Kratos Defense and Security Solutions Inc (KTOS) 2005 Q3 法說會逐字稿

Welcome to the Wireless Facilities Incorporated third quarter 2005 earnings conference call. Your speakers for today are Mr. Eric DeMarco, President and Chief Executive Officer and Miss Deanna Lund, Senior Vice President and Chief Financial Officer.

At this time, all participants are in a listen-only mode. As a reminder, this call is being recorded today, November 7, 2005.

I will now turn the conference over to Mr. Eric DeMarco for all warning regarding forward-looking statements. Please go ahead, Mr. DeMarco.

Good morning. Thank you for joining us.

Joining me this morning is Deanna Lund, our Chief Financial Officer. While Rochelle is not available for this morning's call, she will be available to answer any questions following the call.

Before we begin the substance of the call, I'd like to remind our listeners that today's comments may include forward-looking statements about our plans and expectations about future performance. These plans and expectations are subject to the 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 the call this morning by briefly walking through our results for the third quarter of 2005.

Total revenue for the third quarter increased 14% to 109 million from 96 million in the third quarter of fiscal 2004. Domestic revenues increased 28% to 87 million from the third quarter of fiscal 2004.

Operating income for the quarter was approximately 8 million compared to a loss of 16 million in the third quarter of fiscal 2004. Net income for the quarter was 6 million, or $0.08 per share compared to a net loss of 15 million, or $0.22 per share in the third quarter of last year.

As our press release indicates, included in net income for the quarter was a benefit of 2.5 million related to the reduction of an excess accrual for contingent acquisition consideration, and a tax benefit of 900k, which were both offset by 3.2 million in reductions in gross margins from unexpected contract adjustments in Latin America, which both Deanna and I will discuss in further detail in a few moments. These three items basically net out to an immaterial amount.

This past quarter, we made significant progress on a number of strategic initiatives that are relevant to each one of our vertical markets and which are important to WFI's future success.

First, we were successful in winning a number of important contracts in our government division, including two sizeable five-year contracts. One with an expected value of 25 million and the other with an expected value of 30 million.

Additionally, we also won two Blanket Purchase Agreements to supply RFID technology to the Department of Defense.

We were also successful in continuing to expand the bid pipeline for our government work. And we now have approximately 115 million in bids outstanding that are in various phases of evaluation process.

As many of you know, developing a robust pipeline in the federal government marketplace takes approximately 18 months to 2 years because of the long procurement cycles. Accordingly, these large recent contract wins and the size of our existing pipeline are the direct result of the efforts of the organization over the past year and a half or so, which hopefully will only continue to improve upon going forward.

The bottom line here is that we believe we now have considerable momentum in our government division's business development, sales and capture processes and we are going to try to increase on it further.

To that end, we have continued to make key hires in the area of business development. For example, during the quarter, we hired as a Senior Vice President of Business Development Brad McAleer, who came from a multi-billion dollar government information technology systems integrator, FIIC, and who has significant experience in putting together and winning very large prime procurements.

WFI's government division, with its backlog, bid and proposal pipeline and momentum, along with its key executives, is an area we are looking towards as a growth driver for our Company in 2006.

Second, and we believe very significantly, during this past quarter, we were successful in gaining traction on our strategy of targeting the municipal market for wireless network infrastructure services, winning a spot on the team that will build the WFI network for the city of Madison and joining with Google in a bid to provide Wi-Fi services to the city of San Francisco. We believe that this emerging market area can be a very exciting growth opportunity for WFI in 2006 and hopefully beyond.

We are actively involved with several other municipal Wi-Fi projects at this time and we expect to be successful in winning additional work in this area in the very near future. We believe that we have positioned ourselves as a leader in this new emerging market area, and as I mentioned before, we are looking at businesses in this area to be a growth driver for WFI.

Thirdly, we have been able to make additional key hires in two important new markets for us, public safety and IP and core network engineering. Related to this, we have already been able to place our first land mobile radio engineers on public safety-related projects and our first IP engineers on core network-related projects.

We believe both markets represent significant potential growth opportunities for us as we head into 2006. As carriers seek to invest in the development of converged voice and data networks, we believe there is an opportunity for vendor independent engineering firms, such as WFI, to assist them in the design, deployment, integration and ongoing maintenance of their networks.

We also believe that the public safety market, which includes facilitating the inneroperability of communications systems between law enforcement and first responders, is a key area of opportunity for companies such as WFI. With experience with traditional cellular systems, land mobile radio systems and 802.11 systems.

In summary, we believe we are successfully executing on our strategic plan, which includes continuing to diversify our business into markets where our core competencies add value.

I'll now provide an operational overview of the third quarter.

Operationally, this past quarter our domestic business was strong and WFI succeeded in meeting its profit targets. Our domestic carrier division generated approximately 49 million in revenue, which was up 7% sequentially from the second quarter and up 32% from the third quarter of last year.

We accomplished this growth while at the same time continuing to execute on our goal of increasing margins by reducing low or no margin third party pass-through revenue in our deployment business by obtaining agreements from our customers to pay more of these costs directly.

Our plan is to continue to pursue this strategy wherever possible, which may reduce revenue by a couple of million dollars at any particular quarter, but will increase profitability and will improve overall cash flow. This is an important point because I know investors are generally very focused on revenue and in our business, we try to keep the focus on profit as well as the balance between overall growth and risk.

Specifically in the deployment portion of our business where up to 60% of the revenue can be subcontracted labor and materials at varying levels of profitability for us, it is important that we continually strive to reduce the low or no margin revenue in order to improve free cash flow and overall profitability.

In addition, we continue to balance our opportunities for growth with the required working capital uses to fund these opportunities and may at times elect to forego certain opportunities because of the associated risks.

As we have discussed on several conference calls in the past, a key objective of the organization is to continue to focus on pure engineering services and solutions opportunities, which typically have higher gross margins and tend to be less risky than deployment programs which contain firm fixed price contractual elements. This plan of action could somewhat reduce our revenue growth trajectory in any given quarter, but hopefully with increasing profit margins and decreased risk.

Our largest domestic carrier customers this past quarter were Cingular, Sprint Nextel, Alltel and Verizon Wireless. Year-over-year, increases from Cingular were the result of a variety of engineering activities, including work related to the integration of the AT&T network and significant progress on a couple of large new site deployment projects.

Year-over-year, increases from Sprint Nextel were the result of deployment and optimization activities stemming from the launch of their 3-G EVDO upgrades, increased engineering work associated with Sprint Nextel's rebanding efforts, and further progress on the new deployment contracts we have won over the past nine months.

Year-over-year growth was also driven by an increase in work we are performing for certain new customers in an entirely different market area, which for competitive reasons we will not get into publicly yet, but one where our expertise is needed and extremely well suited.

While we are clearly starting to generate momentum in our domestic carrier business, as we indicated in our press release this morning, revenue and profit in the fourth quarter will be negatively impacted by delays and increased cost estimates on fixed price contracts in our deployment business as a result of the effects of hurricane-related labor and material shortages.

A meaningful amount of our deployment business at this time is located in the southeastern United States. And in this region, we are seeing what we believe to be short-term impacts to our business from construction delays and higher costs of both raw materials and subcontracted construction-related labor on fixed price contracts.

We are currently attempting to work with our customers on equitable resolutions of these unexpected costs and delays. However, because these are fixed price contracts, at this point we have no assurance that we will be successful in this endeavor, though we will continue to work it.

Specifically, we will continue to work with our customers on these issues in the hope that we will be able to share some of the increased costs associated with schedule slippages and labor and material shortages. More importantly, now that we are aware of the labor and material dynamics that are occurring as a result of the significant amount of hurricane-related damage in the southeast, we will ensure that all fixed price contracts going forward incorporate this new increased pricing.

As we look past the fourth quarter and into 2006, industry trends in the wireless market dynamics lead us to the conclusion that the overall environment for WFI services should continue to remain favorable.

Third quarter results from the major domestic carriers indicate that net subscriber additions and growth in minutes of use remain strong and that the percentage of voice subscribers, who also subscribe to data, is increasing and that the carriers are continuing to invest in expanding and upgrading their voice and data networks.

Additionally, the proliferation of new bandwidth intensive applications such as mobile TV, mobile videos and streaming radio, is accelerating with numerous announcements this past quarter, such as Cingular, Motorola and Apple's announcement of the launch of iTunes phones and MTV and Sprint's announcement of a partnership for mobile video content services. Together with the growth in voice and data traffic, these new applications and services will continue to drive new site deployment activities throughout the United States by all of the major carriers.

Another important trend for our business has been the arrival of third generation technology upgrades. With Verizon and Sprint's 3-G launches underway and Cingular's planned launch in Q4 of '05, there should be demand from all three of the largest U.S. carriers for either 3-G deployment or optimization services for the foreseeable future.

Additionally, general industry trends, our business continues to be driven by specific opportunities with each of the major national carriers, most significantly for WFI with Cingular and Sprint. We continue to see opportunities from Cingular for network optimization and rationalization services that are needed as a result of the AT&T Cingular merger as well as a range of other services related to new site deployments.

As I indicated a moment ago, we also believe the much anticipated launch of UMTS in Q4 will create significant opportunities in the optimization area for us in 2006. Sprint Nextel is an area of significant opportunity for us in 2006, as well, as they embark on their network integration and rationalization efforts.

We continue to believe that in 2006, alternative carriers and new technologies will start to become important growth drivers for our business and we are targeting a significant piece of our discretionary SG&A spending at growing this part of our business with alternative carriers and new technologies.

For example, the use of IP as part of the backbone infrastructure by wireless carriers is here. And its growth is expected to continue for many years in the future, creating a whole new market for new kinds of outsource engineering services, services which we believe WFI is uniquely positioned to provide due to our outstanding customer relationships and technology expertise.

Directly related to this, as I mentioned in my opening remarks, we have made some important key hires in this area and we are beginning to gain traction in the IP and core engineering marketplace. 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 2006.

In our enterprise business, revenues for the third quarter were 16 million, flat sequentially and year-over-year. Revenue and profits in the enterprise division were only slightly impacted in the third quarter by Hurricane Rita, which caused a complete shut down of our Houston operation for nearly two weeks right at the end of the quarter.

However, in the fourth quarter, we expect the effects of all three hurricanes in the southeast to be much more significant as this region comprises nearly 60% of WFI's enterprise business. Similar to our carrier division, not only are we experiencing project delays, but we are also experiencing higher costs of both raw material and subcontracted labor as a result of supply shortages.

As you can imagine, a significant amount of resources in this area of the country have been and are being diverted to assist in infrastructure rebuilding efforts, which is causing greater demand than there are resources, which is somewhat driving up costs. We believe that these impacts will be short-term only and that business will return to a more normalized level in 2006.

As I have mentioned earlier and in prior calls, a key strategy for growth in our enterprise business has been our focus on the municipal market for wireless networks. We have now started to gain momentum in this area, winning our first couple of municipal wireless projects, which we have been able to announce publicly.

We currently have bids submitted on a handful of additional municipal projects involving wireless data, video, security and parking meters, including the recently-announced partnership with Google on the city of San Francisco's proposed wireless network.

We expect to be successful in winning more new contracts in this area in the very near future in addition to the work recently awarded to us, and we expect that this work will provide meaningful contribution to WFI going forward. A combination of our RF engineering site deployment expertise and our experience with security applications for the enterprise market makes us well-positioned to be one of the leading system integrators in this market and we are hopeful that this large new market will provide us with considerable new opportunities.

In our government division during the third quarter revenues were 21 million, flat sequentially but up nearly 50% year-over-year. Key areas of growth for us in the quarter included our logistics and RFID business, where we continue to gain traction and our homeland security initiative, Tactical Survey, which attracted several new customers, including the Department of Energy and the Hawaii Convention Center.

Most importantly, we were extremely successful this past quarter in winning a number of contracts with an expected value of approximately $65 million that lay a strong foundation for organic growth in 2006. We believe our success this quarter in winning new bids demonstrates that strategically we are on track in building a profitable and growing federal government information technology and communications services business.

The contracts won include this past quarter, two additional Blanket Purchase Agreements to provide RFID technology to the Department of Defense, bringing our total count on such awards for RFID technology to four out of a possible five Blanket Purchase Agreements issued by the DoD. A subcontract on SAIC's $108 million contract to provide program management engineering and technical services in support of their recently-awarded Navy automatic identification technology program office contract.

And two large multi-year 25 to $30 million contracts, one to provide aerial target-related services for the United States Army at the White Sands Missile Range and the other for the engineering, installation, maintenance and technical support for various command and control systems on United States Navy submarines.

The pipeline for new business at our government vertical remains very strong with over 550 million in new opportunities that we are currently tracking. Of that 550 million we are tracking, we have approximately 115 million worth of bids that have already been submitted that we are waiting to hear the award on.

As I indicated previously, based on our bids submitted and the total value of our pipeline, we fully expect that in 2006 our government business will continue to be a driver of internal growth. Additionally, with the integration of our most recent acquisition in January now complete, we will also continue to look at opportunities to make additional strategic and accretive acquisitions in the government communications and information technology market.

The downside to our quarter was clearly our international operations and specifically Latin America where we unfortunately encountered significant operational issues, which became evident during our internal quarterly review process.

For the quarter, our international operations generated approximately 23 million in revenue, down both sequentially and year-over-year. Revenues were significantly lower than we originally expected in part as a result of the negative impacts to revenue from contract adjustments, and in part because we made the decision to slow down our new site deployment work to limit our working capital outflow to Latin America.

As we have discussed on prior conference calls, we are constantly focused on balancing our growth rate with our free cash flow goals. Related to the contract adjustments, subsequent to the end of the quarter, we identified cost overruns resulting in a change in estimate on certain fixed price contracts and we determined that out of scope work and additional work had been performed without formal contract documentation and without formal contractual price increases, resulting in a reduction to gross margins of approximately 3 million.

We have taken corrective action and we are in the process of implementing a reorganization of our entire Latin America operations. Part of these corrective actions also include working closely with our customers over the next several months to obtain formal approval for the change orders and other contractual documents for the work we have performed.

So hopefully we will collect on part, if not all of these amounts in the future. Though at this time, we are not making this assumption in our forecast for Q4.

As a result of the issues just recently identified in Latin America and our need to re-organize our operations and make significant management changes, we are significantly scaling back on our near-term new site deployment plans in the region. While we still believe that there are abundant opportunities for growth in Latin America, as our two main customers, the two largest customers in Latin America continue to invest in the expansion of their networks, we believe that this near-term slowdown in our work is the prudent course of action.

This will result in a reduction of revenue of approximately 15 million in the fourth quarter from our prior forecast. Combined with the carrier enterprise deployment delays primarily associated with the hurricanes, we now expect revenues for the fourth quarter to be roughly flat with the third quarter.

Let me now turn the call over to Deanna to talk more about the financial results for the quarter and then I will come back with some concluding remarks.

Thank you, Eric. Good morning.

As Eric mentioned at the start of the call this morning, we reported revenues for the third quarter of 108.9 million. Our international operations in Europe and Latin America contributed 20% of our revenue while our domestic operations comprised the remaining 80% of our revenue.

Gross margin for the quarter was approximately 21%, while gross margin excluding the impacts of the 3.2 million in contract adjustments that Eric discussed previously, would have been nearly 23%. Operating expenses were in line with our prior guidance at 16.5 million.

Operating profit was 7.8 million and EPS was $0.08. Included in operating profit for the quarter was a benefit of 2.5 million related to the reduction of an excess accrual for contingent acquisition consideration, which was offset by the 3.2 million in contract adjustments in Latin America.

Operating margin for the quarter was 7.2%. Also included in EPS of $0.08 was a 900,000 tax benefit that was greater than expected compared to our originally anticipated statutory tax rate, resulting from reductions in the Company's tax valuation accounts.

Turning to the balance sheet, total cash, cash equivalents and short-term investments at the end of the quarter were approximately 16.5 million. As we indicated it would be on our second quarter call, our cash balance is down by close to 8 million from the end of the second quarter as a result of the use of working capital, primarily in Latin America, as well as 2.5 million in capital expenditures and half a million in earn out payments from previous acquisitions.

We expect this issue of cash to reverse itself in the fourth quarter where we expect to generate positive cash flow and to recover the cash used in the third quarter.

As expected and discussed on our second quarter call, our DSOs increased to 129 days from 108 days at the end of the second quarter, largely as a result of Latin America as well as to a lesser degree as a result of our U.S. deployment business, where we are in the construction phase on some of our larger turnkey deployment projects where contractually we are not allowed to invoice our customers until certain contractual milestones have been reached.

We expect to be complete with these milestones on a number of our projects in the fourth quarter and to be able to invoice our customers for the costs that we have incurred.

We expect our DSO number to once again decrease in the fourth quarter as we significantly scale back our Latin America operations and achieve contractual milestones on many of our deployment contracts and therefore be able to invoice and collect these amounts during the fourth quarter.

As Eric indicated, we expect revenues in the fourth quarter to be roughly flat with the third quarter, largely as a result of the hurricane-related cost issues that Eric discussed earlier. We expect gross margins to drop 1 to 2 points in the fourth quarter from a normalized third quarter level of approximately 23%.

This combined with our Latin America reorganization and the fourth quarter cost associated with the reorganization results in the EPS forecast for the fourth quarter of approximately $0.05 to $0.06.

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

Thank you, Deanna.

In summary, as those of you who know me personally can imagine I'm clearly very disappointed with the situation we recently discovered in Latin America. And disappointed that this affected what would otherwise have been an outstanding quarter for WFI.

It is frustrating because I believe that WFI truly is positioning itself for sustained, balanced revenue and profit growth. As I said earlier, we have already taken action to fix the Latin American situation and overall we continue to remain optimistic about our business, especially our domestic operations where we feel really good about our ability to continue to win new work and execute on our contracts.

Also as I noted before, we made considerable progress this quarter in executing on our strategic plan across all three of our business units and are successfully using our core competencies and customer relationships to develop new markets and new revenue streams, which we believe will also reduce the risk to our business model.

In summary, new business areas we believe to be growth areas for WFI in 2006 include but are not limited to United States government networking and communications programs, land mobile radio opportunities here in the United States, the municipal wireless broadband and security market, and IP and core networking solutions for our wireless carrier customers.

As a result of these new initiatives and the traction we have, we firmly believe that our growth trajectory is solid. That we are strategically positioned to take advantage of market trends in each of our vertical markets and that we have the fundamental structure in place to allow us to capitalize on these opportunities.

We are also continuing to focus on keeping a tight control on our SG&A, generating positive cash flow for 2005 and keeping our DSOs on our accounts receivable at the lowest possible level.

In closing, I want to thank our employees across our entire global operation for all of their hard work and continued commitment to our customers and our shareholders. I believe that you all understand how well-positioned WFI is in each of our vertical markets and that we are focused on building a truly outstanding organization. The management team and myself truly appreciates all of your continuing support.

Let me now turn the call back over to the moderator for questions.

Thank you, Mr. DeMarco. [OPERATOR INSTRUCTIONS] Our first question comes from Mike Ounjian of CSFB. Please go ahead, sir.

Hi, this is Jai Cupod in for Mike Ounjian. Can we get some color on how we should think of seasonality going in the March quarter? And can we also get the operating income by segment, please, for this quarter?

Sure, I'll handle the first one and I'll let Deanna address the operations by quarter.

Seasonality affecting the March quarter, as you know, a significant amount of the work that we do on the carrier side is concentrated on 7 to 10 customers. Typically their are capital budgets in a good portion of their operating budgets come out in this quarter in Q4, which would lead to, excluding any aberrations like any mergers or takeovers or things of that nature, that Q1 seasonally should be fairly strong for WFI because of our carriers in Q1.

On the government side, depending on the number of direct labor days, Q1 typically is a ramp-up quarter for us. We ramp-up from Q1 into Q2 and into Q3, heading into the federal fiscal year-end September 30.

And to answer your question regarding segment operating profit for the quarter, our wireless business was at 1.8 million, our enterprise business was at 3.8 million which does include the 2.5 million of earn-out of excess accrual that was reduced this quarter, and our government business was at 2.2 million for the quarter.

Our next question comes from Frank Marsala of First Albany.

Good morning, everyone. Got a couple of questions. First just could you give me the numbers on Cingular and Sprint< Can you tell me what they did with you in the quarter?

Yes, Frank, Cingular was at about 28 million and Sprint, Nextel was at 4.6 million for the quarter.

Were those your two biggest, did you say that?

Actually our second largest was Telefonica in Latin America at 9.9 million.

So, Telefonica was still pretty significant in the mix on a relative basis?

Yes.

As far as far as being a significant customer to you. Okay.

When you talk about pass-throughs for the quarter and minimizing those, how much would you say your revenues were impacted by the minimizing of the pass-throughs?

Revenues the previous quarter impacted a couple million dollars for pass-throughs where we consciously negotiated where our customers would handle those directly.

Okay. And then just, again, back to Telefonica for a minute. You've said, Eric, I think you said they are doing work or they seem to be doing work and you look at that as an opportunity. Are you missing an opportunity or missing out on an opportunity now as you scale yourself back while they apparently move forward?

Actually from a timing standpoint, even though this issue is significant to us and that's why we addressed it so quickly, we're fortunate that it occurred in these months because typically in Latin America with both Telefonica and American Movil, their new contract lets on their new work doesn't happen until January/February of the new year.

So, from a backlog standpoint, our backlog is intact, it's contractually in place. As I indicated we've just made the decision to slow down on the build and we've worked that with our customers, over the next few months, until the new management team gets up to speed to make sure that we continue to deliver on the quality basis that our customers are used to.

Have you, are you contemplating shutting down any of the things you're doing like outside of say, Mexico or anything like that?

No, we're not contemplating shutting down any of that at this time. This truly was a case, as we tried to explain, of the Company doing work that was requested by the Company.

We successfully completed the work, this is for the most part, where in today's environment the appropriate change orders, contract mods and price increase documents were not in place. And so the revenue could not be recognized which impacted both revenue and cost because it was negative cost hitting the income statement.

And as I indicated, we are already begun the process of pursuing these with our customers and we're hopeful to be successful the next couple of quarters in recovering it.

And how long before you think Latin America can resume growth as you said in the press release that you put out?

Hopefully sometime in the first half of '06.

And that would be year-over-year growth that you're talking about or sequential?

Year-over-year.

Year-over-year. Just, Deanna, again on the cash balance, did you say down by 8 million from prior quarters that would be 16, is that correct?

Correct.

And could you tell me what the cash flow from operations and free cash flow numbers were for the quarter?

Cash flow from operations for the quarter from continuing operations is a use of 6 million.

Uh-huh.

I'm sorry, what was the second question?

And free cash flow, as well.

I don't have that readily available here. The capital expenditures that we incurred this quarter are 2.5 million.

That's good enough. Okay. And let's see.

As you look into '06, Eric, looking at your government business, do you think of that business will become a bigger part of your overall business in '06? In other words, does that grow faster than the rest of your business?

Yes, that's -- I want to answer that question straight out, but let me give you some variables.

We, right now, on the commercial side, both on the carrier side and on the enterprise side with wireless municipalities, we have some very large bids out there. Extremely large, particularly on the carrier side, some of the largest that we've had in this Company since I joined the Company, and one of the reasons we were able to go after these now is WFI has gained additional critical mass, not only from a revenue standpoint, but from a personnel standpoint and capability standpoint, we're able to go after some very large procurements.

If we are fortunate in landing some of these very large procurements, it is very possible that our commercial business could grow faster than our government business in 2006.

On a normal, steady state type a plane, if we were not bidding on these very large jobs on the commercial side, if they weren't there, because of the backlog that we have in house on the government side and our bid and proposal pipeline, and the visibility we have today on the government side, which goes out several quarters, I'd say the government business would grow faster on an internal growth standpoint in a normal environment.

But hopefully we're going to win one or two of these very large ones in the commercial business, even though it's larger, could grow faster.

Uh-huh. And just the last question, as you look at '06, in total -- one of the presentations you made this quarter, I think you talked about targeting kind of 20% earnings growth. As you look now at your fourth quarter, earnings number and then looking to '06, do you still think that's a possibility? Or do you think that number needs to be brought in it?

As we sit here and we look out to '06 and if you take a look at our last three quarters here, we know that we have leverage on the operating income side relative to SG&A. We get leverage on our SG&A.

And what that means, hypothetically, if revenue were to grow 10% next year organically, organic revenue growth of 10%, EPS can easily grow by 15%. If we make an acquisition or two, which as you know is our strategic plan, make an acquisition or two a year, 20% EPS growth is doable for us. It is achievable.

Okay, thanks very much, guys.

Yep.

Once again, if you would kike to ask a question or if you have a follow-up question please press star one to signal. We'll take our next question from Seth Potter of Punk Ziegel & Company.

Good morning. Deanna, can you break out just Latin America and EMEA revenues from the international mix? Thanks.

Sure, Seth. Just a second. Our Latin America [stat] is 16 million and EMEA is just over 6 million.

And then just as you spoke about your deployment business and subcontracting revenues, can you give us an approximation of just what subcontracting is of your revenues just so we get a better understanding of, you know, as you do less of that business to make it more profitable, so we get a sense of what the magnitude could be in terms of revenue, lower revenues yet higher profitability.

Yes, Seth, we don't typically break out those pieces but as I indicated, as I said in the prepared remarks, we're looking at, as we look at the next two quarters ahead of us, it could be 2 to 5 million in any particular quarter if we're successful in negotiating with our customers to exclude these from our turnkey bid.

Okay. Okay. And then just on the contingent consideration, 2.5 million, is there any more detail on that? Or is that just from one of the acquisitions?

Yes, Seth, that was the result of an excess accrual we reviewed this quarter that was previously accrued related to a previously acquisition that was done in 2003.

Okay. Thanks. And then should we expect to see one-time charges I guess in the fourth quarter as you restructure Latin America? And if so, is that included in your EPS outlook?

We've included in the EPS outlook for Q4 the reorganization costs that we've identified and that we've already taken the action on them.

Okay, great. And then last question is related to the municipal Wi-Fi deployments.

You talk about Google and other potential large contracts. Just in general, in that business, my understanding is that deployment in that business, we'll call it more of a commodity type deployment. What's your expectation of the types of margin you would be able to obtain in that business and how it compares with your overall margin? Thanks.

Right. On the contracts that we've won and on the bids that we have in, the gross margins in every one of those are mid to high 20s and one of them is actually touches 30. On the gross margin side.

Thank you.

You're welcome.

We'll take a follow-up question from Frank Marsala. Please go ahead, sir.

I'm sorry, just two more questions. You just mentioned, Eric, about the reorganization numbers being in Q4.

Yes.

Do you or Deanna have what that amount is in the Q4 numbers?

Yes, Frank, it's roughly 1 million.

1 million.

Yes.

And just one last question. Recently one of your competitors announced they were making some changes to some of the contract terms that they were, with some of the U.S. carriers, where it seemed like they were minimizing some of the deployment work that they were doing and therefore minimizing some of the past, or similar to what you're doing. But have you looked at those changes? Is that something that you are contemplating right now?

I don't know exactly what our competitor is doing specifically. But specifically what we are doing and what we have been doing successfully for the past two or three quarters and which we're going to try to continue to do if not accelerate going forward is where there are pass-throughs, whether they be material pass-throughs or certain types of level of effort pass-throughs where we can put zero or very little fee on, only in material and subcontracting fee, we're doing the best that we can up front in the negotiations, to negotiate with our customers where we are not responsible for that as part of our turnkey effort. So, we will not get that revenue and we will not get that zero margin or very low fee margin.

That's strategically something we're trying to do because A, it positively will impact cash flow because we don't have to fund that work for the milestone term, which can be 90 to 100 days, and additionally, it can help bring up the overall margin rate of the Company because the other work that we're doing is the much higher margin work.

Okay, thanks again.

And we will take our next question from Tim Hasara of Kennedy Capital.

You know, you've missed your own earnings projections and revenue projections the entire year for three quarters now, and you seem to be optimistic about '06, saying if you can grow revenue 10%, you can grow earnings 15% and gosh, if we do acquisitions by this amount, we can do this amount. Clearly there's things out of your control when you do forecasting, other events, but these seem to happen all the time. Can't you factor those into your forecast or at least refrain from giving such optimistic forecasts that you can't meet?

Yes. We've learned this past year that for example, we sit here today and we're looking out for '06, based on the nature of good part of our business and I'll get into details on that in a second. That being 14 months out from the end of '06, it's too early to be giving any type of meaningful guidance.

But you did. You basically said if we can grow 10%, we'll grow operating income by 15%. To me, that's guidance.

That's right.

And so you must be really comfortable with that or have a handle or be able to discount some events out of your control. I mean why go out and give that sort of guidance? It's hard to believe any of the numbers you put out based upon what you've done here.

Right. This last quarter, as I mentioned, over 60% of our enterprise business is down in the southeast and the Gulf Coast. And a significant build that we're doing for of our carriers is in southeast Texas.

So where that work is in backlog and we're actually performing on it and because of something that is obviously out of our control, it stops it and it pushes it to the right. There's nothing we can do about that.

I guess my only point would be, I mean is there some way you can factor that into what you're saying? You've given projections here, people can model those in for '06. You've even given sort of expectations for your acquisition and what that will mean. Is there some way to be a little bit more conservative because you've clearly missed guidance all year here, every time you gave guidance.

Yes, you can rest assured that as we head into '06, the guidance that we give will be significantly calibrated. Calibrated is some extent that some people may not think it's credible because of these types of things that are both within our control and a lot of the time outside of our control.

You know, we are going to go through the list of everything we can as far as what we think could happen and some of the things, okay, what if they were to happen. How do we factor this? What if there were to happen.

What if one of the carriers is acquired because there's word out there that there may be another merger. What if there's another merger? How can that impact?

And then we have to take a look at all of those and try to see what makes sense, what we should factor in or whether it's just so conservative it just doesn't make sense to factor in.

Okay. Fair enough. And one other question, just on, I mean on your bid with Google, financially, where would we expect that business to come in from a margin standpoint?

Mid to high 20% on the gross margin side.

And there's a lot of other cities that are announcing RFPs or awarding businesses on the Wi-Fi similar to the San Francisco project. How are you involved on those? Are you bidding on those with partners? Or to what extent are you involved there?

We are, to my knowledge, on virtually every other city opportunity that's been public in the press. We are involved in every one of them to my knowledge, either as a prime bidder or as a partner with either a ISP or a content provider or an equipment provider.

So on the Philadelphia and Anaheim project, how are you involved there, the ones that have already been -- those two that have been awarded?

Yes, we, as you can imagine and if you take a look at how limited what we said relative to the Google announcement, we haven't disclosed anything on any of those and we won't until we can.

Okay. Thank you.

You're welcome.

And our next question comes from Dan Wimsatt of aAD Capital.

Eric, can you talk at all about a typical muni project, whether it's Madison or San Francisco? And just give us a sense for revenue opportunity. I mean what's the biggest, what's the smallest just so we can try and get a sense for that.

The other question, Eric, you talked about a couple new opportunities that you can't disclose right now, but again, I'm trying to get a sense for new business and trying to quantify just in round numbers, if nothing else, the revenue opportunities of new business areas you're going after that you're not currently spending a lot of time in. Thanks.

Sure. You're welcome.

On a city like a Madison, where it is contemplated that we will just be a pure services provider, where we're not prime, we have a partner, and a city of that size, our revenue opportunity there is anywhere from half a million to a million and a half, depending on the square mileage that it's going to cover.

On a opportunity like the city of San Francisco, and on an opportunity like that, pure services, not including any equipment pass-through or anything like that, again, assuming we're not the prime, it can be anywhere from 3 to 5 million.

On a city of that size where if we were the prime and we were going to, the equipment was not going to be procured directly by the municipality, it was going to be procured though us and then go up through us to the ultimate customer, it could actually be north of $5 million.

Okay.

And on the other part of your question, we are trying to be as forthright as we can from a competitive standpoint on the new areas where we are trying to lever our customer relationships of carriers and government agencies and our expertise, communications engineering, RF engineering with what is going on in the world and that is why we have come right out and stated our strategy as far as pursuing in a very big way for us from a discretionary dollar standpoint, going after IP, core networking, fixed network, back haul, things of that nature.

There are also a couple of other industries out there that are very, very large industries, where technology today is taking those industries towards wireless communications, RF communications. We have been very fortunate it this past quarter to have landed with one of the giants in this space for a very unique application that literally, a very unique service/solution application, that literally is applicable to dozens and dozens of sites throughout the United States.

We are not getting into any of the details on this at all for a couple of reasons. One, we're under an NDA, and two, we're not going to push that NDA because we want to get into and we're working to get into the other couple of, the other two large players in this industry, but hopefully lock it up competitively from an exclusive standpoint before we come public with it.

Thanks.

You're welcome.

At this time, that does conclude our question-and-answer session for today. I would like to turn the call back over to Mr. DeMarco for any closing remarks or additional comments. Please go ahead, sir.

Thank you very much.

As I said at the end of my prepared comments, I want to thank our employees for all they've done and continue to do and we'll be speaking with you again at the end of the next quarter.

Thank you, ladies and gentlemen. We do appreciate your participation in today's conference. At this time, you may disconnect.