MasTec Inc (MTZ) 2006 Q2 法說會逐字稿

Welcome to MasTec's August 4, 2006 Second Quarter Earnings Conference Call. Let me remind participants that today's call is being recorded. At this time, I will turn the call over to Marc Lewis, MasTec's Vice President of Investor Relations. Marc?

Thank you. Good morning and welcome to MasTec's earnings conference call in which we will discuss the results for the quarter ended June 30, 2006. 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 day 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 the 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 CEO, and Bob Campbell, EVP 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 will be limited to GAAP-based financial items and their derivatives. These discussions will be followed by a Q&A period and we expect the call to last approximately 45 minutes. Austin?

Thank you, Marc, and welcome to MasTec's second quarter 2006 conference call. Yesterday, we announced continued financial improvement for the second quarter of 2006. This represents five quarters in a row of profitability in our continuing operations. The visibility into our end markets continues to improve. At the same time we continue to drive improved financial performance from each of our operations. Bob will be giving you detailed financial data points in a few minutes, but I would like to highlight a few important items.

Our Q2 2006 results improved 80% to $0.18 per diluted share versus $0.10 a share in the second quarter last year. Our core revenues were up 11% over Q2 2005. Gross profits continue to trend well and upward for MasTec. The industry trends towards outsourcing continue to be -- to increase. Our cash and liquidity position remains strong even as we deploy working capital to support our increased revenues. And our DSOs continue to trend well compared to our prior years and our peer group.

As I stated in our first quarter call, MasTec's continues to have an excellent customer portfolio. We continue to be mission critical with many of our customers and I have noted before, the outsourcing trends continue to expand. Overall, the demands for each of our markets is trending upward. As some of our customers consolidate and expand, we believe that MasTec will be a strategic part of their network rollout plans.

Some examples of these trends would include MasTec is in a hiring mode in many of the regions throughout the country. Historically, this environment leads to improved economics for our services. We are up 750 people from the first part of the year. MasTec continues to see agreement extensions and favorable economic terms of energy and utility customers, including TXU, Florida Power and Light, Allegheny Power, AEP, and Arizona Public Services. We expect growth in the cable markets as the Adelphia has just emerged from bankruptcy, and existing MSOs offer new advanced products. We believe the MSOs will devote significant CapEx to upgrade new products and install them. These opportunities are beginning to surface now and we expect to see stronger activity early next year.

We have also seen increased RP activity, and actual contract wins in our normal maintenance and fiber upgrades for RBOCs and rural telcos. These include Verizon, Citizens, [Neema] in Montana, Qwest in South Dakota, Venture in South Dakota, Nunn Telecom in Colorado. And our Install-to-the-Home business continues to perform well.

As HDTV sales continue to exceed projections and demand for programming increases, additional bandwidth will be needed. Estimates are over 1,200 high- definition programs are planned for this year alone. As these trends are pushing competition into the voice, video and data marketplaces. Due to years of underspending in the utility and energy sectors, the long-term CapEx trends are increasingly favorable. Recent blackouts in New York, Texas, [St. Louis], Missouri and California's recent progression for rolling blackouts this summer highlight the reliability issues of our current electrical grid. The need for expansion, and upgrades in both transmission and distribution systems are quite evident. We expect spending in this sector to show strong growth to years to come.

In the Florida markets, they continue to be strong for MasTec's energy revenues. In addition to expansion of normal maintenance services, the Florida Power & Light grid is being hurricane hardened. Over the next five years, conversion from aerial to underground compound replacement projects will result in a large amount of contract work. As you can see from the Weather Channel, hurricane season is here. Storm restoration is always a good source of revenue and increased productivity for MasTec. MasTec has been very involved with RPR activity as well, dealing with broadband over power line projects. According to industry sources, there are now about 10 commercial deployments and 50 trial programs underway in [St. Louis]. We expect MasTec activity in broadband over power lines later in 2006 and throughout 2007.

As our customers continue to focus on our core product offerings and our higher costs work force that continues to age, we believe that outsourcing will continue to expand. MasTec has the platform, the brand, and the personnel to expand on their core business. We are also looking for core business acquisitions that would be accretive to our business. We continue to focus on innovative solutions for our customers. I would now like to turn the call over to Bob, so he can discuss financial results for the quarter and discontinued operations in a much greater detail. Bob?

Before I cover Q2 financials in our usual detail, let me review the headlines. First, our Q2 earnings from continuing operations were $0.18 a share compared to $0.10 profit last year. The Q2 $0.18 a share is after a $0.02 hit for the non-cash FASB 123R stock compensation expense. The $0.10 a share in 2005 had no FASB 123R expense. So, apples-to-apples continuing ops earnings were double last year's. Second, for the first six months of this year, we had $0.25 of continuing operations earnings versus a $0.01 loss a year ago. Third, Q2 revenue was up 11%. Fourth, we continue to make progress at the gross profit line. 14.6% versus 13% last year. Fifth, liquidity is about 110 million, which is far better than the $50 million we had when we did this call last year. Sixth, DSOs were at 66 days for continuing operations compared to 73 days last year. Finally, we want to reconfirm our 2006 earnings guidance of $0.70 to $0.80 per share earnings from continuing operations. So much for the headlines, now let me take you through the details.

For Q2 2006, income from continuing operations was $12.1 million or $0.18 diluted earnings per share, compared to $5.2 million or $0.10 per share last year. Included in the Q2 2006 earnings is $1.6 million or $0.02 a share for the FASB 123R non-cash stock compensation expense, and that compares to zero expense last year. Last year, the comparable expense was in our footnote disclosure and not in the P&L. As I mentioned in our headlines, Q2 earnings ex-FASB 123R charges were $0.20 versus $0.20 last year. And year-to-date, we are at $0.29 continuing ops earnings ex-123R versus $0.01 loss last year. So, we are obviously off to a far better start this year.

Revenue was up 11% from $210 million to $232 million. The $22 million increase was primarily due to increases in Install-to-the-Home and in energy services. Gross profit was 14.6% for the quarter versus 13% last year and that is before depreciation. Our trend line continues to improve. We have gone from 12.3% in Q2 2004 to 13% in 2005 and up to 14.6% in 2006. The improvement reflects productivity improvements and the better pricing environment we have been talking about. Also, we are starting to see improvement in fleet and equipment cost from rationalizing the fleet and we are starting to get better equipment deals due to improved balance sheet, and we are putting considerable management attention to making cost-effective equipment acquisitions, both purchases and leases.

Finally, we had a good safety quarter, continuing the improvement trend that we saw all last year. As I say on every one of these conference calls, gross profit improvement remains the number one priority at MasTec. SG&A expense increased from 6.7% of revenue in Q2 2005 to 7.5% in 2006. In dollars, the increase was about [$50] million. There were three areas causing higher SG&A - FASB 123R stock option expense, bonus expense, and legal expense. As I mentioned earlier, the FASB 123R stock option expense was $1.6 million versus zero last year. Our bonus expense was $1.2 million compared to only $100,000 last year, which seems fair since we are at $0.25 continuing operations earnings for six months this year compared to $0.01 loss a year ago. Finally, continuing operations legal expense was $2.6 million versus $1.2 million last year.

Let me expand on our legal cost and outlook for legal cost. We warned everyone on our year-end call and also on our Q1 call that 2006 legal spending would be high. So far this year, we have spent $4.4 million versus $2.8 million last year. As we have mentioned before, we are spending legal dollars today in order to get recoveries in the second half of 2006 and into 2007. The recoveries are expected to be materially higher than the dollars we are currently spending chasing our old receivables. There is a description of the major cases in the legal footnote in our SEC filing if you want to know more. In Q2, we did get additional recovery in settlement of our ABB litigation, which has been in our litigation footnote for about two years. We expect a number of other similarly old cases to be resolved in the second half of 2006 and in 2007.

We're not ready to provide earnings guidance, of course, but we do expect that 2006 will be the high watermark for legal spending and that we will get the benefit in 2007 of reduced legal spending. We expect to keep reducing the number of legacy cases, and fortunately, we have had very few significant new lawsuits in the last several years. So, we should finally be on the downside of the legal cost slope next year.

To get back to my comments on SG&A cost overall, we are generally pleased with the progress we have made in lowering SG&A over the last couple of years. That is with the exception of our current spike in legal costs. And the higher bonus costs and the new FASB 123R stock costs are just the cost of running a more successful business. Looking forward, we will continue to focus on keeping a tight lid on our overhead costs. It's an important part of our profit improvement plans.

Net interest expense was reduced by $2.4 million, primarily as a result of the paydown of $75 million of subordinated debt in Q1, plus interest income on $60 million plus of cash that we have on the balance sheet. A year ago, our Q2 balance sheet only had 4.5 million in cash. So, we have come a long way in a year. Our accounts receivable, days sales outstanding or DSO has improved dramatically this year. We closed Q2 at 66 days compared to 73 days a year ago. That is for continuing operations. We were 2 days higher than Q1, but that is primarily due to the seasonal ramp up in this business. Our DSOs reflect improvements in the credit quality of our customer base, the diversification of the customer base and positive changes in the customer mix. Management's goal, as we have said before, is to get the DSOs under 60 days.

Our gross liquidity is currently 110 million compared $50 million when we had this call a year ago. Typically, our Q2 liquidity is the weakest in a year as we are in our seasonal ramp up. We define liquidity as bank cash plus availability on our credit line. Liquidity is up dramatically due to $156 million net proceeds from the recent equity offering and the improved bank deal that we did in May.

For the second quarter, our 10 largest customers were DirecTV, 34% -- that's 34% of revenue, BellSouth 11%, Verizon 8%, Embarq formerly Sprint 5%, Florida Power and Light, Progress Energy, and TXU are all at 4%, Qwest/US West is at 3%, Dominion Virginia Power 2%, and the South Florida Water Management District 1%. Currently, continuing operations backlog is roughly at the $1 billion level. That is an 18-month backlog number. Even though we believe the fiber deployment work will last for many years, our backlog only includes the specific work for which we have visibility.

Regarding Capital expenditures, we said in our 10-K that we expected to spend $20 million to $40 million in CapEx for 2006. With our improved balance sheet and improved financial results, we now have the clear option to either buy fleet and equipment or to do leases at much more attractive rates, whichever makes the most sense financially. In recent years, prior to our equity offering, almost everything had been leased. After six months, our CapEx spending was $10 million, plus $6 million in capital lease additions.

Now, I'd like to comment on our discontinued operations. Before our start, I'd like to say that we believe investor focus should be on continuing ops and the bright future for our core businesses and not on the business we are selling. Also, I want to repeat very clearly our firm commitment that we will absolutely exit the Highway Transportation or DoT business. Having said all that, let me walk you through disc ops in enough detail to answer your questions. As a frame of service, the overwhelming majority of our discontinued operations are the State Highway Transportation or DoT projects and assets, which we discontinued at year-end 2005. In Q2, we had a $15 million discontinued operations loss before the impairment charge, and Q2 disc ops negative cash flow was $10.6 million.

After evaluating our disc ops results and our efforts so far this year to sell the Highway Transportation projects and assets, we have taken an impairment charge in disc ops in Q2 of $21 million. At the end of Q2, the net asset or carrying value of our State Highway Transportation or DoT assets was $41 million, and after the $21 million impairment charge, we now have the Highway Transportation net assets on the books for $20 million.

Now, let me add color to the discounts numbers. First of all, management is very disappointed in the disc ops results for Q2, or for that matter for the last three quarters. But now, let me take you through what has been happening this year and what we are doing to both fix the business, but especially to exit the Highway Transportation projects and assets as expediently as possible.

In Q1, we installed a new Group President and a new Group CFO in an effort to get our troubled projects completed as fast and as economically as possible, and to preserve the value of the projects and assets that we are in the process of the selling. Many of the issues that we have been facing are some badly bid projects, most of which are bonded, which were bid in 2003 and 2004, and that we are trying to finish to fulfill our contractual obligations and to eliminate the outstanding performance bonds.

The bottom line is that there are about 20 projects out of a beginning of the year total project count of 127 projects that have been the primary reason for our big losses in Q2. These troubled projects as well as a number of marginal ones have certainly made it more difficult for MasTec to dispose of these projects and assets, and I would like to elaborate on this issue.

When we discontinued the DoT projects and assets at year-end, we switched from quietly marketing this business to aggressively marketing the business. We engaged an investment banker to represent us. We had a package out on the street, and we had considerable interest from a number of parties in buying the projects and assets. However, the losing projects and the time and dollar uncertainty regarding these projects and the negative cash flow were a big negative in the eyes of potential buyers, which has clearly hurt our ability up to now to close the transaction.

So, we have been very focused on closing out trouble jobs, adding much higher margin new jobs, improving operations and predictability, in general cleaning up both the business and the project portfolio, so that we can have a more attractive, more marketable business to sell.

Now, to talk specific numbers with you, here is the 2006 DoT overview. At year-end, we were working about 127 open projects, had a backlog of $117 million, and had exposure on ITS performance bonds of $81 million. By the end of Q2, we have worked the project count down to 94 active projects, have a backlog of 88 million, and have reduced our bond exposure down to $56 million, a 31% reduction. We closed out 67 projects and added a number of new projects that are profitable. More importantly, we are working down the number of trouble jobs. With the benefit of hindsight, our beginning of the year 127 project or job count, included about 75 jobs that on a burden basis will show a loss. Of these 75 jobs, 40 were closed in the first six months of the year, and we expect another 20 of these projects to close out Q2. So, numerically, we will have worked 75 beginning of the year loss jobs down to about 15 at the end of Q3 and down to about 5 at year-end. So, we will be left with a smaller but far better portfolio of jobs, primarily bid in 2005 and 2006 and bid at much better rates.

We have just changed investment bankers in an effort to attract more strategic buyers and are developing a new package, reflecting the project clean-up, to put the package on the street, and we will be commencing our remarketing efforts.

My final comments regarding disc ops are as follows. We are committed to exiting the State Highway Transportation or DoT projects and assets. We have reduced our carrying value appropriately, and we will dispose off the projects and assets, and we will not, I repeat, we will not keep the DoT projects and assets in our portfolio. I will not promise no operating losses or a positive cash flow while we are selling the assets, but I will tell you that our efforts so far this year to close our troubled projects will be reflected in far better results, P&L, and cash than we have seen in the first six months of this year. Sorry to take so much time on disc ops. As I said earlier, I believe investor focus should be on continuing operations and the outlook for our core businesses, but I did want to try to answer your questions.

We continue to discuss optimal capital structure and target leverage internally and with our bankers. At this time, all that I would like to say on this matter is that our capital structure will remain conservative. We will deal with our February 2008 bonds in a timely manner and you will be hearing more from us over time about capital structure plans and parameters. We get a lot of questions from the investment community about acquisitions, our interest in acquisitions, the likelihood of acquisitions, and the type of acquisitions that we would do and so on. So, let me try to answer some of your basic questions for the benefit of everyone on the call.

First, let me repeat what we said throughout our equity offering road show. We are going to be great stewards of our new-found wealth and much improved financial condition. You can expect to see MasTec retain its current conservative capital structure. Second, when we make acquisitions, they will be in our core businesses, the businesses that carried us through our tough period and the businesses in which we have been successful over the year. Third, there are acquisitions out there, acquisition opportunities out there, and we are routinely looking at the opportunities available in the marketplace.

Fourth, in addition to now having a capital structure that allows us to make acquisitions, we now have the infrastructure to do successful acquisitions. We have quality ops and finance people to analyze the deals thoroughly and to make sure we have the right return on investment. And we have a finance back office and IT capability to integrate another business or businesses into MasTec. As a point of information, the Ron's TV acquisition, our Southeastern home service provider for DirecTV, which closed at the end of January, it has already been fully integrated into MasTec's DirecTV operations. If you remember, we now have the entire Company on a single Oracle platform, which helps us with acquisition integration.

So, the bottom line is that we are interested in acquisitions in our core businesses. We are routinely looking at acquisition opportunities, and we have the resources and infrastructure today to make both smart deals, but also to operate them successfully. Of course, we will not be talking about anything we are looking at and our guidance does not contemplate future acquisitions.

Our 2006 earnings guidance remains unchanged. We remain on track for continuing operations earnings of $0.70 to $0.80 per share on revenue of $950 million to $975 million. That is a 12% to 15% revenue increase, and the $0.70 to $0.80 per share compares with $0.37 for 2005.

To give our earnings guidance some additional perspective, let me cover a few numbers with you. Our first half continuing operations earnings were $0.25 compared to $0.01 loss last year. In the second half of last year, 2005, we made $0.38. So, our first half earnings of this year plus last year's second half earnings, they totaled $0.63 a share. So, with the revenue and margin improvement trends that we have been seeing this year and with our normal strong second half seasonality, we can visualize and forecast a $0.70 to $0.80 continuing ops year.

In summary, we are pleased by the Q2 results of our continuing operations. We have now strung together five respectable quarters of solid revenue and earnings improvements. We believe that we are on the right track with our core businesses, and we have plenty of opportunities for profitable growth. And as Austin mentioned, our markets are good. At the same time, we also believe and continue to say that we have significant opportunities to improve our profitability much further, and we are certainly not satisfied by current levels of profitability. We are just very encouraged by the trends. At this point, let me turn the call back to Austin.

Thank you, Bob and I would like to turn it back over to the operator for question and answers.

Thank you.

[OPERATOR INSTRUCTIONS]

We will go first to Alex Rygiel at Friedman Billings Ramsey.

Could you hear me?

Now I can, Alex.

Great, good morning.

Good morning.

With regards to your commentary on the MSO opportunity, can you expand upon that a little bit, Austin?

Yes. We have seen some more activity here recently from -- we picked up some work for Cox Communication in Virginia. We are picking up some work from Time Warner recently in a couple of markets. So, there has been more activity than we have seen probably in the last six months coming our way. They are all -- mostly clients are talking a lot about post the Adelphia process, what they are going to be doing. I think they are aligning contractors up to handle those needs. So, we are seeing increased enquiries about availability, capacity, and timelines in the marketplace. So, definitely seeing some movement, definitely seeing fiber being driven a little bit deeper, some equipment changes and a little bit more activity on the commercial side of the business that we had not seen for quite some time.

Great. That's really helpful. And with regards to your guidance for the second half of this year, have you included any revenue associated with potential upcoming hurricanes in that guidance.

No, nothing other than just normal historic numbers.

Okay.

No.

Guidance does not include any acquisitions and it does not include any hurricanes?

Very little hurricanes.

Very helpful. That's it for now. Thank you.

Thank you, Alex.

We go next to John Rogers at D.A. Davidson.

Hi, good morning.

Good morning, John.

First, Bob, I am sorry, but I did not hear what you said about backlog.

$1 billion.

$1 billion, okay. And then secondly, in terms of the margin improvement, how much of that is capacity utilization? I guess I'm just trying to get a sense of -- in terms of hiring people and how much available capacity you have? What is not being deployed?

John, we do not have people sitting around -- go to work. Capacity on people, our people hopefully are all productive everyday and generating revenue.

John, let me add to that a little bit. I think that what we are doing now differently than we probably have in the past, is our adds now are 90%, 95% productivity type of individuals are being added. We have the backbone, the back office, the infrastructure to support our business that's going to grow now much better than we ever had in the past. So, because we have fixed the systems, the processes, the procedures, now our adds can count, make them do lot of work, and make them be productive for us in the bottom line.

Presumably, looking out into next year, the overall size of the business is going to grow up above previous levels. Are you going to be able to get -- hire people to do that? What sort of wage inflation are you seeing out there? And can you have it all approved?

We have said before that right now, yes, we are finally starting to feel a little bit of the supply and demand issues, more so in sectors than overall. The energy sector is probably feeling it worse than any other individual other piece of the business that we have. But the reality is that we have been very successful by hiring 752 people since the beginning of the year, it shows a little bit about our success. We have programs and we are working on other things like retention programs that are very important to firms like ourselves to just kind of build and keep team members and push them through. But, we have done this before. We feel confident that we will develop the methodologies to continue to do so. And we look forward to growing our Company with good assets.

Okay, great. Thank you.

Our next question comes from Steve Mather of Sanders Morris Harris.

Thank you very much. Let's see, a couple of things. First, a large HSP was, I think, recently for sale. Could you guys -- to what extent did you analyze that acquisition?

Right now, we would not be able to comment on that. I mean, yes, there's company called 180 Connect that came out in the marketplace. MasTec is going to pay attention to anything that comes out in that space. It's a very important industry to us. But, we would not be able to comment on how far or what we are doing of that review.

Okay, that's fair. Let's see, secondly, what kind of benefit might you see if DIRECTV is able to offer a triple play by let's say, adding a wireless solution for voice and broadband?

Well, I think as any one of our customers add new services, and of course, we are the extension of doing that for them in 13 states, installing their products. Those things are very exciting to a company like MasTec that has the footprint, has the capacity, and the number of people that we have installing every day. So, we are quite excited about all the new technologies, all the new ideas that are coming out and even excited about the consolidation dialogs that are happening throughout the voice, video and data world. So, I think all those things bode pretty well for the service offering that we wind up.

Okay. And lastly, I appreciate your legal explanations, but just so I understand, the 4.4 million is for the first half of this year. And can I think of 3 million of that as recurring and maybe 1.4 million as non-recurring offences?

I think what you got to look at is the information we did give and look at the year before, what we spent and what we expect this year, year-over-year. We are working diligently to, number one, do the thing so that we have eliminated the legal issues that have plagued the Company over the last four years. But number two is to really try to bring down cost in general. The legal cost in our society are, needless to say, out of whack, and I [would only want to spend all your time on anything total reform] or something. But the bottom line is that we are working very diligently, I'm trying to reduce those numbers the best we can. And the biggest way we can do that is doing good business and making sure that we are not exposed to potential issues. And like Bob stated in his conversation, we have seen a really serious reduction over the last couple of years and have seen very few new litigations come up in the last couple of years.

As part of the 1.6 other income, is that part of a recovery?

One second.

Some of that is the equity pick up in our joint venture. And then, routinely, the vehicle and equipment gains are in other income.

Oh, I see. Okay. Just my last and real quick, I guess your $0.70 to $0.80, does that include some, I guess, assumed recovery? Or you don't really include that? Is that a bonus to your EPS guidance?

Due to the fact that we can't predict when recoveries will take place, our guidance would not include those recoveries.

Okay. That's it. Thanks for taking my questions.

Thank you.

We will move next to Colby Synesael with Merriman.

Hey guys, how are you?

Fine.

My question has to do with the energy sector, obviously, it is a pretty popular subject right now. But, from my understanding, it looks like the sector in general has been underinvesting in their capacity for quite sometime. Is there any change when you are speaking with them that will make you think that that is going to finally reverse itself? Or do you think that that trend is going to continue going forward?

Well, let me go a little bit deeper. I think if you look at just year-over-year performance for MasTec, the evidence [of the matter] just in how we have grown in the energy sector, which showed that we're spending more money. These are the same customers we had a year ago, two years ago, three years ago, and each of them were on a rise of spend. Without a doubt, the fact is that the spending has not been adequate to maintain and grow the grid appropriately. And many energy of the companies are now, first of all, have favorable legislation to do so and have need to do so and demand to do so. So, their income is lined up correctly that will drive CapEx. And we are absolutely seeing across the board, with our energy customers, more activity and RFPs, actual wins and actual gains and revenues across the board in energy customers.

Okay, great. And then my final question, as it relates to Comcast and I guess, now Adelphia, have you begun to have conversations with those two respective companies as far as what they may be looking for and what MasTec's potential role could be?

I think more of our dialogs have been with companies like Time Warner, Cox and some of the other MSOs. It hasn't been focused on the Comcast at this point.

Okay, thank you.

Next from Liam Burke at Ferris Baker Watts.

Good morning, Austin. Bob, how are you?

Good morning.

I had a question for Bob. In the press release, you say that the cash outflow from discontinued ops was about $20 million. If I look at your free cash flow statement year-to-date on an operating basis, it is roughly breakeven. That would suggest that your core businesses generated year-to-date about 20 million in free cash. Is that an accurate assessment of the cash flow profile of core business?

Yes, I think you have got the math directionally right.

Okay, great, thank you.

Thank you, Liam.

And next we will go to Todd Mitchell at Kaufman Brothers.

On the Verizon business, you disclosed that it was pretty -- down pretty significantly this quarter, and I realize it will be lumpy, how do you feel about that in general of on an annualized basis? Is that customer maxing out in terms of total dollars?

What I would say to you is we have forecasted in our internal budgets for full year, not looking at anyone quarter over another. We are still confident that we are going hit our internal or beat our internal forecasts for Verizon for this year. So, recently, we are seeing some pickups in project activity in the State of Florida, little bit in Texas and a couple of other areas. So, I think it is just -- it is lumpy, it is what we have talked about in the past that different types of situations force it to be up or down in any given month. But, I would think that overall, we will have our budget that we did internally met or exceeded.

Okay. One other question. In terms of your backlog, qualitatively, could you characterize it by segments? Has one segment been particularly strong or one line of business?

We don't break things into segments. But generally, what you are seeing is a continued, strong year-over-year growth in DIRECTV. You are seeing energy growth continue to expand, and you are seeing that our telecom customers overall have some growth in them and some expansion in them. But, for example, Qwest had some significant growth in this quarter, up 2% over last quarter alone. But, just seeing in general 5% type of growth numbers in telecom.

Do the energy business -- does it have a longer lead time?

It has always had a longer lead time.

Okay, okay. Thank you very much.

Thank you.

We will move next to John Harmon at Needham and Company.

Hi, good morning.

Good morning, John.

Couple of questions for you. The DIRECTV business was down a bit in dollar terms sequentially, and as a percentage, even though you owned Ron's TV for an extra month in the quarter, is it just lumpy or is there some -- is there a seasonality to this business?

One of the things you want to follow in any of those types of businesses is their sale initiatives, their new rollouts of products. And even, as we were out on the road, some six months ago now, what we talked about is that, any time if there is a new product or a new offering coming out, you will see pickups and you will see [rollouts]. I think what we are seeing is right now a very strong activity in the market, right now. We saw some softening in the beginning of the second quarter, but the numbers are coming back up strongly. And at the end of the year, I think it will be very much in line with our original internal targets we thought we will be doing for that service.

So, actually, the DIRECTV takes to promote its services, can cause fluctuations in your revenues as well, you are saying?

Yes. But, I think it is important to realize that about 65% of our revenues in growing are derived from maintenance activities, for upgrades and move-outs and changes. And only 35% basically is from new installs. So, it impacts us but not worth a large number.

Got it, thank you. Kind of a more general question, as Verizon's Fiber-to-the-Home project moves from more suburban areas to more urbanized areas, multiunit dwellings, is that good or bad for you?

It really depends on what the infrastructure is around those buildings. Really the big factor that changes that for us mostly is whether it goes from an underground facility to an aerial facility and most of the work we are doing is in the underground areas of the country. The other thing I think you want to look at is the northeast has more of the MDUs than maybe the southeast does, if you look for geographic coverage area. And therefore, some of the areas that we are in aren't as impacted by multiple dwellings units, as maybe the northeast might be.

Okay, thank you. Did the change of ownership of the Sprint local business, does it change anything for you? Or is that same business, different owners?

We are excited about the new folks that are running Embarq right now. They are really -- they are focused on local line business. These are people we have known, it's a lot of the same people, but people we have known for many, many years. They know what MasTec brings to the table. We know who they are. So, it's more of the same with a very new energy to continue to roll out our new products.

Thank you. What is your estimate of option expense for the year? Is it really just four times $0.02 to $0.08 or a little, a less?

Yes, I think in round numbers it is. It changes a little but not much.

Thanks and finally, does the unusually warm weather impede your business in any way or I mean certainly it can cause burn outs, which might generate business for you?

I think, when we talk about the energy section, it definitely kind of creates the obvious need for additional spend, but really, really what affects us weather-wise is the storms. Other than that the hot weather, we are used to it. Hot weather of north, they are not -- as a Company, we are very used to work in them, in tougher environments like that. The hurricanes will have effect.

Great. Thank you very much.

We will now take a follow-up from Alex Rygiel at Friedman Billings Ramsey.

Thank you very much. Austin or Bob, it would appear that your DIRECTV revenue was down about 5% sequentially. But, historically, DIRECTV's gross subscriber number is down 10% sequentially. So, it appears that you actually might have had some organic growth from that customer. Is that correct? Am I doing the math right?

Alex, I think you are doing the math correctly.

Very good. And then, with regards to your government business, there appears to be some seasonality around that. Can you talk to that a little bit to help us sort of think about how to model that over the next couple of quarters?

I don't -- government business meaning the [ITFs] discontinued ops?

I think your business as you break it out in your 10-Q?

It is a relatively small number. From memory, I think it went from about 15 million to 18 million. No, I do not think there is a lot of seasonality with it.

I just think it is how the jobs come out, Alex, I don't think we have any -- have no master plan on it.

Great. And one last question, with regards to AT&T, it would sound as if AT&T is starting to slow, it let out some more projects as it relates to Project Lightspeed. Are you seeing that as well?

We are absolutely seeing -- really in the last four months, and we talked about it really at the end of the last quarter announcement that definitely the RFP and the [inaudible] activity at a much more rapid rate.

Great. Thank you very much.

Thank you.

And that does conclude the question-and-answer session. Mr. Shanfelter, I'll turn the conference back over to you.

Thank you very much. And once again, we want to say a special thanks to all the support and encouragement we have got over the last year and thank our employees for truly making a difference here in the last six months to get the Company really on track. We are going to definitely continue to work very hard on improving the margins, as Bob said. We know what our job is, and we are focused on it. So, thank you very much, and we look forward to talking to you folks in the near future.

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