CRA International Inc (CRAI) 2006 Q4 法說會逐字稿

Good day and welcome, everyone, to the CRA International fourth quarter and year-end fiscal 2006 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website 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 by e-mail. With us today are CRA's President and Chief Executive Officer, Mr. Jim Burrows; and Executive 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. Statements made during this conference call concerning the future business, operating results, financial condition of the Company and statements using the terms anticipates, believes, expects, should, or similar expressions, are forward-looking statements as required in the Private Securities Litigation Reform Act of 1995. 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 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 including the impact of Internal Revenue Code Section 162(m), share dilutions from the Company's convertible debt offering, the impact of the adoption of Financial Accounting Standards Board's Statement Number 123R, the impact of FASB Interpretation Number 47, Accounting for Conditional Asset Retirement Obligations, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, risks associated with acquisitions, risks inherent in the international operations, NeuCo's performance, changes in accounting standards, rules and regulations, the potential loss of clients, the 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, and thanks everyone for joining us today. Revenue in the fourth quarter of fiscal '06 increased 17% to $86.3 compared with $73.8 million in Q4 last year. Net income for the fourth quarter was $6.3 million or $0.51 per diluted share as compared with net income for Q4 of fiscal 2005 of $6.6 million or $0.55 per diluted share. Fourth quarter 2006 net income and EPS included the effects of two items, not expected to recur in future periods, totaling approximately $1.4 million or $0.11 per diluted share. In addition, the Company's fourth quarter net income and diluted earnings per share reflected approximately $738,000 and $0.06 per share respectively of stock based compensation expense.

The first of the two items not expected to occur in future periods is a charge of approximately $400,000 or $0.03 per share related to the adoption of FASB Interpretation Number 47. The second item related to the expansion of the executive management team announced in late October and the payment of last year's or prior year's bonuses during fiscal 2006. This caused us to exceed the IRS cap under Code Section 162(m) for deductible executive compensation resulting in a charge of $1 million or $0.08 a share, and a higher than expected effective tax rate for the fourth quarter. Wayne will cover those items in greater detail later on in the call.

From an operational perspective, CRA recorded its strongest quarter of the year with operating margins of 14.9% due to lower SG&A and improved utilization. The 14.9% operating margin was equal to the fourth quarter of 2005 when 123R was not applicable. For the fourth quarter of fiscal 2006, we achieved utilization of 78%, in line with our previous guidance. This is an improvement from utilization of 76% in both Q3 2006 and Q4 of 2005. Going forward maintaining a utilization rate of 78 to 80% will continue to be a top priority.

Looking at fiscal 2006 as a whole, it was a year of significant achievement for CRA. Revenue increased 18.4% to $349.9 million. Net income was $27.4 million, an 11.6% increase from $24.6 million in fiscal 2005. Earnings per diluted share grew to $2.24 in fiscal 2006 from $2.13 in fiscal 2005. Net income for the full year of 2006 included the effects of the two expense items mentioned previously totaling $1.4 million which are not expected to return in future years. Also, included in net income and earnings per share for 2006 was approximately $3.3 million and $0.27 respectively, of stock based compensation expense.

Weighted average diluted shares outstanding used to categorize earnings per share in fiscal 2006 were 12.3 million compared with 11.6 million a year ago.

Another strategic objective for fiscal '06 was to reestablish the area of momentum internationally. Reflecting several large projects awarded during the year, and increased activity in the Middle East, CRA's international revenues grew approximately 20% from last year. Expansion of our London-based practices continues to drive growth overseas. To accommodate this expansion, we are consolidating several smaller locations into our new leased office space in London, a process that should be completed in the summer of 2007.

Turning to our consulting processes, we continued to experience significant contributions during the fourth quarter from a broad range of practice areas. Within our litigation practices, overall revenues grew more than 20% from Q4 of '05 and over 25% for the full year driven by notable increases in competition, finance, transfer pricing, and forensic accounting. Our business consulting revenues grew nearly 20% from Q4 last year, primarily fueled by significant growth in chemicals and petroleum.

Within litigation, the main growth driver in Q4 was our finance practice which delivered revenue growth of approximately 30% year-over-year and over 25% for the full year. The forward business in finance remains strong. For example, CRA assisted counsel in the successful defense of two NYSE specialists of Bear Wagner against criminal charges of improper trading. All criminal charges were dropped by the government upon the eve of trial. In addition, CRA continued to work on several mutual fund cases analyzing damages due to market timing, late trading, broker execution of trades, and other business practices.

Our competition practice continued its steady performance in fiscal 2006 with revenues increasing greater than 10% year-over-year in Q4 and over 15% for the full year. Some examples of the competition engagements and M&A work around the globe that we can identify publicly include the following. CRA was jointly retained by CVS and Caremark to provide the economic analysis of this $21 billion merger combining the nation's largest retail pharmacy chain. CRA assisted counsel with winning antitrust clearance from the Federal Trade Commission. The joint U.S.-European team of CRA economists assisted Union, [Inaudible] obtain antitrust clearance for its EUR4.4 billion acquisition of [Sports Pharma] from the U.S. and EU authorities. CRA provided expert testimony before the Canadian Competition Tribunal on a refusal-to-deal case in which the plaintiff complained that CRA's client, a major Canadian bank, terminated various banking services necessary to provide online debt payment services.

CRA is working with Equitable Resources to obtain regulatory approval for its proposed purchase of the Dominion Peoples Natural Gas LDC assets in Pennsylvania. In Europe, CRA worked for Pan Fish and Marine Harvest in connection with the proposed merger of these two suppliers of farmed salmon. We also worked on the merger of two Portuguese mobile telephone companies. Additionally we are providing economic advice to the Irish carrier Aer Lingus which is the target of a hostile takeover bid by Ryanair.

Market forecasts indicate that M&A is expected to continue to be strong in 2007 coming off a record 2006 year. Several investment banks are forecasting takeovers climbing at least 10% in 2007 with the biggest increase in volume occurring in Europe and emerging markets. Performance in our transfer pricing practice benefited from the first full quarter of revenues from the acquisition of the Ballentine Barbera Group or BBG which we completed in May. Successfully integrating the BBG organization reinforces our belief that CRA has the capabilities to become a recognized leader in the transfer pricing arena.

During Q4 we worked with a number of major clients in providing economic analysis and documentation. For example, the transfer pricing group worked on performing planning, documentation audit work in support of intercompany transactions entered into between subsidiaries of a large, multinational commodity manufacturer. In addition, the transfer pricing practice announced in the fourth quarter with the hiring of Gerben Weistra as a director in Amsterdam giving our practice a physical presence in Continental Europe.

CRA was hired for a number of sizable forensic accounting projects during the fourth quarter and revenue in this practice grew more than 50% from a year earlier. Large projects are increasingly made up of significant international arbitration matters which tend to be complex and protracted. The number and proportion of international arbitration assignments being handled by our forensic accounting practice has increased in total and as a proportion of revenues over the fiscal year. We are involved in some of the most significant bilateral investment trading matters being arbitrated around the globe at present as well as a range of other complex financial disputes.

Turning to our business consulting practices, revenues in the chemicals and petroleum, or C&P practice increased by approximately 80% in Q4 and about 30% for the full year. This impressive growth more than offset declines in the quarter of about 15% in our energy and environment and 20% in our pharmaceutical practices.

For the full year pharmaceuticals work grew over 30% and energy and environment declined by a little over 10%. Energy and environment's Q4 performance was affected by a delay in the startup of a relatively large electric restructuring project and the continued slowdown in merger related work following the termination of two major proposed mergers in the electricity market.

Overall, for FY '06, E&E saw lower revenues from M&A activity and bankruptcy related work, for example, our large bankruptcy case with [Merat] ended in Q3. For 2007, E&E expects an increase in work assisting energy companies assess how future climate change policy will affect their business.

Other regulatory activities related to the continued fallout of the 2000-2001 California electricity market crisis as well as some projects related to improved M&A activity also could contribute to growth in the 2007 revenues. The growth in our C&P practice resulted from substantial growth in revenue from the Middle East which accounted for nearly 40% of C&P revenues in Q4 and the expansion in our London based practice. Some notable assignments in our C&P practice in Q4 included the following -- we are conducting a review of the corporate strategy for a large international integrated oil and gas company. The focus of the review is to develop a deeper understanding of our clients' existing portfolio, furnish insight into the competitive landscape and positioning, and provide recommendations for differentiation and growth.

CRA is also working with a major oil and gas company to understand the nature of its production cost escalation, including analyzing costs of drilling, well services, and fabrication at production facilities and defining options on how best to manage it. We expect this work to continue through much of 2007.

Looking at our headcount on an up basis we ended the year with total employee consultant headcount of 733 including the BBG acquisition. This is a 70 person increase from 663 employees at year-end 2005. Our current breakdown is 229 junior consultants and 504 senior consultants.

One important item I want to discuss before turning it over to Wayne is the trend we are experiencing towards work that includes higher billing rates. As a company we've generated higher utilization at the more senior levels thereby increasing revenues and improving margins. With the increase in our international business, we've also benefited from increased work in overseas regions where bill rates tend to be higher. This current mix of geographic business and senior staff levels positively affects our average billing rate and revenue growth for 2006.

For fiscal 2007, we anticipate employee consultant headcount growth of 8% to 10%. In addition we expect revenue per consultant to grow by 6% to 8%. If we obtain these targets our revenue growth rate will be in the mid to high teens.

With that, I will turn the call over to Wayne for the financial review.

Thanks, Jim. As always, 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 17% to $86.3 million compared with $73.8 million for the fourth quarter of fiscal 2005. Revenue for the full year 2006 increased 18.4% to $349.9 million from $295.5 million in fiscal 2005.

Fourth quarter gross margin was approximately 36.6% compared with gross margin of 36.3% in Q3 of 2006 and 42% in Q4 of last year. The decline in gross margins over Q4 '05 was attributable to the effect of 123R stock based compensation, higher direct compensation costs that allow us to remain competitive in the marketplace and resulting from a higher proportion of our revenues being sourced by internal staff rather than outside consultants whose performance payments are classified under SG&A rather than cost of services, and a small offset related to the impact of deconsolidating NeuCo.

Our revenue per consultant for fiscal 2006 was $512,000, compared with $477,000 in fiscal 2005. The average billing rate per hour for fiscal year 2006 was $333, up from $315 in 2005. Our 2006 bill rates include the impact of acquisitions that occurred during the fiscal year and as Jim mentioned, our staff mix and growth in geographic areas where rates tend to be higher.

Reimbursable expenses were $10.8 million or approximately 13% of net revenue compared with $10.2 million or approximately 14% of net revenue in Q4 of 2005. This level of reimbursable expenses is consistent with historical metrics that have averaged between 12% and 15% of revenues. Total consultant utilization in Q4 was 78%, up from 76% reported both in Q3 of 2006 and Q4 of 2005. For the year, our utilization was 78%. As Jim mentioned, maintaining utilization will continue to be one of our top priorities in 2007.

SG&A expenses for the fourth quarter were 21.6% of total revenue compared to 27.1% of revenue in the fourth quarter of 2005 and 22.2% of revenue for Q3. The improvement in Q4 SG&A expenses on a percentage basis was principally the result of rent and depreciation, lower performance payments to outside consultants, lower audit and legal fees, and the deconsolidation of NeuCo.

Fourth quarter 2006 operating income was $12.9 million versus $11 million in Q4 of fiscal 2005. Operating margin for the quarter was 14.9%, up from an operating margin of 14% in the sequential quarter and consistent with the operating margin in Q4 of 2005. As Jim mentioned, the operating margin for the fourth quarter of '06 marked the strongest quarter of the year due to lower SG&A expenses and improved utilization. If you exclude approximately $1.1 million of the pretax effect of FAS 123R in Q4 this year for a true apples-to-apples comparison, operating margin in the quarter would have been approximately 16.1% versus 14.9% in Q4 of fiscal 2005.

Interest income was $1.3 million for Q4 2006 compared to $877,000 for Q4 2005. The growth in interest income was primarily due to higher interest rates combined with higher cash balances due to 2005 equity offering and cash generated from operations.

Our effective tax rate in the fourth quarter rose to 49.4% from 41.8% in Q4 last year. This was due to the loss of tax deductions related to executive compensation that Jim mentioned earlier. With the expansion of our executive management team announced in late October, and the payment of prior years' bonuses during fiscal 2006, we exceeded the $1 million cap for the deduction of executive officer compensation imposed by Internal Revenue Code Section 162(m). The result was a higher than expected effective tax rate of 49.4% in the fourth quarter of fiscal 2006 and 42.9% for the full year. This item represented 7.7 percentage points and 2.1 percentage points on the quarter and full year's tax rates, respectively. We anticipate returning to our normalized tax rate of 42% to 43% in fiscal 2007 as a result of the Company's election to defer the future payment of any compensation to executive officers that is subject to the 162 compensation limitation.

In addition, we're anticipating submitting to and receiving the approval of our shareholders for a new performance based plan for executive officers that will not be subject to the 162(m) limitations in fiscal 2007 and forward.

Net income for the fourth quarter of 2006 included the effects of two expense items totaling approximately $1.4 million or $0.11 per diluted share which are not expected to recur in future periods. The two items consisted of approximately $1 million or $0.08 per share related to the loss of corporate tax deductions for executive officer compensation, which I just covered, and approximately $400,000 or $0.03 per share related to the required adoption of FASB Interpretation Number 47, Accounting for Conditional Asset Retirement Obligations.

In fiscal 2006, CRA began to expand stock based compensation in accordance with Financial Accounting Standards Board's Statement Number 123R. The Company's fourth quarter fiscal 2006 net income and diluted earnings per share amounts reflected approximately $738,000 and $0.06 per share respectively of stock based compensation. Weighted average diluted shares outstanding used to calculate earnings per share in Q4 of fiscal 2006, were 12.5 million versus 12.1 million in Q4 of fiscal 2005.

Net income for fiscal 2006 was $27.4 million, an 11.6% increase from $24.6 million for the prior fiscal year and earnings per diluted share grew to $2.24 in fiscal 2006 from $2.13 in fiscal 2005. Net income for the full year of 2006 included the effects of the two expense items mentioned previously totaling approximately $1.4 million which are not expected to recur in future years. In addition, the Company's fiscal 2006 net income and diluted earnings per share include $3.3 million and $0.27 per share respectively of stock based compensation. Weighted average diluted shares outstanding used to calculate earnings per share in fiscal 2006 were 12.3 million versus 11.6 million a year earlier.

Looking at the balance sheet, billed and unbilled receivables in Q4 increased to $110.5 million compared to $104.8 million at the end of Q3. Current liabilities were $99.7 million at the end of Q4 compared to $82.7 million at the end of Q3 primarily due to the timing of bonus payments.

Total DSOs, days outstanding, were 107 days. This consists of 39 days of unbilled and 68 days of billed versus 108 days in Q3 which contained 37 days of unbilled and 71 days of billed. We continue to target total DSO below 100 days and expect to introduce a program at the beginning of Q2 that will directly link our consultants' individual DSO with their compensation.

Cash and equivalents and short-term investments stood at $131.6 million at the end of Q4, up from $113.2 million at the end of Q3. We generated cash from operations in Q4 of $24.7 million and $46.6 million for the year compared with $13.8 million for Q4 a year ago and $41.9 million for fiscal 2005. Our capital expenditures totaled approximately $1.3 million for the quarter and $6.1 million for the year compared to $1.7 million a year ago and $13.9 million for fiscal 2005. Depreciation and amortization expense was approximately $2.7 million for Q4 compared to $3.3 million in the sequential third quarter.

In late July, CRA announced a multi-year stock repurchase program of up to 500,000 shares of its common stock. The primary purpose of the repurchase plan will be to offset the dilutive effect of stock options and restricted stock grants that have been made or may be granted to employees, directors, and non-employee consultants. For the full year, CRA purchased approximately 243,000 shares of its common stock at an average price of $49.41 or approximately $12 million. We expect to continue our stock repurchases in fiscal 2007.

During the fourth quarter, our closing stock price exceeded $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 trigger was satisfied and these debentures can be converted during the first fiscal quarter 2007. This test will be repeated each quarter. To date, no bonds have been converted.

Now, back to Jim.

Thanks, Wayne. Looking back on fiscal 2006, CRA had a successful year financially and operationally. We added a number of renowned industry experts to our expanding roster and accelerated our growth overseas. We believe the continuing success of our blended strategy of combining organic growth with strategic acquisitions will enable us to deliver additional growth for the Company.

Turning to the outlook for fiscal 2007, as we announced in today's press release, we anticipate our revenue growth percentage in the mid to high teens for the full year 2007. CRA anticipates a net income growth percentage in the low to mid 20s range. We expect an EPS growth rate of 18% to 23% over fiscal 2006. This net income and EPS guidance includes the impact of 123R and is based on our reported GAAP numbers. Our 2007 EPS guidance is based on approximately 12.5 million average diluted shares and the stock price of $51.35 which was the average closing price for the past ten trading days. Deviations from this stock price will cause our earnings per share to vary based on share dilution from our stock options and 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.

With that, I will ask the operator to open the call for questions. Operator?

Thank you. [OPERATOR INSTRUCTIONS] We'll go to Brett Manderfeld of Piper Jaffray.

Good morning, guys and congratulations on the quarter.

Thank you.

Wayne, do you have an organic revenue growth rate for the quarter?

We haven't published one for the quarter, Brett, as I think you probably know. The one item that we have in this year, is the acquisition of BBG, and the BBG revenues for the period they were part of CRA, which was from roughly middle of May onward is about -- they were about $8 to $9 million; however, we also had the NeuCo subsidiary that was previously consolidated with us and therefore their revenues were included which is now no longer and roughly, the two offset in fiscal '06.

Okay, very good. And I'm assuming that your guidance for '07 does not include any other acquisitions in the midteen, mid to high teen revenue growth assumption organic, would be primarily organic, just a little bit from BB&G; is that correct?

Yes, that is right on.

Excellent. And just kind of the final question here, Wayne and Jim. Thinking about utilization next year. What would be the one or two main things that might drive utilization to the lower end of your targets, the 78% versus maybe the higher end or even above that 80%? Thanks.

There's really, it would really be no one thing. I think the areas of the Company that historically had lower utilization included the London operation, Asia Pacific, and some of the areas that were experiencing lower growth like energy and environment. Now, the London and Middle East utilization has come up dramatically during the past year and has been on a rising trend. Energy and environment did not have a good year but we expect an improvement, so I would say the biggest single factor would be whether we get a bounce back in energy and environment, and if the other areas can be as strong then I see an improvement in utilization.

And can you kind of talk about what kind of visibility you have there, Jim, in terms of energy and environment?

Well, I think one of the characteristics of our business that I've related to investors in past discussions has been that there isn't a whole lot of visibility because most of our work was time and materials, so it's more of generally, it's more based on our feel for the business and what we see as a trend as opposed to actual contracted backlog. That's just not the way the business works.

Sure. You're suggesting that just the overall feel is that that part of the business, you could see an uptick looking out to '07?

Yes.

Okay, very good. Thanks much.

We'll go next to Andrew Fones of UBS.

Good morning. First of all, your net income growth guidance is higher than your revenue growth guidance, implying some margin improvement. I was wondering if you could explain what should drive this and perhaps if you could kind of detail within the SG&A as a percentage of your revenue, that looked to have reached a new kind of low in Q4. Was that sustainable? Or should we expect any further improvement there in '07? Thanks.

Just in general, clearly, as we continue to grow, we expect more scale from our SG&A costs and other costs, and that, I think, is what you're seeing in the slight difference between the rates of growth in revenue versus the net income differential. That would be my primary response. Jim, I'm not sure--.

Well, the other factor is that the growth is projected off our quarter GAAP numbers which include the effects of the one-time events that we elaborated on both in the press release and in today's talk, so this is a GAAP based guidance. I think it's, you may need to do some analysis on your own of (multiple speakers).

Maybe let me state what I was hoping was clear but this is a very important point. A number of the factors we listed in these -- couple of these non-recurring items that we noted are something we expect you all will take into account as you look at the numbers. As I think you understand, we are somewhat limited in terms of what we can say without a relatively elaborate table and explanation which we concluded was probably -- had the greater risk of confusing you than helping you, but we clearly tried to lay out the pieces in the press release and this morning in our points. So we expect you'll pick up on what some of those are and factor them into your projections and clearly, these are all in the income category as opposed to in the revenue category.

Right. Thanks. And then also I guess on a little bit different subject, your cash balance now is $131 million. Can you tell us a little bit about what areas you would consider for either future acquisitions or investment?

Okay. Maybe I can handle that. The first thing is on the cash. We pay bonuses in the first and second quarter. This year, it will be mostly in the first quarter so there will be a significant drawdown on that number when we report next time. Secondly, as we always do, we are continually evaluating acquisitions. We are looking at a number in the product line that are small. We are really focusing on strategic acquisitions as opposed to large acquisitions that would be large numbers of people and dollars, but their number is small and is in the pipeline that cumulatively could certainly use some of that cash.

And would you care to elaborate on some of the areas that you would be looking at or not at this point?

We're looking at a couple of small acquisitions in the United States, it would be in the litigation area. We're looking at two or three modest acquisitions, both domestically and internationally that would be in the business consulting area. We're looking at a small one in Canada. These are all companies in the $5 to $10 million revenue size, but we have, these are cases where we have extensive conversations with, but we're not at the terms sheet stage with any of them.

Thanks and then finally could you comment on what you see in terms of the trends in turnover or consultant attrition and so forth?

We don't have any statistics to report but turnover has this year been higher than in the past. It's concentrated in the lower and middle ranges. I think it's a very hard labor market. There's no particular -- no one particular factor that's going on. In many cases individuals are leaving for entirely different kinds of employment or are going back to school. So we have taken that into account in our entry level recruiting so we'll be bringing in -- or we're assuming that will continue. It's just simply a phenomenon in the market today. It's not just affecting us, it's affecting everybody. So we will be stepping up our entry level recruiting and that will tend to offset that.

Okay, thank you.

We'll go next to Tim McHugh of William Blair & Company.

Hi, it's Tim McHugh for Matt Litfin. Congratulations on a solid quarter.

Thank you.

I was wondering if to start with if you could just give an update on the 8% to 10% hiring you talked about for '07. Any color there regarding differences by geography or by practice area?

Yes. We will have significant hiring at the entry levels which will show up in the third and fourth quarters. That's sort of across-the-board. We are looking aggressively in the finance area, certain areas of litigation. Finance has been a strong area for us for a number of years and one where we think we can get, if we had more people, we would get more work. We're also aggressively recruiting in Europe and in particular for the Middle East. If we could find -- we would be willing to hire almost anybody that met our criteria to go to the Middle East because we have an excess demand for our services there.

One other thing that I would note is that we have and are in the process of adding some significant internal resources in the recruiting area, and HR area that we expect will go some distance to helping us in this process of adding people, not just in fiscal '07 but as we move forward.

That's a good point. We recently split the HR department and now have a separate recruiting function. Also, we will have a recruiting function in each of our three product lines. So we'll have dedicated recruiting talent not only corporately but also by -- within the platforms. This is brand new for us. It will make recruiting a front and center activity as opposed to something people do when they have time and we're putting much more of a corporate focus on recruiting going forward.

Do you envision additional offices needed to support the growth in Europe or will this fit within your existing structure?

We anticipate we'll have some new offices in Europe and it wouldn't surprise me if we had at least one new office in Asia over the next year or two.

Okay. And then lastly, can you provide any guidance in terms of stock based comp in '07? Should that grow similar to other expenses or any variance relative to '06?

We're actually expecting it to grow slightly over the fiscal '06 level. We don't expect it to grow, say, in concert with some of the other expenses, but somewhere in the $0.30 to $0.32 range is what we expect it to be.

Okay. Thank you.

We'll go next to Mike Fox of JPMorgan.

Good morning, guys, and congratulations on the strong quarter and full year.

Thank you.

Just one quick question. I noticed on the guidance for the headcount and the pricing, it seems like headcount may be marginally lower than in the past and pricing a little bit stronger than in the past. Can you just comment on the overall pricing environment, if it's improved for you guys, just given the demand or what's driving that?

We have been able to implement better than 5% rate increases now for many years. Our target has been 5%. We've always been a little bit above target. That continued for '07, we implemented our new rates in December that were a little bit better than 7% on an across-the-board basis. And we've never had any problems achieving those rates. In fact, we've already been submitting bills to clients at new rates for fiscal '07. So we don't anticipate a problem in achieving those higher rates.

The other factor is that our business has been growing in the direction of higher rate work, so there's a mix effect happening as well and we saw that in fiscal '06. Our finance work is higher rate work. Our European work in general is higher rate. Middle East work is higher rate than our corporate average. So there's a business mix issue. Not surprisingly, we're growing in the direction where we can get more for our services.

Okay, great. And then did you guys say what M&A was as a percent of the total revenue?

We didn't. We don't have an estimate for that. It turns out that there are too many projects that could be classed one way or the other but I can certainly say our M&A work has continued to be strong.

Okay, and then with regard to the international business, it seems like it's growing very quickly, obviously. Is that part of your business still lower utilization rate than North America?

I'm sorry, I didn't catch the tail end of your question?

Is the international business still at a lower utilization rate than your overall business? Or excuse me, than your North American business?

Hold on. I'm just looking up the number to make sure I answer it correctly.

No problem.

Yes. The international business is a somewhat lower utilization but it's been rapidly approaching convergence.

And do you expect it to maybe have parity in '07 or do you think it's maybe '08?

I think it's a reasonable objective for parity in '07.

Great. Thanks a lot and congratulations.

Thanks.

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

Hi. Yes, good morning Wayne and Jim. A couple of questions. To what extent did the delay in some of these large projects, well, first of all, are these large projects that you said that there was a delay in, will -- has that been cancelled or is it a delay that it's been pushed out into future quarters?

Are you talking about the energy and environment practice?

Yes, that's correct.

Yes, these were delays, I'm told.

Okay. To what extent do you estimate that that had a negative effect on utilization? I mean, did it take it down a full percentage point or two or weren't they big enough?

Usually as a whole, [there was certainly some] dragging utilization during the past year, so certainly it would have made a big difference if those projects had come in as planned. As one example, we had significant work in Lebanon that was scheduled to start up at just about the time the war broke out there and now that seems to be getting back on track but as you can imagine, it's hard to get things started and moving on a regular fashion. So there have been issues around the globe that have just impacted E&E, but clearly, if we had that work, it would have helped overall corporate utilization.

And in the past when -- I can appreciate, we can appreciate that you were a much smaller company, utilization at CRA had risen as high as the upper 80s. I don't want to answer the question for you. I assume it couldn't get that high again certainly on a sustainable basis, but do you see any reason why it couldn't go into the mid 80s?

There's no fundamental reason. It's obviously -- in a bigger company, it's harder to be clicking on all cylinders at all times, but there's no fundamental reason the utilization could not get up in the mid 80s range.

Okay. You talked about compensation rates, that they had negatively affected your gross margins. Are your bill rates still growing faster than your compensation rates and can you give us a range of what the increases in both areas are?

Well, I mentioned the rate increase we put through for '07 has been above our target of 5%. It's more in the range of 7% plus, and we're targeting salary growth to be no more than that. So we're certainly expecting to be able to continue to raise rates at least as fast as salaries grow.

How hard is it to find people, Jim, and I know you've always had a pretty competitive internal program for hiring. It's one of the reasons why you don't hire very aggressively, but has it been -- incrementally over the year, has it gotten more difficult as the year progressed?

Entry level and middle professional, middle career professionals, those areas, they're not -- I don't see significant problems in hiring. We've always been able to meet our hiring targets. At the very senior levels, the individuals with 10 or 20 years of experience in our line of business, that's always somewhat like looking for a needle in a haystack, but there's always been a flow of those people, but you can't just turn the spigot on and off as easily there as you can at the more junior levels.

Wayne, when is this program for tying compensation to DSOs and the ability to collect on them? When is that being implemented?

Our plan is to have it implemented with the beginning of our second quarter which begins in mid February.

And without going into a lot of details, if you don't collect within the range that you have set for your consultants, then it will have a negative effect on their compensation; is that a correct way of looking at it?

Let me give you a couple of basic points that I think will answer your question. The basic concept is that we're going to set a goal for what we think DSO ought to be and anybody above that goal is going to be penalized and below that goal will benefit. So, presumably this would be a zero-sum game that we think will create the right incentive for people to pay more attention, frankly, to billing and collecting, which is -- I think it's just that simple. That's what we need to do and this methodology we're going to use is something that I call the so-called [fall-back] method which basically means you take an individual's receivables, billed and unbilled and you go back in time, you fall back in time as many days of revenue that's been generated to cover those dollars, and that determines what their DSOs are. And that will be the method and the approach we use. So it's going to be very straightforward, it's very simple, not difficult for any of our consultants to understand and I'm hopeful that it has the intended result.

Okay. I think it's a good idea. I know it's been a thorn in your side for awhile. Okay, thanks very much.

Sure.

We'll go to Dom LaCava of Canaccord Adams.

Good morning, guys, good quarter.

Thanks.

Most of my questions have been asked. I just want to circle back on the EPS guidance. That is based off of the GAAP 224 number; right?

Yes.

And then moving over to the new London, the lease in London. Can you talk a little bit about how much bigger the space is than the other locations and then talk about how many people the space can handle?

Sure. Just to give you a little sense for what's going on, I think we touched on it briefly in the script but we'll be moving into just under 30,000 feet in a new building which actually is literally across the way from the principal building we're in. We're now in three locations and the total of actually new space will be about 32,000 feet.

What this is going to do is it's going to bring everybody under one roof. There are going to be three contiguous floors in this building that we're going to be in. Timing is -- a portion will move in during the summer of '07 and the balance will join us many months later, so we're both trying to work out of the existing leases and commitments that we have and not double up, if you will, any more than is possible and still accomplish our real key business objective which is to get everybody under one roof and we think that that's -- not being under one roof has certainly been a factor that has affected our effectivity and efficiency at times in London. So we're very happy that we've put this together and we're looking forward to executing it.

Okay, so when you put everybody that you currently have over from the other offices, would you say you'd be more than half full there or how much--?

We're taking the new space on a staggered basis, so as I said, the goal is basically to leave the facilities whose leases are beginning to lapse and come into the new space coincident, not perfectly coincident but reasonably close, with the new lease starting that we're taking up, so we're taking two floors initially and then a third floor comes online many months later.

Okay, no, I understand that. I just am trying to get a feel for how much extra capacity you have built in in the new space. Okay, and then how is this going to flow through the P&L as far as an impact for 2007? What could we expect as far as the P&L?

Say that again -- with respect to the London lease?

Yes, exactly. What kind of an impact as far as all of the expenses all in? What could we expect to see in the P&L from this transition?

It's reflected in our guidance. Let me put it that way. The exact numbers for London, I don't have here with me. Clearly, they are higher than the ones that we have. As you may or may not know, real estate rent in London proper is very, very expensive relative to what we here in the U.S. are used to paying on a square foot basis for central business district office space. So comparable from here to there, the factors are much higher but the billing rates are much higher there in London as well. So the margin that we've built into our budget and our guidance for '07 reflect that.

Okay. That helps. Thanks. And then the second thing I wanted to touch on was the partnership lock up that is coming up in April. Can you just quantify what your expected impact is from that? Are you expecting to lose or is there a potential to lose some producers as a result of the lock up and how many people currently still at the Company would fall under that lock up?

No, I don't think -- we don't have any concerns about losing any key people. The amount of the shares involved are a little bit in excess of 600,000 shares that are currently locked up that will be released at that point. A lot of those shares are owned by individuals that have unrestricted shares now, so for those people, since they aren't selling now, it's not clear that there will be any difference in their situation after the lock up expires. And all of these shares are owned by individuals that were here in 1998, so the Company has grown a lot. Since then, a lot of new people. The significant number of shares are owned by members of the Board of Directors. We don't see that there's anything -- any real significance on that front.

Okay. And do you have a feel for how many people would fall under that right now that were, from the pre-IPO, 20, 30--?

Well there were 36 shareholders at that time and five or six have retired.

Okay.

So it's on the order of 25 or 30 people that have shares.

Got it.

Some of those people are already partially retired anyway, so in terms of people active in the business, it might be on the order of 20 people out of say our current office equivalent is well over 150.

Okay, got it. All right, great. Thanks, guys.

Thank you.

We'll go to Jim Wilson of JMP Securities.

Oh, thanks, good morning. Great quarter. I just had a couple quick questions. Work that you guys are doing related to stock based comp, I know you mentioned in the past you don't get involved terribly early but are you seeing any work that's starting to flow your way as we progress further through the investigations or shareholder suits? And my second question is more removed, it's -- I know you mentioned potential office in Asia but we'd love your thoughts on business opportunities for CRA in Asia?

The share based compensation matters given the mix of the services we offer would only affect us when they become large [shareholders which] cease driving a lot of value and that has yet to happen in any significant way. We have been hired on some but it's not a significant part of our business. I'm sorry, what was the other question you asked?

Was Asia an opportunity that you see potentially in your future there?

Well, there's certainly opportunities and we had our eyes on it but there's nothing imminent in terms of what we might do, but obviously with the growth of China and also possibly India, those are future opportunities.

Okay, thanks.

We'll go next to Sandra Notardonato of Robert Baird.

Great, thank you. Jim, you mentioned the use of fewer outside consultants in the year, and I was wondering, is that the plan as well for 2007, and if so, what do you think the impact would be on the utilization at the senior level if they're now required to spend more time on selling?

Well, first of all, it hasn't been a drop in senior consultants, it's just been the growth -- the growth has generally been growth that didn't use significantly less senior consultants, but that's our [search for] outside consultants, so it's not that we're reducing but there are fewer of those types that have been working with us. It's just that the growth has been in directions that don't really rely on their ability to bring in business. For example, in the Middle East, and there's very little use of outside consultants in Europe as well. The insiders have always been developing business.

Right.

So I don't really think that has any effect on utilization because the inside senior people have always been -- their job is to grow our business, it's just that the ratio of that business is being brought in by insiders to the total that's been going up.

I understand your comment about work in the Middle East as an example of not coming from outside consultants. Are you noticing that the outside consultants are working with more companies and therefore, they just aren't dedicating as much time to CRA or is it really an issue of business mix?

No. Our outside consultants -- or all the major ones are all exclusive to us. That's not a factor at all. It's just business mix. For example, intellectual property consulting, that's not an area that uses lots of professors. The outside consultants in terms of the ones that drive business are mainly NHS and finance.

Okay.

And while those are areas that have been growing for us, other areas have also been growing so the proportion of those areas are dropping, but the other is that within our competition and finance practices, as we've grown, more and more of the business has been coming from internal employees.

Okay. Just a couple of questions not related. Do you have a sense of how competitive the market is for the companies that you're currently in talks with to acquire?

I would say it's almost invariably the case that when we're in discussions with a company, it's a one on one discussion, where they're not actively talking to somebody else. First of all, we don't want or we don't like to be in a competitive bid situation, and the way we do acquisitions is basically, we're looking on them as hires, so we're carefully evaluating the people, they are evaluating us as a place to work. If a company is in an auction situation, that's not conducive to that kind of thinking. That's not to say the parties we talk to aren't conscious of their alternatives but if they are talking to us, it's because they decided that we're the Company they want to be with.

Yes.

So there have been one or two instances, for example, Intercap was marketed through an investment banker but we basically told them when we decided that we were interested that we would only talk to them if they would, if we had an exclusive, at least for a period of time, so they had to make a decision that we were the ones they wanted long before we got to the initiation stage. And that's typically the way we operate.

Okay, good. And I'm not sure if you can answer this question but I'll throw it out there. What percentage of the turnover would you say has gone on to the competition as opposed to lifestyle change or school, et cetera?

Well, I would say almost none has gone on to direct competitors. It's mostly junior and early stage professionals, and a lot has been back-to-school or maybe going in a totally different kind of business. It might be going into investment banking or something, or government, so unless it's forced turnover, where we ask somebody to leave, it's very rare for somebody to go to a direct competitor.

Last question. Any thoughts on growing a lower cost labor force in India to handle some of the initial financial work that you guys have on some of the more intense contracts that you -- engagements that you work in?

Well, it comes up from time to time, but we've never felt that we would be able to make effective use. Very little of our work is really repetitive, so there's a need for the people doing the work to be working actively together on a team as opposed to farming out pieces. This is obviously something that we'll think about on a regular basis.

Okay, great. Thank you.

We'll go next to Brad Vassallo of Riveredge Capital.

Most of my questions have been answered. I'll follow-up with you guys off line. Thanks.

Thank you.

And at this time, there are no further questions in the queue. Gentlemen, I'll turn the conference back to you for any additional remarks.

Okay. Well, thanks, everyone. We certainly look forward to speaking with you for our first quarter conference call and this concludes today's call.

Thank you for your participation. You may disconnect at this time.