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Globecomm Systems Inc. (NASDAQ:GCOM)

F1Q09 (Qtr End 09/30/08) Earnings Call Transcript

November 06, 2008, 10:00 am ET

Executives

Matthew Byron - Corporate VP, IR

David Hershberg - Chairman, President and CEO

Andrew Melfi - VP and CFO

Analysts

Irit Jakoby - Susquehanna

Rich Valera - Needham & Company

Jim McIlree - Collins Stewart

Mark Jordan - Noble Financial

Dick Ryan - Dougherty & Company

Neal - Stephens, Inc.

David Cohen - Athena Capital

Operator

Welcome to today's Globecomm Systems Inc. First Quarter 2009 Earnings Conference Call. Today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Mr. Matthew Byron, Corporate Vice President. Please go ahead, Mr. Byron.

Matthew Byron

Thanks [Tasha]. Good morning, everyone, and welcome to the Globecomm Systems fiscal 2009 first quarter earnings conference call. Joining me today from the company are Chairman, CEO and President, David Hershberg, and our Chief Financial Officer, Andrew Melfi.

Last night after the closing bell, Globecomm issued its fiscal 2009 first quarter earnings press release. In the event you have not seen or received a copy of the release, it is posted on the Globecomm Systems website at www.GlobecommSystems.com, or you can contact me directly at 631-457-1301 and I will get a copy to you.

Comments made during this conference call may contain projections or other forward-looking statements regarding future events or the future financial performance of Globecomm systems. These statements are only projections and reflect the current beliefs and expectations of the company.

Actual events or results may differ materially. With that said, it is routine for internal projections and expectations to change as quarters progress.

All forward-looking statements are based on information available to the company on the date hereof and the company assumes no obligation to update such statements.

Please refer to the documents the company files from time to time with the SEC, specifically the company's annual report on Form 10-K, its quarterly reports on Form 10-Q, its current reports on Form 8-K and the Safe Harbor language contained in the company's press releases.

These documents contain and identify important factors that could cause the company's actual results to differ materially from those contained in its projections or forward-looking statements which the company urges all investors to consider.

Globecomm undertakes no obligation to publicly release the revisions to such forward-looking statements that may be made to reflect the events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Note that this call is being recorded on Thursday, November 6, 2008, contains time sensitive information, and will be available as a webcast replay for at least nine months on the Investor Relations section of the Globecomm Systems website and as a phone replay at 888-203-1112 for domestic callers, or 719-457-0820 for international callers with an access code of 182-3245.

At this point, I'd like to turn the call over to our CEO, David Hershberg. David?

David Hershberg

Thank you, Matt. Good morning, everyone, and welcome to our fiscal 2009 first quarter conference call. As you all know, we're facing some challenging times out there. Last night after the closing bell, Globecomm issued its fiscal 2009 first quarter financial earnings press release.

As we discussed in the release, the company made a difficult decision to withdraw our previously issued specific guidance. This was mainly due to first quarter infrastructure bookings in the government marketplace being lighter than we anticipated and some delays in new bookings that are already in our pipeline.

Yesterday was a good example of the situation we are facing in the company's infrastructure segment. We announced a $27 million contract, which I think is our largest one we've booked to date, a funded inventory, a funded project that we have been waiting over six months to sign.

While the company was ultimately awarded the contract, the revenue is not due to be recognized until fiscal 2010 which is after June 30, 2009.

The company's concerned that while we have not experienced order cancellations or lost any major projects in the current booking pipeline, we're having difficulty gauging the timing or ultimate outcome as the economic backdrop continues to deteriorate. With that said, the company's current backlog and services have provided the company with a base of business to remain profitable this year. I do want to point out that our service business is ahead of plan, including performance of our new IT service company, Cachendo.

We are well suited to continue to successfully grow the company with products in broadcast, cellular, IT and network management services, tactical and strategic earth terminals, networks and so forth. Not only products, but a diverse market of domestic and foreign enterprises broadcast carriers and governments.

We are part of a number of basic ordering agreements, plus we have over $180 million of unfunded backlog as a result of these agreements. At this time our funded backlog is higher than last year. However, the timing of shipments and the product mix consisting of more lower margin projects and less higher-margin product business will reduce our earnings outlook.

We will reinstate annual financial guidance when we have a better picture of our bookings profile going forward. The company is actively taking steps to address this on a fixed-cost base, supporting the related business level. The company finished the first quarter with $56 million in cash and zero debt. Throughout the quarter, Globecomm continued to invest in the sales force and technology platforms.

While we are disappointed that the economic downturn has forced us to withdraw guidance, we view the current economic conditions as optimistic on the acquisition front.

At this point, I'd like to turn the call over to Andy Melfi, our CFO.

Andrew Melfi

Thank you, David. Good morning, everyone. Revenues for the company's fiscal 2009 first quarter were $42.4 million, compared to $42.3 million in the same period last year. Revenues from infrastructure solutions decreased by 12% to $23.5 million, compared to $26.8 million in the same period last year. Revenues from services increased 21% to a record $18.8 million compared to $15 million in the same period last year.

The increase in service revenues was driven by an increase in managed network service revenue with content distribution service offering and lifecycle support revenues. This was offset by a decrease in infrastructure solution revenues from the government marketplace.

Net income for the company's fiscal 2009 first quarter, decreased to $800,000 or $0.04 per diluted share compared to net income of $3 million or $0.16 per diluted share in the first quarter of fiscal 2008. Adjusted EBITDA for the first quarter of 2009 decreased to $3 million as compared to $4.6 million in the first quarter of 2008.

The decrease in net income and EBITDA was primarily driven by lower infrastructure solutions revenues to the government marketplace and increased selling and marketing expenses. The company continues to maintain a strong balance sheet with cash and cash equivalents of approximately $56 million and no debt.

As Dave mentioned earlier, the company's current backlog and service base provides the company with a base of business to remain profitable this fiscal year. We will institute annual financial guidance when we are able to provide more definitive guidance. In the meantime, the company is taking steps to address the related fixed cost base supporting the business levels experienced in the first quarter.

At this point, I'd like to hand the call back to Dave.

David Hershberg

Okay, Andy. Thank you very much. We'd be happy to answer any of your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll take our first question from Irit Jakoby from Susquehanna.

Irit Jakoby - Susquehanna

Hi. Thank you and good morning. So with respect to infrastructure revenues which were down over 10% year-over-year, and that was in the first quarter where it seemed like maybe some of the trends weren't in full force yet, do you think it's reasonable to expect that a decline in subsequent quarters of this year will be more significant?

David Hershberg

It's very hard to tell because we do have some significant backlog in the infrastructure business. The problem with it is it's a different type of margin profile because it's mainly on integration types of contracts. I don't think the revenue is going to be hurt that much; what will be hurt is more the bottom line.

The biggest problem we've got right now is that we were expecting certain projects, the certain contracts that had a product mix of more products in them that have higher margins that we're not seeing yet and we are hoping that we're going to see some of them going forward. That's really what the issues are. These are what we call our pre-engineered systems. And I think, though, as far as our backlog right now in the infrastructure business, we should be able to hold our own.

Irit Jakoby - Susquehanna

Okay, that's helpful. And another question on the operating expenses, if you could maybe give us an idea of where you have room to make any adjustments given the lower level of business that we're seeing?

David Hershberg

We'll let Andy address that.

Andrew Melfi

I guess basically when we start to look at Q2, we'll probably see a little bit of an uptick in the expenses in the SG&A and based on what we're doing, but going forward I expect to see a 10% reduction over the next two quarters -- the third and fourth quarter.

David Hershberg

We want to be careful in the sales and marketing area, not to start cutting in that area, because obviously that's an area we've got to keep pushing to get our bookings up.

Irit Jakoby - Susquehanna

Okay. And that's it for me. Thank you.

Andrew Melfi

Okay.

Operator

Thank you. We’ll take our next Question from Rich Valera from Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thank you. Just to follow up a little bit on that expense question. So, in terms of the uptick, we should expect sequentially in-expenses, are we talking sort of a few percent and then by the fourth quarter going down 10% from that new higher baseline in Q2, is that what you were thinking?

David Hershberg

Yes, basically from the original baseline in Q1.

Rich Valera - Needham & Company

Right.

David Hershberg

Going down approximately 8% to 10%.

Rich Valera - Needham & Company

All from the baseline in Q1?

David Hershberg

Right.

Rich Valera - Needham & Company

Okay. And they wouldn't be fully phased in until the fourth quarter probably?

David Hershberg

Third and fourth quarter is gradually phased in.

Rich Valera - Needham & Company

Okay.

David Hershberg

But there will be some uptick in Q2.

Rich Valera - Needham & Company

Okay. That's helpful. And then I think you sort of addressed this in your comments about the forward outlook in terms of margins, but obviously, you had pretty well below where your historical margins were in the infrastructure solutions business this quarter. Was that predominantly mix related, less pre-engineered systems, more integration?

David Hershberg

That had a lot to do with it, plus we did make investments on some major projects that we're doing in the cellular and the broadcast area which, as you know, when we do R&D in those projects, so we develop some new offerings. We usually put them in cost of sales, so that hurt that issue too. But the biggest issue is really the pre-engineered systems do much better than our integration business and the product mix was more integration than it was a product.

Rich Valera - Needham & Company

In terms of looking forward, it doesn't sound like you're expecting the mix of pre-engineered to move up sharply in the near term, so should we think of gross margins in that segment, sort of at similar levels at least into the second quarter?

David Hershberg

Well. I think you hit the nail on the head of where our uncertainty is. We've got bids out. And to give you an example, we just heard three days ago on a major project that there's been at least a 60-day delay. That, that the project was canceled but they said they're coming back out on it and with about a 60-day delay, but we're not sure about that. That was in our Auto-Explorer mode for a large quantity of those. Its -- We just don't have the visibility on those products and when they're going to actually be ordered. We do have a lot of bids out but we don't know when they're going to start ordering them.

Rich Valera - Needham & Company

Great. And I guess I'll try to follow up as well on the revenue trajectory question. Any sense from the 1Q baseline of where you'll be sequentially revenue-wise? I mean, I assume that the services business will be fairly steady, but on the infrastructure side, is that potentially heading down from 1Q levels or do you think it's reasonably stable at these lower levels?

Andrew Melfi

Our numbers now are showing, I think, that we're stable or actually increasing a little bit. But again, it's going to depend on some booking turn also.

David Hershberg

Yes. I think quarter-to-quarter, we're looking at some growth -- we're looking at growth kind of -- to remain kind of stable.

Rich Valera - Needham & Company

Okay. And obviously then historically, you've had a pretty strong -- at least a strong fourth quarter, so right now for that to happen presumably you're going to need to book some stuff which is part of the issue you're having as far as predictability of these bookings for the second half.

Andrew Melfi

That’s right. We usually book and turn about 50% more than we've backlogged. This has been historically for many years. We do 50% to 60% more revenue than we go with the backlog we have coming in. But looking at our projections and talking to our customers, and there's a lot of uncertainty about whether the budgets are going to be there to be able to do that.

Rich Valera - Needham & Company

Right. And finally if I could, could you provide a reconciliation between your operating income, which was about $800,000, and your $3 million of adjusted EBITDA, what are the add backs there?

David Hershberg

I'll let Andy answer that question.

Andrew Melfi

Yes. I guess, basically, we're talking about depreciation and amortization of approximately $1.4 million, stock compensation expense which was approximately $900,000. And there's a one-time -- about $700,000 one-time accelerated investing based on the recent death of our former President at the company. So that then we don't expect that to continue at those levels and the taxes and the interest income kind of net out to zero.

Rich Valera - Needham & Company

Okay. That's helpful. Finally, your tax rate, I think you had thought that you were going to be at a -- you reporting a GAAP tax rate -- sort of a full tax rate in the mid-to-high 30s and it looks like you didn't see at this quarter.

Andrew Melfi

Well. one of the issues was this -- that during the death of our President, that was sort of offset by an insurance policy and that insurance policy affected the taxable income base. But going forward I expect to see that disappear and the tax rate go direct back to 34%. So that was a book-to-tax difference on Q1.

Rich Valera - Needham & Company

Okay, that's helpful. Okay, thanks very much.

Operator

Thank you. We’ll take our next question from Jim [McIlree] from Collin Stewart. Please go ahead.

Jim McIlree - Collins Stewart

Thanks. Good morning. I just want to understand, Dave, what's going on with the business. It sounds like the top line in the infrastructure business is generally speaking okay, but it's the mix that's caused you to pull the guidance. And specifically it's a lower visibility on the pre-engineered systems, is that all correct?

David Hershberg

Yes. That's pretty much -- that s pretty much the story.

Jim McIlree - Collins Stewart

Okay. And you keep talking about the difficult economic times and it makes it sound like you're attributing the economy to the decline in pre-engineered systems. I’m just -- I'm having trouble reconciling that.

David Hershberg

Well, I'm giving you an example. I talked to one -- another guy, who's a CEO in this business. He told me that he was expecting a bunch of orders and his customer told him, well, we're using that money for ammunition and diesel fuel and we're not buying anything more right now. Even though, those orders are there in an IDIQ mode, they just don't seem to be spending the money for the kind of quantities of equipment that we're expecting to be able to book.

I think there's -- I don't know what you're finding in other companies, but it seems that a number of our customers in the government area are holding back as far as that year-end money than we expected in this September quarter. Last year we did very well in the September quarter, this year we did not do well.

Jim McIlree - Collins Stewart

All right. Okay.

David Hershberg

And I don't know about economic times and I know from a standpoint of some of the enterprise business that we're going after, there is an issue there. We had one case, for instance, where we have about $5 million worth of equipment to ship and our customer said they don't have the budget to pay the freight forward to pick it up, so I can't take a sale on it. There are a lot of things that show up that we've never seen before kind of thing.

Jim McIlree - Collins Stewart

All right. Okay. How much if -- in fiscal '08, just a ballpark, what was the percent of revenues from pre-engineered systems?

David Hershberg

It was by far the highest we've ever had before. And -- just a minute, we'll try to find out that number. I know we’ve booked something on the order of $20 million to $25 million just in that quarter of those pre-engineered kind of systems, the first quarter of last year, so --. What would you guess, 20%, something like that?

Andrew Melfi

Yes, I mean that the mix, just using the first quarter as an example -- more than -- approximately 50% of the revenues were from pre-engineered systems and in this Q1, it was more like 15%, to give you an idea.

Jim McIlree - Collins Stewart

Okay. And you're talking about total revenues or of the infrastructure revenues?

Andrew Melfi

On the infrastructure revenues.

Jim McIlree - Collins Stewart

Okay.

Andrew Melfi

So you can see that --

Jim McIlree - Collins Stewart

Right.

Andrew Melfi

And then the margin difference is tremendous.

Jim McIlree - Collins Stewart

Right, of course. Okay, great. Thank you very much.

Andrew Melfi

Okay.

Operator

Thank you. We’ll take our next question from Mark Jordan from Noble Financial. Please go ahead.

Mark Jordan - Noble Financial

Good morning, gentlemen. Could we talk a little bit about the services revenue, specifically you saw, obviously, very strong growth sequentially in that area? Where was it derived? Was it down in Laurel or up in your corporate headquarters? And is this base sustainable throughout of that, so that it will grow sequentially from here and what kind of growth rate might we see?

Andrew Melfi

Okay. Well, there was one $3 million uptick on infrastructure. One of the reasons, if you notice in the service revenue, we didn't make the margins, that we normally make there. We had a $3 million product that we shipped under a service contract that we had that we shipped with very little margin, but we get additional service revenue out of it.

And the model looks okay, but it's mainly to get revenue going forward. And just to give you an idea how we're going to do in the service area going forward, it looks like we're going to be ahead of last year.

David Hershberg

And I would say that this is -- we should be ahead of last year's by approximately 10% -- on an annual basis -- 10% increase, 12% increase over last year's revenues.

Mark Jordan - Noble Financial

Okay, thank you. With regards to Cachendo, could you gauge how much you're investing there? And do you still have the potential or inclination to potentially make an acquisition in that area that could allow you to move that operation to a profitable status versus an investment?

David Hershberg

In our plan we have one acquisition for Cachendo, each year going forward. And we are actively looking at it. We're very pleased with the performance there. They've basically -- they're ahead of plan, they're running at a good run rate. They continue to book business. Right now, we are in the mode of trying to hire more people down there to fulfill those requirements and I think it's a very good story and I think we should continue to grow it.

Our idea is, obviously, to grow the service revenue. We stated that for a long time. And I think just looking at where we are in our financial condition now and our P&L going forward, you can see that the service business is really our bright spot right now and we'd certainly like to have a lot more of that. And so we have good plans for increasing Cachendo and here -- and I think from the standpoint of between Maryland and up here, I think, we both have a little bit of growth in both of those, is that right, Andy?

Andrew Melfi

Yes.

David Hershberg

Although, it's a little misleading because in Maryland we took about $2.5 million out of that operation to put it into Cachendo because there were people doing IT services. But both operations from a standpoint of where they were before and where they are now, both are showing some growth. And we've got some very nice potential business in both of them coming. With that, we're hopeful we're going to start -- we are going to book.

Mark Jordan - Noble Financial

Right. Also I have a question relative to your pre-engineered products. I noticed that a company called Telecommunication Systems has had a very strong booking period relative to their SwiftLink product, which, at least on the surface, looks relatively competitive to your pre-engineered product line. Is that -- Has that company potentially put pressure on demand that out of the government for you?

David Hershberg

They were one of the people that were in the WWSS. They won a couple of those projects. They won them at levels that we could not compete with. We were higher priced. We didn't win those jobs. I'm not sure what their business plan is. I don't think they're profitable in those areas, they may be now, I don't know.

But yes, you're right. They were bidding against projects that we were against -- but those orders that they've gotten recently are a result of these buying agreements that they won a while ago. I don't think there were any recent -- I don't remember losing any projects recently to them. I think these are more orders against these basic ordering agreements that they've been getting.

Mark Jordan - Noble Financial

Thank you very much.

David Hershberg

Okay.

Operator

Thank you. And we’ll take our next question from Dick Ryan from Dougherty & Company.

Dick Ryan - Dougherty & Company

Good morning. Hi Dave, in last quarter you indicated some pretty significant investment in Cachendo. Has that occurred or is there some flexibility and discretion where you can kind of pull back in that area or--?

David Hershberg

Well, that's an area we certainly don't want to pull back. We did invest money -- I'm sorry, I guess I didn't answer that last question. We did invest money in there in people and in recruiting help, in sales and marketing, in management and just to set the whole business up. It cost us $450,000 to $500,000 just as an investment in it and we felt very comfortable making that investment.

We don't expect to -- we're not in a position where we can cut anything back there. As a matter of fact, we do have opportunities to feel that we are actively trying to recruit people to fill those areas. So we do not expect to cut any expenses back in Cachendo.

Dick Ryan - Dougherty & Company

Okay. And I didn't catch, was there any revenue in September from that group?

David Hershberg

Yes, there was.

Andrew Melfi

Like Dave said, some of the business transferred from the GlobalSat business over, but approximately their revenues for professional services was about $1.2 million, $1.3 million for the quarter.

David Hershberg

And it's growing.

Dick Ryan - Dougherty & Company

And that included the shift from the GlobalSat?

David Hershberg

Yes, it's a combination of both. We expect at year end we should do about double of that business what we were doing previously or a little more.

Dick Ryan - Dougherty & Company

Okay. You mentioned an unfunded backlog of $180 million. Can you give a little perspective on what the funded backlog is?

David Hershberg

Yes, our funded backlog is at a record right now. Our funded backlog is actually higher than it was this time last year. And the problem with it is a lot of that funded backlog is long-term in the service area and in this $27 million project we just booked, which we're not going to get any sales this year. I think --.

Dick Ryan - Dougherty & Company

Has that gone into backlog?

David Hershberg

Yes, sure it's funded. We only put in backlog what's funded. And the unfunded represents contracts we've won that we've gotten some incremental funding on but not the full funding on.

Dick Ryan - Dougherty & Company

Okay. And when you look at the pre-engineered solutions, are there more funding pots out there? Is it primarily dependent on defense or is it a variety of funding pots that the pre-engineered solutions can be sold against?

David Hershberg

Well, we are in the process of developing X band and Ka band terminals. We're pretty much done with the X band one, we're not done with the Ka band yet. We expect that there will be a lot of funding in those areas because the new government satellite system is going to be in the Ka and X band area and they've got to replace, I think, a lot of equipment that's out there in the Ku band and C band commercial area.

So we are hopeful to get some funding. One contract we were waiting for -- that's one of the contracts we're waiting for, is in those frequency bands, we're waiting to get that. Also there's some potential with some foreign governments also for a similar kinds of products. Again, we're waiting for funding on these projects.

Dick Ryan - Dougherty & Company

Okay. Thank you.

David Hershberg

Okay.

Operator

Thank you. And we will take our next question from Steve Ferranti from Stephens, Inc. Please go ahead.

Neal - Stephens, Inc.

Hi guys. This is [Neal] for Steve. The composition of the services business in the backlog -- are there any large customer concentrations there that we should be thinking about?

David Hershberg

The largest one is our SHOWTIME contract which is close to $5 million a year now in the service. That's our largest one and we expect that will go on for a long time. Other ones have to do with their FAA and the National Weather Service and contracts like that that have -- they're five-year contracts. So they'll obviously go on at least another few years.

I don't know if there are any really large ones -- SHOWTIME is by far our largest one that we've got. And we're actively pursuing similar types of contracts. We've won a couple of smaller ones that are the same kind of contract where we're hosting video services out of our facility here.

But they're at best, spread around a lot. We do have contracts down in Maryland which are reasonably good-sized five-year contracts with different government agencies that -- we have contracts which we don't put in backlog because we're not sure how to define exactly how much we're going to get each month.

So, we don't put it in backlog until we actually take a sale on it and there's are a number of those contracts down in Maryland with different government agencies that come under that category. They continually get renewed but we only usually put in what's in that particular month in our backlog. Those are contracts that they've had for a number of years and they continue now.

Neal - Stephens, Inc.

Okay. And I guess just two follow ups on that. What percentage of the backlog is services related? And then also, if I recall correctly, I think the September quarter is usually a period of pretty heavy contract renewals.

David Hershberg

That’s correct.

Neal - Stephens, Inc.

Can you talk about where we stand in the contract renewal process?

David Hershberg

Well, I can tell you that the September quarter last year was a very good quarter for us, we booked about half our government business in that quarter, this year we did not. And the main reason we're having these issues right now is that very reason.

In the service area they did okay. They booked -- they had pretty good first-quarter bookings. Let's see, on a backlog level they're ahead of last year at this point. And both of them, both GSM -- both are -- all three of those service companies are ahead on their backlog right now. So their bookings have been good. Our major disappointment in bookings this first quarter has been in the government area and to a large extent for pre-engineered products. I hope I answered your question?

Neal - Stephens, Inc.

You did. You gave me a lot, but I guess I was thinking too, in terms of renewals going forward or contracts that you might have had coming up for renewal, was there a buildup in contracts that you expected to have renewal. And if there was, how did that process go in the September quarter?

David Hershberg

Our major renewals are in November, I think.

Neal - Stephens, Inc.

Okay.

David Hershberg

And we expect to have every one of those renewed and in one case we expect it to be increased.

Neal - Stephens, Inc.

Okay. Do you know how big that renewal will be or those renewals will be?

David Hershberg

Matt, do you know what those numbers are?.

Matthew Byron

$10 million to $15 million.

Neal - Stephens, Inc.

Okay. Thanks, guys.

Operator

(Operator Instructions) we will take our next question from David Cohen from Athena Capital. Please go ahead.

David Cohen - Athena Capital

Good morning, guys.

David Hershberg

Good morning.

David Cohen - Athena Capital

Couple of questions and then one brief comment. You've obviously talked some about the challenges presented by the financial crisis. Is there an opportunity to take advantage of current circumstances to build the services business further or is it a situation where more companies may be looking to outsource things?

David Hershberg

We think there is. And not only companies but we think the government. And I think the government's budgets are such that maybe they would look more towards a smaller company like guys that has smaller loadings than some of the big guys. We're hoping -- we've heard a little bit about that.

I think there will be more outsourcing, but I think people are going to outsource and people are going to spend money when they absolutely have to and it's just like any other company -- people are trying to conserve their cash and when they need to do it they'll do it. And we are hoping that we'll see some of that -- some more outsourcing.

The point is that we're running at a relatively low rate on those and we think we have a very -- we have a very good run rate now. We have very good opportunities if we can get the right people to put them up. Andy, you've been looking at that, what do you think?

Andrew Melfi

Well, I think when you look at the overall business, the ramping up of service is a lot slower and we are starting to ramp up. So that takes time to continue to build that business organically and whereas on the infrastructure side you get a big pop for a $5 million contract, you get the sale right away. But we are making some improvements in the service area as far as growing that business incrementally, but it's not going to make – it’s not making those huge jumps in revenue like an infrastructure project does. But we are making good progress on the service side.

David Hershberg

The run rate is increasing every month right now.

David Cohen - Athena Capital

Okay. Second question, it’s with regards to the transition -- political transition. Can you sort of talk through what kind of impact you think a change in administration is likely to have on the booking pattern over the next year on the government side?

David Hershberg

We've always thought in the government area that we were sort of immune to any kind of changes. And I really believe that was true if the government had the budget because most of our business is really with government agencies or parts of the government that are not military. Of our government business, probably, 20% was in the military side, the rest of it was really different government agencies.

Like for instance, down in Maryland I think that's a lot of government, mostly government. I don't think any of it is really defense-related. We've got some service business here that's defense-related, but in the hardware side we've mostly been shipping to people like USAIP, Peace Corps, we've got a number of UNICEF type of projects, UNICEF World Food Program, State Department, people like that.

And I think that's where our business lies. And we believe that the requirements -- and then there are some intel agencies and I think they're still going to be -- and that business is growing to some extent, although it's – unfortunately, yes we were expecting some orders in that area, we still are, but we didn't get them in the first quarter.

David Cohen - Athena Capital

Okay. And then the comment I wanted to make is, I know you're sort of looking around at the acquisition market and I understand why you would like to do that. I would urge you to proceed with more then all due caution. The same things -- the same factors that make you feel the need to suspend your guidance, obviously, will also have a big impact going forward on any potential acquisitions and you probably don't understand their businesses as well as you understand your own. And particularly given where the stock is trading, ex the cash on the balance sheet, I think you ought to think about whether buying back your own stock might constitute a much better investment right now.

David Hershberg

Well, that's something we've certainly looked at. And as you probably know, we've been looking at acquisitions for a long time and we have not spent that money that we've got because we're looking at exactly what you're talking about. What would -- when we see an acquisition, we're looking at something that has to be very synergistic to help us grow, get us into some new markets and good financial investments.

And we are not very quick to run and do it, but we are looking at some things that we think are attractive right now that might be a good time to do it. You're right, this is something that we've kicked around, whether it makes more sense to buy our own stock back or to go out and do an acquisition, and it's something we certainly are considering. But you know we've been looking a long time and we haven't been jumping at anything. We've been very, very careful of what we've been looking at and we've been very careful to understand that whatever we do has to have a big upside -- have a reasonably good upside for us.

David Cohen - Athena Capital

All right. That's all I've got. Thanks a lot.

David Hershberg

Okay.

Operator

(Operator Instructions) We’ll go back to Rich Valera with Needham & Company. Please go ahead.

Rich Valera - Needham & Company

Thank you. As far as the stock comp -- quarterly stock comp going forward, what's a good number to use there?

Andrew Melfi

I'd say, $200,000 a quarter.

Rich Valera - Needham & Company

And the D&A number of 1.4 is a pretty good one as well?

Andrew Melfi

That's correct.

Rich Valera - Needham & Company

Okay, that's helpful. Thank you.

Operator

And it appears that we have no further questions at this time.

David Hershberg

Okay. Well, thank you very much for participating in the call and hope to have some better news for you going forward. Thank you.

Operator

Thank you. This concludes today's teleconference. You may now disconnect your lines and have a wonderful day.

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