Kratos Defense and Security Solutions Inc (KTOS) 2006 Q2 法說會逐字稿

Welcome to the Wireless Facilities 2Q 2006 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to the Vice President of Corporate Communications and Investor Relations, Mr. Michael Baehr. Please go ahead sir.

Thank you. Good afternoon. Thank you for joining us. With me are Eric DeMarco, our President and CEO and Deanna Lund, our Chief Financial Officer. We will begin Eric and Deanna providing an overview of WFI's results for fiscal 2006 and then we will open up the call for your questions. If anyone has not yet seen a copy of the earnings release it is available on WFI's corporate Web site at www.wfinet.com. Before we begin the substance of the call, I would like to remind our listeners that this conference call is open to the media and we are providing a simultaneous Web cast of the call for the public. A replay will be available on the Company's Web site later this after afternoon. I also want to remind you, today's comments include forward-looking statements about our plans and expectations of future performance. These plans and expectations are subject to risks and uncertainties which could cause actual results to differ materially from those suggested by our forward-looking statements. We encourage all of our listeners to review our SEC filings including our most recent 10Q and 10K for a more complete description of these risks. In addition, this conference call will include a discussion of non-GAAP financial measures as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the Company's results prepared in accordance with GAAP are included in the earnings release which is posted on the Company's Web site. With that as an introduction, I will turn the call over to Eric and Deanna for detailed review of our operational and financial results of the second quarter.

Thank you, Michael. During the second quarter, WFI demonstrated progress in several of our strategic focus areas as we continue to transition and diversify certain areas of the Company. Additionally, each of our commercial businesses showed improved margins and profitability over the first quarter. In the wireless network services business, one of our primary areas of focus in attempting the transition our engineering services and consulting business from being predominantly RF staffed augmentation to other higher margin less competitive service areas. For the second quarter just ended, domestic non-RF engineering revenues were approximately 31% of the revenue compared to 16% for the second quarter of 2005 and also up sequentially from approximately 29% for the first quarter of 2006.

This directional shift indicates that the technical consulting group within WFI's wireless division is obtaining traction with its focus on delivering advanced technical consulting to an increasingly diverse group of customers including wireless and wireline customers, satellite communication providers and content providers. This area of our business is starting to attract a number of potential new providers and customer entrants who require engineering and technical consulting across a broad range of technologies most of which leverage the expertise we have already deployed.

This is the initiative where our strategy is to move the business more toward what we believe to be the potentially large and growing consulting IP, LAN, mobile, radio, fixed network, back haul and transport engineering markets. We understand that growing the business of these potentially more profitable areas and having a meaningful impact overall may take some time because the majority of WNS's core competency still resites in RF. However, we are committed to executing this transition as quickly as possible and we are optimistic based on the initial result we are seeing.

One example where we are seeing solid opportunity for high end consulting is in the 4G and Wi-Max areas where we are currently under contract including 4G work with the large national carrier. At the moment we are seeing little to no competition in the new focus areas from what has become an our primary competitor, the small mom and pop engineering firms, and we believe we can achieve higher gross margins with this strategy. The primary reason we believe that we are able to differentiate ourselves from the smaller engineering companies is the training, the resources and leading edge technology focus WFI can bring to bear with our engineers and our customers which this competition cannot do.

Additionally, as we discussed in our last call, we believe a valuable differentiator and a significant competitive advantage is to provide a bundled solution in response to our customers' request for an innovative turnkey end to end solutions that can help them to remain competitive and reduce costs. We have demonstrated this concept most recently with connective solutions and route watch product by offering this diagnostics tool to our customers to help decrease costs and increase operational efficiencies . We have also introduced other bundled solutions to our carrier customers over time and this has been very positively received and therefore, we believe there is a real opportunity to provide these services in response to our customers' requests. By bundling tools and services such as this, WFI can leverage with a distinct advantage derived from our long term in the industry which we call our domain expertise. This is a result of the familiarity with the leading global carriers stemming from our long history and experience with the customers. Our engineering capabilities and the trust we earned with the customers and the multiple channels and distribution we have access to. By utilizing this domain expertise to our advantage and with the partnerships in place. we believe we can bring a cost-effective added solution to WFI customers. Once again a solution that the mom and pop engineering firms cannot match due to the limited size, scale and breadth, and resources particularly at the national level and in the technical sales and business development areas. This is an area of our business we are actively pursuing and an area you will hear more from us about in the very near future.

As we look ahead WNS has been very focused over the last several months on the advanced wireless services spectrum auction which is scheduled to be kicked off tomorrow. During the proceedings, the FCC will be auctioning off spectrum that can be used for a variety of wireless services. Including, Third Generation, 3-G Mobile Broadband, 4G and other advanced wireless services. This AWS auction is a major event for the entire wireless carriers industry with both incumbent wireless carriers and potential new wireless carriers planning to participate. In the auction, 1122 licenses will be auctioned and allocated within the spectrum covering the 1710 to 1755 and 2110 to 2155 megahertz bands. A total of 90 mhz of newly available spectrum.

To put this in context, you might recall in the mid 90s the FCC auctioned wireless spectrum which ignited a whole round of investments, innovation and industry players. However, in comparison tomorrow's auction is expected at this time to be the largest block of wireless spectrum to come up for auction in the U.S. ever. Beyond the wide range of new and advanced wireless services this auction may spawn, the results of the auction can create potentially two new national carriers roughly the size of Verizon Wireless, for example, but perhaps of a different flavor than we are accustomed to today.

Currently, just over 250 entities have applied to be included in this auction, of which we have recently learned, there are approximately 170 officially qualified bidders. For WFI, any time an investment is made in wireless spectrum it can provide the Company with a business opportunity for our services and solutions. We believe WNS has established relationships with or is working with many of the expected major participants in the AWS auction both traditional and nontraditional bidders. We are hopeful a successful auction will renew opportunities to WFI with both existing customers and new customers. However, let me balance my optimism by emphasizing that we will not know what will happen because of the auction but we have been very actively positioning WFI to take advantage of the opportunities that may arise from the event. Additionally, WFI is also starting to focus on a second huger auction whereby the upper portion of the 700 megahertz band will be auctioned off as part of the transition strategy to move from analog to digital television. This spectrum is expected to provide more opportunity for advanced wireless services as well as communication services for first responders and we have already begun discussions with certain expected participants in this auction.

Within the WNS deployment group, we are continuing to try to reduce the amount of higher risk turnkey firm fixed price contracting that we do in higher risk markets, by being selective with the projects while focusing on lower risk areas and modular work. We continue to believe that with the right business risk we can be successful in the deployment area generating positive growth and pretax income for the business. We believe that we are heading in the right direction with this approach with the second quarter's gross margins improving over the first quarter's. Deanna will walk you through one major, national program that we are currently working on in the deployment program later in her prepared remarks.

Finally in the carrier industry, there are several significant events over the past several months. We are obviously seeing the continued consolidation of the wireless industry which arguably started at the beginning of 2004 with the Cingular AWS merger. This consolidation continued on the carrier side with the Sprint Nextel and Altel Western Wireless mergers. Most recently we have seen the consolidation which has effectively, reduced the major wireless carriers in half begin reaching into the vendor market with the Alcatel Lucent, Nokia Siemens and ADC Sanders announcements. Obviously this wireless industry consolidation has produced quite a challenge for WFI and similarly the other OEM vendors. However, we are committed to navigating through this industry activity successfully with the WNS strategy we have laid out along with what could be a host of new opportunities and potentially even new major wireless carriers out of the AWS auction and later on the 700 megahertz ban auction in the future.

Additionally the FiberTower and First Avenue network as well as the Motorola investment in Clearwire are both transactions we believe could lead to new opportunities for WFI. The FiberTower and First Avenue Network is an acknowledged leader in back haul transport services. As I mentioned in the past. We believe the area of back haul can provide opportunity for WFI and at present, WFI is under contract currently and in performing a significant amount of work with FiberTower. Clearwire is focused on and is an acknowledged leader in Wi-Max and pre Wi-Max on a high-speed Internet phone service, and it is also a current WFI customer. These transactions are, we believe, paving the way for enhanced solutions for carriers and new network technologies that may ultimately provide opportunity for WFI. So in summary, for WNF with our focus on higher-end consulting solutions, back haul and transport gaining traction, and two very large wireless spectrum auctions occurring in the near future, we have reason to be optimistic on our prospects as we move forward.

Moving on to the enterprise business. As I reported in the last call. We focused on the business management following the completion of the three year acquisition earn out periods and following some earn out related employee issues we experienced in the southeast and southwest offices in Q1. I can now report that we substantially completed the rebuilding of the management, sales and business development teams in these two regional offices with the addition of several qualified team members. Following are the bios of certain new executives which ENS were fortunate to have join our team over the past several months.

In our Atlanta office, Steve Corey [ph] joined as general manager. Steve was previously at Simplex Grinnell as VP of International Operations and at Johnson Controls overseeing the fire and security based programs. Steve has a decade of experience with security, fire alarm systems, security systems and building technologies. Steve has hired a team of experienced managers who have previous experience at companies ranging from General Electric, North American Video Corp., ADT Security, Madison Financial, Hewlett Packard, MCI and Scientific Atlanta. Together, the new management team in Steve's Atlanta office are highly qualified in the areas of security and surveillance systems, fire alarms, building management systems and wireless LAN and WAN networking. In our Houston office we brought on board Mike Madden [ph] as general manager. Mike has over 20 years of general management success throughout the United States in building automation, security, life safety systems and HVAC industries. Mike has extensive profit center and leadership experience with both MCC Powers, which is now Siemens Building Controls, and ADT security systems, as well as a strong facility systems background in the south and north Texas market places. Steve has assembled a strong team in his office with industry veterans who have extensive experience in security systems and fire and building controls.

With the year now behind us and strong management in place, we believe ENS is well placed for the margins and for its revenues and margins to returns to historical levels over time. Accordingly, sequentially, ENS revenues were up in the first quarter and both gross margins and pretax operating results in ENS especially improved sequentially. Year-over-year were down however, due to the impact of the personnel turnover particularly in the sales and BD areas and customer delays that we encountered in Q1 '06 which did not return to normalcy until the latter part of the second quarter. However, backlog improved quarter over quarter. Bookings have improved quarter over quarter and we believe the business is trending in the right direction.

Key programs that ENS is currently working on include the following: Design and deployment of a network for access control CCTV and perimeter protection for a major northeastern electrical Company; Expanded security, surveillance and access control networks for Westward [ph] Malls throughout the United States, And we will soon be announcing the details of new work with the major U.S. city and wireless parking meters as well as security surveillance network. Additionally in the city of Mountain View, California, we have now successfully completed the deployment and initial test phase of a municipal wireless development with Google which we understand to be one of the largest municipal wireless networks deployed to date. In the United States. Finally for ENS in Europe, we are now actively pursuing wireless LAN, mesh network, and security opportunities as we try to build the material enterprise business in Europe, Middle East and Africa. Moving to WFI's wireless government services business.

Profitability remains strong year-over-year despite some contract mix differences between the quarters that causes slight reduction in revenue and despite an increase in additional discretionary SG& A dollars and capabilities. During the second quarter, WGS won contracts with an estimated value of 37 million. And we anticipate a significant number of these government contract vehicles to begin ramping up during the latter part of 2006 and into '07. Certain key programs that WGS are working on are as follows: Defense contract management agency or DCMA, networks operations center contract on which we monitor the nationwide DCMA network and all web enabled applications ensuring reliable performance and install upgrades as required; The defense logistics agency or DLA Enterprise Network Engineering program, on which we are finishing the final implementation of the DLA network in the Asia Pacific region having already implemented the network throughout the continental United States and Europe. C4ISR operations center contract vehicle on which we provide operation center equipment installation, upgrade and maintenance services for Spay War [ph] the joint interagency task force, or GSL. Finally, the army aerial target flight services at White Sands missile range which includes aerial target preparation, mission planning, target flight control services and target recovery.

During the second half of 2006, we expect to continue to allocate discretionary some SG&A dollars within our government business towards further enhancing our sales and business development capability so we may continue to extend our reach within the United States Department of Defense and generate additional internal growth. We have been extremely focused on maximizing profitability in our government business over the past several quarters as WFI has been initiating and working through the industry and related transitional issues in both the wireless and enterprise business units which has impacted our margins. As I previously mentioned, although the WFI transition strategies I just mentioned will take some time especially in let of the consolidation of the wireless industry which is occurring, we believe we have traction with our initiatives. We are on the eve of the AWS auction which may bring additional opportunities for us, and we are starting a trend in the right direction and also accordingly within WGS, we are going to trend more towards the normalized sales EBITDA profitability balance going forward.

Finally on the acquisition side, and we have reported in the past, we have been actively screening and reviewing candidates and I am pleased to report that just this afternoon we announced WFI has entered into a definitive agreement to acquire Huntsville-based Madison Research Corporation or MRC. MRC is a privately held technical solutions and technical company focused on advance programs and IT solutions and space programs. Specifically MRC offers the broad range of technical solutions and developed core competencies in weapons systems life cycle report, test and evaluation, commercial off the shelf or hardware or software implementation, software development, and systems life cycle maintenance.

In terms of resources, MRC has nearly 400 talented employees including engineers and IT professionals of whom just under 70% has secret and top secret classifications. This talented group of individuals will significantly contribute to WFI's competitive advantage in the federal market and I want to extend a warm welcome to each every MRC employee joining the WFI team. The press release we distributed out this afternoon outlines in more detail MRC's specific services along with it's very impressive list of government customers. I would like to spend a few minutes explaining the transaction to WFI.

Firstly, this acquisition significantly advances WFI's customer's reach within the United States Department of Defense and among MRC's key customers including U.S. Army, U.S. Air Force and NASA. As you know, an important element of our strategy has been to expand the customer footprint of all branches of DOD and our acquisition of MRC brings with it numerous new entry points and customer contacts as well as synergistic contract vehicles.

Some examples of MRC's key clients include the army aviation and missile command or AMCOM and space and missile command, U.S. Army program executive office PEO command missiles in space, U.S. Army PEO Aviation, Naval Weapons Support Center, NASA's Marshal Space Flight Center. U.S. Army PEO or simulation training and instrument takes, Patterson Air Force base, Maxwell Air Force base, and Warner Robin's Air Force base. Secondly MRC experienced impressive industry momentum and in 2005 MRC was one of six vendors to win a contractor role in the technical domain on the five year AMCOM expedited engineering support services contract vehicle and we expect to announce details including the value of the associated task order under this vehicle very soon. Also, fueling MRC's prospects for growth is the expected transfer of the significant amount of business to the Huntsville area as a result of the base reassignment and closure or BRAC announcements.

The final point I would like to make regarding the acquisition is WFI has obtained financing commitment from Key Bank for this transaction and we believe this represents an important signal to WFI's investors. In today's climate banks will not extend credit unless they are fully supportive of the model, the synergy of the combined Company, and the financial condition of the underlying Company and acquiring companies. We believe the financing from Key Bank is a positive endorsement of WFI's business model and indicates WFI's vitality and reiterates the optimism that we have going forward for our business. WFI is very comfortable taking on the leverage to execute the transaction because as we point out before, federal IT business carries much larger backlogs and long term contracts and more stable and predicable cash flows. Not only are we pleased that we have identified and executed such an ideal acquisition with world class management team and world class ownership but today's announcement highlights the ongoing commitment to diversify the overall business for the federal contact vehicles with longer terms multi year backlogs, a high level of profitability and cash flow predictability. Let me turn the call over to Deanna to talk about the financial results for the quarter, and I will wrap up with concluding remarks.

Thank you, Eric. Good afternoon. This afternoon we reported revenues for the second quarter of 86.2 million, sequentially up from the first quarter revenues of 83.9 million. Revenues the second quarter of 2005 were 95.3 million. Our second quarter revenues compared to Q2, '05 were primarily impacted by competitive pressure in our AMEA operations which were down 3.5 million year-over-year, reduced revenues at 1.6 million in the Brazilian operations as a result of the winding down of our deployment business last year as well as reduced ENS revenues which were down 2.8 million year-over-year resulting from customer delays and personnel turnovers that Eric mentioned had occurred in the first quarter and did not return to normalcy until later in the second quarter.

In addition, as a result of the manner in which we are awarded new sites under the large national deployment program that we discussed in our first quarter call in which we are awarded the work in phases and modules, we are recording the profit for this program at a 0% margin or at revenue equal to cost since we have not been awarded all phases of the project. As we receive more purchase orders for additional phases we will record the estimated margin on the entire project at that time. As a reminder our operating results of the discontinued operations for all current year and prior year results have been reclassified as discontinued operations and therefore, any revenues, gross margins, and operating income generated from the operations is now reflected in the single caption: Income loss from discontinued operations.

Our International operations in Europe and our remaining operations in Brazil contributed 8% of our revenue while our domestic operations comprised the remaining 92% of our revenues. Some of the significant customer insist the second quarter included: Cingular at 27.1 million or 31.4% of our revenues, the U.S. Navy at 8.2 million or 9.5% of our revenues of the Sprint Nextel at 5 million or 5.8% of our revenues, O2 at 3 million or 3.5% of our revenues and Verizon at 2.9 million or 3.4% of our revenues. Our top-ten customers accounted for 65% of the total revenues which remain unchanged from 65.1% in the first quarter.

Gross margin for the quarter was approximately 18.1% up sequentially from first quarter 2006 gross margin of 16.9%. The sequential increase in gross margins is primarily result of the subcontract rework cost overruns and the impact of site build delays that impacted the quarter's operating results. Gross margin year-over-year declined from 29% in the second quarter of 2005 to 18.1% in 2006 which includes 300,000 of FAS123-R stock option expense. Excluding the stock compensation in Q2 '06 gross margin was approximately 18.4%.

The year-over-year decline is primarily attributable to the impact of competitive pricing pressures in our legacy RF business in Europe and in the U.S. as well as the impact of the large national program that we are currently recording at zero profit margin, and to a lesser degree due to the 300,000 of stock compensation expense that is included in cost of sales. Operating expenses were 15.5 million which includes depreciation and amortization of 1.1 million and stock compensation of 500,000. Since the Company adopted FAS123-R on January 1st, 2006, this is the first year that the Company has recorded stock compensation expense.

The total operating expense of 15.5 million in the second quarter of 2006 compares to the 17.6 million of operating expense in the second quarter of 2005. The reduction year-over-year despite the increase related to stock compensation expense is due in part to the impact of cost reduction measures as reduction of professional fees and audited SOCS compliance that were incurred of the second quarter of 2005. Operating income for the quarter was approximately 100,000 compared to operating profit of 4.3 million in the second quarter of fiscal 2005, reflecting the reduction in gross margin and the impacted reduced revenues which includes a total 800,000 stock compensation expense in 2006.

Loss from continuing operations was 400,000 or a $0.01 per share compared to income from continuing operation of 5.2 million or $0.03 per share in the second quarter of 2005. Income from continuing operations before income taxes of 200,000 was reduced by a 600,000 income tax provision resulting in the $400,000 loss from continuing operations. The effective tax rate in the second quarter of 2006 was over 300% due to the non deductability of certain tax permanent items for which we cannot take a tax deduction for and due to operating losses in our foreign operations that we have not taken any tax credits for. In other words, our income for tax purposes is much greater than the GAAP 200 income from continuing operations from before tax and therefore results in a higher tax expense. Thereby skewing the tax rate to a rate that is greater than a normalized statutory rate of approximately 40%.

We expect that the impact of these permanent tax items will continue to impact our effective tax rate going forward and higher than the statutory tax rate. Excluding the impact from the stock compensation expense in 2006 and assuming a more normal lied statutory tax rate income from continuing operations would have been approximately 1 million or $0.01 per share. Net loss for the quarter according to GAAP was 600,000 or $0.01 per share compared to net income of 3.3 million or $0.04 per share in the second quarter of 2005. Included in the net loss for the quarter was a loss from discontinued operations of 200,000 for the second quarter of 2006 compared to net income from discontinued operations of 800,000 in the second quarter of '05. The activity in the second quarter primarily relates to the final wind down costs with exiting these businesses.

The sale of our operations in Mexico was completed in February which we sold at the net carrying value of this business for approximately 18.9 million. In June, we finalized the net closing calculations with the buyer at 18.9 million. During the second quarter, we received a second installment payment from the buyer of 3.25 million making our total payments received to date of 4,8 million. In addition, we have made modifications to the due dates of the remaining installment dates of and from August 7th to September September 29th and from November 17th to December December 29th. With the modifications that we have made, the original installments due in the third and fourth quarters of approximately 5.5 million and 8.6 million respectively plus interest are still scheduled to be collected in those same quarters.

Our 2006 revenues by operating segment were 52 million or 60.3% from our wireless network services segment, 20.7million or 24% from our government network services segment, and 13.5 million or 15.7% from the enterprise network services segment. The revenues by operating segment compared to the second quarter 2005 were as follows: Revenues were 57.6 million or 60.4% for our wireless segment. 21.4million or 22.4% from government and 16.3 million or 17.1% for our enterprise segment. The revenue decline year-over-year in our wireless segment was substantially driven by reduced international revenues in our AMEA division as the result of the competitive pressures previously discussed as well as large project in 2005 and reduced revenue insist the remaining Latin America in Brazil resulting from the wind down of certain projects. Our domestic wireless segment business was only down by 500,000 year-over-year despite a 6.8 million year-over year reduction due to the merger of Western Wireless and Altel.

Turning to the balance sheet. Total cash. Cash equivalents at the end of the second quarter were approximately 11.6 million. Our cash balance is up from approximately 10 million from the end of the first quarter primarily from cash generated from 2 million as well as cash collects received in the sale of the Mexican operations in 3.3 million. DSO or day sales outstanding for the Company decreased from 115 days at the end of the first quarter to 110 days. This was expected as we were expecting to achieve mile stones on some of the larger turnkey which allowed us to invoice the customers on the projects.

As of June 30th we had cash under 12 million and 8 million drawn on the credit facility which was drawn in the first and second quarters for the earnout payments made to the ENS acquisitions. With the exception of a minor remaining payment of 100,000 outstanding we have made all final payments relating to the acquisitions in the enterprise segment. We expect the cash flows that would generate and cash from installment payments due on the sale of the Mexican operations in the next several months will be substantially utilized for our pending acquisition with MRC. Let me turn the call back to Eric for final comments.

Thank you, Deanna. In closing, I want to crisply reiterate WFI's plan of action which we are and which we are going to continue to execute. Number 1 we are going to transition the majority of the WNS business towards executing lower risk, higher margin engineering, solutions based and consulting opportunities and try and take full advantage of the wireless spectrum auction which begins in approximately 24 hours. Number 2, we are going to leverage WFI's wireless network domain expertise to bring end to end solutions to our customers for greater value, enhanced relationships, and an overall competitive advantage. As I previously mentioned we hope to be communicating with you in the very near future of some very tangible steps we are taking in this area.

Number 3, return our ENS business to it's historical profitability levels, focusing on wireless mesh networks, municipal wireless networks, and security integration and expanding into Europe. Fourth, aggressively build WGS both internally and through higher business development investments and through acquisition focusing on the Department of Defense, Department of Homeland Security and other federal government agency information technology and communications opportunities. This is the plan of action that we are executing and we will be executing going forward. In closing, I would like to thank our employees and shareholders who have remained committed to WFI and who share in our vision for transitioning this business and I would like to welcome our newest employees from MRC once again. We have a promising future ahead. Let me now turn the call back to the moderator for any questions.

[OPERATOR INSTRUCTIONS] Our first question will come from Mike Ounjian with Credit Suisse.

Thank you very much. If you could talk a little bit about the bigger drivers we should be looking at in each of your business segments. Looking at the second half of the year, can we talk about some of the factors we should think about that could drive sequential improvement in revenues or things that may be working against you in each of the businesses in transitioning away? You know, businesses that you are transitioning away from in the second half to think about the models for the rest of the year? Sure.

Some of the things to look forward to on the positive side is what comes out of the AWS auction of course which starts tomorrow. And we are, we are very anxiously awaiting this and we think we are well positioned with most if not at all of the potential bidders both traditional carriers and newcomers to the field. And this is an area where it could be a mover for us and if the right people participate, and the right people make the investments, and it goes well for us, this could be good for us.

Also, in addition to that and related to that, what is going on with Wi-Max in the industry. There have been recent announcements on WI-max on the national level, we believe we are very well positioned on the OEM level and the carrier level, to take advantage of this that includes guys like Clearwire, Sprint, Nextel, some of the OEMs, Samsung, Motorola and Intel. And we believe that could be a positive for us going forward, a driver. On the converse side, just from the macro industry point, the continued consolidation not only at the carrier side but the OEM side and any types of stoppages, or slow downs, or hiccups that may cause is something that we need to be cautious of and wary of going forward. So that's it on the carrier side.

On the enterprise side, as I tried to communicate in my prepared remarks, we have new management teams in and I went through some of the bios and some that they are bringing in which are just outstanding. Bookings are up and we are the number 2 security system integrator in the U.S., we believe on that side and unless there is some major market issue, we should get back to -- we're hopeful to get back -- to normalized gross margins in that business in the high 20s. And the run rates we have been on in the past and some of the growers or the drivers there that could help us with sequential growth is what is going on in the municipal wire base. We are actively involved in that. And we mentioned some of the programs we are working on and we have got a handful of large bids out there. I mentioned one in a very large city where we are given the verbal for two aspects: Meter reading and security. If that industry continues to develop and mature that could be positive for us.

On the negative side of that base, at the market level, if some of these higher profile networks when they are fired up don't work as advertised, that could have tarnish and slow it down from an industry standpoint. On the government side, obviously we are very excited with today's announcement, and we believe that we are well positioned, WGS before consolidating MRC bid and proposal pipeline is now at nearly 3/4 of $1 billion, 700 million, and we are building that pipeline and been announcing awards and we are looking for these to take hold and start giving us traction in the latter part of this year and '07 as they start ramping up. What could be issues in that business area? Minimally contract mix issues could impact us some. Minimally. And probably at a more material, potential level and we don't see any indication of this happening. Funding issues and budgeting issues as we head towards September 30th and the fiscal year end. Does that answer your question, Mike?

Yes, it does. It is helpful and just on the carrier side, Things like AWS and Wi-Max. is that reasonable to believe they are going to be contributors in the second half or more likely to contribute in '07?

I don't know. It is possible it could be in the second half. Depends on who the winners are and how quickly they want to realize it, and more cautiously '07.

Right. On the MRC acquisition, is there anything you can share for the metrics for them? Their revenues? Profitability?

Sure.

Just some sort of timeline for the transaction?

Sure. Purchase price approximates one times revenue and MRC's operating margins are higher. They are in excess of our government businesses operating margins which as you know are strong. MRC's is somewhat higher than that. Timeline on the close is 30 days to 45 days depending on the HSO Hartscoff Medino [ph] approval.

Great. And it is reasonable to assume the bulk of the acquisition price will be coming in the form of debt given where your cash balance is today?

That is a reasonable assumption.

Okay. Could we get a break down, Deanna, of the gross and operating margins by segment or what ever you are willing to share there?

Sure, Mike. The operating margin for WNS is a loss of 900,000 for the quarter. ENS is a loss of 700,000 for the quarter. And WGS is a profit of 1.7 million for the quarter.

Great. Thank you very much.

Sure.

[OPERATOR INSTRUCTIONS] We will now hear from Bob Lee with Sidoti & Company.

Good afternoon, thank you for taking my question here. I want to talk about your backlog for the WGS group. Do you have any figures for the bid and proposal and pipeline or the backlog?

The bid and proposal pipeline today is approximately $700 million. And the backlog is somewhere approximately backlog, firm backlog, somewhere approximately 150 million to 200 million excluding the acquisition.

Of course. Understood. Okay and then the operating margins you mentioned were higher than the WGS currently?

Yes.

Any earn out considerations that you can give information on for the WRC acquisition?

No earn out considerations at all. There are no earnouts.

I think my other questions were answered. Thank you.

Thank you.

[OPERATOR INSTRUCTIONS] We have a follow up question from Bob Lee.

Sorry about that. I totally forgot this one. You mentioned there was contract mix issues that can cause margins to contract possibly as a negative in your government business. Can you discuss what kind of, what makes up that contract issue, what can affect that?

Sure. And it is not something we are anticipating that we are sitting here today. But it is something that can happen. On the material pass through, if we are doing system integration work or engineering support service work and we are all services that part of the material or the systems we are working on passes through us on a sub. If in any one month or one quarter from a timing standpoint the material as it passes through it is higher than the services or the labor we put in, and the revenue could be higher and margins could be lower. Margins could be lower. Revenues can be down. It could be all over the place depending on the mix.

It is not really an engineering radio frequency engineering versus an IT type of consulting that is going to drive that?

Not typically. It is more of, if there was a significant amount of material that passes through us from a sub on a total solution we were working on. That could skew it.

All right. That's it. Thank you.

Ladies and gentlemen, that will conclude today's question-and-answer session. Mr. DeMarco I would like to turn the conference back to you for any additional or closing comments.

Great. Thank you for joining us. We look forward to touching base with you at the end of the third quarter.

That will conclude today's conference. Thank you for joining us and have a great afternoon.