Kratos Defense and Security Solutions Inc (KTOS) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thanking you for standing by. Welcome to the Wireless Facilities Incorporated third quarter 2006 earnings conference call. Your speakers for today are Mr. Eric DeMarco, President and Chief Executive Officer, DeAnna Lund, Senior Vice President and Chief Financial Officer, and Michael Baehr, Vice President of Corporate Communications. At this time, all participants are in a listen-only mode. As a reminder, this conference is being recorded today, November 9th, 2006.

I will now turn the conference over to Michael Baehr, who will read the Company's warning regarding forward-looking statements. Go ahead, Mr. Baehr.

Thank you. Good afternoon, and thank you for joining us. With me this afternoon are Eric DeMarco, our President and CEO, and Deanna Lund, our Chief Financial Officer. We will begin with Eric and Deanna providing an overview of WFI's results for the third quarter of fiscal 2006, and then we will open up the call for your questions. If anyone has not yet seen a copy of our earnings release, it is available on WFI's corporate website at www.wfinet.com.

Before we begin the substance of today's call, I would like to remind our 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 will be available on the Company's website later this afternoon.

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, 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 more complete description of these risks.

In addition, this call will include a discussion of nonGAAP financial measures, as that term is defined in Regulation G. The most directly comparable GAAP financial measures, and information reconciling these nonGAAP financial measures to the Company's financial results prepared in accordance with GAAP are included in the earnings release, which is posted on the Company's website.

With that as an introduction, I will turn the call over to Eric and Deanna for a detailed review of our operational and financial results for the third quarter.

Thank you, Michael.

Starting first with our Federal Government business. We successfully closed the acquisition of Huntsville-based Madison Research Company, MRC, about a month ago on October 2nd. With this acquisition complete, WFI's government business now comprises approximately 35% of the Company's total business. And we have a significant presence in several key military locations, including San Diego/Southern California, Washington, D.C./Northern Virginia, Huntsville, Alabama, White Sands, New Mexico, and Hawaii.

As you know, a strategic focus area for WFI is to diversify our business, and build more balance between WFI's government and commercial businesses. Strategically, we are diversifying the business for a number of reasons, including the fact that the Federal Information Technology contracts are typically multi-year in length, and are more predictable and are less capital intensive.

Accordingly, as we have stated in previous calls, our intention is to build our government business, and the addition of MRC adds additional revenue, new contract vehicles, expanded presence among various DoD customers, and ultimately a greater level of predictability to WFI's overall business.

You may recall that MRC is focused on Engineering Services, Advanced telecommunications programs, Software and IT solutions, product solutions, and Space programs. Additionally, MRC has expertise in the engineering and maintenance of weapon systems, and other highly specialized technical and product services, with key customers such as United States Army, Air Force and NASA.

Today, WFI's Government Division has capabilities and core competencies in the following areas: Network planning, Network design configuration deployment and maintenance, Weapon systems engineering and maintenance, Military range operations and maintenance, Mission planning, test and evaluation, and also Command, Control Communications and Computer Engineering services.

Because of its expertise in weapon systems support, MRC recently won two very large contracts with the United States Army under the Army Aviation and Missile Command, AMCOM express contract and the Army Foreign Military Sales contract, FMS. Both of which we plan to formally announce shortly.

It is important that we continue with the strategy of acquiring government expertise and additional contract vehicles, so that we can both expand our footprint within the Department of Defense, and so that WFI can grow large enough to pursue larger government procurements as the prime contractor. Deanna will address more details about the completion of the MRC acquisition in her comments later in today's discussion.

Other programs that WFI's government division worked on during the quarter included: The successful completion of the first year of the White Sands aerial target flight services contract, during which we planned and conducted 115 successful aerial target flight missions. The win of the Keyport program management and financial management contract, which further establishes our presence at the Naval Undersea Warfare Center at Keyport, Washington.

The win of the MSC Ashore information technology services contract to continue our support of the Military Sealift Command, and the implementation of cutting-edge technology solutions for the DCMA web-based enterprise environment in four geographic locations, to host over 50 government applications, which will be accessed from all over the world.

With MRC now included as a part of WFI's government operations, and the integration of the business well underway, we are looking towards 2007 with an enhanced Federal business focused on opportunities in the U.S. Department of Defense, Homeland Security services and solutions, and obtaining the critical mass necessary for long-term sustained internal growth.

In our Enterprise business, as expected, we saw several positive trends that were a result of the management changes we made earlier in the year, and were a result of moving farther away from the completion of the earnouts in Q1. Some of the positive trends we saw in Q3 included, revenues increased sequentially from Q2 to Q3 by approximately 24%, revenues increased year-over-year by approximately 4%, operating income performance in Q3 improved by approximately 600,000 sequentially over Q2.

We are encouraged by these positive trends from an execution perspective. Our Enterprise business is successfully completing some of the very important industry milestones we are proud to be part of. For example, we have just finished the first phase of acceptance testing of the Tucson municipal wireless network, covering about 56 linear miles. The application that we are providing to First Responders in Tucson is the first successfully deployed quadruple play, constituting of voice, video, data and mobility for a municipal wireless network, and is a testament to the value of these types of networks we will provide in the future.

Another milestone and industry first in the area of municipal wireless networks, is the work we are doing pertaining to a Wi-Fi deployment in the City of Houston to support credit card transactions for parking meters. This application is going to provide a revenue boost to the City of Houston's traffic department, and is another way in which WFI is thinking 'outside of the box' to support innovative city services.

Additionally, we have been working on the following projects within ENS. A several-year multi-million dollar security deployment for a large utility company in the Northeast, service and maintenance on a fire/life safety and security network at one of our nation's largest commercial airports, fully-integrated building automation services and security, all on one platform across multiple buildings for a large college campus, and additionally our Enterprise business has recently been awarded a contract in Barbados, to design and deploy a security and surveillance network for a large correctional facility, details for which we plan to announce soon.

As you know, a key strategic focus for WFI and our Enterprise business is security systems and data network planning, design, deployment, and operations and maintenance. Strategically, we are focused on the security area, as it is a core competency of our Enterprise division as an organization, which has been ranked as one of the largest independent security systems integrators in America. We believe that spending in the enterprise environment, particularly as it relates to security and surveillance, is more mandatory than discretionary in nature, and therefore leads to greater predictability and stability in this business area.

A final point on our Enterprise business. We estimate that today, approximately 15% of this business is recurring in nature, including operations, services and maintenance, which is an area we hope to continue to expand as we deploy more networks. Similar to our Federal Government business, which typically brings long-term work that is recurring in nature, we are also trying to build into our Enterprise business operations service and maintenance contract elements, which would bring more stable recurring and predictable revenue sources.

In our Wireless business, one area of significant attention in the third quarter was the Advanced Wireless Services, or AWS spectrum auction, which began in August and concluded in mid-September. In the AWS auction, over 100 applicants, including some of the major first and second-tier operators, as well as a number of new entrants, to bid nearly 14 billion for over 1100 licenses. The auction officially concluded on September 18th. The new spectrum is intended to be used for the delivery of band services, such as new broadband and video services, And this is an area we expect will start to fuel growth and profitability starting in 2007.

As most of you know, half of the auction spectrum is currently licensed by the FCC in the commercial band of 2.1 gigahertz, and primarily used for fixed point-to-point microwave applications. Some of the major incumbent licenses in this band include state and local governments, transportation and rail companies, electric utilities, and wireless carriers.

The other half of this spectrum, the 1.7 gigahertz band, is currently used by an array of U.S. government agencies, including the Department of Defense, the Department of Homeland Security, the Department of Energy, the Department of Commerce, the FBI, Federal Aviation Administration, along with many others. This portion of spectrum, like all government spectrum, is administered and managed by the National Telecommunications Information Administration Agency, or NTIA.

As a condition of this auction and prior to the usage of the AWS spectrum by the licensees, each licensee is required to negotiate and pay for the relocation of the existing commercial user systems, from the 2.1 band to other areas of the spectrum. Additionally, all systems currently operating in the government spectrums of 1.7 will need to be relocated as well.

The funds for the government relocation will be allocated to each respective agency through the Office of Management and Budget, or OMB. As a result, two potential opportunities arising from this auction for WFI are the design, engineering and integration services required for the winners of new spectrum, who wish to roll out new services or expand coverage areas, and the relocation of existing incumbents, both commercial and government users, to other spectrums to clear out the spectrum for the AWS bid winners.

In the early '90s WFI was a key provider of spectrum management and microwave clearing services during the PCS spectrum relocation. WFI relocated the very first link in the nation in 1994, and since then we have been instrumental in relocating over 3,000 links in the PCS band.

In recent months, we have undertaken significant initiatives to prepare for the increased level of activity created by this auction, by selecting some of the most experienced engineers, negotiators, legal and program managers. We are equipping these highly skilled staff members with the latest tools and databases, in anticipation of the spectrum management issues and challenges that new licensees will face.

We have also been very active in working directly with the NTIA and other government agencies, in trying to support the users in the government band, by helping them understand the issues and challenges of the spectrum relocations. We are proactively working to support these agencies with the processes, procedures, analysis, and program management required for this effort.

As part of these initiatives, WFI was invited in September to speak at an NTIA sponsored inter-agency spectrum workshop for government agencies. This was a rare opportunity to access key influencers and decision makers from a broad range of government agencies including the DoD, the Department of Homeland Security, Commerce, and Agriculture.

This workshop and its subsequent meetings and discussions have been productive, and we have been able to demonstrate our knowledge and cultivate new relationships, and we believe this strategic visibility has put WFI in a unique position, to support both commercial and government incumbents in this endeavor.

Following our presentation to NTIA, we have been contacted by the Department of Defense for follow-on discussions, which thus far have been very promising. We have been proactively communicating with most of the related government agencies following this presentation, and we are optimistic that these discussions will ultimately result in new business opportunities in the area of spectrum relocation. Additionally, WFI is already in communication with the majority of the Top 10 bidders, who represent 90 to 95% of the total spectrum that was auctioned.

Specifically, in the area of WiMAX, WFI has been engaged by Samsung, to provide engineering support for the first major deployment of WiMAX in North America, which we already have a number of WFI engineers and technicians working on this program. Also, although we are not permitted to mention them by name, we are working with a top tier national carrier and a leading second tier carrier to plan, design, engineer, and deploy a next-generation network to support their WiMAX 4G services.

In both instances, WFI has recently been awarded several hundred sites, and we expect work to begin and ramp up in Q4 of '06, or Q1 of '07. Also, with another large national carrier, WFI is actively working on a two-tier strategic plan to help this carrier, both directly and via their OEM design and deploy their 3G network. Our activities in these areas include, providing engineering services for the WiMAX RF and network design, as well as backhaul engineering design services using the WiMAX and Ethernet technologies, as well as certain 3G technologies.

A noteworthy point to mention is that in the wake of the AWS auction, WFI has expanded its customer footprint significantly, and we have started work or have engaged in substantial discussions with a number of new customers, emerging carriers, and others during the third quarter. We remain optimistic that these new relationships will grow as our discussions proceed, and that this will ultimately result in new business opportunities for WFI in 2007 and beyond.

As broadband services continue to proliferate, the carriers network via the rollout of 3G and 4G services, the importance of providing reliable, robust, backhaul services will take on greater importance in our carrier business. As we have previously discussed, backhaul will take on key strategic importance with our customers, and to-date we believe WFI has more experience in the backhaul area than any other independent service provider. Our experience with industry leaders such as Clearwire and FiberTower and our technical expertise in the WiMAX area, has squarely positioned WFI to continue to have a leadership role in this area as it continues to evolve.

In our WNS international operations, which presently accounts for just under 8% of our overall business, we continue to have some successes in both EMEA and Brazil. For example, in EMEA we recently announced a contract extension valued at several million dollars with O2, the largest mobile carrier in the UK, and in Brazil we were recently awarded several small to midsized engineering programs.

In both EMEA and Brazil, we need to achieve a certain size and critical mass necessary to realize sustained profitability after covering the SG&A infrastructure, necessary to support statutory and regulatory requirements in these countries. The requirement to achieve a certain size and critical mass is balanced by our requirement to bid and accept work with customers that meet our credit criteria, to maintain our liquidity in days sales outstanding, or DSO expectations on our receivables.

Unfortunately, due to some of the recent pricing pressures we have experienced in these businesses, coupled with our balanced growth criteria, we have been unable to maintain profitability in these countries. Accordingly, I am working with both of our general managers to oversee these areas, in assessing how we achieve value for WFI and sustained profitability.

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

Thank you, Eric. Good afternoon. This afternoon we reported revenues for the third quarter of 84.3 million, down comparatively from revenues in the third quarter of 2005 of 94.5 million, and down sequentially from revenues for the second quarter of 2006 of 86.2 million. Our third-quarter revenues compared to Q3 2005 were primarily impacted by customer and program delays, some of which was attributed to the capital requirements needed to support bids in the AWS auction.

The Western Wireless/Alltel merger has also negatively impacted our revenues by over 4 million year-over-year with the consolidation of these two customers. 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 or modules rather than the total project, we are currently recording the profit for this program at zero margin, or margin below the anticipated overall project margin at completion, as we have not yet been funded all phases through the completion of the project. This program is consequently impacting both our revenues and gross margins.

As we received more purchase orders for additional phases, we will record the estimated margin on the entire project at that time. Our international operations in Europe, and our remaining engineering operations in Brazil contributed just over 7% of our revenue, while our domestic operations comprised the remaining 93% of our revenues.

Some of our significant customers in the third quarter included Cingular at 19.9 million, or 23.6% of our revenues, the U.S. Navy at 9.1 million, or 10.8% of our revenues, Sprint/Nextel at 8.7 million, or 10.3% of our revenues, Verizon at 4 million, or 4.7% of our revenues; and O2 at 2.7 million, or 3.2% of our revenues. Our Top 10 customers accounted for 63.8% of our total revenues, which was a decrease from 65% in the second quarter.

Gross margin for the quarter which includes $200,000 of FAS-123R stock option expense was approximately 18.1%, consistent with our gross margin in the second quarter, and down from 21.4% in the third quarter of 2005. Excluding the stock comp expense of 200,000 in Q3 '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 the U.S., as well as the impact of the large national program that we are currently recording at an overall zero profit margin, and to a lesser degree due to the $200,000 of stock compensation expense that is included in costs of sales.

Operating expenses were approximately 16.1 million, which includes depreciation and amortization of 1 million, and stock compensation expense of 500,000. Since the Company adopted FAS-123R on January 1st, 2006, this is the first year the Company has recorded stock compensation expense.

SG&A expense was 15.6 million in the third quarter of 2006, compared to 17.2 million of operating expense in the third quarter of 2005. The reduction year-over-year in SG&A is primarily attributable to the impact of cost reduction measures that we have taken. Also included in the third quarter of 2005 operating expenses is a credit of 2.5 million of contingent acquisition considerations, resulting from the reduction of an excess accrual for estimated earn-out consideration due on certain of the Company's acquisitions in the Enterprise division.

Operating income for the quarter was a loss of 800,000, compared to operating profit of 5.5 million in the third quarter of fiscal 2005, reflecting the reduced revenue volume, the reduction in gross margin, the inclusion of 700,000 in stock compensation expense in 2006, and the $2.5 million favorable reduction of earn-out consideration in the third quarter of 2005.

Loss from continuing operations was 1.1 million, or $0.01per share, compared to income from continuing operations of 4.7 million, or $0.06 per share in the third quarter of fiscal 2005. The effective tax rate in the third quarter of 2006 was negative 63%, primarily due to losses incurred by our foreign operations of over 1.7 million, for which we are not able to record a tax benefit.

In other words, our income for tax purposes is much greater than the 700,000 loss from continuing operations before tax. It is actually 1.7 million higher without the foreign losses, for an income of approximately 1 million. An approximate 40% tax on that taxable income is equal to 400,000 in tax decision that we would have recorded.

However, this 400,000 compared to our book operating loss of 700,000 results in a negative 63% tax rate, thereby skewing the tax rate to a rate that is greater than a typical normalized statutory rate of approximately 40%. Excluding the impact of the stock compensation expense in 2006, and assuming a more normalized statutory tax rate of 40%, income from continuing operations would have been approximately breakeven.

Net loss for the quarter, according to GAAP was 900,000, or $0.01 per share, compared to net income of 5.2 million, or $0.07 per share in the third quarter of 2005. Included in the net income for the third quarter of 2005 was income from discontinued operations of 500,000, compared to income of 200,000 from discontinued operations in the third quarter of 2006.

We have received the third installment payment from the buyer of our Mexico operations of 5.5 million, with 5.2 million collected on September 29th, and 300,000 collected on October 10th. The total payments we have received to date are 10.3 million. The final payment of 9.5 million, which includes interest, is due on December 29th, 2006.

Our 2006 revenues by operating segment were as follows, 47.4 million, or 56.2% from our Wireless segment, 20.1 million or 23.9% from our Government segment, and 16.8 million or 19.9% from our Enterprise segment. The comparable revenues by operating segment for the third quarter of 2005 are as follows, revenues were 57 million or 60.3% from our Wireless segment; 21.4 million or 22.7% from our Government segment, and 16.1 million or 17% for our Enterprise segment.

The revenue decline year-over-year in our wireless segment was substantially driven by reduced domestic revenues of 8.1 million, and reduced international revenues of 1.4 million. Our domestic wireless segment business was down by 8.1 million year-over-year, which includes the 4.1 million reduction year-over-year due to the merger of Western Wireless and Alltel, with the remaining decline resulting from the delays of one of our customers, caused by their anticipation of the capital required for business in the AWS auction.

Our international revenues are down year-over-year due to the completion of a significant contract in 2005, and in part due to pricing pressures experienced in our EMEA business. Revenues in our Government network segment are down 1.3 million year-over-year in Q3 '06, as a result of two customer delays and program reductions. Revenues in our Enterprise network segment are up year-over-year by 700,000, as a result of the new contract awards, as Eric previously discussed.

Turning to the balance sheet, total cash, cash equivalents and short-term investments at the end of the third quarter were approximately 12.9 million. This was up approximately from 11.6 million at the end of the second quarter, primarily from cash used from operations of approximately 1.9 million, offset by cash collections received on the sale of our Mexican operations of 5.2 million.

DSO or days sales outstanding for the Company increased from 110 days at the end of the second quarter, to 116 days at the end of the third quarter. This was expected as we were planning to be in between certain contractual milestones in some of our larger turn-key deployment projects, which would not allow us to invoice our customers on those projects, until we completed those milestones. As Eric discussed previously, our focus to maximize liquidity and to keep DSOs at the current level, impacts our credit criteria and customer acceptance criteria, which may at times impact our bid or no bid decision-making process.

As of September 30th, 2006 we had cash on hand of just under 13 million, and approximately 8 million drawn on our credit facility, which was drawn in the first and second quarters to fund the acquisition earn-out payment that we made related to our ENS acquisitions. We currently have cash on hand of approximately 6 million, and 63 million drawn on our new $85 million credit facility, which we executed to fund our acquisition of MRC on October 2nd, and to extinguish the outstanding borrowings on our original credit line.

The credit agreement for the 85 million credit facility is due in 5 years, with principle due in 2011, and interest payments due on a monthly basis. The acquisition price of MRC was 69 million subject to working capital adjustments, of which 62.1 million was paid on the closing date, and 6.9 million in holdback payments due in increments over the next 6, 12 and 18 months following the closing date.

As of the close date, we had 70 million drawn on the facility, and cash on hand of 6 million. Since the close date of October 2nd, we have paid down approximately 7 million of the borrowings and had cash on hand of 6 million, for a net debt reduction of approximately 7 million since October 2nd.

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

Thank you, Deanna. In closing, WFI's strategy remains highly focused in the following areas, continue to drive a balance between the federal and commercial businesses, with the objective of achieving overall predictable and growing profitability. Related to this, our plan is to use our free cash flow to reduce the MRC acquisition debt, and position us to make additional acquisitions in the future.

As Deanna just noted, since October 2nd, net debt has been paid down by approximately $7 million already, continue to a leading systems integrator and technical solution provider, in the Enterprise of municipal communication, data and wireless markets, with security and wireless expertise being our key differentiator. Exploit the opportunities provided by the recently completed AWS auction, and the emerging 3G, 4G, WiMAX markets with our WNS division, which we are hopeful will provide incremental growth, as well as higher overall profit margins. And to position ourselves as a premier provider of 3G and 4G engineering services, by leveraging our domain expertise and long-standing relationships with virtually every carrier and a host of OEMs, to introduce value-added services.

An example of this strategy includes our recent announcement with Redline Communications to bring cutting-edge WiMAX products, services, and the latest technical training to our customers. Our intent is to continue with these efforts in a very focused manner to maximize WFI's profitability as we complete the year, and head into 2007.

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

Thank you. [OPERATOR INSTRUCTIONS] We will take our first question from Bob Lee with Sidoti.

Good afternoon. Thank you for taking my questions here. I want to focus in on top line. It sequentially declined, and you attribute that to the capital requirements from some of your clients to support the AWS auction. Do you expect this to be the bottom line I guess, in terms of the revenue decline and do you expect the fourth quarter to be better in terms of top-line growth?

Well, Bob, as you know, we are not giving any guidance now going forward. And in addition to the reason you mentioned, there was also some impact at a separate customer from a consolidation of some carriers that impacted us as well.

As I mentioned in my prepared remarks, we think we believe in the third quarter we have continued to make some very good progress on diversifying our customer base to reduce the concentration. And I mentioned some of the recent wins that we have had there. And so we are hopeful that that's going to be able to offset some of the negatives that we have seen.

Okay. Now, if I focus in on the AWS auction here, now you have T-Mobile, which is one of the big winners of the AWS auction, and you have not had a strong working relationship with them because of their contract issues, and the way they contract out their work. Does this prohibit you from in the future working with them, or are you seeing a different dialogue from T-Mobile?

There is no prohibition at all from us working with them. We do currently do work with them. We do several million dollars a year in revenue with them. We are looking at the AWS auction, and the significant amount of investment that T-Mobile made, to hopefully be an impetus for us to expand our position with them.

Okay. Now, if I can ask two more really quickly. You also mentioned in the release that you had two large national carriers that are doing 4G and WiMAX work with. Can you give us a little more detail as to what your role will be, and how much percentage of the work that you will be doing?

I can't give you an idea of the percentage of work we will be doing out of the whole that they are going to be putting out. But I can tell you the role that we are playing is total soup to nuts, starting out with design, planning, consultation, deployment, integration, and then ultimately, hopefully operations and maintenance.

Okay. And then, lastly, is with the change in I guess the political landscape, do you see any kind of difficulties with your government business going into the future?

No, we don't anticipate, especially with global, the global situation as it is today, with the continued transformation of the Department of Defense, that Rumsfeld did start, and it will be continuing as I read today. We don't see any as we sit here today, any negative impact at all from the outcomes of the elections the other day.

Okay. Thank you very much.

And moving on to Frank Marsala with First Albany.

Hi, everyone, how are you doing?

Hi, Frank.

I got a couple of questions. Eric, when you talk about the AWS auction and the spectrum relocations, when you talk about deals in that area. What are we talking about in terms of kind of size of opportunities, or size of individual deals? Can you give me some color on that?

Sure. The relocation of the link, depending on the type of work that we would be doing, can be anywhere from 50,000 to $100,000 per link, to several hundred thousand dollars per link.

The opportunity side out there both between the commercial side, the carrier side and the government side, particularly on the Department of Defense side and the Department of Homeland Security side, There are several thousand links that need to be relocated. So that is the market opportunity. And as I indicated, we believe we are fairly well positioned to get some of that work.

Okay. And then I think you just touched upon it, but I want to just ask again. You mentioned Samsung, some of the engineering support you are doing for WiMAX. Can you just give me a sense of the type of work you are doing at this point for Samsung in the WiMAX world?

Yes. I am not exactly sure how much I can disclose on this, but we are, we have a number of engineers that are working with Samsung on certain of the respective markets, where they are going to be the key rollout person. I know I can say we are involved in the engineering design, and engineering design support and planning.

Okay. That tends to be kind of the more, the higher margin type work that you have done in the past, is that correct?

Historically that has been the case, yes.

Okay. And then as you mentioned Brazil, and I think you said EMEA, did I get that right, EMEA where you are reassessing, or taking a look at what's going on. Was that correct? Did I get that right?

Yes. Let me be clear. We are clearly taking a look at how to turn these business profitable, and keep them sustainably profitable.

All of the revenue that you are talking about for these areas is in WNS?

Say that -- excuse me, Frank, say that again, please.

All of the revenue in these regions is in WNS?

Yes, it is.

And let's see. I had one more. Just on the outstanding debt that you have now. What Deanna is the interest rate that you are incurring there?

It is approximately 8.5.

All right. I'm sorry, one last question. Just, you've closed Madison Research now. If I'm correct, Eric, you said you paid about 1 time sales for that. You didn't get any of that revenue in the third quarter, but there should be some of that in the fourth quarter?

That is --

That should, the entire quarter should be there for the fourth quarter, correct?

Yes, sir.

Okay. So you know, kind of even without guidance, I mean with WNS even with some things not happening, if Enterprise is back on its feet, we should see an increase in revenue sequentially, because of the inclusion of Madison Research, is that correct as well?

Your logic, Frank, is spot on.

Okay. That's great. Well, thanks for your help, guys.

Thank you.

Moving on to Mike Ounjian with Credit Suisse.

Great. Thanks. It's Mike Ounjian from Credit Suisse. Could you talk Eric a little bit about the pricing environment, and how the competitive landscape is looking on a lot of the opportunities from the AWS auctions? We have had some, I mean obviously there's been a lot of experience with Cingular's 3G build, and other big builds in the last few years in the U.S. where pricing may have not been optimal, even if there was a revenue opportunity. How are you thinking about that as you look into next year?

Thus far on the Engineering design and Engineering services side for the work coming out of the auction, particularly related to the 4G area and the WiMAX area, pricing has been very, very good. We are cautiously optimistic in that area. It's not, there are no competitors out there that are doing anything outside of the market bounds of supply and demand, and we are cautiously optimistic that it's going to stay that way.

And we're also cautiously optimistic it's going to stay that way, because these are obviously new technologies, and one of our primary competitors are the small and mid-size engineering shops. And they don't have the resources to do this work. And they don't have the training capability that we have, where we are training our guys on this new technology.

So right now and cautiously optimistic looking ahead on the Engineering services side, the supply and demand equation appears to be in our favor, and pricing is pretty good.

On the deployment side of 3G, 4G, and WiMAX, there is really no change in the pricing that we are seeing right now. It's still in the gross margin area, high mid-teens is what we are looking at.

Great. Thanks. And as we look into Q4, that's helpful, you know, how to think about Madison Research. Besides that, I know you're not giving guidance, but could you just talk about business by business. Is there anything else going on that we should think of is a change in either direction, or sort of moving pieces we should be factoring in sort of looking into Q4 and Q1?

At the highest level, Q4 in the Federal Government area is typically a pretty good quarter. The new federal fiscal year has begun. A lot of money out there. Typically, historically Q4, calendar Q4 is a good quarter.

On the WNS side, as usual in this industry we have lots of puts and calls. We got lots of calls with work coming out of the AWS auction, particularly in the 4G and the WiMAX area. On the put side is coming into the carriers, CapEx and OpEx budgeting cycle, where things tend to slow down a little bit, until they get those settled out really in Q1, and then it ramps up again. So as you know those are kind of the puts and calls on the carrier side.

On the ENS side, our new management teams in Atlanta and in Houston are outstanding, and they are clearly turning the businesses around as the results that we are seeing here.

As you recall, in the enterprise side and the municipal side, there is some seasonality there where Q2 and Q3 are typically strongest, because of weather issues in the parts of the United States that are impacted by weather. And calendar Q4 and calendar Q1 can be softer on these outside muni builds, and some of the enterprise builds on the campuses. So at the macro level, that is kind of how we see it heading into Q4 and Q1 of '07.

Great. Thanks. And Deanna, could you just give us the gross margins and operating margins by segment, or any sense on that?

Sure, Mike. For our Wireless business, gross margin is just under 16%, our Enterprise business just under 24%, and our Government business is under 20%.

Great. Thank you very much.

Sure, no problem.

Thanks, Mike.

[OPERATOR INSTRUCTIONS] Next we will move on to Seth Potter with Punk, Ziegel and Company.

Hi. Good afternoon. A few questions, Deanna. Can you give us the operating profit by each unit also?

Sure. Sure, Seth. On the Wireless side, which obviously includes both the international and domestic operations, that is an operating loss of 2.4 million. Enterprise is an operating loss of 100,000. And our Government business is a profit of 1.7 million.

Great. And then maybe it would be helpful too, in terms of like the revenues associated with Latin America and EMEA, what was the breakdown there so we get a sense of the impact there too?

Sure. The EMEA revenues and Latin America combined are, I will get that for you, 7.3 million. I'm sorry --

The majority of the loss that is the operating profit loss during the quarter, was it predominantly associated with that business?

That is correct. And I need to correct myself. That was 6.3 million of international revenue, Seth.

Okay, okay. Also, I forget, what was the annual run rate for MRC? I forget what it was when you announced the deal originally?

Yes. We didn't announce it, Seth. What we did is we said that the purchase price was somewhere around, or just under 1 times revenue.

Okay, okay. And then, also, can you give us the employee count at the end of the third quarter, and again, I don't know if you talked about the number of employees coming off of MRC?

We did not. I can give you the headcount at the quarter end, which obviously does not include MRC, Seth, and that is 2200.

Okay. And the final question is, are you feeling any pressure, or any sort of pressure from some of the delays on the muni Wi-Fi rollouts? You know that, like San Francisco, that's been delayed. Is that affecting the way you look at things? I mean, how is that affecting you at all, I guess?

That's a very good question, Seth. The answer to that question at the highest level is yes. And yes, it does affect how we look at things, and how we allocate our resources to go after the municipal jobs.

And what I mean by that, is on the larger cities, or the large municipalities, we believe there is a higher probability of politics being played, or a bureaucracy coming in, or fits and starts where we can invest a significant amount of B&P. And, as you have seen in Philadelphia, and as you have seen in San Francisco just recently, it can be delayed after the contract is done, and everything is negotiated.

So thus far, our strategy has been to focus on two areas. The small to mid-sized municipalities, and municipal opportunities that carry a security element. Because the security element, what we have seen so far, seems to be least politicized, than opportunities without the security element.

That's interesting. And so is it safe to assume that as you kind of change your focus here, there may have been some margin drag from that business, originally from focusing on the larger ones. Now, as you focus on the small municipalities, is it safe to assume that again that was part of the operating loss that Deanna spoke about before?

The term you said up front on that is I think is pretty accurate. There is some drag. You know, very candidly, Seth, you know, the industry is relatively new. And we have been pursuing it for just under a couple years now, hardily as the procurements have come out. So we have been trying to redirect our strategy to where the money is, and to where we think the higher probability of success is, and not just success of signing the contract, but of actually deploying it, and deploying it in the timelines that are contractually stipulated, so we don't have any margin bleed.

Great. Thanks again.

Okay.

[OPERATOR INSTRUCTIONS] And there are no further questions at this time, I would like to turn the conference back over to you, Mr. DeMarco, for closing remarks.

Great. Thank you very much, and we look forward to speaking with you at the end of Q4.

This does conclude our conference today. We want to thank you for your participation.