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NCI Inc. (NASDAQ:NCIT)

Q4 2008 Earnings Call Transcript

February 18, 2009 at 5:00 pm ET

Executives

Maureen Crystal - Vice President, Investor Relations

Charles K. Narang - Chairman of the Board & Chief Executive Officer

Terry W. Glasgow – President & Director

Judith L. Bjornaas - Chief Financial Officer

William M. Parker - Chief Operating Officer

Analysts

Timothy Quillin - Stephens Inc.

Erik Olbeter - Pacific Crest Securities

Michael Lewis - BB&T Capital Markets

Analyst for Ed Caso - Wachovia

Joseph Vafi - Jefferies & Company

Brian Kintslinger - Sidoti & Company

Mark Jordan - Noble Financial Group

Operator

Good day and welcome to the NCI Incorporated fourth quarter and fiscal year-end 2008 results. My name is Millicent and I will be your conference coordinator today. (Operator Instructions). At this time I'd like to turn the presentation over to your host for today’s conference Maureen Crystal, Vice President of Investor Relations for NCI.

Maureen Crystal

Good evening and welcome to NCI's fourth quarter and year-end 2008 financial results conference call. Here's our agenda for today. Charles Narang, NCI's Chairman and CEO, will provide a high-level overview of our accomplishments during 2008 as well as some comments and current market condition. Terry Glasgow, our President, will then discuss our operational and business development accomplishments during the quarter and full year 2008.

Next, Judy Bjornaas, our Chief Financial Officer, will provide fourth quarter and full year 2008 financial results on operating metrics. She will also review the first quarter and full year 2009 guidance initiated in today's earnings press release. We will then open up the call for your questions and we have Bill Parker, NCI's Chief Operating Officer, joining us today during the question and answer session.

Before we begin our discussion, it is important that we remind you that on this call we will make statements that do not address historical facts and thus are forward-looking statements made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to factors that could cause actual results to differ materially from the anticipated results and include the risk and uncertainties identified in our earnings press release under the caption forward-looking information.

For a full discussion of these factors and other risk and uncertainties, please refer to the section entitled risk factors in NCI's Form 10-K filed with the Securities and Exchange Commission. Also, we undertake no obligation to update any of the forward-looking statements made on this call.

I will now turn the call over to Charles Narang.

Charles K. Narang

Thank you Maureen. Good afternoon everyone and thank you for joining us today. I am pleased to report that 2008 was another great year for NCI. As we continue to build business focus and quality, integrity and total customer satisfaction. I am proud to say that over the past four years we have delivered solid operation results and build an exceptional management team that is executing its strategic plan, focus on study and sustainable momentum and growth.

And such we are reaffirming our long-term target of 10% to 15% organic revenue growth. While our CFO, Judith L. Bjornaas will provide detailed guidance for 2009 sharply. I would like to touch briefly on some of our key accomplishments during 2008. Our revenue grew 28% to a record $391 million. Our organic growth rate was 10.5%.Operating margin increased to7.8% up 50 basis points. Earnings per share increased 34% to $1.25 per share. New bookings for the year were approximately $610 million close to a 100% increase over 2007. Backlog hit a record of $1.2 billion which continues to reflect our solid accomplishments in winning business.

While going the top and bottom line is important, I am convinced that we have achieved the level of growth and the quality of our business. While not as easy to measure in dollars, the quality of our business has dramatically improved. I believe that in the long run this provides the type of platform that helps us achieve growths towards progressing engagement efforts bringing to us new business and attracts people, partners and customer to NCI.

Following my remarks, Terry will give more details on our new business accomplishments, customer expansion and overall business execution. In terms of quality, we exit 2008 with a strong portfolio of key prime GWAQ at agency specific IDAQ contact vehicles that have total programs dealing value of $86 billion.

An element of our business strategy has been to capture these contact vehicles as a means to build more access to new customers and new markers. Prior to 2005, we get only a few of these contact vehicles. Over the last four years we have captured more of these contacts and with them we have been able to pursue and renew contracts with new customers

Again, Terry will give you some details on our customers added during 2008. Another key focus for NCI has been to build a strong business development in the whole organization. During 2008, we have continued to build an effective new business development organization as our next processes to spur the right business model.

We believe we have done wisely in areas that will spur our growth over the next few years in our targeted market areas. The markets we have played turned to be dynamic and rewarding. In large measure our results reflect not only a very effective execution of our business model but also we benefit from being in the market areas that are well funded and with substantial opportunities for growth.

In 2009 we believe we will continue to see a favorable market conditions. The change in the administration while possessing some unknowns does not in our opinion represented this guidance. The new administration will clearly implement changes and lead to expanding but does not likely to carry on until 2010. Even those changes we believe our market positioning is favorable for continued growth. Major areas that will be priorities for this administration include cyber security information insurance, the war on terrorism, health care, intelligence, and sources on the market area and information technologies to support President Obama’s initiatives to transform government.

Another area that may receive growth would be for professional services in support of the financial bail out and economic recovery programs. Areas that could come under pressure in 2010 budget and beyond periods would include the system platforms, program directly supporting while efforts in the luck as well as high dollar value programs experiencing program over runs.

In 2008, we won an important recompete and closed on a great acquisition while our preference is to grow organically we continue to look for acquisition opportunities that will diversify our customer base and help augment our organic growth. As demonstrated in the past, we have a disciplined review and acceptant process for acquisitions that will be driven by an experienced senior leadership team and a seasoned board of directors who also see these important processes.

We look for quality companies that will continue to expand NCI into new markets with new and complimentary capabilities as well as offerings. More importantly, any future acquisition must be accretive. Have a culture very similar to NCI’s culture and bring long-term shareholder value.

Areas of particular interest to NCI are Australian agencies including health and human services, the Justice and Treasury Departments, the Intelligence Community and other agencies likely to experience growth under the Obama Administration.

Our balance sheet is strong and we have the financial resources in place to acquire companies within our targeted size range. In closing, NCI’s high mark has been to establish long-term relationships with customers, employees, partners and shareholders.

We will continue to stuff the boards as a tenant of our overall strategic growth strategy. We have so many of our key elements in place as we have in 2009 and we look forward to another prosperous and great year.

With that, I will now turn the call over to Terry to provide an operational update. Terry?

Terry W. Glasgow

Thank you Charles and good afternoon, 2008 was a great year for NCI. Achieving quality results across all of our business areas. We continue to drive forward with a sharp focus on the execution of our business strategy. Since going public in 2005, our goal has been to build a business platform that drives sustained organic growth of 10% to 15%.Our 2008 results validate our execution and support our longer-term business strategy. The following results illustrate our performance and highlight some of our key quality metrics.

In 2008, our revenue of $391 million was 28% higher than in 2007.Total awards for 2008 was $610 million almost double of 2007. Our book to bill for 2008 was 1.6 x at 53% year-over-year improvement. Our $1.2 billion backlog is 57% better than 2007. Total staff increased to more than 2500 employees or 27% growth. In 2008, we completed the acquisition of PEO Soldier and successfully integrated into the NCI family. Operation and financial performance has been outstanding.

Our contract execution remained solid and has driven strong performance across the Broad, and in 2008, we added to and strengthened our senior leadership team to address new in emerging market areas, especially in the air force, national intelligence and agency areas.

We are pleased with the overall quality of our business base and a solid foundation for growth that we have established. We firmly believe that we are on the right track and that we have the resources, leadership, contracts, customer positioning, and service offerings to view our growth.

Let me touch on a few additional metrics and provide further insight into progress achieve in both the fourth quarter as well as for the full year.

First, I want to summarize our new business awards performance. Our fourth quarter new business awards totaled approximately $215 million. Overall, net additions to backlog were $195 million. Our book-to-bill ratio for the quarter was 1.9 time.

The fourth quarter award of the Army National Guard Bureau and Air National Guard Contract was a significant win for NCI. This $173.4 million ITES-2S task order has a period performance that extending to September 2015. It will option our exercise. It was a major recomplete award for NCI and validates the outstanding quality work that we have been providing to these customers since 1994. The scope of work has been expanded on this contract beyond the services previously provided and we will provide these opportunities for organic growth over the life of the contract.

During the quarter, we receive a number of new task orders under our portfolio of agency-specific IDIQs and GWAC’s vehicles, including the ITES-2S, NetCents, OPM TMA and GSA Schedule 70 contracts. Of the $215 million of awards in the fourth quarter approximately $25 million was attributable to progressive engagement awards. Progressive engagement is our program of expanding our work with our existing customers and continues to deliver excellent trends in the Company and speaks highly of the reputation and trust that we have with our customers.

For the year, we booked record awards of $610 million, including three large an important task orders with values and excess of $90 million. Closing out 2008, NCI ranked in the top three or four winners of work under the ITES-2S vehicle, clearly demonstrating our ability and skill in pursuing and winning work under this important contract.

Our full year book-to-bill was a strong 1.6 times. Achieving business focus for us is the expansion of our customer footprint. Examples of new NCI customers in 2008 are the US Army Directors of Information Management at Fort Carson and Colorado Springs as well as Fort Belvoir in Virginia; US Army Material Command at Fort Belvoir; the Defense Acquisition University also at Fort Belvoir; the US Army Corps of Engineers; US Forces Command Korea; US Marine Corps at Quantico; Nellis Air Force Base, Nevada; the Naval Postgraduate School in Monterey, California, as well as others.

It is important to point out that our large portfolio of agency-specific IDIQs and GWAC’s continues to provide us access to new customers and as a great source for business expansion.

Over $610 million award approximately two-thirds was for new business in about one-third was for recomplete less. Our strong mix of new business is a positive indicator of the effectiveness of our business development process.

Looking now at the quality of our business execution, an important dimension of growth quality is revealed in the expansion of our professional workforce in high-end technical and management functions. Increasing our high-end professional staff supports our margin expansion strategy, builds NCI’s market reputation, improves our core service offerings and helps us to create enduring value added relationships with customers.

The fourth quarter continued our pattern of staffing growth. Our total staff at the end of December was over 2,500 employees, a net increase of over 500 people compared to 2008 and an increase of more than 100 staffs compared to the third quarter, tickly significant, we increased our staff with important high-end technical personnel.

I will give some examples. One of our most important new contracts that ramp up in 2008 was the US Army NETCOM [Emails] Program. As planned, most of the staffing ramps occurred in the third and fourth quarters of 2008. As of the end of December, all but a few task orders have transitioned to the NCI team from the prior incumbence and the total program staff was approximately 175, about three forces of which are NCI employees.

The NCI worked unto this contract is for high-end subject matter experts to support cyber security and information assurance, enterprise systems management, network operations, enterprise architecture and strategic planning. With this program, we now only added significant new staffing but also add the key technology subject matter experts, both of which support our growth model.

Another example is the third quarter win of the TEIS BRAC IA Program. Under this potential, $90 million task order NCI will provide specialized high-end private security and information assurance services for army, DOD and other federal agencies or relocating or modernizing as part of BRAC or other transformation activities.

Initial tasking began in the fourth quarter and we are implementing aggressive staffing strategies to feel critical cyber security positions. Our core team of approximately 20 professional cyber security subject matter experts for this quarter is on-board. Staffing on this program will build in the second of 2009 with a majority the staffing coming late in 2009 and ended 2010.

In early September we won the Scott Air Force Base A-76 Program and supported the air forces 375th communication supports quarter. This work originally planned start in the third quarter was halted due to the protest. The protest was subsequently denied and staffing begun in November. The delay in staffing until late November shifted our staff buildup into the first quarter of 2009, approximately one-third of the planed staff was 66 was in placed as of the end of 2008 with a balance coming in the first quarter.

The program will reach its full run rate in the second quarter of 2009. Also during the third and fourth quarters we stopped new contracts and task orders at Fort Carson, Fort Machuca, Fort Belvoir, Quantico and Fort Lee. Tapping in these programs were essentially completed by the end of the year. These programs provide solid momentum as we entered 2009.

And a final example is the PEO Soldier Program which we acquired in March 2008. Financial and operational performance has exceeded our expectations as outlined at the time of the acquisition.

New customer requirements have been added to the contract and staffing has increased accordingly. As of the end of December, total staffing of program was approximately 185, an increase of 14% since we acquired the program.

We are pleased with all aspects of this acquisition. We have a superb leadership team, a strong professional staff and excellent working relationship with our customer and the prospects for growth going forward are good.

Turnover has improved over the last several quarters. As of the end of December, turnover is in a high-teen about a percentage point lower than the peak level teen ended June 2008 contract.

I will conclude with some visibility into our new business development feature. During 2008, we invested smartly in areas to support our future growth. Investments included hiring season business development leaders and capture management personnel, as well as the key technical staff to address emerging business priorities, including senior subject matter experts and cyber security and information assurance healthcare enterprise architecture and intelligence community experts.

Our new business pipeline reflects our emphasis and focus in positioning NCI in the right markets with the right leadership and the right business model. The following metrics characterized our new business pipeline. Our total pipeline now exceeds to $14 billion, about 75% higher than a year ago and about $1 billion more than last quarter. Approximately $3 billion of the pipeline is for up until is to be awarded in 2009 with a balance of opportunities in 2010 and beyond.

We have 90 programs with values of $25 million are more in the pipeline broken down as follows. There are 27 programs with values greater than $100 million, another 28 programs with values between $50 million and $100 million, and 35 programs with values $25 million to $50 million. These 90 programs represent approximately 85% of the total pipeline dollar value.

As of the end of 2008, we have proposals outstanding in pending award totaling approximately $200 million. With the first quarter, we anticipated preparing in so many proposals with a value of about $500 million to $600 million.

In conclusion, we had a great quarter and an outstanding 2008. We continue to build a solid platform for growth and a delivery a value to our shareholders, customers and employees. With our exceptionally strong and focus leadership team, we are energized and positioned to take us to the next level.

I will now turn the time over to Judy who will present the financial results for 2008 and guidance for 2009. Judy?

Judith Bjornaas

Thank you, Terry and good afternoon everyone. For the year ending 2008, NCI reported revenue of $390.6 million which represents a year-over-year growth rate of 28%. This increase was due to our acquisitions, new contract awards, and growth on existing contracts.

New contract awards consisted primarily at numerous new task order awards under our ITES-2S, NetCents, and TEIS contracts. Additionally, we saw revenue growth on existing programs through progression engagement. The additional revenue on this and other contracts was partially offset by a decrease in revenue due to lower product sales and our NetCents contract, as well as reduction in revenue from expired contracts. Our organic revenue growth rate for the full year 2008 was 10.5%.

Operating income for 2008 was up 36% to $30.4 million, representing a full year operating margin of 7.8%. This compares to operating income of $22.3 million in 2007 and then operating margin at 7.3%.

This 50 basis points increase was the result of leveraging our indirect restructure over a larger base, an increase in the percentage of our revenue that is coming from NCI labor. For the full year 2008, our income tax rate was 39.9% compared to 40.1% for 2007.

Net income for the full year 2008 was $17 million compared to $12.6 million for the same period last year. We reported diluted earnings per share for the full year of $1.25 per share compared to $0.93 per share in 2007. Diluted shares outstanding for 2008 were approximately $13.6 million shares and approximately $13.5 shares in 2007.

For the fourth quarter of 2008, revenue was up approximately 15% to $101.6 million compared to $88.2 million for the fourth quarter of 2007. Our fourth quarter organic revenue growth rate was approximately 7%. Operating income for the fourth quarter was $8.7 million compared to $6.5 million for the fourth quarter of 2007. Our operating margin of 8.5% for the fourth quarter of 2008 compares to an operating margin of 7.4% for the same period in 2007.

Net income for the fourth quarter was $4.9 million compared to $3.3 million for the same period in 2007. Diluted earnings per share for the fourth quarter were $0.36 per share compared to $0.25 per share for the comparable period in 2007. The effective tax rate for the fourth quarter of 2008 was 40% which was lower than the prior year’s fourth quarter rate of 41.7%. Diluted shares outstanding for the fourth quarter of 2008 was $13.7 million shares compared to $13.6 million shares for the fourth quarter of 2007.

Stock compensation expense for the fourth quarter was approximately $246,000 compared to approximately $493,000 in the fourth quarter of 2007, which is when we had an acceleration of vesting of some options based on the achievement of certain performance charges.

I would like to briefly discuss Q4 results compared to our expectations as provided in the guidance we gave on our last earnings call.

Revenue came in at the level of the range we had provided. This is primarily due to our reduction of pass through items which we have projected as possibly heading in the fourth quarter. Some of these items had slipped to the Q1, Q2 or even Q3 of 2009 but some of these pass through items and product revenues are now not expected to occur at all.

As we have mentioned in the past, pass through and product revenues provide little margin and now indirect cost absorption. Therefore, we do not review the reductions in these areas as significant.

The bottom line is that our income was not significantly affected by these slips and in fact our operating margin was increased due to the decrease in subcontractors and other direct costs as a percentage of revenue. Besides, the reduction of pass through and product revenue our margins came in higher than expected due to a number of other factors as well.

First, we receive higher the normal award fees in the quarter including the final award fee at our old White Sands Missile Range contract which ended in March of 2008. Another positive factor that helps our margins for the quarter was lower indirect expenditures in the fourth quarter had been expected, as well as lower been in proposal expenses that resulted from the slippage of several large procurements into the first quarter and beyond.

Moving on to our fourth quarter 2008 metrics approximately 84% of our revenue was performed as a prime contractor. For the fourth quarter of 2008, 85% of our revenue came from the Department of Defense and intelligence agencies approximately 14% from federal civilian agencies and approximately 1% from non-federal sources, primarily commercial business learning training services.

Our contract mix for the fourth quarter was approximately 50% from time and material contracts, 19% from cost plus contracts and 31% from fixed price contracts.

Now, for a brief summary of cash flows and the balance sheet. Cash flow provided by operations for the year 2008 was approximately $22 million, which equates to 128% of net income. Our strong cash flow over the year enabled us to pay down our debt by $2 million year-over-year including the debt associated with the PEO Soldier acquisition and at the end of the year, our outstanding bank debt was $40 million on our $90 million facility. At the end of fourth quarter, our DSO was 83 days. While this is up from the 76 days last quarter, we have stated on our last conference call that we typically see a higher DSO level during the fourth quarter.

At the end of 2007, our DSO was at 92 days. This improvement year-over-year was a large contributor to our strong cash flows for the year and we continue to be committed towards getting our DSOs down into the low to mid 70s during 2009. Our total backlog was $1.189 billion at the end of the fourth quarter with $234 million of this is funded. This compares to $756 million of total backlog at the end of 2007 of which $189 million was funded. We believe that our backlog adequately supports our current revenue base and gives us clear insight into our forecasted revenues.

Now, I am going spend my remaining time in the call giving you an overview of the guidance for the first quarter and full year 2009 that we initiated today as published in our earnings press release. With the first quarter of 2009, we expect revenue to be in the range of $102 million to $107 million and diluted EPS to be in the range of $0.31 to $0.33 per share. This guidance is based on weighted average shares of approximately $13.7 million for the first quarter of 2009.

Margins in the first quarter of the year are typically the lowest for us and they tend to rise over the year as indirect rates drop as the base grows during the year. Additionally, we are expecting significant bid or proposal expenditures in Q1 which will decrease our margins for the quarter. For the full year 2009, we expect revenue to be in the range of $440 million to $455 million with diluted EPS to be in the range of $1.44 to $1.52 per share. This guidance is based on weighted average shares of approximately $13.8 million for 2009.

The midpoint of this revenue range represents about a 12.5% organic growth rate over 2008. We are also expecting a 10 to 20 basis point improvement in operating margins on a year-over-year basis. The first quarter and full year guidance include the 40% estimated tax rate and assumes net interest expense for the first quarter of approximately $300,000 and $1.5 million for the full year. Depreciation and amortization is expected to be $1 million for the first quarter and $4.3 million for the full year.

Finally, stock option expense is expected to be approximately $300,000 in the first quarter and about $1.6 million in the full year 2009. This guidance does not reflect the impact of any potential future acquisitions.

With that, Melissa, I believe we are ready to begin the Q&A session.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from the line of Will Loomis - Stifel Nicolaus & Company, Inc.

William Loomis - Stifel Nicolaus & Company, Inc.

Quarter, just looking at the bids and first of all in new organic growth, you came in at the low and you mentioned that it was products but then you also mentioned for example on the stock contract that was a little bit later in the quarter to start up. How much of that, when you look at the sequential improvement revenues from fourth to first quarter, how much was because of some of that large contract once you had in 2008 were a little bit late in starting up and how much is the kind of new wins that you expect went since?

Terry W. Glasgow

Will this is Terry. As far as new wins contributing in the first quarter of 2009 other than what we have talked that there are no major new awards built into the first quarter, we do have a ramp up of things that occurred in the third and fourth quarter like we said and some of those will not fully ramp up in the first quarter. They will ramp up through the year so it is a combination of factors there.

William Loomis - Stifel Nicolaus & Company, Inc.

So as far as coming on the low end of your guidance on the fourth quarter, how much of it was the product shortfall versus some of the direct labor type contracts that were later to start up?

Judith L. Bjornaas

It was almost all either products or subcontractors.

William Loomis - Stifel Nicolaus & Company, Inc.

Okay.

Terry W. Glasgow

The other things would have come in that would have improved it but as you have said, it was that that pass through in product kind of thing.

Judith L. Bjornaas

That one process that he talked about, we were aware of that at the time we gave guidance so that was built into our assumption.

William Loomis - Stifel Nicolaus & Company, Inc.

Okay and then just one question on the $215 million in award versus the $195 million you put in backlog, what is the difference there and then related to that of the $173 million National Guard task order, how much of that was put in the backlog?

Judith L. Bjornaas

I will answer the second question first. Of the $173, all of that was put in backlog. We have a very strong relationship with this customer. We fully expect that backlog to be utilized. The difference between the $215 million and the $195 million, the National Guard contract is a big part of that $20 million differential. They actually recomputed that contract early so we did have something in backlog for our existing work on that under the old vehicle that was replaced by the $173.

Operator

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

Timothy Quillin - Stephens Inc.

In terms of the revenue guidance range for 2009, the difference between the low end and high end, is that mostly a function of how the [IABRA] contract ramps up in 2008, just kind of the timing of that ramp up?

Charles K. Narang

Not really, Tim. Some of the programs that we are bidding are likely to start in the second quarter and so on and so forth. But not really, it is not because of the ramp up of the business we won back in third or fourth quarter of 2008.

Timothy Quillin - Stephens Inc.

Okay, so the high end would reflect new opportunities. And in terms of bookings, 2008 was a great year in terms of booking for the full year and seasonality should we expect a little bit below in our first quarter and it sounds like you have a lot of bids planned for submission in 1Q, are those expect to be adjudicated more in 2Q, 3Q or how do you think this year will play out?

Terry W. Glasgow

Typically first quarter is a little bit low anyway. You have a lot of activity in Q3 and Q4 and we had a lot of that before. We would expect to see a lot of this adjudicated in the second and third quarter. As you know, the procurement process right now, the acquisition process is probably taking longer than it has in the past because the customers are trying to protect against protest, taking longer to evaluate and then of course there are protest out there.

So these things tend to be taking longer so I would expect these things to happen in Q2 and Q3.

Timothy Quillin - Stephens Inc.

Okay, very good and Judith, I just missed the expected tax rate for 2009.

Judith L. Bjornaas

We are using 40%.

Operator

Your next question comes from the line of Erik Olbeter - Pacific Crest Securities.

Erik Olbeter - Pacific Crest Securities

Real quick, two questions. One I think, Charles you mentioned at the beginning of the call professional services related to economic stimulus scenario that you see opportunity in. Can you flush some of that out for us doing what in particular, is there anything particular you sort of, your eyes are on?

Charles K. Narang

Well, if you look in the stimulus package, we are spending some monies to manage the health programs and that is where we got a lot of information technology to back up this operation to manage that. And on the star program that we therefore manage it, some hand coming back in some back office operations to manage all the programs we are putting in place, where the money is coming and where the money is going.

So I think all this money that is being spend in stimulus package to our program is some relevant that is going to happen that will relate to our industry and information technology industry.

Erik Olbeter - Pacific Crest Securities

I guess a question for Judith on the issue of award seized in the quarter, you sort of normalized that. Where would the sort of gross margin have in toward this?

Judith L. Bjornaas

I think if you normalize it, it would have been maybe $200,000 less in operating context.

Operator

Your next question comes from the line of Michael Lewis - BB&T Capital Markets.

Michael Lewis - BB&T Capital Markets

Terry, I was wondering, can you walk us through in little more detail on the Army National Guard contract? I was wondering we all understand that there was an increase of in scope on this but I want to kind of hone in on what the areas of your business benefited from this new contract and then also what is the proportion of the new contract versus, what is the proportion of the increase level of dollars on the new contract versus prior engagement?

Terry W. Glasgow

We cannot breakout that last one that way. The scope was expanded and broadened that would allow us to do more work than we have before but the guard has several different piece of work going now. Their way have been doing the, wanting their networks down. There are local area networks for them and have been doing this for a number of years.

Just to back you up, we started off this contract a number of years ago with less than 40 people and substantially more than 150 people today just on this one not counting as well all the other international guard and other business that we have which is kind of been born because of this relationship. We see our existing work continuing. We think the National Guard is going to be well funded and that is good for us. We also see us as now having the ability to fill in gaps for new requirements coming in as new issues come up or as they see us as being an alternative to perhaps others doing work down there.

So there is a scope of work there. Our experience has been on the past looking at our vehicles that we have essentially used of all of those ceiling values. Judith did mention that we have some of that which was not ease but percentage wise that the vast majority, a very significant percentage was used.

Judith L. Bjornaas

Only it was not used because the contracts ended early.

Terry W. Glasgow

Right and so we cannot see this one playing out with a ramp up of more requirements as the National Guard gets more requirements as well as a little bit broadened scope in doing it more.

Judith L. Bjornaas

But from our guidance standpoint, I do not think we have projected a whole lot more beyond the current works we have been performing in 2009.

Terry W. Glasgow

Yes, I do not think it would be appropriate right now. I think because of the length of this job which is essentially seven years, it gives us a lot of opportunity to be ramping up and I do not think you would see it right way and we certainly did not want to build that into the forward projections at this point.

Michael Lewis - BB&T Capital Markets

Yes and Judith thank you. That was the key point I was trying to get out, what was kind of factored in. And Judith, can I ask you one more question? Actually two more questions and then I will get out of the way here. You had stated that the revenue shortfall versus I guess what consensus sort of midpoint here fourth quarter guidance was due to pass-throughs and then you commented that you are going to see some of that slip in to the first or second and maybe even the third quarter and then you also said you may not even see some at all. Can you kind of quantify how this will, what your expectation is on that rollout of these pass-throughs so that we do not get overly aggressive with regard to expectation top line?

Judith L. Bjornaas

Well obviously what we expect to happen in first quarter that is in our first quarter guidance and then I think it will just ramp from there.

Terry W. Glasgow

But Michael, the very nature of a lot of the product were specifically having pass through in generally is that we have less direct visibility and control other than we do for our traditional services model where we are supplying people, where we are fulfilling missions. That is one of the reasons why we really do not see this as a critical element of our growth strategy because it is lumpy in nature and because it does not give you any real, longer term hold on customers.

Michael Lewis - BB&T Capital Markets

I agree and I understand as lower margin contribution and all that, I am just, my focus was that if the expectation is that we will see a more aggressive organic growth pegged in the first few quarters of 2009 and I think that this was one of the first quarters where we witness below double-digit organic growth rate in the quarter. So what I am trying to get to as we are trying to firm up the top line so that the investment community understands the real current expectation here.

Judith L. Bjornaas

That is approximately $4 million or so that shifted out. Actually, it is almost breakeven in the first, second and third quarter. We will have that one later.

Operator

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

Analyst for Ed Caso - Wachovia

This is Chris [Witland] for Ed Caso. I was wondering if you could talk about bidding proposal actually I believe in your call you have mentioned what the year-over-year increase was?

Terry W. Glasgow

We can not hear you. Could you speak up louder please?

Analyst for Ed Caso - Wachovia

I am sorry. This is Chris for Ed Caso. In prior quarters you had provided some color on the year-over-year growth in the proposal activity and I was wondering if you can quantify that…

Charles K. Narang

We still cannot hear you.

Judith L. Bjornaas

He is asking about the year-over-year increase in bidding proposal cost.

Charles K. Narang

Okay.

Judith L. Bjornaas

It is pretty significant. It is over a million dollars when you look at 2008 compared to 2007. I do not have the exact figure in front of me but I know it is over a million more that we spent in 2008.

Analyst for Ed Caso - Wachovia

Okay great and then also if you could give us an update on your expectations for the timing of NetCents II?

William M. Parker

This is Will Parker. NetCents II, the acquisition strategy used to be employed by the Air Force is sort of under revision again and specifically, the RFP has slipped. Their plan now is to address RFP in the spring on 2009 with final RFP probably late summer and an award in January 10. So that is a major revision to their plan and part of this because NetCents I period performance ends at September of 2009, they are now planning for an 18 to 24-month extension so there is also overlap between NetCents I and NetCents II, something that they are working out. That is what we understand about their strategy.

And they have also changed the procure part of, the delays are related to changes in their procurement strategy. Originally they were planning on a number of different acquisition buckets if you will and now they are planning for a single contract with separate claims for three different categories and separate acquisitions for products and [NNA] services.

Another part of the delay is because now have an Office of the Secretary of Defense review and peer reviews for contracts in excess of a billion dollar. So there is a lot going on that is delaying the procurement and all that has resulted in a plan for extending NetCents I.

Operator

Your next question comes from the line of Joseph Vafi - Jefferies & Company.

Joseph Vafi - Jefferies & Company

Maybe just a question on the margins for 2009, Judith I think you are talking about a 10 to 20 BIPS increase in 2009. You might have bit less pass through revenue and expected strong organic growth. Is the 10 to 20 BIPS, maybe 10 to 20 BIPS seems a little bit low in terms of margin expansion. One offset obviously would be business development. Is there anything else we should be thinking about?

Judith L. Bjornaas

Obviously the market plays in general as it has gotten a little more competitive so I think you are going to see margin pressure just on new business activities as well.

Joseph Vafi - Jefferies & Company

Okay, so it was just kind of a little general conservatism built in based on market industry.

Charles K. Narang

I do not think that is true but I just want to starting what Judith says, it is going to become more and more comparative and we are putting a lot of work continuing 2009 and as they have said, the first quarter related to us including $500 million to $600 million in programs. We will be coming very price comparative. On top of that, really we have mentioned that also we are building this organization business development and capital organization that can help us beyond 2009 and that is quite of taking a lot of [46.14] expense.

Joseph Vafi - Jefferies & Company

And then maybe just one follow up on the planning process and the outlook for 2009 if we can of rewind the clock and look at where you were in 2008 in terms of visibility, in terms of contract wins, ongoing work, things in the pipeline, is there really any change this year versus last year and kind of the amount of visibility you have to the guidance range versus the year ago?

Judith L. Bjornaas

I think we have a pretty good visibility last year and I think we are in about the same situation as we where last year. We feel very comfortable with the numbers we provide there.

Joseph Vafi - Jefferies & Company

Okay and then maybe just one final one, you circle back to the pass throughs, do you look at that as an isolated incident relative to the customer base with maybe the delay and maybe slightly lower pass through revenues or is that I mean you are concerned about kind of becoming maybe a larger challenge for 2009.

Judith L. Bjornaas

No, I do not think we are concerned about it at all. There were specific isolated events. I think the business strategy we have in place and the contracts we have that we are working, I think support the numbers we provided and the mix of business.

Operator

Your next question comes from the line of Brian Kintslinger - Sidoti & Company.

Brian Kintslinger - Sidoti & Company

The first question I have, the $195 million bookings or what was put in backlog, how much of your business actually was $215? Of the $215, how much of that was expanded for new business just from the quarter? Do you know?

Terry W. Glasgow

Expanded or new business, I am going to say that again we have progress some engagement about $2 million to $5 million and we had about $170 sum of million of new business coming in directly out of the National Guard alone and the rest of it was new business coming in from our GWAC contract vehicles and all that.

Brian Kintslinger - Sidoti & Company

So, if I take the $170, sum out say 25 of that and the remainder was all new business?

Terry W. Glasgow

Yes.

Brian Kintslinger - Sidoti & Company

Okay and then you provided how much new business 2008 provided roughly by the percentage of the year. Last year, you did $311 million of total bookings. Do you know how much of that was new business? I am just trying to get a year-over-year comparison of new business.

Terry W. Glasgow

I cannot give you an exact number but last year, we did not have a large re-compete and in 2007, we did not have a large re-compete and in 2008, we had two re-compete of some size. One of which was the White Sands shut around $30 million and the other was $170 million for the guard. So, the percentage would have been higher in 2007 of new business but the absolute dollar was much larger.

Brian Kintslinger - Sidoti & Company

Right, I was just trying to get an absolute dollar comparison.

Terry W. Glasgow

Yes, that is probably pretty close, okay?

Brian Kintslinger - Sidoti & Company

Okay. The civilian agency revenue came down quite a bit on percentage as year-over-year and quarterly. What is inside of that that would cause that to happen? Was that any of the things you mentioned so far?

Judith L. Bjornaas

We did have a couple of contracts in the civilian space that ended.

Brian Kintslinger - Sidoti & Company

That ended, so that was about almost 15% of revenue that came off?

Terry W. Glasgow

No, actually we would cause that effect that the other business went up quite a bit so it might have come down a little bit but the percentages would have change. So I mean, I think we are reporting 17% or so in the prior quarter. It was like 15% now so it is just the rest of the business was going up.

Brian Kintslinger - Sidoti & Company

Got it. The PEO Soldier contract, I am wondering if you can provide like you do in your Q, how much revenue that provides for the quarter, rough estimate? I think it was $9.7 last quarter.

Judith L. Bjornaas

I think it was probably a little less than that this quarter. Actually it is right about that same level.

Brian Kintslinger - Sidoti & Company

Great and the last question I had. When you look at the next four quarters other than potentially NetCents, is there any other major re-competes that you are facing for the year?

Judith L. Bjornaas

We do have higher level of re-compete this year than we have had in the last couple of years. Overall, depending on what happens with some extensions and what they view with NetCents that they will talk about it. They had more life with the contract but right now kind of a worst case is about 20% of our 2008 revenue is up for re-compete at some point in 2009 but our 2009 guidance of the total of top end of the guidance range is about 7% of the 2009 projected revenue comes from the assumption of winning re-compete.

Terry W. Glasgow

That is because we have these programs that will be running through most of the year and then the re-compete portion comes later in the year.

Brian Kintslinger - Sidoti & Company

And is there any one major or two major pieces that will make up that when I look at it 20% or 7%?

Terry W. Glasgow

Yes, there are a lot of pieces that make those. None of them are of a significant size in terms of 10% or anything else like that.

Operator

(Operator's instruction) Your next question comes from the line of Mark Jordan - Noble Financial.

Mark Jordan - Noble Financial Group

I would like to talk a little bit about your M&A exiting. You obviously have $50 million on your existing line but if you were to look at a clean sheet of paper today, how much cash do you think you could potentially deploy if in fact you found an attractive target?

Judith L. Bjornaas

Well we have not done anything formal with our current credit facility but we do always obviously specially in today's environment. We are in very close contact with not only on existing bankers but with other banks. Our sector I think is one of the few that they are actually happy to continue lending with. So I think if we found an acquisition of size, something $60 million to $75 million, I am very confident that we would be able to modify the credit facility to get that done. Obviously our pricing is quite as favorable as it currently is but given the interest rates now, it still would be pretty cheap money.

Mark Jordan - Noble Financial Group

Okay. You also stated in your presentation that acquisition is generic. They need to be accretive to be considered. We are also facing accounting changes where for example bill expenses have to be written off instead of capitalize moving forward. There is also push to increase the intangibles that you have to write off over time. Is it realistic to say that you will be able to stick to that moving forward that they would be accretive given those shifts?

Judith L. Bjornaas

You just do not ignore all that, are not you?

Charles K. Narang

We are like, this is Charles, we like to do that. We would like to stick to that form. We have been using that. Acquisition should be accretive. You are absolutely right. We those changes, this might impact a little bit but when you look accretion, you are looking at the period of 12 months, not the first three months or four months. The period of 12 months should be accretive.

Judith L. Bjornaas

Yes that is definitely be an impact and obviously the quarter of the acquisition related to any deal expenses.

Mark Jordan - Noble Financial Group

Okay. Final question to sort of generic, how do you see with the changing of administration kind of a little bit more of an activist congress, do you see any longer terms say over the next 12 to 24 months shift in terms of contracting trends with regards to moving away from cost flows or [T&M] business towards more of fix where you might have an impact on margins?

Charles K. Narang

We have not seen some trend and Judith then will give more detail but as they are moving to more and more total fix price than staying in cost plus, that is the trend in the new administration and that is the trend that has been the acquisition process because they want to control their budgets and that is one way of controlling it and it is good for both the contractor as well as the government to do that. That is the trend that we have been seeing so far.

Mark Jordan - Noble Financial Group

So you believe at least on the service side versus the hardware manufacture that it has moved switching toward fix cost and support margin expansion for you over the longer term and not to your pressure point?

Judith L. Bjornaas

I think in the short term as I kind of mentioned before with budgetary pressure in general, I think cost is becoming more of a selection criteria in new business awards. So I think in the short term, it could have some near term margin impact and pressure but as Charles mentioned in a fix price environment over the long term, there are a lot of things you can do to ultimately improve those margins.

Operator

You have a follow up question from the line of Michael Lewis - BB&T Capital Markets.

Michael Lewis - BB&T Capital Markets

Two housekeeping questions on free cash flow, what did you say your cash flow came in at? Did you say it was $22 million?

Judith L. Bjornaas

That was operating cash flow. I did not give…

Michael Lewis - BB&T Capital Markets

Okay, thank you. That answers the question. What is your guidance for free cash flow in 2009? Could you help us with your expectation?

Judith L. Bjornaas

Obviously the biggest driver of our cash flow is improvement in DSOs which we are still focused on so I would expect although I do not have a specific number to give you but I would still hope that our operating cash flow in 2009 would exceed net income again. We do not do a whole lot of CapEx.

Michael Lewis - BB&T Capital Markets

Okay that is fair. Also with regard to Q1 top line guidance, what is the implied organic growth at the midpoint?

Judith L. Bjornaas

I think it is about 7%.

Michael Lewis - BB&T Capital Markets

About 7%, and then just one final question, do you have a NetCents product number for the quarter by chance?

Judith L. Bjornaas

No.

Operator

Thank you and it appears we have no further questions at this time. You may hear a replay of today's call through May 4th by calling 1-888-203-1112 or 719-457-0820 using pass code 8455478. Again those numbers are 1-888-203-1112 or 719-457-0820 using pass code 8455478. This concludes today's call. You may disconnect at this time.

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