ManTech International Corp (MANT) 2008 Q4 法說會逐字稿

Good afternoon. At this time, I would like to welcome everyone to the ManTech fourth quarter and full-year 2008 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Mr. Cormier, you may begin your conference.

Thank you. Welcome to ManTech International Corporation's fourth-quarter 2008 earnings conference call, and again, we thank you for joining us today. I am Joe Cormier, our Senior Vice President of Corporate Development. And leading today's call from ManTech are George Pedersen, our Chairman of the Board 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 from 2008 and provide our growth outlook for 2009, and Kevin will review our 2008 and financial performance as well as 2009 forward guidance.

Before we begin our discussion, it's important that we remind you that the company's fourth-quarter results are preliminary in nature and thus are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act. 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 risk factors and other risks and uncertainties, please refer to the second 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?

Thank you, Joe. Good afternoon, and thank you for participating in today's call. We are extremely pleased to discuss our record 2008 financial results. As you will see from our press release, 2008 operating results were strong across the board. 29% revenue growth with 18% coming organically, 34% net income growth, and 31% EPS growth over 2007. Operating margins improved from 7.9% in 2007 to 8.2% in 2008.

This financial performance was the result of executing our growth strategy, which we have been faithfully following since 2001. The result from this growth strategy is roughly a $2 billion enterprise today that has achieved 25% compound annual growth in revenue and income since our IPO in 2002 and is poised to continue our growth trajectory in 2009 and beyond. In addition, during the year, we completed two more selective acquisitions in the high-end intelligence and defense markets to enhance both revenue and operating profits. Today ManTech's mission-critical services focus on the nation's highest priority government programs.

Our forward guidance implies continued operating momentum for 2009 consistent with our historical performance and is based upon the robust demand we see for our mission-focused services. As a reminder, this guidance does not include any future acquisitions, but we have ample credit available and strong financial cash flows to complete accretive strategic acquisitions in any given year. We remain confident that the areas where our business is focused will continue to be a priority under the new administration in terms of funding over the next several years. The threats to our nation continue to grow, not diminished, and the fronts on which we will protect our country continue to expand.

The President will be submitting his budget this week, and we believe that the defense portion contains $537 billion for FY '10, a 4% growth factor over FY '09, while the remaining supplemental spending for FY '09 represents another $83 billion of funding which should come in the March or April time period and is up from the $66 billion requested by Secretary Gates previously. This should bring the total FY '09 defense spending to over $636 billion.

We are also convinced that cybersecurity will be a large and growing market for years to come. As we have discussed in the past, ManTech has been a key partner to the Department of Defense and the intel communities in their efforts to combat the cyberthreat and we feel positioned to continue these partnership well into the future. Our position of trust and partnership with our customers is evident by our historical growth and financial performance.

As we enter 2009, we look to continue executing the support of our nation, our customers, and our employees and you -- our shareholders. With that, I would like to turn the call over to Bob Coleman. Bob?

Thank you, George. We are all extremely pleased with our 2008 operating results. And I would like to take this opportunity to thank all of our almost 8,000 employees for another successful year. It's your commitment to our customers and their missions that make ManTech successful.

In 2008, we delivered exceptional growth with $1.87 billion of revenue and earnings per share of $2.55. At the same time, we strengthened our capabilities and extended our market position through acquisitions of ETG and EWA services and we continued to penetrate deeper into the mission-critical intelligence and DOD community. We now have over 1,000 contracts and task orders generating a run rate of $2 billion in revenue, and we are strategically focused in the mission-critical market space and broadly diversified throughout the intelligence and DOD community. Our national security customer focus has positioned ManTech for strong demand across our mission critical services and solutions. Our bookings highlight this demand as we won roughly $3 billion in contract awards in 2008, a record amount, and 35% of those bookings came from new business wins and contract add-ons. Specific areas of our business such as cybersecurity and our global logistics and supply chain management services had very strong growth in 2008, and we expect this to continue. To meet these increasing requirements and ramp up new contracts, our recruiting continues to deliver as we increased our staff by over 600 net adds in 2008. Overall, we are very pleased with our results.

Going forward, we maintain our focus in mission-critical markets, yet remain diversified across the intel and DOD community. We are extremely well positioned for continued long-term growth in revenue and earnings. As a result, we are projecting 2009 revenue of $2.1 billion to $2.2 billion and we are forecasting operating margins of 8.3%, which implies operating profit of $174 million to $183 million. This represents a 12% to 18% increase in revenue growth off our 2008 base and an expansion of our 2008 margins. Kevin will fill you in on these details.

Consistent with our expectations, bookings for the quarter totaled $180 million. We expect to win a large share of new business in 2009 that will drive double-digit organic growth consistent with our mission-critical markets. Our qualified pipeline currently stands at $12.6 billion, and we're tracking about 30 opportunities in our markets that are over $100 million. We're off to a good start in 2009 as we receive the new $355 million two-year award with SOCOM for MRAP and route clearance support in southwest Asia in January. As a reminder, $50 million annually of our existing work on the JERRV contract will move to this program. This award expands ManTech's customer set in the counter-IED market with specific focus on Afghanistan.

With regard to our 2009 growth, I would like to point out that the contracts are in place, and our customers' budgets support the funding requirements for these contracts. Roughly 15% of our 2009 business base is up for recompete, which is below average for a typical year. The timing of these recompetes is spread throughout the year, which means that only 7% of our 2009 revenue is at risk. Of course we feel very well positioned for our recompetes and protecting the base remains a priority.

As we have discussed in the past, our work in the cybersecurity space, but I think it is important to provide more depth in this area. As you are aware, the comprehensive National Cyberinitiative will touch all agencies of the government and critical infrastructure and will drive upwards of $15 billion of new spending over the next five years. The lion's share of the dollars will go toward intel, DHS, and DOD. ManTech's history in supporting and partnering with these lead agencies positions us to capture a significant share of the new program funds being directed toward this initiative. For example, we mentioned a classified program we were awarded in April 2008. We have already seen the requirements expand significantly from day one, and we continue to see additional opportunities and funding for future expansion.

To strengthen and expand our presence, we will continue to seek out acquisitions like the Emerging Technologies Group. ETG brought us two new customers and added depth to our cybercapabilities. Additionally, we see 2009 as a critical year for winning new cyber-related programs, which will position ManTech for significant growth in our cyberbusiness in 2010 and beyond.

In closing, we are excited about our growth prospects for 2009 as we continue to leverage our market position to build ManTech into the premiere mid-tier national security company. At this point, I'd like to turn the call over to Kevin. Kevin?

Thank you, Bob. As you saw in the release, fourth-quarter revenues of approximately $495 million represents 17% total revenue growth with 12% coming organically for the fourth quarter compared to last year's fourth quarter revenues of $422 million. For the year, revenues grew to $1.871 billion, up 29%, 18% coming organically over 2007. Our core markets continue to be strong. We continue to be well positioned in all components of our DOD and intelligence community customer base. Our revenue is well diversified, with only one contract contributing over 10% of revenue. This contract, Countermine, generated $100 million in revenue in the fourth quarter and $342 million for the full year.

Contract revenue mix remained relatively unchanged during the quarter and year. 98% came from federal government sources for the quarter and year. Defense, intelligence, and Homeland Security-related business comprised 95% for the quarter and 94% for the full year. The portion of revenues coming from contracts billed on a time and material basis was 69% of revenue, fixed price was 12%, and cost plus was 19% for the fourth quarter; and 66%, 14%, and 20% for the full year respectively.

As of December 31, total backlog was $3.97 billion, and funded backlog grew 55% over last year to $1.18 billion at the end of the fourth quarter. This represents over 50% of 2009's mid-point revenue guidance. This continued strength in funded backlog demonstrates ManTech's positioning in the center of the nation's mission critical security operations and provides solid visibility into future quarters.

Our operating profit was $41.4 million in the fourth quarter, which yielded a margin of 8.4%, which is up from 8.3% in the third quarter. The key drivers of the strong performance was the higher than anticipated direct labor contribution to revenue in the quarter, and increased award fees and returns on some fixed price contracts in the quarter as well. These gains were partially offset by investments in infrastructure and business development during the fourth quarter, which increased G&A expense.

For the year, operating profit was over $153 million, which represented an 8.2% operating margin. We had expansion of margins in the second half of the year as our strong support of customer needs resulted in improved returns on contracts and direct labor additions. As a reminder, of the $153 million of operating profit, Countermine contributed approximately $12 million in operating profit in 2008 or 3.4% margin. The rest of ManTech's core business delivered 9.2% margin.

Our effective tax rate for the year increased to 39.8%, resulting in a 40.3% effective tax rate for the quarter. The increase in the effective tax rate was driven by declines in the asset values of investments in our deferred compensation plan, otherwise called our ESSP.

Based on this significant operating margin contribution, our fourth quarter net income was $24.6 million and translated into diluted earnings per share of $0.69. For the full year, net income was $90.3 million, which was up 34% from 2007. This produced $2.55 in diluted earnings per share for a growth rate of 31%.

Turning to the balance sheet and cash flow metrics, during the year we generated record operating cash flows of over $127 million, which represented over 140% conversion of 2008 net income. The operating cash flow was more impressive given the working capital needs associated with our accelerated organic growth during the year. Our receivable days sales outstanding at the end of December was 74 days due to slightly higher than expected receivable delays that occurred during the holiday season. As of December 31, the company had $4 million of cash and $44 million of debt and an equity base of $681 million.

Turning now to our guidance. We have provided our initial first-quarter 2009 and full-year 2009 guidance in our earnings release. Our first-quarter 2009 revenue guidance of $485 million to $505 million represents a 14% to 19% total growth over last year's first quarter, with 12% to 16% coming organically. We are forecasting an operating margin of 8.4%. Our net income range of $24.6 million to $25.6 million results in earnings per share guidance of $0.68 to $0.71 per share on weighted average shares of 36 million. This represents 20% to 25% growth over last year's first-quarter earnings per share. The guidance assumes net interest expense of $275,000 in the first quarter and a 39.4% effective tax rate.

Our full-year 2009 guidance, which does not include any future acquisitions or divestitures, of between $2.1 billion and $2.2 billion represents 12% to 18% revenue growth from our 2008 full-year results. This guidance implies organic growth of 10% to 16% in 2009.

Based upon the improvement in the operating margin we delivered in the second half of 2008 and our strong headcount growth and focus on improved profitability across the corporation, we are forecasting operating margin of 8.3% for the full year 2009, which is up from 2008 operating margin of 8.2%. We estimate our 2009 net income to be $105.5 million to $110.6 million, which results in earnings per share guidance of $2.91 to $3.05 per share based on weighted average shares of $36.3 million. This earnings per share range represents 14% to 20% growth over the 2008 results of $2.55. Our guidance assumes $200,000 net interest expense for the year and a 39.4% effective tax rate.

Looking at our balance sheet and cash flows for 2009, based upon the strong growth and consistent receivables conversion, we expect strong cash flows from operations of over $120 million with modest capital expenditure of $10 million. As a reminder, our cash flow includes the benefit of $7 million of deferred tax benefits related to goodwill amortization for prior acquisitions for tax purposes. Additionally, we anticipate noncash expenses of depreciation and amortization to be approximately $18 million and expense from stock option grants to be approximately $8 million during 2009. We are targeting receivable days sales outstanding of 70 days for 2009.

Our continued strong cash conversion performance will allow us to pay down our debt and provide flexibility to fund future strategic acquisitions. As a reminder, we have a $300 million credit facility along with the $120 million of positive cash flow we expect to generate in 2009, which provides significant additional capacity to grow our revenue and earnings base going forward.

In closing, we are excited about the prospects of our business, as we are operationally well positioned for continued growth in revenue and profits, supported by our strong balance sheet and cash flows. And now we would be pleased to take any questions you may have.

(Operator Instructions). We will take our first question from Michael Lewis, BB&T Capital Markets.

Thank you very much for taking my call. George, just a quick question for you from 30,000 feet here. I attended a briefing today with Senator McCain speaking. He was discussing Afghanistan. One of the interesting comments that he made with regard to Afghanistan was that -- I'm quoting him here -- that the increase in troops was not a surge, but just an increase in end strength that could last for a number of years. And with that said, I'm wondering about the JERRV and the other RG 31 and 33 work. Based on the expectation we saw from the contract release in January on this work, what's your expectation on the ultimate level of business that you can derive from this over, say, the next -- assuming we're in Afghanistan for the next five years?

Well, I can't look out five years. But as the troops move there, our support operations -- not just on JERRV but a number of areas -- will have to go with them. And I'm aware of some of the comments that the Senator made. And I won't get into the business of defining it, except as you've heard us say for the past two to three years now, we did not believe that this mission would be over any time soon. Bob, would you like to amplify at all on the -- ?

Sure. Mike, we're already seeing a ramp-up in requirements in Afghanistan. As you know, that's much tougher terrain than Iraq. So I think we have our work cut out for us there. I'm worried that that is going to be a long endeavor, as Senator McCain has said. So, I think we'll continue to grow in that area in '09 and '10.

It's Kevin. I will comment, because I know the question is coming, that as we mentioned, $50 million of the JERRV program is related to SOCOM and is rolling into that effort. We are projecting at least $75 million of the low end of our guidance coming from that program. And obviously if requirements come up, we can provide you more detail as we get better visibility as well.

I think you know that they're looking at an $82 billion -- $82.2 billion plus-up which would take them through. That's a bit higher. I think last time Secretary Gates was talking about $66 billion, and that number has increased. If you look at some of the components of where they're spending the money, you will find that the systems that they are sending in require the kind of support we provided for the past five years.

That's very helpful --

That's too long an answer.

I would like to add to that that we do not get a lot of funding through those supplementals, though. Most of the work we have is in the base budget of our customers.

I understand that.

We're not at risk for that.

One more question and I'll get out of the way here. And it's -- Bob, I was wondering if you could handle this. Of the new business awards, I think it was a little north of $1 billion in actual new business or expansions of business. Where did you experience the greatest demand within your customer base? Was it from the individual military services, or specifically related to some of your three-layer intelligence customers?

I think the majority came in the DOD spaces. But we haven't experienced strong great in the intel spaces, particularly in the cyber area. As you know, we won a classified program I mentioned back in April. We've seen some good growth on that contract and we expect that continue over the next several years. There's a lot of money, as you know, in the NCI and I think we're well positioned to continue to capture that.

Thank you very much.

And we will take our next question from Bill Loomis with Stifel Nicolaus.

Hi, thank you. Good quarter. Can just clarify on the -- the Countermine and JERRV? When you talk about your guidance and the $100 million you had in the fourth quarter, the $105 million in the first quarter, which contracts specifically are you talking about? Are you including the older JERRV contract as well in that number?

Yes, Bill. I'll crosswalk that because we do have the $28 million in the fourth quarter from the JERRV program that is going to be split -- effectively part of it going into the SOCOM contract that we mentioned, which is the $50 million annually, and the balance going to the Countermine program. Between the $100 million in Q4 on Countermine and approximately $15 million on the current JERRV program, the baseline we consider for Q4 for comparative purposes -- about $115 million in Q4, and our low end of our guidance is projecting $105 million related to that. As you may recall from last year, the first quarter's ODC flows have stronger variability in them and go down a bit based on the timing of frankly holidays and the like for some of the vendors. And we have to factor that in in the first quarter.

Okay. So when I'm looking again at the $105 million number, that's equivalent -- you said in the fourth quarter you had the $100 million on Countermine, and about $15 million on JERRV, did I hear that right?

Correct.

So in the fourth quarter, did you have $115 million in total Countermine, JERRV, including the older JERRV contract?

That's correct.

And then your equivalent, your $105 million is an equivalent, a low end equivalent to that $115 million?

That's correct.

Okay.

And then out of the $28 million on JERRV, the remaining balance, the $12 million to $13 million is the SOCOM related portion for the quarter.

Okay. What's your assumptions in terms of level of activity? Can you talk a little more subjectively about how that -- what the level activity you're expecting in Iraq and -- and the level of activity that you'll expect as we -- as you grow in Afghanistan? What are you assuming in terms of number of MRAPs in theater? I don't need specifics, but just more generally what are you assuming in terms of actual MRAPs in theater split between Iraq and Afghanistan? And then what are your thoughts on the Security Agreement have an impact on this contract this year?

Bill, it's Bob. First I -- I just -- one of the things I'd like to say is I think the Countermine mission in Iraq is going to continue at some level as we shift our support to the Strategic Overwatch mission. Even when the combat troops decline. The number of MRAPs in theater are now over 10,000, and -- and if you recall, we really haven't done a lot of MRAP support, and we're expecting a large increase in that in Afghanistan. We've already seen the requirements double, and we expect it will go up from there. So I think that we're going to be there for a while. I think there's going to be strong growth in this program through '09. And I don't see a reason why it wouldn't continue through 2010.

So Iraq stays where it is versus what you did in the fourth quarter, plus you're getting an incremental growth from Afghanistan. Is that -- ?

In Afghanistan. That's correct. I expect it to level off in Iraq. Correct.

Okay. Thank you.

And we will take our next question from Joseph Vafi with Jefferies & Company.

Hi, guys. Good evening and good results here.

Hi, Joe.

Maybe we could talk a little bit about how you got to your guidance numbers for '09. If we rewound the clock and we were at the same time last year, what kind of level of visibility did you have to your guidance then versus now? Is it about the same? Is it different? Does it I guess also -- I guess there would be some other puts and takes in there that would be interesting, get some commentary on. One would be recompetes. Then secondly, pipeline last year versus this year -- and comparing the two years and figuring out where guidance came out.

Sure. I'll take a crack at this and then let Kevin add on to it. I think the data for the -- for formulating the guidance is similar this year to last year. We did expect a little higher recompete level last year, but that went down. And a lot of those opportunities were extended or shifted to the right on us. If you're looking at comparisons quarter over quarter, remember that Q4 '07 was a big revenue quarter for us. And I think we did a good job this year growing the business. I think those bookings along with 35% of that being new business wins and add-ons position us for another strong year. So I think all of that together really is how we developed our guidance and our margins for the year. I'll let Kevin add on to that.

Just a couple of data points. If you look at the end of last year, we had $758 million of backlog funded. That went to $1.177 billion. There's an increase there. The visibility is very good on the commitments to the customers. We had expected pipeline of about $10.3 billion. That's gone up to $12.6 billion. We also had over $1 billion in new contract awards in FY '08, and as importantly, the second half of 2008 had the highest level of net labor adds during that period. So in terms of the margin driving piece of the business, we've got a stronger baseline going into 2009 and better visibility. We're widening the range for the year in terms of the revenues because the variability in the ODCs, but generally, I think that we outpaced where we thought we would be at the beginning of last year. And we're trying to reflect the strong continuance of the business with what we have in hand and what we know as -- we currently have visibility into what's going on.

Okay. That's helpful. So in essence we're about the same level of visibility vis-a-vis last year's guidance, or maybe a little better. Or -- ?

Yes.

Relative to the range of guidance in the visibility you have to the guidance today versus a year ago when you provided guidance?

A little bit better, and on the recompete side, the revenue risk from recompetes is about 7% for 2009 and the recompete amount for total business is about 15%. So again, below the average 20% annual amount, and that provides us good visibility as well.

Okay. That's helpful. And then have you seen any kind of slowdown yet in terms of decision making given new department heads or agency heads at this point?

We have not seen a slowdown as a result of that. I mean, there's always opportunities shifting to the right as they try to formulate the requirements and then, of course, the acquisition work force, the strain on the acquisition work force causes delays, as well. But nothing as a result of the change in heads.

I think there's another factor here. A year ago, we were looking at a philosophy that we would be out of Iraq in a year's time. And I think the budgeting and thinking reflected that. We now know that that's not exactly the plan that President Obama has in there indeed [the shifts offsetting] soldiers. There's a totally different philosophy that's supporting the appropriations that are likely to come.

Okay. And then just maybe one quick followup on -- final question. SOCOM MRAP margin, we're looking at that as similar to Countermine type margins?

Kevin, I'm going to say it would be slightly higher than the Countermines because of the labor mix. But it is closer to the Countermine margins than the other core business.

Great. Thank you very much.

Our next question will come from Brian Kinstlinger with Sidoti and Company.

Great. Thanks for taking my question. You talked about the cybersecurity a little bit and said booking should begin in '09 and revenue maybe in 2010. Can you talk about if you've already submitted proposals and maybe quantify the pipeline in terms of number of programs and dollars you're tracking?

Sure. I will say that the dollars have started flowing a little bit faster than we expected. But what we're seeing is them flowing on to existing contracts. I know some folks out there have announced cyberwins, but I doubt those are CNCI related wins. They're probably cybersupport to other IT solutions. We are seeing strong growth in the pipeline in cyber. I'm not going to get into the specific details, but the agencies that we serve, the -- the intel community, the DHS, Justice Department, FBI, and DOD all have a main -- major role on this mission. I believe ManTech, and I know this is a big, big statement, but I think we're probably the most qualified company in this market to support our customers' requirements because we've been doing this for so long. Our capabilities are very deep, very broad -- they're well-known in these tight circles of the community. So I am confident that we'll have some good growth in the area going forward.

Considering these programs are black -- or a lot of them are, how will you be able to discuss them? Will you be able to discuss the bookings related to cybersecurity without getting into them particularly? And how can we track them to the year? And do you expect to have announcements throughout the year?

Yes. We will be able to announce the bookings amount. Wu won't be able to say anything about the customer, the mission. You can expect those to come out in probably our quarterly announcements. We won't go into details on them.

Can you tell you the numbers that were booked in 2008 related to cyber?

Related specifically to the CNCI?

Right -- well, maybe both, I don't know. Whichever you think is --

Over $120 million just in CNCI. But remember, cyber's about 5% of our business that's been growing. There's a little bit higher margins in that business because of the nature of the work. And we do expect that to double by 2011.

Okay. And then when I look at the margins, Countermine is obviously going to grow a lot slower this year. Especially if you combine JERRV and add the two year over year. In this year, you grew 30 basis points despite that growing so aggressively in terms of operating margin. Now with Countermine slowing and a lot of the stronger pieces of your business in terms of profitability growing, why might we not see the same amount of operating leverage in the business?

It's Kevin. I'll speak to that, then Bob can add comment. As we have said for the last 1.5 years, our goal is to be able to go after as a prime $100 million plus procurements, to to position ourselves. And what we are doing is focusing on our business development capabilities and processes, the systems underlying companies of our size that need to go after large procurements as a prime, as well as differentiators to include IRAD and other components. So we are investing into certain areas so that we can ensure we can go after these procurements as a prime and win to continue our growth in the out years.

I'd like to also just add to that that, you're hearing a lot of people report that there's been a lot of pricing pressure in this market over the past year. And just like them, we expect -- we have had some of that pressure, particularly in our non mission-critical business areas. Even with that pressure, we grew the margins by 30 basis points, and we're still forecasting a 10 basis point increase in '09. So I think that's pretty good.

When I take a look at SG&A from some of the answers you discussed, went up a lot from the third quarter to the fourth quarter. And sounded like that was due to [proposal] activity. Is that something that is going to be -- as you talk about building a stronger team for bigger programs the higher sort of run rate? Is it going to be more choppy than that? Maybe can you talk about the proposals outstanding or the ones expected to be bid in the first quarter?

It's Kevin. I'll speak to the G&A. For 2009, you should expect about an 8.2% G&A to revenue. It was higher than that in the fourth quarter. Not only did we have development activities, but we also had some one-time infrastructure activities in there as well. Again, trying to make sure that we were positioned. Not all of that is continuing going forward. So for 2009, you should target about 8.2% G&A as a percent of revenues.

Last question, then I'll get back in the queue with some others. We haven't talked a lot about A-Space in a long time. A long time ago I remembered that being a very small program that has huge potential. And maybe you can update -- it still has that potential, where it is sort of in the life cycle? And what we might be able to expect from that?

Sure. A-Space has grown very nicely. We're over 5,000 users on A-Space. And most importantly, it's grown across communities. So it started with one agency, as you recall, the DIA. And now it has expanded across all the intelligence agencies. Going forward, we will expect to add additional capabilities on to A-Space that will serve a broader set of our customer requirements. Another example of where A-Space is about to be used as well is in the cyberinitiative. The government's realized that this is probably a good tool for helping to identify and collaborate on cyberthreats. The program was originally sole sourced to ManTech, and it is increasing in size. So we expect that we'll see a competition come up for A-Space over the next, I don't know, second or third quarter. So I think at that point we'll see an increase in the value. But I also believe it will expand from there.

Now it was pretty small I remember in the grand scheme of things. Will it still be very small -- ?

Very small. But like all these programs, as they get adopted into the community, requirements continue to get added on, and -- and the revenue grows for us.

Okay. Great. Thank you.

Our next question will come from Gautam Khanna from Cowen and Company.

Hi. Is it fair to assume say $12 million for EWA services? If I recall, it was $20 million of sales. What's the accretion implied in your guidance?

Yes. This is Kevin. It was $12 million, just a couple pennies accretion. Expect $20 million in revenue run rate.

Okay. And if you could -- I don't know if you can answer this question. But perhaps you could help us frame it. With respect to Countermine, presumably there's a piece that's more kind of original equipment based. And then more the spares tail, as well. Is there -- can you give us a breakdown percentagewise or ballpark figure of how much is more recurring revenue? More spares based versus building of original equipment?

It's Kevin, I'll try to answer that a little bit. As you know, the route clearance systems lead the way for routes that are going to have troops run through it, which means they are likely to sustain a slightly higher level of repair and maintenance on an ongoing basis if there is a threat and if those systems are doing their job. So I would say that we expect to have a continued requirement for those systems on an ongoing basis. I can't give you specifics of how many systems fielded in, out, which location, whether it's -- which locations are coming into Afghanistan. But if your concern is the continuity and the continuance of it, they are a high-sustainment in maintenance requirements.

And the basis for the question is, ITT has guided the CREW 3.1 systems down roughly this year down 30% in terms of new deliveries. And I wondered if that could show up in your Countermine results in the back half?

It's not -- it's not something that we see in our view over the next 1.5 years to two years based on the information we have.

Okay. One last one, I'll turn it over. Kevin, could you give the RSC revenue for the quarter?

Sure. RSC for the quarter was $34 million.

Thank you.

And we will take our next question from Tim Quillin with Stephens, Inc.

Good afternoon. Good quarter.

Thank you.

Lots of good questions already. But in terms of the ongoing or what's rolled up into the Countermine contract, that was $115 million in 4Q. You're looking for $105 million in 1Q. But then back up I guess to $115 million type of run rate to get to that $450 million level for the year? I mean, what's happening there, the downward move in 1Q?

Tim, what you're seeing is a pattern in Q1 of '09 similar to a pattern that occurred in Q1 of '08 that the byes go down based on the longevity of the program. We don't have a lot more history beyond that. But it seems to be a pattern based on the vendors shutting down certain activities during the period of time during the holidays and the delays that result of that on the receipt of some of the shipped product.

Okay. Okay. And then so you're only on the -- on the SOCOM RG 31/33 contract, you're only assuming about $25 million in incremental revenue, even though the contract ceiling implies, the potential for significantly higher revenue. What will need to happen for you to get more comfortable that you'll realize closer to that ceiling value?

Well, Tim, that is at the low end of our rage. We have a wider guidance range, a $100 million range for the year, to try to reflect for that potential upward need. And again, as we get requirements from the customer and as we have better visibility, we'll be certain to tell you how that's playing out.

That's fair. RSC and JERRV for the year, was RSC about $134 million and JERRV $88 million for the full year?

Yes.

Okay. Just lastly, on the rebillable components -- one of the reasons why of course the margins are so low is -- it's a low labor content and a lot of rebillables in Countermine. Is there anything that we have to think about in terms of rebillables potentially falling off and -- or would increased labor content offset that even at the top line? Thank you.

It's Kevin. I'll mention and then Bob can add if he wants -- that our visibility on the rebillables is that's going to be constant or potentially increasing and the labor will be increasing based on the additional locations.

Yes. That's exactly right. I don't really have anything else to add to that.

Okay. Brilliant. Thanks, gentlemen.

And our next question will come from Mark Jordan with Noble Financial.

Good afternoon, everyone. For Bob, we talk about the emerging CNCI marketplace, but yet many players in the industry claim that they're heavy into the cybersecurity also. Could you differentiate or educate us a little bit what is incremental that is being done under CNCI versus what I guess everybody used to call information assurance?

Well, there's a huge difference between the two elements of cyber. One is more of -- information assurance is more of a -- if you would, a governance and compliance role, where it takes a completely different individual than you would find in the cybermission. The cybermission is going to be a lot more extensive. You have kernel developers, reverse engineers. You're going to have an analytical component -- cyberthreat analytic centers springing up all over to do intelligence analysis and counterintel on the cyberthreats. You're going to have damage assessment requirements, and you're going to have just like any combat system you would have a response area as well. So it's a much broader area. As you know, they added $3 billion into the budget this year for the CNCI. And they plan to continue that over the next several years.

How will CNCI be centralized -- I assume if you're going to do this efficiently you need to have some centralization to share best practices because this is esoteric technology.

Remember, DNI is the executive agent for it. And I think the roles are well defined. ManTech's fortunate that we sit on the Defense Industrial Base Cybercouncil along with -- I think we're probably the smallest company on there. It's mostly the major primes. And that's because of our capabilities in this area. And the one thing I've learned from that is that the roles are very well defined. NSA has a main role on in it. DHS is going to be the domestic side, along with FBI. And then DOD has a different play in this, as well. So in terms of the funding, NSA and DHS will get the majority of it from what we can tell. The NSA, CIA, and DHS.

Okay. Final question, if I may. You did talk about the increase in G&A in the quarter, which had some one-time investments. But also you saw 100 basis point sequential improvement in gross margin. Overall, op margins were up 100 basis sequentially. What was the cause for that uptick in gross margin in Q4? And what implications did that have moving into 2009?

I'll answer the last one first and then explain the variabilities. I think that for 2009 that the gross margin expectation should be around 16.5%. It could be higher or lower based on the labor growth but that's the target. The one-time activities, there are a number of them, unfortunately. But we had less fringe-related expenses in the quarter. We had some pickups in award fees based on the performance of our people. We also had some fixed price contracts that delivered a stronger level of return for the quarter. If it was any one thing, I would certainly spike it out. But there are just a number of good things that happened in the quarter.

So they effectively balanced out with the proposal, whatever the higher G&A activities all balanced out? You came in where you thought you would be? You had a lot of moving pieces for the year?

Yes, sir.

Okay. Thank you very much.

We will take our next question from Edward Caso with Wachovia.

Hi. I guess my question is on use of capital. Looks like your cash flow remains terrific as it has for years. What are you doing in the share repurchase area? What are your thoughts there?

It's Kevin. Our belief is that our best return is through acquisitions and targeted acquisitions and areas that we had gaps with our customer sets. We will continue to use our cash to that end. Share repurchases aren't in our plan.

As you know, when we went public, we stated that the objective is to grow not only internally but through acquisitions, which we obviously have done. And we think the opportunities out there right now continue to be very significant. Before the end of the year we are certain we'll find one or more two that we can close.

Can you talk about what percent of your work -- you mentioned pricing on the commodity side you were seeing -- what percent of your work would you say is more at risk to current pricing pressure?

Well, like I said before, it's really the non mission-critical areas. But again, I think we've done a good job of managing and reacting to that pricing pressure. And like I said before, we grew our margins nicely in '08. And I think we'll continue to grow them in '09.

All right. You mentioned you had a $300 million bank line. Would you, as you -- if you did a bigger deal and you approached the upper end of that line, would your rates step up?

Yes. As you know, in today's market, if we are going to expand beyond that, it would certainly require a higher level of cost for the capital.

Great. Thank you.

And we will take our next question from Michael Lewis with BB&T Capital Markets.

Kevin, just a quick followup on the balance sheet. If we were to -- I guess the question is what's your current level of debt coming into the end of February here? Just trying to figure out whether you're going to have it paid off by the first quarter or whether we should lead this thing out?

Mike, we expect that we'll have at least in our current plan the debt paid off by the end of the second quarter, not the first.

Very helpful. Thank you.

At this time, there are no further questions. Thank you for participating in today's conference call. This call will be available for replay beginning at 8:00 PM this evening through March 12, 2009. To access the replay, please dial 1-888-203-1112. For domestic calls, you may dial 719-457-0820 and use the ID number of 8146922. This concludes our conference for today. Thank you for participating.