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Edited Transcript of NVEE earnings conference call or presentation 26-Feb-20 9:30pm GMT

Q4 2019 NV5 Global Inc Earnings Call

HOLLYWOOD Mar 16, 2020 (Thomson StreetEvents) -- Edited Transcript of NV5 Global Inc earnings conference call or presentation Wednesday, February 26, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander A. Hockman

NV5 Global, Inc. - President, COO & Director

* Dickerson Wright

NV5 Global, Inc. - Chairman & CEO

* Edward H. Codispoti

NV5 Global, Inc. - CFO

* Richard Tong

NV5 Global, Inc. - Executive VP & General Counsel

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Conference Call Participants

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* Christopher Paul Moore

CJS Securities, Inc. - Senior Research Analyst

* Jeffrey Michael Martin

Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst

* Lisa Springer

Singular Research, LLC - Research Analyst

* Robert Duncan Brown

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Scott Benjamin Blumenthal

Emerald Research - Senior Research Analyst

* Tate H. Sullivan

Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst

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Presentation

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Operator [1]

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Good afternoon, everyone, and thank you for participating in today's conference call to discuss NV5's financial results for the fourth quarter and full year ended December 28, 2019. Joining us today are Dickerson Wright, Chairman and CEO of NV5; Edward Codispoti, CFO of NV5; Alex Hockman, President and COO of NV5; and Richard Tong, Executive Vice President and General Counsel at NV5.

I would now like to turn the call over to Richard Tong.

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Richard Tong, NV5 Global, Inc. - Executive VP & General Counsel [2]

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Thank you, operator. Before we proceed, I would like to remind everyone that this conference call may contain forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, including statements concerning future events and future financial performance. The company cautions that these statements are qualified by important factors, including those discussed in the Risk Factors section of NV5's annual report on Form 10-K for the year ended December 28, 2019, which is on file with the Securities and Exchange Commission as well as in other documents that the company files with the commission from time to time.

These factors could cause actual results to differ materially from those reflected by the forward-looking statements contained herein. While the company may elect to update forward-looking statements at some point in the future, the company specifically disclaims any obligation to do so even if estimates change and, therefore, you should not rely on these forward-looking statements as representing views as of any date subsequent to today. During this call, GAAP and non-GAAP financial measures will be discussed. A reconciliation between the two is available in today's earnings release and on the company's website at www.nv5.com.

Please note that unless otherwise stated, all references to fourth quarter 2019 comparisons are being made against the fourth quarter of 2018 and all full year 2019 comparisons are being made against full year 2018.

I would like to remind everyone that a webcast replay of this call and its accompanying presentation will be available via the link provided in today's news release and the Investors section of the company's website. Any redistribution, retransmission or broadcast of this call in any way without the expressed written consent of NV5 Global, Inc. is strictly prohibited.

We will begin the call with comments from Dickerson Wright, Chairman and CEO of NV5, before turning the call over to Edward Codispoti, Chief Financial Officer, for a review of the fourth quarter 2019 and full year 2019 results and outlook for 2020.

Alex Hockman, President and COO of NV5, will then provide some insights into NV5's operational achievements for the year and quarter before turning the call back over to Dickerson Wright to provide the outlook for 2020. We will then open the call for your questions.

Dickerson, please go ahead.

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [3]

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Thank you, Richard, and good afternoon to everyone for joining our Q4 2019 conference call, along with full year 2019 results. The year was a year of process improvement and restructuring for our planned growth for 2020. However, we did have significant accomplishments for 2019, and I'd like to review those with you. So if you would please turn to Page 4 in the presentation, at Slide 4, it will list some of the specific accomplishments that NV5 had for the year 2019.

First, we had 22% total revenue growth over 2018. We became the leader in geospatial solutions through the QSI acquisition, coupled with our existing company Skyscene for geospatial analytics. We also entered the high-growth Pacific Northwest marketplace. We saw rapid acceleration toward our goal of 2021 of energy expansion. We also, through acquisitions and process improvement, strengthened our verticals in all geographies of the company. And we capitalized on our platform through cross-selling between all of our offices.

I now turn your attention to Slide 5. The success of our fourth quarter has provided significant momentum for us to -- going into the year 2020. I'd like to speak of the 5 specific areas that we've strengthened, and that gives us encouragement for future growth in 2020. First, in the core business and our core business is our 5 verticals of NV5 and so when I refer to the core business, I'm referring to those 5 key verticals.

As I said, we had strong performance in Q4 of the core vertical that positioned us very solid for organic growth and future growth, and we will -- our strategy for growing that core business is through -- will be through tuck-in acquisitions that support the existing 5 platforms, and we are very encouraged about the performance of the core business. We will expand and have expanded, as you see, our service platform, and that is by adding both the geospatial services through Quantum Spatial, which is added to our core -- our current business of Skyscene, Quantum Spatial. It greatly expands that, gives us the platform to grow in a high technology area. And also, the highly profitable forensic construction defect business that we've certainly strengthened the platform of the CQA and forensics through the acquisition of GHD. So this is very encouraging to us that we've grown the service platform.

Cross-selling is an opportunity that we have, and I've expanded on, and we get certain metrics for that growth and that is really keeping as much as the work we can amongst our existing offices and platforms. So we exceeded our goal in 2019 by 11% and we are very encouraged with the performance and what we were looking for in cross-selling. And that really shows us that our integration is working, that we can certainly offer the same services over multiple offices in multiple geographies. And Alex Hockman, our President, will speak specifics and more specifics of the cross-selling opportunities that we see going forward.

I'm also very encouraged by the backlog. The overall growth is 46% year-over-year increase and you will see us further explain that and a good following for backlog is -- in growth is a good barometer to how we are doing and will do in 2020.

Last is the project starts and project delays. As we mentioned in the third quarter, we said there was a delay of the North Carolina DOT project, and we're happy to say that that's resuming and moving ahead and so we're encouraged there. We also announced a large award of our LNG project, which is now -- we recognized the revenue and that was the $34 million award for an expansion in our LNG area.

So we look forward to all those, and that's what leads us for encouragement going into 2020. On Page 6, you'll see that the NV5 core business results were very encouraging, reaching the revenue guidance with minimal contribution from QSI, and I'd like to just speak a little bit about that. QSI has been a tremendous company, but the acquisition delays -- our expected closing was later in 2019, we actually closed and began on December 21. We then -- operational results.

What caused this delay was government regulation and the Hart-Scott-Rodino filing pushed back our closing by several weeks. So what did we achieve and what we would expect to achieve in the Quantum Spatial acquisition? You heard me mention earlier that we saw 22% revenue growth over from 2018 to 2019. We anticipated acquiring $7 million of revenue from Quantum Spatial. In actuality, because of the late closing, we only received $1.4 million. So -- however, the core business beat guidance. We -- the core business showed -- NV5 showed $513 million in revenue and so this was very encouraging without the anticipated contribution of QSI.

So if we would look at this slide and look closely at this slide, if we were to have Quantum Spatial for the full 10 days that we were expecting in operations, we would have achieved $520 million in revenue for the entire year. So we are very, very pleased with the guidance and with the strength of the NV5 core business prior to Quantum Spatial and very encouraged with Quantum Spatial's contribution. Actually, before turning that slide, Quantum Spatial had a very strong month. It's just that NV5 was not able to capture all of that. QSI had $13 million in revenue for the month, but as I said, we were only able to realize NV5 through the acquisition $1.4 million.

So now if you go to Slide 7, let's look in specific impact of the consolidation of NV5 with Quantum Spatial. So I draw your attention to the left hand column. And you'll see our, what we call, NV5 core businesses, all those NV5 platforms that we had prior to the acquisition of Quantum Spatial and you've heard me say this by times before, but those -- that platform is infrastructure, environmental, engineering, program management and construction quality assurance. Those total revenues for the quarter were $132.4 million. Net revenues were $103.5 million, adjusted EBITDA was $18.1 million and adjusted earnings per share was $0.72. When we combined it with Quantum Spatial, the total consolidated was $138 million (sic) [$133.8 million], net revenues of $104.3 million. But you'll notice some degradation in EBITDA, we went from $18.1 million to $17.9 million. It was purely on the closing time frame of Quantum Spatial. So the $0.72 per share, which is linked very closely with the guidance; with the Quantum Spatial acquisition, we are reporting $0.69 per share.

If you go to Page 8 or Slide 8, it's the strategy that we're using for acquisitions for 2019 and beyond and going forward. So let's look at what we accomplished in 2019. And remember, we want to always increase shareholder value through these acquisitions. We want to strengthen our vertical. We want to enter new markets and high-growth expansion, and we want to have organic growth. So how did these acquisitions strengthened that platform of NV5.

Well, if you look on the left, the verticals that we strengthened: Celtic Energy really helped our energy efficiency services through that acquisition; J.W. Surveying (sic) [J. V. Surveying] combined with our ALTA surveying and environmental services, we strengthened areas in Arizona and California that we were not very visible in that specific area of ALTA surveying.

Not to confuse you, but we made an acquisition of ALTA Environmental, which is a leading -- full service environmental compliance company in California and that also would strengthen the verticals.

To the right, we acquired Sextant Group, which is a key technology design firm that really is a differentiator in our mechanical and electrical and plumbing offering because it gets audiovisual and high technology. Very, very happy with that acquisition and it's really strengthened our full-service offering of MEP to our clients. In the CQA space, we acquired Page One in Orlando. Page One is known very much for public works, transportation, infrastructure work and that strengthens our Central Florida operation.

Lastly, in November, in the core business, we acquired GHD's Forensics division and that really helps us and expands our highly profitable construction defect and forensic consulting business in the southeast.

Now moving over to the second sector in our strategy, it's entering of strategic markets. We moved into the northwest and as you know, the northwest is a high-growth area, but not only high growth area, it is also extremely attractive to corporations for tax-based structure. So we entered GeoDesign with operations throughout California, Northern -- the Northeastern -- Northwest, I should say, in Portland and in Washington with WHPacific. GeoDesign really gave us strength in both Southern California in geotechnical operations in our CQA division as well as existing offices in Portland. So that combination really entered us into strategic markets, and we're very pleased with that.

Now to the expanding of our platform. Quantum Spatial gives us, by far, the nation's largest geospatial market and platform for this technology vertical. It will operate as NV, the 6th vertical, but it really differentiates us in analytics. It's addressing a large market and it really gets us entrée for a consolidation and further growth through acquisition and organic growth in the geospatial marketplace. It aligns very well with NV5 in our energy space because we are very strong in our energy '21 efficiency, and we will now introduce Quantum Spatial to many of our utility clients with a key service offering of geospatial and mapping. So we're very pleased. That is the strategy. Going forward, we will still be acquisitive, but we will only look for acquisitions that strengthen our markets in many of these key areas as evidenced in this slide.

So now going to Slide 9, a little bit more on Quantum Spatial. It's by far the largest acquisition NV5 has done to date and it really captures 3 key areas: one, in the data collection, we were, through our Skyscene, doing LiDAR and imagery and some multispectral imagery, but nothing to the extent in data collection that we now get with Quantum Spatial on a much larger platform. They also have fully scalable proprietary software and analytical solutions that really gives them a cutting-edge and a great barrier to competition. I think that the geospatial market can become commoditized, but if you have the analytics and you have the way of delivering this information to the client, it really sets you apart. So we're very excited about what has been going on with the technical delivery of Quantum Spatial. But also in the actual, if you look at the lower bottom, the numbers of QSI, they are available to provide services in all 50 states and Canada. EBITDA growth has been 46%, compound CAGR over the years. And very high 96% reoccurring revenue with clients and a very long runway of relationships with clients. Those are all things that will enhance what we are delivering through NV5. So we're very pleased with that acquisition of Quantum Spatial.

I'd like you now to go to Page or Slide 10 and look at our organic growth. It grew 46%, and many times you've heard me say that, it's key to budgeting and to give you an opportunity to see how that budget project is going to work for the following year. Backlog is so important. So the growth of our backlog by 46% is very encouraging and that includes our guidance. And if you look at the Q4 '19, we're entering 2020 with a backlog of $567.4 million, which is roughly 80% or so, 81% of the guidance that we're giving. A good backlog in the service business is usually 65% or above. So we are very, very encouraged. So that is our report.

I will speak to you a little bit later on, but that's the overview of what we've accomplished in 2019. And I'd now like to turn the call over to our Chief Financial Officer, Ed Codispoti for further detail on the financial results.

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Edward H. Codispoti, NV5 Global, Inc. - CFO [4]

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Thank you, Dick, and good afternoon, everyone. I'll be providing a review of the company's results for the fourth quarter and the full year ended December 28, 2019. So if you would please turn to Slide 12, I'll review our overall financial accomplishments. Total revenues were $133.8 million in the fourth quarter of 2019, compared to $116.1 million in the fourth quarter of 2018.

Net revenues in the fourth quarter of 2019 increased to $104.3 million from $88.5 million in the fourth quarter of 2018. Adjusted EBITDA for the fourth quarter 2019, excluding stock compensation and acquisition-related costs, was $17.9 million, an increase from $16.4 million in the fourth quarter of 2018, after excluding a $1.5 million dollar reversal of 401(k) accruals in the fourth quarter of 2018. Adjusted EPS in the fourth quarter of 2019, after excluding nonrecurring income tax adjustments, was $0.69 per share compared to $0.91 per share in the fourth quarter of 2018. Finally, cash flows from operating activities increased to $18.3 million for 2019 compared to $17.4 million in 2018.

Now for the full year 2019 results. Total revenues in 2019 were $512.9 million compared to $422.1 million in 2018. Net revenues in 2019 were $398.4 million compared to $334.3 million in 2018. Adjusted EBITDA in 2019 was $68.6 million compared to $59.8 million in 2018. Adjusted EPS for 2019 was $3.19 per share, which was based on 12.5 million diluted shares outstanding compared to $3.24 per share in 2018, which at the time was based on 11.5 million diluted shares outstanding. The increase in weighted average shares outstanding reflects the issuance of shares of common stock from our secondary offering in 2018 as well as restricted stock granted to employees. Cash flows from operating activities increased to $39.9 million for 2019 compared to $35 million in 2018.

Finally, I am pleased to report that the financial issues identified as of December 29, 2018, related to project contracts and analysis of certain percentage of completion projects have been resolved.

At this point, I would like to turn the call over to Alex Hockman, NV5 President and Chief Operating Officer, to discuss opportunities for our core business, Q4 key wins and an update on our cross-selling program. Alex?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [5]

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Thank you, Ed, and good afternoon, everyone. As NV5 has grown in recent years, we have continued to build capabilities across all 5 of our verticals, providing a unique blend of services and technical expertise that differentiates our company. Our expansion has also provided an opportunity to take advantage of synergies across the organization, allowing us to improve the effectiveness and profitability of our operations. Our core business continues to strengthen through our increased capabilities and improved efficiency as we identify opportunities to merge offices, increase cross-selling and build a unified NV5 organization.

If you turn to Slide 14, you will see some of the key wins that are the results of our dynamic organization that we have built at NV5 and have contributed to the record backlog that Dick referenced earlier in the presentation. Our infrastructure business secured some significant wins in the fourth quarter, including a $20 million owners' representation, design, oversight plan review and field inspection contract by a San Francisco Bay Area municipality on a 240-acre mixed-use redevelopment project. The $8 billion project includes over 9 million square feet of office, retail, dining and entertainment space, hotels and more than 1,600 residential units and apartments.

In New York City, NV5 expanded 2 contracts with an Nassau County Department of Public Works for an additional $5.5 million of funding. These 2 contracts provide engineering design and construction inspection services for a variety of capital projects for Nassau County. And NV5's funding level was increased due to our excellent performance and drive to bring the greatest value to one of our most important clients in the Northeast.

Our Building Technologies group secured a $3.6 million contract with the Midwest electric transmission company for the development of a substation and high-voltage standards. Though much of our MEP services are dedicated to vertical construction, we do provide commissioning services for utilities generation, transmission and distribution needs, and this contract is an example of the reputation we have developed with utilities as experts in this specialized field.

Higher education is another key market for our Building Technologies group and our technology design group was awarded over $2 million in new contracts with colleges and universities in the fourth quarter to deliver design of audiovisual and security systems. In addition, we were also awarded a $2 million contract for mechanical, electrical, plumbing and audiovisual design for a residential housing complex at an Ivy league school in Cambridge, Mass.

Our energy vertical continues to be one of the fastest-growing groups within NV5 and fire mitigation, aging assets and service reliability continue to be the driving factors in energy capital investments. We secured a $20 million contract in Q4 to design underground power lines in a California community that has experienced fire damage in recent years. The project will not only help to mitigate fire risk, but will also minimize the need to shut down power to residents as a precaution in high-wind situations that pose a fire risk. In Pennsylvania, a utility retained NV5 to design and build a $6.2 million boil-off gas compressor replacement for an LNG facility.

The new compressor will improve the efficiency of the LNG equipment, which is used to compress natural gas for storage, minimizing the risk of service interruptions during peak periods of demand. A utility in Ohio and West Virginia awarded NV5 a $6 million environmental inspection and consulting project for the replacement of underground gas pipes. The existing price for replace -- not only to replace the aging assets, but also with larger diameter pipes to once again limit service interruptions.

In Hong Kong and Macau, we secured some significant contracts in both energy efficiency and MEP design. As we mentioned in the third quarter of 2019, we did see some service interruptions in Hong Kong due to the civil unrest. The issue we are facing now in the region is, obviously, the coronavirus, and we continue to monitor the situation closely. Our business in Hong Kong is a relatively small piece of our business, accounting for approximately $9 million, but we have several employees there and their safety is our utmost concern.

In the Middle East and Southeast Asia, we have seen rapid growth in the fourth quarter and continue to identify opportunities to build upon their rapid expansion.

If you please turn to Slide 15. We will review the cross-selling success in 2019 and look at our goals for 2020. Cross-selling is an important part of our strategy for growth and profitability, and we have a vested interest in continuing the success of this program. Cross-selling allows us to in-source much of the work that would typically be performed by a subcontractor, and we can generate higher margins with work performed within NV5.

Additionally, our cross-selling efforts provide us with a competitive advantage because we can bundle services into solutions that cannot be provided by many of our competitors, providing us with unique growth opportunities that wouldn't exist without our cross-selling program. In 2019, our cross-selling goal was $400,000 per week or $20.8 million. We exceeded our cross-selling target by 10%, delivering $23.2 million, which is close to 6% of NV5's net revenue achievement for 2019. In 2020, we have increased our cross-selling target to $500,000 per week or $26 million for the year. With the addition of Quantum Spatial and other 2019 acquisitions, we see new opportunities for cross-selling that will make this new larger target obtainable.

At this point, I would like to turn the call back to Dickerson Wright to provide a look at our 2020 projections. Dick?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [6]

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Thank you, Alex. If you go to Page 17 or Slide 17, it gives the macroeconomic factors that drive our sustainable growth and make us feel comfortable that we are in the right spot for providing our services. So macro one, the population growth. Tremendous population growth throughout all of our areas, all with infrastructure chasing our finite resources. So we think that the population growth will be -- continue to be a driver of our business and our business growth, and particularly through delivering of infrastructure solutions.

We also are looking for energy, safety and reliability to continue to grow in 2020. Some of that contribution will be in the energy efficiency; and particularly in the west, the mitigation of fire risk and service interruption and the major capital expenditures for delivering energy and delivering electricity underground and having that service change from overhead utilities. The overall piece of this driver is the aging infrastructure. So what is running into each other is the growth of the population, the tremendous demand for more energy and safety and reliability coupled with an aging infrastructure. I think the -- and you'll see it in other publications, but the North America infrastructure is -- has a D rating from an A being the best to F being failing. So there is a tremendous amount of improvement, and this gives us a great opportunity for NV5 to work with clients to increase the transportation and water infrastructure that is being delivered.

Energy efficiency. We still continue to want to grow that market space. There's been a tremendous push to green energy and conversion of private sector to energy efficiency, and we think that through our Energenz platform, we are -- have the leading edge on providing those services. We will concentrate also on technological innovations and that really deliver -- speaks to our service delivery. How we manage data, and through Quantum Spatial and the actual analytics and management of data, is extremely important as well as the design and commissioning of tremendous amount of expansion in government projects. So we look for these 5 things to be the major economic drivers for our sustainable growth in 2020. And NV5 is well positioned in any of those 5 drivers to provide services.

If you now go to Slide '18, it speaks of -- and this, for me, was a compelling slide because it really shows the financial growth of our company from measurable period of time. In just over a 3-year period of time, in 2017, we went from an EBITDA of $40.3 million to now projecting in 2020 an EBITDA of over $103 million. How does -- how is the company valued and grew over that period of time? If you look at 2017, where we had an enterprise value of $578 million to now an enterprise value of $877 million, and we're projecting that value to be at least or close to $900 million or $1 billion by 2020. So this gives a very, very good glimpse of the financial accomplishments and the growth of NV5. And without the support of everyone, our employees and our clients, this would not be the case. So we are pleased to report that.

And if you now turn to page -- or Slide 19. What we want to focus on in 2020 is we're going to accelerate our organic growth. We think that we're going to give guidance between the mid- to high-single digits in 2020. And where will that come from? Execution, of course. We'll build on our momentum that we've generated in Q4, where we had a very strong quarter. We will focus on strengthening our internal project management so that we can make sure that we are capturing everything efficiently. And, of course, recruiting and retention in our business is something that we need to focus on, and we want to have people stay with us, and they are being incentivized by share ownership and opportunities to grow within NV5.

Integration, you've heard me say many times, if you go to your right. We must integrate the companies that are joining us. We have a very proven track record and a process for integration. It just does not come anecdotally. So we were able to -- and in the process of integrating all of the acquisitions in 2019 and always, always with a focus on keeping the best people, making the integration scalable and adding value in organic growth and profitability of the acquisitions. And that's the main focus on integration.

Cross-selling. If you look at synergy, cross-selling can bridge as the synergy and the integration process because cross-selling really shows that we are inclusive to all of our organizations, all of the opportunities that we can add between offices. And so I was very pleased to see the report on cross-selling and how we're growing and that really does 2 things: It shows that we can expand the market through our multi-office space, and it also shows that we're integrating those companies through cross-selling that join us.

Synergy implementation. Synergy simply says that we can scale it, we can do it better as a group than we could do with isolated offices. So we are always looking for opportunities to scale our support areas and support services. So the investment we are making in acquisitions, we are looking for high growth, high-barrier entrée acquisition and opportunities, and our investments will still be there.

Of course, we are really focusing on 2020 of execution and growing and strengthening our verticals. So what is the guidance? If you look in the right-hand corner, we still maintain that guidance of $700 million to $730 million that we gave a month ago and we feel comfortable with the adjusted earnings per share guidance of $4.38 to $4.90. So those are the completion of all of our planned remarks for the day, for the time. And now we'd like to turn that over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Our first question comes from Jeff Martin with Roth Cap Partners.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [2]

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Dick, I was wondering if you could give us a 30,000 foot view of where the largest opportunities in the business today appear for 2020? And then also if there are any headwinds that you see out there, kind of help frame that for us so we kind of know what to expect as we get into -- further into the year?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [3]

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Great. Thanks, Jeff. I see the biggest opportunity for us is the space that we're in, and it's the -- our ability to work approve the aging infrastructure of our country. There has not been any funding really, in a large-scale, to infrastructure improvement. And so we think we are really in a very good spot to do something that is needed and it's demanded. And it's not something that is selective. Drinking clean water, going over safe bridges, going down roads are something that is expected and we're in that spot that we're not having to educate the market. So I really look for the opportunity in our positioning as engineers in the infrastructure space. So that, I see, is the macro opportunity.

The headwinds. Obviously, there's going to be various -- I don't foresee any -- or see any immediate headwinds right now, but there's things that happen beyond our control. I mean we had no way of predicting what would be happening with the virus, the coronavirus, and how that would impact some of our employees. And that we still don't know what that's going to do for the overall transportation and mobility of our employees. The fortunate thing for us, Jeff, is that, of the 100-or-so offices that we have in the state, they service a client in a 30- to 50-mile radius of that office. So they are not subject to terminal and airfare and large distance of transportation to service clients. It's in that local area and so that is maybe one thing that we think can mitigate the concern of the coronavirus. But anything can happen. And it's -- some things that are just happened that are not foreseeable. So I don't see anything in the market itself that is -- would cause headwinds, but certainly, things can happen that are beyond our control.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [4]

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Right. Okay. And then with respect to the backlog, are you able to break down how much of that is an increase from the core verticals? And how much of the increase in backlog came from the 9 acquisitions that happened throughout the course of the year?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [5]

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Well, I can give it to you in total amounts. The backlog for the core business itself was running over 70% -- 73%, 74%, and the backlog of the geospatial business was slightly less than that. So in budgeted terms, of that $569 million, I believe, in backlog, the vast majority, or 70% to 80%, or 70% to 75%, is coming from the core business and the remainder is coming from Quantum Spatial. The organic growth in backlog and support, we do a cumulative of all of the offices. So it's hard for us to say what the backlog for each individual office is, although it will be tied to their individual budget.

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Jeffrey Michael Martin, Roth Capital Partners, LLC, Research Division - Director of Research & Senior Research Analyst [6]

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Okay. Great. And then do you have an organic growth number for Q4 and the full year?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [7]

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Yes. Maybe, Ed, you can.

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Edward H. Codispoti, NV5 Global, Inc. - CFO [8]

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Yes, sure. So if you look at our 10-K disclosure, which will be filed this evening. Footnote 6 refers to our annual organic growth, and it was actually just slightly under 2% negative for the full year. But we picked up momentum in the fourth quarter, and the organic growth was positive by about 2% in the fourth quarter.

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Operator [9]

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Our next question comes from Chris Moore with CJS Securities.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [10]

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Just kind of probably dovetails into the cross-selling conversation. But just looking at net revenue as a percentage of gross margins, it's decreased a bit since '16. I think it was 81% then, it was closer to 78% now. I know some of that is acquisition-related, the CHI Engineering, for example, more subcontract work. But can you talk a little bit about the trend that you expect in '20 and '21, with respect to net revenue versus gross revenue and kind of how QSI impacts that?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [11]

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Yes. The -- and certainly, Alex can also comment on this. The Quantum Spatial has a higher percentage of subconsultants in the core business. And some within our core business, we -- they have a higher percentage of subconsultants because they experience a higher markup, and that is on our Bock & Clark and our ALTA survey business and some of our LNG business, where we are not so much government related, and we can have a higher markup on those subs. But generally speaking, we're not going to drop too much on the overall. We're not going to drop too much below 18% because most public projects require a 17% at least minority participation. So I think that if you see some trends going up or down, it's -- if you see some indication of the subconsultants going up or down as a percentage, it's not a trend. It's just really specific to the projects that we're doing. So I think a good number for you to look at, Chris, is pretty much where we are around 15% to 18%.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [12]

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Got it. The LNG project and the North Carolina DOT project that are back online. When did they get back online?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [13]

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The LNG project was awarded and it had all our licensing contracts signed in February of this -- actually, this month. And North Carolina has been ramping up. It started at the latter part of Q4 and we are continuing to see those projects ramp up. It's not a single project. It was the North Carolina DOT that stopped funding the projects and now they have resumed that funding process.

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Christopher Paul Moore, CJS Securities, Inc. - Senior Research Analyst [14]

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Got it. And last one, just I think the QSI revenue that you said, obviously, you didn't recognize most of it, but it was $13 million in December. Any sense of what kind of growth that represented for QSI year-over-year?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [15]

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Well, it was significant. We think that we could realize somewhere between $11 million and $13 million in revenue for Quantum Spatial. So if you multiply that number by 12, it's significantly higher than the budget number. So I think you'd see double-digit organic growth.

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Operator [16]

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Our next question comes from Rob Brown with Lake Street Capital.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [17]

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Just to clarify on the North Carolina project, when do you expect that to be -- or projects, when do you expect those to be sort of ramp to full normal run rate? Is that going to take a little longer? Or is that fully done at this point?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [18]

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It is not fully done. It will continue to ramp up. The funding sources have been released now. But we're still -- it takes a while for it to ramp up. So we're still not at the 100% -- or the capacity and the volume of projects that we had in 2019, but we are continuing to see new projects come online and we expect it to ramp up through 2020.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [19]

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Okay. That's good color. And then in terms of the utility in energy markets. You talked a lot about utility work and fire-related work, but could you just characterize maybe the pipeline there, and I would imagine there's a lot of stuff that's being thought about that you haven't gotten yet, but is that an area that you see growing significantly from where you're at? And what's the time line on how long it will take?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [20]

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I think it's an interesting question because it really shows the synergy between QSI and the core business. QSI has several thousand miles if they are able to fly in order to determine which areas need to be hardened. And one of the services that we provide is the engineering to determine how to harden those particular areas. So those are coming onboard. They are MSAs that they have -- that QSI has as well as NV5 providing those services to power utility companies. So it's an ongoing effort and we're seeing new MSAs that are being advertised, and we see tremendous opportunity for that continuing in 2020 and beyond.

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Robert Duncan Brown, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [21]

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Okay, good. And then just a little more color on the QSI cross-selling? I know you're only a few months into it, but have you seen additional cross-selling opportunities or maybe just characterize the cross-selling opportunities you're seeing at QSI and how they're developing at this point?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [22]

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Yes, I think we may have sandbagged a little bit on the $500 million -- $500,000 per week in the cross-selling because that did not contemplate anything from QSI, so it will be higher than that. Where I see, and Alex can certainly comment on this, but where we really see the synergy is, NV5 has been very strong in utility business and we think the -- our entrée at the level of what QSI can do in imagery and data analytics will be phenomenal. This is what the utilities have been asking for. And so we think with that introduction, we can -- we see a real opportunity for cross-selling. So we really look for that. And the other opportunities are the things that, that Quantum Spatial is doing that, we are not doing whatsoever. They're doing a tremendous amount of work with shoreline erosion, they're doing a lot of work with vegetation, they're doing a lot of work with forestry work. And these are things that may give some opportunities for NV5, but they had not been explored at all.

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Operator [23]

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Our next question comes from Tate Sullivan with Maxim Group.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [24]

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You -- mainly you kept 2020 guidance unchanged, but does that -- just more digging into previous comments, does that include an unchanged number for your free cash flow expectations for '20? And then, can you just put that in context, will you use the majority of that free cash flow to pay down debt versus the bolt-on acquisitions you mentioned before?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [25]

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Well, we certainly are focused on paying down debt. I mean that is a very significant thing. We don't believe in leverage as a company; however, acquisitions are opportunistic. So we can't say, and it's not so linear that we can say this is an acquisition and this amount will be dedicated acquisitions, this amount is going to be the pay down debt. We will continually focus on paying down debt, but if there's a really good opportunity that's going to expand our company, expand our platform and we can do it prudently, we will focus on that. But there is not a set amount that -- I can tell you this, we're focused on smaller acquisitions right now for the year. But we have not allocated what portion of cash flow is going to go to the acquisition. We will be focused on paying down debt and there are certain covenants with the bank, and we can certainly efficiently pay down debt and have free cash flow afterwards.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [26]

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Okay. A follow-up question. Alex, you mentioned the North Carolina DOT ramping up at the end of 4Q '19. Was any of the -- I understand how the timing of the Quantum close can change sort of the revenue in the quarter versus the previous guidance. Was DOT part of that as well? Were you expecting earlier start to previously delayed North Carolina DOT projects?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [27]

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No. Again, the DOT ramp-up, it started in Q4, but it was relatively slow. And now we're starting to see it ramping up.

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Tate H. Sullivan, Maxim Group LLC, Research Division - Senior VP & Senior Industrials Analyst [28]

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And was that a situation unique to North Carolina? Or is there -- I mean, could that theoretically happen at other DOTs? Or was that just an extraneous circumstance?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [29]

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It was somewhat of a black-swan event. I mean the legislature has just stopped funding the DOT projects, that is not common. It has certainly happened once in a while before where we had something -- if you may recall, the New Jersey had Bridgegate, but it is very rare that the legislature does not fund the DOT and municipal infrastructure projects.

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Operator [30]

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Our next question comes from Lisa Springer with Singular Research.

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Lisa Springer, Singular Research, LLC - Research Analyst [31]

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I have a question about cross-selling as well, specifically about QSI. So QSI takes you into some new areas for the company, and I'm wondering if there's a learning curve as other parts of the organization become familiar with capabilities and how you go about educating the group about capabilities?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [32]

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Okay. Well, as any acquisition and more so with QSI, the very first thing is, we introduce them to all of our offices. So we had a webinar broadcast of all of our offices, 120 offices, and QSI presented their services and what they can do. Now some of that they had some familiarity because we were in the geospatial surveying business on a much smaller scale with Skyscene. So some of our offices were aware of that. But Lisa, very good question. It has to be organized. It has to be intentional and it has to be pragmatic.

And so it's just something that we channel everything on cross-selling through our Chief Synergy Officer. It's very organized and we just have not yet allotted in our budgeting process for the Quantum Spatial opportunities that we have and we're learning as we go. But we first start by educating all of our offices, at least, of the services that Quantum Spatial offers and then it's managed by -- the actual management of that work is done through our Chief Synergy Officer, Scott Kvandal.

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Operator [33]

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(Operator Instructions) Our next question comes from Scott Blumenthal with Emerald Advisers.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [34]

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Alex, I was wondering if you might make a comment or 2 about what's going on with your projects in China. Obviously, that's been in the forefront of the news. You mentioned a couple of wins: Hong Kong, Macau. Can you give us an idea as to what the level of activity is there? And you guys are operating relatively normal still or if there's been any headwinds at that point?

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Alexander A. Hockman, NV5 Global, Inc. - President, COO & Director [35]

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It's an interesting question because while Macau is essentially shut down revenue-wise relative to the casinos, they're taking advantage of this time to go ahead and basically do some of their improvements and retrofits that are necessary. So while we don't have our employees going to the office, we have set up where they can work from home. So we do expect to see some continuation of services, but it's not going to be nearly as robust. And we're not actually in Mainland China. Our work is primarily in Hong Kong and in Macau for our Asia operations.

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [36]

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Scott, I'm glad you left me off the hook because international reports directly to me, but that was a good test for Alex on the operation. But let me speak to a couple of things. Overall, Hong Kong itself, when Alex has mentioned, the Asia operations at $9 million, really, a lot of that is coming, of that work, of that $9 million is coming from Dubai and from Kuala Lumpur, and Hong Kong is becoming a smaller piece of our operations now. But the Hong Kong office is shut down. It's a beautiful office. It's vacant right now. And those employees are working from their home, as Alex said. In Macau, the Macau Ferry from Hong Kong to Macau has been shut down.

So as Alex rightly said, we are doing a lot of work for those offices -- from their house, the work that they can do. And the second thing is that we've really expanded in working on what we're calling offshoring, where Kuala Lumpur and Dubai and to some extent Hong Kong does a lot of work for our MEP offices in the States. And there are some very specific clients that I can't mention, but -- so we're trying to mitigate this as best as we possibly can. But the overall revenue is probably less than -- from Hong Kong and Macau, it is certainly less than 1% of our overall revenue. So we are very concerned with our employees and believe me, I have another call-in with them tomorrow. But it's not -- as far as pure financial, it's not the impact that we would normally have if it was affecting us in our core business in the States.

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Scott Benjamin Blumenthal, Emerald Research - Senior Research Analyst [37]

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Okay. And Dick, with regard to, once again, the QSI cross-sell, I think the obvious is applying the data analytics portion or piece that you acquire from them to what's going on over at Skyscene. But what would you feel would be the most obvious first kind of low-hanging fruit cross-sell opportunity that you might have with them?

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [38]

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What we're seeing some of that right now. Great question, Scott. I mean client-based, it's our strength with utilities. And the wonderful thing that Quantum Spatial offered is a tremendous amount of opportunities. But really, their strength was not with the utility business, that is our strength. So the first low-hanging fruit is with utility business. The second thing for us is, their ability to now say, with the combination of NV5, California is such a tremendous opportunity with utilities and naturally where we're strong. And now Quantum Spatial is looking at a one very large opportunity that required a certain number of employees in a state. Now we can say they're 600 in California. So those are the 2 immediate opportunities that I see. But it mostly is focused right now in California. The lesser opportunities, I think, is what's going on with our federal government, where we can help them, but they -- we -- it's we -- I keep saying, we -- it's Quantum Spatial, NV5, we're all one, but where we can all help each other is we have a lot of work that we're doing directly with the state department. NV5 is doing with our embassy work and our commissioning work. We have a very nice office in Arlington, Virginia. Quantum Spatial has a very good operation with the military Department of Defense in St. Petersburg. But they both -- and Richard Tong has been working on this very closely, there's security clearances that are required and we have them both in Quantum Spatial and with NV5. And so we think the Federal government is also going to be a great opportunity for cross-selling. But first, it's going to be the utilities, California. Then it's going to be the state department and Department of Defense opportunities that we have outside of California.

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Operator [39]

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And I'm not showing any further questions at this time. I'd like to turn the call back to Dickson Wright.

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Dickerson Wright, NV5 Global, Inc. - Chairman & CEO [40]

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Well, thank you, everybody, for listening in. 2019 was a year of positioning NV5 for further expansion and growth, and you can see that by the guidance that we're giving for 2020. So what does that mean? As you grow, we strengthened all of our internal infrastructure, our support services, our financial reporting and many of the things that we've had for future growth. I think one thing I'd like to point out before speaking into some of the comments is, there was some look, if you look at that, it looked like there was a creeper growth in our SG&A.

And that really -- and the opportunity when you are acquiring companies is to be scalable and constantly try to have those indirect or support services, the G&A more than the S, we really want to lower that. So you'll see -- in annualized, you'll see an increase of about 7.9% to 8.3%, but it was really impacted by the QSI acquisition in 2019 where we had a tremendous amount of acquisition-related expenses, onetime expenses. So if you see a blip in that, it really wasn't from the erosion of our support services or the flattening, if you will. But it was basically more a onetime occurrence with what happened with QSI. So I wanted to comment on that because I thought that was something -- that was meaningful, if someone was to look at that.

I think I also want to point one more thing. I think what was really refreshing to me and encouraging to me was the strength of NV5 in the core business. That we were able to meet or beat revenue guidance without the anticipated closing of QSI.

We gave guidance of about $511 million, and that it was the assumption of the $7 million from QSI. But as you see, we're reporting $513 million with only a little over $1 million of contribution. So core business is strong, but it's really important that we are so encouraged with QSI because now we can offer technology for our growth. And if you will envision the strategy of acquiring companies, of course, growing organically, but acquiring companies, both our existing core business of NV5 and also the chance to roll up and acquire companies through its very solid platform of QSI. So we are really encouraged about 2020. We're looking for the opportunity. I can tell you, I've been very, very involved with the integration of QSI. And I can tell you that it's been a great experience. They have great leadership and management.

And so I want to thank all of you who are listening; all of you that are investors; all of you, employees; the employees that every day represent NV5 in a manner that is positive for our growth. So thank you for listening to this call. We are really excited about 2020, and we appreciate your continued support of NV5, and thank you for listening in today.

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Operator [41]

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Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.