Kratos Defense and Security Solutions Inc (KTOS) 2003 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wireless Facilities Incorporated fourth quarter 2003 conference call. Your speakers for today are Dr. Masood Tayebi; Chairman and CEO and Mr. Eric DeMarco; President and COO. At this time all participants are in a listen-only mode. After the speakers have concluded their remarks we will conduct a question-and-answer session. As a reminder this call is being recorded today, February 19th, 2004.

I will now turn the conference over to Ms. Martha Lessa, who will read the company's warning regarding forward-looking statements. Go ahead ma 'am

Thank you for joining WFIs fourth quarter 2003 conference call. A replay of the call will be available from 4:30 p.m. pacific time on February 19th through 4:30 p.m pacific time February 27th by dialing 800-633-8284. Additionally, the conference call is being broadcast live on our website at www.wfinet.com. The call will be archived there for one year.

Our comments today contain certain forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those anticipated in such forward-looking statements. Such forward-looking statements include the use of words such as anticipate, expects, intend, plan, believes, and may. Forward-looking statements include, by way of example, revenue, margin, and earnings expectation, or projections and various references to trends in the industry in which we operate our business in general. Such statements reflect our current views with respect to future events and are subject to risks, uncertainties, and other factors, some of which are beyond our control and could cause the company's actual result to differ materially from those anticipated by these forward-looking statements.

Factors that may cause the company's results to differ materially include but are not limited to risks associated with successful integration of the government service division and companies within the enterprise solution division, company's inability to win government contracts or achieve the synergies or benefits expected from the HTS acquisition, changes in budgets of U.S. Government customers upon which government services division is dependent, changes in the scope or timing of company's wireless network projects, which could affect revenue and profitability, slow-downs in telecommunications infrastructure spending in the United States and globally, which could delay network deployment and reduce demand for the company's service, the timing, rescheduling, or cancellation of significant customer contracts and agreements and changes in the company's effective income tax rate. The complete description of company risks and uncertainties is available in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K, filed on March 21st, 2003. Copies of this report are available free of charge on our website.

In response to the SEC's regulation of fair disclosure any forecast of WFI's revenue and earnings will only be provided with quarterly earning conference calls or press releases, as of the date of the call or the press release and are based on assumptions which management believes to be reasonable at that time. WFI assumes no obligation to update any such projections at any time.

Now I would like to turn the call over to Dr. Masood Tayebi, Chairman and CEO of WFI.

Good afternoon and welcome to our call. Joining me this afternoon in addition to Martha are Eric DeMarco; our President and COO, Dan Stokely; our Corporate Controller and acting CFO, and Rochelle Bold; our SVP of Corporate Development and IR.

This afternoon we reported results for the quarter and for the year that demonstrate the extent to which our business has not only recovered from the prolonged downturn in the telecommunication industry but as a measure stronger than at any time in our nearly ten-year history. For the fourth quarter we reported record revenue of 82.9 million, an increase of 63% over the fourth quarter of 2002. Operating profit for the quarter was 7.9 million, a 216% increase over the fourth quarter of 2002. And diluted earnings per share were 11 cents, 120% increase over the fourth quarter of 2002.

For full year 2003 revenue increased 40% to 262.2 million, operating profit increased from a loss of 54.7 million to a profit of 22.2 million, and diluted earnings per share increased from a loss of $1.33 to a gain of 32 cents in 2003. After several years of significant reductions in capital spending, wireless carriers responded to consumer demand for improved coverage, quality and capacity by increasing investments in their radio networks creating new opportunities for companies such as WFI. Our Legacy Wireless Network Service business moved aggressively to capture this opportunities and we were successful in winning a substantial amount of new business in both RF engineering and in network deployment. At the same time we were also successful in reducing the revenue concentration among our top customers. Also in 2003, believing we could leverage off our engineering system integration and project management skills, we made a decision to enter two new markets; the enterprise market for voice data networks and security systems and the government market for communication system design integration and outsourcing of technical services.

Each of our three business divisions, Wireless Network Services, Enterprise Network Services, and Government Network Services, shared the same core capabilities that have become the hallmark of WFI. Our engineering in network design, network deployment, system integration, network management and outsourcing of technical services, we believe strongly that there are opportunities for each vertical to leverage off the other two and accelerate the overall growth of our business.

As we look to 2004 and beyond, we have good reason to believe that the company's better positioned today than at any point in our past. Strategically we have diversified into synergistic businesses that allows us to capitalize on our core capabilities. Operationally we have the strengthened and diversified our customer base and are well positioned for growth in each of our core markets. And financially we have the means available to us to continue to execute our strategy with more cash today than when we went public, no debt, and trailing four months EBITDA of just over 29 million. Our plan for 2004 is to continue to focus on internal revenue and profit growth in each of our three business divisions, while at the same time continuing to potentially pursue complimentary acquisitions within our three verticals that expand either our customer base our our technical strategies or our geographical reach.

On April 1, Eric will be assuming the role of CEO, a position he has been occupying in some sense for the past three months and I will become Executive Chairman. This will allow me to devote my time to working with new carriers, while Eric focuses on executing our strategy and on the day to day operation of the business. The board and I are confident that WFI will be well served by having Eric as our CEO during this next phase of the company's development. We have also narrowed our CFO search to a few candidates and hope to make an announcement regarding that position in the near future.

With that, let me now turn the call over to Eric to talk more about our strategy, our operations, our results for the quarter, and our outlook for 2004. Eric.

Good afternoon. As Masood indicated in his remarks, we are encouraged by our fourth quarter results and by our success in growing our revenue, while at the same time limiting our SG&A expense and improving our overall profitability. But even more importantly, as we will discuss later during our financial outlook, we believe that our efforts in 2003 in solidifying our relationships with the major wireless carriers and in strategically diversifying into the government and enterprise markets have laid a strong foundation for what we expect should be significant earnings growth in 2004 as well as beyond.

Let me start by talking about our Wireless Network Service division. Fourth quarter revenue grew 35% year-over-year and operating profit was up 152% year-over-year. This division includes the business consulting, design and deployment, and network management segments. Beginning in 2004 the results of operations for each of these areas will be combined into a single segment called Wireless Network Services.

Our international operations in the Wireless Network Service division, which accounted for 26.4 million in revenue in the fourth quarter, demonstrated significant year-over-year growth primarily as a result of our Telephonica contract in Mexico, under which we just recently checked a significant amount due under our receivables, which Dan will mention when I wrap up my comments. Telephonica was our largest customer this past quarter with just over one-third of the expected value of our current contract or approximately 15.3 million recognized on this contract in Q4. We expect the balance to be recognized primarily over the first half of 2004.

As we have indicated in the past, we are optimistic that growth in our international business will continue in 2004 as subscriber growth and marketplace competition in Latin America provide us with significant new contract opportunities. Related to this, recent statements from Telephonica regarding their investment plans for Mexico, combined with strong subscriber growth in the fourth quarter suggest that additional cell sites will be built by Telephonica in Mexico in the coming year. We believe that it is likely that our current contract will lead to additional work from Telephonica throughout the remainder of 2004.

In Europe, we are finally seeing the market for design and deployment services meaningfully develop as carriers begin to roll out their 3G networks. Just last week, Vodafone, which is our largest customer in Europe, announced that they are launching Europe's first 3G lap top data card for use in what is, currently, a limited 3G network. We are hopeful this fore shadows expansion of the Vodafone 3G network later this year and the launches of 3G networks by other major carriers, including T-Mobile, who also recently announced this intention to begin selling 3G phones.

We are continuing to pursue new bid opportunities with the carriers directly and with our partners, the major equipment vendors, who still command a large part of the European services market. We have reason to believe that we will also be successful in at least breaking into the deployment market this year.

Domestically, in our WNS division, demand for our services in the fourth quarter continue to be driven by the desire on the part of the carriers to improve network coverage, quality, and capacity as a result of continued subscriber growth and minute growth in increased data usage. Our largest domestic customers in the fourth quarter were Cingular, at 10.5 million, followed by Western Wireless at 8 million, AT&T Wireless at 6.5 million, Sprint at 3.3 million. Together with Telephonica our largest customer at 17.4 million, these top five customers represented 55% of revenue, down from customer concentration of 79% in the prior year.

As you saw from the press release this afternoon, in the fourth quarter we were successful in bidding on and winning turn key development project with two of the major carriers, which we believe will be very significant for us in 2004. These contracts combined with other smaller deployment contracts are ongoing engineering work with each of our major customers, and overall positive industry trends have led to us believe we could see a robust market for our service in 2004.

As we saw from the carriers' fourth quarter results, subscriber and minutes of use growth remain strong and data and multimedia usage, at least for some carriers, is beginning to gain some traction. Additionally camera phones have proven to be extremely popular and may small the demand for other multimedia services. Additionally, as many in the industry expected, number portability coincided with increased churn for some of the carriers and magnified the network performance differences between them. We believe this is likely to result in near-term increased pressure to improve network quality.

Some of the other recent news that we see as potentially positive for our business include Verizon's announcement of the rollout of their EVDO data network. This may mean the demand is developing for higher speed data service and could potentially put increased pressure on the other major carriers to provide similar services.

Also, AT&T Wireless has increased cap ex guidance and the increased pace of cell site development by Cingular in the fourth quarter, coupled with their stated continued commitment to improving coverage in 2004, confirmed our belief that not only will capital spending increase but that capital spending on the network will increase at even a faster rate than overall capital spending. All of these factors combined with the ongoing requirement by carriers to provide E-911services have led us to believe there will be healthy market for network design and deployment services. As we have indicated in the past, we also believe that the carriers will continue to use third-party companies, such as WFI, to provide turnkey network deployment services. Consequently we expect turnkey deployment work will be a significant driver of our growth in 2004.

One topic I want to mention briefly before moving on to our Enterprise Network Services division that I know has been of interest to investors is carrier consolidation, in general, the AT&T Cingular proposed merger, in particular, and potential impact of such a merger on our business.

There are two separate issues to address here relate to this topic. The first is the effect of consolidation on demand for engineering work on existing cell sites such as upgrades, overlace, and optimization. First of all, we have a high degree of confidence that demand is not likely to be negatively affected by an AT&T/Cingular merger. Wireless networks are uniquely built, and they're configured based on a projected level of subscriber density, traffic patterns, and the coverage area. These networks are designed to make optimal use of the spectrum and result in the highest possible signal quality for the greatest number of subscribers within constraints such as cost, terrain, license limitations, interference with other operators, and site availability. Accordingly, since each cell site is an important component of the overall network design, cell sites located within existing networks are not likely to be removed because doing so could have a material adverse effect on the network and could result in a redesign of the system.

The second issue is the effect on demand for the design and deployment of new sites. While here the likely effects for consolidation are less clear, we believe that in the short term buildout plans are not likely to be affected since they are being driven by quality, coverage, and or capacity issues that exist regardless of who owns the network. We also believe it will take time for the two carriers to consummate a merger transaction and develop a fully integrated future buildout plan.

Longer term. While it is possible that less new sites may be constructed you should combined entity we are hopeful that sales, marketing, customer care, and administrative savings may actually work to our favor by freeing up additional dollars that may be invested in building out and upgrading the network for next-generation service. Additionally, to the extent that deployment opportunities may be reduced by scaled-back buildout plans any effect on service providers such as WFI will likely be mitigated by the increased need for optimization and RF engineering service to ensure that the integrated networks run properly.

In summary for WNS, our goal for 2004 is to continue to strengthen our relationships with each of the major carriers so that we are well positioned regardless of who survives any consolidation process, and to capitalize on what we believe are significant opportunities in the wireless market over the next couple of years.

Now, let's move on to our Enterprise Network Solutions division. ENS is our business unit where we provide the design, deployment, integration, management of security systems. These include access control, digital surveillance, and intrusion detection, as well as other inbuilding systems including voice and data networks. In the fourth quarter despite the seasonality of the holiday months, which typically adversely impact this business we continue to build momentum with significant new wins from our customers. These included Computer Sciences Corporation, [Agelant] Technologies, British Petroleum and [Halberdine] . We were also successful in winning business from locations such as the Toyota Center, Lincoln Financial Field, and the Atlanta airport.

Additionally in Q4 we continue to build on our partnership with the Westfield Shopping Center Organization, adding digital surveillance and Wi-Fi connectivity to 17 new shopping malls bringing the total number of malls we are now in to 19. In 2004 we will continue to focus on the integration of the three companies we acquired last year, which we believe will lead to meaningful cost synergies and positively impact operating margins in the second half of 2004.

We continue to be very optimistic about the opportunity to integrate wireless technology in enterprise networks, especially physical and electronic security systems, as well as voice and data networks. We plan to continue to look at additional acquisitions in 2004 which would further build out what we hope will eventually become a national presence for this business unit.

As Masood alluded to earlier our strategy for the company for 2004 will be to continue to focus on the growth of all three divisions, that is, Wireless Network Services, Enterprise Network Service, and the recently established Government Network Services division. We intend on doing this while continuing to manage our cost structure and leveraging our incremental revenue dollars in order to lower our SG&A expense as a percentage of overall revenue. We will also continue to pursue complimentary and accretive act we suggestions.

Moving on to the Government Network Services division. In this division, where we are involved in the design, deployment, and integration of communications and information technology networks for the Federal Government, our goal is to profitably build scale and to expand our customer relationships within the Department of Defense and the Department of Homeland Security. While our core WNS business is stronger than ever before and already growing organically at approximately 30%, we believe this strategy will allow us to take further advantage of the significant government opportunities for companies with substantial expertise in communications and wireless technology.

By acquiring government companies we will also increase our backlog, which helps bring additional stability and predictability to our revenue and profit as businesses in this area typically carry multi-year backlogs due to the nature of the contracts under which they perform. Additionally, this type of business area is enjoying and is expected to continue to enjoy significant growth as the Department of Defense continues its transformation to a more wireless network centric force. As we indicated on our previous conference call these types of businesses can generate sustainable operating margins of approximately 9 to 10% along with significant free cash flow generation.

In order to pursue this part of our strategy, this afternoon we filed two registration statements with the SEC. A universal shelf registration on Form S-3, and an acquisition shelf registration on Form S-4. While we want to stress that we have no immediate plans to raise capital under the universal shelf, or to utilize the acquisition shelf for a transaction, we believe that having effective registration statements available will benefit the company and our shareholders by allowing us to quickly and opportunistically consummate strategic acquisitions, potentially providing WFI a strategic advantage over other competitors trying to do what we are going to do.

Additionally I want to also stress we will only raise funds for acquisitions that are accretive and that continue to leverage off the synergies of existing businesses and our core capabilities to further accelerate internal growth. Also, we have included registration rights for shareholders of our preferred stock in the universal shelf. While the common share equivalents of these preferred shares are already included in our diluted share count, our goal in providing the preferred shareholders with registration rights is to ensure a more orderly distribution of the converted shares into the market than may have occurred in the past. We believe this should provide us with less volatility in our stock price as we remove what is arguably been a considerable overhang on the WFI stock.

Once again I want to stress there is no additional dilution to WFI shareholders related to the registration rights for the secondary shares we are registering today. And anything we may do with primary shares is ultimately intended to be accretive to WFI.

In summary, we believe we are well positioned strategically, operationally, and financially to capitalize on the many opportunities in front of us and to execute our long-term plans. For all the reasons I have outlined this afternoon, as we look to 2004, we fully expect that our financial performance will continue to improve and that we will continue to generate significant value for our shareholders. As part of our effort to provide our shareholders with the clearer picture of what we expect in the coming quarter as well as in the coming year, we have decided to begin providing guidance on our expected financial performance, which Dan Stokely will share with you in just a minute. We look forward to keeping you updated on our progress in meeting these goals and objectives throughout 2004.

I'll now turn it over to Dan, and then I'll wrap up with some closing remarks.

Good afternoon. As Masood mentioned earlier for the fourth quarter we reported record revenue of 82.9 million, an increase of 63% over the fourth quarter of 2002. Our international operations contributed to 32% of our revenue while our domestic operations were 68% of our revenue. We continued our goal of diversifying a revenue base with our top five customers accounting for 55% of our fourth quarter revenue compared to 79% in the prior year. Operating profit for the quarter was 7.9 million, a 216% increase over the fourth quarter of 2002.

As expected, due to our increase in our turnkey deployment work our gross margin dropped to 25% while our operating margin improved to 9.5%. As a result of our continued focus on expense control, SG&A continued to decline as a percent of revenue at 13.5%, the lowest in more than four years. Diluted earnings per share was 11 cents, 120% increase over the fourth quarter of 2002. For the full year 2003, revenue increased 40% to 262.2 million, operating profit increased from a loss of 54.7 million to profit of 22.2 million and diluted earnings per share increased from a loss of $1.33 to net income of 32 cents.

Total cash, cash equivalents, and short-term investments at the end of the year were $114.2 million, with no debt, excluding capital lease obligations. Total net accounts receivable for the quarter were 97 million, DSOs were flat at 106 days as a result of the Telephonica contract. However, we have already invoiced our customer under this contract for a significant amount of the work performed in the fourth quarter and recently received a payment for 9.5 million.

Looking out to 2004 as Eric mentioned earlier, the business consulting, design, and deployment and network management segments will be consolidated into a single segment called Wireless Network Service. Our other two segments for financial reporting purposes will be our Enterprise Network Service segment and our Government Network Services segment.

For the first quarter of 2004, we currently expect to record revenues of approximately 76 to 83 million and an EPS in the range of 7 cents to 8 cents. This assumes a tax rate of approximately 15 to 18%. Operating margins in the first quarter will be affected by the need to significantly ramp up the hiring of both direct labor and indirect program managers for our recent new turnkey wins in advance of commencing work. However, we fully expect operating margins to improve significantly beginning in the second quarter as revenue on these contract begin to ramp.

For full year 2004 we expect to record revenues of approximately 390 to 420 million with approximately 275 to 295 million from our Wireless Network Services division. This represents an increase in revenue of approximately 55% over 2003 with approximately 30% growth expected in our Wireless Network Services division. EPS is expected to be in the range of 39 to 43 cents. Again this assumes a tax rate for the full year of approximately 15 to 18%.

Finally, any future acquisitions that the company may make are not included in this forecast. That concludes my remarks. And now let me turn the call over to Eric to make a few final comments about our guidance for the year.

Thank you very much, Dan. Before we wrap up, there are a couple of other final things I wanted to highlight relative to our guidance for 2004, which, by the way, is the first time in the past three years WFI has done so. The first is that unlike our Wireless Networking Services business, which is not historically experienced significant seasonality we now derive a material portion of our revenues from two divisions, Enterprise Solutions and Government Services. Seasonality based on the number of labor days in the quarter and customer spending cycles will materially affect quarterly revenue and profit. As a result, we believe going forward year-over-year comparison of our results will be much more meaningful than sequential quarter to quarter comparisons of our results as these because more substantive pieces of our business.

Secondly, as Dan indicated, margins in the first quarter will be impacted by our ramp-up on a couple of our recent wins. However, as we indicated, we would do so on our conference call this past December, we are focusing this year not on gross margin but on operating margins and more importantly on overall WFI profitability in EPS. While we expect full-year operating margins to be over 9% with the goal of reaching 10% by the fourth quarter, the continued growth of our turnkey business may have the effect of slightly lowering our overall margin. However, our overall profitability should continue to benefit from this new work.

Now let me turn the call back over to the moderator so we can take some questions.

Thank you. Ladies and gentlemen, if you'd like to register a question, please 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 would like to withdraw your registration, please press the 1 followed by the 3. If you're using a speakerphone, please lift your handset before entering the request. One moment, please, for the first question.

First question comes from the line of Seth Potter from Punk Ziegel.

Hi. Good afternoon. Just a couple of questions. Is there any way you can break out for the fourth quarter the different divisions? It looks like if you grew revenues year-over-year on the wireless group 35%, assuming last year's fourth quarter was all wireless, you'd net out about $14 million to Government and Enterprise, and a break out of that would be helpful.

Also, you wanted to verify on the guidance, the 2004 guidance, that I thought you said 225 to 275 million was related to Wireless. Thanks.

Yeah. On the question in our enterprise solution is 16.9% of our revenue, but as you know we didn't have Government Services starting in January. So all of that is Enterprise. And as Eric alluded to, we do have seasonality in that business, typically the seasonality is Q4 and Q1 are lower for Enterprise, then Q2 and Q3 are stronger.

On the 275 on the Wireless Network Service that's we expect this year revenue growth to be for that division.

Was it a range, or was it just 275?

It was a range, 275 to 290.

Okay, 275 to 290. Thanks.

Then included in guidance, assuming you obviously have your HTS acquisition, if I remember correctly there was 40 or, so maybe 40 to $50 million in backlog, what are the assumptions that you've made going into next year with your guidance here on that business?

You know, as we said on the conference call in December, last year revenue on that company was just over 14 million, and what we also said we expect that business to grow organically in the 15 to 20% range. And still assuming the same assumption.

I also wanted to point out that backlog for that business was approximately $130 million.

Okay. And one last question and I'll get off. What was the staff level for the quarter, end of the quarter?

The average headcount was 1,760.

Okay. Great. Thanks a lot.

Next question comes from the line of Frank Marsala from First Albany Capital. Please go ahead.

Hello. My question is with regard to first quarter guidance for revenues. You've got two new contract wins and you say you started to do some work. Why, then, is first quarter revenues flat? Why should we not see an increase there, or kind of flat as the upper case of your guidance?

It is primarily based on the timing of when we started the work relative to where we initially thought we would start the work in the quarter.

Given that your upper end is like 420, we should see a significant ramp, I would imagine, in the second quarter, and then smoother throughout the rest of the year? How should that work some is it the third quarter?

Your assumption is correct. As we head into the second quarter.

So significant ramp in revenues in the second quarter, smoother beyond, reasonable?

Smoother but potentially still ramping as we continue to execute on these things.

Question about the tax rate. You're saying now 15 to 18%. Last call you said 5 to 10%. Without getting into any arcane accounting issues, is there a reason why you can tell me 15 to 18 now versus 5 to 10% before?

Absolutely. Very simple. When we gave the 5 to 10% I believe that was back in December. We had our forecast for 2004 on where we thought profit would come from domestically and internationally, and the level of it domestically and internationally. And we have NOLs and we have other tax benefits domestically and internationally. The mix as we sit here today appears to have changed on us. We're not going to be able to utilize as many benefits as we thought then. Now, that may change again as the year goes on but that's the best picture that we have today.

Okay. And then one last question. If you are looking at the series A and B shares, preferred shares you have today, if you were to convert all of those shares that could be converted, how many shares would that come to today?

Well, that's a good question, because we're not exactly sure how many of those shares have been, that are available for sale, have been sold as we sit here today.

So the 5.4, I'm just trying to get a sense of what the 5.4 million represents.

The 5.4 million represents what we believe is a substantial portion of the preferred shares remaining to be converted into common and sold.

Remaining. Well, that pretty much addresses what I was looking for. Thank you very much.

Next question comes from the line of Ned Zachar from Thomas Weisel Partners.

Thanks very much. My questions have been answered.

Very good.

Next question comes from the line of Eric Helmond from Piper Jaffray.

Good afternoon, gentlemen. Congratulations on a strong fourth quarter. My first question is the tell fon Telephonica work you're doing in Mexico, I was under the impression that it was going to be complete at the end of the first quarter. Do I understand it now correctly that it's going to be the entire first half of 2004, and what's the breakdown in terms of distribution? Is that even or still the majority of which is going to be in the first quarter?

As we said December call we expect that most of the remaining piece to be done in the first half of this year. Actually, almost all of it, but we can't guarantee all of it will be done. Expect it to be evenly distributed in the first and second quarter, approximately.

Okay. And then also, with regards to Vodafone in Europe, did you say that you are assisting Vodafone in the deployment of their wide ban networks?

What we said is Vodafone phone is our largest customer in Europe, and the other thing we can tell you, just about all of our work in Europe is 3G related.

And that would encompass how many Vodafone market?

We are not discussing exactly how many because that's a customer.

Okay, okay. And then in December conference call I think you said that you had three contract awards that the two that were announced today, are these two of the three?

No, we said two.

Oh, okay.

And these are the two.

My apologies.

I mean, obviously, you know, every bid we win different projects, different contracts, but they are not at the size that they are worthy of press release or disclosure.

Okay. Now, my last question is with regards to the Cingular/ AT&T merger. I'm just trying to get a handle in terms of the size of the magnitude of the integration project of these two networks. Can you give us some in sight in terms of how much in terms of dollars would it cost, whether it's AT&T/Cingular or there are outsourced pieces of this to WFII, what's encompassed in terms of integrating these two networks and what's a reasonable time frame?

Obviously, I can't give you a specific dollar, because we don't know, but we expect it to be substantially large in terms of the effort, after all they are the number two and number three largest carriers in U.S. Expect that to start next year. I would say our biggest advantage from our perspective is that these customers, we've been involved with them for many years. As you know, Cingular was our top customer, and AWS was our top customer for awhile. We have a great relationship, a tremendous amount of network design, optimization, and deployment, and really understand both sides of the network. As a result we are hopeful, due to our relationship and expertise, that as the measure goes through early next year or sometime this year, early next year, that should serve very well for us. Putting a specific dollar, I think, is way too early.

Great. Thank you so much.

Ladies and gentlemen, as a reminder, if you'd like to queue up for a question, please press the 1 followed by the 4 on your telephone.

Next question comes from the line of Frank Marsala from first Albany Capital. Please go ahead.

I might as well take advantage to ask some more questions while I'm here. On the HTS business I know the government's doing a lot of work and there's some contract awards due in the May time frame, Project Visit, I think is one thing I've seen, what can you tell me about that business? What kind of awards might we expect if the government comes through with the things its doing?

The pipeline on our government business today is very robust for us, particularly in the areas of work that our division is performing. We have some very large bids out there that are going to pan out, as you indicated, not only in Q2 but also in Q3, Q 4, and we've got some other ones we're tracking in Q1 of '05 and Q2 of '05. We're already tracking them. The BOD budget came out and it was just over $400 billion with a significant amount of money and increase still flowing to communications, C4ISR and wireless networks, so as we sit here today, the business position that we're in with the backlog that we have, almost all of our prime vehicles are under contract through 2008 or 2009, they're all under contract already. Things are fairly optimistic right now.

Okay. Thank you very much.

You're welcome.

Next question comes from the line of Tom Meager. Please go ahead.

Yeah, hi, congratulations on the quarter. First question I have is, given that you've now got these three separate operating units I'm wondering, will we look to do some segment reporting, at least at the top line, or are you still going to give a consolidated number?

Hi, Tom. We are going to give segment reporting for the three divisions, yes, sir.

Eric, you know, you're coming from an environment where, you know, billion and a half dollars you could pretty much bang heads with any of the big guys out there, I was just trying to get some additional color on the government side of the business, how you plan to position WFI initially, you know, in other words, would you pursue a subcontractor a choice type of strategy, or is there something else you might be looking at there?

We're doing a couple of things. We're pursuing it on a prime basis, we're doing it on a teaming basis, but a key differentiator for us, Tom, that we're seeing related to programs like the link 16, for example, is the wireless capabilities that we have and the number of engineers that we have in the RF area and the wireless area and the integration side and things that are going on not only on the Department of Homeland Security but over in Europe and some of the rebuilding opportunities that are going on in the Middle East, the communication networks are substantially going to have some wireless element to it and we are involved in that right now.

Okay. And then just one last question. You mentioned budgets before. You know, the IT part of the budget this year is up about 1% or so off of last year, but within that, the Air Force and the Navy are seeing some pretty big increases. I think the army and the civilian agencies have seen a corresponding decrease. Within, you know, your current customer base, how is that kind of spending pattern going to affect you? In other words, will you pretty much just stay away from civilian agency work at this point in time and kind of concentrate on the DOD and Intel side?

Yes, we are going to stay away from civilian agencies. For the most part though, as you know, under VHS, TSA and some of the agencies are getting a significant amount of funding relative to communication infrastructure. Where we're currently positioned also, as you know, MDA Missile Defense Agency, and some of the areas that they're involved in communication, is seeing some significant increases. We're very well positioned there. We're very well positioned with the Navy as well.

Okay. Thanks very much. I appreciate it.

Our last question comes from the line of Seth Potter from Punk Ziegel.

Just a follow up, Eric, on the backlog for HGS. You mentioned 130 million. What's the timing of that running off?

Right. If you can envision a water fall, trailing off to the right-hand side, that backlog will substantially be burnt off over the next four and five years with some of it falling into six and seven years.

Okay. And is there any color you can give us in terms of what will be a percentage that may be burnt off in '04?

Let's see. I'd say on that probably 20 to 25%.

Okay. Great.

Yeah, 20 to 25%.

Thanks a lot.

Yes, certainly.

I would like now to turn the conference call back to you. Please continue with your presentation or closing remarks.

I'd like to take this opportunity and thank our shareholders, investors, and our listeners and we are looking forward to having you on our call next time.

Ladies and gentlemen, that does conclude our conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you, and have a great day.