NewMarket Technology Inc. (NMKT)
The Wall Street Transcript — April 3, 2006 1
SECTOR: BUSINESS SERVICES
(ADT605) TWST: Would you begin with a brief historical
sketch of NewMarket Technology Inc. and then bring us up to
date on the company?
Mr. Verges: NewMarket is a company concentrated on
evolving corporate high-tech research and development — research
and development coming out of some of the incumbent technology
providers such as Microsoft, Cisco and Sun. All of those companies
depend on continuous research and development that provides new
features and functions in their product lines from year to year.
Certainly, if we were all using Windows 95 today, Microsoft might
be having some corporate issues with ongoing revenue and continuous
growth, so research and development is critical.
Research and development budgets traditionally come
from earnings. Yet, earnings at incumbent technology companies
are under pressure from the globalization of information technology,
so there is less money available for research and development
and there is less venture capital available for research and development
that might otherwise occur outside of the corporate walls of
the incumbent technology providers.
NewMarket has set out to try and develop a new process
and a new approach for finding capital to invest in research and development
and to monetize the investment return from successful
research and development. We do this by taking three fairly traditional
business functions and combining them in a way they haven’t
been put together before. One is simply systems integration, very
similar to the business that IBM, Electronic Data Systems or
Affiliated Computer Systems is in today. NewMarket provides traditional
systems integration services. We are a reseller for Cisco,
Microsoft and Sun, just to name a few incumbent technologies. We
integrate and maintain and resell those products.
We also are a technology incubator. We acquire emerging
technologies that are being developed in garages and on kitchen tables
around the world. We put those two business functions together
so that we can get some good old-fashioned operational efficiencies
from a core business (systems integration) and a developing business,
as well as getting the marketing synergies of combining brand
name incumbent technologies with no-name emerging technologies.
The third function, which is just starting to come into play
in our business development to date, is where we monetize the value
of the incubated companies by publicly listing them independent of
NewMarket Technology. That gives us the ability to, one, issue a
dividend in the form of a new stock to the shareholders of
NewMarket Technology and, two, be able to sell fractional ownership.
While NewMarket still stays in control of that company, we can
create equity income that will improve our profit margins beyond
typical systems integrators. The third, of course, is so that the spinoff
company can be capitalized using its own stock to grow even beyond
where it has been incubated inside of NewMarket Technology.
TWST: How long have you been an incubator?
Mr. Verges: We have been an incubator since a company
that I founded with my family in 1997 merged into a public company,
NewMarket Technology, originally named IPVoice. My family’s
company, VergeTech, was started to bring new technologies to
market, and we really did that first function of being a traditional
systems integrator and then reselling the products of many of the
dot-com technologies that were out there. But, of course, they ran
out of funding, so we decided to see if we could build a process that
not only brought those technologies to market, but provided that
necessary early funding through those early stage emerging technology
companies.
TWST: Would you give us a couple examples of that?
Mr. Verges: I think one of our founding technologies has
been a voice over Internet (VoIP) protocol. There is a lot of excitement
in the market about VoIP, and there are a few companies out
there that have made big names for themselves and have a number
PHILIP VERGES, Chairman and Chief Executive Officer of NewMarket Technology
Inc., previously managed VTI from its inception. Mr. Verges is an experienced
executive manager, with a track record in both telecommunications and high
technology. Mr. Verges is a 1988 graduate of the United States Military Academy.
His studies at West Point centered on national security. Accelerated for early
promotion, Mr. Verges served with distinction as a U.S. Army Captain in a wide
variety of important engagements, including research and development of
counterterrorism communication technologies and practices. Mr. Verges’ early
career after the Army included time in the Computer Sciences Research and
Development Department of General Motors as well as experience teaching
systems engineering methodology and programming to Electronic Data Systems (EDS) employees
from 1991 to 1995. Mr. Verges’ first business startup experience was at EDS in a new division
concentrating on call center technology in financial institutions. Later in 1995, he added to his startup
experience at a $30 million technology services business with the responsibility to open a new
geographic region with a greenfield operation. Mr. Verges founded VTI in 1997.
C O M P A N Y I N T E R V I E W
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C O M P A N Y I N T E R V I E W — N E W M A R K E T T E C H N O L O G Y I N C .
of customers signed up. But as far as the global telephone market is
concerned, VoIP is still a relatively small overall portion of that entire
market. The primary reason is overcoming perceptions, the
technologies’ capability at the moment, and then also overcoming
some of the collateral hurdles. Your potential customer already has
sunk investment in a traditional telephone switch or has a long-term
contract with a traditional service provider, so our approach has
been to go in and provide traditional services to the telecommunications
department, establish a long-term relationship, and as those
long-term contracts with traditional service providers end, replacing
it with a VoIP contract. And as those traditional switches are fully
depreciated, we replace them with soft switches. Our VoIP business,
which was one of the earliest technologies we started with, just
posted its first profit in the third quarter of 2005 and has grown to
just shy of $10 million in annualized revenue.
TWST: You are saying that voice over IP can temporarily
coexist with embedded technologies?
Mr. Verges: That is correct. We have more of an evolutionary
approach from a marketing perspective. It is packaged with
some of the traditional solutions today, and we move it in over time.
TWST: Where do you go from here? What are the key
elements in your strategy for the next couple of years?
Mr. Verges: I think we are really in an exciting stage of
our business. NewMarket has grown to $50 million in annualized
sales with good profitability. We have done that really with just
the first two components of our business model, the systems integration
and the incubation. We have not yet started to realize the
most exciting benefits of the company that come from the monetization
of our emerging technologies. In 2006 and beyond, shareholders
will begin to see the first public listings of some of our
incubated technology and see the opportunity to have equity dividends
issued in the form of stock in the spinoff company and the
increase in our profitability from adding the equity income line to
our traditional systems integration and incubated technology
product and service sales.
TWST: What challenges or problems might lie ahead
for you?
Mr. Verges: In the traditional systems integration business,
there are certainly a lot of competitors. We’re being successful.
We are growing rapidly and being noted for that growth. We
were recognized this year by Deloitte in their Fast 500 program as
the second fastest growing high-tech company in Texas and the 13th
fastest growing company in the nation. Great recognition, great accolades,
but we still don’t have household name recognition or an
appreciation in the investment world for our success.
Our challenge is continuing to compete and be recognized
as a viable provider of traditional system integration services. The
most exciting part of our business model is the challenge, because
it is a new business model. We actually have made our first attempt
at listing our first subsidiary in an independent public listing and issuing
our first dividend, and we stubbed our toe, but only temporarily
We are months behind on actually getting that dividend out
the door to our shareholders, and in fact, it may not end up being
our first dividend. Our second publicly listed company may be our
first dividend received by our shareholders.
Understandably, the delay has frustrated some shareholders,
but I think we have to look at it in a similar fashion to breaking
the sound barrier. Certainly, Chuck Yeager didn’t break the sound
barrier in his first attempt, not even in his first aircraft that he took
off the ground. In building the new business model, we will perhaps
have other toe stubbing issues along the way, but I am confident we
will succeed and establish the full cycle of this new business model,
the systems integration, the incubation and the equity monetization
of those incubated companies.
TWST: What would you reasonably expect the company
to look like in about three years?
Mr. Verges: In three years, our goal is to develop
NewMarket into a company approaching $500 million in revenue, primarily
from the traditional systems integration business and the growing
portfolio of incubated technologies. It is a goal that we feel is
attainable, but not quite a forecast yet. I think that you’ll see a lot of
that growth from our success at building a reputation for managing
larger and larger contracts in the traditional systems integration business.
Our approach to establishing that reputation and growing organically
by winning larger contracts today is largely by expanding our
Board of Directors with some industry names and reputations.
For instance, we just added General Hugh Robinson, a
retired Major General who graduated at the United States Military
Academy at West Point. After his retirement from the military, he
served for seven years on the Board of Directors of the Federal
Reserve of Dallas and was the Chairman for two of those seven
years. He sits on the Board of Directors of CarMax today and
ROS. With that type of reputation and the relationships that he
brings to our company, I believe we’ll be able to bring in more impressive
customers than we have today with larger and longerterm
contracts.
I think that in a couple of years, you will see our profitability
improve dramatically and impressively as we kick this equity
monetization program into high gear and are able to sell
fractional ownership in a number of publicly listed subsidiaries,
where we are able to acquire the company at a par rate per share of
pennies and sell it for a significant profit on that pennies-per-share
acquisition. I think that shareholders in years to come can look forward
to a reputation of NewMarket issuing dividends in the form of
equity in publicly listed subsidiaries.
TWST: Would you tell us about the career path that
you followed that led you to be the CEO of NewMarket
Technology, as well as some sense of how you developed your
own ideas over the years?
“NewMarket has set out to try and develop a
new process and a new approach for finding
capital to invest in research and development
and to monetize the investment return from
successful research and development. We do
this by taking three fairly traditional business
functions and combining them in a way they
haven’t been put together before.”
The Wall Street Transcript — April 3, 2006 3
C O M P A N Y I N T E R V I E W — N E W M A R K E T T E C H N O L O G Y I N C .
Mr. Verges: There is a great deal of continuity in my career
path and what NewMarket is today. I would say some of that
may be accidental as much as it is logical in hindsight. I am not sure
it was well thought out or planned. I’m a graduate of the United
States Military Academy and chose a life dedicated to public service
until I started having a family and my wife informed me that public
service was not going to support the size family that we were planning
on. I have five children today, and I had to look for a new job.
I ended up moving back to my hometown when I exited
the Army and going to work for a notable hometown company that
was started by Ross Perot. I went to work for Electronic Data
Systems and cut my teeth in technology. I was actually a programmer
building the mechanical engineering software application for
Electronic Data Systems’ client, General Motors.
I grew from there and eventually went into account management,
managing customers outside the mechanical engineering
area. I ended up working in the non-depository credit industry,
working for credit card companies and mortgage banks. With a
background in low-level programming of Unix applications and
working in financial institutions, at that time I discovered that many
financial institutions were investing in the early computer telephony
integration. These platforms were largely low-level C/Unix software
applications. Ironically, I had a technology background and
fell into a space where the industry I was working in was buying applications
in the area that I had a technology background in.
What I discovered there is that digital technology for
decades has been sold to create efficiencies and savings. When
you’re selling the technology that has been used to manage customer
relationships into an environment, you’re using technology to
create differentiation from your other financial institution competitors
at that time or create new lines of revenue.
That’s what the vision is for NewMarket today. How can
emerging technology be used to create differentiation for the customers
of that emerging technology? How can it be used to create
new revenues that are complementary to existing revenues for the
customers of that emerging technology? And we have simply gone
and built a business model by turning to existing business models
and combining them in order to achieve that vision.
TWST: Would you also tell us about the backgrounds
of a couple of your key colleagues?
Mr. Verges: Until the last 12 months, NewMarket has
been largely a key man operation. But in order for us to grow beyond
$50 million, clearly we’ll have to have a full management
team. I think one of the most exciting additions to the team has been
Phil Rauch, our current Chief Financial Officer. Phil Rauch has
come to the company through one of our acquisitions. Phil Rauch is
a graduate of Wharton Business School, brings a great deal of experience
with supporting the financial infrastructure of the company
and has a lot of experience in large corporations as well as startup
and fast growth companies.
We are also adding a great deal of oversight to the company
by expanding our Board of Directors. One example is General Hugh
Robinson, which I’ve already shared with you. An additional example
is a gentleman named Mike Tinsley, who has worked for one of
the largest notable turnaround consultant companies in the world.
And sitting on our Board of Directors, while we are not necessarily
doing turnarounds, often when you acquire a young, emerging technology
company, some of the disciplines that need to be implemented
are similar to corporate turnarounds, so he is an example of the oversight
that we are adding to the company. In addition to adding that
function of oversight, he is also chairing the subcommittee on our
Board of Directors to continue to add to our management team.
TWST: How many employees do you have now?
Mr. Verges: NewMarket has well over 300 employees.
Domestically, we are just shy of 100 employees. Most of our other
employees work for us in Asia and Latin America.
TWST: Being a small company, do you anticipate having
some difficulties in satisfying the requirements of Sarbanes-
Oxley, since it is often very burdensome for the small company?
Mr. Verges: The challenges of Sarbanes-Oxley for small
companies is something I am extremely vocal about to as many as
possible sources that I think may be able to create change. I’m talking
to legislators, to Chairmen of various exchanges and now trying
to bring General Robinson and some of his contacts to the table.
Some of the challenges may actually be outside of what
people might expect. There are fewer accounting, auditing and legal
vendors available to small businesses as a result of Sarbanes-Oxley.
Having fewer of them available to you by law of supply and demand
is increasing the price small businesses have to pay. There is more
volume of work that has to be done, and I think that interested shareholders
would expect those prices to increase just by the volume.
I think one of the unanticipated impacts has been the reduction
in the number of available resources to small businesses,
and the resulting increase in just the hourly rate of service. That certainly
will be an impact. I think that the key for small business to
manage that impact is by building a strong Board of Directors that
brings with them a great deal of experience, knowledge and capability,
as well as the attitude to roll up their sleeves and get involved,
so that we take on as much of the burden of Sarbanes-Oxley internally
and leave as little of the burden of Sarbanes-Oxley as possible
to outside vendors.
TWST: Do you see any need to improve the company’s
capital structure?
Mr. Verges: We are doing a number of things to address
the capital structure inside the company. We’ve been a company
traded on the Over the Counter Bulletin Board, which is a tremendous
environment for concepts and early development stage companies,
because concepts and early development stage companies
do not have fundamental financials to submit to potential investors
in order to gain the necessary capital to build their companies. But
“We are a reseller for Cisco, Microsoft and
Sun, just to name a few incumbent
technologies. We integrate and maintain and
resell those products. We also are a technology
incubator. We acquire emerging technologies
that are being developed in garages and on
kitchen tables around the world.”
4 The Wall Street Transcript — April 3, 2006
C O M P A N Y I N T E R V I E W — N E W M A R K E T T E C H N O L O G Y I N C .
with a publicly listed stock, that company without fundamental financials
has a tool they can use for capital formation. Inevitably, the
issued and outstanding and the float of those early development
stage companies grows. Ours has grown from less than $50 million
shares outstanding in the last three years to over $100 million in recent
months, so we had a substantial increase in the number of issued
and outstanding shares.
Certainly, there are many companies on the OTCBB that
are in the billions of shares outstanding. In fact, the top 100 most actively
traded companies on the OTCBB are 1 billion shares on average
issued and outstanding. So, while ours has been significant, we
still feel as though we have got a respectable issued and outstanding.
Nevertheless, now that we have fundamental financials with three
years of profits and $50 million in revenue, we have a balance sheet
that can stand on its own for potential financing without simply turning
to our stock for capital formation and mergers and acquisitions.
Recently, as a watershed event for the company, we just
made our first acquisition of a company for all cash, so we have
been able to demonstrate the soundness of our fundamental financials
in order to continue to execute on our business plan. We are
looking at this all cash acquisition of a company that has $14 million
in sales as a watershed event and a turning point to demonstrate
that we can not only grow without a continued significant increase
in the issued and outstanding, but also reduce that issued and outstanding.
We have used preferred stock for many, if not all of our
other acquisitions.
We are currently in the process of restructuring much of
the preferred stock into subsidiary companies, so that we can actually
reduce the fully diluted issued and outstanding of NewMarket.
We anticipate disclosing a dramatic reduction in the fully diluted issued
and outstanding of NewMarket Technology concurrent with
the release of our 2005 annual report on Form 10-K. We also anticipate
upgrading our listing. We have announced an application to
the American Stock Exchange and do anticipate the listing on an upgraded
exchange in the course of 2006.
TWST: What would be the two or three best reasons
for the long-term investor to look very closely at NewMarket
technology?
Mr. Verges: I think our growth would be one. There’s the
recognition, for example, that we have received from Deloitte in
their Fast 500 program, being one of the 13th fastest growing companies
in North America, the three-year of profitability, the
18,000% growth and our continued growth into 2006. I think investors
should keep a close eye on the third aspect of our business
model, the equity monetization, and the public listing of our subsidiary
companies, the dividends that will be issued, the continued
growth of those subsidiaries gaining access to financing with an independent
listed stock, and the ability to increase our profits well
beyond the profit opportunity of comparable technology service
companies when we add equity income to our traditional technology
service income.
TWST: Is there anything that you would like to add,
especially regarding challenges, opportunities, strategies and
long-term objectives?
Mr. Verges: I think that challenges in general are associated
with the pros and the cons, which are the same topic of conversation
in regard to the Over the Counter Bulletin Board
exchange, as I mentioned earlier in our conversation. In a concept
or very early development stage of the company, when you don’t
have fundamental financials, the Over the Counter Bulletin Board
exchange is a tremendous environment for managers and Founders
of companies. As you establish fundamental financials, there is very
little correlation to the fundamental financials and what the share
price is. Share prices on the OTCBB lean toward a simple formula
of supply and demand, rather than any true representation to the
fundamentals and market valuations of the company.
Those are challenges that we have to overcome, and one
of several approaches to overcome that challenge is growing off of
the OTCBB. I think a related challenge is in managing the patience
of shareholders. Shareholders in early development stage companies
invest for the dramatic return opportunities of an early development
stage company that successfully grows to sustainability.
What a shareholder in an early development stage company
has to understand is that they are investing in the fundamental
strategy and the fundamental financials that are produced from the
strategy of that company and that, fundamentally, a reasonable valuation
is not always reflected in the share price of the company. The
company has to mature past the OTCBB listing for the share price to
be aligned with the fundamental investment in the company. That is
a difficult stage for shareholders to be in, but, inevitably, every early
development stage company that leverages the OTCBB environment
will go through this stage. And, if they are successful in building this
sustainable company, they will grow through that stage.
But that transitional period can be a challenging period,
testing the patience of shareholders, and I believe that is the period
that we’re in with some of our long-term shareholders today. That’s
offset by people who are meeting NewMarket for the first time and
haven’t previously invested in the company and they’ve discovered
a company that has an undervalued share price. That brings new excitement
into the company and bolsters that patience that the longterm
shareholders have to have during the transition.
TWST: Thank you. (MC)
PHILIP VERGES
Chairman & CEO
NewMarket Technology Inc.
14860 Monfort Drive
Suite 210
Dallas, TX 75254
(972) 386-3372
newmarkettechnology.com
e-mail: ir@newmarkettechnology.com
AI
