CRA International Inc (CRAI) 2005 Q4 法說會逐字稿

Good day and welcome everyone to the CRA International fourth quarter and year-end fiscal 2005 conference call. Today's call is being recorded. You may listen to the webcast on CRA's webcast located at www.crai.com. In addition, today's news release is posted on the site for those of you who did not receive it via e-mail. With us today are CRA's President and Chief Executive Officer, Mr. Jim Burrows; and Vice President and Chief Financial Officer, Mr. Wayne Mackie. At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you. These statements are based upon management's current expectations and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain and actual performance and results may vary materially due to many important factors. Such factors that could cause actual results to differ materially from any forward-looking statements made by the Company include among others changes in the Company's effective tax rate, share dilution from the Company's convertible debt offering, the impact of the adoption of Financial Accounting Standards Board statement Number 123R, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, risks associated with acquisitions, risks inherent in international operations, NeuCo's performance, changes in accounting standards, rules and regulations, potential for loss of clients, dependence on growth of the Company's business consulting practice, the ability of the Company to integrate successfully new consultants into its practice, intense competition, and professional liability. Further information on these and other potential factors that could affect the Company's financial results is included in the Company's filings with the Securities and Exchange Commission. Jim?

Thanks, Wayne. Revenues in the quarter increased 27% to $73.8 million, compared with $58.3 million in Q4 of fiscal '04. On the bottom line, we achieved net income of $6.6 million, an increase of 51% from Q4 a year ago, or $0.55 per diluted share from $4.4 million or $0.42 per diluted share, for Q4 of last year. For the full fiscal year of 2005, CRA's revenue increased 36% to $295.5 million. Net income for fiscal 2005 was 24.6 million, a 51% increase from $16.3 million in fiscal 2004. Earnings per diluted share grew 37% to $2.13 in fiscal 2005, from $1.55 in fiscal 2004. Weighted average diluted shares outstanding used to calculate earnings per share in fiscal 2005 were 11.6 million versus 10.5 million a year ago, reflecting the successful offering that was completed during 2005, the shares used in conjunction with certain acquisitions, and the effect of an increasing share price on dilution effects of stock options and the convertible bonds.

In addition to continuing our rapid growth in 2005, we were able to achieve our major strategic objectives for the year. One of our major objectives was to increase significantly the scale and diversity of our global practices and to lay the foundation for continued growth and profitability in our international operations. Both through organic growth and three acquisitions that were modest in size but highly strategic, CRA's international's revenues grew 150% in 2005 and international revenues grew to 19% of CRA's total revenues, up from 10% in 2004. Our three major locations in the United Kingdom, Canada, and Australia, were solidly profitable and international operations on the whole operated well in the black, significantly reducing our trap losses. We continue to work on eliminating trap losses in some of our smaller locations.

With the acquisitions of Lee & Allen and the former Lexecon Limited business, both of which are headquartered in London, we have now significantly increased the diversification of our European business with the addition of forensic accounting and computing practices and have expanded our service offerings in competition economics, commercial litigation, and energy industries. We have also developed a significant presence in the European litigation and regulatory markets. In addition we can now serve clients in South Africa, Hong Kong, and other parties of Asia. Going forward, we will continue to create the type of brand awareness on the other side of the Atlantic that we have established here in the United States. With the addition of NECG near the end of 2004, our practices in the Australia regulatory market have been significantly broadened and we have achieved a greater critical mass to expand our platform for growth in the Asia-Pacific region.

During 2005, we also accomplished our objectives of strengthening our core practices and leveraging growth of the firm by increasing the scale of these practices. CRA's litigation revenues grew over 45% in 2005 with gross of about 50% in competition, nearly 25% in finance, and over 60% in intellectual property litigation. Our business consulting revenues grew over 20% with gross of over 20% in chemicals and petroleum, over 50% in pharmaceuticals, and over 15% in energy and environment. These three practices account for over 85% of our business consulting revenues.

Turning to the fourth quarter specifically, utilization for the quarter was 76%, up from 74% in the sequential third quarter. For the full year, our utilization was 78%. Improving utilization will continue to be one of our top priorities in 2006. We continued to see robust demand in the majority of our practice areas this quarter. Overall, our litigation revenues grew in excess of 30% over Q4 of last year, while business consulting revenues grew about 25% for the quarter. The main growth driver within litigation was the competition practice, which increased more than 35% over Q4 of last year.

Mergers and acquisition work continues to be an important driver of the growth of this practice. M&A activity grew approximately 35% from Q4 of 2004, and continues to account for about 12% of CRA's revenue. Some of the competition engagements that we can identify publicly include working for Adobe in connection with its acquisition of Macro Media, assisting United Healthcare in acquiring it's acquisition of PacifiCare with federal and state antitrust and insurance authorities, advising the Hungarian Oil and Gas Company, MOL, with respect to European commission Phase II antitrust investigation of a German electricity and gas utilities proposed acquisition of MOL's wholesale gas business, working for Sprint and Nextel in connection with a number of losses brought by Sprint affiliates that allege that the Sprint/Nextel merger violated the terms of their affiliation agreements with Sprint. CRA's been retained to evaluate the extent of harm, if any, to these affiliates that may result from these alleged violations. Advising Telstra with respect to regulatory and commercial issues in regard to the wholesale pricing of several of its core fixed telephone services. The resolution of these issues is an important work for Telstra and the wider industry as it will lay down the terms of third-party access to Telstra's telecommunications network in Australia, and the basis of competition in the market more generally. I should add that as most of you know by now, most of our engagements are confidential and cannot be disclosed.

CRA's finance practice continued to grow in Q4 increasing over 15% year-over-year and 10% sequentially from Q3 on a normalized basis. The flow of business and finance remains strong. For example, CRA has an active pipeline of work relating to certain states' investigations of business practices within the insurance industry and to SEC's scrutiny of market trading in the mutual fund industry. Revenues of our intellectual property practice in the quarter increased about 10% from the prior year. As an example of the numerous active IP cases, we recently worked with attorneys for the Gerber division of Novartis in connection with their successful defense of a patent infringement suit involving child drinking cups. In addition, CRA successfully assisted a start up biopharmaceutical company in recently obtaining a $48 million jury award against a competitor for unfair competition, stealing trade secrets, and interference with its business.

Turning to our business consulting practices, overall revenue increased over 25% in Q4. Our chemicals and petroleum and pharmaceuticals practices continue to drive the growth of our business consulting group. Revenues for chemicals and petroleum or C&P increased by nearly 60% in Q4. We continue to see significant growth in revenues from the Middle East which accounted for nearly 25% of C&P revenues in Q4. This work includes business strategy work in Saudi Arabia, Jordan, Yemen, and Kuwait. Given the current high energy prices, we have supported numerous clients in that sector with their strategic and operational challenges For example, for one of the worlds' leading oil companies, we have just performed a comprehensive assessment of the economics and options for producing transport fields. In this work we evaluated the competitive position and likely financial performance of upgrading a series of raw materials into energy products. The raw materials that we examined included coal, shale oil, tar sands, traditional crude oils, and biomass. In addition we provided support in understanding long-term tends in transportation the key driver of demand. We anticipate continuing our support in coming months.

Energy and environment continue to be the largest business consulting practice in terms of revenue, increasing over 10% in Q4. The practice benefited from ongoing work on several large mergers as well as other sizeable energy litigation and consulting engagements. One of the large consulting assignments that we started in late November, or early December was for the Department of Energy, DOE to identify natural interest transmission carders. This study is being undertaken on behalf of the DOE in response to the transmission provisions of the Energy Policy Act of 2005. The practice also continued active long running engagements for Morant and Enron.

In addition the practice continues working on various regulatory matters relating to ensuring comparative electricity markets. In 2006, we expect to benefit from work related to the increased investment in the electric utility industry that is expected to result from implementation of the Energy Policy Act of 2005. Looking at our headcount, we ended the year with total consulting staff employee headcount of 663, and 653 full-time equivalents. Excluding headcount added by acquisitions, the growth in the headcount was about 8%. We continued to recruit actively in Q3 and Q4 and we expect this recruiting activity to result in continued headcount growth in Q1 of 2006 and thereafter.

Turning to our NeuCo subsidiary, Q4 revenue was $2.9 million, versus $3.2 million in Q4 of 2004. For the full fiscal year 2005, NeuCo generated revenue of about $9 million compared with $8.4 million for fiscal 2004. Overall, CRA's fourth quarter performance reflects the ongoing success of our blended growth strategy combining organic growth of acquisitions aimed at strengthening our service offerings and expanding our geographic reach. There is a strategy that we continue to believe will enable us to deliver continued growth for the Company and best value for our shareholders. With that, I'll turn the call over to Wayne for the financial review.

Thanks, Jim. Let me start the financial review by reminding everyone that CRA's fiscal year operates on 13 four week cycles, producing quarters unequal in length, Q4, Q1, and Q2 are typically 12 weeks in length while Q3 is a 16-week quarter. Looking first at our top line, revenue for Q4 as Jim said increased 27% to $73.8 million, compared with $58.3 million in the fourth quarter of fiscal 2004. Fourth quarter gross margin was 42%, relatively flat with gross margins of 42.4% in Q4 of last year. Our revenue per consultant for fiscal 2005 was $477,000, essentially the same as compared with fiscal 2004, and the average billing rate per hour for fiscal year 2005 was $315, up from $310 in 2004.

Our 2005 bill rates reflect the full year effect of the acquisition of InteCap which had somewhat lower billing rates than legacy CRA, the impact of the other acquisitions that occurred in late 2004 and in 2005, the slight decline in utilization and the rate increase of approximately 5% that began being phased in at the beginning of 2005. As we saw last quarter, our improved international performance directly affected our tax rate. This quarter resulted in an effective tax rate of approximately 42%. Our year-to-date tax rate was in line with annual guidance of approximately 43%. We remain focused on reducing the impact of so-called trap losses in a number of our smaller overseas locations for which we receive no tax benefit in our consolidated financial statements. We anticipate our effective tax rate to be -- for 2006 to be in the 42 to 43% range.

Reimbursable expenses were $10.2 million or 14% of revenue compared with 7.2 million or 12% of revenue in Q4, 2004. This level of reimbursable expenses is slightly higher than our past several quarters that have averaged 11 to 12% of revenues, but consistent with historical metrics that have averaged between 13 and 15% of revenues. Total consultant utilization in Q4 was 76%, up from 74% in Q3, 2005, and down from 79% in Q4 of 2004. For the year, our utilization was 78%. As Jim mentioned earlier, improving utilization will continue to be one of the top priorities in 2006.

Fourth quarter operating margin was 14.9% compared to 14.8% in the fourth quarter of 2004, and 14.9% in the third quarter of fiscal 2005. SG&A expenses for the fourth quarter were 27.1% of total revenue, compared to 27.6% of revenue in the fourth quarter of 2004, and 25.8% of revenue in Q3. Q4 SG&A expenses included the write-off of 569,000 of cost attributed to an acquisition that we abandoned and a facility we abandoned. In addition, Q4 SG&A expenses included somewhat offsetting normal year-end adjustment to estimates made during the year. Our results for the fourth quarter included a foreign exchange gain of approximately 330,000, versus a gain of 103,000 during Q3 of 2005. We continued to mitigate our foreign exchange exposure through frequent settling of intercompany account balances and by self-hedging our foreign dollar position.

Interest income was 877,000 for Q4, 2005, compared with 286,000 for Q4 of 2004. The growth in interest income was due primarily to higher cash balances from the successful stock offering we completed in mid-2005, additional cash generated from operations and higher interest rates. Fourth quarter net income was $6.6 million or $0.55 per diluted share compared to $4.4 million or $0.42 per diluted share in Q4, 2004. In Q4, '05, we benefited from higher operating profits, the increase in foreign exchange in interest income previously mentioned. In addition, we benefited from our first full quarter of revenue contribution from the acquisition of the former Lexecon Limited business. Also, Q4 was affected by the write-off in connection with an abandoned acquisition facilities, as well as the normal year-end adjustments already mentioned. Shares used to calculate Q4 EPS were 12.1 million, compared to 10.4 million shares outstanding in Q4 of fiscal 2004. Our staff breakdown is 207 junior consultants and 456 senior consultants, which includes both Lee & Allen and the staff of the formerly named Lexecon Limited business.

Looking at the balance sheet, billed and unbilled receivables in Q4 increased to 92.8 million, compared to 87.8 million at the end of Q3. Current liabilities are up to 78.6 million at the end of Q4, compared to 68.4 million at the end of Q3, primarily because of the timing of bonus payments. Total DSO, days sales outstanding were 105 days. This consists of 33 days of unbilled and 72 days of billed, versus 37 days of unbilled, and 66 days of billed in the third quarter 2005. We continue to target total DSO to be below 100 days.

Cash and equivalents in short-term investments stood at 115.2 million at the end of Q4, up from $104.4 million at the end of Q3. We generated cash from operations Q4 of $13.8 million, and $41.9 million for the year, compared to 18.4 million for Q4 a year ago, and 31.8 million for fiscal 2004. Our capital expenditures totaled approximately 1.7 million for the quarter, and $13.9 million for the year, compared to $2.5 million in Q4 a year ago, and 8.7 million for fiscal 2004. Depreciation and amortization expense was approximately $2.3 million in Q4, compared with approximately $2.6 million in sequential third quarter.

During the fourth quarter, our closing stock price did not exceed $50 for at least 20 of the last 30 consecutive trading days. Pursuant to the terms of the indenture governing our convertible debentures, the coco trader was not satisfied and these debentures cannot be converted during our first quarter of fiscal 2006. Tests will be repeated each quarter. To date, no bonds have been converted. Now back to Jim.

Thanks, Wayne. Looking back on 2005, CRA had a very successful year from both a financial and operational standpoint. We continued to grow headcount and we added a number of renowned industry experts to our expanding roster. We also accelerated our growth overseas. Lastly, we ended 2005 with a strong cash balance that will allow us to continue capturing opportunities to expand our business.

Turning to the outlook for fiscal 2006, as we announced in today's press release, we anticipate that revenue growth for the full year will be in the range of 18 to 20%. This year, we will be required to begin expensing stock-based compensation in accordance with Financial Accounting Standards Board statement 123R. The adoption of 123R will impact most major captions in our income statement below the revenue line. In order to provide useful comparative information with fiscal 2005, we included a table in the press release that provides fiscal 2005 revenue in net income and diluted earnings per share as reported and pro forma with the impact of 123R, as if 123R had been adopted at the beginning of fiscal 2005. The table also includes comparable guidance for fiscal 2006 revenue, net income and diluted earnings per share both with and without the effects of 123R. A copy of the press release can be found on our website at www.crai.com.

For fiscal 2006, we anticipate a $0.29 to $0.30 per share impact on the implementation of 123R. CRA anticipates net income of 26.5 million to $27.5 million, and EPS of $2.18 to $2.27 for fiscal 2006, including the impact of 123R. Our 2006 EPS guidance is based on approximately 12.2 million average diluted shares and assumes a stock price of $47.23, which was the average closing price of the past 10 trading days. Deviations from this stock price will cause our earnings per share to vary based on share dilution from our stock options and (indiscernible) convertible bonds. These estimates are based on planning targets of an effective tax rate for the year of approximately 42 to 43% and utilization in the 78 to 80% range.

As we do every quarter, I would like to remind everyone that our business has a pronounced seasonal pattern arising from the fact that our revenues are derived almost entirely as a function of billable hours and that staff holiday and vacation time are strongly seasonal. Vacation and holiday time tends to peak in the first quarter as a result of the Christmas and New Year's holiday weeks, and in the third quarter, as a result of the summer holiday season in the northern hemisphere. As a result, revenues will have a tendency to drop relative to trend while most of our costs will continue in these two quarters, namely the first and third quarters, the opposite effect happens in the second and fourth quarters. With that, I'll ask the operator to open the call for questions.

[OPERATOR INSTRUCTIONS] And your first question comes from Michael Fox with JP Morgan.

Good morning, guys, congratulations on a great quarter. Two quick questions. On the utilization, can you talk about the trend you're expecting in 2006 throughout the year, and I was wondering if you can comment at all on the first quarter. I know usually it's seasonally a little bit lower but I know you had some strength last year, I was wondering if you can tell us if it's going to be -- what it's going to do sequentially from the fourth quarter to the first quarter? And then also if you can talk about your expected price increases for 2006. And then one on the fourth quarter, I was wondering if you can give us the organic revenue growth? Thanks a lot.

Okay. Well, there are several questions there. First on the utilization, this is a difficult time for us to be making assessments because -- at this time of year because they're always coming off the very significant holiday periods that impact three of the weeks that recently passed in this quarter. So we're not really in a position to be able to say much about the trend other than the guidance statements I've already made. I will point out that Q1 is a quarter where one would tend to see some impact of the holidays both on vacation time and on utilization.

In terms of the rate increase, we did put through a rate increase at the beginning of the quarter across the board that was in excess of 5%. That increase will not take effect -- will not be fully implemented immediately as they're sometimes grandfather provisions with certain clients, but we would expect to see the rates become fully, most of that increase to be fully in effect by the end of the quarter. From the point of the organic growth, we're not in a position to make those estimates. The primary -- there are two reasons for that: One reason is that we made four acquisitions, four small acquisitions over the past 12 months. Actually, past 13 months, including the ones at the end of 2004. And we don't have reliable baseline data for -- to develop the baseline for such projections. Those acquisitions were small, in some cases were operating on a cash basis. We do have estimates obviously but nothing that we would want to announce publicly. That makes it, in fact, impossible to come up with organic growth numbers. We did provide estimates at the time of headcount to give investors a rough idea of the size of those acquisitions.

The other reason is that our strategy in acquisitions has been to integrate the acquired staff and operations very quickly so it becomes increasingly difficult over time accurately to measure organic and acquired growth separately. I should point out that we do continue to target a long-term revenue growth rate of about 15% excluding new acquisitions.

Okay, great. Thanks a lot.

Your next question comes from Brett Manderfeld of Piper Jaffray.

Good morning, guys. My question relates to utilization. Jim, I think you mentioned it in your remarks in the release that you expect to drive utilization higher. Can you talk a little bit about how you plan on doing that? And related to that, I know the -- or my sense is the finance practice, utilization was very, very high for several quarters up until the August quarter when it dipped. Did that bounce back in the quarter, and is that kind of at levels where it probably won't go any higher? Thanks.

Well, finance did bounce back, as we said it would. It's back to fairly normal levels now, that's not to say it couldn't go higher. In terms of how we manage utilization, there are obviously several answers to that. The first is we try to manage the availability of time by not having hiring run ahead of our headlights. So if we -- if we are not seeing utilization rise, we would probably pull back on bringing in at least junior staff into the Company. We also obviously need to work on increasing demand in those areas that have weak utilization, and also increasing the incentives on staff to be higher utilized. So we're working across the board on all those things.

Have you seen any kind of change in the demand environment outside of just the little blip over the summer?

No, I would say the demand environment has been strong and continues to be strong. We continue to have an active flow of new opportunities. Again, we're coming off a holiday season where both a lot of our people go on vacations as well as our clients. But even in spite of that, there's been a continued flow of opportunities.

Okay, great. My final question, if I'm looking at this correctly, it looks like your guidance suggests somewhere between 14 to 16% internal growth for '06, and I think you mentioned a 5% rate increase. So would that just -- would that back into a 10% headcount addition or so for the year planned?

That's -- that continues to be our long-term model. There are obviously other ways of increasing revenues, by getting better revenue yield out of consultants, we're working on things on that side also. But that's roughly the pattern.

Okay, thank you.

Your next question comes from Colin Gillis of [Kennecott Adams].

Yes, good morning everyone. Jim, can you just talk a little bit about the hiring environment, and if you still see that there's strong talent interested in migrating from accounting firms?

Well, there's been a continual availability of people really at all levels. We're always recruiting actively. We have quite a long list of candidates right now. So I would say it's continued as it has in the past.

Okay, great. Then can you talk about marketing efforts to reach out to law firms and any impact that's had on the business pipeline?

Well, we're always engaged in marketing efforts to reach out to law firms. We do plan to step that up but there's been an ongoing effort.

How would you step that up, and what form might that take?

We recently had a major conference in Brussels, I think attended by over 300 lawyers, where we made a big splash, effectively making sure that the lawyers in the continent were well aware of our expanding capabilities from both our organic growth in Europe as well as our two recent acquisitions. We do plan to have more targeted sales efforts. A lot of our marketing consists of conferences and seminars, and having individuals keep up with our contacts but we will also be making more targeted sales presentations at law firms.

Okay, great. Without getting into absolute numbers, can you just talk qualitatively or whatever way you can about the differences in utilization we should be thinking about between Europe and America, if they're running particularly in the first quarter, are we seeing more fringe time in Europe? Is that something that we should be expecting?

I actually don't have the information in front of me on the fringe time, although Europe tends to shut down more than the U.S. does on periods like Christmas week. The utilization picture is hard to generalize because there are portions in our -- of our European operations are operating extremely high utilization. The other factor to consider is that business consulting tends to have a somewhat higher rates and lower utilization than the rest of the Company. On the whole, our U.S. operations are continuing to operate at higher average utilizations than our foreign operations, but it is a mixed picture. The other thing I should note is that London billing rates actually tend to be higher so there's some offset from that.

Just one last one, on the London side, is there an update in terms of the office space? Has the offices been consolidated into a central location yet?

We have not actually accomplished that. We have activities underway. We have a plan for doing that, but it hasn't been fully implemented yet.

Okay, great. Thank you, nice quarter.

Thank you.

Your next question comes from Patrick Elgrably of Next Generation.

Hi, good morning. Jim, can you comment at all on the acquisition pipeline and perhaps other uses of cash in 2006?

We do have, as always, acquisitions that are in the process of being looked at. There is one fairly promising acquisition that's in the process. I can't put it to probability, but if it happens, it might happen in the next quarter or so, modest size. There are also others in the pipeline, so there's an active pipeline.

And will that be the main usage of cash as we look out into '06?

That's the principal uses of cash that we have in mind.

Okay. And then is there any way to quantify the utilization rate internationally either during the quarter or during 2005?

We have not been breaking down utilization rates at those levels.

Okay. And then one last question if I could, on the leverage ratio, it seems that that hasn't really been an emphasis of the business model, especially in recent quarters, and so I wonder if we should be looking at that as a potential driver of margin expansion in 2006 and beyond, and what some of those forces might be that could increase the leverage ratio?

Well, you're correct that one of the ways we could drive margins up in the future is by having leverage increase. That's also related to utilization. Leverage tends to follow -- leverage growth tends to follow utilization growth. So if utilization remains in the range it has been recently, we probably shouldn't expect to see much leverage growth. As utilization starts to rise, we would be hiring more junior staffers and you would see leverage growth increasing.

Okay. Thanks a lot.

Your next question comes from Kevin Steinke with William Blair & Company.

Hi good morning, it's Matt Litfin.

Hi.

Hi. Wayne, the $0.29 to $0.30 of stock-based compensation expected in 2006, I'm wondering what that is on a dollar basis? Trying to get a sense of the expected tax treatment there.

Matt, the way it works as I think you know is that under 123R you have to separate the options that are noncalls versus ISO's in terms of tax-effecting them. And so under 123, it was simply once you determine the total impact, you'd simply multiplied it by whatever the effective tax rate for the Company is. This 123R doesn't allow you to do it that shorthand way. And so you have to go in and take it apart and it gets a little bit involved. But the total -- if the table that you saw in the press release, if you look to that and simply dollarize the EPS swing in the '06 guidance versus the $0.28 -- if you dollarize the $0.28, roughly multiplying it by 12.2 million, you'd come to the after-tax effect and you can work yourself back that way, if you follow me.

Yes, okay. SG&A as a percent of revenue was up in the quarter as you explained. Where do you expect that to settle out? I know you had some one-time issues. But will we continue to have some of that or do you think you can get that down a couple points?

Well, I don't want to commit to a couple points but SG&A is clearly one of the areas that we're looking at as particularly as the Company scales up that keeping it at a level of in the 27% range is not what we desire to do. So as we grow and increase the scale of our operations, we're hopeful that we will get that rate down. I just don't want to commit to a particular percent today, or when that will happen in terms of a quarter, but it's certainly a target we have.

Okay. Turnover rates, along your consultants, how did that trend in the November quarter?

I missed the first part of your question, Matt?

Yes, I asked about turnover rates among your consultants, both senior and junior levels. How is that looking?

I don't have specific numbers. I think the turnover rate was a little bit higher than normal because of some churn at the middle levels at some of the acquired entities, which was expected. But I don't have a specific number.

Okay. Last question, if I might. On the guidance that you've given and the utilization that you think you're going to get in '06, can you just talk through what the pipeline looks like? In other words, what kind of visibility do you have? I know you don't have the full year's visibility at this point, but how far can you see out and what do look at to determine where you think that's going to come out for a upcoming year?

Well, as I think most of you know, most of our business does not have the normal kind of pipeline you would have in a contract business. We generally get hired often within days or weeks of an inquiry. And I'm referring now to our litigation business, which is up from -- whose share is up from what it was last year because the acquisitions we made were primarily litigation acquisitions. So a very large percentage of the Company is litigation or regulatory-related work and that work typically, when there's an opportunity, we'll be hired, my guess is a very high percentage of the time is within a month of the opportunity. So and then once we're hired, because we're billing by the hour as responsive to the needs of the client, we don't have a firm project size or budget. It's often hard to determine exactly how big the project will be or how long. So we have to make the best assessment as we can based upon what we see as a stream of opportunities and what we think is happening in the markets and we use that to come up with our assessments of the future and our planning models. But we don't have firm data to be able to publish a backlog or anything like that.

Right, okay. Thank you.

Your next question comes from Jim Wilson with JMP Securities.

Thanks, good morning guys. Two questions, I guess. One probably for Jim is, you continue to show the good revenue growth rate, the competitive share gains, wondering how you might characterize it if you had, say you've been picking more of it up from big four accounting firm competitors, or larger independent public companies are picking up from smaller companies or a little of both? And then the second question was, is I guess probably for Wayne, is the option expensing, should it be fairly linear per quarter as we model it?

Okay, on the share gains, I don't have any very precise information on gains in share because we don't have very much information on what the competitors are doing. Obviously, some of our growth in share came about through acquisitions. In the litigation area, where our growth was very substantial during the year, that was a combination of organic growth, but also we acquired four companies, and before that InteCap in the middle of last year, in the middle of 2004. All of these companies are primarily litigation companies. So there's been a big share gain just from that, but there's also been organic growth going on. Now, the market itself is growing. I do think we're growing a little bit faster than the market but probably not much. So we've had a little -- we've had incremental growth and gained possibly plus the acquisitions in terms of the market share.

With respect to the 123R expense, the comp expense, it should follow very closely the number of weeks in each of the quarter, as you know, the first two are 12 weeks, the last -- the fourth quarter's 12, but the third quarter is 16. So if you use those rough proportions, you should be reasonably close.

Okay. Got it, makes sense. All right, great, thanks a lot.

Your next question comes from Jim Janesky with Ryan Beck & Co.

Yes, good morning. On the SG&A line, Wayne, you said you're focused on that. Within the quarter, the fact that you exited the acquisition accounted for about -- it did come in higher than I expected, and that accounted for about half of it. Can you just give us an idea of what you'll be focusing on in the future to bring down SG&A?

Well, the -- one of the most significant costs in SG&A is facilities. And when I say facilities, I mean both rent as well as the depreciation and amortization associated with the furnishings, equipment, and leaseholds and so forth. That certainly is one of the most obvious areas that we need to and want to and intend to focus on. In addition to that, what I would say is the areas of finance, accounting, administration, we actually may spend in the near term a little bit more there. In absolute dollars, I definitely expect we'll spend more. But what we're focusing on is as we grow, and one of the requirements that's been placed on me is to develop the organization that this company is going to need a year or two from now when it's potentially of a much greater size and scale. So on one hand, we will be increasing the size of many of our SG&A functions, on the other hand, we're looking to do them more effectively. So as I say, you will see increases in dollars, but hopefully not increases as a percentage of our revenue.

Okay. And turning to the interest income line in the quarter, did that currency gain flow through that line item?

It's in other, down in the other income category, yes, down below operating income.

Sure. Even despite that, I was surprised that the interest income came in so high. Was there anything else? Was there any sales of securities or anything, or was it interest rates, do you feel, going up?

No, it was just the outstanding work of our assistant treasurer in placing the -- keeping those things in the best securities we could keep them in.

Okay, fair enough. Turning to the first quarter, just remind us, is there anything unusual in either last -- in the first quarter of 2005 or in the first quarter of 2006? Jim, you did a good job of talking about, let's remember the seasonality of the holiday period in the first quarter, but is there anything unusual that either went on in the first quarter of 2005 or you see going on in the first quarter of 2006 that will make the seasonality either more pronounced or less pronounced?

I'm not looking at the data, but my memory was that the Q1 of last year was unusually strong, and that the seasonal didn't show up significantly in that quarter. And then other Q1's where there has been a strong seasonal impact. Now, some of that is because there's other confounding, I mean the business has been fairly strong, that can offset a loss of 6 or 7% of your hours. The negative swing in available hours, because of vacations, can range in 4 or 3 to 6% range from Q4 to Q1. That means relative to Q4, Q1 can have as much as 6% fewer hours available for billing because of the vacations, and yet most of those costs continue. So if there's nothing else going on, Q1, if there's no increase in the headcount, no change in utilization, nothing else confounding it, Q1 you can have lower revenues, and obviously disproportionate effect on earnings in Q1. Now, there are other things going on, you tend to have some headcount growth et cetera. So it's a little bit hard to pare it out just by looking at historical Q1's, but there is underlying that data, there will be a seasonal.

Just based on your history with the Company and the fact that you did say that the pipeline of business is still very strong and the momentum is very strong as you entered the first quarter, do you find that consultants tend to delay taking time off or take less than normal time off when there is a very strong pipeline?

Well, if you're in an overheated period with a lot of deadlines, for example, if there's a large project team and there's a deadline to get something done by January 2, you will see people working through the holiday week. So there is some impact on that. So in other words, that actually -- you could have high -- very high utilization and lower than normal vacation time and the reverse effect happening in a low utilization quarter.

Sure. Okay. And then Wayne, on the options expense, this roughly I figured out $6.5 million pretax option expense, does this flow through SG&A, Wayne?

It's a combination. It goes through cost of sales and SG&A, and roughly it's 90% in cost of sales, 10% SG&A. But you're not -- I think what you have to be careful about in the number you came up with, I assume what you did is just took the EPS, the $0.28, $0.29, $0.30 number and you multiplied it by the 12.2. As I'd mentioned a few minutes ago when I was responding to this, the tax effect or the tax rate to use to back into the pre-tax number is a little complicated because of the nonqual versus ISO factor.

Okay, so it's the post-tax that's more accurate. Okay. No problem. All right, that's helpful. Thank you.

Your next question is a follow-up from Colin Gillis of Kennecott Adams.

Hi, Wayne, I just had a quick question about what are some of the steps you think you could take to lower DSO in '06?

Well, I think Colin, you might have noted the split between the billed and unbilled. We can't collect anything until we bill it. So we're certainly focused on reducing the unbilled. That's really an internal matter. That's not something we can blame clients or anything else on. That's purely we have to get the bills out quicker. So that's certainly going to be our first and most significant area of focus. I think there's a fair amount of opportunity just in that piece of it. If we were much more effective and efficient in that area, I think that alone could get DSO down under 100 days.

Okay. Is it -- would you rule out the possibility of billing clients simultaneously at the same time of billing law firms just because of sensitivity issues?

That's generally not possible for reasons. The first is law firms often want to have it -- have to take a position that they're hiring is not the ultimate client for discovery protection reasons. So I would say we would have very few situations in the legal business where we would be allowed to bill a client at the same time. Secondly, when a case is ongoing, the law firm representing a client often wants us to have no contact with the client, even to follow up about why a bill hasn't been paid. That's just an inherent problem in the business that we don't face with business consulting.

Okay. And then Jim, can you just -- did you see any pick up in demand from the recent hurricanes in terms of the energy and the environmental businesses?

Before I answer that, let me just answer one additional thought on the DSOs.

Sure, yes.

The DSOs on the litigation business, I think, will always be significantly higher than on business consulting, and we've recently had an increase in our share of litigation, partly because of the acquisitions, so that alone would tend to add a few days of DSOs over what they've been running historically. Now that's not to say that we're not going to continue to do whatever we can to drive the number under 100. Now, in terms of the hurricane, we actually have had some business and some inquiries. For us, for the kind of things we get involved in, they tend to lag. We often don't get involved until there's litigation filed and they're looking around for witnesses, that can lag it by a long time.

Okay, great. Thank you.

Gentlemen, do you have any closing remarks at this time?

Well, thank you everybody. We look forward to speaking with you on our first quarter conference call. This concludes today's call.

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