NewMarket Technology, Inc. (NMKT)

Q3 2008 Earnings Call

November 21, 2008 12:00 pm ET

Executives

Philip M. Verges - Chairman, Chief Executive Officer

Presentation

Welcome to the third quarter financial review webcast for NewMarket Technology, Inc. My name is Philip Verges and I am the Chief Executive Officer of NewMarket Technology.

Please take a look on your screen at the Safe Harbor Statement, and I encourage all of you, in addition to the information that you hear today, to go out and do more research on the company. In particular you should look at the public filings and disclosures that are available for NewMarket Technology at www.sec.gov.

In addition to discussing the Q3 2008 financials today, I am going to provide an industry update. I think, particularly in the prevailing economic environment today it is important for us to not just look at the company, but look at the framework of the market that we participate in, both the market where we are publicly traded, as well as the market where we are doing our business; where we are selling our services and what that looks like.

So we will review that. We will review the overall private investment and public equity market; the over-the-counter market, where we are listed; the prevailing regulatory environment and some of the things that are going on there; what NewMarket’s participation is in all of those things; and then, of course, we will review the Q3 financials, which many of you are probably already aware of but we will take a couple of different slices and looks at the numbers to be able to get a better picture of where we are.

Then we have some ongoing initiatives that we want to talk about, in regards to mergers and acquisitions and sales and stock buybacks. And we should also take a look at what the coming quarter and year looks like. Again, particularly in light of the prevailing environment, I think it is important that we communicate as frequently and as thoroughly as possible.

Why do I talk about the PIPE environment, the private investment in public equity environment? I think it is important to keep in mind that the primary reason corporations, small businesses, emerging markets, large businesses for that matter, list publicly is so that they can get access to capital; capital to help with existing operations, to make those operations more efficient, and in the instance of small or earlier-stage companies, they are looking for capital usually for growth. That is certainly the case with NewMarket Technology.

The private investment in public equity market is the primary industry, is the primary structure, for capital availability to small issuers today. So as you, as investors, are considering NewMarket, or any other small issuer for that matter, I think it is important for you to pay attention to the PIPE market and learn as much about it as you can.

I would compare the PIPE market to the pre-2001, 2002, pre-IPO venture market. Companies at that time were seeking capital from venture capitalists and they were doing it prior to an IPO and then listing. And then when that fell apart, reverse mergers and hedge fund-driven PIPE investments replaced that access to early-stage companies.

The PIPE market has a lot of bad reputation that is associated with it; much of that is well deserved. There have been a number of improvements in the PIPE market and there is still plenty of room for more improvement. It is definitely a still-evolving and growing market. It is under $100.0 billion in total market today, which in the financial services industry is a relatively small market.

People are probably becoming more aware with the magnitude of financial markets in the financial crisis as it becomes front-page news on a regular basis. For instance, the over-the-counter financial derivatives market is approximately $600.0 trillion, so this is a young industry, still evolving.

Last week I took time in my efforts to try and keep an eye on this market and learn about it, to go to the PIPE conference held in New York City, conducted by DealFlow Media. I put DealFlow Media’s web address here [www.dealflowmedia.com]. I think it is probably the best source of information, both education as well as data on the PIPE industry.

And I have captured some highlights here. I think for depending on how much you would like to invest in it, I think for about $400 you can probably buy all the slides off the DealFlow Media site that were used at the presentation. And there is some excellent data that is available. I will just highlight some of the data here.

As you might imagine, the transaction activity is down in 2008. The number of PIPE investments is approximately 1,000 through September, compared to 2,000 for the total year. Obviously we are looking at just a partial year compared to the total year but I don’t anticipate that we’re going to see a dramatic change, that the market has come almost to a halt in new investments.

So a dramatic reduction in transaction activity. However, something that is very interesting is that the number of dollars that have been invested in 2008 is substantially increased from 2007. In 2007 there were approximately $70.0 billion in total that were invested through PIPE structures. In 2008, so far this year, through September, the total is $89.5 billion.

Now let me break that down a little bit. How is it possibly growing? And I have some subsequent slides here, in addition to the breakdown, that you will find very interesting. As the PIPE market is maturing, you are starting to see PIPE investments used more, and more frequently at large, well-established brand-name-recognized operations and those transactions conducted by large, well-established brand-name brokers.

So, the PIPEs report, the DealFlow Media data, is now starting to break the data on transactions and the number of dollars into two categories. Those two categories are core PIPEs and mega PIPEs. Small companies, and where PIPEs originated, are considered the core PIPE market. The core PIPE market last year was $20.0 billion, so of the $70.0 billion, the core PIPE market, where this all started, was $20.0 billion.

In 2005, the core PIPE market was almost exclusively the entire PIPE market, at about $16.0 billion. So since 2005 you have seen growth in these mega PIPEs, over $100.0 million per PIPE.

And in 2008 you have seen dramatic increases in mega PIPEs. One substantial PIPE investment, that you may not even realize is a PIPE investment, but from the media and front-page news today, you are probably well aware of the investment; Berkshire Hathaway, led by Warren Buffet, did a PIPE investment into Goldman Sachs. So a number of PIPE transactions that are categorized as mega transactions is what is growing that space.

Now, when we look at the space where NewMarket participates, we look at the over-the-counter market, the smaller issuers on NASDAQ or AMEX that are seeking capital through the PIPE environment, that has actually shrunk in 2008.

So in 2007 it was approximately $20.0 billion in the core market and in 2008 it was $12.0 billion. Again, that is year-to-date but, again, we do not anticipate that to grow dramatically. I would not anticipate that to grow dramatically through the end of the year.

So the number of dollars available to early-stage companies is getting smaller in the prevailing economic environment and I cannot tell, nor do I think many economists are taking a guess at, how long this reduction of the availability of capital will continue.

So, again, looking at some of these numbers, 95% of the transactions only represent 22% of the dollars. That’s because of these mega transactions.

Banks and financial institutions have accounted for the majority of these investments, so as we are looking at bailouts of financial institutions, not only are they going to the federal government, they’re going to the PIPE market.

Outside of banks and financial institutions, a great deal of money is going to energy, mining, healthcare, and software. In fact, those account for the majority of transactions. That’s not the majority of dollars, it’s the majority of transactions.

Sovereign wealth funds, interestingly enough, are accounting for most of the dollars that are being invested in PIPE investments, while hedge funds are doing the majority of transactions.

The slide coming up now is very, very interesting and it is important to all of us that invest in these small issuer companies. Look at some of the investors that make up the top-ten list of dollars that have been invested: The Government of Singapore, Berkshire Hathaway, Mitsubishi, several state-organized investment authorities, Fidelity.

It is important to notice, as the PIPE industry evolves, the caliber and quality of improvement in the participants. While we are all concerned about some of the challenges with terms that have amounted to death spirals, a term that some of you have probably heard to characterize some of the predatory terms that have been in PIPE investments in the past, some of the behind-the-scenes shorting against PIPE investments that have gone on, as higher-caliber participants come into this market, we can be optimistic about the involvement of those participants improving the overall terms and processing and functioning of PIPE investments.

So I think that the caliber of this list here, of the top-ten investors, is good news for our industry, that hopefully we will continue to see ongoing improvements in the structure, terms, and execution of PIPE investments.

Similarly, the brokers that are participating in this are improving. We have heard many of the broker/dealer names of PIPE investors that have been in this space for a long time and many of those names have raised the hair on the back of some people who are familiar with the PIPE market, raised the hair on the back of the neck of people that are familiar with this market, but look at this list and some of the participants that are starting to be involved in this space now: Goldman Sachs, who also received a PIPE, investment; Credit Suisse; and JP Morgan Chase. Again, I think this is good news.

Let me shift gears now, out of the PIPE market, and just look at the over-the-counter market. You can go grab these numbers on the Over-the-Counter Bulletin Board website but notably, as we look at the market, as we look at NewMarket and consider it in this overall framework, wow! this is just amazing.

This is not rational, this is an indication of overall fear in the market; people and investors just not knowing what to do. Share volume is down 56% when you compare October 2007 to October 2008. The number of dollars that are being traded and the purchase and sales of shares is down 80%. 80%! That is an almost incredible number.

The transactions volume, the number of trades, is down 62%. So we are seeing liquidity, a term that we see on the front page of newspapers on a regular basis, really drying up. It is drying up not only in the big markets, but it is drying up in the over-the-counter markets as well.

SEC and FINRA, a couple of points to make here, and in subsequent presentations and webcasts in the next coming weeks I will talk more about this.

Yesterday I was in Washington, D.C., and I participated in the 27^th Annual Forum on Small Business Capital Formation. Notably, I can’t say for sure in the primary session but I can say for sure when we broke out into the small group sessions, that NewMarket Technology was the only issuer present. Most of the participants, and perhaps all of the participants though I didn’t take a survey in the main section, were lawyers and accountants. And when we went into the small business issuer session after lunch, NewMarket was the only issuer there.

Very, very positive environment. I was delightfully surprised by the receptivity of SEC staff to suggestions that were made by an issuer. And I will tell you that as investors and as issuers, you have a voice and the voice can be heard. I think that the voice just isn’t being spoken; there is not enough participation. And I will work next year to encourage investors, as well as other small business managers, to go to this forum.

Two of the things that I brought up in the session that will be included in recommendations to the SEC that formally come out of the small business forum have to do with Sarbannes-Oxley regulatory oversight and of short selling.

There was a great deal of discussion on both. Short selling is a big topic of conversation. It is finally, after years, getting more into the press and one of the specific areas of conversation on short selling had to do with a great deal of litigation today that is going on regarding SEC action that has been taken against hedge funds that have pre-sold stock that they have not yet received.

So in other words, they have a letter of intent to do a PIPE transaction into a company and are short selling prior to the transaction actually being conducted. The litigation today is being considered under Section 5-Insider Trading. I actually suggested in the session that it is a de facto IPO, that PIPE investors that are participating in this type of short selling prior to the transaction actually being done, are in fact selling shares as if it were an IPO. Only they are not really providing funds as an underwriter, but they are selling the shares to retail investors unbeknownst to the investors that there are going to be new shares and then actually taking that money, never providing any investment, but just taking retail investors funds and putting them into the company.

At that litigation there have been rulings that have deemed the pre-shorting of these transactions as being legal. Now, those are being appealed and litigation is probably going to go on for some time, but while that goes on, the conversation in the forum on small business turned to what can be done in the meantime.

And I think a meaningful suggestion that came up in the conversation, that will be made as a recommendation, is that short positions be disclosed. That as you, as investors, come to make a consideration of an investment in a company, you have got the insight into how many shares are short. That information is not available today. There are some estimates that are sometimes made available for some issues, but the suggestion that came out of the meeting yesterday was that the absolute numbers should be disclosed on a daily basis.

In fact, the conversation, as we talked a little bit about Sarbannes-Oxley, was that most of the feedback we get from shareholders has less to do with our fundamentals and has more to do with the price of stock and what the impacts are on the price of stock and that there is less correlation, not only with NewMarket but with other issuers as well, between what the fundamental financial performance of a company is and what the price of the stock is.

So, while it is good under Sarbannes-Oxley to have audited financials and oversight on those audited financials, are those audited financials, particularly for early-stage companies, really giving the complete picture necessary for investors to make purchase or sale decisions, and that more than additional regulation on disclosing financials, additional disclosure of short positions would be more beneficial to investors than additional disclosures on financial information.

So, the SEC is very receptive to suggestions. They are very sensitive to the prevailing environment and one of the most encouraging things with the opening comments made by Chairman Cox at the meeting, and he very specifically pointed to small businesses having been the key to every recessionary recovery in the United States. Ever, in all time. It’s been small business that has led the country out of recessions. And he talked much about some of the improvements that need to be made to help small businesses in capital formation.

The discussion was not only about publicly traded companies but it was also about the commercial banking availability of capital to small businesses.

FINRA notably has passed a very important new rule, as of November 11, 2008, regarding limit orders. When you are trading your stock, if you trade and designate your trade as a limit order, the market maker is not allowed to make any related trades prior to your transaction.

Let me give a little bit of insight into one of the practices that this new order is trying to prevent. When you buy and sell stock, you are not actually buying and selling the stock from another shareholder or someone who wants to be a shareholder; you are buying and selling it from a market maker and then market makers subsequently buy and sell the stock.

So market makers can see your order and if there is a difference between the bid and the ask, there is an opportunity for the market maker to not only make their fee on the transaction of moving the stock back and forth, but to actually try and do a trade between the bid and the ask, knowing in advance what your price is.

So this limits the ability of market makers to make excessive profits from pre-trading of the stock of any over-the-counter listed company, which they might be able to do because they have information of what everyone is willing to buy or sell their stock at.

So the SEC and FINRA are both sensitive to, and aware of, issues with small issuers, independent of the prevailing economic conditions, but even more sensitive and trying to accelerate actions to improve the overall environment for small issuers because of the prevailing environment.

Let’s move on and talk about our financials here. Third quarter was a great quarter; one of the best quarters in history for NewMarket Technology. We need to not be distracted from the fact that there is an industry-, or global- really, wide economic crisis, but so far NewMarket is doing well in spite of the overall crisis.

Our revenue increased dramatically to better than $32.0 million. Our income from operations also increased to $2.2 million. Our net income is up and our overall financials are improving dramatically. Not only are our operational financials improving, but we are continuing to improve our balance sheet.

Our cash has increased, our working capital has increased, and our total assets have also increased. Liabilities are down and our stockholders’ equity is up. The improvements even look more dramatic on a year-to-date basis, as we look at the nine months and see a 20% increase in revenue to $76.0 million and a 36% increase in our net income to $2.8 million.

As we usually do and some of you have listened to these webcasts before, we like to put up our chart that shows our historical, because we do have some seasonality in our business. Our highest revenue and net income periods are in the second half of the year. We have just had a very strong third quarter and so far, literally knock wood, our fourth quarter is going dramatically well. We are having a great fourth quarter and are well on track to realizing our $120.0 million revenue objective for 2008.

We need to be wary of the prevailing economic environment and anything could happen to us in the weeks that are left in the year, but so far we have not had an impact.

Talking a little bit about business, moving on from financials. Many of you are aware of our anticipated Everex transaction; let me update you on that.

Everex primarily has their revenues from retail sales today and retail sales have been hit hard so Everex’s operations are substantially different today from what they looked like when we entered into the original negotiations. In addition to that, many of the mobility environment initiatives going on in North America that our mobility initiative was intended to take advantage of have also slowed. So we have similarly slowed. We are still in conversations with FIC, the parent company of Everex.

We are still committed to moving forward with a mobility strategy and we believe that Everex is instrumental and can be very beneficial to that overall strategy. But we are certainly in a holding pattern as we try and look at the original terms of how we were going to put this together, seeing if those are still the appropriate terms, and I believe they are not the appropriate terms, and the strategy for taking advantage of Everex and their technology, based on what the overall environment is.

Again, we are still very interested, we are still in conversations with FIC, but due to the current environment, I don’t think it is prudent for us to rush into that transaction.

NewMarket Latin America, our public shell that we were wrapping some of our South American operations around and trying to get that cleaned up, and back on to the bulletin board or at least fully reporting. What we are doing with that and the challenge that we faced, the management of the previous company that was in the NewMarket Latin American shell has moved on and have other jobs, yet the financials for the last couple of years, for that operation, were never filed.

So we have been working diligently to get those cleaned up. You have probably seen some of those past financial filings being posted recently. And as we have struggled through that we have kind of taken a step back and looked at what we believe is a more efficient way to get the NewMarket Latin America public entity cleaned up and moving forward again in full reporting compliance.

And that is to actually de-register the company and then re-register the company. By de-registering the company we get to skip some of the past clean up that we would have to do and just look at the time frame since we have had our operations. We intend to do this very quickly.

This is not going to impact anybody’s position in what they hold today. They will still have the same stock. There will be a period of time, we anticipate weeks, at most a couple of months, where the stock will not trade, but then will be back up and trading again. And this is the most affordable, most efficient way to get it cleaned up as we have taken a step back and looked at it again.

We discussed management looking for sponsorship to make a substantial buy-in or buyback of NewMarket stock. I am in New York right now, I was in New York last week. The primary purpose of the great deal of time I am spending in New York is knocking on doors and looking for that sponsorship.

As I have mentioned before, management’s intention is to subsequently share that opportunity with shareholders. As the share price has gone down, as we have had to issue more shares than originally anticipated in some of the acquisitions that we did in previous years, we believe that the low share price right now gives us a tremendous opportunity to go and correct, or recoup from, some of those issues of too much stock being issued for some of our acquisitions and of a low share price.

So we are very optimistic about our ability to complete this strategy. We have a lot of interest. We have got a number of proverbial fish on the line, so to speak, and we hope that by the end of the year we will be able to make some exciting announcements about our progress in this area.

Q4 sales, again, as I have mentioned previously, are going very well and we are optimistic about what the year will look like overall in regard to our $120.0 million revenue objective for the year.

An outlook, my last slide here on the presentation, again, strong Q4 sales. In 2009, it could be a challenge, it could be an opportunity. Let me explain. As our customers that buy our technology services look at their budgets, their access to capital, there is a very strong possibility that they may cut back on some of the projects that they hire us for. And we could see a decline.

On the other hand, many organizations that perhaps today are using electronic data systems or Pro systems or are using IBM or some of the large service providers, some of our large competitors, they could be looking for more cost-effective, more affordable solutions, which could potentially have an increase for us in sales.

And we will be looking through the end of the year how to take advantage of some of these opportunities. We have not participated in any new acquisitions for almost two years. The Everex acquisition is a very strategic acquisition in regard to a new technology arena, the mobility technology arena that we are looking at moving into.

However, in the past, the way NewMarket has grown its core technology services business is by making acquisitions of technology services companies in emerging markets. That’s how we got into Brazil, Chile, and Venezuela, that’s how we’ve gotten into several different regions in Asia.

We are continuing to look at expansion into additional emerging market regions, as well as increasing our percentage of revenue from technology services in North America. And because of the prevailing economic environment, we believe that 2009 is going to have some tremendous acquisition opportunities.

So we are excited about the opportunity to do a stock buy-in by management, share that opportunity with the overall shareholders, subsequently see if we can get access to an acquisition pool of cash so that we can do cash acquisitions of new technology services companies and expand our footprint.

So I am not prepared today to make a commitment to the specifics of what our 2009 outlook and what our strategy for 2009 is, but these are highlights of what we are looking at: and the potential to increase sales by picking up business as people look to more affordable solutions than the IBM or the EDS that they may be hiring today; taking advantage of what we believe is going to be a hot acquisition environment.

We have an opportunity to improve our balance sheet, specifically we have an existing $4.0 million term note. That $4.0 million term note comes from one of the industry PIPE investors. Many of those PIPE investors, those hedge funds, are under pressure for redemption from their investors, that just want to exit all their investments and go back to cash. Our investor that holds that $4.0 million term note is under similar pressure. So we believe there is an opportunity for us to take that debt out on attractive terms and improve our overall balance sheet. And again, as I’ve talked out with the buy-in, or buyback as you may call it, I think we have an opportunity to recapture lost equity value in the company.

And I look forward to talking with you more over the course of the year, as our strategy for 2009 develops, as our Q4 sales progress, and as our opportunity to improve our balance sheet on attractive terms continues to develop and as we look for sponsorship to help us in a stock buyback.

Thank you very much for your time and attention today. I hope this has been informative. I know I spent a lot of time talking about the PIPE market, the over-the-counter market, and SEC and FINRA regulation, but I believe that in today’s environment it is important for us to look at the overall framework, not just at NewMarket.

NewMarket is operationally having its best year ever. It just had its best quarter ever and Q4 looks like it may be another best quarter ever. We are not seeing the share price reaction that we would all like to see, but then again, there is not a lot of new buying in the market going on right now.

We are putting a lot of news out. I think you have seen multiple press releases every day. We are doing that because we are trying to get the word out, that there is a great opportunity in this overall market, a company that is substantially undervalued and continuing to perform.

So bear with us as we put out a lot of news that maybe some of you have seen before, but hopefully it captures the eyes of someone who has never heard of NewMarket before.

We welcome your questions. Obviously in this time of concern and share price not performing the way it is, we’re getting a lot of calls and we are working very hard to get back to all of you, so I encourage you to continue to give us your feedback. We are listening; some of you that have given us feedback, we hope you see from some of our communication and things that we’re doing that we’re trying to address your questions in our overall communications and make improvements. Please continue to e-mail us and call us.

We think the time right now is to hang in there and be tough while we look for new folks to realize that there is this tremendous company out there. We are very proud of it as founders and what we have built and think that there is an ongoing tremendous opportunity.

So think you very much for your time today and enjoy the upcoming Thanksgiving holiday.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

• Was this positive or negative for the company? Why?
• What is the most important quote from this transcript?