Kratos Defense and Security Solutions Inc (KTOS) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the Wireless Facilities Incorporated fourth quarter 2005 and fiscal year-end 2005 earnings Conference Call. Your speakers for today are Eric DeMarco, President and Chief Executive Officer, Deanna Lund, Senior Vice President and Chief Financial Officer and Michael Baehr, Vice President of Corporate Communications and Investor Relations. [OPERATOR INSTRUCTIONS].

I will now turn the call over to Mr. Baehr who will read the Company's warning regarding forward-looking statements. Please go ahead, Mr. Baehr.

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.

We will begin with Eric and Deanna providing a overview of WFI's results for fourth quarter and fiscal year 2005, and then we will open the call up for your questions. If anyone has not yet seen a copy of our earnings release it's available at WFI's corporate web site at www.WFInet.com. Before we begin the substance of today's call I would like to remind the listeners that this Conference Call is open to the media and we are providing a simultaneous webcast of the call for the public. A replay of this call is available on the Company's web site this afternoon and will run through March 28th.

I also want to remind you 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 that 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.

With that as an introduction, I will now turn the call over to Eric and Deanna for a detail of our financial results for the quarter and full-year of 2005.

Thank you Michael. I would like to start out with the announcement that we made a few weeks ago regarding the sale of our Mexico business and the discontinuance of our Latin American deployment businesses. As you may know,WFI had two primary customers in Mexico. Telefonica, and American Mobiles, or Tel Cell, Which in 2004 accounted for over $60 million in revenues for WFI combined on a annualized basis.

Accordingly we had expected fourth quarter Latin America revenues to be approximately $13 million at about a 10% EBIT Recently, approximately 75% to 80% of these revenues were generated with Telefonica, as we had consciously moved the mix of our business more towards Telefonica, as this was a more profitable business for WFI.

Late in the fourth quarter of 2005, we were apprised by Telefonica that there would be two very important changes to the contractual terms, conditions, and practices under which we were operating which would significantly impact the vast majority of our work financially going forward. First, on a milestone payment term basis, Telefonica informed us that in the future, there will be little to no milestone payments paid to vendors on the progress of work performed, instead payments for work, which WFI performed, would be based on a site by site completion, or completion of contract method.

This change in contract terms would in effect mean that WFI would have to carry the receivables for all of the work that was being performed, which could be up to a year and potentially longer prior to collection of any cash. Additionally, they informed us that the pricing for any new deployment work that WFI performed would be determined by an e-auction process. An E-auction is a process whereby Telefonica performs an internet auction between all of its contractors, including WFI, where the opening bid is at a fraction of the target price set by the vendor, and the first contractor to accept that price is selected. We believe, that such an E-auction process would significantly reduce FWI profitability for future work, and subsequent to 12-31-05, the results of the first two E-auctions confirmed our fear in this regard due to significantly reduced pricing bid by our competition.

In fact the pricing accepted by our competition would have resulted in losses in the WFI operating margins. Accordingly, faced with these contractual changes, and changes in the pricing and payment processes, and taking into crucial the opportunities that WFI has in its carrier business, its enterprise business and its Federal Government business here in the United States, which I will discuss in detail later in this briefing, we made the decision to exit these markets in Mexico and Latin America and sell the business. From a short-term standpoint there of course is the impact WFI of the reduced revenues and profits to WFI resulting from the sale of this business.

We intend on replacing these revenues and profits through internal growth in our existing business, and through additional acquisitions in the federal information technology area over time. However, there is also an immediate and significant positive increase in WFI's cash resources available to pursue our strategic objectives of maintaining and improving upon our position as the largest independent RF engineering firm, and serving our customers here in the United States and Europe.

Furthermore, our ability to be more effective in growing our government business through strategic acquisition will also be directly and positive impacted by the exit of our deployment businesses in Latin America and Mexico for the same free cash flow reasons. We obviously believe that exiting the network deployment business in Mexico and Latin America at this time was the right thing to do for WFI. Specifically related to the sales transaction, WFI engaged the Lloyd's valuation group to assess the independent assessment of the valuation and to present to WFI's Board of Directors an appropriate fair value range of the business. Additionally, WFI conducted a formal sales process, utilizing an intermediary to run the process, whereby We approached what we believe to be most if not all of the potential interested parties for the businesses.

The process came down to two participants, both of which were private Companies, with the final participant decision being based on the transaction value but also the fact that the party which we sold the business to, agreed to assume all of the Mexico businesses liabilities, including approximately $13.5 contingent liabilities as part of the consideration. It's important to know that both of private Companies with much smaller infrastructure costs, since neither are required to maintain and comply with US public company requirements, such as Sarbanes-Oxley and other financial reporting stipulations. Therefore, with a less costly overhead structure, these Companies were able to react and adjust to the pricing pressures caused by the E-auction process, while still generating positive operating margins.

As we noted in the transaction release, we have already received the first cash payment on the approximate $18 million consideration and expect to receive the balance before the end of the year with installments due every three months. The cash proceeds are subject to adjustment for any net asset changes between 12-31-05 to the closing date, which we do not expect there to be any material adjustments at all. Moving on to the the quarterly operating results we announced today.

All operating results from continuing operations have been reclassified to represent the Mexico and Latin America operations that we exited as discontinued. The presentation for all prior periods to reflect the discontinued ops has also been reflected in the 2004 comparative results. Total revenues for the fourth quarter increased 7.2% and 94.8 million, up from $88.4 million in the fourth quarter '04. For the full-year revenues increased 12.3%, and $375 million in 2005 up from $334 million in '04. Domestic revenues increased 9% to $86.3 million for the fourth quarter of '04 and increased 14% for $337.7 million in '05 over 2004.

On the carrier side, revenues for the year ended December 31, '05 increased to $223 million, compared to $217 million for 2004, a year-over-year increase of approximately 3%. For the fourth quarter 2005, revenues were fairly flat at 54.7 million, as compared to 54.9 million on the carrier side for the fourth quarter. And decreased sequentially from revenues of 57 million for Q3 of '05.

Year over year revenues increased despite the fact that during 2005, there were two major consolidations of major carrier customers here in the United States. Those between Sprint and Nextel and Alltel and Western Wireless. We have discussed with you previously, when major carriers combine or merge, even though in the mid-to-long term, we believe such transactions provide additional opportunity for WFI in the areas of network integration, network upgrade, optimization and so on. There can be near-term unfavorable impacts to our business.

In spite of these two significant carrier customer mergers, we still were able to grow this piece of our business in 2005 over 2004. The sequential Q3 to Q4, '05 decline in revenue was related to a reduction of our work with Alltel/Western Wireless with our legacy Western Wireless program build starting to wind down now that this merger is complete. Some declines with Cingular and Verizon, related to certain specific programs. Carrier accounts where we realized increases in revenues of Q4 of '05 as compared to Q3, include '02. T-Mobile and partner work with Erickson.

As we know, slight fluctuations on any specific customer accounts can occur month to month and quarter to quarter, such as what happened with Cingular and Verizon, as timing between certain programs were completed and new programs when they were started in which such timing is not always completely consistent. Some specific areas where WFI performed during the first quarter include network deployment projects in the Georgia, Alabama, and Carolinas regions, and work in the Texas, New York, and I Illinois regions. E911 network solutions in the Northeast and Western United States. UMTS optimization work in various markets throughout the United States. EVDO optimization work in various markets throughout the United States.

In Europe we started to see existing UMTS operators initiate trials and start to deploy HSDPA. Also in Europe, there continues to be a steady amount of 2G network optimization opportunities. From a macromarket or industry standpoint, we continue to feel confident on our carrier business, based on certain key industry indicators. Wireless subscriber growth grew approximately 15% in 2005 over the previous year. Minutes of use also continued its upward trend, increasing 31% in the first half of 2005, over 2004, to 675 billion minutes of use. We believe that these are both very good indicators for WFI from a overall market standpoint as continued increases in numbers of subscribers and minutes of use per subscriber translate directly into additional wireless network usage, and the need for engineering services to maintain and optimize the efficiency of the networks.

Additionally, on a worldwide basis, our industry added 450 new mobile subscribers in 2005. Bringing the total number of global subscribers to approximately 2.2 billion. Directly related to this, in 2005 for example, Cingular, WFI's largest domestic customer, added 5 million subscribers and ended the year with over 54 million subscribers. In the fourth quarter alone, Cingular added 1.8 million subscribers. Also in the fourth quarter alone, another key WFI customer, Verizon, added over 2 million subscribers, as our industry experiences this increase in Wireless subscribers, the industry is also seeing strong growth in the demand for data services, measured here in ARPU, or average revenue per unit.

WFI's carrier customers are reporting year-over-year increases in data ARPU of 60% and 75%, which highlights the significant traction data applications are making in overall wireless use. Data applications such as text messaging, downloadable ring tones and e-mail and internet access and internet-based television, like Verizon's VCast service are continuing to add presence on the nation's Wireless networks which means increased opportunity for WFI. We'll talk a bit more about Mobile video, broadcasting and television opportunity in wireless in a minute.

Specifically relate to 3G, as is the case in Europe, an important trend that is finally materializing in the United States is the full arrival of third generation technology upgrades. For example, in 2005, Cingular launched 16 markets UMTS HSBPA markets, covering over 30 million people, and Cingular expects to launch many more markets in 2006. Additionally, both Sprint and Verizon continue to add 3G EDDO technology to an increasing number of markets here in the United States, and this is expected to continue throughout 2006. And into 2007.

Also, T Mobile, the United States fourth largest carrier, which is yet to initiate a 3G upgrade to its network, is expected to do so sometime this year, which will be expected to continue into 2007 and beyond. Additionally, to these potential catalysts for WFI's business. We continue to perform varying levels of consulting, engineering, planning and or design services in the following emerging or growing business areas. Network back haul and transport which is an area where WFI is providing solutions to our carrier customers to assist them in increased operating efficiencies and overall cost reductions. IP core networking and system engineering, Ymax and other alternatives for 4 G technologies. MVNOs, cable company initiatives, and alternative carrier initiatives. At the highest level, these are just some of the reasons we're confident that the overall wireless business environment related to the carrier networking business is robust, it is sustainable, it's growing and continues to provide opportunity for WFI. In addition to these catalysts, following are some of the other key trends and/or expectations occurring which WFI is already participating or planning on participating in in the future.

In building networking and distributed antenna systems for the enterprise in campus. If carriers continue to roll-out, adequate within the building or facility is important to the overall user experience. There is more and more utilization of Mobile devices for not only voice and basic data, but for e-mailing, messaging, Mobile search movies, news alerts and the like. We are also continuing to see the continued proliferation of more and more Wireless devices. Today there are nearly twice as many Wireless devices as there is personal computers. 65% of U.S. households.

As I alluded to before, Mobile television and broadcasting is one potential very large emerging business area in the Wireless industry. Today Wireless operators are fine-tuning their mobile TV line ups with collusive content and organic programming. For example some of the potential key players in this area include Cingular video, Verizon and V cast and Sprint TV. Additionally in getting television to the phone there are also new players entering the wireless delivery market.

For example, Roundcastle media which is looking to a major U.S. marketing. They are utilizing the digital video broadcast hand held network technology or DVBH which is a global standard in a technology that WFI is very familiar with. Additionally, wallcom with its media flow or forward link only technology, plans on offering TV broadcast cellphones sometimes in 2006. Trials in Europe have shown that broadcasting live events, such as news, sports, or concerts, to Mobile phones can be popular to subscribers and Mobile TV broadcasting is an emerging market area in providing value to our customers. Other areas of opportunity for WFI include IMS or the IP multimedia subsystem.

IMS is the technical framework that enables applications and media beyond voice to work on IP based networks. IMS though not significant with WFI today is an area where we are positioning to assist our customers to support IMS capabilities. An area where WFI is involved today is the area of location based services or L B.S. We believe there is a growing appeal of location based service as a s revenue generating business, a value added differentiator and a competitive tool and we see this going beyond basic L B.S. navigation. For example, gaming, entertainment, new media, precise location as well as tracking services are potential areas for next generation L B.S., all of which involved an enhanced network capability. It is possible that sometime in the future, navigating via the cellphone maybe the deferred place of choice. This is an area where WFI expects to continue to participate.

On the enterprise or municipal side, fourth quarter 2005 revenues increased to 17.8 million up sequentially from 16.1 million in the third quarter. Fiscal 2005 revenues increased 67.3 million up from 65.3 million in 2004. Growth of the ENS business continues to be driven by security applications. Wireless municipal opportunities and building and automation and safety applications and solutions. Our enterprise continues to be focussed on Wi-Fi and internet security. WFI's, ENS business is the second largest integrator in the United States. Related to this we continue to see public safety as a driver of municipal Wireless deployments.

During the fourth quarter, the ENS business unit performed work for a number of business enter price customers including the city of Tucson, Westfield shopping centers. The Georgia World Congress center and certain other high profile clients which we are unable to name right now due to the nature of the work. Each of these system deployments include some type of security application. Additionally, over the past several months, we have started to see, what we believe is very important interest in Europe for 80211 technology and other enterprise based solutions including security applications as we work to expand to other markets in Europe.

Closing on our commercial businesses, we believe that the commercial Wireless market continues to be gtowaing diversifying and ever-changing marketplace. Recent GMI polls asked consist measures what technology they believed would impact they're lifestyle in the coming year and Wireless topped the live. Some of the examples were Wi-Fi, internet capable PDA's and Wireless. Excess of 70% of WFI's business base. And we believe, based on our presence, as the largest independent U.S. Wireless engineering firm and the growing industry dynamics some of which I have continued above that this will continue its profitable growth trajectory.

Moving on to our government division, and our federal government information technology business. Revenues in the fourth quarter of 2005 increased to $22.3 million up sequentially from $21.4 million. Revenues for the year-ended 12/31/05 were 85 million, up from 51.6 million for the year-ended 12-31-04, which included the TLA acquisition in January '05. In our government division we're building what we believe to be a solid federal government based networking and information technology business. During the 2005, major customers and work performed included work with the defense logistics agency. For the year-ended December 31, 2005, our government division generated approximately $8 million in revenue with important customer.

At the DLA we are performing network design, network implementation and network maintenance worldwide. Additionally, we are supporting the DLA's primary network management center. During 2005, we also performed approximately 8 million of work for the defense Contract Management administration or DCMA. For the DCMA, WFI performs network design, network management, network implementation and network maintenance worldwide. Additionally, we are currently developing web-enabled software to assist support of the DCMA network operating center.

Another key contributor to our government business is WFI tactical survey, video-based mapping, and 3-D technology solution also generated approximately $8 million in revenue during 2005. This is a solution where the first responder type application, is being provided to high priority and strategic buildings and assets for the Department of Defense and Department of Energy.

Our focus continues to be on diversifying our revenue base which has resulted in our government business generating 23% of our fiscal year 2005 revenues compared to 15% revenue generated for 2004. Our bid proposal and potential target pipeline of 500 million, continues to grow as we focus on a larger procurements with the DOD, Department of Homeland Security and other federal agencies. Once again, building WFI federal IT business is a key strategic priority, as high barriers to entry, long-term contract terms and the nature of the work will provide WFI an overall more predictable financial foundation.

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

Thank you, good afternoon.

As Eric mentioned at the start of the call, This afternoon, we reported revenues for the fourth quarter of 94.8 million, compared to 88.4 million for the fourth quarter of last year. As expected, our revenues were relatively flat sequentially from third quarter revenues of 94.5 million.

As Eric stated previously, the operating results of our discontinued operations for all current year and prior year results have been reclassified as discontinued operation and therefore any revenues, gross margin and operating income generated from these operations is now reflected in the single caption income or loss from discontinued operations. As all of the current year and prior year operating results have required to be reclassified as discontinued operations and therefore both our current auditors and prior auditors need to be involved in the review of the presentation of the Latin American operations as discontinued we anticipate we will file a form 12 B 25 to extend our deadline for our 10-K to March 30, 2006. We are working closely with our auditors to file prior to that date.

Our international operations in Europe and remaining engineering operations in Brazil contributed 9% of our revenues. While our domestic operations comprised the remaining 9% of our revenues. Some of our significant customers in the fourth included, Cingular at 26 million or 27% of our revenues, the U.S. Navy at 9.4 million for just under 10% of our revenues, Sprint Nextel at 3.9 million, O2 at 2.8 million. Alltel western Wireless at 2.6 million and Verizon at 2.6 million. Our top ten customers accounted for 59.1% of our revenues for the fourth quarter, which was down from 68% in the third quarter.

For the full-year of 2005, our significant customers included, Cingular at 98.8 million, or 26% of our revenues. The U.S. Navy at 33.6 million, or approximately 9% of our revenues. Alltel Western Wireless at 22.5 million, Verizon at $14.5 million, Nortel at 14.3 million and Sprint Nextel at 13.3 million. Our top ten customers comprise 62% of our full-year FY '05 revenues down from almost 64% from the prior year. As we move into 2006, we currently expect Cingular, the U.S. Navy, Verizon and Sprint Nextel to remain in the list of top customers for WFI with Erickson potentially joining the list.

Gross margin for the quarter was 22.7%. Operating expenses were approximately $19 million, which includes $400,000 in consideration, and depreciation and amortization of $1 million. Excluding the depreciation and amortization, operating expenses were $17.5 million up from the approximate $16.6 million expected for the quarter. The increase was due primarily to increased audit and proxies, and to a lesser degree, due to legal fees that were unanticipated. Operating income for the first quarter was approximately $2.6 million profit compared to 4.9 million in the fourth quarter of fiscal 2004. Reflecting a reduction in gross margin of 25% in the fourth quarter of 2004 to 23% in the current year.

The reduction in gross margin year-over-year is primarily a result of increased pricing pressure in the US that we have discussed on previous calls. Income from continuing operations was 1.6 million, or $0.02 per share compared to 15.7 million or $0.21 per share in the fourth quarter of 2004. The income from continuing operations in the fourth quarter of 2004, was favorably impacted by a tax benefit of $10.7 million which increased income from continuing operations dollar per dollar and was a effective tax benefit rate of 214% compared to a provision rate of 38% in the fourth quarter of 2005.

Our tax rate in the fourth quarter was negatively impacted by the 400,000 of contingent acquisition consideration, which is not deductible for tax purposes and we are unable to recognize any benefit for this item. Excluding the impact of the contingent acquisition consideration, and normalized impact, our income was continuing operations was approximately 1.9 million or $0.03 per share on a diluted basis.

Net loss for the quarter was 3.4 million or $0.05 per share compared to net income of 12.3 million or $0.16 per share in the fourth quarter of 2004. As our press release indicates, we also announced today that we would be revising our previously recorded second and third quarter results to reflect the accounting impact of the cancellation of sites by our customer in Mexico for those quarters. Senior Management, as well as the audit committee recently became aware of communications regarding these cancellations after the replacement of certain managers in these operations in the fourth quarter of 2005. The Company had an agreement with this customer to build these sites, the terms and conditions did not provide recovery by the Company of costs incurred on in process cites in the event of site cancellation unless agreed to by the customer.

The financial impact of these adjustments which will be reflected in amendments to our previously filed 10-Qs aggregate to a reduction of $4.8 million in revenue and $1.3 million in net income for the combined prior two quarters. 1.3 million in net income for the combined prior 2 quarters. These have resulted in a reduction of 1.3 million to the previously estimated 5 to $6 million contract loss that we had estimated for the fourth quarter in our press release in February. Included in the net loss for the quarter was a loss from discontinued operations of 5 million for the fourth quarter of 2005, compared to net loss of discontinued operations of 3.4 million in the fourth quarter of 2004. The current quarter loss was primarily a result of the write-off of unrecoverable contract costs that we incurred to build and process that were canceled in fourth quarter by our customer in Latin America and Mac Intel.

For the full-year, revenues increased 12.3% from 334.2 million to 375.3 million. Operating income increased from a loss of 1.9 million in 2004 to income of 17 million. Included in the 2004 results was a $13.9 million expense for contingent acquisition consideration compared to a credit of $2.1 million in 2005, for earn-out amounts that were seen to excess. Net income increased from 5 million or $0.07 per share in 2004 to 8.9 million or $0.12 per share in 2005. Included in net income was a loss from discontinued operations of 2.8 million in 2005 compared to net income from discontinued operations of 9.4 million in 2004.

Revenues generated historically from the Latin American operations that we discontinued were approximately $63 million in 2004, and $42 million for 2005. Revenues generated from our continuing operations have increased from 228.5 million in 2003 to 334.2 million in 2004, to 375.3 million in 2005. Our 2005 revenues by operating segment were 223 million, or 59% from our wireless segment, 85 million, or 23% from our government segment, and 67.3 million or 18% for our enterprise segment.

Turning to the balance sheet, total cash, cash equivalent and short-term investments at the end of the fourth quarter were approximately 13 million. Our cash balance is down from approximately 15.3 million from the end of the third quarter, primarily resulting from cash from the Latin American operations in the fourth quarter. As expected, and discussed in the third quarter call, our DSOs decreased from 107 days at the end of the third quarter to 105 days. This was expected as we were in the the scrubs phase where we have now achieved certain contractual mile stones. We believe the exit of our Latin American business will improve our cash flow to be able to fund growth for our domestic, commercial and government operations.

For fiscal 2005, our continuing operations generated approximately 18 million in cash flow from operating activities compared to 10 million of cash for businesses that we have discontinued. As Eric mentioned, key strategic focus of our Company is to not only build a profitability growing business but one that is more predictable as well. Though we are for expecting WFI to have revenue and profit growth in 2006, along with generating free cash flow, we have made the decision not to provide either quarterly or annual financial guidance as we move forward.

This is nothing to do with the fundamentals of the business or our expectations for profitable growth going forward. Rather, as we have experienced this past year, our expectations at the timing of certain projects, events, milestones or programmatics do not match our customers actions on a month to month or quarter to quarter basis. Accordingly, we will not be giving near term financial guidance at this time. Today we have cash on hand of approximately 10 million and approximately 7 million drawn on our credit facility, which was drawn solely to fund acquisition earn out payments that we made in early March.

We have one remaining earn out payment related to these acquisitions that will be paid in the second quarter. Therefore the earn out payments that we have been making since 2004 related to the acquisitions that we made in the enterprise segment will be complete by the end of the second quarter. We expect that cash flow that we will generate in the next few months will be utilized to pay down the amounts drawn on the credit facility, and we are comfortable in the expected growth going forward.

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

Thank you Deanna. Well we are profitably building the business. We are going to continue to focus on things that we can directly control in order to improve our financial performance, like the majority of our SG&A costs. 2005, SG&A as a percent of revenue was 18.4% including some very high-costs in the legal area and auditing and SOX areas. With auditing and Sarbanes-Oxley being higher than the quarter just ended.

The securities class action suit now just dismissed and remediation efforts we have been taking in the SOX issue areas, we expect costs such as these to be lower in 2006. Additionally, over the the past few months, we have made operational changes to improve efficiencies and further reduce SG&A costs, including for example, the combining of certain support functions like recruiting directly with the operating units.

As you know, our ultimate goal it to successfully and profitably build this Company and its value. Consistent with this goal, and as Deanna mentioned over the past two years we have grown WFI revenue 64% from approximately 228 million in '03 to 334 million in '04 and to375 million for the year just ended 2005. We expect this growth trajectory to continue. I want to also mention, that as we have grown our revenue base, we have been working towards a key strategic objective, market diversification within our core competencies. Specifically over the past two years we have diversified our business to include 23% for our federal government business and 18% for our enterprise business and our municipal wireless business.

The final thoughts that I want to end with in summarizing With the sale of the Mexico business along with the existing business, except for engineering business in Brazil, we have now she had our biggest risk from a execution standpoint throughout WFI. Today WFI is over 90% domestically focussed here in the United States in two principal markets. Commercial Wireless networks, federal state local government networks and information technology. Our international business is now limited to approximately 10% of our overall Company, focussed primarily in western Europe.

As we look farther out into 2006, we anticipate that our federal government information technology business to be just under 25% of WFI's overall business, assuming the business base that we have today. As you may recall. Some of the key reasons WFI has been diversifying into the federal government market are higher barriers to entry and security requirements and most instances. Longer term contracts that are typically 3 to 5 years in length. Higher levels of predictability. As our government business becomes a larger component through WFI, we believe these characteristics will provide WFI with the more predictable and sustainable business model with reduced risk.

As we build this business, we plan to maintain our focus on making significant inroads with the Department of Defense, the Department of Homeland Security, and the overall Federal Information Technology or Federal IT market. In our commercial business, in addition to be focussed on maintaining and expanding, one of the largest consultant RF engineering or wireless Companies into the Wireless carriers in the U.S.

We're going to be focussed on the following areas. Be focussed on the emerging technologies such as EBDO, UMTS and Ymax. Which I stated will provide attractive opportunities now and into the future. Continue to focus on back haul and transport which helps our carrier customers improve their operational efficiency, reducing the costs. Continue to focus on the various opportunities in municipal Wireless, Wi-Fi, enterprise areas with a specific focus on security applications for these environments. And continuing to focus on high value added tool solutions, like Route Watch. We fully believe that with this kind of focus, and with these very clear priorities we'll successfully and profitably continue to build the Company. Bottom line, we are executing on our strategic plan and will continue to grow the Company at higher margin lower risk areas.

One additional positive development I would like to note relates to the class action lawsuits filed against WFI in 2004. Just this past Friday, we were informed that the judge had granted our motion to dismiss the case. The plaintiff's attorneys are permitted to amend the lawsuit and try again but we believe this decision will make it much more difficult for the plaintiff to prevail against WFI. I personally look at this as very good news for WFI and WFI shareholders.

In closing, let me emphasize that WFI continues to keep its eye on the future with a robust pipeline and industry dynamics that very much support our business model. I would like to take this opportunity to thank our shareholders and talented employee base. We are making significant progress in growing our business and reducing risk and positioning ourselves for greater predict ability and growth. We look forward to continuing to grow WFI in 2006.

Thank you, and now I will turn it over to the moderator for questions.

Thank you sir. [OPERATOR INSTRUCTIONS].

We'll take the first question from Mike Ounjian with Credit Suisse.

Thanks. Eric, I know you're not giving guidance but, could we at least for Q1 could we talk a little bit about some of the trends you're seeing in the business, and anything going on we should be aware of to make us think anything beyond normal seasonality. What might some of the moving pieces about quarter and in terms of looking at the OpEx going forward, how should we look think about the trend there. It's been higher for a number of quarters given audit and legal related expenses. Is this the higher level we should expect for some time or will we expect this to trend down an what should we expect in terms of cash flow in Q1 given that you had Latin American operations for most of the quarter. Should we expect that to be more limited improvement in Q1 than in Q2 we should look for cash flow to improve?

First I will start Mike with the seasonality. Since you brought it up. As you know, with carrier budgets, being generated in the fourth quarter and being finalized early in the first quarter, typically the latter part of the first quarter and the early part of the fourth quarter are slower for us on the carrier side as things are advertised in February and March. That's a seasonal part of our business, the carrier business and things typically from a market standpoint start to accelerate for us in March and on out.

From a -- putting the seasonality piece aside that I just mentioned, from a market trend standpoint on the engineering service side, we continue to see lots and lots of opportunity. Many opportunities. The challenge that we continue to have that we talked about last year, and will probably continue to talk about this year, is being able to satisfy all of the opportunities that there are out there which we just cannot do, because it's very difficult to line up the exact resources with the exact experience, with the exact technical modality at the exact point in time.

That continues to be one of our biggest challenges, it's not necessarily the lack of opportunities out there. It's obtaining the resources in the high end areas. UMTH. DVDO, some of the things going on in the demanding area where it's not necessarily new technology it's older technology. We're trying to get resources that have that experience that want to get back into those older technologies. It's matching up the resources with what is going on in the industry. So those are challenges that we're facing and we're continuing to focus on the resourcing side.

So from a overall engineering services side on the carrier side, market looks continues to look robust as I said in the prepared remarks. On the government side, as you know, the -- it's a much firmer backlog type of business, not so much book and burn, so on the government side, taking into consideration seasonalities around the government fiscal year. Which is September 30. Typically the two strongest quarters for government contractors on the federal IT side are calendar Q3 and calendar Q4, which surround the federal 9-30 year-ends. As Companies like us head into the fiscal third quarter, the government agencies want to use up whatever funding they have to be sure it's not limited into the next year and when they receive that funding in the new fiscal year, their new federal fiscal year, our fourth quarter, they're left with money to spend.

Those are typically the strongest numbers, it comes down a little bit in Q1, then up it goes. That's from a industry standpoint. On the enterprise side, there is some seasonality, there as well, we have seen that in the past, Q4, as Q3 and Q4 have been stronger quarters than Q1 and Q2. Those are things we typically tend to see. There are opportunities out there on the enterprise side, specifically and particularly in the security area. Security system integration. Whether it be Wireless CCTV, cameras or other types of motion detector,s opportunities are there.

Now moving on to your question on operating margins and operating costs. Yes as I mention and as deAnna alluded to, in the fourth quarter we continued to struggle with auditing and accounting, external auditing and accounts and SOX costs we had not budgeted enough for. I know from reading many transcripts out there. We're for a smaller mid-size Company like us in the first year or two in the compliance process for SOX it's not unusual to have these types of costs or surprises, as I mentioned the finance team here has done what I think is a magnificent job of remediation over the last year, remediating issues and continues to significantly limit the number of SOX issues or internal control issues or deficiencies or the various terms that they use. We expect now clearly with the sale of the Latin American business or significant amount of costs there were related for these to be more normalized.

Lesser, lower going forward. We have taken the risk out. We have done a lot of remediation and put the infrastructure in. Similarly on the legal side, before we , are a piece of the legal bill, we had to pay the initial fees. The insurance Companies came in and started kicking in the later of the year. We had to pay at the beginning of the year. We're expecting that hopefully this will be the end of it and the legal costs will subside as well. And I mentioned some operating moves that we have continued to make trying to move with the market, not from a reorganization standpoint but from a combination of back office functions with the operating groups to try to bring down the SG&A and improve the operating margins.

And in terms of the cash flow?

Yeah. On the cash flow side, as you know, we're not going to give guidance going forward, but as a Deanna allude today, in 2005, cash from operations was 18 million and change. Cash used in the discontinued the sold business was 10 million, add those together it's 28. In addition to that we're going to be receiving the cash payments receipts for the sale. DSO's continue to come down.

So net as Deanna mentioned we're comfortable with the cash position and comfortable we're going to continue to generate cash. It can always be impacted by the nature of deployment work and the timing of milestones. But overall you smooth out the quarters, we continue to expect this Company to generate cash over the long-term.

Great, thank you very much.

Thank you.

Our next question comes from Dave Kang with Wells Capital.

Good afternoon. A couple of questions first. Could we expect any kind of a potential disruption from Cingular due to the merger between AT&T and BellSouth, and Deanna maybe you can talk about stock compensation for 2006.

Right, I'll take care of the first one. Dave. At this time, we are not seeing any indices at all of any disruption relative to that merger at all.

And Dave, this is Deanna to answer your question, regarding stock compensation, in accordance with FAS123R. We are in the final processes of estimating those numbers. We have engaged an outside valuation expert to assist us in that process. We have not completed our analysis. We are close.

Okay. Fair enough, and then, Eric, just last question, can you just go over your IP strategy, can you just give us a little more color or more specific cases perhaps?

I have specific cases, I don't want to get into specific customers because I'm not sure specifically of the nondisclosures we have. Let me talk about the strategy.

The strategy is two-fold. One, is related to the back haul, and transport area of the business. Where we are seeing significant growth, and that back haul and transport area of the business has been and continues to dove tail directly into IP. And IP solutions. That's an area we're trying to exploit the IP part of it as we bring more optimized and cost efficient back haul and transport solutions to our carrier customers. On the other pronged approach, we -- as we initiated last year, we are through consultants that we are utilizing and internal resources, we are starting to a very small IP group which is combined with our back haul transport group.

We have certain OEMs, we have successful thus far in placing handfuls of IP engineers to help them with the ultimate customer on the IP solution. We are now starting to get traction in both of those areas relative to IP.

Thank you.

[OPERATOR INSTRUCTIONS]. And we will go to Seth Potter with Punk, Ziegel & Co.

Good afternoon. First, what was the number of employees at the end of the year?

Seth, on employees, do you want, we have employees and subcontractors, which we includes in employees, okay?

I'll take them both that would be great.

Sure Seth, at the end of the year it was 2200. In total employees.

Okay.

That's actually all the data I have.

And its somewhere Seth on the subcontractor side, it's somewhere between 130 and 150.

That excludes Mexico and the other Latin American business.

Yes that's the continuing business.

Actually it's the total of subcontractors that we had was just under 150.

Great. And then, on the SG&A, absolute numbers, is there anything that is being pulled out of there from the Mexican business, you talked about the increase in related costs of compliance and all of that. What was pulled out if anything from the Mexican business?

The accounting rules are specific as far as what can be assigned or presented in the discontinued operations. So, it's only directly specific charges, as far as -- obviously the administrative structure in Latin America, certain legal expenses that are incurred specifically for that business, related to that business, but as far as general allocations of corporate overhead that's not permitted in accordance with the accounts rules. It's only specific identification of actual costs that are incurred for those businesses.

I'm just looking at last quarter, the total employee count was about 2800 if my notes are right. So clearly, there is a decline, the decline is probably due to Mexican business getting out of that. So why aren't we seeing, why wouldn't we see a bigger reduction I guess, if these employees aren't there or am I looking at it the wrong way?

If you think about the infrastructure we have in Latin America, it's a very lean organization. The SG&A costs are not significant. That's something we have talked about in the past. Although the gross margins have historically been lower than what we would see in the U.S., the overall EBITS were fairly good because of the low SG&A infrastructure. As far as from a SG&A standpoint that you would expect to see a significant reduction from the discontinuance, you would not see that. Although the head count is fairly high, the dollar, the salaries are very low.

Right. Okay and is there a comparable employee count for -- for third quarter, is this the 600 left for third quarter or last year's fourth quarter.

Sure, yes, the comparable would be, actually about even, as far as on the total employees as well as the total subcontractors for the prior quarter.

Okay great. Thanks a lot.

Sure.

We have a follow-up question from Dave Kang. Go ahead, please.

Yes, I just have questions regarding depreciation and amortization. Did you give that number? I must have missed it.

Yes I did it was 1 million for the first quarter.

That's included in the 18.5 million?

Yes it is.

Great thank you.

There are no further questions at this time. I will turn the call back over to our speakers for additional or closing remarks.

Great thank you very much. We will hold a similar call again at the end of Q1. Thank you.

Thank you and again that does conclude today's conference call. We appreciate your participation and you may now disconnect.