Kratos Defense and Security Solutions Inc (KTOS) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Wireless Facilities, Incorporated second quarter 2004 earnings conference call. Your speakers for today are Mr. Eric DeMarco, President and Chief Executive Officer, Deanna Lund, Senior Vice President and Chief Financial Officer, and Rochelle Bold, Senior Vice President Corporate Development and Investor Relations. At this time all participants are in a listen-only mode. After the speakers have concluded their prepared remarks we will conduct a question-and-answer session. As a reminder this conference is being recorded today Wednesday, August 4th, 2004. I would now like to turn the conference over to Ms. Rochelle Bold who will read the company's warning regarding forward-looking statements. Please go ahead, Ms. Bold.

Thank you. Good afternoon, ladies and gentlemen, thank you for joining us. Joining me this afternoon are Eric DeMarco, our President and Chief Executive Officer, and Deanna Lund, our Senior Vice President and Chief Financial Officer. Before we being this morning, I'd like to remind our listeners that today's comments include forward-looking statements about our plans and expectations of future performance. These plans and expectations are subject to risks and uncertainties which could cause actual results to differ materially from those suggested by our forward-looking statements. We encourage all of our listeners to review our SEC filings including our most recent 10-Q and 10-K for a description of these risks. This conference call will also include a discussion of non-GAAP financial measures as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP have been included in our press release this afternoon and posted on the investor relations section of our website at www.wfinet.com.

I'd like to start off our call this afternoon by briefly walking through our results for second quarter. For the second quarter 2004 we reported record revenue of 102.3 million, an increase of 84% over the second quarter 2003. Operating profit from continuing operations for the quarter was $8.9 million, resulting in an operating margin of 8.7%. Adjusted earnings per share from continuing operations were 10 cents in line with the company's previous guidance for the second quarter. EPS from continuing operations including the impact of an asset impairment charge of 3.1 million was 6 cents. EPS including the impact of the asset impairment charge and a $2.5 million one-time exit charge from our now discontinued Scandinavian operations was 2 cents.

As you will note from this afternoon's press release, the Company is in the process of working to restate its prior year financial statements to reflect the accrual of certain contingent tax liabilities. Deanna will discuss this in more detail later on, but in general we expect the magnitude of the adjustment to be in the range of 3 to 8% of net income or loss for each of the prior four years for an aggregate impact of 10 to $12 million. The restatement will not affect the Company's operating results for the current year. Due to the fact that the process for the restatement of prior year financial statements is not complete at this time and the opening balances of certain balance sheet accounts for 2004 will change, year-over-year financial comparisons are not currently available. We hope to complete this review within the next two months and we will make those numbers available to you as soon as possible. With that as background I'll turn the call over to Eric and then to Deanna for a more detailed review of our results and our outlook for the remainder of 2004. Eric.

Thank you, Rochelle. As you can see from Rochelle's introductory comments we have a number of topics to go through this afternoon. First and most importantly is the fact that we continue to execute on our strategy of growing our business while continuing to improve the Company's operating margins. While revenues across the Company were up 84% year-over-year ,revenues in the Company's wireless network service business were up 65%, all of which was from internal or organic growth. We are fortunate that the industry in which we operate continues to enjoy robust growth and that this growth combined with the continuing trend on the part of the major carriers to outsource their design, deployment, and technology upgrade activities continues to drive the growth of WFI. With the long awaited announcements of next-generation technology upgrades by both Sprint and Cingular this past quarter and Verizon in Q1, it is now clear that it is no longer any question of whether third-generation high-speed data networks will come to the United States but only a matter of when.

Each and every day announcements are made and studies are released which show that consumers, corporations and the government continue to use wireless technology to access and transmit information. That they want to be able to do so faster, cheaper, and from an increasing variety of portable devices. This trend will only continue to create opportunity for us at WFI. Both domestically and internationally and across each of our vertical markets: the carrier market, the enterprise customer market and the government market, our business is fundamentally sound and improving. We continue to be successful in bidding on and winning new contracts and in executing on the long-term contracts we already have in place. Not only does our business remain fundamentally sound but our balance sheet remains strong with just under 50 million in cash at the end of the second quarter and the significant cash collections expected in both the third and fourth quarters of this year. Along those lines, we received approximately 4 to 5 million of additional cash the first week in July to start off the third quarter.

Before I delve into operational details about the quarter, I want to talk briefly about each of the two issues Rochelle mentioned in her opening remarks. As most of you know I was appointed Chief Executive of WFI in April and about month later Deanna joined WFI as our new Chief Financial Officer. During the quarter we just ended, in the course of Deanna's detailed financial review of each of our operations, we became aware of certain issues that the board and the executive management team believe needed to be addressed. First, as Rochelle mentioned, a review of our investments indicated that we are unlikely to recover the carrying value of an investment which is unrelated to our current core business. This is an investment that the Company made in 2001. This resulted in an asset impairment charge in the second quarter of $3.1 million. Secondly, in the second quarter, we made the decision to divest our Scandinavian business unit. A detailed financial review of the Scandinavian business unit showed that this entity has not been profitable in the past and unlikely to be profitable going forward. Divesting this operation will not only increase our profitability going forward but even more importantly it will allow our European management team to devote its energy entirely to our remaining European operations which are profitable and rapidly growing. The decision to divest this operation resulted in a one-time charge to discontinued ops of 2.5 million. We do not expect to incur any further losses related to this entity going forward.

Thirdly, a detailed review of our foreign operations indicated that in prior years the Company had not properly accrued for certain potential tax liabilities that could result from the manner in which a foreign entity was structured. Related to this, approximately $400,000 of expense was recorded in the second quarter for the current year amounts incurred, and as Rochelle indicated, our prior year financial statements will be restated to reflect the accrual for the amounts incurred and those respective prior periods. I want to reiterate that this is an issue related prior years only and does not affect the integrity of our current financial statements. Once again all applicable current year costs have been properly included in the Company's 2004 financials. Additionally, we are in the process of changing our legal structure in certain of our foreign entities and expect this process to be completed this quarter. We expect the net result of this structure change going forward to be an additional cost of approximately $200,000 per quarter to the Company. While we recognize that both issues make our financial statements this quarter somewhat more complex, we take comfort in the fact that neither one affects WFI's backlog, WFI's value proposition to our customers, the fundamentals of our current business or our future profitability.

Now moving back to the operational results for the quarter. Our international operations in the wireless network services division continued to be a significant driver for our internal revenue growth in the second quarter, accounting for approximately 27 million in revenue. This was driven by significantly increased demand for our services in both Europe and Latin America. Telefonica, Mexico's second largest wireless carrier, was once again our largest customer in WNF at approximately 11 million. Largely as a result of continued work on a multihundred site turnkey deployment project in Mexico. We were recently awarded a new contract for several hundred additional sites from Telefonica, and we expect Telefonica to remain a significant customer for WFI in the foreseeable future. In the second quarter we also continued to grow our Mexican business with TEL-CELL, Mexico's largest wireless carrier, to just over 5 million as they respond to significant subscriber growth by expanding both coverage and capacity.

In Europe the initial rollout of 3G networks by customers such as Vodafone and Orange continue to make our European operations the fastest growing operations within the company. However, since the scope of 3G coverage today is still very limited in relation to the total European opportunity, we are hopeful that the uptick in new business witnessed this year foreshadows even greater possibilities in 2005 as the major carriers expand their 3G networks. Our largest domestic carriers -- customers in the second quarter were Cingular, Western Wireless, AT&T Wireless, Verizon, T-Mobile and Sprint. With the largest year-over-year increases coming from Western Wireless, T-Mobile and sprint. This is for both deployment and engineering services.

As expected, year-over-year revenues came down significantly at both Cingular and AT&T as a result of the contemplated merger. However, we have been fortunate that in spite of this we have been able to grow our carrier business significantly. We've done this by continuing to diversify our U.S. customer base, focusing on operational outsourcing needs such as network management and optimization and not just the services tied to capital spending budgets. Additionally, by capturing significant new international business in both Europe and Latin America.

Looking out to the remainder of 2004 and into 2005, we believe that the market for our services will continue to remain firm as all of the factors contributing to strong second quarter results, outsourcing trends, network investment trends, and wireless market growth are all likely to continue. With most of our customers in our WNF division, we expect revenue in the back half of the year to be roughly equal to revenue in the first half of the year. The one notable exception to this is the combined AT&T Cingular entity or AT&T and Cingular. Clearly we anticipated revenue to be generally lower this year for both AT&T and Cingular than it otherwise would have been had the merger not been announced. However, one issue that we did not anticipate in past discussions about revenue guidance for this year was Cingular's very recent announcement that in preparation for the AT&T merger it would sell its California and Nevada network to T-Mobile. As a result of this transaction, a number of new site builds were placed on hold by Cingular. Additionally, a number of new site builds were also placed on hold by T-Mobile as they evaluate their capital spending priorities. We are hopeful upon consummation of this transaction much of this work will return to T-Mobile as T-Mobile continues to develop its western network. We also believe there may also be an opportunity to assist Cingular in these markets as they work to further develop the existing AT&T network.

While now we expect the third and fourth quarters to be slightly more affected by the AT&T Cingular merger than we had originally planned, as a result of the T-Mobile and Cingular transaction we still believe the merger should ultimately provide positive benefits to our business in 2005 by creating significant opportunities for network optimization and rationalization services and accelerating the rollout of 3G technology. As we look out into 2005, we continue to view the arrival of third generation technology combined with robust capital spending by the carriers for quality and capacity as important catalysts for our business. We believe that every one of the national carriers which have reported second quarter results has posted capital spending figures that were higher than expected. We also believe this trend will continue into 2005. Additionally, the rollout of 3G technology in the United States by Verizon and Sprint, Cingular, and possibly Nextel, and the continued rollout of WCDMA networks in Europe should continue to provide us with significant new engineering, deployment, and optimization opportunities.

Our experience this year in Europe with the initial 3G rollouts by several of the major carriers made us optimistic that a 3G roll out here in the United States will likely stimulate significant demand for our services in 2005 and beyond. Not only does data usage diminish voice capacity but 3G networks require greater cell density than today to reduction the high-speed throughput consumers are looking for. We believe that ultimately two times the number of cell sites that have been already deployed will be needed for a ubiquitous 3G network that delivers truly high-speed data in a heavy user environment. Finally, as we look at the opportunities for the back half of the year and into 2005, we believe that the regional carriers are once again investing in expanding and upgrading their networks providing new market opportunities for WFI's services. While the majority of our domestic work over the past couple of years has come and will continue to come from major national carriers, we have hired a new business development executive specifically focused on the regional carriers, and we are actively pursuing this area of potential growth and opportunity. Some of our goals for the balance of 2004, in addition to deeper penetration into the regional carriers, include continuing to position ourselves for a sizable stake in the new technology rollouts that will unfold throughout 2005 and 2006, continuing to strengthen our relationships with our customers by providing them with innovative and creative solutions to their network engineering challenges.

Now moving on to our enterprise and government divisions. Revenue for the second quarter in our enterprise network services division was 15.1 million up approximately 50% year-over-year. Significant drivers for the second quarter included a contract with Hatsfield Airport in Atlanta, a contract with the Fortune 100 company for telecommunications outsourcing,and a contract with the national financial institution for comprehensive security and building management system. Also, the impact of the businesses acquired in the third quarter of last year also contributed to our second quarter results. With DNS our plan is to build on the success we have been achieving in growing our list of marquee reference accounts and to continue to bid on and win more of these large-scale integrated services projects. We are very optimistic about the opportunity to integrate wireless technology into enterprise networks and we believe we're well positioned to address this market.

In the government network services division, revenue for the second quarter was 12.1 million. The highlight for this division in the second quarter was the award of a contract by the Department of Defense with the potential value of 29.6 million over the next two years for the continued deployment of our tactical survey solution for first responders to emergency situations. Tactical survey is an image-based information system that includes spherical imagery which is embedded with tactical intelligence in navigational aids. This information is used with ground and aerial interactive mapping and ingress and egress video to build a complete database with site and location specific data which can then be accessed real-time by our first responders. With the award of this contract our product has now begun to generate significant momentum among many types of users ranging from local entities such as airports to Federal Government agencies like NASA and the United States Navy. We are optimistic this product will continue to be a significant revenue driver for our government business in the future. Another significant win we had in the government side of our business this quarter was an award of a contract with the potential value of 25 million over five years by the state of Maryland for wireless communications infrastructure. While the dollar amount of the contract was relatively modest in relation to WFI's overall revenue base, the contract was nonetheless significant for us because it marks our entry into the state market for wireless networks. As we have said before, we believe that wireless technology will play an increasingly larger role in homeland security related procurements such as public safety networks and we are looking for this to be meaningful and an opportunity for growth for WFI in the future.

Also, related to our government business, this afternoon we announced the acquisition of Defense Systems, Inc., or DSI, a government services company which specializes in logistics automation with a strategic focus on RF ID technology. DSI's primary core competencies include system architecture, system software development, software and data integration, database development and systems integration. Key DSI areas of expertise include functional logistics automation, supply-chain management and data mining and data warehousing. Although relatively small this is a very strategic acquisition for WFI. Logistics automation and RF ID technology are being adopted rapidly as a result of mandates by both the Department of Defense and Wal-Mart requiring that vendors move to an RF ID-based system beginning in 2005.

By their very design RF ID systems pose unique RF engineering and implementation challenges since tags are encoded with digital information that must be read in a variety of adverse physical and environmental conditions. We believe this creates opportunity for companies such as WFI that understand these engineering challenges. DSI brings to WFI a solid customer base that includes the both Army's program executive office for automatic identification technology and the Defense Information Systems Agency or DISA. DSI has also been very successful in establishing a stake hold in the rapidly growing logistics automation market. As the need for RF ID solutions expands we believe we will now be in a position to leverage our expertise in RF engineering, wireless data networks, and the integration of in building technologies to provide complete network design, deployment and maintenance solutions to both the government and commercial customers. We also believe this acquisition is a terrific example of building synergies across our government and commercial business units as we believe the combination of our capabilities across the company make us well positioned to capture a share of the growing RF ID market. Let me now turn the call over to Deanna to talk more about our financial results and our outlook for the balance of the year, and I will come back with some summary comments. Deanna.

Thank you, Eric. Good afternoon. I'd like to start this afternoon by addressing the issues that both Rochelle and Eric discussed that are probably the most confusing to our investors. First on the tax contingency issue. As Eric indicated this quarter we initiated a detailed review of our international operations as part of our site visits to foreign operations in conjunction with our compliance with Sarbanes-Oxley. In the course of this review we identified certain potential tax liabilities that may exist from the manner in which one of the entities was initially structured. Accordingly in the judgment of management this potential liability should have been recorded in the year in which the contingency arose. As a result our prior year financial statements will be restated to reflect this accrual. We are currently working to assess the exact magnitude of this accrual but our current estimate is that the impact to net income or loss will be approximately 3 to 8% in any of the given years of 2000, 2001, 2002, and 2003. For an aggregate total impact estimated at 10 to $12 million. Because of restatements of the prior year financial statements is not yet complete we are unable at this time to present the prior year data for comparative purposes. We expect the restatements to take a couple of months to complete and as a result the company will be unable to file its quarterly report due on Form 10-Q on a timely basis. We will work diligently to get this prior year matter resolved and are looking forward to providing you with the prior year numbers as quickly as possible. In addition, we are in the process of changing our legal structure related to this entity and expect that process to be completed this quarter. We expect the net result of this change going forward to be an additional cost of approximately $200,000 per quarter to run our foreign operations and this cost has been factored into our financial outlook.

The charge of $3.1 million reflects an asset impairment charge on the carrying value of an investment that we made in 2001 in a network management and data services company called DNI which has been unable to generate significant revenues or to raise additional capital to fund the business. The charge for the discontinued operations in Scandinavia of 2.5 million primarily reflects severance costs mandated by Swedish law that were incurred in order to prepare this business for sale as well as an asset impairment to the estimated fair value. Since there is a tax benefit to a potential buyer of more than $8 million of operating losses, we are hoping to be able to recoup some value for the sale of these operations. However, regardless of the success of our divestiture efforts, we do not expect to incur any future losses related to these operations.

Moving on to our results from the quarter, on the revenue side of the equation, our revenue is 102.3 million, and with our international operations contributing approximately 27% of our revenue while our domestic operations were approximately 73% of our revenue. At the vertical market level we were 73% wireless network services, 15% enterprise network services, and 12% government. We continued our goal of diversifying our revenue base in the second quarter with our top five customers accounting for only 45% of our second quarter revenue compared to 62% in the prior year. Operating profit for the quarter was 8.9 million equating to an operating margin of 8.7% significantly above the 6.7% reported in the first quarter. As we indicated we would do on last quarter's call, we made significant improvement in our operating margin in the second quarter by improving our margin and our deployment business and by holding our G&A constant as we grew our revenue base.

The effective tax rate of 29% for the current quarter was solely a result of the non deductability of the asset impairment charge due to its expected capital nature. In other words, the 3.1 million charge is not currently deductible for taxes and consequently did not provide a tax benefit for this item. Therefore we recorded a 19% tax provision on the pretax income excluding this charge resulting in an overall effective rate on total pretax income including this charge of 29%. We expect to return to a 19% rate for the balance of the year. Total cash, cash equivalents, and short-term investments at the end of the year were approximately 48 million, down from the first quarter by about 7 million primarily as a result of an earn-out paid on an acquisition that we had made last year in our enterprise division, and we continue to remain debt free. As we continue to collect the cash on our deployment contracts based on milestones achieved, including a significant amount of cash from Telefonica, we expect free cash flow for year defined as cash flow from operations, less capital expenditures, taxes, and working capital, to be approximately 20 million for the year.

Moving on to our financial outlook, for the third quarter of 2004, we currently expect to record revenues approximately equal to this quarter's 102 million, but we expect EPS will be a penny lower at 9 cents. The difference between Q2 and Q3 relates almost entirely to additional costs that must be incurred in order to meet the internal controls requirement of Section 404 of Sarbanes-Oxley legislation that was adopted by Congress last year as well as higher than historical audit fees also associated with Section 404 compliance and other related matters. While we knew that some cost would have to be incurred to meet these stringent new requirements, we had not fully anticipated the magnitude of the expense which will be in excess of $700,000 per quarter for the remainder of the year. After hiring an outside consulting firm this past quarter and consulting with our auditors on implementation, we became aware of this magnitude of this effort for the balance of 2004. Fortunately the bulk of the nearly $2 million that we expect to spend in compliance costs in 2004 will not be recurring in 2005. In addition, there were several lower margin long-term contracts that we had anticipated would be completed by the end of the second quarter which we now believe will roll into Q3, thus impacting our ability to further increase our margins from our Q2 levels as we had originally expected to be able to do so.

As a result for full year 2004, we now expect to record revenues of approximately 405 to 415 million within our previous range of 400 to 420 million. This represent an increase in revenue of over 50% over 2003. However, full year adjusted EPS from continuing operations is now expected to be in the range of 37 cents to 38 cents. This translates to GAAP EPS including both the asset impairment charge and the discontinued operations charges from Q2 of 29 cents to 30 cents. Our ultimate margin rate in the fourth quarter will depend upon our exact mix of contract revenue. For example, increased work in Mexico where the margins tend to be historically lower due to these types of projects coupled with the fact that we are more conservative in booking profit at the beginning of a new project will result in earnings at the lower end of the range while a greater mix of European and domestic revenue will result in earnings at the higher end of the range. Clearly the closing of the AT&T and Cingular merger in early October is expected to have a positive impact on our business and would help drive our results toward the higher end of the range. With that let me now turn back the call back to Eric for concluding remarks. Eric.

Great, thank you, Deanna. So in summary, despite the challenges of the quarter, we continue to enjoy substantial year-over-year internal revenue growth, and we've made significant progress since the first quarter improving WFI's overall operating margins and margin rates. While we have encountered some issues that we had not anticipated, we are committed to quickly fixing these prior issues and not letting them distract us. Accordingly, I want to reemphasize we have already taken the corrective actions we believed were necessary to fix these prior year issues and now firmly believe that they are behind us. This management team is absolutely focused on building this Company in a manner in which all of our employees and shareholders can be proud. Also, and fortunately, as I indicated in my opening remarks, none of these issues affects the fundamentals of our business, our prospects for the future, and most importantly it does not affect the integrity of our current financial statements. While we are clearly disappointed by the need to provide EPS guidance lower than the range previously provided, we remain extremely optimistic about the growth prospects as well as the opportunities for this Company in 2005 and beyond. As the largest RF engineering company in the United States with approximately 25 -- excuse me, 2100 employees, we remain extremely well positioned to be a leader in the market for designing, building, and optimizing wireless networks. The entire senior management team remains energized by the opportunity in front of us and committed to building long-term value for our shareholders. That concludes the prepared remarks. Let me now turn the call over to the moderator for any questions.

Thank you. Ladies and gentlemen, if you'd like to register for a question please press the 1 followed by the 4 on your telephone. You'll hear a 3-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration please press 1 three. One moment for the first question. Our first question comes from the line of Seth Potter with Punk Ziegel.

First I was hoping to get stats on the top five customers. I know you gave Telefonica and TEL-CELL but can you give the other three in terms of the top five what they represent?

Sure, Seth.

Obviously Telefonica we mentioned. Cingular and AT&T were also in the top five. As well as Western Wireless,

Okay. Can you provide us some numbers in terms of percentages?

Sure. Western Wireless was approximately 3% of the current quarter's revenue. Cingular was approximately 9%. AT&T was approximately 7%.

And the other two were TEL-CELL and Telefonica. Also, can you give us any detail or color on how the integration is going for the HTS acquisition and if you're at all seeing any potential slowdown in the government business just as the budget becomes more of an issue for the government.

Right. The back office integration is complete. As you recall one of the strategic reasons why we acquired HTS was to get their government-approved cost accounting system along with their facility clearance, et cetera. So we have that on board, and we have completed merging them from their facility here in San Diego into our facility. So from a back office standpoint, it is totally complete. From a business development and procurement standpoint, we have across the company on a number of occasions gone after procurements that included our government business, HTS, and either one of or both of our commercial businesses, either BNS or WNS. So the integration is in the 90% plus complete stage at this time.

Okay. Thanks. And a few other questions as long as I've got you here. What's the magnitude of the margin impact going into next quarter? You talked about some lower margin contracts that had rolled over. What should we expect to see margins for the next couple of quarters?

Right now we're looking at where 8 to 8.5% Q3, Q4.

Those are --

EBIT margins, operating margins.

Okay. Then finally what's the probability of this charge from the restatement being more than the range you provided? Any insight to that would be great.

Yeah. We've spent a significant amount of time, as you can imagine, with the outside experts, both on the legal and the tax side, taking a look at this, and range is the company's best estimate at this time based on all the facts and circumstances as we understand them today.

Okay. Thank you.

Yes, sir.

Our next question comes from the line of Frank Marsala with First Albany. Please proceed with your question.

Hey, guys. How are you doing? Question really is in the second page of your release you talk about other adjustments to various financial statement accounts that also may be required. Can you highlight for us what that means? I don't understand what that is.

Yes, Frank, this is Deanna . We're in the process of reviewing the detail of adjustments that were identified in the prior years by our external auditors and at the time was deemed immaterial to the financial statements and therefore not recorded. So we are in the process of reviewing that at this point.

Is it possible that adjustments to those accounts in prior years could impact anything that we would expect going forward, or have you ruled that out completely?

You know, I've learned in my life never to rule anything out completely, but as we sit here today, and we've reviewed all of them, we don't believe so.

Uh-huh. Okay. Today you announced a new agreement, $15.5 million as well?

Yeah.

That's Latin America? Is that what that said?

It did.

Potential of that 15.5 million is lower margin revenue?

Yes that 15 -- it's not low margin, but on a relative basis it is somewhat a little bit lower than we have been enjoying on the majority of our other work down there.

And so the impact in Q3 and Q4, because we had previously talked about those numbers being sequentially higher because of new work you had been receiving, the impact there for -- is that all related to this AT&T Cingular thing where you talked about California and Nevada and all that stuff, Eric?

We've got a couple of things going on. Let me give you the pieces at the high end. We've got a number of what I'll call older long-term contracts that the company was awarded in 2003. That we've been working through and they're winding down. Our initial estimates we believe that they would have been substantially wound down by now or half-way or so through Q3. We're going to probably be finishing these up more than likely in Q4. So these older contracts where we bid, we very candidly bid a lower margin rate, we're going to be working through those and getting those done in Q4 instead of Q3. That's number one. Number two we have a revenue mix issue going on in the Company. Part of it's good news, part of it's bad news. The bad news is, is, of course, what's happened with the AWS and Cingular proposed merger, it has -- it stopped a bunch of work, pushed a bunch of work out that we're not going to get this year, and we just saw some recent activity there with what's going on with T-Mobile and Cingular. The good news is that we have been able to back-fill that with our business development efforts, primarily internationally, and as you just pointed out Latin America. That Latin-American margin work is fairly consistent with the work we do in Latin America but it's somewhat lower than the work that we do here domestically. So that revenue mix is causing us a little bit of margin compression in the second half of this year along with what I said about those older contracts that are going to last a quarter more.

Lastly, just on a couple of your biggest customers, AT&T is at 7%, what kind of work are you do doing there and what should we expect in terms of the risk to third quarter numbers now that we're hearing some caution around your comments around these two companies? Stay at these two levels, or are you guiding us that AT&T will come down a bit?

A good piece of the work we're doing right now with AWS is E-911 work and that work we expect to continue. And that's answer one to your question. Answer number two is we are -- we're giving guidance right now, we're comfortable for Q3 and Q4 with what we just gave or we wouldn't have given it so we're comfortable that we understand exactly what's going on and with hopefully that merger coming -- closing in the next quarter or quarter and a half, then there won't be any more minor hiccups and we'll continue on our way. One other point on the margin compression, the operating margin compression, not necessarily the gross margin compression. I just want to reiterate, and Deanna did clearly state this in her comments, we have identified, because of everything that's going on, a significant amount of additional consulting costs related to 404 and SOX and audit fees and things like that that we're going to be incurring that hopefully the majority of which will be I'll call it episodic, and once we clear this going into '05 it won't be that significant.

Okay. Thanks.

Yeah.

Ladies and gentlemen, as a reminder if you'd like to register for a question please press 1 followed by 4 on your telephone. Our next question comes from the line of John Bright where Avondale Partners.

Eric, Rochelle, Deanna, let me start with the acquisition you made. Any kind of revenue on that acquisition?

Yes, trailing revenue is just about $6 million.

Okay. Trailing 12 months?

Yes. It's small.

Any kind of EBITDA?

It's consistent with what you see with small government service IT companies. 9%, 10%, something like that.

Next, on the contract also announced today you assume that information is obviously included in your guidance that you've provided.

Yes, it is, John.

Okay. Next, let me move on kind of -- let's kind of walk through a time line here if we can so I can kind of think about things unfolding over the next six months. So we're thinking it's about two months before the Q is going to be able to file, is that correct?

Yes. Before we file the Q the 10-K A needs to be filed which would restate the fiscal years of '01, '02, '03, and then we would be able to file the Q but not before that time.

From an operational standpoint we've got the consulting fees we're going to take into consideration that look like that they're going to last through 2004 but not in '05, is that correct?

Correct.

On the AT&T-Cingular side of the equation, that's supposed to close in the October time frame. Your best guess is between now and then you're seeing some pressure -- or some hold back but your expectation is good on the other side of the equation, is that right?

Yes, that's correct.

Okay. What other things would I think about on the time line immediately some of these? What have I left out?

I -- on the time line for the issues you mentioned, you know, assuming that the Cingular AWS merger closes early in mid Q4, which we hear the same things publicly that you do, and that's an opportunity for us, because they are -- they have been consistently two of our largest customers consistently in our top five, top ten. We have significant presence with them, and they -- and we believe they're going to have a lot of work to do in the out years and we're looking forward to this merger happening, we think it could provide us some up side.

Okay.

On the restatement issue, based on all communication and discussions that we're having with our outside advisors, auditors, et cetera, we're looking, as Deanna said, for this to be wrapped up, behind us, in a couple of months. We don't expect any additional hiccups based on the facts and circumstances we know today. This is absolutely not going to be a distraction to the praying team and we're going move on.

One last one on you. Changing the foreign tax structure, the legal structure, what -- why is that necessary and what's the time line on that?

We believe that's necessary based upon discussions that we've had with our foreign tax counsel, and we believe it would be the most prudent thing to do at this point.

What's the current structure and what are you changing it to?

We right now are not going to get into those details on exactly how the thing is set up now and what it's going to be changing to.

Okay.

And very candidly I think if I tried to I'd probably screw it up.

That's fair.

All right.

That's fair. Thank you.

No problem.

Thank you.

No further questions at this time. I'll now turn the call back over to you.

If there are no further questions we'd like to thank the group and we'll be communicating with you shortly.

Ladies and gentlemen, this concludes the conference call for today. We thank you for your participation and ask that you disconnect your lines.