CRA International Inc (CRAI) 2007 Q3 法說會逐字稿

Good day, everyone, and welcome to the CRA International third-quarter 2007 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 email.

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. I would now like to turn the call over to Mr. Mackie. Please go ahead, sir.

Thank you, Felicia. Statements made during this conference call concerning 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 in the Private Securities Litigation Reform Act of 1995. These statements are based on management's 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 Board Statement Number 123(R) 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 regulation; changes in the law that affect our practice areas; management of new offices; potential loss of clients; dependence on growth of the Company's Business Consulting practice; the unpredictable nature of litigation-related projects; 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. Thanks, everyone, for joining us today. As we outlined in today's press release, during the third quarter overall revenue increased more than 16% over the prior year to $124.3 million. We have not completed any major acquisitions since our acquisition of BBG in May 2006. So it is important to note that almost all of this revenue increase was through internally-generated growth.

The revenue increase resulted from strong demand for a number of our US-led service offerings including Competition, Transfer Pricing, and Finance, as well as significant contributions from Energy & Environment and Chemicals & Petroleum, which also contributed to strong international growth during the quarter.

We were extremely pleased to see all three of our platforms produce healthy growth in the quarter, particularly at our Finance platform, which rebounded nicely from Q2.

During this fiscal year, we have made a strategic decision to increase our focus on internally-generated growth. As a result, we have devoted significant resources to corporate marketing and business development, including branding, staff training and development, and recruiting to fill gaps in our capabilities mix and to provide the headcount needed to support expanded revenues. We have also been investing in new practices and geographies. These resource investments have increased our operating costs in the short run, but should result in revenue growth over the long run.

We have already started to see a payoff of these investments in our Q3 top-line results.

During Q3, we made excellent progress in our overall hiring efforts as we attracted a number of recognized industry experts across many of our practices. In conjunction with some of these hirings, we made the strategic decisions to invest in additional offices in Hamburg, Germany, Tallahassee, Florida, and Austin, Texas, that were outside the scope of our original plan for 2007. The costs of opening these offices included associated recruiting fees, which contributed to our flat bottom-line performance year-over-year.

We believe these offices, which expand our offerings in our Labor and Employment, Financial Markets, and Chemicals & Petroleum practices, were necessary investments and that they will help fuel our long-term growth.

To position us for growth we also expanded our London and New York offices. In addition, our travel indirect expenses were higher by nearly $1 million in Q3 as compared to Q3 of 2006, reflecting our investment in marketing and practice development efforts.

Our Q3 net income was $8.6 million compared with $8.7 million in Q3 2006. EPS was $0.72 per share in Q3 2007 compared to $0.71 in the comparable period of 2006.

In addition to the costs related to our office openings and other infrastructure investments, there were several factors that hampered our bottom-line results during the quarter. We incurred a onetime charge of $245,000 related to internally-developed software that was written off. We also incurred a foreign exchange loss of approximately $225,000 in the quarter. We have programs in place to mitigate our exposure to any major swings, but the currency shifts in Q3 were not in our favor.

Two other items that weighed on our margins in the quarter were client reimbursables and external consultant contributions. Our client reimbursables, which as most of you know carry little or no margin, were higher than normal during Q3. At the same time, a high percentage of our business was driven by external consultants, who generate revenue at a lower margin than our internal staff.

Utilization in the third quarter of 2007 was 76%. Despite the effects of the summer holiday season, this utilization rates represents a modest improvement over utilization in the sequential second quarter. On a year-over-year comparison, utilization was even with the 76% we registered in Q3 of '06.

We continue to target utilization of 76% to 78% for fiscal 2007. Taking into account the year-to-date utilization of 76%, we expect to be at the low-end of the range for the full year.

Our recruiting efforts continue to focus on senior individuals who can help build business. Our headcount grew from 718 consultants within the Q2 to 767 consultants within the Q3, consisting of 261 junior consultants and 506 senior consultants. For fiscal 2007, we continue to target internally-generated employee consultant headcount growth of 6% to 10%.

Turning to performance of our business areas, revenue in the Business Consulting platform grew more than 25% from the third quarter of fiscal 2006. This growth was primarily attributable to continued solid performances from the majority of our practices, including Chemicals & Petroleum and Energy & Environment. Strength in these practices offset a year-over-year decline in pharmaceuticals that resulted from the completion of several large projects that generated significant billings in FY '06 and Q1 of FY '07. The pharma practice performance improved in Q3 as compared to Q2, driven by product launch work and distribution strategy issues for specialty pharmaceuticals.

The litigation business continued to growth through work on litigation cases in the United States and new retentions on arbitrations and litigation outside the United States.

The Chemicals & Petroleum practice had another very successful quarter in Q3, with revenues growing nearly 50% from the same period of fiscal '06. Some notable assignments in our C&P practice in the quarter included commercial and technical due diligence to one of the bidders for the state-owned petrochemical producer in Turkey; supporting a large Canadian oil company over the past year in defining a commercialization strategy for its oil sands resources; and implementation of a new corporate risk management strategy and organizational structure for a major global agribusiness company.

Elsewhere in Business Consulting, our Energy & Environment practice grew nearly 30% year-over-year. Our E&E practice continued to benefit from various projects including work on the financial impacts of climate change regulations for a number of clients; work for a consortium of utilities and generators to assist in the design the California capacity market; work on a project for the government of Lebanon on the restructuring of the Company's electricity sector; continued work on a number of regulatory projects related to individual states' efforts to build power plants, transmission lines, and the potential restructuring of the electric utility industry; and in addition leading a joint Australian/US project assisting EMC in Singapore to examine alternatives for trading of electricity derivatives.

Our capital projects practice grew more than 20% from Q3 of '06. Capital projects provides a broad array of services focused on the effective execution and performance of large projects ranging from facilities to infrastructure. In Q3, CRA continued to support an international consortium in its final drive for submission of a multibillion-dollar infrastructure project in the Middle East.

Our aerospace and defense practice, while smaller in scale, continues to perform extremely well, growing nearly 40% from Q3 of fiscal '06.

Within the finance platform, as I mentioned earlier, we were particularly pleased to see a rebound from Q2. Revenue for the finance platform increased nearly 20% from Q3 of last year as new and ongoing projects in the finance and forensic practices ramped up during the third quarter of '07. Performance of the finance practice was fueled by renewed activity in securities litigation cases that had been slowed in the second quarter, as well as the startup of several new engagements.

During the quarter in finance, CRA advised a client in a favorable ruling where the court denied class certification in a securities litigation. The court dismissed the suit alleging fraudulent accounting practices and false statements. We also provided analysis of risk associated with revenue recognition practices for a major client; assisted a life insurance company in a dispute concerning the sale of a subsidiary; worked on a project that [applied] on collateralized debt obligations in a matter involving alleged fraud and breach of fiduciary duty; assisted several clients with their subprime lending portfolios; and worked on a number of projects that involved insurance-related class actions.

Turning to our economic litigation platform, overall revenue grew nearly 10% from Q3 of '06, driven by an increase in Transfer Pricing, Competition, and Labor and Employment. Q3 recognized the first nearly full quarter of internally-generated revenue growth from our Transfer Price practice, following our acquisition of the Ballentine Barbera Group in May 2006. The Competition practice also experienced double-digit growth compared with Q2 of 2007 and Q3 of 2006.

With respect to projects this quarter, CRA played a leading role in providing economic justification for the June 28 US Supreme Court decision to overturn a 96-year-old ban on price wars. CRA assisted Whole Foods in its proposed acquisition of Wild Oats Markets. CRA advised Procter & Gamble in the recent approval by the European Commission of the acquisition of P&G's European consumer tissue business by SCA. CRA advised Lloyds TSP in the UK Competition Commission's recent provisional decision to release the UK's four largest clearing banks from the price controls imposed in relation to banking services for small and medium-sized enterprises in 2002.

CRA advised GSM, a global trade association representing mobile phone operators, manufacturers, and suppliers, on the Internet protocol environment. CRA testified on behalf of Static Control Corporation in a successful litigation regarding the competitive effects of Lexmark's restrictions on third-party remanufacturers' ability to use empty Lexmark toner cartridges.

In our intellectual property practice, revenue was essentially flat compared with the second quarter of 2007 and the same period of last year. While overall revenue in Q3 was affected by project timing issues beyond CRA's control, such as unexpected court delays, there continued to be a steady flow of new IP engagement opportunities involving patents, trademarks, and trade secrets in a broad range of industries.

For example, CRA advised Broadcom in a case that resulted in a $19.6 million damage verdict against QUALCOMM for illegally using Broadcom technology in its handset chips. CRA testified on behalf of Merisant, the maker of Equal no-calorie sweetener, in its recently settled lawsuits against McNeil Nutritionals claiming damages and defendant profits to the false advertising of the Splenda brand no-calorie sweetener. CRA assisted Sprint in obtaining a favorable outcome at trial related to a patent infringement claim on voice-over-Internet protocol technology against Vonage.

The House recently passed patent reform legislation. Although it is not clear what action the Senate will take, the bill includes provisions on how patent royalty awards should be calculated. The bill is very well aligned with CRA's analytical strengths and fact-based approach to determining the economic value of patent rates both in the court room and in real-world licensing transactions.

As previously reported, the Labor and Employment practice has expanded working with clients on labor law issues and providing estimates of economic losses associated with alleged employment discrimination, wrongful termination, and wage and hire violations. During the quarter, the practice assisted clients on multiple matters involving alleged employment misclassification issues; monitored a settlement agreement; and provided proactive reviews of employment decisions to in-house counsel.

Looking at our business from a geographic perspective, revenue generated by CRA's non-US subsidiaries represented approximately 26% of revenue in Q3 versus 28% in the second quarter of 2007, and up slightly from 25% in Q3 of '06. The growth outside the United States continues to reflect the strength of the global economy and the sustained flow of large engagements from the Middle East, as well as the expansion of our London-based practices. In addition, we believe our recently-opened German office and the expansion of our Energy & Environment practice in Hong Kong will contribute to our momentum overseas.

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

Thanks, Jim. As always let me remind everyone that CRA's fiscal year operates on 13 four-week cycles, producing unequal quarters in terms of length. Q1, Q2, and Q4 are typically 12 weeks at length, while Q3 is a 16-week quarter.

Briefly recapping the results, Q3 revenue grew 16.2% to $124.3 million, compared to $107 million for the third quarter of fiscal 2006. As I pointed out on our past two quarterly calls, prior to Q1 2007 we classified our internal information technology group's labor costs as an element of cost of services. In recent years the IT group gradually became less involved in direct client projects and more focused on internal systems. As a result, and similar to the first two quarters of the year, we recorded approximately $1.4 million in SG&A for Q3 2007 and reclassified $1.2 million for Q3 2006 for comparability purposes.

These reclassifications increased the Q3 2007 and Q3 2006 gross margin percentages by approximately 1.1 and 1.2 percentage points, respectively, and increased the respective SG&A expenses as a percentage of revenue by identical amounts. This reclassification continues to have no effect on operating income. All my comments today on our financial results reflect this reclassification.

Third-quarter gross margin was 37.9%, compared to a 37.4% in the third quarter of 2006. The 0.5 percentage point increase in gross margin from a year ago is a result of a 2.5 percentage point decrease in employee compensation expense, offset by the effect of a corresponding increase in revenue from reimbursable expenses that contain little or no margin.

In Q3 2007, reimbursable expenses were approximately $17 million or 13.7% of net revenue, compared to $12.6 million or 11.7% of net revenue in Q3 2006. The increase in reimbursable expenses representing 1.9% of revenue was due to an increase in the uses of subcontractors and external consultants and an increase in legal expenses billed directly to clients. The legal expenses related to one matter that we do not expect to recur.

SG&A expenses in the third quarter 2007 were 25.8% of revenue, compared to 23.3% of revenue in the third quarter of 2006. The third-quarter SG&A expenses increased on a percentage of revenue basis principally as a result of an increase in performance payments earned by external consultants of 1.3 percentage points, and 0.8 percentage point of rent expense due to the increase in the number of office locations, our office relocation in London, and our expanded office in New York. SG&A also expensed in the area of indirect travel expenses, representing 0.5% of revenue.

Third-quarter 2007 operating income was $15 million, which was level with Q3 of fiscal 2006. Operating margin for Q3 2007 was 12.1%, compared to 14% of Q3 of last year, reflecting the higher than anticipated costs and other factors previously mentioned.

Interest income was $1.5 million for Q3 2007, compared to $1.6 million for Q3 a year ago, reflecting the lower cash balances resulting from our share repurchase program. During the quarter come a CRA repurchased approximately 915,000 shares at an average price of $47.57 per share under its existing program.

Our effective tax rate in the third quarter was 42.6%, compared to 40.3% in Q3 of 2006. Consistent with the guidance previously provided, we expect our effective tax rate for the remainder of fiscal 2007 to be in the 42% to 43% range.

Third-quarter fiscal '07 net income was $8.6 million or $0.72 per diluted share. This compares with net income of $8.7 million or $0.71 per diluted share in the third quarter 2006. We calculated the Q3 '07 earnings per share using 12.0 million weighted average diluted shares outstanding, compared to 12.3 million shares outstanding in Q3 last year.

Looking at the balance sheet, billed and unbilled receivables for Q3 were $120.7 million, compared to $112.9 million at the end of Q2. Current liabilities were $80.9 million at the end of Q3, compared to $71.7 million at the end of Q2.

Total DSO, days outstanding, were 108 days. This consists of 47 days of unbilled and 61 days of billed, versus 106 days in Q2 which consisted of 40 days of unbilled and 66 days of billed. We continue to target total DSO below 100 days.

As we mentioned last quarter, we have implemented a program that provide our consultants with specific DSO information related to their client receivables and unbilled balances. This program creates a direct link of the consultant's individual DSO with their compensation.

Cash and equivalents stood at $84.0 million at the end of Q3, down from $113.9 million at the end of Q2. The decline in cash reflects approximately $43.5 million for the share repurchase; $5.7 million for earnout payments associated with certain acquisitions; offset by approximately $19.8 million of net cash from operations and $4.5 million from the exercise of stock options and several other miscellaneous items.

Our capital expenditures totaled approximately $5.5 million for the quarter, compared to $1.8 million in Q3 of fiscal '06, reflecting office buildouts in London and New York. Depreciation and amortization expense was approximately $3.2 million in Q3, compared to approximately $3.3 million in Q3 of last year.

Our closing stock price did not exceed $50 for at least 20 of the last 30 consecutive trading days during the third-quarter 2007. Pursuant to the terms of the indenture covering our convertible debentures, the COCO trigger was not satisfied and these debentures cannot be converted during Q4. The test will be repeated each quarter. To date, as expected, no bonds have been converted. Now back to Jim.

Thanks, Wayne. Looking ahead, we believe the demand we've experienced across our practices in fiscal 2007 will continue. In addition, we are carefully examining our cost structure and expect to return to more normalized op margins going forward.

Based on the three quarters, our outlook for the remainder of the year, and current market conditions, we continue to anticipate revenue growth in the 10% to 12% range for the year. We expect to be closer to the high end of this range. Our previous guidance reflected annual net income growth in the mid to high teens percent range, and an EPS growth rate in the range of 12% to 18% over fiscal 2006. We expect to be at the low-end of the range for net income growth and the middle part of the range for EPS growth.

As indicated in our news release this morning, and consistent with past practice, in order to estimate potential share dilution for our fiscal 2007 EPS guidance, we based it on approximately 12.1 million average diluted shares for the year, assuming no further stock repurchases in fiscal 2007 and a stock price of $48.66, which was the average closing price of the past 10 trading days. Deviations from this stock price would cause our earnings per share to vary, based on share dilution of our stock options and convertible bonds.

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

(OPERATOR INSTRUCTIONS) Jim Janesky, Stifel Nicolaus.

A couple of questions. First is, Jim, back in, around the 2000 time frame, you also made significant investments in new offices and headcount. The underlying demand came in much lower than expected, and you were caught with lower demand as well as higher costs. What do you see out there on the horizon that this time makes you make those aggressive investments again?

Well, I think the 2000 experience was fairly unique, because at that time we were much less diversified than we are now. A lot of our revenue was coming from merger work and work in the telecom area in connection with various regulatory litigation proceedings involving the telecom industry. That work really declined very sharply after the middle of 2000.

We really do not see anything like that on the horizon and we are much more diversified. A lot of our expansion activity has to do with new lines of business, new offices. So it is not expansion of existing lines. (inaudible) business, but in 2000 it was -- a lot of it was just more of the same of what we had been doing.

Okay. How has the M&A business held up recently at your firm? About what percent of revenues would you estimate it is today?

We do not make that measurement. We basically stopped doing it because we realized that it was almost impossible to classify projects, because there's too much gray zone in terms of what is a merger case, what isn't a merger case. But that business continues strong. I think it is still the backbone of our Competition practice, and it pops up throughout a range of our other practices as well.

So there is still a reasonable amount, but as a percentage of our business it is much smaller than it was eight or 10 years ago.

Right. Can you define what normalized margins should return to when you look at margins? Should we expect that the fourth quarter's operating margins will be similar to last year's fourth quarter?

In terms of the operating margin for the quarter, for the fourth quarter, as you know we do not give quarterly guidance. As Jim said earlier in his comments, we are certainly expecting that the investments that we are making in some of the new offices and in other areas are going to pay off.

We are targeting broadly -- not so much for the fourth quarter, but broadly -- to bring our operating margin back up to where it has been over the last year or two. So clearly we do not think where we are here in Q3 is where we intend or want to be as we go forward.

Let me ask it another way. Do you expect operating margins sequentially to increase, or year-over-year to increase?

You mean for fiscal '08 over '07?

Your guidance is just for fiscal '07. Do you expect -- with one quarter left, do you expect them to increase sequentially, or year-over-year?

Again, we do not give quarterly guidance, which in effect is what you're asking me. I guess the best way I can answer that is to simply say that we do not view Q3's performance as what we expect or intend as we move on.

Okay, thank you.

Mike Fox, JPMorgan.

With regards to the hiring environment, obviously you guys are able to hire given the investments you've made. Can you talk about whether the costs of hiring have increased for you guys, and if there has been any significant increase in pay or benefits that you've had to pay to get high-quality associates, as well as senior officers? Thanks.

I do not think the hiring environment has really changed. Obviously over time compensations go up, but it is not spiking.

We have an extremely active pipeline. We actually have a lot more candidates we have had all year long than we normally have. I think it's part because we have been making more efforts at identifying potential candidates. So there has not been a shortage of individuals to look at for hiring. When we have hired people, we have been able to do it within the context of our compensation framework.

Okay. Then with regard to the client interactions that you guys are having with clients, can you talk about if they have any caution? Or what kind of their outlook is for projects maybe on the Business Consulting side, that might not be as resilient as some of the litigation work?

Actually our Business Consulting side is very bullish. Maybe that is a function of the industries we work with. But the issues there for us have been mostly expanding our capabilities and geographic presence and getting the staff in place. There has not been a feeling that there is any shortage of work coming.

Okay, great. Then can you also talk about the landscape for acquisitions, if that has changed at all in the last few months?

We have a rather rich set of acquisition possibilities that we're looking at. There is nothing imminent. But we are looking at a number of possibilities.

Okay, great. Just given that I think the credit markets have tightened a little bit, have the companies that you're looking at, have their expectations for multiples changed at all?

We're not -- we are actually not in the -- we are not actively negotiating any deals right now, so it is hard for me to comment on that one. When we get to that stage I guess we'll find out.

Okay, great. Thanks a lot.

Tim McHugh, William Blair & Company.

Yes, I wanted to first touch on some of those investments that you made in the quarter in the new offices and the business development. What type of timeline do you hope for or anticipate in terms of realizing return from those investments?

They are all generating revenue right now. We think the two new US offices will be solid performers right away. There were revenues fairly quickly, and there's already revenues coming out of our German office, so. But that one may take a little bit longer, but I think it will be a solid revenue contributor pretty quickly.

I mean are they up to -- even if they're contributing some revenue now, how long I guess -- are they up to full -- what you would consider kind of full speed already? Or are you saying that it just won't take that long?

Again, I think none of them are up to full speed, because we have aspirations for growth. But I believe the two US offices will be profitable this quarter. I am not sure about the profitability of the German office, but it does have some significant revenues. But that one, that office is expected to grow very substantially over the next two or three years.

Okay. Then touching on -- you mentioned the improvement in operating margin that you hope for. What areas, as you have at least preliminarily looked at this, are you thinking of? Is it pulling back on the business development expenses? Or are you looking at other items in your SG&A?

Well, we have laid the groundwork for growth. We do not anticipate that we will be adding SG&A costs as rapidly as revenue growth. So some of this is just simply the volume catching up with the level of staffing we have now. We will be incrementally looking at every item of overhead costs, and we are going to trim it.

Okay, thank you. Then last, can you just update us on your thoughts as you think about your capital structure and how you prioritize? You said no acquisitions are imminent. But should something be imminent or if you want to retain a cash balance for future opportunities, how do you prioritize that versus share repurchases?

Let me touch on that one. We just completed, as you know, this past quarter 915,000 share repurchase. Under that authorization from our Board we have just under 600,000 additional shares that we can buy. So we certainly have additional capacity both in terms of a standing authorization and the cash.

However our principal interest is to find good opportunities to be able to deploy the cash in that fashion. So we will evaluate this literally quarter by quarter as opportunities present themselves and, frankly, as the opportunities in the stock at attractive prices present themselves as well.

Okay, thank you very much.

(OPERATOR INSTRUCTIONS) Matt McGeary, Sentinel Asset Management.

Getting back on the new offices, their organic growth looked quite good this quarter. When you make a decision to do that, to open new offices, is it -- are you going there because you want new business? Or you need to be there because you know that there is business in the pipeline? Or what? Just take me through a little bit of your thought process, if you don't mind.

It really depends on the situation. In Germany, it was because it was part of our strategic plan over time to grow in Europe. Given the industries we serve, we almost had to be in Germany. Our strongest verticals are chemicals and petroleum, energy, and other basic industry, where Germany is where you have to be.

So in that case we simply were looking for some key employees we could hire. We did not open an office and then start hiring. We basically hired somebody and opened an office. But the idea was to hire somebody that could lead a practice and develop it into a substantial piece of work over time.

In the two US offices, the one in Florida was simply that is where the people were that we hired. There is no strategic reason to be in Tallahassee, Florida.

Austin, Texas, that location was related both to the location of some people that we brought in; but also there are a number of academics in the University of Texas that we have worked with over the years. This would bring in new affiliations that would be helpful towards our litigation practice.

So there really is no one reason, but our philosophy in opening offices is not to open an office unless we think we can get almost immediate revenue.

Okay, good. You talked about how business being sourced from outside consultants increase some of your expenses. How do you view that going forward? Or is that just sort of to difficult to forecast?

Well, over the long run it has been declining. It did jump up a bit this year. It is good business to have; but once you have employees on board, obviously you're better off doing the business internally, because the employees are all fixed cost at that point.

So the work coming in through senior consultants is highly profitable. But at the margin it is always preferable to do it with our own people.

Okay, good. Just lastly if you are going to be continuing to grow a little bit more internally, do a little bit more marketing, you talked about $1 million in extra expenses for that, is that -- albeit slight -- is that a modest increase in your structural cost structure as you think about it? Or not? Or is the revenue (multiple speakers) going to make up for that?

This is a very -- we're talking very modest numbers, but it is enough to show up as a few pennies a share. Over time I think that will result in increasing profits, not declining profits.

Okay, great. Just one last housekeeping, maybe for Wayne (inaudible). When you guys give your EPS guidance, your 12% to 18% for the fiscal year, what number are you using for '06? Because First Call gives you $2.24; and I think most guys on the Street are using about $2.35.

For the full year, the number that we cited, and it is in the script or the press release this morning, is 12,100,000, in that range.

I think (inaudible) can we help you out and everybody that is trying to figure out what share number you might want to think about for Q4. Again, we do not give guidance, but just let me say a couple things that might help you think through this.

12.1 million is what we are expecting for the full year. For the Q3 number it is 11.9 million; high 11.9s call it. We called it 12.0 million.

The full number of shares that we repurchase, which is 915,000, will be out of what was there for Q3 for the full quarter of Q4 for us. To give you some sense as to when we started buying shares, we started buying shares back in the middle of June; and our blackout period began August 3. So we had the 915,000 in by August 3.

So I think that might be helpful in terms of coming up with how you might try to put a parameter around what the Q4 denominator ought to be.

Okay, that's helpful. I think maybe I asked the question incorrectly. When I am looking at your full-year EPS growth guidance of 12% to 18%, what are you using as the base number for 2006? Because First Call has one number, and most guys on Wall Street use something else. The First Call number is $2.24 for full-year fiscal '06.

Oh, what is the base from which it is calculated?

Right.

$2.24, which is the '06 EPS number.

Got you. Okay. Thanks, guys.

Jim Janesky, Stifel Nicolaus.

Two follow-up questions. First, where would the extra recruiting and hiring costs flow through? Would that be SG&A or gross margin, Wayne?

The recruiting fess would show up under SG&A. These our fees paid for outside recruiters. Any payments made to consultants themselves would show up under cost of goods.

Okay. Could we expect that there might be lower bonus accruals because the compensation is tied to DSOs, and DSOs since you instituted the program has actually gone up a little bit? So is there a possibility we could see bonus accruals come down in the fourth quarter or next year?

Just to give you a very skeleton, the idea we have is not so much to reduce bonus expense. It is frankly to encourage behavior of having the consultants try to collect in a more rapid way and bill in a more rapid way.

In fact what we're trying to aim towards is there are some, of course, that are below the goal we have. There are some above. In effect the ones below would presumably get the benefits from the ones who were above in terms of a penalty. It is not exactly that way, but that is the general idea.

So we do not expect a dramatic or significant change in compensation in total, rather a penalty of sorts for those who are above and a benefit for those that would be below the DSO target.

Okay, thanks.

(OPERATOR INSTRUCTIONS) Steve McBoyle, Royce.

With regards to the stepped-up focused on organic growth, I'm trying to --

We can't hear the question.

Sorry about that. With the increased focus on organic growth, what I am trying to get clarity on, does that necessarily mean that there is greater office growth? Or what we saw in this quarter, is it largely opportunistic in terms of those folks that you hired? Or, as we think of more organic growth, we ought to just imply greater office growth? And to the extent that I recognize you do not give guidance, but perhaps what your office outlook may be for '08 versus the plan you came in versus '07.

You were breaking up there at the end, but I will take a stab at it. The organic growth would not be particularly through new offices opened. It might be some of the offices, just like there were this past quarter. We see it as just continuing to grow our business, both expanding existing lines and adding new lines over time.

Now in terms of projected new offices, there are none being planned right now. But we do have in mind over the next several years that there would be a few additional offices.

Gentlemen, at this time there are no other questions in the queue.

Okay. If that is it, then thank you, everyone. We look forward to speaking to you on our year-end conference call. This concludes today's call.

We thank you for your participation.