CGI Inc (GIB) 2003 Q4 法說會逐字稿

Welcome to the American Management Systems fourth-quarter and year-end earnings conference call.

Today's call is being recorded.

The Webcast archived version of today's call can be found on the Investor Relations portion of AMS.com under the event calendar.

I would like to remind you that certain statements made by AMS management during this conference call that refer to financial projections, forecasts, 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 constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These statements are based on management's current expectations and involve known and unknown risks, uncertainties and changes in circumstances, which may cause the Company's actual results to differ materially from those expressed or implied by such statements, including but not limited to, the risk factors detailed in the Company's filings with the Securities and Exchange Commission, such as its annual report on Form 10-K for the fiscal year ended December 31, 2002.

Any forward-looking statement should not be relied upon as representing the Company's investments or views as of any subsequent date.

Any 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 provides useful information to investors.

The Company will post reconciliation of those measures to GAAP on its investor's page at AMS.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 take it.

AMS Chairman and Chief Executive Officer, Alfred Mocket, will begin the call with a broad overview of the Company and our business operations.

Following Alfred's remarks, Jim Reagan, our Executive Vice President Vice President and Chief Financial Officer, will provide greater detail on our financial performance, as well as provide guidance for the first quarter of 2004.

We will then open for questions.

Now I would like to turn the call over to Alfred T. Mocket, Chairman and CEO.

Good morning, everyone, and thank you for joining us for our fourth-quarter and year-end conference call.

This morning, I would like to review with you AMS's performance in the quarter and the year as well as our near-term outlook for our business.

While the fourth quarter delivered some notable successes, I'm very disappointed that despite a $2 million insurance recovery, we fell $4 million short of our profitability target, causing us to revise earnings guidance downward.

Fourth-quarter earnings per share came in at 13 cents, well below our original guidance of 18 to 20 cents.

These disappointing results were primarily due to nonrecurring costs on early installations of new Web-based versions of AMS software products, increased recruitment costs and additional commissions on increased order activity.

Jim will provide you with more details shortly.

In the meantime, let me share with you certain measures that we have instituted with immediate effect to insure that these circumstances are not repeated.

We have moved from quarterly to monthly reviews of all fixed-price and early-stage contracts.

We have insured business models anticipate all early support costs of new run-updated (ph) software solutions.

We have centralized control of all our recruitment activity.

And we have refined our forecasting procedures to capture all business development costs associated with future with revenues.

I'm confident these measures will ensure the potential problems are serviced early and corrected.

During the fourth quarter, AMS posted its third quarter of sequential revenue growth and delivered revenues at the top end of the range, despite concerns of seasonal weakness, especially in Europe.

We drove strong order intake, resulting in bookings of $375 million of new business.

As a result, we entered 2004 with a healthy backlog of $1.3 billion.

This performance underscores our effectiveness and executing on a business strategy to increase sales and win larger and longer-term contracts.

Our cash position remains strong.

Key investments and initiatives and developing the sales and marketing culture; and achieving a complete refresh of the product portfolio; and rescaling and rebalancing the workforce; and funding the Vredenburg acquisition, have all been achieved out of internal cash resources.

As anticipated, the demand on our cash flow from our investments in capitalist software has peaked, and will trend down over time.

We are producing positive cash flow, of $62 million in cash-on-hand, and a bank facility of $200 million.

Our ability to grow inorganically is intact.

And our competence in selecting profitable acquisitions is demonstrated by our purchase of Vredenburg.

Incidentally, Vredenburg added more than $175 million in backlog to AMS in 2003.

As we approach 2004, the worst period in our industry's history appears to be behind us.

While pricing pressure is still evident, hourly rates are stabilizing.

Our capacity overhang is still there, on the customer's bench, the competitive bench, near shore and offshore.

But overall and industrywide, billable headcount and utilization rates, are showing modest improvement.

Voluntary turnover rates are stable, gross margins are holding, and the clients are ready to selectively increase spending, indicating that 2004 will be a year of modest recovery.

These key metrics for our industry have us positioned at the threshold of a period of consistent and sustainable growth, for which AMS is well-prepared.

Before I share with my further perspectives on 2004, I would like to call on Jim to discuss 2003 financial performance and guidance for the first quarter of 2004.

I would like to reinforce Alfred's comments on AMS's performance in the fourth quarter.

With the 254.5 million in revenue recorded in the fourth quarter, AMS has now experienced three consecutive quarters of modest but continual revenue growth.

Our current backlog is stronger than any period in our recent history.

These are indications that there is some strengthening of IT services spending in our sector, and that our strategy is beginning to pay off in getting business in the door.

But first, let me deal directly with tenant issues on the minds of directors and analysts resulting from our pre-announcement last week.

Namely, what caused the decreased profit number, why the Company did not disclose it sooner, what we're doing about it and what the implications are for the first quarter and beyond.

In order to track our performance to our forecast, we monitor several variables -- billable hours, backlog, utilization, hand-labor and third party costs.

Through the fourth quarter, our billable hours stayed in line with our forecast as did our total labor costs, giving us a reasonable basis for reaffirming our estimate in December.

This estimate has been further validated by a detailed re-estimation of our project cost estimates at quarter's end.

However, as we closed the books on December, two significant issues came to light.

First, progress on certain projects did not keep pace with the level of incurred costs.

This was primarily due to higher than expected integration costs on initial deliveries of certain new product releases.

This forced us to revise our cost estimates to provide lower revenue and profit recognition on these projects, where we are performing our first implementations of newer software releases.

The second issue is that while we had forecasted higher recruitment costs to enable us to work on recent project awards, we overspent that amount.

These two issues were responsible for misses of about 4.5 cents and 2 cents per share, respectively.

As mentioned in our news release last week, we also had to accrue for future commissions payments on contract awards that were not in our forecast.

This had about a 2 cent impact.

These factors were offset by the receipt of a payment from one of our insurers of $2 million for its portion of our coverage on the Thrift Board matter.

That payment had a positive impact of 3 cents per share.

We continue to work with our other carriers to finalize our insurance recoveries on this matter, and we will record their impact when the amount is finalized.

When it was clear in late December that certain projects were showing unplanned implementation costs, we worked immediately to assess the root causes, determine the product changes required to insure smoother implementations in the future and to quantify the impact.

At this point, we were close to the end of the quarter and determined it was most prudent to defer any pre-announcement until the books were closed, until our audit was substantially complete and any other issues were quantified.

As to our controls over our recruitment spending, we are now taking the dollars previously spent on business area-specific recruiting and centralizing it under the control of corporate HR to better optimize our spending as well as our ability to forecast it.

We expect that these actions will return us to the project profitability levels that we saw earlier in 2003.

Let me now turn to a discussion of our target markets.

In the fourth quarter of 2003, all of our target markets produced revenues slightly higher than guidance ranges, with the exception of financial services, which I will speak to in a moment.

Our federal government agency target markets generated revenues of $106.2 million, slightly above our guidance of 102 to 105 million.

This represents sequential quarterly growth of 5 percent from the third quarter.

For the year 2003, this market grew at 10 percent year-over-year.

Fourth-quarter federal government results were affected positively by a growing level of services revenue in our defense and Intel group, and strong services additions in our federal health-care practice.

As an example, during the quarter, AMS won a $115 million contract with the U.S.

Naval Sea Systems Command to continue program management for the Navy's surface mine warfare program.

Additionally, we were awarded two task orders valued at $28 million from the Centers for Medicare and Medicaid Services.

Along with defense and intelligence, the federal health-care market is expected to be one of the fastest-growing segments of IT services in the next few years.

We are ensuring that we are positioned to be capitalized on this development.

State and local government target market revenues were $68.1 million for the fourth quarter.

This was above guidance for the -- this was above the third quarter results and slightly above our 66 to $68 million range of guidance.

And this represents sequential quarterly growth of 3 percent.

The primary drivers for these increases were client ERP decisions deferred in the third quarter that were awarded in the fourth quarter and some delayed projects that were started in the fourth quarter, generating additional services revenue.

We also secured new programs with states, including a $26.8 million program with New Jersey to install a state-wide child welfare system.

These results are particularly positive in light of the fact that state and local governments remain under continuing budget pressure.

Communications, media and entertainment revenues for the fourth quarter were $44.3 million, which is consistent with the third quarter.

Year-over-year revenues for this target market declined by 10 percent, reflecting the shrinking landscape of in telecommunications in 2002.

However, the quality of our people and solutions enabled us to stabilize our position in this sector in 2003.

During the quarter, we welcomed several new customers to this business, including a top U.S. wireless provider, a large competitive local exchange carrier and one of the largest Internet service providers in the world.

We see the most potential in the U.S. wireless sector, where we launched a new practice during the fourth quarter.

We are now actively engaged with wireless and wireline customers in Europe and in the U.S., exploring the value that can be driven for mobile data services.

At the same time, we continue to see strong interest and other key areas in AMS expertise, including business intelligence, customer interaction, and billing and credit risk management.

We continue to have a positive outlook for this business.

The backlog and pipeline for this target market indicates continuing improvement in results in 2004.

Revenues from our financial services target market were 29.6 million for the fourth quarter, which was slightly less than the third quarter results and more than $2 million lower than our prior guidance of $32 million.

There are specific drivers here.

In financial services, we have seen an abrupt slowdown in sales of product upgrade in the CRM and credit risk area, which adversely impacted our revenues.

We believe that sales of this product have declined pending a rollout of a newer originations product that recently went live with our reference customers.

While this bodes well for our second and third quarter revenues in financial services, it does suggest that the first quarter revenue will be lower.

With that said, we are seeing increased procurement activity in areas where we compete well.

Collections, retail loan originations and decisioning tools, which also points to a resumption of growth in this sector in the second quarter.

For the Company as a whole, we had another strong quarter in terms of new bookings.

In the fourth quarter, AMS experienced bookings of approximately $375 million.

Given the fourth quarter revenue of 254.5 million, this translates to a book-to-bill ratio of nearly 1.5.

For 2003, AMS had revenues of $961.6 million and total bookings of approximately 1.3 billion for a book-to-bill ratio of 1.4.

Although we had promising sales results, we clearly view our earnings as a disappointment, both in missing our product margins on newer product delivers as well as in providing timely control over indirect costs.

The Company's pretax income for the fourth quarter was $8.7 million as compared with 12.5 million for the third quarter.

Net income for the fourth quarter was $5.5 million or 13 cents per share as compared with $8.6 million or 20 cents per share in the third quarter.

Earnings before interest, taxes, depreciation and amortization or EBITDA, was $20.1 million for the quarter, including the insurance settlement of $2 million.

Expenditures on product development in the fourth quarter, both capital and expensed, were $16.5 million compared to 16.4 million in the third quarter of 2003.

Capital expenditures on product development were $13.4 million in the fourth quarter compared to $13.5 million in the third quarter of 2003.

This spending was almost entirely focused on an upgrade and refresh of our core suite of software products.

We expect this spending to be slightly lower in the first quarter of 2004 and to decrease substantially throughout the latter half of the year.

As in the third quarter, this spending was focused on our product re- platforming initiatives.

The small increase over the third quarter relates to a decision in the fourth quarter to undertake a replacement of our internal ERP system.

This will continue through 2004 and enable significant cost efficiencies in our HR, IT, financial management and billing operations.

As we have said before, we plan on a significant decrease in total capital spending in 2004, including the impact of our internal system replacement.

We intend to hold capital expenditures for all of 2004 at approximately 5 percent of revenues.

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

At December 31, we had $62 million in cash, up from $55 million at September 30, and no borrowings on our $200 million credit facility.

At December 31, our DSOs stood at 91 days.

A reality of working in the public sector business is that some projects and customers drive high DSO.

Our deferred revenue, which represents advanced payments for customers, projects and maintenance, increased $10.7 million since the third quarter.

Now let's turn to labor productivity.

At year-end, AMS had 6,448 employees, including 4,222 direct employees and 519 product development and support employees.

Of our total available staff hours, 70.4 percent were on client-related work in the fourth quarter.

This breaks down as follows -- 61.5 percent were on direct projects, 5.8 percent were on product development and 3.1 percent were on billable product support.

Utilization was lower in the fourth quarter versus the third quarter rate of 71.8 percent as a result of more holidays and vacation days taken during the quarter.

For all of 2003, AMS's utilization rate was 70.8 percent.

Again, the utilization rate is based on client-related hours divided by standard hours.

The annualized voluntary turnover rate for total staff in the fourth quarter was 11.5 percent, which is lower than the third quarter rate of 12 percent.

I would now like to review AMS's metrics and guidance for the first quarter of 2004.

As many of you who follow the Company know, the first-quarter performance historically trails that of the previous fourth quarter.

In fact, looking back as far as the fourth quarter of 1999 to the first quarter of 2000, and each year since, we have seen a sequential revenue decline.

This is driven by a fall-off of peak software license revenues and delays in the ramp-up of new project awards in the new year.

Today, we find that the first quarter of 2004 will be similar to those past.

Together, we would expect a value from our pipelines for the quarter of 18 million to $23 million.

And the 227 million that we expect to realize in Q1 from our existing backlog, we expect first-quarter revenues of 245 million to $250 million.

This expected decrease from the fourth quarter is predominantly in a couple of areas. ,First our expected software license revenue, particularly in our state and local target market within the public sector group, will be lower in the first quarter.

In addition, as I mentioned earlier, we expect our revenue in the financial services group to decline in the first quarter with sequential increases in the second quarter and beyond.

We expect our results to be comprised of the following target market revenues -- federal government agencies, 103 million to $105 million; state and local governments, 64 million to $66 million; communications, media and entertainment, approximately 45 to $46 million; financial services institutions, approximately 28 million; and other corporate clients, about 5 million.

Given our current revenue outlook for the first quarter of 2004, EBITDA is projected to be 20.3 to $22.3 million.

Projected pretax income should be between 7 million and $9 million.

Net income for the first quarter is expected to be in the range of 4.1 to $5.3 million with an expected tax rate of 41 percent.

These results should produce earnings per share of between 10 and 12 cents per share for the first quarter of 2004.

In summary, we have dealt with the issues that surfaced in the fourth quarter of 2003, and have established practices to ensure that they do not reoccur.

We continue to carefully manage our financial assets and resources to maximize profitability.

Importantly, taking into account historical factors for the first quarter, we're confident that the Company is returning to a growth mode that will deliver topline and bottom-line results in 2004.

I would now like to turn the call back over to Alfred for closing comments.

Thank you.

Looking ahead to the balance of 2004, I see many hopeful signs.

GDP growth should remain steady, setting the stage for the U.S.-led global recovery that will ultimately stimulate global IT spending.

Further, the most recent economic news points to increased, but guarded optimism for 2004.

Pricing pressure is still evident, but it's stabilizing.

And for the first time in several years, some CIOs are saying they will selectively invest in new project.

And most are expecting to spend to budget over the next 12 months, as opposed to deliberately aiming to underspend.

It is estimated approximately one-third of IT expenditures over 2004 will be earmarked for new projects rather than existing ones.

This is up from 23 percent in 2003.

The greatest growth in our industry in 2004 will come from several government IT, which is expected to reach nearly $60 billion.

Defense and intelligence agency spending will account for the bulk of the growth in this sector, but increased investment is also expected in the federal civilian area.

In the state and local government segment, there are signs of improvement following nearly three years of decline.

State governments are reporting that their budget outlooks are stable, budget debts (ph) are shrinking, and there's cautious optimism in many states for the remainder of the year.

The telecommunications industry is expected to recover modestly in North America in 2004 on growth of that 3 percent.

Following several years of tremendous cutbacks on capital expenditures, communication companies are now considering new investments and carriers are focusing more on applications and services that generate revenue rather than cut cost.

Western European markets are still lagging behind.

The slowest growth area in Europe will be the communications sector.

But there is a chance for uplift in the new service areas, such as mobile data services, where AMS has a proven expertise and capability.

The financial services industry is now starting to look at revenue growth fueled by products and service creation.

This compares with the last two or three years where the industry was primarily focused on cost containment and efficiency and productivity improvement.

There are particularly good signs in the capital market sector and the global banking market, especially for investments and networking and infrastructure, and in the retail banking and lending areas, all areas where we have strength and compelling value propositions.

Throughout all of our markets, I believe the opportunities are there for growth.

Just two months ago, at our analysts investor conference in New York, I laid out AMS's strategy for moving forward and positioning the Company for competitive advantage in 2004.

I would like to further emphasize our four-point plan.

First, we will integrate the financial services unit in the communications, media and entertainment unit into one group to enable greater focus and to better leverage its strength and capabilities across the organization.

As part of this initiative, we will report on two lines of business, commercial sector and public sector, starting with the first quarter financials.

Second, we will bring together all of our software engineering activities across vertical factors and service lines into one single organization.

We are on track to combine software development and support across the Company by the end of the first quarter of 2004.

Our offshore development efforts are progressing well.

We are ahead of schedule and ramping up our operation in Krakow, Poland; and our new Krakow development center will officially open next month.

Third, we will further capitalize on our software assets and broaden the reach of our software product solutions by developing alliances with targeted third-party integrators.

The selection of SI partners is proceeding well, and we're on-target to announce these relationships before our next earnings call.

Fourth, we will continue ramping up our AMO and BPO capabilities to seize the large and attractive opportunities in managed services.

As I mentioned before, we will provide AMO of our own applications and on a selected basis, those of others.

By the end of 2004, we plan to operate and report the outsourcing business as a dedicated division.

Over the next ten months, we will work to more than double the scale of our outsourcing business.

As I close today, let me leave you with two key thoughts.

We are disappointed by our earnings miss in the fourth quarter.

As I hope you now understand, we've taken steps to ensure this set of circumstances will not be repeated.

And while our first-quarter guidance takes account of known seasonal events leading to a slow start for 2004, we expect continuous improvement in revenue and earnings for the balance of the year.

Thank you.

Jim and I would now like to take your questions.

So Sylvester, it's over to you.

(OPERATOR INSTRUCTIONS).

George Price, Legg Mason.

The first question on margins, Jim.

Lower than we were anticipating in the first quarter.

I am wondering if you can maybe break out what factors may be impacting margins, how much impact may be from lower financial services revenues, other factors you could break out there?

And then if you can give us some color on expectations for profitability, operating margin that is, as we move through '04, that would be helpful?

The lower margins, I believe you're speaking of just a lower overall pretax margin and EBITDA margins, and your models might have expected before -- it's primarily driven by the fact that our volumes are ticking down somewhat in the first quarter over what our run rate had been in 2003.

The level of relatively fixed SG&A and labor costs that should get more coverage as the revenue ticks back up in Q2 and Q3, is the primary driver of that.

This is not something that is a project-based phenomenon in Q1.

So I guess is it just -- are things just kind of slow to ramp up in terms of new work?

Is that what is at work?

And can you relate that to what you're seeing in terms of the positive outlook of incremental new spending coming on?

Let me give you my comments on the revenue line.

Historically, the first quarter has been soft and we have got five years of pattern recognition in AMS to demonstrate that.

We generally get off to a slow start to the year.

Customers have got a lower propensity to commit large amounts in the early part of the budget cycle.

And there are some industry specific issues in financial services.

We have seen a wave of consolidations, which has caused a hiatus in the market, and AMS is going through (indiscernible) to change that.

So those all lead to the belief to the revenue expectation in Q1.

Beyond that, in Q2, we'll see the backlogs start to kick in.

And that will give us the upside operating leverage.

We have invested two years of time and effort in building this backlog.

And it's a quality backlog.

It's longer-term contracts.

It's multi-year annuity revenue streams (ph).

It's larger scale contracts.

We have achieved these in partnering with some very prestigious partners.

And I am confident that this will help the margin as we go forward.

So we cannot say with conviction that beyond Q1, we expect continued improvement in margins.

Lastly too, keep in mind that our software sales, as we said in the call, they dipped down a bit for Q1, but they should be going back up to their normal levels, which also will help bolster margins in Q2 and beyond.

Do you have a target, either EBITDA or pretax margin to exit the year to give us a sense of how the year should trend versus '03?

Yes, we still have a target exiting the year, as we said back in December at the investor conference, of exiting at around 6 percent.

That's pretax?

Pretax, that's right.

(OPERATOR INSTRUCTIONS).

Bill (ph) Kidd (ph) with Center (ph) Securities.

I was noticing the R&D was down as a percentage of revenues.

I know you're putting a fair amount into capitalizing and refreshing new products.

Can you sort of give us the whole picture there of what your spend was in '02, what it is in '03 and where it is going?

First of all, while we address the detail, let me just say that we consider that our total investment on product, be it capitalized or expensed R&D, peaked.

Those numbers fall where they might according to the accounting standards, which we rigorously apply.

I indicated last quarter we expected that to trend down.

And by the time we get to the second half of the year, we should be approaching the point where we are capitalizing no more and taking no more to the balance sheet than we are amortizing.

And so then we reach a steady-state in terms of the balance sheet strain on capitalized investment.

But if we look year-on-year, Jim, it's over to you.

Year-on-year, our R&D that is shown as expensed R&D, went from about 25 million for the 12 months ended 12/31/02 to 13 million for the 12 months ended '03.

And that is primarily because we had a number of projects that we were in the early stages in '02, where the accounting standards preclude your capitalizing those costs that actually went into development phases during '03.

Those projects are ramping, starting to ramp down now, and in fact will largely be complete in the middle of 2004, which is again, why we say that the development costs in the capitalization of those projects will be ramping down significantly in the latter half of the year.

What I am really asking is if you add up everything you spent in '02 and '03 and looking at 04, forgetting the accounting issues, I want to know just what you spent each year, '02, '03 and 04?

If that's impossible.

We don't have the '02 numbers in hand.

But in rough percentage terms, this year, we spent about 6.5 percent of revenues on capitalized software and research and development.

And this year, we are going to take it down to 5.

Tom Meagher, BB&T Capital Markets.

Maybe you could address a question I have about -- there was the article in the Post I think last week in reference to the EPA contract where you went up against Lockheed Martins.

Obviously, this whole past performance thing is kind of a dilemma; you cannot get past performance until you get contracts, but nobody will give you a contract unless you have past performance.

Given your relative lack of past performers, as was delineated in that article, is it a fair assumption that you guys will be looking to strengthen that record by continuing to make the acquisitions like Vredenburg?

First of all, I think, despite the Post's view on our past performance, we have had some remarkable successes this year with some very large-scale contracts.

California child transport, $800 million, joint venture with ourselves, Accenture and IBM.

Our share was 231 million. $100 million pilot program with IBM and Bearing Point for Department of Defense financial architecture.

And strings of deals at the state and local level in the tens of millions of dollars.

So I feel good about our performance this year.

Looking forward, I would love to do a lot more deals like Vredenburg.

If we just look at the template for a deal there, it was a classic.

It was an excellent strategic fit, excellent business model fit, excellent cultural fit.

It was a fair and reasonable price.

It was easy to integrate and we were able to -- we were able to go earnings accretive in the first year of acquisition.

And so yes, I would love to do more of those deals.

We have a pipeline of prospects we are reviewing.

And when we meet one that meets the right profile, then we will do it.

Okay.

Just a follow-up on your remark about the budgets.

How do you see it falling out?

Typically, if you look at past years where we have had budget deficits and things have been cut back, typically the first things that have gone have been the back office systems that you specialize in.

Is that something you all expect at this point in time?

Since, once again, relating to the acquisition strategy, looking to do more of Vredenburg, support the war fighter, kind of acquisition as a way to kind of keep things going in the right direction there.

Certainly, this year, we have seen Department of Defense spending heavily skewed in support of the war fighter.

And historically, AMS has not played significantly in that area.

With the acquisition of Vredenburg, then we do play in that area.

So we're able to get capitalize on the trend.

We expect that there will be some movement back next year.

The Department of Defense is clearly part of the modernization program and part of Bush initiative, they are going to have to address back office systems.

And we are well-positioned with our ERP suite for digital government in that regard.

Turning to state and local, in that area, we tend to focus on mission critical systems, Vodafone (ph) systems, opportunities that are underpinned in part by federal dollars.

And we found those opportunities much more resilient, much less subject to cuts or deferment as in some of the other work.

And that has held us in good stead in the last two years.

Bob Finch (ph), Lord Abbott.

In regards to the backlog, you stated what it is currently.

What was it at the end of the prior quarter and a year ago?

We had not previously disclosed that.

And right now we are going to choose to leave that number where it is.

I think what we can infer though, by taking a look at what our performance has been this year, is that the backlog was significantly thinner than it is at the level we have got right now at around $1.3 billion.

The last number that we had disclosed and was discussed at the investor conference, was that it was about $1.2 billion in the third quarter.

And we expect that, given the traction that we have resulting from the investments we have been making in sales and business development, that we will continue to keep building that long-term backlog throughout this year.

Can you break down the current backlog at all in terms of market exposure?

We will be doing that as part of our segment reporting beginning in the first quarter.

You talked about one of issues in earnings for the past quarter was higher commissions.

I guess commissions are being paid solely -- is this on gross revenues or gross orders?

This is on gross orders.

So the commissions are based on the amount of the contract value.

That is even though contracts might not be executed on or begun for some period of time?

To the extent that a contract is not funded, we do not pay a commission on it.

This is based on the signed funded value of the contract or task orders underneath them.

So the phenomenon that we see is that we do actually have to report commissions expense in advance of the revenue being recognized on the contract.

Are there times where the revenues may be a few quarters before they are realized?

Yes, that is possible.

Okay.

And then on the recruiting, you talked about a number of steps that you have taken to deal with some of the issues you have had.

Can you talk a little bit further on the recruiting issue?

How many people did you had add?

And if you can characterize that with the framework of the fact that you talked about even though rates are stabilizing, you folks still have overcapacity.

Many of your clients may have overcapacity.

What actually is the utilization rate at the same time you are recruiting to hire more?

Let me just address the recruitment issue for you.

Over the last 12 months or so, we have had an attrition rate of about 200 people per quarter.

And our recruitment machine has been geared up to replace this at the same rate, achieving a skilled rebalancing and a different skills mix.

As part of the first quarter, we are probably going to double that hiring rate.

It is the first time in a considerable period then we have hired faster than the attrition rate, and that is to fill the backlog and pipeline with qualified people.

Obviously, some of these are rare skills.

Certainly, getting polygraph cleared, top security cleared people in the DC area is a challenge at the moment.

And they tend to be expensive and expensive to recruit.

We had a distributed model for recruiting, and we failed to take account of that, quite frankly in our cost estimation, and did not pick up the cost overruns early enough.

We have now completely centralized data.

We have our hands around it.

We have absolute control over it.

And I am confident that that situation will not recur.

So is it distributed -- more a function of more people than expected being hired or higher-priced people being hired?

It is a volume and a mix issue, and it was a distributed data issue that is now centrally controlled.

And then on the higher startup or installation costs on a number of the programs, is there any one or two factors in particular that cropped up in the current period, and in the next (ph) that you're dealing with that is unlike what you might have had to deal with in the past?

The cost that we had estimated in the project -- the projects we're talking about -- had been estimated based on history, and the history that we have experienced in many years of implementing product refreshes and product updates.

The software that specifically left us with these issues in the fourth quarter simply had a few more issues and a few more things that we needed to deal with in putting them in the customer environment.

That is what caught us by a bit of surprise in the fourth quarter.

What we have done since then to take care of this problem, again, on these specific products, is we have taken the code back, made a few minor tweaks to it, so that in future implementations, we are not going to have those same kind of cost difficulties.

This is a learning curve experience as we put in new versions of our software.

We will get up the learning curve a lot faster from here on out.

On the outlook for the quarter, you were talking about revenues that roughly might be about 20 million higher than they were a year ago, and earnings might be as much as 20 percent to a third below your prior.

Why such a disconnect in terms of any operating leverage?

We continue to make investments for the long-term health of the business.

Clearly, we are continuing to step up our expenditure on training and development, particularly in project management and certifications.

We continue to invest in standards, methodologies, tools and also our internal systems.

If we look at two major programs under way that will deliver long-term margin benefit, first of all, moving offshore.

At the moment, there are some duplication of costs as we ramp down onshore and moved up offshore.

And that duplication will go away in the back half of the year.

Secondly, as we look to integrate all our software development across all verticals and horizontals, there are some transition costs that we have to incur before we get to the synergies.

Once again, that is a front end cost, back-end benefit.

So those are the primary drivers.

One last question related to this issue then.

So would you characterize this kind of spending as catch-up spending for investments that were not being made on a timely basis along the way at this stage?

Or were they kind of new investments that you just got to a point in time that you realized you had to make in order to maintain a competitive position?

Quite honestly, the refresh of the product line, the refresh of the internal systems, the refresh of internal development, are all things that fell on my watch, and I had to deal with them, and I dealt with them accordingly.

Lastly, can you comment on any outstanding litigation of note?

No outstanding other than one suit pending in Ohio.

In September, AMS was served with a federal whistle-blower lawsuit that was filed by some private relaters (ph).

The lawsuit is now pending in the U.S.

District Court in the Ohio Western division.

The suit was originally filed in 2002, and it was only recently unsealed because under the process for whistle-blower suits, the Department of Justice has got an obligation to review it first.

They reviewed it and declined to intervene.

And so now we have to let this work its way through the courts.

There's a question of whether money that was paid to AMS by the state of Ohio for work done was appropriately paid under a particular federal block (ph) grant.

And that is the issue at hand.

We believe that this suit is completely without merit.

We are vigorously defending it and we have filed a motion to dismiss, and that motion is pending.

Alan Fournier, Tenant Capital.

I had a couple quick balance sheet-related questions.

Can you comment on three line items?

Prepaid and other current assets seem to have increased quite materially; goodwill also increased sequentially; and can you comment on the life insurance asset; what is that and what are the dynamics there?

Sure.

The prepaid expense increase was primarily related to an increase in prepaid taxes, if you are talking about the increase from September 30 into December 31.

In terms of the increase in goodwill, it's primarily driven by the final earn-out payment on the acquisition of RM Vredenburg as well as an increase on an acquisition we had done earlier of a company called Synergy.

Both of those earn-out payments are finalized, and we don't have any significant increases in goodwill related to those.

The other item, the third item you said was?

The life insurance asset?

The life insurance asset actually went down.

That has to do with a set of assets that we have to fund our deferred compensation program for certain employees of the Company.

And that withdrawal was made to simply fund payouts.

(OPERATOR INSTRUCTIONS).

A follow-up from Bill Kidd.

You referenced in the earlier answer to a question that hoping to exit this year with a pretax margin of around 6 percent.

Can you comment on -- I know you have said you wanted to be best in class, Alfred -- longer-term margin goals and how you get there?

Okay, certainly.

Longer-term, I think it will come from the strategy we have had in place for 18 months, to build a quality backlog, of higher margin, longer-term business.

What we need out of this business is more predictability, more continuity and that will come.

It's going to make the business a lot easier to manage and will give us a lot firmer platform on which to start driving out additional costs.

The move to offshore will give us more benefits in subsequent years.

There is tremendous leverage on the cost per hour of development and support on moving offshore.

That will undoubtedly help us.

In addition, we can get a lot more efficient in software development and software deployment.

And we need to be best in class as a software developer as well as best in class as a systems integrator to drive the benefits of the hybrid model.

Then went we look at the intellectual property we have in our software suite, at the moment, we're getting three layers of revenue from that.

We are getting licensees; we're getting maintenance fees; we're getting drag-along systems integration revenues.

We are going to overlay that with two additional revenue streams from the same investment.

Third party software sales from selected systems integrators that will sign up within the next quarter.

And in addition to that, additional revenue streams from AMO and BPO, where we leverage the intellectual property that we have already invested in to drive managed services revenues.

So that's where the improvement is going to come from.

And we are aiming on a glide slope to get to double-digits.

George Price.

First of all, what were Vredenburg revenues in the quarter?

In the last call, we indicated that because we were going to be fully integrating the Vredenburg operation, we don't even crack Vredenburg in the fourth quarter, separately as a separate business unit.

When we take a look at what projects we had that moved into our defense and intelligence group primarily from Vredenburg, they were pretty flat with our third quarter revenues, approximately.

Do you have an organic growth number?

An organic growth number for just Vredenburg or do you mean for the number without Vredenburg?

That's right.

Actually, I don't have it offhand again because we had not tracked separately.

But I would say that when you saw that the revenues did pick up from Q3 to Q4, that was entirely organic growth because like I said, Vredenburg was relatively flat.

Okay.

And the bookings, the 375 million, can you just refresh our memories on the third quarter and 4Q '02 comps?

I don't know if you have bookings comps for Q4 '02, but if you do?

And then if you could maybe comment on how those bookings were split up, commercial versus public?

And do you have an average duration for that number?

We do not have comparable bookings numbers figures for the fourth quarter of '02.

I can tell you that we will again be disclosing our bookings and backlog by segment in the future.

If you take a look at the contract awards that we have through the year, the big ones are clearly multi-year contracts.

In fact, if you take a look at the big ones like the California child support, Naval Service Mine support and all of our Intel contracts, these are five to seven-year contracts that have been very consistent with our strategy of going for large, multi-year contracts to give us more stability in our revenue stream.

I would also say -- to your question and to give you a preview of what you'll see, the bookings that we had in '03 have been somewhat disproportionately weighted in the public sector world.

The big contracts that you have seen are public sector.

What we're doing right now is working to get a greater balance between our commercial sector and our public sector bookings.

Did you have a third quarter '03 bookings number?

Yes.

Let me take a quick look at that.

It is around $490 million.

It gave us a book-to-bill about 1.9 to 2.0

409 or 490?

I'm sorry.

490.

If I can just make sure I understand a couple of things, basically driving the upside in federal and state and local is largely ERP-related, so largely related to your proprietary products.

The downside in CME and financial services, it sounds like CME is kind of industry turbulence, for lack of a better word; financial services, I guess you mentioned the slowdown in product sales relative to the new product rollout.

Is that about accurate?

I would say that in state and local, it's not just ERP products, but it's also our child support work that we're doing.

For example, we mentioned New Jersey and we mentioned California.

Revenue and tax collection.

I would characterize our CME as stable.

In fact, we've produced three or four quarters of flat to modest growth.

So that is definitely stable in what has been a very difficult marketplace.

Certainly, if you look over the past three or four quarters, our financial services business has been very, very stable.

We have some one-time issues within that sector for the first quarter, notably the turbulence or the hiatus in the industry caused by the recent flurry of acquisitions; and secondly, a product change out in AMS's portfolio.

We will get growth from first quarter out on from financial services.

There appears to be no further questions at this time.

I would like to turn the call back over to Mr. Schillereff.

Well, it's Mr. Mockett.

Let me just say that in closing, I would like to thank you for questions.

I trust we did them justice.

And I would just like to leave you with one thought.

While our first-quarter guidance takes account of known seasonal events, leading to a slow start for 2004, we expect continuous improvement in revenue and earnings for the balance of the year.

On that point, I wish you a good day.

Thank you for attending.

This does conclude today's conference call.

At this time, you may disconnect.