CGI Inc (GIB) 2002 Q2 法說會逐字稿

Please stand by.

We are about to begin.

Good day, everyone, and welcome to the American Management Systems second quarter earnings conference call.

Today's call is being recorded.

Before we begin the call, I'd like to remind everyone that certain statements may be made by AMS management during this conference call that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such statements are based on management's current expectations and are made in good faith by the company pursuant to the Safe Harbor provisions of the Act.

Forward looking statements include financial projections, estimates in statements regarding plans, subjectives and expectations of the company and its management as well as the company's views regarding industry and economic conditions and trends.

These forward looking statements involve known and unknown risks, uncertainty and changes in circumstances which may cause the company's actual results to differ materially from any future results expressed or implied by such forward looking statements.

Such risks and uncertainties also include other factors, some of which are beyond the company's control.

Additional information concerning factors that can cause results to differ materially from those projected in the forward looking statements is contained in item seven of the company's annual report on the form 10(k) for the fiscal year ending December 31st, 2001, which is on file with the Securities and Exchange Commission.

These forward looking statements should not be relied upon as representing the company's estimates or views as of any subsequent date.

I would now like to turn the call over to Ronald Schiffler [phonetic], senior vice-president and director of investor relations.

Please ago ahead, sir.

Thank you, Wendy.

Good afternoon, everyone, and welcome to AMS's second quarter earnings conference call.

We will begin today's call with our chairman and CEO Alfred Mockett [phonetic], followed by our president and chief operating officer Bill Purdee [phonetic], and John Britain, executive vice-president chief financial officer.

We will then open the call up to questions, after which Alfred will have some closing comments.

Now I'd like to introduce Alfred T. Mockett [phonetic], chairman and CEO.

Alfred?

Thank you, Ronald.

Good afternoon, ladies and gentlemen, and welcome to our second quarter earnings conference call.

I am pleased to report to you this afternoon that AMS continues to meet its commitments across all fronts.

The executed a strategy and as a result we met revenue and earnings goals and concluded the quarter with a balance sheet that by any measure is robust.

Cash position increased by $22 million, and we remain debt free.

From an operations perspective, we have launched our first free service line, building a stronger sales culture and closing new deals.

To achieve these results at the same time we continue the transformation, the evolution of AMS.

And all of this is accomplished in the difficult and uncertain economic environmentment the IT with respect to its stock demands continued select.

Recent reports speculate that recovery we expected were late this year might well be pushed into 2003.

From the global communications market is the hardest hit.

In my more than ten years in that business, I've never seen an environment with such an absolute lack of visibility, daily surprises, expected volatility and just overall uncertainty.

The global telecommunications market continues to decline and by many accounts the work may be overcome.

Industry is struggling with massive debt and [Inaudible] too much capacity for the current demand and costly transitions to new technology.

The capital crunch plans for capital expenditure technology.

Now telecommunications customers are looking for solutions that cut costs, [inaudible] 30, 60, 90 days.

Our telecommunications group has responded with new aggressive go to market plans that address those customer demands.

The purpose is right where it needs to be.

They are honing in on areas that will deliver the short term ROI customers need and demand.

So, given these worsening market conditions our telecommunications business is one that must undergo careful evaluation virtually every day to make sure that we are making the correct investment decisions, maximizing our revenue opportunities and aggressively controlling costs.

The volatility that the market demands nothing.

Less.

Contrary to telecommunications market conditions, we are seeing both continuing as well as renewed growth in government markets.

A public sector business is sound.

The larger longer term deals are again moving into a pipeline and we're very optimistic about closing these something.

The activity in services market with a focus on collections and customer attention.

Both strong [inaudible].

In a few moments Bill will review the particulars of our second quarter operating results.

John will follow with our overall financial pro formas for the quarter and specifically address the restructuring charge of 16.1 million.

Now, what I wanted to share, both my concerns about the telecommunications business and my optimism about the rest of the business with you.

I also want to provide perspective in building a more vibrant business model.

When I first spoke to you some six months ago, I noted although it was imperative to flex the business model, we were doing so from a position of strength, core strength, the depth and breath of our expertise in our traditional industry group, especially the public sector.

Also, individuality of solutions our customer base has come to expect, our expertise in system integration as a software provider, positions as well for continued growth.

I said we will achieve this growth by implementing sales throughout the company, focusing on systems integration rather than proprietary stock ware, and entering the business process and application outsourcing arena.

We are well on our way in achieving these.

I am pleased with our progress.

This week we announced our general counsel and chief risk officer David Fran say.

This is a critically important point from what I see is essential to our company wide emphasis on quality control, customer satisfaction and risk management.

In addition to his role as general counsel, David will be responsible for leading an enhanced company wide risk management program.

We also announced the appointment of Walt Howell as head of our financial services group and Rick will lead the managed service group.

These appointments complete the management team I committed to building shortly after I arrived.

The team blends the best of both worlds, experience at AMS, knowledge of our team market, and a fresh perspective from the outside.

This team truly reflects the strategic changes underway at AMS.

This management team will remain steadfast in our commitment to transform the business model with critical and necessary investments in people, growing the sales culture, forging new technical and business partnerships and establishing and strengthening our brand.

In sum, while we continue these transformational changes at AMS, let me assure you we will also maintain our focus and commitment on preserving operating margins while striking the delicate balance while managing the business of today and the investment opportunities ahead.

With that let me turn it over to Bill copy who will provide an operations update for the quarter and report our progress in building a consistent and where coordinated enterprise to execute the business strategies.

Bill?

Thank you, Alfred.

Good afternoon, ladies and gentlemen.

I'd like to pick up where Alfred left off and provide some additional insites service line initiatives and highlight some of the contract wins we had during the quarter and detail our progress and other strategic initiatives.

We have completed the consolidation of our public sector groups under executive vice-president Donna Morraya [phonetic].

New organization structure, global market strategy and sales plans were completed on July 1st our strategy for this group has four execution components.

First the strategic account focus, next mission critical service lines, then sales competency, and finally product engineering excellence.

Our strategic account groups are responsible for customer satisfaction and loyalty.

They are stable customer based organizations with long term growth objectives and are accountable for account management, sales delivery and delivery oversight.

It is through the strategic account groups that we will unleash the the power of AMS in this market Donna is building upon an already strong sales team by blending the best of the old and new leadership and approaches going forward.

She is actively recruiting for a sales leader and in the near term has retained an executive sales consultant to help us move forward.

Our new wins in this market validate our new business model.

State of Wyoming awarded us a $4.8 million contract to host the state's and other accounting and procurement services.

In addition over the next year AMS will migrate Wyoming's financial data to our web enabled platform.

This win demonstrated the power of bringing together AMS's deep industry knowledge with our 25 years of application hosting experience to win new innovative deals.

Late last month the Department of Defense formally accepted the newest version of our software supporting the standard procurement system SPS.

SPS is currently deployed to over 750 defense bases worldwide with over 23,000 users processing over 36 billion in goods and services in fiscal year 2001.

Deployment of the newest version of SPS will begin immediately to the U.S.

Army and agency and is expected to be completed by the end of 2002.

Opening a significant new market for us, the Boeing company will implement AMS's procurement desktop offering as solution worldwide.

PD is designed to seamlessly to integrate offering a level of buyer seller integration previously not available between government and private industry.

This is a major win for the public sector group at AMS demonstrating our ability to extend our solutions from the public to the private sector and penetrate the large and vibrant defense contractor supply chain marketplace.

In our financial services group as Alfred mentioned we are pleased to have the leadership of a true industry veteran to build upon our strong foundation of solutions and customer list in this market.

Walt Howell brings a wealth of experience in bringing customer relationships as well as financial management system, development and integration as well as strategic out sources.

At the start Walt and the AMS team will concentrate on architecting a sales start strategy that will take maximum advantage of AMS's market leading credit and collections, CRM and trade services offering.

The emphasis will be on new account sale while revitalizing and extending our relationship with existing customers.

In addition, we are beginning to see renewed activity in the pipeline for financial services.

Recently we worked for a top-ten U.S. bank on a highly strategic credit collections and recovery.

Larger deals for services in the enterprise CRM arena with shorter anticipated close cycles.

Our existing customers are moving forward with higher dollar value, longer term add-ons to our contracts.

Our new business incubator group led by Gary LeBovich [phonetic] is executing plans secure larger deals and move solutions into larger accounts.

Our work for the center for Medicare Medicaid services which manages the Medicare.gov web site continues to expand with 2002 revenues expected to be over $8 million.

Based on our Medicare.gov work, a large federal civilian agency selected AMS as part of a team to build a citizen centric web portal.

In addition, AMS will implement a fraud investigation system for the center and he can lent example of our new enterprise security service line collaborating with our industry experts to deliver new solutions.

As Alfred said, the telecommunications industry continues to present challenges to all IT service providers.

As this industry struggles, market opportunities will arise to address core problems.

According to industry experts, anywhere from 30 to 50 percent of the customer base of cable and wireless companies turns over each year or turns each year.

Integrated systems and better enterprise security needed to streamline operations and address revenue presents opportunities to drive more efficiently operations.

With this market's decline predicted to extend into 2003, AMS will focus its business on key customer needs while controlling cost.

Our contract management, turn management and business intelligence solutions are well known in the financial services industry.

In this challenging tell commune cautions market we are actively focusing these offerings on turn problems of wireless and cable markets.

While historically have been part of our larger engagement in telecommunications firms, we will more aggressively sell these offering as independent solutions [Offerings] our core billing and customer care solution tapestry will become the foundation of the billion customer care outsourcing business.

As telecommunications firms look to off load cost centers while preventing revenue leakage, AMS delivers here in the outsourcing model.

For new growth we are taking offerings emerging from our enterprise security service line and targeting the digital media management market.

Digital rights and asset management require application based security.

This is the cornerstone of our security service line.

Now let me turn to service lines.

Service lines are the new weapon in our arsenal.

They are responsible for venting, developing and packaging offerings selling value propositions to sell into our strategic accounts.

They are to create standard methodologies and approaches that enable successful and repeatable offerings delivery.

I have already mentioned a few customer examples where our service line offerings are creating leverage for us and winning new business.

They are the foundation of our entering into new business areas in our core markets.

Three service lines launched zero on July 1st were enterprise security, managed services and public sector ERP.

Our enterprise security practice is defined offerings completing sales training and ready to go to market.

Jeff Johnson has assembled a strong team of security experts that is already working closely with our industry groups in key strategic accounts.

Last month we announced a partnership with DAC services, a Tulsa based provider of employment screening for the transportation industry.

DAC will offer AMS's electronic ah called an authenticating.

Background and preemployment screening data.

The combined products will help the transportation industry address the increased concerns and threats of commercial vehicles being used by terrorists to harm our nation.

The authenticate offering grew out of our work in the public sector securing citizen's pry privacy and preventing driver's license fraud.

Alfred highlighted the appointment of Rick Lotti [phonetic] to build this business.

He will use this business using AMS credit collections applications.

Our existing applications hosting group continue to serve customers across our industry and is and has completed the initial analysis for our go to market plan.

Our public sector ERP service lines account for over $300 million of AMS business under Donna Morraya's stewardship, actively working large opportunities across the public sector leveraging expertise, qualification and resources.

As Alfred mentioned we are seeing growth in this sector, more large deals moving through the pipeline at a greater rate.

Planning activity is underway in the next wave of our service lines.

Boeing, then, is evidence of our emerging solutions of enterprise contract management and procurement.

We are synthesizing our plans around real time integration long time strength of AMS.

Let me spend a few minutes updating you on our progress and fine tuning our sales culture.

AMS long failed at the relationship sales.

Today's more aggressive approach focused on obtaining new name customers.

Our commission sales force at the beginning of 2002 hovered around ten.

We are now at over 50 and expect to exceed 80 by the end of August.

The new company wide sales compensation plan is completed and being rolled out.

Comprehensive sales training for all is scheduled in third quarter, with a focus on acquiring new names clients our emphasis will be on cross selling AMS across industry groups.

We will employ consistent sales methodology sales support across the organization for greater efficiency.

Now let me give you a brief update on the thrift board litigation.

The appeal by Roger may the thrift board's executive director of the U.S. district court ruling dismissing his suit against AMS is still pending in the U.S. court of appeals for the D.C. circuit.

The Court of Appeals has set a briefing schedule for the appeal and oral argument in March 2003.

The Department of Justice has intervened in the appeal and is seeking to have it dismissed.

There is no change in the status of our suit brought against the U.S. government in a court of federal claims.

Finally, earlier this week AMS submitted its close out proposal to the thrift board seeking recovery of unpaid costs for performing the contract [inaudible].

We submitted our closed out proposal pursuant to the strucks given by the thrift board's contracting officer at the time of termination and in accordance with the terms of the contract and federal acquisition regulations.

The submission of a government contract to close our proposal is routine in the administrative process of terminating a Federal government contract.

In closing our business is healthy.

All of our businesses, except telecommunications, are financially strong.

Transformation of AMS is well underway.

Our new business model for the industry groups and service lines is taking shape.

They are working together to execute on business plans and sales targets for the second half of 2002 and we are already seeing the benefits of turns of new sales.

With that, I will now turn the conference call over to John Britain, our chief financial officer.

Thank you, Bill, and good afternoon, everyone.

I am pleased to report in the current challenging industry environment AMS is able to meet our financial guidance in the second quart irof 2002 for all metrics and delivered strong profitability from ongoing operations.

For those of you who have not had a chance to review our press release, total revenues three months ended June 30th 251.7 million compared to 251.4 million for the first quarter of 2002, and 319 million for the second quarter of 2001.

Our target markets revenue remained essentially flat quarter over quarter.

Federal government target market posted revenues of 84.5 million while the state and local government revenues were 70 million.

Revenues for our communications media and enter at the same time group totaled 53 million.

Financial services target market delivered 28.8 million and revenues from other corporate clients 15.4 million [Entertainment].

Our public sector target markets represent 51 percent of our total revenue, and continue to deliver solid financial performance and increasingly competitive market.

While the financial services target market revenues declined slightly in the second quarter from the first quarter, the soft market demand.

This target market also continued to deliver solid contribution to AMS' overall profitability.

As we have previously discussed, the overall state of telecommunications market continues to decline.

Although revenues from our communications media and entertainment group was stable in the second quarter compared to the first quarter, current market conditions have lowered our revenue outlook for the third quarter in the target market.

In the second quarter of 2002 the company incurred a 16.1 million dollars pretax restructuring charge attributable to surplus facilities related costs and employee severance costs incurred during the quarter.

Severance cost related to the company's continuing efforts to realign its work force to match market conditions and our new business strategy.

Floating the restructuring charges of 15 it the 1 million, net earnings for the three months ended June 30th 10.6 million were 25 cents for fully diluted share which exceeds analyst's consensus expectations of 24 cents per share for the second quarter.

Operating cash flow profitability as measured by divvied D A of 29.8 million for the second quarter in line with our prior guidance.

A AMS ended the second quarter with a strong balance sheet and healthy liquidity.

Company had no outstanding debts and cash and available credit liquidity of approximately $185 million as of the end of the quarter.

Our receivable date sales outstanding was 78 days as of June 30th.

AMS strong liquidity position is a distinct advantage in today's challenging marketing environment.

Now let's review AMS financial value metric as well as our financial guidance for the third quarter of 2002.

First revenue outlook.

For the third quarter of 2002 company's current back log of 213 million and expected value from our pipeline of 32 to 42 million results in a projected revenue for the quarter of 245 to 25 $5 million.

Our forecast of third quarter revenue is 245 to 255 million and prizes the following target market details.

Federal government agency, 84 to 87 million; state and local government and education, 70 to 73 million; communications, media and entertainment, 47, 49 million, financial services institutions, 29 to 30 million; other corporate clients, 15 to 16 million.

Now, labor productivity.

Our billable head count was 4,000 530 as of the second quarter end, and represents 67 percent of our total head count, 6,736 employees as of the quarter end.

Staff utilization rate was 76 percent in the second quarter, an improvement over first quarter of 2002 our annualized voluntary turnover rate for total staff was 12.8 percent in the second quarter.

Summarizing financial guidance for the third quarter.

We are projecting revenues of 245 to 255 million which is essentially flat across all sectors as compared it to our second quarter except for the telecommunications market where we are forecasting lower revenues.

Divot DA profitability is projected to be 26.8, 30.6 million, projected pretax income range 14.4, 18.2 million, the net income is targeted at eight.five to 10.7 million.

This net income range results in a projected earnings per share of 20 to 25 cents for the third quarter.

Our guidance for the third quarter reflects the increased volatility of the IT services market our projections for recovery are being pushed out to 2003.

In addition we see continued weakness in uncertainty in the they will communications market for the balance of the year.

However, under these conditions, we remain confident in the fundamentals of our business.

While we continue to closely monitor our expenses in a time of wilting over growth, it is important that we strike a balance in managing our current business, maximize profitability, we'll continue to make critical investments prior to transform our business model, broaden our come pettive reach and achieve increment ask and multi year revenue stream.

In a challenging market across the company we are vigorously containing costs, reevaluating incremental investments to preserve maximize shareholder value.

Given the [inaudible] uncertainty in the telecommunications market we are continually analyzing our cost structure and ongoing investment in our communications media enter at the same time group.

In conclusion, AMS delivered on its second quarter financial guidance for generating strong operating cash flow profitability.

Furthermore, our debt prebalance sheet superior liquidity position provide a firm foundation for the balance of 2002 during which we will continue to exercise financial discipline, control, and focus for maximizing shareholder return.

Thank you.

Now, I'd like to turn the call over to our moderator to take your questions after which Alfred will conclude our call with his closing comments.

Thank you.

The question and answer session will be conducted electronically today.

If you do have a question, please press star one on your touch tone telephone.

Once again that is star one if you do have a question.

Due to time constraints you will be allowed to ask one question and if you would like a follow-up question, you may signal again.

You may only ask one, one part question at a time.

We'll go ahead and proceed in the order that you signal us and take as many questions as time permits.

Once again, press star one to ask a question and we will pause for one moment to assemble our roster.

[Pause.]

And our first question comes from Bill Lehman with Legg Mason.

Please go ahead.

Hi.

Thank you.

Good quarter, good outlook in this environment.

Can you talk about on the public sector side when you talk about the outlook in pipeline, Bill, it looks like you want both federal and state lump into one unit.

Can you look at those separately and give me some insight into how the federal units tracking as far as pipeline and in contract opportunities, and then do the same on the stateside?

I know you gave revenue guidance for each but just talk more in terms of opportunity pipeline?

Bill, in the federal marketplace, we're seeing follow on business and also new opportunities flowing.

And we have some, as I mentioned we've got some good deals I believe down the pipeline.

The state and local marketplace we have both follow on and some significant major opportunities that we're tracking very vigorously.

We're enthusiastic about in the state and local marketplace.

So net we're seeing, we're seeing decent strength in both state and local and the federal marketplace pipeline.

Again, bill, John for reference the guidance was federal revenues in the third quarter we're forecasting 84 to 87 million compared to the second quarter 84.5 million.

State and local we're forecasting 70 to 73 million against second quarter of 70 million.

And we'll go ahead and take our next question from Mike Lay [phonetic] with Jeffries and Company.

Please go ahead.

Thanks.

Clearly you've done a great job getting rid of your debt and building up your cash availability.

Do you have any plan [Inaudible] to the acquisition area or stock buy back [inaudible]?

Sure.

This is Alfred here.

When we met in New York, I explained that the strategic analysis were completed, sorry about the gap analysis, and that we needed to plug the gaps with insole resources investment of our cash or skills based acquisition.

Obviously we got a range of M and A opportunity available to us at the moment.

There are some good asset values out there, and if I was looking at ranking them prioritizing it, I mean first of all, our cash has got to go to funding our benefits from the contracting model because that is a unique differentiator in the market.

It goes to building up business application outsourcing, it goes to [inaudible] product lines, investing in our people, and the sales culture, and then we start looking at inorganic activity.

I guess there first of all we'd be looking at broadening your sweet of propositions we'd take to the service line looking for skill safe acquisitions that would give us contract base, customer base and backlog.

After that we would look at additional verticals and then the final ranking in the prior we would probably be looking at geographies.

But that's some way down the line.

With regard to the question of the stock buy back, we have got authority to continue with the buy back and have had that for some time, now.

However it's not high on priority.

We have much better opportunities to create shareholder value by investing the cash [inaudible].

Before we move to our next question, I'd like to remind everyone to please press star 1 if you do have a question.

We'll go ahead and move to Tom Maher [phonetic] with BB and T Capital Markets.

Please go ahead.

Thank you.

Good afternoon.

Actually a housekeeping item.

It looks like, if I follow this correctly, depreciation expense may have gone up in quarter over quarter sequentially.

Is that 11 and a half a number we should be looking at, John, going forward.

Yes.

We have some.

We did have some incremental one time amortization, additional software that we took an incremental charge on it.

It will be going up slightly from that amount in the third quarter, maybe in the neighborhood of 12, 12 and a half points.

Okay.

Thank you.

[Inaudible.]

Great.

If I could follow-up on a question that was asked earlier in terms of the robustness of the pipeline.

I guess it seems like there was a little bit of disconnect of the revenue being flat.

Is that a lot of the contracts you think are going to continue to be assigned further out than we would start to see any revenue impact or are there going to be a lack of confidence in that?

Could you detail that a bit better especially in the federal arena?

We're look at substantial multi year contracts here.

And contracts where we have an award conditioned on final negotiations, especially the timing on the negotiations that would lead to the revenue recognition.

So the deals are there.

They're in the pipeline, it's just a question of revenue recognition and where it kicks in in which quarter.

That is it.

We remain confident about our forward guidance there on the revenue range.

We'll go ahead and move to Gale Alexander with Darfield Associates.

Please go ahead.

Good afternoon.

Could you give us some idea whether there will be restructuring charges [inaudible]?

This restructuring charge we've taken right side of our business against the forward view of the market.

That said if the market view changed, we'd have to revisit it, but this has not been a company wide layoff program.

This has been very focus almost surgical in approach as we have combined the public sector as we have refocused our communications medium and enter statement services and services group.

It is very precise this its approach.

I said the company was a little bit top heavy a few months ago.

And if we look at the action we've taken on the staff reduction more than half comes from the top senior ranks.

Company.

And I think we're taking the appropriate action against the market.

The market changes, we'll have to come back and talk to you about it.

This is John speaking.

Let me give you a little more detail in the charge. 16.1 million, of that total approximately 11.6 million was severance related and the balance of power and a half million was related to surplus utility.

That 11.6 million affected approximately 220 people in the organization.

Reiterating what Alfred said we put our cost structure well against the business but it's a dynamic process.

If we look at the balance of the year and we maintain focus on delivering profitability, we have the correct revenue market conditions, we'll move forward and deliver that.

And if there are adjustments in the marketplace we'll have to take a look at our cost basis accordingly.

And we'll go ahead and move to Greg LaCasko [phonetic] with Lord Abbott.

Please go ahead.

Thank you.

Yes, nice quarter.

Could you talk a little bit about the turnover ratio?

You said it was about 12/7.

It's been lower in the past, obviously it bounces it round.

I'm assuming this is not with regard to the layoff, it's separate from that.

And could you talk about the is the turn^over at this level perhaps maybe higher than it might normally be because of the desire to hire higher level, higher quality people?

Yes, let me address that.

Certainly the turn^over rate is well within the industry norms, and it's in a range where we feel very comfortable and to some extent that level gives us an opportunity to rebalance the skills and allows us to bring in some people in areas where we need world class.

Three quarters have gone.

I think a little bit of a blitz this quarter maybe a bit of an uncertainty concerning the restructuring as we consolidated three elements of the public sector.

That might have caused a little upset because of the uncertainty and it will settle down.

But well within the norm range.

I would argue it's quite healthy for business at that level.

And we'll move on to George price with Legg Mason.

Please go ahead.

Good evening, George price with Legg Mason.

I want to follow-up a little bit more specifically on state and local business from the guidance.

The demand appears to be pretty solid, but with the state I wonder if you could comment a little bit further on [inaudible] the state budget situation, [inaudible] are you seeing changes in any particular area, any types of programs?

Yes, certainly.

As I go around the states and I meet with governors and heads of state agencies, they're all giving me the same story.

They're all facing revenue shortfalls, they've got budget deficits, they don't know quite how to handle them.

They're going to have to say cross the board cut.

Some are facing layoffs for the first time in the state's history and there are some attendant labor issues associated with that.

If we look, 45 out of 50 states are in fact going to post budget deficits this year.

On the cumulative budget deficit for those 45 states $50 billion.

So there is an acute situation across the state.

We are very well positioned.

Generally we deal with the mission critical systems of the state dealing with their finances, their administration and their human services side of the state.

And so that just has to proceed.

We also have a unique differentiate benefits fund.

This is a great opportunity for the state.

This is off budget financing.

This is pay as you go.

This is leveraging the AMS balance sheet for the benefit of the state.

And we are very encouraged by the interest shown across the states on this unique contracting model.

We'll go head and take a follow-up question from bill knew man with Legg Mason.

Go ahead.

Hi, thanks.

Let me under the operating line that in the quarter interest expense of 300,000 and other expense of 600,000, if you could just explain both of those on the street expense looks like you had no debt going into the quarter and 48 million in cash and you ended with the the quarter with no debt and 69 million in cash.

So why would you have an interest expense line and what is in the other expense line?

Thanks.

Yeah, bill.

It's a very good question [inaudible].

In fact in our interest expense line item includes accrual of interest for compensation and banking while we did run a net positive investment position in the quarter [inaudible] plus our bank fees getting paid interest income and short term balances, interest rates requirement.

Turning over 2 percent.

In terms of other expense that largely relates to our fully company owned life insurance program where we have to market that portfolio that unfortunately creates volatility in our income statement and we're actually looking for future adoption longer term what to do with that plan, take some of that volatility out of the income statement.

And we'll take a follow-up from Mike lane with Jeffries and company.

Thank you.

Gave us good guidance in the third quarter obviously in the second quarter you hit it right on the mark.

Do you have any comment on fourth quarter the remainder of the year?

At this point it's John speaking, we're not going to give guidance on the fourth quarter.

The environment right now with the amount of volatility and uncertainty in the overall I think the services market, we just don't think it would be prudent to give guidance because of limited visibility in the marketplace.

We're executing on our business plan.

We're looking to drive profitability for the balance of the year.

And drive revenue growth from revenues stability at least if not growth offset the balance of the year.

But at this point we just don't think it would be prudent giving guidance for the quarter.

I'd just like to remind everyone to ask a question today please press star 1 on your touch tone telephone.

We will go ahead and move to Tom Maher with BB and T Capital Markets.

Please go ahead.

Just one quick follow-up question, Alfred.

You mentioned the sheer benefits model and used the term offset.

I probably wouldn't.

In any case, I was wondering, could you tell us how that differs from the self funding model we saw a lot of these enter net base names, I whatnot entering into they were taking all the funding risk, if you will, and that sort of thing, so can you explain how your model differs from what those guys were doing.

Yes, certainly.

It's our budget financing, not off balance sheet [inaudible].

Yes, this is where we leverage our domain knowledge.

We're taking typical example where we go into web enable the whole of the revenue collection cycle for tax agency, we would work with them on benchmarking the status quo.

And that is where we have our expertise in coming up with a benchmark which is a robust basis for a contractual commitment.

We then will term the ranking and priority of implementation of the program in order to front end load the benefit.

We front the installation and development then we share in the up side with the state agency.

And obviously in such - having done this now in five states, we've got a good track record of actually maximizing the benefits for the state.

By the end of the summer the cumulative benefits for the states we've installed the tax systems will go to a billion dollars.

And generally we're getting about 20 percent of that.

And it's good business, good margin, and relatively low risk because we leverage our domain knowledge and expertise.

We'll go ahead and take a question from Andy news with Westport asset management.

Please go ahead.

Hi, I had a question about the balance sheet.

Have you completed a formal review of the good will and capitalized software on the balance sheet from an impairment point of view?

Absolutely, that's an ongoing requirement that we do on a quarterly basis.

As you know, our capitalized software position in the quarter between the balance sheet was approximately 113 million.

In addition I believe our good will balance was approximately 24 million and we feel we go through that process on a quarterly basis as well.

And we're comfortable in terms of the valuations that we're carrying on the balance sheet.

And we'll move to Klench Finley [phonetic] with Wachovia Securities.

Please go ahead.

Thank you.

Good afternoon.

Alfred, I wondered if you could comment on the home land defense opportunities do you think you'll see between now and the end of the year, and also John, if you can comment on any potential accounts receivable exposure, particularly in litigations area.

Thank.

Well, first of all, home land defense, the budget through the current fiscal year ending September 30 was about $20 billion.

Most of that was spent or appropriated 9-11 [inaudible], there's been some initial work done on bioterrorism and biohazards, and some money spent on physical security.

Most of that is EMR.

We work in uptake however there may be a late splurge of spending in the August, September time frame.

When the new budget year kicks in, home land security gets an $17 billion, goes to $37 billion.

From my perspective it doesn't take much of a market share to make a huge difference to AMS.

I think it's a great opportunity for us.

We've been working with government's on the hill on this.

We're exercising a position of fort leadership.

We're looking at creative ways of bringing tried technology from our commercial sector such as telecommunications and financial services and reapplying these in the government arena rather than reinventing the wheel and this is a proposal that's getting a fair amount of traction.

I think it's a great opportunity for us.

I think bringing all the various agencies together into a single unit was the right move.

I mean after all most of those agencies are in the same business the risk business and we're very good at managing the risk business so we have a great opportunity there.

The risk is the procurement and we're sure the various agencies are going to make a part of the home land defense department will continue uninterrupted, but standing that operation up in 2003 is a tall order, and that's a huge number of organizations to come together and I'm sure there is bound to be a hiatus.

That said I think that is probably the single largest opportunity within the federal budget next year.

Now responding to your question regarding balance sheet receivables, if you look at the balance sheet for the quarter end you'll see that our net receivable position was approximately 220 million in aggregate, clearly we've been doing a good job relative to the collection of our receivables and the management of the working capital.

Dave tail outstanding remaining 78 which is [inaudible] first quarter.

With regard to the specific exposure and allowance forbad debt, I can tell you that we've been in a very good position.

In fact, I've not had to make any material increases to our accounts and which are running rounded approximately $12 million is what we're carrying.

In terms of exposure to the communications immediate yum entertainment industry, I've gone through a rigorous review with our team reviewing the telecommunications sector in particular to see if we have any exposure relative to telecome companies.

Largely our clients are Arbuck [phonetic] and encompass operators and I can tell you that currently 90 percent or more of our receivables in that sector are current at [Inaudible] and we had no major credit exposure at [Inaudible] or resuscitating increase bad debt resurgence.

Now we'll move to a follow-up question with George Price with Legg Mason.

Yes.

Did you mention how much outsourcing revenues longer term revenues were in the quarter and where you see them going over the next several quarters?

No, we didn't, but what I said in New York our existing asset management services business was running 5 percent and $50,000,000 a year and I think the revenue recognition on that is it's pretty even.

Obviously with new hirings in major investments, that is a rich target of opportunity for us in terms of we can penetrate that one we'll wait a little bit for guidance.

And we'll take our final question is a follow-up from Gale Alexander with Darfield Associates.

Please go ahead.

Hi.

You mentioned tapestry in your presentation.

How large a role can tapestry play in the future?

I think tapestry has a great role for us in the future.

One of our initiatives in business outsourcing is going to be outsourcing of billing in the telecommunications sector.

Currently the telecommunications companies that survive in the U.S. are collectively spending $10 billion a year in running their own billing system.

They have now concluded that this is no longer mission critical nor differentiator, and there is a sharp increase in the potential to out source.

I would believe fully assertive market [inaudible].

The tapestry is the latest state of the art generation building customer care system will provide the core of that proposition to outsourcing and billing.

And there are no further questions at this time, gentlemen.

I will go ahead and turn the conference back over to you, Mr. Mockett [phonetic], for any closing remarks.

Thank you, Wendy.

In closing I want to take away you to take away a few important points.

We remain profitable.

Cash flow.

We have an excellent cash position.

We address the challenges of the current marketplace from a position of strength.

We have the depth of talent and resource to capitalize on the upturn when it arises.

Meanwhile, we continue with rigorous cost control in a disciplined approach towards incremental investment.

We put in place a strong management team with the vision and the leadership skills to take to the next level and beyond.

And finally, we're changing the something to one that values and rewards results.

Thanks once again for joining us, and bye for now.

That concludes today's conference.

We thank you for your participation.