ManTech International Corp (MANT) 2008 Q3 法說會逐字稿

Good afternoon. My name is Cherlyn, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the ManTech International Third Quarter 2008 Earnings Conference Call. (OPERATOR INSTRUCTIONS). At this time I'd like to turn the call over to Mr. Cormier. Please go ahead, sir.

Thank you, and welcome to ManTech International Corporation's Third Quarter 2008 Conference Call, and we thank you, again, for joining us today. I'm Joe Cormier, Vice Present of Corporate Development. And leading today's call from ManTech is George Pedersen, our Chairman and Chief Executive Officer; Bob Coleman, our President and Chief Operating Officer; and Kevin Phillips, our Executive Vice President and Chief Financial Officer. In our prepared remarks, George will discuss our strategic positioning and outlook for ManTech, Bob will touch on our operational highlights, and Kevin will review our third quarter financial performance and guidance for the fourth quarter and full year 2008.

Before we begin our discussion, it's important that we remind you that on this call we will make statements that do not address historical facts and thus are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Security Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results and include the risks and uncertainties identified in our earnings press release under the caption "Forward-Looking Information." For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled "Risk Factors" in ManTech's annual report on Form 10-K, filed with the SEC on March 17, 2008 and in ManTech's other public filings. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

Now, I'd like to turn the call over to George Pedersen. George?

Good afternoon, and thank you for participating in today's call. We are pleased to report our third quarter 2008 financial results. As you see from our press release, our third quarter operating performance was exceptional on all fronts, with growth of 27% for revenue, 33% for operating income, and 31% for EPS. In addition to our strong growth in revenue and earnings we produced outstanding cash flow of 66 million from operations and were able to pay down over 53 million of our debt. This pay down is even more impressive given we completed the strategic acquisition of ETG in August and funded the $25 million purchase price and associated costs out of operating cash flow.

We welcome ETG to the ManTech family and we're very pleased to add their high-end cyber security operations expertise to our existing capabilities. This is a crucial segment of the market. As you may know, a current appropriation bill contains approximately 15 billion to 20 billion for cyber security initiatives over the next five years, and ManTech is positioned now to solidify our growth opportunities in this area and support our customers in this extremely important mission.

We have raised our forward guidance as a result of our continued operating visibility and momentum for the remainder of 2008, as Bob and Kevin will detail. This is based upon record bookings and backlog we enjoy at September 30. To augment our organic revenue growth we will continue to pursue strategic acquisitions to enhance our mission capabilities, strengthen our market position and increase our revenue in earnings growth.

By virtue of our exceptional cash flows and ample line of credit, we have the financial capacity to execute this plan. We will be prudent and selective going forward and feel comfortable that our current credit facility provides all of the purchasing power necessary to achieve our growth goals.

As you all know, the Defense and Homeland Security appropriation bills are only two of the three appropriation bills passed by the Congress and signed into law by the President prior to October 1. Coupled with advance '09 funding contained in the last supplemental appropriation bill that was passed in early July, our key customers have significant funding to execute their mission over the next four quarters. The advanced supplement will provide funding for 665 billion for defense and 3.6 billion for the State Department. The final defense appropriation bill provided 488 billion combined with the supplemental funding. Now the total is over 550 billion.

As we move through 2009, there will be additional spending bringing it closer--the total closer to 700 billion for the calendar year for defense. This funding environment is consistent with recent history and ManTech stands to benefit from the DOD and intel funding, which comprise 95% of our revenue base.

We continued to see long term growth for our business throughout 2008 and 2009 and we will continue--we look to continue executing in support of our nation, our customers, our employees, and you, our shareholders. We are very proud of our approximately 7,700 employees serving here and in 40 nations around the world, including those on the battlefield in Iraq and Afghanistan. They are a key part of the critical mission of confronting global terrorism.

With that, I will now turn the call over to Bob Coleman. Bob?

Thank you, George. Q3 was another great quarter for ManTech on all fronts. We continued our strong revenue and earnings growth, delivered record bookings, and completed the acquisition of Emerging Technologies Group, which added scale to our already significant cyber operations. Additionally, our focus on operational efficiency coupled with increases in direct labor allowed us to expand operating margins to 8.3%, which reflects a 30-basis-point increase over last year's third quarter.

As I mentioned, we had record bookings during the quarter of 1.42 billion. These bookings translated into total backlog of 4.3 billion and 1.2 billion of funded backlog as of September 30, both record levels. Roughly 30% of those bookings came from expansion of existing contracts and new business awards. Our third quarter book to bill was 2.9 times and year to date book to bill now stands at 2.0 times revenue.

Key awards during the quarter include the two--the 820 million two-year sole source follow-on to our U.S. Army Countermine program, as well as our $124 million re-compete award of our global IT modernization effort for State Department. In addition, we received new work with NAVSEA for IT support of $151 million over five years and another $138 million three-year C4ISR award from the Army related to persistent surveillance in Southwest Asia. This Army C4ISR award is similar to our RAID contract that we received in the second quarter and is consistent with our view that our armed forces are establishing intelligence systems for the long-term presence we need to have in that region. Once again, these awards demonstrate ManTech's positioning at the heart of our customer's mission and the strong demand and funding allocated to them. Our qualified pipeline currently stands at 11 billion and we are tracking 32 opportunities that are over 100 million each. Our pipeline coupled with our year to date bookings and backlog growth provides us with solid visibility to continue our impressive track record of organic revenue growth.

Turning now to our acquisition of ETG, I am also very happy to welcome them to the ManTech team. We are already seeing the benefits of combining our existing cyber capabilities with theirs and are seeing numerous near and long term opportunities to continue to grow our presence within the community. As we mentioned in the specific press releases and subsequent presentations, ETG brings to ManTech a unique and highly [cleared] culture focused on computer forensics. Their customers are complementary and combined we look forward to further penetrating the cyber market.

As I detailed on our last call, the comprehensive national cyber initiative calls for significant new efforts to be developed over the next five to 10 years with 15 to 20 billion of planned funding to accomplish the 12 key initiatives detailed in the plan. We are starting to see RFIs specifically related to the cyber initiative and expect to see the flow of opportunities in this area pick up in the back half of 2009. As these opportunities are awarded and existing programs continue to ramp up, we anticipate that 2010 and beyond will be strong growth years for ManTech's cyber business. To that end, we believe that ETG will speed up our growth in the market and we look forward to building our already strong presence.

The combination of our strong bookings and potential growth on existing contracts creates significant demand for additional employees. Through October we have added 380 FTEs and today we have approximately 650 open job requisitions, which combined with the expected ramp up on recent wins, provides us confidence in meeting our labor requirements for 2008. During the quarter, our percentage of top secret cleared employees was 47%, which remains a clear differentiator for ManTech.

Going forward, we will maintain our focus in mission critical markets yet remain diversified across the intelligence and DOD community. We are well positioned for continued long term growth in revenue and earnings. As a result of the demand we see across our contract base and our expected headcount growth, we have again increased our 2008 revenue guidance from 1.866 billion to 1.886 billion. This represents 29 to 30% revenue growth off our 2007 base.

In closing, we are excited about our growth prospects for the rest of 2008 and going forward as we continue to leverage our market position to build ManTech into the premier mid-tier national security company.

At this point, I would like to turn the call over to Kevin Phillips. Kevin?

Thank you, Bob. As you saw in our press release, third quarter revenues of 486 million represents 27% total revenue growth with 23% coming organically for the third quarter, compared to last year's third quarter revenues of 383 million. Our core markets continue to be strong and we continue to benefit from our positioning across the DOD and intelligence community customers.

Our Countermine contract generated over 97 million in revenue in the third quarter based on increased mission requirements. We expect this to continue in the fourth quarter of 2008 and as such are expecting 95 million in revenue from the contract and approximately 340 million for the year. The contract revenue mix remained relatively unchanged during the quarter. 98% of revenues came from federal government sources, while defense, intelligence, homeland security, State Department, and law enforcement related businesses comprised 95%.

The proportion of revenues in the quarter coming from contracts billed on a time and material basis was 66% of revenue, fixed price was 14%, and cost plus was 20%. With our record bookings during the third quarter, our total backlog as of September 30 rose to a record 4.26 billion and funded backlog also reached record levels of 1.21 billion. Total backlog was up 21% over last year's funded backlog--while funded backlog grew about 43%. This continued strength in funded backlog demonstrates ManTech's positioning in the center of the nation's mission critical security operations.

Our operating profit was 40.3 million in the third quarter, up 33% from 30.4 million in last year's third quarter. Our operating margin of 8.3% was up significantly from 7.9% in last year's third quarter. In the third quarter, Countermine contributed approximately 2.7 million in operating income. The rest of ManTech's core services business delivered 9.7% operating margin. Based on our business expansion and strong operating margin, our third quarter net income was 23.9 million, up 37% from 17.5 million in last year's third quarter. Our effective tax rate for the quarter was 39.6%. Our performance translated into diluted earnings per share of $0.67, up 31% over last year's third quarter.

Turning to the balance sheet and cash flows, as of September 30, the company had 7 million of cash and 45 million of debt, compared to 98 million in debt at the end of the second quarter. This debt pay down occurred even after our funding of the ETG acquisition, which was 25 million. During the quarter, we generated over 66 million in operating cash flows or almost three times our net income. This was driven by our improvement in receivables days sales outstanding at the end of September, which was down five days to 64 days and down 10 days from the end of the first quarter.

Focusing now on the guidance in our press release, we have provided our initial fourth quarter 2008 guidance and increased our full year 2008 guidance. Our fourth quarter 2008 revenue guidance of 490 to 510 million represents 16 to 21% total growth over last year's fourth quarter with 12 to 17% coming organically. We are forecasting an operating margin of 8.25%. Our net income range of 24.2 to 25.2 million results in earnings per share guidance of $0.67 to $0.70 per share on weighted average shares of 35.85 million. This represents 10 to 15% growth over last year's fourth quarter earnings per share. Based on our reduced debt levels, this guidance assumes interest expense of 375,000 in the fourth quarter and a 39.6% effective tax rate.

Based on our strong performance and outlook, we are increasing our full year 2008 guidance, which does not include any future acquisitions or divestitures, to between 1.866 and 1.886 billion. This represents 29 to 30% revenue growth from our 2007 full year results and implies organic growth of 18 to 19% in 2008. We are forecasting operating margins of 8.15% for the full year 2008, which is up from the 2007 operating margin of 7.8%.

We estimate our 2008 net income to be 89.9 to 90.9 million, which results in earnings per share guidance of $2.53 to $2.56 per share based on weighted average shares of 35.47 million. This earnings per share range represents 30 to 31% growth over the 2007 results of $1.95. Our guidance assumes an overall interest expense of 3.35 million and a 39.6% effective tax rate for 2008.

In closing, we are excited about the prospects for our business as we are operationally well positioned for continued growth in revenues and profits supported by a strong balance sheet and cash flows.

We'd be happy to take your questions.

(OPERATOR INSTRUCTIONS.) We'll have our first question from Mike Lewis, BB&T Capital Markets.

Good evening. Nice quarter.

Thank you.

And I was--Bob or George, I was wondering can you help us quantify some of the relative sizes of the cyber RFIs that we're starting to see come through from the customer? And then, I have a follow-up.

Yes, Mike. Again, with the money just getting approved and beginning to flow, we don't expect to see a lot of the RFIs--the RFI is now but we don't actually see the competitions occurring until Q2 at the earliest of '09, but from our point of view the back half of '09. We just recently did win a small cyber--NCI cyber contract at DIA. And that contract we believe is one of the first we've seen outside of our previous large award there.

Okay, that's helpful. And then, if I could just shift over to your employee base over in Iraq and Afghanistan. Once you start to see some of these employees rolling off out of the desert, what do you think--how is that going to impact the profitability of the firm? Are we going to see a benefit to profitability or is this somewhat higher margin type work that they're doing over there?

Mike, I'll speak generally to the contract, and then to the rollout you speak of, I'll provide comment, and then Bob or George can add to that. We have not seen any change in the mission requirements from our customer sets. We're seeing increased requirements in both Iraq and Afghanistan. At some point in the future the material flows may reduce. That's--there's no margin, there's no fee on the material component. As a reminder, the RSC business we have may increase the amount of requirements if there is a reduction in forces that impacts our business out there. But we don't see any change in the requirements that are going to be reducing the staffing in the [tier] of operations, and as a result, the profitability as well.

And I'll hand that over to Bob.

Yes, as a matter of fact, Mike, I think we see continued double-digit growth in that program. In '09, we're seeing increased requirements, like Kevin said, in Afghanistan. And the margin on the direct labor over there is very strong, so even if and when the materials trail down, I still think the work will continue as the vehicles maybe pull back to Kuwait, maybe come home. Basically, our relationship is very strong with the customer and where the money goes is--for these vehicles is where we'll follow. Does that answer your question?

Yes. My takeaway here is that a significant reversal in the number of employees you have overseas is not going to end anytime soon within the next, say, two to three years.

Overseas. I'm talking about where the vehicles go I expect our workforce will go. But also, keep in mind that in the script I talked about RAID and [BOSS] is a new award over there and we are seeing an increase in activity in these C4ISR systems, persistent surveillance systems, and of course, we're staffing up to support those as well. So I think that we're already seeing the offset, if you will, occur.

That's exactly what I was looking for. Okay, thank you very much.

We'll have our next question from Joseph Vafi, Jefferies and Company.

Good afternoon. Great results here.

Thanks.

Thank you.

I wonder if we could talk maybe a little bit about the pipeline. Obviously, a real big quarter and I guess it would be fair to say there was probably a little bit of flush here at the end of the government's fiscal year. How does the pipeline look now relative to say three or six months ago, considering the big awards in the quarter and the fact that Countermine has now been rewarded as well?

The qualified pipeline's just under 11 billion, which is pretty consistent with the previous quarter, Joe. I mean, we continue to see a lot of opportunities out there and a lot of large opportunities. We're tracking over 30 opportunities in the pipeline, over 100 million, and we just see continued strong demand for our services.

Okay. Just--do any of those large deals or is the pipeline--has it really started to include some of these increased cyber initiatives that you're starting to talk about a little bit more? Is this kind of still in some of the other traditional areas of strength for the company?

Traditional--it's been in the traditional areas, Joe. And we're--again, we're not expecting to see--and in all my discussions with the customers, they're not expecting to see the money flow until the back half of 2009. So the pipeline will start filling up coming into the new year, I'm sure of that, and the opportunities will come out and we'll start seeing them awarded in the back half of the year. In terms of large opportunities, I mean, there's some large IDIQs in there that we're well positioned for and we're priming, but I can't point to one specific one for you.

Okay. And then, maybe one just quick one on margins. Ex-Countermine, obviously, kind of--definitely an industry leading operating margin for the company. Can it go higher from here do you think? And we've heard some chatter a little bit about more price sensitivity coming out of government customers moving forward. And have you heard some of that and do you think that might play into your model moving forward as well?

Joe, it's Kevin. I always concern myself with that and our performance has proven otherwise. I would say that going into next year I think that we will be exceeding an 8.2% operating margin just based on the staffing and the requirements. More details will be provided later. But in the markets we're in we haven't seen that price competitive nature as much as in other areas. I'll let Bob speak to the--.

--Joe, in terms of we are anticipating some of that into the space. And, of course, we don't believe that margins have to come down to be competitive and that we can do it with more creative solutions for our customers, creative pricing strategies as well, which is exactly what we're planning for.

I think some of the margin discussion you are hearing has to do more with the acquisition commodities, as opposed to the type of research services that we provide. And as everyone said here, I don't think we see a real hit on our margins.

Thanks very much.

Our next question comes from Tim Quillin, Stephens Inc.

Good afternoon. Another nice quarter.

Thank you.

Did you say how much you expected ETG to contribute in sales this year?

We did not. We have said in '09 we expect about $20 million in sales.

Okay. And this is quibbling a little bit, and I understand. But if you take out--or if you factor in the ETG contribution and the amount that you raised Countermine, one might have expected you to raise your overall sales guidance a little bit more than you did. Was there any factors in there that made you a little bit conservative on other things?

Tim, the only thing we're factoring are the holiday seasons on the services component and try to make sure that we factor for that.

Okay.

That's all.

Yes, okay. And Kevin, you're always good about giving us the revenue for RSC and JERRV. Do you have that in front of you?

Yes. RSC was 31 million. JERRV was 25.

Oh, is RSC down? Was that--but that was RAID related?

Partially RAID related and partially just the material close on that contract as well. It's a mixture.

Okay.

About half and half.

And if I can sneak in one more question. Can you talk about the other emerging opportunities on C4I, in particular [BETSY] and how you might be positioned for opportunities there? Thank you.

I think we've been very good at working with our customer to identify these--work with them on their planning phase so that we're well positioned for when the opportunities come out. RAID was a great example of that. BOSS is a good example of that. BETSY is another RAID-like solution that is in our pipeline as well. So we obviously feel very well positioned.

These things have many different names, so I think the one you're referring to is the one we're tracking that's very similar to our RAID program. But these things have--like I said, there's a bunch of different names for them.

Yes, thank you.

Our next question comes from Bill Loomis, Stifel, Nicolaus.

Hi, thank you. Good quarter. Looking at the cyber opportunities, can you tell us what these RFIs--what--just generally what area--are they coming out of the DHS side for civilian or the intelligence agencies or out of the DOD agencies?

Well, the intelligence agencies have the charter to provide comprehensive cyber operations for the federal government. DHS obviously has a piece in that. The way these opportunities are is you're going to see a lot of information assurance type opportunities - intrusion detection, intrusion prevention systems. You're going to see an operational component of this. But along with it, you're going to see an analysis center stood upright, because there has to be an analysis capability now. Along with that, a counter intel capability, a threat assessment capability, damage assessment capability. So it's really--when we say comprehensive cyber we're talking really end to end from--don't just look at it is information assurance and operation. There's a large analytical piece and a CI piece to this as well.

So--but are you seeing--which area are you seeing most of the flow today? Is it--?

--Well, again, keep in mind, these things don't exist now. So the RFIs--for example, the one we just recently won at one of our intel customers was to develop a framework based around what I just told you. Right? How does an analysis center look like? What does an information assurance program look like? And how do you tie all these together and fuse it with other intelligence sources that are coming in?

Okay.

Does that explain this?

Yes, I mean, I definitely want to pursue this a little bit further later on. But just jumping to one more question on the--just in Afghanistan and Iraq. What is your split now in terms of the programs you have over there between what the work's being done to support in Iraq and what work is being done to support in Afghanistan?

Well, it's Countermine and JERRV are--I mean, those are the two main programs. We're seeing a lot of the [MRAPs] move into Afghanistan and we're increasing our support for those in theater. Are you looking for the specific revenue breakout? I mean, with headcount there's probably three times as many in Iraq as there is Afghanistan.

At this point.

Yes.

And how about outside of that, just looking at things like RAID and some of the ISR stuff that you're doing?

We have that lumped into it.

Into what?

Into the total of about 700.

Of people? Okay.

Right.

But as we start to increase forces in Afghanistan, you mentioned you're going to see some transition of just--do you think it will be a one for one or--I mean, because we're not going to have nearly the amount of people or resources tied up in Afghanistan.

I think it's too early to tell right now. Right now, it's not a one-for-one.

Okay. And then, just one final question on the pipeline, the 11 billion. Did that--did the 11 billion that hit last quarter, did that include 800 million in there for Countermine when you talked about pipeline last quarter?

Yes, I believe it did, yes.

Okay, thank you.

You're welcome.

We'll have our next question from Brian Kinstlinger, Sidoti and Company.

Yes, hi. Thank. The first question I had was related to pricing down the road as the government wants this bailout and has to figure out ways to pay for that. Everyone's talking about defense cuts and mostly for the contractors. It sounds like that maybe there will be less money for growth. Will that cause pricing pressure do you think as contractors like yourselves all go after the same work more so than maybe in the past?

It will not be pricing pressure in the segment of the market we are in, because of the high end technology aspect of it. Again, as somebody else questioned, there may be pricing pressures in some of the commodity areas, but not in the market we're normally in. Also, you have heard that there's talk that the 700 billion will be cut. I think when the new administration gets in, reality always sets in. They already have 550 billion of what they need.

The remaining funding is for the troops on the battlefield and I cannot envision a scenario that the first thing the new President would be--would do is withdraw funding for the troops on the battlefield. So we don't see the pricing pressure--we may not see the 700 billion go up year to year as has occurred over the past five years, but we don't see it being significantly different. And again, it's only 3% of gross actual product. And I know the nation needs money for all of these other issues, but I think it will come from some other source.

Great. And my second question was related to cash flow, which was pretty strong with DSO coming down. What do you think a sustainable DSO is? And then, given valuations--and we heard that on another call today--are still pretty high, could we see other uses of capital right now, such as buy backs or anything else that you might use your cash for? Sorry.

Regarding DSOs, we believe that a 69 or 70-day is a target especially for Q4, based on holidays and the government price processes. Going forward beyond that, we've seen the trending toward the mid-60s and our goal is to get to that and to maintain that. We're very happy with what we've done so far. But going into Q4, we just think there's going to be a bump up in the DSOs based on the government payment cycle.

And is there an authorization in place that you might think about buying back stock is--as you get hit and while business remains pretty strong?

At this point in time, I don't see a scenario where we would seek to buy stock back. I think a better utilization of our capital and credit is to continue to grow this company, both internally and through acquisitions.

Great. Thanks.

It's worked for us over the past six years, and I don't see the point of changing at this point.

Okay, thank you.

(OPERATOR INSTRUCTIONS.) We have no further questions in the queue at this time. Thank you for participating in today's conference call. This call will be available for a replay beginning at 9:00 p.m. this evening through November 12, 2008. To access the replay, please dial 1-888-203-1112 for domestic calls, or 719-457-0820 for international calls, using the conference ID number of 3312456. This concludes our conference call for today. Thank you for participating. You may now disconnect.