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Operator
Please stand by.
We're about to begin.
Good morning and welcome to the American Management Systems third quarter earnings conference call.
Today's call is being recorded.
The webcast archived version of today's call can be found on the investor portion of ams.com.
Under the event calendar.
I would like to remind you that certain statements by AMS management during this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements are based on management's current expectation and are made in good faith by the company pursuant to the safe harbor provision of the act.
Forward-looking statements include financial projections, estimates, and statements regarding plans, objectivities 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 change in circumstances which may cause the company's actual results to differ materially from all -- 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 ended December 31st, 2002, provides a more detailed analysis of the factors that could cause the company 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 investments or views as of any subsequent date.
In addition, the company assumes no obligation to update the information presented during this call.
Also, during today's call management will reference certain non-GAAP financial measures which the company believes provide useful information to investors.
The company will post reconciliation of those measures to GAAP on its investor relations page at amsinc.com.
I would now like to turn the call over to Ronald Schillereff, Senior Vice President and director of investor relations.
Please go ahead sir.
Ronald Schillereff - SVP and Director of IR
Thank you, Sylvester.
Good morning everyone.
Before we begin the call, I'd like to remind you that the AMS analyst and investor conference will be held on December 4th, in New York city.
For more detailed information, please visit the Website at amsinc.com.
This morning, AMS's Chairman and Chief Executive Officer, Alfred Mockett, will begin the call with an overview of our business operations and strategy.
Jim Reagan our Executive Vice President and Chief Financial Officer will discuss our financial performance.
Then we will open up the call for questions.
Now I'd like to turn the call over to Alfred Mockett, Chairman and CEO.
Alfred Mockett - Chairman and CEO
Good morning everyone.
And thank you for joining us.
This morning, I would like to review with you AMS's performance for the quarter and the near term outlook for our business.
Let's start with an operational overview.
First, AMS performed well in the third quarter, extending the return to growth that we noted in the second quarter.
The benefits of our restructuring and refocusing of the business are evident in the form of increasing revenues, a growing pipeline of business a book of new orders and strong balance sheet fundamentals.
Further we increased our bank lines by $40 million giving us available liquidity of $255 million to fund future growth initiatives.
Second, despite ongoing challenges in the economy and our markets, AMS met its third quarter earnings guidance.
Exclusive of the Vredenburg acquisition earnings per share of 16 cents were at the top end of our guidance aided in part by improvement in our expected tax position for the year.
On the same basis, revenue for the quarter of $233.6 million grew sequentially but a little short of our guidance of 235 million impacted by delays in the startup of several Projects that were previously awarded.
And third, we closed on our acquisition of R.M.
Vredenburg and Company and expect to complete its integration in our public sector group by the end of the year.
Vredenburg is performing well almost immediately accretive to AMS earnings.
In fact contributions from the Vredenburg acquisition in terms of revenues and profit are ahead of expectations aided by additional software sales at the close of the federal fiscal year.
Now let's take a look at the operating environment.
I believe we are beginning to see signs that the economy is improving.
Across all of our target markets demand appear to have stabilized.
In the commercial markets there continues to be an overhang of capacity and clearly the pricing power remains in the hands of the customer.
The focus is still primarily on cost reduction and efficiency.
While some customers are beginning to look for new value propositions most still want us to show them how to better utilize their existing assets.
They are still predominantly driven by faster pay back and higher ROI.
These needs play directly to AMS's strengths.
Our public sector business remains our strongest business.
To date AMS has won more than $760 million in new contracts and extensions to existing work.
Many of these programs are multiyear engagements that will deliver stable and predictable revenue for AMS for years to come.
One of the largest wins during the quarter was our selection by the Library of Congress to provide an integrated financial management and procurement system.
The system will support operations at the library and other congressional agencies.
This is a ten year program worth $34 million to AMS.
Based on momentum AMS's enterprise resource planning suite for federal government agencies the solution will enable seamless integration of the library's procurement and financial systems.
Momentum is one of only four commercial off the shelf packages that are compliant with newest government standards.
Two defense related wins for the quarter include an $8 million contract with the Defense Advanced Research projext Agency for support enhancement and integration as DARPA’s finance and procurement system and a program with the DOD to developr our next major release in the department stander procurement system project.
The SPS win is valued at 16.7 million over two years before all options are exercised.
We are especially pleased with the SPS win, as the extent of project we have worked on since 1996 to simplify the military acquisition process.
Our federal defense business delivered the greatest sequential revenue growth of our public sector group in the third quarter.
Our work with intelligence agencies remains our fastest growing area.
While we're not yet seeing much traction in either appropriations or funding for the DOD transformation program, we expect to see above market growth in IT spending in our federal defense target market.
State and local markets remain under pressure due to fiscal shortfalls.
Our revenues for the quarter were essentially flat.
Although the quarter was relatively quiet as we are in the early stage of the local government procurement cycle we won an important new project with the State of Missouri department of revenue.
Under the $11 million Projects AMS will upgrade Missouri’s tax system with new software solutions and provide consulting services to assist in collecting state debt.
For the first time in a state tax agency we will implement the new web-enabled version of tax plus for government software as well as the strata risk management decision engine.
An important future of this project is that it utilizes our benefit funded contracting model.
During the quarter, one of our key programs, EVA, the Commonwealth of Virginia state procurement system reached a significant milestone by, passed the $1 billion mark in government purchases made through the system.
Since its inception in March 2001, EVA has been a resounding success.
Currently EVA is being used more then 200 state agencies and institutions almost 300 local government entities, 30 public universities and the community college system.
More than 13,000 vendors are registered on EVA.
EVA is a shining example of the power of solutions we bring to our customers and is a tremendous reference account generating much interest in other states.
In our commercial sector, the communications media and entertainment group marked its third consecutive quarter of increase revenues.
CME also secured three important new partnerships during the quarter.
Through these relationshups CME won three contract engagements in the quarter.
Also CME is partnering with the Public sector group to pursue opportunities in the federal government.
Together these groups are bidding on large public sector telecommunications Projects that leverage AMS's systems integration and billing expertise.
Looking ahead although this industry remains under pressure we expect that large telecommunications companies will slowly increase their IT spending looking to overhaul tide infrastructure and preparing for the eventual market rebound.
In the financial services market after a two-year slump there are signs of upturn in IT investment.
Similarly we are seeing an increase in pipeline activity.
In particular product offerings that drive revenue growth are beginning to be of special interest to our clients while management clients are once again investing and anticipation of business growth in 2004.
In the retail banking arena there is an increase in demand and customers are looking for domain experts.
As you are well aware AMS is well known for its domain expertise in this area.
Through out this end we recently announced a new project with Bank One under the program we will develop an open architecture loan origination system soulution, this solution will support the bank's first mortgage business as well as its direct and indirect consumer lending Projects.
This next generation system will Support real time operation of the bank and improve customer service we expect this system to become a leading customer based origination solution for the financial services industry.
There are still challenges in this marketplace however.
While the financial services market is showing improvement, and there is optimism for 2004, pricing pressure will persist.
As I mentioned earlier, a key highlight of the quarter has been the performance of the Vredenburg acquisition.
On August 1st we completed the purchase of its leading provider of professional and technical services to the DOD and the U.S. intelligence community achieving a significant milestone in our commitment to deliver growth and scale through acquisition.
We estimate that Vredenburg will add annual revenues to AMS of over $60 million while expanding our presence and capabilities in key markets.
Our ability to quickly and efficiently mesh its operations, culture and capabilities with those of AMS, has delivered early benefits.
During the 60 days that we have owned Vredenburg, the acquisition added about $50 million in revenue, surpassing our initial expectations.
We're very encouraged with the long term potential of Vredenburg.
During the quarter we continued to invest in a complete refresh of our product portfolio.
We purposefully stepped up our investment rate on such as momentum and advantage suites.
These products will account for approximately $400 million in revenue this year.
The level of our investments peaked in the third quarter and will start to come down in Q4, in 2004, we expect software investment levels to decline significantly compared to 2003 as our initiative to refresh and re-architect our key products nears completion.
We recently added strength to the board with the appointment of Frank Keatin former two-time governor of Oklahoma, and the current CEO of the American Council or Life Insurance, notably Frank rose to national prominence with his handling of tragedy in the aftermath of Oklahoma City bombing.
Frank brings the 30 year record of spending public service to AMS.
Additionally he shares our commitment to the hire standards of corporate governance.
We are delighted to have Frank on the board.
Now to summarize, I'm encouraged by the signs of an impending recovery in our business.
It is gradual, and tentative but definitely there.
We expect that our restructuring efforts of the past 18 months will allow us to capitalize our market trends and demand of increases and will improve our efficiency and profitability.
For the fourth quarter of the year we expect revenues to grow modestly maintaining our track record of sequential revenue growth.
Annuity revenue streams, growth, scale, and improved profitability remain our key areas of focus to deliver increased value for our shareholders.
Outsourcing remains an important element of our strategy for growth.
This year approximately $70 million of our revenue will come from outsourcing Projects.
We expect that number to increase significantly through 2004.
Overall I'm very pleased that we delivered on our expectations and again reported sequential revenue growth.
Our move to longer term and larger dollar value contracts is on target and as we approach 2004, I'm confident that we have made the right investments in our people, and in our intellectual property.
As a result, we are correctly positioned for growth and improved profitability into 2004 and beyond.
I'd now like to turn the call over to Jim Reagan our Executive Vice President and Chief Financial Officer for a closer look at the financials.
For those of you that have not yet met Jim, he has served as our Senior Vice President and corporate controller since May of 2002.
Jim was appointed to CFO on October 1 and he was accomplished for [Inaudible] and effective transition CFO.
Following his remarks I will have a brief closing comment and we'll open the call for questions.
Jim Reagan - EVP and CFO
Thank you Alfred.
I'd like to reinforce couple of Alfred comments regarding our financial results, first that our third quarter results validate our belief that there is a strengthening in the sector and second that our acquisition of Vredenburg puts us squarely in the parts of the federal sector where we believe there is significantly increased demand into the coming year.
For the third quarter I am pleased to report that we met the profit commitments outlined at our last earnings call.
Earnings per share for the third quarter were 20 cents, including the impact of the Vredenburg acquisition.
Excluding the effect of the Vredenburg acquisition earnings per share were 16 cents.
These figures compare favorably with our previous guidance of 14 to 16 cents per share.
Third quarter revenues were $248.1 million.
Excluding Vredenburg, revenues were $233.6 million, slightly below the range of our guidance.
Our ability to meet guidance on pretax income reflected faster than expected results from our restructuring.
Pretax margins before Vredenburg rose from 2.4% in the second quarter to 4% in the third quarter.
The second quarter results do not include the second quarter impact of our charges for restructuring, asset impairments, and contract litigation settlements.
After giving effect to the acquisition pretax margins were 5% of revenue.
With that overview of our revenue and pretax margin results, let me turn to a discussion of our revenues by target market.
Before the impact of the Vredenburg acquisition, our federal government agencies target market generated revenues of $86.8 million within our guidance of 86 to 88 million.
This represents sequential quarterly growth of 3%.
With the addition of Vredenburg, the federal sector sales advanced 20% to $101.2 million.
Third quarter federal government results were affected positively by demand in our intelligence and Department of Defense markets.
In contras to prior year this quarter end saw no end of the fiscal year buying surge although Vredenburg did benefit from a couple of software sales late in September.
State and local government target market revenues were $65.7 million for the third quarter.
This was about even with second quarter results and slightly lower than our range of guidance.
This was due to delays in closing certain license deals and a slower than expected ramp up of previously awarded contracts.
These delays reflect the fact that state and local budgets remain under significant pressure.
Governments CIOs and IT departments continue to struggle to address conflicting priorities of cost-cutting security and technological advancement.
Revenues from our financial services target market were $30.1 million for the third quarter which was slightly less than the second quarter results and $2 million less than prior guidance.
Now, there were two specific drivers here.
First, certain third-party product licenses that we expected to book on a pass-through basis to our customer did not occur.
In the second case, the decision to buy was deferred into the fourth quarter.
With that said we are seeing increased procurement activity in the areas where we compete well.
Collections, retail loan originations and decision tools.
Communications, media and entertainment revenues for the third quarter were $44.8 million, representing 4% sequential quarterly growth.
While we have a positive outlook for this business, our growth here will be dampened in Q4 by the impact of holidays, as well as vacations in Europe.
However, the backlog and pipeline for this target market indicate continuing improvement in results beyond 2003.
The company's net income for the third quarter was $8.6 million, or 20 cents per share as compared with $3 million or 7 cents per share in the second quarter.
The second quarter results exclude the second quarter impact of the special charges that I referenced earlier.
Excluding the impact of the Vredenburg acquisition net income for Q3 was $6.7 million or 16 cents per share.
During the third quarter we revised our expected tax rate for 2003 to reflect the improvement in the level of nondeductible costs for 2003 and beyond.
The impact of this change gave us a 2 cents per share benefit in Q3.
Earnings before interest, taxes, depreciation and amortization or EBITDA was $23 million for the quarter.
EBITDA excluding Vredenburg was 19.3 million which was in line with our prior guidance.
Capital expenditures on product development in the third quarter were $13.7 million compared with $13.2 million in the second quarter of 2003.
As we mentioned before, this spending was almost entirely focused on an upgrade and refresh of our core suite of software products.
We expect the spending to be slightly lower in Q4 and to decrease substantially into 2004.
We continue to maintain an excellent balance sheet with strong liquidity.
At September 30 we had $55 million of cash and no debt, along with our -- which along with our credit facility of $200 million gives us available liquidity of $255 million.
We continued our efforts to manage cash.
During the third quarter, our receivables days outstanding decreased by one day to 89.
While we drive hard to manage this number, we're comfortable with the quality of our receivables.
As an example, since September 30, 2002, the percentage of our billed receivables over 90 days has decreased from 14% to under 10% as of September 30, 2003.
The phenomenon that we're seeing and managing carefully, is an increase in the number of customers that pay us between 30 and 90 days.
We believe this is due to a growing need for some customers to manage their cash needs more carefully.
The change in our cash position at the end of the quarter was primarily due to the acquisition of Vredenburg.
I'd now like to review AMS's metrics and guidance for the fourth quarter of 2003.
First, let's discuss our revenue outlook.
Together with expected value from our pipeline of $27 million to $32 million, and the $223 million that we expect to realize in Q4 from our existing backlog, we expect fourth quarter revenues of $250 million to $225 million.
We expect these results to be comprised of the following target market contributions.
Federal government agencies, $102 to $105 million.
State and local governments, $66 to $68 million.
Communications, media and entertainment, approximately $44 million.
Financial services institutions, approximately $32 million.
And other corporate clients, about $6 million.
These projections reflect the expected impacts of fourth quarter holidays and vacations both domestically and in Europe.
Now let's turn to labor productivity.
During the third quarter, inclusive of the acquisition, the company increased its total headcount by 209 people from 6248 to 6457 employees.
At the end of the quarter our billable headcount represented 66% of our total headcount consistent with the second quarter.
The utilization rate of our billable staff was 85%.
The annualized voluntary turnover rate for total staff was 12%, remaining roughly even with the second quarter.
Now, given our current revenue outlook for the fourth quarter of 2003, EBITDA is projected to be $24 million to $26 million in Q4, and pretax income should be between $12 million and $14 million.
Net income for the fourth quarter is expected to be in the range of $7.5 to $8.7 million with an expected effective tax rate of 38%.
Now, these results should produce earnings per share of between 18 cents and 20 cents for the fourth quarter of 2003.
In summary, we finished the quarter in strong financial shape.
While returning to a growth mode we continued to carefully manage our financial assets and resources to maximize profitability.
I'm confident that we're well positioned to participate fully in the recovery of our markets.
I'd now like to turn the call back to Alfred for closing comments.
Thank you.
Alfred Mockett - Chairman and CEO
Thanks Jim.
The end of our second quarter conference call I said I was enthusiastic about our future prospects.
That continues to be the case.
Our financial condition is very sound.
We have a robust balance sheet.
We're generating positive free cash flow and we have significant available liquidity.
Our cost structure is under control and right sized against the market.
Our pipeline is growing as we focus on larger multiyear opportunities.
With the completion of the Vredenburg acquisition, amidst early contributions we have demonstrated our ability to add inorganic growth to our strategic mix.
We will look for other opportunities to add capabilities and scale in our core markets through acquisition.
Continuing revenue growth reflects our investment in sales and marketing capabilities, as well as the gradually improving external environment.
We have a strong management team and an excellent board.
In summary I'm pleased with our progress and eager for more.
Jim and I will now take your questions so Sylvester over to you.
Operator
Thank you sir, due to time constraints you will be allowed to ask one question.
And if you would like to ask a question, please do so by pressing star 1 on your touch tone telephone.
And if you would like to ask a follow-up question, please do so by pressing star-1 on your touch tone telephone.
You only can signal one time.
And if you would like to ask a question you may do so by pressing star 1 on your touch tone telephone.
And we will take our first question from George Price (ph) with Legg Mason.
George Price - Analyst
Good morning.
Thank you very much.
Could you give us a little more color maybe on the delays in the startup of the Projects?
It seems like a good amount of that is focused in state and local, but I think you also mentioned that there was some of that also occurred on the financial services side.
Can you maybe, you know, give a little color in terms of how much of the impact was in state and local versus other verticals, and you know, are these things, have any started up?
Are they going to be starting up in the fourth quarter?
Alfred Mockett - Chairman and CEO
Yes, George, this is Alfred.
Certainly.
The phenomenon is predominantly in state and local where we have been awarded contracts, but the appropriations have not yet come through.
Remember, there's some very large-scale deals such as the state of California, child support system, and some of the tax systems reporting in.
It's just been a little slower ramped up.
They will start ramping up in the fourth quarter.
We expect California to get to probably the $30 million year run rate during the next fiscal year.
And then peak spending of that will not probably occur until 2006, 2007.
But we're confident the projects are coming through.
Because what we've tended to do in the main is focus on state and local Projects that are in part funded by federal dollars.
For example, the California child support system was supported to the extent of, oh, over 65% in federal dollars.
So we're quite confident that those are coming through.
And a large portion of the states have got a June 30 fiscal year-end and we've seen a bit of a slow ramp up as they've got their budgets in order for the first quarter of the new fiscal year.
So nothing untoward in that regard.
And with regard to financial services, it isn't industry-wide phenomenon, it was just customer specific issue where one deal slipped from one quarter to the next.
George Price - Analyst
Anything in on the telecom side anything meaningful pushed off?
Alfred Mockett - Chairman and CEO
No telecom has showed three quarters of gradual growth.
George Price - Analyst
What should we expect from Vredenburg in the fourth quarter?
Alfred Mockett - Chairman and CEO
Well, we've said that Vredenburg was running at an annualized $60 million.
Obviously we got a bit of a surge because of some deals that were sort of pushed through as part of the federal spending towards the end of their fiscal year.
It will be approximately the annualized run rate.
George Price - Analyst
Okay, thank you.
Operator
And once again due to time constraints, you will be allowed to ask one question.
And if you would like to ask a question, you may do so by pressing star-1.
And we'll take our next question from Gil Alexander (ph) with Darfield Associates.
Gil Alexander - Analyst
Could you give us a little more color on the Vredenburg acquisition, how it helps strengthen you in the federal arena?
Alfred Mockett - Chairman and CEO
Certainly so.
Vredenburg was well positioned within the intelligence communities and that is probably the highest growth area within Department of Defense and federal civilian spending at the moment.
So that's encouraging.
They also are very well positioned with the Navy and with the beneficiaries of GWAC, government wide acquisition contract which will allow us to provide more AMS products and services into that contract.
Also, they came with a large cadre of top secret cleared and polygraph cleared people which is very scarce in this community and they are very difficult to recruit.
And they came with a good pipeline of business and good backlog and this is the type of acquisition we like to do.
Earnings accretive right out of the chute.
It's a good one.
Gil Alexander - Analyst
Thank you.
Operator
We'll take our next question from Harold Zirkin (ph) with Zirkin and Cutler Investment
Harold Zirkin - Analyst
Good morning.
We were happy to have the success of the California win on the contract bid with IBM.
I'm wondering if you are bidding with IBM on any other state Projects at this time?
Jim Reagan - EVP and CFO
Well, on the state of California deal, we bid with IBM and Accenture.
We were also bidding with IBM and Accenture on the $100 million pilot project with the Department of Defense to look at the systems architecture.
And at the moment we've probably got another six or eight deals where we're considering partnering with them throughout the country.
It is just part of my commitment.
That was one of my main strategic objectives when coming into this company to partner in old dimension of our business and we have been very successful partnering with some of our competitors.
Harold Zirkin - Analyst
Thank you very much.
Operator
Once again, if you would like to ask a question you may do so by pressing star 1 on your touch tone telephone.
Again, to ask a question you may do so by pressing star 1 on your touch tone telephone.
And we'll take a follow-up from George Price with Legg Mason.
Alfred Mockett - Chairman and CEO
Yes, George.
Operator
George, your line is open.
Please check your mute button.
George Price - Analyst
Sorry about that.
Wanted to focus a couple of questions specifically on your capex comments in '04 that product capex would be down.
Can you give us, you know, some kind of -- can you quantify that at all in terms of how much of a decline we should expect?
Alfred Mockett - Chairman and CEO
Well, it definitely peaked in Q3.
It will be a modest decline in Q4.
We expect it to ramp down significantly towards the middle of next year so we'll get to the point that the amount of capitalized software we're putting on the balance sheet will be equal to or less than the amortization.
And that's the steady state condition I want to get to.
George Price - Analyst
Okay.
And I guess is -- one thing I'd say that from an investment perspective looking at AMS over the years, you obviously have some very good products and a number of verticals.
It's not clear that you know we've seen the margins over time and I realize there's been a very depressed market in general over the last several years but even before that with the higher amount of business around some of these proprietary products we haven't seen the margins or return on invested capital.
Are you possibly looking at other ways that some of these products and/or the services around them might be priced differently to get a different return on the investments that you're making?
Alfred Mockett - Chairman and CEO
Well, first of all the investment in our product suite is absolutely key to our business model in that it produces a lot of drag-along revenues.
For every dollar of software license and support fees we get, we get $4 or $5 of drag along systems revenue.
That is fundamental to our business What I'm moving towards as we enter next year is trying to get two sets of uses out of that single investment in intellectual property.
First of all, continuing the core business that we are engaged in.
But secondly, reusing that intellectual property as part of an applications management outsourcing business process outsourcing model.
And you'll see us move significantly in that area, expanding our business model from design, build and install to design, build and operate.
And so I believe that leveraging the same intellectual property with two business models will allow us to expand our margins.
George Price - Analyst
Okay, thank you.
Operator
Once again that is star 1 to ask a question.
We'll take our next question from Will McKeed (ph) with Center Securities.
Will McKeed - Analyst
Alfred.
Alfred Mockett - Chairman and CEO
Yes, Will how are you?
Will McKeed - Analyst
I'm good.
Hope you are.
Listening to your comments about expenditures for software development.
I'm also looking at R&D declining.
And can you square this for me?
Alfred Mockett - Chairman and CEO
Yeah, well, we manage it as a total cost whether it's expensed or capitalized.
That's the first point to make.
And we just follow the accounting rules and the numbers fall where they should according to GAAP.
There is no conscious decisions or tradeoffs between the two.
So we manage it as a total expense.
For the long run, I would expect our total expenditure on product in aggregate to be around 4% of revenues on a steady-state basis.
You know it's going to peak at probably 50% more than that figure this year because we were committed to do a complete refresh of our core product suite, to be sure everything was web enabled, everything is been re-written in modern open languages like Java 2E and dot net.
And make sure we will open up the architecture and provided open API’s and use a exit and so we could get much more use out of that intellectual property.
That was a conscious step up decision in expenditure.
It will come down to the more normalized run rate in aggregate.
I am very confident in that level, that will sustain the hybrid level as well.
Jim Reagan - EVP and CFO
Let me add an additional comment onto that, one of the reasons we are seeing a bit of a decrease in the expensed R&D is that typically what you see when we recognize it's there during the early phases of development and because of the work we're doing are refreshes of existing proven products, the appropriate accounting for that is to account for it and amortize that once it goes into service.
Will McKeed - Analyst
Thank you all very much.
I think that you should -- I mean, find a way to make this clear in your releases, because if I'm right, you're penalizing your operating results by making investments for the future, and from an investment standpoint that's good.
And I'm not sure that it's adequately being communicated to us.
So just a thought.
Alfred Mockett - Chairman and CEO
Okay.
Well, thanks for that thought.
We'll make sure we pick that up on December 4 when we give you a much fuller articulation of the strategy and business model.
Will McKeed - Analyst
Thanks very much.
Alfred Mockett - Chairman and CEO
Okay.
Operator
We'll take our next question from Gareth Evans (ph) from Investech.
Gareth Evans - Analyst
I just want to pick up on financial services quarterly run rate of revenues You're guiding towards $32 million for Q4 which is around 2 million higher than the Q3.
If that's the same $2 million that was deferred from Q3, mostly into Q4, does that mean that it's roughly flat run rate across the quarters in second half of the year and if so, at what stage during 2004 would you expect to see the pickup based on your discussion of the increase in pipeline that you're seeing?
Alfred Mockett - Chairman and CEO
Well, it's on a slow growth rate track.
I mean there are a number of factors affecting our view on Q4 and some of that pertains to seasonality in Europe.
I look at the data for last seven years, billable hours always goes down in Q4 in Europe because Europe shuts down in the last two weeks of the year.
I want to make sure we recognize that in our forward guidance.
Gareth Evans - Analyst
Okay, great.
Operator
Once again that is star 1 to ask a question.
And we'll take a follow-up from George Price.
George Price - Analyst
Thank you.
Wondered, Jim, what the tax rate expectations, you know, we should think about in 2004.
You mentioned 38% for fourth quarter, right?
Is that sustainable next year?
Jim Reagan - EVP and CFO
What I expect, George, is that given what our expectations are for growth next year and how we're going to be running the business, it will probably come in at around 39%.
George Price - Analyst
Okay.
Okay.
And percentage of completion accounting, how much POC, how much are your revenues under POC?
Jim Reagan - EVP and CFO
It's around 45% of our total revenue.
George Price - Analyst
And can you give us a sense of where -- where that is and what type of work?
I mean is more or less that saying the federal, state and local side versus commercial?
Jim Reagan - EVP and CFO
Actually, it's pretty well spread throughout our business.
And it tends to be on on our larger systems integration Projects where we wrap the sale of our -- sale and licensing of our software in with the implementation services.
So I wouldn't say that it's concentrated in any specific segment of our business.
George Price - Analyst
Okay, thank you.
Operator
Mr. Mockett there a appear to be no further questions at this time so I like to turn the call Back over to you sir.
Alfred Mockett - Chairman and CEO
It’s been fun and wish you a good day, thank you.
Operator
This does conclude today's conference call.
At this time you may disconnect.