Kratos Defense and Security Solutions Inc (KTOS) 2004 Q1 法說會逐字稿

Welcome to the Wireless Facilities, Inc. first quarter 2004 earnings conference call. Your speakers for today are Dr. Tayebi, Chairman, Mr. Eric DeMarco, President and Chief Executive Officer, and Ms. Martha Lessa, Director of Investor Relations. (OPERATOR INSTRUCTIONS)

I will now turn the conference over to Ms. Martha Lessa, who will read the company's warnings regarding forward-looking statements. Please go ahead, Ms. Lessa.

Thank you for joining WFI's first quarter 2004 conference call. A replay of the call will be available from 4:30 p.m. Pacific Time on April 27th, through 4:30 p.m. Pacific Time on May 11th, by dialing 1-800-633-8284. Additionally, the conference call is being broadcast live on our Web site at www.wfinet.com. The call will be archived there for one year.

Our comments today contain certain forward-looking statements and 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 the words such as anticipate, expect, intend, plan, believe and may. Forward-looking statements include, by way of example, revenue, margins and earnings expectations 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 results to differ materially from those anticipated by these forward-looking statements.

Factors that may cause the company's results to differ may include, but are not limited to, risks associated with the successful integration of the Government Services Division and the companies within the Enterprise Solutions Division. The company's ability to win federal government contracts or achieve the synergies or benefits expected from the HTS acquisition, changes in the budgets of U.S. government customers upon which Government Services Division is dependent, changes in the scope or timing of the company's wireless network projects which could affect revenue and profitability, slowdowns in telecommunications infrastructure, spending in the United States and globally which could delay network deployment and reduce demand for the company's services, the timing, rescheduling or cancellation of significant customer contracts and agreements and changes in the company's effective income tax rate.

A complete description of the company's risks and uncertainties is available in our filings with the Securities and Exchange Commission, including our annual report on Form 10K filed on March 8, 2004. Copies of this report are available free of charge on our Web site. In response to the SEC's regulation of Fair Disclosure, any forecasts that implies revenue and earnings will only be provided within quarterly earnings conference calls or press releases. These forecasts will be as of the date of the call or the press release and are based on certain assumptions which management believes to be feasible at that time. WFI extends no obligation to update any predictions at any time.

Now I would like to turn the call over to Eric DeMarco, President and CEO of WFI.

Good afternoon, and welcome to our call. Joining me today in addition to Martha, are Masood Tayebi, our Executive Chairman, Rochelle Bold, our Senior Vice President of Corporate Development and Investor Relations, and Deanna Lund, who has been selected as our new Senior Vice President and Chief Financial Officer.

Deanna comes to WFI from the Titan Corporation where she was Corporate Controller and Principal Accounting Officer during the period that the company's revenues grew from approximately 150 million to nearly $2 billion. Deanna was responsible for all aspects of financial accounting, SEC reporting and budgeting, and she was instrumental in executing numerous capital and debt transactions and over 25 acquisitions. Deanna also played a key role in tax planning, communicating with the financial community, and Sarbanes-Oxley compliance. Deanna has the experience necessary to help this company execute our strategic plan and grow to over $1 billion in revenues, which, as you know, is our strategic goal. Masood, the Board and I believe we are extremely lucky to have her as part of the WFI management team.

This afternoon we also announced a new addition to our senior management team in addition to Deanna, Jim Edwards, who will be joining WFI as Senior Vice President and General Counsel. Jim comes to WFI from Qualcomm, where he was Senior Legal Counsel. Prior to that, he was Vice President and General Counsel at Wireless Knowledge and served as Vice President and General Counsel for over a decade at General Atomics, a privately held defense contractor here in San Diego.

I'd like to start our call this afternoon by turning the call over to Dr. Tayebi to provide some general comments on the current state of the wireless industry and our outlook for the industry for 2004.

Following Masood's remarks, I'll come back and provide financial and operational updates and I'll discuss our expectations for both the second quarter and the balance of the year. Masood?

Thank you, Eric. Good afternoon.

As you can see from the results we reported this afternoon, the growth in the wireless industry that we have seen building in the past few quarters is continuing to drive the organic or internal growth of WFI. While revenues across the company were up 82% year-over-year, revenues in our wireless network services business were up 42%, all of which was from organic growth. First quarter results reported by most of the major carriers have shown strong increases in both net subscriber additions and minutes of use per subscriber, as well as growing momentum in data usage. Results such as these are facing further strain on already saturated networks and fueling the demand by the carriers for improved coverage, quality and capacity.

One of the most important trends coming out of the first quarter is the continued growth of wireless data multimedia. It is now clear that these technologies are gaining acceptance, as they are being deployed by the carriers and used by their subscribers. For several of the carriers who have already reported, including Horizon, Sprint PCS Cingular and AT&T Wireless, data growth in the first quarter was very significant.

This was due in large part to the rising popularity of the downloadable ring tones and photo messaging. 75 million camera phones were sold last year, well exceeding the 50 million digital cameras sold worldwide. While slightly less than 20% of the handsets sold in 2003 were camera phones, fourth quarter 2003 and first quarter '04 numbers show that this figure is growing rapidly. Several handset manufacturers have recently made statements that camera phones may comprise up to 50 to 70% of new handsets sold in 2004 and nearly 100% of the handsets sold in the future. New technological advances are already on the way with several manufacturers recently announcing multi-mega pixel camera phones and new camcorder phones.

Music is also becoming a very important application for the wireless industry. In 2003 global revenue from ring tones was around $3.5 billion, which is about 10% of the total global recording industry revenue. More importantly, almost all the carriers around the world are focusing on wireless music delivery as part of their 3G marketing efforts.

Following in the footsteps of ring tones will be picture phones, services that enhance ring tones with animation, moving pictures and media clips. All of this means more bandage usage and a need for carriers to increase network capacity to respond to consumer demand. Our booking success in the first quarter, combined with our continued discussion with the carriers, the growth of our sales and opportunities pipeline, and the recent wireless industry trends, lead us to believe that the pace of activities seen in the past few months is likely to continue throughout the balance of the year.

Even more importantly, our experience these past several months in Europe with the initial 3G rollouts with several of the major carriers has made us highly optimistic that the 3G rollout here in the U.S. will likely stimulate significant demand for our services. Europe carriers have come to accept what our internal analysis has long shown. First, data usage diminishes voice capacity, especially when you consider the fact that industry statistics show that the average voice calls are slightly over 2 minutes, while average data calls are around 20 minutes. Second, 3G technology, which has lower propogational ranges from 2 to 2.5 G technology, requires efforts (ph) (inaudible) identity than exists today to produce the highest speed (inaudible) that consumers are seeking. We believe that alternately two times the number of cell sites that have already been deployed will be needed for ubiquitous 3G network that delivers truly high-speed data, creating significant opportunity for WFI.

In summary, we are very encouraged by the many positive indicators we have seen this past quarter. We believe that not only will growth in the wireless industry remain strong in 2004, but that the ultimate arrival of 3G network in the U.S. could serve as a significant catalyst for our business in 2005 and beyond.

Let me now turn the call over to Eric to talk more about our operations, our results for the quarter and our outlook for 2004. Eric?

Thank you, Masood. For the first quarter we reported record revenue of 98 million, an increase of 82% over the first quarter of 2003. The company's operating profit for the quarter was 6.6 million, a 106% increase over the fourth quarter of 2003, and diluted earnings per share were 8 cents, a 33% increase over the first quarter of 2003. As Masood indicated in his remarks, the continued strength of the wireless industry was a significant driver for our business in the first quarter, enabling WFI to grow revenue organically in our WNS, or wireless network services business, by 42% year-over-year, or $72.4 million.

Both domestically and internationally we were extremely successful in bidding on and winning new engineering and deployment contracts and in executing on the longer-term contracts that had already been in place. Our international operations in the wireless network services division accounted for 23.9 million revenue in the first quarter, driven by significantly increased demand for our services in both Europe and Mexico.

Telefonica was once again our largest customer in WNS at approximately 12.2 million, largely as a result of continued work on a multi-hundred site turnkey deployment project in Mexico. While this particular contract is expected to be completed sometime in the third quarter of this year, Telefonica has publicly indicated that it plans to invest significantly in Mexico this year and beyond, with some reports indicating that figure could be as high as $600 million, providing WFI with an opportunity for additional deployment work.

We were also successful in winning additional deployment from TelCel this past quarter and believe there is still opportunity to receive additional orders over the next few quarters.

Additionally, we believe that Telefonica's recently announced acquisition of Bell South's Latin American properties may provide us with additional new opportunities outside of Mexico. We believe these could occur specifically in Chile and Argentina, where Telefonica has indicated publicly that they are planning to overlay the existing infrastructure with the GSM network.

In Europe, where our revenue grew 65% year over year to 8.6 million, the initial rollout of 3G networks by customers such as Vodafone and Orange has made our European operations the fastest-growing operations in the corporation. The 3G activity by the major carriers in Europe has finally started to have a meaningful impact on this company's revenue.

We are hopeful that the up-tick in new business witnessed in the first quarter foreshadows even greater possibilities later this year, as the major carriers expand their 3G networks. While our greatest strength today is in the United Kingdom and France, we are actively looking at new opportunities in other European countries, such as Denmark, Norway, Spain and Germany, and we are optimistic that Europe will remain a significant driver for our business for the foreseeable future.

Domestically in our WNS division, as Masood discussed earlier, demand for our services in the first quarter continued to be driven in large part by the desire on the part of the carriers to improve network coverage, quality and capacity.

However, several other important factors, including outsourcing trends, which are shifting a greater amount of engineering and deployment to third parties, like WFI, and network investment trends, which are resulting in greater amounts of capital budgets being spent on radio networks, are also positively impacting WFI's results.

Our largest domestic customers in the quarter were Cingular, AT&T Wireless, Western Wireless, Sprint, T-Mobile and Verizon, with the largest year-over-year increases coming from Western Wireless, from Sprint, and from T-Mobile, for both deployment and engineering services.

One item that I think is important for investors to understand is that WFI's business is not driven - pardon me - is driven not only by the carrier's capital budgets for the radio network, a subset of overall capital spending, but also by the carrier's operating budgets, which fund expenses such as network maintenance and network optimization.

While a healthy environment for radio network capital spending certainly contributes to improved demand for our services, there is not the direct correlation between capital expenditures and our revenues that many have assumed exist. For example, capital expenditures by Cingular decreased significantly between the fourth quarter of '03 and the first quarter of '04, yet WFI's revenue from Cingular increased by 14% during the same period, i.e., there is not necessarily a direct correlation.

Looking out to the remainder of 2004, we believe that the market for WNS services will continue to remain solid, as all of the factors contributing to strong first-quarter results, the outsourcing trends, network management and network investment trends, and wireless market growth, are all likely to continue.

We know that there may be concern among investors about the effect of the AT&T-Cingular merger on our business. While we understand the concern, we are comfortable that our revenue for the entire corporation remains likely to be within the range we provided for you last quarter.

This company's pipeline for New York remains very strong, and we expect any reduction in revenue from new site deployments at AT&T or Cingular to be offset by revenue from these carriers in other areas, such as integration planning and engineering services, combined with increased revenue from existing customers and new revenue from carriers that are not customers of WFI's today.

While the majority of our domestic work over the past couple of years has come and will continue to come from the major national and international carriers, we believe a healthier wireless industry has led some of the regional carriers to begin once again investing in their networks, and we are actively pursuing new opportunities with these carriers.

As we look out into 2005, we believe that AT&T and Cingular and a merger between them could ultimately provide positive benefits to the WFI business by creating significant opportunities for network optimization and network rationalization services.

We also believe that the arrival of third-generation technology in the United States, and the continued rollout of 3G networks in Europe, could serve as a major catalyst for WFI as well.

We continue to believe that Verizon's EVDO data network rollout will drive other carriers to move towards a UMTS solution such as wideband CDMA, one that is capable of competing with EVDO on speed.

In summary for WNS, we are very encouraged by both recent industry trends as well as our success in winning new business and broadening our customer base. Our goal for the balance of 2004 is to continue to strengthen our relationships with each of the major national U.S. carriers, as well as the major international carriers, such as Telefonica, Vodafone and Orange, while at the same time looking at new opportunities with regional players in both the United States and abroad.

Now our Enterprise Network Services division.

ENS is our business unit where we provide the design, deployment, integration and management of security systems such as access control, digital surveillance and intrusion detection, as well as other in-building systems, including voice and data networks. Revenue for the first quarter in ENS was 14.4 million. Significant drivers for first-quarter revenue included contracts with the Hartsfield-Atlanta Airport, and with a major national financial institution.

The financial institution project was an especially important win for ENS. This project involves the installation and integration of numerous security and building management technologies, including closed-circuit television, digital recording, access control, intercom, X-ray, metal detection and hbacked (ph) management.

By successfully creating a single converged platform joining many different systems, we will be able to showcase for future potential customers the significant benefits of such an integrated approach, and begin to build a reputation for ourselves as a premier provider of integrated, in-building technologies.

Also in the first quarter, we were successful in winning a telecommunications outsourcing contract with a Fortune 100 country that has the potential to generate up to $35 million for the company in the next five years. Our plan is to build on the success we have been achieving in growing our list of marquis reference accounts, and to continue to bid on and win more of these large-scale communications outsourcing projects.

In summary, we are very pleased with our progress in building our enterprise business for the first quarter. We continue to be optimistic about the opportunity to integrate wireless technology into enterprise networks, especially physical and electronic security systems, and voice and data networks.

We believe that the markets for these services is large and rapidly expanding, and that we are well positioned to address this opportunity.

In our government network services division, where we are involved in the design, deployment and integration of communications and information technology networks for the federal government, revenues for the first quarter were $11.2 million. Revenue growth in the quarter was driven by increased demand for engineering services from the Department of Defense, as well as from new Homeland Security initiatives.

Our tactical survey solution for first responders, which is an image-based information system designed to deliver vital information to first responders attracted several new Navy customers in the first quarter, including the United States Naval Academy.

The pipeline in our government business remains strong, as we continue to see commitment by the Department of Defense to improving its communication infrastructure as it moved towards transforming itself into a more mobile, network-centric force. We believe that wireless-related technology will continue to play an ever-increasing larger role in both Defense and Homeland Security-related procurements, and we are currently actively looking at several different and very significant opportunities in this space.

In order to ensure that we maximize our prospects for success on these government procurements, this past quarter we created a corporate strategic business development function, which is responsible for identifying multi-division business opportunities which cut across any of WFI's three core business divisions.

We currently have over half a dozen multi-division opportunities for wireless-related networks for which we are in the process of formulating bidding strategies. These are opportunities that involve both security systems and wireless communication networks and are often for a government customer.

We are very enthusiastic about the collaboration that is occurring between our three different divisions, and believe that over time we will be able to use the collective capabilities that exist across the corporation to further accelerate our internal revenue growth.

Now, moving on to our financials, which Deanna will be providing to you in detail beginning next quarter.

As I mentioned at the start of my comments, for the first quarter, we reported record revenue of $98 million, an increase of 82% over the first quarter of 2003. These higher-than-expected revenues were primarily the result of greater-than-expected progress on our turnkey deployment contracts, for which we recognized a significant amount of subcontractor and material costs in our revenue.

WFI's international operations contributed 24% of our revenue, while domestic operations were 76% of revenue. We continued our goal of diversifying our revenue base in the first quarter, with our top five customers accounting for only 48% of first quarter revenue, compared to 74% in the prior year.

Operating profit for the quarter was 6.6 million, a 106% increase over the first quarter of 2003. Margins in the quarter were impacted slightly by the significantly higher-than-expected revenue associated with prime turnkey deployment contracts under which we're operating. However, the net result was increased overall profitability for the corporation, which allowed diluted earnings per share to come in at the high end of our indicated range, at eight cents, a 33% increase over the first quarter of 2003.

The primary difference between the growth in the operating income and the growth in the EPS is our effective tax rate, which was zero last year, and 19% this year.

On the balance sheet, total cash, cash equivalents and short-term investments, at the end of the quarter, were 55.7 million, down from year end, primarily as a result of the HTS acquisition, which we closed in January. Additionally, WFI remains debt free.

During the first quarter, we were successful in collecting $83 million of cash. I believe this is the most in WFI's history, and the $83 million of cash we collected in Q1 equates to all of WFI's fourth quarter of 2003 revenue. Additionally, during the quarter we were able to reduce DSOs one day. We are now at 105 days.

Converse to this are higher than expected revenues, which resulted in an 18% sequential, quarter-to-quarter growth rate from the fourth quarter of '03 to the first quarter of '04, combined with several once a year prepaid expenses in the first quarter, such as the corporation's insurance premiums, caused the temporary use of cash of a few million dollars in the first quarter, which we used to fund the operations.

However, as we continue to collect the cash in our large prime deployment contracts, which are based on milestones achieved, including a significant amount of cash from Telefonica, we still expect free cash flow for 2004 to be in the previously given range of $25 to $30 million.

Now for the company's financial outlook. For the second quarter of 2004, we currently expect to record revenues of approximately $100 to $105 million, and earnings per share of 10 cents to 11 cents.

This forecast also assumes a tax rate of approximately 19%. For full year 2004, we expect to record revenues of approximately $400 to $420 million, with approximately $280 to $295 million of this revenue coming from our wireless network services division.

This represents an increase in revenue of approximately 55% over 2003, with approximately 30% growth expected in WNS, our wireless network services business unit. Earnings per share for the full year are expected to be in the range of 39 cents to 43 cents per fully diluted share.

Again, this assumes a slightly higher than previously expected tax rate for the corporation, with a full year of approximately 19%. Finally, any future acquisitions that the company may make are not included in this forecast.

Strategically, just last month the company completed its annual strategic planning process, where we spent a significant amount of time discussing our market opportunities, including our multi-divisional opportunities.

Our conclusion was that for the foreseeable future, consumers, corporations and the government are going to continue to use wireless technology to access and to transmit information faster, cheaper and from an ever-increasing variety of portable devices, for both communication and security purposes.

As the largest RF engineering company in the United States, with a little over 2,200 employees, an expertise in each of these verticals, we believe that WFI is extremely well positioned to be a leader in the market for designing, building and optimizing the networks that make these new technological advances possible.

Our emphasis for the balance of 2004 will be on continuing to focus on internal revenue growth and internal revenue profit growth in each of our three verticals, while at the same time continuing to identify new multi-division opportunities which utilize our core capabilities in order to grow the business.

That concludes my prepared remarks. Now let me turn the call over to the operator for any questions.

Thank you. (OPERATOR INSTRUCTIONS).

Our first question comes from the line of Frank Marsala from First Albany. Please go ahead, sir.

Hello, everyone.

Hi, Frank.

How are you doing today? Good, good. The question I have is regarding, number one, could you give the breakout by major customer, as you've done in the past? Is that something you're still going to do.

Yes. Do you want the - Frank, what would you like?

The revenue breakout by major customer that you mentioned, so Cingular, AT&T, Western Wireless, those guys.

Sure. Yes. So, for Telefonica, 12.2. AT&T, 12. Cingular was about 12. Western Wireless, 7.1. And contract work with Nortel, just over 4 million.

And so you guys did real well with AT&T in the quarter, and so there was some skepticism or some concerns that I heard about AT&T slowing down their work. Can you give me some color on what type of work, or where the work is that AT&T is pushing for you guys, because that's almost double last quarter, isn't it?

Sure. That's a great observation, Frank. Obviously, we do do a lot of different types of project for AT&T Wireless. A lot of our work is engineering-related, optimization-related, E911 type of projects. So some of those projects have been expedited and ramped up.

How significant, Masood, is E911 as a driver of these revenues? I mean, in the past hasn't it been more software deployment, things of that sort?

No, E911 is fairly significant for us for the remainder of this year, actually, and potentially we'll go into '05.

And I don't want to take up too much time just myself, but what are the things that you need to do, the things that Wireless Facilities does best and that you can earn some margins on E911 activities, the types of work that you do there.

You know, we do a lot of engineering activity, plus we do installation and integration activity for various carriers in the U.S.

And then only other question I have, really, is regarding the operating margins in the quarter and the operating margins looking forward. When I look at what you've guided for second quarter, if I kind of stay in the middle of your range and come to about the 10 cents or so that you're guiding, it seems like you're getting operating margins back to about a 9% level. Is that generally what I should be thinking about as we move forward?

Yes, it is. The company is focused on overall profitability and net income, and the EBIT line of the net before tax line. And that is our targets as we move forward into the out quarters, absolutely.

And so though this quarter the fact that it was a little lower than the 9% or so percent number on the operating margin line, just give a little color on what happened there, again. I know you said some of those things earlier, but I think a little more color there.

Sure, sure. As you saw, we came in at the high end of the revenue range. And as you know, and as we've discussed, we're becoming more and more of a prime contractor, where we're responsible for the entire procurement, OK?

In addition to that, as we talked about I think on the last call, we had won some contracts in the late 2003 that were starting up in the first quarter. We have been told that they were going to be started up at a certain date, early in the quarter. It was about a one month lag, where the customer didn't turn us on, but we had to ramp up. So we had some in addition to some of those materials on the high end of the revenue range. He had a few people, what I'll just call on the bench, because we were targeting a start date. The start date didn't happen for a few weeks after that and that hit our markets a little bit but now those people are running.

So there was a [inaudible] and you think the margin should then get back to the levels that you've gotten here and you feel comfortable with those levels throughout the year, you said.

Yes, we feel comfortable with the levels that as we get into fourth quarter of this year we should be nine plus.

That's great. Thanks, guys. Congratulations on a very good quarter.

Thank you

Ladies and gentlemen, as a reminder to register for a question press a one four . Our next question comes from the line of Seth Potter from Punk Ziegel. Please go ahead.

Good afternoon. A few questions. First, can you talk about the percentage of subcontract revenues for the quarter and maybe some of the pricing trends you are seeing, some of the work you are doing right now on the wireless..

Yes, on the subcontract part, on these prime contracts we really don't track it that way any more since we're the turn key provider of the total solution. I can talk more about the utilization and the pricing. On the pricing side, the pricing is starting to come up some now. That is occurring and we are in a position now in our bid pipeline, in our target pipeline, we're chasing only work that has a margin with a price that generates a margin that is acceptable to us and our objectives as we move out into the year. And so we are seeing pricing starting to come up a little bit. And the converse to that a little bit, we do have a little bit of cost pressure, on the costing side as the economy improves as well. So it's a balancing act but thus far pricing is a little bit ahead of the cost side.

Ok fine, and have there been many deals that you have walked away from on the wireless network side?

I don't know how to define many. There have clearly been some where we were tracking them. We either walked away before the RFP came out or after we got the RFP and we got some insight on the pricing. We have turned down and flat walked away, absolutely.

And back to the pricing comment, is there a reason why you're starting to see better pricing? Is it because there are less competitors out there or there's just so much work or a combination maybe?

My opinion is that it has to do with the industry trends that we are seeing, where the procurements that are coming out and the procurements that we're chasing are larger and larger. And there are only so many, what I'll call pure play guys like us, that have the financial resources, the critical mass and the scale to go after them. And that type of an industry trend, globally, not just domestically, but globally is kind of playing into our strategy of being a prime contractor, turnkey deliverer. That's kind of helping us out some.

Ok, if you don't mind, I have a couple other questions. You mentioned Telefonica or Masood did and the potential after the third quarter once this deployment is over that there may be a potential for more work, is that included in your O4 guidance?

Well all the work that we have under contract right now which goes deep into this year is at our guidance. In addition to that, the way that we build up our guidance and our forecast that reaches out into 2005 is, what I'll call a pipeline or a waterfall, that has everything under backlog then it has what we call either opportunities or prospects and these are either verbal awards that we've gotten that we haven't documented yet or they're verbal awards where we may have started work and the contract documents are in the contract administration phase.

And on top of that there is the classic sales pipeline, which is a very large number that we're tracking out into the future. Something like Telefonica and this potential additional contract let is in that sales pipeline and it's factored. Some of the factors that we consider for example specifically related to Telefonica as we are lead to believe by them that we are their preferred provider . They continue to tell us as recently as the last week or so that we are doing an outstanding job. They continue to pay us ahead of the milestone schedules, which is a very important database, at a point. With industries(ph) like that , we make assumptions on how much of the next contract let we should expect.

That's fair. And then, in Europe, you mentioned that you've 8.6 million revenues worth. Can you give a customer break down there or give us a sense of what customers those are coming from? Is that all Orange and --?

They're primarily they were Vodafone, Orange and Nortel, with a little bit from Nokia as well, and of course, some of the other carriers as well, on a much smaller basis.

Ok. On the government contract, you mentioned in your release, is there a size of that contract or is it included in your government backlog?

It's in the backlog and it's a classified contract. So we are limited in what we can say other that we've won it and it goes out into multiple years.

Can you disclose what your backlog is for government?

I don't have that in front of me but when we are done circle with Rochelle and those individual data points. I just don't have it broken out by the segments right now.

My other question, number of employees for the quarter.

As we talked about it was 22 hundred or so.

Thanks again

Thank you, sir.

Our next question comes from the line of Ned Zachar from Thomas Weisel Partners. Please repeat your question.

Most of my questions have been answered, thank you, but I did have one. The depreciation in the quarter was down a smidge. Not a big amount of money but I was sort of curious as to what was going on there, if anybody knows.

Yeah, I do. In the fourth quarter, certain of our assets, that we utilize in the business, reached there useful life and they were fully depreciated in the fourth quarter, so they weren't around in the first quarter to be depreciated anymore.

So we use for a basis a little over a million bucks per quarter as far as D and A is concerned.

Yeah, D and A, about 1.6 million, 1.7 million, right around in there on a normalized run rate.

Terrific. Thank you very much.

OK.

If there are no further questions at this time I will now turn the call back to you. Please continue with your presentation or closing remarks.

I would like to take this opportunity and thank our employees first of all for all their hard work that enabled us to achieve this great results as well as thanking our shareholders for participating on this call and we look forward to having you on our next call. Thank you.