Tetra Tech Inc (TTEK) 2004 Q1 法說會逐字稿

Good day, everyone, and thank you for joining us. By now, you should have received a copy of the press release. If you have not, please contact the corporate offices at 626-351-4664 and we will get one out to you right away. With us today from management are Li-San Hwang, Chairman and Chief Executive Officer; James Jaska, President; and David King, Chief Financial Officer. They will provide a brief overview of the results and will then open up the call for questions.

During the course of today's conference call, Tetra Tech management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. These statements are only predictions and may differ materially from actual future events or results. Tech Tech's Form 10-K and 10-Q reports to the Securities Exchange Commission identify certain risk factors that could cause actual results to differ materially from the forward-looking statements.

At this time, I would like to inform you that all participants are in a listen-only mode. At the request of the Company, we will open the conference for a question-and-answer session after the presentation. As a reminder, today's conference is being recorded. With that, I would like to turn the call over to Li-San Hwang. Please go ahead, Dr. Hwang.

Thank you. Good morning. My name is Li-San Hwang, CEO of Tetra Tech. I'm very pleased to report to you our first quarter 2004 results. As you see in the chart, our gross revenue is 337 million as compared to 233 million. That's about 44.6 percent increase, and a significant part is due to subcontract increase. Our net revenue, which is the after subcontract, deduct (ph) of subcontract, is 242 million as compared to 181 million, an increase 33.6 million. This is (indiscernible) of our original guidance. Our income from operations is 23.9 million as compared to 17.1, which is about 40 percent increase. This is due to some margin increase and also increase in the revenue. The diluted earnings per share were 23 cents compared to 17, which is about 35 percent increase.

Go to next page. Look at our business segment. The resource management part of this increased from 51 percent to 59 percent, while the infrastructure side reduced from 49 to 41 percent. This has caused a significant increase in the (indiscernible) we'll be seeing later page. Our growth rate in the resource management part year-to-year is 55.9 percent increased. Among that, organic was 3 percent. This was because of a significant increase in federal work and also we have seen a little bit of improvement in the commercial side activities. In the infrastructure is a 10.7 percent increase; organic is .6. Nevertheless, it's positive, so we expect this to show some further improvement in the organic aspect, too. And that's because of the commission (ph) work is somewhat improved.

The company as a whole (indiscernible) pet increase of 33.6 and organic is 1.9 percent. Look at our customer, as you see, the federal side is from 24 percent to 41 percent. That's really (indiscernible) for some of the growth and this seems to be continuing improvement. And all the rest (indiscernible) reduced by 11 percent from 51 to 40, and (indiscernible) reduced from 23 to 17 percent.

We have received a lot of programs. Some of the key ones that we have announced -- a worldwide environment restoration project, which is a big program -- about $4 billion. It's worked (ph) through 9 large companies and the rest is about 17 so-called smaller companies. And that total (indiscernible) we expect it to be at least 150 million will come to us. The next one is that we are subcontract to Perini. They just announced. The total is 1.5 billion for their portion, and we are basically responsible for the design aspect of that, which normally is about 10 percent of that, so this contract (indiscernible) somewhere in the $50 million range.

There's another one which (indiscernible) environment restoration project, we joined together with Jacobs Engineering. Total project 240, and we expect it to be 59 percent to us, or we are about 120 million for us. Then the next, we have numerous other programs. We had the recent (indiscernible) from California. That's about $10 million in model management aspect (ph) program. And this, actually, we are very happy about because this is actually more than we get from California previously. We also have some work in the (indiscernible), $6 million.

As of our backlog, year-to-year, we increased roughly about 40 percent. However, compared to the quarter, we come down some (indiscernible), possibly due to the seasonal effect normally in the last quarter. Our first quarter, our work is always a little lower. In addition, as you probably remember, some of the large programs we have, particularly (indiscernible). We have 65 million at that time (indiscernible) one time, and now is working through those actually the program will come down (ph) of that. And we want to expect (ph) it about 12 months from the (indiscernible) before that, we are scheduled to have continued additional work come through, based on the situation -- the work we are doing. So (indiscernible) at that time, we will have a significant increase in backlog (indiscernible).

All these results are under the following (indiscernible), the market (ph). As I mentioned this earlier, (indiscernible) to the federal government the market is strong, both in the domestic part of federal and also some (indiscernible) that will come in through the federal government. And also, as I mentioned, also receive some improvement in the commercial (indiscernible) group. In infrastructure, state, local and general still weak. (Indiscernible) so you see the percentage has not -- has come down some. And the commission work started to improve, so that will help our overall infrastructure activities. Now I'm going to turn for the financial picture (indiscernible).

Thank you, Li-San. If we can go to the financial highlights slide. This is a good quarter for us. Our EPS, as Li-San indicated, was 23 cents -- met forecast. Our net revenue was 242 million, also exceeded forecast. This net revenue, as you noted here, we now call revenue net of some contractor costs. This is exactly the same net revenue that we used previously. This is a minor change of description at the suggestion of our new independent auditor, Price Waterhouse Coopers, which I will spend a minute or two at a later slide. DSR was improved by about two days from 94, 95 days to 92, 93 days on a year-to-year basis.

The income statements slide. Income from operations improved about 40 percent from 17 million to 24 million. Our operating margin improved from about 9.5 percent to over 10 percent. This is largely attributable to our absorption of our G&A cost, as well as our net revenue base grew 30 to 40 percent; our SG&A costs increased only by half. On a net revenue basis, it decreased from 11.3 percent to 9.9 percent. Our net interest cost increased a little bit due to our borrowings and from acquisitions. Our tax -- we are a bigger company now; we (indiscernible) better earnings and we pay more tax. We expect our tax rate to be 40 percent -- unchanged.

Our cash -- the balance sheet slide, please. Our cash, you see some reduction in cash. This is a result of our tax and bonus payments, which I will spend a little bit time at the next slide. The total net revenue receivable also increased from 243 million to 343 million, about 41 (ph) percent increase, which is less increase than compared to our gross revenue base increase. Our accounts payable, we manage a larger subcontractor base, increased pay (indiscernible) pay term, as you can see here from 47, 48 million to 90 million, 89 percent increase. I believe we are doing a better job in this area than before. DSR improved year-to-year by two days. Normally, this is a high DSR quota for us, historically speaking. Our net debt increased from 68.7 million to 109.8 million. The increase reflects the acquisitions and working capital needs. We expect our net debt position to further improve in FY '04, barring any acquisitions. (indiscernible)

Our depreciation increased somewhat mostly due to acquisitions, particularly the Foster Wheeler acquisition. Our cash used in operation, you see 2 million negative from the same quarter last year to -23 million this quarter. The difference is due to two or three factors. One is we had a good fiscal '03 and we paid 6 million more in bonus and 401(k) contribution than the prior year. Number two, we made about 7 million more in total tax payments to federal and state government. Three, the balance has to do with growth and increase in our receivable base.

If we can go to the next slide. I'm sorry -- let's stay at the cash flow. Our cap expenditure increased from 1.7 million to 4.3 million. There are a couple of comments I wish to make. One is purchased -- we have decided to implement a companywide project management and accounting system. We call it a ERP system. We chose Oracle for our ERP implementation. We purchased during the quarter about 1.6 million worth at software. For (indiscernible) purpose, we plan CAPEX this year about $8 million for the ERP system and implementation. On an ongoing basis our CAPEX budget will remain relatively the same -- about $8 million a year. So this was a -- for FY '04 purpose, about $16 million in total to our CAPEX (indiscernible).

I'd like to spend a minute or two just to talk about our new independent auditors. During fiscal '03, we made a special effort to assess our major service providers, including our travel service provider, including our professional service providers. We also tried to a align our audit and tax service providers for Tetra Tech in the future. We evaluated the performance of the incumbent and qualifications of the incumbent and compared them to the requirement under Sarbanes-Oxley 404, compared them to Tetra Tech's business needs and the strength in our sector. We look at firm's industry capabilities and expertise; we look at value proposition.

We conducted extensive due diligence. We (indiscernible) proposal, reviews and oral presentations. We short-listed Deloitte and Touche, PricewaterhouseCoopers, Ernst & Young for these proposals interviews. Our audit committee at the end selected PWC as our new independent auditors, and PWC has successfully completed our first-quarter review and exceeded the expectations by all the committee for the quarter. I'll turn this back to you, Li-San.

For this year's operating plan, which we will really try to be on one side, we're very careful to -- we want our company to grow, but we assess some of the opportunities, particularly in the communications side because the (indiscernible) that's a work in improving (ph). And we also recognize the payment terms of those issues and what should we do to absorb those increases, whether they be subcontract operation (indiscernible), and we are careful with that.

Another thing (indiscernible), you know, there's a lot of work coming through and how we are going to handle that, how much should be involved in the areas we are good at. So those are the evaluations of the some of the growth opportunities that we are very careful because those are very interesting opportunity for us; yet also, (indiscernible) some challenges. Another thing we certainly want to improve, our ROI, which is always -- it's an issue so that we have more money available for other use, for acquisition or for investing in the business. So we also certainly identify the things -- the areas which we talk about before, we are still focused in that (indiscernible) area - the federal outsourcing and (indiscernible) activities and the (indiscernible) security-related activities and the water plant, still is (indiscernible) we can (indiscernible) those areas where Tetra Tech (indiscernible).

Looking for the rest of the year and for next quarter, our net revenue we expect to be 240 (ph) to 250 (ph) in range. On the earnings, diluted EPS, will be 25 cents. For the year, our net revenue to 950 1.06 billion. Our EPS is somewhere in the $1.09 to $1.14 range. Those are based on the current market environment and also (indiscernible) our tax rate is about 40 percent.

In summary, we have -- because of the communication on there, we have significant -- organic growth not very good, but we are start turning around, turn the corner. We are expecting that to be improved. We will continue trying to (indiscernible) our federal work and believe that, because those programs are much longer-term and give us much more visibility and also (indiscernible) easier to manage also. The commercial work environment is improving, so we are hoping that this cycle will continue for us to grow in the area. Thank you. Now (indiscernible) going back to the monitor.

(OPERATOR INSTRUCTIONS) Debra Coy.

Good morning. A couple of questions. Li-San, can you talk a little bit more about the organic growth directions that we are seeing? The fourth quarter was certainly encouraging with 10 percent in the -- particularly on the resource side. That has pulled back, although you are showing a little bit of recovery on the infrastructure side. I know it's hard to put a handle on this, but can you give some better sense of what you expect the overall organic growth rates to be in your two segments throughout '04?

I would say in the resource management side, we would probably come up to around, say, about 5 or 6 percentage point. And this quarter was a little bit lower. And in the infrastructure side, I would say 2 to 3 percent. So one would be higher single digit; one part lower single digit.

Okay. So not a huge -- a little bit of improvement from where we are, but not a huge change. And that's because you are still seeing the state and local continue to be weak and maybe you can -- last quarter you said that that business was actually down 10 to 15 percent -- whether you saw further decline there? And also, apparently on the commercial side, general environmental and so on, it sounds like you are not -- you say the overall business environment seems better, but you are not really seeing the business come through, is that it?

Yes, we see less a decrease in our state and local business as a whole. Actually, they maintained well for the same -- from quarter to quarter comparison.

So you are kind of bouncing along the bottom?

Right.

So no further decline. And then commercial is also relatively flat, not really improving yet?

Yes, we see some improvement in the commercial area, and -- probably about around 5 percent from quarter to quarter basis.

All right.

Also, this is regard to the infrastructure side, we also -- there's an issue. If you really look at our gross revenue growth, it's a 4.7 percent as a whole company, which is much more than the net revenue, which is 1.9. Basically, we have made (ph) a number of programs which (indiscernible) our subcontract more, rather than we try to build (ph) up. For example, on the communication side we are doing more subcontract than we (indiscernible) ourselves. So that prohibit us to have internal growth, but it make us to manage the thing easier, because those are (indiscernible) higher. And also the future, we always worry about that, even though it seems to be improving. But we are still cautiously dealing with those issues. So in the gross revenue growth, we are expecting to do much better than what do I just say earlier.

Finally, and I will get back in line. So then just following up on that, would you expect then we are going to continue to see the higher level of subcontractor use? And it sounds like that's coming primarily in the infrastructure side. Does that allow us to keep this 10 percent operating margin that you showed in the first quarter, which is higher than you had earlier said? You had said we should expect about 7 or 8 percent operating margin in infrastructure. So how does that all work together?

We expect in the infrastructure side the margin will be higher. And also the resource management will be somewhat higher in the coming quarter.

On margins?

Margins. And that's one of the things we are doing, and we basically look at it for the (indiscernible) side very high the subcontract. And all (indiscernible) are to see whether we can improve our operating efficiency. You can see the overall (indiscernible) subcontract increased significantly, from 25 percent to 31 percent, so that itself -- if we want the internal growth delivered (ph) faster in term of net revenue basis, we could do so, but it could be not -- that is an issue we will be debating ourselves.

I understand. Thanks. I will get back in line.

Jeff Beach.

Stifel Nicolaus. A couple of questions. First, can you provide us with the revenues in the communications and talk about the profitability there in some general terms?

Revenue in the communication area, this quarter we are running about -- net revenue basis about 24, 25 million. And compared with the same quarter last year of (indiscernible) over 20 million. And the margin is about 10 percent, give or take, this quarter. And we see some -- in the next couple of quarters, the communication we have steady workload and the margins should be around 9 to 10 percent on an ongoing basis for the next few quarters.

Great. Two others. One, the share base is moving up at an accelerated rate. I'm assuming that this is employees that are exercising options at this higher price. Can you reaffirm that, is that what is happening and what can we look for for the share base over the next few quarters?

That's really exactly the reason, because of the stock went up, the options from -- some of them from underwater got up. They become above the water, so that (ph). In fact, that cost us additional; it cost $1 million just to handle that part of the stock increase. So that could continue. That really depends upon stock go up and down, and if it goes down, it will be less years and (indiscernible) that we don't happen right now in our position (indiscernible). In fact, we used the cash to buy that company, too. So that's primarily due to the employee stock option changes.

Thanks. Last question if I might. Can you preview, give us a little bit of an idea of some of the large projects you are pursuing in fiscal 2004 or over the next 12 months that could be impact projects?

Obviously, we are all seeing the need for infrastructure improvement in Iraq. And we have focused our effort in Iraq on opportunities and requirements that align directly with our capability and our knowledge. And what we see are some of our existing contract capacity, both in the Air Force, the Army Corps of Engineers, as well as the Navy, being focused towards some missions in Iraq. And we have -- Li-San mentioned the Air Force work contract. We have put into place proposals, over several hundred million dollars worth of work capacity, of which the clients are in the process of evaluating on a very short cycle time. In addition, we are looking at other infrastructure requirements, primarily in the water and water infrastructure areas in the Mideast, including Iraq and other countries. So our capability and our knowledge and the need in that region have been much of our attention.

In addition, we are looking at defense support service activities, especially as both government and industry look at more cost-effective ways to provide services to both the military and non-military government activities, as well as industry looking at outsourcing engineering services that align with our capabilities. So those opportunities are being evaluated and really focus our skills to a need. Lastly, in an area, especially with the addition of Foster Wheeler's environmental capability, we are looking at larger DOE opportunities and an expansion in that area, given their program management needs and our capability.

Just two other comments. Do you have any feedback on the UTOPIA project and are there some wireless network build out there you are still pursuing?

Let me talk a little bit about UTOPIA, Jeff. Number 1, we have not included that in our FY '04 plan, in our revenue base, until we can see this project go through some significant milestones. One is the securing of bonding capacity on the part of UTOPIA. I am pleased to report that that is moving forward at the expected rate and results. In addition -- so that's proceeding. In addition, communities are now -- and I am talking about participating communities in UTOPIA -- they are now in the process of going through their council and council support. The first city on a similar basis had a very significant yes vote for this type of effort. So we now are seeing that part of the project unfold. So we would expect the latter half of this year, those activities and projects to move forward.

With respect to wireless builds, on the wireless side, there are certainly additional opportunities that we see in the market. We are very carefully evaluating those. We have focused our energies on Nextel and that build activity and supporting that. We are going to determine our focused road map -- and what I mean by that is we are not going to drive for opportunity beyond our capabilities and we are cautiously evaluating that. But I can tell you the majority of our energy and the majority of our efforts are delivering on Nextel.

Thanks.

(OPERATOR INSTRUCTIONS) Richard Eastman.

Regarding the communications business, are we trying to manage kind of a net revenue growth towards that 20 percent number year-over-year? Is there an intent to stay within that kind of a growth rate?

In (ph) the communications itself?

Within the communications segment. We have issues with DSRs and we have issues with our regional capabilities and people. And I'm curious when I look at the net revenue line, is the intent to manage to maybe a 20 percent type of growth rate there?

That is an issue we are very carefully evaluating the situation. Should we? Do we want it? Because there is a lot of work available at just Nextel alone. So that's an issue were debating and we are discussing with them some of the issues in relation to payments, all those issues. Because we know they pay slow, but they want us to do more work, and what should we do. All those are issues we are in the process of discussing. That will determine how fast we will grow.

(Multiple speakers) traditional note, Li-San? Right now, our communication business is under the 10 percent of net revenue basis. We are not putting a lot of capital towards that growth. We are managing our workload, Rick, and I think what you are seeing is just year-over-year comparisons on a very restricted market of interest.

So again, as you kind of model this, modeling out at a 24, $25 million quarterly net revenue forecast, we might stay at about that level at net revenue, even though our gross revenue might inch up.

That is correct.

Let me ask you, can you give us a general sense of what the subcontract markup is on that business?

The subcontractor model that we -- it's about 10 to 12 percent.

That number again should, as that markup flows down to the op profit line, it at least helped lift our margins a little bit.

Yes.

Can I also ask you, in terms of the backlog number, could you give any kind of color on that sequential decline in backlog? I know there is some seasonality in that. Can you give any added color as to where the backlog -- did the backlog only fall off sequentially in federal?

Basically -- let me give you one contract, and then we can (indiscernible) few more if you want to. Just, let's say, (indiscernible) contract alone, when we give $65 million, each quarter we're eating up $15 million roughly, and that 15 million eats up until probably come down to few million dollars or something like that. Then we'll add another -- the Federal government has large work orders, and normally you get (indiscernible) and then you gradually going down and then sometime later, and normally -- yearly, they give you that kind of money. So that's one of those projects.

We have also in the (indiscernible) a similar type of situation also. So those have contributed -- Basically, those two or three large programs have contributed to that decline.

So we should expect as a business kind of is in the cycle where it's swinging towards the federal work. That backlog number may be a bit more lumpy quarter to quarter.

That is correct, but there's a pattern. If you can see (indiscernible) pattern. In the last year, we are kind of just flat. So sometime during the fourth quarter, it's always a little bit less because Federal award the contract and work orders (indiscernible).

Just one last question. The FTE number that you disclosed. That's up 10 percent quarter to quarter? Where are we gearing up there?

On a sequential basis, some of that FTE growth is attributed to performing on this Nextel contract. And I wouldn't see that FTE number having that same kind of trend. In addition, as we staff for that Iraqi work that Li-San talked about, remember that's an atypical task-ordering mechanism, Rick. It's a large size as opposed to an incremental release that our customers normally give on our federal work. So it's a large size and a very quick utilization rate, and so we are staffing to support that contract too.

Very good, thank you.

Corey Greendale.

First Analysis. Good morning. First of all, just to follow up on that last question. Li-San, when did you begin eating through that 15 million per quarter with the Iraq contract and when do you expect that to be fully sort of eaten through -- the entire -- I think it was 65 million?

Total is four quarters and (indiscernible) this is the second quarter really eating up in that (indiscernible). So we have spent another two quarters or so, should have another lump money come through.

Just one point. In addition, we are looking at follow-on work that supports that. But quarter four was when that task order was released to us -- fourth quarter of last year.

On sort of a similar note, on the Nextel contract, how much work in terms of net revenue have you done to date and how much do you still expect to realize from it?

On the net revenue basis, we have roughly about $20 million on a net revenue basis. So we are -- it's a two-year committed cycle, and roughly we are about one-third through that contract duration.

Okay.

Remember, as Li-San pointed out, we have program management responsibilities and so we are using a subcontractor base, which is really bringing a higher gross revenue on this space (ph) too.

So in terms of the net revenue, sort of multiply that by 3, in terms of the total net revenue you would expect from it at this point?

Actually, not exactly three because it ramps down as we complete our delivery orders. Maybe about 2.

And in general on the commercial work, it looks like commercial revenue, net revenue, was down about 10 million sequentially. I guess part of it was the subcontracting strategy. Is there anything else in terms of various markets that you would highlight as contributing to that sequential decline? And how much seasonality would you expect?

It's down less than 10 million and has a lot to do with seasonality of our business.

Okay. So in terms of specific types of markets, there is nothing you would point to as being particularly noteworthy?

No, and as I mentioned earlier, as a whole, we see improvement in this area -- in this sector, if you will.

Okay. And then David, I also wanted to ask you about the accounts receivable. In the quarter, it looks like you accounts receivable was about a 22 million use of cash. Was there something particular? I mean, I know there is some seasonality, but also that was somewhat higher than it's tended to be in the past. Is there anything particularly contributing to that?

First, we have acquisition impact; we (indiscernible) bigger company with EMC coming into a normalized (ph) receivable. And we also -- Nextel, as Jim mentioned earlier, we started to work and ramp up quickly in the first quarter. But most of our billing milestones are not yet reached during the quarter. So that's what caused the increases.

So you would expect that to reverse over --?

We expect that receivable balances to continue in the second quarter, if not slightly higher, as we ramp up some of the key projects like Nextel. But we expect that to taper off in the third and fourth quarter.

Do you have an expectation for cash from operations for the full fiscal year?

We are expecting about 50 to $60 million cash operation for the year.

Thank you.

Vincent Cellicio (ph).

Sterling Financial. First question is in Iraq, you talked about bidding on several hundred million dollars on the infrastructure side and the water project side. Number one, is it right to assume that none of this is in your forecast for this year? And secondly, can you give us an idea on the range of both pieces in terms of how much you can win?

The first question with respect to forecasted work in Iraq. We currently have -- we are working under several vehicles. One, as I mentioned, with the Corps of Engineers, and that's a task order. That is in our forecast for the year. So that is where we have really a look at as follow-on work as these task orders unfold. But right now, that work is in the forecast. We are also working under a -- working for Cincom (ph) for the U.S. Army. That is in our forecast for civil infrastructure design services. We were just awarded a subcontract arrangement for Cincom II, so we define that as Cincom I and Cincom II. That was a forecasted, targeted opportunity, so that was a factored probability of awarding our baseline forecast.

With respect to the work that I talked about on these additional task orders under the work contract, we had some work -- a very small work, task order based, in our baseline forecast. Some of this work -- w-o-r-k -- is not forecasted. And we, as I mentioned, we put in four proposals. Li-San talked about the number of contractors that the Air Force has under contract, and so we are very optimistic about our ability to compete, but obviously we need to determine whether any of that work will be allocated to us.

Lastly, there is an additional targeted opportunity for water infrastructure. We are looking and proceeding on a proposal effort for water infrastructure design services. That is not in our forecast.

Any sense for how large that latter piece could be?

The work right now is really focused at the government obtaining contractor capacity, and we have not, nor has the government defined that work scope to enough clarity to be able to quantify the volume to Tetra Tech.

Fair enough. We are hearing in the press in recent days that Bush plans to increase domestic security spending by 9 percent in the next fiscal year. I know you can't talk about a lot of the security-related activities. To the extent you can, could you provide some clarity on the types of opportunities that lie ahead for you?

Let me just talk about our targeted markets in the homeland security. We are applying the capability of threat and vulnerability assessment, which is a risk assessment skill base very, very aligned to our internal core competencies, applied to both domestic infrastructure, as well as foreign ports and lands. So that is a very important market of interest for us. In addition, we are applying our skill base in the areas of emergency response, both on the trading and the preparedness area. And that is targeting markets and customers for emergency responders here, first responders as well as secondary responders. And lastly, in the area of emergency preparedness, we are looking at opportunities in the area of communication integration and improvement of communication capability.

And also, I want to mention about (indiscernible) how to protect (indiscernible) facilities from -- ships coming in, something of that nature. And we're not privileged to (indiscernible).

Do you know offhand what percentage of overall revenue is tied to security this quarter versus the year-ago period?

It's embedded in some of our current program base, but we are now starting to track our revenue. Prior to that, they were using existing emergency response vehicles to do that, so it's very difficult to break out.

One last question. Could you comment about your pipeline in terms of acquisitions? What types of companies are looking most interesting to you?

More in the government outsourcing and security aspect and water infrastructure aspect. Those are the areas.

Thank you. Good quarter.

Seth Tutlis.

Sidoti and Company. Can you talk a little bit about the potential timing of -- I know you mentioned back log -- I guess potential backlog and the sequential decline, and that you mentioned that you expect some new task orders to flow through as you continue to work some off. But can you talk about potential timing of that? Should we see this start to trend up in the March quarter or are looking further out in the second half of the year?

Probably second half of the year be more -- a little bit more realistic. And the reason is that on the communications side, we are in the process deciding how much we want to accept some of the Nextel work. And in the Iraq orders, because that's kind of (indiscernible) cycle, and so that will come at that time. But also, next quarter should be better than this quarter, simply because normally in the first (ph) quarter for us is always is the (indiscernible).

Thanks. Lastly, can you talk about the planned implementation of the new ERP system in terms of timing and can you just add a little color to that?

What we have done is we are -- first we have chosen Oracle and Oracle Consulting, our system and implementer, together with our own team. We are looking at a design phase of the next six months and implement the phase (ph) of the following two years throughout the Company.

Is that going to be done -- can you put that in the (indiscernible) in terms of revenue. Are you planning to do it like that or is it by office? Can you talk about how you're planning to implement that?

We have selected units based on the impact of the business. We have carefully carved out these units by basis. So as I mentioned earlier, there's a two-year implementation cycle. And we will roll this out and convert units phase-by-phase in the next two years.

Thank you.

Maybe I didn't answer you question correctly. You said revenue?

Can you quantify it in terms of if you just look at it, just to make it easy, $1 billion, are you planning -- is this going to be 500 million in year one, 500 million in year two, in terms of your operating units?

I see. That is a very difficult definition, but we can scale up as we -- for example, first phase, we may only do three units. And then we may do bigger units -- (indiscernible) six units in the following year. So we don't' look at a revenue basis.

Thank you.

Debra Coy.

With Schwab Capital Markets. Quick follow-up. David, talking about the cash flow and listening to how things are, I know there is still some debate about where you go in the telecom business, but with the buildup perhaps of Hanford, are we talking about a 2Q use of operating cash also in this similar 20 to $25 million range? And then weighted toward the back half, where you would have to be then generating 50 million a quarter to meet the number?

Yes, when I mentioned earlier 50 to 60 million, first is, as I mentioned earlier, is the additional CAPEX spending on the Oracle system. And we also built in a few percentage of growth, which also needed cash to do that. I mentioned earlier in one of the questions that Nextel and one or two other contracts will be able to have a reduced receivable in the third and fourth quarter. So I expect the second quarter to be negative, but not to the extent of this quarter.

Not to the extent?

Of this quarter. I think it's probably in the range of $10 million (ph).

So the bigger issue is the Nextel receivable, and it's not really related to some of the government stuff that you might be building up? That is just a personnel issue?

Yes, that is correct.

Also, we don't need to pay bonuses (indiscernible).

Right. Of course.

(Indiscernible) now pay quarterly. And tax, he just mentioned about that. So I would expect somewhere 0 to 10.

Fair enough.

Most likely to be flat -- (indiscernible) zero.

I think, David, that is an instruction from Li-San.

I (indiscernible) every day.

I'm listening to the call and I'm kind of coming to the conclusion that you are in a little more of an investment and growth phase. Typically, Tetra Tech's earnings and cash flow is a little bit back-end loaded, but it sounds like that's going to be more true this year than normal.

Yes, that is correct.

Finally, to clarify or confirm what you said earlier, Jim, on the UTOPIA contract, which we talked a lot about in the prior quarter, sounds like you are sort of downplaying that in terms of not any expectation for this year? I did see that Provo voted to go forward, but that there has been an awful lot of political controversy out there regarding communities being allowed to do their own broadband roll-out. And I guess what I am trying to understand is whether there is -- you do have a contract there -- where there is any need for you to be putting anything in there while you are waiting for revenues to build. In other words, are business development costs significant for you out there?

No. We actually have approached that contract in a conservative way, Debra. In other words, we said -- we are very pleased that UTOPIA entrusted their needs with Tetra Tech capabilities. However, we all understand the unique nature of this approach. And we assessed, as you point out, the number of steps that are required for this approach to be deployed in the 18 communities in Utah that have been in the initial partnership formed called UTOPIA. So what we did, we actually said, okay, we are very pleased to win this award. We will certainly support all of our clients from a technical capability. But until we get through the steps, we are not going to really put revenue into our baseline plan.

Okay. So the 22 million you mentioned a quarter ago is still not actually booked, right?

No, it is -- actually, we haven't even recorded that as backlog.

Okay. And you are not working in Provo. Provo is separate from the 18 cities in UTOPIA, right?

It is, but it is a very similar relationship. It is a very similar technology and capability. The structure is a municipal utility versus a cooperative municipal corporation. So, the structure is a little different, technology is the same, the dynamics -- the community dynamics are the same as you pointed out. For us, when we looked at this project moving through the various steps and requirements, Provo and the community decision-making was an important observation on our part.

Okay. I see. So just in terms of looking at the overall communication business for the year then, if UTOPIA gets hung up in political controversy, never goes forward, you are still with Nextel and everything else doing your call it 120 to 150 million in revenues in the telecom business this year?

If UTOPIA doesn't go forward in terms of our baseline forecast, there is not an impact.

All right. Thanks.

As we have reached the one-hour mark, the question and answer session will conclude at this time. I will now turn the call back over to our speakers for any additional or closing remarks.

Thank you very much for supporting us and we certainly want to move forward to continue our growth, as we always try to do. And as I mentioned earlier, we are focused more in the (indiscernible) side, some federal outsourcing of those aspects. We also very much try to put our efforts -- try to (indiscernible) some receivables so that our return on investment can be better. Thank you very much.