CRA International Inc (CRAI) 2007 Q1 法說會逐字稿

Good day, everyone, and welcome to the CRA International first quarter 2007 conference call. Today's conference is being recorded. Ask 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.

And to get us started with opening remarks and introductions, I'm pleased to turn the conference over to Mr. We -- Mr. Mackie. Please go ahead, sir.

Thank you, operator. Statements made during this conference call concerning the future business, operating results, and financial condition of the company and statements using the terms: anticipate, believes, expects, should, or similar expressions are forward-looking statements as defined 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, share dilution from the company's convertible debt offering and stock options, the impact of the adoption of financial accounting standards forward statement number 123(R) and total -- and total stock-based compensation, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to its recent acquisitions, including integration of personnel, clients, offices, and unanticipated expenses and liabilities, risks associated with acquisitions it may make in the future, risks inherent in international operations, the performance of NeuCo, changes in accounting standards, rules, and regulations, management of new offices, the 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 practices, intense competition, risk 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, everyone, for joining us today. Overall we maintained the momentum we established in fiscal 2006 and got off to a solid start in fiscal 2007. Revenue for the first quarter grew approximately 15% to $83.3 million from $72.5 million in Q1 of last year. Net income increased to $7.1 million, up 25% from the first quarter of 2006. And earnings per diluted share increased to $0.56 from $0.47 in the comparable period last year. The first quarter's traditionally a challenging quarter for CRA because of the winter holiday and vacation season and its impact on available consulting time and on utilization. Our utilization rate for the first quarter of fiscal 2007 was 77%. This compares with 78% in the first and fourth quarters of fiscal 2006. Our target for utilization in 2007 is 78% to 80% and hitting this target will continue to be a top priority going forward.

We experienced favorable trends in most of our consulting areas during Q1. Turning first to our business consulting practices, revenue grew more than 30% from the first quarter of fiscal 2006. This growth resulted from generally stronger demand overall, solid results in our chemical and petroleum practice, and positive contributions from our energy and environment practice, which grew both sequentially and year-over-year. In addition, revenue from our capital projects practice more than doubled compared to last year. Strength in these two practices offset a year-over-year revenue decline of greater than 10% in our pharmaceuticals practice. However on a sequential basis, pharmaceuticals revenues increased approximately 40% from Q4 of '06. CRA continues to be retained in several of the pharmaceutical price litigations that have been filed across the country.

Revenues from business consulting projects in the practice also continued to grow, led by projects related to the launch of new pharmaceuticals, the evolving world of specialty pharmaceuticals and biologics, and policy studies regarding global access to pharmaceuticals. Revenues of the chemicals and petroleum practice, including metals and minerals more than doubled from the first quarter 2006. Middle East revenue growth continued to be strong. Some notable assignment in our C&P practice during the quarter included: helping a super major oil company implement a suite of leading-edge technologies across its global refining network and assisting a large integrated international oil company transition from its path to growth from conventional oil and gas resources by strengthening the company's portfolio growth opportunities in northern American unconventional gas and oil sands and developing a -- a set of new options in coal to liquids and biofuels.

Elsewhere in business consulting, CRA's energy and environment practice posted steady results in Q1 with revenues increasing by more than 25% sequentially and nearly 10% from the first quarter of fiscal '06. Our energy and environment practice benefited from the continued strength and projects related to environmental and climate issues, various significant energy litigation cases and continued activity in asset trans -- transactions in the electric utility industry. Our capital projects practice grew over 100% in Q1 as compared with Q1 of the prior year and over 50% compared with the sequential quarter. The capital project's practice provides a broader array of services focused on the effective execution and performance of large capital projects ranging from facilities to infrastructure. The service is focused -- the -- the service is focused on dispute resolution with respect to design and construction, as well as providing advice for major public and private infrastructure pro-- projects.

Our professionals recently participated in achieving a favorable settlement in connection with a multimillion dollar labor productivity case for subcontractor on a 20-megawatt power facility -- 520-megawatt power facility. In addition, the practice has been retained by a large middle easter consortion to advise and lead a multi-million effort to privatize an existing public transportation entity, which will also include the design and construction of over 1,000 kilometers of additional railroad infrastructure. Revenues related to our aerospace and defense and transportation practices increased by over 20% sequentially, but declined by more than 10% from Q1 of FY '06. We expect revenues from these practices to continue to grow in FY '07.

Turning to our litigation practices, overall revenues grew by more than 10% from Q1 of '06, driven by an increase in transfer pricing, which benefited from the second full quarter of revenues from the BBG acquisition. We worked with a number of major clients in providing economic analysis and documentation during the first quarter of 2007. We also provided expert testimony for the Massachusetts' Department of Revenue on a transfer pricing litigation matter. Our finance practice revenue was up nearly 15% from Q1 of last year, due to steady demand for our services and valuation on securities and litigation matters on behalf of accounting firms, investment banks, and corporations. Revenues in our competition practice were relatively flat compared with Q1 of '06, as a result of the conclusion of several substantial projects during the quarter. We expect that the revenues from these projects will be -- be replaced by new cases that -- that we'll be starting up in Q2.

The competition practice continues to participate in a high percentage of the world's most important M&A transactions and -- and antitrust cases. Among those can identify publicly are the following. CRA assisted Georgia Pacific with antitrust analysis in support of its acquisition of plywood and engineered rubber mills from International Paper. This transaction was cleared by the department of justice without any restrictions. A CRA team from London and Australia worked for Millennium BCP on gaining regulatory clearance for the acquisition of rival Banco BPI, the first and third largest full service financial institution from Portugal. CRA was retained by Micron Technology, Inc., and Micron Semiconductor Products, Inc. to assist in defense of allegations of price fixing in the -- in the [inaudible] industry. Micron relied upon CRA's analysis to obtain a favorable settlement outcome. We also continue to work actively on behalf of [inaudible], one of South Africa's largest banks on a competition commission inquiry into the retail banking industry.

During Q1, CRA held its annual conference on the economics and competition policy in Brussels. About 350 delegates attended the event where a number of distinguished speakers discussed recent developments in the use of economics and competition policy. Revenue from our intellectual property practice was down about 10% in Q1 compared with the same period last year. Q1 of '06 was particularly strong in comparison to other quarters in '06. In addition, utilization was affected by a start-up delay and several new projects that we will -- that we anticipate will be ramping up in Q2.

Looking at our business from a geographic perspective, revenue generated by CRA's nonU.S. subsidiaries represented approximately 27% of total revenue in Q1 in line with the fourth quarter 2006, and up from 19% total revenue in Q1 of '06. This -- this growth outside the United States, primarily reflects the strength of our London-based practice and the continued flow of large project work from the Middle East. As we have mentioned in previous phone calls, our London-based practice is expanding and we are in the process of consolidating several small offices into one office location. This expansion is progressing on plan and we expect that the first phase of the consolidation will be completed in the summer of 2007.

Before turning the call over to Wayne, I will comment briefly on head count. On a net basis total employee consultant head count for Q1 was 724 compared to 733 at year end 2006. Our current breakdown is 227 junior consultants and 497 senior consultants. As we mentioned in last quarter's conference call, we recently reorganized our human resources department.

And we now have dedicated recruiting functions for each of our consulting practices, as well as internationally. We believe this reorganization will enhance our recruiting capabilities going forward. For fiscal 2007, we continue to target internally generated employee consultant head count growth of 8% to 10%, the bulk of which we expect will come in the second half of the year, similar to fiscal 2006. In addition, we expect revenue per consultant to grow by 6% to 8%. With that, I will turn the call over to Wayne for the financial review. Wayne?

Thanks, Jim. The company previous postponed its earnings announcement until today. CRA completed its evaluation, reconfirmed the acceptability of the manner in which it accounts for certain payroll tax and fringe benefit cost, related principally to annual cash bonuses.

As always, let me remind everyone that CRA fiscal year operates on 13 four-week cycles, producing unequal quarters in terms of length. Q1, Q2, and Q4 are typically 12 weeks in length, while Q3 is a 16-week quarter. Turning to the financial results, as Jim said, revenue for Q1 increased 15% to $83.3 million compared to $72.5 million for the first quarter of fiscal 2006. Q1 2006 included revenue from NeuCo, which we deconsolidated in Q3 of 2006. Excluding NeuCo's revenue of approximately $1.5 million for Q1 2006, first quarter revenue increased more than 17% compared to Q1 of 2006. Prior to Q1 2007, we classified our internal information technology group's labor cost as an element of cost of services.

In recent years, the IT group gradually became less involved and direct client projects and more focused on internal systems. Accordingly we began classifying these costs as SG&A in Q1 of 2007, and reclassify these costs as SG&A for Q1 2006 for comparability purposes. Our information technology group labor costs were approximately $1.1 million and $. -- $0.9 million for Q1 2007 and Q1 2006 respectively. The effect of this reclassification was to increase the Q1 2007 and Q1 2006 gross margin percentage by approximately 1.3% and 1.2% points respectively, and to increase the respective G&A -- SG&A expenses as a percentage of revenue by the same amount. This reclassification has no effect on operating income. All my comments that follow will reflect this reclassification.

First quarter gross margin was approximately 38.0% as compared to 39.2% in the first quarter of 2006. The Q1 2006 gross margin percentage would have been reduced by approximately 0.4% point -- percentage points if NeuCo had been deconsolidated for Q1 of 2006. The remaining lower gross margin percentage for Q1 of this year was due to higher labor and fringe benefit costs as a percentage of revenue of 0.9% points compared to Q1 of 2006. Total reimbursable expenses this quarter were $8.8 million or approximately 10.6% of net revenue compared to $7.6 million or approximately 10.5% of revenue in Q1 of '06. Total consultant utilization in Q1 was 77% compared to 78% reported in both Q1 of 2006 and Q4 of 2006.

As Jim mentioned earlier, targeting a utilization rate 78% to 80% continues to be a top priority in 2007. SG&A expenses for the first quarter of 2007 were 24.0% of total revenue compared to 26.2% of revenue in the first quarter of 2006. The Q1 2006 SG&A percentage would have been reduced by approximately . -- 0.8% points if NeuCo had been deconsolidated for Q1 of 2006. The remaining lower SG&A expenses as a percentage of revenue during Q1 of 2007 as compared to Q1 2006 without NeuCo were due to lower professional fees and legal costs of . -- 0.9% points and a number of other net reductions in SG&A expenses.

First quarter 2007 operating income was $11.6 million versus $9.5 million in Q1 of fiscal 2006. Operating margin for Q1 2007 was 13.9% compared to 13.0% for Q1 of last year. Q1 2006 operating margin would have been 0.5% points higher if NeuCo had been deconsolidated that -- for that last -- for that quarter last year. Interest income was $1.6 million for Q1 2007 compared to $1.5 million for Q1 a year ago. The growth in interest income was primarily due to higher interest rates and to a lesser extent higher cash balances. Our effective tax rate for the first quarter was 41.3% compared to 42.3% in Q1 of 2006. Our effective tax rate in Q1 of '07 was lower because we anticipate no limitation on deductability of executive offices compensation in 2007. This is due to the company's election to defer the future payments of any compensation to executive offices that is subject to the 162m limitation.

In addition, we anticipate receiving the approval of our shareholders at the upcoming annual meeting where a new performance-based plan for executive offices that will -- that will not be subject to the section 162m limitation in fiscal 2007 and beyond. Another reason why our tax rate was lower was due to stock-option compensation expense attributal to incentive stock options that is not tax deductible, was less than in the prior year. First quarter fiscal '07 net income was $7.1 million or 56 per diluted share -- $0.56 per diluted share. This compares with $5.6 million or $0.47 per diluted share in the first quarter of 2006. We calculated Q1 earnings per share using 12.6 million weighted average diluted shares outstanding compared with 12.1 million shares outstanding in Q1 of last year. Looking at the balance sheet, billed and unbilled receivables in Q1 were $111.5 million compared to $110.5 million at the end of Q4. Current liabilities were $71.7 million at the end of Q1 compared to $99.7 million at the end of Q4, primarily due to the timing of bonus payments.

Total DSO, day sales outstanding, were 111 days. This consists of 40 days of unbilled and 71 days of billed versus 107 days in Q4 which contained 39 days of unbilled and 68 days of billed. The increase in DSO occurred principally in the U.S. practices. We continue to target total DSO below 100 days and recently introduced a program that will provide our consultants with specific DSO information related to their client receivables and unbilled balances. This program will lead to a direct link of our consultant's individual DSO with their compensation. Cash equivalence stood at $117.2 million at the end of Q1, down from $131.6 million at the end of Q4 due to bonus payments.

In July 2006, CRA announced a multi-year stock repurchase program of up to a total of 500,000 common shares. The primary purpose of the re -- of the repurchase plan will be to offset the dilutive effect of stock options and restricted stock grants that have been or may be granted to employees, directors, and nonemployee consultants. In 2006 we bought approximately 243,000 shares of our common stock for approximately $12 million in cash at an average price of $49.41 per share. In the quarter -- in the first quarter of fiscal 2007, we did not purchase any shares of its -- of our common stock due to the short window of time available following our year-end black-out period. We expect our -- to continue our stock repurchase in Q2 and throughout fiscal 2007. With Q1 we used cash from operations of $16.0 million compared with cash generated of $9.6 million in Q1 a year ago, again due to the timing of bonus payments that occurred in Q2 of fiscal 2006 versus Q1 of this year. Our capital expenditures totalled approximately $1.2 million for the quarter compared with $1.6 million in Q1 of '06. Depreciation and amortization expense was approximately $2.3 million of Q1 compared with approximately $2 million for Q1 of last year.

During the first 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 [inaudible] was satisfied and these debentures can be converted during our second quarter of fiscal 2007. The test will be repeated each quarter. To date as expected no bonds have been converted. Now, back

Thanks, Wayne. Looking at our first quarter results and the trends that led to that performance, we believe CRA's heading towards a successful 2007. We continue to expect percentage revenue growth in fiscal '06 in the mid to high teens for the full 2007 fiscal year. We anticipate percentage net income growth in the low to mid 20% range and an EPS growth of 18% to 30 -- 23%. These estimates are based on planning targets of an effective tax rate for fiscal '07 of approximately 42% to 43% and utilization in the 78% to 80% range. As indicated in our news release this morning, in order to estimate potential share dilution for our fiscal '07 EPS guidance, we based it on approximately 12.6 million average diluted shares and a stock price of $51.72, which was the average closing price of the last 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 convertible bonds. And with that, I will ask the operator to open the call to questions. Jim?

Just one other thing, Jim. Let me correct one thing I said. I -- when I talked about interest income, I said that interest income was $1.5 million for Q1 of last year. It was $1.1 million for last year.

Thank you, gentlemen. [OPERATOR INSTRUCTIONS] We'll take our first question from the line of Brett Manderfeld at Piper Jaffray.

Good morning, guys. And good to see the energy environmental practice swinging more positive. I was looking at a couple of the other practices, though. Looks like the competition and the IP in particular, a little bit lower than the past, and I think litigation in terms of growth here, utilization a point down. I guess, two questions. One, Jim, what is your confidence that some of the projects that you expect to start in Q2 will happen, especially in the competition and IP side? And two, do you feel better or worse about your chances to hit the 70% 80% utilization target for the year given Q1's performance? Thanks.

Well, I think it's hard to judge a year from Q1 because that's -- that's a tough period for us. It's a 12-week quarter and two weeks are basically largely holiday and vacation time. And we did have a couple of projects in during the quarter. New work is coming in, so we feel -- as I said, we don't think Q1 is necessarily a leading indicator. It's traditionally a difficult quarter for us.

And are those newer projects of kind of consistent size and scope that you have seen over the last couple of years in those bigger practices?

Some of them can be significant. One -- one issue in litigation is it's often hard to tell how big a project is. Just because its stakes are larger doesn't mean there's a lot of work. So we do have -- we do have a flow of significant projects that continue to come in. And we're big enough so that large numbers should be taken place.

So would you characterize the demand environment as having been changed at all from say the last couple of years?

No, I don't think -- I don't think we've seen any signs of the environment changing.

Okay. Very good. Thank you very much.

We'll take our next question from Mike Fox at JPMorgan.

Good afternoon, guys. I just had a couple quick questions. I know the holiday season definitely probably impacted the utilization. I was wondering if there was any way to quantify that? And I was wondering if you can give us any indication on how the second quarter is trending on the utilization? And then on the second question, I just wondered if you can comment on the current hiring environment and the -- the competition levels that you're having to pay relative to the prior year or just in the past. Thanks a lot.

Well, generally the thing about the first quarter is that there -- there are two weeks during which we generally averaged more than half a staff not here, or not working. So as you can imagine, if you have you're -- effectively losing more than a week on a full-time basis out of a 12-week quarter. But a lot of our costs continue. So if you look over the years, you'll notice that Q1 is often a quarter where the results are a little choppy.

Right.

I've -- actually I've forgotten what your second question was.

It was about the -- the hiring environment and the compensation levels that you're paying relative to the past.

First on utilization, it's a little bit early in the quarter to make any -- to make any judgments about Q2. The hiring environment, I think continues to be an active one. We -- we have a lot of hiring activities going on. I don't think [inaudible] any different than -- than other years. It is true that wages and compensation levels continue to rise, but nothing unusual.

Okay. Great. Thanks a lot.

And Jim Janesky at Stifel Nicolaus. Your line is open.

Hi. Yes, good morning. Jim and Wayne. A couple of questions. Are you still able to raise your prices, or is -- is either revenues per consultant or pricing going up faster than the rate of compensation?

Yes. We -- we put in our annual price net increase of well over 5%. I think it was actually more over 7% during Q1. And it is effectively fully implemented by the end of the quarter. The only issue on rolling it out is there's some cases where we've just been hired we may not increase immediately, but we do believe that generally expect to have them all in place before the end of Q1. And we -- we did not experience any significant pushback or really any pushback. What was your other question, Jim?

Well, what is the rate of -- can you -- can you quantify the rate of compensation increases?

Well, all can say on that is we generally strive to keep our rate increases at least as high as the costs -- the compensation costs increases. So, I don't have a number for that, but we are increasing rates at least as much as cost and generally a little bit more.

Okay. Alright. Looking at utilization, it -- was utilization in the first quarter of 2006 positively impacted, do you recall, by the fact that both Christmas and New Year's came on a weekend day, and we should have expected that it would have been down this first quarter?

Well, that's a good point. When -- I hate to sort of get down to that level of detail, but I think it is true that when Christmas and New Year's follow during the three-day weekend, obviously people take a three-day weekend, but you've got -- many staff will work the rest of the week. Whereas when -- if it falls on a Tuesday, Wednesday, or Thursday, there's a temptation for staff just to take the week off.

Right.

[Inaudible] client activity during those weeks. So, years in which the holidays fall on the Tuesday, Wednesday, and Thursday, I think I would imagine are slightly worse years for availability of staff and utilization.

Okay. And on the flip side of your confidence level of getting to 78% to 80% over time, it sounds like -- over time meaning over your goal for 2007 -- fiscal 2007. It seems like there were delays in some project start-ups, you had some big projects come to an end that you have to kind of move the people around. So, on the flip side of that question, what would -- if we look back over the course of the year, what do you think would prohibit you from getting into that 80% -- even 80% plus range, which historically you've even gone higher than 80%. You haven't been real aggressive on head count, in fact you've been down sequentially on head count.

Well, nothing would prohibit us. It's obviously feasible. We do tend to have a fair -- most of our head count additions come in Q3 and Q4. So, to some degree we're -- we're taking a risk that the work will increase as the people come in. So, those -- those are often periods where we have a lot of people coming in and getting trained. On the other hand, Q -- Q4 tends to be a strong quarter for us. So, generally the timing is okay in terms of when people are coming in. I'm sure we'll have some of that happen this year. New hires coming in at the end of Q3 and the end of Q4.

Okay. And the fact that head count was down from the fourth quarter to the first quarter. Does that have any implications for turnover going up, Jim? Or what were the reasons behind that?

No, that's -- that's not -- Q1 is not a quarter where we tend to have a lot of new hires. We also had some -- some temporary labor that came on board in the second half of last year to help around some of the middle eastern work. And some of those turned over as we got work assigned to people internally. So some of that is simply that -- normal turn.

Okay. But you're not seeing any increase turnover above and beyond the -- above and beyond the normal course of individuals going back to graduate school, etc.?

No, I think this is just normal -- normal activity.

Okay. Thank you.

Next we'll go to Andrew Fones with UBS.

Hi. I just wanted to ask one more question on utilization. You mentioned, I think in your prepared remarks, that utilization in the IP practice was weak in Q1. Was that really the reason for the -- for the decline? Or would you say it was a little bit broader than that?

I -- I missed when you said utilization in the what practice?

In the intellectual property practice.

We had some -- some project churns during Q1 with projects ending and others starting up. And we do expect that will turn around.

Would you -- would you say that the magnitude of the declining utilization in that practice could have caused the -- the 1% drop in utilization from Q4 to Q1?

Would have contributed to it. I don't have the data in front of me.

Okay.

Obviously one of the factors.

Okay. Can -- can you share with us what your -- what you anticipate in terms of gradual hiring in Q3 at this point?

I -- I don't have statistics to share, but the Q3 and Q4 is when we do -- when most of the new entry level hirings come in. And we don't -- we have a head count growth target of 8% to 10%, but we don't tend to commit to hire at this stage for the full amount of that, because we want to maintain some flux, so some reasonable amount of that 8% to 10% could be coming in in Q3 and Q4 and we would adjust to fine tune that as the year goes on.

Okay. Thanks. And then, finally, you mentioned the -- the new performance-based comp plan that you're going to put to shareholders at the annual meeting. I was wondering if you could quantify what the impact could be if that goes through on equity comp expense ,and also on your tax rate, whether -- whether we should expect a little bit lower tax rate.

We don't antic -- anticipate -- we assume that we'll go through, we're confident of that. But we don't anticipate it will change any of the metrics that you'll see in terms of percentages of income or our effective tax rate. It clearly will help the effective tax rate in a sense that this section 162 issue that we encountered in fiscal '06 will not be an issue. As you probably are aware any performance -- any compensation that's considered performance-based is not subject to the limitations of the 162m portion of the tax law. So, I think we effectively dealt with that, so we don't anticipate a -- any impact in our tax rates going forward.

Okay. And then in terms of the impact on equity compensation expense, you would expect that to be kind of at a similar level to prior years, or --

Yes. We don't anticipate it being out of line or up or down significantly as a result of the performance-based plan that was put in.

Okay. Thanks.

Next we'll go to Jim Wilson at JMP Securities.

Thanks. Just had one more -- one rainy question myself, which was as you look at the project flow coming in, I know you mentioned a few areas where you expect to see additional projects. But is there -- can you give any color on size or industry or anything else? In particular thing, is there anything new related to all the housing subprime fallout? Anything that you see falling into your book of business in the near term?

Well, the subprime -- subprime markets issue is one that will play out. And my guess is with -- we can work the share, but not in the short-term. We tend to get hired after there's been some major issues that's led to a major litigation and our hiring comes after that. So we would not expect to see any -- any significant business for us in the next quarter in that area. The cases I was talking about are -- are merger cases and IP cases. And there's nothing -- I don't have any additional color beyond that.

Okay. Fair enough. Thanks.

[OPERATOR INSTRUCTIONS] We'll go to Kevin Steinke at William Blair.

Good morning, this is Kevin Steinke in for Matt Litfin this morning. Just a question on the energy and -- and environment practice. Any particular reason for the pick up in that practice? Did you see some of the delayed projects start off that you'd discussed in the last call? Or any specific trends going on there?

I think this is just the -- the rhythm of cases waxing and waning. I don't think there was any significant trend either up or down.

Okay. And you said that hitting the 78% to 80% utilization target for the year is a priority, is that just a matter of business as usual, or any specific initiatives in place there?

I think it's -- it's a question of improving the management of the people, improving the incentive structure to make sure we get there, and just doing a good job of moving people around the workplace.

Okay. Great. That's all I had. Thanks.

Thanks.

Next we'll go to Matt McGeary at Sentinel Asset Management.

Good morning. I apologize if you hit these already. But just have a couple of quick ones. Just curious what you think of the current M&A environment. Are there opportunities that you see? And are there certain areas that you're interested in getting into that you're not in already?

When the competition announces an M&A environment continues to be strong and it's particularly strong in Europe where we continue to be extremely busy. And we do participate in all areas in that business. So if there's a major competition issue regardless of what industry it's in, there's a good chance we'll get hired.

And -- and just secondly, how much of your business right now is in the middle east, and how is your staffing there, do you have trouble filling those positions, or what's the situation there?

Anything further, Mr. McGeary?

Yes. I'm sorry, did you not hear that?

The middle east work is a little bit less than 5% of our total revenues at the moment. And we have been staffing strained. I think -- I think we have in a situation where we could have had higher revenues with more staff, it would have been rapidly moving to fill that need, both through internal transfers and recruiting. So we think that problem's been solved. It's in the process of being solved.

Great. Thank you.

[OPERATOR INSTRUCTIONS] We'll take a follow up from Jim Janesky at Stifel Nicolaus.

Wayne, I happen to miss the -- your comments about the reclassification between cost of services and -- and SG&A. Can you go over that quickly again?

Sure. What's happened over the last few years, if we go back in time, our software engineering and IT people worked to some significant degree with our consultants on projects in the technical IT, analytical assistance capacity. What's happened more recently is that's become less and less of a -- a portion of what they do. And to the point where they're really much -- very much like a -- an IT shop in most companies -- most corporate scenarios. And so we concluded that classifying their costs, and their principal cost of course is labor, as SG&A was more appropriate. So, we -- we did that beginning in Q1 here of '07, at the start of a new year, and of course we reclassified the amounts -- the comparable amounts from the prior quarter of fiscal '06. And we'll do that as we go through the year so that we'll keep them comparable as we -- as we go.

And it appears as if the -- the reason you delayed announcing your results -- There was really nothing that was significant or meaningful that came out of that in terms of its effect on the income statement, is that correct?

That's correct, there's no changes at all to anything we've done in the past or that we plan to do.

Okay. Thank you.

And we'll take another follow up from Andrew Fones at UBS.

Yes, hi. I just had a question about the [inaudible] news that came out a couple of days ago. It sounds as though there's going to be a hearing. I was wondering what your thoughts are about that and what you -- what you think the outcome could be?

All I can say on that is that we have -- we filed a pleading, it's on the [inaudible] website in connection with that -- addressing what we believe to be serious flaws in the -- judge's order. And we are seeking to remand the matter for a hearing at which the parties will be allowed to provide a full explanation about the matter. And at this time, it would not be appropriate for us to provide any -- any additional comments on that.

Okay. Thanks.

And at this time, gentlemen, there are no further questions in the queue. I will turn it back to you for any additional or closing remarks.

Okay. Thanks, everyone. We look forward to speaking with you in our second quarter conference call. And this concludes today's call.

This does conclude the CRA International first quarter 2007 conference. And we thank you all for your participation today. You may now disconnect your lines.