CGI Inc (GIB) 2002 Q4 法說會逐字稿

Please stand by.

Our conference is about to begin.

Good afternoon and welcome to the American Management Systems fourth quarter and year end earnings conference call.

Today's call is being recorded.

I would like to remind you that certain statements by American Management Systems management during this conference call might 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 [ inaudible].

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

These forward-looking statements involve known and unknown risks, uncertainties, 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 could cause the results to differ materially from those projected in the forward-looking statements is contained in Item 7 of the company's annual report on Form 10-K for the fiscal year ended 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 views on any subsequent day.

I'd like to turn the call to Ron Shillereff, Senior Vice President and Director of Investor Relations.

Please go ahead, sir.

Thank you, Jennifer.

Good afternoon, everyone, and welcome to AMS's fourth quarter and year end earnings conference call.

AMS chairman and Chief Executive Officer Alfred Mockett will begin the call with a broad review of the company and our business operations.

John Brittain, our Chief Financial Officer and Executive Vice President will then discuss our financial performance.

Following their formal comments, Alfred will have some closing remarks, then we will open the call for questions.

Now I'd like to turn the call over to Alfred Mockett, Chairman and CEO.

Thank you, Ron, good afternoon and welcome to the AMS fourth quarter earnings conference call.

Today I'd like to highlight our fourth quarter and full-year financial results and speak more specifically about our operational performance for 2002.

John Brittain will take you through the specific details of our financial performance of the quarter and the full year as reported in our press release, and he will outline our guidance for the first quarter of 2003.

Upon the closing, I'll provide you with my assessment of the progress of achieving the vision that I articulated last April, and also discuss how we will realize this vision in '03.

Now, let's begin.

Our fourth quarter 2002 fiscal year can be summed up with one word focus.

Focus on key vertical industry segments where we have the depth and breadth of domain expertise and focus on core service lines where we can leverage our intellectual assets to deliver solid financial performance, all the while delivering on our commitments to the customer and to the street.

That intense focus paid off.

I'm very pleased to report for the fourth consecutive quarter this management team has met its revenue and profitability commitments.

We also achieved the first call consensus earnings estimate.

During the fourth quarter, we continued to improve upon our already strong financial position by increasing our cash balances and credit facilities.

We continue to execute the strategy.

Our operations were self sustaining and we continued to generate positive cash flow.

As a result, our company remains debt free with a robust balance sheet.

In the difficult economic environment that all businesses are confronted with today, I consider our performance to be a particularly noteworthy achievement.

We're doing well in tough market conditions.

At the beginning of the last call, I said we faced the toughest market conditions of the year as we headed into the fourth quarter.

That proved to be true.

Now, let's put 2002 in context.

The U.S. economy was weak with pervasive uncertainty regarding any recovery.

Budget year-on-year were flat at best, and CIO's made themselves heroes by deliberately under spending subjects.

Deal sizes were smaller and broken up into multiple phases.

Decisions were based on strictly financial parameters rather than strategic ones.

With pressure on faster paybacks and higher rates of return.

CEO's and CFO's said no when business heads previously said yes.

There was and still is an absence of business optimism which left decision makers reluctant to move forward with new projects.

Impending war only added to the problem.

Yet, even in the face of this political and economic uncertainty, we delivered on our commitments.

Further strengthened our competitive standing, and repositioned the company for growth.

Turning to the state of operations, let me remind you of our business model, the three-by-three matrix.

We complimented our existing industry positions in public sector, financial services, and Communications, media entertainment with creation of core service lines across all segments.

Management services, enterprise integration, Innovation and transformation.

The approach is demonstrated by the business we are winning in the management services area.

In late 2002, the New York City department of finance awarded AMS a $156m even seven-year contract to manage the complete end to end New York City parking violation process while remotely hosting the summons, tracking and accounts receivable stars.

We will also support the integration and other maintenance of other New York City systems.

Also let me tell you about our new win as recently as yesterday.

AMS has been asked by the Commonwealth of Virginia’s department of taxation to assist Virginia tax in managing the tax amnesty program through a BPO [ph] contract.

The Commonwealth is planning on more than 40 million increased collections this year from the amnesty program, and the direct cost of the program will be paid through the revenue benefit stream.

The New York City and Virginia tax contracts validate the AMS business model where we not only create and sell proprietary software, but also function as a systems integrator of both our own and other supplies products.

This sets us apart in the market and enables us to integrate commercial off the shelf products with our own offerings.

This scale is prized in the public sector and expands our reach into business process outsourcing and the management of ongoing technical operations.

To our management services line, we booked a total of $182 m in contract value in '02.

By providing end-to-end outsourcing solutions that improve services and reduce cost for customers, we are creating multi-year revenue streams from AMS.

In November, we invested to deliver additional annuity revenue through announced acquisition of the brand trade processing technology and other assets of Proponix [ph] A leading provider of back office processing and front office outsourcing solutions to trade services banks globally.

Through Propenix, AMS will focus on providing application service provide solutions for trade services processing.

There is no doubt that our service lines open doors to significant areas of new business opportunity.

We will continue to focus on service lines that represent repeatable, scalable solutions for our customers.

These service lines will provide cost efficiencies and leverage revenue potential across the country.

AMS moved away from the old business model of design, build, install to design, build, install, operate, and maintain.

Now, let's look at the vertical industry groups, turning first to the public sector group.

Overall, our public sector business had solid performance in '02.

In the Federal Government sector, we continued to experience steady revenue growth posting modest increases from quarter-to-quarter throughout '02.

We had notable large-scale successes with the federal Financial management solution Momentum. [ph] Momentum was rolled out internationally for the department of state and.

For the general services administration.

AMS is also implementing Momentum in more than 90 offices of the U.S. district court system.

We also achieved double digit growth rates in our military services business where we primarily provide transformation consulting and e-business solution and federal and environmental and healthcare practices.

On the whole, we believe activity in the federal market is encouraging.

The '04 budget request for IT spending shared significant increases over '03.

And this trend toward higher IT spending is likely to continue.

Growth areas for AMS include intelligence, federal financial management, health and human services, digital government, enterprise architecture and Homeland Security, all areas in which we have solid capabilities and experience.

Further, as the government increasingly looks to outsourcing, there will be expanded opportunity for AMS.

We are working to ensure that AMS will benefit from growing federal spending, as it has in the past, and strengthening our public sector team we have hired two key rain makers who are well known in the Government Services and Defense industry.

John Hillman has joined AMS to lead the overall defense and intelligence practices.

John has extensive DOD [ph] and international security expertise and is an internationally recognized intelligence expert.

A proven business development executive, Daryl Solomonson, To spearhead our efforts to win large federal contract engagements.

Prior to joining AMS, Daryl led business development for Dinecorps [ph] IT services group.

In our state and local government business we maintain a strong market position and enterprise resource planning and financial management.

During the latter half of '02, three states and 18 municipalities procured our new web-based advantage financial management solution.

Nine of these wins were in December.

Diminishing tax revenues and looming deficits are creating budget challenges for state and local governments.

In this market environment, our proven benefit-funded solution is more valuable than ever before.

On hold the promise for providing the potential for millions in new revenue for state and local Governments across the country.

We've established a strong track record based on implementing the innovative approach in five states.

In the coming year, we plan to leverage this highly-successful benefits-funded model into additional states and into the federal space.

This effort is consistent with the Bush administration's push for a government operating model based on corporate performance management.

We will continue to look for opportunities to achieve greater scale through both acquisitions and partnerships.

We are already teaming on various ventures with Techie [ph] IBM, Accenture [ph] and Northrup Government [ph].

The communications, media and entertainment sector of our business has been challenged by difficult industry conditions in the telecom sector where capital expenditures down nearly 50% over '01.

We have served the telecommunications market for years and we have a solid understanding of that industry.

Our in-depth knowledge led us to focus on areas we believe will be crucial and critical to survival and the success of our clients.

This move is paying off.

During 2002, CME implemented new strategy, deployed a new sales approach and restructured its operations to focus on attractive market segments.

These segments, risk and collections, management, telecom cost management and billing are areas of immediate need with very short payback for our clients.

Achieving scale and maintaining differentiation is important to sustaining market leadership.

Recently, we acquired the interconnection Gateway software efforts of Quintessent communications.

Extending our reach into the telecommunications Operations supports systems market.

AMS is the now only company to allow full service interconnection gateway solutions.

And since the purchase in December, we already signed up five new customers.

Financial servings industry continues to generate stable demands throughout '02, albeit day reduced level.

As with many other industries, economic uncertainty, constrained IT projects of most financial institutions.

Cost reduction was a top priority for virtually all U.S. banks.

In response to these market conditions, we leveraged our market leading position with our proprietary credit line products through up grades, follow on and cross selling to existing customers.

In the fourth quarter of '02, AMS had success with new clients such as KeyCorp, one of the nation's largest bank-based financial services company.

At KeyCorp. we are implementing our tax enterprise and recovery solution.

The first single system to end collections and recovery solution for the financial services industry.

We will also provide KeyCorp systems integration and business consulting services.

Other new deal activity includes engagement with RBC Financial Group for our trade line product.

Trade line is market leading international trade solution used in more than 30 financial institutions worldwide.

Looking ahead, we will continue to leverage investments in our collections and decisioning software products, and look to create annuity revenue streams in all segments with specific emphasis in the retail credit area.

There are other important measures of our operating success during '02.

Bid and proposal activity is up significantly and added more than 70 new customer accounts.

With an aggregate contract value approaching $100 million since the spring.

Perhaps the greatest measure of our progress comes from our customers themselves.

According to our latest survey, our overall customer loyalty index is nearly 30 percentage points higher than the normal for professional services companies.

Our engagement satisfaction index is 89% favorable, which is a testament to our commitment to our customers and their satisfaction with us. 60% of our customers indicate they would consider broadening AMS as a supplier.

This is an extremely positive indicator for our future.

Before laying out the strategic objectives for '03, I'll turn the call to John to review the financials for the quarter and the year.

Thank you, Alfred.

I'm pleased to report that in difficult market conditions, AMS met financial guidance for the fourth quarter '02.

In addition, we continued to build our strongly liquidity and capital position.

Our total revenues for the three months ended December 30 were $236.1 m, compared with our public guidance of $230m to $240m, and $247.5m for the third quarter of 2002.

With exception of the state and local government sector, all sectors met or exceeded our prior revenue guidance for the fourth quarter.

The public sector remains our largest market sector, representing 64% of fourth quarter revenues.

Our federal government sector generated revenues of $88.5m in the fourth quarter, which was higher than the third quarter results of $86.6m.

The better-than-expected performance was due to strong levels of defense-related spending and success of our federal ERP financial management aviation.

State and local government target market revenues were $62.6m for the fourth quarter, decreased from the third quarter of '02 of $68.2m.

Performance of this sector reflects the budgetary challenges being experienced by state and local government agencies.

In addition to lower tax receipts and reductions in federal grants for state and local governments.

Nearly half the states have new governors with new priorities.

Budget deficits continue to force operational cuts and reassessment of technology priorities.

There still is good demand however for revenue generating and cost management solutions, both areas of strength for AMS.

Revenues from our financial services target market for the fourth quarter were $31.6m, which increased compared to third quarter 2002 revenue of $30.4m.

This increased reflects stabilizing market conditions as well as the continuing success of our credit line products and collections and recovery solutions.

Our solutions are well-positioned to deliver banks increased collections revenue and reduce cost.

Critical needs in the current market environment.

In our communications meeting entertainment target market fourth quarter revenues are $41.4m as compared to third quarter '02 revenues of $45.7m, reflecting continued softness in the telecommunications market.

For the '02 fiscal year, revenues totaled $986.7m, representing a decrease of 17% from fiscal year 2001.

Our 2002 revenues were comprised of the following target markets Federal Government agencies, $343.3m; state and local governments, $272.8m; communications media Communications, Media and Entertainment $193.3m; financial services institutions, $121.6m, and other corporate clients, $55.7m.

The company's pretax operating cash flow from ongoing operations for the fourth quarter or EBITDA was $23.9 m, which was in line with our prior public guidance for the quarter.

EBITDA from ongoing operations for the full year of '02 was $109m and remains strong, despite weakened market conditions due to our continued focus on both cost controls and profitability.

During the fourth quarter, we had a pretax gain of $19.9 m due to the sale of our global utilities practice, as well as a pretax charge of $19.6m for the write-down of software assets related to large-scale, enterprise-wide telecom building systems.

The company's reported net income was $8.0m, or 19 cents per share for the fourth quarter of 2002, as compared to net income of $3.9m, or 9 cents per share for the fourth quarter of 2001.

For fiscal year 2002, reported net income was $28.2m, or 66 cents per share, as compared to net income of $15.9m, or 38 cents per share for fiscal year 2001.

We have an excellent balance sheet with strong liquidity.

As of 2002 year ended, we had $136m in cash and no debt.

We have a new $160m credit facility in place, giving us total available liquidity of over 290 million to fund future growth opportunities.

During the fourth quarter, our receivable days sales outstanding or DSL was reduced to 81 days from 85 days in the third quarter.

Through a company-wide receivable collections effort, our accounts receivable balance has declined by more than $21m during the fourth quarter.

Our increased cash position of $57.4m in the fourth quarter is a result of strong cash flow from operations, improved receivable collections, and proceeds from the sale of our global utilities practice.

I'd now like to review AMS's financial volume metrics and financial guidance for the fourth quarter of 2003.

First revenue new outlook.

Together with expected value from our pipeline of $24m to $29m million and current backlog of $206m, we expect first quarter revenues of 230 to 235m, comprised of the following target market details: Federal Government agencies, $89m to $91m; state and local government $62m to $63m; communications, media and entertainment, $42m to $43m; financial services institutions, $30 to $31m.

Other corporate clients at $7m.

A reduction which reflects the sale of the global utilities practice which generated $4.9m of revenues in the fourth quarter of 2002.

Now, let's turn to labor productivity.

During the 2002, the company reduced its total headcount by 12% from 7,157 to 6,288 employees as we adjusted our total cost base to our forward view of the market.

At the end of the fourth quarter, our billable headcount was 4,169, or 66% of our total headcount of 6,288.

Utilization rate of our billable staff was 83% for the fourth quarter, as compared to 85% in the third quarter.

This decline in if fourth quarter utilization rate is largely due to seasonality.

Our utilization rate for billable staff remains high relative to industry standards.

The annualized voluntary turnover rate for total staff was 8.1% during the fourth quarter, representing a decrease from the third quarter.

Given our current revenue outlook for the first quarter of 2003, EBITDA profitability is projected to be $22.4m to $23.9m for the quarter, projected pretax income is $10.0m to $11.5m.

Net income for the first quarter is targeted at $5.9m to $6.8m, taking into account effective tax rate of 41%.

These projections result in forecasted earnings per share of 14 to 16 cents per share for the first quarter of 2003.

Now, let me comment, the forecasted levels of profitability for the first quarter of 2003 do not reflect the company's approved earnings power in a better sales environment, nor are they indicative of our earnings potential for the remainder of 2003.

However, while our policy is not to provide forward financial guidance beyond the first quarter of 2003, Alfred will address our overall prospects for the year in his concluding comments.

In summary, AMS met its fourth quarter financial guidance, and we have repositioned the company for future growth.

We are generating strong operating cash flow profitability, and we are debt free with a superior cash liquidity position.

We are now able to take advantage of opportunities for faster growth in acquisition while continuing to exercise financial discipline, controls and focus to maximize shareholder value.

Thank you and I'd like to turn the call back to Alfred.

Thank you, John.

I'd like to spend a few minutes reporting on our progress in transforming the company.

Last April, I articulated a vision for AMS and the strategy to achieve that vision.

We started with a strong foundation, our deep industry experience, our reputation for providing solutions to critical business problems, our strong core values, our commitment to results.

Our goal was to transform a very good company into a great one that could leverage it's strength for much faster growth.

I believe our objective, while delayed due to the macroeconomic environment is in sight.

Our strategy had several key elements.

The first was leadership.

Over the last year, a world-class team was put in place, including adding debts and strengths to the business unit management teams.

The second element was to create a sales culture and build an organization of commissioned sales professionals who can cross sell all services to all customers and find and deliver multi-year contract awards.

We have made great progress towards this goal.

We now have more than 100 salespeople in place.

The sales force was recruited during the second and third quarters.

Another element was key to transforming our business was restructuring our staff and facilities.

Over the past year we have reduced headcount by 12%.

We have rationalized our facilities for greater efficiencies.

Our investments have been prioritized towards our three-by-three matrix, and as a result we're a more efficient and focused organization.

So where do we stand now?

Our business is focused and streamlined.

Our leadership team is in place.

Our customer satisfaction is high.

We are poised to capitalized on the market recovery as it materializes.

Specifically, for 2003, we foresee a return to growth with a 5 to 7% year-on-year growth in public sector, 4 to 6% growth in financial services, and a flat 2 marginally down year in CME recognizing the challenging conditions in that sector.

We continue to explore joint ventures, partnerships and strategic alliances as ways to restore growth in CME.

Building on successes in management services we expect to book 250 to 300 million of multi-year contract value in '03 from contracts now under bid and/or in negotiation.

Over all, adjusting for sales of the utilities practice, we expect to deliver 3 to 5% revenue growth in '03.

I anticipate our investments in our people, product, service lines and new accounts to restore AMS's pretax income margins to historic levels of 7 to 8% towards year's end.

Our financial strength gives us the opportunity to accelerate our growth through acquisitions.

We have the experience and the resources to be a consolidator in our vertical industry markets and our core service lines, and we intend to move forward promptly in this area.

We're actually working opportunities to add customers and build backlog and capabilities in existing focus areas and fill gaps in the current offering set.

While looking for perfect acquisitions, we also took advantage of an opportunity to rationalize our existing businesses.

We sold our global utilities practice during '02 to Wipro Ltd.

This divestiture allowed us to exit a non-core business and redeploy the capital to areas of focus.

Certainly, we have alternatives to building shareholder value.

Our first choice at this time is to continue investing in organic growth.

Business process outsourcing of management services are particularly bright areas of opportunity.

As our government and corporate clients outsource ever increasing tasks and function, AMS will benefit.

Much of the addressable market consists of existing AMS customers who already are very satisfied with our work.

In brief, I'm confident we have taken all the steps necessary to enable us to achieve our vision of restoring AMS to a growth company.

In closing, let me reiterate my earlier commitments to you you one, leveraging the new business model within our three-by-three matrix we'll return AMS to a track of organic growth of 3 to 5% year-on-year. year-on-year; two, the investments will lead to restoring AMS’s financial performance to 7 to 8% pretax margins towards year end, and thirdly, the cash will be put to work with an aggressive acquisition strategy.

Thank you, and John and I will now take questions.

And Jennifer, over to you.

Thank you.

The question and answer session will be conducted electronically.

If you would height ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone.

If you are using the speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Due to time constraints, you will be allowed to ask one question.

And if you would like to ask a follow-up question, you may signal again.

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

Once again, please press star 1 on your touch-tone telephone to ask a question.

We'll take our first question from George Price of Legg Mason.

Good afternoon.

Thanks very much for taking my question.

Just curious if you could give revenue contribution from acquisitions in the quarter.

Well, the revenue is not material.

This is sort of mid-year to late-year up tick it would have.

Okay.

No, you're looking at life-for-life in the quarter.

Given that was a pretty simple question, I'll go ahead and throw one more out.

If you could expand maybe on the state and local market and what you're seeing.

It seems like you're seeing some cross currents.

Obviously, negatively impacting the business.

Yet you noted nine wins in December.

Just wondering what your near-term outlook maybe in the next six months in that sector is.

You will see it from our forward guidance.

We're expecting a roughly flat performance quarter-on-quarter.

Within state and local business, in a clearly 45 out of 50 states posting substantial deficits with aggregate deficits north of $75b, gives cause for concern.

However, if we look at AMS's positioning within this, we tend to be positioned with in mission critical systems in revenue generation, in financial and management systems, in health and human services.

This is money that has to be spent to preserve the status quo.

And also leveraging our benefits from the contracting model allows states to leverage their capability beyond their budget limits.

So I think we're well-positioned in a difficult market to actually s hold flat and possibly show some recovery this year.

Thank you.

Our next question comes from Thomas M. Meagher with BB&T Capital Markets

Yeah, good afternoon.

Alfred, could you just give me the annual guidance you had there?

I was in the middle of something else when you laid that out.

Okay.

The annual guidance was overall revenue growth of 3 to 5%.

Okay.

That consisted of 5 to 7% growth in public sector; 4 to 6% growth in financial services; and flat to marginally down in CME and other.

Okay.

And within public sector, once again, to make sure I'm clear on that, is that growth being generated at the federal level, or any snap back at all in state and local?

Obviously it is heavily weighted in federal level by anticipated growth year-over-year on modest proportions for state and local.

Thanks.

Next question comes from Scott Shear of Clovis Capital.

Alfred can you talk about the concept of buying companies versus buying back your stock?

I'm just curious, maybe my math is wrong but looks like your stock is trading at three times EBITDA 42 million shares times $11, back out the cash and take $100m EBITDA run rate, which is probably low because you're suggesting 3 to 5% top line and you took out so many people, so my guess is in '03 you will generate higher EBITDA that you did in the prior year.

So do you truly believe you could buy anything in the public marketplace for three times EBITDA?

Could you comment on that?

First of all, I'll let John comment on the financial mechanics of potential buybacks.

Let me tell you that we do keep buybacks under advisement.

But at the moment it's not at the top of the priority list.

We believe we can delever far greater increases in shareholder value in with other opportunities in a market right for consolidation.

But let me turn it to John to talk about the mechanics of the buyback.

Your analysis, I agree with you.

If you take the numbers, EBITDA of $108m for the year and, you know, we're investing into capitalized software probably 25 to $30 million, so the business is generated some very strong free cash flow and accumulated cash balances.

The issue becomes -- I agree with you we're under valued, but the issue is long-term growth here.

And what we've got to determine is if we, in our core industry segments and our core service offerings, we want to grow this business. and we want to sustain growth over the long term in the industry which we believe would be consolidating over time and we think it’s prudent to be allocating our liquidity into the business acquisitions where we can sustained longer-term growth rates.

If we were to distribute excess capital, I'm concerned we wouldn't have the platform to grow the business and over time it would be a declining business, which would be a different scenario, and that’s clearly not what we're interested in pursuing.

So, at this point, while, you know, you can look at comparable values in the marketplace, what companies are trading at in multiple revenues as cash flow, your right, we’re undervalued, the point here is we'll find right acquisition opportunities to drive synergy and benefit and drive long-term revenue growth for the company and increase shareholder values for all of us.

One follow up if I may.

Alfred, can you offer what you think is the multi-year growth rate on each of your businesses?

You offered 5 to 7 for public, 4 to 6 for financial, and flat for CME for '03.

Can you offer what you think the long-term growth rates are for the businesses ex [ph] acquisitions.

In general, first of all, we've gone through an unprecedented period in the history of the industry.

We've had back-to-back, flat-to-down years after ten years of sustained double digit growth.

Over all we see the market flat for the first half of 2003 with a modest recovery in the second half of low single digits.

The AMS historically has always been able to grow at faster than market, and we see no reason to doubt that we couldn't sustain that performance.

So we are looking to grow more than one times market against the market in aggregate.

But by focusing our resources on areas of opportunity within that, of higher growth opportunities, I think that we can achieve that performance.

On growth rates sector-by-sector, I think we could be reasonably assured of year-on-year growth rate sustained in the federal sector as articulated.

It will probably be a year or two before the communications, media, entertainment industry shows a real uptake.

The rest of it is within the bounds of their market parameters, I think.

Thank you.

And as a reminder to a listening audience, it is star 1 to signal for a question.

At this time, we'll go to a follow-up question from George Price of Legg Mason.

Thank you.

Alfred, I wonder if you could give us a little more color in terms of the assumptions underlying, you know, your expectations for the second half of the year in terms of a little bit of single-digit growth.

You know, AMS has in the past, grown, you know, ahead of the market, I think, you know, the environment, arguably, you know, could little a bit different this time around.

From, I guess from two perspectives, if you can talk about what your assumptions are, one just a macro perspective, what you're assuming in terms of the overall macro environment and how that's going to perform in the second half of the year, and then if you can talk more about -- you know, is it also part of the business opportunities you're pursuing in terms of managed services and BPO and increasing focus on the Federal government that's underlined those assumptions?

What underpins our assumptions is a consequence of the investments that we've made in the last twelve months.

AMS has undergone a fundamental and quite remarkable transformation in the last 12 months.

We entered this year a very different company than last year.

We'll be able to build and capitalize on our investment and a sales organization.

It's more than 100 men strong.

We've pulled in more than 17 new accounts in what was a down market.

So we'll see growth from the new accounts development.

We will see growth from rolling out new service lines.

We've had great early success with managed services.

We've got some embryonic [ph] service lines such as security, focusing on application security, and once again we've had early successes with that.

We have -- in bringing our existing suite of financial and management systems up to later state-of-the-art web enabled software have seen increased opportunity.

And I think in terms of working with government to uplift revenues, again, we've got unique pockets of opportunity where we're focusing on growth opportunities that the give us -- well, are giving give us greater growth in the overall market.

So it's underpinned [ph] with operational plans.

Okay.

Thanks very much.

Next we go to Wilmot Kidd of Central Securities.

Alfred, could you expand on why your margins are expected to increase from the first quarter to the end of the year?

Well, there's operating leverage within the business model.

I think you will note in the last 12 months we've done a good job on cost containment.

We have dramatically lowered the cost base of this company.

We have an opportunity to leverage that existing cost base, leveraging the existing employment base.

We're consciously managing the companies there on a 5% bench so we've got available for the up tick.

We're also using spare our capacity to increase our activity rates on business proposals.

And so, that will give us capacity to get incremental revenue at marginal cost.

We have leverage on service lines and synergies [ph] of economy and scale as we drive service lines across the verticals.

We're continuing to work on driving the synergies out of what we've done on pulling the company into the three by three matrix.

There still are synergies to be derived from fully integrating all the elements of the public sector.

In looking at running the company on vertical metrics, as opposed to vertical stovepipes [ph]there are synergies in terms of cost avoidance, cost reduction, and revenue enhancement and all the plans embedded in our business plans going forward.

It's the operating leverage that's going to get us the improved margins.

You're not forecasting a very large increase in revenues.

So there’s not much operating leverage It seems like that mathematically it must some from something else in addition.

No, I think you will find that that does come from increase in revenues while still working on the cost base.

Yeah.

Thank you very much.

You're welcome, Bill.

Next, we take a follow-up from Thomas M. Meagher of BB&T Capital Markets.

Yeah, thanks again.

John, maybe a couple of quick items.

Could you give us your expectations for shares outstanding going forward, CAPEX, and I believe you mentioned a revenue number from your multi-year contracts?

I can answer the first two.

I don't have an answer for you on the third.

Okay.

Shares outstanding were approximately $42.5m.

We've got total options outstanding of about $5m.

In terms of -- your second question was.

On the capital expenditures on the year.

Yeah, capital expenditures, I believe, as I said before, we had spent capital investments on software development of about $28m, and we're actually amortizing at a rate greater than we're adding.

So you will see capitalized software at the end of the near $91m compared to close to $119m in the prior year.

We have a split between, you know, investments and R&D that goes through the P&L and capital investment.

I think its safe to say that our capitalized investment will be at a rate approximating the prior year.

So $25m to $30m in the neighborhood for capitalized investment would be a good number.

And Alfred maybe a couple of questions, First, can you give us an update on the Thriftboard [ph] lawsuit there; and second on terms of the acquisition policy, could you talk a little bit about the types of companies you're looking at?

In other words, are you looking at the companies that have the multi-year contracts or are you interested in other folks that are maybe in the financial systems business?

What are your objectives there as far as the acquisition program goes?

Okay.

Obviously with respect to ongoing litigation with the thrift board, AMS continues to vigorously represent its interests.

You may recall the lawsuit originally filed against AMS by Roger Maly [ph] was dismissed last year for lack of jurisdiction by the federal district court.

Mr. Maly appealed that ruling.

And that appeal is scheduled to be argued in the U.S.

Court of Appeals in the District of Columbia on, pretty soon actually, on March 7th of this year.

Now, as a result of Mr. Maly's recent resignation from his position the executive director of the thrift board, Mr. James Petric [ph], Thriftboard’s current acting executive director, is now named the litigant in this proceeding.

Turning to the other court, with regard to AMS's lawsuit against the United States.

The United States is seeking immediate appellate review of the court of federal claims ruling that it had jurisdiction over the AMS lawsuit.

So pending resolution of the Government request, discovery in this case has been stayed, so that's about as accurate a representation I can give you at this time

And once again about your acquisition policy?

What are you looking to do there?

Okay.

Now, if I look at how I'm prioritizing this.

First of all, we're looking at a range of options in a public companies, privately held companies, caveats [ph] and existing companies, to rank and prioritize my objectives for acquisition strategy, it will be to, first of all, beef up our capabilities in our defined business model in the three by three.

So, first of all, focusing on the service lines and looking how to broaden our propositions we can take to market with skills-based acquisitions, acquiring contract-based, customer-based backlog, intellectual property and the people necessary to drive the value out of that So I look to broaden the offerings.

We take longer existing service lines so we can garner a bigger share spend of the existing customers because that's the low hanging fruit.

The second approach is to look within the existing three verticals and see what acquisitions are available to infact broaden the capabilities in terms of the breadth and depth of domain expertise in chosen vertical.

Next would be possibly looking at an additional vertical to bolt on, going to a three by four matrix from a three by three and then some where down the line we might look at supplementing geographies.

But this priority list is very heavily weighted to the first two.

Thanks very much.

I appreciate it.

We go now to a follow up question from Wilmot Kidd in Central Securities Corporation.

I hear companies that are in analogous businesses to yours talking about the fact that it's going to cause a lot of business to come loose from public accounting consulting operations.

Have you seen that?

Well, you know, I've heard that, too.

But we haven't seen any increased activity that you could directly relate to that separation of public accounting from services.

I think that opportunity, at the moment, is a little more hype than substance, from my perspective.

Thank you.

We'll now go to a follow-up question from George Price with Legg Mason.

Thank you.

John, I just wonder if I could get you to confirm a couple of data points.

Cash from operations for the fourth quarter, CAPEX, and if you have the PP & E and software split, and D&A.

In terms of depreciation amortization in the fourth quarter, I think it was approximately $11 million.

The split in the fourth quarter, you were asking between capitalized software and R&D?

Hold on for a minute.

Yeah, capitalized software and PP &E.

PP & E was $1.3m.

Hold on for a minute.

Capitalized investment amortization in the fourth quarter, I gave you in depreciation was $11m.

The capitalized software added in the quarter -- I don't have that figure.

I tell you what we'll do with that, George, is I'll do a follow-on with you on it -- a follow-up.

Sorry.

Cash from operations.

Cash flow from operations in the quarter?

Yes.

For the year 105 million.

We had net cash additions of $57.4m in the fourth quarter that was largely driven by combination of reduction in receivables of $21.4m, $19.9m from the sale of Wipro, and the balance was cash flow from operations.

Okay.

And if you could also just talk about maybe where you see DSOs moving over the next couple of quarters and obviously saw some improvement this quarter?

Sure, the capitalized software investments in the fourth quarter was $8.8n.

In. terms of DSOs we were at 81 days in the fourth quarter.

And, in fact, the reduction in sales, sales were down fourth quarter by 4% in aggregate, impacted days sales outstanding negatively.

If you looked at the reduction in receivables alone, we would have reduced our days sales outstanding by 8 days.

But the reduction quarter was four days because we're working off a lower sales base.

If you look at historical DSOs, getting around an 80 day level is representative average.

I believe over time we can get that down and I'd like to shoot for 75 days on average.

Okay.

Thank you.

And we are now out of time for any additional questions, so I'd like to turn the conference back over to Mr. Ron Shillereff for any additional or closing remarks.

Thank you very much.

I appreciate your time and effort today.

We'll be here to follow up on questions tomorrow.

Thank you very, very much for your time.

And once again, that does conclude today's presentation.

You may disconnect your line at this time.