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Executives

Matthew Byron – Corporate Vice President, Investor Relations

David Hershberg – Chairman, President and Chief Executive Officer

Andrew Melfi – Vice President and Chief Financial Officer

Analysts

Jim McIlree – Collins Stewart

Stephen Ferranti – Stephens Inc.

Richard Ryan – Dougherty & Company

Mark Jordan – Noble Financial

Rich Valera – Needham & Company

Globecomm Systems Inc. (GCOM) F2Q09 Earnings Call February 9, 2009 3:00 PM ET

Operator

Welcome to today’s Globecomm Systems fiscal 2009 second quarter 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, sir.

Matthew Byron

Welcome to the Globecomm Systems fiscal 2009 second quarter earnings conference call. Joining me today from the company are Chairman, CEO and President, David Hershberg, and our Chief Financial Officer, Andrew Melfi.

Due to logistical travel issues with the company executives, we were forced to adjust the timing of this call and the earnings release as compared to historical timeframes. Earlier today Globecomm issued its fiscal 2009 second quarter earnings press release. In the event you have not received or seen 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 performances 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 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 of 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.

Please note this call is being recorded on Monday, February 9, 2009, 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 6410227.

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

David Hershberg

Welcome to our fiscal 2009 second quarter conference call. Earlier today we issued our fiscal 2009 second quarter financial earnings press release. While the impact of the current economic downturn had disrupted our ability to predict the timing of infrastructure orders, we are extremely encouraged by the stability and predictability of our service segment resulting in continued profitability and continued anticipated second half earnings to be greater than our first half.

In the second quarter, we announced multiple infrastructure contracts, which we have been waiting a while to book, resulting in a near record bookings quarter and record backlog. Our backlog does consist of some contracts over multiple years and longer term and does not have some of the product business that we have been waiting for. However, we do expect that we will be in position to book some of that business shortly.

Unfortunately, many of the contracts will not result in revenues until our fiscal 2010 start in July. With that said, we are witnessing uncertainty and push out of certain infrastructure contracts in the government marketplace and also in the enterprise marketplace. We are not seeing any cancellations at this point, and we have taken steps to reduce cost in areas that we can control while continuing to invest in sales and marketing.

We believe that the investment in these areas will ultimately make the company more successful when the environment stabilizes. One example of a return on our investment in sales and marketing was the early announcement of the receipt of an initial order and launch of our Broadband Maritime Solution and partnership with Mach6.

We see the maritime market as a natural long-term fit for Globecomm. Emerging platforms and ocean satellite coverage makes broadband connectivity to the over 50,000 active sites a reality. We see the market from narrowband to broadband happening over time similar to adoption rates seen in the U.S. over the last ten years.

Globecomm, with our partner Mach6, is well positioned to capitalize on this trend and has been successfully demonstrating the sea trials of our platform. The booking problem that has most significantly affected our current bottom line has been the U.S. government holding off of awarding certain contract releases for products that we supply.

Last fiscal year approximately 50% of our government business was booked in Q1, which provided revenue in fiscal 2008. This year we had significantly less than last year. These products provide higher margin than our system integration infrastructure products. We can also turn these products in a shorter length of time than our system projects. We are looking forward to booking some of this business in the near future.

Our service business has been ahead of plan and at record levels and our new subsidiary Crescendo is now running at about a $5 million run rate. The recent environment has been very good for booking opportunities in both infrastructure and services so we are very encouraged for a turnaround next year.

We are seeing multiple opportunities on the acquisition front as P/E ratios and EBITDA multiple contractions on the pricing front is becoming more in line with the realities of the marketplace. This posed well for Globecomm and the company finished the quarter with $56 million in cash, no debt and a non-cap $50 million line of credit. We are getting closer to closing one of these acquisitions and hope to announce something in the next quarter.

As you know, the company is extremely disciplined when it comes to acquisition review while we are well positioned there are still many factors involved to close a deal. In the backdrop of a very difficult environment, we are very well positioned to remain profitable and we are very excited about our future.

At this point, I’d like to hand the call over to our CFO, Andy Melfi. Andy?

Andrew Melfi

Revenues for the company’s fiscal 2009 second quarter decreased 26.6% to $40 million compared to $54.4 million in the same period last year. Revenues from infrastructure solutions decreased by 45.2% to $21.3 million compared to $38.9 million in the same period last year. Revenues from services increased 20.1% to $18.6 million as compared to $15.5 million in the same period last year.

The increase at service revenues was driven by an increase in managed network service revenue within the internet and data solution offering and life cycle support revenues. This was offset by a decrease in infrastructure solution revenues. Net income for the company’s fiscal 2009 second quarter decreased $900,000 or $0.05 per diluted share compared to net income of $3.7 million or $0.18 per diluted share in the second quarter of fiscal 2008 on a GAAP basis.

Adjusted EBITDA for the second quarter of 2009 decreased to $3.1 million as compared to $5.2 million in the second quarter of 2008. The decrease in net income and adjusted EBITDA was primarily driven by low infrastructure solution revenues and increased selling and marketing expenses caused by the global economic slowdown resulting in government and commercial customers and prospects delaying projects.

Looking forward to the year, revenues for the company’s fiscal 2009 six months ended December 31, 2008 decreased 14.9% to $82.3 million compared to $96.8 million in the same period last year. Revenues from infrastructure solutions decreased by 31.7% to $44.9 million compared to $65.7 million in the same period last year. Revenues from services increased 20.6% to $37.5 million as compared to $31.1 million in the same period last year. The factors behind these trends were the same as reflected in the second quarter results.

Net income for the company’s first six months of fiscal 2009 decreased $1.8 million or $0.09 per diluted share compared to net income of $6.7 or $0.34 per diluted share in the same period last year on a GAAP basis. Adjusted EBITDA for the company’s first six months of fiscal 2009 decreased by $6.1 million as compared to $9.8 million in the same past year. The decrease in net income and adjusted EBITDA was primarily driven by lower infrastructure solution revenues and increased selling and marketing expenses.

As Dave mentioned earlier, we continue to maintain a strong balance sheet with cash and cash equivalents of $56 million and no debt. At this point, I’d like to hand the call back to Dave.

David Hershberg

At this time I would be happy to answer any questions you might have.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from Mark Jordan - Noble Financial.

Mark Jordan – Noble Financial

Could we talk a little bit about the infrastructure solution? In the second quarter your gross margin jumped up about 650 basis points from the first quarter with a modest decline in revenues. What caused this significant improvement? And I also thought that on last quarter’s conference call you said that you were investing heavily in the first half of the year on technology development and that the infrastructure gross margins were to be depressed.

David Hershberg

Well, as usual, it depends on what our mix of business was and we happen to have some, as I think I’ve told you in the past, our product business provides higher margins and we had a good mix of product business in there at the time. Some of these projects that we haven’t shown in the infrastructure do have some lower margins and then based on doing a lot of R&D as part of the projects, but this was a product mix issue. You won’t see that next quarter.

Mark Jordan – Noble Financial

You had stated that you expect some good engineer product revenue out of the government but had been disappointed in the first six months or so of the year in terms of orders. Could you characterize one, the application that you expected to receive these orders, and also characterize why you see six-month plus type of hiatus in orders during a timeframe, which has generally been pretty decent for the defense electronics industry?

David Hershberg

It’s hard for me to explain it as why there has been a hiatus. One or two reasons could be the following those products in some cases, in most cases, are transportable or field deployable satellite terminals. Those are standard products we have from .77 meters to 1.5 meters and to date the government has been buying KU-band product.

Recently they launched the first WGS satellite of a constellation and that is the government’s first wideband satellite in many years, 25 years, and that system is an X-band and KA-band satellite. We have received contracts now to upgrade those terminals to X and KA-bands. However, we have not received any significant quantities, even though we are part of some IDIQ contracts that do have those products in them.

It isn’t the fact that we haven’t received them. From what I could tell, a lot of them just have not been let. And we are hopeful that in the near future that we will start seeing some of that business coming our way.

Also with another customer we have, we have $117 million buying contract, which I think to date they’ve bought about $8 million again so far. So we have the contracts out there, but we’re waiting to really get some significant quantity with the higher margins so we can show a decent bottom line.

Mark Jordan – Noble Financial

Relative to Crescendo, you said you were at a $5 million run rate. Could you talk about the backlog you have there and what kind of sales pipeline you have, what kind of run rates would you expect to be end of the year, and where your breakeven point is?

David Hershberg

For that, I’m going to turn it over to Matt because one of his side jobs is worrying about Crescendo, so he’ll answer that question.

Matthew Byron

As far as backlog goes, we don’t separately breakout the Crescendo backlog. Laterals, contracts, jobs that go, it depends on the timeline to the customer, so they may call us up a week at a time, two weeks at a time. It’s more of a body shop type of business so it’s difficult to gauge the exact backlog. But as far as the breakeven, Crescendo is already a breakeven. We’ve been operating at breakeven point pretty much since we started because we carved some of the people out of the Global SAD acquisition. I don’t know if that answers your question.

David Hershberg

Tell him about some of the larger contracts we’re going after.

Matthew Byron

Okay and the part three was the prospect pipeline. We are working right now on a couple of very large prospects. A couple in the $20 million range and a couple in the $40 million range. The RPs will be led beginning April 1, a couple that I’m aware of, and we’ll have to take it from there and see. It’s a little different because we have Globecomm’s backing, so even though Crescendo is small and a startup, we can leverage the resources of Globecomm where we can handle large procurements.

Operator

Your next question comes from Rich Valera - Needham & Company.

Rich Valera – Needham & Company

I could start on the infrastructure solutions business. Just want to try to get a sense of the near to medium term trends in this business. Dave, following up on an earlier question, you seemed to imply that you expected margins in that business to be down in the March quarter that they were sort of an unusually favorable product mix. In the December quote, I just wanted to confirm that and maybe how much they might be down.

And secondarily from a revenue standpoint, want to know how we should think about that business. It sounds like you may have gotten some pre-engineered systems orders recently but maybe not as many as you’d hoped. But you’re more hopeful of maybe of getting some, presumably in the March quarter for shipment in the June quarter. So wondering if we can think of the revenue there as maybe flattish sequentially and then up in June, or if you could give more color on that.

David Hershberg

Those kinds of products business we can turn around in 90, around 90 days, 90 to 120 days. So if we can book some business in the next month or two, which we’re hopeful, that would go into the last quarter. We do expect an increase though in revenue in infrastructure over the next two quarters.

A couple of those projects do have quite a bit of engineering development and they’re not, as you know we charge-off development and some R&D into cost of sales. As a result, those margins are not as high as we like to see them, one of those being our Alaska project, which is developing a whole new line of base stations and infrastructure.

We also have a couple of other major infrastructure projects that requires some development on the job, but that’s probably the biggest one that we’re going to have an issue with the margins on. We do expect some modest increase in infrastructure revenue next quarter, and then some more the quarter after that. Again, the product mix will probably be mostly systems infrastructure rather than product, although, we did book, like I say, in this last quarter we did book some product business.

Rich Valera – Needham & Company

So do we think the margins go back to sort of first quarter levels because there was a huge discrepancy between the first quarter level gross margin, which I think were sort of sub 15 in that business and they pumped up all the way to 20%. So just wondering if we have any sense of where the gross margins fall within that range say 15% over the last couple of quarters?

Matthew Byron

It’ll probably be in between the 15% and the 20%.

David Hershberg

That first quarter we sold off a very major IPTV system in India and it required a lot of development into project. In the infrastructure side we do expect that 21% for the overall margin, I think that was related mostly to a product mix we hope to get a little bit more of next quarter. But that’s going to be a little unusual for this year. Even though we did better last year, it’s going to be unusual for this year.

Rich Valera – Needham & Company

Then just looking at the service side of the business, very solid performance there I’d say on both revenue and margins. Was there anything there that you’d consider one-time sort of a temporary boost or can we think of the business sort of sustaining at the kind if levels that you saw in the December quarter?

David Hershberg

Well, we did have one product we sold off, which was a development project. It had some software development and hardware in it. It was a $3.9 million project, but we’re hoping that’s going to turn into a much larger project. This was just for the pilot program and that's about the only one.

I think in general the service business is doing extremely well. They've got some other opportunities there. When you see a bump up it typically has to do with a service contract where the customer up front buys the equipment to go along with it and that'll bump it up, and then it goes to a normal service kind of revenue.

Also, we had a bump up in Showtime revenue. What happened there was they bought some more products. Most of the Showtime networks project is a large broadcast center that's written off over five years. When they do upgrades they sometimes pay us right on the spot for those upgrades and there was a little bit of that in there also in that quarter.

Rich Valera – Needham & Company

I think, Andy, maybe in your prepared remarks you said you thought you'd see higher profitability I think in the second half of the year than the first. I'm just trying to get an overall profile here. It sounds like revenue probably sequentially up overall for the next couple of quarters. Gross margins in the infrastructure solutions probably down sequentially, at least in March. But overall, you're pretty comfortable with your profitability being up in the second half versus the first.

Andrew Melfi

Yes.

Rich Valera – Needham & Company

Any sense of the magnitude there a little bit, a lot or you don't want to provide any color on at this point.

David Hershberg

We didn’t do real well in the first two quarters do I would hope it would be a reasonable amount of increase.

Andrew Melfi

Dave keeps saying it depends what we can get in turnaround, but I would say it's modest of where we are now. I mean it will be an increase. We were hoping it would do somewhat better this quarter. What happened was one of our customers decided he wasn't going to come and buy off on equipment. And we can't take any kind of revenue recognition until we sell it off in plant and ship it to his facility.

So, that held up about $3 or $4 million which is going into next quarter. I think in general we hope to do better. And a lot of times it depends on the timing of getting something out in that particular quarter. But, yes, we do expect an improvement in the infrastructure going forward.

Rich Valera – Needham & Company

So it sounds like in terms of what to look for from an order standpoint on the infrastructure side you've got some WGS upgrades that you're fairly, I don't know if I want to use the word confident of receiving. Is that one of the things that we should be looking for?

David Hershberg

It's not just those it's pretty much any kind of product business. What you need to do is take a look at the product business and what we booked there. We also have one major teleport that we've been chasing for about two years, which looks like they're finally going to be funding which will be reasonably good size. We have a number of bids going out this quarter, the last few weeks and this quarter some pretty good size.

We've been extremely busy here this last five, six weeks with proposal activity. It seems to have picked up significantly in the last five or six weeks. We're also hoping that the government, from what we hear from our customers that with the new administration when people understand exactly how their budgets are going to go and what they're going to be emphasizing, that we hope that we're going to be able to pick up some additional business that we were expecting the first two quarters of the year.

Operator

Your next question comes from Steve Ferranti – Stephens Inc.

Stephen Ferranti – Stephens Inc.

Andy, I think in the last conference call you had talked about OpEx coming down in the second half of the year. I think the number was 8% to 10% off of first quarter levels. Should we still be thinking about that kind of decline in OpEx?

Andrew Melfi

I'd say it's about 5%, 4% or 5%.

Stephen Ferranti – Stephens Inc.

So and we might see that in the March quarter. Is that fair?

Andrew Melfi

Yes.

Stephen Ferranti – Stephens Inc.

And then just kind of turning back to the gross margin question again, and not to beat a dead horse, but I want to make sure that I've got the terminology straight here. In terms of some of the sort of factors that have driven the volatility in gross margin in the last two quarters, essentially you've got programs that may have a lower development expense associated with them and then you've got the pre-engineered business, which has been a little bit lighter.

The rebound that we saw in the last quarter was that mostly due to programs that had perhaps less development expense associated with them and maybe just a little bit associated with the pre-engineered coming back? Is that a fair way to think about it?

David Hershberg

Yes, it is. When we went from this large IPTV network that we developed, which was quite extraordinarily because it's the only one of its kind that provides a video for internet and direct-to-home and to handheld devices all in the same location, it's the only one we know about like that. But we did spend a lot of development on it.

We made a little bit of money on it but we spent a lot of development on it too. If you want to take a look and characterize the business, the service business you can look at between 35% and 38%. You can look at this infrastructure, the typical infrastructure running anywhere from 12% to 18% in some cases 20%. But the product business can run anywhere from 28% to 35%.

And our problem this year is strictly the loss of what we felt we get about $20 million to $25 million worth of this product business more than we've gotten so far. And if we could book that business then our bottom line starts to look a lot better. You can see most of that will all go to the bottom line. So, we can book $20 million at 30%. That's another $6 million in the bottom line. So, that's the thing to really look for.

Stephen Ferranti – Stephens Inc.

I guess along those lines two follow ups. I guess number one, what are you hearing from your customers these days? I'm assuming that portion of pre-engineered business that didn't come in you can attribute to very specific customers. I guess what are you hearing from them these days in terms of the tone of when they might come back to the table? And then secondly, how much pre-engineered business did you do in say fiscal '08?

David Hershberg

Probably we saved $30 million worth of that stuff? I guess something in that order. That's between the trailers and fly-aways and these SC terminals. Andy's going to look it up. My guess is somewhere around $25, $30 million, and when you look at that at 25%, 30% margin you can see what that meant to us. What numbers do you got there, Andy?

Andrew Melfi

About $25 million.

David Hershberg

About $25 million.

Stephen Ferranti – Stephens Inc.

And then what are you hearing from customers these days in terms of their potential to place orders here sometime in the next quarter or two?

David Hershberg

Well, we've had some encouraging words that it looks like some money’s going to free up because I think the areas that we're supplying equipment to are not necessarily military. They're other agencies and we think that they're going to get funded. And we had some indication on a couple of contracts that did break loose that things are starting to look a little bit better, but it's very difficult to tell.

And it seems if the contracts are in place and people are supplying us those contracts and they have a firm commitment, those things are getting funded. When it comes to new funding, even though the contract might be in place, and it's taking some while for them to get their money. And I can only say we haven't lost anything there, but it's just taken longer than we thought.

Stephen Ferranti – Stephens Inc.

I guess last one for me, the strength in the managed network business that you mentioned in the press release, I wonder if you could get more granular in terms of the specific markets or maybe even customers that are driving that strength. Is cellular, is it IP television, government? Maybe you can just give us a little bit more color in terms of where you're seeing the strength in the managed network business.

David Hershberg

Well, it's definitely the majority of it is government. Most of our business in Laurel is government and a good percentage of it up here in Long Island is government. The video business is getting to be a bigger part of it. We have now between about four different platforms here for co-location of customers, plus we are supplying a significant amount of video overseas turnaround 30 channels, something like that.

One of the things that has been a little discouraging, we had some pretty good size enterprise business we've been waiting for and from the financial community a major bank and brokerage house. They have sort of fallen a little bit on hard times and those contracts have been delayed and we were expecting a big increase there on the video side.

The cellular we have an awful lot of hopes for. We've got a lot of bids out for service revenue, which is a combination of first building base stations and systems for people and then providing cellular service out of our facility here. We just signed a pretty good size agreement with a major cellular provider and we're going to be putting another switch in here. So it'll make three different switches we have in here and we expect to be getting most of this company's cellular service business that they've had for smaller properties.

So we expect that that service business is going to increase significantly going forward. So, we're very encouraged about the cellular business, the video business, obviously the government has been a major growth factor for us, and we’ve got an awful lot of opportunities there with a lot of proposals out. So we're very hopeful to see some real growth here this year.

Operator

Your next question comes from Jim McIlree - Collins Stewart.

Jim McIlree - Collins Stewart

Dave, I think in answer to an earlier question you said $3.9 million of software and hardware in services in the December quarter. Did I hear that correctly?

David Hershberg

Yes, that's correct. Showtime was Q1, but the $3.9 million was the emergency weather program, but most of that, what you say for Q1 was Showtime. Yes, that was a pilot program for a national weather service.

Jim McIlree - Collins Stewart

Andy, I think you said that second half services you thought would be greater than first half service revenues. Is that correct?

Andrew Melfi

Yes.

Jim McIlree - Collins Stewart

So this $3.9 million you're expecting some sort of replacement for that in the second half. Is that a fair way to look at it?

David Hershberg

Yes, that's a fair. Most of the contracts, I know one recently does require $2.3 million for a government agency we just got, right? Excuse me a minute. Yes, we do have a contract we just got for like $2.3 million of equipment for a government agency and then service after that. So that helps a little bit. That's going to be delivered this quarter.

Jim McIlree - Collins Stewart

Generally speaking, when we look at the $18 million-ish of quarterly revenues in the services business, is it for the most part or on a regular basis you get $3, $4 million of equipment in there for the initial stages of a contract?

David Hershberg

Not necessarily. A lot of them are a lot less.

Jim McIlree - Collins Stewart

I'm not talking about in total if you looked at the total.

David Hershberg

You're talking about does $4 million out of $18 sound like the right number each quarter?

Jim McIlree - Collins Stewart

Yes.

David Hershberg

I think it varies a lot because a lot of the projects we got have some pretty low cost resets in them so we don't really get that much. And then it'll jump somewhat if, for instance, we're putting some video infrastructure in and we're getting paid for that. So it's very hard to say. I'd say it's more like the $2.5 to $3 million I think per quarter, but occasionally we'll get something more.

Jim McIlree - Collins Stewart

For the first half, how much of the total revenue came from government customers? Not just U.S. government, but all government customers combined.

David Hershberg

Let me get my guys here. Are you sure of that? Sure it's that much, 75%. How much of that is foreign to U.S.? Do you know about how that breaks down? Total foreign government as percent, 28%, total U.S. government, as a percent, total, 47%, 28 and 47 - just a minute now, 75%.

Jim McIlree - Collins Stewart

Our math is working. Great.

David Hershberg

Well, that was Q2 only, right? Year-to-date was, let me give you – year-to-date was 68%, so somewhere between 68% and 75%. The U.S., 47% and 48% and, as you know, that's been our goal is to get U.S. up around 50%. We've been hanging in there pretty good with that and a lot of that now has to do with the service revenue, too, not just the hard work.

Jim McIlree - Collins Stewart

And relative to the WGS satellite, do you have purchasing vehicles or IDIQs or blanket purchase agreements in place that allows you to sell the X and KA bank equipment, or would you need to modify your existing contracts in order to sell that equipment?

David Hershberg

I think if you look at WWSS I really think that that could pretty much buy anything against that. I don't think that would be an issue. We've got one customer that has already given us X-band money to upgrade X-band, so, I would guess he could still do that as part of that contract. It's hard to say. I really don't know how strict they are on what they're going to buy.

I know WWSS is pretty wide open. For instance, we got that $80 something million modem contract and that's part development contract, which was never part of what we thought WWSS was going to buy. My guess is that WWSS is very convenient buying and I think they can buy just about anything against that. And what we're hoping is the fact that we're going to have something on the shelf of design that we can make quicker deliveries, which they usually require in these types of contracts.

Jim McIlree - Collins Stewart

And lastly, the acquisition that you're hopeful you can close relatively soon, is that more something that would go with Crescendo or is it more something that would go with the services?

David Hershberg

It's going to be under the services company. We're working very hard on it and we're hopeful to do something, Jim.

Operator

Our next question comes from Dick Ryan - Dougherty & Company.

Richard Ryan - Dougherty & Company

Andy, do you have handy the operational income or loss per segment in Q2?

David Hershberg

I'm sure he has. Can you look at that separately?

Andrew Melfi

Yes. Just bear with me.

Richard Ryan - Dougherty & Company

Sure, no problem.

David Hershberg

It's going to surprise you.

Andrew Melfi

Well, basically, on a six-month basis the infrastructure is on an operational basis about $2.5 million loss and the service would be roughly $4.6 profit.

Richard Ryan - Dougherty & Company

Dave, can you talk a little bit about the bookings in the quarter?

David Hershberg

Yes. Like I said, we had near record bookings this quarter and I guess we had some reasonably good bookings in the service business. I can tell you how that breaks down percentage-wise. Percentage-wise the infrastructure did very well. As a matter of fact, I think it was probably a record, at least compared to anything, if I look at my Q2 of '08. It's twice as much as it was in Q2 of '07. That being said, we had a very poor Q1. So, to date it looks like about, you want it from a percentage basis you're looking at?

Richard Ryan - Dougherty & Company

Sure, if that's what you're willing to give or absolute dollar basis probably would be better.

David Hershberg

It looks like about, on the infrastructure side about 65%, and on the service side about 35%. It’s about 65 to 35 infrastructure.

Richard Ryan - Dougherty & Company

I know you don’t give the numbers for backlog in the quarterly base, but could you give a little color there maybe funded versus unfunded kind of backlog.

David Hershberg

Our backlog, we don’t say anything unless it’s funded. And in a lot of cases we have things that are semi funded, like Matt was talking about, where we only put in one month at a time even though we’ve got a one-year contract let’s say per people. First off, we don’t know how many people they’re going to hire, or voice over IP services we don’t know how many minutes we’re going to get, so we only put in one month at a time.

If it’s not funded it’s not in our backlog. These two contracts we have, I guess I mentioned, ones 117, ones 85. That’s about $200 million that’s one two contracts and they bought a total of about $22, $23 million so far against them. But we only put in what’s funded and what the money is available for.

Andrew Melfi

So based on our measurements, we’re about 20% higher then Q1 as far as backlog goes.

David Hershberg

This is our record backlog, we said, right? I’ve got to warn you a little bit about record backlog because some of it is service, which is spread out over a while, and some are longer term contracts that spread out over awhile. And there’s not enough for what we’ll looking for of the product business that we like to see.

Richard Ryan - Dougherty & Company

I didn’t catch your comments on the maritime solution, Dave, with Mach6. Did you put any numbers behind the announcement today?

David Hershberg

No. We haven’t and we’re not sure exactly how that’s going to turn out because we’re still negotiating on some more ships. It’s relatively small to get started with, but you’ve got to start sometime. And we are hopeful that having a flagship customer like we have here, it’s going to lead to quite a bit more business.

We do have a pretty good size proposal backlog out in this area, so we’re hoping it’s going to be a reasonably good business. I wouldn’t look at this thing as a big financial occurrence. I’d look at it more as a fact that after something that we’ve spent some time developing a product for we’re getting it out there. It’s not a big number and it is service revenue. We’re hoping to get somewhere in the order of 1,500 to 2,000 a month on these ships.

Operator

Your next question comes from Mark Jordan- Noble Financial.

Mark Jordan- Noble Financial

While you don’t give kind of quarterly backlog, could you give us some sense of what percent of your second half anticipated revenue is either in funded backlog or part of an ongoing relationship, which you might book on a monthly basis? Therefore, another way of saying what percent of the expected revenue screen do you have sort of solidly in-hand at this time?

David Hershberg

Like I said before, everything we’ve got is funded backlog. We don’t put anything in backlog that’s not funded. So it’ll be in the revenue stream, the question is when. And on the service revenue, like I say, some of that backlog is 18 to 24 months type of backlog, so it doesn’t help us an awful lot next year.

And in the case of Showtime, it’s like another 3.5 years yet to go on that one. So the main thing is very backlog to have and it’s a record, like I say, but the main thing about it is, it doesn’t have a lot of the short-term kind of product business with a higher margin that we can turn quickly. But it is a record backlog we’re at now.

Mark Jordan- Noble Financial

Let me rephrase my question. If hypothetically you saw $100 million of revenue in the second half, as you sit here at the start of the second half, what percent of that $100 million do you have either in solid orders or they’re part of ongoing relationships where you have a high degree of certainty that they will be realized?

David Hershberg

I think based on our plan we’ve got a book in turn of how much?

Andrew Melfi

That’d be 92%.

Operator

Your next question comes from Rich Valera – Needham & Company.

Rich Valera – Needham & Company

Andy, can you give us the cash flow from operations in the quarter?

Andrew Melfi

Basically it was neutral. There’s no change in the cash.

Rich Valera – Needham & Company

I noticed that you used about $3 million each in receivables and inventory, both of them moved up in the quarter despite the lower revenue. How do you see those trending over the next couple of quarters?

Andrew Melfi

We have a major job that we’re starting to work on that, because of the payment milestones with it, they’re very stringent. It’s probably going to take some of our cash and put it into a working process. So I would expect that over the next two quarters that the cash flow is going to go down a little bit regarding this one particular program.

We’re going to have to buy inventory build up inventory yet. We’re not going to be able to invoice it because it’s a long-term program, so my gut is it will probably be $4 to $6 million of cash flow being used for inventory.

Rich Valera – Needham & Company

I was wondering sort of what you think of as in the total. Do you think you’ll have sufficiently higher cash from ops to offset that, or do you think you’ll actually go into a net use of cash position in the second half?

Andrew Melfi

We’ll probably go into net use of cash in the second half.

Rich Valera – Needham & Company

To the magnitude of that inventory usage you mentioned, like in that sort of $4 million.

David Hershberg

Yes. That NATO contract that we announced, which is just $27 million, I guess we got 5% down on that thing? Yes, 5% down and we don’t get anything until we ship and that’s a relatively long shipping cycle. It’s not going to be shipped until next year. The first product won’t be shipped until next year.

That’s the bad news. The good news is each time we ship we cut an invoice, right? Is that right? It’s going to take cash until we can start getting some cash flow on it.

Andrew Melfi

We’re trying to manage it but it could be a little worse.

Rich Valera – Needham & Company

So when would you expect that trend to reverse? Would that be the first fiscal quarter of next year you’d start to go positive cash flow again?

Andrew Melfi

Yes, in Q1 of fiscal ’10 hopefully.

Operator

(Operator Instructions) Your next question comes from Stephen Ferranti – Stephens Inc.

Stephen Ferranti – Stephens Inc

One quick follow-up just on the M&A front, Global SAD I think was a very good acquisition for you guys. I think there’s some question in folk’s minds about how I guess sort of repeatable that acquisition is. Can you describe some of the targets you’re looking at in terms of how they match up, in terms of profile versus how Global SAD looked when you were looking at that?

David Hershberg

Yes. That was a tough act to follow and there is some denial out there from some of the people we’re looking at that the fact that we’re trying to get somewhat of a better price. But, Matt can really comment on that because he’s been looking at all those acquisitions.

Matthew Byron

The environment is giving us more opportunities then we’ve ever had and that’s the good news. The bad news is we don’t have and we’re not willing to spend a lot of money on the team here to address all the opportunities. So we are sifting through them and trying to find something equivalent to a Global SAD, but that is going to be tough to follow.

The deals we are looking at most of them are roughly half the size of Global SAD and the pricing maybe could be in that range. We got a reasonable deal with Global SAD and I think you could expect something near that range, but we’re also looking at different verticals and trying to penetrate the different verticals rather then trying to build product to get into the verticals. So the answer is probably not. Not that size of scope.

Stephen Ferranti – Stephens Inc

But at least in terms of the accretiveness, I guess relatively speaking and the multiples that sounds like you’re seeing some similar opportunities, but just not quite maybe the size that Global SAD was.

Matthew Byron

Our acquisition methodology is the same regardless of size. So as far as the amount of accretiveness it’s going to depend on how we can lever our existing investments on the service side to determine post acquisition. It will be immediately accretive any deal we do, but to determine post acquisition how much leverage we can get out of the investments we’ve already made. And to summarize that, every one of the acquisitions we’re looking at are pretty much on that service side.

Operator

At this time, there are no further questions remaining in the queue. For closing remarks, I’ll turn the conference back over to Mr. David Hershberg. Please go ahead, sir.

David Hershberg

Thank you very much for attending the conference call. I appreciate your questions as they were all very good ones, and hope to see you again next quarter. Thank you.

Operator

This does conclude today’s teleconference. We thank you all for your participation. Have a great day.

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