CRA International Inc (CRAI) 2006 Q3 法說會逐字稿

Good day, everyone and welcome to CRA International's third quarter 2006 conference call. Today's call is being recorded and webcasted. You may listen to the webcast on CRA's website located at www.crai.com. In addition, today's news release is posted on this site for those of you who did not receive it by e-mail. With us today are CRA's President and Chief Executive Officer, Mr. James Burrows, and Senior Vice President and Chief Financial Officer, Mr. Wayne Mackie. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Felicia. Statements made during this conference call concerning the future business, operating results and financial condition of the Company and statements using the terms "anticipates," "believes," "expects," "should," or similar expressions are forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based upon management's current expectation 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 differ 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 Financial Accounting Standards Board Statement No. 123R and total stock-based compensation, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to the Company's recent acquisitions including integration of personnel, clients, offices and anticipated and unanticipated expenses and liabilities, risks associated with acquisitions it may take -- it may make, risks inherent in international operations, performance of NeuCo, changes in accounting standards, rules and regulations, management of new offices, potential 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, risks inherent in litigation 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, and thanks to everyone for joining us today. We are extremely pleased with our financial results in the third quarter during which we achieved double digit growth in both revenues and earnings. For the quarter, we increased revenue nearly 16% to $107 million from $92.5 million in Q3 of '05. This growth reflects strong contributions from a number of our litigation and business consulting practices as well as strength in our international business and contribution from our recent Ballentine Barbera Group or BBG acquisition.

As we mentioned in our second quarter call, NeuCo is no longer consolidated in our financials, so our third quarter results for fiscal 2006 do not include NeuCo, while the third quarter results for fiscal 2005 do include NeuCo.

Utilization in the third quarter was 76%, which is up 74% in the third -- from 74% in the third quarter of '05 and down from 80% in Q2 '06. The third quarter tends to be a seasonally weak quarter due to summer vacations. However, we remain on track to achieve our guidance of 78 to 80% utilization for full year fiscal '06.

In the third quarter, we achieved net income of $8.7 million, up 10.5% from $7.9 million a year ago. EPS grew nearly 8% to $0.71 per share compared with $0.66 per share for the comparable period last year. Included in net income and diluted EPS announced for Q3 '06 are approximately $950,000 or $0.08, respectively, of stock based compensation expense. Weighted average diluted shares outstanding used to calculate EPS in the third quarter of fiscal '06 were 12.3 million versus 12 million shares in the third quarter of fiscal '05.

Our international offices performed very well in the third quarter following steady growth in the first half of this year. International revenue was approximately 25% of total revenue in Q3 '06 compared with 22% in Q2 '06 and 21% in Q3 of fiscal '05. Our increasing business consulting projects in the Middle East were a significant factor in our international growth.

As we mentioned in the Q2 conference call, CRA completed the BBG acquisition in late May building out our transfer pricing practice. The BBG acquisition reflects CRA's corporate strategy of adding businesses that complement our core capabilities while further expanding our geographic reach, both in the United States and abroad. We are pleased to report that the integration of BBG has gone smoothly and the Company's 33 employee consultants are now part of our roster. As we previously discussed, BBG's revenues have been steadily increasing and totalled approximately $12 million during the trailing 12 months prior to the transaction. We continue to believe that recent revenue trends indicate significant growth potential going forward.

We also announced last quarter that CRA's NeuCo subsidiary completed the acquisition of Pegasus Technologies, formerly an Ohio-based majority owned subsidiary, Rio Tinto Energy America Services Company. The acquisition resulted in the decline in CRA's ownership of NeuCo to approximately 36% from approximately 50%. As a result, CRA began to deconsolidate NeuCo from its financial statements. We indicated that CRA's investment in NeuCo would result in a reduction of approximately $500,000 in CRA's net income over the balance of fiscal 2006. CRA incurred a loss of approximately $500,000 in Q3 from NeuCo, which included a one-time charge attributable to a legal settlement, stemming from a patent infringement lawsuit brought by Pegasus against NeuCo.

This loss was partially offset in CRA's financials by foreign tax and other tax benefits which essentially lowered CRA's corporate tax rate by roughly 2%. Our corporate tax rate for Q3 was 40.3%. Excluding the one-time tax benefits, our tax rate would have been about 42%, in line with our previously announced fiscal '06 guidance of 42 to 43%.

Turning to the performance of our consulting practices, we experienced robust demand from many of our practice areas this quarter, particularly within litigation. Overall, our litigation revenues increased more than 30% over Q3 of last year. This improvement was spearheaded by our competition in finance practices. In addition, our transfer pricing practice benefited from almost a full quarter of revenues from the BBG acquisition. Our finance practice increased nearly 30% year-over-year while our competition practice was up approximately 25% from Q3 '05.

Some examples in the third quarter of our competition and M&A work around the globe include the following. We worked for Alcatel and Lucent in connection with the proposed merger of these two telecommunications equipment suppliers. Both the Department of Justice and the European Commission approved the merger and neither competition authority recorded any divestitures. A team of CRA experts from London, Washington, and Boston demonstrated to the regulators that the market structure would remain competitive post-transaction as a number of effective competitors would remain in the market and the customers would constrain the merged entity through their countervailing power and bidding procedures.

We also worked for Maxtor Corporation to provide economic analysis in connection with investigations with the recent merger of hard -- of major hard disk drive makers by the U.S. Federal Trade Commission and the European Commission. CRA analyzed a variety of theoretical empirical issues associated with the proposed transaction ranging from market definition and competitive effects to entering efficiencies. Both the Federal Trade Commission and the European Commission approved the merger without conditions.

Following an in-depth investigation, the European Commission cleared the acquisition of FalconBridge by Inco subject to divestments. Both companies are active in the mining, processing and refining of nickel and other metals. The merger was also investigated by the DOJ and approved subject to consent decree. A CRA International team of competition economists and mining and metal experts advised NeuCo both before the DOJ and the European Commission.

For several mergers in South Africa, CRA provided expert advice and testimony for our clients before the competition tribunal and in Australia, CRA provided expert testimony on behalf of the Australian Competition and Consumer Commission in a case against a retailer, Woolworth's, that involved a number of anti-competitive agreements to restrict entry into retail markets -- retail with their markets.

The finance practice had another strong quarter with net revenues increasing nearly 30% compared to Q3 of last year. With respect to finance cases, CRA continues to work in several high profile litigation corporate matters. In addition, CRA assisted in the defense of an executive accused by the SEC of channel stuffing and earnings management. We also provided expert evaluation advice associated with a disputed merger in the retail distribution industry. We analyzed the solvency of a leveraged buyout in the textile industry and we continue to work on several mutual fund cases analyzing damages due to market timing, late trading, broker execution of trades, and other business practices.

Revenues of our intellectual property practice increased more than 5% compared to Q3 of last year. During Q3, the IP process was involved in a number of significant projects that required assessing damages in patent, trademark and trade secret litigation in a variety of industries. We were also retained to value certain patents held by clients and have continued to assist other clients with transactions relating to intellectual property assets.

With the addition of BBG personnel, CRA now has over 50 professional staff in its transfer pricing practice. During this quarter, CRA worked with a number of major clients on global impacts controversies by providing economic analysis and documentation. Clients range from high-tech to retail firms. As an example of the work in this practice, for a major global manufacturer, CRA provided ongoing assistance to develop and implement transfer pricing policies in conjunction with its business restructuring. We assisted the client in setting prices for its product and service flows and in determining the appropriate sharing of its intellectual property and risk across the global organization. We anticipate continued growth in the tax controversy assistance area as tax authorities in many countries continue to ramp up audit activities. With respect to our management of the practice, CRA is in the process of consolidating its BBG offices in Palo Alto and Washington, D.C. with CRA offices.

In addition, the transfer pricing practice provides integrated service offerings through cross-functional teams with other CRA practices in IP, energy and pharmaceuticals. This practice produced new marketing materials this quarter and were featured in the July-August issue of International Tax Review and the August-September issue of World Finance magazine.

In business consulting, revenues of the chemicals and petroleum practice increased more than 10% compared with the Q3 of last year.

This increase was offset by a decline in our energy and environment revenues. Energy and environment revenues were affected by the completion of two large utility merger projects before the end of the quarter and CRA's work on several large bankruptcy cases was lower in Q3 of '06 relative to Q3 of '05. However, given some of the pre-merger assignments that E&E has received at the end of Q3 and our anticipated project pipeline, revenues of the energy and environment practice for Q4 are expected to be higher than the Q3 run rate. At the end of Q3, CRA was retained on a large scale strategy study by a major utility to analyze the effect of major regulatory reform and we anticipate similar assignments with other clients in Q4. CRA has also been assisting three energy companies in assessing how future policies addressing climate change will affect their lines of business. We anticipate expanding work in the next quarters to help companies design robust processes for taking these kinds of policy uncertainties into account in their investment planning decisions.

Revenues of our pharmaceuticals practice increased approximately 15% year-over-year fueled by new projects related to the evolving world of specialty pharmaceuticals and biologics and some ongoing litigation projects related to pharmaceutical pricing.

The growth in our chemicals and petroleum practice resulted in part from increased Middle East revenues and the continued expansion of our London-based practice. Revenues from the Middle East included business strategy work in Saudi Arabia, Jordan, Bahrain and Kuwait. Our pipeline of work in the Middle East region remains active and we continue to see a number of promising opportunities there.

Some notable C&P assignments in Q3 included a project for a major resource rich government to implement an industrialization strategy. CRA had previously developed an analytical methodology to identify several industries to meet the client's national objectives of industrial diversification and the creation of large-scale, sustainable employment. CRA recommended four industrial clusters for further investigation which were accepted by the government. We are now implementing these recommendations.

In another project, we developed a strategy for coal participation for a large multi-national client. A joint team drawn from CRA's chemicals and petroleum and energy and environment practices contributed to this effort by developing a rigorous, fact-based review of the coal landscape. This work consisted of a global assessment of coal reserves, value chain in industry structure, conversion technology and economics, policy and participation options. We were also key participants in an executive working session that resulted in a series of business model opportunities which are now being evaluated.

As I touched upon earlier, our London office performed well in Q3 as we continue to benefit from a considerable amount of Middle East work. Additionally, we believe we are close to concluding arrangements to lease new space in London that will allow us to consolidate several offices when the build-out is completed during 2007 and 2008. We believe that the consolidations of the London office will positively affect our U.K. operations.

Looking at our headcount, on a net basis, CRA's headcount in Q3 was 723, up from 661 in Q2 '06. As I mentioned earlier, 33 employee consultants were added to our staff as a result of the BBG acquisition at the beginning of the quarter. FTEs were 706 for Q3 as opposed to 649 for Q2. With that, I will turn the call over to Wayne for the the financial review. Wayne?

Thanks, Jim. As always, it's important to remind you that CRA's fiscal year operates on 13 4-week cycles producing unequal quarters. Q3, which we announced today, is a 16-week quarter while Q2, Q4, and Q1 are typically 12 weeks in length.

Briefly recapping our results, Q3 revenue, as Jim mentioned, increased approximately 16% to $107 million from a year ago period. Third quarter gross margin was 36.3% compared to 40.7% in Q3 of fiscal 2005. Nearly 20% of the gross margin percentage decline between the quarters was the result of the effect of FAS 123R stock based compensation. About 15% of the gross margin percentage decline between quarters was the result of the deconsolidation of NeuCo. The remainder of the gross margin decline was due to higher direct compensation costs resulting from a higher portion of our revenue being sourced by internal staff rather than outside consultants whose performance payments are classified under SG&A rather than cost of services in other direct compensation costs.

Total reimbursable expenses were $12.6 million compared to 11.0 million in Q3 of 2005 and represented approximately 11.7% of net revenue for Q3 '06 and 11.9% of revenue for Q3 '05. Total consultant utilization in Q3 was 76% as compared to 74% for the comparable period a year ago and down from 80% in Q2 of '06. Again, Q3 is typically a seasonally weaker quarter due to the effect of the summer vacation period.

Turning now to SG&A costs for the third quarter, SG&A costs for the third quarter were 23.8 million or 22.2% of total revenue compared to $23.9 million or 25.8% of revenue in the third quarter of 2005 and $20 million or 23.8% of revenue in Q2 of this year. The sharp improvement in Q3 SG&A expenses on a percentage basis was principally the result of lower performance payments to outside consultants and the deconsolidation of NeuCo. SG&A in Q3 of this year improved over the sequential quarter, principally because of the nonrecurring $600,000 cost of closing our Mexico office during Q2.

Third quarter operating income was $15 million versus $13.8 million in Q3 of fiscal 2005. Operating margin was 14% compared to 14.9% in the third quarter 2005. If you exclude approximately 1.4 million of the pretax effect of FAS 123R in Q3 of this year, for a true apples to apples comparison, operating margin in the quarter would have been approximately 15.3%.

Interest income was 1.6 million for Q3 2006 compared to 660,000 for Q3 of 2005 and 1.1 million in Q2 of this year. After taking into account that Q3 is a 16-week quarter in contrast to Q2, which is a 12-week quarter, the normalized interest income was slightly higher than last quarter. Year-over-year, higher interest income is due to higher interest rates combined with the higher cash balances due to the 2005 equity offering and cash generated from operations.

Our effective tax rate in the third quarter was 40.3% compared to 39.0% in Q2 of '06. As Jim mentioned earlier, we incurred approximately 500,000 loss from NeuCo, which was offset by a gain from foreign tax and other tax benefits that we received. Without the one-time tax benefit, our corporate tax rate for Q3 would have been essentially 42%, in line with our previously announced fiscal 2006 guidance of 42 to 43%. As a result of the discrete tax benefits in the third quarter and the tax benefit from the Mexico office shutdown in Q2, we now expect a slightly lower full-year 2006 tax rate compared to our prior guidance of approximately 42 to 43%.

Third quarter fiscal 2006 net income was $8.7 million or $0.71 per share, per diluted share, compared to $7.9 million or $0.66 per diluted share in Q3 of 2005. Third quarter net income and EPS included the effect of 123R on stock based compensation, which was approximately $950,000 or $0.08 per share.

In terms of share count, we calculated Q3 earnings per share using 12.3 million weighted average diluted shares outstanding, utilizing an average share price for the quarter of $44.24 compared to 12 million shares outstanding in Q3 for fiscal 2005.

As Jim mentioned, professional headcount stood at 723 at the end of Q3 compared to 661 employee consultants at the end of Q2. Our current staff breakdown is 246 junior employee consultants and 477 senior employee consultants, which includes the BBG staff.

Turning to the balance sheet, cash and equivalents stood at $113.2 million at the end of Q3 compared to $112.9 million at the end of Q2. Net cash provided from operating activities in Q3 was $25.0 million compared to $29.8 million for Q3 a year ago. The change in cash balances reflect cash from operating activities offset by cash used from the BBG acquisition of $17.6 million and the $2.5 million used so far on our stock buy back program.

In late July, CRA announced the multi-year stock repurchase program of up to a total of 500,000 shares of its common stock. The primary purpose of the purchase plan will be to offset the dilutive impact of stock options and restricted stock grants that have been made or may be granted to employees, independent directors and non-employee consultants. For Q3, CRA purchased 56,200 shares of its common stock at an average price of $45.13 or approximately $2.5 million. We expect to continue our stock repurchases in Q4 once our Q3 blackout period is over.

Billed and unbilled receivables in Q3 were $104.8 million compared to $104.1 million at the end of Q2 2006. Total DSO, days outstanding, were a disappointing 108 days versus 102 days for Q2 of 2006. This consists of 37 days of unbilled and 71 days of billed for Q3 versus 35 days of unbilled and 67 days of billed in the second quarter of 2006. We are taking steps to bring our DSO back in line. Going forward, we continue to target DSO below 100 days.

Current liabilities were $82.7 million at the end of Q3 compared to $67.5 million at the end of Q2, due primarily to the increase in accrued bonus that will be paid out next year. Our capital expenditures totalled approximately $1.8 million for the quarter compared to $6.1 million in Q3 a year ago. Depreciation and amortization expense approximated 3.3 million for Q3 compared to 2.2 million in the sequential second quarter and 2.7 million for Q3 of fiscal 2005.

During the third 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 debenture, the CoCo trigger was not satisfied and these debentures cannot be converted during Q4. Tests will be repeated each quarter. To date, no bonds have been converted. Now back to Jim.

Thank you, Wayne. For the fourth quarter of 2006, we anticipate a continuation of the primary global trends that generate demand for our services. We have a promising pipeline of projects across a number of our key markets. And as our performance indicates quarter after quarter, we have become less vulnerable to swings in the general economy because our customer base is more diversified and we operate within both cyclical and counter-cyclical markets. Based on our outlook and existing market conditions, we continue to anticipate revenue growth for fiscal 2006 in the range of 18 to 20%. For the year, we expect a $0.29 to $0.30 per share impact of stock based compensation. Based on year-to-date results, CRA anticipates a slightly lower effective tax rate for the year compared to our prior guidance of 42 to 43%. We anticipate our tax rate for Q4 will be in line with our prior guidance. As a result of the expected slightly lower tax rate, CRA anticipates net income for the full year to be slightly above the high end of the previous guidance of 26.5 million to $27.5 million or $2.18 to $2.27 per diluted share including the impact of stock based compensation. This is based on approximately 12.2 million average diluted shares for the year and assumes a stock price of approximately $46.05, which was derived from the average closing price of the past ten trading days. Deviations from the stock price will cause earnings per share to vary based on share dilution and CRA's stock options and convertible bonds. With that, I'll ask Felicia to open the call for questions. Felicia?

Thank you. [OPERATOR INSTRUCTIONS] We'll go to Matt Litfin of William Blair & Company.

Hi. Good morning and congratulations on the strong quarter.

Thanks, Matt.

Last quarter, I think you talked a little bit about junior-level turnover having ticked up, maybe the last couple of quarters actually. I wondered if you could give us an update there and any quantification would be appreciated.

Hold on, Matt. We're just pulling some information out.

I don't really have any data to address that, Matt. Obviously in the third quarter, that's the quarter when people tend to leave. They're going back to school and people coming in, they're coming in. So I don't think there's anything that's happened during the quarter that is noteworthy apart from that.

Okay. Maybe, Jim, you could talk about the acquisition pipeline, how that's looking today versus maybe 12 months ago?

We always are involved in discussions with companies. There's nothing that's terribly advanced right now. There's -- we are talking to a few opportunities that would be in the companies in the $10 million to $30 million revenue range.

Okay. Great. And maybe I thought if you could give us a window into your initial thoughts here about your hiring plans for 2007 since it will be upon us soon. And also, Wayne, from what you can see today, how do you think stock-based compensation would look next year compared to this year?

Let me do the hiring plans, first. Our business model for next year will be approximately the same as it has been in the past, namely a target of 10%, roughly 10% headcount expansion. We actually are in the process of putting together our budget for next year and so we don't have the final set of numbers on that. We'll address that at the Q4 conference call, but I don't anticipate any major change from what we've done in the past.

Matt, on the stock based comp for '07, I don't have a precise number yet, but I, and as Jim said, we're in the midst of our '07 budget exercise right now, but I don't anticipate it to be a substantially different percentage, possibly up a little bit in terms of absolute amount.

Okay, and I have one more follow-up for each of you. Jim, the -- as you look at that plan for next year, is there any reason to think that the mid-single digit rate increases that you've been able to get in the past would not materialize next year? And then, Wayne, you mentioned in your prepared comments that you're targeting some things to bring that DSO number down and I wondered if you could just shed a little bit of light on the kind of things you want to try there?

Okay. On the rate increase, again, it's part of our budgeting process. We're putting together our planning for rate increases that would be implemented in time for the, to take effect on December 1st, and we anticipate that we will at least be in the range that we've been in the past or higher, so certainly mid-single digits, at least.

Matt, on the DSO in terms of actions, the most -- I think the most effective element of what we are planning to do is to come up with a method to directly, if you will, hold responsible the officers whose receivables, they have the most leverage to work with clients to collect. And that would be some linkage to their bonus, their compensation for -- , related to the receivables that they control. So that would be the most effective element of what we're going to do.

Okay. Great. Thanks and congratulations, again.

Thanks.

We'll go next to Mike Fox of JP Morgan.

Thanks, guys. Good morning and congratulations on another strong quarter. I was wondering if you could talk about if you're starting to see any business from the stock option backdating yet or how big you think that could be? And then also, you talked about your expectations for headcount, things like that. I was wondering if you could talk about the hiring environment, and it seems like it continues to be pretty strong. I was wondering if you were seeing any pressure on wages?

Okay. On the stock option backdating issue, we have been -- we've been getting inquiries and some retentions on large litigations. We don't -- we don't -- we're not primarily in the business of doing the forensic research that comes with the front end of that kind of work, but when it becomes major litigation, for example, if the big share cards change and losses start to be filed, that's basically our bread and butter. That work tends to follow the events quite considerably. Quite often our retentions come several years later. But we're already seeing activity like that.

Okay. Thanks.

We'll go next --

Your other question --

Yes.

With the hiring. We're, obviously, active in the hiring market. There has been some wage pressure and we will be raising rates by at least as much as the wages go up. So we don't necessarily anticipate any effect on our business other than the fact that the, that our rates will be going up in line with any wage increases.

Okay. Great. Thanks a lot.

We'll go next to Jim Janesky of Ryan Beck & Company.

Yes. Good morning, Mike and Jim. Couple of questions. When you look at utilization year-to-date for the first three quarters, Wayne, what is that number?

The year-to-date utilization for the nine months is, let me just pull it off of the list I have here, Jim.

Okay.

78%.

78%, so then as we move into the fourth quarter for the year to be 78 to 80, you expect that to either maintain or to tick up, right?

Correct.

Okay. And you obviously have even room to go above 80% in utilization. Hiring, you say, I guess you implied that it's not extremely difficult to hire, but you really don't have to hire very aggressively because you still have capacity within your staff. The question is, what could derail the momentum that you have generated in the pace of business going into the fourth quarter and into fiscal 2007? You said you're not economically sensitive. Is it execution or --? Just give us an idea what could derail that momentum.

Well, I'm not sure there's anything specific that I can put my fingers on because we're really quite diversified, as you know, across a lot of different geographies and lines of business, and there's no single client that dominates their -- that's a very large percentage of our revenue. So it would have to be something major like a major terrorist action in the Middle East or something that affected European business significantly. European business actually has been quite strong and we expect that those trends over there will continue. But I don't think there's anything, other than some major unanticipated event in the economy.

Okay. Okay. Fair enough. And when you look at merger and acquisition activity and that was, as a percentage of your revenues years ago when you were smaller, got up to about a quarter, I think about 25% of your revenues. What are you seeing in the trends there? Have -- has nervousness about the economy or anything, has that slowed down any of your revenues in the M&A area?

We're continuing to be very active in M&A, and new projects coming in all the time. So it's a very, very active field. I don't have a number for the third quarter. We just didn't have time to get that put together for this call. But qualitatively, I think that's running strong as it has been all year.

Okay, and following up on Matt's DSO question. Have DSOs ticked up at all because your percentage of international business has increased? Did that have any effect on it?

Jim, it's varied by quarter, and one or two quarters in the last five or so, international was the culprit or the benefactor, if you will, of DSO having gone down a bit. And one or two quarters, it's gone the other way. They've been, had lower DSO. There really isn't a clear trend that the DSO, the international, are higher consistently.

Okay. Okay. And then final question, is there any way for us to model where your expectation is for where the sourcing revenues will flow through? We understand that there is a bigger push to source more work internally and that means gross margins are going to come down but then SG&A comes down along with it. Is there any way for us to model that or will that continue to move around quarterly?

Well, I think, it's fair to assume that as the business grows, the predominant growth would be from sources that are, where the sourcing is done by employees versus outside consultants, and that's been certainly the case. If you look at -- if you look at that over a long period of time, the amount of sourcing done by outside consultants has declined a lot since our IPO, and I don't think it will tick back up, but I would guess we'll see a continued decline as we grow.

Okay. Fair enough. Thank you.

We'll go next to Don Rockava of Canaccord Adams.

Hi, guys. Good quarter.

Good, thanks.

I have a question about vacation time. Relative to utilization, was there more, actually was there less vacation time taken this year versus last Q3? I know the fringe time in Q2 was 9% and can you give us some color on that?

I don't have that statistic in front of me but my guess is it doesn't tend to change much from year to year. People take their vacations. What does happen, what can change from year to year is how busy people are when they're here and that's a little bit unpredictable. August is always a very difficult month to predict. This year, actually, August came in stronger than it looked would be the case mid summer so things were picking up. But the summer's a very dicey period because you never know to what degree people are taking vacation, or just simply do less work in the days before and after vacation.

Okay. And did you give an organic growth number? And if you didn't, I was wondering if you could provide some comments around that.

We haven't provided an organic growth number, but what I will say is that in Q3 we added BBG but subtracted NeuCo from our revenue numbers. So those are rough offsets, but that's the best I can do for you.

Okay.

There are no other events. Q3 this year compared to Q3 last year, the only changes would have been the addition of BBG and the subtraction of NeuCo.

Sure. Okay. And I think you mentioned something about the, I missed it, but the energy practice, just trying to get a feel for whether it was up or down, how much it grew and what percentage of the total revenue was.

Well, the energy practice declined year-over-year at Q3 in the range of 10%.

Okay.

The -- we do anticipate a recovery to some degree in Q4 just based on projects that came in towards the end of the quarter, and what the run rate was as they were running into Q4. So we believe that's on its way back.

Okay. Good. And last question, I guess is around international. It looks like if you kind of reverse engineer the numbers, looks like U.S. revenue was up about 10% and international grew around 38% or so, just kind of backing into those numbers. Is that what we can expect going into Q4 and into 2007 that international would be that far ahead of the U.S.?

No, I think those numbers are converted. I think international will continue strong, will be growing, but I would guess, I would expect to see a conversion of those run rates.

Okay. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS] We'll go to Brett Manderfeld, Piper Jaffray.

Good morning, guys. It looked like most of the practice areas were up comfortably in the double digits, but the intellectual property area was only 5%, if I heard you correctly. Is that a tougher comp or is there something else happening in that particular business line?

I don't think there's any particular event. There was just the question of the timing of projects ending and stopping and coming in. And actually that's another practice that was on an upward trend as the quarter -- as we ended Q3 and went into Q4. I don't think that's -- I don't think you can really draw any conclusions of a long-term trends from the fact that their growth was fairly modest from last year. It's just for that one quarter. I think we'll see an improvement.

Okay. And I guess just related to Anacap, and the IP area, my sense is that that's been a -- since you acquired it, it's been a very strong performer and now it sounds like BBG is performing well also in the transfer pricing area. I'm probably missing one or two other vertical that you've moved into over the last few years. But can you talk a little bit about what maybe is the next area that you might see, Jim, in terms of acquisitions that might fit nicely tangentially to the business and be another growth driver going forward?

It might be premature to say anything because I wouldn't put any of the acquisitions we're looking at right now at even the 50% range. We're just not at that stage in the discussions. So I will say that we're looking at more opportunities in the business consulting area than we had last year. But there's -- there's nothing at a stage where it makes sense for me to start talking about it.

Okay, very good. Thank you.

At this time, there are no further questions in the queue. I'll now turn the conference back to Mr. Burrows for any additional remarks.

Thank you, operator. Thank you, everyone. We look forward to speaking with you on our fourth quarter and year-end 2006 conference call, and this concludes today's call.

That does conclude today's conference call. We thank you for your participation. You may now disconnect.