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With the world continuing to go more
and more wireless - Wireless Facilities is uniquely positioned as the largest pure-play RF
engineering company in the U.S.
Capital Goods
Construction
(WFII-NASD)
Wireless Facilities Inc.
4810 Eastgate Mall
San Diego, CA 92121
Phone: 858-228-2000
Eric M. DeMarco
President and
Chief Executive Officer
Interview conducted by:
Walter Banks
Publisher
CEOCFOinterviews.com
June 2004
BIO:
Eric M. DeMarco
President and Chief Executive Officer
Wirless Facilties, Inc.
Eric M. DeMarco is President and Chief Executive
Officer of Wireless Facilities, Inc. Prior to coming to WFI, Mr. DeMarco most
recently served as President and Chief Operating Officer of the Titan Corporation, which
recently agreed to be acquired by Lockheed Martin. Prior to serving as President and
Chief Operating Officer of Titan, Mr. DeMarco served as Executive Vice President and Chief
Operating Officer, Executive Vice President and Chief Financial Officer, and Senior Vice
President and Chief Financial Officer of Titan.
As President and Chief Executive Officer, Mr.
DeMarco was directly responsible for all operational and financial activities at Titan,
which included direct oversight of the company’s seven operating segments. During his
tenure, he was also responsible for developing a strategy which grew Titan from $138
million and $4 million in cash flow in 1996 to an annualized revenue and cash flow run
rate of $1.5 billion and $115 million and a backlog of over $4 billion at the time of his
departure in March 2003. His efforts were instrumental in creating one of the ten
largest government information technology companies in the United States, and the largest
“pure play” publicly traded government information technology company, with over
11,000 employees, up from only 1,000 employees in 1996.
Over the course of his six years at Titan, Mr.
DeMarco lead the restructuring and recapitalization of Titan, raising approximately $1.0
billion in equity and debt financing, including implementing a $450 million 40 bank credit
facility, to execute the company’s growth strategy. He was also responsible for
acquiring and integrating nearly 20 synergistic businesses focused on the federal
government information and communication technology market. His commercial
experience at Titan included creating and building several technology businesses with
aggregate revenue of over $300 million, including a telecommunications services business
operating in over 40 countries internationally.
In September 2003, Titan agreed to be acquired by
Lockheed Martin in a transaction valued at approximately $2.4 billion, following several
quarters of internal growth by Titan that exceeded 20%.
Prior to joining Titan, Mr. DeMarco served in a
variety of public accounting positions primarily focusing on large multinational
corporations and publicly traded companies. He holds a Bachelor of Science, Business
Administration and Finance, Summa Cum Laude, from the University of New Hampshire.
In addition to having direct responsibility for all
existing operational activities at WFI, Mr. DeMarco will also lead the company’s
efforts to diversify into the government market for wireless related integration and
outsourcing services, a rapidly growing market with significant opportunities for WFI.
Company Profile:
Headquartered in San Diego, CA, Wireless Facilities, Inc. (MASD: WFII) is an independent
provider of outsourced communications and security systems engineering and integration
services and other technical services for the wireless communications industry, the US
government, and enterprise customers. The principal services the Company provides include
the design, deployment, integration, and the overall management of wireless communications
networks. Wireless Facilities also provides communications systems engineering, systems
integration, and the outsourcing of technical services such as operational test and
evaluation and program management for the federal government and the design, deployment,
and integration of security and other in-building systems including access control and
intrusion detection for enterprise customers. Since 1994, WFI has completed projects
for more than 100 customers ranging in scope from the installation of a single cell site
to multi-year, large-scale deployment contracts. The company has offices in Washington DC,
Dallas, Montvale NJ, Chicago, Seattle, Mexico City, Sáo Paulo, New Delhi, London,
Stockholm, Gothenburg, Kalmar and Madrid.
The Company’s communications industry customers include wireless networks for
cellular and PCS and carriers, and equipment suppliers worldwide. Specializing in network
architecture and dimensioning of mobile and high speed wireless data systems, including
third generation (3G) networks, WFI provides a complete range of network services - from
business and market planning to RF engineering, fixed network engineering, IP and data
engineering, site acquisition and development, installation, optimization, maintenance and
network operations center services. Representative customers include wireless mobility
carriers, broadband wireless carriers, equipment vendors and satellite services providers.
WFI delivers end-to-end turnkey network solutions, providing clients with a single point
of contact for delivering and managing a network. The Company has real world experience in
all major wireless technologies, including GSM, CDMA, TDMA, and iDEN, as
well as migration to next generation platforms such as UMTS. WFI continually monitors
emerging technologies, and provide services with engineering staff qualified and approved
by virtually every major equipment vendor worldwide. WFI services are provided on a
fixed-price time-certain basis, enabling our clients to better forecast their capital
expenditures and more accurately forecast the timing and management of network deployment.
WFI is currently involved in multiple projects to improve the interior and exterior
network environment for enterprise spaces, municipalities and local jurisdictions. Aspects
of the design and deployment include: the installation of in-Building Optical Networks,
which allows for a decrease in overall bandwidth requirements from the street, which
result in increased bandwidth availability for the actual network users within the space,
the delivery of Bandwidth as an in-building "utility", improved Installation
Times & Decreased Infrastructure Costs and improved property security through wireless
video surveillance, access control, traffic monitoring and fire safety infrastructure.
CEOCFOinterviews: Mr. De
Marco, can you give us a brief history of Wireless Facilities?
Mr. DeMarco: “The
Company was founded in the mid nineties as a pure-play RF (radio frequency) engineering
company, providing engineering services to the wireless telecommunications industry. The
company experienced rapid and significant growth in 1999, 2000 and part of 2001 with the
telecom boom. The company achieved an annual run rate of a couple of hundred,
million dollars with very high operating margins in the 20% range, because during that
time, there was a supply/demand imbalance on the demand for the company services by
emerging telecommunications carriers, for example, Teligent.”
CEOCFOinterviews: So
where are you today and who are some of your customers?
Mr. DeMarco: “The
Company has almost entirely, transitioned its customer base, where today, the
company’s customers are the largest global wireless telecommunications company in the
world. For example, our customer base, who are very active customers, are Vodafone (NYSE
and LSE: VOD), Orange PCS, Verizon Wireless *a joint venture of Verizon Communications
(NYSE:VZ) and Vodafone (NYSE and LSE: VOD)*, Cingular Wireless * a joint venture of the
wireless divisions of SBC (NYSE:SBC) and BellSouth (NYSE: BLS)*, Telefonica, Telcel (a
BellSouth subsidiary), T-Mobile, Sprint PCS, and Hutchison 3G UK Limited. The
company’s customers today, are the tier-one, wireless telecommunication carriers,
while during the initial growth period it was with the emerging carriers. The emerging
carriers went away when the tech bubble blew up and the Nasdaq crashed. We have also
transitioned from primarily a subcontractor to more of a prime contractor role, working
directly for the carriers. By this, I mean that we work more directly with AT&T
Wireless, Verizon Wireless or Cingular etc., instead of working as a subcontractor to the
prime for one of those companies.
Today, over 95% of our contracts are prime contracts where we have the direct relationship
with the executive office of these global carriers. This is one of the reasons we have
been enjoying the kind of growth rate that we have been enjoying. For example, we just
reported our first quarter and our internal growth was 42%. I believe it is because we
have business development flexibility now, being a prime contractor, to position ourselves
with the executive office of these global carriers, understand where they are heading, not
just next month, but where they are heading next year with their technology and their
technology migration path. Next year and the year after that, we will position ourselves
to be in front of the curve so that when they make these technology decisions, whether it
is an upgrade, a performance enhancement, that we will get our fair share of that
opportunity for this company as the prime contractor.”
CEOCFOinterviews: In
your market space, do your clients generally look to outsource this type of stuff, and
work through partnerships and clients, and if so, why?
Mr. DeMarco:
“Historically, our customers did the majority of this work themselves. If you look
back over the past three to seven years, they liked to do the vast majority of this
themselves. We believe that the industry trend today is for the carriers to outsource more
and more of the high-end engineering work. This allows them to focus their management work
more on what I will call their core competency; their sales and marketing of subscribers,
obtaining new subscribers, and retaining subscribers on their networks. That is where they
want to put their management time and discretionary dollars. In my opinion, it makes
better business sense for them to outsource to a company like us their high-end
engineering optimization work, their network development work, and their network
integration work. For our customers, it benefits them by allowing them to control
cost under a firm fixed price contract as they have ebbs and flows in their build-out
plans, they don’t have to be hiring and letting go their own people; they can dial in
cost by outsourcing to us.”
CEOCFOinterviews: Why
are they selecting you over your competitors?
Mr. DeMarco: “Our
competitors are very capable technically, no question about it. I believe one of the
reasons why we in the past several months have achieved more traction and accelerating
traction, is our size. We are going to be at somewhere between 400 to 425 million dollars
this year. That means that here in the United States as the carriers consolidate their
procurements and devote very large regional procurements of work or even national scope
procurements of work, we have the size, the breath, the scale and staying power to be able
to execute on these very large contracts. Our customer’s mind is at ease that we are
going to be here tomorrow and we are going to stand behind our work. If they want to
expand the scope, we are going to be able to react quickly and execute. Our balance sheet
is capable of handling some of these milestone payment terms, which in our industry can
equate to accounts receivable-based sales outstanding of 90 to 100 days. I am a firm
believer in my career that it is possible that the larger you get, the more capable you
are of taking on larger and larger procurements, which can help accelerate internal
growth.”
CEOCFOinterviews: How
large is the market and how much have you captured so far?
Mr. DeMarco: “We
look at the market in a few different pieces; we think that he overall market that we are
playing in right now that is available to us, is about three to four billion dollars. That
is national and it will probably be similar sized in Europe and half that size in Latin
America. That market is comprised of the carriers operating budgets, and when I say
operating budgets, they engage someone like us to optimize their existing network and to
retune their RF antennas for hot spots. Optimization and tuning of the network, falls
under operating on the side of the carriers budget. In addition, there is the capital
expenditure or the cap ex side, of the carrier’s budget where they are constantly
building new sites for quality, coverage, and capacity issues. There are around 150,000
such sites in the U.S. and every year an additional 15,0000 to 20,000 new sites are added
by the big six carriers here in the U.S. for quality coverage and capacity as more
subscribers come on and as minutes of use increase. It is hard for us to gauge what our
piece is. If you take our revenue run rate of 400 million dollars on that three or four
billion dollars of domestic; we would have around ten or fifteen percent of the market. We
believe we are the largest, pure-play in this space.”
CEOCFOinterviews: Do you
have agreements with most of the larger U.S carriers?
Mr. DeMarco: “Yes,
we have master service agreements with just about every one of the national U.S carriers
and many of the regional carriers like Western Wireless Corporation (NSDQ: WWCA).”
CEOCFOinterviews: Are
there any countries in the world that you haven’t accessed yet that you are looking
at for future growth?
Mr. DeMarco: “Yes,
we are actually evaluating some of the Eastern European countries to see if we can get
comfortable with the opportunities there. We are going to be a rifle and not a
shotgun because our current book of business is solid and that book of business is
primarily in the U.S., Western Europe, and Latin America. There is a lot of low hanging
fruit for us in those three large market areas. Our expansion plans are going to be very
methodical.”
CEOCFOinterviews: Do you
feel you have all the pieces in-place and can your partners or the people that you get
your products from, handle the ramp-up?
Mr. DeMarco: “From
a WFI standpoint, our company’s capital structure is that we have zero debt,
approximately 50 million dollars in cash, and this year of 2004, we are going to generate
between 25 and 30 million dollars in free cash flow. From our side, if potential expansion
opportunities come that we want to pursue, we believe we have the capital to do that very
comfortably. On the supplier side, when it comes to things like test equipment that we
would use to execute these expansion plans, or the products that our customers would have
us design a network around, which would come from Lucent Technologies (NYSE: LU),
Ericsson, etc., we believe that all the pieces are in-place for expansion.”
CEOCFOinterviews: Do you
have enough of your own staffing to handle this growth?
Mr. DeMarco: “Yes,
there is always the balance of making sure people are chargeable/utilized enough to keep
our profitability up vs. having the people on the bench, flexible enough to move at a
moments notice. At a services company like ours, where we have somewhere around 2,400
fulltime equivalent employees, we are a big recruiting firm and we are constantly
recruiting. I think today, that we have over 100 open requisitions for engineering talent
across the world. If we made the strategic decision to go after some of these new markets
in some of these areas that we are talking about, we would plan in front of it to recruit
to get the people right on the cusp of when that work would begin.”
CEOCFOinterviews: In the
countries where they are active?
Mr. DeMarco: “Yes,
in the countries where they are active, or in an ex-patriot type of arrangement, where for
example, they could be U.S. citizens and we would ask them to work there a year or two,
that way they would work there and get training in that specific technology that the
customer is having us put in. Once the specific assignment is complete, and they are
learned on that technology, we would ask them to move again, and obviously this is all
negotiated up-front because when people are moving to different assignments, they would
move to a different customer or that same customer geographically somewhere else where
that similar technology is being deployed.”
CEOCFOinterviews: When
you look to the future growth of your company, will it come through new market entries or
expanding your current customers services?
Mr. DeMarco: “I
believe that the vast majority of our forecasted growth over the next couple of years is
going to come in the market regions that we are in today, and primarily with the existing
customers that we have today and that would be the U.S., Western or developed Europe, and
Latin and South America. There is a significant amount of work whether it be the 3G (third
generation) deployments that right now are well underway in Europe and that are
accelerating and that we expect to accelerate further over the next few years, which is
significant for us, or down in Latin America, where it is not 3G, it is more a 2G and the
type of technology that we are used to in the U.S. today, but where the two largest
players; Telefonica and Telcel are both expanding aggressively for market share, quality,
and coverage of the service and network capacity. Here in the U.S. it is kind of a
combination of both. Verizon, for example earlier this year announced that they were going
to roll out their 3G technology in the 100 largest markets, which could be the beginning
of a 3G rollout here in the U.S. In addition to that, the minutes of usage, here in the
U.S. continues to go up; people use their phones much more. In addition to that, with
camera phones here in the United States, and data on the P.C or your phone; those links
use a significant amount of the network and a data call is typically 20 minutes in length
vs. a data call, which is on average two minutes. The market here in the United States
continues to be very robust. With those three things alone, we believe there is enough
opportunity for the vast amount of our growth plan going forward.”
CEOCFOinterviews: It
sounds like your engineering team is knowledgeable about the industry and staying ahead on
growth and changes in technology!
Mr. DeMarco:
“Absolutely! What I learned when I first got here, is that our engineering team at
WFI, if they are not the best in the world, and I think they are, but if they aren’t
they are darn close. They are extremely, smart and aggressive and they have fantastic
customer relationships and they are constantly training themselves. We actually have an
engineering group here in the company that is specifically set aside, it is called
“Advanced Technology Group” that is looking at not the cutting-edge technology
but the bleeding-edge technology, and that helps train our existing workforce to be
prepared when our customers or potential customers decide to go to that technology
migration path.”
CEOCFOinterviews: How
many years ahead do you plan for?
Mr. DeMarco: “Over
the past few months, we have put together a strategic plan, which goes out three years,
and our operating plan, which is a month-to-month, quarter-to-quarter and detailed
bottom-up plan, that will take us out over the balance of 2004 and then we will do that
operating plan again for 2005. The company is experiencing significant growth. Our overall
growth in the first quarter was over 80% and as I mentioned our internal growth was over
40%. We are trying to put the plans in place and execute the plan long-term for three or
four years, sustainable internal revenue growth of around 25%; that is something that is
very important to us, and while doing that growth rate, achieving pre-tax or operating
margins of 10% plus. That is the plan of the company.”
CEOCFOinterviews: Do you
see major carriers building out more cable or more wireless infrastructure?
Mr. DeMarco: “On
the major communications companies, I personally believe that there is a robust wired
infrastructure in the developed world, it is fantastic with incredible capability and
capacity. There is always going to be a need for that whether it is for cost, speed,
capacity or security, that need is always going to be there. I believe that we are going
to see significant additional assets deployed in the wireless sector because I think
today’s business person and casual person is more and more mobile and they want more
information with that information being still-picture or streaming video or data on their
portable device and that means wireless. I think there will be a significant amount of
resources deployed there as well. I have a great team that keeps me on the curve.”
CEOCFOinterviews: In closing, what would you like to say to
potential customers and investors and why your company would be a good investment?
Mr. DeMarco: “For
our customers or potential customers, I believe the value proposition that we bring is
that we are technology neutral and we are vendor agnostic. What that means is that if you
want to design a network solution, we are going to design the best, most efficient network
for your specific business plan. We are not going to be pushing you the customer to buy
one particular equipment vendor’s equipment, but we are going to identify the best
equipment for your business plan, growth plan and your type of subscriber, the
geographics, the demographics, etc., and then we will design the most efficient, cost
effective and value added network possible. You can do that through a fixed price
kind of contract relationship with us so you the customer’s risk is mitigated.
Because we are a very large company, we are financially stable and you know that we are
going to be here tomorrow is there is an issue, and we are going to make it right. That is
our value proposition to customers.
To the investing public, I will tell you how I looked at it when I made the decision to
come here. A few of us here, on the open market just bought a bunch of stock for
ourselves, so we obviously believe in what we are saying here. The world continues to go
more and more wireless not only for mobility but for cost reasons because it is less
costly to have wireless networks whether they are cellular networks outside or 802.11
networks inside -- you don’t have to string the cable, or the copper.
Subscriber growth continues to grow. Minutes of usage and network usage continues to
grow as we are moving more towards data and the speed race of 3G, between 300-500 kilobits
per second. With our technical expertise and strong customer relationship we believe we
are uniquely positioned as the largest pure-play RF engineering company in the U.S. and
maybe in the world to take advantage of this wireless industry growth curve that we
believe we are on.”
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