Tetra Tech Inc (TTEK) 2002 Q3 法說會逐字稿

Good morning, and thank you for joining us. By now you should have received a copy of the press release. If you did not receive that, please contact the corporate offices at 626-351-4664, extension 456, and we will get one out to you right away. Again that number is 626-351-4664, extension 456.

With us today from management are Li-San Hwang, Chairman and CEO, and James Jaska, President and CFO.

Li-San and Jim will provide a brief overview of the results and will then open up the call for questions.

During the course of the conference call, Tetra Tech's management may make forward-looking statements within the means of the Private Securities Litigation Reform Act of 1995. These include statements concerting Tetra Tech's fiscal 2002 financial and business prospects. The statement's which represent Tetra Tech's expectations or brief beliefs concerning various future events are based on current expectations that involve a number of risks and uncertainties that could cause actual - excuse me - results to differ materially from those such forward-looking statements.

These uncertainties and risks are reported from time to time in Tetra Tech's reports to the Securities and Exchange Commission, including those described under the heading Risk Factors and the - in the form 10-Q for the quarter ended March 31, 2002.

Tetra Tech undertakes no duty to update forward-looking statements. At this time I would like to inform that all participants are in a listen-only mode. At the request of the company we will open the conference up to questions and answers after the presentation.

With that, I would like to turn the call over to Li-San Hwang. Please go ahead Dr. Hwang.

Thank you. Good morning. I'm going to present to you our quarter three results. The presentation is based on the new graph should show up on your computer. talk about it is again business overview and then Jim will talk about some financial details and come back to me for outlook and summary and some questions and then.

Go to page four. The business overview communication downturn coming down about 71.4 percent quarter to quarter comparison. And to this on 28 million down to essentially $8 million business. And that - we cut not fast enough and did suffer some losses in this period which we profit.

Another thing about it was the stabilized and overall we made $1.4 million and their quarter to quarter comparison 21 percent. In fact, the quarter sequential quarters improved somewhat from 14.9 million to 16.9 million. So, it's .

So, overall in the communications is profitable with $100,000 profit which is a lot effort been going on and unfortunate the wireless was going down so fast to a point of just not to overcome the get people already off and reduce . It's just not fast enough to be able to respond. And we expect the next quarter will be some improvement on that.

some just went from other areas other areas and earnings and revenue little expectation and . However, the and homeland security market remains strong and unfortunately the homeland security is not overall.

We have to back up into into work. There's hope for the coming future quarters or next year. One very important thing we do is to manage in all cash so forth. So we are pleased we have more cash available to invest and to support . We have very strong cash generation operation or that is reduced significantly.

Aside from we spent $22 million for acquisition of debt - of all debts you know with the cash all this together is combined to 98 which is a very significant acquisition. So that available for the investments in the stronger areas.

Let me give you on page five. The net revenue, as you see, we are minus 3.2 percent, certainly this is major we look to overcome the communication.

And some effect on commercial side of infrastructure . Operating income, certainly a very significant effect, and original -- you know, last year we have , but this year, all those -- basically not have profit effect and also -- , all that. So also is not or operating income .

Regard to earning per share, and we were below the expectation as I mentioned. The wireless comes to probably $0.02 or $0.03 down, below expectation. The cash flow provide the operation is very , our reduced about 11 base during this period of time, result in operating cash was improved by almost $232 million. This is why we bank that so much.

Regard to our business segment changes. Resource management changes is improved a significant , 41 percent to 48 percent of cost of communication is essentially half -- reduced by half, so that is certainly effect the whole , because the SG&A original can contribute. We will provide some more of the SG&A have not been shared by other .

Turn to page seven. If you look at the overall, the resource management, we have our total growth of 14.3 percent, organics, 3.9, infrastructure is 10 percent, or minus . This is a very significant part of the contribution of the losses, because, that business, we had a 25 million, essentially -- we made the decision to eliminate it, basically evening in most of the business. So those , you know, the part in the design aspect of the -- those are not margin improve, we just stopped that and that's .

So that effect. Communication, we just mentioned earlier, so it's , it's just to . But the fact the wireless goes on so much, you know -- also we had to de-mobilize that, to get all the people, all those -- it certainly cost some money, too.

Overall, we have minus 3 percent combined, and organically, 14.5. But with other communication, our total, our growth is 12.5 percent if the communications . And we certainly have a lot of work to do communication, hopefully get 5, 10 percent of goal we have said to do. But I do want to mentioned the wired, we have reached that goal. In fact, they need 9 percent.

The other customers side, of private side, is reduced somewhat -- significant improvement in the overall government side. Publicly, that you know, stay . Our government side is more than effective to one percent more than private, which is just like the last year.

And that will continue reduction . This will no cause a complication reduction . You know, effective overall .

OK a little bit about our strategy is difficulty, considering the we want to do that shows in the page nine. We want to do it to how to manage the financially more effective allow us to have more money available to - to invest in the target area and that's what we are doing and we put a lot of effort to do that and - and so that whole process - it will take some time. It will probably take another quarter, maybe two. Another quarter is probably most likely. So hopefully during that period we will be able to and invest in a stronger branch.

And we feel we have the money, we have the effort to put in to it to come out of cash - cash flow to the to do that.

This effort is show . In particular we managed some of the projects, we did good on some of the larger projects and - and but you know we in page 10 are the projects that we have been bid on some of the and this on the page 11. start picking up and this is a very significant that we not only overcome some very significant back log in the complications as much as $40 million year to year. And we not only overcome that, but we start to show some improvements, so. So, this was - this was quite a bit for us.

And now I will ask for Jim to go over some of the financial details and how accomplish some of the improving cash flow and so forth.

Thank you Li-San. I'd like to direct the audience to page 13 on the financial highlights.

As Li-San pointed out we've had a - a significant percent increase in our annualized backlog with 9.2 percent and within our resource management and both infrastructure increasing to the total backlog growth, and as Li-San pointed out, we had about a 50 percent reduction of backlog on communication So, we have strong increasing backlog in the businesses that we are investing in.

And the other highlight Li-San also mentioned, because of our - our efforts in the receivable management in both the building and cash collections process, our cash from operation deal did $31.8 million, with approximately 11 day reduction in our base from a DSO standpoint of five - five - five percent, a little over five percent sequentially. And with the operating earnings and net income delivering 15 cents per share below our expectations.

Turning to the income statements on page 14, certainly the pretax income was affected not only year to year but also sequentially from the communications business. There were costs embedded in our communication cost base attributed to downsizing that base and yet on the other hand on a sequential basis our communication business was restored to profitability from the performance that we saw in quarter two.

Our effective tax rate for Q3 was 31 percent and that's a further recognition of the research and evaluation credit that we have communicated to the previously and in line with an annualized effective tax rate of 37 percent for fiscal year '02.

Our comparable SG&A rates on an annualized basis were up due to the reduced revenue levels but also we've seen some higher costs in our SG&A basis associated with the downsizing of the communications business coupled with some higher corporate costs attributed to such consulting fees associated with the tax rate reduction that were reflected in our effective tax rate.

On page 15, the balance sheet, our cash and cash equivalents for the quarter was 22.7 million and we're talking about a significant increase on a year to year basis while we've reduced our AR base $21 million from last quarter. And as I mentioned previously that reduction was yielding 11 days with our DSO sitting at about 94 days which is a very significant progress that we've made on a sequential basis.

We did see a little increase in our capital spending. It's up at 1.7 million for the quarter and that is attributed to some financing of equipment in growth areas. Obviously, our communications business we are not deploying the capital in that area. And we are focusing a minimal capital spending plan targeted to our growth areas such as water. And with respect to the application of gas which I'll talk about in an upcoming slide our net debt is down, is at 98.2 million and a 14 percent reduction from last quarter.

Going to page 16 on cash flow. We had a strong cash from operations yield this quarter. Operating activities provided $31.8 million in cash and up strongly from a year ago. And the application of that debt - I mean that cash rather, was to apply to the reduction and retirement of debt to about $14.8 million as well as deploying the cash for acquisitions in growth markets. And we have applied about $18 million of that cash to those markets.

Turning to page 17, I'd like to make a specific comment and update on FAS-142 adoption by Tetra Tech in fiscal year '03. The company's going to discontinue the application of its current methodology for examining goodwill impairment under FAS-121. And the adoption of 142, effective September 30th, 2002, and that's in keeping what we have discussed previously in our conference calls.

Now, what we are seeing is obviously a significant change in the communication market throughout this fiscal year from quarter one to quarter two in what we see in quarter three. And so we have to consider those markets when we develop our valuation models, when we look at our reporting unit structure, and obviously the analysis on impairment in quarter two under FAS-142. So we're currently looking and analyzing the communications business outlook as we put together our fiscal year '03 financial plan in not only communications but our other two segments.

And we're -- those plans will examine our future customer capital spending, especially in the communications market, as well as our market segment strategies as we put together our analysis for goodwill under FAS-142, effective September 30th, 2002.

Going to page 18 on segmentation, I'd like to briefly provide some further detail of the segmentation, operating segmentation data that Li-San provided earlier. We look at the net revenue from our various segments, we see -- obviously some positive growth, and some change on an annualized basis. The communications business is about 23.9 million of net revenue, and that is in line with how we have adjusted our cost base, which we discussed previously in last quarter of bringing down our cost base relative to a roughly -- a low 20 net revenue basis.

Our infrastructure is about 71 million, and the yield on operating income from those businesses is slightly positive in our communications business, and that reflects the added expenses in downsizing, or these one-time action for severance and other associated downsizing costs, which we do also see some of those costs reflected in our infrastructure business, yielding operating income of $7.6 million, and obviously a rate of 10.6 percent, slightly lower than our expected rate reflecting those additional costs.

On our communication business, as Li-San pointed out we have - we have reduced our cost base to reflect a slightly positive operating earnings and rate perspective, which being almost 10 percent on an process basis, and still some additional work on a cost basis in our wireless business as we are continuing to work on this quarter.

Operating margin for resource management slightly over 10 percent, in line with out expectation in those growth markets.

With that, I'd like to turn the back over to Dr. Hwang for the guidance and outlook.

I'm going to basically based off what we have now, what is the issues facing us.

We our guidelines. for the year was 758 to 753 million net . First quarter for 90 to 205. that we are in. We do not expect the to go on much further because it's already down to the very, very bottom. I think that the reason for this going - going down, one of the reasons is there much business there.

Another reason, we made very cautious decisions a lot of business off specifically because they were not very much to have those businesses even with revenues but it just going to have more losses. So we - we stop taking those, and that's probably one of the key contributors also to the rather than just coming down and it's part of the business because it was not profitable, partly because some of the profitable businesses are not much there.

So that is earnings per share we are expecting about 17 cents for the quarter, the condition we face right now.

So what we - what we really - the effort is to do - what we want to do is basically we want to be sure that by all of those issues, solving those issues will not affect our long-term future. And what we really tried to do is to induce you know, the cash back, you know the and get more cash and be able to invest hopefully in the growth area and we contributing basically that concept. The problem with most businesses we feel are not really the unfortunate not . We have put a lot of effort to cut some of .

And hopefully this - this effort, based on some of the improvements in some of the cash flow improvement in the backlog and so forth, we are pretty optimistic I would say. The coming year should be a good one.

Now I'll turn back to .

Hello?

Thank you, gentlemen.

The question-and-answer session will begin now.

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We'll take our first question today from at .

o'connor: I was wondering are there any competitive situations where Tetra Tech might benefit from the recent problems of some telecon companies that you can talk about? Or are the problems of others mostly a negative for Tetra Tech? Thanks.

I - if we look at the opportunities in some of our markets in the communication markets attributed to changing landscape in the communication provider world . . .

o'connor: Right.

. . . we do see some opportunities historically as providers consolidate. And that opportunity comes from the non-compatibility of various networks and as the mergers consolidations occur the need to install equipment, extend networks and also bring additional systems in to bring combined networks in a compatible fashion. We saw that in divestiture of its Idaho market shared by cable one. We see that in also some of our wireless markets.

The issue for us is the timing of that consolidation. And I think if we look at that being a market driver historically we have seen that. The issue right now is when those actions will happen.

o'connor: OK. Thanks. And then relative to your backlog I was wondering if you could further characterize your backlog. Is your backlog growth mostly organic growth or from acquisitions made? And how much backlog will come with your recent acquisition of Ardaman & Associates in Florida?

Nine million dollars . So sequential internal growth 2.8.

o'connor: OK. And then, doctor, did I hear you say nine million from Ardaman?

Yes.

o'connor: OK. And then, lastly, in terms of converting your backlog into revenue, I was wondering how does the average time to accomplish this change since the end of the first quarter?

I would say normally those - all those backlog come in on average in 12 months - nine to 12 months would finish most of it. So all the backlog come in wouldn't affect us within that .

O'connor: So, has there been any change in terms of the nine to 12 month period from the first quarter? It's about the same?

You mean in terms of the translated to revenue?

Right.

It's normally about the same. The overall change is not as much as normally occurs during this period. There a long time. So we would see this money come in the increasing backlog. We should expect next quarter, I'm talking about the next year, and maybe a little bit this quarter, we'll start to show some effect.

OK, thanks very much.

Thank you.

Please remember to press star, one, if you would like to ask a question. We'll move next to at .

Yes, good morning. When I look at the revenues in this quarter versus the second quarter and your previous expectations, it looks like there was not the typical seasonal upsurge in both resource management and infrastructure, and the way I would quantify it is there is a hole in resource management of about 10 million, and in infrastructure of 6 or 7 million. And through the conference call, I didn't here anything about where communications is performing in line. Where some of the significant shortfalls are occurring relative to your expectations, and why there was no seasonal bounce.

I think you probably like the seasonal bounce was not as much, and this year seems to be -- overall, business seems to be a little tight.

, I'd also -- what I think if we look at resource management, start off with that, our water business has a sequential increase, as Li-San pointed out. What we did see is a faster EPA spending in quarter one, attributed to some of the homeland security response, and I think where you are seeing some timing differences on a sequential basis as EPA and certain of its programs are normalizing their spending on an annualized basis.

Because the anthrax response in quarter one, and our efforts to support that terrible event through our EPA contracts accelerated some spending in quarter one.

How about infrastructure.

I think in infrastructure, I agree with Li-San. In some of the -- and it's in -- we commented in our presentation, there certainly is the commercial projects that are -- that we have seen some delays in some regions attributed to the economy.

Can you be more specific about what kind of -- is it water, waste water, in building communications. Can you be more specific?

It would -- no, it's neither one of those. It is primarily the commercial development such as in New York, large buildings in New York.

And just one more time, you explained some timing differences between the first quarter and this quarter, but your revenue shortfall, you've - you've taken down for the third and fourth quarter's, I think it's something on the order of $30 or 40 million and if you are seeing those the timing of those programs early in the year, is there some other loss business that is still out there that - that we haven't heard about?

Well one of the affect on that we were you know, program our 70 million comes from the condition and that been delayed for them for this quarter that position especially no backup. That and the revenue comes in and because I don't think we could have more than half of that revenue come in to this - this quarter. I would say contributes to the $30 to 35 million.

OK, thanks.

we'll next hear from at .

Hi. Just an internal revenue growth based segment, I think I missed some of those numbers. If you could just review that and just talk generally about directionally where you think those internal revenue growth based segments are going over the next quarter and the next year and when we should positive organic growth for the entire company. How soon does that ?

Well I see the overall expect it to be resource management growth and particularly in the area in the related. And . Infrastructure side I would say in the commercial some of the infrastructure is going to weaken and I would expect it that some of the communication on those, I think it will start to come back somewhat.

And communication, I unfortunately I would say if my for now on we would experience at least as good as this quarter for the coming quarter. Why this is come down to about $80 million now so, even internal growth is concerned it's a very significant affect. So certainly we hope that they are going to maintain some of that and I think will change.

The trouble in the competitor amount take to those concepts not making money. We are - we don't want that. That is the the growth and the for that.

So my overall feeling is that things should start to coming back up this coming quarter and hopefully next year. simply because cannot go down much more.

OK, so again the internal growth assumed in the 190 to 205? How much is that roughly?

I would say the it seems you know where we are expect this coming quarter internal growth so we mentioned with 14 minus 14 something will come down to maybe less than 10 percent of that.

Less than 10 percent, OK. And for next year, do you have any sense of where that would be?

I would have not even made a detailed . I think it will probably . I know we are right now in very detail and aspect. call.

OK, and then just for this quarter, you said resource management was up 3.9 organic and this - you said per structure.

Three point eight.

Three point eight. What was infrastructure?

Let me go through the numbers. Resource management 3.9 percent. Infrastructure was - let me give you both total and organic. Resource management total growth 14.3, organic 3.9. Infrastructure total growth 10.1, organic growth reduction of 8.7. Communications 50.2 percent total growth, organic 52.8 reduction.

That show up in page seven.

OK. And then finally what tax rates should we be assuming for the fourth quarter?

Thirty seven.

OK. Thanks.

We'll next hear from at .

Yes. Good morning guys. Li-San, just to follow up or, Jim, on the infrastructure, the decline in organic growth of 8.7 percent and you mentioned that you're doing some pruning in that segment as well. Can you give a little more color on whether you've already cut some business out of that, how much more revenue you expect to cut and really what the margin outlook is, certainly the 10 percent operating margin in that segment is below my expectations? You know where do you see the revenue growth and margins in the infrastructure segment.

We have some in the in the communication part we would expect probably by the time finish it this year they're approaching the business . And that's . . .

Versus how much now, Li-San?

Two point - this quarter was 1.7 million for now? It was - you know last year was - the total was about . . .

About $22 million of communication business, . . .

Within infrastructure.

Within infrastructure. Correct.

OK.

Last year.

. Yes. to become very small. And then in the other area we have some particularly infrastructure sometime we do some of the development aspects of part of business and seem to be somewhat.

This is development of . . .

business development development.

OK. So net net we're talking about, what, maybe something like on an annualized basis 30 plus million in revenues coming out of the infrastructure segment?

Probably close to that. Yes.

OK. And the margin outlook?

Margin outlook I would say this quarter may not strong but improvement next quarter.

Strong as in going back to the . . .

11, 12 .

OK.

Or maybe even more. Yes. Because we - when you cut those things, not only they very not only they will normally come to on those potions and which averaging . So we are essentially - we want to be a better margin for try to .

So a normalized margin infrastructure should be 12 to 13?

I would 12.

OK. And on the resources side, the margin has also come down, certainly, year over year. Jim, you said it, it was about in line with expectations. Does that mean that we should expect about a 10 percent margin on the infra -- or, 10.5 percent margin on resources going forward?

Given our mix of cost-type contracts to our fixed price, that's about an appropriate rate right now.

We also will, for one thing, when communication goes , it affects every aspects to margin, too, because you have much larger G&A absorbed by all the other guys, because -- it's even now, to all the other guys, so that has some impact, too. So we are right now looking very seriously how to cut -- reduce some of our G&A expenses, too. So our G&A expenses increased.

Right, that's right. Certainly, that's noticeable. But overall, the operating margin -- I mean, looking into '03, or a more normalized level, the resource operating margin should still be in the 10 to 11 percent range.

Yes.

OK. And lastly, then, on the margin issue. You had quite a jump in state and local source of, you know, customer mix. Quite a jump in state and local revenues as a percent of the total this quarter. Is that a margin issue as well? In other words -- is that -- is that source of business depressing margins?

I think if you look at the margin changes, , it's attributed to the mix, and the type of contract more than the customer. And obviously the state and local business has a higher cost type component to it, so in part there's -- that is attributed to margin changes.

OK, and my last question, I promise, is -- you mention that you're reviewing for goodwill impairment. The communications business -- I guess reading between the lines, this suggests that we may expect a write off in that. If that was to be the case, would it be in the fourth quarter before fiscal year end, and number two, is there also any review going on in the infrastructure business that might be included in that?

Let me just back up and start off with reading between the lines.

Right.

We are not -- what we're doing right now is establishing the business models for the entire business, not segment -- not unit by unit, it is the entire business, so we're not excluding any unit that does not have goodwill attached to it.

Sure.

So it is an aggregate company evaluation, and what we are doing is we are -- the effective date of that change from 121 to 142 is September 30th, 2002. So at that time, we will build our models, our financial models, on the revenue profitability, and as well as the go-forward structure and reflect that evaluation in -- within the six month transition period, OK? But the effective date is not fourth quarter for this conversion from 121 to 142, for us.

OK, so the impact -- any actual impact would be in '03.

Correct.

OK, got it. Thank you.

We do have a follow up question from , Capital.

Thanks. Again, this might be on your Web site, unfortunately I don't have that, but in regards to financial management, how do you see accounts payable trending over the next few quarters? And maybe Jim, can you tell us what does the company do to limit slow paying customers?

We - I think if - if we look at our payables, our payable trend has not changed dramatically on a sequential basis, and - and for that matter, from a year to year. Although obviously what we do from a contractual standpoint is where contracts allow us, and especially on cost type contracts we put forth paid when paid down to our subcontract base.

With respect to credit worthiness of our client base, and I think Li-San had alluded to this in his comment of - of our - our reduction of our customer base in communications, that we do look at credit worthiness prior to entering into contracts. It's - it's obviously a historical look, because that's the data we have. But obviously that is a considering and it was the reason for us to reduce some of the business base in our communications - communication business, as well as some of infrastructure base.

o'connor: So there much matter yet to be wrung out of the rag on these issues? Or going ahead, would you expect accounts payable then to be about the same? Likewise for receivables?

Well, let's start off with the base. We will continue to work both the invoicing side as well as the collections side of our - of our A/R management efforts.

On the payables side, we will first comply with our contract requirements...

o'connor: ...sure...

...that key and as those business contract mixes change, that may have some impact to our payables; I don't see a major deviation on our payables side.

One thing I could add is, as you know it cost most significant part of low payment are all in communication part of the business. Unfortunately you know, the business part is basically improved because the bad part of customers customer . That impact is not - not only the money come in from, but we consciously made some decisions to take some of those .

So I would expect that will continue to come down.

o'connor: Thanks again. Good luck, guys.

Thank you.

Up next is at .

Good morning. Most of my questions were answered, but just a couple of clarifications. Li-San I apologize, but did you say the backlog grew at 2.8 percent organically?

Right, for the sequentially.

Sequentially?

Sequential, quarter to quarter.

Great, thank you. The other question I had was, just in terms of margins, I know you've discussed this in terms already of the sequential decline, but is the business that you are booking now in the backlog; is it your impression that is carries a higher margin or at least consistent margin with what you are earning now? Is that what gives you the confidence that margins will stablize at these levels or improve a little bit?

We book business up to now to try to get rid of some of the businesses business but the most of the business tradition of the kind of profit margins. My certainly one varying fun part is that it all communication business essentially down to percent .

And when that kind of revenue come is - or G&A or G&A has not been able to reflect that kind of - so, certainly affect that. That G&A is allocate to all the units to affect that too. So, and certainly that affects all you know the profit margin. And we certainly don't want that profit margin to be .

OK. And would the Ardaman acquisition did that add to backlog significantly?

Nine million dollars.

OK. And so that closed in the quarter.

Yes. That affect 3.8 percent increasing backlog sequentially. Because of that - that up is 2.8, something like that. So that sequentially affect if we took that out of percentage. Yes.

OK. And in your projections for revenue for the fourth quarter do they assume any additional acquisitions?

We're hoping for but it's not for sure we can do that but we certainly working hard on that. But by the time we got it part of revenues probably relatively very small.

OK.

Because acquires.

OK. And in the - on the possible review of your good will, Jim, is it even worth looking at then what good will is by segment? Because it sounds like you're just going to look at the whole - the company as a whole. So you won't even look at it by segments?

No. Let me be clear. What I'm saying is our consideration is our segmentation reporting. We managed the business linking the good will to the management of the business beginning in '03 when we adopt the 142. So there are basically as I mentioned there are three considerations. The two critical ones is the forward outlook of those business, an allocation to the good will to the reporting units, the definition and structure of how we're managing the business on a go forward basis. All that has to be integrated into our determination.

OK. So can you give us a sense of the $278 million in current good will how that breaks out by segment?

I think we did last quarter approximately 130, 140 million of it resides in communication segment as we currently see it right now. The remaining - the majority of the remaining good will is in the infrastructure business with some minor good will in our resource management system.

OK. And of the amount that's in the infrastructure presumably a portion of that also includes communications work that you do for infrastructure?

It - there is communications work performed in those units but those units - that wouldn't be a specified acquired unit working in communications and infrastructure.

Oh, right, because they end up consolidated.

Correct, correct.

OK, OK.

So it really is, if you look at the infrastructure business, and work supporting the communications business, it really is design activity supporting network deployments. So it's structural designs and other sorts of planning, design engineering, supporting our communication customer base.

OK. OK. And then one last question, I'm sorry, if I could. The -- in terms of strict environmental EPA work, what portion of your business is that now?

EPA, on our net revenue base, is about 8.5 percent for the quarter and 9.2 percent of the net revenue base of the nine months ended for the period.

OK, and what would be the similar numbers for defense related work?

DOD on the quarter is 10.8 percent of our net revenue and for the nine months ended, it's 12.2 percent.

OK, great. Thank you very much.

You're welcome.

We'll next here from at .

Yes, for obvious reasons, wasn't able to make it today, but he wanted to pass along his congratulations as well as mine. Thanks so much. Just had one or two quick questions. Do you have the AR allowance?

The AR allowance is 4.8 percent of the receivable base, excluding . Inclusion of , 16.7 percent.

Do you have the dollar number, I can't work the math that fast.

OK, $12.7 million excluding , 51 -- $51 million including the reserve.

Perfect. And this allowance, is that still 800,000?

It's the -- this allowance is 1.1 million, approximately.

Very good, that's all I needed.

You're welcome.

Moving on, we'll here from at .

Yes, in the future, let's use our correct names when we ask questions on the call. I just have a quick question, Jim, on the operating margin within the communications business. Your comment was that the wire line business was running at 10 percent.

Slightly under, Rick. Approximately 10 percent.

So the wireless business is losing perhaps 1.5 million on 8 million of sales?

It's about 1.3 million.

At what point do we just shut that business down?

Well, certainly we're looking at the viability of that business, and the margins of that business on a forward basis.

Is that -- is -- we had talked earlier that -- that the communications business -- the goal and target was to try to get at OP margin in the mid single digits for this quarter. And we obviously came up a bit short there. Was the -- the shortfall obviously was on the wireless side. What came off track, just -- the revenue declined further or

...well we had two things, , we - we had costs associated with the downsizing, one time costs that are in those wireless numbers and obviously I had some further reductions in our revenue base.

One of the issue that coming down the , the people and now you have the all the other things associated with that is just not to manage fast enough...

...OK...

...and because this is basically it come down percent sequentially.

OK.

It's not - it's not - it's come down five percent, 10 percent, we - we have but this don't come down so fast and the question we have also ask ourselves is do we want to keep . So some of the jobs we stop it. Now you have to give up and also the depreciation of the things it's just so difficult for that.

So the - so the wireless net revenue in Q2 was about 16 million? Is that what you are suggesting?

11 or 12 million .

OK, I see. I understand, OK.

OK. And then so as we - as we evaluate the communications business going forward, still you know, a profit target might be in the eight to 10 percent range over time, or hopefully in the next ?

I think the major part is . The we probably have some increase next quarter and wireless hopefully less write off on that. And that is something we hope for, and that happens then we can coming up to five to 10 percent of .

OK, in the wire - in the wireless or in the overall?

In the overall.

That's five to 10. OK. And then just one last question. The headcount that you show in your data sheet, does it necessarily represent headcount reductions? Is that a function of the acquisition contributions? The headcounts? If I look at the headcounts sequentially, it's - it's pretty much at seven - 7,360...

...I think that you are right, because when you acquire companies...

...yes...

...the people increase suddenly, but the revenue does not.

OK, so the revenue will , because you don't have have a whole quarter to...

...yes, so in the overall sense, we did not reduce that much, but the revenue is very small.

OK, OK, that's fine. Thank you.

Due to time constraints, we do have time for one question, one final question, as well a follow up question, comes from , .

Thank you. Let me wrap up then with the - with a big picture question. I mean obviously this year has been a complete disaster. The stock has been a complete disaster. I'm wondering Li-San, if you can give us you know, a view - you spoke some of - of and Jim did, of utilizing cash to reinvest in growth and you know, pruning the poorly performing businesses, doing your traditional thing of reinvesting in growth.

Without specific guidance, which I know you don't have yet, can you give us some view of you know, what your - what your general strategic outlook is for the business over the next couple of years in terms of what kind of growth rate you know, you'd like to - you'd like to be achieving?

I can say the following, and. then for this year communications, with communications now going down so fast, we are about 12, 13 percent, the overall total growth. So I would expect the communication, you know -- I think all together should be come to this kind of level. I don't think it's going to go down much more because wireless is the only one where we're still facing the unevenness, but wired communication has been -- always there. So, assume that's constant.

So we would expect revenue growth, assuming our position's not very successful, which we expect to at least one or two come through, we should expect it to have more than 10, 15 percent of the overall -- the revenue growth. And then with margin, certainly will not be because the margin as of now, as it's not to communication itself will have a better margin, will be 9.5 percent type of thing, or minus in the whole year period.

So I expect to be 5 to 10 percent, at least hoping to get that close to 10 percent. So my feeling, with all that situation, we overall expect it to have 20 to 25 percent of the EPS growth is -- should be within -- so no doubt about that. I would -- my feeling's pretty good on that. So with that's of pass, so with this what we see, and certainly this year's a very disappoint and also the occurrence is just so fast event. So that's how we look at it.

OK. That's helpful.

And that does conclude today's question and answer session. I would like to turn the conference back over to Dr. Hwang for closing comments.

I think if just have questions it's probably -- it's really what I want to say, and what we are doing, particularly, you probably don't see it. The we're putting into the organization, the people working hard on that, it's probably more than previous years. But, you know, is problem time if you don't give credit, and we don't ask for the credit either.

But I assure you we are working hard, try to solve those issues, employ the all resources in the right location, which you have done before, because of all of our diversify activity, and we are , and the next year should be a good. And thank you very much.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating and have a nice day. All parties may disconnect now.