference.
Item 9.01. | Financial Statements and Exhibits. |
Exhibit No. |
Description of Exhibit | |
Exhibit 99.1 | Press Release, dated May 9, 2017. | |
Exhibit 99.2 | Earnings Call transcript, dated May 9, 2017. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NCI, Inc. | ||
By: | /s/ Lucas J. Narel | |
Lucas J. Narel | ||
Executive Vice President, Chief Financial Officer, and Treasurer |
Date: May 10, 2017
Exhibit 99.1
11730 Plaza America, Suite 700
Reston, VA 20190
News Release
Investor Contact | Media Contact | |
Lawrence Delaney, Jr. | Joelle Shreves | |
Investor Relations | Vice President, Marketing & Corporate Communications | |
(714) 734-5142 | (703) 707-6904 |
NCI Reports First Quarter 2017 Financial and Operating Results
| First-quarter revenue of $79 million, near the high end of guidance; |
| Adjusted EPS of $0.25 exceeds high end of guidance; and |
| NCI raises guidance for full fiscal year 2017 and issues guidance for second quarter. |
RESTON, VA, May 9, 2017 NCI, Inc. (NASDAQ: NCIT), a leading provider of information technology (IT) and professional services and solutions to U.S. Federal Government agencies, today announced its financial and operating results for the first quarter ended March 31, 2017.
First-quarter 2017 revenue exceeded the midpoint of managements guidance range issued last quarter by approximately $2 million. Adjusted diluted earnings per share (EPS) exceeded the high end of guidance by $0.02.
NCI turned in a solid performance in the first quarter. Were seeing the topline impact of awards in the second half of 2016 as well as additional task order revenue on several of our IDIQ vehicles, said NCIs president and CEO, Paul A. Dillahay. Im especially pleased with margin improvements as a result of the higher contribution of fixed-price contracts to our revenue mix, which we anticipate will lift profitability throughout the remainder of 2017. Therefore, were increasing the midpoint of our revenue guidance range by $10 million and raising the midpoint of our adjusted EPS guidance range by $0.09 to reflect greater expected profitability, primarily from our agile software development revenue, over the remainder of the year.
First-Quarter 2017 Results
For the three months ended March 31, 2017, revenue decreased by 5.9%, or $4.9 million, over the same period a year ago. This decrease is principally due to contracts that ended in 2016 and reductions in staffing and scope of work on certain other contracts. The decrease was partially offset by increased scope and funding on additional contracts and higher revenues from task orders on the expanded CNOSS program as well as revenue derived from contract awards in the second half of 2016.
NCIs PEO Soldier program accounted for 15.9% of revenue, in the first quarter of 2017, up slightly from 15.8% of revenue, in the first quarter of 2016. NCIs CNOSS program accounted for 11.9% of revenue, in the first quarter of 2017, up from 10.1% of revenue in the first quarter of 2016.
Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the first quarter of 2017 (see Table One below) was $7.4 million, or 9.4% of revenue, compared with $7.9 million, or 9.4% of revenue, for the first quarter of 2016. Adjusted EBITDA for the first quarter of 2017 excludes $0.4 million of misappropriation loss and $6.2 million of costs related to the investigation of the previously disclosed embezzlement of funds by the companys former controller. Adjusted EBITDA for the first quarter of 2016 excludes $1.5 million of misappropriation loss related to the embezzlement. Adjusted EBITDA for the first quarter of 2017 decreased compared to the first quarter of 2016 due to higher general and administrative costs on a lower revenue base.
GAAP operating loss for the first quarter of 2017 was $1.0 million, compared with operating income of $4.5 million for the first quarter of 2016. GAAP operating margin for the first quarter of 2017 was -1.3%, compared with 5.4% for the first quarter of 2016. Excluding the impact of the $0.4 million of misappropriation loss and $6.2 million of the investigation-related costs, operating income was $5.6 million, or 7.1% of revenue, for the first quarter of 2017. Excluding the $1.5 million of misappropriation loss, operating income was $6.1 million, or 7.2% of revenue, for the first quarter of 2016. Operating income, as adjusted, decreased primarily as the result of the same factors that affected adjusted EBITDA.
2
GAAP net loss for the first quarter of 2017 was $0.8 million, or $0.06 per diluted share, compared with GAAP net income for the first quarter of 2016 of $2.6 million, or $0.19 per diluted share. After adjustments, (see Table Two below) adjusted net income for the first quarter of 2017 was $3.5 million, or $0.25 per adjusted diluted share, compared with adjusted net income for the first quarter of 2016 of $3.5 million, or $0.25 per diluted share.
Days sales outstanding (DSO) increased one day to 62 days at March 31, 2017, as compared to 61 days at December 31, 2016.
Net cash provided by operating activities was $1.1 million during the three months ended March 31, 2017.
NCI reported total backlog at March 31, 2017, of $590 million, of which $139 million was funded, compared with total backlog at December 31, 2016, of $625 million, of which $139 million was funded. Net bookings for the first quarter were $44 million, equating to 0.6 times revenue. Trailing 12-month bookings were $407 million, equating to 1.3 times revenue.
Managements Outlook
Based on the companys current contract backlog and managements estimate of future tasking and contract awards, NCI is issuing guidance for its second quarter and updating guidance for full fiscal year 2017. The table below represents managements current expectations about future financial performance based on information available at this time:
Second Quarter Fiscal Year 2017 Ending June 30, 2017 |
Fiscal Year Ending December 31, 2017 | |||
Revenue |
$81 million$87 million | $324 million$342 million | ||
Adjusted diluted EPS |
$0.24$0.26 | $0.95$1.05 | ||
Diluted projected share count |
13.8 million | 13.8 million |
Were continuing to implement our strategic turnaround plan. Our efforts are focused on three key areas: people, performance and growth. As for people, we are well into the process of recalibrating our corporate culture to reward our highest-performing team members and giving
3
them the tools they need to perform even better. Regarding performance, we are implementing plans to drive operational excellence into our support functions. This should further enhance contract performance; reduce administrative cost; help improve future margins; and provide business development with a more disciplined methodology for capturing larger and more impactful opportunities, said Dillahay.
Our growth strategy centers on protecting our core business; investing significant resources to expand our footprint with existing strategic customers, including the Department of Homeland Security; selectively extending into new, well-funded customers like the Defense Health Agency; and developing differentiating capabilities in key technologies such as agile software development, advanced data analytics and applied artificial intelligence. We believe that delivering sustained organic growth will yield greater value for all of our key stakeholders, including customers, employees and shareholders.
Conference Call Information
As previously announced, NCI will conduct a conference call today at 5 p.m. EDT to discuss first quarter 2017 results, issue guidance for the second quarter of 2017 and update the outlook for fiscal year 2017.
Analysts and institutional investors may listen to the conference call by dialing (888) 490-2763 (United States/Canada) or (719) 325-2432 (international) with pass code 1510196. The conference call will be provided simultaneously as a webcast through a link on the NCI website (www.nciinc.com).
A replay of the conference call will be available approximately two hours after the conclusion of the call through May 16, 2017, by dialing (844) 512-2921 (United States/Canada) or (412) 317-6671 (international) and entering pass code 1510196.
About NCI, Inc.:
NCI is a leading provider of enterprise solutions and services to U.S. defense, intelligence, health and civilian government agencies. The company has the expertise and proven track record to solve its customers most important and complex mission challenges through technology and
4
innovation. NCIs team of highly skilled professionals focuses on delivering cost-effective solutions and services in the areas of agile development and integration; cybersecurity and information assurance; engineering and logistics; big data and data analytics; IT infrastructure optimization and service management; and health and program integrity. Headquartered in Reston, Virginia, NCI has approximately 2,000 employees operating at more than 100 locations worldwide. For more information, visit www.nciinc.com or email investor@nciinc.com.
5
Forward-Looking Statement: Statements and assumptions made in this press release that do not address historical facts constitute forward-looking statements that NCI believes to be within the definition in the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties, many of which are outside of our control. Words such as may, will, intends, should, expects, plans, projects, anticipates, believes, estimates, predicts, potential, continue, or opportunity, or the negative of these terms or words of similar import are intended to identify forward-looking statements.
Such statements are subject to factors that could cause actual results to differ materially from anticipated results. The factors that could cause actual results to differ materially from those anticipated include, but are not limited to, the following: our dependence on our contracts with federal government agencies, particularly within the U.S. Department of Defense, for substantially all of our revenue; a reduction in the overall U.S. Defense budget, volatility in spending authorizations for defense and Intelligence-related programs by the U.S. Federal Government or a shift in spending to programs in areas where we do not currently provide services; federal government shutdowns (such as that which occurred during the federal governments 1996 and 2014 fiscal years), other delays in the federal government appropriations process, or budgetary cuts resulting from congressional committee recommendations or automatic sequestration under the Budget Control Act of 2011 (as amended by the American Taxpayer Relief Act of 2012 and the Consolidated Appropriations Act of 2014), risk of contract performance or termination; failure to achieve contract awards in connection with recompetes for present business and/or competition for new business; adverse results of federal government audits or other investigations of our government contracts; government contract procurement (such as bid protest, small business set asides, etc.) and termination risks; competitive factors such as pricing pressures and competition to hire and retain employees (particularly those with security clearances); federal government agencies awarding contracts on a technically-acceptable/lowest-cost basis in order to reduce expenditures; failure to successfully identify and integrate future acquired companies or businesses into our operations or to realize any accretive or synergistic effects from such acquisitions or to effectively integrate acquisitions appropriate to the achievement of our strategic plans; economic conditions in the United States, including conditions that result from terrorist activities or war; material changes in laws or regulations applicable to our businesses, particularly legislation affecting (i) government contracts for services, (ii) outsourcing of activities that have been performed by the government, (iii) government contracts containing organizational conflict of interest (OCI) clauses, (iv) delays related to agency-specific funding freezes, (v) competition for task orders under government wide acquisition contracts (GWACs), agency-specific indefinite delivery/indefinite quantity (IDIQ) contracts and/or schedule contracts with the General Services Administration; and (vi) our own ability to achieve the objectives of near-term or long-range business plans, including internal systems failures. These and other risk factors are more fully discussed in the section titled Risk Factors in NCIs Form 10-K filed with the Securities and Exchange Commission (SEC), and from time to time, in other filings with the SEC, such as our Forms 8-K and Forms 10-Q.
Any projections of revenue, margins, expenses, earnings, tax provisions, cash flows, benefit obligations, or share repurchases, and any statements of the plans, strategies and objectives of management for future operations, the execution of cost reduction programs, and restructuring and integration plans are also subject to factors that could cause actual results to differ materially from anticipated results.
The forward-looking statements included in this news release are only made as of the date of this news release, and NCI undertakes no obligation to publicly update any of the forward-looking statements made herein, whether as a result of new information, subsequent events or circumstances, or changes in expectations or otherwise.
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Non-GAAP Financial Measures
This press release contains non-GAAP financial measures, including adjusted EBITDA and adjusted EPS. NCI defines adjusted EBITDA to exclude costs associated with embezzled funds by its former controller, and costs related to the misappropriation loss. NCI defines adjusted net income as GAAP net income excluding the impact of embezzled funds by its former controller, costs related to the misappropriation loss, and the interest expense related to the resulting tax position, including the tax effect thereon. NCI defines adjusted diluted earnings per share (EPS) as adjusted net income divided by the diluted share count for the applicable period, excluding the tax impact of the items above. The company believes this information is useful in allowing management and investors to better assess NCIs comparable financial results. Non-GAAP financial measures should not be considered in isolation from, or as a substitute for, financial information presented in compliance with GAAP, and investors should carefully evaluate the companys financial results calculated in accordance with GAAP and reconciliations to those financial statements. In addition, non-GAAP financial measures as reported by the company may not be comparable to similarly titled amounts reported by other companies. As appropriate, the most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the companys financial results prepared in accordance with GAAP are included in this news release.
7
NCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands, except per share data)
Three months ended March 31, |
||||||||
2017 | 2016 | |||||||
Revenue |
$ | 78,751 | $ | 83,655 | ||||
Operating expenses: |
||||||||
Cost of revenue |
64,696 | 69,693 | ||||||
General and administrative expenses |
6,690 | 6,107 | ||||||
Depreciation and amortization |
1,788 | 1,792 | ||||||
Misappropriation loss and related expenses |
6,617 | 1,541 | ||||||
|
|
|
|
|||||
Total operating expenses |
79,791 | 79,133 | ||||||
|
|
|
|
|||||
Operating (loss) income |
(1,040 | ) | 4,522 | |||||
Interest expense, net |
208 | 190 | ||||||
|
|
|
|
|||||
(Loss) income before income taxes |
(1,248 | ) | 4,332 | |||||
(Benefit) provision for income taxes |
(441 | ) | 1,743 | |||||
|
|
|
|
|||||
Net (loss) income |
$ | (807 | ) | $ | 2,589 | |||
|
|
|
|
|||||
(Loss) earnings per common and common equivalent share: |
||||||||
Basic: |
||||||||
Weighted average shares outstanding |
13,277 | 13,153 | ||||||
Net (loss) income per share |
$ | (0.06 | ) | $ | 0.20 | |||
|
|
|
|
|||||
Diluted: |
||||||||
Weighted average shares outstanding |
13,277 | 13,867 | ||||||
Net (loss) income per share |
$ | (0.06 | ) | $ | 0.19 | |||
|
|
|
|
|||||
Cash dividend declared and paid per share |
$ | | $ | 0.15 | ||||
|
|
|
|
8
NCI, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except par values)
As of March 31, 2017 |
As of December 31, 2016 |
|||||||
(unaudited) | (audited) | |||||||
Assets: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,851 | $ | 1,014 | ||||
Accounts receivable, net |
53,857 | 51,112 | ||||||
Prepaid expenses and other current assets |
5,915 | 4,062 | ||||||
|
|
|
|
|||||
Total current assets |
61,623 | 56,188 | ||||||
Property and equipment, net |
5,591 | 6,332 | ||||||
Other assets |
1,520 | 1,526 | ||||||
Deferred tax assets, net |
41,833 | 41,912 | ||||||
Intangible assets, net |
14,678 | 15,586 | ||||||
Goodwill |
33,878 | 33,878 | ||||||
|
|
|
|
|||||
Total assets |
$ | 159,123 | $ | 155,422 | ||||
|
|
|
|
|||||
Liabilities and stockholders equity: |
||||||||
Current liabilities: |
||||||||
Current portion of long-term debt |
$ | 2,000 | $ | | ||||
Accounts payable |
10,934 | 9,995 | ||||||
Accrued salaries and benefits |
17,748 | 17,665 | ||||||
Deferred revenue |
4,689 | 4,571 | ||||||
Other accrued expenses |
9,468 | 6,306 | ||||||
|
|
|
|
|||||
Total current liabilities |
44,839 | 38,537 | ||||||
|
|
|
|
|||||
Other long-term liabilities |
2,555 | 2,545 | ||||||
|
|
|
|
|||||
Total liabilities |
47,394 | 41,082 | ||||||
|
|
|
|
|||||
Stockholders equity: |
||||||||
Class A common stock, $0.019 par value37,500 shares authorized; 9,944 shares issued and 9,027 shares outstanding as of March 31, 2017, and 10,002 shares issued and 9,085 shares outstanding as of December 31, 2016 |
189 | 189 | ||||||
Class B common stock, $0.019 par value12,500 shares authorized; 4,500 shares issued and outstanding as of March 31, 2017 and December 31, 2016 |
86 | 86 | ||||||
Additional paid-in capital |
75,082 | 76,886 | ||||||
Treasury stock at cost917 shares of Class A common stock as of March 31, 2017 and December 31, 2016 |
(8,331 | ) | (8,331 | ) | ||||
Retained earnings |
44,703 | 45,510 | ||||||
|
|
|
|
|||||
Total stockholders equity |
111,729 | 114,340 | ||||||
|
|
|
|
|||||
Total liabilities and stockholders equity |
$ | 159,123 | $ | 155,422 | ||||
|
|
|
|
9
NCI, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: |
||||||||
Net (loss) income |
$ | (807 | ) | $ | 2,589 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,788 | 1,792 | ||||||
Share-based compensation |
361 | 329 | ||||||
Deferred income taxes |
80 | 67 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable, net |
(2,745 | ) | (8,892 | ) | ||||
Prepaid expenses and other assets |
(1,847 | ) | (1,233 | ) | ||||
Accounts payable |
939 | (1,738 | ) | |||||
Accrued expenses and other liabilities |
3,372 | (1,072 | ) | |||||
|
|
|
|
|||||
Net cash provided by (used in) operating activities |
1,141 | (8,158 | ) | |||||
|
|
|
|
|||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(140 | ) | (339 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(140 | ) | (339 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities: |
||||||||
Borrowings under credit facility |
23,194 | 47,233 | ||||||
Repayments on credit facility |
(21,194 | ) | (36,733 | ) | ||||
Proceeds from exercise of stock options |
127 | 172 | ||||||
Purchase of equity awards |
(2,291 | ) | | |||||
Dividends paid |
| (2,020 | ) | |||||
|
|
|
|
|||||
Net cash (used in) provided by financing activities |
(164 | ) | 8,652 | |||||
|
|
|
|
|||||
Net change in cash and cash equivalents |
837 | 155 | ||||||
Cash and cash equivalents, beginning of period |
1,014 | 233 | ||||||
|
|
|
|
|||||
Cash and cash equivalents, end of period |
$ | 1,851 | $ | 388 | ||||
|
|
|
|
|||||
Supplemental disclosure of cash flow information: |
||||||||
Cash paid during the period for: |
||||||||
Interest |
$ | 190 | $ | 104 | ||||
|
|
|
|
|||||
Income taxes |
$ | | $ | 327 | ||||
|
|
|
|
10
TABLE ONE
NCI, INC.
RECONCILIATION OF NON-GAAP OPERATING MEASURES
(UNAUDITED)
(in thousands, except per share data)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
GAAP operating (loss) income |
$ | (1,040 | ) | $ | 4,522 | |||
Depreciation and amortization |
1,788 | 1,792 | ||||||
|
|
|
|
|||||
EBITDA |
748 | 6,314 | ||||||
Misappropriation loss and related expenses |
6,617 | 1,541 | ||||||
|
|
|
|
|||||
Adjusted EBITDA |
7,365 | 7,855 | ||||||
Adjusted EBITDA margin |
9.4 | % | 9.4 | % |
11
TABLE TWO
NCI, INC.
RECONCILIATION OF NON-GAAP OPERATING MEASURES
(UNAUDITED)
(in thousands, except per share data)
Three months ended March 31, | ||||||||
2017 | 2016 | |||||||
GAAP net (loss) income |
$ | (807 | ) | $ | 2,589 | |||
Uncertain tax position interest |
69 | | ||||||
Misappropriation loss and related expenses |
6,617 | 1,541 | ||||||
Tax impact of adjustments |
(2,363 | ) | (620 | ) | ||||
|
|
|
|
|||||
Adjusted net income |
3,516 | 3,510 | ||||||
GAAP diluted (loss) earnings per share (EPS) |
(0.06 | ) | 0.19 | |||||
Diluted adjustments per common share |
0.31 | 0.06 | ||||||
Adjusted diluted EPS |
0.25 | 0.25 | ||||||
Basic shares outstanding |
13,277 | 13,153 | ||||||
Dilutive effect of stock options and unvested restricted stock |
544 | 614 | ||||||
Diluted shares outstanding |
13,821 | 13,867 |
# # #
12
Exhibit 99.2
THOMSON REUTERS STREETEVENTS
EDITED TRANSCRIPT
NCIT - Q1 2017 NCI Inc Earnings Call
EVENT DATE/TIME: MAY 09, 2017 / 9:00PM GMT
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
CORPORATE PARTICIPANTS
Bridget Medeiros NCI, Inc. - Corporate SVP of Business Development
Joelle Shreves NCI, Inc. - VP of Marketing & Corporate Communications
Lucas J. Narel NCI, Inc. - CFO, EVP and Treasurer
Paul A. Dillahay NCI, Inc. - CEO, President and Director
C O N F E R E N C E C A L L P A R T I C I P A N T S
Lu Guo Cowen and Company, LLC, Research Division - VP
Mark Conrad Jordan NOBLE Capital Markets, Inc., Research Division - Senior Research Analyst of Government Services and Defense Technology
Richard Mottishaw Eskelsen Wells Fargo Securities, LLC, Research Division - Associate Analyst
Tobey OBrien Sommer SunTrust Robinson Humphrey, Inc., Research Division - MD
PRESENTATION
Operator
Good day, ladies and gentlemen. Welcome to the NCI Incorporated First Quarter 2017 Earnings Conference Call. My name is Sharlon, and I will be your conference operator today. This call is recorded. I would now like to turn the presentation over to your host for todays call, Joelle Shreves, Vice President of Marketing and Corporate Communications for NCI. Please go ahead.
Joelle Shreves - NCI, Inc. - VP of Marketing & Corporate Communications
Good evening, and thank you for participating in NCIs conference call today. By now, you should have a copy of the press release we issued a short time ago. If not, it is available on our website at www.nciinc.com. With us are our President and CEO, Paul Dillahay; and our Chief Financial Officer, Lucas Narel, both of whom will deliver prepared remarks. Our Senior Vice President of Business Development, Bridget Medeiros; and Investor Relations Advisor, Larry Delaney are here as well to participate on the Q&A portion of the call.
Before we begin our discussion, it is important we remind you that on this call, we will make statements that do not address historical facts and are thus forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding future strategic initiatives and operational outlook and financial guidance for 2017, as well as statements relating to the recent embezzlement of company funds by our former controller.
These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties, including those identified in our earnings press release under the caption, Forward-Looking Statements. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in NCIs Form 10-K and Form 10-Qs filed with the Securities and Exchange Commission. We undertake no obligation to update any of the forward-looking statements made on this call.
Todays call will also include a discussion of non-GAAP financial measures as that term is defined
In regulation G. Non-GAAP financial measures should not be considered in isolation from or as a substitute for financial information presented in compliance with GAAP. Accordingly, at the end of todays press earnings press release, we have provided a reconciliation of these non-GAAP financial measures to the companys financial results prepared in accordance with GAAP.
I will turn the call over now to Paul Dillahay.
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2
MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Thanks, Joelle, and good evening. Im excited to share the progress we have made since we last spoke with you.
First quarter revenue of $79 million was at the high end of guidance we issued last quarter. Also first quarter sequential revenue growth was approximately 2%, the first time in 5 quarters that weve reported sequential topline growth.
A number of factors led to this increase including increased taskings on our 2 largest programs, PEO Soldier and CNOSS; exceptional execution on the startups of our FADS agile software development contract with the Department of Homeland Security; and contract extensions on a number of our smaller DoD and fed civil programs.
Profitability metrics on an adjusted basis continued to be strong both sequentially and year-over-year. We exceeded the top end of our first quarter 2017 adjusted EPS guidance by $0.02, largely as a result of improved mix in operational performance on our fixed-price contracts. We anticipate these trends will continue during the remainder of 2017, which gives us confidence in raising the midpoint of our annual revenue guidance by $10 million and the midpoint of our adjusted EPS guidance by $0.09.
Offsetting our profitability on a GAAP basis were higher-than-expected misappropriation costs, including investigative and related accounting and legal fees. We will continue to update you on the progress in this area.
As part of implementing the strategic turnaround we discussed on our last call, we have increased our investment in business development to include making key hires as we strengthen our pipeline and capture capability. Consequently, G&A expenses were higher year-over-year. I will provide you more insight into the progress we are making, but first Lucas will take you through the financials.
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
Okay. Thanks, Paul. Ill provide more detail on our first quarter performance on a year-over-year basis as well as outline NCIs increased guidance for 2017. Well also issue our guidance for the second quarter. But before that I want to update everyone on NCIs activities related to the embezzlement issue.
As Paul noted, our misappropriation loss and related expense line item was higher-than-expected. We had estimated embezzlement related costs would be approximately $5 million for the first quarter. That number was actually slightly more than $6 million.
We havent yet recognized an estimated value of the potential recovery due to the limited amount of information available at this time. And we expect we will incur additional costs during the year related to the embezzlement, including legal, accounting, audit and other consulting fees.
I wish we could provide an estimate for both of these numbers, recovery and costs, but its simply too early for us to do so. The good news is that NCI continues to post strong operational performance, which was clearly evident in both revenue and non-GAAP adjusted earnings metrics.
Moving on to our results, first quarter revenue of $78.8 million was just shy of the high end of our previously issued guidance. As we expected, revenue was down by 6% over the same period a year ago, primarily due to contracts that ended in 2016 and reductions in staffing and scope of work on certain other contracts.
The decrease is partially offset by increased scope and funding on additional contracts and higher revenues from new task orders on the expanded CNOSS program. We also benefited from revenue derived from contract awards in the second half of 2016.
NCIs PEO Soldier program accounted for approximately 16% of revenue in the first quarter of 2017, down slightly from the first quarter of last year. Our CNOSS program accounted for around 12% of revenue, up from 10% in the first quarter of 2016.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
For the first quarter, contracts where NCI is the prime contractor accounted for 91% of revenue, down 3 percentage points year-over-year. And DoD and Intel contracts made up 61% of revenue for the first quarter, while Federal Civilian contracts comprised 39%.
Fixed-price contracts accounted for 29% of revenue, up 5 percentage points from the first quarter of 2016. As Paul said, this increase helped drive higher profitability in the quarter and was the result of fixed-price contracts awarded last year.
Time-and-material contracts were 18% of revenue, up 1 percentage point year-over-year. And cost-plus contracts accounted for 53% of revenue, down 6 percentage points compared with last year.
Adjusted EBITDA for the first quarter of 2017 was $7.4 million or 9.4% of revenue compared with $7.9 million or 9.4% of revenue for the first quarter of last year. Adjusted EBITDA for the first quarter of 2017 excludes $400,000 of misappropriation loss and $6.2 million of embezzlement related costs. Adjusted EBITDA for the first quarter of 2016 excludes $1.5 million in misappropriation loss related to the embezzlement.
Adjusted EBITDA for the first quarter of 2017 decreased compared to the first quarter of last year due to higher G&A costs on a lower revenue base.
Adjusted operating income was $5.7 million or 7.2% of revenue for the first quarter of 2017 compared with $6.1 million or 7.2% of revenue for the first quarter of last year. Operating income as adjusted decreased primarily as a result of the same factors that affected adjusted EBITDA.
Adjusted diluted net income for the first quarter of 2017 was $3.5 million or $0.25 per diluted share. This compares with $3.5 million or $0.25 per diluted share last year.
Days sales outstanding or DSO increased 1 day to 62 days at March 31, 2017, as compared to 61 days at December 31, 2016.
Cash flow from operations for the first quarter of 2017 was $1.1 million, and capital expenditures were about $100,000, resulting in free cash flow of $1 million.
Total backlog at March 31, 2017, was $590 million, of which $139 million was funded compared with total backlog at December 31, 2016, of $625 million, of which $139 million was funded.
Net bookings for the first quarter were $44 million, equating to 0.6x revenue. Trailing 12-month bookings were $407 million, equating to 1.3x revenue.
And now moving on to guidance. As I mentioned in todays press release, we expect revenue for the second quarter of 2017 to be between $81 million and $87 million. Our second quarter guidance reflects assumed sequential organic growth of approximately 7%, raising our fiscal year 2017 revenue range to be between $324 million and $342 million with a new midpoint of $333 million, an increase of $10 million.
Our new annual revenue midpoint assumes approximately 92% coming from existing contracts, 5% coming from contract re-competes and 3% coming from new business awards. I should add that the new annual revenue midpoint projects more than 3% organic growth.
As for our earnings guidance, we are providing a range of adjusted EPS that excludes the following items: One-time legal accounting consulting fees and other related expenses associated with the embezzlement, any offsetting recovery of embezzled assets and any related insurance recovery. After excluding these items, we expect adjusted EPS for the second quarter of 2017 to be in the range of $0.24 to $0.26. Were raising our annual expected adjusted EPS range to $0.95 to $1.05 with a new midpoint of $1, which increases the midpoint by $0.09. The annual adjusted EPS guidance also excludes embezzled funds early in 2017.
We expect interest expense for the second quarter to be approximately $150,000 and $600,000 for the full year. Depreciation and amortization is expected to be $1.7 million for the second quarter and $7 million for the full year. Stock comp expense is expected to be approximately $300,000 in the second quarter and about $1.2 million for the full year. Were forecasting an annual affective income tax rate of approximately 40%.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Ill now provide a bit more detail on our 2017 guidance. Our adjusted EPS midpoint is $1, which implies an adjusted EBITDA margin of 9.2%. We expect our portion of annual revenue from fixed-price contracts to continue to represent approximately 30% of total revenue for the remainder of the year. And as usual, well provides updates as events and circumstances warrant. And with that, Ill turn the call back over to Paul.
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Thanks, Lucas. As was noted, were raising both annual revenue and EPS guidance significantly on this quarters call. The primary driver to the improved guidance is the clarity we have gained on both the FADS contract as well as multiple contract extensions. To remind you, the U.S. Citizenship and Immigration Services FADS contract award, which was announced in December of last year is a fixed-price multiple award task quarter with a $43 million ceiling and an 18-month period of performance.
In March of this year, we rapidly responded to the governments request to double the number of teams we were initially contracted to deliver on this effort. By mid-April, we had staffed all 10 teams, these teams are using dev ops, agile and lean processes to deliver application and systems development projects across the agency. This will result in innovative solutions that increase the speed to market of new capabilities, while reducing both cost and risks for USCIS.
Our performance on the FADS contract is illustrative of the progress were making in implementing the strategic turnaround plan we told you about last quarter. We said we were focused on 3 key areas, people performance and pipeline. Ill talk a bit about our pipeline focus, how it has our focus has broadened into a larger growth agenda.
But let me speak first for a moment about our people. Since NCI is a services business, its critical for us to invest in our people, providing highly skilled, motivated and passionate employees and leaders, committed to helping our customers achieve mission success.
In first quarter, we implemented several initiatives to enhance employee engagement, muscle build our leadership team and establish a culture of meritocracy, accountability and urgency.
As for performance, we continue to implement plans to drive operational excellence throughout our company. A few examples include, the strengthening of our recruiting team and processes. Our cycle time to fill open requisitions is improving and as shown by our FADS performance, we can now quickly recruit and retain quality talent. Second, implementing a new operating rhythm to ensure contract transparency and oversight to enhance contract performance. Third, continuing to target efficiencies in our operating cost and muscle build our organization to achieve improved adjusted operating margins and competitiveness. And finally continuing to add rigor and discipline to our BD process, improving the quality and win rates of our proposals and making NCI an agile, responsive and a highly competitive industry leader.
Looking at our pipeline I want to reiterate how it fits within our overall growth strategy, which starts with protecting the core by growing our base and winning our re-competes. Next, we will be extending our footprint with existing NCI customers and selectively expanding into new well-funded customers. Additionally, we will be developing differentiated capabilities in key technologies such as agile software development, advanced data analytics and applied artificial intelligence. And finally, concentrating our BD resources on fewer, but larger higher-value opportunities.
To update you on key pipeline metrics, our total 3-year pipeline increased from $4 billion to $4.3 billion and our qualified portion has grown from $2 billion to $2.4 billion and now consists of a greater weighting of higher probability opportunities that extend our capabilities with current customers. We currently have bids submitted and awaiting award of approximately $500 million and we expect to submit an additional $1.4 billion of bids during the remainder of 2017 with approximately 50% of those delivered in the next 3 months.
I want to emphasize that 2017 is a rebuilding year for NCI. Were making progress on key elements of our strategic turnaround, and we believe that delivering sustained organic growth will yield greater value for all of our key stakeholders, including the customers, employees and shareholders.
And with that, operator, well open the call to questions.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
QUESTIONS AND ANSWERS
Operator
(Operator Instructions) Well have our first question from Lucy Guo from Cowen and Company.
Lu Guo - Cowen and Company, LLC, Research Division - VP
Good performance in the quarter. Had a question, so it seems like the tax rate came in below your expectation of 39%, now 40% in Q1. Can you just address whether that was the case and what youre expecting for the remainder of the year?
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
Yes. Sure, Lucy, this is Lucas. The reason for the tax rate, the effective tax rate being where it is really relates to the amount of pretax booked income we realized this quarter. Obviously, related to the cost we incurred to support the investigation of the embezzlement, we ended up with a lower number than anticipated. In addition, there were several discrete items that were recorded in the first quarter that affected that tax rate. So those combined pushed that rate down for the quarter. Ultimately for the year, we do expect it to increase slightly from what we had said last quarter. Obviously, the rate for this quarter of 35% benefited the adjusted EPS that we reported by about $0.01.
Lu Guo - Cowen and Company, LLC, Research Division - VP
Right. And then your Q2 expectation on sales, it looks like its a step up of $5 million sequentially at the midpoint. Is that all due to the ramp-up on the DHS agile development contract or is there anything else in there?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Lucy, this is Paul. Yes, its a combination of things, but most notably it is the increase in the agile development program FADS.
Lu Guo - Cowen and Company, LLC, Research Division - VP
And how do you see that play out in the second half? It looks like, given your Q2 guidance, the balance between first half and second half is relatively even. But how does that contract and revenue ramp between Q2 and Q3?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes. Right now were contracted for the 10 teams and so our projections consider it to be flat quarter-over-quarter second to third into fourth quarter.
Lu Guo - Cowen and Company, LLC, Research Division - VP
Got it. And then your adjusted EBITDA margin guide went up 40 basis points because partly because of the fixed-price mix. Is there anything else thats helping you? You sort of listed a few headwinds last quarter, any of those is giving you relief?
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
Yes, Lucy. This is Lucas. Really, its related both to the contract performance, obviously, the improved fixed-price contracts mix we have, but as well as just the additional revenue, thats helping overall just bring up the EBITDA margins.
Lu Guo - Cowen and Company, LLC, Research Division - VP
Good to know. And then lastly, before I move on, just wanted to see you highlighted a few focus areas in terms of customers and technology. Any of those could potentially be something that you can acquire or that youre looking to identify as something maybe, perhaps near-term M&A targets?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, Lucy, Paul here. The technologies that I walked through, the agile, the data analytics and the IA, are all things that were partnering with, with the industry and some leading software providers or leading technology providers. I think as we mentioned on the call last quarter, M&A is certainly part of my mandate from a growth perspective, but right now were focused on what were here to talk about is the organic growth, and then obviously, we continue to evaluate M&A opportunities as they come up.
Operator
Well go next to Ed Caso, Wells Fargo.
Richard Mottishaw Eskelsen - Wells Fargo Securities, LLC, Research Division - Associate Analyst
Its Rick Eskelsen on for Ed. The first question was, just what are you seeing from your clients on decision making? I guess weve heard some mixed data points throughout the industry on whether theres been a slowdown or sluggishness on decision-making. It definitely didnt sound like that was the case on the Homeland Security contract, but maybe more broadly, what are you seeing?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, its Paul Dillahay. And were familiar with some of the comments that our industry peers have said. Quite honestly, we are not seeing a material impact to our projections based on the new administration or the ability to get awards issued. The reality is our first half of the year is significantly impacted from a revenue perspective by the lack of bids that went in, in the second half of 2016. I think we bid 12 jobs. And thats the bigger impact on 2017 than any government slowdown or delays in getting things awarded.
Richard Mottishaw Eskelsen - Wells Fargo Securities, LLC, Research Division - Associate Analyst
That is helpful. Just in terms of talking about bidding and the bids you expect to submit, can you give us a sense for what the bids you have submitted, what percentages of those are new and what about that percentage for the ones that youre expecting to submit?
Bridget Medeiros - NCI, Inc. - Corporate SVP of Business Development
This is Bridget. Of the about $500 million that we have under evaluation, Id say half are either re-competes or extensions of our current work, and the other half is new, new business for us.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Richard Mottishaw Eskelsen - Wells Fargo Securities, LLC, Research Division - Associate Analyst
Okay. And then just the last one, you talked about the talent strategy and listed some of the technology areas. And I know you did mention that youre partnering. But whats the availability of finding that talent? I would think its in pretty high demand, particularly in areas like agile. So how are you able to find and retain and then track the talent? Maybe if you could go into a little more detail that would be helpful.
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, sure, Rick. This is Paul Dillahay again. Quite honestly, we were very aggressive when we were asked to ramp-up that program. We were very aggressive in our recruiting efforts. We also partnered with industry to help bring that team together. And more longer term, when you think about retention, I think its about the culture of the business that will help retain the people. And I think the initiatives we have to enhance the culture and make us more attractive to the younger generation is going to pay dividends over time.
Operator
Well go next to Mark Jordan, NOBLE Capital Markets.
Mark Conrad Jordan - NOBLE Capital Markets, Inc., Research Division - Senior Research Analyst of Government Services and Defense Technology
First question, you noted that in the quarter you benefited from increased tasking orders received. Could you talk about the duration of those tasks that youve seen, and what kind of visibility you have on those IDIQ vehicles for additional tasks through the year?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, Mark. Paul here. The comments that I had made were specific to both PEO Soldier and CNOSS. And I think those are obviously 2 of our premier programs that we have in our portfolio, and the sustainability of that work looks like itll hold through 2017. So we feel pretty confident in the growth that were seeing on those programs will hold through the year. Just to make sure were clear though, it is not competitive task orders that were winning in the market on those 2 programs. This is specific to the mission of that customer and experiencing some incremental funding and work to be done and were supporting that.
Mark Conrad Jordan - NOBLE Capital Markets, Inc., Research Division - Senior Research Analyst of Government Services and Defense Technology
Okay. Do you have any guidance that you give with regards to the companys free cash flow generating profile for this year relative to adjusted net income?
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
Yes, Mark, this is Lucas. Unfortunately, Im not in a position to do that, obviously, based on the expenses were incurring related to the investigation. It becomes a little convoluted to try to do an adjusted cash flow for you. So obviously, we worked through the first quarter and did generate positive cash flow from operations, which were pleased with, and were focusing on keeping the expenses limited going forward. But as I said, we do expect to incur some additional costs as we go through. And hopefully, well be able to get some recovery as well as we work through the year.
Mark Conrad Jordan - NOBLE Capital Markets, Inc., Research Division - Senior Research Analyst of Government Services and Defense Technology
Okay. Do you have any sense as to the magnitude of assets that were seized for liquidation?
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
We dont have any value that we can present to you. Obviously, this is still being worked out with the former controller as well as a lot of the civil investigation is ongoing. So absent any clear decision there, we prefer not to comment on any values that have been identified by him or by the investigation team.
Mark Conrad Jordan - NOBLE Capital Markets, Inc., Research Division - Senior Research Analyst of Government Services and Defense Technology
Final question for me is that as Paul has come in, hes paid an emphasis on enhancing the BD functions in the firm. How long do you think it will take to see a payback from that increased emphasis?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, Mark. I think theres some short-term things that well see. But I think to really be able to assess the improvements that were making, the team that were bringing in, the muscle building that were doing, I think its a 12- to 18-month cycle. That probably started 2 quarters ago. So were 6 months into it and probably have another 6 to 12 months before we begin to see real material sustainable benefit from it.
Operator
(Operator Instructions) Well go next to Tobey Sommer, SunTrust.
Tobey OBrien Sommer - SunTrust Robinson Humphrey, Inc., Research Division - MD
First, I was wondering if you could comment on the investments youre making in improving employee engagement, et cetera. How has voluntary turnover trended in was this kind of a proactive move or was it reactive to some changes you saw?
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Yes, Tobey. So when I joined the business almost or 6 months ago, our turnover was not materially different than what we believe industry is. That being said, its a material cost to the company and I thought that there were things that we could do to outperform the industry. Theres not enough data to guide to an improved turnover number yet. But I will tell you, I watch it almost daily and I can see where were at, and I feel good about the changes. But this is a long-term cultural change that were trying to make and its going to take some time. But I do see the indications from a turnover perspective that things are looking up.
Tobey OBrien Sommer - SunTrust Robinson Humphrey, Inc., Research Division - MD
Okay. DSO picked up a day in the quarter, could you give us a little color as to why that was and what where you think it may trend for the year?
Lucas J. Narel - NCI, Inc. - CFO, EVP and Treasurer
Yes, Tobey, I dont really have a comment for the change in the day. I mean likely it was just it was based on the timing of when a receipt came in towards the end of the quarter. We have been trending in the low 60s, I dont anticipate any situation at this point that would alter that expectation. So Im continuing to model out and expect our DSOs to be between 60 and 65 days.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
Tobey OBrien Sommer - SunTrust Robinson Humphrey, Inc., Research Division - MD
When we look at your pipeline, qualified pipeline and backlog, how did the values that you describe, which youve had limited influence on in the last 6 months really, how did they shape up compared to where you think they should be for a company of your size to grow as youd like to?
Bridget Medeiros - NCI, Inc. - Corporate SVP of Business Development
Tobey, its Bridget. I think what we are seeing is that we were moving from a more tactical pipeline to a more strategic pipeline. And thats going to take another, to your point, another 6 months or so to see the real benefit of. What Id like to see is that our 18 and 19 pipelines have more volume and qualification in them than they do today, but we are trending in the right direction. Just really taking our strategy and applying it to our pipeline and really focusing on where we can have the most highest probability of win. The actual volume for this year, as we said is going to be about $1.7 billion. Were aiming to do about $1.7 billion to $1.9 billion next year with about half of the jobs we did this year. So this year were looking to do 70 to 80 jobs, next year were looking to do 40 to 50 with that same volume of pipeline. And 19 will continue on that trend. So were trending in the right direction, but we still have some work to do.
Tobey OBrien Sommer - SunTrust Robinson Humphrey, Inc., Research Division - MD
Okay. In terms of the investment in business development talent, does that represent talent focused at a new set of customers, to kind of amplify the customer set available to the company? Or is it more a function of upgrading talent among existing customer sets?
Bridget Medeiros - NCI, Inc. - Corporate SVP of Business Development
Still, it really is focused on the existing customer set and capabilities, but increasing the size and complexity of the job. So when we are muscle building on the BD side, were looking for resources, people that have actually known to be able to win those larger more complex jobs and strengthening on our pricing and our strategies around those higher complex jobs. So it really is extending to our current customers with higher volume, higher profitable jobs.
Operator
This concludes the question-and-answer portion of the call. I will turn the call over now to Paul Dillahay.
Paul A. Dillahay - NCI, Inc. - CEO, President and Director
Thanks, operator. Well be speaking with you again in July to discuss our second quarter results. Well also be on the road meeting with investors in June. Weve spoken to a number of our top and potential investors about our plans and progress. In the meantime, if you have any questions, please direct them to Larry Delaney, and well be sure to get back to you promptly. Thanks again for joining us on todays call.
Operator
That concludes todays conference. Thank you for your participation. You may now disconnect.
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MAY 09, 2017 / 9:00PM, NCIT - Q1 2017 NCI Inc Earnings Call
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