ManTech International Corp (MANT) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the ManTech International Corporation first-quarter FY14 conference call.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Stuart Davis, Executive Vice President of Strategy. Sir, you may begin.

Thank you, Sam, and welcome, everyone. On today's call, we have George Pedersen, Chairman and CEO; Kevin Phillips, Executive Vice President and CFO; Lou Addeo, Executive Vice President for Corporate Development and Strategic Acquisitions; and Dan Keefe and Bill Varner, our two Group Presidents.

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 things over to George.

Good afternoon, and thank you for participating in today's call. As we discussed on our last call, 2014 is a transition year for ManTech International. We're changing mission requirements in Afghanistan, and in the first part of the year we'll see declines in revenues and earnings. However, with a stable budget picture, strong balance sheet, and excellent position in key markets, we will return to growth as we head into 2015.

Everything I've seen so far in the markets have brought my conviction of this outlook. With full-year 2014 appropriations, our customers are executing their plans to obligate funds by the end of the fiscal year. Spending levels are generally flat compared to last year, but above the customers -- what they were prepared for, meaning that they have additional money to put on contract at this point.

As a result, our proposal activity has increased dramatically. Our entire Company is focusing on positioning for and winning our share of these new opportunities, many of which are substantial. From the awards we're expecting in 2014, we should drive organic growth in our business in 2015.

In addition, we are a cash-generating machine, which allows us to grow the Company through acquisitions, as we have in the past. Operating cash flow of $62 million in the quarter led to a record quarter-ending cash balance of $276 million, even after paying $45 million for the acquisition of Allied Technology Group that we closed in February. We have already seen the first [DHE] win based upon the combination of ManTech and ATG 's capability and positioning in this market.

We will continue to invest in our growth. We signed a definitive agreement yesterday to acquire a firm called 7Delta, Incorporated, which should bring about $80 million in annualized revenues, almost all of it providing IT solutions and services for the Department of Veterans Affairs. We made a strategic commitment to the healthcare IT market, and we have now a strong capability and the presence across the entire spectrum of the Federal Healthcare, including VA, DoD, Health and Human Services.

Going forward, the market dynamics should be more stable than they have been in the past. [The floor] level of spending for 2015 is set about the same as the 2014 level by the Bipartisan Budget Act of 2013.

Since the last call, President Obama submitted a 2015 budget consistent with the BBA, which separately requested an additional $56 billion in spending, with half going to defense. The House of Representatives passed a budget that also adheres to the BBA caps for 2015, but raises the defense budget in 2016, and again in 2017. I do not foresee large cuts to the defense budget.

Now, Kevin will provide you with details on our financial performance and outlook. Kevin?

Thank you, George. Revenues for the first quarter were $452 million, compared to $622 million (sic - see Press Release "$646m") in the first quarter of last year and $491 million in the fourth quarter. The revenue differences are mostly explained by the decline in the MRAP and S3 contracts, which are heavily tied to Afghanistan.

The MRAP family of vehicle support work contributed $41 million in the quarter, down $102 million year over year, and down $32 million from the fourth quarter. S3 revenues were $95 million in the quarter, down $38 million year over year, and down $12 million from last quarter. More than three-quarters of the year-over-year and sequential drops in these two programs were from material and subcontractor costs.

For the quarter, the prime contractor and contract mix distributions were relatively steady. 90% of revenues were as a prime, 71% were on cost-plus contracts, 10% were on time and material contracts, and 19% on fixed-price contracts.

Operating profit for the quarter was $20 million, for a margin of 4.4%. Many of the factors that drove the margin below our expectations for the quarter were one-time in nature.

As is typical in the first quarter, we had more than $1 million in fringe benefit costs that we'll recover over the course of the year. We incurred about $600,000 in acquisition-related costs, including an early-lease termination as part of the ATG integration. We also had start-up costs on a fixed-price DoD health program that we will recover over time.

Other drivers that reduced profit were investments we are making this year in bid and proposal, IR&D, and commercial initiatives. We believe that now is the time for these investments, based on our capability sets and the opportunities at hand. We will drive G&A efficiencies over the year, and the margin trend will reverse, as revenues build through new awards and the investments lead to new business.

Net income was $9.6 million, and diluted earnings per share were $0.26 for the quarter. The effective tax rate was 40%, which was 1.9 percentage point higher than last year's fourth quarter.

Now onto the balance sheet and cash flow statement. We were able to improve DSOs by six days, compared with the fourth quarter, to 78 days, which helped us generate strong cash flows. For the quarter, we generated $62 million in operating cash flows, or 6.5 times net income. We expect modest improvements in DSOs over the remainder of the year.

With capital expenditures of about $3 million, free cash flow for the quarter was $59 million. In February, we deployed $45 million to purchase ATG, which strengthens our position in the homeland security market and allows us to access a $33-billion sales channel through the TABSS and EAGLE ID/IQs.

Since the end of the quarter, we've taken two significant actions that use our balance sheet grow the earnings of the Company. First, in April, the no-call provision on our high-yield debt expired, and we paid off the $200-million note. Interest expense will be EPS neutral in 2014, given the fees to call the note, but we will save $15 million annually in interest-related expense beginning the second half of this year and into future years.

Second, yesterday, we signed a definitive agreement to acquire 7Delta, which brings strong qualifications at the VA on the $12-billion T4 vehicle. I won't disclose the deal terms, since we haven't closed, but we expect the deal to be slightly accretive to earnings in 2014, and then significantly accretive thereafter, given the growing business space. Once the deal is completed, we will be in a roughly cash-neutral position, with plenty of firepower through our $500-million line of credit.

Turning to business development, bookings for the first quarter were $337 million, for a book-to-bill ratio of 0.7 times. Although we'd always prefer to generate bookings in excess of revenue, we were up double the rate of last year's first quarter.

Awards were again strong in cyber and intelligence, with a book-to-bill ratio of 1.3 times, which should sustain strong top-line growth rates. We expect overall bookings to increase substantially, beginning at some point in the second quarter. The value of proposals currently in process increased fourfold compared to last quarter, and is at its highest level in more than two years. With $3 billion in proposals awaiting adjudication, and almost $2 billion in proposals in process, award activity should be very strong.

We believe the government will adjudicate twice the value of ManTech proposals over the next 12 months, as they did in the last 12 months. Backlog at the end of the quarter stood at $3.8 billion, of which $1 billion was funded. At the end of the quarter, we had a total qualified pipeline of $22 billion.

Now to the forward-looking outlook -- to the forward outlook. We are maintaining our top-line guidance by adjusting our earnings guidance slightly downward. While the 7Delta acquisition is expected to provide around $50 million in revenue in 2014, the volume of new business growth in the second half the year is subject to the timing of new contract awards. We expect revenues of $2 billion, net income of $52 million, and diluted earnings per share of $1.39.

The earnings-per-share guidance reduction reflects our commitment to invest in bid and proposal, R&D, and cyber, which we believe are essential to gain substantial awards and capabilities over the next 12 months. Cumulative activity will provide consistent revenues in earnings growth during the latter part of 2014, and then to 2015. Earnings per share will trough in the second quarter, with a $0.12 charge from the prepayments on a debt with virtually no interest expense for the second half of the year. All of the estimates for tax rate, share count, and cash flow from operations from the February call remain intact.

Our primary focus throughout the remainder of this year is winning new business, which requires investments and to ensure a sustainable long-term growth platform. The spending environment is turning more positive, and we are in a position to benefit.

Now, Lou will speak to the 7Delta acquisition and our acquisition outlook. Lou?

Thanks, Kevin. The M&A team is executing on a strategy-driven acquisition program. We have been tracking 7Delta for some time. As part of our strategic push into healthcare, gaining a strong position within the VA and on the Transformation Twenty-One Total Technology, or T4, contract vehicle represented the next logical extension.

We researched all of the companies who would be complementary to ManTech's current healthcare business, and who hold T4. And 7Delta, one of the most successful T4 primes, was our overwhelming choice. 7Delta has won 66 -- over 66 task orders, totaling $235 million on T4. And their work is at the heart of the VA modernization effort. The acquisition should close in about a month.

We still have plenty of acquisition capital left, and would like to complete additional acquisitions this year. We are keenly focused on intelligence, cyber, and enterprise IT, and our established presence there allows us to be disciplined around price.

Now, our Presidents will speak to the performance and outlook for our two operating groups. Dan?

Thanks, Lou. Within the mission solutions and services group, we are focused on four major activities. First and foremost, we are investing in solutions development, account management, and bid and proposal to qualify, bid, and win work. This is the lifeblood of a service firm like ManTech, and I'm committed to enhancing our capabilities in this area.

Second, we are leveraging the ATG acquisition. Integration is complete, and it went smoothly. We are bidding our combined capabilities on the TABSS ID/IQ. We have bid legacy ManTech work that is migrating to TABSS, and we won our first TABSS task order for work that is new to both companies. This task order will establish a combined ManTech ATG organization to our DHS customer.

Third, we are preparing for the integration of the 7Delta acquisition, which will complete our initial set of healthcare acquisition targets. 7Delta's presence in the VA healthcare IT is the perfect complement to our current positions with the defense health agency and HHS. Not only will the acquisition give us access to a large and growing budget at VA, but it will provide essential capability and knowledge as the defense health agency and VA revise their separate electronic health record systems with the requirement to be interoperable.

Our combined work on the virtual lifetime electronic record, or VLER, program will make us one of the leaders in the space. Post acquisition, ManTech will have a $130-million-plus federal health business, with a reputation for innovation that can compete with anybody.

Finally, we are effectively managing our core Army and Navy business in this dynamic DoD services market. With respect to the downturn in support of oversee contingency operations, our Army MRAP business is stabilizing. Assuming the future Afghan president signs a bilateral security agreement, and there's a continued US presence in Afghanistan, the program should generate about $120 million in 2015, slightly down from the current run rate.

We are experiencing continued drawdown on S3, especially on OVCs. That is where we have the most volatility within the group, and where we are focused on keeping our share of work.

Our Navy business is stable, as the NAVAIR and NAVSEA systems demand. In the first quarter, we opened a C4ISR integration facility in Charleston, South Carolina, for SPAWAR that has already brought in new business and put us in a stronger position as we compete for work on the SPAWAR pillars contracts.

Bill?

Thanks, Dan. For the fourth quarter in a row, the mission cyber and intelligence solutions group posted a book-to-bill ratio of 1.2 or higher. This track record of wins, despite all the uncertainty in the market, speaks to our compelling value proposition to the intelligence community. The wins over last year support our plan to continue to build the cyber and intelligence business in 2014.

I am even more confident in our growth prospects when I go and visit our proposal teams. Proposal activity is stronger than at any time in my five-year tenure here at ManTech. We are very well positioned for prime positions on large important intelligence community opportunities that will be adjudicated over the next 12 months, and I am convinced that we have the right team in place to win and execute that work. This is an exciting time for NCIS and ManTech.

George?

Thank you, Bill. In closing, ManTech is well positioned for growth later in the year through organic investments and future acquisitions, and the two we have. Our cyber and intelligence group is a true national treasure and a growth engine for the Company, and defense and civil group is gaining strength in health and homeland security markets. We will make the investments necessary to provide sustainable growth in earnings in 2015 and beyond.

And with that, we're ready to take your questions.

Thank you, sir.

(Operator Instructions)

Our first question comes from Tobey Sommer of SunTrust, your line is now open.

Thank you. What is the current run rate of the MRAP on an annualized basis?

For 2014 our MRAP business will be $150 million for the year. And we had $41 million for the quarter, so it's going to be fairly stable. It will decline just a little bit between now and the end of the year.

Okay. And how much revenue -- I didn't catch the details on S3, so I apologize. Could you recap that real quick?

Our S3 revenue dropped $12 million compared to the prior quarter, Q4, and it's running around $95 million for the quarter.

Okay, thank you. And shifting gears to cyber and intelligence, it sounds like proposal activity there is very good. Are there areas of spending focus that you could describe as the customer set honing in on? That would be helpful, thanks.

Well this is Bill. We're seeing a continued release of RFPs pretty much throughout our entire intelligence community customer set. I think it's very well distributed across the broad spectrum of all of the agencies we support.

I don't think we're seeing any one agency doing more than anyone else. It's just a lot of activity going on, and we're eagerly participating in all of it.

Could you describe how is adjudication process working there in terms of projects that were or RFPs that came up a while back, just to get a sense for how we should set our expectations for this surge in RFPs eventually translating into growth and revenue and profits?

The timing is slower than any of us would like, I believe. We continued to await numerous awards, some in my case we are waiting adjudication of almost $1 billion worth of awards as we sit here on this call. We do get periodic questions from the government.

There's usually a process where the government will ask all of the bidders pretty much the same question. We get to respond again, and maybe we get to make some adjustments, maybe we don't. But the pace is slow, but we do see indications that things are picking up and we're anticipating numerous awards very, very soon.

Tobey, I'll add to that. As I mentioned, when we talk about two times the volume, we're looking at over the next 12 months over $8 [million] of our bids the government deciding on, and that's a number that is light compared to what we're submitting, assuming some delays. So there's a lot of volume going on.

From a broad perspective across the entire business, is the next five months likely to be among the busiest you've seen? In terms of awards?

Well, at least, I think we can say that right now is the busiest time most of us have ever seen. And we see no slowing down of that at least through the Summer.

Okay, thank you. I'll get back in the queue.

Thank you. Our next question comes from Gautam Khanna of Cowen, your line is now opened.

Hello, good afternoon. Couple questions. I guess first, I want to make sure I understand. The guidance reduction on earnings reflects to incremental investment, but if I recall on the last earnings call when you provided guidance, the $1.50, that you had assumed something like $0.10 of investment. So have we just raised the investment number, or is there a shortfall in the on the demand side or elsewhere?

What we're doing is looking at the entire set of activities, the R&D, the commercial, the commercial cyber as well as the proposal volume, which is increasing. And the R&D and the proposal volume is going up, and we're take a fairly cautious view of when we expect the levels of revenue pick up to happen from that in order to provide the revised guidance. We do expect there to be a pickup on that, but we're trying to be cautious about that until it starts occurring.

So previously, you had assumed some of those sales kicked in earlier in the year?

We'd assumed that there would be a higher level of return from them for the course of the year, and we're trying to be cautious, and investing initial money because the opportunity is at hand

Okay. And then, then should I assume, because I don't believe the revenue guidance was changed, that the revenue guidance includes the pending acquisition?

We're including the 7 Delta acquisition; however, given the proposal volume, there's a wide range of potential revenues from the new business. Over half of the proposals that we expect to adjudicate in the next 12 months are from new work. And depending on how we perform on that and the timing of etiquette have a fairly positive impact on that outlook, but it's too early to tell where that comes out

Should I assume that you've put in it in your guidance at around $45 million, $50 million of sales this year? Just based on $80 million run rate, it closes in a month.

That's correct

Okay. On S3, I think last quarter we talked about it being down somewhere in the $100 million range year-over-year in calendar 2014. What's your updated thinking?

Our current updated thinking is it's about $25 million under that, so somewhere in the $125 million to $140 million range based on the early drop of some of the ODC activity in this quarter.

Okay. And when you -- you're not obviously excluding the $0.12 debt retirement charge in Q2, and that's included in the guidance of $139 million, correct?

That's correct. That's all in.

Okay. And so sequentially in Q3, we'll have de minimis interest expense, we'll have interest income, and that will explain a lot of the plus up sequentially. Fair?

Yes.

Okay. One other thing, if I may. So, in terms of just seeing more award activity, are you seeing anything with the pace of procurement itself? And not just new contracts coming in, but once they're in the pipeline, that the government is actually engaging as opposed to just kind of stretching out the time from in RFP being written to when questions are asked and what have you. The interactions with the contractors that are bidding. Is there any indication that that timeline is speeding up?

I will give a broad indicator, but leave it to Dan and Bill to comment. I do think the government is more focused on awarding activity kind of -- and as well as obligating funds, and there's a little bit more of a sense of urgency based on the fact they have the budget and they have more certainty. How that plays out, is kind of where the framework in the range of our outcomes for the year are. Dan do you have anything on your end that you want to add?

No. I would just add to that is a bit of pent-up demand, and certainly more activity as Bill and Kevin have already articulated. I wouldn't say that their timeline on awarding has necessarily increased, and we still get a number of [VNs] and questions. There's a lot of due diligence from the government on the awards. But certainly the amount of activity has certainly increased.

Okay. And last one for Kevin or George or whoever, if you could just comment on M&A opportunities beyond the two you hope you've already announced. Is there anything that you're looking at beyond these two, or do you feel like your somewhat constrained, either from opportunities or from bandwidth internally to manage acquisitions after those two close?

This is Lou. And a couple things on [supposed] to a acquisition pipeline, I'd say that the supply is reasonable. Better than it was six months ago. Not as full as we'd like relative to choice. But I think the supply of companies will pick up.

We continue to reach out prospectively to the opportunities. And then, and I do believe that we are not constrained, relative to either appetite, and for due diligence, and for the integration. So we do feel constraints, and nor do we feel constraints relative to cost at this time.

The other thing we have to ask, for 1.5 almost 2 years, we were afraid to proceed in our normal pace of acquisitions because of the appropriation process. Always when we look at acquisitions, we will not buy [sales]. It has to be new technology, new customers, and new funding.

And we couldn't find the funding for some of these candidates in the acquisition process, because there hasn't been, in the appropriation process, because there hasn't been one. Things are returning to what is normal, and as always, we will again pursue acquisitions. We will not buy sales, but we're going to build the Company in some of these new areas, and we think with great success.

Thank you very much.

Thank you. Our next question comes from Ryan Kinstlinger of Sidoti and Company, your line is now opened.

Hello, thanks so much. I'm curious about the revenue guidance. It suggests an average of $60 million more per quarter than the first quarter. With the first quarter being a seasonally weak bookings quarter, the continued drawdown a little bit of S3 and MRAP I think you mentioned. Even if the proposals go your way in the next two quarters, can they ramp up that quick to generate an average of [$16 million] more per quarter?

The answer is, based on the timing of awards and the volume, if it occurs on a reasonable path, yes. And if not, we're supplementing that by maintaining guidance with the additional acquisition of 7 Delta, which provides $50 million of revenue.

Right, okay. The percentage of new bookings maybe on the first quarter, could you provide that new work?

Most of the work that we've obtained in the first quarter, was extension or add-on business to current work. The new business was fairly light, it was about 10%.

Great. And then, can you touch on the recompete environment and related pricing? And then how much if the work is up for renewal in 2014?

2014 -- I'll start with the later part of the question first. 2014, our recompete rate is total about 25%, which would drive about 10% of revenue at risk. It's more heavily weighted in the S3 area, meaning that piece of the business aggregates Dan's business above 25%, but the NCIS or Intel business is only about 10% in total. So when Bill talks about new opportunities he's going after, there's a huge upside because there's very little recompete risk in this business. And your first part of your question was?

It was on the recompete, especially S3, it might be a little bit more competition. What is the pricing environment like when you're trying to retain work?

I'd say it's more important that -- and Dan can add to this, that we do the right solution against their current and future demands, rather than the overall return to the business. Dan, do you want to add to that?

Certainly, a solutioning is key and the government still looks for that. But on the same token, it's a lot of our contracts are in a low-price environment, and so we have to be competitive there. And it's not Draconian, but we have to be competitive on price to win.

Great. And my last question is for George, you mentioned a return to growth. Are we talking about total revenue, organic revenue, earnings-per-share, and are we talking about (inaudible) in the fourth quarter, is that how we're looking at it?

We're talking about growth across-the-board. We think the whole marketplace has changed, again, because of the funding being available to the customers that was not there before. So we see growth across-the-boards. Thank you.

Thank you. Our next question comes from Steven Cahall of Royal Bank of Canada, your line is now opened.

Thanks. Maybe just the first question on what we've got going on in the SG&A line. You talked about the one-off costs related to the fringe benefits, the start up costs, the acquisition costs. I'm just looking at that line, and as we project forward, my back of the envelope suggests that there's still quite a few million in the investment and bid proposal and the [I-RAD]. So I was just wondering, if we think about that going forward, how does that phase through the rest of the year? Does it stay at a sustained rate, do we see it come down at some point? So how do we think about that new run rate?

And I'll give you full year percentages first, and then talk about the components on the R&D if Bill would like to add, he can. So our G&A percentage was roughly 8.6% in Q1, for the full year will be the 8.2%, 8.3% range if things go according to plan.

There's always an area of focus that we're making in efficiencies around our infrastructure. That said, it's not the time to walk away or reduce the amount of expense that we've talked about in those areas that are going to support growth. So the trend should bring it down to an 8.2%, 8.3% for the whole year. Bill, do you wan to -- ?

Sure, I'll be happy to. So we're, in the special investments, we're making, most of that is in the cyber security area. And we're trying to build up both our commercial cyber business by adding some new capabilities that we don't currently have.

And we're also trying to build up our government cyber business by enhancing and providing some capabilities that our customers have strongly suggested they're interested in. So we're spending a combination of IRAD money and additional funding to try to build up the cyber area, to add our capabilities, to make us much more of a full-service provider.

That's very helpful. And then, just as a second one on MRAP and some of the other Afghanistan related revenue. You mentioned the assumption of the signing of the Status of Forces Agreement. Can you give us any sense, because that is in some political analyst's mind still up a bit of a big if, or if we go into a run on election in Afghanistan where that maybe doesn't just happen?

Can you tell us a bit when you have that assumed in the plan, and if there's some sort of delay in that? And do you have a sense of how much that run rate could drop within the fiscal year and what that might do to revenues?

This is Dan. Our plan is based on what our customer or the government has told us they expect for the year. And so -- and everything we're hearing is there will be troops through December, for sure. Now what happens politically with the agreement, it's pretty much you read the same things we read in the open-source. It seems like the election is moving along. There's going to be a runoff election, and I'm confident that it will be signed, but time will tell. Kevin, anything to add there?

No. We've mentioned the MRAP revenues. I would note that out of the MRAP revenues that we have and the number of personnel supporting MRAP in total, a little under or roughly a third of the head count is now in the US. So there is some sustainable business beyond this that we will expect, regardless of what happens in the overseas environment.

Yes. That's a good point Kevin.

Thanks, that's very helpful. Just a final housekeeping one, the cash conversion was so exceptionally strong in the quarter. Is that down to receivables, and do we expect it to be at or around what's been in the past, which is still strong, or do we think it would be up for the full year? Thanks very much

Yes. Cash flow was strong because of our improvement in DSOs. It was receivables based. We do expect to maintain the slightly better DSO to get to the cash that we have, and we'll hold to a roughly $130 million plus operating cash flow for the whole year. The first quarter was very strong, and it could be better than that.

Thank you. Our next question comes from Robert Spingarn of Credit Suisse, your line is now opened.

Good afternoon. You just talked about organic outlook, and I wanted to ask what the organic growth was in the first quarter, separating really for defense and non-defense?

I don't have a specific percentage between defense and non-defense. It was 30% down for the full year. The majority of that, as you mentioned and we mentioned, in terms of the dollar value drop for the quarter was MRAP and S3 related. For the balance of the business, and as we had mentioned before, Q1 was recovering from government budgets in January and movement. So, we did not expect any significant growth in that quarter, based on the timing of the government ramping back up.

Okay. All right. Kevin, going back to the bookings discussion. You talked about the proposals in the pipeline and the big increase in the size of those. Just maybe if I could ask the question a little differently, what would you expect based on that book-to-bill to look like for the year, and how would you expect it to trend? I understand you said it's a little bit unclear right now. But overall, what are you thinking for the year?

We certainly believe are confident that it will be above 1, based on these awards and the level above that. And again, the reminder of the new business component in it. So even if the 1, given the lower recompete, that's a growth pattern. And it totally depends on when those new awards happen, but it could be significantly stronger than that. It's just too early to tell.

Okay. And then just lastly, I wanted to ask you about margins. In the quarter, given that it looks like I guess the mix on the business, how would you characterize the mix, the margin mix, on the business that declined in the quarter, and the resulting impact on your reported margin?

Margin mix for the overseas work is fairly consistent for the MRAP. A little bit larger return drop on some of the S3 activity. The other balance, I would say that there's some margin pressure in the other pieces of the business that are not cyber. But the balance of it is, is more Q1 performance specific.

Okay. And then just one more thing, you've done a number of acquisitions, George, in healthcare. How would you size that business at this point within the context of the $2 billion in revenues for 2014?

I don't have a percentage number for the healthcare, but we just see the funding for that area has grown very significantly. We didn't have a real position in there before to be able to compete for it, and now we do. And I don't have a number at the tip of my tongue here as what that would be, but it will go up substantially.

Can you comment at least to the relative profitability of that business versus your core defense business?

Yes, Kevin, I can. If you exclude the amortization for deal-related costs, the -- first of all, the core business we have today in health is above average. It's running more along the lines of our higher end Intel work, and we would expect these acquisitions to bring in excess of 7% prior to amortization.

Thank you very much.

Bob, this is Stuart. And one of the things that we do see in this segment of the business is a higher degree of fixed-price work that supports the higher margin, and that's one of the reasons that this market is attractive to us.

Understood. Thank you, Stuart.

Thank you. Our next question comes from Bill Loomis of Stifel Nicolas, your line is now opened.

Hello, thank you. What was the cyber and Intel revenues in the quarter?

They were fairly consistent, just slightly down from prior quarter.

Sequentially slightly down?

Sequentially, yes.

And the progress on the investments in the commercial? I know you're developing products, and it's going to be a little bit longer-term. But can you give us an update on any progress that would be made there with commercial customers?

I'll speak to the financials, and then I'll leave it over to Bill on the commercial side in terms of customers. So the operating performance for the first quarter was consistent with the prior quarter as well. And I'll leave it to Bill to talk about customers.

Yes, Bill, to answer your question, we have actually completed at least one of the four or five different projects that we've identified that we need to build. And we're offering that to current customers as we speak.

I don't know if I can claim we've had any awards yet, but we've only been doing this for one quarter so far. But we think the future is good there. We think we have picked the right opportunities, and we think we've identified enough funding to really be able to produce something that will be helpful to us.

Okay. And then when you guys talked earlier about awards picking up, it sure sounded like you thought it might happen even in the second quarter, you said pretty soon. Do you think more in third-quarter, or do you really think we could see actual award activity show up before the end of the second-quarter here?

We believe it will happen this quarter, if the government delays, there are a lot of things that are imminent in that proposal outstanding that it is time and the indicators are they've gone through all their questions. That said, I can't rush the government on the decision. So we just see heavy volume next three quarters.

Realize also that the funding is in the fiscal year ending September 30th. So they don't have the whole year to make that commitment for those funds, they've got to be completed by that time period. That's another reason we are confident that they're going to accelerate the awards in the next couple months very aggressively.

Okay, thanks. And then just last on S3, I missed, Kevin, what you talked about S3 expected S3 revenues for the year.

Yes, it was $100 million down last quarter, and it's between $125 million and $135 million down from last year at this time.

So the full year will be $125 million to $135 million down year-over-year for the full year?

Yes. $375 million to $400 million roughly, but probably closer to $375 million.

Great, thank you.

Thank you.

(Operator Instructions)

Our next question comes from Edward Caso of Wells Fargo securities, your line is now opened.

Great, thank you. On the awards that are out there, what's the mix between ID/IQ and direct orders?

The amounts we're looking at that we've stated are new single or bookable ID/IQ, meaning that we'll have work immediately out of it. The ID/IQ component would be above and beyond that, and we haven't valued that.

Okay. Can you just, Kevin, can you just do a couple numbers here on the guidance, margins, tax rate, and share count?

Share count is 37.3 million for Q2, 37.3 million full year, effective tax rate 39.7%, margins for the full year at 5.1%.

5.1%. Okay. And on the acquisition front, I heard that the pool was good, maybe not great. But I'm more curious on the bid ask spread, are the sellers getting more rational or are the buyers getting more hungry? Has that spread narrowed at all?

This is Lou. No, I'm not so sure yet. I do believe that the things that we look at, we've been able to look at markets where the spreads are rational.

That said, there are irrational buyers out there. I'm sorry, sellers, but we're not necessarily an irrational buyer.

One of your competitors talked about a set of contract consolidation and a greater push towards more small business work, are you seeing any of that impact, and is it either positively or negatively?

It's Kevin, I'll speak, and then if others want -- on the consolidation, in some customer sets they are looking to consolidate certain IT architectures and the like. And that is a net-net to our benefit likely, given our positioning over time and those customer sets and the ability to prime. Small business has been trend for a while, it's been [filtering] for over a year. I think a lot of the work that heads that way is on a lot of systems engineering type work, something we have factored in that to take care of. But it's just part and parcel of the environment now. You want to add to that, Bill?

Sure. Ed, this is Bill. I think first of all in the consolidation programs, particularly in some of the IT consolidation effort, so we actually think we're in a pretty good position to be a strong bidder for a lot of those efforts. A lot of that is new work for us.

We may be supporting part of what the government is doing, but if you're the incumbent and the work pool is a lot larger, then consolidations are a real opportunity. And in terms of small business, I really don't think I'm seeing any different trend than we've seen over the last couple of years. Those of us who are large or midsize businesses always think that too much of it is going to small business. I don't see that that's any different than it was last year, for example.

Great, thank you.

Thank you. Our next question comes from Tobey Sommer of SunTrust, your line is now opened.

Thank you. A follow up on your commercial effort. Have you put in a different kind of infrastructure and sales organization to go to market with those, or are you utilizing infrastructure that you had in place?

Well this is Bill. We do have a completely separate sales and development and even management infrastructure for the commercial cyber business, than we used with the government business. The two markets are sufficiently different. We call its sales in the commercial world, we call it marketing in the government world. So the types of people who are successful in those two different businesses are different, and so we keep them different here within ManTech.

How many people in total would you have involved in the commercial side at this point?

70.

Off the top of my head without committing me, it's probably about 70 people.

Okay. And just in general terms, ballpark terms not holding you to a specific headcount, a year or more from now where would you see that going?

Well, I'm always success oriented, of course, so if I look at some of the investments we're making and some of the new activities we're undertaking, I would certainly like to see us at least double our revenues in the commercial business area. That might not necessarily correspond to a doubling of the headcount. You would hope that with products, we wouldn't need twice as many people to sell twice as many products. So that's the way I see it for next year.

Thank you very much. Just one last question from me, a doubling of revenue, what would that mean? How big of a base of commercial sales are there currently?

It would mean we would be very happy.

So our objectives in the commercial enterprise is to take advantage of the markets where we were active in. We would expect that we would exceed $20 million in revenue in total commercial from all our investments, but we'll have to wait and see. And we're not committing to that.

Thanks for your help.

Thank you. Our next question comes from Brian Kinstlinger from Sidoti and Company, your line is now opened.

And, Bill, I have one more question for you. That one commercial product where the project is complete, is it software, and what function does it play in the cyber landscape? Is a logging, is it [halinex], is it detection? Is it more specialized, maybe just give it a sense of what that is?

It is software. Brian, at the moment, all of our commercial products are essentially software. And so it is complete, and it's more of a I would call it a platform capability. It allows users to a much easier user interface to some of our products, and we've received good feedback on it so far.

Sorry, our use interface to other people's products, or your products?

They're our products.

Okay. All right. Thank you.

Thank you. And that --

And I was going say, it doesn't look like we have any more questions at this time. But I'd like to offer everybody that our senior team will be available for follow-up questions, and thank you all for participating on today's call.

Thank you, sir. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a wonderful day.