MasTec Inc (MTZ) 2007 Q3 法說會逐字稿

Welcome to the MasTec 2007 third quarter earnings conference call. Let me remind you, all participants are in a listen-only mode. There will be a question and answer session at the conclusion of the call. This call is being recorded.

Now at this time, I would like to turn the conference over to a Marc Lewis, MasTec's Vice President of Investor Relations. Please go ahead.

Thank you, Duane. Good morning.

Welcome to MasTec's earnings conference call for the quarter ended September 30, 2007. The following statement is made pursuant to the safe harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. And in each communications, we 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 were the company's expectations on the day of the initial broadcast, November 7, 2007, 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 & 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.

In addition, we may use certain non-GAAP financial measures in the conference call. A reconciliation of these non-GAAP financial measures to the most comparable GAAP financial measure can be found in our earnings press release which is posted on the investor relations section of our website located at www.mastec.com. With us today we have Jose Mas our President and Chief Executive Officer, and Bob Campbell, Executive Vice President and Chief Financial Officer. Before we ran the call with opening remarks and analysis by Jose followed by a financial review from Bob. These discussions will be followed by a Q&A period and we expect the call to last approximately 45 minutes. Jose?

Thank you, Mark. Good morning and welcome to MasTec's third quarter call. First,, some third quarter financial highlights. Revenue for the quarter was $267 million. Income from operations prior to our legacy issue charge was $12.4 million or $0.18 per share. Operating cash flow was $16.9 million, a 23% year-over-year increase and year-to-date operating cash flow is $44 million, an 83% increase over last year. This quarter, we have made some very difficult decisions that we feel are in the best long-term interests of the company.

Today, I would like to focus on a few important highlights. First, I would like to discuss our shift in legal strategy and the reasoning behind it. Second, I will talk about our third quarter performance and give an update on each market including the acquisition of a Northeast-based electrical transmission company we made subsequent to quarter end. Third, I want to talk about our install to the home business and the challenges and opportunities we face in that business, and finally, I want to talk about our fourth quarter forecast and where we see the business going. As we have previously disclosed, MasTec has had a significant amount of legacy legal cases, issues and disputes mostly dating back to the period from 2001 through 2005. These cases, over the years, have cost the Company a significant amount of outside legal fees, almost $20 million in the last two years. More importantly, consume management time both the corporate and field levels.

In an effort to significantly reduce future legal expenses, as well as to free up management's time so they can be focused on growing and improving the business, we have decide to shift our strategy, settle some cases, and accelerate closure of these issues. Although we believe we would have ultimately been successful and being awarded what we were rightfully owed, we have determined it to be prudent to focus our time and energy on the future rather than the past. Over the the last couple of years, the Company has not generated any significant litigation, and we expect that positive trend to continue. During the quarter, our communications business continued to deliver strong predictable results.

Verizon, our second largest customer, accounted for revenues of approximately $22 million for the quarter. Our year-to-date revenue with Verizon is up 31% despite the expected slowdown in the third quarter due to budget constraints. We anticipate the fourth quarter to be relatively flat but continue to be very optimistic of our opportunities with Verizon in both FTTP and EnView fiber placement along with routine maintenance work in the coming quarters. Our third largest customer, AT&T accounted for revenue of approximately $17 million, up slightly from the second quarter of this year. We are beginning to see increased activity and have been awarded work during the fourth quarter in both traditional AT&T markets and legacy BellSouth markets that we were previously not serving. In fact, yesterday, AT&T raised its spending forecast on their U verse fiber deployment by $500 million. Noting that the increase will largely be allocated to the southeast region, one of our core markets. We are also encouraged by Qwest's recent announcement that fiber spending will go up from about $70 million in 2007 to $300 million in 2008. Qwest is our sixth largest customer, and we feel we are well-positioned to take advantage of opportunities to expand our offerings to them.

In our energy business, we continue to strengthen our foundation and in anticipation of a bright future. I am please to announce that in early October we acquired three phase-line construction based in Farmington, New Hampshire. Three phase has been providing transmission line construction and maintenance services for over ten years. Three phase works primarily in the Northeast where we believe there are a number of great opportunities with new customers for MasTec. Three phase. a union contractor. will provide with us a new geographic footprint and an opportunity to participate in union jobs we have historically been able it to compete for. While three phase has remained relatively small, MasTec will now provide it with the financial backing and strength it need to do pursue some of the larger projects in its markets. We welcome the three-phase team of MasTec.

We continue to see our energy customers show budget constraints as they deal with the slowdown in-housing starts. While we have been successful at gaining market share throughout the year, we have seen that offset by lower spending. We have also had delays in the commencement of transmission projects awarded earlier this year and now expect that business to ramp up late in the fourth quarter and into next year we continue to be optimistic about our energy business. We will continue to seek opportunities in this industry, both organically and via acquisition and expect this business to be a growth catalyst for MasTec. Moving to our install to the home business, the third quarter was very challenging. While revenues increased to $118 million for the quarter, a 28% year-over-year increase, we faced operational challenges. As previously disclosed early in the third quarter, our customer encountered a significant increase in demand requiring us to hire an additional 1,700 technicians. All of our new technicians undergo an extensive training period comprised of classroom and on the job training. While we hired these technicians in the third quarter, most of them will not become a productive resource for the Company until the fourth quarter. As a result of the increased volume in our markets, DirecTV brought in alternate service providers to supplement our workforce and help meet the demands of its customer. As a result of our efforts, we have gone from about 2,800 technicians closing work orders at the end of the second quarter to approximately 3,800 closing work orders today with an additional 650 technicians in training. We are now staffed to meet the increased demand of this important customer, thus allowing them to reallocate the nearly 900 alternate service provider technician currently in our service areas. While we expected this to happen early in the fourth quarter, we now anticipate this to be completed by the end of the year. Although the training and deployment of the more than 1,700 new technicians will have a negative impact on both the third and fourth quarters of 2007, it has put us in a very strong position for 2008.

Going into next year, we will have a technician workforce of over 4,000 men and women ready to take advantage of DirecTV's recent high-definition marketing campaign. We believe DirecTV has claimed their spot as the leader in high-def television and continue to see strong demand for our services as DirecTV ramps up its channel offerings. We are working very closely with this valued customer on forecasting and scheduling to make sure that we have a clearer understanding of their future needs. In short, while these decisions will cause disappointing results in the second half of the year, we believe they were the right decisions. We understand the importance of consistent, predictable earnings and our credibility around that. We strongly believe our earnings weakness in the third and fourth quarter are related to a very specific isolated issue which we are confident will be behind us in the fourth quarter. We have positioned the Company for a very successful 2008. Getting our legal issues behind us, gearing up for the growth opportunity afforded to us by our largest customers and strengthening our energy business through a strategic acquisition we're all necessary steps towards achieving MasTec's long-term strategy and vision. I will now turn over the call to our CFO, Bob Campbell. Bob?

Thank you, Jose. Today, before I go through a detailed review, let me give you the key points. Before the legacy litigation and other charges, continuing operations earnings for Q3 were $0.18 per share on a fully diluted basis and consistent with our guidance. We were successful in Q3 in hiring 1,700 DirecTV technicians to meet increased demand and our Customer Service by the end of the quarter had improved dramatically. However, the negative financial impact of our DirecTV initiatives was unfortunately just as large as what we were expecting. We booked in Q3 a $39 million charge primarily related to legacy litigation, claims and other disputes including our wage and hour settlement. The charge reflects both some Q3 settlements and also the accrual required to reflect the shift in strategy regarding legacy litigation that Jose mentioned. I will cover in a moment the favorable future financial impact of our shift in legal strategy. Liquidity and cash flow from the business remained strong with liquidity today at over $150 million and DSOs had 59 days which is our best in recent history.

With my overview out of the way, let me take you through more detailed information. Revenue for the quarter was up 6% increasing from $240 million to $267 million. Without the $39 million charge, primarily for legacy litigation claims and other disputes. Our pro forma earnings from continuing operations were $12.4 million or $0.18 per diluted share. That compares to $14.3 million in earnings last year or $0.22 a share. The decrease in earnings was primarily due to costs and inefficiencies related to our install to the home technician ramp-up which totaled 1,700 new hires and to a lesser extent lower performance than expected in our energy group. On a year-to-date basis, our continuing operations revenue was up 9%. Without the $39 million charge for legacy litigation, claims and other disputes, our year-to-date pro forma continuing operations earnings were $35.4 million compared to $30.7 million last year. That's $0.53 diluted earnings per share from continuing operations year-to-date versus $0.48 last year.

Now let me make additional comments about our Q3 2007 P&L. As I mentioned, Q3 revenue was up 6%. Although our DirecTV revenue was up significantly, it was actually hurt in Q3 by three factors. First, we went through much of the quarter without enough fully trained technicians to handle our customers demand. Second, we had third party swing resources in our traditional DirecTV markets. Supplementing our resources but picking up revenue that we would normally have gotten. And third, throughout the quarter, we used our best technicians as on the job trainers helping us get 1,700 newly hired technicians ready to provide service for our customer. Therefore, our best customers were not as productive as normal in terms of generating revenue. Also, we saw pockets of slower spending from our telecommunications and energy customers which appear to be related to lower new housing activity and in some cases budgetary constraints with some of our customers. For Q3 2007, our ten largest customers were DirecTV 44% of total revenue, Verizon 8% of total revenue, AT&T 6%, Embarq 5%, Progress Energy and Qwest 3% each, Florida power and light, Encore TXU, XTO energy and American electric power 2%. Our gross margin before depreciation was 13.5% for the third quarter of 2007 compared to 15.4% a year ago. And it was impacted by our major recruiting, hiring and training program for our install to the home business. The program went well.

We hit our recruiting and training goals, and it is beginning to pay off as we get swing players out of the territories with DirecTV. Gross margin was also impacted by softer margins with our electrical utility projects as we ramp up our capabilities in this area. As Jose mentioned, there were a number of energy projects where commencement was pushed out till later this year or into 2007. On the favorable side of the ledger, we continue to make progress with our cable television or broadband projects. After losing over $2 million or more in Q1 and also in Q2, we reduced the operating loss to $700,000 in Q3. Our goal for Q4 is for the cable TV or broadband project to say reach break even and then be profitable there after. This has been a good market for MasTec in the past and we expect good growth and good profitability from our cable TV or broadband projects in the future. Also, again this quarter, we had a 60 basis points improvement in the cost of leased equipment. That's a 8% of revenue. This improvement reflects the benefits of our dramatically improved capital structure and our focus on leasing and buying vehicles and equipment better.

Margin improvement remains as the number one priority at MasTec, both for Q4 but also for 2008. I have mentioned something on previous calls about our margins that is worth repeating. Our gross profit margin and our EBITDA margin percentages are not comparable to our peers because of our use of operating leases. Our leases are mostly operating leases, and the lease expense is in the cost of revenue line on the P&L that lowers our gross margin instead of having those costs below the gross margin line in depreciation expense. This tends to unfavorably distort our gross margins as compared to some of our competitors who own most of their vehicles and equipment. We may have 200 basis points or more of additional lease expense compared to our peers, lowering our gross margin percent and conversely, we generally have much lower depreciation than our peers. We're 1.6% of revenue for depreciation and our peers generally have 3 to 6% of revenue. It is worth noting that because we have $200 million plus in net operating losses to carry forward for tax purposes, we are unlikely to pay any significant amount of cash taxes until 2010. Some of the the NOL tax benefit has already been taken for booked P&L purposes, so we should start accruing P&L tax expense sometime in 2009. G&A expense was $55.9 million or 20.9% of revenue in Q3 versus $20.9 million or 8.3% of revenue last year. This included a charge of $38.4 million primarily related to the settlement of several legal claims and the decision to accelerate the closure of a number of legacy legal cases claims and disputes. Without the legacy litigation charge, Q3 pro forma G&A expense was $17.5 million or 6.5% of revenue, and that's down significantly from $20.9 million last year or 8.3% of revenue in the same quarter last year.

Now let me make a few comments about our Q3 charge which was primarily for legacy litigation claims and other disputes. First, as we had previously announced, we just settled a wage and hour case for which we now accrued $9.6 billion. Second, we settled several other cases in Q3. Third, we have now reassessed all of our legal cases, claims and disputes. And as Jose mentioned, we made the decision to accelerate the closure of many of these matters. Now, let me share with you some insight on the accounting for these older legal cases and disputes. First of all, accounting rules prohibit the anticipation of a gain so we cannot accrue for any gain expected from the litigation. Second, in many cases, the outcome of the legal cases cases or disputes, if they go to trail, is just not determinable. However, following our shift in strategy regarding legacy litigation, we have reassessed every significant case with outside counsel and in a number of cases, we have developed a settlement strategy and a dollar amount for which we would be willing to settle, then we have booked an accrual reflecting the anticipated outcome of our settlement strategy. Because it takes two parties to reach a settlement, there likely will be cases in which we have a settlement strategy and we have an accrual for an estimated settlement, but where we fail to reach a settlement, and therefore we will then just proceed to trial and press our case. In aggregate, we believe we made the appropriate accrual for the value of our legacy litigation. Given our settlement strategy and without anticipating any P&L gains. The cash impact of these matters related to the $39 million P&L charge primarily for legacy litigation claims and other disputes will be significantly less than $39 million. That's for three reasons.

First, we'll collect some old accounts receivable as we resolve these matters. Second, $15 million of the $39 million charge is for an increase to our bad debt reserve reserve, basically a noncash charge. And, third, proper accounting prohibits the anticipation of a gain or a gain contingency, and while we believe that we will have P&L and cash gains, they are not reflected in the Q3 litigation charge. One last thought relative to our shift in strategy to accelerate closure of these older matters. We expect to get many of these cases behind us over the next six months or so. Therefore, we expect to see a significant reduction in the amount of outside legal fees later in 2008. Our outside legal fees were roughly $12 million in 2006 and have a run rate of about $8 million for 2007. With improvements to our operations organization with improved financial controls and with improvements in our customer and project mix we have not been generating significant new litigation over the last several years. As a factual matter, we have not had any significant new litigation initiated during 2006 or 2007. Therefore, as we get our older cases behind us, we expect to see a drop in outside legal costs beginning in 2008 and then we expect to see much lower legal costs after 2008. Also in Q3 we accrued $4.5 million in discontinued operations for a potential settlement regarding warranty and indemnification issues arising from the sale of our state Department of Transportation projects and assets. While a settlement has not been reached, it is proper accounting to make an accrual reflecting the settlement negotiations.

While backlog is not a statistic that we believe has much relevance, our backlog estimate remains strong at $1.3 billion. Backlog we believe is less relevant today as we have my grated away from large dollar multi-year bid projects to mostly contractual revenue, service and maintenance, master service agreements. Now let me take you through our cash flow liquidity and our balance sheet. Our cash flow from operations for Q3 was $17 million. That's the 23% year-over-year increase, and for nine months year-to-date our cash flow was $44 million, and 83% year-over-year increase. At the end of of Q3 2007 liquidity remained strong at $151 million compared to the 112 million at the end of Q3 2006. We define liquidity as unrestricted bank cash plus availability you should under our bank credit facility. Our quarter and accounts receivable day sales outstanding or DSOs were 59 days. The same as last quarter, and better than our 64 days in Q3 2006. As we said last quarter, that's the best DSO in recent MasTec history if not our best ever. One last cash flow liquidity comment. In Q4 we bought out about $8 million of assets from some of our old leases. While the economics are favorable, you will see a spike in Q4 CapEx, so that our full year CapEx will be about 34 to $36 million within the forecast that we have in our 10-Qs. Finally, regarding 2007 guidance, the last quarter of 2007 is unusually difficult to forecast. As Jose mentioned, it depends in a large part on how quickly we get third party service technicians out of some of our DirecTV markets. This process is controlled by the customer, and as of today we still have a number of markets with third party technicians. The speed with which the customer reallocates the alternative service providers out of our traditional markets is the primary key to our fourth quarter financial performance. Even though we expect to have substantially all markets reclaimed by year end, the speed of reclamation is the key to the fourth quarter. Therefore, we're being cautious about our fourth quarter outlook.

We anticipate improved results in Q4 from both our energy and our cable television or broadband projects, but we also see softer customer spending, some related to the housing slowdown and some related to end of the year budget constraints. Our fourth quarter guidance is as follows: Q4 revenue is estimated at $258 to $263 million with continuing operations, diluted EPS of $0.14 to $0.16. That's an 8 to 10% increase in Q4 revenue, and the $0.14 to $0.16 for Q4 compares to $0.14 last year. As usual, our guidance does not reflect the positive or negative impact of outcomes from our legacy litigation. Now let me give you full year numbers excluding the $39 million Q3 legacy litigation charge. Revenue for 2007 is estimated at $1,022,000,000 to $1,027,000,000. Continuing operations income is estimated at $45 million to $46.4 million, and continuing operations diluted EPS is estimated at $0.67 to $0.69. That's a 9% revenue increase, a year-over-year increase of 12 to 16% in continuing ops income. That's without the litigation charge, and the EPS of $0.67 to $0.69 compares to $0.62 a year ago. The the 2006 earnings members are adjusted for the reclassification of the Canadian discontinued operations. That concludes my financial review, so now let me turn the call back to Jose Mas.

Thank you, Bob. In order to ensure we have enough time for the Q&A session, I will now turn the call back over to the conference operator so we can devote the remaining time of the call to questions.

(Operator Instructions) We'll pause just a moment to assemble the question roster. Our first question will come from Liam Burke with Ferris, Baker Watts.

You talked about the year-of-year decline in gross margins and identified the DirecTV and the delay of some projects. In general, I guess this is a Jose question, what is the pricing environment ought there?

The pricing environment we think is fine. We talked all year about the fact that in many of our markets the pricing environment is actually improved. We continue to see that. We think that as the AT&T's and Qwest's begin their ramp up of their projects, we'll begin to see more pricing pressure in the market which we think will ultimately help our business on the energy side. We've seen positive pricing pressure all year. We think that there is a huge lack of resources for the demand that exists in that market place, so we expect to continue to see positive pricing pressure in that market, so we haven't seen any negative pricing pressures our business for the most part this year.

Okay. And, Bob, if I netted out all the one-time charges on the SG&A line, it was $17.5 million run rate.

That's correct.

Okay. So if I looked into '08 and I factored in what you estimate your annual legal fees to be, would that be a ballpark SG&A number for '08?

Yeah. I think that would be a reasonable G&A number.

Okay. And then just the last question is on the communications side you up over 9%. What was the benefit of acquisitions in there?

In terms of year-over-year?

Yes.

The only acquisition that we made was the direct star business, and we actually haven't separately disclose that had revenue figure, Liam.

Okay, fine. Thank you.

Our next question will come from John Harmon with Needham & Company.

Good morning. I was just wondering if you could elaborate a little on these third party technicians you talked about, sort of where they got them from and where they go when you're done and talk about your level of confidence that they will be able to return to their original jobs by the end of the year?

Sure. It is obviously the key to our fourth quarter. It is the key to our performance going forward. During the quarter DirecTV has that they call an AFS network. It is called an although mat fulfill leer supplier network in addition to their HSP network which is the home service provider network which is the one that we're the largest in. We actually also participate as an AFS company, and these are technician that is they bring into markets where demand has spiked. They have a group of companies that they use almost like a tiger team to throw into certain markets to catch them up on demand. We've got about 900 of those people still in our markets or in our markets as of last week. The real issue that we've had in the fourth quarter is we expect those 900 resources to be out by October 1st. We felt that we geared up to meet those demands, and I think in anticipation of the high definition marketing campaign launch, we saw some delays there that we felt at least on our side were probably delayed a little bit too long, and thus we're now beginning to see the beginning of the exits of those 900 and feel very confident that the majority of if not all of those 900 will be out by the end of the year.

Okay. Thank you.

Our next question is from Eric Kainer with Thinkequity.

Thank you very much. A couple of different questions. First, I notice that Verizon was sequentially down pretty good. I wonder if you can talk about what you saw there?

Sure. On our last quarter call we actually thought that we were going to see some slowdown in Verizon. There were a number of markets that by mid-year had actually spent a significant amount of their budget dollars, so there were a few specific markets where we actually saw their spend decreased, and some others were flat. So as we look forward, we're actually expecting Q4 to be relatively flat from where we are today. We think we've done again a very good job this year of growing our business with Verizon. We think that there is going to be a number of opportunities for us in 2008, not only on the fiber to the the home business that we've generally be doing for them but also on the day-to-day maintenance or what they call their SSP contracts. They put out a number of SSP contracts out for bid and we feel that we've got some very good opportunities to enhance our business mix with Verizon and do some different things with them, so we're actually very encouraged about whether the future lies with us for Verizon. Undoubtedly we are seeing somewhat of a slowdown in Q4. I think we've traditionally seen that in the past, although the last year Q4 was pretty strong because I think that some of the inverse happened where they didn't spend a lot of money early in the year and they spent a lot in the back end of the year. This year has been somewhat embroidered where they spend a lot at the beginning and began cutback a little at the end. We're actually hoping to see somewhat of a spikeup there towards the end of the year as your new budget cycle kicks in.

Okay. The SSP contracts, then, they are for maintenance on the same piece of work that you're basically building now, is that past construction, that kind of stuff, is that accurate?

It's their maintenance on the entire system in the market. It is very similar to the other maintenance contracts we have with other our other customers where we're responsible for maintaining their plan in our particular geography, so it would include what we're doing, but it would also include the rest of the their network.

That sounds pretty interesting. Now, in addition to that, I wonder if you can shed a little bit more light on the reasons for the energy ramp for the contracts that you already won, kind of being delayed as far as ramping?

A couple of issues there. I think one of the projects in particular was with TXU. TXU went through some obviously a buyout earlier this year. And we saw basically a tabling of some of their projects which they've now begun and as of today we've actually restarted on that project which is a very important project for us. If you look at our TXU revenues year-over-year, they're actually down as well, and the main reason behind that drop is we actually did a lot of transmission work for them in 2006, and in 2007 through this process they've spent very little money, at least with us on the transmission side of the business, so it is very encouraging for us to be able to get back on their system and working in that arena as well which we think will hopefully be sustainable throughout 2008.

Does that, I mean, as a natural out growth of that, I would kind of think that perhaps there is additional opportunity freeing up with TXU now that they've kind of come through the transition when they basically changed ownership here?

They've been a great customer for us. There has been some changes. If you look at our Q3 versus our Q2, TXU was actually doing a lot of the BPL work which was happening on their system for a company called current who is the actual BPL provider. That work has now shifted from TXU back to current, so some of the drop that you see if you just look at our Q2 to Q3 drop towards the end of Q3, that work actually moved to current, so we'll continue to work for current hopefully on that BPL project, and some of the revenue will shift, though, from TXU to current, but again they've been a great customer for us. We anticipate actually being able to continue to grow with them both on their distribution side both on over head and underground. Again as well as the increased activity hopefully in 2008 on the transmission side.

Okay. Last question for me. These AFS techs, 900 of which are still in your territory. How many techs did they originally have in your territory at the onset of the wave of demand?

You know, Eric, I don't have that answer, and there might have been a few, but it wasn't anywhere near those numbers. The majority of them came in for the onslaught in demand.

Okay. But maybe I have asked the question wrong. I assume that the 900 number is down from some larger number a little earlier. Is that right, and what was that original number?

They peaked out at about 900, and then they left it there. It did not reach -- we're almost at the peak right now of where the number has been.

Okay. So you haven't reclaimed anything yet?

In the last two weeks we have, but so that number is probably a week old or so. We probably reclaimed the first 100 or so of that at this point.

Okay. Great. That's what I was looking for. Thank you very much.

[Operator Instructions] We'll next go to Simon Leopold with Morgan Keegan.

Thank you. I first wanted to do a little bit of clarification on what's going on with the operating expense. The way I am coming up with the SG&A number is taking me the GAAP $55.9 million, subtracting the legal $39.1. Coming up with a $16.8 million for the quarter, and you mentioned sort of a $17.5 and a run rate around $17.5.

Yeah. Not to interrupt, but about 800 of the $39.1 million was not in SG&A but was in cost of sales.

Okay. Great.

That's different.

Okay, and shifting gears a little bit to the guidance for the December quarter, just trying to get a sense of what are the elements in there in terms of assumptions? I send to think of seasonality in terms of holidays, and weather as a force that would lead to a sequential decline, perhaps greater than what you're forecasting, so what's working out? Is it really primarily the ramp-up of claiming DirecTV customers or is there something else I might be missing?

A couple of things. AES, the fourth quarter is traditionally a slower quarter for us. I think during the year we've actually stated we thought we were going to have a very strong fourth quarter if you look around at our different business from a revenue standpoint, into the fourth quarter actually looks pretty good. Part of our drop in revenue for the fourth quarter is related to the ramp-up of DirecTV, so as we hired the employees in Q3, we expected to reclaim a significant portion of that revenue, so just to put some ballpark numbers around, we feel that the 900 technicians represent well north of $100 million a year in annualized revenue so roughly somewhere around $9 to $10 million a month in revenue which at one point we were hoping to capture in Q4 which we will now only be capturing a portion of, so I think our revenues could have been a lot better and should have been a lot better had we been able to recapture our markets quicker. With that said, most of our other businesses are actually performing quite well in Q4.

Okay. Just touch on the costs associated with the business you acquired in New Hampshire? What would that contribute to your SG&A line? Anything?

It should contribute more or less the same percentages, so I really shouldn't shift percentages at all.

Great. And backlog, if you could just give us that number?

A billion three.

Great. Thank you very much. I will yield the floor.

Thank you.

Our next question is from Alex Riegel with Friedman Billings Ramsey.

Thank you. I have a few questions. First, the cost of gas and diesel has been increasing quite a bit. Have you factored any future increase in gas and diesel into your guidance for the fourth quarter?

You know, when we looked at fourth quarter, we're basing it off a lot of our Q3 expenses, Alex, so, yes, unless fuel takes a significant uptick or vice versa, a significant downtick, we really shouldn't see it built into our numbers.

Okay. And could you attempt to quantify the carrying cost you're realizing right now to carry on productive head count due to the AFS techs being out in your markets?

You know, it is obviously a significant multi-million dollars issue. We've got a lot of technicians today that while they're being routed and while they're out going and completing works, works, they're not being efficient and their volumes aren't maximized maximized, so we have all of the costs related to the trucks, the carrying, the supervisors along with the actual employees not generating the amount of revenue you need to offset all of your fixed expenses, and that's really the downward margin pressure that we're having on that business, so I don't think we're going to get a specific number, but it is obviously a very large number and obviously the main issue behind our drop in guidance from Q4 from where it was to where it is.

What is the process of removing the AFS techs out of your markets? Is that a decision that you can make or is that a decision that DirecTV needs to make and why would it take 90 days if in your eyes your techs are ready to replace them?

It is a DirecTV decision. They pull the [trigger] on a particular date, and they say how many techs are leaving the market, and we reclaim that work. I think if you -- looking back on, I it think the part of the issue that we've had and really having them remove them quicker has been their launch of their high definition marketing, and I think so the fact that they weren't sure exactly that that offer was going to do and how it was going to affect their business, so I think they were extremely conservative on the amount of people they had in those markets to be able to meet their customers demands.

Is there any risk that these AFS techs gather together and become a competing HSP and retain that market share indefinitely?

I don't think so.

And then with regard to the cable segment, that's been under performing since the fourth quarter of last year. Why is it still losing money?

You know, Alex, we get into legacy issues, contracts that we're completing, that we're at a loss position, almost since inception, and our costs associated with doing this work and getting out under the contractual requirements of that business incompetent I think is really what creates a lot of that drag.

Okay. And one last question. I notice you did invest again into globe tech can you quantify your total investment to date for globe tech and what is your strategy longer term with that investment now that you own 64%?

Globe tech is basically a company that focuses on water, shore and drainage in the Florida market. It is a company that's performed extremely well for us over the course of the last few years and one that we expect to have significant growth over the course of the next few years, so really our strategy there is we're going to continue to buy as much of that company as we can. There are a number of shareholders and to the extent we can take them out that far business we will. Some of the shareholders are managers and actually operators of the business, but our intent is to continue to grow it, and to actually maybe even expand their footprint somewhat, so it is an excellent business for us. It has been a fantastic investment, and one that we expect to continue and to grow.

Thank you.

Our next question is from a Michael Novak with Frontier Capital.

Yes, can you tell me some of the details behind your conversations with DirecTV and that you decided to add 1,700 techs given that I guess they were meeting market demand with 900 additional techs in your market and clearly they knew there was expenses associated with this and it was under the impression it was a partnership tech type decision so maybe a little more clarity on why they decided to leave those additional techs in your market and maybe what they had told you going into the decision to ramp up your installation force?

You know, the decision to hire the 1,700 technicians in our opinion was a fairly easy decision. We to want reclaim our markets. We want to take our territory back and take advantage of the opportunities there from a revenue and earnings perspective, so I think that ultimately our intent is to win the business back, get our markets back and have a much health year business, so we do that during Q3. We do that with the expectation of - - during that time DirecTV also needs to find a way to meet their customers demands. That's where the AFSs come in, bringing third party from other markets that come in and help meet that demand. I think in the main reason behind the slowdown in the exiting flt AFSs this their high-def launch, the fact they recently started a very massive campaign as they went to 70 channels or 72 channels, and without knowing the exact impact of what was going to happen there, I think they took a very conservative view, and had a lot of extra capacity in markets, so I think as we've gotten as that marketing campaign, it has been very successful. I think they believe that we have the resources in those markets to meet the demand, and they're now in the process of removing those technicians, so that's exactly the conversations we've been having with them at very senior levels and we know it is under way, and we're confident and fairly sure it is going to happen by the end of the fourth quarter.

If how did you come up with adding 1,700 techs if it looked like they brought in 900 to meet market demand, so is there a risk that - - what is the risk that you over hired?

There is a big issue with churn in this business, and we've got very solid statistics as to how many individuals that we hire we're going to ultimately keep, so the fact that we hired 1,700 and put 1,700 through training, we're not going to stick with 1,700. As we said, we had 2,800 technicians at the end of Q2. Today we have 3,800 technicians, so we actually added about 1,000. We've got about another 600 in training, some of which were added in October, and and there is a number of technicians throughout that process dropped, so whether it was existing churn in the business or whether it was people that went through training and decided it wasn't for them, we still bore that cost of that training, but at the same time ended up losing that individual, so the reason that we pick 1,700 is because our goal is to ultimately end up with somewhere between 4,000 to 4,200 technicians, and to get to that number we felt that we need to do hire 1,700 to ultimately end at that net number of somewhere between 1,000 to 1,400.

And if you didn't add -- if you didn't make this big ramp, were you in jeopardy of losing the master service contract for your territories? I guess with a stated goal of trying to reduce DirecTV assist a percentage of your total revenues and I don't understand what was the problem of perhaps operating a network of installers slightly below demand so that you can keep them fully employed and then just have their be some of these alternative service providers in your home market?

I think ultimately that's our decision and we look at the business differently. We look at the business and said we have the opportunity to take this account and significantly grow it, and rather than allow somebody else to come in our markets and take a piece of that business, we made the decision to take that revenue and take that growth with that customer. This is not a spike in demand. This is not a process where we have all these people and two months from now the work is not going to be there. We feel this changes the long-term demand of that customer base and long-term needs based on the activities that are happening in their business today, so again we think that they stake their crown added leader in high definition television. We think that's going to cause pent-up demand for a long period of time, and we want to be the provider to take advantage of that, and really that's why we make the decision to hire the 1,700, ultimately at a very large cost, but we think it is going to pay big dividends into '08 and beyond.

In doing this and making this investment for your customer, does it perhaps offer you additional geographies? I am trying to understand why something that dramatically hit your earnings for half a year, what the longer term payback is? Maybe you could walk through that?

Well, I think the way we look at it is we've gone from 2,800 technicians in Q2 which is probably not the right number for the whole year to a beginning in '08 with 4,000, so there is -- we expect to see a significant increase in our revenues going forward, and --

That's a typical annual profit per tech that you get?

I am sorry, I missed the question.

How much do you make on an average technician in the course of a year?

We don't disclose it, but we make the relatively same margins in that business than we've historically made in our other businesses, and obviously we want to run technicians at a profitable level and we feel that a normalized circumstance we run technicians at a profitable level.

What's the annual revenue per technician?

It is north of $100,000.

Okay. All right. Thank you.

Thank you.

There are no further questions in the queue. I would like to turn the call to Jose Mas for closing comments.

Once again, we appreciate your interest in MasTec and we thank you for participating in today's call. I look forward to talking again in February. Thank you.