Third Quarter Earnings Updates: WLDN and RMGN

Willdan

Willdan has put together a number of good quarters in a row and did not disappoint in the third quarter.

Earnings were 28c per share and revenue was $58 million. Revenue was at a similar level to the second quarter but up 75% over the prior year.  Though part of the revenue increase was due to acquisitions, organic growth played a big part as well. Organic growth is up 30% year to date.

Willdan’s strategy has been to expand by acquiring small engineering services firms with complementary skills that operate in areas that expand Willdan’s reach.  These acquisitions have been Genesys Engineering,  Abucus Resource Management and 360 Energy.  The expectation is that the more complete services package will allow them to bid on contracts they previously would not have been able to.

The strategy has worked.  In the third quarter Genesys generated $16.2 million of revenue, up from $8 million the previous year.

Willdan also provided a robust update of projects in the early stages.  They named the following new programs that are ramping in the third and fourth quarter of this year:

• 6 year $90 million LCR program for SGD&E announced in March is expected to ramp in 2017
• 2.5 year, $41 million multi-family program for ConEd, announced in June, continues to ramp, will make a larger contribution next year
• 3 year, $35 million contract, small/medium business direct install and industrial program for PacifiCorp in Utah, will contribute a little in revenue this year, ramp in 2017
• 2 year $10 million clean energy program in New Jersey will contribute a little this year and ramp 2017
• NYC housing program is beginning to contribute a “modest amount”, and is “expected to increase considerably next year” – they only have notice to proceed on small amount of the program right now, expect to know more about the timeline by year end

All the major ongoing programs are expected to remain in place in 2017.  With only a few small projects rolling off, 2017 will almost assuredly be a growth year.  The company put a “minimum public target” for growth of 10% for next year.

Also mentioned on the call was the improving growth landscape in California.  Right now in California 20% of energy efficiency services are outsourced by utilities.  The total ultities budget is around $1.8 billion.  The California Public Utilities Commission (CPUC) has mandated across the board that outsourced volumes needs to exceed 60%, and they have used language that they would like to see it  “as high as 100%”.  This will “dramatically increase the market as new procurements are initiated”.  Basically it is a 3-fold to 5-fold increase in contracted services.  Willdan will be well positioned to take some of this business.

Finally the Tom Brisbin, the CEO, made comments about how he would like to expand the company into more industrial projects, specifically oil and gas and refining.  Industrial end users are larger users of electricity.  The amount of savings per user will be higher and so these will be larger contracts.  Given past history, an acquisition in this area would not surprise me.

I was tempted to add to my position in the stock, but its already quite large.

RMG Networks

RMG Networks had what I would consider pretty decent results, and the color on the conference call was very positive.  Yet the stock has floundered flat to down.

In my opinion investors are being too impatient with the story.  Everyone is looking for a big top line number.  When it doesn’t come they are ignoring what is happening under the surface.

Everything is moving in the right direction: pipeline, partners, pilots, and products.  One of these quarters, maybe even the next one, the momentum will break through to the surface with a big revenue number, $12-$13 million, and it will be off to the races.

The company continues to make inroads into the supply chain vertical.  On the third quarter conference call they said that they had 40 supply chain prospects that were in various stages of negotiation and that the 3 previously mentioned pilots had “been extended” to investigate functionality roll-out in 2017, Each of these pilots can be $1 million of revenue or more.

They also put aside some time to give us more detail on their 3 recently signed partners:

• Manhattan Associates – Manhattan manages supply chains, sells supply chain products, has 1,300 products, performed account planning in Q3, training to Manhattan sales team, expect initial sales in early 2017
• Regan Communications – Regan is a leading corporate communications consulting company – are specifically educating and promoting Inview.  The relationship will materially expand reach into the internal communication market.  The partnership kicked off on Sept 29^th at Global Employee Communication Conference at Microsoft.  Robert Michelson, Chief Executive Officer was MC for part of event and delivered a keynote presentation.  The presentation demonstrated Inview.  RMG has received 30 new leads on Inview from summit
• Airbus DS Communications – Airbus is a 911 call leader, 60% of 911 calls are received by Airbus. A new RMG-Airbus solution puts real time data displays into the Airbus system.  RMG closed their first two Airbus customers in Q3 for $100,000 in revenues.  There are a total of 2,800 Airbus customers.

They believe these channel partners can generate $5-$10 million of revenue annually once they are trained and ramped.

Michelson also reiterated that large deals in the pipeline have “increased dramatically” over the past couple of quarters.

Looking at geographical strength, the United States and Europe have been strong but the Middle East has not.  Michelson said with regard to the Middle East that (I’m paraphrasing here):

[We have] orders in the millions but need to see the down payments, the customer has signed the contract… we need things to clear up with the economies there because price of oil has such a disproportionate impact on economy, it gives more beta there.

If oil can return and stay at the $50 level we could see some upside there.  On the other hand at current prices, the Middle East may continue to be a drag on results.

Finally, some color was given on the recently filed S-3.   Michelson was clear that they believed the stock was under priced and any move to raise funds would only be done because growth led to the need for additional working capital.  He said that they would “protect stockholders” and keep them from being diluted, leading me to think it may be a rights offering.   Michelson also said the raise would not be for anywhere near the $10 million shelf that was filed.

I didn’t add to my position but continue to sit tightly.