Kratos Defense and Security Solutions Inc (KTOS) 2005 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Wireless Facilities Incorporated Second Quarter Earnings Release 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 currently in a listen-only mode. As a reminder, this call is being recorded today, Thursday, August 4th, 2005. I will now turn the conference over to Ms. Rochelle Bold, who will read the company's warning regarding forward-looking statement. Ms. Bold, please go ahead.

Thank you. Good afternoon, and thank you for joining us. With me this afternoon are Eric DeMarco, our President and CEO; and Deanna Lund, our Chief Financial Officer.

Before we begin the substance of the call today, I would like to remind our listeners 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.

I'd like to start off our call this afternoon by briefly walking through our results for the second quarter of 2005. For the second quarter we reported revenues of $111 million compared to $103 million in the second quarter of 2004. Operating profit for the quarter, including the $1million previously announced charge related to unanticipated professional fees, was $6.8 million compared to $9.3 million in the second quarter of 2004. Diluted earnings per share, including the $1 million charge, was $0.06 inline with our guidance for the second quarter. This compared to diluted earnings per share from continuing operations in the prior year of $0.06, which included a $3 million asset pending charge.

With that as a background, I will turn the call over to Eric and Deanna for a more detailed review of our operational and financial results for the quarter, and our outlook for the balance of 2005.

Thank you, Rochelle. Good afternoon. In the second quarter, the company succeeded in meeting our profit target and we continue to build our backlog. We also continue to generate positive cash flow and to bring our DSOs on our accounts receivable down to 108 days, the lowest level in over a year at WFI.

Revenue was slightly lower than expected in the quarter, primarily as a result of lower than expected progress on some deployment contracts in our domestic carrier division. However, as is often the case in our business, slightly lower than expected revenue was offset by strong project execution and a favorable revenue mix, resulting in slightly higher than forecasted gross margins for the company.

Domestically, our carrier division, our largest division, generated approximately $46 million in revenue, which was up slightly sequentially from the first quarter and down slightly from the second quarter of last year. Our largest domestic carrier customers this past quarter were Cingular, Western Wireless, Verizon Wireless, Nextel and Triton PCS. While our work with the majority of our customers was up both sequentially and year-over-year as expected, our Triton business was down significantly year-over-year, primarily as a result of the recent sale of part of their network to Cingular.

In addition, our work with some of our equipment vendors and other prime contractors was also down year-over-year as we continue to succeed in becoming more of a direct competitor to them. In fact, in the past year, we have successfully backfilled nearly $8 million in quarterly revenue in our domestic carrier business that previously came from equipment vendors and other large prime contractors.

While this decline in vendor and other prime contractor revenue mix year-over-year comparison is difficult, we believe taking on a prime role was the right strategic move for WFI, and one that places us in a stronger position for sustained growth in the future. Prime revenues tend to be more recurring in nature than subcontractor revenue and maintaining direct customer relationships allows us to avoid being vertically integrated out by the prime.

Offsetting the revenue declines I just mentioned were year-over-year increases from the following. Cingular, as a result of a variety of engineering activities, including a significant amount of work performed in the second quarter related to UMTS design. Verizon Wireless, largely as a result of their 3G upgrades. And Nextel, as a result of the beginning of a ramp-up on the deployment contracts we have won over the past six months.

As we indicated last quarter, our biggest operational challenge in our domestic carrier division continues to be finding qualified engineering talent. At any given time, we have openings for between 75 and 100 engineering positions in this division alone within WFI, and have continued to bring on additional recruiting resources to help with this effort.

Our international carrier operations generated approximately $27 million in revenue in the quarter, up sequentially from the first quarter and essentially flat year-over-year. However, as a result of our new multi-100 site deployment contract in Argentina and the signing of the extension on our largest contract in Mexico, we are now back on a growth trajectory in Latin America, and expect year-over-year revenue growth in the back half of this year.

Our largest customers internationally continue to be Telefonica and American Movil, including both Telcel and CTI in Latin America, in addition to O2 and Nortel in Europe. We continue to believe that there is significant opportunity for further expansion into Latin America, especially as Telefonica continues to invest in its recently acquired assets from BellSouth beyond what is already in backlog today. However, we also continue to be focused on balancing our growth rate and our free cash flow goals. One of our key strategic issues is to continually striving to find the right balance in the growth versus cash flow area.

The nature of the work in Latin America and the contract payment terms are such that they tend to require us to carry the receivables longer than in our domestic business. And therefore, we continually have to assess what our desired growth rate should be in light of our other cash priorities, which include additional acquisitions in our government business.

Our current plan for the balance of the year assumes that we continue to invest only modestly in Latin America so that we are able to maintain our day sales outstanding on our receivables below 115 days. As we look to the second half of 2005, our own sale trends combined with recorded results from each of our major customers, both domestically and internationally, indicate that the industry dynamics should continue to remain favorable. As the second quarter results from the major domestic carriers indicate, net subscriber additions and growth in minutes of use remain strong, and the carriers are continuing to invest in expanding and upgrading their voice and data networks.

Continuing to drive this growth in network usage, in addition to competitive voice offerings, such as family plans and one-rate plans, is the acceleration of data and multimedia usage, including text messaging, downloadable ring tones, games and photo messaging. Each and every quarter, we continue to see a steady progression in the percentage of voice subscribers who are also subscribed to data and a corresponding increase in the percentage of ARPU coming from data. Data and multimedia applications are inherently more bandwidth intensive than voice causing further strain on already saturated networks in creating the need for quality and capacity upgrades.

Together with the growth in voice traffic, this is what is driving the new site deployment activities currently going on around the country by all of the major carriers. Another important trend for our business is the arrival of third generation technology upgrades. We have been involved for the past couple of quarters in 3G activities in Europe and domestically with Verizon, and believe 3G upgrades are likely to continue to provide opportunities for us.

With Verizon's 3G launch underway, Sprint's launch planned for the third quarter, and Cingular's planned launch in Q4, there should be demand from all three of the largest US carriers for either 3G design, deployment or optimization services for the foreseeable future.

In addition to general industry trends, our business continues to be driven by specific opportunities with each of the major national carriers. For example, as I mentioned earlier, Nextel, which has publicly committed to use and invest in IDEN network post the merger with Sprint, has recently become a very significant customer WFI.

We've been successful in the past two quarters and strengthening our relationship with Nextel and building a substantial amount of deployment backlog. While we have finally begun the ramp -- excuse me, the ramp up in on our deployment work with Nextel, as evidenced by our second quarter results, because of the nature of the location in which we are building these new sites, we have unfortunately not been able to get through the leasing, zoning, and permitting stage as quickly as originally planned and forecast.

As a result, our second quarter revenue on this project was slightly lower than expected, and a good part of the revenue from this backlog will move to the right and be recognized in 2006 versus the back half of '05. Also related to Nextel, we continue to see opportunity both with Nextel and with the public safety agencies for engineering services related to spectrum clearing and frequency realignment as a result of the FCC's rebanding mandate.

We also continue to see opportunity from Cingular, for network optimization and rationalization services that are needed as a result of AT&T-Cingular merger, as well as arrange other services related to network upgrades for Cingular.

Looking out to the balance of 2005, and into 2006, we believe that demand for outsourced engineering and deployment services will continue to grow. However, we continue to operate in an environment with what we believe is irrational pricing by one of our major competitors here in the US. We are aware of at least one case of this competitor offering services at what we believe was below breakeven pricing.

In this case, WFI had to walk away from the opportunity because we could not come close to our competitor's pricing. The result is a meaningful amount of lost revenue that we were previously expecting in the back half of the year. Fortunately, this competitor cannot afford to do this on every job where we compete. And we are proud here, the fact that in spite of challenges like this, we continue to execute on our strategy of profitably growing the business.

Moreover and more importantly we believe this competitor's balance sheet has deteriorated considerably with the past six month and it is continued to burn its cash. We are hopeful that capital constraints will cause this irrational activity to cease in the very near future. In the meantime, we will continue to focus on strengthening our customer relationships, expanding our business development activities and further developing our service offerings.

We continue to believe that alternative carriers and new technologies will start to become an important growth driver for our business, and we are targeting a significant piece of our discretionary SG&A spending at growing this part of our business base. For example, the use of IP or Internet Protocol as part of the backbone infrastructure by wireless carriers is here. And it's growth expected to continue for many years in the future, creating a whole new market for new kinds of outsourced engineering services.

Because we see this as such a large opportunity for us, we have recently hired a new Director of IP and core network engineering and placed our first few IP engineers on assignment. We have also started to build our business with some of the emerging alternative carriers, who are looking at both traditional wireless technologies as well as new technologies such as WiMax.

As a technology neutral, vendor independent partner, WFI can provide much needed engineering and deployment expertise to these new service providers as they seek to test and ultimately launch new wireless networks. And we expect this to be a new source of revenue for us in the back half of the year.

In summary, while we clearly have some competitor issues that we will have to continue deal with, hopefully, for only a couple more quarters. We are still optimistic that we will be able to continue to grow our carrier business sequentially throughout the balance of this year.

Now, moving on to our Enterprise Network Services division, or ENS, revenues for the second quarter in ENS were $16.3 million, down sequentially from the first quarter but up year-over-year from the second quarter of 2004. A significant drive -- driver for year-over-year revenue growth was a recently awarded contract with a large shopping center group for video surveillance systems in a number of their retail complexes.

The sequential revenue drop was due to timing issues on a large access control project in the Northeast, which we have now won and which will be a key driver for the sequential revenue growth going forward this year.

Year-over-year revenue growth in the second quarter was also driven by continued work on integrated optical network projects for high-rise office buildings, which involve a multitude of technologies such as Wireless VoIP, Wireless LAN connectivity, wireless surveillance and building control, automation running of a centralize network platform.

Looking out to the second half of 2005, a key area for growth in our enterprise business is our work with municipalities. As we have indicated in prior calls, municipal wireless projects have been a strategic priority for us over the past few quarters. We recently won our first work on municipal wireless network, and currently have bids submitted on a handful of additional municipal projects involving wireless data, video, security, as well as parking meters.

We have also recently signed a Master Services Agreement with one of the largest ISPs in the country to be their services partners as they seek to deploy municipal infrastructure throughout the United States. We expect to be successful in winning one or more new contracts in this area in the near future, in addition to the work recently awarded to us, and expect this work will provide a meaningful contribution to revenue toward the end of this year.

In the Government Network Services division, revenues for the second quarter were $21.4 million, up sequentially and year-over-year. Sequential revenue growth was largely the result of the acquisition of TLA, while year-over-year revenue growth in the quarter was driven in part by increased demand for engineering services from the Department of Defense.

In addition, our logistics and RFID business is starting to gain traction. We were successful this past quarter in winning a Blanket Purchase Agreement to provide RFID technology to the Department of Defense. And we are currently in the process of assisting several customers on RFID and logistics-related projects.

Our Homeland Security initiatives also a meaningful contributed to year-over-year revenue in the government division. Tactical Survey and image based information system, designed to deliver vital information to first responders attracted several new customers in the second quarter. These included the Department of Energy, the Ted Stevens International Airport, the Los Angeles Convention Center and the Hawaii Convention center.

This past quarter we were also successful in achieving an important strategic objective in our government division by winning a spot on the Navy's Seaport-E contract vehicle. This is a $5.3 billion a year vehicle that will allow us to compete for a variety of tasks, including network engineering, deployment, integration and program management services. And we believe this vehicle will be an important contributor to WFI's revenue growth in the future.

More importantly, the pipeline for new business in our government vertical remains strong with over $500 million in new opportunities that we are currently tracking. Of that $500 million, we have just under $100 million worth of bids that have already been submitted and we are waiting to hear on. Based on our bid submitted, and the total value of our pipeline, we fully expect that in the back half of the year our government business will continue to be a strong driver of internal revenue growth.

In summary, as we look to the balance of 2005, we believe that the industry trends in each of our vertical markets remain favorable, and that both strategically and operationally, we're well positioned to continue to grow revenues while leveraging our SG&A to improve our operating margins. With that as a backdrop for our financial overview, let me now turn the call over to Deanna to walk through the details of the quarter and our outlook for the balance of 2005. And then I will follow-up with some concluding remarks prior to questions.

Thank you, Eric. Good afternoon. As Rochelle mentioned at the start of this call, this afternoon we reported revenues for the second quarter of $110.8 million, slightly lower than we had expected, primarily, as a result of slower than the expected progress on two deployment contracts. Our International operations in Europe and Latin America contributed 25% of our revenues while our domestic operations comprised the remaining 75%.

Operating profit was $6.8 million and EPS was $0.06, which included the $1 million charge previously announced related to unanticipated professional fees. While revenue was slightly lower than forecasted, we were able to meet our profit target through strong project execution and a favorable revenue mix, resulting in a higher than forecasted gross margin of 23.2%. Combined with a tight control of operating expenses in Q2, this led to a slightly higher than forecasted operating margin of 7%, excluding the unanticipated professional fees.

Turning to the balance sheet. Total cash, and cash equivalents and short-term investments at the end of the quarter were $24 million, down by $14 million from the end of the quarter first quarter as the result of the use of $14.5 million for earn out payment associated with prior-year acquisition as well as $2.6 million in capital expenditure. Our operations continued to produce positive cash flow, generating approximately $2 million in the quarter despite the significant sequential revenue growth in Latin America. This brings our total cash flow from operations with the first six months of the year to $14 million.

Our day sales outstanding continued to improve, dropping to 108 days from 114 days that we reported at the end of the first quarter. However, as Eric indicated in his earlier comments, our DSL outstanding are likely to go up slightly in the third quarter as we use cash to fund our growth in Latin America. This may result in a use of cash in the third quarter. However, we expect that whatever cash is used in the third quarter will be recovered in the fourth quarter. In the third quarter, we expect earnings per share of $0.08 on revenues in the range of $115 million to $120 million and we remain comfortable with the current analysts' consensus number for the full year of $0.29.

As Eric mentioned earlier, we have had some delays in our Nextel contract, which will push out a chunk of our backlog there until 2006, and we continue to experience instances of irrational pricing behavior by one of our competitors, both of which will somewhat affect our revenue for the year. However, we are comfortable that through continued strong project execution and tight control over SG&A expenses, that we can achieve EPS of $0.29. Let me now turn the call back over to Eric for some final comments.

Thank you, Deanna. I said at the start of the call, this quarter we've succeeded in meeting our profit target, and we continue to build our backlog. While we clearly have some issues that are beyond our control, such as deployment delays and the irrational pricing that we have to deal with and will continue to have to deal with this year.

Overall, we feel good about our ability to win work and execute on our contracts. In addition, we're continuing to focus on keeping tight control on our SG&A, generating positive cash flow for 2005, and keeping our DSOs on our account receivable at the lowest possible level.

As we looked at the balance of the year, our top priorities are to focus on things within our control but the strong program management and project execution and continuing to expand on the sales success we have had in the first half of the year. We continue to believe that WFI is strategically positioned to take advantage of market trends in each of our vertical markets and that we have a fundamental to allow us to capitalize and opportunities. We are looking forward to continuing to keep you updated on our progress throughout the balance of the year. Now, let me turn the call over back to the moderator for questions.

(OPERATOR INSTRUCTIONS). Our first question will come from Mike Ounjian with Credit Suisse First Boston.

Great. Thank you. Eric could you talk a little more, I mean you gave an earnings number for the rest of the year. But could you talk a little bit more about how we should think about sequential growth over the next two quarters. And how we should think about SG&A lines in terms of where you're going to get -- where you're going to get some savings there to make up for what sounds like slower than expected revenue growth

Right. Well, Mike on the revenue side, we are still comfortable with the yearly number of about $470 million. And as Deanna indicated, we are still comfortable with the consensus EPS. We are -- as you just indicated -- very focused on the discretionary SG&A in every area except business development and sales. In those areas, wherever we have additional discretionary dollars, that's were the discretionary dollars are going to go. So, SG&A even with the ramp in revenue opt to the about 470 level, we're expecting to be flat. And keep in mind that we did have about $1 million or so what I'll call surprise professional fees that we will not have again this year.

Please do clarify that, you are thinking flat with what it would have been this quarter without those fees? So without the $1 million.

Yes, that's right.

Great. And then what was-- could you name some of the big customers. Can we get more specifics on what the customer -- what the concentration of revenue was with your biggest customers this quarter?

Sure Michael. I'll let on Deanna give you that information.

Hi, Mike. Some of the largest concentration mix was with Cingular, which was about 21% of our revenues and Telefonica with just under 9% for the quarter.

Great. Thanks. And then the last question was -- what was your operating profit by segment continued to that.

Hold on one second. Deanna will point out.

Yes, Mike, the operating income by segment on Wireless business was $4.2 million of the $6.8 that we reported. Enterprise Network or ENS is about $0.6 million and the remainder on Government business at $2 million.

Great, thank you very much.

Sure.

We'll move next into John Bright with Avondale Partners.

Thank you. Eric, when I look at the top line, the two deployment contracts that accounted for the light performance, one being Nextel. The second one -- I didn't catch the second one, is that Cingular? And then how would you break down if it's caught between $5 and $6 million between the two of them?

Right. That's exactly right. It was Cingular and Nextel. I would look at it weighted a bit heavier towards Nextel, maybe, 60/40, 70/30.

Okay. And then on the guidance looking forward to the end of the year, 470. So we've -- before we had 470, 490 range, $470 is now the number with $0.29. Are we staying with the -- I assume we're going to use the lower share count before we talk about $77 million and the 37 by tax rate of those. Are those still good?

The share count and the tax rate, they are still good. On the revenue, comfortable does not mean we will not do better. I just want to make that clear.

Are you coming off for 490 -- 470 to 490 range?

I think that we're comfortable with consensus right now. So I'm glad you're clarifying that. We're comfortable across the board.

Okay. And on then on a lower share count for the quarter, did you buy back shares?

No, I thought you said the share count is the same.

I did for the year. And then this one was more about specific financial question, maybe better for Deanna.

Yes.

Deanna, when I look at the share counts sequentially it looks like it went down.

Yes, John that is -- it is a fairly complicated calculation, but that is driven by -- in part by our stock price for the average price during the quarter.

Okay, all right, thank you.

Sure.

Our next question will comes from Frank Marsala with First Albany Capital.

Hey guys, how are you doing?

Very good. Thank you.

Good. A couple of questions. When Cingular talks about decommissioning cell sites, do you -- do you guys view that as an opportunity, a threat, both? How and have you seen any of this playing out yet in the work that you're doing for them?

We look at any type of activity by the carriers as an opportunity for us to assist them in what they're doing, whether it be deploying or retiring. So, either way, we look at it as an opportunity. Relative to the mix of our Cingular revenue right now, that does not come to the forefront of my mind as being a material part -- retirement of sites of what we're doing right now.

Okay. So, in this quarter, they put out something like -- I don't know -- 10 or 11 press releases when they talk about new coverage in different areas. Would you be able, Eric, to tell me, what parts of the country your work dominates for them or could you give us a sense of where you do most of your work for Cingular?

Yes, we -- it's an interesting question. We work in virtually every Cingular market out there. I don't know if it's everyone, but it's in virtually every Cingular market. And at one point in time, we could be very heavy in the Northeast or in the Texas area, at another point time we could be very heavy in the Western region. It just depends on the phasing of where they are at and what they expect us to do. But we are aware of the press release that they put out, and we are, once again, in virtually every market where they're doing business.

So, I mean, California looks like a place were there's going to be the most activity. What is your level of participation with them in California?

I don't have that specific breakdown by state with me right now. I may be able to get that for you offline. I just don't have the details by state with me.

Okay. All right. Just to get through some services then. You talk about a lot of things, and I make note of these things as well, you know, the different industry dynamics, whether its sub growth data, minutes are used for voice, things of that sort. Can you give me a sense as to -- from your viewpoint -- is it still voice quality that dominates - is it still kind of coverage or is data becoming more important -- has it become more important to them?

Voice is voice quality, coverage and capacity - is very, very important to them. As you know the vast majority of their revenues today comes from voice calls. As more data and higher bandwidth desires by consumers come out, which is now leading to 3G, which as I mentioned, we are currently involved in with Cingular and with Verizon and will be with Sprint, I think it will move to a little bit towards that side, the 3G side, the higher data side over the next few years as 3G rollouts continue and they mature. But if you just take a look at the absolute numbers. Because the voice revenues are so large compared to the other, there is a significant amount of work there to reduce churn -- quality, coverage and capacity to reduce churn and keep the subscribers.

Okay. So as we focus on this quarter, really, as we don't have to see is that you're saying it's more the Nextel stuff that you're almost having zoning issues or that kind of issue. Is that the way we'd look at it?

That's it -- it's a type of a zoning issue. We will get it done. But it just happens to be that the initial traunches of markets that we're working in it can be very challenging. And you know, what you would do is you'd say, okay, we're going to get 1,000 sites. And of those 1,000 sites, 200 of them - I'm being facetious -- and I'll give you an example, they're going to be on Rodeo Drive and the other 800 are not. And so, you have an 80-20 mix and that mix phases in how our customer wants it to phase in. And so, obviously, in my example, the Rodeo Drive sites would have little bit more challenging zoning issues than those out in Fremont, California.

Sure. And the work you are doing for Sprint or you're expected to do for Sprint is that 2G related or is it 3G related?

It is both with the 3G piece, specifically, EBBO, increasing.

Do you sense any risk there from them just in terms of timing because they're getting ready to close their deal, or they kind of moving along?

We haven't -- I haven't seen or I am not aware of any instances where they have slowed down from the initial plans that they briefed us on.

Okay. I think that's all I had. You covered the cash and cash FROM operations and things of that sort. So thank you very much.

Thank you.

(OPERATOR INSTRUCTIONS). And we will go next to Seth Potter with Punk, Ziegel & Company.

Hi. How are you? Two questions, first, what is the total number of employees at the end of the quarter.

Hold on one second and Deanna will pull out the headcount sheet.

While you are looking there Deanna, if it's possible to give the breakout between international operations between Latin America and Europe, that would be helpful also.

Sure. Seth, that was just a little over 2,400 employees.

Okay

And the Latin America breakout is just under 470.

Just on revenue, sorry. Could you give a break out in terms of percentage of revenue for Latin America and then Europe?

I'm sorry. I thought you meant headcount. Okay.

Sorry about that.

Just a sec.

Mr. Potter, did you have anything further, sir.

Yes. Once I get that, I have one last question.

Sure. The revenue, Seth, for Latin America is just under $20 million.

And the remainder is Europe of the 25%?

Yes. It's just a little over $7 million.

Okay. And one last question, I'm just hoping to get more detail on these extra fees, this $1 million, is any more detail you can give us on this?

There is none other than what we previously disclosed and what we disclosed now. It's done issue that's behind us.

Maybe you can help me out in terms of looking at the number. I mean $1 million on -- $1.9 million is a rather large increase. And I'm just trying to understand, what would cause that and if you think about it, the more I thought about it -- an accountant is paid $250 an hour. We are talking about many, many man-hours, 400 man-hours, assuming a 10 hour workday. We're talking may be three months of work by a group of five. I am trying to figure out, what happened here and why was it unexpected?

The reason why it was unexpected is because you are under a firm fixed price contract. You have a number that you agreed to. You are on a firm fixed price contract. And similar to the business we are in and you are on a firm fixed price contract that customer expects that -- sure, there may be some marginal change in order activity, but there wasn't.

Okay. Thank you.

Thank you.

(OPERATOR INSTRUCTIONS). And we will go next to Joe Annoni with Roth Capital Partners.

Hi. Good afternoon. A question on the slowdown that you had mentioned with Cingular, can give us a little bit color on that?

Yes. It's not really a slowdown. What we're doing with Cingular, particularly in the UMTS area, we haven't experienced any type of slowdown. This was primarily related to what -- to Cingular just delaying some work that they had already awarded us. And it moved out on us. And without getting into the details, they have the orange sites and the blue sites, the Cingular sites and the former AW West sites and it's the workloads between those two different types of sites and how it's phasing.

Okay. All right. So now I just have to do with UMTS work?

No, not that piece, not at all.

Okay.

No, these are just normal deployment sites, not UMTS site.

Okay. All right. Good. And then as far as the competitive environment, outside of the one, can you talk a little bit about what you're seeing with the major OEMs. Who is kind of making the most strides in the services and where that sort of increases the risk?

Right. Well, actually we don't look at it as an increase to risk. Let me tell you why. Because when we run up against the OEMs, for example, say a Lucent here in the United States, as they are public company. And I believe they will manage, they're very focused on the profitability and the bottom line also. And so when we run up against a company like that that's well managed, we also went their, and necessarily cut each other's throats on price because we deliver very high quality work. And so, we would much rather run up into a competitive situation with the larger OEMs.

Actually, I was thinking of risk in a different way.

In which way?

No. Not that, this is a specific situation, but perhaps with Ericsson and then getting more work at Cingular, is that a situation or is there anything like that?

No. Our revenue growth at Cingular continues to be very strong. So, we're not sound, particularly in Cingular. We are not -- we haven't seen any instances of that. I mean, there's always competition. I believe there's going to be room always for the independent provider equipment diagnostic and independent and that is obviously, what we used to our competitive advantage.

Okay. How about if I think of it in terms of market share at Cingular then?

I don't know that specifically, but I do know, I do believe, I think I still know that we're the one -- we continue to be one of the as not the largest outsourcer of engineering services at Cingular.

Okay. That's very helpful.

Okay.

And then as far you mentioned biggest challenge is still finding talent. Can you give a little bit color on, has that changed from the last quarterly call. You mentioned this. Sort of what's going on with that?

The supply/demand imbalance continues, where there is continues to be very strong demand for UMTS and EVDO engineers and engineers with a certain amount of experience on the certain equipment platforms etcetera, etcetera, etcetera. So that continues to remain a challenge for us. What has gotten better for us because of the actions the management team took is we have enhanced our recruiting capability. We have enhanced our resourcing capability. We continue to do that and the amount of open recs that we have today is significantly less than it was three months ago, because we built them up.

Okay. Good and that one final question. You mentioned that some new initiatives, you mentioned these before -- IP and broadband Wireless, can you give a little bit more color on -- I don't know maybe just the size, the timing? What type of customers this entails?

Sure. The customers are our same customers on the carrier side today. It's all of the carriers. The timing is right now. It has begun. And as I think, I mentioned, we have now started to fill slots. We've brought on one key manager. We've hired a second key manager, a very senior executive, who starts hopefully in the next 45 days. Our strategic objective, our plan is over the next year or two to build a very significant IP engineering group in this company to meet the demands that our customers are asking us to meet right now.

Okay. All right. Very good. Thank you.

And that is all the time we do have for questions. I will turn a conference back over to our presenters for any additional or closing comments.

Very good. Thank you, very much and we will get back to you at the end of the Q3.

That does conclude today's teleconference. We'd like to thank everyone for their participation and wish everyone a great day. And now at this time, you may disconnect.