CRA International Inc (CRAI) 2007 Q4 法說會逐字稿

Good day, everyone. Welcome to the CRA International fourth quarter and full year fiscal 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 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 would 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, 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 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, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to the 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, performance NeuCo, changes in accounting standards, rules and regulations, changes in the law that affect its practice areas, management of new offices, potential loss of clients, dependence on growth of the Company's business consulting practice, 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 are included in the Company's filings with the Securities and Exchange Commission. Jim?

Thanks everyone for joining us today. Revenue in the fourth quarter of fiscal 2007 increased 14% over the prior year to $98.7 million. Continuing the steady growth we've achieved over the past several quarters. As a reminder we have not completed any major acquisitions since our acquisition of the Ballentine Barbera Group in May 2006, so the revenue generated in the fourth quarter was entirely through internal growth led by a number of our service offerings. In particular, we experienced strong contributions from our competition, energy and environment, chemicals, petroleum, and transfer pricing practices. Net income in the fourth quarter of 2007 was $10.3 million or $0.89 per diluted share. This compares with net income of $6.3 million or $0.51 per diluted share in the comparable period of 2006. Net income in the fourth quarter of 2007 includes a one time benefit of approximately $2.1 million or $0.18 per diluted share related to the licensing of intellectual property rights by NeuCo. As you may recall CRA has a 36.4% interest in NeuCo and accounts for its interest under the equity method of accounting.

Looking at how the core business performed by excluding the one time benefit from the account, net income for the quarter would have been approximately $8.2 million or $0.71 per diluted share which was below our expectations. Our Q4 operating income performance was primarily the result of higher than anticipated SG&A costs which Wayne will discuss in more detail later in the call and lower than expected employee consulting utilization. Utilization in the fourth quarter 2007 was 74%. On a year-over-year comparison, utilization was down from the 78% we achieved in Q4 '06 and below our target range of 76 to 78% for the full year. To bring our utilization rate back into the 76 to 78% range, in fiscal 2008 we are reallocating consultants to the most active practices and only hiring new consultants that can quickly bring in business or who are immediately needed on our projects and we are not generally replacing employees who leave. We are also examining a range of other options to increase utilization.

Looking at consultant head count, we ended the year with 771 consultants. This is a 5% increase from the 733 consultants at year end 2006. Our current break down is 231 junior employee consultants and 540 senior employee consultants. Our recruiting efforts continue to focus on senior individuals that can act as rain makers in dry business.

Before I discuss the performance of our specific business areas during the quarter, let me provide you with our annual update on billing rates. Our average net revenue realization rate for billed labor hours for fiscal 2007 increased 11% to $344 as compared to $310 for fiscal 2006. This reflects the effect of our across the board rate increase in Q1 of this year of 2007 implementation of our FY '08 rate increase of 6% in mid October of this year. Exchange rate effects and changes in the mix of our work. Revenue for internal consulting for fiscal 2007 was $545,000 as compared to $512,000 for fiscal 2006. Earning driven performance of our business platforms we continue to experience growth during the quarter from a broad range of practice areas.

Our strongest performer was our business consulting platform where revenue grew nearly 20% during the fourth quarter and approximately 25% for the full year 2007. This growth was attributable to continued solid performances in the majority of our business consulting practices. The top business consulting practices during the fourth quarter were chemicals and petroleum and energy and environment. We also experienced approximately 10% growth in our primary practice which rebounded from several down quarters as new consultant hirings began to experience greater success with our business development activities.

Effective with the start of fiscal 2008, our pharmaceuticals practice has been renamed the life sciences practice. We believe that the term life sciences more closely reflects the thrust of the practice reaching beyond pharmaceuticals to encompass more from biotechnology, diagnostics, and medical devices.

In chemicals and petroleum revenue grew nearly 15% from Q4 of fiscal '06. That includes a year of outstanding growth in that practice which saw chemicals and petroleum revenues increase nearly 55% over fiscal 2006. The growth in our CMP practice continues to be assisted by demand from the Middle East which accounted for about a third of CMP revenue in Q4 and the full year.

The notable assignments in our CMP practice in Q4 included helping a major community energy company establish integrated bench structure in order to best monetize oilsands resources. Assisting a leading North American retailer with an assessment of its store portfolio and the performance of its capital spending program and assessing the transfer pricing and value chain management practices of a major European agri-business and food company. Our energy and environment practice also posted strong Q4 results with revenues increasing more than 25% year-over-year. Our E&E practice which grew more than 15% for the year continues to benefit from various projects. For example, CRA was selected by the New York City economic development council to assist the city implement it's energy strategy to provide cleaner and more reliable power by upgrading the city implement its energy strategy to provide cleaner and more reliable power by upgrading the city's energy infrastructure.

The CRA study for the American Petroleum Institute testimony before the U.S. Senate Committee on environment and public works and another CRA study for the Florida Chamber of Commerce described the economic shocks that will result in various proposed energy bills from the past. CRA's leading an effort to reorganize the federal electricity and water authority in the United Arab Emirates.

Turning to our finance platform, revenue increased nearly 5% from Q4 of last year as a result of demand for our services in securities and litigation matters. Utilization of finance step was high as staff in this platform participated in finance related aspects, of projects, and selected other practices during the quarter. During the fourth quarter the finance practice continued to work on a number of ongoing securities, other financial litigation matters including subprime lending and risk management advisory projects. For example, two of our clients in securities litigation won major decisions currently on appeal denying class certification this year. The IPO securities litigation CRA was assisting the broker-dealer underwriter defendants on a second attempt by the plaintiffs to certify the class after the Second Circuit denied the class certification. In the Merck Vioxx securities litigation, CRA is working with legal counsel on the plaintiff's appeal.

CRA continues to work for major specialist firms in various litigations including a new case involving an alleged improper handling of orders and execution by option specialists related to automatic execution systems. CRA also assisted MF Global, one of the world's largest futures and options brokerage firms and has recently settled litigation related to the bankruptcy of a large hedge fund. CRA was engaged by Equity Group Investments counsel Jennifer Black served in analyzing certain valuation issues relating to the recently closed Tribune Company transaction. Finally, we are assisting in a number of subprime lending matters including for example providing expert testimony on behalf of a monitor of a bankrupt mortgage company regarding valuation of residual interest collateralized mortgage obligations.

Demand for the finance practice continues to be strong and we are optimistic that the growing subprime related work will contribute to solid growth of the finance practice in fiscal '08. Our forensic accounting practice grew approximately 15% for the quarter as compared to Q4 of '06 and grew approximately 30% for the full year. The practice successfully concluded one major international arbitration matter which went through a final hearing in the quarter. The terms for preparations continue for further arbitration matters are scheduled to go to hearings in 2008. Within our litigation of applied economics platform revenue grew more than 15% in Q4 of '06, fueled by our competition of transfer pricing practice areas. For the year, our litigation in applied economics platform grew approximately 10%. Q4 our competition practice posted approximately 25% increase over the year ago period.

In terms of Q4 projects in competition CRA was jointly retained by Abitibi-Consolidated, Inc. and Bowater to prepare economic analysis related to the merger of the two leading North American newsprint suppliers. U.S. and Canadian competition agencies approved U.S. deal of $1.2 billion acquisition of Canadian Steel Managers telco, making the combined entity the fifth largest producer. CRA assisted counsel for U.S. Steel during both the U.S. and Canadian merger review processes. CRA is working for Intel in competition matters before the Korean Party Trade Commission and the European Commission. CRA continues substantial ongoing work of antitrust projects in the payment card industry and Europe CRA work on the acquisition of the Danone biscuits by Kraft Foods and also in Europe CRA assisted the software and information industry association with economic advice relating to Microsoft's dismissed appeal of the European commissions decision that ordered Microsoft to supply information on their communication protocols.

Intellectual property net revenue was down approximately 10% for the quarters compared to Q4 2006. And more than 5% for the full year as compared to the prior year. We are taking a number of actions to grow our business in an intellectual property consulting. For example, we plan to add more senior consultants and specialized expertise, build a greater presence in Europe, and increase our cross selling efforts with other CRA practice areas which IP issues often intersect with our client needs such as transfer pricing and business consulting.

With respect to IP litigation activity in Q4, previously reported that CRA has assisted Sprint in obtaining a favorable outcome at trial relating to patent infringement by Vonnage, over a Voice over Internet protocol technology. Subsequent to that trial, CRA assisted Sprint in connection with negotiations that resulted in the recently announced $80 million settlement of the case. CRA testified on behalf of Trading Technologies and a patent infringement case against eSpeed involving training software. The result was a $3.5 million jury award in favor of our client.

The CRA Vice President offered CRA -- offered expert opinion on lost profits in the patent infringement case between DePuy Spine and Medtronic, Inc. dealing with spinal implant systems. CRA assisted z4 Technologies in the patent damage claim that was successfully affirmed by a Federal Circuit Court at $160 million patent verdict. The patent is related to the prevention of software piracy.

The transfer price practice had a very strong quarter with net revenue up approximately 35% as compared with Q4 2006. With respect to projects this quarter, revenue growth was driven by key projects including documentation analysis for an international pharmaceutical firm, consulting to a global company in the building supplies industry. Documentation analysis for a leading private investment company, testimony in a private shareholder lawsuit. CRAs labor and employment practice continues to expand its client base and was engaged during the quarter in multiple reviews of corporate compensation practices for Fortune 100 companies, computation of economic exposure and wage and (inaudible) matters and reviews of reductions in forest for adverse impact.

Looking at our business from a geographic perspective, international revenue continues to represent a significant portion of our total revenue. Revenue from CRAs non U.S. subsidiaries during Q4 represented approximately 26% of revenue that was comparable to the third quarter of 2007 and 27% for the full year 2007 compared to 24% for the full year 2006. The growth outside of the United States continues to reflect the strength of the global economy and its sustained flow of large engagements from the Middle East as well as the expansion of our London based practices. As a result of our continued growth and expansion particularly overseas we encountered some margin pressure during the year.

Our international work tends to generate lower margins in our U.S. led service offerings where we have an established presence and benefit from economies of scale. However, overseas markets continue to represent a significant opportunity to expand been long-term. Therefore we are currently analyzing our overseas cost structure by identifying areas for improvement including reallocating resources to our most promising areas of growth. I will now turn the call over to Wayne for the financial review. Wayne?

Thanks, Jim. As always, let's remind everyone that CRAs 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.

Briefly recapping our Q4 results, revenue grew 14% to $98.7 million compared to $86.3 million for the fourth quarter of fiscal 2006. And as Jim mentioned, all of this growth was internally generated. As I pointed out on our past three quarterly calls prior to Q1 2007, we classified our internal information technology groups labor costs as an element of cost of services. In recent years the IP group gradually became less involved in direct client projects and more focused on internal systems. As a result, and similar to the first three quarters of the year, we recorded approximately $900,000 in SG&A for Q4, 2007 and reclassified $900,000 for Q4 2006 for comparability purposes. These reclassifications increased the Q4 2007 and Q4 2006 gross percentages by approximately 0.9 and 1.0 percentage points respectively, an increase to respective SG&A expenses as a percentage of revenue by identical amounts. This reclassification continues to have no effect on operating income. All of my comments today on our financial results reflect this reclassification.

Fourth quarter gross margin was 38.63% compared to 37.6% in the fourth quarter of 2006. 0.6% increase in gross margin from a year ago is the result of a 1.5 percentage point decrease in employee compensation expense offset by the effect of a 0.9% increase in revenues from reimbursable expenses that contain little or no margin. Q4 of 2007 reimbursable expenses were approximately $13.2 million or 13.4% of our net revenue compared to $10.8 million or 12.5% of net revenue in Q4 of 2006. The increase in reimbursable expenses was due to an increase in the uses of sub contractors and external consultants as well as an increase in travel costs billed directly to clients.

SG&A expenses for the fourth quarter 2007 were 24.8% of revenue compared to [22.27%] of revenue in the fourth quarter of 2006. Fourth quarter SG&A expenses increased on a percentage of revenue basis principally as a result of higher performance payments earned by external consultants of 0.9 percentage points and 0.5 percentage points of rent depreciation amortization expenses due to an increase in the number of office locations, the relocation of our London facilities, and our expanded office in New York. Q4 SG&A also increased by 0.3 percentage points due to recruiting, training, and employee relocation expenses. For the full year 2007, SG&A expenses increased to 25.3% of revenue from 24.2% yet I'm not satisfied with our current SG&A cost levels and began a review of these costs in December assisted by outside consultants.

This review should identify areas where the management can streamline SG&A costs. Fourth quarter 2007 operating income was $13.3 million compared to $12.9 million for Q4 of fiscal 2006. Operating margin for Q4 2007 was 13.4% compared to 14.9% from Q4 of last year reflecting the higher than anticipated expenses in addition to other factors previously mentioned. Interest income was $1.0 million for Q4 2007, compared to $1.3 million for Q4 a year ago reflecting lower cash balances resulting from our share repurchase program. CRA did not repurchase any shares under the share repurchase program during the fourth quarter of 2007. During the first three quarters of fiscal 2007, CRA purchased approximately 1.172 million shares at an average price of $48.42 per share. CRA has approximately 585,000 shares of remaining capacity under its existing share repurchase program approved by its Board.

Our effective tax rate for the fourth quarter was 40.9% compared to 49.4% in Q4 of 2006. Which includes the loss of tax deductions related to executive compensation. Our full year tax rate was 39.0% as compared to 42.9% for fiscal 2006. The lower tax rate in 2007 was largely due to the $1.4 million net tax benefit associated with the advanced pricing agreement that CRA entered into with the IRS and Inland Revenue in the second quarter for $1.8 million offset by the effective trap losses in several locations of $0.4 million. The 2006 tax rate was adversely impacted by the loss of corporate tax deduction associated with executive compensation of 2.0%. Looking ahead, we expect our effective tax rate for fiscal 2008 to be in the 42 to 43% range.

Fourth quarter fiscal '07 net income was $10.3 million or$0.89 per diluted share. As Jim mentioned earlier, fourth quarter 2007 net income includes a one-time benefit from NeuCo related to a license of intellectual property rights by NeuCo. CRA share of the net after tax effect of the NeuCo benefit was $2.1 million or approximately $0.18 per share. Excluding the one time benefit from NeuCo, net income for the quarter was approximately $8.2 million or $0.71 per share. This compares with the fourth quarter 2006 net income of $6.3 million or $0.51 per diluted share.

I want to point out that net income for the fourth quarter of 2006 was lowered by two items. Approximately $1 million or $0.08 per share relating to the loss of corporate tax deductions relating to executive compensation and approximately $400,000 or $0.03 per share related to the required adoption of FASB interpretation number 47 (inaudible) conditional asset retirement obligations. We calculated Q4 '07 earnings per share using 11.6 million weighted average diluted shares outstanding compared with 12.5 million shares outstanding in Q4 last year. Deduction in shares outstanding is the direct result of the Company's share repurchase program during fiscal 2007 that was discussed previously. Incidentally in fiscal 2007 the sum of our four quarterly diluted EPS amounts do not equal the full year EPS amounts by $0.02. This results from the impact of the share we repurchased during fiscal 2007.

Briefly recap our full year fiscal 2007 results, revenue for the year increased 13% to a record $394.6 million from $349.9 million in fiscal 2006. Net income for fiscal 2007 was $32.6 million compared with $27.4 million in fiscal 2006. Earnings per share grew to $2.68 in fiscal 2007, from $2.24 in fiscal 2006. Net income for fiscal 2007 included the one time NeuCo benefit of $2.1 million or $0.18 per diluted share and the net a tax benefit of the advanced pricing agreement and effect of trap losses of $1.4 million or $0.11 per diluted share. Net income for the full year of 2006 included the expense effects of the loss of corporate tax deductions on executive compensation and adoption of FASB interpretation 47. Totaling approximately $1.4 million or $0.11 per diluted share. Weighted average shares outstanding used to calculate earnings per share in fiscal 2007 or 12.0 million versus 12.3 million in fiscal 2006.

Turning to the balance sheet, billed and unbilled receivables in Q4 were $131 million compared to $120.7 million at the end of Q3. Earned liabilities were $98.8 million at the end of Q4 compared to $80.9 million at the end of Q3. Total DSOs, days outstanding were 109 days. This consists of 37 days of unbilled and 72 days of billed versus 108 days in Q3 which consisted of 41 days of unbilled and 67 days of billed. We continue to target total DSO below 100 days.

As mentioned in our Q3 call, we have implemented a program that provides our consultants with specific DSO information relating to their client receivables and unbilled balances. The program creates a direct link of our consultant individual DSO with their compensation. Q4 was the first full quarter that program was in place and we already started to see evidence of improvement during the first four weeks of fiscal 2008 with DSO falling under 100 days for the first time in over three years. Cash and equivalents stood at $100.5 million at the end of Q4, down from $131.6 million at the end of Q4 of 2006. Decline in cash reflects approximately $56.7 million for the share repurchase program. During the fourth quarter the Company did not buy back any shares of common stock under the share repurchase program.

Our capital expenses totaled approximately $2.4 million for the quarter, and $11.1 million for fiscal 2007. Compared to $1.3 million for fiscal -- in Q4 of fiscal 2006 and $6.1 million in fiscal 2006. Increase in capital expenses reflects our investment in new, relocated, and expanded offices mentioned previously. Depreciation and amortization was approximately $2.4 million in Q4 compared to approximately $2.7 million in Q4 of last year. Our closing stock price did not exceed 50 for at least 20 of the last 30 consecutive trading days during the fourth quarter 2007. Pursuant to the terms of the indenture governing our convertible debentures the (inaudible) trigger was not satisfied and these debentures cannot be converted during the first quarter of fiscal 2008. That will be repeated each quarter, to date as expected no bonds have been converted. Now back to Jim.

Thanks, Wayne. Fiscal 2007 was a year of steady growth for the Company as we continued to extend the CRA brand. CRAs reputation is among the best in the industry and we continue to be involved. More significant transactions, litigation, and other events affecting the economic landscape. We approached $400 million in revenue by strengthening several of our practice areas, establishing new areas of expertise and making strategic investments in our international operations. The continued success of our growth strategy depends on our ability to further diversify our suite of service offerings and areas of expertise.

Turning to our guidance for fiscal 2008. As announced in today's press release we anticipate revenue growth in the 10 to 14% range for the year. We expect to achieve annual net income growth in the 6 to 10% range and EPS growth rate in the range of 10 to 14% over fiscal 2007. Our 2008 net income and EPS guidance range percentages are based on our 2007 GAAP reported net income and EPS of [$33.6] million and $2.68 per diluted share respectively. Our 2008 guidance does not include the impact of any acquisition or share repurchases.

While we do not give quarterly guidance I would like to remind everyone that Q1 generally is a slower quarter because of seasonality including the effects of the midweek Christmas and New Year's holidays. For your information for the last three fiscal years 2005 to 2007, revenues for the first quarter for each year have averaged 20.9% of the full year revenue. As indicated in our news release this morning, consistent with past practice, in order to estimate potential share dilution for our fiscal 2008 EPS guidance, we based it on approximately $11.5 million average diluted shares for the year and a stock price of $47.80 which was the average closing price of 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. With that, I will ask the operator open the call for questions. Operator.

Thank you. (OPERATOR INSTRUCTIONS) We will go to Tim McHugh of William Blair & Company.

Yes, I want to start off by digging into the utilization quickly. Can you talk about whether there is anything specific by region or practice level that caused the fall off in utilization?

Obviously some were higher than others. Intellectual property probably had the biggest drop in average. Other than that it was probably a little bit across the board.

Give than this surprised you, was this late in the quarter and did this, is a trend that continued in the first few weeks of the fiscal 2008? Yes?

Actually, I think it was -- probably didn't change a lot during the course of the quarter. It's a little bit early for us to know how the first quarter will come out. But bear in mind the first quarter is how we got there by the seasonal effects, the utilization tends to be low in the weeks close to the holidays.

Okay. And my other question would be on the -- you mentioned international margins being -- or international operations being lower margin. What's the differential right now between international and domestic margins?

We haven't given out detail, but there is a, certainly there's a difference between the international and domestic margins that's nontrivial.

Okay. And the last question would be, you mentioned that you are going to probably not hire as aggressively going in the new year. Can you talk about what other factors I guess give you -- give you confidence that you will continue to generate the revenue growth that you are forecasting without the head count additions?

Well, we were projecting head count additions for the year. And one thing to bear in mind is that the way our head count growth tends to happen, it tends to be back end loaded because all the hiring at the entry levels goes up late in the third quarter and early in the fourth quarter. And several -- there tends to be a tendency for more senior hires to be later than the first quarter than in the second quarter. Our pattern historically is for most of the head count growth will be Q3 and Q4 effects. We certainly have the capacity to do more work. So it really boils down to demand. We do assess that on a fairly continuing basis practice by practice. And the practice is, each practice as has a business plan and they have taken, given the knowledge of the market it is basically installation of that that leads to our assessment that it was likely to happen during the year.

Okay. Thank you very much.

We will go to Randy Hugen of Piper Jaffray.

How should we think about operating margins as we move through 2008? Adjusting for seasonality should we see a pickup toward the end of the year?

Well, I would think that, again, we don't give guidance on operating income specifically. But clearly the seasonality factor that Jim referred to almost definitely means that later in the year we should be stronger in that area. We are also as we mentioned looking closely at SG&A levels and hopefully we will make some progress on that during the year. So that may well come later in the year as well.

Thanks. And is it reasonable to think the competition practice may slow down through the year because of the high level of M&A in early 2007? Or will the long term nature of the engagements offset that?

Well, the M&A work continues to be quite strong. And competition actually had a strong quarter based on year-over-year. So we -- competition actually has been a pretty strong performer for us throughout the year and that continues to be the case.

Okay. And then just quickly, comments on the acquisition pipeline?

We are as is generally the case we are always active examining alternatives. We have several that are at least in the stage of barely active discussions, but they are all a fair ways off from being something that's likely to happen. There is a fairly full pipeline but I really can't predict finding a way we might do something.

Thanks.

We will go to Andrew Fones of UBS.

First of all, could I ask what the share count is right now, please?

What is the share count now?

Yes.

Hole on for a second, Andrew. We will come up with that for you. I think you heard what we said with respect to what we were using for the fiscal '08 and the denominator for our guidance.

Yes, I did. And if you like while you are looking for that I can kind of move on. As you look at kind of the international base needs, what differences are there in terms of the cost structure to cause the margins to be lower? Or so maybe your offices have they not yet reached critical mass? Or have you seen lower utilization or is it just generally higher business costs?

Well, I think there are a number of factors. One is that the our London operating costs are very high. This is basically just a function of being in London. The operating costs of the office, these are not corporate overhead costs. As a percent of revenue are 8 to 10% higher than the rest of the Company. So that's a significant factor requiring standard utilization high rates to offset the generate the same amount of income.

Secondly, utilization has tended to be lower for the foreign operations than the U.S. average. That gap has been closing over time, they are not equal yet. So we have higher operating costs in some of our utilization and the combination of those two obviously we have lower operating margins.

The third factor which I guess I should mention in the foreign operations we have one very large office, namely London. That office recently had a real estate consolidation. I think as a result of consolidation we will have a more efficient use of our real estate but throughout fiscal '07 and into fiscal '08 we are continuing to have essentially to pay the cost of carrying redundant space. We were still carrying the cost of two locations so we will be getting out of one of the leases during fiscal '08. Which has been a substantial cost overhang as well as the consolidated space.

The second issue is that outside of London the offices are very small. So they're basically startup offices. It's a range of factors. Some of those are just related to the fact that we were still in the startup mode. As you may recall, we opened the London office essentially very late in 2000 and really early 2001 when we started. And the growth in the last three years has been very substantial. But it's still basically reaching equilibrium and then outside of London we have very small offices. So there's a whole range of factors that led to the operating margins being lower, profitably lower than the United States.

Okay. Thanks. And kind of as you look at SG&A and target cost reductions, is it primarily real estate that you are looking at? Or other -- some other initiatives or areas that you think you might see savings?

It's really a number of different areas, Andrew. That's certainly one of them. But it would conclude travel and other related costs. Frankly infrastructure costs within and throughout the Company as well.

Okay. And then obviously costs are up significantly on the SG&A line year-over-year. Do you think you can get back to the levels you saw in 2006, just over 20% of revenue?

I think that's a reasonable target. We have not -- we are early on in looking at this so we've intentionally not tried to set expectations either overly high or frankly, overly low in this area. So we haven't even internally locked in on a specific target. But it's clearly an area where we have our sights on to look at.

Okay. Thanks. And then if I could perhaps ask for your insights into kind of two of the practices in the demand environment that we might see in 2008? It seems as though for the litigation practice we are currently seeing a pickup in securities litigation. Are you seeing that? Do you think that could have an impact this year on demand and utilization in that group? And then secondly competition. I think somebody had asked about what the outlook could be. Obviously there is some concern about a fall off in M&A. But also obviously it's an election year and there could be some impacts there. If you could talk about that, that would be great. Thanks.

I missed the second part of your statement on competition. I heard the M&A part. What's the second part?

On competition, the M&A, the impact there, you think it could be from a falloff in M&A? And then also it being an election year and the potential change in administration and what impact you think that could have on the competition practice? Thanks.

Well, first, on finance, we are continuing to experience a steady flow of new engagements. There is some areas that are active, for example, of a subprime mortgage area where we have been retaining a number of potentially major litigations and we think that the momentum there is pretty good. And there is a continuing amount of other, large engagements that are starting to appear. So how rapid it will show up in growth is hard to tell. But I think the mood is quite bullish in that practice in terms of the assessment of the full year going forward.

In the competition area work in the management quite steady, obviously if the economy really goes south, M&A transactions could decline significantly, that will affect us. It hasn't really affected us to date. So I'm not sure I'm in a better position to predict that than anybody else. It's really a function of hat the macro-economic impacts are. That work has been strong, is quite strong in Europe and where much of the work is emanating from, soe we're geographically diversified at least. And as I said, as I sit here today that's continuing to be a fairly steady producer for us.

In terms of the effects of the election, I think our assessment is that almost regardless of the outcome of the election, whatever the outcome is, it should be good. Because the current administration is pretty much of a hands off on business of -- there is a tendency to let a lot of mergers go through without a lot of resistance. And even if it's just another Republican administration, I think the belief is that either there will be no change or there will be change for the better in terms of we have for our client services.

Okay. Thank you.

Andrew, the question you asked on shares at the front end of your questions, if this helps you, the number of shares that were reflected on the balance sheet is outstanding which I think is what you asked, I'm not sure this is what you wanted but it's just about 11 million at the end of the fiscal year. Of course, the 11.5 million that we are using as the estimate of the shares that are used for guidance and EPS calculations reflects the diluted effect of the cocoa bond shares that would be convertible and options and so forth.

Okay. Thanks, yes, that's great. And then as a follow-up to your comments there. If you don't mind, on competition. I know that in the past you've tried to give some quantification of the impact of M&A on the competition business or the proportion of business that was related to M&A. Do you have any thoughts you could provide there? Thanks.

We haven't quantified it, probably because that's not a number that we can pin down pretty easily because there is a lot of work that's very zone in terms of how it would be classified. It is a substantial share of our competition group.

By substantial, you would say possibly half or more than half or?

I'm not sure it's more than half, but it's certainly not 10% either.

Okay. Thank you. Thank you very much.

(OPERATOR INSTRUCTIONS) We will go to Jim Janesky of Stifel Nicolaus.

Good morning, guys. This is actually [Adam Koser] for Jim. My first question is going into '08 what's the sustainability for growth in like the chemicals, petroleum, and energy practices? What does the demand pipeline look like?

The demand pipeline looks fairly good. There has been in the last several months a turnover projects as projects are ending others opening up. I think there has probably been a slowdown of actual growth in revenue. But there seems to be plenty of opportunities. In the Middle East we have one very large project that we are still working on with a substantially reduced because we are in the late stages of that. That's being replaced by a number of new projects and leads but they require convergence. We are in one of those periods where we are turning over projects but the rate of new opportunities seems to be pretty good.

Great. And then briefly touching in on the subprime mortgage area. What types of clients are you starting to see or expecting to see the most demand from?

Generally it would be either the lenders themselves or accounting firms or other financial institutions that become involved. Our (inaudible) litigation, we don't tend to get involved on just during the forensic investigation or the early on stage work. It's when something becomes litigation and a major player is involved, large damage, probably over their head.

Thanks a lot.

(OPERATOR INSTRUCTIONS) Gentlemen, having no further questions, I will turn the conference back to management for any additional remarks.

Thanks, everybody. We look forward to speaking with you on our first quarter fiscal 2008 conference call. And this concludes today's call.

Thank you for your participation.