Applied Signal Technology F4Q07 (Qtr End 11/30/07) Earnings Call Transcript

Applied Signal Technology, Inc. (APSG)

F4Q07 Earnings Call

December 18, 2007 5:00 pm ET

Executives

Gary L. Yancey – Chairman of the Board, President & Chief Executive Officer

James E. Doyle – Chief Financial Officer & Vice President Finance

Analysts

James Mcilree – Collins Stewart LLC

Michael Lewis – BB&T Capital Markets

Miles Walton – CIBC World Markets

Patrick McCarthy – Friedman Billings Ramsey

Steven Levenson – Stifel Nicolaus & Company

Robert Kirkpatrick – Cardinal Capital

Presentation

Operator

Greetings and welcome to the Applied Signal Technology fourth quarter 2007 earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Gary Yancey, President & CEO for Applied Signal Technology. Thank you Mr. Yancey, you may begin.

Gary L. Yancey

Good afternoon and welcome to our fourth quarter earnings calls. Probably most of you have seen our press release for this call. We will go through the fairly typical format that we use. I have Jim Doyle our Chief Financial Officer here as well. I will turn it over to him in a moment to recap the financial aspects of the fourth quarter and the fiscal year 2007 and I’ll have a few minor remarks and then we’ll open up to questions. With that, I would turn it over to Jim.

James E. Doyle

Good afternoon everyone. I’ll provide a brief review of our financial results as I normally do. However, let me begin with our Safe Harbor Statement. Our presentation today may contain forward-looking statements which reflect the company’s current judgment on future events. Because these statements deal with future events they are subject to risks and uncertainties that could cause the actual result to differ materially. In addition to the factors that may be discussed on this call important factors which could cause actual results to differ materially are contained in the company’s 10Q and 10K.

The order received during fiscal 2007 were over $191 million and increased about 54% compared to fiscal 2006 orders of $124 million. We believe there continues to be an interest in intelligence, reconnaissance and surveillance by the US government to respond to the threat of terrorist activities and the war against terrorism. We also believe our company is well positioned to benefit from the anticipated spending. We focus our operations on assuring program performance, maintaining a competitive cost structure and penetrating our marketplace. Our customers continue to come to us with their requirements for ISR solutions heavily weighted towards new development.

Revenues for the fourth quarter of fiscal 2007 were approximately $46.2 million essentially the same as the fourth quarter of last year. At October 31, 2007 there was approximately $4.5 million in pre-contract costs on the balance sheet that the company anticipates will convert to revenues in future periods. Revenues for fiscal 2007 were a little over $170 million, up about 5% from approximately $162 million of revenues recorded last year.

Operating income for the fourth quarter and fiscal 2007 was approximately $4.1 million and $11.3 million respectively compared with operating income of approximately $1.8 million and $8.9 million for the same periods in fiscal 2006. Operating income increased during the fourth quarter and fiscal 2007 due to improved program profitability.

Net income for the fourth quarter and fiscal 2007 was approximately $2.4 million or $0.19 per diluted share and $6.8 million or $0.55 per diluted share respectively. Compared to net income for the fourth quarter in fiscal 2006 of approximately $600,000 or $0.05 per diluted share and $4.3 million or $0.36 per diluted share respectively. Net income improved for the fourth quarter and fiscal 2007 because of improvements in program profitability and a reduction in our effective tax rate.

I’d like to briefly review the balance sheet. The combined cash and investment balances at October 31^st were approximately $39 million and grew about $6.4 million over the year. We had a balance of about $32.6 million at the end of October of 2006. Accounts receivable balances were about $44.5 million. Included in accounts receivable are billed receivables of about $25 million and unbilled receivables of a little over $19 million. The inventory balance at the end of October, 2007 was essentially unchanged. During the fiscal year it was approximately $5.9 million compared to approximately $6.1 million at the end of 2006. Other current assets included pre-contract costs of about $4.5 million at the end of fiscal 2007 and that compares to approximately $5.7 million of pre-contract costs at the end of fiscal 2006.

Our current liabilities are about $20 million down about $2.5 million from a year ago and that is due to a reduction in account payables balances. We did pay dividends of about $1.5 million in the fourth quarter and about $6 million during fiscal 2007. Our ending backlog for fiscal 2007 was approximately $127 million up from about $105 million a year ago.

That’s an overview of our financial results. I’ll turn it over to Gary and he’ll open up to questions after that.

Gary L. Yancey

I don’t have too many comments to add over what was in the press release. Obviously, with this stronger backlog though, we are well positioned for 2008 to be able to have an opportunity for continued growth in the company. As we’ve said and I’ll just reiterate that the marketplace definitely has a requirement therefore, opportunities pretty well across all of our offerings in intelligence, surveillance and reconnaissance – we’re seeing opportunities across all capabilities and areas of the company and believe that the requirements for better ISR will continue to be out there and provide a marketplace with growth opportunity for us.

With those few comments, I guess what I would do is plan on going ahead and opening this up to questions.

Question-and-Answer Session

Operator

Ladies and gentlemen we will now be conducting a question and answer session. (Operator Instructions) Our first question comes from the line of Jim Mcilree of Collins Stewart.

James Mcilree – Collins Stewart LLC

Could you guys – Jim, the operating margins that you posted this year, I think you talked about a range of 6 to 9% being reasonable going forward and you came in kind of near that low end. Is there something about the backlog that would argue that the operating margins should be about the same or higher going forward?

James E. Doyle

I think Jim, it should be about the same as this year. It still consists of a significant amount of engineering development work which was typically awarded on a cost reimbursable type basis which does provide lower margins. Going forward, I would anticipate it, we anticipate a continued significant amount of development work so, it would be towards the lower end of that range. Is what we’d anticipate for that.

James Mcilree – Collins Stewart LLC

Okay. I think on the last call you talked about trying to change around how you were accruing for things during the year which would make less R&D and less gross margins in the quarter. Is that what happened? Because, usually you get a bump in the gross margins for the quarter.

James E. Doyle

No. You’ve got to remember Jim that less R&D won’t really impact this since this R&D is billable back to the government and so is part of our billable costs. So, the R&D doesn’t really impact that. I’m not sure quire why the margin, why you would think the margin would’ve popped more the last quarter than here.

Gary L. Yancey

Sometimes Jim we’ll see a fourth quarter improvement in margins because of increase in product sales and things like that. There was some of that coming through here in the fourth quarter but, the biggest drivers were some improvement in profitability on our development program.

James Mcilree – Collins Stewart LLC

Could you give headcount at year end and talk generally about what your plans are for 08 headcount?

Gary L. Yancey

Sure. Our headcount was roughly 635 people at the end of October and we are in a hiring mode given the backlog that we do have. We have immediate need for additional staff in FY08 and we’re in that hiring mode right now.

James E. Doyle

Actually, in most all areas in the company, in most all disciplines in the company, technical disciplines that it is we’re in that hiring mode. We had anticipated more hiring last year but, as I had mentioned in the release even though the orders came in pretty well as anticipated and even slightly greater than anticipated they were also later than anticipated and so what it created was more of a hiring need right towards the end of the year and now going in to 08. We’re getting pretty good activity and positive responses on our hiring.

James Mcilree – Collins Stewart LLC

The backlog is like an 18 month backlog? Is that reasonable?

Gary L. Yancey

That’s reasonable, yes.

James Mcilree – Collins Stewart LLC

There’s an RFP out there for something called Measurement & Signature Intelligence, Advanced [inaudible] Intelligence Program. Are you aware of that or involved in that?

James E. Doyle

We are actually planning to be on a team to be pursuing that.

James Mcilree – Collins Stewart LLC

When are the bids on that one due?

James E. Doyle

I believe that they will be due towards the end of spring. I believe it’s going to be, I think, a summer award or late summer.

Operator

Our next question comes from the line of Michael Lewis with BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

Nice clean quarter. Okay, Jim just a quick question on pre-contract costs. Over how many quarters do you think that we would expect to see the $4.5 million convert?

James E. Doyle

Probably over the first two quarters of the year.

Michael Lewis – BB&T Capital Markets

Okay. Can I get your mix please, what the mix was at the end of year?

James E. Doyle

The mix in?

Michael Lewis – BB&T Capital Markets

With regards to cost plus.

James E. Doyle

As far as sales? Or bookings?

Michael Lewis – BB&T Capital Markets

With regard to sales.

James E. Doyle

With regard to sales, in the fourth quarter it was roughly 15% from product and about 85% from our engineering work.

Michael Lewis – BB&T Capital Markets

Okay.

James E. Doyle

And that’s about the same for the year, Mike. It’s roughly 14% to 86%. So, it’s roughly 15% product sales and 85% development.

Michael Lewis – BB&T Capital Markets

Gary, we would expect to see, because of the large portion of R&D inthe mix right now, continued flatlining of the product percentages at around 15%, but low 20% going out for the rest of this year?

Gary L. Yancey

That’s definitely what we believe for this year, Mike.

Michael Lewis – BB&T Capital Markets

By the way, it was nice to see that IDIQ on process hit back in October. I’m kind of wondering whether opportunities are out there in the field for SAS systems with the UUVs. Are you looking at other RFPs or any other type of near term opportunities for that type of process right now?

Gary L. Yancey

We have a number of opportunities actually, over the next five years that we’re looking at both unmanned undersea vehicles SAS – Synthetic Aperture Sonar, of course, is what that stands for and towed SAS where you have a towed vehicle or a towed fish as they call it and there’s different applications for both. Both fit different applications. We have some international opportunities that we have to make sure we can get export license for and we’re working with the State Department on that as we speak to verify that we can do such. Then we have some naval opportunities as well. Some of those could happen in this fiscal year and 09 and actually we’ve identified opportunities clear out through 2012.

Michael Lewis – BB&T Capital Markets

Gary, are these going to be DARPA development type contracts? Or, are they going to be full competitions?

Gary L. Yancey

Well, they won’t be DARPA development. Some of them will be competitions. We have one foreign opportunity right now that’s going to be a competition between two primes and so, that will be competitive. Some of the opportunities are a bit smaller and could perhaps be sole source. We need to completely productize our towed SAS. We have productized unmanned undersea vehicle SAS and we have a towed SAS system actually, sitting in our LA office now. Actually, not in an office, it’s pretty big but, sitting in a laboratory and it’s been out for sea trials quite a bit. So, we’re pretty close to having that as a deliverable system as well and we think there’s going to be some opportunities that might be sole sourced to us as a result of having that pretty much off the shelf opportunity.

Michael Lewis – BB&T Capital Markets

Just one more question and then I’ll hope back in the queue. I might be taking a tangent on your Gary. The Air Force obviously, is right now standing up the new cyber command. Major General Lord recently said the budget could be as large as $10 billion to set that thing up. Have you guys looked into areas that you think you could leverage some of your product that could be beneficial to this new command? Because, this is going to start up sometime next year I’m wondering if you guys have looked into that as a possible new market opportunity.

Gary L. Yancey

As we speak we are looking into that but, very preliminary, very premature right now for us to have much knowledge about what this whole cyber initiative will be. We had a strategic advisory board meeting a while back with some very high level experienced individuals from out of the government and that was a strong recommendation to make sure we follow that initiative and see if there would be opportunities for our capabilities there.

Michael Lewis – BB&T Capital Markets

Okay. So, they’ll be looking at your algorithms, right?

Gary L. Yancey

Well, it could be algorithms, it could be hardware products. You know, it depends on again on exactly what the cyber – what all capabilities the cyber initiative wants to have. But, most all of our expertise is based on the algorithms we’ve developed and we can implement in fieldable solutions and whether that would be running on commercial off the shelve equipments or in some cases the special purpose engines. It’s way too premature for us to know what the initiative will be to know where we might fit in.

Operator

Our next question comes from the line of Miles Walton with CIBC World Markets.

Miles Walton – CIBC World Markets

You did have actually, nice improvement in operating margin in the quarter. I was just hoping either Jim or Gary, if you can probe a little bit deeper maybe give some color behind what in particular in characterization of program performance is driving that? It looks like maybe excluding the stock based comp you’re getting pretty close to about a 9% or excuse me 11% op margin.

Gary L. Yancey

We had some nice improvement Miles in one of our development programs. It’s an Award B type program. We picked up some nice – we had been a little bit conservative on what we thought the program might look like the rest of the way and we had a good Award B period this last one and given the way the programs going and we anticipate essentially completing it by the middle part of next year. Just the way everything looks. The programs going well until we’re able to improve our profitability on that.

Miles Walton – CIBC World Markets

A million pick up, or something in that order?

Gary L. Yancey

Well, it wasn’t that big but, it was a good three-quarter of a million or so.

Miles Walton – CIBC World Markets

Okay.

Gary L. Yancey

We also, throughout the year and even in the fourth quarter we’ve had some good improvement with the royalties that we were getting from ComTech. So, that’s been a nice royalties stream and continues to show improvement. Those are some of the things – were some of the bigger drivers in helping fourth quarter profitability and year-to-date profitability.

Miles Walton – CIBC World Markets

Okay. Maybe back to, I think Jim had brought this up initially but, on the R&D side, it was lower as a percent of sale here in the fourth quarter, just over 7% of sales and I understand that it’s billable back Gary. But, presumably there’d be better margins on your contract work than your R&D. So, on a go forward basis, what’s the appropriate percentage of sales kind of you think R&D is going to be as a run rate?

Gary L. Yancey

We target on the order – or actually we’ve changed the mix a little bit because some of our business development is going to require a bit more of an investment in marketing and we’ll trade that a little bit for an investment in R&D. But, we should get back up more towards 11%, 10.5% to 11% of a portion, a large portion of our revenue. There’s some – it’s way too involved to try to explain here but, there’s some type of contracting work we do that does not generate the G&A pool for R&D. Or, the R&D pool would be a better way to say it. So, we don’t count that revenue in when we make a decision at the beginning of the year for our R&D budget. The reason the R&D rolled off in the fourth quarter, as I mentioned before, these bookings came in much later than had been anticipated and once they hit we had to pretty immediately shift staff from R&D activities and a few of the other what we call end direct activities on to contract activities so that we would keep up the good program performance that Jim’s been referring to. It was a conscious decision that we had to trade that until our hiring picks up to where we can then get back to the balance that we want.

Miles Walton – CIBC World Markets

Jim, maybe on the stock based comp for next year. I think you had a reset that was triggered. So, is just over $5 million the right number to be targeting in terms of the stock comp expense before it drops to kind of the mid threes in 09? Also, if you can comment on the tax rate assumption.

James E. Doyle

Sure. Let me just give you some color on the FY07 results. Stock comp was about $4.2 million. We anticipated growing just a little less than that. It should be less than that $5 million Miles so, we’re a little bit under that for FY08. Then, as far as our effective tax rate for fiscal 08, right now we see it somewhere in the 44 to 45% range. That’s kind of a similar range to where we came in FY07. Our effective tax range for 07 is about 43% so, we’re in about a similar range for next fiscal year.

Miles Walton – CIBC World Markets

Okay. That’s helpful. Gary, on the guardrail program obviously, Northrop has now been on contract for that. Is there a timeline for when they are going compete the work on that that you’re looking to compete on? Also, if you can kind of lay out for us the major programs that you’re thinking about in 08?

Gary L. Yancey

They are competing that. They actually had an informal competition where they had some run off. We probably are not going to get the piece that we originally had wanted on guardrail. It looks like we still think there’s opportunities and we’re in discussions. There’s opportunities on the program for our expertise and we’re in discussions on that. The amount that guardrail could mean to us is still questionable at this time. Some of the other programs, I mentioned that we had a foreign opportunity inthe SAS area, that’s one of our major opportunities. There’s a few different ELINT opportunities for the division, our electronic systems division where we’ve been making a pretty major investment and a state of the art ELINT processor. Those opportunities we’re a little cautious about this because a number of them are foreign. We have licensing so, that’s not an issue but, it seems like the foreign opportunities slip even worse than US government ones. But, there’s about three different ones that are suppose to be awarded inthe fiscal year 2 08. Those are competitive in most all cases so, there’s still also the competitive factor behind that. Then, a number of – well, actually there is one potential opportunity for selling 10-20 ground base wireless comment processors which is not real big but, it’s not bad and hopefully, that would bea little higher margin even though it’s still not enough of the revenue that it would greatly swing it but, it could help the margin.

Miles Walton – CIBC World Markets

Okay. Near term, the next couple of quarters will the supplemental delay or the budgetary dynamics and politicking that’s going on now, is that going to way on the booking trends in the next couple of quarters?

Gary L. Yancey

I don’t think the supplemental – it turns our we do get benefit from the supplemental each year. We never know how much and our customers don’t really know how much, you know, we can get benefit from that. But, the fact that is maybe hitting a little bit later probably isn’t a real issue for us, especially with the fact that we’re starting out with a stronger back log this year going into the year than last year.

Miles Walton – CIBC World Markets

Okay. Indirect rate variance, I guess at the end of the year you’re able to absorb that, I think you were carrying maybe just over $4 million on the balance sheet after reserves last quarter. I guess, we’re sitting now at zero and that was able to be absorbed on plan.

James E. Doyle

Yes. You’re right Miles. We reported that we estimated $4.5 million of variance that we could not absorb and it did in fact, itall trues up to actuals at the end of the year. What was left on the balance – what was left before we actually trued everything up was bout $2.3 million. We did better than we thought. We lowered what that variance was and that was a primary result of the back log improving. Things coming ina little bit earlier than we thought in the fourth quarter so it enabled us to charge directly to contract and that helped to lower the impact of that indirect rate variance in the fourth quarter.

Miles Walton – CIBC World Markets

The $2.3 million that was left was then charged to contracts?

James E. Doyle

Essentially. Some was charged to profits some was flowed back on the cost reimbursable type job.

Operator

Our next question comes from the line of Patrick McCarthy with Friedman Billings Ramsey

Patrick McCarthy – Friedman Billings Ramsey

I had a couple of additional questions on the order flow during the quarter. I was wondering, typically you see this year end, December year end flush of product and I was wondering if you saw that in the quarter. Given the FFP contribution it maybe looks like you might not of.

James E. Doyle

It wasn’t that big of a flush. You’re right.

Gary L. Yancey

You’re right Patrick.

James E. Doyle

A little bit. It was improved over the third quarter but it wasn’t a significant amount.

Gary L. Yancey

It was a weak flush so we’re calling a plumber.

Patrick McCarthy – Friedman Billings Ramsey

So, should we assume that because that was kind of driven by year end it’s probably not going to come in the current quarter either?

Gary L. Yancey

That’s correct.

James E. Doyle

Right.

Patrick McCarthy – Friedman Billings Ramsey

Some other programs that you talked about in the past but didn’t mention. You haven’t talked about these in a while but, some smaller ones you were looking for at the end of the quarter. Did any of those come in? Some multiple channel system program and particle imaging program that might have come in the fourth quarter?

Gary L. Yancey

Yeah. We did get some particle imaging, I’m just trying to think back to what you might be referring to versus what versus what we got. We did get some bookings in the particle imaging area. We definitely got a large number of bookings in the multi channel area, multi channel comment area, high capacity comment area. It was somewhat across the board that we got the bookings.

Patrick McCarthy – Friedman Billings Ramsey

Then, just on the ELINT side. I mean, is it far to say that unit is now up and just kind of waiting on orders? And, did anything fall inthe fourth quarter here? Or, is it much more of an 08 hopefully the bookings start coming in then?

Gary L. Yancey

08 for the bookings. The unit, we actually, in fact, we mentioned that in that one press release where we had the demo, fairly well attended demo by prime contractor representatives of US government agencies and there we were able to demo essentially, all of its capabilities. There’s still a bit of work. Most of that work is just finishing up now for a few more of the capabilities. Then, we have a qualification phase to go through which would not necessarily impact us being able to stand up to the opportunities we have and is not impacting that. But, the unit will be more of a complete off the shelve capability by probably April to May timeframe of next year.

Patrick McCarthy – Friedman Billings Ramsey

Okay. Could you just give us a sense of how many bodies you have allocated to that effort?

Gary L. Yancey

Probably about 15.

Operator

Our next question comes from the line of Steven Levenson with Stifel Nicolaus.

Steven Levenson – Stifel Nicolaus & Company

I know you caught up on the labor rates. Can you tell us how you plan to handle the situation in fiscal 08? Do you think we’re going to bump into those same things? Or, do you plan to raise your – try to avoid the variance? Or, do you think you will have a better time negotiating labor rates with the customer?

Gary L. Yancey

We’ve got a much better opportunity here in 08 and we say that damn near every time we start a fiscal year. But, by having the higher back log we can regulate this better to balance between contract labor which has to happen anyhow and the indirect labor that is discretionary spending. Going into 07 with the lower back log we had to start investing more heavily keeping staff occupied investing in our R&D, internal R&D more heavily early on and some of our other business development activities. We’re actually in an opposite situation now we’re really needing to hire just so we can start making those investments and as we can hire then we can start making those investments. But, we’ve got a much better opportunity to keep that in balance.

Steven Levenson – Stifel Nicolaus & Company

That sounds good. Do you think – do you plan on one of your job fairs? Or, is the employment situation such out there that you think you’ll have a little bit easier time?

Gary L. Yancey

No. We’ve been holding our own job fairs; we’ve been attending many job fairs. There’s many of them around coast-to-coast, actually across the United States. We’re hiring at almost all offices except our Texas office. We’re seeing pretty good resume flow, in fact, surprising this time of year typical would be pretty slow and we’re still picking up new employees right through the holidays too. It’s an investment, a fair amount of investment. But, I think we’ll get a good stab at what we need to do.

Steven Levenson – Stifel Nicolaus & Company

Thanks. You mentioned one of the teaming agreements before. Can you give us a little update or outlook on how you think that’s going to work going forward? What sort of programs you’re going after and if you can say how your partners are?

Gary L. Yancey

I’m not sure which teaming agreement I would have been talking about is the problem.

Steven Levenson – Stifel Nicolaus & Company

You mentioned on one of the foreign programs.

Gary L. Yancey

Oh well, we have – we’re teamed on maybe three or four different foreign – most of itin the ELINT area but, on those. Those were the ones we were referring to earlier when I said we had some opportunities coming up in 08.

Steven Levenson – Stifel Nicolaus & Company

Do you have a goal for bookings in the coming year?

Gary L. Yancey

Yep. Next question.

Steven Levenson – Stifel Nicolaus & Company

Any more detail on that?

Gary L. Yancey

Nope.

Operator

Our next question is from the line of Robert Kirkpatrick with Cardinal Capital.

Robert Kirkpatrick – Cardinal Capital

Although I’m a little bit new to the story, you talked earlier about royalties from ComTech. Could you give us a ballpark as to what those are on an annual basis?

Gary L. Yancey

Actually, we can tell you what they were for this year. I mean, it’s a bit of a projection Robert but, it has been growing as Jim said.

James E. Doyle

For FY07 Robert it was about $1.5 million in royalties. As Gary mentioned, it has grown up from about $8 to $900k a year ago.

Robert Kirkpatrick – Cardinal Capital

Okay.

Gary L. Yancey

But again, we don’t know how much one should trend that. I mean, that’s nice and healthy and looking good but, you’re still looking in the future. This is a market that ComTech’s really the expert in and can control much better than us so, we kind of ride along with them on this.

Robert Kirkpatrick – Cardinal Capital

Okay. Do you have what D&A was for the year?

James E. Doyle

Yes. Depreciation and amortization was approximately $5.6 million.

Robert Kirkpatrick – Cardinal Capital

Okay. I’m sorry you didn’t get the guardrail business. Did that end up going all in house to Northrop?

Gary L. Yancey

No. I think there’s going to be another contractor that will get that. They were looking at two or three of us and I think we’ll get that – we still think we have offerings for guardrail, as does Northrop. It isn’t necessarily all gone yet.

Robert Kirkpatrick – Cardinal Capital

Okay. Finally, with three quarters or more than three quarters of your business being termed development when does that mix of business really start to change? Or, does it never really change with Applied Signal toward production?

Gary L. Yancey

Well, I’m not sure it’s even just Applied Signal but, in our business model as we go forward and as we keep growing and feel that we need larger parts of larger programs to grow the company in a multi $100 million range invariably the kinds of programs of records we’ll be going after will be cost reimbursable. There will be enough development in them that they won’t be fixed price. Even some of our air bourn programs that we’re in right now pretty heavily every platform will be cost reimbursable because – you can think of them as production but, there’s enough new engineering and engineering issues that come up platform-to-platform that a contractor just couldn’t take the risk of taking those fixed price. We believe that we’ll be seeing this type of a mix for – definitely for 08 and probably into even further years out.

Operator

Our next question comes from the line of Michael Lewis with BB&T Capital Markets.

Michael Lewis – BB&T Capital Markets

Gary, I was wondering, you’ve maintained 635 employees since I think April, the April quarter, what would be your internal goal? Are we talking trying to get close to 700 by the end of your fiscal 08? Is there any goal that you could talk to us about so we can kind of?

Gary L. Yancey

It is in that ballpark, in fact, I think it’s actually a little over 700 is what we are showing we need. Our attrition has picked up because the economy has picked up. It’s a bit higher so there was a fair amount of hiring that went along but, the real issue from April to the end is what we’ve been referring to is the slip bookings or you would have seen growth in staff in that period. That’s what caused this phenomena now of having a much heavier hiring effort going. Right now we’re really running in favor of contract work versus any of the discretionary spending.

Michael Lewis – BB&T Capital Markets

Can we somewhat isolate are you seeing more turnover out there in Silicone Valley? Are you seeing more turnover in Indianapolis or Northern Virginia? Where are you seeing the turnover that’s really hitting because, I know you’re hiring people. It’s a matter of where you’re holding on to them.

Gary L. Yancey

It’s almost universal. Perhaps a bit less in Salt Lake City although, we’re seeing a bit there and again, it’s just going to opportunities, some of them commercial and other opportunities. But, otherwise I would say it’s relatively uniform amongst all of our offices.

Michael Lewis – BB&T Capital Markets

Okay. That’s helpful. Bookings, at least north of one time next year? Would you offer anything there?

Gary L. Yancey

We’d offer something there. No, we think it’s north of one.

Michael Lewis – BB&T Capital Markets

Okay. North of one. Then Jim, just two remaining questions. Operating cash flow? Well, you can give me full year?

James E. Doyle

For the full year Mike is $14.1 million.

Michael Lewis – BB&T Capital Markets

$14.1 million. What about CapEx?

James E. Doyle

CapEx was about $2.8 million for the year.

Operator

Mr. Doyle, there are no further questions in the queue at this time.

James E. Doyle

In that case, then that will conclude our conference call. Thank you very much.

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