Kratos Defense and Security Solutions Inc (KTOS) 2004 Q3 法說會逐字稿

Welcome to the Wireless Facilities, Inc. third-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. (OPERATOR INSTRUCTIONS) As a reminder this call is being recorded today, Thursday November 4, 2004. I would now like to turn the conference over to Ms. Bold.

Thank you for joining us. Joining me this afternoon as John indicated are Eric DeMarco, our President and CEO, and Deanna Lund, our Chief Financial Officer.

Before we begin this afternoon I would 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-KA for a description of these risks.

In addition, this conference call will include a discussion of non-GAAP financial measures as that term is defined in Regulation G. The most directly comparable GAAP figure -- GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's financial results prepared in accordance with GAAP has been included in our release this afternoon and posted on the Investor Relations section of the Company's website at www.wfinet.com.

I would like to start off our call this afternoon by walking briefly through our results for the third quarter. For the third quarter of this year we reported revenues of $95.8 million, an increase of 45 percent over the third quarter of 2003. Adjusted operating profit for the quarter was 7.6 million compared to 300,000 in the third quarter of 2003.

Adjusted earnings per share were 9 cents, in line with the Company's previous guidance for the third quarter, compared to 1 cent in the prior year. ETS, including onetime charges of 23.7 million in accordance with GAAP, were a loss of 22 cents. As Eric and Diana will discuss in more detail these charges relate primarily to contractual obligations entered into by the Company in 2003, as well as 1.5 million in other expenses incurred as a result of the restatement process that we recently went through.

With that as background I will now turn the call over first to Eric and then to Deanna for a more detailed review our results and our outlook for the remainder of the year and our preliminary outlook for 2005.

Good afternoon. This past quarter was obviously an extremely important quarter for WFI. As are investors are probably aware, the third quarter we're reporting was the first full quarter with our new management team in place. During the quarter we took a number of actions to correct prior year errors, to strengthen our internal processes and procedures, and better prepare us to take advantage of the growth opportunities we see for 2005 and beyond.

The most significant of the actions taken this quarter include restatement of our financial statements for the prior three years, the discontinuation of an unprofitable international operation, and the restructuring of another international operation to remove potential tax contingencies. In addition, with our new General Counsel onboard and as result of our restatement and our intense focus on Sarbanes-Oxley compliance, WFI created a Contracts Administration Department to create stronger internal controls over our contracting process.

We also reorganized our Carrier Division, our Wireless Service Networking Services Division, or WSN, in order to better divide management responsibilities and tighten operational controls. The results reported this afternoon reflect the financial impact of all of these actions we have taken.

As we indicated we would do when we filed our restatement, we have taken a onetime charge this quarter. The total amount of this previously mentioned non-recurring charge is 23.7 million. As Deanna will discuss in more detail, approximately 12.4 million is related to future earnout consideration likely to be paid over the next two years for two companies in our Enterprise Division which we acquired in 2003.

The balance was related to costs associated with the restatement totaling approximately 1.5 million, as well as just under 10 million in charges identified as a result of improvements in our contract administration and program management processes, which I will discuss in more detail in a few moments. While these charges are significant, we believe they have enabled us to put all issues related to prior years behind us, and lay a strong foundation for significantly improved operational and financial performance from this point going forward.

We are fortunate that the dynamics of the industry in which we operate, the wireless industry, continue to be favorable and are expected to remain favorable over the near term. Related to this, the Cellular Telecommunications Industry Association recently released statistics indicating that subscribers to wireless services grew by approximately 15 percent over the past year. Even more importantly, the use of minutes increased by 35 percent, and capital investment to keep up with the growth in network usage also increased, with 27,000 new cell sites added during the same period, an increase of 18 percent. As a result, despite the issues we had to address in Q3, we were still able to grow revenues 45 percent year-over-year.

Most importantly, with the exception of Europe, where initial 3G roll outs are just starting to accelerate our growth, the impact of 3G technology on our business has yet to be felt. While we have done a small amount of 3G work for Verizon, Verizon has launched only slightly more than a dozen EVDO markets to date. And Sprint, Cingular and Nextel all of which have announced plans to roll out next generation technology, have yet to begin large-scale commercial deployments.

For the most part our domestic and international carrier business today remains driven by coverage, quality and capacity improvements by carriers, which are responding to continued growth of network traffic and high turn rates, all combined with the continuing trend towards outsourced engineering and outsourced deployment activities.

One of the most important trends this year has been the strong growth of wireless data and multimedia services, including down loadable ring tones, games and photo messaging. As data becomes a larger and larger part of average revenue per user, it is now clear that these technologies are rapidly gaining consumer acceptance. This trend will continue to create opportunities for WFI, as already saturated networks become further strained by the bandwidth requirements of data and multimedia applications.

In the third quarter just ended our international operations in the Wireless Network Services Division, or WNS, continued to be a significant driver for our internal growth, accounting for approximately 28 million in revenue despite a seasonally weak August throughout most of Europe.

Telefonica, Mexico's second-largest carrier was once again our largest customer in WNS at approximately 12 million as result of continued deployment work in Mexico. During the third quarter we're awarded an additional contract with Telefonica for approximately $16 million, and expect Telefonica to continue to be a significant customer for us throughout 2005. Kelso, Mexico's largest wireless carrier also continues to be a significant customer at more than 5 million in revenues in the quarter, as they continue to respond to significant subscriber growth by expanding both coverage and capacity.

In Europe, revenues for the quarter totaled over 9 million, as initial roll outs of 3G networks by our customers such as Vodafone, Orange and O2 continue to make our European operations the fastest-growing operations throughout our Company. While our greatest strength today is in the United Kingdom and France, we're actively looking at new opportunities in other European countries. And we're optimistic that Europe will remain a significant driver for our business for the foreseeable future.

Our largest domestic customers in the third quarter were Cingular, AT&T Wireless, Western Wireless, Sprint and Verizon, with the largest year-over-year increases coming from Western Wireless and Verizon.

Both domestically and internationally our business continues to remain driven not only by the carriers' capital budgets for the radio network, a subset of overall capital spending, but also by the carriers' operating budgets which fund expenses such as network maintenance, and network optimization.

As expected, year-over-year revenues came down significantly at Cingular and to a lesser extent at AT&T Wireless as result of the merger, and specifically as result of the planned sale of Cingular's Western network to T-Mobile. We expect this trend of declining revenues to reverse itself shortly now that the AT&T and Cingular merger is complete.

We have been fortunate that in spite of the lost revenue as a result of the AT&T Cingular merger, we have still been able to continue to grow our carrier business. We have done this through diversifying our United States customer base. To this point, just today we released that we've won a significant contract from a major national wireless carrier that has not been a significant customer for WFI up until this point. So we continue to be successful in diversifying our U.S. customer base.

Secondly, focusing on operational outsourcing needs, such as network maintenance and optimization, and not just services such as design and deployment, which are tied to capital spending, also capturing significant new international business in both Europe and Latin America.

As I mentioned earlier in my remarks, largely as result of events surrounding our financial statements, we have taken a number of actions to strengthen our internal processes and procedures, including the creation of a Contracts Administration Department and a detailed review of each of our major contracts.

In the process of reviewing the documentation on each of our major turnkey contracts, we discovered that certain contracts signed in 2003 do not contain the change order clauses necessary to allow WFI to recover the costs that have been incurred or may be incurred for out of scope work or changes in schedules. While in certain of these contracts we will continue to pursue additional compensation and change orders, since the contract terms do not specifically provide for this, we have assumed for purposes of our Q3 financial statements that none of these costs will be recovered, and have accrued the cost expected to be incurred to complete these projects. The aggregate result of properly reflecting these contractual obligations is a charge this quarter of just under $10 million.

As Deanna will discuss in more detail, we believe the cost buildups on each of our turnkey projects has been thoroughly reviewed by our finance team and that we now have properly accrued for all of our remaining contractual obligations under these contracts. In addition, we believe we now have a contracts administration process in place to insure that each contract we side is thoroughly reviewed, that the contractual terms provide for additional compensation for schedules slips and scope changes, and that all change order documents are approximately executed.

We've also reorganized our Carrier Division, WNS, to divide responsibilities between sales and business development and operational execution. In addition, with the very recent decision by the prior President of this division to retire from the position in order to spend more time with his family, we're now in the process of searching for a new President of this division. In the meantime, I am serving as President of WNS, with each our operational manages reporting directly to me. We're currently in the final stages of our search process and are looking forward to having a new President of WNS onboard very soon.

Looking out to the remainder of 2004 and into 2005, we believe we're extremely well positioned to continue to grow the top line of our carrier business by a minimum of 20 percent. WFI's pipeline for new work remains strong. And the market for services should continue to remain firm, as all of the factors currently driving our business, outsourcing trends, network investment trends, network usage growth and technology upgrades are all likely to continue. Equally important, we believe we now have the processes in place to drive strong operational execution in addition to strong revenue growth.

Specific areas of new business opportunity for us in 2005 include the following, new opportunities for network optimization and rationalization services as a result of the AT&T Cingular merger, the roll out of 3G technology in the United States by Verizon, Sprint, Cingular and Nextel, Nextel's spectrum clearing and frequency realignment activities, which will create opportunity for both Nextel and with the public safety agencies affected by the FCC's rebranding -- rebranding mandate, the continued roll out of WCDMA networks in Europe as most industry analysts expect only 10 percent WCDMA population coverage by the end of 2004, leaving much more to be built out in future years, the continued deployment of new cell sites in Mexico by both Telcel and Telefonica, the closure of the acquisition of the Bell South assets by Telefonica expected to be completed by Q1 '05 which should create opportunities with Telefonica for both deployment and technology upgrades services, additionally, continued diversification into additional markets in both Europe and Latin America. For example, we now have over 50 engineers working in Brazil, up from only 30 a few months ago, and expect that market to continue to ramp significantly for us throughout 2005.

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

With our new President of WNS onboard, a key goal for us in 2005, in addition to capturing a number of these opportunities, is to continue to strengthen our relationships with our customers by expanding the types of engineering services we provide to them to include IT services, data services and other types of core network services.

Now moving on to our Enterprise Network Services Division. Revenues for the third quarter in E&S were $16 million. Significant drivers for the third quarter revenue include a contract with Hartsfield Airport in Atlanta for a fighter safety system, a contract with a Fortune 100 company for telecommunications outsourcing services, and a contract with a national financial institution for a comprehensive security and building management system.

Additionally, the opportunities to integrate wireless technology into enterprise networks including voice, data, and security networks continues to grow. We were recently successful in winning a number of integrated optical network projects for high-rise office buildings. And we're currently in the process of bidding on several other similar projects. These projects involved a multitude of technologies, such as wireless VoIP, wireless LAN connectivity, wireless surveillance and building control automation.

Looking out to 2005, for E&S we expect to be able to continue to grow our revenues at approximately 15 to 20 percent as the demand for these types of wireless in building opportunities continues to grow, as more and more enterprises come to understand and appreciate the benefits of intelligent converged networks.

In our Government Network Services Division revenues for the third quarter were 14.6 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 customers in the third quarter, including NASA and a major international airport. We're starting to see increased interest in our tactical system from both local and federal public facilities around the country, and are about to sign a significant contract for a major convention center. We are optimistic that this business could become a meaningful revenue driver for WFI in the future.

Another significant win we had on the government side of our business this quarter was an award of a contract with a total potential value of 25 million over five years by the state of Maryland for wireless communications infrastructure. While the dollar amounts of the contract was relatively modest in relation to our overall revenue base, the contract was nonetheless significant for us, because it marks our entry into the state government 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. For 2005 we believe that 15 to 20 percent internal revenue growth is achievable for our government business, as the pipe line in our government business remain strong, as we continue to see commitment by the Department of Defense to improving its communication infrastructure as it moves towards transforming itself into a more mobile network centric force.

In addition, as I indicated a moment ago, we're are now starting to bid on procurements involving public safety networks, and are looking for this to be a meaningful area of opportunity for us in the future.

In summary, as we head into 2005, as we look across each of our three vertical markets, we're comfortable that we are well positioned to grow revenues in this Company internally by approximately 20 percent, and possibly hire, if several of the opportunities in our WNS division come to fruition.

With that as a backdrop to our financial outlook, let me now turn the call over to Deanna to walk through the details of the third quarter, the Company's outlook for the fourth quarter, and our preliminary outlook for 2005. Then I will follow-up with some concluding remarks before we take questions.

Good afternoon. As Rochelle mentioned at the start of this call, this afternoon we reported revenues for the third quarter of 95.8 million, an increase of 45 percent over the third quarter of 2003. Our international operations in Europe and Latin America contributed 29 percent of our revenue growth, while our domestic operations comprised the remaining 71 percent of our revenue.

Domestic revenues were slightly lower than expected as a result of the delayed start of two contracts in our enterprise division, and slightly lower than expected revenue at Cingular is a result of the merger.

Adjusted operating profit from continuing operations was 7.6 million, or equivalent to an operating margin of 7.9 percent, compared to 300,000 of profit in the third quarter of 2003. EPS on adjusted basis was 9 cents in the third quarter of 2004 compared to 1 cent in the prior year. The GAAP net loss in the quarter was 14.9 million, equivalent to an EPS loss of 22 cents. As both Rochelle and Eric have mentioned, in the third quarter we recorded charges of 23.7 million.

First we recorded a charge of 13.9 million, which was primarily related to the two acquisitions we made in 2003 and our Enterprise Network Services Division. As we discussed during our last conference call, during the restatement process we learned that certain clauses within the purchase agreements of these two companies required under GAAP that any future earnout consideration be treated as compensation expense, as opposed to additional purchase price consideration or goodwill.

The Company had previously been incorrectly treating additional earnout considerations as purchase price consideration reflected as an increase to goodwill as opposed to compensation expense. We have amended the purchase agreements to more accurately reflect the intent of the acquisition transactions. However, these amendments constituted a triggering event under GAAP, which resulted in the Company incurring a onetime charge for the estimated remaining amount of the contingent purchase consideration based on the original earnout provisions.

So no change of potential additional cash outlays to be made by WFI if these companies achieve their earnouts or to the timing of these payments as a result of the modifications to the purchase agreement and the charge taken in the third quarter.

In addition, on this same line item on the income statement we recorded approximately 1.5 million in general and administrative expenses, primarily comprised of legal and accounting fees related to the restatement process.

The other charge line on the income statement is for 9.8 million. And as Eric discussed in detail, was identified as a result of improvements that the Company has made in the contracts administration and program management processes made as a result of issues that were identified during the restatement process and as a result of the Company's ongoing effort to comply with requirements of Sarbanes-Oxley.

This charge relates primarily to contracts signed in 2003 which do not contain the change order clauses necessary to ensure the Company's recovery of the costs that will be incurred for out of scope work or costs incurred, or which may be incurred, due to changes in schedule or scope.

As result of these issues, the finance department has now completed a review of the cost buildups on all of the -- on all of our significant contracts, including those signed in prior years, to ensure that the estimated cost included in the estimate and completion calculations reflect the contractual terms of recovery for out of scope work, the scheduled delays and that the future cost to complete these projects are probably accrued.

We believe we have corrected the situation, and have a process in place to ensure that these types of errors do not occur going forward. These actions include placing a dedicated project accountant on each of our major turnkey projects, and implementing a training and certification program for all of our program managers to ensure that all proper contract costs are included in the estimate and completion calculations.

Turning to the balance sheet, total cash, cash equivalents and short-term investments at the end of the quarter were 55.9 million, up by 8 million from the end of the second quarter, even after accounting for the acquisition of DSI, which used cash of approximately 6.5 million. Cash flow from operations in the quarter was 17 million, as a result of the previously expected milestone payment in some of our large turnkey deployment projects. We expect this trend to continue with significant cash collections also expected in the fourth quarter.

For the fourth quarter we now expect revenues to be in the range of 95 to 102 million, which is lower than the previously expected estimate as a result of the delays in certain significant contracts that we now expect to begin later in the fourth quarter than originally expected or in the first quarter of 2005.

In addition, we expect slightly higher than previously expected accounting fees related to Sarbanes-Oxley compliance and legal fees related to the shareholder lawsuits that had been filed against the Company. The impact of these two items combined is approximately 500,000 more than previously expected.

As a result, we now expect EPS for the fourth quarter to be in the range of 7 cents to 8 cents. For 2005 our preliminary outlook is for revenues of 460 to 510 million, which is a 16 to 30 percent increase over the expected revenues for 2004, 391 to 398 million.

GAAP earnings per share are expected to be in the range of 36 cents to 42 cents. This assumes a tax rate of 38 percent in 2005 compared to a 19 percent tax rate in 2004. We're in the process of refining our tax rate projections for 2005, and as result of our preliminary estimates, we have assumed a statutory rate of 38 percent for 2005.

On an apples-to-apples basis, this is a 38 to -- I'm sorry -- 68 percent increase over 2004 adjusted earnings fully taxed at 38 percent versus the 19 percent rate actually recorded this year.

Let me now turn the call back over to Eric for some final comments.

As we head into 2005, it is now clear that 2004 can best be described as a transition year for WFI. With the new management team in place and our intense focus on Sarbanes-Oxley compliance, we have made a number of changes designed to strengthen our internal processes and procedures and lay a solid foundation upon which to build this Company in the future.

But in spite of the challenges of the past few quarters that the Company clearly did not anticipate at the start of this year, we have continued to enjoy substantial year-over-year growth, and we have made significant progress in diversifying our customer base and positioning us well, we believe, for 2005.

Both domestically and internationally and across each of our vertical markets, carriers, enterprise customers, and the government our business is fundamentally sound and our balance sheet remains strong with nearly 60 million in cash at the end of the third quarter. In addition, we have now taken all of the corrective actions and changes and charges we believe were necessary to fix prior year issues and put them behind us.

We look forward to 2005 for its prospects of continuing to grow our business, while improving our operational performance, and to the opportunity to build on our reputation as the leader in the market for designing, building and optimizing wireless networks.

We will now open it up for any questions.

(OPERATOR INSTRUCTIONS). Mike Luciano (ph) from Credit Suisse First Boston.

Eric, could you talk a little bit about sort of the -- in backlog terms or visibility going into that '05 guidance as to sort of what -- how much of that is going to be coming from existing projects and contracts? And how much of that is still to come in terms of winning business? And sort of by division, I guess, would be helpful. So I would get a sense of how you think that could break out.

Sure. I will start with the easier one first. On the government site the nature of our contracts are long-term or multiyear in nature. And as we sit here today a couple of months from the beginning of '05, we are highly confident, 80 percent, 75 percent, 80 percent plus for 2005, because we have a good amount of that in backlog in our long-term contracts.

On the enterprise side, which is very similar to our telecom side, we have a very good rate on screen for approximately two quarters or six months. And then we build our pipeline after that with bids that we have that have already been submitted, bids that we are working on, and opportunities that our business development group, or groups, that are at the various customers are tracking for us.

And so that is one of reasons why we give a rather wide range right now -- and as we move -- as we report Q4 we will be tightening that up -- it is because on the enterprise side, and very similar to our wireless side, we have again solid visibility, high visibility for two quarters out. On top of that, from a comfort standpoint for the management team, the amount of RFP activity that we're seeing on the carriers side right now is very, very heavy. It is extremely heavy. It has actually accelerated in the past week or so since the merger was announced for those particular customers. And it has been very heavy in Europe relative to 3G. And it has been very heavy here in the U.S. related to some of the factors I mentioned. And we take that from a macro standpoint in building together how we see the next year.

And in thinking about seasonality for next year, given that there has been somewhat of a slow down with some of the major U.S. carriers, should we still be thinking of Q1 as being sort of seasonally weaker or should we expect growth to sort of resume sequentially even that early in the year?

I would imagine as we're seeing it right now Q1 should be better than Q4, and just from the macro standpoint we see increasing each quarter. So Q1 should be better than Q4. And we should have pretty good visibility on Q1 right now. As I mentioned, we have pretty good sight a quarter or two out.

We see it increasing in the summer months. And as obviously we get five quarters out, the fourth quarter, hopefully it'll continue to increase. That is our -- obviously the most fuzzy one on the radar screen being so far out.

Right. And then to this last question. On the Sarbanes-Oxley process, could we just get an update on where you are with that? And is there any risk at this point of not being compliant by the end of the year?

I'm going to let Deanna take that one. She has been right in the middle of that.

As far as the Sarbanes-Oxley process, we are on track for KPMG to conclude and to complete their work for year end. So we do not see any road blocks on that as far as not completing that in the time allowed for 12/31.

Frank Marsala from First Albany.

Just as far as the opportunity that you do see, and you're talking about this heavy RFP activity, Eric, with respect to Sprint, Cingular and Nextel can you give us a sense of timing of where these things would sit as far as awards were concerned? And then perhaps, if you can get too specific aircraft there, when do you think the deployment of the thing that they're talking about what start to play out?

Right. On the first part of your question, we announced one of them today. This is a very recent opportunity that came about, and we were fortunate enough to win. I can tell you that each of the last several days I have been involved with the team on going through rather large multimillion dollar bids that we are submitting in that have time -- they have a very quick turnaround. The next month or two it is going to be decided and the work is going to go.

And that is related to some of the guys you just mentioned. So it is happening right now. And the most real data point for you do see on that is what we announced today. I did mention in the prepared text that we have recently won another tranche with Telefonica, a rather large one for 15 or $16 million. So it is happening real time.

And the things that are happening, are they more like the $10 million things, or do you see anything out there is just really big on your radar screen that could dwarf that? I'm just trying to characterize the nature of that stuff that is out there.

There are many, many, many, many in the 5 to 20. They are a handful of some that are much larger than that, that we have either submitted or we're preparing to submit.

And on the larger ones, are you going as a prime or are you partnering with someone?

All prime. On prime on the carrier side. On the government side, there are some other very large ones where we are a sub. And our piece would be several tens of millions pieces if we were to win them all.

And then what are you sensing as far as the competitive environment for those things that you are bidding on now? Is this better than last year, worse than last year, what can you say about that?

It is -- on the carriers side in my opinion the trend of larger procurements, more consolidated procurements from the carriers, either out of their corporate office or larger regional procurements, continues to trend in our favor because we're the largest independent out there.

And as you can see factually our DSOs are somewhere around 120 days or so. Well, on a $100 million contract it is almost impossible for a company half our size or smaller to be able to perform and carry those types of DSOs, which are the carriers' terms and conditions on these firm fixed-price milestone contracts. And so that is just -- you can see that in our financials. I don't like these DSOs, but it is what it is. So it is kind of bad on the cost -- the carrying cost side, but it is good because it really eliminates the field down to just as us on the independent side and some of the services groups and some of the big OEMs.

Interesting. And then just a last question. That's pretty much it on the whole pipeline thing and I appreciate that. It has been very helpful. Then on the other side of this, I want to better understand this charge you have taken in the cost of goods sold. I understand what you have said. Is this a stuff that happened already that your preparing for? I am just not understanding it properly. Maybe you can help me with that?

Yes, let me -- Deanna again has been in the nitty-gritty on this. And so I didn't screw it up, let me have her respond to that.

As far as the nature of the cost, if those were incurred or if they are to be incurred, it is actually both. But a substantial portion of those costs are forward-looking costs. They are future estimated costs to complete certain of these projects, which go through in some cases through the mid 2005 time frame. But so it is a mix of both costs that have been incurred or will be incurred.

(OPERATOR INSTRUCTIONS). John Bright from Avondale Partners.

On the Cingular AT&T merger, can you talk to me about how much efficiency you think they're going to receive putting the two networks together?

I'm not right with you, John. Ask it a different way.

A different way. Let's think about it this way. They are putting together two particular networks. Are they going to be able to share -- when they start sharing some of the usage on the networks how much synergy will they receive out of those networks?

Right. Right. I have been tracking all the public information myself on this. And based on what we now, there's going to be -- there will be quite a bit of synergy. It is going to depend on A., how many sites actually do come down or eliminated out. And it is going to -- they're going to take a look at equipment. What type of equipment is in each market. Do they have two different types of equipment in each market, and do they want to combine it on one platform in a market? They're going to take a look at that. As you -- I think it has been mentioned publicly that very soon, very, very soon they're going to be eliminating any roaming between the networks. And so over time I think that these guys know what they're doing. They are put together a very solid plan of action. And over the next year or so they're going to execute it, and they're going to get quite a bit of synergies out of it.

So when I'm thinking in terms of their performance of the networks, in particular markets where they maybe even -- that they are both in the same location, they're going to be improving their performance on that just strictly through the integration to start with?

I believe so, yes.

On an admin side more, your top five customers you mentioned, could you break out the revenue segment for each of those?

I'm going to -- Deanna has got all the customer data. So I'm going to let her walk through the top five with you. Here you go.

The top five is -- the first Eric had mentioned is at Telefonica at $12 million. And the next one is at Cingular at 7.8 million, a government customer at 7.7 million, AT&T at 6.6 and Nortel at 6.1.

Okay. Another question on the -- and I missed this, I apologize -- on the new President for the WNS division, that is someone who is leaving and you haven't hired a new person as of yet, is that correct?

We are -- we believe, fingers crossed, we're very close to hiring a very high-caliber name person to run this group for us.

Seth Potter from Punk Ziegel.

First of all on the departure of the first President, what was the timing of it? Was it recent? First question. Second question, is there any out of run rate revenue during the quarter? And then finally, on your '05 guidance does that assume same any other legal costs related to --?

Yes.

Your (indiscernible) class actions outstanding.

On the second one, no. There were no out of normal run rate revenues in the quarter -- out of normal run rate. You have to put some calls, but nothing of a material nature. Okay? And the retirement and the reassignment of the President, that was very recent that that happened. Weeks is when that occurred. And in the '05 guidance -- a very good question -- yes, we have included in the '05 guidance an assumption for our out-of-pocket legal costs, that would be over and above what the insurance carriers are paying throughout the year, that is the operating income.

Is there a deductible that you have on that, or what is the M&A that you would pay out?

Yes, there is. It is a layered type of a policy. The first million is on us. And then the carriers, the insurance group, comes in. They pick up the next five million. And then if there is anything after that at all, it is a split of 80 them, 20 us.

There would appear to be no further questions at this time.

Thank you very much. And we will be having our fourth-quarter call shortly after the New Year. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your lines.