Sintx Technologies, Inc.
Q4 2007 Earnings Call Transcript

Published: 25 Feb 2008

[Operator:]

Good day, ladies and gentlemen, and welcome to the SI International Fourth Quarter 2007 Earnings Call. (Operator Instructions). At this time, I will now turn the presentation over to Mr. Alan Hill, Vice President of Investor Relations. Please proceed.

[Alan Hill:]

Good morning everyone, and thanks for joining us on SI International’s fourth quarter fiscal year 2007 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:]

Thanks, Alan and welcome to everyone joining us on the call this morning. We are pleased to report another quarter of solid performance to finish a year of strong progress and the execution of our strategy. Even with the difficult operating environment resulting from the budget stalemate in Washington D.C., SI International delivered positive results across our business. During 2007, we won several important new contracts, expanded our client base, and enhanced our portfolio of mission critical solutions through the LOGTEC acquisition, and positioned our business for future growth. As we entered 2008, we see an improved outlook for the Federal IT industry as the civilian agencies have an approved budget and a portion of the Iraq supplemental was passed in late December. This is now alleviating some of the budget pressure across federal government. In the improved environment, we are confident that SI International is well positioned with a balanced book of business across defense and civilian agencies and a clear focus on long-term government priorities that enjoy bipartisan support to deliver annual organic growth in the range of 10% for 2008. Some of the financial highlights of 2007 include, revenues grew by 11% to a record $511 million, operating income was $39 million, net income was $19 million, and fully diluted earnings per share were $1.45. SI International’s results for 2007 were driven by our exposure to high priority federal government programs in the areas of Federal IT modernization, defense transformation, homeland defense and mission critical outsourcing, as well as the acquisition of LOGTEC. We are especially proud of the growth we experienced on civilian agency side, even with the yearlong continuing resolution. Our civilian agency revenue organically grew 20% when compared to fourth quarter of FY ‘07 to the fourth quarter of FY ‘06. When you look at the civilian agency, organic revenue growth in the second half of 2007 grew 17%. Therefore, we are again experiencing our historic double-digit organic growth on the civilian side. We believe that once the war pressure on the budget – defense budget is minimized, we will see double-digit organic revenue growth return for that sector as well. The overall organic growth rate for the fourth quarter was 7%. During 2007, SI International’s significant investments of resources in the pursuit of new business yielded important contract wins. These wins will contribute to our organic growth in 2008 and beyond. In the area of Federal IT modernization, SI International was among the award winners of the $50 billion GSA government-wide acquisition contract. This gives us opportunity to compete on task orders for integrated information, technology solutions to facilitate integration requirements for a broad range of Federal IT initiatives. We understand that GSA will begin issuing task orders under this contract vehicle in the second quarter, and expect this contract vehicle to be widely used throughout the federal government for follow-on contracts, as well as new starts. In our Homeland Defense focus area, SI International was awarded a Service Center Operations Support Services prime contract called SCOSS with the Department of Homeland Security’s U.S. Citizen and Immigration Services. This contract has a ceiling value of approximately $225 million. SI International has been a subcontractor for these services under the SCOT contract, since June of 2001. Our track record of success has enabled SI International to take a prime position on this contract. Another win with the Department of Homeland Security was a new prime contract to provide case management specialists to review case actions and managed case inquiries, associated with alien files. Contract value is approximately $20.5 million. Leveraging our past experience with the Second Line of Defense initiative, we’ve recently won a new subcontract to provide systems communication and software for this critical nuclear, non-proliferation program. The contract value for SI International is approximately $100 million. We are also on the ARINC team that was awarded the Counterdrug/Counter Narco-Terrorism Engineering and Management Support Services contract for the United States Air Force at Langley. This has an approximate value of $6.5 million to SI International. Within our Defense Transformation focus area, SI International is a member of the KT Consulting team that has been awarded IT services contract for the DoD headquarters, Washington Headquarters Services. This contract is valued at approximately $28 million to SI International. In addition, we were a member of the I2S team that was awarded a contract with the Intelligence Agency. The anticipated value of the new contract win is approximately $18 million. This new win demonstrates that we continue to broaden our exposure within the intelligence community. The LOGTEC acquisition in June of 2007 significantly strengthened our logistics capabilities. This has made us one of the largest Federal IT government contractors in the Dayton, Ohio area, supporting headquarters, Air Force Materiel Command and the Aeronautical Systems Center. We see opportunities to grow our position as BRAC continues to roll forward. This acquisition not only extended SI International’s footprint in the Air Force logistics arena, but it provided us a substantial platform to bid on larger logistics programs and extend this capability into new DoD clients. Within our mission-critical outsourcing focus area, we won a new $4.3 million task order under our HR Solutions contract to support the Warrior Transition Unit at Brooke Army Medical Center in San Antonio. We believe the various military installations in San Antonio will continue to grow both in importance and present new opportunities for SI International over the next several years. Also under the HR Solutions IDIQ contract, we won a new $8.9 million task order to provide training services to the Army’s Family, Morale, Welfare, and Recreations Command. Earlier in the year, we were awarded a new $16 million Federal Retirement Thrift Investment Board contract to provide business process outsourcing services, supporting the processing, imaging, and data entry of 401(k) applications and forms for the Thrift Savings Plan. The President’s FY09 budget – IT budget request for $71 billion is up 7%, when comparing it to the presence FY08 budget. The FY09 civilian IT budget request is up 11% when comparing it to the FY08 budget request. The DoD IT budget request is up 5% from the President’s FY08 budget request, and believed that before the appropriations bill are passed, the Congress will boost spending above the President’s proposal. In addition, a substantial group of programs we are pursuing within DoD and the intelligence community are funded through mission budget which has both been robust and growing, the improving federal spending environment, our balance sheet exposure to defense and civilian agencies, and our increased efforts in the business development arena all support our organic growth targets for 2008. Backed up by our significant contract wins during 2007, and our pursuits for 2008, we remained confident that our capabilities are aligned with our customers needs and long-term priorities, and that we are well positioned to deliver positive results in the quarters ahead. With that, I would like to turn the call over to Ted Dunn for more detailed discussion of our financials. Ted?

[Ted Dunn:]

Thanks Brad and good morning everyone. In a challenging operating environment, SI International achieved solid results in the fourth quarter meeting EPS guidance and street expectations. Revenues were mildly off guidance primarily as a result of pass-through revenues on certain of our DoD contracts. As we have discussed on previous calls, these pass-through revenues do increase our top-line that have little if any impact on profits. In the fourth quarter of ‘07, we reported revenues of 137.2 million, up 19% from Q4, 2006. Organic growth for the fourth quarter was 7%. Following a flat first half, we now have two consecutive quarters of organic growth in the 7% range. Organic growth in our civilian agency business was 20% in the fourth quarter and 12% for the full year. That growth has spread across many customers including Department of Homeland Securities, State, Patent and Trademark Office, Thrift Board, and others. Most of our civilian agency work is user fee based, unless we are somewhat sheltered from the constraints of the continuing resolution. DoD business grew 17% in the fourth quarter due to the acquisition of LOGTEC this past June. From an organic point of view, our DoD business declined 5% in 2007. This decline was driven by a 12% decline in revenues from our C4I2TSR contract with Air Force. As many of you know, war spending in Iraq and Afghanistan has been squeezing out growth across our industry. We do not have any people in those countries and our DoD business should do better when the war spending begins to decline. For the fourth quarter, our DoD engagements made up 45% of revenues, while work for civilian agencies made up 54% of revenues. We produced approximately 80% of fourth quarter revenues as prime contractor, consistent with the prior-year period. Time and materials contracts made up approximately 33% of revenues in the fourth quarter, cost plus accounted for 25%, and fixed price were 42%, up from 28% the prior year. This increased mix of fixed price revenues came from many customers including Patent and Trademark Office, Air Force, Office of Personnel Management, BHS, State, and others. EBITDA was 13.2 million in the fourth quarter compared to 12.8 in the same period last year. EBITDA margin was 9.6% compared to 11.1% a year ago. Our earnings news release discusses the GAAP measures we use to calculate EBITDA. Operating income was 10.7 million compared to 11.1 million reported last year. Operating margin for the fourth quarter was 7.8% compared to 9.6% in the fourth quarter of ‘06, operating margin for the quarter was in line with the guidance we gave during our last earnings call and with street expectations. Interest expense was 2 million in the quarter versus 1.5 million in the same period last year. This increase in interest expense is due to the acquisition of LOGTEC last June, which we financed with debt. Net income for the fourth quarter was 5.2 million compared to 6 million last year, fully diluted earnings per share were $0.39 and in line with guidance and street expectations. Diluted weighted average share count in the fourth quarter stood at 13.3 million shares. Turning to the balance sheet. As of December 29, 2007, we had 13 million in cash and our funded debt load was 114.3 million. Day sales outstanding or DSOs was 78 days. A recently upgraded payment system installed by one of our customers has caused a temporary three to four day spike in our DSO performance. We expect that situation to correct itself soon. Looking at the cash flow statement, we have reported 19.2 million in cash from operations for FY07. CapEx for the year was 6 million. Netting these two results in free cash flow of 13.2 million for the year or 2.6% of revenue, adjusting for the temporary spike in DSOs would result in free cash flow of 3.7% of revenue, which is consistent with our guidance. Our total backlog as of December 29 was 1.45 billion, of which approximately 180 million was funded and 1.27 billion was un-funded. Total backlog is up 19% from what reported in the fourth quarter of ‘06. We define backlog as the estimated revenues we expect to derive from awarded contracts over the remaining lives of those contracts including any option periods. Now on the guidance. Operating guidance for the year is as follows

[Brad Antle:]

Thanks, Ted. SI International strategy is to focus our efforts on high quality federal clients, whose IT budgets are expected to grow consistently in future years. We also focus on developing the core capabilities to deliver differentiated technology solutions, leveraging our rapid response/rapid deployment capabilities on mission-critical assignments. Here are few examples of rapid response/rapid deployment work performed by SI International team over the past few months. In the area of defense transformation, we oversee mission-critical logistic support to the U.S. Air Force’s F-22 Raptor Program. This support includes scheduling and execution of all approved retrofit activities, the planning of analytical condition inspections, and depot drop and maintenance, thus making our efforts critical to the sustainability in vital – of this vital defense system. In the area of Homeland Defense, our rapid response/rapid deployment was highlighted by our Second Line of Defense teams. They have installed cargo-scanning systems in 14 countries around the world and are presently installing systems in ports of eight additional countries, bringing the total number of countries to 22. There are many more plans for 2008 and beyond. U.S. bound containers from those ports are scanned by systems we helped that – we integrated and deployed to help ensure that radioactive contraband does not enter our homeland. Our team is on call 24 hours a day to support our customers around the world. Our mission-critical outsourcing work continually proves to be just that, critical to the security of the United States. During this past year, a major focus of our SCOT contract was on work – that was work on a special H1B cap project that saw the Lincoln, Nebraska center take in 200,000 applications in one month alone. That’s 40 times their usual task load intake. The SCOT team prepared all those documents for screening and background checks to ensure that American companies can bring in the critical foreign staff in the phase of the terrorist threat. Despite the tighter funding environment, these successes have enabled us to continue to grow our share – our federal, civilian, and DoD customers. Total bookings for 2007 were $714 million – $741 million. Looking forward, we see opportunities across a number of important areas, where SI International has well-established customer relationships and a successful track record of execution, including acquisition and program management support for the army, which is facing critical shortage of acquisition personnel. U.S. Port Security and Second Line of Defense Systems, U.S. based war fighter services and support associated with the anticipated future drawdown of combat troops, opportunities that are developing from BRAC, the Base Realignment and Closure activity and the intelligence communities renewed emphasis on acquisition excellence. As of this past Friday, February 15, our qualified pipeline of opportunities exceeds 2.5 billion, at the end of fourth quarter, the amount of proposals we have submitted, and are waiting to be awarded was $344 million. We have another $400 million in bids planned for submission in the first quarter of 2008. On the acquisition front, we will continue to focus on opportunities that can create value for SI International by expanding our geographic reach, our customer base and our intellectual capital and areas that are aligned with our focus on high priority assignments within the civilian and defense agencies. As many of you know, SI International employs a very rigorous screening process to make sure that any companies that we acquire have a positive contribution to shareholder value. Our rapid integration ensures that the acquired company becomes fully integrated and operates under a one-company approach within 90 days. Although our immediate focus for 2008 is on organic growth, we will continue to evaluate acquisition candidates that fit our criteria. During 2007, we received a couple of recognitions that we are extremely proud of. First, we were named a technology supplier of the year by the Boeing Company, where we were the only company selected for this category from a pool of more than 27,000 suppliers to Boeing from across 100 countries around the world. The selection was based on stringent performance criteria for quality, on-time delivery, cost and customer satisfaction. This award demonstrates our passion for excellence and ability to apply SI International’s engineering architecture – our enterprise architecture expertise across a broad range of applications. Our architecture techniques have contributed to the development of more than 30 enterprise and associated systems for our federal government customers. This past October, we were named Contractor of the Year at the fifth annual Greater Washington Government Contractor Awards. Contractor of the Year award honors a company for its distinguished financial and operational accomplishments, and for outstanding contributions during the past year to its employees, the government contracting industry and the U.S. government. In summary, we are confident that SI International means well positioned with a significant backlog of orders to achieve our 10% organic growth rate objectives for 2008. And a strong track record of execution to weather any uncertainties associated with the changing budget priorities and the government spending environment. As we entered 2008, we intend to deliver on our organic growth and profitability objectives. With that, I will open the call to your questions. Operator?

[Operator:]

(Operator Instructions). Your first question comes from the line of Michael Lewis with BB&T Capital Markets. Please proceed.

[Brad Antle:]

Good morning, Mike.

[Michael Lewis:]

Hi, good morning. How are you guys doing?

[Brad Antle:]

Very well.

[Michael Lewis:]

Okay. So, Ted, I was wondering if you could kind of walk us through some of the assumptions surrounding the ‘08 guidance. Specifically, are there any new seasonality trends that we should be paying attention to? And also if you would offer us what your internal assumptions are for PTO over the next say six to twelve months?

[Ted Dunn:]

So, major themes in the 2008 budget, I believe as Brad teed it up, we see 10% organic growth. We are coming off of two quarters of 7%, organic growth in our third and our fourth. We see momentum building. We see pipeline growing, civilian agency organic growth up 20% in the fourth. We think we have the momentum and the opportunity to deliver on that 10%. Looking at operating margins, when you peel the onion here, you will find an operating margin up about 7.4%, and that is teeing up some interest from many folks. Let me just tee it up by like this for you guys. 2008 is going to be a year of investment for us. We are going to continue to invest in sales and marketing people. We are going to continue to invest in our management team, in facilities, in order to achieve that organic growth. We believe once we deliver that and continue to deliver that, that margins will follow suit and our theme is top line first. Looking at interest expense, we will take advantage of a new credit facility that we have just entered into, new $200 million credit facility. We are lowering our spread at current leverage from about L plus 225 to L plus 125, so pick up about 100 basis points on interest. We are somewhat pleased to see that despite choppy waters in the credit market, we were able to secure a much more favorable credit facility. As you know Mike, we are free cash flow positive, so we will be doing this credit facility to position ourselves for the next acquisitions to come. And the fact that we can do it a little bit cheaper than the previous facility is wonderful news. And that’s the best way to understand how to build your models for next year. The gross margin to be inline with what we saw this year, and something between 35 and 36%, and the rest I think you can build from there.

[Brad Antle:]

In terms of seasonality, I think nothing atypical for this year. Typically, first quarter is probably our lightest quarter in terms of revenue through the year, largely based on just government appetite; they come back slowly from the holidays. So, some of that work is a little slow to start after the holidays, but a very positive year going forward with 10% organic growth I think is really achievable for us. And as Ted mentioned, we are going to invest in front of that. We are going to invest and we are going to continue to issue equity to our leadership team to get them focused on our future. We are investing in new facilities; we opened a new building in Colorado Springs this month. We opened a new customer demonstration center here is Reston this month. So, we clearly want to get in front of this double-digit growth that we see in the budget that’s coming. Now, even the ‘09 budget, very positive outlook, which means we are going to be – adding to our B&P expenditures to bid into these opportunities to continue to support our growth going beyond ‘08 into ‘09 and ‘10.

[Michael Lewis:]

That’s helpful, but with regard to the EBIT margin, Ted. If you were to quantify what you think the investment would be in sales and marketing over the next 12 months, can you offer to us what you think that would be on an impact to EBIT margin? How many basis points is that going to pull out of what the current expectation may had held prior to this news that you are going to invest higher?

[Ted Dunn:]

There are many ingredients to that investment theme, but I will tell you that – from my way of thinking it comes to between 125 and 150 basis points, that’s what that investments can cost us in ‘08?

[Michael Lewis:]

That’s helpful. And then just one more question, I will get out the way. You mentioned the pass-throughs come from DoD not hitting. Can you tell us how much you were anticipating in the plan did not come through?

[Brad Antle:]

I think we had, Mike, its probably in the neighborhood of 5, 6, $7 million of pass-throughs we are expecting associated with one program but they didn’t materialize, and it’s just sliding to the right. So, it hasn’t come out the customers needs it just didn’t happen when we expected.

[Michael Lewis:]

Is that from C4?

[Brad Antle:]

Yes.

[Michael Lewis:]

Okay. Thank you very much.

[Brad Antle:]

You are welcome.

[Operator:]

Your next question comes from the line of Cai von Rumohr with Cowen & Company. Please proceed.

[Brad Antle:]

Good morning, Cai

[Cai von Rumohr:]

Brad, good morning. So, C4, it’s like the volume was pretty good in the quarter close to 25 million even though you missed the pass-throughs, what are you expecting for 2008?

[Brad Antle:]

Well, I am expecting C4 to continue to grow from ‘07 levels.

[Cai von Rumohr:]

It didn’t continue to grow in ‘07, it basically was down in ‘07 but it looks like...?

[Brad Antle:]

From the fourth quarter – fourth quarter was little bit higher.

[Cai von Rumohr:]

No, no. exactly, I mean, it looks like it kind of troughed in the second quarter, and it is now growing and if you have 5 million of pass-throughs, I mean, should we expect it to be up 5 to 10 million, something like that?

[Ted Dunn:]

On the year, you are talking, or are you talking about on the quarter?

[Cai von Rumohr:]

On the year, on the year for 2008?

[Ted Dunn:]

I am not going to give that specific on C4 but I see the trend as positive. Air force is more comfortable in its budget. So, the planning is little more certain. I can’t tell you what’s going to happen with the supplemental, the other $103 billion tranche. But assuming that, that comes of as expected in May, April-May timeframe, I think the government is going to execute their budget. That’s the signals we are getting from our air force customer. They don’t see as much pressure this year as they did last year to hold those frames tight. And so I expect them to spend into that program.

[Cai von Rumohr:]

Okay, great. And on the use this SCOT, whatever we are calling it now. Can you tell us, what are the others, contractors on the program, kind of faces a unionization issue. Is that an issue for you and kind of how is the profitability of that contract versus its predecessor?

[Brad Antle:]

Well, good question. Let’s address them in order. And in terms of unionization, that’s not something that we are currently facing at the centers that we manage. We did not have a same transition issues because of our long-standing presence in those centers, and look forward the employees. So, I think we handle the transition differently, it was just a different environment for us, we weren’t a new kid on the block. We didn’t create the same kind of concern in employees that made them rush out to unionize. So, I don’t expect that to be a problem. Although, having said that, we continue to pay very close attention to our employees, so that we don’t give them cause to unionize. Now, on the profitability standpoint, I would tell you that because it’s, we are – as indicated before, the revenue is about the same for us because even as a prime, we now have two centers instead of half the revenue across four centers. But now we have – 50% of our workers subbed out. So, it’s a little bit dilutive, but we are very happy with the profits, they are coming in as expected on that program.

[Cai von Rumohr:]

Got it. And then last question, Ted, you had mentioned this 125 to 150 bps of SG&A investment. So, what are we seeing there that the SG&A ratio is going to be up by that amount and I guess I didn’t understand, exactly, what does that refer to?

[Ted Dunn:]

I was responding to the level of investment, we will be making in personnel and facilities in 2008, in order to position ourselves in front of this growth.

[Cai von Rumohr:]

So, that’s 125 to 150?

[Ted Dunn:]

But that investment will show up in the SG&A line, if I was responding – 125, 150 basis points what that means is operating margin.

[Cai von Rumohr:]

Right. But I mean, does that mean that the SG&A as a percent of sales will be up by 125 to 150 bps or that will be the drag and because the sales were up you get a positive impact, and so, it’s not quite that number, I guess, that’s what I’m trying to understand?

[Ted Dunn:]

It’s not quite that number.

[Brad Antle:]

It will still be up, that won’t be quite, right.

[Cai von Rumohr:]

The deal will grow significantly. And then, so you won’t see that rise in the SG&A line, you just won’t see it push down as hard as you would otherwise see it?

[Brad Antle:]

Right.

[Cai von Rumohr:]

Got it. Thank you very much.

[Brad Antle:]

You bet.

[Operator:]

Your next question comes from the line of Matthew McKay from Jefferies. Please proceed.

[Brad Antle:]

Hi, Matt.

[Matthew McKay:]

Good morning guys. Just kind of looking at the cost of services line and given the fixed price contracts are growing at the rate that they are granted the acquisition of LOGTEC might push that expense little higher. Just trying to think through why you wouldn’t see sort of more leverage in the gross margin line as fixed price continues to grow?

[Ted Dunn:]

This is Ted responding to that. Our forecasts say that we have to do about 35.5% gross margin in ‘08, and the question is teed up, is why are we not seeing more leverage. PTO is going to continue to drag on us in the first quarter. It will begin to turn in the second quarter. We expect to make money on it next year. Until that turns and we get the kind of improvements in productivity that we are looking for. We are forecasting this kind of margin.

[Brad Antle:]

We will make money out of this year. That is not the right message, to me. It will be profitable in the second quarter. But, I think we are also seeing – with some of the fixed price work content, some of it is subbed out, so to some extent, we also are sharing that fixed price with our subs. Little bit different arrangement that we’ve had in the past, normally a fixed price work your sub, your time and material with some of our more recent contracts like SCOSS, we actually share on the fixed price nature of that work with our subs. So, a little bit different.

[Matthew McKay:]

Okay. That’s helpful. And then, just kind of belabor too much, but on the SG&A line, if my math is right, you are looking for SG&A to increase 10 to 15% year-over-year on absolute basis in ‘08 or probably somewhere around 13 to $15 million. And I’m just wondering, if there is anything that specifically kind of dominating that on the investment side, for example, the new facility in Colorado, maybe some more D&A that’s associated with that or if it is predominantly on hiring, and if so hiring maybe a little bit of color, kind of where specifically you will be hiring?

[Ted Dunn:]

I would tell you the bulk of that is investment in people, and the second tranche would be investment in facilities, I don’t have those two numbers in my head, but you’ve got the total right?

[Matthew McKay:]

Yeah, okay. So, if it is in people then, it’s granted that it’s kind of more senior management, where are you guys looking at the business development area, more sort of M&A, kind of more – kind of a little bit more color just in terms of where you are adding heads will be helpful?

[Brad Antle:]

This is Brad. Let me come at that from a different perspective. Clearly in facilities, the investment we are making is probably maybe a couple million dollars there, so the investment in physical plant equipment is not huge. But certainly it is going to be important from positions of growth. What we are finding now is that, even with 10% growth we are projecting this year that we are pretty much in capacity in our facilities, and you need to get out in front of that growth in order to invest. So, even beyond the facilities I mentioned, we are looking at expanding our facilities here in the Northern Virginia area to accommodate that future growth. We are also looking at making some investments in new areas within business development to focus in areas like healthcare, like we are very focused in intelligence, where we are seeing some greater opportunities to grow, and in transportation. So, we are launching some initiatives into some new areas that are going to draw some additional business development and marketing, I had mentioned.

[Matthew McKay:]

Okay, yeah, that’s very helpful, I was just more trying to get a feel for kind of investing that has a curve versus playing a little catch-up, which sounds like a little bit of both but a lot of its investing has a curve, and especially when you see SG&A growing at a faster rate than the organic growth rate-?

[Brad Antle:]

Yeah, clearly getting out ahead of it and largely stimulated by the increased budget growth within DoD and civilian sectors.

[Matthew McKay:]

Okay, great. Thanks a lot guys.

[Brad Antle:]

Thanks, Matt.

[Operator:]

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

[Brian Kinstlinger:]

Hi, good mornings guys. The first question I have is related to first quarter EPS guidance, we are half way through the quarter and it’s one of the largest ranges you guys are giving. Can you just sort of discuss over the next half quarter what’s going to happen in order to hit towards the high-end versus the low-end what are the puts and takes there?

[Brad Antle:]

What we are looking there is the timing of some award fees and certain of our contract that may slip from the first into the second, so that’s why we have a wide range sitting there in the first. Also, traditionally, well, as you all know I’m sure the first quarter tends to be the thinnest quarter, government customers coming back from their holidays late, new starts are a bit slow to get off the line but we were – that’s the fairly traditional, our first quarter guidance for us.

[Brian Kinstlinger:]

Okay. Second in terms of the top line guidance for 2008, can you give us just a high-level overview of civilian versus defense, same trend that we are seeing in the fourth quarter where civilian will dominate the growth of defense is flattish, or is there some kind of change in dynamic there?

[Brad Antle:]

No, I mean, I think we see -- we see some significant growth opportunities both on the DoD and the civilian side of the house. In fact some -- we have some large opportunities in with our DoD customers --- intelligence customers that we are very positive about. So I think you are going to see significant wins in both civilian and defense intelligence.

[Brian Kinstlinger:]

Let me ask you it different way then, you are growing 20% in the civilian side right now, if they are going to both be about 10%, are you suggesting that civilian will slow a little bit while defense will pickup a little bit? Is that how we should think about it next year -- this year?

[Brad Antle:]

I would tell you that, if I had to give you a break out right now of bids in our pipeline because frankly it’s going to -- Brian, it’s going to vary depending on what bids get awarded at what time. But I would tell you that we are probably right now pretty close to 50

[Brian Kinstlinger:]

What about in terms of the backlog, is it more heavily weighted towards DoD?

[Brad Antle:]

Backlog -- well, the backlog I would tell you is little bit more heavily weighted in civilian and largely that’s just because we’ve seen more opportunities we’ve been pursuing on the civilian and a lot of activity with customers like DHS and State and so forth. But I would tell you that when you are looking at a pipeline that’s between 2.5 and $3 billion, the fact that it’s 60

[Brian Kinstlinger:]

Okay. In terms of PTO, you mentioned that you are expecting the second quarter for it to turn a profit. What is going to change? If you can give us some insight that will make that profitable in the second quarter that hasn’t been profitable, for example, this quarter?

[Brad Antle:]

(inaudible) Brian. We have been developing some productivity software that we are close to implementing on that program, which is going to really provide some workflow process improvements that are going to improve the throughput and quality of the work that we’re performing there. So that’s going to contribute significant to profitability, and it’s just a few weeks behind schedule, but it’s on track. So I expect to see that result reflected in Q2.

[Brian Kinstlinger:]

Okay. In terms of the bookings, could you give us a sense for the rough percentage of what was new business versus renewals, in new business also would be expansion work I would classify.

[Brad Antle:]

New business versus renewals. Yeah, you would consider the SCOT recompete probably renewal.

[Brian Kinstlinger:]

Right. Well, part and part, half and half, depends how much was expansion work.

[Brad Antle:]

Because clearly as a prime, not all the incumbents won that contract. So do we have a break down, Alan?

[Alan Hill:]

No. Call me offline, I will try to dig out a number. But at the top of the house, guys, there is lot of new business in there that you might call renewal (inaudible) defense.

[Brad Antle:]

We have given that -- we have given that number before. We gave that --- last call, we gave a break down, and I apologize for not having it for you this time.

[Brian Kinstlinger:]

Okay. I will follow-up. I have two more. First of all, you mentioned the acquisitions with your credit facility. I mean how you are looking at acquisitions? Where are you looking to add? Is it something around BRAC to find where there is more work going? I mean what -- forget the profitability standpoint, what are you looking at in terms of businesses to get in?

[Brad Antle:]

Well, you mentioned BRAC and we’ve talked -- certainly talked about it before and it’s still going to continue to be an area of interest because there are still areas that have -- that are --- have not experienced BRAC growth. In fact, most areas have not really experienced their BRAC growth yet. So there are still some areas that are we are interested in from a geographic standpoint. But we are also interested in some specific areas like military healthcare because that’s going to continue to be a growth area for the next five to seven years and there is a fair amount of investment going into it. And we are also looking at some customers, military health, it certainly includes VA, but there are customers like VA that have significant and growing budgets and where we don’t have a presence. As you know, it can take you four years to develop a relationship with a customer from scratch; you can acquire it in a matter of months and then go build upon it. So where we see growth opportunities, we will continue to be flexible in that arena. We are not particularly interested in the intelligence market just because the prices have been a bit unreasonable and frankly, we’ve demonstrated an ability to grow organically very well in that arena. So we are going to continue to make investments in marketing and sales. It’s a better return dynamic for the shareholder and we’ve demonstrated we can do it.

[Brian Kinstlinger:]

Last question I have. Thank you. Is NVC, the new terms went in on December 1, is that contract now profitable? Is it still well below the operating margin now of the business, or has it gained, and is there more improvements ahead in that contract?

[Brad Antle:]

You are talking about SCOSS, not NVC.

[Brian Kinstlinger:]

I meant, SCOSS, sorry. Yes, I am sorry. I meant SCOSS.

[Ted Dunn:]

We don’t -- it is profitable. It is moderately more profitable than SCOT was, but we do not disclose profit margins on individual contracts.

[Brian Kinstlinger:]

Okay. Thank you.

[Operator:]

Your next question comes from the line of Gregory Wowkun with Banc of America Securities. Please proceed.

[Gregory Wowkun:]

Good morning, gentlemen. Can you please speak to the turnover in quarter as well as provide us an update in terms of where head count is today and where you see it ending in 2008?

[Brad Antle:]

Okay. Sure. Let’s see. I will take the turnover part and we were -- last year ran at under 14%, right around 13.6%. So for us a good watermark. I mean we are happy with that level of turnover. Second part of the question...

[Gregory Wowkun:]

Head count as of today is (inaudible) 4600.

[Brad Antle:]

Well at the end of the year, it is about 4500. We are up from that now, but it was 4500, at the end of the year.

[Gregory Wowkun:]

Why did it drop so much from last quarter?

[Brad Antle:]

For head count?

[Gregory Wowkun:]

Yes.

[Brad Antle:]

Well, we had the SCOT contract was we had SI employees at four centers. And when we won the SCOT recompete, we were only at two centers. So we went down roughly 600, 700 employees.

[Brad Antle:]

About 600.

[Gregory Wowkun:]

Okay. Great. Thanks.

[Brad Antle:]

You’re welcome.

[Operator:]

Your next question comes from the line of Alex Hamilton with Jesup & Lamont. Please proceed.

[Alex Hamilton:]

Good morning.

[Brad Antle:]

Good morning, Alex.

[Alex Hamilton:]

Just a couple of questions. We have talked about your investments that are going to be made during the year. We have talked the impact of the income statement. Can you quantify that in terms of CapEx, in terms of the physical addition, should it be a little higher than it was last year ---- this year I mean?

[Brad Antle:]

Last year, we had a new facility in Harrisonburg, which was a plus up to CapEx. It will be a little higher this year but not much, still within -- probably still under...

[Ted Dunn:]

Around 75 bps.

[Brad Antle:]

Less than one.

[Ted Dunn:]

Yeah, well, that’s less than 1%.

[Alex Hamilton:]

Okay. As a percentage of sales, it should be a little higher then -- okay. Also, I am assuming that these pass-through revenues in the quarter are going to be recaptured in the first quarter. As such, should we expect the operating margin in the first quarter to be the lightest throughout the year?

[Ted Dunn:]

Well, your conclusion is correct, but the premise is a bit off. It maybe falls into the first quarter, maybe falls into the second quarter, but...

[Brad Antle:]

We have up and downs all over the place, it’s sometimes a challenge to predict that bumpy road.

[Alex Hamilton:]

Yeah, ups and downs kind of like my life, interest expense...

[Brad Antle:]

No comment.

[Alex Hamilton:]

Okay. Interest expense in the quarter or in the year, you talked about it being a little lighter due to the credit facility, but it should still be a little higher than it is at the end of ‘07, is that correct?

[Ted Dunn:]

Yes. Year-over-year, ‘08 versus ‘07, it will be up because we borrowed against LOGTEC in the middle of the year. My model is kind of about 7.6, $7.7 million of interest expense. If you want to walk through the details of that, I will be happy to do it with you offline.

[Alex Hamilton:]

Okay. Thank you for the time.

[Brad Antle:]

Thanks Alex.

[Operator:]

Your next question comes from the line of James Harlow with Stifel Nicolaus. Please proceed.

[James Harlow:]

Hi. Thanks for taking my call. Just a quick question, a few quarters you had mentioned corporate staff reduction that were going to lead to about 1.5 million in the annual savings. Can you give us an update on where that stands now?

[Brad Antle:]

Well, we did those reductions and they were certainly the right thing to do. They helped streamline us as we were flat in the front half of ‘07. And now, we are clearly seeing that growth come back, so we are trying to get back up the curve and in front of that growth. So, I think, I have mentioned on the second -- at the end of the second quarter, I probably should have made those cuts a little sooner, but didn’t. So they did provide help in the back half, but now we’ve got a different situation where we have got to support the growth opportunity in front of us.

[James Harlow:]

Okay. Thank you.

[Brad Antle:]

Welcome.

[Operator:]

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

[Brad Antle:]

Good morning, Tim.

[Tim Quillin:]

Morning, how are you?

[Brad Antle:]

Good. How are you?

[Tim Quillin:]

Ted, you -- I think we have gone through every modeling question. And so, I have a couple more just to complete the guidance, just so we don’t have to think at all about building a model. But amortization and depreciation, could you talk us through the assumptions there?

[Ted Dunn:]

Okay. I would use the same amortization you saw in the fourth quarter here and projected across the whole year. So call it, what was it 1.2-ish, so call it 4.5, $4.8 million of amortization next year. Deprecation, we are running about a million a quarter now. I would think 4.3 to 4.5, is what we will see next year.

[Tim Quillin:]

Okay. Fair enough. And on amortization, going into ‘09, does that stair-step down again a little bit?

[Ted Dunn:]

Yeah. I would bake that into my number.

[Tim Quillin:]

Okay. Okay. Fair enough. And with regards to the guidance, at the beginning of ‘07, I think the initial guidance -- for EPS guidance for 2007 was 1.60 to 1.74, and it came in lower. I think part of that is PTO, but I think there are other issues there. When you looked at your guidance for ‘08, where there any lessons learned that you baked into there, we are looking at 1.56 to 1.64, I think, maybe one of the issues in ‘07 was there was some gross margin deterioration. Is there a potential for that to happen again and us to be surprised, or do you feel like this is solid number? Thanks.

[Ted Dunn:]

Well, the first line is, we believe in our guidance. I think what we said at the top of the call was we’ve seen two consecutive quarters with 7% organic growth. That 20% organic growth in the civilian agency, we know we’ve got some big awards coming soon. Wish we would have had them before the call, unfortunately, do not. So we feel pretty good about delivering 10% organic growth, and that’s why we guided that way. On profit, we have learned some tough lessons this year on what it takes to win some of these larger jobs and we just got to spend more to make it happen. So if we were a touch conservative, so be it, but I would not build my model if I was a sell-side analyst north of 7.4%.

[Tim Quillin:]

No, don’t plan on it. Thank you.

[Ted Dunn:]

Okay.

[Operator:]

Your next question comes from the line of Chris Donaghey with SunTrust Robinson. Please proceed.

[Chris Donaghey:]

Hi. Good morning, guys. Brad, I wonder if you could talk a little bit about the recompete outlook, and specifically any significant contracts that may have come in as a small business through an acquisition that may be either recompeted as a small business or upgraded to a full and open competition.

[Brad Antle:]

Well, let me just start with the general comment that we don’t have any major recompetes in 2008. So 2008 is a good for us. And we clearly have some recompetes coming out of 2009, but obviously we are focused on 2008 right now. And in terms of small business content, nothing in 2008 that’s going to pose an issue for us. Clearly, we have talked about small business content for the C4 contract is a small business contract and that will -- when the final option gets exercised at the end of 2009, the customer for new task orders won’t get small business credit, but there are going to be on a path to recompete that contract few years down the road from there anyway around 2012. So my expectation is that that will come out full and open. It was full and open before it went the way it did, but the way it went certainly was and advantage to SI and our ability to compete for it. But we are ready for that contract to go full and open when it does. And so, we certainly have contracts like that that are small business now, but we are strategizing to how to take that work full and open. I don’t see a significant near-term impact for us.

[Chris Donaghey:]

Okay. Great. Thanks.

[Operator:]

Your next question is a follow-up from the line of Brian Kinstlinger with Sidoti & Company. Please proceed.

[Brian Kinstlinger:]

Yes. Thank you. Companies that I talk to, such as yourself and your competitors, look at funded backlog a different way. Right now, your funded backlog towards the low end of guidance is about 31% of that. Are you continuing to get less funding by the month now or by the quarter? How should we look at that and how do you look at that funded backlog compared to your revenue estimates?

[Brad Antle:]

Well, let me just start by saying that our funded backlog, we’ve been pretty consistent to say, as long as we have 60 days -- more than 60 days of funded backlog, we are pretty comfortable. Some of our customers still go month to month, some go quarter to quarter, and very few go full year. But there is no issue in my mind with funded backlog sitting at $180 million. I mean that to me is very comfortable. Leslee, do you have a view of that?

[Leslee Belluchie:]

I am in agreement with you. We are in good shape.

[Brian Kinstlinger:]

Okay. Two more questions. First of all, did you mention what your pending bids are right now? You said you are waiting for a couple of large contracts either now or at the end of the quarter, what the pending size of your --

[Leslee Belluchie:]

We’ve got some pending bids coming out of some of our DoD and intel clients. We will get into specifics about what’s going to happen, but we’ve got some strategic and large bids that we are waiting to hear awards on this quarter.

[Brian Kinstlinger:]

Would you characterize ---

[Brad Antle:]

I think, unless you are referring -- I mean, I did mention numbers --

[Brian Kinstlinger:]

Yeah. I might have missed them. Do you have a --

[Brad Antle:]

Yeah. We had $344 million worth of bids submitted that we are waiting for awards, that was at the end of the year. We have got $400 million worth of bids planned for submission in the first quarter.

[Brian Kinstlinger:]

And that 344, as I am trying to dig it out here because I think I have it, compares to last quarter’s 360. So were all of that -- was all that 360 then awarded in the September quarter?

[Ted Dunn:]

Not every dollar. Some of it was awarded, but -- and some of it slipped to it the right.

[Brian Kinstlinger:]

Okay. All right. Thank you.

[Ted Dunn:]

You bet.

[Operator:]

Your next question is a follow-up from the line of Cai von Rumohr with Cowen & Company. Please proceed.

[Cai von Rumohr:]

Yes. Thanks a lot guys. So fourth quarter volume was 4 million below the third quarter, and yet I mean, by my numbers, you are up about 4, 5 million on C4 ISR, where did the decline come sequentially? And looking forward, if you have got 5 to 7 million of pass-throughs, shouldn’t C4 ISR be up in the first quarter from the fourth?

[Ted Dunn:]

I am sorry, Cai, could you repeat that please?

[Cai von Rumohr:]

Yeah. Well, the first part was you were down 4 million in the fourth quarter in revenues from the third and yet C4 ISR was up pretty nicely, so what were the factors that were down sequentially from the third in revenues?

[Brad Antle:]

While Ted is looking for that data, let me -- I think the last part of your question...

[Cai von Rumohr:]

Right. Well, the last part was on, I think, you had mentioned that you had some pass-throughs that slipped out of the quarter on the C4 ISR and yet C4 ISR, the number looks like it was up 4.5 million..

[Brad Antle:]

Yeah. It just wasn’t where we expected to be, Cai. And, I think you are alluding to will we see them in the first quarter and wouldn’t C4 be up over the fourth quarter? Well, all things being equal, that’s true. But we have more going on than just -- it’s not a steady-state expect for those pass-throughs. There are tasks that constantly start and stop, new tasks that come on, old tasks that drop off. So ---- and that’s assuming that the customer turns that particular pass-through on in the first quarter, which they may or may not do. So not everything is steady-state expect for that one piece of pass-through.

[Ted Dunn:]

Yes. And let me go back to the top of your question. We are down, we did 141 in the third, 137 in the fourth, so that’s we’re down 4, and C4I was down roughly 5 million. So most of that variance was in C4I, the rest is -- I don’t want to say flat, except in total it was flat. The organic growth was actually up phenomenally in the fourth quarter. So I would say, the DoD business was down and civilian was up.

[Cai von Rumohr:]

Okay. Okay. Great. Okay. Great. Thanks so much.

[Brad Antle:]

You bet. Thanks.

[Operator:]

And your last question is a follow-up from the line of Michael Lewis with BB&T Capital Markets. Please proceed.

[Michael Lewis:]

Ted, with regard to the DSO slip that we saw in the quarter from the payment office upgrade, have you recouped those conversions already?

[Ted Dunn:]

Not yet.

[Michael Lewis:]

When do you anticipate you will?

[Brad Antle:]

We ask that question every day.

[Ted Dunn:]

Are you offering to be my collection agent?

[Michael Lewis:]

For 10%.

[Brad Antle:]

It’s a very valuable client for us and it isn’t the payment office as much as it is the financial system of the customer that’s driving this. So we will -- I don’t if it’s any solace, but everybody that has -- doing work with this customer has the exact same problem, and they are a valued customer. So we are hanging on with them. They are committed, they are a bit embarrassed, and we appreciate that. So I am thinking it’s going to be cleared up this quarter. So I am hopeful that you will see DSOs return at the end of this quarter to our more normal 75 and below.

[Michael Lewis:]

Okay. And then just one more question, what were the total RFP dollars submitted in the fourth quarter? What did you actually submit?

[Ted Dunn:]

Actual amounts?

[Michael Lewis:]

Yes.

[Ted Dunn:]

In the fourth...

[Michael Lewis:]

Yes.

[Ted Dunn:]

Let me dig it up for you. We submitted 344. That makes sense, that’s why I said how much it was out. So it looks like it was pretty well cleared out, expect for what we submitted.

[Michael Lewis:]

Okay, so 344.

[Ted Dunn:]

Right.

[Michael Lewis:]

Thank you, sir.

[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 2007 fourth quarter earnings conference call.

[Operator:]

Thank you for your participation in today’s conference. Ladies and gentlemen, you may now disconnect, enjoy your day.