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Affiliated Computer Services (ACS)

F2Q07 Earnings Call

February 13, 2007 4:30 pm ET

Executives:

Lynn Blodgett - President and Chief Executive Officer

Ann Vezina - Executive Vice President and Group President, Commercial Solutions

Tom Burlin - Executive Vice President and Group President, Government Solutions

John Rexford - Executive Vice President and Chief Financial Officer

Jon Puckett - Vice President, Investor Relations

Analysts:

Julio Quinteros - Goldman Sachs

Jim Kissane - Bear, Stearns & Co.

Moshe Katri - Cowen & Co.

Bryan Keane – Prudential Equity Group

Adam Frisch – UBS Investment Research

Laura Lederman – William Blair Company

David Grossman - Thomas Weisel Partners

Greg Smith – Merrill Lynch

Presentation

Operator

Good afternoon and welcome to the ACS second quarter fiscal 2007 conference call. Today's call will consist of prepared statements by ACS followed by a question and answer period. All participants will be able to listen only until the question and answer session begins. The call is webcast live on the company's website, and available for replay purposes.

If you have any objections you may disconnect at this time. Leading today's conference is Mr. Lynn Blodgett, President and Chief Executive Officer. Also speaking today is Ann Vezina, Chief Operating Officer (commercial segment), Mr. Tom Burlin, Chief Operating Officer (government segment), Mr. John Rexford, Chief Financial Officer, and Mr. Jon Puckett, Vice President of Investor Relations. Mr. Puckett, you may begin.

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Jon Puckett

Thank you Maggie. Good afternoon and thank you for joining us today to discuss our second quarter fiscal 2007 results. Joining us on the call today are Mr. Lynn Blodgett, our Chief Executive Officer, Ann Vezina, the Chief Operating Officer of our commercial segment, Mr. Tom Berlin, our Chief Operating Officer of our government segment, and Mr. John Rexford, our Chief Financial Officer.

As always, I must caution everyone that any statements on this call that are not historical facts may be considered forward looking statements within the meaning of the federal securities laws. As you know, forward looking statements are subject to known and unknown risks and uncertainties, and could cause actual results to differ materially to those expressed in or implied by these statements.

Additional information concerning these factors is contained in the company's filing with the SEC. Copies are available from the SEC's website, from the ACS website, and from ACS Investor Relations. We have also provided a presentation on our website that we will refer to during our discussion.

We will refer to certain non-generally accepted accounting principal financial measures which we believe provide useful information for investors. We've posted both the presentation and the reconciliation of those measures to generally accepted accounting principles on the investor relations page of our website at www.acf-inc.com.

And finally, have no intention to and undertake no obligation to update any forward looking statements. Now let me turn it over to Lynn Blodgett, our Chief Executive Officer, who will provide a summary of the significant events during the quarter.

Lynn Blodgett

Thank you John, and thank all of you for joining us on this very important call. I think as each of you are probably aware this is my first earning's call since becoming the CEO of ACS, and today I am proud to be joined by my executive team. One of our primary goals was to make sure that ACS had the right team to take ACS to the next level. We're joined today by Ann Vezina, our COO, over the commercial operations, and Tom Burlin, our COO for government, and they'll give more color and detail on their options.

Before I move into our formal presentation I want to take just a few minutes and give my strategic vision for ACS, and discuss why I'm so proud of ACS. I'll also discuss what I believe are our forestrengths.

Mine is the position of leading a company with the tremendous track record of growth and success. The company was about $500 million in revenue when I joined in 1996, and now we generate more than ten times that amount of revenue. We now earn more than that amount in operating income. Our share price adjusted per stock has grown from about $80 per share to approximately $50. And we've grown from a US company with 10,000 employees, to a company supporting client operations in more than 100 countries, with approximately 58,000 people worldwide.

The reason for our growth and success are simple, and I will cover them with a few simple guiding principles. Principle number one, we applied technology to deliver services to our clients to make their businesses better. We’re technology independent and following this principle there are several things to ensure consistent profitable growth over the long term.

It freezes us from the risk associated with any technology, we’re not tied to a single technological path which insulates us from any natural (inaudible) or hold of any industry or market, ensures that we grow to evolution rather than revolution. We make changes and improvements in our people and technology every day rather than betting on the next new higher risk technological marvel

We build unique solutions, meeting our customer needs on our standard platforms. Our innovation comes where it matters most, and that is at the client solution level. Our approach has allowed us to maintain and grow earnings while transforming ourselves from a bank data profiteering company in 1989 to a leading IT infrastructure company to a leading global provider in the (inaudible) market.

There are several examples of our evolution including electronic payment cards, advanced scanning software, electronic benefit payments, our leadership and multi-scope HR, our early development of the medical management information system, our electronic toll systems, and many more.

The second principle is that we must grow the business profitably by winning new customers and by adding depth and scope of service for existing customers. We must focus on markets and services where we can achieve sustained internal growth and profit. This doesn't mean that we will not maintain any low growth business.

Our portfolio business dictates that some business is more mature in its growth cycle. These businesses must be carefully managed from a cost and margin perspective to ensure they contribute to the entire earning's performance of the company. But, our focus must be on service offerings where our performance demonstrates internal growth in revenue and profit.

Following this principle will ensure that we properly invest in our businesses that demonstrate internal growth, and second, that we capture proper returns on lower growth businesses that are acceptable cash generation businesses. Acquiring successful companies is a core competency of ACS. Again, our strategy is to buy successful companies at a fair price, not to buy trouble companies at a low price.

Our philosophy has always been to expand, through a balance of internal and acquisition growth. We have a long track record of success in both, and therefore our third principle is, acquisitions are good for ACS when they do the following: One, they add a new technology or service or capability that makes us more competitive for new and existing customers. As an example, we acquired Intellinex to add significant depth in our training business.

Intellinex gave us expanded capabilities in SAP. Second is that, and this is an AND or an OR, is the acquired company's internal growth rate to be significantly increase by being part of ACS. I use my own company Unibase that was acquired by ACS 10 years ago. Because ACS was financially stronger, and invested in our business, it brought management and technical skills to Unibase…our growth rocketed and dramatically exceeded our historic growth rates.

Fourth principle, people are the most valuable assets, and the service companies, the quality of our people, drives the quality of the business, and to create the long term client relationships we want. We do everything we can to recruit, hire, train, develop, and retain the best people in the industry. Customers receive outstanding service and they provide us with more opportunity and growth. This translates into more growth in revenue and earnings, which of course translates into happy share holders.

Please turn to slide one and I'll provide more detail on my strategic vision for ACS. Our goal is to become a $10 billion revenue run-rate company by the end of 2010.

Obviously, we will have to grow at a higher rate than we have in the first half of fiscal 2007 to achieve this goal. I am confident that we can reach and achieve this goal based on a balanced mix between high quality acquisition and the estimated five (inaudible) for commercial VTO, commercial ITO, and state and local market, which the industry analysts estimate are 9%, 6%, and 8% respectively.

My expectation of ACS is that we will grow internally at least as much as the market. So how we get to ten by ten? Internally, I believe we have good opportunities for future growth in the multi-scoped HR market, which is expected to be the fastest growing detail market over the next several years.

Many of you are aware that we have experienced service delivery issues related to multi-scoped HR, while working to remediate the issues, we consciously sign new contracts in this space and devoted resources to some of our service delivery issues. I believe that we’ve made significant progress in our performance to enhance project management and improve processes.

And I’m thrilled to announce that we’ve recently signed a new multi-scope HRBPO contract with GSK or Glaxosmithkline. This contract with GSK meets our sweet-spot of multi-scope HRBPO services and our return criteria, and we’re looking forward to deepening our relationship with this great client who we already provide with IT services.

In the government segment, we believe that integrated eligibility markets present many existing and future opportunities that states move to an outsourced eligibility model.

In the second quarter, we signed a large ten-year contract to provide eligibility outsourcing services as part of the larger service delivery team to a mid-western state. We’re very excited about this opportunity and we look to expand our service capability in this area for future opportunities.

We recently signed a deal to acquire the assets of Albion, which should close later this quarter. These assets will provide ACS with the proprietary integrated eligibility software solutions, which combined with ACS’s existing IT and VPL service capabilities, will provide is with an end-to-end solution to offer to this large and growing market.

We’re very excited about our competitive position and the opportunities as well that are in the global transportation services market. Tom will discuss more of that in his presentation. In addition to these large and growing markets, we will continue to see opportunities in financing and accounting where we continue to build the depth of our skill sets and breadth of our service offerings.

Additional markets where we see growth and can leverage our existing capabilities, both in commercial and government segments, are health care, transportation, manufacturing, transactional BPO and customer care.

We see growth opportunities internationally to provide services in local markets in which we are expanding. I also believe that we have solid growth opportunities as we extend the value chain by providing more complex value added services to our clients.

Although we are generally perceived in the market as a transactional BPO services provider, we actually perform transformational BPO for our clients, day in and day out. We’re learning from our implementations and leveraging this experience every day as we provide more value added services in our four BPO markets.

We will continue to innovate and create new markets as we have done historically. Let me give you some examples of ACS innovation. We were one of the early movers in the multi-scope HR market and we continue to shape this market by developing sophisticated web (inaudible) technology to better serve our clients. We were early developers of (inaudible) based system which is the foundation of our current MMIS business, which has developed innovative technologies which has allowed commuters to pay tolls electronically at highway speed.

Innovation is at the core of our entrepreneurial culture and will continue to be in the years to come. My goal as CEO is to place even more emphasis on innovation at ACS.

Another key agenda item for me is to simplify ACS. By simplify, I mean eliminating unnecessary spans and layers within our organization, and pushing decision making further down within ACS. I firmly believe this will make us more useful and client focused.

I also believe that this provides our employees with the opportunity and the appropriate level of autonomy and empowerment, which is critical to our fast moving entrepreneurial culture. The end result of simplification is more satisfied clients and employees.

Next we will continue to pursue an acquisition strategy that has helped fuel our growth and provide us with many innovative solutions and entrepreneurial talents. We will continue to take a straight forward approach to acquisitions and buy well-run, profitable companies with similar cultures that are creative to earnings.

This is a strategy that has served us well and we will continue to be opportunistic with our acquisitions. We will also target acquisitions that deepen our penetration into certain markets or broaden our capabilities.

My final initiative is to spend more time with our clients and with you, our investors and analysts. Looking forward to meeting many of you face-to-face over the coming months to provide you with information that helps you better understand our business and to improve the dialogue between ACS and the investment community.

Before I move on, I want to highlight how proud I am of our 58,000 plus employees who continue to provide excellent service to our clients. We completed our internal stock option investigation and we became current once again in our SEC filing. I cannot thank our employees, our customers and our shareholders enough for their enduring commitment to ACS while we work through these issues.

Please turn to slide number two and I’ll review the highlights from our second quarter fiscal 2007.

First, reported operating margins improved sequentially in both the commercial and government. Commercial operating margins were up 160 basis points and government operating margins were up 80 basis points.

Second, signings increased sequentially 26% with significant improvement in the government sector, moderated by lower than expected signings in our commercial segments.

Our second quarter fiscal 2007 signings are obviously below our record signings of $251 million in the second quarter of fiscal 2006. And the commercial segment was below our expectation.

Third, we achieved excellent renewal rate during the second quarter of fiscal 2007 at approximately 90%, and for the first half of fiscal 2007 renewal rates are approximately 95%. I’ve read recently a lot of commentary from industry analysts regarding ACS’ performance and customer satisfaction.

You can see from recent announcements, many external agencies are giving ACS support, and we believe that renewal rates are the best leading indicator of client satisfaction. And our renewal rates for the quarter and year-to-date speak for themselves.

On the surface, operating and free cash flow of $132 million and $57 million respectively, looked like they were below our historical ranges of 12-14% for operating cash flow and 6-8% for free cash flow. I’ve asked John to cover cash flow in more detail later in this presentation and give you more information on the drivers.

Last, we improved our execution in the second quarter of fiscal 2007. Over the past several quarters we have modified and improved our project management-training program and hired many additional project managers to help us successfully navigate our more complex contracts and service offerings.

We are seeing the results of our improved project management in both our IT and multi-scoped HR lines of business, where we’ve improved our execution. As you may have read in certain bankruptcy filings, we negotiated our contract with one client and they took some services back in house.

This was a real positive for ACS and for the client. The revenue impact of the services taken in house is minimal, and not providing these services is already improving our service levels and client satisfaction levels.

Please turn now to slide number three. Reported consolidated revenue grew six percent year over year and grew ten percent when adjusted for the welfare-to-work divestiture that was substantially completed in the second quarter of fiscal 2006.

Internal revenue grew by 4% year-over-year and was flat sequentially. Total revenue growth in commercial was 9% with 3% sequential internal growth, which was below our expectations.

I realize that we have work to do in our commercial segment to restore revenue growth to our expected levels and I’m confident that we will do so. Total government revenue growth was 10%, excluding the welfare-to-work divestiture. Government internal growth was 4%.

I’m obviously pleased with the 3% sequential improvement in government sequential growth, but we’re not through yet.

The CEO's or COO's, Ann and Tom, will give you more details on our segment results later in the presentation.

Now let's turn to slide number four. We will review new business signings for the fiscal quarter 2007. I remind you that the quarterly bookings will continue to be lumpy in our business. With that being said, we signed $162 million of annualized recurrent business in the quarter, a 26% increase from the first quarter. As I mentioned earlier, signings decreased year over year from our record signings in the quarter of fiscal 2006.

The government segment signed $114 million in new business or 69% of the total. The commercial segment signed $52 million in new business or 31% of the total. The service-line perspective of BPO signings were $155 million, ITO signed a remaining $11 million of new business.

Second quarter of new business represents approximately $1.1 billion of total contract value and an average contract term of 6.5 years which is driven by several states and local signings that were longer term.

We provided our preliminary first quarter results on November (inaudible). We indicated that we had been awarded approximately $170 million of annually recurring revenue that has not yet signed. Of this $170 million, approximately $102 million actually signed in the second quarter of fiscal 2007. The remaining signings are expected to sign in the third quarter of fiscal 2007.

Let's turn to slide number five for some additional color on second quarter fiscal 2007 signings. This chart shows the top 20 deals that we signed in the second quarter which represents about 81% of total signings for the quarter.

Average contract life for second quarter is about seven years and reflects the more significant government mix for the quarter. The top 20 contracts we signed during this quarter have expected capital intensity of roughly 2.5% of total contract value, which is below typical capital intensity due to the long term eligibility contracts with Glaxosmithkline during the quarter. The top 20 contracts are expected to generate about 16% of upgrading margins over the life of this contract.

The primary takeaway from this side remains, one, the competition is not causing our capital of the overall margins to be lower than its historical levels. And two, capital intensity on signed new business is not increasing.

Let's turn now to slide number six. I'm very pleased about the excellent client renewal rates that we achieved during the second quarter and for the first half of fiscal 2007. We calculate our renewal rates on the total annual recurring revenue of the new deals at the percentage of total annual recurring revenue of all deals sought.

During the second quarter we renewed approximately 90% of total deals sought, or $162 million of annual recurring revenue. For the first fiscal 2007, we renewed approximately $468 million of annual recurring revenue with a renewal rate of approximately 95%. To put this in perspective, this represents a total of 169 deals we sought and we renewed 158.

The total contract value for the second quarter renewals was $553 million. And for the first half of fiscal 2007, total contract value was $1.5 billion. Obviously you can't deliver results like these without having satisfied clients and these results are a testament to the excellent service we give to our various clients, day in and day out.

Please turn to slide number seven for an update on our sales pipeline. As always, our pipeline is a qualified pipeline of deals with the decisions we make made within the next 180 days and excludes deals in excess of $100 million of annual revenue. Our pipeline at the end of the second quarter will be approximately $1.4 billion. We're seeing particular pipeline strength in transactional BPO involved in both government and commercial. Our pipeline is also strong in health care ITO and BPO. We're seeing opportunities across provider, payer, and government healthcare.

There are several good opportunities in transportation, including some international opportunities. Our IT outsourcing pipeline, which was not as robust as we would have liked, has grown and has some good opportunities for expansion with existing customers and new logos.

Finally there are several good opportunities in customer care. I'd also like to point out that while some industry advisors have indicated that ACS is involved in fewer deals on which they were consulting, I remind you that there are multiple advisory firms consulting on deals. So you have to look at all firms. We are not seeing a slow-down. Also the state and local government markets, where we compete, typically do not use advisors and several of the business processing service deals we have pursued did not use advisors. In summary, I am please with our existing pipeline and I am looking forward to converting that existing pipeline to signings for the remainder of fiscal 2007.

Now let me turn the mic over to Ann Vezina the CFO of our Commercial Solutions group who will discuss the commercial segments performance of our group in more detail.

Ann Vezina

Thank you Lynn. Please turn to slide number eight.

Total revenue grew 9% in total with 3% internal revenue growth. Obviously, I have higher aspirations for our internal growth than we achieved this quarter. Commercial internal revenue growth was negatively impacted by the anniversary of large new business findings like Disney, some lower volumes related to certain care clients, and known losses from our acquired HR business. The decline due to lower commercial signing began to slow in the first quarter of fiscal 2006 and remained at lower levels for the second quarter fiscal 2007.

While some of this is within our control and the result of actions we took to slow down our percents in the multi-scoped HR space, some of this is also attributable to external distractions and negative publicity related to the stock options investigations and the delay in our filings of financial statements.

Now, I'm not making excuses for our performance, but I also think it would be naive to think that these did not have an impact on new business signing over the last nine months. I am confident we will see improvement in internal revenue growth going forward as we move past the large anniversaries of new signings and known losses from the acquired HR business, as well as the external distractions that we've had over the past several quarters.

Alternatively, I'm very pleased with our sequential improvement in operating margins. Reported operating margins improved 160 basis points. The progress we are making on improved execution on our multi-scoped HR business, which is a direct result of the investments we have made that Lynn mentioned earlier.

Additionally, we began to see margin impact of our first quarter 2007 restructuring efforts which were partially offset by certain non-renewals in fiscal 2006 and investments we are making in our workforce.

On this slide I have highlighted the restructuring charges and asset impairment charges we took in the first quarter of fiscal 2007. We will continue to monitor our operating margins and make sure we are aggressively managing our costs, to make sure we maintain our near industry high margins.

Please turn to slide number nine for some details around the Systech issue that closed during the fiscal quarter of 2007. In October 2006, we acquired Systech, a leading middle-market provider of system integration and consulting services, at a purchase price of $65 million. Based on trailing 12 months of revenue, the revenue multiple was approximately one time, which is within our historical range of purchase price for multiples. There is a typical earn-out of up to $40 million based on future performance which we hope to pay. The rationale behind the Systech deal was to compliment our existing SAP hosting business with additional front-end consulting and system integration services, which I felt would provide ACS with the end-to-end SAP solution.

We are excited about this deal because it makes ACS a premier partner of SAP America, and it allows us to cast in to the large growing SAP middle-market. I believe that with this acquisition, we are poised to be a leader in this growth area.

While on the topic of growth, please turn to slide number 10 and I will cover some additional markets we are focused on for expansion.

First, let me talk for a second about how we look at the markets we serve.

For ACS expansion opportunities have both vertical and horizontal components. Verticals represent industries we serve, like health care, transportation, manufacturing, communication, and education services. Horizontals represent services that we provide including finance and accounting, transactional BPO, IT outsourcing and customer care.

In short our goal is to continue to develop our horizontal offerings in response to customer needs as well as evolve our vertically integrated capabilities.

Let me provide an example of each. Several years ago our image and data capture services were going to a single insurance provider. Today we proudly serve a significant number of providers, all of the national payers, most of the large regional payers, and several Blue Cross and Blue Shield organizations.

This level of market penetration has accrued over the years by listening to our clients, delivering innovations, and adding targeted acquisitions. Today we deliver an array of services including premium billing support, clinical solutions, enrollment now with the ability of customer service, IT, segregation and cost of recovery services, and disease management.

Hopefully, this gives you a sense of our level of commitment to the health care vertical and to our ability to take advantage of continued growth in this space.

Now let me provide an example of horizontal expansion. Again we view a horizontal market as being a technology enabled service that has growth of potential across many or all of the vertical markets we can serve.

For example, we launched our finance and accounting horizontal line of business. We started with a single client in the manufacturing industry and delivered accounts payable services.

Today, we a deliver a full section of services ranging from AR and AP, to expense reporting, receivables, in house account reconciliation, and expense analysis.

We deliver these services to 20 clients in a variety of industries including travel, retail, communications and technology. I am very excited about the growth and opportunity in both our vertical and horizontal markets and we will continue to move up the value chain by adding services that our customers and prospects are demanding.

Now I would like to turn it over to Tom Burlin, the COO of government solutions who will go through the government segment performance.

Tom Burlin

Thanks Ann. If we could turn to slide 11.

Government revenue in the second quarter was $569 million. Adjusted for the workforce solution of the past year, second quarter government revenue increased 10% for the five years forward.

Internal revenue growth was 4% in the second quarter which was a 3% improvement both sequentially and year over year. As you know this increase in our internal growth rate is significant, given our internal growth over the past several quarters which has been plus or minus 1%.

Our improved internal revenue growth was driven by the ray up of previous new business findings including Texas Medicaid, the social security administration, and growth in our acquired transport revenue business which is offset by lower nonrecurring business in our employee and property division.

Overall, I am fairly pleased in the improvements we are seeing in the government segment. Our improvement is a direct result of the action we started taking 18 months ago to reorganize the sales organization.

We also saw an 80 basis point sequential improvement in operating margins due to our cost efficiency programs and the improved results in our transportation services business.

If we could turn to slide 12 in the pending Albion acquisition.

In 2007 we announced the signing of the definitive agreement to acquire certain assets of the Albion for approximately $30 million. The purchase price is approximately 1.2 times trailing twelve month revenues and its within our historic range of purchase price multiples.

As Lynn commented earlier, acquisitions are good for ACS where we can work confidently. Albion is a perfect example of this strategy. Albion proprietary solutions, which provides ACS with a commercial off the sale house solutions, determined the eligibility and managed people for various health and human services for HHS programs including temporary assistance for needy families, food stamps, Medicaid and childcare.

Albion propriety advantage HHS framework will bring ACS a proven, federally approved, top solution to respond to our client’s current and future needs. Albion’s software access and HSS qualifications significantly enhance ACS’ capabilities to bid on eligibility systems and corresponding IT and backend BPO services.

I believe this acquisition will give ACS the competitive advantage as the de-integrated eligibility market evolves. We expect this acquisition will close in the third quarter of fiscal 2007.

Now if you will please turn to slide 13, I’d like to take the time to let you know why we are confident not only to sustain, but improve our growth in the government market.

First, we are seeing resurgence across the U.S. local markets and governments have merged extended periods of deficit budgets to budget surpluses.

We anticipate the political shifts in the last election to focus spending on social welfare programs, health, and education. We also anticipate countries in identically populated states to make efforts to solve their perplexing transportation challenges. These are all traditional areas of ACS market strain.

We have also seen a recent increase in outsourcing opportunities in both the government IT and integrated eligibility markets. I would like to take the opportunity to reinforce Lynn’s earlier comments about how ACS uses acquisition to leverage growth, and as a strategic and competitive advantage.

The integrated eligibility market is an emerging market which we have sensed to be an opportunity of several hundred billion dollars with endured recurring revenue over the next few years. The acquisition of Albion uncoupled with ACS’ market premises, our strong customer service ability, and placed in the hands of the best subject matter experts in the industry, would drive additional internal growth in both ACS’ base IT and BPO business and the acquired Albion.

As a result of these devastating storms of 2006, and generally in response to homeland security and first respondent needs, we are seeing new community customer care opportunities such as a recent award of the 311 emergency response center in the city of New Orleans.

As constituents continue to require more efficiency and effectiveness from their governments, ACS is uniquely positioned to respond to these needs through our nationally distributed workforce, already serving in 440 locations across the country.

Again, I would like to point out the unique position ACS enjoys in the state local market.

For example, ACS is recognized in the industry as a world class provider of call center services. When this capability is coupled with a deep understanding of government growth, the delivery of customer care solutions in government is no longer a commodity offering, but in fact becomes a business solution which is highly valued by our government clients.

In fact, in our vast experience of state health care markets, in addition to our world class customer and commercial health care capability, uniquely positions us with the emerging and reengineered federal health care markets. Whether it’s the consolidation of Medicare claims management, or the emerging electronic health records market, few companies are strategically positioned to address these opportunities as is ACS.

Because of our experience in state local market, we believe that the federal BPO market represents another opportunity to grow. Over the many years of serving the state and local market we developed an extensive set of mature solutions many of which are equally applicable to the federal market.

For example, our solutions for helping state departments of transportation manage (inaudible) would be very similar to life chances on alcohol and tobacco and would be highly transferable solutions. All of this represents field opportunity for ACS.

Finally, I am excited about the opportunities and the strategies that ACS has developed for globalization within our government business and what it has to offer in adding to international growth.

As we indicated a year ago when we acquired transport revenue business from ASCOT we are seeing extensive opportunities for growth in our transportation business.

As we integrate the service offering across the business, ACS is uniquely qualified to address a variety of transportation needs of governments around the world.

We were recently awarded transportation programs in Mexico City and Marseilles, France. We are currently engaged in other significant international opportunities we hope to win.

Additionally, we are seeing applicable markets for our traditional U.S. based solutions and developing economy.

For example, solutions such as land record management and tax and revenue solutions are receiving great interest in each country. We are encouraged by the response today to go forward into these markets.

Again, this also represents the Greenfield opportunity for ACS. Let me now turn it over to John who will take you through our financial market.

John Rexford

Thanks Tom, please turn to slide 14, I will briefly recap the quarterly results.

Revenue for the quarter was approximately $1.4 billion representing total growth of 6%. Excluding the impact the WWF put us through, revenue grew 10%. Consolidated internal revenue growth for the quarter was 4%. At the consolidated level, reported offering profit margin is 30 basis point sequentially from 10.2% to 10.5%.

For your information, I have highlighted on the slides the items to consider that are included in both first and second quarter of fiscal 2007 results. Reported earnings per share increase by 22% on a sequential basis and we are encouraged by these improved results.

Please find for an update on cash flow for the second quarter of 2007, which, given our additional debt…and the cost of debt is something we are monitoring quite closely…second quarter report operating cash flow was $132 million, or 9% of revenue, and free cash flow for the quarter was $57 million, or approximately 44% of the revenue.

Considering our additional debt load, we provided you with certain additional information on slide 15, for cash interest paid, cash interest received, and cash paid related to the ongoing stock option investigation and shareholder driven lawsuits for the first and second quarter.

These net payments were approximately $25 million or approximately 5% of revenue for the second quarter of fiscal 2007. For the first half of 2007, our net cash payments total approximately $96 million, or approximately 3% of revenue.

One other item of note is our level of spending on CapEx and intangibles for the second quarter for fiscal 2007, which totaled $75 million, approximately 5% of revenue. And for the first half of fiscal 2007 which totaled $185 million, or approximately 7% of revenue.

The level of CapEx for the second quarter is at the lower end of our historical range, the lower capital requirements on some government and commercial new business, and the results of focus on reducing internal capital expenditures.

Please turn to slide 16 and I’ll cover the balance sheet.

Cash increased primarily because we determined that we’ve proven to retain a portion of our cash flows provided by operating activities rather than pay out any debt through the delay of filing our financial statements for fiscal 2006 and first quarter of fiscal 2007, and our reduced ability to access the capital markets during that delay.

Now that we have filed our financial statements, we anticipate that we will begin a reducing of any debt in the third quarter of fiscal 2007. (Inaudible) and other intangibles increased by approximately $57 million, primarily due to the Systech acquisition that closed in October of 2006.

Other accrued liabilities increased by approximately $42 million, primarily related to timing of payments to subcontractors, other contract costs, and the timing of payments on our debt. Long term debt increased by approximately $211 million, primarily due to our decision to build cash during the quarter.

Slide 17 provides you with an overview of our present capacity as of December 31, 2006. We were approximately $2.7 million outstanding as of December 31, 2006. The Senior notes turned an average fixed interest rate of 4.95%. As it relates to our $1 billion revolving credit facility, we have approximately $275 million outstanding, and approximately $141 million of letters of credit, as of December 31.

The revolving credit facility carries an interest rate of LIBOR plus 125 basis points. The term loan had approximately $1.8 billion outstanding as of December 31, 2006, and an expandable portion of $3.8 billion for purchaser to pay off our Senior notes.

The term loan facility currently carries an interest rate of LIBOR plus 200 basis points. In anticipation of one of your questions, we have not bought back any shares under the August 2006 $1 billion authorization. Regarding our anticipated capital structure mix, management and our board are continually evaluating the best means to maximize shareholder value.

Before I conclude, let me address what I anticipate what will be another question, the direction of operating margins going forward. As you know, our consolidated operating margins are dependent upon our mix of business, given that we have many businesses within these areas.

Several of these businesses generate operating margins that are above our corporate average, while several generate margins that are below our corporate average. Given all the moving parts, I don’t spend a lot of time forecasting direction of corporate operating margins.

I do, however, focus on the expected operating margins of new business that we are signing, to ensure the operating margins we expect to generate are commensurate with the capital intensity of the deal, the risk profile and services we are providing, and the overall return on capital.

Therefore, we will not provide any directional guidance on operating margins due to the always changing mix and amount of new signings and the ramp on new business.

That concludes our prepared remarks so Operator, so let’s open it up for questions, we have quite a few people in line, so please hold your questions to one per caller. Operator, you may begin the question and answer session.

Question-and-Answer Session

Operator

Thank you, if you would like to ask a question, please press *1.

And our first question comes from Julio Quinteros.

Julio Quinteros - Goldman Sachs

Hey guys, just wanted to focus real quickly then on the commercial side.

Maybe if you can give a little bit of color on where we are in terms of the restructuring, how far along are we if we were to think about it that way? What’s left to do, and more importantly, as you look forward in terms of the work force? But what opportunities are there for redeployment of the current work force, particularly between the onsite and offshore effort mix.

Lynn Blodgett

That’s a great question Julio, and what I’ll do is ask Ann Vezina, the COO of our commercial organization to answer that question.

Ann Vezina

Thanks Lynn. I view, in the commercial business, as is true in the government as well, is that our challenge is to constantly be looking for opportunities to get offshore and to reduce cost. That is something we have to do every single day, it isn’t something we do in one particular quarter or another.

I think, as I look forward in this business, I think we’ve put some structure in place and some processes in place that ensure that we do that on an ongoing iterative basis. So at this point in time…last quarter we did as we talked about, go through a pretty significant restructure. I think at this point in time, we’re in more of what I would refer to as a steady state, steady ongoing cost production as a way of during business mentality, and I think we’ve got that in place effectively.

Lynn Blodgett

Good, and I’ll add on another comment Julio. And that is, considered when you talked about the redeployment of the work force, about 40% of our business is government business, and typically is not as eligible for a lot of offshore. Now we can do some internal forward of our operations, but the actual service delivery to our client in the government space is typically limited.

And so when you look at our head count offshore, you need to factor in that a large percentage of our head count is not eligible to go offshore. If you think about the rest of the business, and the eligible headcount there, when we entered this year, we had a goal of about 30% of moving what was 30% of our current workforce to 40% of the eligible workforce. We’re on track to complete that by the end of the fiscal year.

Julio Quinteros - Goldman Sachs

Any specifics on how many heads that actually accounts for?

Lynn Blodgett

You know what, its several thousand. It depends on exactly which customer, and what the work mix is, and sometimes I can be a little skewed because if it’s a higher level job that will be a lower headcount, but the revenues will be higher. Does that make sense?

Julio Quinteros - Goldman Sachs

Definitely, thank you.

Lynn Blodgett

Ok, thank you. Next question operator.

Operator

I have the next question from Jim Kissane of Bear Stearns.

Jim Kissane - Bear, Stearns & Co.

Thanks, I know you guys don’t want to get specific on the margins, and the direction going forward, but can you tell me generally about the margin with potential forwards? Say transformational and multi-scoped outsourcing versus your traditional transaction based BPO?

It does seem as the market is moving more towards the custom solutions may be away from the more standardized offerings.

John Rexford

Now Jim…thanks for the question. In terms of the margins, as John pointed out, and I really don’t want to be evasive on this answer, as maybe you think we’re being, but there really is a significant impact on margins based on the mix.

If we’re signing a lot of federal business, as we move back into that market, margins in that business are typically going to be lower than they would be in our state and local government business, but that doesn’t mean its bad business.

So when we give you this answer, it isn’t that we’re trying to be crude, the truth is it’s hard to predict that given the business mix. I think what you’re getting at, or maybe this is the way to get at your question, and that is that the overall health, or the overall return with the earnings capability or earnings power of the company, I think you’re going to see a continued improvement as you saw from the first quarter to the second quarter.

Jim Kissane - Bear, Stearns & Co.

Ok great, nice job guys, thanks.

Lynn Blodgett

Ok next question?

Operator

Our next question comes from Moshe Katri of Cowen & Co.

Moshe Katri - Cowen & Co.

Thanks, its Moshe Katri with Cowen. Can you look at your bid and proposal pipeline, I think it was about $1.4 billion, can we break it down by BPO by ITO, and also by commercial versus state and local government? And again, we’re trying to get

on the health of the commercial pipeline at this point.

Lynn Blodgett

Sure. And it's good to hear from you, Moshe. And let me give you a couple of pieces of information about that.

The commercial area is something that, as Ann said, we're been concerned about. We’ve been concerned about the lower growth and the lower signings. And so we're very focused on that. And at this moment in time the commercial pipeline is just under $1 billion and the government pipeline would be the balance of the rest.

And Tom, if you'd like to give him a little more color in that regard?

Tom Burlin

I think the government pipeline remains strong. There was a quarter-to-quarter reduction in the pipeline, predominately due to the decisions that were made on trading fairly large engagements that we were a participant with. The space business that contributes to our quarter-to-quarter growth…those projects tend to be in the $2-5 million of annual recurring revenue remains very strong.

That said, we're working very diligently to reload the pipeline with new opportunities that we've seen in the future.

Moshe Katri – Cowen & Co.

And Lynn, can you also break it down by BPO and ITO?

John Rexford

Yeah, Moshe, this is John. The BPO piece is significantly larger. But you're going to have at least twice as big in the BPO side, maybe a little bit bigger than that.

Moshe Katri – Cowen & Co.

And then, finally, just as a follow-up to Jim Kissane's question regarding outlook. We're not going to talk about EBIT margins, but is there anything that can give us a good feel on what sort of top-line growth, maybe, to the two or three year outlook? Are we looking for 5% upline growth? Are we going to go back to double-digit growth rates organically? What's your feel, given what you were saying given demand trends in general?

John Rexford

Yeah, Moshe, I think that as I mentioned in my prepared comments, we have a goal to end a $10 billion exit rate by the end of 2010. And obviously to be able to accomplish that, we will need to have significant internal growth. I mentioned those growth rates in the various industries, and as I said, our objective is to grow at least in line with those, and then obviously, to make that number, depending on when we would find an acquisition, we would have to find a fortune of acquisition revenue to make that ten by ten.

But, as I said, the growth objectives…and I'll be disappointed if we don't fall at least in line with those industries’ level.

Moshe Katri – Cowen & Co.

Thanks.

John Rexford

You bet.

Lynn Blodgett

Okay, operator. Next question?

Operator

Our next question comes from Bryan Keane of Prudential.

Bryan Keane – Prudential Equity Group

Hi, good afternoon. You guys talked about the operating margins being impacted by the mix of business. I guess I'm trying to think about that versus operational improvements in the restructuring cost saves you had. So I guess in the quarter, how much of that was mix-of-business improvement and operating margins versus some of these other operational improvements and restructuring? Is there a way to balance it, or think about it that way?

Tom Burlin

Sure. I think, as Ann mentioned, we had significant efforts that we've been engaged in for about the last three quarters, in terms of these restructuring efforts. And some of that, as we said, was completed in the first quarter.

I think that most of the improvement in operating margins for the second quarter, and John, you can come back and correct me if this is wrong, but I think that the majority of that came through the cost-reduction initiatives versus mix-of-business.

John Rexford

Yeah, I don't perceive a lot of change in the mix of business, between first quarter and second quarter, Bryan. I think, again, most of the first-quarter structure activities that we did, I think we're pretty well completed with those. But we did throw some money back into the organization investing in our people. We had some other corporate charges: we were building up a procurement center here in the company, and we spent some of that money, quite frankly, to generate future business and savings in the future.

Bryan Keane – Prudential Equity Group

And Tom, did you want to make a comment here?

Tom Burlin

I would just add Bryan, that as we've looked at 2006, there's been problems about the business. We looked at our pipeline, we knew we were going to have to generate a pipeline and then go through the appropriate cycles that are representative of government. So, in order to continue to maintain a healthy business, we had to focus on our core business and focused on cost reduction.

I think we mentioned in our last call when we talked about our ABC, our incentive based compensation, which we had traditionally not used extensively through our government business. We avoid that on a very aggressive basis in government starting in 2007...actually, in late 2006, and have accelerated that, and we're seeing the results of that.

It's not only good for our clients to get a higher-quality product. It's good for our employees, they make more money per-capita. And it improves our bottom line. And I think you're seeing the results of that in the fourth-quarter improvement.

John Rexford

Yeah, I would just add on to that, Bryan. We are very encouraged and excited by the impact of things like ABC, activity based compensation. We've always viewed that as a genuine competitive advantage that we have.

And of course things like migrating work offshore and improving process efficiency, those are things that we have to do day-in and day-out. The fact that we had this reception in the government space around the activity based compensation, to me represents a very important move in terms of cost reduction.

Bryan Keane – Prudential Equity Group

Okay, that's helpful. And just a clarification, John, about the buyback. Did you start on, or did you plan on, staring to use the $1 billion authorization in August? If you don't plan to do it, what would hold you back from using that?

John Rexford

Well, at this point in time, I think that the board is going to start to continue, or is continuing to evaluate the possible way to return capital to shareholders. And at this point, that's all we're really going to talk about that.

Bryan Keane – Prudential Equity Group

Okay. Thanks a lot.

John Rexford

Thank you.

Lynn Blodgett

Okay, operator, next question, please.

Operator

Our next question comes from Adam Frisch of UBS.

Adam Frisch – UBS Investment Research

Thanks for taking my question. A couple of things for you guys here. I tend to look at margins more on a year-over-year basis, to take out seasonality. And by our estimates, commercial was down 50 basis points, government was down 340 basis points. I know you want to stay away from projecting near-term margins, but can you just give us a sense, I think it's a follow-up on other questions, some of the pushes and takes up there, what happened that was by the business going the way it was going, how much was investment, to give us a better sense of how to model going forward?

Lynn Blodgett

We'll do that, Adam, thanks for the question. And what I'm going to do is ask Tom to respond to some of the developments, or the dynamics in the government space, and I'll turn it over to Ann to do the same. And Mr. Rexford can cap it off.

Adam Frisch – UBS Investment Research

Okay.

Tom Burlin

Sure, Adam. Well, I would tend to agree with you that a per-annual basis would tend to level-out. I think we have to take into account that divesture of our workforce solutions which affect the quarter-to-quarter comparison to the tune of about a $26.5 million gain in that quarter. You eliminate that, about $3.4 million or by a fourth-quarter comparison, about a 0.9% improvement in our margins, and it was largely due to operational costs.

Adam Frisch – UBS Investment Research

Yep, that's good on commercial and government. I'm sorry, the reverse!

Ann Vezina

No problem. In the commercial space, let me just make a couple of points. I think as you look at the year-over-year, there are two things that I would point out that have negatively impacted us. One is the impact of certain non-renewals that had a significant impact on the year-over-year. And the second is year-over-year price reductions, specifically in our ITO business.

Having said that, my expectation is that as we continue to build on the concept of cost reduction as a way of life and as we continue to remediate some of our, the two problemed HR contracts that we talked about, we'll continue to see improvement in the year-over-year margins for the commercial group.

Lynn Blodgett

And before John comments, I would just add to that, I think we've mentioned a couple of times, that we were not as aggressive in our cost of production in the IT space, in the last part of, actually, through a lot of '06. And that caused us some decline there, but we are comfortable in saying that it remedies the majority of that issue and well, we’re moving forward.

Adam Frisch – UBS Investment Research

OK, if I could just ask a quick question on the credit facility? Slide 17 suggests you have about $2.5 million left in terms of capacity. If I grow seven (inaudible) by about 10% every year organically, that leaves a gap of about $2.5 million. Is that how you plan on using your leverage, or is that money just for buybacks?

Lynn Blodgett

That credit facility was put into place where we’re considering doing the Dutch auction, and it is that the additional money available on the term loans are available if and when we need them for share repurchases or for repayments of the senior notes.

Adam Frisch – UBS Investment Research

So, that’s not to be used for acquisitions?

Lynn Blodgett

There’s an accordion facility on the revolver to be able to extend the revolver size out for acquisitions.

Adam Frisch – UBS Investment Research

Okay. Just a couple of house cleaning items, these should be real fast. You said you increased debt to raise cash. Did I hear that correctly? So why would you do that?

Lynn Blodgett

No, we didn’t pay down debt in the second quarter, because without financial statements, people felt we were curtailed, at least we felt we were curtailed in our ability to access capital.

Adam Frisch – UBS Investment Research

Okay.

Lynn Blodgett

So we built cash over quarter and then I said that—

Adam Frisch – UBS Investment Research

—Taking debt up a little bit...

Lynn Blodgett

Yeah.

Adam Frisch – UBS Investment Research

Yeah, okay.

Lynn Blodgett

So what we’ll do in the third quarter is now that we got our financial statements filed is start to repay some of that.

Adam Frisch – UBS Investment Research

Okay.

Jon Puckett

Adam, I’m going to add, just because we’ve got a number of people….

Adam Frisch – UBS Investment Research

Sorry about that.

Lynn Blodgett

That’s okay. And please give us a call afterwards and we’ll try to answer whatever we can. Okay?

Operator, next question please.

Operator

Our next question comes from Laura Lederman of William Blair.

Laura Lederman – William Blair Company

Yes, thank you. A few quick questions. One, can you talk about the health of the ITO market in general? I think the growth rates you gave earlier of about 9% seemed a little high, so can you talk about some of the structural things that are happening that support that number, and also separately, given the problems and tests with the HRV field contracts, can you talk a little bit about the scoping of the glass and how you feel that it would be profitable given how large it is in the scope of it?

And finally, acquisition pipeline, how big of a deal would you do or just a lot of little ones? Thank you.

Lynn Blodgett

So this was a single, three-part question?

Laura Lederman – William Blair Company

Yes, sorry about that.

Lynn Blodgett

It’s okay. You’re very creative. We’re going to ask Ann if she would address the first issue in terms of the IT pipeline.

Ann Vezina

Just to clarify from the third comment, we see the ITO market as growing at a 6% rate. And I think if you were to look at the pipeline that we’ve got an ITO in, we’re feeling very good about that and I think we’re beginning to get some good traction on that pipeline, and if I look at that pipeline and where deals fall in the deal cycle, I’m pleased with how that pipeline lays out. I think we’re in a good position there relative to the ITO pipeline.

Tom Burlin

Let me add some additional comment on that, Laura, and that is that the issues of growth in IT are not because they’re isn’t a pipeline or there isn’t a market out there. You’d be surprised at how many green filled opportunities we have in pure IT infrastructure deal. So the market is...there’s an awful lot of growth capability in the market. It comes down more to how well we execute and how we manage our sales process and our sales pipeline. And we’re confident that pipeline has already picked up significantly and we’re confident we’re going to speed this growth up out of our IT organization.

Ann Vezina

Let me explain a little bit about the service line expansion that we’ve made with the acquisition of Systech and then previous acquisition of AMF.

Tom Burlin

Why don’t you expand a little more on that?

Ann Vezina

I think, you know, if you look at ITO historically, we’ve only…If you go back several years, our ITO capability was largely around infrastructure. As a result, some of the acquisitions that we’ve done over the past 24 months or so, we’ve been able to expand our ITO so that now we have Systech capability that the SH communal market capability that came to us from the Systech acquisition and then SAP hosting capabilities that came to us from what we now refer to as AMF.

Tom Burlin

Those look like other great opportunities.

Ann Vezina

That’s right. That’s right.

Tom Burlin

In terms of the scope and the challenges on the HR, these multi-scope HR contracts, as we said, most have had challenges with a couple of those, and I’m just happy to report that our people have made good progress on those specific contracts, and both of those clients are green in our stoplight reporting system. They’re green, which is a great thing, indicating that the client’s satisfaction is where we want it to be.

We have spent a lot of time, as we said, and I think Ann mentioned in her prepared comments, we did back off pretty considerably from the HR, the multi-scope HR space until we were able to get the processes in shape to where we felt they needed to be in order to be able to deliver the service that the client needs. And we learned that in terms of scope, there are some towers that, a couple of towers actually, that we may not offer as readily as we have in the past, because they appear to be something that is beneficial to the, or is something that is better left with the customer.

The multi-scope HR business is new, and the clients are learning what things are reasonable to outsource, and the suppliers are learning things that are reasonable to outsource, and I think you’re going to find that folks are going to adjust quietly because of that knowledge.

Does that help?

Laura Lederman – William Blair Company

Yes. Which towers do you think are better off after the outsource deal?

Tom Burlin

Finding it depends on the client, because you have some clients with a very, very diverse, work force, and you have others that may be concentrated in a given area. Under the right circumstances I would think something like recruiting, maybe something that’s better off served. On the other hand there are cases where recruiting works well. But if you asked me for a specific, I’d say recruitment is one we want to look harder at.

Laura Lederman – William Blair Company

OK, what about acquisitions, pipeline, pricing, which are helpful in terms of acquisitions for more likely little ones?

John Rexford

It’s John. The acquisition pipeline right now is relatively in good shape. They were coming, at building time frankly, for the pipeline, as we come off the calendar year-end. It is a pretty diverse pipeline. There are items in government, there are items in commercials, there are items in IT, there are items in BPO. There’s kind of a mix size. There are some relatively small ones, there’s a few larger ones. It’s kind of a normal pipeline.

In fact, another thing that happens too is we have a relatively large deal, not hundreds of millions of dollars that we actually passed on because we thought it got too pricey, and so we pulled back in.

In terms of promise in the marketplace, we’re not seeing a tremendous amount of upwards pressure on price. There are some transactions being done out there, well outside of what we consider to be good value. But frankly we’ve seen that for the last ten years. So I think we’ll be successful on that.

Tom Burlin

And, Laura, acquisitions are important, as we said earlier, because we can in a major way they act as some of our research and development. And so, the idea of being able to continue to acquire smaller organizations because they have a unique technology like the Albion acquisition is very appealing to us. And yet, on the other hand, because of our size, we know that we’re going to have to keep an open mind to acquisitions that may be larger than that.

Jon Puckett

Operator, let’s move on to the next question, please.

Operator

Our next question comes from David Grossman of Thomas Weisel Partners.

David Grossman - Thomas Weisel Partners

Great. Thanks very much. I’m wondering if maybe we could just review some of the contracts that have been discussed in some of the filings over the last couple of periods, and specifically if you can update us what’s going on with the Department of Education, and what the risks, write-off there are, and what other issues we should be considering on that contract.

And then on Melon, I know we talked about losing some clients, I know we talked about that for a long time. Have we finally anniversaried that growth headwind after the December quarter.

And then just finally on the two HR contracts that we talked about, are we still on track to hit a break even run rate on those two contracts by the end of the fiscal year?

Lynn Blodgett

Good questions David. I’m going to ask Tom to address the Department of Ed., and then Anne if you’ll talk about the Melon and HR contract?

Tom Burlin

Sure. Yeah David, the Department of Education contract is our largest contract, it’s been a long term contract for us, and one that we hold very dear. There’s really two aspects to the contract. There’s the servicing aspect of the contract in which we perform and have performed very well, consistently exceeding our SLA’s. In example, when compared to the cohorts of similar services and earning bonuses against our performance there we do exceptionally well and do a very good job in terms of that aspect of the contract.

On the other hand, there is a component of that contract that was focused on developing new software to be installed as a service improvement and we haven’t done as well there, haven’t performed as strongly there. We have been in discussions with the client about how to improve that performance and as part of that discussion as we indicated in our filing, it’s very likely that we will impair some or all of the software that is currently being developed.

Ann Vezina

OK, in terms of the question about the Melon business. We are nearly through that. You’ll see some gradual declines in terms of the impact in the back half of this year and it will be completely gone at the end of Q4 of FY07. So, there’s still a bit to go on that but it’s completely gone as we go into our next fiscal year.

In terms of the two HR contracts, when we disclose that information we put together our own recovery plans, and we are on target with that recovery plan for both of those contracts and both are scheduled to be break-even by the end of this fiscal year and are on track to do so.

Jon Puckett

Operator can we move onto the next question and let’s, just in the interest of time, why don’t we have this be the last question?

Operator

Our last question comes from Greg Smith of Merrill Lynch.

Greg Smith – Merrill Lynch

Alright, thanks for taking my question. Just regarding the projected contract operating margin, those numbers that you’ve laid out in the slide which I think are very helpful. I just want to understand, what exactly is measured in there, do we also have to allocate some corporate margin, or is that showing us an operating margin as if this was the only business that you had and it worked out as expected. That’s what ACS’ overall operating margin would be?

Lynn Blodgett

Well what we do, I’ll give some color on this and then John if you want to add onto this.

When we sign a deal, we create a model that is standalone for that particular deal, meaning that if we take into account any overhead that would be associated with the operating organization into which that deal would fall. So, there is a division person who would have some direct responsibility with that contract and that cost would be allocated in the model. We do not allocate corporate expenses as to these contracts and so we’re looking at this before corporate allocations. Though I think most of you know that our corporate overhead is quite low.

John Rexford

That’s exactly the way it is Lynn, you got it.

Greg Smith – Merrill Lynch

So we just should add whatever our expectation is for overall corporate is, a couple percent against that and that gets to the answer I think I’m looking for.

John Rexford

Yup, perfect.

Lynn Blodgett

Let me just say that we appreciate those who were on the call today. I’m sorry we weren’t able to get to all the questions but we very much appreciate your involvement and look forward to spending more time with you. Thank you very much.

Operator

Thank you for participating in today’s conference. You may disconnect.

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