Tetra Tech Inc (TTEK) 2004 Q2 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 not, please contact the corporate offices at 626-351-4664, and we will give you one right away. With us today from management are Li-San Hwang, Chairman and CEO; James Jaska, President; and David King, CFO. They will provide a brief overview of the results, and we will then open up the call for questions.

During the course of the conference call, Tetra Tech management may have forward-looking statements within the meeting of the Private Securities Litigation Reform Act of 1995. These include statements concerning future events and Tetra Tech's future financial performance. The statements are only predictions, and may differ materially from actual future events or results. Tetra Tech's Form 10-K and 10-Q reports to the Securities and Exchange Commission identify certain risk factors that could cause actual results to differ materially from forward-looking statements. Tetra Tech undertakes no duty to update 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 up the conference for questions and answers after the presentation.

With that, I would now like to turn the conference over to Li-San Hwang. Please go ahead, Dr. Hwang. (technical difficulty).

Good morning. My name is Li-San Hwang, CEO of Tetra Tech. I am sorry this morning, we have had some phone problems that delayed this phone call. I am here to report to you our second-quarter results. Our revenue, which is net revenue previous call (ph) has increased about 26 percent, from 193 to 243. Income increased 12.4 percent, which was from (ph) $21.3 to $24 million. Our EPS is 23 cents compared to last year's 21 cents.

Our customer mix is slightly changed. Federal customers from (ph) 28 percent to 42 percent. And our commercial is reduced from 47 to 39 percent. State/local particular (ph) has been shrunk (ph) from 23 to 16 percent.

Into '04 (ph) growth rate resource management (ph) totaled 33.4 percent growth -- this is (ph) Internet revenue. So organically, 0.4 percent. This is because the federal markets were very strong. Also, in addition, we have an acquisition. So that's why the total revenue is going up faster. However, in the commercial and state/local (indiscernible) compensate part of the federal market.

Infrastructure is 15.3 percent and organics 0.8 percent (indiscernible). The communication part of revenue has significantly improved -- increased. And the state/local and commercial is still relatively weak in this aspect (ph). As a Company we have 25.9 percent, as I mentioned, and overall organic 0.5 percent increase.

Into our business (ph) segment, our resource manager percentage-wise is increased from 55 to 59 percent or so (ph). In terms of all revenues, (indiscernible) is much more because of our revenue growth.

I do want to mention about the communication part of our business. Certainly, this quarter we have lot of events (ph) associated with this part. Our wireless part of business is $2 million below original plan, and that is one of the reasons why we have a lot of figures (ph) that make some announcements what the reason for it (ph).

In terms of the also (ph) DSR also increased during this quarter, but we expect that next quarter should be very significant reduction in this area. So currently we are -- according to the contract, we have already sent some of the invoice out, and we expect that to reduce -- to get payment within this quarter.

In regard to wired, that is also, you know, affect us because this one's been delayed. But we do expect that the later part of this quarter we'll notice the proceeds (ph) -- they already discussed the issue with us. And this will be significant toward (ph) revenue in the probably next year. And this is all sort of (ph) $200 to $250 million business. By the way, the terms and conditions are reasonably good for us, on this one.

In this period of time, from last phone call to now, we won the following projects. One's Air Combat Command for the 200 million; U.S. Navy CLEAN, which is 80 million; Port Security, associated with the Homeland Security in San Diego, both dealing with the federal government, and also the port (indiscernible), the commercial part of the port, is about 50 million. And we also received the EPA Office of Water for about 17 million.

Our overall backlog has increased about 50 million. Among that, 20-some million is because of the acquisition, so it's for half of that -- about 50 million is coming out from the internal growth. The acquisition of AMTI we have announced before. The (indiscernible) are in March, and we paid 31 million in cash and 19 million in receivables, (indiscernible) 50 million.

The revenues were 96 million in terms of so-called gross revenue (indiscernible), and 61 million is (indiscernible). And that -- we expect that. And they are more in the capability in the evolution contra-security (ph) aspect. This is our strategy to build up a certain homeland security aspect that we were mentioning about; it is our strategy, why we were going to do that.

Now, I'm going to have David tell you (ph) the financial results.

Thank you, Li-San. If we can flip to the income statement page, this is a quarter that we resolved the issues in our wireless business, and about two weeks ago we guided down 2 cents or about 2 million in operating profit. However, we grew 12 point percent (ph), from 21 million to about 24 million. Our SG&A continues to be a pretty strong story. We had $1 increase due to the fact that we are a bigger Company. Percentage decreased (ph) from 10.6 percent versus our formerly (ph) net revenue to about 10 percent due to improved efficiency. And our G&A increased about 18 percent while our top line grew about 35 percent.

Net interest costs continue to be maintained, despite the acquisitions. We, in fact, funded most of our acquisitions -- cash outlay from cash from operations, which I will touch on a little bit later. And one thing I went to point out is a large amount of interest expenses are fixed in nature; it's close to $2 million.

Tax rate is 40 percent, and the high amount increase -- reflects we have higher income.

The next page is the balance sheet. Our increase in cash reflects stronger cash generation from the operation and a better collection effort during the quarter. Our billed on billed (ph) receivable grew about 10 percent -- versus our total top line, about 35 percent. We will continue to manage that area, particularly in the next two quarters, as Li-San mentioned earlier.

Accounts payable maintained -- we continue to manage subcontractor to pay (ph) when pay terms, and we will continue to maintain the ratio to our total revenue growth. Our DSR, we continue to focus on this area. We expect further improvement in the next two quarters to liquidate some of our receivable in our wireless business.

Net debt decreased about 14 percent, reflect the payoff of our Foster Wheeler acquisition, which I will touch on a little bit later on. In fact, during the quarter, we self-funded the majority of our new acquisition, AMTI.

Cash flow page, please. If we show to you (ph) amortization there is no special news there. We reflect the fact we are a larger business. Cash from operations is, again, a good quarter of solid DSR management, and we funded about $7 million worth of working capital through our new acquired company, AMTI. In other words, our cash from operation would have been about close to $20 million, if we did not have this acquisition. In the third quarter, we expect to fund another $7 to $7 million, and AMTI will be on its own from that point on. Capital expenditures slight increase reflected the ERP initiative that is underway right now.

Next page is the segment operating results. Under resource management operating profit, we increased from 9.8 percent in '03 to current quarter of 12.8 percent. The increase was due to our improved federal market share and some contracts were converted into fixed-price job (ph). And to a lesser extent, we have a couple job close-outs during the quarter.

DSR receivables under resource management improvement due to strong management of federal work, particularly our Foster Wheeler unit has done a great job in terms of their receivables. On the infrastructure side, our profit margin decreased from 11.4 percent to 7 percent, primarily due to our wireless performance on the plan. And on the DSR side, it improved some improvement from 119 days to about 116 days, due to increased federal security and outsourcing work in those areas. And as I mentioned earlier, we expect further improvement in the next two quarters, as we liquidate our wireless receivable.

I will turn this back to Li-San.

Looking at this quarter, we (indiscernible) disappointment because of the 2 cent reduction for our guidance, and -- but further disappointment that, in the next two quarters, because of our state/local and commercial part of work has not been any improvement. And we believe that the potential in the next two quarters may not be improved also. So, because of the worker market soft (ph) and also the margin under pressure, we believe that is the best (ph) at this time to let you know the potential of reduction due to these two quarters, for each 2 -- about 2 cents potential reduction could occur. And we hope that will quickly improve, but we are planning on that may not improve.

So, as a result of this situation, this current quarter I am talking about, third quarter, our revenue will be 255 (ph) to 270 million. This is net revenue. EPS, 26 to 28. That is the range. But if the conditions do improve, we may be able to get back higher level. On the other hand, we could -- if not improve, we could go down (ph) to 26 cents.

For the whole year, will be 1 billion to 1.04 billion, in terms of net revenue. Into our profit (ph) will be similar how the (ph) situation in the fourth quarter, we think, could be reduced (ph) by 2 cents also, so total of about potential could be 4 cents due to a similar reason. We are afraid that state/local and commercial will not be coming back as fast as we think.

Looking at the overall, I think we do have some good aspects of that I do want to mention about here. We do believe our communication part of program, particularly when UTOPIA comes to fruition, which is, we expect, within this quarter. And, together with the long-term negotiation we have with our wireless customer, we expect this could be a relatively (ph) long-term stability for the next couple years.

We also generated, as David mentioned about strong cash flow. This is about as much as (ph) $20 million overall the operating cash flow generated, even the 13 million we mentioned about, but the 7 million was the partner receivable (ph) for the new company we acquired.

In addition, we have really made some headway in the Homeland Security area, and we believe we have established a fundamental activity group in this area. We had hoped that we have to grow strongly. This will really relate to port access control, which includes airports and seaports. And currently, we -- a acquisition which it can (ph) contribute to that. And in addition, we do have a San Diego Port Authority title (ph), which is really very unique and this includes the military aspect and also the commercial aspect. And we do have some other projects, in again (ph) New Jersey area, also in the port. And we also have the programs dealing with worldwide port monitoring project, which is -- this is this part activity (ph) certainly is very important in dealing with Homeland Security, because everything -- critical things come move into the United States we need to know. So we believe this will establish a strong presence in this area, which we feel (ph) will give us long-term growth.

Thank you.

(OPERATOR INSTRUCTIONS). Jeffrey Beach.

Stifel Nicolaus. Looking back over the last decade and your business model, where you have had very few surprises in 10 years, and all of a sudden the state and local appears to be catching you a little bit off guard, but it's been soft. Can you talk about -- I am looking back over the years, and you have always had things to pull out of your hat to maintain an earnings estimate, and earnings guidance for the year. And here, it does not sound like you have got some things you can pull out of the hopper. Can you talk about how, as you saw this weak or maybe weaker-than-expected state and local develop, what actions you may have taken to bolster the outlook for 20 percent or better growth next year?

It's very difficult for me to answer that question. It's difficult because we have not been delivered (ph) for that. But the reason why we put (ph) that -- because of recent -- we feel that the programs that we got and the margins under pressure -- it's probably best to let you know ahead of time, to deal with that. We certainly were looking into the other possibilities, but it's better that you know that possibility may not be realized. So this is the reason why we let you know ahead of time on that, to deal with this issue, rather than we wait until it happens (ph) to bring that to you. Jim, do you have any answers on that?

Li-San, I will just add a few points to your answer to Jeff's question. Number one, I think, Jeff, the backlog remains strong. And what we are talking about here in some of our state and local projects is the timing of the startup for these projects. And so that timing had impacted some of our margin and our workload.

And another thing I do want to mention (indiscernible) was a little bit disappointment that it started late. And that basically we were always in the plan (ph) to start it this quarter, but last quarter, but now started basically, really good third quarter actual year (ph) start, because by the time paperwork all goes through, we will be -- what could really going to come through (ph) for us will be third quarter. So that will not be -- it's unfortunate that -- we thought this (ph) could be something -- that come out in the half (ph) -- that's the clinical dust (ph) on that, too.

Richard Eastman.

Robert W. Baird. A couple things. One is, could you just maybe highlight the amount of revenue that may be at risk on the commercial side? You talked a little bit about the commercial work. You give a percentage in that data sheet, but that includes the communications part. I'm just curious; are we talking about a revenue number of $200 million that is soft on the commercial side, or what is our exposure there?

We basically -- in the commercial side, from the communication, we basically have about 7 percent of reduction -- 6 to 7 percent reduction this quarter. And so, assuming that, that's a part -- almost we're talking about close to $2 million. 6 percent of the revenue could pass a little bit of the margin under pressure, which is -- we talked about, overall, about $2 million type of reduction, in terms of the overall earnings.

And this is, in some ways, already show up a little bit in the, as you can see, the margin, you see in our margin in the area right now dropped to about 7 percent. And if -- assuming that the 2 million come in the next step, is not (ph) the case, it should probably give us about 80-some (ph) percent. So therefore, it's really about 1 to 2 percent reduction in that whole area. And we do not expect that, unless something really happens, we worry about that may not be recoverable.

Jim, do you have any -- do you want to -- okay. That's really the reason for it. Because we really look into details already showed up (ph) for this quarter aside from the next, we do have some weakness in that area, internal margin.

Can I ask you -- I mean if -- when I look at the resource management organic growth rate, that obviously would be lighter than maybe -- at least, that we forecasted. Is the weakness on the commercial side? Is that what is impacting that net revenue number?

That -- exactly. That's a 14 percent commercial-side reduction in the resource management.

So the commercial piece that falls into resource management was down --

Also, yes.

-- 14 percent year over year?

Right.

And then, can I also ask -- I noticed that headcount is down maybe 1.5 percent sequentially. What areas are you taking some expensive initiatives in?

Mostly in the infrastructure area. And that's an area because of weakness (ph) -- in fact, we regret -- we should have taken down a little bit faster in the whole area. And that is going to cause a little problems for us also.

And infrastructure -- to be specific, is it state and local or commercial?

Infrastructure is mostly state/local, is more problems than actually than the commercial. Commercial have problems, but state/local have more problems.

And then just one on the margin side. You had mentioned that the resource management margin was boosted a little bit with some project close-outs. That would suggest maybe that number is a bit high, just as you recognize the residual profit in those projects. Is it more likely that we deliver an 11 to 12 percent margin going forward?

That's the -- now, seasonable effect is going to kick in, so we expect that in general (technical difficulty) it will be higher, normally. But in this case, I will say it will not be much higher. And because of this quarter was a little bit better in the results in that area.

So we could hold maybe 12 percent?

Something like that.

Seth Tutlis.

Sidoti & Co. Just a follow-up on this private -- the commercial and state and local markets -- can you maybe get a little more specific, as far as what you are seeing? Jim, you mentioned the timing delay specifically. I was under the impression that year over year, you were seeing improvements in the state and local side. Obviously, the commercial market and the industrial market have improved year over year. So can you talk a bit more specifically about what exactly the dynamics are that's causing this -- the issues for you?

I just mentioned about this -- I think the economy is probably the most obvious, because the states just don't have enough money for -- even though we do get some last years (ph) in the water side, but some of the programs just start to have problems. Maybe, Jim, you want to add a little bit more (indiscernible)?

Sure. First of all, I think the state markets we have been clear on those markets, and the position of those markets relative to strength. I think the issue on the commercial market is that it's the timing of these projects against capitalization of the projects. And we see a lot of infrastructure projects. Capital improvement projects, there's a lag. And as economies change, as markets change, projects have to get planned, have to get permitted, and there is this lag. And I think that's the seasonality that -- some of the seasonality that Li-San was talking about, and some of the conditions we see in the market.

So it's just happening slower than you had originally thought, essentially? But you still expect your pipeline to kind of wash out and the stuff to essentially slow down?

Let me just add to the commercial side of things. I think, in fact, on the comp basis, it's an improvement for us about 4 or 5 percent, compared with the second quarter last year on commercial. And what we are experiencing is really in the infrastructure area, let's say, that the (indiscernible) of it is not there. However, in some of our areas like New York, it's coming back. And in some of our design side of things.

So the decrease that Li-San quoted earlier -- I was looking at a number here. If you look at our commercial as a whole, we actually ticked up about 5 percent. Sequentially, we (indiscernible) 4 percent, so the visibility and stability is not here yet. And so that's why we sort of qualify, and just want to let you know earlier that we are not totally comfortable yet.

And also, just to follow up on the last question, when you were talking about the operating margins for resource management, when you look at infrastructure, assuming that you have got an improvement from the Nextel contract, what is -- presumably, you are going to see something higher than the 7 percent -- Li-San, you mentioned something around 8 percent. Is that 8 percent kind of -- should we just apply that, really, to the rest of the second half of the year? Or are you going to see a ramp -- do you expect to see a step-up sequentially?

My feeling is that that's really roughly what will be the number, about 8 percent, 8.5 percent, something in that nature. That's really the issue. If margin does improve, things certainly will come back to a much better situation.

Just one last question, if I can. When you look at the Iraq work that you booked last year, and when -- is that included in your organic growth rate, revenue growth? Or is that still acquisitive in terms of rolling up into Foster Wheeler?

Mostly it is -- partially, it's organic. It's not totally. It's a part of it is organic, because we acquired it in the winter quarter. And so it's partially acquisitive. It's actually three -- I think three weeks or four weeks is the -- we kick up (ph) three weeks in the previous year. So it's about -- approximately (ph) about $12 million is organic.

$12 million? Can you quantify the total revenue contribution from work in Iraq?

Total revenue contribution across the whole is about -- on net revenue is about 25 to 26 million, so far. But that's -- half of that is the subcontracts, so it was -- in terms of total is 50 -- we had tried to pick up (ph) over 50-some million.

And that is just in the second quarter?

Yes. No, no, no. This is since August of last year.

So that's aggregate?

Yes. And about half of them -- you know, you hire security, all these other things. So it is really the subcontracts.

Deborah Coy.

Schwab Soundview Capital Markets. Just to reiterate, Li-San, you have mentioned several times margin pressure. This is somewhat of a new -- it sounds like you might be saying that you are seeing some margin pressure in terms of the contracts themselves. Or are you just simply talking about utilization rates when you talk about margin pressure? Because you have some delays on some revenue? Or are you seeing some price competition on contracts themselves that's pressuring margins?

I would say a little bit of both because, certainly, we build in the downsizing (ph) we may not be fast enough. This is part of -- that relates to the transition. But a similar situation -- we have the problem of margin itself. So, because the contract was not able to get a better margin, we would like to see a combination of those.

And is that in those same segments, the commercial and state and local, where you are seeing the price pressure?

Actually, the price -- state/local local is in even more problems than the commercial, actually.

And it does appear -- I know we have been talking about this, but you certainly were saying in the last couple of quarters that you felt that that market had bottomed, and was maybe even showing some modest signs of improvement, at least on the water segment. And we did see another sequential decline in revenues in state and local. So are your -- on the bidding activity, where backlog has held up, are you still seeing declining bidding activity, where it could get still worse in the state and local? Or is this more related to, as you said earlier, some of the project delays?

We are right now planning that they will not improve for the next two quarters.

So that we would stay in this -- you posted 39 million in revenues this quarter. That would be about the same going forward in that segment?

Yes, in that segment. Yes. Our revenue, we propose to increase some. But the conditions would be similar to what we are now. So, as a result of that, we would probably have about $1 to $2 million, overall, problems. And that is what we tried to let you know ahead of time.

I hope that, certainly, that maybe we were a little bit hopeful to say that we're looking forward to increase -- improve. But the reality has not been -- show up to the extent we like to see. But that's why we make it early, you know. If situation do improve, we certainly will let you know.

Okay. All right. Understood. And then on the commercial side, it sounds like you're just still -- it's sort of bouncing around, it's unpredictable, these tend to be shorter-term contracts, and you just don't have the visibility on the commercial side?

That's correct. And (indiscernible) we feel -- we have the like UTOPIA (indiscernible) overcome that (ph), but obviously have not been able to overcome, because that's in there (ph) also. But we do understand that contract's going to come, and we expect it will contribute some results in the fourth quarter.

Actually, that's one of my last two quick questions. On UTOPIA, you said that you expect to get some work released in the third quarter. Can you give any sense of what the timing of that is? I am trying to understand why you still think this is a $200 to $250 million potential contract. I thought Salt Lake City had just voted against funding it, so that you were just going to be in the smaller cities. How do you see that ramping up?

First of all, just on the schedule, we expect the Board of Utopia to meet mid-May. And shortly after that, we will receive a notice to proceed, which then we will initiate mobilization and engineering efforts on some of those systems.

With respect to the issue of Salt Lake City and their decision to really decline backstopping (ph), in our original model, in our original bid, we had 11 cities, not the ramp-up to 18 cities. So Salt Lake was really out of our original plan, which -- that 11 cities tied to the revenue estimate that we're communicating here over the three-year period.

So that does not include Salt Lake?

It doesn't. It never included Salt Lake in our plans, nor had we anticipated in any forward forecast.

But this is primarily a fiscal '05, in terms of this ramping up? You don't expect to see too much in Q3/Q4, do you?

Well, in Q3 there is very minimal contribution. But in Q4, we will see some ramp-up. But I think, as you described, the revenue base will be in '05.

And then finally, David, you mentioned that you are funding working capital for AMTI to the tune of 7 million or so this quarter, another 6 or 7, I think you said, or 7 or 8, next quarter. I presume that's basically taking care of the receivables that you had left with them? And what does that do to your cash flow forecast for the year, which last quarter you were saying was 50 to 60 million?

Yes. Both what you just quoted was correct. We funded in March, and we expect to fund the same amount in April. And on a whole-year basis, we are probably going to reduce probably by 10 million, probably in the $40-plus million range.

And was the stipulation that it would have been 50 plus if you weren't funding at AMTI?

Yes.

Fair enough. And very last question. This is sort of a more big-picture question, Li-San. You have made a number of acquisitions. It feels like in this quarter that there are perhaps some surprises or some things that did not quite come through according to expectations, from what you're getting out there in the field. How do you feel about the -- it's a bigger company now. How do you feel about your ability to keep track of what is going out in the field offices, the reporting back that you're getting? It just feels a little bit to me like maybe it's harder to track what is happening in all the various segments and offices out in the field. Are you feeling like you are losing some predictability with the size of the organization?

Well, that's one of the reasons why the RP (ph) systems try to set up (ph). And we also set up office to dealing with program review all the activity (ph). So that's all aspects, try to improve the situation, in relation to manage the project and the control of all activities. So that whole process is right in the middle of that.

John Flanagin.

First Analysis. Can you talk a bit about the outlook for the unexploded munitions program in Iraq, and perhaps when that contract is up for renewal? Is it possibly going to expand?

We are expecting to have that contract and we are (ph) reasonably sure for that (ph) and you should see very shortly announcement. So we currently been handling (ph) pretty well so far. We expect to continue some of that, and that contract will be expanded.

And more generally, the outlook for work in the Middle East -- are you now factoring in some heightened security concerns, as you plan for that region?

So far, we are really only in the munitions part. We do have a little bit on the other, but it's barely minimal. Whether we're going to expand that activity or not, we currently have no plan in our numbers.

And you in discussions with Nextel for possible follow-on work beyond that which has already been announced?

We are expecting in the wireless, that activity to continue for a significantly long time, provided we certainly do work out well with them. But the contract certainly will be improved, and so we will be very -- we are going to have our hands full in that area, and most of those will not show up on the gross margin. A significant part of that will be subcontract on that, to perform that part of work. We expect that will probably be a number of years for that continue (ph).

Alex Rygiel.

It's Friedman Billings and Ramsey. Could you please help us to understand your backlog a little bit better? What portion of UTOPIA have you included into your backlog? Can you quantify that for us?

Nothing. We normally do not include any contract which has not been authorized to work (ph) and the money is funded. So that UTOPIA is really nothing (ph). Probably sometime from now in the middle or later part of this quarter, the current, the third quarter, you'll see some so-called Now, that does not include anything of that. In fact, anything we mention, all those projects we mention here, there's no backlog included until they are assigned to work.

So let's assume that in late May, you get a notice to proceed on that project opportunity. Should we at that time layer in a third of the $200 to $250 million opportunity for fiscal '05?

No. They will be safe (ph). They will be -- each time, when they give us that, when they say okay, you're going to start this city or that city, we had -- you know, for them (ph), the original plan was for possible $20 million. And so, as soon as they gave us this city, they gave us a money estimate (ph). And proof of that -- (ph) we only book on that piece. So we would expect probably sometime this month, the backlog could increase $20 million or so from that project.

So in the first year of the UTOPIA project, you anticipate potentially booking 20 million, with the remainder over the last 24 months?

20 million -- that would probably be this year. And then they would continue to assign more work to us, more cities, then we will continue that. We expect that within this three-year period of time, maybe shorter, to finish this part of the work money (ph).

So let me just clarify that again. The 20 million -- when you refer to this year, you mean fiscal 2004?

That's correct.

So effectively, the majority of that would be in the fiscal fourth quarter. Therefore, you'd get an annualized kind of run rate going into '05 of something close to 75 million or so?

That's most likely.

And turning to Iraq, how much of your backlog is associated with Iraq right now?

Probably 10 to 20 million, maybe. About 20 million left (ph).

Vincent Colicchio (ph).

Vincent Colicchio, Sterling Financial. What organic growth is embedded in your guidance for the second half of the year for overall Company?

The lower single digits.

Vincent Colicchio, Sterling Financial Okay, that's a better number than you recorded this quarter. Is that based on your visibility?

Well, that's a couple of things. One, certainly, when you have write-offs, couple million dollars or things like that, it doesn't add to the growth, internal growth. That itself is about 1 percent of that. So we are hoping that in the next quarter, we don't have that kind of issue.

And also, this summer -- the spring and summer comes -- improves that.

If I back into the fourth-quarter guidance you're giving for earnings and revenue, it looks like you are expecting quite an improvement in Q4 versus Q3. What gives you the confidence for that?

Summer is one thing, and also UTOPIA could be contributing significantly to that whole issue, because if we add another $5 to $10 million, that's about -- we're talking about 5 percentage effect -- 5 percentage. UTOPIA probably gives us 1 to 2 cents.

John Quealy.

Adams, Harkness. Just to clarify the cash flow expectations from operations in the back half of the year, David, did you say 40 million expected in the back half?

That's for the whole year.

That's for the whole year?

Right.

In terms of the 55 million in short-term dent, that's not included in that number? In terms of paying it off?

Yes.

Right.

No, no. And then we will -- dimensionally (ph) we will continue to generate cash to pay down that debt, and that is a portion -- in terms of accounting, we treat it as current portion.

In terms of going back to the municipal and state and local issue, in terms of the competitive issues or the weakness there and the project push-outs, was this a result, in terms of your due diligence of looking at the budgetary issues coming up for many state and local municipalities in the June timeframe, or is this something different altogether, more along the lines of the competitive issue?

I think that the real thing which we have is that we have this year go through the budget review and budget communion (ph) and from the managers in the local, and that should basically show some weakness in that area. And certainly, as you know, that every day the local have budget problems certainly added to the issues. So that leads us to modify the plan, and that causes reduction.

And then, lastly, on the backlog expectations in the back half of this year, you previously mentioned some expectations out of UTOPIA in the back half. Should we expect sequential increases each quarter in backlog, moving forward?

We should have a better situation in backlog for them, simply because when we got the Iraq project -- $68, $69 million -- that started working down (ph) to about 20 or 40's expanded (ph). Sometime from now is that would add another probably $70 million also, so we should have a big lift-up there. And also UTOPIA should have some. And also the wireless -- also we will have some significant increase in that, too.

Jeffrey Beach.

Stifel Nicolaus. I wanted to go back once again to your business model. Kind of looking at your forecast for the year now, with the midpoint of the net revenue gain at about 18 percent, it looks like if you could go back and rebudget for the year, typically you are looking for net revenue growth well in excess of 20 percent to deliver your earnings. Looking ahead to fiscal '05, at this point, and seeing some soft markets and some business develop, is 20 percent growth in '05 pose a big challenge at this point, and going to take a lot of acquisitions to produce those kind of results? And what is your greatest challenge, looking ahead to that kind of growth next year?

I think we'll probably be in the 15 to 20-percent range. But we're going to be get into a little bit more details to project for this (ph) for next year, and we will probably let you know later. And in regard to that, if you look at that, one of the contributions of the acquisition we have currently occurred mostly -- significantly will be occurred in next quarter or next year for half of that. And that's about 50 million. The (indiscernible) will continue, as we understand it. We have basically the -- we know that the contract we are awarded, so that we will have continued for two or three years on that.

So I would say acquisitions certainly would be a required one (ph), and to depend upon the size of acquisition. So what we are looking at right now is probably in the 15 to 20-percent range, and we have to get into more detail to confirm that.

This will conclude the question-and-answer session, and I will now turn the conference back over to Li-San Hwang. Please continue.

My only summary is that we certainly, ourselves, are disappointed in not being able to meet our plan. And we certainly will work hard to (indiscernible) variable (ph) but I just want to be sure that you know where our business situation.

And we also do believe the Homeland Security part activity could cause us to (ph) experience significant growth. So we hope that can continue to deliver good results in the next two quarters. 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 now disconnect.