ManTech International Corp (MANT) 2004 Q1 法說會逐字稿

Good afternoon. My name is Michael, and I will be your conference facilitator today. At this time I would like to welcome everyone to the ManTech International Corporation First Quarter 2004 Earnings Conference Call. All lines have been placed on mute to prevent any background noise, and after the speakers' remarks there will be a question and answer period. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad, or if you would like to withdraw your question, please press star then the number two. Thank you. Miss Crystal you may begin your conference.

Welcome to ManTech International Corporations first quarter 2004 earnings conference call. My name is Maureen Crystal, and I'm the Executive Director of Investor Relations. Leading today's call for ManTech are George J. Pedersen, Chairman of the Board, CEO and President; and Ronald R. Spoehel, our Executive Vice President and CFO. Before we begin our discussion it is important that we provide you with the required statement relating to our written, and verbal disclosures, and commentary regarding ManTech, and results, and operations. Statements made in ManTech's written and verbal disclosures and commentary, which do not address historical facts, could be interpreted to be forward-looking statements. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to factors that could cause actual results to differ materially from those statements, for example, we note the risks and uncertainties of retaining existing contracts and winning new ones, and the contract performance, and legal and regulatory compliance. For a discussion of these, and other risks and uncertainties, please refer to the section filed risks related to the company's business and ManTech's annual report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2004, and from time-to-time in ManTech's other filings with the Securities and Exchange Commission including among others its reports on Form 8-K and Form 10-Q. The company's statements are made at of April 28, 2004, and ManTech assumes no obligation to update any such forward-looking information. Also, the entire content of today's call, which is being recorded, and webcasted is a copyright of ManTech International Corporation, and may not be reproduced in any form without prior written consent. Now I'll turn the call over to George.

Good afternoon everyone, and thank you for joining us today. I will provide some opening comments then Ron will report our results, after which I will provide some closing comments, and then we will be prepared to take your questions. We are pleased to report a very successful quarter. Revenues for the first quarter of 2004 were up 37% to $203m exceeding $200m for the first time in the company's history. Operating margins increased to 9.5%, and earnings per share were up significantly to $0.35. Further, our organic growth rate for the first quarter was 24%, substantially higher than the rate of growth we had experienced last year as we benefited from a surge in our defense system support related to activities in Iraq, Europe and the United States, and the overall increased spending for national and home line security. Although difficult to predict, it is not uncommon to experience such an increase given the complexity of the mission, and the nature of ManTech's on going support for the war efforts. This surge is reflected in our guidance for the year, which has also increased, as Ron will report to you shortly. Our results reflect a continuous successful execution of our strategic plan originally formulated prior to ManTech's IPO in February 2002, a plan that focus on the high-end defense intelligence market for growth, of our existing, and long established business base. We will laud ManTech well to target at acquisitions, additional acquisitions as well. Our acquisitions not only continue to provide increased revenues and profits, but the acquired skills have become a real force multiplier. We picked the right markets, markets that are very large, and diverse and we are growing faster than the general spending trends. We have strategically positioned ourselves to benefit from the dynamics we see in this market place, our concentrated focus on national security corresponds with our customer's needs, and the responsibility to safeguard this nation during today's turbulent times.

As well as prepare the country for the uncertainties in the future. And as it depends intelligence establishments shifts away from a platform centric focus toward an information centric model, we are exceptionally well positioned to compete in this marketplace. We are extremely pleased with our performance during the first quarter as we continue to deliver sustainable growth, long-term value to our shareholders. Now, let me turn the conference over to Ron, our Chief Financial Officer. Ron?

Thank you, George. Good afternoon everyone. We have achieved dramatic improvement in sales and profits for this quarter with a sharp increase in organic growth that resulted from the disciplined execution of our strategic plan, and the positioning we have achieved through acquisitions. As George said, revenues for the first quarter 2004 were 37% quarter-over-quarter to $202.8m from $148.1m. Our operating profits for the quarter also grew substantially, up 53% to $19.4m from $12.7m last year, with margins for the quarter moving up to 9.5% as a direct result of a recent surge in growth and a favorable profit pick-up of $1m as profit performance improved on our fixed price contract, which is self accounted for about 0.5 point of margin. Net income increased 63% to $11.3m from $7m for the comparable period in 2003 and diluted earnings per share increased 59% to $0.35 per share for the quarter as the company's effective tax rate was 40.7% and diluted shares were 32.4m. The organic growth rate for revenues for the quarter was 24% from a pro forma base of $163.9m in last year's comparable period. This organic growth was achieved due to a recent sharp increase in our defense related revenues and better than expected performance in other areas of our business. As well the performance of our acquisitions continues to be very good, Aegis, CTX, IDS, MSM and ACS have all proven to be quality acquisitions, not only in terms of sales and profit but also in significantly enhancing our technical capabilities and customer relationships in some new and important markets.

Now to turn to some balance sheet and cash flow items. Shareholders' equity reached $300m. Net debt was $21m, after disbursing $6.5m for the acquisition of ACX. Cash flow from operations in the quarter was $2.1m. Receivables collections have been a priority focus for us and we collected $84m in the month of March alone, which was a record. To provide a more detail description of the current status of our receivables as we did in our last call, it's useful to separate our receivables into two categories. The ManTech MSM, our security clearance background investigations business and balance of ManTech without MSM. Each of which has a fundamentally different contract completion profile, billing, and cash collection cycle. The detailed information on DSS breakouts in the following way. The traditional ManTech receivable DSOs dropped from 87 days to 82 days at end of the quarter. And we are targeting these DSOs to be under 80 days, which is the goal for our business other than MSM by the end of June. MSM's receivables increased by that $9m in the quarter to a total of $37.5m. The largest component of these receivables is under a contract that currently authorizes billing at the end of clearance process for individual, Personnel Security Investigation (PSI). The optimal collection cycle here is about six months to seven months, given the ramp up of this business, it is becoming more important to us to negotiate progress payments. Thus, we have been in discussions with our customers to request performance-based payments on the basis of the fact that we have been processing a significantly increased number of clearances on behalf of the customer. We've had discussions with the contracting officer and believe negotiations could conclude before the end of May. We remain highly enthusiastic about the PSI business. As you know, there are a variety of reports including one from GAO, which indicates the government's backlog of PSI clearances is some where between 300,000 and 500,000. It is having an enormous impact in the defense establishment, both the Department of Defense itself and the defense industry. The demand for security clearance investigations is extraordinary. When we acquired MSM, the sales were approximately $19m on a run rate basis and since September when we transitioned to our new facility, we have ramped up to a current run rate of about $50m on an annualized basis. We believe we are now the second largest supplier in this industry.

The defense budget has significantly increased and is likely to go higher producing a greater demand for more cleared government in contract of personnel. This growth was a major opportunity that Mantech foresaw and positioned itself to exploit. We've spent the last several months creating a totally new business process to execute the clearance investigations, transitioning to a new much larger facility improving software and system processing procedures in creating a unique training academy, as well as recruiting a talented new team of people to supplement the original MSM team growing from 90 people over 300 people today. We are confident in our ability to deliver this PSI service efficiently, effectively and profitably. Traditionally, the largest contracting agency for PSI services has been the Office of Personal Management, OPM. Over the past seven years they have had a single source providing support to their agency, they are currently conducting a competition to expand the contracts in base and we believe that they will make multiple awards. We hope to be one of these support contractors. OPM traditionally has their more realistic for the industry and MSM's cash flow would benefit under an OPM contract. Further there are additional government contractors with a standing requirements they will also continue to contribute to the growth of our market. We are extremely well positioned in this business. As we now how the processes, the people, the knowledge and the background to excel. We made the investment and we expect to reap the rewards. Moving onto backlog, in recent news for the total company. Our total backlog at the end of the first quarter was $1.4b and funded backlog grew to 352m from 278m a comparable time last year. This backlog in recent unannounced divorce of over 400m continued to give us confidence and support for our expanded guidance for the year. For the first quarter of 2004, the percent of revenue from GSA contract vehicles continues at about 43% of total revenue. With the focus on improving our operating margin, we increased our proportion of time and material contracts to 55% of revenue and the increase from the 46% low in the first quarter 2003. Cost plus contracts were reduced to about 30% of revenue, while fixed priced contracts were 15% of first quarter 2004 revenues. Revenue from DOD and intelligence community contracts was 93% of our total revenue for the quarter up from 83% in the first quarter last year. Overall, our federal government contracts accounted for about 99% of revenues, and we service prime contractor on 87% of our work, with margins enclosed interactive relationships with our customers. While we continue to seek the highest levels of customer knowledge to prove their management leadership, is an instrument to enhance our growth potential. We are also leveraging our technology rich capability to win roles and larger opportunities. We remain committed to grow our efforts to grow, we remain committed to our efforts to grow both internally and through acquisitions. As I mentioned in the last conference call, we've expanded our financing capacity this quarter with the execution of an expanded line of credit. We have a proven ability to successfully merge organizations and integrate operations, and we will continue to pursue our range of attractive growth opportunities. we are not strategic growth objectives. So with the rapid results for the quarter the recent acquisition and ACF, and the strategic and financial of the company today. We are expanding the guidance for 2004. For the second quarter of 2004 revenue guidance is in the range $204 to $208 with diluted EPS in the range of $0.32 to $0.34 per share. For the full year 2004 guidance for revenues is increased to the range of $840m to $855m with diluted EPS in the range of $38 to $42 without further acquisitions. This assumes diluted shares of $32.5m for the second quarter and $32.6m for the full year 2004. At this point let me turn it back to you George.

As we indicated one of the reasons for the increase in revenue in the first quarter, was that we responded to critical customary requirements in Iraq and here in United States. As you know the situation in Iraq has become very complex and fluid. And we expect in the months ahead that we will respond to additional critical machine assignments of the same nature. We are continuing work on new assignments with Homelands Security and the Justice Department as we told you about during our last call. We believe that our skills and knowledge of defense, intelligence, state department homeland security and justice will lead to new important assignments related to the distribution and sharing of critical intelligence across the board, the network in ways that are new to the government community. This is a Critical mission. These new systems will be developed with all end-users of information in mind. The funding for defense, intelligence, and other customers will, in our opinion, continue at a higher level to '05 and beyond. There is talk on the hill of the supplemental appropriation, for the Defense Department over and above the 487 approved to date. Our states department customer has a major mission in reestablishing its presence in Baghdad, an enormous responsibility that we believe will require additional funding and continued support. On acquisition front, we continue active discussions with numerous interested fronts. On the business front, we told you our forecast for the quarter and the year's end. We believe that our outstanding proposals and pipeline will permit us to achieve these results. Now we'll be happy to take any questions you may have, and I thank you.

Thank you. The question and answer session will begin at this time. If you're using a speakerphone, please pick up the hand set before pressing any numbers. At this time I would like to remind everyone, in order to ask a question, please press star then the number one on your telephone keypad. We will pause just a moment to compile the Q&A roster. Your first question comes from Sandra Notardonato of Adams Harkness and Hill.

Hi, congratulations on a very nice quarter.

Thank you.

Ron, I missed what the DSO number was including the PSI business?

Yes the total DSO for the company for the quarter was 93 days, again from 94 in the end of the year.

Okay, and can you just tell me, at the end of June, what will the total DSO number be? What's the target?

It will probably be, if we continue with the same level in our MSM, PSI business, probably in the range of 95,96.

Okay. The pass-through revenue in the quarter, what was that number?

It remained about the same level in the low thirties.

Okay

Low 30%.

Okay, and why are we are going to see a sequential decline in EPS in the June quarter? The guidance $0.32 to $0.34, you did $0.35 this quarter, why would we see a sequential decline?

Due to the non-recurring items in the first quarter. We had a $1m profit to pick-up on a fixed price job, another increase is that we related to items in just the first quarter.

Okay, and the margins in the second quarter, what number -- what margins does the guidance imply?

It's roughly 9%.

Okay, so that is sustainable. And the increase in revenue, how much is that for the year? How much of that is organic versus the ACS contribution?

For the balance is - the 24% includes ACS, it would be in the noise related to the ACS partner.

Okay, so the increase in guidance is virtually all organic?

Yes, no -- let's go back for a second, the increase in guidance includes $23m of ACS revenue for this year, compared to 25% last -- that's right, I thought you meant was the organic growth for the year including the growth on ACS?

I am trying to get, what is the organic growth projection for 2004?

Right. It includes $22m to $23m of ACS, and the balance will be organic growth.

Okay. And are there any other acquisitions that anniversary later this year that I need to be reminded of?

No it didn't anniversary in this quarter

Okay, great, thank you very much.

Good luck.

Your next question comes from the line of Raman Kumar of BB&T Capital Markets.

Great, thanks. I just have a quick follow up on the DSO. Is there a -- I believe that was around 13 extra days in the quarter, did I write that down correctly? I think 93, I am sorry, it would be more like a 11?

Yes.

Okay. Do you have any idea - can you quantify us today somewhat you have been talking to the contract, and also how that might impact -- the impact if you were successfully in getting the progress payments on that work?

We're not at the level of detail that we would like to disclose as to where we are in the negotiation.

Okay.

With effect of that would, well, I think it will be useful would be look at the, under the current contract terms, as we move forward over the balance of the year, we would expect from the receivables level related to MSM to peak somewhere within the next two to three months.

Great okay. And then may be just a question for George. I know George, you are big on the budget where it is going, if you look at the FY05 IT request, it was relatively flat compared to '04, obviously winners and losers within that booked, within DoD and the civilian agencies, there is a big debate obviously over budget deficit and where it is going to go and the election and all that sort of thing, I am just wondering what you see happening in terms of the IT budget as I suppose to say the DoD budget overall, if we do see it reduce, in other words, would there be a greater impact on the civilian agencies as opposed to the DoD and intelligence community in your opinion?

The only ones that I heard, specifically disgust is on the NASA side, some individuals on the hill have actually talked about whether they could fund NASA to the tune of $16.4b which they had hoped for. In terms of the overall defense budget, I think you know well, we are hearing that the current year appropriation bill Michael is up as much as $50b over and above what they have. That's perhaps on a house side and in the senate side is somewhat higher. Whether that increases the deficit or they talk of taking that amount of money away from some other department, I don't know. I can concede that they will cram down the civilian agencies to any great degree. I think the IT budget has to go up a bit. It just can't stay flat in my judgment.

Okay. Thanks very much. Great quarter.

Your next question comes from the line of Meir Ukeles of S.G.Cowen.

Hi guys. Congratulations on a terrific quarter. Obviously the cash is on your mind and I assume on the investors as well, Ron, you talk about a kind of getting the DSOs down closer towards the target, obviously the importance of trying to get progress as same as worked into the MSM contract. Anything else in this quarter that was, a sort of, cyclically different accrued and payables kind of comps, burn some cash as well and what would you say is the target for the year in terms of kind of getting in terms of net income conversion, if we can catch up some of these MSM receivables.

Let me start with the item related to the balance sheet and the change from year-end. The year-end then also talks about the cash flows for the balance of the year. On the year-end to current change in the balance sheet and the cash from that two items made the difference to us. One was on accrued salaries. There was a normal incentive compensation disbursements in the first quarter this year, so that would not continue. And secondly, at this time, it was slightly different than last year, which ended up being in the second quarter. The second thing was ACS' $6.5m use of cash, obviously that's related to a specific acquisition. And then thirdly, related to, you mentioned accrued and AP, now relates to the timing of payments. We had some payments that were just about to be made at year-end and payments that were just made in the first quarter. So, it was normal in both ways going through the quarter. Next to the cash flow for the full year, we believe we sill see a turn and we would estimate, although it is inherently harder to estimate cash flow given various items. We believe that with the DSOs moving down to 80, we could see cash flow $25m to $35m for this year.

Okay. Terrific. And in terms of the operating margin assumptions for the year, I mean, not that long ago, I think on the Q4 call that you talked about, kind of, keeping the operating margins about flat for '04 versus '03. Can you talked about sort of what - obviously leaving aside the one time pick-up that boosted this quarter. It looks like you are looking for about a 40 or 50 basis points increase in overall operating margins year-over-year, A, is that correct? And B, can you talk a bit about what's driving that.

It's primarily volume. As you look at those margins, we think it is more or like a 30%, I'm sorry, 30 basis point differential overall for the year and where we are headed and that's basically the higher volume allowing us to better cost absorption.

So it's primarily, it's more kind of overhead absorption or anything else.

Yes.

Okay. And finally, minor item but George you talked in the past about kind of, I think specifically about the size of the Embassy that was being built in Iraq and obviously you had a few business including an asset and infrastructure protection per se. Any overall comment on the kind of business, is the business opportunities relating to the current conflict.

As I understand it the assistant secretary was in Baghdad last week and they are back and re-examining the whole situation. We don't know the outcome of those meetings. We have heard in recent days that the number of people in that embassy might be little bit different than reported before. It is certainly still a work in process. We will be involved as we are in the securities systems in a variety of other areas where we provide support. We are still very active in all of their securities needs and obviously that's going to be a major security mission.

Okay. Thanks a lot, congratulations again.

Thank you, sir.

Your next question comes from Alex Hamilton of Advest.

Hi, good evening. Just two simple questions I believe. If you could kind of expand on what you were talking about on the office of personnel management and the opportunities that are derived from that, that's the first question?

The office of personnel management has a major responsibility for security clients in the United States. And they have been utilizing one source over the past seven years. And they opted to change that and they put out a competitive procurement. And we believe there are six or seven firms that have responded to that competitive procurement. That is driven in part by the fact that the number of clearances that they are being asked to deal with has expanded in an extraordinary way. I think you know there is a GAO report out there. That tops about 300,000 to 500,000 backlog. We are one of those that responded, we obviously hope to win. We cannot, at this point of time, forecast how many clearances that we might be assigned to us if are successful. The only words that have been put out there, there is so much work that there is enough work to keep all of these companies meeting all of bidders very, very busy, That's the extent of what we know.

And any color on kind of when an award s expected this year, is it this quarter?

The word that we heard, have been told, is sometime around the first to the end of May. They have a very tough job, they have worked very diligently. We are surprised that the quick response that we got in submitting our proposal material. So we know they are working actively, but obviously we don't know the approval process. So, we hope certainly sometime during the month of May, June.

Okay. Any color can be given on the $1m profit pick up, what kind of contract was that, where did it come from?

It was fixed price contract, in which we've been performing a variety of task orders, each fixed price underneath that and we had the benefit of the learning curve as our people got up to speed and on those fixed price task orders, that is security related, we are now in a position where we are taking a profit on certain work that 's been done where we are now achieving a profit that as we moved up that learning curve and have taken on more of the work ourselves under this contract.

Great. Thank you very much.

Your next question comes from Joseph Vafi of Jefferies & Company.

Hi good afternoon and congratulations on busting through $200m, George.

Thank you sir.

Just a few more million and we are going to be at 250 then we are at $1b run rate.

That's sir.

Okay, just a few questions. Super strong growth in the first quarter and in some of our comments in the release you were talking about a lot of heightened activity going on around the Iraq conflict in the liking. Just trying to get a sense for how much, may be of this, the surge you saw in the first quarter was kind of one-timish, as kinds of things have gotten a little more complicated over there versus the sustainability of some of that business that's a kind of that we saw flow through in the topline in Q1?

The amount of that was actually attributed to that surge, it was some where in the band of $8m. Don't hold me to that exactly but it came from a couple of different sources and that support got in terms of a about $8m.

Okay, and so I can that surge was -- that was kind of one-timish surge, that will be the way to look at it then?

I don't know. Obviously the same mission is out there and there could be additional requirements I can't tell you that will be $8m each and every time but its, I would put it highly likely that in the next quarters we will also get that kind of requests.

Okay, fair enough.

You know the environment as well we do, it is difficult to predict other than we know that we position ourselves to respond because we know they are coming.

Right, absolutely.

Joe, this is Ron, I might also add to that. The guidance does treat those as one-time items.

Okay, that's good to know. Ron, do you have the MSM revenue number in the quarter by any chance?

It would be roughly $13m.

Okay. And I was wondering if you had by any chance the breakdown on the AR side between billed and unbilled?

Yes, unbilled was $81.8m, and billed was $131.2m.

Okay. So, I guess, given the MSM business and kind of the growth there and the fact that we haven't reached some of the milestones, it would be fair to say that probably unbilled has moved up a little bit, and it sounded like maybe some of the billed as you collected on some of the non-MSM business moved down.

Yes, we collected a total of $84m in the month of March, as you know, we've been pressing very hard.

Absolutely. Okay, I think that's it, thanks very much.

Thank you.

Thank you.

Your next question comes from Ed Caso of Wachovia Securities.

Hi, thanks and congratulations. I need a little help here with my memory, when you gave guidance at the end of Q4, did it exclude the impact of the ACS?

Yes, it did exclude. We had not included the impact of ACS.

So, if I take your new guidance and I subtract that with your old guidance and subtract out upside of the quarter, I come up with about an increase of about $26m for the next, the last three quarters of the year. I believe you said ACS was about $25m trailing revenue. So, does that mean almost not all, but almost all of the increase in revenue guidance is for ACS?

No, our guidance increased by $45m, from $810m to $855m. $22m of that is related to ACS and about $8m is the one-time items. So, there's about a $15m pick up for the balance of the year.

Okay, and was ACS beneficial to EPS in the quarter, or was it accretive this quarter?

No, it would be roughly break-even. It's accretive on its own, but with the purchase contract cost to amortization, it's roughly break-even.

And just a follow up for the prior question, does your new guidance, this $15m of include continuations of one-time right item, the right way to say it, but --

No, that's what we are saying, it is not included, those were things that occurred in the first quarter that will not repeat. We're taking into any new account.

We're not saying they won't occur, but we are not putting them into because we don't know what they are today.

Okay. Great, thank you.

We have a follow up question from Meir Ukeles of S.G.Cowen.

Hi, actually two questions, at the risk of assuming ungrateful, backlog was down a little bit, total backlog was down a little bit kind of sequentially and as was funded. Is there anything and obviously the booming volume in this quarter is partially responsible for that, but anything, any comment you want to make on kind of the contracting -- the pace of contracting activity that your customers and/or any prospects for that to pick up through the rest of the year?

Yes, as a matter of fact, what we mentioned in the remarks was the $400m of unannounced awards. Those were not included in the backlog in the first quarter. So, we have over $200m that would be added just from that alone in the second quarter.

Okay, and does that include anything -- or how much does that include from the .

We have not included anything at this point.

There is nothing to answer.

Okay. And one other item, is there any way to kind of size the amount of spending that OPM does on personal clearance today? And obviously it's ramping all the time, but you are just sort of sizing that opportunity.

I don't know that exact number. It is quite large.

Kind of $5m, $10m, $50m, $100m, $200m.

It could be $500m. They have had a single supplier over these years and that supplier does quite well in terms of the volume. But, we think it's probably a minimum of $300m and it probably is as $500m and going up.

Okay. Terrific, thanks a lot.

Your next question comes from Bill Loomis of Legg Mason.

Hi, thank you, great quarter guys.

Thank you.

Just in the last call on March 4, was that you had two months on the first quarter, and you gave guidance that was both for revenues, EPS that were below the substances and it cost the stock a pretty good hit. So, obviously you didn't know what that last month of March was in, was it hardly upside in the last month of March? I'm just trying to reconcile, I know you wouldn't do anything to lower the stock price on purpose, I'm just trying to understand why you didn't understand that with the two months in the quarter already under your belt?

What we had at that point in time in subsequent to that was a surge in business. For example, in the one-time items we had an army command headquarter relocation, it was accelerated into the quarter that's subsequent to that call, we were informed that they wanted to finalized, and in place, and up and running March 31. We had a number of other items that occurred as the expansion and the operational tempo of the activity increased in Iraq and we were asked to support that. We had other ODCs and activity that are related to the increased deployments in those parts of the world.

We understand also that on March 3, we didn't have a final wreckage for February, we had some indication that was in there, but we didn't have a financials in February and we were reluctant to just include numbers on a basis of some projections.

Okay. By the start if we take out some of these one-time events, and certainly we were positive to results, but look at the underlying business with that track with a longer-term contracts. Does that track --- you have pretty good confidence in your forecasting ability both to the upside and the downside over the next couple of quarters?

Yes, we do.

Okay. Just to confirm, I don't know, I think you cleared this up a couple of questions ago, but the $400m not announced that's for the second quarter, so we got your current $1.4b backlog, you burn off about $200m, and so you are talking about so far backlog will at least be $1.6b? Is that accurate?

Well, Bill, the answer is sort of a yes and no, because the $400m, we only expect about $200m, a little bit more than that to go into the backlog based on the contracts.

Okay.

The contract value is over $400, it's only $200m or so will go into backlog.

So, the backlog for the second quarter at this point based on your revenue guidance in that comment should be at least sequential side if you win no more business?

Correct. We expect obviously we will continue to win business, and as our business is still 43% GSA, we have a lot of work that comes through the smaller increments and funded overtimes. So, those will come through and into the contract wins and backlog over the quarter.

Just remember, so we have no acquisitions factored into any of these numbers.

Right. And the ACS acquisition, do that add any backlog in the quarter, or did you just put the $23m or so that you expect for the year in backlog or nothing?

We see that as a very small amount in the backlog.

Okay. Thank you.

Your next question comes from Cynthia L. Houlton form RBC Capital Markets.

Hi good evening. Just a couple quick questions. First on headcount and turnover. What was that at the end of quarter and for the -- I guess turnover, what was it during the quarter?

The headcount at the end of the quarter is somewhere around 5,300 as somewhere in that band maybe a bit above that. The turnover, as far as I know, I don't have those numbers in front of me --

Its about 15%.

It's about 15%.

And then, I guess, just to understand, how many people came with the ACS acquisition?

142.

Okay. 142 people? And I guess, the thing I just want to make sure I understand is, we had a lot of kind of one-timish revenue, certainly picks by quarter-over-quarter, but headcount was only probably up maybe 150 people quarter-over-quarter excluding?

I think its a little more than that.

Okay. Was the lot of the, I guess, and maybe the next question is on subcontractor revenue, what percentage of this work was -- was that different this quarter and in prior quarters?

No, it was roughly the same, that's been in the low 30s.

30% revenue is from subcontracts?

Yes, it's a little bit right, -- these fluctuates somewhere between 30%, 33%, 34% in that range overtime, it's pretty consistent.

Okay. And then on the new bookings for the current quarter, I am not sure what you will sign this quarter, can I set $400m unannounced, $200m that's going to backlog, but what was it for the March quarter?

The March quarter it was in the range of a 150.

Okay.

That was the quarter that we didn't happen to have particular contracts that we were looking at come through in this quarter. So that's why -- it's a lumpy business. It doesn't happen in a particular sequence over the year.

Okay. So it's also safe to assume lot of usage for storage was from the existing work or existing customers that you had already had agreements with?

That's correct.

Okay. Great. Congratulations on a good quarter.

Thank you.

Your next question comes from Chris Penny of Friedman Billings and Ramsey.

Hi actually it is Mollie Sandusky. I am for Chris. I just wanted to make sure I am clear on the ACS guidance, you said it was $22m to $23m for the rest of the year or does that include --?

No. That's for the total year because it was -- if you recall we acquired it during the quarter. So it was roughly a $25m run rate last year. So it's in for 0.35 or you know that range this year.

Okay.

Do you want see it a little bit longer before we tell you something different than what that forecast presented to us.

Do you expect that to grow --?

Yes ma'am.

Or in line with the rest of the business over time?

Yes ma'am.

Okay. And can you just us kind of an update on what you're looking at in terms of acquisitions and maybe some -- what's going on with valuations?

The number of acquisitions we see is about a steady state we see them, we look at them, we have conversations. We haven't gotten into detail pricing negotiations since ACS and I wouldn't want to comment whether anything has changed. But we are seeing quality companies, they just haven't met our particular criteria that we told you before, the high end they have to be accretive and the other requirements we have. There are lots of good companies out there, they just haven't been on RBOCs.

Okay. And then just one quick on housekeeping. Can you give us the breakdown of revenue between state, local and civil.

State, local would be well less than 1%,

That has declined because we have --

Civil is though.

Okay. Great, thanks.

Let me just say one thing. We have some state and local government that is generated really by our Federal contract, but some of the traditional state and local we have pursued in earlier time that's not the marketplace we are going at today.

Thank you.

Your next question comes from Tim Quillin of Stephens Inc.

Good afternoon. Just want to make sure, I understand ACS and I think you all got started, but how much revenue was from ACS during the first quarter?

That's 3.6.

Great. And then as far the backlog is concerned and the increasing amount of GSA scheduled business, which is little bit harder top track does it go into backlog, remind me how you treat that and how we can track you opportunities without lot of it going into backlog?

On the GSA schedules the work goes into the backlog when we actually have the task orders specifically awarded. Basically it's when the funding is in the - the funded contracts in the backlog. On tracking it over time, I would agree with you, its not something that you're going to see going in and out of backlog in this way same way longer term large contracts are -- its more of the continuing volume of work and looking at these areas that we're in, and the markets we are in. That's how we judge what our continuing levels of business are going to be there.

We have seen in the past that sometime by comparison our backlog is less than the others that we are willing to check that 44% in GSA because as you know the profit margins are better, far more flexible, contracts are issued faster.

All right. And are the Intelligence Agency's using GSA schedules - and just kind of in general if you can kind of take us through the demands, what your seeing as far as demand from the intelligence community, peer services, and their kind of emphasis on using outside contractors?

I don't know about using outside contractors, but obviously the requirements are increasing, and we are seeing increased demand there. Whether they use GSA contracts, it depends on what part of the community we are talking to. In some cases we have very strong direct contract with these agencies and others -- they may have new start and we have a unique capability, so they will use a GSA contract.

Okay.

We like GSAs. We spend a lot of effort getting as much GSA businesses as we can, I think you know from the past.

Yes. And I like the margin implications. But just lastly, in terms of acquisitions you talked about being a billion dollar company by the end of the year with new guidance, I guess you need to make a smaller acquisition. Just help me understand the opportunities that are out there in terms of acquisitions and can you -- do you think it is still a viable goal to get into that billion dollar market.

It is a goal. If I don't find the right acquisitions I won't do them. They are not out there that we are looking at. And again we look at them in a range of $25m to $200m. I want it to be $1b, but only if it works.

I like that. I appreciate it. A great quarter.

Thank you.

There are no further questions. I will now turn the conference back to Mr. Pedersen for closing remarks.

Thank you folks for listening. Thank you for your questions. Once again as I always do, before we sign off, we need to take a minute to remember the efforts of the people, men and women in the armed forces and intelligence agencies, state departments and other organizations we support around the world. Our people are working side by side. God bless them and take care of them. Thank you.

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