Kratos Defense and Security Solutions Inc (KTOS) 2002 Q1 法說會逐字稿

This is an unedited realtime transcript. An edited version with proper case and full speaker names will be available shortly. Welcome to the Wireless Facilities, Inc. first quarter earnings conference call. Your speakers for today are Dr. Masood Tayebi, Chairman and Chief Executive Officer, Mr. Tom Monro, President, and Mr. Terry Ashwill, Executive Vice President and Chief Financial Officer.

At this time all participants are in a listen-only mode. After the three speakers have concluded their prepared remarks we will conduct the question and answer session. As a reminder, this call is being recorded today, Wednesday, May 8, 2002. I will now turn the conference over to Mark Francois, Director of Investor Relations, who will read the Company's warning regarding forward-looking statements. Please go ahead, Mr. Francois.

Thank you very much. And thank you for joining us today for WFI's first quarter 2002 conference call. A replay of today's call will be made available through May 10, 2002 by dialing 800-633-8284 using the reservation number 2051 7484. Additionally the conference is being broadcast live on our website at wfinet.com, and will be archived there for several weeks.

Our comments today will contain forward-looking statements and involve risks and uncertainties. Words such as anticipates, expects, intends, plans, believes, may, will, hope and similar expressions are used to identify forward-looking statements. Such statements are only predictions and the Company's actual results may differ materially from those anticipated and these forward-looking statements. Forward-looking statements made today will include, among others, references to the following: The Company's belief that it is increasing its market share and that the Company's size and scale will provide a competitive advantage among outsourcing providers; the Company's belief that its revenue growth will be driven by an increasing number of projects with greater size and scope reflecting the strength of a larger, consolidating, and better capitalized group of customers; the Company's belief that it can effectively manage its business and strengthen its financial position; the Company's expectation that its revenue related to the Cingular Wireless GSM/GPRS network overlay project will be approximately 135 million, to an excess of 200 million of revenue over the next three years; and any statements discussing future Company revenue or financial expectations, or projections of fiscal year 2002, or beyond, that the Company should make. In response to the SEC's regulation FD, any forecast of WFI's revenues and earnings, will be provided only through quarterly conference calls or press releases or through specific regulatory filings. These forecasts will be as of the date of the call, the release, or the filing, and will include estimates based on factual information, as well as certain assumptions which management believes to be reasonable at that time. WFI assumes no obligation to update any such projections, at any time. WFI will continue to provide additional Company information on its website including press releases, conference calls, SEC filings and other financial data.

There are many risk factors that could prevent the Company from achieving its goals and cause the underlying assumptions of these forward-looking statements and actual results of WFI to differ materially from those expressed in or implied by those forward-looking statements. These risk factors and others are more fully discussed in the Company's ready available and most recently filed annual report on Form 10-K, which we filed on March 19, 2002 at the Securities and Exchange Commission. And now, I'd like to turn the call over to Masood Tayebi.

Thank you, Mark. Good afternoon ladies and gentlemen and welcome to WFI's quarterly conference call. Our first quarter results reflected the continued weakness in the wireless industry, with large reported losses from business model changes, work force and expense reduction, and significant goodwill and intangible write-offs from previous [indiscernible] activity. Despite this, we are able to provide an improved Company outlook for our second quarter and beyond.

Let me begin by reviewing some general trends in the wireless telecommunication market. This market remains a very difficult environment to operate in as characterized by limited access to capital, even for the wireless industry leaders, volatile carrier capital spending plans. Over the quarter, we saw a series of down [indiscernible] provisions to publish industry CapEx forecast and the possibility of further industry consolidation, which creates an additional layer of industry uncertainty. As we look back at the first quarter, it is apparent that despite the need for network coverage and capacity improvements, carrier plans followed a yearlong trend of delays and cancellations. And while we felt our share of delayed projects and scope reductions in the first quarter, we maintained a sales strategy that had served us well in 2001, that is to focus on the top national and regional wireless carriers and on the top wireless equipment manufacturers. While we are obviously disappointed with our first quarter results, new business wins in conjunction with a disciplined approach to total expense control improves the prospects for our financial performance in the second quarter. New contracts won in the first quarter included a new contract with AT&T Wireless TeleCorp Unit to provide network overlay of GSM/GPRS technology for next generation wireless services, an engagement with Motorola to provide network-engineering services, an overlay contract with Western Wireless for a CDMA technology upgrade for a substantial portion of their network, and new business with Telefair [phonetic] Corporation for nationwide network performance testing services.

At the beginning of this quarter, we were very pleased to report a major contract win, in fact the industry's largest for 2002, involving a national scale GSM/GPRS network overlay for Cingular Wireless. Together with our strategic partner Bechtel Corporation, we developed a strategy that will enable Cingular to lower their overall deployment costs through the synergy of the WFI-Bechtel partnership, while simultaneously increasing Cingular's project manageability. We forecast revenue from this project at approximately 135 to an excess of 200 million for WFI over the next three years.

In addition to providing professional services, we have licensed our proprietary projects tracking tool, Dynamic Tracker. This project-tracking tool enhances our ability to a scale as an organization while allowing Cingular to maintain total visibility over their large project. Our international business remained steady despite the ongoing weakness in Latin America and Europe with revenue flat, compared to our fourth quarter of 2001. In Mexico, we are hopeful that the completion of Telefonica's acquisition of Pegaso PCS will resolve the uncertainties that have curtailed their deployment plans over the past several quarters. Additionally, Pegaso PCS recently announced their one-millionth customer in Mexico, a very significant achievement by this CDMA- based carrier. In Europe we have made some slight progress in the 3G arena, having secured several small but highly visible engagements with global carriers.

In summary, we have repositioned WFI in a changing wireless landscape to serve a customer base of industry leaders. Our skills and business practices have been sharpened to prepare the Company for an increasingly competitive and demanding environment. We appreciate the support of those investors who have stayed the course through our transition. We believe as they do, that wireless remains a growth industry and that the trend towards outsourcing should benefit WFI. Our gratitude extends beyond shareholders to the very core of our success, the professional women and men of WFI who daily prove that they add value in this wireless world. I will now turn the call over to Tom Monro.

Thanks, Masood. Let me start by adding some texture to the industry outlook. As we reported last quarter, WFI has completed our transition to major, established clients, the emerging telecom players who were our primary customers a year ago, have in most cases either failed, consolidated with larger players, or completed their network rollouts. Today, our domestic work is focused on the wireless networks of AT&T, Vorizon, Cingular, Sprint, VoiceStream and Nextel, directly and through our industry partners. Outside the US, we are similarly focused on the networks of industry leaders, from TelCel to Mexico to Telia in Sweden. This shift has a number of direct operational implications for WFI. First, we're facing a longer sales cycle. Carriers are being more cautious with their capital budgets, ROI thresholds have been raised, and capital efficiency has become more important than time to market. Second, we are faced with tighter margins. There are fewer projects available. They are more visible as the competitive environment is intense. On the positive side, the longer sale cycle has been offset by the availability of larger projects from better customers. The established players represent higher quality receivables for us, although not always better payment terms.

Operational scale, that is the capacity to solve a significant problem for a carrier across a national network, has become an important competitive factor. Today, smaller competitors who cannot match the size requirements of the few large carriers are being relegated to a minor role, or are facing real financial distress and the resulting engagements are typically longer in term, which can help us to manage staff utilization more efficiently.

Our recent Cingular win is a case study of this new model. Cingular was faced with the requirement to build a GSM/GPRS 2.5G overlay, to put together a seamless nationwide network. They needed a migration path to 3G. It was vitally important for Cingular to maintain a seamless transition for existing customers, and it was critical that this be done in a competitive, capital efficient and timely way. In response, WFI has partnered with Bechtel to offer a comprehensive, scalable, turnkey solution to provide best in class technical expertise, program management, processes and tools. The resulting offer was attractive to Cingular because it focused accountability. It aligned the interest of the client, equipment vendors, and service providers, and because it offered significant cost savings over the competing alternatives.

In some ways, this is an evolution of the model we've been using successfully with Bechtel to meet the needs of AT&T Wireless, with their project, Liberty, and also the model that WFI has refined on smaller, regional and international projects over the last five years. We believe this template will prove to be instrumental in driving our revenues with future clients.

Equipment vendors are an increasingly important source of business for WFI. Over the past year, WFI's vendor revenues have trended from 24.5 percent to 43.6 in the most recent quarter. This shift has arisen for a number of reasons. Most new equipment contracts are being negotiated on the basis of guaranteed coverage and capacity, rather than a fixed number of bay stations or switches. As a result, the vendors have a powerful incentive to stay involved throughout the design and deployment process. In addition, many of the equipment vendors have reduced or eliminated their service divisions, turning instead to alliances with outsourcing partners like WFI. Today, WFI has global partnering arrangements and active projects with Nortel, Eriksson, Siemens, Nokia and Motorola.

For the quarter, our revenues came primarily from network design and deployment, with 74.9 percent of revenues from this category. Our pre-deployment consulting efforts grew modestly to 3.2 percent of revenues, up from 2.2 percent last quarter, with the strongest growth coming from new engagements with 3G carriers in Europe; a hopeful leading indicator of future network builds. Those deployment revenues were 21.9 percent of our total, up from 18.5 percent in the fourth quarter.

Our largest customer relationship for the quarter was with AT&T Wireless, which represented 27.7 percent of revenues both through our Bechtel relationship and directly with the carrier. Other top customers in the quarter were TelCel at 12.7 percent, Vorizon at 10.5 percent, Cingular at 8.0 percent and Triton PCS at 4.7 percent.

Our work continues to be dominated by 2.5-generation technology with 86 percent of revenues from this category, although 3G systems represent a growing share, up to 8.5 percent in the period from 5.1 percent in the fourth quarter.

The most difficult decisions over the past several quarters have all been personnel related. At the end of the quarter, WFI's headcount was 1509, down 490 over the last year, but up 23 for the quarter. The increase was driven primarily by anticipated staffing requirements for our Cingular project. Despite the net increase, there were layoffs in several job categories during the quarter. We reduced the threshold at which we retain personnel for future projects. We've introduced the new employment model for project specific personnel and we have cut executive and other non-billable personnel to balance the organization appropriately. After the quarter end, we implemented an additional set of measures to reduce personnel expenses, including salary reductions for many of our staff and management team. As reported earlier, merit increases and cash bonuses have been eliminated, pending the Company's return to profitability.

On balance, it's difficult to characterize a quarter with decreasing sequential revenues and a $71 million loss as anything but a disappointment. We do however, believe that the Company is executing well in this environment. Our sales and business development efforts have been successful. We believe that our market share is increasing and that the model we have defined is gaining acceptance. Outsourcing has gone from a novel new solution in telecom, to an integral part of operation for all of the equipment vendors and a growing number of carriers, and WFI is well- positioned to drive this trend, with a strong technical team, well developed processes and a reputation for quality and the scale to meet the needs of ever-larger client enterprises. I'll now turn the call to Terry Ashwill.

Thank you, Tom. The first quarter of 2002 continued the very challenging trends experienced in the year 2001, [indiscernible] rationing, site development deferrals and cancellations, and continued weak pricing. As a result, the financial consequences to WFI in the first quarter have been significant, reflecting costly personnel repositioning expenses and large reductions in project [indiscernible]. In response to this, SFI has made significant and numerous changes to its business model and related cost structure. Beginning in the second quarter of 2002, WFI is transitioning its internal cost structure to a variable cost model. This means that billable and support personnel staff and related expenses will flex with various levels of revenue. Examples of action steps necessary to affect this transition to a variable cost model and respond to industry conditions, are as follows: There will be changes in hiring practices, changes in benefit plans to new employees, changes in compensation for new billable employees, changes in real estate leases, and even changes in training practices.

In order to rescale WFI's business operations to this variable cost model and as a result of other related actions taken in the first quarter, a number of expense adjustments were recognized in the first quarter. The following is a summary of these selected expense adjustments. Goodwill and intangibles were 19.9 million. Tax provision was an increase of 14.3 million. Accounts receivable was a provision of 10 million. Real estate was 10 million. Equipment and other current assets were 4.6 million. Severance and all other items were 8.8 million for an aggregate total of 67.6 million. It should be noted that nearly all of these recognized expense adjustments are not items that impact cash for the quarter. Looking to the income statement, revenue for the first quarter of 40.1 million was 4.9 million or 10.9 percent below the fourth quarter of 2001. Reduced revenue from domestic operations more than offset increased revenue from Latin America. Similarly, revenue reduction from wireless carriers more than offset revenue increases in wireless equipment vendors.

Gross profit of 10.9 million was 1.7 million or 13.5 percent below the third quarter reflecting the difficult operating environment and related pricing pressure in the wireless industry. The percent revenue was 27.2 percent or nearly even to the 28 percent of the prior quarter. SG&A: SG&A expense of 47.1 million was 30.4 million higher than the fourth quarter 2001 as a result of significant expense accruals related to rescaling the Company's expense structure to the variable cost model format. Although expenses related to underutilization declined from the previous quarter, the base expense structure exceeded the previous quarter and more than offset the benefits related to improve utilization rates.

In accordance with SFAS-142, goodwill for the current and future quarters will have no recurring amortization. However, during the first quarter, aggregate goodwill and intangible impairment charge of 19.9 million was recorded, which related to acquisitions [indiscernible]. Excluding the impact of impairment recognition related to goodwill and intangibles, depreciation and amortization for the first quarter was below the prior quarter.

Total cash at the end of the first quarter was 62.3 million, up 1.2 million or 2 percent from the previous quarter. Net cash flow from operations for the first quarter was a net inflow of 1.3 million and debt for the first quarter was 41.0 million, or 1.1 million below the fourth quarter of 2001. This reduction resulted solely from a pay down of capital lease obligations. Usage of the line of credit facility was 33 million, which was no change from the prior quarter.

Total net accounts receivable for the first quarter was 73 million dollars, a decrease of 21.7 million from the 94.7 million the prior quarter. Excluding the impact of incremental reserves principally related to two Latin American carriers, the net decrease was 11.7 million from the prior quarter. Days sales outstanding decreased from 191 days to 166 days, or a decrease of 25 days.

Total shareholders equity at the end of the first quarter was 128.8 million or 60 percent of total assets.

Looking to revenue, effective beginning in the second quarter, WFI has signed a significant contract with Bechtel Corporation related to a nationwide network overlay project and GSM/GRPS technologies for Cingular. Revenue for this project to WFI is expected to range from 135 million to in excess of 200 million for the end of year 2004. Consolidated revenue for the second quarter should grow at least 5 percent over first quarter revenue. And we expect the new Cingular contract, while modest in the second quarter, to ramp up more significantly in the third and fourth quarter and to get a full run rate in the year 2003.

Numerous expense adjustments, including the impact on goodwill under SFAS-142 have been recognized in the first quarter, which have significant ongoing expense reductions in future quarters. Examples of such items are severance, cross the board salary reductions, intangibles amortization, equipment depreciation, terminated lease facilities, etcetera. In aggregate, the anticipated benefit to the future quarterly expense run rate is a minimum of $6 million.

Because of available net operating losses, it is expected that future levels of pre tax profitability should have no tax provision expense for the remainder of calendar year 2002. Therefore, future pre tax income will also become after tax income.

The Company is expecting to achieve positive EBITDA in the second quarter.

Thank you. Ladies and gentlemen, if you wish to register a question for today's question and answer session, you will need to press the 1, followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you wish to withdraw your registration, you may do so by pressing the 1, followed by the 3. If you're on a speakerphone, please pick up your handset before entering your request.

Tim Long, CS First Boston. Please go ahead with your question.

Thank you. Two questions, if I could. On the Cingular contract, could you talk a little bit about the margin profiles of that business, relative to past deals? And also, if there's anything in the contract, or just give us your views if there is some consolidation that involved Cingular, what that would mean to the contract? And the second question would be, with 3G, 8.5 percent of the business in the quarter, where do you see that going over the next 12 months or so? And if you could give us a little bit more color on how many deployments you're involved and maybe which countries have been exhibiting some strength there? That would be helpful. Thank you.

This is Masood, Tim. With respect to your first part of your question, reflecting-- with regard to the margin, we expect the gross margin to be in the mid-30's in that project. We expect to, the second part of your question, relates on the consolidation, really this project is primarily tied to GSM overlay or TDMA network and whether the consolidation happens or not, CDMA networks need to be converted to 2.5G, acknowledging in this case, GSM or GPRS which they have adopted to, because the subscribers will move on from TDMA to GSM. So it's still a capacity requirement needs to be there. When you convert it from TDMA to GSM, the subscriber's going to move from TDMA to GSM. That should have no impact. Also, we also believe that it is at the interest of Cingular, if they go through a consolidation that they do not put their 2.5G project on the side waiting for consolidation or SCC approval, which may take another year. And if the approval is not done within that year, that will put them at a significant competitive advantage. So, we don't think that will hurt or change their direction. First because of capacity, second because of competitive advantage. The third point regarding the 3G, basically almost all of our work in Europe is 3G related, also we are seeing some of the work we are doing in Asia-Pacific is 3G-related as well as some small amount of work here, we are doing in US is 3G-related, but Europe, I would say is where we are seeing for the first time, I didn't expect the 3G to really gain any momentum until next year, but what we are seeing is the regulatory bodies are putting pressure on the carriers, that they are giving them their licenses, and they have to meet their minimum requirements in terms of the coverage on 3G. That is one driver. The other driver is becoming more apparent, is that the handsets on 3G are starting to become available towards the end of this year on a mass volume basis and early next year. So, I think it's going to take 12 to 18 months to rollout and that is in time to get those handsets out at volume prices. That is becoming another driver.

Okay, just to follow-up on that, is your view that because some of this build is for the license build-out requirements that it might not be a sustainable or business, or do you think there's enough behind it to keep some momentum behind the 3G builds?

Oh! I believe there is some momentum behind it because they have been going through different types of- The carriers in Europe, they are fairly mature in terms of our revenue model as it is today, and they need to get additional revenue coming in. So, they need [indiscernible] revenues coming in. One of the things is that again, I'm not saying that 3G is going to make a major rollout this year, this is very, very slow this year, leading into next year, we're going to see more activity in Europe, but the real, still in our opinion, the real 3G deployment in Europe is going tobe in 2004, 2005. So, it's a very small start this year. It happened in this year, we didn't think it was going to happen this year, we thought it's going tobe next year. Starting this year, there will be a little momentum behind it next year, but the real boom will come in 2004, 2005.

Okay, great. Thank you.

The next question comes from Carl Palledi [phonetic] with GKM. Please go ahead with your question.

Yes, thank you very much. Terry, could you go through the financial adjustments again? I couldn't get that at all.

We had 67.6 million of total adjustments on an after tax basis. And goodwill and intangibles were 19.9 million and that's principally, [indiscernible], Telia and [indiscernible]. We had a tax provision, in other words, even though we had a substantial pre tax loss, we actually a very conservative position with our NOLs and actually impaired all of the NOLs going-forward, so that- Excuse me, for the current period and going backward. So that we gave ourselves no benefit from that. As a result of that, we had to reverse a deferred tax asset, which became an expense for the period and that aggregated the total expense related to that decision was 14.3 million, which paradoxically put us in a position of having an expense on a write-off kind of a quarter.

Is that because you can't guarantee your return on profitability? Or, what's the impetus for that decision?

Conservatism.

Okay.

Accounts receivable, we put up a reserve of 10 million during the quarter and that related principally to some conservatism related to two Latin American carriers and also, we put up a provision for unbilled accounts receivable and this is something that [indiscernible] has talked to us about. We've spoken to them about. We felt that it was appropriate given the continued nature of our percentage completion accounting. Real estate, as we switch to the variable cost model, and looked at our real estate needs and unused real estate, we put up a reserve of a net 10 million during the quarter. That's net of expected sub-lets. We also put up a reserve of 4.6 million for various equipment and other current assets that we would deploy a little bit differently under the variable cost model. And then also, we had a significant charge for severance and other personnel related activities as we repositioned our personnel to adopt the variable cost model.

And what was that amount for that [indiscernible] in personnel?

The total amount including other items was 8.8 million. The specific number regarding severance only, from a cash point of view was 1.1 million and parenthetically, the 1.1 million is the only amount that really related to any cash impact of the 67.6 million total accrual for the [indiscernible].

Okay, let's see. On the SG&A line and of, I think it was 46 or 47.1 million, can you help me get to a core SG&A for the quarter, you know, for recurring [multiple speakers] and operations?

From an expense point of view?

Yeah.

Yeah. For the quarter, we had a base expense of 13.7 million in a total underutilized expense of 5.4 million and that aggregated between 3.6 for domestic and 1.8 for international. In addition to that we expensed 28 million for the write-off, which got us to 47.1 million.

Okay.

however, there were numerous charges that I don't think would be technically categories as write-offs, but had we not done the variable cost model, were imbedded inside the base expense that would've returned us very close to the SG&A number we had in the fourth quarter.

And going-forward for forward quarters, as we alluded to in the guidance, this will be reduced pretty significantly going-forward, a minimum of 6 million. So, if we use the fourth quarter as a base point of 16.7 million in aggregate, and take about 6 million to 6.7 from that, we should be at around a 10 million run rate in the second quarter. And I think that's a fairly conservative or minimum kind of a benefit as it relates to the decisions we took.

Okay, so under your variable model then, what happens to under-utilization?

We haven't been able to measure perfectly the way the variable cost model will work is, obvioulsly we'll transition a few people that are currently in our core employee group, but more importantly as we hire new, billable project people, they will come in as the new billable employees will come in as project people. And therefore, it'll be a whole new postion for them. In other words, they will be employed for the project life only. Benefits will be paid by the employee. When the project ends, the person will be terminated at that point and await his or her new assignment for the nesxt project. The benefit obvioulsly is that we hope to reduce our benchtime immeasureably and have virtually no under utilization as a result of the decision. So, we feel very comfortable that as we start doing this- We've already, in fact, during the quarter, hired over 20 people into this cataegory, so we know it's a very marketable and sellable proposition.

All rigfht. Is that because of the unemployment situation in the industry or is it because you know, a lot of other companies are moving to this model as well, or is it a little bit of both?

I think it's a little bit of both, but keep in mind it's feasible that these people will actually be paid on a base pay basis or money, while they're employed in order to accommodate the benefits. And a lot of people actually like the flex time idea and actually look at it as an attractive proposition. So, we feel very comfortable that it's a very viable concept.

Okay. And looking at your top customers, can we just do- Well, could we just maybe get a feel for the revenues that are coming from the US domestic carriers, the top, you know, five US domestic carriers?

Sure.

Do you have an idea of what that was in the quarter?

Sure. Revenue- Why don't I just walk through the top five customers and just walk through the revenue in percents for them?

Okay.

Bechtel obviously, is not a carrier, but was 8.5 million. TelCel was 5.1 million. Vorizon was 4.2 million. Cingular was 3.2 million. AT&T Wireless was 2.6 million. And the top five as a category, aggregate about not quite 59 percent of the total.

Okay. Well congratulations on the Cingular contract and I look forward to better results ahead!

Next question comes from Christine Pazzino [phonetic] with JP Morgan. Please go ahead.

Hi. Could you talk a little bit about the pipeline and you know, kind of a size there and trends you're seeing in the pipeline? Is it kind of flat? Building at all? And then, I know Cingular's been on the radar for a while, so whatever large deals are kind of in the pipeline generally and what stages are these potential deals? Are they, you know, late stages or early stages?

Christine, this is Tom. I'll take that question. It's a-- I think it's fair to characterize the pipeline as lumpier than it has been in the past, that is there are fewer, but very much larger [indiscernible]. You're right that for example, Cingular was a contract that we pursued over a period of 9 months or more, and I think it was, you know, widely known in the industry that that contest was going on. And that's not a typical, as we get down to a list of a few carriers and a limited number of very large products that come from them. So, in terms of what's in the pipeline today that we can see, there are a number of fill-in projects sort of a shared infrastructure engagements, people that are adding some capacity in some markets. But, nothing of the scale of the ATT&T Liberty project or the Cingular Genesis project that we've spoken to before, at least in the US market. So, we will see some smaller engagements from that, as you saw, we announced five contracts this quarter, all smaller than the Cingular project, all which took some time to win.

In terms of sort of the most interesting things that we're working on, they're all related to outsourcing opportunities. That is carriers that have historically not been open to, but are in this market, increasingly interested in the idea of outsourcing. All of the functions that might be done in a region or in a country, doing that, that type of analysis had worked with four or five carriers globally. Those are, as I said, just to make the point completely emphatic, a very long sales cycle, but we do think they're quite valuable contracts in the end.

Okay and then on the- You mentioned earlier that you're seeing scope reductions, is that continuing? Or have we kind of hit the tail end of the scope reductions? And are customers, are they more postponing things? Or are they outright canceling projects?

Typically, Christine, what we're seeing is people deferring decisions, in other words, they'll line up the suppliers to build out a market or a region and then hesitate on pulling the trigger, making the final approval. Or they'll build it out on a slower time frame than they had initially planned. And we think that's really tied to the capital market uncertainty that all of our customers face. It's been very tough for even the largest carriers to get out to market. Those that can, [indiscernible] the capital that they can raise as being a competitive resource and something that they're very careful with.

So, our ROI thresholds have gone up so that people are a bit more careful with money. I guess the characterization that we use here is that 1999 and 2000, it was field of dreams, telecom world. If you build it, they will come. The new mantra is very much the opposite. It's if they come and that we need the capacity, then we'll build it for them. So, it just tends to be a bit more cautious in terms of how money is spent. And we do end up with a sort of a jittery start to many projects and often the opportunity that projects do get postponed or deferred once they're started, as we saw last year, for example with Nextel CDMA overlay.

Okay, thanks.

The next question comes from Carl Palladi with GKM. Please proceed with your follow-up.

Oh, yeah, sorry. I have a few other questions. You mentioned Sprint PCS, and I was just wondering what kind of work you're doing for them and do you see that relationship growing in the near-term?

Hi, Carl, this is Masood. We're doing some optimization work currently for Sprint PCS and obviously, as with all the carriers, we're hoping that the relationship is going to progress into a much bigger relationship. So, we're optimistic on that.

Okay.

I cannot go into any more detail.

Okay. And then the other thing about one of your relationships with-- You know, AT&T Wireless has indicated, that I think they want to have essentially 100 percent of their project complete, the Liberty project complete by the end of this year. And, I mean, what do you think going into '03? Do you think you'll see a sharp drop-off in the Bechtel/AWE work? Not for Bechtel, because you have the Singular relationship with them as well, but for AWE, in particular, where do you see that going in 2003?

Yeah, Carl, I wouldn't characterize that just the way you did. In other words, the project Liberty is actually a three-year project that includes much more than just the transition from TDMA to GSM. So, what AT&T has announced is that they plan to have 100 POP coverage in the markets that they cover with GSM by the end of the year. And I think they're well on track to do exactly that. But, project Liberty is actually to increase coverage and capacity in all the existing markets. And it extends really almost in all the nationwide-- the major nationwide markets. And that will continue for at least another couple of years, so we might see a bit of a bubble in the end of the GSM implementation, certainly a rush to get that done, but that's by no means a complete network. There's a lot of work left to do.

Okay and then for the Cingular deal, you mentioned that will start ramping more significantly in the third and fourth quarter and leading to kind of some kind of a quarterly run rate in '03. I mean, is there any idea now on what you think the quarterly run rate should be when it's kind of fully ramped?

You know, Carl, it's probably too soon for us to really map that out very specifically. There's a-- We're tied to work that's being done by a number of other parties in the market. So, we'll-- As the project develops, certainly in the next quarter or so, we'll be able to give some insight into that. But, it'd be tough to do it today.

Okay. Fair enough. And the last thing, I don't know if you gave- Did you give the breakout of the international versus the domestic revenues and then the breakout of the international in Latin America and Europe, Middle East and Africa?

Sure. US, the domestic accounts were 74.1 percent of the total. And Latin America, 19.7 and Europe, Middle East, Africa, 6.2 percent.

6.2? Okay, thank you.

CALLER INSTRUCTIONS] Mark Duracy [phonetic] with Raymond James. Please go ahead with your question.

Good afternoon. A couple of questions. First, on the Cingular contract, big dollar amounts with a wide range of minimum versus possibility. Can you talk about how you could get from the 135 to possibly in excess of 200 million? Is it going beyond site acquisition and zoning work or is it a function of maybe getting more markets? If you could kind of speak to that? Also, Tom, can you talk a little bit more about what you hit on as far as the outsourcing trends and how they're developing? You mentioned some carriers that sounds like, are willing to give up more than they have in the past. I guess it's what you're trying to say.

On the first point, Mark it's Masood. Regarding the 135 to an excess of 200, actually our projection is around 200. The 135 is basically being on the conservative side. One of the other thing-- that it is not just site acquisition and zoning, our division of responsibility actually includes also our [indiscernible] as well as certain other categories, such as all the engineering work, RF engineering, fix net work engineering, SS7 engineering and so forth. And that is done under a certain type of partnership with Bechtel. So, it is not just site acquisition and zoning [indiscernible]. In fact it is much more comprehensive than that.

And then Mark, this is Tom. Just to give you a bit more flavor on the outsourcing trends. There are a number of things that are driving the effect that we're seeing and I think it's probably well characterized by the recent Ericsson announcement regarding the MMO2 Telfor unit in the Netherlands where that network is going to be turned over for management and ongoing expansion through Ericsson. And we see the same sort of thinking that MMO2 undertook there, being least considered by carriers literally in almost every market. It's the same kind of thinking that's driving the push towards infrastructure sharing. We've seen a couple of US announcements of Voice Dream and Cingular in some markets and Cingular AT&T in others. And I think the thinking has basically evolved to the point where because-- partly because of the conversions of technologies, there are fewer technologies to interoperate with, GSM, CDMA being the winners at this point.

And also, the very acute capital constraints and the financial situation that [indiscernible] that are faced with. They're trying to drive themselves into a free cash flow positive model and to do that, they're willing to consider some things that had been off the table in the past. And certainly among those is the idea of outsourcing, some aspects of network management and operations. You know, to just illustrate that trend, the Cingular contract that we have with Bechtel is not, is not a traditional way of thinking for the carriers. I can tell you, three or four years ago certainly have been done in house by people on the payroll at Cingular and I think there was a recognition that there was a different expertise and a different volume arrangement and a different requirement to put all the pieces together and that it could be done as well outside as inside and that the people inside are fully engaged making customers happy today. So, it was a, I think the same kinds of thinking have opened up literally across the board.

Okay. You're saying there's a potential for more of recurring type revenue?

Absolutely. I think the model fully evolved would include network management operations and would ultimately separate the operating of the network from the selling of minutes and the customer interface.

Good luck with that because that is absolutely the "Holy Grail" in the business, so, best to you.

Thank you.

CALLER INSTRUCTIONS]. There are no further questions, please continue with your presentation or any closing remarks.

Great. This is Tom Monro. I would like to thank everybody for dialing into the call and thanks for your support over the past difficult several quarters. We are pleased to be able-- After some quarters of having suspended guidance to be able to give a forecast and look forward to meeting that forecast and to speaking with you again in a quarter.