Sintx Technologies, Inc.
Q2 2008 Earnings Call Transcript

Published: 25 Aug 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the Second Quarter 2008 SI International Earnings Conference Call. My name is Dan and I’ll be your coordinator for today. At this time, all participants are in listen-only mode. We’ll facilitate a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to your host for today’s call, Mr. Alan Hill, Vice President of Corporate Communications. Please proceed, sir.

[Alan Hill:]

Good morning, everyone, and thank you for joining us on SI International’s second quarter 2008 conference call. With me today are SI International’s President and CEO, Brad Antle; our Chief Financial Officer, Ted Dunn; and our Chief Marketing Officer, Leslee Belluchie. Our agenda for today is as follows. Brad Antle will make some opening remarks about our financial results as well as current trends we see in the present federal government funding environment. He will then turn the call over to Ted Dunn to discuss our second quarter financial results and review our guidance for 2008. Following Ted, Leslee will talk about our marketing and sales initiatives. Brad will then make some concluding remarks on out growth strategy and key initiatives for the business going forward. We’ll then open up the call to your questions. Before we get started, I’d like to remind our listeners that our comments today will contain forward-looking statements, and management may make additional forward-looking statements in response to your questions. Such written and oral disclosures are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the anticipated results. These types of statements and ongoing factors are listed in filings with the Securities and Exchange Commission as well as in today’s news release that was distributed before market open. Our statements on this call are made as of July 29, 2008, and the company undertakes no obligation to update any of the forward-looking statements contained herein, whether as a result of new information, future events, changes in expectations or otherwise. With that said, it is my pleasure to turn the call over to Brad Antle.

[Brad Antle:]

Thanks Alan. Good morning to everyone and thanks for joining us on this call. We made our guidance for the second quarter and have positive momentum in our revenue growth. Our challenge for the remainder of 2008 sits principally in two areas; Patent and Trademark Office contract, PTO; and the Enterprise Program Management 2 contract, EPM. The PTO program has been an issue for us for several quarters now, and I will talk about where we stand with that effort. Also, the award of the EPM 2 program has provided some anticipated burdens. But as the program ramps up to full staffing over the next few months, that drag on margins will be removed. During the beginning of the second quarter, the PTO program was performing as we had projected. We achieved and sustained a level of production that was producing nominal profits for the program in the last month of the quarter. Less than 10 days after sustaining that level of performance, we experienced an approximate 25% decline in patent volumes coming into the program. This decline was unexpected by us, as well as the customer. It became apparent that the quantities were not going to return in the near future. As a result, we downsized our staff assigned to this program to get the staffing levels to match the anticipated volumes. Based on our expectations that the higher volume of patent applications to be processed will not return to the levels projected in the solicitation, we have initiated discussions with a customer to explore possible remedies. The resolution of this issue could easily stretch into the fourth quarter, and consequently we are carrying projected losses through the back half of this year. We have a satisfied PTO customer, and we expect some acknowledgment and support as we move to resolve this issue. We believe putting our clients first and doing what it takes to serve their mission-critical needs will pay off in the long run. We have identified several new opportunities with the Patent and Trademark Office customer and see a lasting long-term relationship. On the EPM 2 front, let me start with a little background. The government originally announced that this program would be awarded in December of 2007 with an assumed 90-day transition period. However, the award was not made until late April of this year. Because of the delayed award, the government had a need to transition as quickly as possible to the new contract. As a result, the 90-day transition period we had proposed evaporated. Using our Rapid Response • Rapid Deployment philosophy, we quickly began hiring and the additional staff we needed so that we could start the clearance transfer process quickly. Unfortunately, as with many new starts, this transfer process initially took much longer than anticipated. Consequently, we have incurred more carrying costs for the staff as they await final clearance to start work on the EPM 2 program. While this is a setback, we expect the EPM 2 projects to grow and become a major contract for SI International. In fact, we expect this program to hit an annual revenue run rate of $56 million by the end of the year. This currently is a startup issue that will have positive benefits over the long run. We considered the cost involved to get this project moving and investment in serving our customer and demonstrating our commitment to their mission as we plan to sustain a long-term relationship with NSA. This contract win is not only important to us from a revenue standpoint, but confirms our presence as a significant player in the intelligence sector with the ability to win large contracts. During the second quarter, SI International won all of our re-competes as a prime contractor. However, we did have two areas in which we served as subcontractor, and the primes lost their re-competes. These losses will impact our operating margins in the third quarter, but our revenue will continue to grow robustly through these setbacks. We’re pleased that our revenue performance in the back half of the year will be strong and will position us well for 2009. At the same time, we have some profit issues that have led us to reduce earnings for the second half of the year. We take our obligations to meet our expectations very seriously and are very disappointed in the back half downward adjustment to earnings guidance, but we have a plan to resolve these issues in 2008. Looking ahead, we have a tremendous pipeline of opportunities with an amazing win rate, well above 35%, with an expectation of strong double-digit growth heading into 2009. Our growth for the second quarter of 2008 has been primarily driven by increased volumes in the civilian side. This partially compensated for what continues to be a very weak funding environment for DoD work as a result of delays in the supplemental funding bill and budget pressures resulting from America’s combat operations in Iraq and Afghanistan. We continued to experience success in winning several new contracts and task orders, with total bookings during the quarter totaling $359 million. These bookings include three new EPM 2 contract awards with the National Security Agency with an expected value of over $280 million, a new $11 million contract to provide information technology services to HHS and two U.S. Census Bureau contracts valued at $14 million. We recognize that our team needs to sharpen our attention to margin performance and a return to acceptable levels. We have put in place an initiative to enhance the organization’s focus while continuing to provide outstanding support to our clients in the federal government. The steps we’re taking to reverse the recent trends in our margins include complete our ramp-up on the EPM 2 program and adjust our plan for transfer time of clearances going forward, resolve the PTO issue this year and cap indirect costs to drive efficiencies and margin improvement as we increase revenue. In summary, we’re confident that we are taking the appropriate corrective measures to increase our operating margin and manage our expenses in order to restore our profitability without sacrificing our growth. I’m committed to maintaining our momentum and staying close to our customers as we help them achieve mission-critical solutions important to the security of our country as well as our continued success. With that, I’m going to turn the call over to Ted Dunn to discuss our financial results for the quarter in greater detail. Ted?

[Ted Dunn:]

Thanks, Brad, and good morning, everyone. In a challenging operating environment, SI International reported strong second quarter revenues of $142.8 million, up 20% from the $118.8 million we reported in Q2 last year. This growth is attributed to both strong organic growth and the acquisition of LOGTEC in June 2007. Civilian agency revenues increased 28% in the second quarter due to growth in our contracts with the Department of Homeland Security, State Department, Patent and Trademark Office and the Office of Personnel Management. Revenues in our defense sector grew 13%, due primarily to the acquisition of LOGTEC in June of last year. Revenues on our C4I contract declined $600,000 from a year ago. We are pleased to report that our DoD business has improved over Q1. In the second quarter, federal civilian agencies made up 57% revenues. DoD made up 43%. Work under our largest contract, C4I, generated 13% of our revenues for the quarter. As Brad pointed out, defense budgets for IT services have been very constrained, and we do expect this to continue for the balance of 2008. We produced approximately 86% of second quarter revenues as prime, up from 79% last year. Time and materials contracts made up 35% of revenues in the quarter. Cost plus accounted for 28%, and fixed-priced contracts were 37%. EBITDA was $10.7 million in the second quarter compared to $11.7 million in the same period last year. EBITDA margin was 7.5% in the quarter compared to 9.9% for the year ago period. The earnings release discusses the GAAP measures we use to calculate EBITDA. Operating income was $8.1 million for the quarter compared to $9.8 million last year. Operating margin for the second quarter was 5.7% compared to 8.3% in the second quarter of ‘07. Operating margin was in line with the guidance. We will return to our profit performance and expectations when we discuss back-half guidance. Interest expense for the quarter was $1.6 million, flat from the year ago period. Net income for the second quarter was in line with guidance at $3.8 million. Fully diluted earnings per share were $0.29, and our diluted weighted average share count currently stands at 13.3 million shares. Turning to the balance sheet, as of June 28th we had $14.4 million in cash, and our debt was $101.8 million. Days sales outstanding, or DSOs came in at 71 days compared to 78 days at the end of 2007. Looking at the cash flow statement, we reported $18.6 million in cash from operations and CapEx outlays of $1.7 million year-to-date. This yields $16.9 million in free cash flow or 6% of revenues. This outstanding performance is due to the efforts of both our customers and our employees, and I want to take this moment to thank them for their efforts. During Q2 we paid down $15 million of our outstanding debt and repurchased $2.5 million of our common stock. As previously announced, our Board has authorized the repurchase of up to 1 million shares of SI International stock at a price not to exceed $25 million. During the second quarter, we purchased 109,000 shares at an average price of $23.18 for a total of $2.5 million. We have filed a trading plan under the rules of the Securities and Exchange Commission, and we expect to acquire additional shares in the future. These purchases are reflected in our guidance. Total backlog as of June 28th was approximately $1.6 billion, of which $182 million was funded and $1.4 billion unfunded. Total backlog is up 24% over the same period last year. We define backlog as the estimated revenues we expect to derive from awarded contracts over the remaining lives of those contracts, including all option periods. Turning to guidance, we expect full-year revenue to be between $570 million and $580 million for the full year. Revenues for the third quarter are expected to be between $147 million and $153 million. Revenues for the fourth quarter are expected to be between $147 million and $152 million. Net income for 2008 is expected to be between $15.4 million and $16.4 million, down from previous guidance of $18.9 million to $20.2 million. EPS for full year 2008 is expected to be between $1.18 and $1.26 on a diluted weighted average share count of 13.1 million shares. Our revised net income guidance includes the after-tax effects of the following items; Patent and Trademark Office contract losses, $1.5 million after-tax effect; Enterprise Management 2 revenue ramp effects of $1.2 million after-tax; and the write-off of third-party costs incurred in connection with the Arrowpoint acquisition of $0.3 million after tax. Net income for Q3 is expected to be between $3.9 million and $4.3 million. EPS for Q3 is expected to be between $0.30 and $0.33 on a diluted share count of 13.0 million shares. Net income for Q4 is expected to be between $4.2 million and $4.8 million. EPS for the fourth quarter between $0.33 to $0.38 on a share count of 12.8 million diluted shares. With that, I’ll turn the call back to Brad.

[Brad Antle:]

Thanks Ted. A couple of weeks ago we announced our entering into a definitive merger agreement to acquire Arrowpoint Corporation, a provider of IT services to the federal government. Consummation of that transaction was subject to a number of precedent conditions. Yesterday, we announced that the merger agreement for the acquisition of Arrowpoint was terminated by mutual agreement. As a result, that acquisition will not be consummated. We do wish Arrowpoint continued success in the future. We continue to evaluate acquisition candidates that can expand our geographic reach, our customer relationships and our intellectual capital to create value for our stockholders. Over and above acquisitions being a part of our growth strategy, we focus first and foremost on expanding our presence with the existing customers and breaking out into new customer sets through the bid and proposal process. Under Leslee Belluchie’s leadership, we have seen our marketing and sales organization ramp up over the past year. And to give you more insight into our marketing efforts, I’ll turn the call over to our Chief Marketing Officer, Leslee.

[Leslee Belluchie:]

Thanks Brad. Over the past year, we have focused our business development efforts on hiring the best talent, opening new market channels and positioning SI International as a prime contractor, pursuing more large deals. As a result, we have identified and are positioning for opportunities in new areas where we can extend our footprint into markets such as healthcare, Veterans Affairs and the United States Army. As our company has grown in size and technical capabilities, we find ourselves qualified to compete for larger, more complex opportunities. Because of our focus on proven business development talent, our discipline on opening new markets and a determination to prime opportunities, the qualified pipeline now stands at $4.5 billion, a record for us. Based on estimated award value, 65% of the opportunities are with civilian agencies, and 35% are with DoD and the intelligence community. Within our pipeline, we have 10 opportunities that are valued at over $50 million. Also of note is the fact that we are pursuing 18 ID/IQs, 12 as a prime, none of which are valued in our pipeline. However, we believe that these ID/IQ vehicles represent hundreds of millions of dollars in revenue potential, providing significant channels for revenue growth in years to come. The amount of proposals we have submitted and are waiting to be awarded is $510 million. Our bid and proposal organization plans to submit $275 million in proposals in the third quarter. Our record of winning re-competes, our ability to move into new markets and our recent EPM 2 win proves we are exceeding our clients’ expectation when it comes to delivery. Our business development methodology is robust and we can successfully compete with any firm. Our attention remains on high-quality federal clients whose budgets will grow and on developing core capability aligned with the government’s long-term spending priorities. We believe that programs relating to the long-term war on terror, securing our borders, increasing the government’s efficiency through modernization, enhancing the U.S. intelligence capabilities and realigning our military to face present and future threats are core to our long-term projects and wide support within Congress. I’ll now turn the call back over to Brad.

[Brad Antle:]

Thanks Leslee. In summary, SI International is very well situated with a significant backlog and a record pipeline of opportunities. Going forward, our margin performance initiatives and our proven success in winning important contracts in the federal IT and intelligence spaces positions us to improve profit margins and return to the company’s historic growth rates. With that, I’d like to open the call for your questions. Operator?

[Operator:]

(Operator Instructions). Your first question comes from the line of Cai von Rumohr from Cowen & Company. Please proceed, sir.

[Cai von Rumohr:]

Yes. Thank you. Ted, you mentioned those three write-offs; PTO, EPM and Arrowpoint termination. Could you just give us some color on how much of that is expected to be incurred in the second half, obviously, I know all of the Arrowpoint is, and the pretax impact?

[Ted Dunn:]

Sure. PTO contract losses are spread about 50-50 between the front half and the back half. EPM ramp-up effects that we’re talking about are mostly Q2, Q3, a little bit into Q4 effects. And of course, Arrowpoint is entirely a Q3 effect.

[Cai von Rumohr:]

Okay. And the tax rate you are assuming this year for all of this?

[Ted Dunn:]

40%.

[Cai von Rumohr:]

40% tax rate, okay. Just standing back here, we had this miss on the PTO. We kind of have this ramp-up situation on EPM. Any thoughts about why we have these, why we missed on these?

[Brad Antle:]

Yes, I think, let’s start with PTO. I believe we were executing the plan. As I had mentioned on the last call, we expected to achieve a level of profitability coming out of the quarter which we achieved. We were above our breakeven in terms of productivity. The sudden drop in quantities was not expected and not predicted by our customer. So therefore, we didn’t have visibility into that. Should we have predicted it? Well, we didn’t have the information to predict that. So, that was obviously something we couldn’t plan for, but we adjusted our staffing to accommodate. We obviously have fixed costs associated with that facility that are being carried, and hence, the loss in the back half of the year. But believe we have a path forward with the customer to get back on even footing. So, turning to EPM, we had a transition plan that took 90 days that would have allowed an orderly migration of clearances and people from existing contracts to ours with the transfer of those clearances that would not have impacted our bottom line. As a result, though, because of the delay in the award and the desire for the customer to get this contract moving, eliminated that 90-day transition plan. We were forced to – we found ourselves faced with the need to bring people on board, and it was taking over 30 days to get their clearances, which they were already cleared; it was a matter of just getting clearances transferred from one company to another within the agency. But it posed a tremendous backlog for our customer in trying to move that many people that quickly. So, I think we have found our path forward with the customer so that it won’t be as much of a burden in the future. But, it certainly posed a significant drag. If you are looking at number of people, we are projecting it being having that program up to somewhere close to 220 people by the end of the year. It’s just a large increase in headcount.

[Cai von Rumohr:]

Okay. And a last because I am there are other questions. On the PTO, if this drop in quantity was unexpected; first, is there any, as you look at this, any tracks in terms of past patterns that PTO that would have explained it? And if it was unexpected, why today, given that it has now happened, do you feel that it’s occurred? And what does that say about business going forward?

[Brad Antle:]

Well, you could probably draw some conclusions about the economy in general in terms of folks submitting patents. I’m not here to draw those conclusions. Clearly, it was not anticipated by our customer that this kind of drop would occur. And they clearly have better visibility into historical rates of patent applications.

[Cai von Rumohr:]

Okay, great. Thank you.

[Brad Antle:]

Okay.

[Operator:]

Your next question comes from the line of Ed Caso from Wachovia. Please proceed.

[Ed Caso:]

Hi. Good morning.

[Brad Antle:]

Hi Ed.

[Ed Caso:]

Could you talk a little bit more about the C4I contract? Why the improvement, maybe the mix of work between the Air Force and other groups?

[Brad Antle:]

As we predicted at the last call, I indicated that I thought C4 would come back and be on par with last year. And, obviously, we had some visibility into revenue that might be coming into that contract. Still not a great deal of visibility, Ed, in terms of what might happen in the third quarter from both a supplemental and a year-end spend because I think the DoD is still trying to work their way through that. So, we are not projecting any pick-ups at the end of the third quarter, but expect it to perform, as I indicated in the last call, so about on par with last year. It’s just indicative of the kind of work that’s going through that contract. It’s still very mission-critical. It’s work that has to get on contract and has to get done. Some of it we can’t talk about due to the sensitivity, but it’s certainly mission-critical.

[Ed Caso:]

So the split, Air Force versus the rest?

[Brad Antle:]

Between Air Force and DoD?

[Ed Caso:]

Or DoD versus civil? I’m just trying to understand how much of the work is coming away from your primary client.

[Brad Antle:]

Historically, C4 was running 15% to 16%. It’s 13% for the quarter. So, it’s still down a little bit. Air Force is still challenged financially; they don’t have the funding. Leslee had mentioned Army as being an area of focus because the Army still has a number of critical missions, particularly in healthcare, that are gaining in focus and it’s an area of concentration for us. So, I think we are seeing some of the shift a little bit away from the Air Force, a little pick up in logistics for the Air Force. But by and large, the Air Force has been fairly consistent in terms of its ratio as a DoD customer. But DoD for the last several quarters has been down, and our civilian side of the business has been ramping up.

[Ed Caso:]

Great. EPM 2, you mentioned rapid ramp to 220 people. Is this project work? Is it outsourcing work? Can you sort of generically, at least, describe, sort of give us comfort that you’ll get to that number and that it will stay up at that number?

[Brad Antle:]

Well, I can tell you that I use that number because that’s the level of work we have on tasking, so we are looking at actual work that has been requested of us. And so, this is typically – it’s not augmentation. But we are working with the client to help them manage projects that are critically important to NSA across a number of different business areas and technologies. So, this is not short-term work. This is long duration tasks that will have, I think, a growing demand over the years of this contract.

[Ed Caso:]

And Ted, on the DSOs, great improvement, is that because you are – I think it was two challenged clients that got things together?

[Ted Dunn:]

That’s a part of the story. But we’ve had really incredible performance across the house, particularly in our outsourcing activities. I want to credit everybody for it. It’s been a great quarter.

[Brad Antle:]

We still have opportunities.

[Ed Caso:]

Okay. Last question, share repurchase you did some this quarter. Did you say you are assuming more share repurchase in the guidance? And if that’s the case, can you quantify it?

[Ted Dunn:]

Yes. If you look at the press release and if you listen to the script, you’ll see that I’m forecasting 13 million in diluted shares outstanding at the end of the third, and 12.8 million at the end of the fourth. And if you run the math, you’ll see that I’m assuming we get all million shares purchased this year.

[Ed Caso:]

I’m sorry? How many?

[Ted Dunn:]

We’ll repurchase all; we’ll do the full million to end of the year.

[Ed Caso:]

Okay.

[Ted Dunn:]

That’s our expectation.

[Ed Caso:]

Thank you.

[Operator:]

Your next question comes from the line of Brian Kinstlinger form Sidoti & Company. Please proceed, sir.

[Brian Kinstlinger:]

Yes, thank you. When I take a look at 2007, your gross margins in the first half of the year were close to 38%, and then you had kind of the PTO problem. So I’m wondering, when I look to next year, once you are fully ramped on EPM, will you be able at that point to get somewhere, when those guys are utilized, somewhere to where that year was at total 36%, do you think?

[Ted Dunn:]

Brian, this is Ted. We have not given guidance for 2009. At this point, I would expect our gross margin to come in between those two points.

[Brian Kinstlinger:]

Okay.

[Ted Dunn:]

We are getting a lot of push from our customers to do more than subcontracting out to small businesses. As you know, the Scott contract, we moved from subcontractor to prime role. When we did that, we picked up a lot of subcontractors.

[Brian Kinstlinger:]

And so –

[Ted Dunn:]

And some others will contribute to gross margin probably closer to the 35%. I don’t want to guide it for you yet. But, we’ll be between the two numbers.

[Brian Kinstlinger:]

Okay. And when you give that revenue number exiting this year on EPM, does that suggest it’s fully staffed at that point, or your people won’t still be fully utilized yet?

[Brad Antle:]

I expect it to be fully staffed to the level of revenue that we have visibility of right now. I have confidence that that will expand above that level, but that’s the level I expect to be staffed at leaving this year.

[Brian Kinstlinger:]

Will you have open capacity with the people you’ve hired at that point, or will hire, then, afterwards, as needed?

[Brad Antle:]

We’ll continue to hire. That’s an area where there is no shortage of demand. So, I expect to be hiring on a continual basis to support that program. Even if just for changing needs over time, but certainly for growth as well.

[Brian Kinstlinger:]

In the last couple of calls you had mentioned you had implemented software on the PTO program to improve efficiencies. I know it’s difficult to step back and look at the difference – with the difference in volumes happening. But would you say – what impact would you say that software has had on improving the efficiency for that contract?

[Brad Antle:]

I would say that the software has had negligible impact on improving efficiencies and it’s all been through process improvement that we were able to achieve the quantities that we needed to generate a profit on that program. So, I still have a tremendous team down there of expertise, qualified and producing at the right level. Right now, the drag simply happens to be – facility was sized for a certain level of production that we proposed, giving the customers guidelines. So, that’s why we think we have a great path forward to achieve a proper remedy with the customer.

[Brian Kinstlinger:]

Okay. And then when I take a look at your metrics sheet, it looks like this quarter cost-plus picked up a good deal compared to the last two or three quarters. Can you talk about the underlying factors there and where you think that might trend in the next couple of quarters?

[Brad Antle:]

Well, you are going to see some pick-up there because EPM 2 is a cost-plus contract. So, as that grows, you are going to see some increase in the cost plus. And frankly, our philosophy has always been that we can’t drive our customers to a particular contract type. We have a preference, but we have to, obviously, bid on the contracts that are before us.

[Brian Kinstlinger:]

Final question is you mentioned two programs that were lost that you were subs on. Can you, A) discuss what kind of annual contribution they had to revenue? And then, secondly, if you’re able to, I don’t know if you, talk about the programs that those were.

[Brad Antle:]

In general, I would say that one contract was the NGB contract, which represented about $8 million to $10 million a year for us in terms of revenue. The other contract area was for Hanscom Air Force Base at ESC, and that represented about $3 million to $4 million.

[Brian Kinstlinger:]

And so all of that was lost towards the end of the second quarter, I take it?

[Brad Antle:]

Correct. Yes actually, NGB has stretched into Q3. But the net effect with severance and everything is really being felt in Q3.

[Brian Kinstlinger:]

Great. Thank you very much.

[Brad Antle:]

Welcome.

[Operator:]

Your next question comes from the line of Tim Quillin from Stephens Inc. Please proceed.

[Tim Quillin:]

Good morning. On the EPM 2 contract, can you give us some sense of what the revenue contribution was in 2Q and what you expect for the full year?

[Brad Antle:]

Not a lot in Q2. Do we have that information? Tim, hang on a second; we’ll pull it right up for you.

[Alan Hill:]

It’s negligible in Q2. It’s in the $7 million to $8 million range per quarter in Q3 and Q4.

[Tim Quillin:]

Okay.

[Ted Dunn:]

In Q4

[Tim Quillin:]

And then, in terms of the NGB work, is that something where we’ll see the drop-off more 3Q to 4Q?

[Brad Antle:]

Well, we’ll see it in 3Q, and it’s going to be grown over in fourth quarter by EPM.

[Tim Quillin:]

Okay. So, it immediately goes away?

[Brad Antle:]

Yes.

[Tim Quillin:]

And there is no transition period?

[Brad Antle:]

No.

[Tim Quillin:]

Also on the PTO contract, can you give us a sense; I think it was a 10 year, $138 million contract. What kind of revenue is getting you that $1.5 million loss?

[Ted Dunn:]

Well, the revenue is about $12 million, $13 million a year.

[Brad Antle:]

It’s roughly by the volumes.

[Ted Dunn:]

Right. The volume drop, the 25%, will impact revenues, similarly, until we can get some sort of an economic adjustment which will bring that revenue back up.

[Tim Quillin:]

And what are the odds of getting that economic adjustment? And, is that something that would carry forward on the remainder of the contract? Do you expect this to get to acceptable margin levels in ‘09 and beyond?

[Brad Antle:]

Right now, I would say that I feel very confident that we have a good basis for that kind of adjustment. We bid to a specific spec that’s not there, and generally the customers are fairly reasonable in that regard. They are not very accommodating if it’s your fault. But in this case, we have a solid basis for that. So, I’m pretty confident we’ll achieve some positive results. But we have expected to carry the loss through the year because it will probably take us to the fourth quarter to achieve that revenue.

[Tim Quillin:]

Right. And what are the operating margin assumptions embedded in guidance for ‘08?

[Ted Dunn:]

Tim, this is Ted. If you look at the fourth quarter, we get up to close to 6.5%.

[Tim Quillin:]

Okay. And close to – would 3Q margins be similar to 2Q?

[Ted Dunn:]

Yes.

[Tim Quillin:]

Okay. And is there any reason – I guess you mentioned the fact that you are going to be doing some subcontracted work, especially on EPM 2. But is there any reason why you can’t get back to an 8% operating margin, where you were for most of ‘07?

[Ted Dunn:]

Tim, this is Ted. We have not given guidance for 2009 yet. But I would think something in the 7% to 8% range is a reasonable expectation.

[Tim Quillin:]

Okay. And the just finally, what happened with Arrowpoint, and what other acquisitions do you have in the pipeline? Thanks.

[Brad Antle:]

Well, we are always looking at other opportunities. With Arrowpoint we had a mutual agreement to not continue the combination. And at this point, that’s really all we are going to talk about Arrowpoint. But acquisitions will continue to be part of our strategy. More targeted, generally looking at specific capabilities, contract access, customer access, sometimes geography. But our main focus really is on organics trend.

[Tim Quillin:]

Okay, great. Thank you.

[Operator:]

Your next question comes from the line of Bill Loomis from Stifel Nicolaus.

[Bill Loomis - Stifel Nicolaus:]

Hi, thanks. Ted, on the $3 million costs you laid out in response to Cai’s question, you said half of the PTO was in the first half and a portion of the EMP 2 was in the second quarter. So that $3 million is spread out for the full year, not just second half?

[Ted Dunn:]

That’s right. We see it across the – well, no, the $3 million is – well, all those effects are Q2, Q3, Q4. None of the Q1 story is in those numbers.

[Bill Loomis:]

Okay. So, of the $3 million, how much do you think was in Q2 that you’ve already reported?

[Ted Dunn:]

Well, I don’t have that answer off the top of my head, Bill.

[Bill Loomis:]

Because you lowered guidance for the year by about that exact amount, $3 million, and you are saying that some of those costs are in the second quarter, and you made guidance for the second quarter. So that means there is something else that’s pulling down your guidance besides those three factors for the second half. Can you talk about that?

[Ted Dunn:]

Let’s go through this. Arrowpoint is a Q3 event. EPM is predominantly a Q3 and Q4, but there is a little of that in Q2. And the PTO effect is almost entirely in the back half.

[Bill Loomis:]

The PTO is back half?

[Ted Dunn:]

Back half. A little bit in the second, but mostly in the back half.

[Brad Antle:]

Those quantities dropped off right at the end of Q2.

[Bill Loomis:]

Okay. It clears that up. And then on backlog, if I just do the old change in backlog less revenue for the quarter, I get $75 million increase, way below what your bookings were for the quarter. Did you have any backlog write-downs in the quarter?

[Brad Antle:]

No, you should – the bookings figure math should work.

[Bill Loomis:]

Okay. So, if I do that math, I get a $75 million net increase in new orders, if you will. And EPM 2 alone is well ahead of that, so.

[Ted Dunn:]

I’ve got to check that, Bill. That doesn’t square with my numerology here. Why don’t you let me look around, and I’ll come back.

[Bill Loomis:]

Okay. And then on C4I, again, I know you mentioned this earlier. But just to be clear, what assumptions are you assuming on the Air Force C4I contract in the second half, sequentially, from what you’ve seen in the second quarter in terms of revenue?

[Brad Antle:]

I think about at the same level we’ve seen in the second quarter, Bill. I don’t have the exact numbers in front of me, but I think we are – we did about $65 million or so in that last year, and we should be close to that this year.

[Bill Loomis:]

Okay, thank you.

[Ted Dunn:]

Bill, this is Ted, come back to you. The backlog at the end of the first quarter was $1.35 billion. The backlog at the end of the second quarter was approximately $1.57 billion, to be really specific about that. The revenue for the quarter is $142 million, and the [win] is a little over $300 million, increases in other items $55 million. That gives you the net booking figure that you see.

[Bill Loomis:]

Okay. I’ll come back to you on that. Thanks.

[Ted Dunn:]

Okay.

[Operator:]

Your next question comes from the line of Mike Smith from BB&T Capital. Please proceed.

[Mike Smith:]

Hi. Good morning.

[Brad Antle:]

Good morning, Michael.

[Mike Smith:]

Can you guys elaborate on some of the other contracts you’ve discussed in the past, IPv6 and the second line of defense, please?

[Brad Antle:]

Sure. As far as IPv6 goes, all those assets are deployed. So there’s no drag associated with that. We still have a number of IPv6 engagements. It still seems to be a bit of a priority for the federal government, albeit in pockets. So it seems like there are urgent requirements that pop up from time to time. And so we’ll continue to maintain a focus in that technology. As far as the second-line defense program goes, there are still a number of initiatives, but we have work that we’re doing for the Department of Energy that stretches into 2009. So, we still see tremendous demand for implementing this technology around the world. Clearly, they are exploring other technologies, as in terms of more of mobile devices that can be used in ports worldwide, and we’re looking at opportunities there. So it’s clearly an expanding market.

[Mike Smith:]

Okay, great. And Leslee, would you mind telling me how much in bids you actually submitted in the quarter, please?

[Leslee Belluchie:]

Alan, do you have those numbers on bids submitted in the quarter?

[Alan Hill:]

Yes.

[Leslee Belluchie:]

Just a second here, Mike, we’ll get you the exact number.

[Mike Smith:]

Okay. While you are pulling that up, another question. I see you are expecting $275 million to be submitted next quarter?

[Leslee Belluchie:]

Yes.

[Mike Smith:]

I mean past two quarters, you have been in the north of 400 -- 400 or north of 400 range, any reason for that drop-off?

[Leslee Belluchie:]

No, that’s just the natural ebb and flow of things. Okay, we actually submitted $438 million worth of RFPs this quarter.

[Mike Smith:]

Okay, great. Thanks a lot.

[Leslee Belluchie:]

Welcome.

[Operator:]

You have a follow up question form the line of Cai von Rumohr from Cowen & Company. Please proceed.

[Cai von Rumohr:]

Yes. Did I mishear, did you say $4.5 billion in the bid pipeline, because it was $2.5 billion at the end of the first quarter. Did I mishear that?

[Leslee Belluchie:]

No, you heard it exactly right.

[Cai von Rumohr:]

Okay. So where did we get the extra $2 billion?

[Leslee Belluchie:]

Well, we have been over the last several months [re-wikering] our business development team. We’ve added to it. We are looking at new markets that we haven’t been looking at before, and we’ve opened up some new market channels that we haven’t had before. So that –

[Cai von Rumohr:]

But if we look at these numbers, your bid submits go down in the third quarter, and yet the pipeline goes up. I mean are we to expect, if that’s the number, that this is a different way of looking at it, which I sense it is, or should we expect the submits to start to pick up pretty aggressively?

[Leslee Belluchie:]

I think you going to see these submits pick up in the fourth quarter and first quarter of next year.

[Cai von Rumohr:]

Okay. Great. And then Brad, did you say C4ISR would still be at the $87.4 million, more or less, this year. And if so, what’s the pattern in the third and the fourth quarter to get us there, and what needs to happen in terms of funding to get us there?

[Brad Antle:]

Basically, what I indicated was that directionally C4 will be a bit flat compared to last year, not quite at the same revenue level.

[Cai von Rumohr:]

Well, okay, flat. Okay then it’s flat, if it’s not quite up, it’s down. But I think, on the first quarter call, you said maybe down 5% to 10%. If we go flat with this level, we’re down $12 million. So, we’ve got to be over $20 million in the third and fourth quarter, just to get to $75 million. So, what would the range be on C4ISR, and how do we get there in the third and the fourth? How do you think we get there in terms of the plan that you have given us to that number, because clearly, it’s got to be up from where the second quarter is.

[Brad Antle:]

Just a second, we’ll get the numbers for you specifically, Cai.

[Ted Dunn:]

Yes, Cai, this is Ted. It’s about $19 million in our second quarter.

[Cai von Rumohr:]

Yes.

[Ted Dunn:]

It did about $14 million in the first quarter.

[Cai von Rumohr:]

I know that. But if you are saying flat for the year, we are talking about $85 million. It’s got to ramp a lot in the third and fourth quarter. And I just kind of wonder, what is the risk in that? And in terms of the guidance that you’ve given us, what is embodied in the third quarter and what is embodied in the fourth quarter to get us to your new number?

[Ted Dunn:]

Yes. I can’t tell you specifically what C4I is in our third and fourth quarter. We are comfortable with our revenue guidance at $570 million to $580 million. There is a little bit of new business in that number, but not a great deal. And we are very comfortable with that revenue number.

[Brad Antle:]

Yes, I mean we’re down. C4 was only 10% of our revenue in the first quarter. And this quarter, Q2, our revenue on C4 was only $500,000 or so below last year’s levels.

[Cai von Rumohr:]

But I repeat; if you say flat, should we assume it’s going to be about $85 million? Is that more or less the level, or $80 million, because even if you get to $80 million, it requires quite a big kick-out from where we were in the second quarter?

[Brad Antle:]

I was really thinking of in terms of returning to the historical levels and up from the down we had in Q1.

[Cai von Rumohr:]

So, you’re saying for the year, about $80 million, more or less, or better?

[Ted Dunn:]

Just a little bit shy of that. We expect $20 million quarters. The first quarter was off.

[Cai von Rumohr:]

And then a question, clearly you mentioned kind of the surprise on PTO and the surprise on EPM. Approximately when were you aware of that situation?

[Brad Antle:]

Well, as I mentioned, PTO happened at the end of the quarter. So that was –

[Cai von Rumohr:]

That was at the end of the quarter? Okay.

[Brad Antle:]

Right. And so was EPM. EPM – well, we knew the delay was happening. It got delayed a little bit later into the quarter than we expected, and frankly didn’t expect the customer not to exercise the 90-day transition period, which was in the plan. So, that surprise sort of hit us around June, the end of May.

[Cai von Rumohr:]

Okay. Well, and you bought shares at $23 a share. So, I mean I guess one question is that, if you knew that the PTM in late May-June was going to be an issue, and therefore you probably knew there might be some potential pressure on your earnings, why were you in the market buying shares at $23 knowing that you might have had a tough compare in the quarter, or what was the thinking behind that?

[Ted Dunn:]

Cai, this is Ted. We briefed our Board that a share repurchase plan would be a good use of our cash in terms of cash flow per share, or in terms of earnings per share, in terms of accretion, in terms of balance sheet positioning, that it would not jeopardize our liquidity position. We filed that trading plan in accordance with the rules of the SEC inside a trading window. We did not possess material nonpublic information when we filed that trading plan PTO event, and the EPM events came upon us after we filed that trading plan. We would not have filed a trading plan with that kind of material nonpublic information, and we did not do so.

[Cai von Rumohr:]

Got it. Thank you very much.

[Ted Dunn:]

You’re welcome.

[Operator:]

Your last question is a follow up from the line of Bill Loomis from Stifel Nicolaus.

[Bill Loomis:]

Hi. Just One more question on the bids outstanding. You said you had $510 million in bids outstanding, is that correct?

[Leslee Belluchie:]

That is correct.

[Bill Loomis:]

And is there any one that dominates that, or is it more spread out?

[Leslee Belluchie:]

There is no big pushers in this one. I mean there are a couple that probably make up 15%. But no; it’s fairly well spread out.

[Bill Loomis:]

Okay. And when do you expect to hear from most of those? Is that third quarter, you said?

[Leslee Belluchie:]

It’s a mixed bag. It’s this year.

[Bill Loomis:]

And then as far as re-competes over the next year, can you talk about your major ones?

[Brad Antle:]

Major one would be the ROC contract, which is a Record Operations Center contract for DHS. We believe that re-compete will happen towards the end of this year, and then we also have the SETA contract next year, which is, I guess, up in September of ‘09?

[Leslee Belluchie:]

That’s right.

[Brad Antle:]

But that may or may not get delayed another year, but right now we are expecting to have that re-compete next year.

[Bill Loomis:]

Okay. And what’s the revenue on the DHS ROC contract, roughly?

[Brad Antle:]

About 7%.

[Bill Loomis:]

Okay, thank you.

[Brad Antle:]

You’re welcome. Operator?

[Alan Hill:]

On behalf of the entire SI International team, we want to thank you for your interest and participation in this call. If you have any interest in visiting with Brad, Ted or Leslee, please let me know. Again, thanks for joining us on this call. This concludes SI International’s 2008 second quarter earnings conference call.

[Operator:]

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.