CGI Inc (GIB) 2003 Q2 法說會逐字稿

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Good afternoon and welcome to the American Management Systems second quarter earnings conference call.

Today's call is being recorded point the web cast archived version of today's call can be called on the investor portion of the web site.

I would remind you that certain statements by AMS management during this 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 this safe harbor portion of the act.

Forward-looking statements including financial projections, 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 risks, uncertainties and changes in circumstances which may cause the company's actual results to differ material materially from any future results expressed or implied by such forward-looking statements.

The company's annual report filed with the Securities & Exchange Commission on form 10-K, for the fiscal year end ended December 31st, 2002 provides a more detailed analysis of the factors that could cause the company's results to differ from those projected in any forward-looking statements.

Any forward-looking statements should not be relied upon as representing the company's investment or view of any subsequent date, and in addition the company's assumes no obligation to update the information presented during this call.

Also, during today's call, management will reference certain non-GAAP financial service measures.

Which the company believes provides useful information to investors.

The company will post reconciliation of those measures to GAAP on its investor relations page at AMS.com.

I would now like to turn the call over to Ronald Schillereff, Senior Vice President of and Director of Relations, please go ahead.

Thank you, ma'am.

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

AMS Chairman and Chief Executive Officer Alfred Mockett will begin the call with a previous overview of the company and our -- John Brittain taken our executive vice president and Chief Financial Officer will discuss the performance and then we'll 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, everyone and thank you for joining us for our second quarter earnings conference call.

I'd like to begin my report to you today with three principal points.

First, while operational performance for the quarter was disappointing, strategically it was a pivotal period for AMS.

Second, the business model have traction and 18 months into my leadership we are slowly but surely reaping the benefit of redirecting and refocusing on investments for growth.

Third we are seeing clear evidence of this model’s momentum.

We are winning longer term contracts and forging new partnerships.

And we are delivering on our strategies to add inorganic growth through immediately accretive acquisitions.

Now let's take a look at the quarter.

Since our last call there have been a number of notable events for AMS.

We resolved a great uncertainty and avoided potentially large costs through the settlement of the outstanding contract dispute and associated litigation pertaining to the federal retirement thrift investment board.

We announced our first significant acquisition, and began the implementation of our strategy to add growth and scale in our primary markets through inorganic as well as organic growth.

We pursued aggressively efforts to contain our cost base, through headcount reduction of approximately 250 people.

This reduction was particularly significant because it was drawn primarily from the most senior as well as non-billable ranks of the company.

This will result over time in annualized savings of approximately $30 million dollars.

This will have a positive effect on earnings in future periods.

In line with this cost reduction effort, we right sized our real estate footprint.

We rigorously reviewed the balance sheet dollars.

This resulted in $9.6 million dollar write-down of certain non-core , non-productive walker assets.

These were purchased assets that were nonperforming and non-strategic for AMS.

We achieved sequential quarter on quarter growth.

For the first time in quite some time, and we won large important multiyear contracts building our revenue base and adding a much higher proportion of larger long-term deals to our pipeline.

This bodes well for our ability to achieve sustained growth.

Throughout this period of intense activity we maintained our core conservative financial discipline, the company remains debt free with strong cash balances and a robust balance sheet.

While adhering to our prudent financial objectives, we also continue to invest in our products and in bolstering our sales marketing and business development capabilities.

Still, as we expected, the business environment remains soft during the quarter.

While there are indications of an impending recovery in both the economy and the technology sector, a rebound is yet to materialize materialized.

Based on developments in our operating businesses, we look for a better second half performance.

Second quarter revenues of $232 million were in the middle of the range of our financial guidance.

This represents a 2% increase over the first quarter 2003 revenues.

Excluding the impact of pretax charges, operating earnings would have been $3 million dollars or 7 cents per diluted share.

These results were adversely affected by increasingly competitive market conditions, overhang of industry capacity for IT services and industry-wide absence of pricing power, all of which combined to squeeze gross margins.

Additionally, our ongoing selective investments and business developments to build backlog and contract base for future periods must be paid for in the present.

Overall, while I'm disappointed with the operating performance of the quarter, I remain resolute and confident about the our future prospects.

Clearly, the disappointment stems from the loss for the quarter that was generated by significant charges and higher than anticipated costs on certain projects.

My confidence comes from the conviction that we will continue to see positive results and benefits of the re restructuring and repositioning efforts of the past year and a half.

Turning to our operating units, in the public sector business, the war in Iraq did no favors or our defense business and steered away from core expenses and areas of focus.

However, our Intel business was a bright spot during the quarter.

In June we announced the award of more than $100 million dollars in new to date -- year to date and new and extend extended contracts for U.S. intelligence customers.

These revenues will be recognized over a five-year period.

Earlier this year we set out to significantly increase our footprint in the defense and intelligence market and that focus clearly is paying off.

The federal civilian business continues to improve as the refresh of our suite for government stimulates interest and activity.

During the quarter we garnered five additional wins on our advantage offering.

Further, we achieved a coveted government certification from the interagency joint financial management improvement plan on our momentum software.

AMS is one of only software vendors to achieve this certification, which validates the capability of our software as well as acknowledges our domain expertise in federal financial management.

Testament to this, the department of state awarded AMS $75 million dollars contract that extends our relationship for worldwide roll-out to our momentum solution through 2008.

Our state and local business is shared showed remarkable resilience in desperate fiscal conditions throughout the country.

We have focused on mission critical and citizens facing systems.

Project supported in part by federal funding as well as local and municipal operations, where spending is supported by much broader revenue base than state tax rolls.

This has served us well in a difficult market.

In this segment, revenues are up more than 6% quarter over quarter.

The commercial sector markets we address remain lack luster and fragile punctuated with pockets of opportunity.

These opportunities are characterized by smaller scale deals with fierce competition and tremendous pressure for customers for faster pay back and higher rates of returns.

Despite these challenging conditions we have managed to deliver modest improvements in financial services while achieving growth in communications, media and entertainment for the second consecutive quarter.

National bank and discover financial services deals represent new wins for the financial services sector.

In CME, we are continuing to see steady albeit smaller dollar valued on work from our existing clients.

Last quarter, I reported an improving pipeline of larger deals over multiple years.

AMS year to date has booked more than $570 million dollars in private sector contracts.

Including $100 million from U.S. intelligence customers we announced last month.

We continue to see opportunities for new larger scale contracts in the public sector and the financial services arenas.

I'd like to focus now for a few minutes on the major events of the quarter.

Some of which I mentioned earlier, and their significance significance cans to AMS’ future.

Resolutions of the federal retirement thrift investment board contract disputes and associated litigation has been at the top of my priority list since coming to AMS.

This dispute has been costly, time consuming, and harmful to the business.

When presented with the first meaningful window of opportunity for settlement, we pursued it with vigor.

The net cash out outlay of $5 million dollars to settle the case was less than our anticipated legal costs over the four to five years it would have taken to resolve in the courts.

The outcome of the litigation was uncertain.

This settlement which resulted in a mutual agreement of no no-fault termination of the contract eliminates a huge cloud hanging over this business and clears the way to pursue federal, state and local business completely un unencumbered by negative references.

When I came to AMS, I committed to undertake a complete refresh of the product portfolio and to open up the architecture.

We are on track to have all AMS products fully weather-enabled by the end of the year. 80% of the portfolio has been rewritten in Java 2 enterprise addition and 10% in dot-net and sundry addressed in early 2004.

We are opening API's to effect more integration with commercial off the shelf software.

This investment in software improvement has been reflected in the P&L and balance sheet in capitalized software development.

It's important to note that these are upgrades of existing proven products with ready market acceptance, rather than blue sky development.

A more recent major event that has occurred after the close of the second quarter is the pending acquisition of RN Vredenburg (ph) Company.

This will bring an accomplished team and professional staff with valuable security clearances to AAMS, along with solid book of business in U.S. defense and intelligence agencies.

The acquisition adds critical infrastructure capabilities and revenue stream of approximately $60 million dollars on an annualized basis, only accretive to earnings in the current year.

Our first acquisition of scale we have chosen an organization that builds on our legacy of commitment to the national security community.

Vredenburg is an exceptional cultural fit.

Another very important development was the award of $801 million dollars contract by the state of California to IBM, in partnership with AMS and [inaudible] our portion of the eight-year award to design, build and install and operate a statewide child welfare and support system is valued at $223.5 million.

This award is particularly encouraging because it demonstrates execution of many of our strategic imperatives.

These include Partnering the packages to achieve scale, winning larger scale contracts to achieve growth.

Building multiyear annuities extremes streams to underpin performance with greater stability and predictability of revenue profits and cash flow and moving AMS into managed services.

On the last conference call, I left you with three commitments, first stronger revenue performance in the second half of the year, a rising from moving larger public sector transactions through the pipeline.

The Intel contracts and the California child support contract demonstrate that we are delivering on this strategy.

Second, I committed to take actions to did a address our cost base in order to restore pretax margins.

Our restructuring has broad sweeping initiative.

Further, to balance investments critical to successful future we'll continue to work on systemic and continuous reduction of our cost base.

The second quarter charge for un-billable headcount, excess real estate, and nonperforming software assets reflects our determination to aggressively pursue our cost reduction initiatives.

We remain committed to delivering high profitability this year, while recognizing the challenges associated with the continued softness of the market.

Third, I committed to deliver growth by putting our cash to work through acquisitions.

The pending acquisition of Vredenburg is an excellent and measured first step towards supplementing organic growth with inorganic growth.

Now I'll turn the call over to John for a more detailed look at the financials.

Thank you, very much Alfred and good evening everyone.

I'm pleased to report that in continuing challenging market conditions, AMS met revenue guidance for 2003.

Our revenues were right at the midpoint of our second quarter revenue guidance range.

This marks a reversal of three quarters of a declining revenues for AMS.

However, due to higher cost, which are being addressed by currently restructuring plan and other management actions, earnings per share fell short of expectations for the second quarter.

This week we announced definitive agreement to purchase RM Vredenburg and company, a leading provider of professional and technical services, the Department of Defense and U.S. intelligence communities.

Vredenburg has annual revenues approximately $60 million dollars.

We expect the transactions to close shortly, most likely within the next 30 days, and to be immediately accretive to our earnings.

This pending acquisition will bring new long-term contract vehicles as well as enhanced capability to serve the growing federal market sector.

Pair total revenues for the three months ended June 30 were $232 million compared with public guidance of $230 million to $235 million and $227 million for the first quarter of 2003.

The public sector remains our largest market sector, representing approximately 55% of second quarter revenues.

Our federal government target market generated revenues of $84.5 million for the second quarter, slight decline from the first quarter 2003 of $85.9 million.

Growth in our intelligence and federal civilian sectors was offset by slower IT services contract activity and the DOD and military services.

Despite the continuing challenges of state government budget deficits, I'm pleased to report state and local target markets revenues were $65.5 million for the second quarter, a 6.7% increase above the first quarter 2003, of $61.4 million.

This marks the first sequential increase in this market segment in six quarters.

Our strengthening quarter over quarter performance in this sector is impressive due to the continuing state budgetary challenges and revenue shortfalls.

While we continue to see some delays in new and ongoing procurements we increased backlog of business and we were recently awarded one of the largest contracts in AMS history, the California child support system award.

Our portion of the $181 million is approximately $224 million.

AMS will lead the systems implementation for all 58 California counties performing the data conversion, change management, local interface and onsite support services.

AMS teams with IBM and [inaudible] for this contract win.

Revenue from our financial services target market for the second quarter were $31.7 million, which is a 4.6% increase over the first quarter 2003 revenues of $30.3 million.

Our performance reflects moderate growth and IT spending in the market segments we serve.

Our banking and credit product lines, the collection recovery solutions, continue to deliver valued business results for our customers.

In the communications media and entertainment target market second quarter revenues $43.2 million, a $1.3 million increase over the 2003 revenues of $42.6 million.

This reflects our second consecutive quarter of overly segment growth and evidence is stabilization in our target portion of the Telecom market sector.

AMS offerings continue to focus on projects that deliver short-term returns on investment, and cost sufficient sis to the customers we serve.

Second quarter revenues from other corporate clients $7.2 million, 5.4% increase over the first quarter revenues of $ 6.8 million.

The company's pretax operating cash flow from ongoing operations for the second quarter, as measured by EBITDA, was $15.5 million.

Significant management actions during the second quarter resulted in aggregate pretax charges of $79.8 million, of which $50.1 million were non-cash charges.

The resolution of the outstanding contract dispute with the federal thrift board resulted in a $45.5 million pretax charge, restructuring charge $24.8 million, and a software asset impairment charge of $9.6 million accounted for the remainder of these charges.

The resolution of the thrift board contract dispute litigation avoided a protracted legal ballots and negative impact to the company's reputation.

While we strongly believed our contract claim was valid, the resolution allows our executive leadership team to focus on key objectives, to profitably grow the company.

The federal thrift board pretax charge included a $40.5 million, non-cash, write-off related to our contract receivable.

Under the settlement agreement, the thrift board agreed to pay AMS $10 million dollars for work performed under the contract.

In turn, AMS paid the thrift savings plan $15 million as a partial reimbursement of the $31 million dollars paid for AMS work previously completed.

The board agreed to a non-fault termination of the contract and all parties agreed to terminate all litigation and claims relating to the contract dispute.

For our second quarter restructuring charge of $24.8 million, comprises $18.7 million related to staff reduction of approximately 250 individuals, and $6.1 million for surplus facilities.

Due to continuing market challenges and higher cost, the company took this aggressive action in the second quarter to align its cost structure to its current revenue outlook outlook.

As part of our quarterly review of our total capitalized software assets, we determined that certain software assets were no longer viable in today's marketplace, which resulted in a pretax charge of $9.6 million.

Including all charges, we reported a net loss of $46.6 million, or $1.10 per share for second quarter of 2003, as compared to net income of $6.3 million, or 15 cents per share for the first quarter of 2003.

Excluding these charges, the company would have reported net income of $3.0 million, or 7 cents per share for the second quarter 2003, below analysts earnings expectations.

We are addressing our higher cost through our current re restructuring plan and work force reductions.

This plan and aggressive cost structure management will drive improving profitability and increased profit margins in the second half of 2003.

The three items I've just discussed, resolution of the federal thrift board contract claim and litigation, staff and facilities reductions, and software asset write-downs all reflect actions and decisions made in the second quarter to allow AMS to focus going forward on growth opportunities in its core markets.

We continue to maintain an excellent balance sheet with strong liquidity.

As of June 30, we had $101.8 million in cash and no debt.

Combined about with our $160 million bank credit facility, we had total available liquidity of approximately $260 million.

During our second quarter our receivables out outstanding were 90 days as compared to 87 days in the first quarter of 2003.

Our accounts receivable increased largely as a result of delays in payment from our state and local government clients.

While payment times have been extended, collection of these receivables is not an issue.

I'd now like to review AMS' financial value metrics and guidance for the third quarter of 2003.

This guidance does not reflect the impact of the pending Vredenburg acquisition which I will discuss in a moment.

First, revenue outlook.

Together with the expected value from our pipeline of $31 to $36 million, and the company's current backlog of $204 million we are forecasting third quarter revenues of $235 to $240 million, comprising the following target market details.

Federal deposit agencies, $86 to $88 million.

State and local government, $68 to $69 million.

Communications, media and entertainment, $42 to $43 million.

Financial services, institutions, $32 to $33 million.

And other corporate clients at $7 million.

Let's turn to labor productivity.

During the second quarter, the company's total headcount was reduced by 63 individuals to 6,248 employees, as compared to 6,311 employees at the end of the first quarter 2003.

At the end of the second quarter, our billable headcount was 4,133, or 66% of our total headcount.

Utilization rate of billable staff increased to 86% for the second quarter, as compared to 84% in the first quarter.

The annualized voluntary turnover rate for our total staff was 11.9% in the second quarter, representing an increase from the first quarter of 8.7%.

Given our current revenue outlook for the third quarter of 2003, EBITDA profitability is projected to be $19.4 to$ 20.9 million for the quarter.

Projected pretax income is $9.1 million to $10.6 million.

Net income for the third quarter is targeted at $5.8 million to $6.7 million, taking into account an effective tax rate of 37%.

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

The pending acquisition of Vredenburg will be immediately accretive I have to earnings.

The company is delivering strong sequential and year over year revenue growth.

It will add up to $10 million dollars of revenues to our third quarter 2003 results, depending on the date of the close of the acquisition.

We will pay approximately $42 million dollars in cash for the purchase of Vredenburg, and assume approximately $2.7 million of debt.

In addition, the purchase agreement includes up to $4 million in performance-based earn payments and executive management retention agreements of up to $4.3 million.

The purchase price will be finalized as of the closing date and is subject to potential adjustments.

We believe that the total purchase price consideration for the Vredenburg acquisition represents excellent value and is a price multiple of .8 times of first half 2003 annualized revenues, and 5.1 times the first half 2003 annualized EBITDA cash flow for Vredenburg.

Moving forward, we continue to work towards our goal of higher profit margins.

We have taken corrective actions to reduce cost structure and drive higher profitability.

Given a slower growth in sales and continued softness in the market, we are forecasting that full year 2003 report reported revenues will be moderately lower than 2003 reported revenues of $987 million.

While our revenue outlook for 2003 has been lowered, our aggressive cost containment program will result in higher profit margins for the balance of the year we anticipate achieving pretax margins of 6% in the fourth quarter of 2003.

Furthermore, we will remain focused on further improving profit margins in 2004.

In summary, AMS met its revenue guidance in the second quarter of 2003, but missed its earnings target during a period of continued difficult market conditions.

We continue to aggressively manage our cost structure.

We're using our liquidity position towards our growth objectives with the pending acquisition of Vredenburg.

With the resolution of the thrift situation, a major win in the top state and local market and revenue growth across majority of our target markets, AMS is well positioned for earnings growth.

Thank you very much and I'd now like to turn it back over to Alfred for some closing comments before we take questions.

Alfred?

Thanks, John.

As I mentioned at the beginning of the call, we have reason to be confident in our future.

We have eliminated a major costly uncertainty in settling the thrift litigation.

Our financial condition remains strong, we are debt free, and we have significant credit capacity.

Our cost basis being brought in line with our current revenue base and future revenue growth will be leveraged against this lower cost base.

Our backlog and pile line potential business is growing and we have the ability to win larger multiyear awards that will underpin our growth.

Business is slowly but surely improving, and opportunities for both organic and inorganic growth are open to us.

I remain resolute and confident in our future prospects.

Thank you, now, John and I will take your questions, so over to you to organize proceedings.

The question-and-answer session will be conducted electronically.

If you would like to ask a question, please do so by press pressing star-1 on your Touch-Tone telephone.

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

We will proceed in the order that you signaled us and we'll take as many questions as time permits.

Once again, please press star-1 on your Touch-Tone telephone ask a question.

And while we'll have our first question from George Price with Legg Mason.

Good afternoon, thank you very much.

I guess first question would be in the higher cost of services, if you could give a little bit more color there.

You mentioned pricing, mentioned business development.

Can you break down what led to the increase, and are there any potential problem contracts related to any of that?

It's John Brittain, sure, I can answer this.

Really, this is an issue of a scale and really adjusting our current cost base to where our outlook for the business is.

Obviously, we're pleased that revenue sequentially increased 2.2% from first quarter to second quarter, but you can see our cost to revenues have been sticky and we have had higher project costs associated with a number of projects, and another -- a number of other issues, and we're addressing that.

And there really is nothing more to say, and we're adjust adjusting our cost structure to come more in line, I'm fully expect to go see an improvement in growth gross and operating margins in the third quarter of the year, as we take our cost down against delivery.

Today, about 45% of our total contracts are fixed price based and we've got to be very efficient in terms of projects and product and service delivery against those contracts, and we're going to do so on a better basis for the balance of this year, which will help pick up our gross margins and operating margins.

Okay.

I guess second question would be, you know, given the magnitude, even excluding the charges of the difference in EPS reported versus guidance and expectations, just curious why maybe there wasn't a preannouncement.

Well, George, I'll take that one.

Quite frankly this has been a complex quarter with a host moving parts.

We are quite early in the year and the cycle here, and you know, we've come to market with results as soon as the final financial determination was available.

Okay.

George, just another -- I mean, the swing factor when we're dealing with such low levels of profit profitability, we're only looking at a $3 million to $4 million dollars swing factor in profitability.

Making the difference on EPS.

So literally until we finalize the books, it's very difficult for us and we don't have the visibility where such small amounts can affect level of profitability.

Okay, and finally, if you could confirm, I just want to confirm something.

Did you say that the pretax margin exiting the clear that, foreclosure fourth quarter, you're anticipating a 6%?

Approximately 6% exiting in fourth quarter, correct.

Okay, I'll turn it over for some other questions, thank you.

And again, it is star-1 if you would like to ask a question.

We'll have our next question from Tom Meagher with BB&T Capital markets.

Thanks very much.

Just a quick question.

A couple quick questions.

Could you talk about the use of cash since December what's gone in there and secondly I'm assuming the Vredenburg transaction will probably finance from the cash on the balance sheet as opposed to the credit line?

Yeah, it's John Brittainain, I can talk you through that.

We're going to use our available cash resources to fund the Vredenburg acquisition, as we've said we have $101 million of available cash at the end of the quarter.

So that's not an issue.

In terms of use of our cash balances, our cash is reduced quarterly from March to current by about $14 million dollars.

I'm not focusing on the year to date numbers but basically we've got increased capital investments, and I believe on a year to date basis we probably are running about $25 million, $26 million dollars, which is a significant portion of the increase, and I know our networking capital in the second quarter was a positive impact to cash, but I'm disappointed with the level of our receivables, and open -- hopefully we will get those to come down over time.

Tom Meagher One other question.

In terms of the, you know, assume the structure down if you will; that an ongoing process, are you where you want to be in you mentioned 250 this quarter.

What are you kind of looking at in the future if indeed you have any more to do.

Tom, 250 for the total program with which about half left the payroll, the rest in the third quarter and some in the fourth quarter.

That payroll level, then, we believe is right sized against our forward view of the market.

But that notwithstanding we'll take any opportunity we can to get the cost base down lower.

Okay, thanks very much.

And we'll have a follow-up from George Price, Legg Mason.

Thanks.

A couple of other things.

One, the $24.8 million restructuring charge, is it safe to assume that the cash component of that is roughly the portion for staff reduction?

Yes, point of view also on the real estate, George, I mean there is some cash impact on that as well over time because we're disposing of real estate and we have net book value exposure against market value.

So, over time, it really all becomes if you thinkable.

What's the timing of the all of the cash out outlay?

It varies.

I mean, I would say over time, 3-plus years, really, large largely associated with the real estate.

With regard with regard to individuals affected, it's a very short-term impact and all individuals involved in this program, I'm anticipating will be completed by the end of this year.

All right.

And I wondered if you could maybe talk a little bit more about the state and local environment.

You know, it's interesting that we still see, you know, our fees, we still are seeing awards, but you mentioned that that some programs are being delayed.

I'm curious if, you know, you're also seeing -- well, I guess first if you could just talk a little bit more about what is being delayed and why, and then second, are the states come down at all on pricing with vendors?

Okay.

Well, the state and local business, no doubt, is still very challenging.

I mean, the fact is that 49 out of 50 states are posting budget deficits in the aggregate deficit about $75 billion.

And most of them have statute requirements for balanced balanced budgets and so we're seeing across-the-board cuts and reduction in headcount.

That produces a challenge, but it also produce as opportunity because with our approach to benefits funding contracting and putting some outsourcing proposals on the table in terms of business process, out sourcing and application management, it gives the states an opportunity to creatively address some of the problems.

So that creates an opportunity for us.

We've been very careful to focus on where the money goes, and especially where the federal money goes to supplement the state budgets.

And case in point, the California child support was a federal mandated program and the feds support that to the extent of over 60% of the cost.

And so that has been our very focused approach to achieve growth in a flat to down market.

Okay.

I'm sorry, and on pricing, was there -- I mean, are they they -- you know, are states using that at all yet, or are they more --

There's no doubt that states like any other customers, they're very price sensitive and believe the pricing power has been transferred to the buyer.

That said, we see a lot less pressure there for the off offshore model.

Okay.

And I guess final question, leading off from the tail end of that is, what kind of impact is the offshore trend, do you think at this point, still having on AMS' business?

Is it still a down pressure point or do you think it's kind of hit a bottom?

It produces pricing pressure that we need to respond to with creative solutions.

First of all, we feel less pressure because that technique doesn't necessarily lend itself to very complex systems where we are into domain-specific applications, specific solutions at any one time more than half are employees, customers on-site.

There's a little less pressure there.

To the extent we need to respond to the offshore model we have contracting capabilities that ewe use in India.

We use our Polish for near shore in Europe and Canada for near shore in U.S.

And that's how we balance the cost against revenue.

Great, thank you.

And we'll now go to Michael Lewis, BB&T Capital Markets.

Good morning, gentlemen.

John, could you address where your expectations for free cash flow will be at the end of this year?

Mike, we don't give guidance beyond the current quarter and really all that we're giving guidance for currently is our EBITDA cash flow, the numbers I went through for the third quarter.

Okay.

And of course, -- we don't give that guidance guidance.

Okay.

How about, can you break out the D&A of your SG&A this quarter?

Sure, I'll roll you forward in terms of our investments in the current quarter.

We had additional investment in the quarter of approximately $13.5 million and against that we had amortization of about $8.3 million, and then we had our write-offs that we've talked about, including some other adjustments of a little over $7 million and our ending net book value in our capitalized software assets was $107.5 million.

Okay.

And even though the Vredenburg acquisition does did not close yet, can you discuss some of the margin impact from that acquisition, how that will move in with the $60 million revenue next year?

I tell you at first we would like to say once again how excited we are in terms of a growth opportunity.

There's really leverages in our existing organization and fits in extremely well with what we're doing in the defense industry and intelligence services and the contract vehicles that Vredenburg has leveraging of potential in the marketplace is going to give us huge growth potential and as we scale the business into ours we're going to get the synergies in terms of the administrative support to our revenue-generating associates in that business line.

And as we've said, it's going to be immediately accretive.

The implication of the multiple numbers I gave you already the purchase price total consideration at point X times first half annualized revenues implies as we said before that their current revenues are $60 million dollars, indicating that the enterprise full consideration value on cash flow is at 5.1 times first half annualized, and implies that they're running about $9 million to $10 million in EBITDA cash flow and my expectation we're going to get margin improvement from the operating side, and drive good profitability from the business.

Excellent, thank you, sir.

And we'll have a follow-up from George Price, Legg Mason.

Thanks.

Last couple questions.

Just on the DSOs, what can we expect in terms of maybe seeing those start to come down?

Frankly, my biggest concern there, as I said before, was not the fact that the collectability (ph) of the receivables.

The issue we have is that we have seen some slow pace, particularly in the state and local government environment, given the challenges, fiscal year end being at June 30th, a number of large payments came in unfortunately right after the quarter end and in fact when we look at our past due receivables over 90 days past due, they've come in.

And I'm disappointed with the level of receivables, we're putting full court press on accelerated collections.

I want DSOs to come in, but right now I'm not going to give specific guidance.

The historic levels should be achievable but we'll have to see and we'll report to you at the end of the quarter.

Okay.

And maybe if you could comment a little bit on the environment that you're seeing in Europe, things appear to be a little bit -- continue to be a little weaker there than North America.

Yes, this is Alfred.

I'll respond to that.

Europe, actually, has shown considerable strength and we're actually beginning to pick up business in the financial services area there.

The Telecom business is told holding its own and we should be able to sustain the revenue performance in Europe.

You know, historically, U.S. has been on about a six-month six-month -- Europe has been on a six-month lag cycle to the U.S. and I think there is some evidence to that.

But nonetheless with the relatively strong Euro, I think Europe is performing relatively approximately well.

Okay, and I think on that, John, any ideas about the currency impact to the quarter's result?

Maybe in terms of revenue?

It's revenue and profitability and just look at the exchange rate differential and you can look at.

I haven't isolated it, but about 13% of our revenues are international, majority of which would be Euro-paced.

Okay.

Great, thank you very much.

And just a reminder, it is star-1 if you would like to ask a question at this time.

Again, that's star-1.

And we'll pause for a moment.

And at this time we have no further questions in the queue queue.

I'd like to turn the conference back over to Mr. Mockett for any additional or closing remarks.

Thank you very much.

I'd just like to thank everybody for joining us on this conference call this afternoon and no doubt we'll be speaking to most of you shortly and in the near future.

Wish you have a good rest of the day and good weekend ahead.

Thanks for joining us.

Take care.

That does conclude today's American Management Systems second quarter earnings conference call call.

You may disconnect at this time.

We do appreciate your participation.--- 0