MasTec Inc (MTZ) 2005 Q4 法說會逐字稿

Welcome to MasTec's March 2nd 2005 fourth-quarter earnings conference call. Let me remind participants that today's call is being recorded. At this time I'd like to turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc?

Good morning. Welcome to MasTec's earnings conference call in which we will discuss our results for the fourth quarter and year ended December 31, 2005. The following statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. In these communications we may make certain statements that are forward-looking such as statements regarding MasTec's future results, plans and anticipated trends in the industries where we operate. These forward-looking statements are the Company's expectations on the date of the initial broadcast of this conference call and the Company will make no effort to update these expectations based on subsequent events or knowledge.

Various risks, uncertainties and assumptions are detailed in our filings with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize or should any of our underlying assumptions prove incorrect, actual results may differ significantly from results expressed or implied in these communications.

With us today we have Austin Shanfelter, MasTec's President and Chief Executive Officer and Bob Campbell, Executive Vice President and Chief Financial Officer. The format of the call will be opening remarks by Austin followed by a few financial comments from Bob. Financial discussions today will be limited to GAAP-based financial items and their derivatives. These discussions will be followed by a Q&A answer session. And we expect the call to last for approximately 45 minutes. Austin?

Thank you, Marc. And welcome to the MasTec's fourth-quarter and year-end conference call. MasTec has had an extremely productive year and start to 2006. The performance from our core businesses has continued to improve over the last three quarters. We concluded a very successful stock offering and we have the strongest business mix in our history. These developments establish strong fundamentals for the year ahead.

For the first time since 2000 all of our service lines have the opportunity to expand both revenue and profitability with our recent stock offering and strong balance sheet, MasTec can leverage may of these opportunities, whether it voice, video, data, energy services or install in the home, many of our customers are increasing capital expenditures and have long-term growth and development plans in place. This along with a continued customer demand for outsourcing all bodes well for MasTec.

We continue to see strong industry growth drivers. On the RBOC front, we believe that each of the RBOCs will expand their deployment plans in 2006 and that MasTec will participate in those expansion plans. For example, our largest fiber deployment customer, Verizon, MasTec has increased the coverage areas from seven states in 2005 to 10 states in 2006. Our current states are Virginia, New York, Pennsylvania, Delaware, New Hampshire, Rhode Island, California, Texas and Florida. We continue to expand in areas where MasTec already has presence thus adding operational leverage and predictability for our performance.

We also have noticed an increase in rural fiber deployment, initiatives and bidding activity. This along with the increased general maintenance work by the telcos is a very positive trend for us.

Cable company bidding activity is just starting to increase in the last few months. And we expect to see projects opportunities from the sale of the Adelphia systems assets very soon. The install to the home business continues to add value for us. At a point of reference MasTec presently has about 3500 service technicians completing approximately 200,000 home visits per month. It is important to note that approximately 35% of our services are related to new installs but approximately 65% is related to upgrades, moves, adds and changes. MasTec is expanding its platform and its capabilities and we believe the present marketplace is favorable for continued growth with video, voice and data customers.

Our energy utility customers are also increasing their CapEx in 2006 and we expect the trend to continue for some time. As we work with many of them on their expansion plans, it is very obvious that the trend for outsourcing will continue to increase and that they are looking for larger financially strong contractors like MasTec to fill their needs.

On a regional note that has not been widely discussed, Florida currently is undergoing a public debate regarding upgrading to buried utility lines. The hurricanes and related power outages in 2004 and 2005 resulted in some communities being out of power for several weeks. The damage to the local economy was severe and has caused local utilities, customers and regulators to reevaluate whether utility lines should be changed from aerial to underground. Published estimates for statewide burial have ranged from $52 billion to $80 billion. Any eventual work in this area would be a significant future opportunity for MasTec.

I would now like to turn over the call to Bob so he can discuss the financial details for the year and the fourth quarter. Bob?

Thank you, Austin. Today before I go through the numbers in detail, let me give you a few financial highlights. First, we were profitable in our continuing operations for 2005. We made $19 million this year versus a loss of $18 million last year. Second, we made progress in our quest for higher margins. Our 2005 gross margin before depreciation was 13.7% versus 10.9% last year. Third, we improved steadily over 2005. After basically breaking even for the first half of the year in continuing operations, we made $0.22 in Q3 and $0.16 in Q4. So we're going into 2006 with good momentum.

Fourth, our 2006 guidance remains at $0.70 to $0.80 earnings per share, that is for continuing operations, and compares to $0.37 for 2005. Fifth, we said last year that we would access the equity markets if market conditions permitted. And we closed a successful $156 million equity offering in January. Sixth, our liquidity which is at $189 million is up dramatically. We only had 20 million in liquidity when we had this call a year ago.

Seven, we recently announced a decision to sell our State Department of Transportation, or DOT, projects and assets. I'll talk later about the positive impact that sale will have on earnings, cash flow and also management time. And finally, I'd like to note that we filed the 2005 10-K a month earlier than we did a year ago and we had no SOX material weaknesses and we had effective internal controls.

With my overview out of the way, let me take you through some more detailed financial information. For the full year of 2005, income from continuing operations was $19 million or $0.37 earnings per share compared to a loss from continuing operations last year of $18 million or a $0.37 loss per share. Revenue was up 5% growing from $807 million to $848 million.

Including losses from discontinued operations and the related write-off of goodwill, the net loss for 2005 was $15 million compared to a net loss of $49 million in 2004. The $15 million 2005 net loss included losses from discontinued operations basically DOT of $33 million and these disc-op losses included a write-off of the DOT goodwill of $11 million. The $49 million 2004 net loss included losses from discontinued operations of $32 million basically for exiting Brazil and those losses included a goodwill write-off of $12 million.

For the fourth quarter of 2005, income from continuing operations was $8 million or $0.16 earnings per share and that compares with a Q4 2004 loss from continuing operations of $4 million or a $0.09 loss per share. The $8 million income from continuing operations in the fourth quarter was offset by $20 million in losses from discontinued DOT operations. And the discontinued losses included the $11 million write-down of DOT goodwill. The net result of the continued operations profit and the discontinued losses was an $11 million net loss for Q4; the Q4 2004 net loss was $7 million.

Now let me switch back to the full year 2005 P&L and make a few comments. Full-year revenue for 2005 was up 5% or up $41 million. The increase was due to increases in install to the home, telecom including new MSA work in fiber deployment and from storm restoration revenue. The increases were partially offset by a year-over-year decline of over $100 million in cable upgrade work for a major customer. This upgrade project was substantially completed by the end of 2004.

Our gross profit, gross margin before depreciation was 13.7% for the full year of 2005 compared to a 10.9% a year ago. The gross margin improvement came from productivity improvement, primarily in the form of decreases in subcontractor costs and also from improved insurance and safety costs. These cost savings were partially offset by higher fuel costs that rose from 2.3% to 3.1% of revenue and by higher lease costs. I'll talk later about further margin improvement.

SG&A expense decreased significantly in 2005 compared to 2004. SG&A dropped from 8.9% of revenue in 2004 down to 7.5% in 2005. The $7 million decrease in SG&A was primarily comprised of reductions in legal and professional fees and also insurance costs. 2005 outside audit costs were down and also we were able to do the SOX work much cheaper by bringing the work in house. I'll talk more about legal costs in a minute.

For the fourth quarter of 2005, our 10 largest customers were DirecTV 35%; BellSouth 13%; Verizon, Sprint and Florida Power & Light 5% each; Progress Energy 4%; Encore TXU 3%; Qwest US West 2%; and the South Water or Water Management District and Dominion Virginia Power were each at 1%.

Today the continuing operations backlog is roughly at the $956 million level and that's an 18-month backlog number. Even though we believe the fiber deployment work will last for years our backlog only includes the specific work for which we have visibility today. Our gross liquidity is currently at $189 million compared to $20 million when we had this call a year ago. We define liquidity as bank cash plus availability on the revolver. Liquidity is up dramatically due to the $156 million equity offering in which we sold 14.4 million shares at $11.50 in January. Also from the new bank deal we did last May and from improved earnings.

The liquidity of $189 million that I mentioned is before the payoff today of $75 million of the 7 3/4% senior subordinated notes that mature in 2008.

We said last year that MasTec would benefit from a more conservative balance sheet and that we would like to access the equity markets, which we did. At some later date, we will be willing to share with you an optimal or target capital structure vision. At this point, we will just say that a more conservative balance sheet works better for us. And of course we haven't forgotten that we need to deal with the remaining senior sub notes well before their February 2008 maturity.

Our year-end accounts receivable days sales outstanding or DSO was 81 days which is a five-day improvement over the 86 days we reported at the end of Q3. But it's still worse than the 75 days we had a year ago. All of these numbers include the much too high DSOs from the discontinued DOT accounts receivable. The DOT DSOs are the worst in MasTec and MasTec will get an easy improvement after we sell that business.

Our DSOs without the discontinued DOT accounts receivable were 71 days at year end 2005 compared to 68 days at the end of 2004. So we're looking at a 7 to 10 day DSO improvement in MasTec's DSOs after we sell the DOT projects and assets. However, beyond the pickup we will get from selling DOT, we still expect further DSO improvement. The DSO improvement will come from selling better payment terms, just collecting better and some favorable changes in customer mix. DSO improvement and the margin improvement I'll talk about in a moment will be the two highest priorities in MasTec for 2006.

Our 2006 earnings guidance remains unchanged. We see continuing operations earnings of $0.70 to $0.80 per share on revenue of $950 million to $975 million. The $0.70 to $0.80 for continuing ops for 2006 compares to $0.37 EPS in 2005.

The revenue increase is 12% to 15% and it includes the Ron's TV acquisition that we made at the end of January. The estimate includes the additional 14 million shares from the equity offering and it also includes the new non-cash FASB 123(R) expense, that stock option expense, which is estimated at $2.5 million plus the expense of any options granted in 2006.

Regarding the DOT projects and assets that are for sale and classified as discontinued operations, let me repeat what we've been saying. The worst is over. We expect to sell these projects and assets in 2006 and we expect to net cash in the process. And we do not expect that the DOT projects will have a significant cash or earnings drain on MasTec looking at it on a full-year basis. It is also worth noting that the sale of the DOT work will allow us to really focus on improving the profit and cash flow from our core businesses.

MasTec does not intend to offer specific quarterly guidance going forward but we may from time to time upgrade our annual guidance. We provided one quarter at a time guidance last year because we felt that no one could model 2005 results by looking at our recent history. Even though we're not going to provide by quarter guidance, I would however like to make two qualitative points about the first quarter. First, it remained seasonally our weakest quarter. And secondly, we're going to have a large amount of legal costs in the first quarter this year. In fact, we're going to have unusually high legal costs in the first half of this year.

We will likely spend about $3 million in outside legal costs in Q1 this year. If you will read the litigation disclosure in our 10-K, you can see that we have a number of cases where we have the opportunity to recover some big dollars, dollars well in excess of what we're going to spend. However, we're at the stage where we just have to spend the money now in order to get the recoveries we expect to get in the second half of this year and for additional recoveries in 2007. Of course we don't comment on specific lawsuits and I'm not going to try to forecast for you just how much we will recover.

The $19 million income from continuing operations for 2005 is only a first modest step. We know that we have a long way to go regarding profit and gross margin improvement. As we have said in the past, management as MasTec knows of no reasons why we cannot reach the profit and margins of either our better years or those of our public competitors. Needless to say, management is working hard to improve profit and margins and we have a number of focus areas.

First, we are very disciplined in our bidding and the pricing environment seems to be firming in most of our markets. Second, our discontinued DOT projects have the worst margins and the worst insurance and safety costs in MasTec. The sale of these projects and assets will be a big step forward toward improving profit and margins. Third, we decreased our insurance and safety costs by about 25% in 2005. But we still have significant additional room for improvement. Fourth, with an improved balance sheet we have significantly greater financial flexibility and we can now make more attractive purchase or lease decisions regarding fleet and equipment.

In recent years most of our fleet and equipment was leased and not all of it was at great rates given the financial condition -- our financial condition at the time we did the leases. So this is an opportunity area for P&L improvement. Now that our financial condition is much improved, we may elect to purchase more of the fleet and equipment. Note that we estimated 20 to $40 million of 2006 CapEx in our 10-K.

Fifth, we can leverage our single Oracle platform further for both cost reductions and management information improvements. We spent over three years and over $20 million to end up on one platform. The single platform has certainly helped us shore up our financial reporting and controls. But we still have cost opportunities in our back offices and our administrative areas and ever improving management information is key to cost and margin improvement.

Sixth, with significant progress cleaning up our portfolio of businesses, shoring up our capital structure and fixing some control reporting problems, we can really go after profit and margin improvement now. There's more value than you may realize from MasTec management being able to focus on profit and margins.

At this point I'd like to turn the call back to Austin.

Thanks, Bob. In short, our remaining business is profitable, scalable and poised for growth. Additionally, our balance sheet is strong and we won't take a back seat to no one for 2006 and beyond as we continue to provide high-quality services to our customers.

I'd also like to take a few moments to welcome the new team members that recently joined MasTec through Ron's TV acquisition. And finally I'd like to thank all the MasTec team members for their hard work in improving our business during the year.

At this point, I'd like to turn the call over to question and answers.

(OPERATOR INSTRUCTIONS) Todd Mitchell at Kaufman Brothers.

Good morning, great numbers. I'd like to talk about the movement to the lease model. I went to through the K, can you give me some idea of how much in your cost of goods sold you spend on leasing equipment and what the mix is right now between what you buy and what you lease?

The lease footnote in the 10-K describes the lease expense.

Okay.

I think it's in the mid to high teens on a per annum basis. I don't have that exact number. If you look at our CapEx for the last couple of years I think it's been in the 8 to $10 million range. Obviously should we go from 20 to 40, that means we did lease most of all of our additions and replacements the last at least three years I believe. We're in the process of looking at those lease buy options and frankly had the opportunity to improve both some existing leases as well as our cost of fleet and equipment going forward.

And you just pull that straight out of the P&L?

That is correct.

Right. There may be shift between lease expense and interest and depreciation relative to things like EBITDA. But of course the net net should be better of course.

Great. Also just one other question, quantitatively on your business with Verizon, one of the things I do is I run a Google search in my g-mail on Verizon and their fiber to the premise. I've seen a lot more activity in local newspapers about just the actual commercial rollout here. Can you tell me what are you seeing in terms of the footprint? Is the size of the footprint not being built out more but are increasing penetration within this footprint? And what part in that equation -- where are you playing the most? Do you see what -- is that a clear question at all?

I'm not quite sure that is a clear question, Todd.

It seems that much more commercial activity from Verizon on ViOS -- actually rolling it out. Do you play a role after the commercial rollout or are you in the -- do you have more activity before they actually launch it?

Let me try to answer it this way. This is year three of their roll out. It's more predominately known that they're doing it that they're going forward with their activities. The fact that they're going to cover 3 million homes again this year is very publicly known. As you get out of the major city areas, and you expand into the second tier cities or you start going to the local communities, I think the process does get more press. And I also believe that as you are watching them starting some install to the home work in certain of their markets, that is getting some press and some activity on it.

For us it is a process that is just a normal upgrade, rebuild process type of thing for us. I think we will get some activity in some other residual types of work such as model drawing units and possibly installation to the home.

Great, thank you very much.

Alex Rygiel at FBR.

Thank you, good morning. Congratulations, gentlemen. A couple of quick questions. Austin, could you talk a little bit more again about Verizon as it relates to the sequential decline in revenue but yet your expectation or your comfort level with the increased number of states that you're working for that customer? And can you talk about directionally will '06 revenues from Verizon be up and directionally do you expect the profitability to be up to at least a similar level? And can you also talk directionally about BellSouth?

Okay, let me go Verizon first directionally in a sense. Yes, we expect our overall revenues to definitely increase. We're not going to guide on what percentage we think that is. But we definitely believe it's going to grow in '06 over '05. Not only because of our geographic coverage but just the capacity that we're going to commit to their efforts that they need to get done.

We also expect the margins will improve. It's just like starting an MSA project would be the best way to describe it. Usually you have an MSA for three to five years and the first year is your toughest margin year; your second year improves; and the third year you really get rolling where you have your margins under control and they are long-term real positive for you as a company.

This is our third year at it. We understand how it works now very well and we've adapted to some of the shortfalls that we may have felt in the first couple of years. I think the other thing that I mentioned in my opening conversation was that we've been really cautious to make sure that we go into areas that we have existing workforces, history in and we're not trying to expand in areas that we just don't have any expertise in. And that is really boded well for MasTec in our models and it has really helped us be more predictable in what we're going to perform in the area.

When you know the dirt, you know the permitting processes, you know the conditions, that really helps you be more predictable. So from that perspective I think that's what we feel about Verizon and the opportunity we have with them this year.

From the BellSouth, I think that right now there's a lot of work that's got to still be done on the restoration work that's had to happen down in Louisiana. The New Orleans area still has to be defined where they are going. I think that you are definitely going to see -- we see activity from BellSouth and additional expenditures on their general maintenance work. We definitely have seen storm restoration. We believe probably the second half of this year we will hear more about their fiber deployment to the home activity.

Great. With regards to AT&T, SBC, can you give us update on what type of activity level you are seeing out there?

I think we're seeing a lot of RFP activity still today. Some small selections being made on some of the beginning RFP activity. But I think it's more the second quarter, third quarter when we're going to be able to define what that really looks like long term.

And one last question. I believe you mentioned that you are not going to be providing quarterly guidance any longer. One of your competitors only provides quarterly guidance. Can you just broadly comment on your comfort level with the longer-term visibility of the business versus the short-term?

Bottom-line is we are very confident in what we've presented to everybody. I think Bob summarized why we decided to go the annual and not the quarterly and why we did the quarterly in the past. I think it was the only way we could have anybody get a feel for where we were and where we were going. We feel very comfortable; we've looked over our annual plans. We have this guidance out and we would update folks if that changed at all.

That is great. Nice quarter.

(OPERATOR INSTRUCTIONS) Eric Kainer at Needham & Co.

Thank you very much. Congratulations on a nice quarter, gentlemen. Just a couple of quick questions. Are you starting to see interest from Verizon in you helping them connect to their FTTP customers or are you still pretty much doing past creation for them?

I think we are definitely seeing some activity and assisting in what we would call the multiple dwelling unit business which are historically the cable TV customers covered that market quite heavily. We are seeing some activity to bid that market and to actually start work in that market. I think the install to the home is something that may come towards the middle of the second half of the year. And it will be -- we don't know exactly where they are -- but there is some information from all the RBOCs requests for proposals from all the RBOCs in that meet.

Okay. Now if I could jump to DirecTV. The statement that you made about basically 35% of the business or 35% of the jobs I think you said for DirecTV installed to the home are new customers. And 65% of them are kind of upgrades or what have you. Is that a change from what you used to see or is that kind of in line?

As they grow their customer base, the maintenance business long-term maintenance business and upgrade business increases some. I think if you look back a couple of years ago you would have seen it more in line of 50-50 but their base is getting larger. I think it's a normal thing to expect. I just think we're trying to communicate that information to the public because it's important for us to make sure you folks understand that this is an ongoing maintenance recurring revenue model as well as a growth model for us as a business. That is the picture that we want to make sure everybody understands.

Absolutely. And I can tell you that I certainly appreciate the additional disclosure. Let's see. Just a couple other quick questions. One is what is the status of the integration of the Ron's TV business? And then if you could just briefly talk about your thoughts about the energy business as we look out over this year and into the future. When do you think you might see the energy bill kind of really starting to kick in?

Let me go with Ron's first. First of all, we have acquired a wonderful company with great people and great quality of service. We're excited about having them on board. One of the wonderful things about buying this acquisition is that it was doing the same exact business that we were doing for DirecTV. The ability for us to flow it into MasTec's platform and the back office structure we've talked very publicly that it's a 60 to 90-day process and it's going to be seamless. We're well on our way to getting that done. I think we will have it completed by the end of the first quarter, very beginning of the second quarter. We've not had any kind of hiccups at all in the transition. A lot of candid complements to the people we've purchased and also to our team for being able to make this synergistically work very, very well.

As for energy, to be candid with you the bill is going to impact the industry I think over the next literally years to come. But right now that industry is under need of a lot more crews. There are supply and demand issues, both on the distribution side of the business and the transmission side of the business. We're seeing growth opportunity literally daily, weekly, monthly in that sector. The energy sector.

But the bottom line is that we could probably add people and literally every one of our customers in energy today and we're working to try to provide those needs for those personnel for those customers.

Thank you very much and good luck.

Jason Simon of JMP Securities.

Good morning, guys, nice quarter. Just a couple of questions. Wondering, Bob, I think I read in the 10-Q that you expect to pay around $75 million of the debt down, is that correct or am I --?

That is the exact amount and we're paying it down today.

Okay. So what would be your implied interest costs going forward on a quarterly basis?

Well, almost all of our interest cost is from $196 million of the 7 3/4 senior subnotes. So the new cost -- we were paying roughly $8 million a quarter and this will take it down to slightly under $5 million. I don't mean a quarter, I mean bi-annually.

Yes, understandable. Could you guys maybe give a little bit more clarity on the breakout of your margin between your DirecTV business and your RBOC business? And what kind of margin potential you would see in both those areas?

Here is what we said to actually everybody, Jason. With the exception of the DOT business that's being discontinued, which as you can read has four margins, the other MasTec businesses and projects have a pretty tight dispersion of margins. In other words, between the -- from the mean there is no part of MasTec that say is more than 100 basis points off that mean. So it's amazingly tight dispersion. And we are not disclosing margin by customer or by industry or anything like that.

Would you be able to elaborate a little bit more on the Florida opportunity? The timing obviously, the magnitude maybe in the second half this year going into 2007?

I think that it's really under public debate right now and there is a lot of different opinions on what to do. I think we are going to see some activity this year for sure. I believe it will be more toward the second half of the year. This is a huge undertaking and a huge decision. They have to figure out how they're going to fund it, if it's going to be a bond offering or if it is going to through the customer rates. There will be a large debate. What I can tell you is we absolutely have a sense that something is going to happen down in Florida, that there will be either upgrading of the aerial plant or strong changing from aerial to underground. And if the project gets started you are probably talking a project that will last five or six years, just because of the enormity of the project and the amount of work that has got to be done.

As I understand it I guess there isn't any bidding; you are just in discussions right now if at all?

There is definitely dialogue with all parties because everybody is talking about the issue, trying to come up with the best ideas. But there is nothing that is been out in our [field] at this particular juncture.

And just lastly on Adelphi you'd mentioned that you expected to see something shortly, is that pending the close of the assets, the acquisition of the assets and are you in the midst of bidding on that business?

It is absolutely pending the close of the asset to most basically Time Warner and Comcast and there are preliminary dialogues that are going on at certain system levels. But nothing to launch until after that is completed.

Okay. Thank you very much.

[Alan Matroni] at [Sylvan Lake Management].

Thank you. On the DOT business, can you -- when you were giving us the customers for the quarter, is that inclusive of the DOT business as your percentages or exquisite of that?

That is exquisite of that.

Excellent. Also Ron's TV, can you give us a sense of how much in revenues you think you're going to have from that this year?

We publicly stated that it will be a $50 million or above revenues from Ron's.

Is it above now that you're getting further into it and you've closed it and you are already in February?

Here again, the public comments that we've got to it is it will be $50 million plus something this year. When we get our hands around it more we will be talking more about the long-term forecast.

Also on DOT, when can we expect to hear something regarding the sell? I mean, Bob, all I hear on the call is sort of how you're telling us it has the worst DSOs -- it's had losses in the past. What kind of bidders would be interested in the DOT contract? And would you consider selling it just for an earnout as opposed to getting cash for it?

Let me go down through a little bit. It's very important to understand that it just became public about 2.5 months ago that we are selling the asset. We were behind the scenes trying to see when we announced that we were going to discontinue the ops, we were behind the scenes trying to see if there was activity out there. We have had strong activity and strong interest. In the last few weeks just to give you a little ballpark, there has been over 10 inquiries and NDAs signed to look at the asset.

There's a number of different folks that are looking at the government space that are looking at this type of opportunity both that are currently in the business and also just general equity markets are looking to buy businesses. I think you folks are all aware of those type of companies that are out there right now that are looking to get into the space.

Secondly, I think that we've worked very hard to fix the business in the sense of not being the profit margins that we want to get out of the rest of our energy industry but to get the business back on the right track so that it is attractive for a sell. What we will consider to sell this business is very -- I would not want to negotiate against myself on this call today. We're going to wait and see what the offers that bring in over the next hopefully 30 to 45 days and we will evaluate those types of things and we will make our decision accordingly.

Okay. And then lastly a competitor yours, DICOM yesterday talked about how they were exiting a couple of markets for Verizon because the margins were not economical for them. I believe you are in some of those markets that they are exiting. Can you talk about whether they are economical for you and what your viewpoint is on Verizon pricing this year?

I will tell you we've been very conservative in our growth of all of our customers and not taking on work unless it met the criteria for what we're trying to get done and that's increasing our margins and our profitability. So we've been very cautious to move into new markets unless we felt that we could meet our goals and objectives. So I feel very comfortable in the adds that we've made this year and our ability to perform that work at the margins that we historically have been able to get in past years.

And when I talk about the past years, I'm talking about pre-2000. We're going to continue to try to grow that market in a very methodical phase and handle areas that we're very familiar with.

Excellent, thank you.

Liam Burke at Ferris, Baker, Watts.

Good morning, Austin. Could you talk briefly a little beyond DICOM and other competitors in the environment? It looks like the RFP backlog is beginning. Your beginning backlog is beginning. The energy bill drives additional buildout of utilities. Is there anybody else surfacing that could provide competitive alternatives?

We've not, as a matter of fact we've had a couple of exits in the last month or so with Arias out of the industry which has caused some -- as a matter of fact some [date] backs on some of our parts. Just recently as a matter-of-fact I found out yesterday we picked up two MSAs up in Minneapolis from Qwest from an exiting party in the industry.

I haven't heard about much news about anybody new coming into the industry right now. The barriers to entry I think are getting stronger every year that we go on and it's very difficult to get that relationship build up with the Verizons the AT&Ts, the BellSouths, and even the cable customers for that matter-of-fact. They will be coming as it starts building up but I think the barriers to entry levels are going to be a little bit tougher and tighter.

The other thing is too is I think that a lot of us have done a very good job of acquiring the companies that will really add value and there are some good companies out there still that are left in the marketplace but not as many as there were in the past. And this is a hard model to build from scratch and organically.

Great. Thanks, Austin. And, Bob, I might have missed this but on your guidance for '06, is there an implied tax rate on your earnings for next year?

No, there isn't. We have a $175 million NOL and we will not be a taxpayer in '06.

Great, thank you.

Min Cho at FBR.

Good morning, Bob. Quick question for you. I noticed that in '05 you did break out the government sector. I just wanted to know is that just a wind down of some existing work or are there any longer term opportunities within the government sector obviously outside of what you're looking to discontinue that you may pursue?

I think it is very important that we are really being careful to say that we're getting out of the DOT project business when it has to do with government. We have had some very successful government projects with Army bases and Navy bases and Marine Corps bases and things like that. We will continue to look at that marketplace and fulfill some of those needs.

Great, thank you.

[Michael Needleman] at Ridgecrest Partners.

Good morning. How are you? Just a couple questions I wanted to be sure that I caught this. You talked about legal expenses and I believe you said like $3 million. Was that over the course of the first half of the year and that's going to be more heavily skewed in the first quarter?

No, Michael, it will be about $3 million in the first quarter alone. That is more than we would normally spend. And again I'd invite you to look at the -- the nature of most of our litigation is going to recover money for us. It's offensive litigation. We're going to have to spend to get.

And I think you also said on the possible sale of the divested assets, you still feel comfortable that you are -- that that is going to be gone sometime in this calendar year?

Yes.

That is actually our intent.

Okay. And as far as margins are concerned do we expect because this is going to be a down first quarter, is it going to be the typical pattern of margins that you actually start to see acceleration second, third quarter and kind of a maybe possibly down again in the fourth quarter?

Yes, I mean, while we are not going to give quarterly guidance, I think the seasonality pattern that the company historically had was pretty evident in '05.

Okay, one last quick question --.

One of the things, Michael, not to interrupt you. But one of the things I think you need to look at too and everybody does, is with the DirecTV and the install of the home platform that we do have, it will smooth that out to some extent especially towards the fourth quarter of the year. As you can see in the results we've just posted, DirecTV went up from probably about 7% or 8% as a customer in the fourth quarter and really the business didn't get bigger, it is just very consistent.

And as you lose some of your normal weather-related type of business, that business is very smooth for us for the fourth quarter. I think our customer mix bodes well for us to get more of a predictable and consistent pattern.

That is exactly what I wanted to ask. Listen, thank you, and again, good quarter.

We have no further questions at this time. Mr. Shanfelter, I'll turn the conference back over to you.

Thank you very much. And once again give a special thanks to those people that have supported us over the offering and currently. We look forward to working with you closely through the year to come and thank you very much. Have a good day.

That does conclude today's conference. Again, thank you for your participation.