ManTech International Corp (MANT) 2012 Q1 法說會逐字稿

Good afternoon. My name is Justin, and I will be your conference facilitator today. Today's call is being recorded. At this time, I would like to welcome everyone to the ManTech first quarter 2012 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 period. (Operator Instructions). Thank you. Mr. Davis, you may begin your conference.

Thank you, Justin, and welcome, everyone. On today's call George Pedersen, Chairman and CEO, will provide an update on our strategic alignment, and Kevin Phillips, Executive Vice President and CFO, will discuss the quarterly results and forward outlook. Bill Varner, President of our Mission, Cyber, and Intelligence Solutions Group, will describe our HBGary acquisition and their recent successes. Lou Addeo, President of our Technical Services Group, will bring you up to date on our core defense business, including current activities in Afghanistan. Finally, Terry Ryan, President of our Emerging Markets Group, will describe our approach to the new markets and our results to date on Evolvent, including the $1 billion Air Force CATS win.

During 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 Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from anticipated results. For a full discussion of these factors and other risks and uncertainties, please refer to the section entitled Risk Factors in our latest Form 10-K and our other SEC filings. 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.

Good afternoon, and thank you for participating in today's call. ManTech's first quarter revenues were essentially the same as last quarter. The national security strategy has increased the nation's focus on cyber and special operations. In response to these changing market conditions, we have developed a new strategy and organizational alignment to support our government's future needs and customers' requirements. We expect this strategy to propel ManTech's next phase of growth. The new approach will allow us to continue to enhance shareholder value, support our customers, even as the military missions in Afghanistan ramp down.

In summary, we're taking four major strategic actions. First, we are enhancing our strong positions in intelligence and cyber. We have put all of the national intelligence community and cyber work under Bill Varner in the Mission, Cyber and Intelligence Solutions Group. In addition to pursuing opportunities with our existing customers, we will and have aggressively built out a commercial cyber solution practice by acquiring firms with leading products that can integrate into an end-to-end solution. The HBGary acquisition marks the first ideal step in executing this dual-use strategy.

Second, we have consolidated business to build scale and solutions. Lou Addeo's Technical Services Group will become the primary execution arm for the core business and create centers of excellence around C4ISR, global logistics, test and evaluation communications, and IT. That will allow to us focus and maximize our value to this larger set of customers in the Department of Defense, Department of State, and more than 25 other government agencies. Third, we have created an Emerging Markets Group to identify markets and rapidly build new businesses. Terry Ryan and his team will initially focus on healthcare IT and civilian -- federal civilian agencies and then explore new potential growth areas such as energy and environment. The recent acquisition of Evolvent exemplifies this strategy.

Fourth, we have strengthened business development and capture across the enterprise with an attempt to realize efforts to identify and position for large opportunities in new technology and customer areas for ManTech. Executing the strategy will be better align our customers and capability lanes and enhance our focus on new and additional growing markets. This strategy will improve our competitive position and profitability at all levels. Despite the challenges in our market we are starting from a position of strength. Our leadership team and our people are the best in the industry. The national security market is enormous, and our focus on mission will enable us to expand our core offerings.

We have a total business development pipeline of $29 billion, including $9 billion in ManTech proposals awaiting adjudication. So there are ample opportunities for to us grow. The government's contracting function for the moment is overwhelmed, which has delayed award of new contracts and tasking under existing contracts. We see this process improving in the months ahead, but it may take a little longer to clear the backlog. We have the balance sheet and financial flexibility to position our business to our best advantage. Now Kevin will provide details on our financial performance and outlook. Kevin?

Thank you, George. Quarterly revenues of $677 million included growth on some cyber security programs and acquisitions in healthcare and intelligence IT, as well as continued support of our mobile cell tower program. The MRAP and route clearance support contracts contributed $144 million in the quarter, which is about the same as last quarter. This growth was offset by reductions on the S3 contract, which contributed $170 million in the quarter, compared to $239 million a year ago. We still have a robust pipeline of S3 opportunities, but we are seeing a slowdown in activity for in-theater ISR and biometrics support.

Across our standard revenue metrics, signed contract of percentage held steady at 89% of our revenue for the quarter. Also, 48% of revenue came from cost plus contracts, 38% from time and material contracts, and 14% from fixed price contracts. Operating profit was $45.7 million in the quarter. Operating margin of 6.8% reflected increased market pressures on in-theater work, as well as increased levels of bid and proposal and acquisition-related expenses and some one-time facilities costs. Our mobile cell tower program moved from development to sustainment. The customer has signaled to us that this program has met its purpose and will end in Q2.

Profitability was also impacted by the MRAP bridge contract, which has lower negotiated fees than the predecessor contract. Net income for the quarter was $25.6 million, with no significant differences in net interest payments, other income, and effective tax rate. Diluted earnings per share for the quarter were $0.69. An explicit component of the strategy that George described is to focus on higher growth, higher return markets to return ManTech to higher levels of profitability.

Now on to the balance sheet and cash flow statement. Operating cash flow for the quarter was very strong at $52 million or two times net income. Days sales outstanding were 76 days, down four days from the first quarter of 2011. With the build of the mobile cell tower completed, capital expenditures returned to a normal level of about $4 million for the quarter. In the first quarter, we invested $39 million to acquire our first healthcare IT company, Evolvent, and paid $7.7 million in dividends, leaving us with $119 million in cash and equivalents. In April, we expanded our cyber capability with the purchase of HBGary. As noted in today's press release, the Board has authorized the next quarterly dividend payment of $0.21 per share, which will be paid on June 22. Our strong cash flows support organic growth, diversified acquisitions, and dividends, and we will continue to return cash to shareholders.

Turning to the forward business development -- turning to business development, bookings for the quarter were [$304 million], primarily consisting of IT and cyber support for book-to-bill ratio of 0.5 times. Backlog at the end of the quarter stood at $4.3 billion, and funded backlog was $1.2 billion. Even though our customers have full program funding through the end of the year, some customers have began to hold back on procurements based on uncertainty around next year's funding. Included in the awards total is a [$69 million] FBI comps award to provide IT support for the Criminal Justice Information Services Division. This is brand-new work for us, and we unseated a strong incumbent. We have put a great emphasis on staffing programs as soon as possible, and we stood up a [100-person] team for the FBI within the first week. Thus, we will see almost immediate uplift for this program, and we will continue to expand this program during the second quarter as well. The FBI is a growing customer for ManTech, and we see law enforcement as an important particle.

In addition to the CATS award, we also won a prime position on the DISA United States Government Omnibus Network Enterprise contract. This IDIQ has a ceiling of $476 million over five years to provide information and communication support to various federal agencies. Although there are some uncertainty around timing of awards, procurement activity continues to be very heavy. We've seen growth in the total pipeline, which is now $29 billion, up $3 billion from last quarter, and bids outstanding, which is now $9 billion, up $1 billion from last quarter. Included in the bids outstanding is a recompete for our MRAP and route clearance support work, with an award expected later this month.

Now to the forward outlook. We are now projecting revenues of $3 billion, which would be almost 5% -- or about 5% growth, net income of $113 million, and diluted earnings per share of $3.06. Our AMBIANCE and FBI comps programs will drive strong growth beginning in the second quarter, and we will also have uplift from strong awards in the third quarter. To be conservative, we assume that margins remain roughly constant throughout the year. We expect a continued push towards cost plus contracts and decreases in fees on in-theater work, which will be offset with rapid expansion on higher-margin intelligence, healthcare, cyber, and IT programs. We will also focus on driving efficiencies through G&A and expect to return to higher profitability levels over time. Now Bill will discuss our cyber strategy and the HBGary acquisition. Bill?

Thanks, Kevin. Good afternoon. As George indicated, the first leg of our new strategy is to consolidate all of our national intelligence community and cyber work into one group, now known as the Mission, Cyber, and Intelligence Solutions Group. MCIS is one of the largest providers of computer network operations support to the intelligence community. We also operate a number of security operation centers where we defend the networks of the Department of Justice and the FBI, among many others.

Up to this point, we have developed tools to make our services more efficient, but we have not generated pure product sales, and we have only minimal commercial revenue. With the acquisition of HBGary, we have embarked on a new path to build a complete cyber solutions practice that combines both products and services and addresses both the commercial and federal markets. HBGary provides a comprehensive suite of software products to detect, analyze, and diagnose advanced persistent threats and targeted malware. Greg Hoglund, who was HBGary's CEO, is a true luminary in cyber threat detection and will serve as our Chief Technology Officer for our commercial cyber practice and, together with Ken Silva, will chart our technical road map going forward.

Almost all of HBGary's revenue was from product sales. We saw an obvious synergy with what we do, where we could offer our world-class incident response services to HBGary's customers. In the two months since we announced the deal, new sales have already exceeded last year's revenue in what was normally HBGary's slowest sales period. Many of those sales have specifically cited the combined strength of ManTech plus HBGary as the compelling factor in their decision. Recent significant sales include a leading credit card company, a large payment processing services company, an international bank, energy companies, major retail chains, large federal agencies, and large federal contractors. With the combination of a sales team expansion coupled with a broader services offering, we are able to target larger deals with a broader portfolio of offerings. I'm excited about the addition of HBGary, which is the first step in a new direction, and I look forward to updating you as we build out our dual-use cyber security offerings. Lou, over to you.

Thanks, Bill. The Technical Services Group was focused on driving growth within the core business, as George mentioned. The business is broad and healthy, and we have a plan to offset declines in the in-theater business over time. In reality, the in-theater picture is nuanced, as we expect stability in our MRAP and counter mine support while we manage possible pullbacks and market pressures around ISR. The new organization will help us sell new solutions to our current customers, for example, by bringing together maybe a Marine Corps C4ISR development and integration work from Terry's old group with our extensive operations and maintenance support to the Army, intense support for Secom as it begins to plan for missions beyond Afghanistan. Within this group, we are now positioned to build on ManTech's long-standing Navy presence with more scale and a broader set of solutions as our nation turns its focus on the Pacific region. And with our Encore and other IT vehicles, we are targeting the ongoing consolidation of DoD IT services by DISA, as the DoD moves away from its multiple large service centers into the various armed services and agencies. We also look to leverage our strong logistics capability as the Army resets in (inaudible) and the State Department takes on a greater role in the logistics supply chain. So, we will aggressively pursue the large set of current opportunities we have, including more than $5 billion in bids outstanding, $2 billion of proposals in process, and over $4 billion of opportunities in evaluation or capture while we transition to the new missions of defense, state, and other customers. Terry?

Thanks. Good afternoon. ManTech's expansive pipeline with expected bids this year is in part due to our emerging position in the healthcare IT market. Based on the President's 2013 budget, this market is expected to grow significantly for the foreseeable future, as the government looks to electronic health records, data analytics, and mobile computing as a means to improve the quality of care and reduce costs. Indeed, Evolvent is a highly proficient platform business that has the requisite contracts and customer relationships in this space to expand our positions this fiscal year in all three major federal health organizations.

This year, we will bid nearly $1 billion in new healthcare IT-related efforts for the DoD, HHS, and the VA, addressing the requirements to rebuild IEHR components and expand our prime position around the virtual lifetime electronic record program. Evolvent is diligently pursuing newly released task orders under the $958 million IDIQ to support the Air Force medical service that was recently awarded. The government wants to step up the pace on new awards and expects to make awards a week after submittal. Evolvent is the first acquisition for the Emerging Markets Group, and we are excited about our role to build a significant business in federal healthcare IT and to seek out new high-growth markets for ManTech. Back to you, George.

Thanks, Terry. In summary, this is a challenging period in sectors of our DoD market, particularly in Afghanistan. But I'm excited about our strategy and alignment for growth. Over our 44 years, ManTech has demonstrated an ability to move to new growth markets where it can meet the changing needs of our nation. With that, we will continue on that path. And with that, we'll take your questions.

Thank you. The question-and-answer session will be conducted electronically. (Operator Instructions).

Justin, I'm showing that there are several people in queue here.

Absolutely, sir. We'll take the first question from Brian Kinstlinger with Sidoti & Company.

Great, thanks. I'm curious, included with S3 and counter mine, maybe your total exposure with those two and anything else you have to the in-theater.

Yes. About 30% of our business is in theater related.

And that 17% is counter mine, and then how much is S3?

The bulk of the remaining business goes to the S3 contract vehicles. If you think of $170 million on top of the $141 million, you annualize that, you get fairly close.

And then is the -- is most of the reduction in the revenue guidance based on what's going on in S3, or is it a collection of other events as well?

It's S3 and other events. When we entered the year, there's a lot of activity and award activity heating up, and we believed that the awards activity would stay very high for the balance of first quarter. And there's been some pullback on timing. We had about $8 billion in proposals outstanding at the end of Q4 and expected over our one times book-to-bill, which was a significant amount of new business. And a lot of that's pushed to the right, and we're trying to filter that into our thinking.

And then on counter mine, how do you think about pricing and how you have to price to win that? And then, you are already seeing -- not yourself, but everyone is seeing a little bit lower volumes in theater on all programs. At what point do you think you start to see significantly lower volumes on counter mine, and then how do you prepare for that?

I'll speak to bidding and then let Lou add to it. We are already seeing on the counter mine contract some reductions in fees as we negotiated the bridge contract into February, March time frame. So along with other overseas contingency work, there's more pressures on fees. And obviously, that has been built in for an impact to Q1, but it's also been built in for the year as we look at it. And on terms of the volume, I think that we expect as a Company a fairly consistent amount of requirements on that program. And Lou can speak to that.

The volume is steady month over month. We have funding through the end of June. There may be less procurements in it, but there's more labor as the transition occurred from Iraq to Afghanistan last year. So we see steady state revenues up until the time the contract is fully adjudicated, and even after that, it's a one by -- one by four year contract. So it's ultimately a five-year contract.

Great. And the last question I had, Kevin, you cited two contracts for basically stepping up revenue, the FBI contract and the AMBIANCE contract. Can you give us a sense of, in the next nine months, maybe what kind of revenues you expect from those two large contracts?

We expect strong growth, specifically out of AMBIANCE. I think it's uncertain with FBI. Obviously, you can tell from the award levels that they'll be somewhere south of 100 of the baseline, but it could go above that, based on requirements in terms of the combined business. So, I think the revenues are variable because they're new customers, new requirements, but we do expect and are seeing a lot of growth heading into this quarter, Q2, around those programs.

Great. Thank you so much, guys. Thanks.

And the next question comes from Michael Lewis with Lazard Capital Markets.

Hi. Thank you so much. Hey, Kevin, the $18 million adjustment to net income, it looks like it's a very high margin in relation to the $150 million backed out of the prior guidance on the revenue. What are -- what's the implications? Why is there $0.50 coming out? That's basically my question.

Yes. So, when we entered the year, we expected to and have expected to hit somewhere in the $0.73 range, I think we communicated. When you look at the ISR work that we have, not only for competitions in the market, but also for renewals and extensions on those programs, as well as the negotiations on TACOM generally in-theater operations, we're seeing a lot of not competitive pressures, but market pressures being negotiations, extensions, and the like. We had to filter that in as well as filter in a lower revenue base that's going to support our overall indirect profile. So we're trying to be conservative, provide a margin that we can work for and achieve, and then expect our top line growth to start picking up where we can get above that number.

Okay. And if you -- if we reconcile this, does it come out to a new guidance range of about 6.8%? And also, if you back out those one-timers you were discussing in your prepared remarks, where would the margin have come in?

We had about $3 million of expenses associated with acquisitions, bringing in new acquisition indirects that we have worked through as we integrated them going into Q2. And that would have brought up, say, 20 basis points in terms of the returns, a little bit higher. That said, knowing the market, knowing the negotiation activities happening in theater, we want to be cautious about how that will pick up. I do believe that the work that's going on in cyber, the work that's going on in healthcare, a lot of these other activities and the FBI and other programs, once they ramp up, we should start seeing the trend moving in the other direction. But we don't -- we want to be cautious against the overseas headwinds.

Okay. Then setting aside the OCO work, what is the core margin of the business, outside all that overseas work?

It is above the overseas work. What we've seen is over the last six months decline in the -- let me put it this way. Almost all the reduction or all the reduction in fees that we've seen over the last six months in the returns are related to overseas-type activities, ISR, logistics, and the like.

Okay. Then just one more and I'll get out of the way. Will you remind if he if there's a large biometrics recompete ongoing? And if so, can we get an update on that?

Well, there's a biometrics task order right now, has somewhat changed from Iraq to Afghanistan. You've gone through some of that and there's over 40 [arteps] in the S3 contract that we're working on right now. I'm not so sure that that one has been moved into recompete yet. It's got 19 -- well, 12 recompetes that will go on for the rest of the year.

Okay. Thank you.

And the next question comes from Tobey Sommer with SunTrust.

Hi. This is Frank in for Tobey. Thanks for taking my question. Wanted to see if I could get some more color on the margin or profitability of HBGary and kind of how that integration is going.

I'll speak to the margins on HBGary and then let Bill talk about the integration, because it's a very exciting opportunity for us in terms of the future growth of the business. HBGary is a software and solutions company, and we -- based on its revenue size and the returns of the business, it's not going to be hugely accretive to ManTech over the first two quarters. The big opportunity is going to be as we combine and go after the commercial market space and take our services behind it and grow that component of the business. And I'll hand that over to Bill to speak to.

Thanks, Kevin. Yes. I think your question about the integration, I think the integration is going extremely well. We're not integrating them totally into ManTech as a whole, but we've established a sort of subsidiary relationship, where HBGary is able to continue to operate under their own name. Their name is very good and well recognized in the community, so we want to keep that name. And we're also leveraging ManTech services as a part of HBGary's product sales.

So, the business model here is using HBGary's products to leverage more of ManTech's service revenues and at the same time use the strong ManTech services business that we have for most of our cyber companies as an avenue to introduce HBGary products to more of our current customers. So we see it working in both directions. Then, as I mentioned in the prepared remarks, it's been very successful so far.

Great. That's helpful. And if you could, could you quantify the either percent or kind of profile of the cyber and intelligence work, now that you've kind of broken it out into this mission cyber intelligence thing.

That's not something that we provide. As we've said in the past, though, the cyber business represents 7% or more of our business. So the intelligence piece is a growing piece as well, but cyber is going to be significantly growing, based on the type of activities and awards that we have. But 7% is historically the cyber amount, and it's going to be increasing.

Also the jobs that were referenced earlier, the AMBIANCE and the FBI comps fall under that umbrella.

Okay, great. And two quick numbers questions. The percentage of awards that were new work and organic growth, do you have a consolidated organic growth number?

Yes. The percentage of work that was new was approximately half of the award value, FBI being the largest one of those. And the other question was?

The organic growth.

Organic growth is 6% down.

Okay. And finally, could you just comment on the hiring environment right now?

I think that there's a lot of opportunities for the Company. We have over 600 openings, and we're aggressively working to fill those. I think that in the areas of cyber, it's still a tough market, but ManTech is winning business that is exciting, and we're able to get our staffing picked up. And the other areas, I think that it's a fairly reasonable market right now. We've added 300 people since the beginning of the year. We've got a good growth pattern going on, and I think between that and a reduced turnover level compared to last year, we're on the path of increasing our labor-based service and revenue.

And we have seen extremely good hiring success on both the AMBIANCE and the FBI comps program. As Kevin mentioned earlier, we were able to hire and have ready to go 100 people during the first week of the contract, which is -- which means we build revenues immediately on that program. And AMBIANCE hiring has been very, very strong, also.

And the next question comes from Gautam Khanna with Cowen and Company.

Yes, thanks. I guess I'm a little bit confused by the guidance. I know $3 billion is a nice round number, but the implication in the next -- the June, September and December quarters obviously averaged to $775 million of sales per quarter. I guess how comfortable, given your bookings even post the quarter, which you haven't talked about, really, that you're going -- how conservative is that guidance? Or is that sort of something that you think has some downside risk to it? How did you come to say that?

The guidance is a point estimate. It's not a floor. It's one we think we can achieve. I would consider it neither aggressive nor conservative. It's based on the awards that we expect to have and occur, the timing of the ramp-ups of activity on hand, and I think that it's achievable. It's something that we certainly believe we could potentially exceed, as well. And it's just a lot of activity going on, and we have been and continue to be very excited about the business we're in. The timing of the awards will help drive us above that number, and I just think we're well positioned, that it's a reasonable target.

One of the things that we are looking at, and you know well, is the award of contracts has really slowed. And if I go back one or two quarters, we were optimistic in our forecast, not realizing that there would be this total slowdown in total contract awards. So, we hope and we're being told that they have to award these funds by 30 September, the end of the fiscal year. We hope that data is correct, because that will certainly significantly increase our revenue.

Okay. And could you talk to -- can you update your estimate for counter mine sales this calendar year? That would be helpful.

Yes. It's consistent with prior years, same level, 550, roughly

Did you say what HBGary will contribute to the year?

We did not. It's not something we disclose. It's a software position that isn't going to be significant to the top line, but it's going to be important for the combination and how we take that to market.

Lastly, Kevin, sorry, D&A. I know Q1 I think was an amplified number. Is that going to drop substantially in Q2 and beyond?

I think D&A will drop about $8 million in Q2 and then drop to a normalized level of somewhere around $7.5 million a quarter in Q3.

Thank you.

And the next question comes from Tim Quillin with Stephens Inc.

Hi, good afternoon. When you announced the AMBIANCE award, it's a $400 million contract over seven years and kind of an implied $57 million a year run rate. I guess A, is that the correct run rate? And B, how close are you to the run rate when we look at the 1Q, the first quarter numbers?

The 1Q numbers are very low compared to that. The ramp-up on the programs is actually -- or it was actually just beginning later in March and into April. So, really not a lot built into the AMBIANCE program in Q1. But as Bill mentioned, a whole lot of activity beginning in late March ongoing now, which was why we have confidence that the second quarter and out into the balance of the year growth from the program will continue. You want to add anything, Bill?

Sure. We continue to see new task orders that we win on AMBIANCE almost every other week or a couple of times a month, so the program is ramping up. It was indeed a little bit slower than we thought it would be, especially last year. But as Kevin mentioned, we saw significant activity the last week of March and the beginning of April, and we're seeing increased activity again. So, we have a lot of confidence that certainly soon we'll be at that run rate that you might expect from an award at that level.

Okay. Very good. And my only other question is on the MRAP maintenance award expected this month. It's one of those things, well, I guess I'll believe it when I see it. But do you -- how firm is the award date for this month, relative to other times when it's been supposed to be awarded? What's the odds of it getting kicked down the road a little bit?

Well, the award date is May 24. That's published. Actually it's June now, June 1 or May 24. It's funded, as I said before, through the end of June, so there's two months of flex right now in terms of funding. And the contract period has been extended until the end of September. So I think the playing field is between the announcement date and of the funds.

Okay. Thank you.

I don't bet necessarily on it, though.

And next question comes from Edward Caso with Wells Fargo.

Hi. Thank you. Can you explain what the rest of the S3 is, how much of it goes to in-theater activities and how much of it doesn't? And maybe give us some examples of what the non-in-theater work is for -- under S3.

There's -- S3 has about eight -- just want to start with the ceiling. It's got about $8 billion worth of ceiling left up through March 2016, earns about $2 billion a year. There's a pretty robust market for it in the US and rest of world. I would say that, as in all things, whether it's southwest Asia or OCO dollars that there's pressure on where the money's spent, but it's a healthy marketplace. I don't necessarily know the full value splits, but do have over $1 billion in our S3 pipeline and $1 billion of recompetes in the year. So it's a pretty robust contract vehicle.

And Ed, when we evaluated it, roughly 50% to 65% of the business running through it when we try to split out the businesses, OCO related, the balance is not -- it would include other things like the defense common ground system and other programs that are ISR-related that aren't necessarily specific to NTR operations.

Any update on -- has the group in Aberdeen got their -- are they more efficient now than they have been of late, or is that still a challenge?

I think George answered that question before, but I think that it was a pretty significant BRAC move. There's a large amount of people in the acquisition center that are coming up to speed, both government and contracting force. But there have been a number of delays in some of the work that's come out, come not out of Secom but out of other places.

We're seeing that delay in the acquisition workforce build up, not just there, but across the DoD. And they keep indicating that they're sensitive to that issue, and they are working aggressively to increase the workforce. We have to see it happen.

Right, but earlier you, George, you expressed some optimism that things were about to get better. It seems like it's been worse for years. I just was curious what the base of your positive outlook was.

I think there are some of the folks in the DoD who have become very sensitive to this issue. What we're hearing from industry associations and the congressional types who touch the market is that they're going to address this. And one of the reasons that there is optimism is that this money will expire by September 30 in most cases if it's not committed. And we think that's what's going to drive them.

Kevin, can you remind me how much Evolvent is contributing to this year?

I think it was about $40 million last year, and we think that it will grow in double-digit growth on top of that. So we expect it to be plus or minus $50 million, but probably exceed $50 million, with a lot of upside in terms of the proposals. I think Terry mentioned very, very strong proposal activity, great market for us to enter into, and I think it has great potential as we go through the year.

And can you repeat what the -- I thought I heard you say 6% organic growth. I assume that was for 2012, but the math doesn't work. I must have misheard.

So the question was Q1, and it's 6% down Q quarter -- Q1 of last year, and the full year's guidance is 5% total growth, about 1% organic.

Thank you very much.

Okay.

Our next question is from Bill Loomis with Stifel Nicolaus.

Hi, thank you. Just returning back to the guidance and the $3 billion revenue, so just to follow on, on the other question, just kind of taking the next nine months and calling it even between the three quarters, so that $775 million. I guess, for example, if we get to the fourth quarter, that would be -- even if you could report that revenue level in the second quarter, which seems a little bit unlikely, so it's going to be more back half loaded. But even if you did, that will still be a 14% increase in the fourth quarter. And we heard about the two contracts, AMBIANCE and FBI, contributing about $100 million in the second half. With the pressures on the other part of the business still, I guess I'm just trying to understand where that strong growth is coming from, because even if you get the awards in the September quarter by the time it staffs up and so forth, it's going to be more impactful next year and not in the fourth quarter. So can you help me with that?

Yes. I think we expect a fair amount of a around activity in Q2 that will ramp up and Q3 that will ramp up. We have $1 billion or over $1 billion in proposals, cyber-related we're sending in and expect to be adjudicated. I believe that the government will work to adjudicate awards and fund them between now and September 30 and that we will be able to expand on top of that. So, we see our positioning and despite the OCO market is strong. We believe they're going to be able to grow the business. It might be flat in the OCO-related activities, but we spent a lot of time and effort trying to build up our pipeline and capacity around these other markets that are going to be priority. The VA is not going to be subject to funding issues around sequestration, so we think that some of the healthcare markets are also going to expand. So, net-net, when you look at $9 billion of proposals outstanding and strong adjudication expected for the balance of the year, we believe it appropriate to factor some of that into our overall revenue guidance.

So far, we're a month into the June quarter. Have you seen award pick up this month so far?

We've seen activity picking up and more communications around certain timing of awards.

Did I hear you right that the issues you're talking about in terms of more competitive pricing and delays and pressures is all in the non-war-related -- I mean that those pressures are all in the war-related business, implying that the rest of the business -- rest of the business is not seeing procurement delays or pricing? Is that what you're saying?

The bulk of -- the vast majority, if not all of the, say, Q4 to Q1 gross margin decline is related to ISR and in-theater operations returns. And what we see is we see steady opportunities in cyber, steady opportunities in intelligence. I think there's some select pressures in some of the other systems, engineering components of the business, but it's not as impactful. And broadly, I think the markets we're in that have reasonable margin expectations are going to be growing at above the pace of some of the other pressured market areas.

Okay. And then just to follow on that point, you said cyber is around 7% and healthcare is pretty small so far with the $50 million for Evolvent this year. What if you combine all your growth areas that you think you can achieve that double-digit organic growth, what do you think that would total up as a percent of the business?

Well, the OCO is 30%. The other components or the other 70% we think have good growth opportunities. If you think of IT, TNE, cyber, some of the healthcare markets. That's going to be in excess of 50% of our business, and we think we're well positioned for that.

Okay. So, we got cyber and healthcare totals about 9% and then the other 41%.

IT, right.

Okay. So you're not including like AMBIANCE in that 7%?

No. The 7% is historically what we had without AMBIANCE.

Okay, okay. Thank you.

That number will grow with AMBIANCE and other program awards.

Thanks.

Moving on to Doug Carson with BOA.

Thanks, gentlemen, and good evening. Just a quick question. I think you said earlier in the call, what percent of the revenue right now is in-theater? Was it 30%?

Yes.

And as we go into 2012, you had kind of mentioned the September -- I know I'm kind of beating a dead horse, but of the business that could fall into the hat in September, what part of it manifests in the 30% of the theater business? Or is it really away from that area?

It's away from that area. There's opportunities in theater. There may be some surge opportunities that we've seen in the past related to troop reductions, but the opportunity sets that we're looking at and the bids that are higher priority and of higher volume compared to the revenue base are outside of in-theater activity.

Okay. And 2013, '14, I mean is -- theater activity is obviously supposed to continue to slow?

Yes. It will decline at the pace we can't define right now, and we'll have to wait and see how that plays out.

Okay. That's it for me. Thanks.

And next question is from Michael Lewis with Lazard Capital Markets.

Thanks for taking the follow-ups. Three quick questions. George, would you entertain a buyback at this valuation level?

We don't think in those terms, frankly. We look at that and we discuss that with our Board. And for the moment, our decision is not to pursue that opportunity.

Okay. So your capital deployments, acquisitions, and the dividend for now?

Yes. And again, as you know, we have a tremendous cash machine here that enables us to grow, and we are focused aggressively on growth, including the acquisitions. But the Board has addressed that issue, and that's our position at this point.

No, that's fair. That's fair. Also, Kevin, can I get the actual revenue from acquisitions in the quarter? I'm running $36 million. Am I on point?

It's going to be somewhere around $31 million to $32 million, $31 million.

Okay. And then, what are your expectations that you have embedded in the plan for the $3 billion revenue on S3 for this year, for the full year?

We are expecting the -- putting S3 aside -- I mean, I'm not putting it aside, but we're expecting in-theater ISR and MRAP-related work to be fairly consistent against Q1 run rates. There are components of ISR running through S3 that aren't overseas related that will build into some growth potential, but it's not going to be nearly as high as the IT through DISA and other components, as we discussed. So, somewhat.

So basically, we're on our $170 million in the quarter straight out, and that should give us a good guide?

Yes. A little bit above that, but not a lot.

Okay. Thank you, sir.

Yes.

Next will be Tim Quillin with Stephens Inc.

Thank you for taking the follow-up. Kevin, the self -- the D&A dropoff, that $8 million I think related to the cell tower contract, should we expect kind of a corresponding dropoff in revenue related to that?

Yes.

And then, I was going to ask the question about how you think about the war support work in 2013 and beyond. And I understand you don't have perfect clarity on it, but you all probably know more than we do. And so if you could at least kind of philosophically talk about how you're thinking about that over the next couple years, that would be helpful. Thanks

I don't think we have a clear view of how the withdrawal will take place. I'll let Lou add to my thoughts. I follow this from the point of view of what funding will the DoD and intelligence community get from the Congress, because that's going to drive whether or not there's activity or not. And at this point in time, you have the CR that takes it to 1 October. Our conversations indicate that there will be a CR coming next year, beginning 1 October. So I don't think there's an opportunity for growth, but I don't see the business going down perhaps as fast as we were projecting.

Thank you.

(Operator Instructions). Next question comes from Rama Bondada with World Bank of Canada.

Good evening

Hello.

Most of my questions have been answered at this point, but I had one quick one on healthcare. When we look at the healthcare company you guys bought and the $1 billion in new awards that you are putting up -- that you are bidding on, how should we think about the growth for not just those businesses but your growth profile going forward in health IT, particularly if the Affordable Healthcare Act is shot down by the Supreme Court in June?

Let me -- this is Terry. Even if the Affordable Healthcare Act is shot down, look, there's going to be more policies around at the state and the federal level to reduce the cost of healthcare. So even if that one's shot down, it's still going to present opportunities, especially in the IT world, both in commercial and the federal sector to improve the way that we account for the rising costs. In terms of our growth, around federal health IT spending, I think the expectation is somewhere around $5 billion this year in growth and just new revenues and with a 7% growth year over year over the next five years in the President's budget across all three federal health agencies. So, we're really positioning our healthcare practice to be in really the position to cover any exposure from reductions in the overseas contingency operation. So, as we ramp up in our healthcare practice and revenues, it's going to coincide with potentially some ramp-down over the next couple years in the overseas contingency operations.

Great. Thank you.

Next is Robert Spingarn with Credit Suisse.

Afternoon. Just on the mobile cell tower program, what was your expectation as to how long that program would last?

So, our expectations matched the government's acquisition, which was a year-to-year. We built it in accordingly, relative to the acquisition pricing award, and mission accomplished for the most part, and the government decided to move on to a different application area.

Now I think you said in the previous quarter that you had recovered your investment profitably at some previous point. Is that fair?

Yes. In terms of the -- you know, two things. When the government wants to build something like that, you expect that there's going to be upside around it, based on its future needs and a fairly quick turn on a decision not to continue. But it was a funded through the contract fairly quickly. It was already paid for, and what we're doing now is reducing the depreciation of the asset with the customers' timing of use, which we did expect to continue on maintenance or some other component with some upside in the future.

I see. So --

Which is gone.

Is it fair -- would you do this again?

Absolutely.

Yes.

Okay. Thank you. That's it.

Okay.

Next is Gautam Khanna with Cowen and Company.

Yes. This one is for George. I remember in the '90s, prior to going public, you guys had a lot of international business. And then you bulked up the high-end intel piece in the early 2000s. So, I guess we're kind of in a cyclical inflection point or have been, and a number of the acquisitions you've done have been in other markets but kind of niche-y, smaller. Would you ever think about doing something that broadly diversifies you away from kind of the core DoD market or the core government market?

Yes, we would. The time period you're talking about was back in the '90s, and we went through a period similar to the ramp-down that we're seeing now. The term at that point in time is the nation wanted a piece of it then. So, what we elected to do is to expand internationally, and I think you know we set up corporations, businesses around the world. In the Far East, we were in China, Australia, New Zealand. We were in England and elsewhere. In fact in, some places, we set up corporations in countries.

And then when we got ready to go public, we decided that there was a better focus back onto intel and defense. So we sold all of those organizations and have none of them today. But today, we're again at the point of looking at what is the market going down the road, and we're doing that assessment now. And the first two that popped out, obviously, were cyber and the medical, but we're continuing to look at other positions. And the reason we're able to do that, as you know well, is we've got $119 million in cash at the end of the quarter, $500 million line of credit willing to take to $750 million. So, we have the financial ability to find new areas and penetrate them. And we've started that process, as you just heard, and the core -- the major focus right now is cyber and healthcare, but we're looking for other opportunity.

I guess as a follow-up to that, do you anticipate that we'll just continue to see some of these -- what I would argue are relatively smaller niche acquisitions this year? Or do you think there are enough kind of more strategic larger deals that could get you in those markets in a bigger way sooner?

We have looked at some that are a good bit larger. We have a basic policy. We will not buy sales. They have to bring new customers, new geographic locations, and at times, contractual vehicles, and they have to be accretive. And some of the larger ones that we are looking at, prices being put on those do not allow to us follow our approach to this. But we continue to look in a variety of areas, and we've done this before, and we will find them. But as I say, we are -- we start in these two areas with good confidence, but we are looking at other technologies, other fields, and we will continue to do that because of this cash position.

Just one last one, maybe for Kevin. Kevin, are you seeing any evidence of contract term changes maybe that don't conform with the black letter contract? In other words, not allowing escalation on wages and the like, whereas maybe previously they were allowed, things like that. So not necessarily a formal change in terms of T&M switching the cost plus, but just not allowing the escalation that you naturally would have anticipated.

That discussion is going on in Congress very intensely. There are proposed bills that would not allow government contractor employees to earn more than their equivalent person in the GSA's schedule. We do not believe that will work out in that manner. There's a very intensive discussion going on, and there's congressional support on both sides of that issue.

It is in many respects a union issue, but for the moment, we don't believe it will happen. At present the first -- the top five individuals in any corporation are capped. Now they're talking about expanding that and -- to all employees, and no employee could make more than a certain level of a government employee. We don't think it will come out that route. There will be change, but we don't think it will be that radical.

Okay. But anecdotally, I guess, in terms of -- maybe it's not a formal legislative -- it's not real yet, but in terms of just your day-to-day negotiations on task orders and the like, are you seeing that type of discussion where --

Yes, we are. We are seeing some of that, not a lot of that, but those words do come up in some negotiations. So we're -- the negotiator will say I'm not going to allow your employees to make more than my GS-14 employees, something like that. There's not very much of that, but there is some.

Okay. Thank you very much.

Putting the escalation aside, there is in the in-theater activity greater levels of negotiation by the customer, putting competitive pressures aside around overall cost, fees, and the like. So that's out there.

It's more pronounced overseas, okay. Thank you.

And that does conclude the question-and-answer session. I will now turn the conference back over to you for any additional or closing remarks.

We obviously appreciate your interest in the Company and the questions that you ask, and we will be here to answer more questions if more occur. Thank you for the interest in ManTech.

And that does conclude today's conference. Thank you for your participation today.