CRA International Inc (CRAI) 2008 Q1 法說會逐字稿

Good day and welcome everyone to CRA International's first quarter fiscal 2008 conference call. Today's call is being recorded. You may listen to the web cast on CRA's web site 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, speaking from CRA's European Middle East regional headquarters in London. And executive Vice President and Chief Financial Officer, Mr. Wayne Mackie, in CRA's corporate headquarters in Boston. 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 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, the company's restructuring cost and attributable annual cost savings, changes in the company's effective tax rate, share dilution from the company's convertible debt operating and stock options, 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 future, risks inherent in international operations, performance of NeuCo, exchanges in accounting standards rules and regulations, changes in the law that affects its practice areas, management of new offices, potential loss of clients, dependence on growth with 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 in included the company's filings with the Securities and Exchange Commission. The company cannot guarantee any future results, levels of activity, performance or achievement. The company undertakes no obligation to update any of its forward-looking statements after the date of this call. Jim.

Thanks, Wayne, and thank everyone for joining us today. Let me start today's call by saying we were very disappointed with our first quarter results as we outlined in today's news release, consolidated revenue and net income and both came in well below our expectations largely as a consequence of underperformance and certain of our overseas businesses. In Q1, international business was only 22% of our revenues, down from 26 to 27% in recent quarters. Aggregate North America net revenues for each of our three consulting platforms were in line with plan

There are five takeaway points that I would like to highlight today. First, Q1 results were impacted adversely by our international performance restructuring costs and a higher effective tax rate. Second, Q1 margins were distorted by higher reimbursables. Third, strong actions have been taken to reduce costs with annual savings of approximately $9.4 million. Divesting less strategic and unprofitable operations in Australia and New Zealand and, fifth, demand for services in the North American and our European litigation operations remains strong and the prospects of recovery of the Chemicals & Petroleum practice are very good. By far, the most significant factor of the disappointing results in Q1 was a substantial decline of the revenues of our Chemicals & Petroleum practice, particularly in the Middle East. Revenues of several large long-running Middle East projects declined more rapidly than expected and follow on contracts were not received during the quarter. Revenues of the C&P practice in Middle Eastern Europe were about $4 million below planned and declined about $3 million from Q4 '07 to Q1 '08. We have been building staff in the Middle East during the second half of 2007 and into the first quarter of this year, so the impact on our profitability of the revenue decline was magnified by an increase in our cost in the European and Middle Eastern component of the C&P practice.

Our international operations were also adversely affected by certain other cost increases. These included a charge to earnings of approximately $600,000 for the cost of reducing head count in our forensic investigations and forensic computing units in London and in the Australian transfer price practice. We continue to incur higher rent expense in London resulting from our consolidation of space and the temporary carrying of extra space in our former location. Finally, our Q1 tax rate was unusually high at 51% as a result of the international losses which could not be offset against U.S. profits. Q1 is generally back-end loaded for us because the holiday period falls in the middle of the quarter. Typically we see a substantial pick up in revenue and utilization during the last third of Q1 as we move out of the holiday season and into the new calendar year. That late quarter rebound did not materialize this year, especially overseas.

Utilization of the first quarter of 2008 was 70% compared with 77% in Q1 '07 and 74% in Q4. Unfortunately, this decline was caused by the reduction in work in the European and Middle Eastern component of our Chemicals & Petroleum practice. Some decline was also caused by slower than expected recovery from the holiday weeks and other practices in regions. Net income in the first quarter of 2008 was $3.1 million or $0.28 per diluted share, below expectations not only due to the lower utilization rate but also because of lower operating margins. Operating margins requested a greater than anticipated percentage of revenue represented by reimbursable expenses which carry little or no mark up. This increase percentage of revenue represented by reimbursable expenses was even more pronounced in our overseas operations. Looking at consultant head count, we ended up the quarter with 772 consultants as compared to 771 as of Q4 2007. Our current break down is 230 junior employee consultants, 142 senior employee consultants.

Before I describe the actions we have taken in response to the Q1 shortfall, I'd like to address the performance of our business platforms. Litigation and applied economics platforms net revenue increased by nearly 10% from Q1 of 2007. This increase was fueled by our competition practice both domestically and internationally which extended the growth momentum that was exhibited in the past several quarters as opposed to greater than 20% increase over the year-ago period. In terms of notable Q1 projects and competition, CRA worked with the Labatt's acquisition of Lakeport Brewing, the New Page acquisition of the North America paper manufacturing business, the Abitibi-Bowater merger and the Thompson Roiter merger in Europe. We also provide testimony on behalf of XM satellite radio and SIRIUS satellite radio before the U.S. copyright royalty award on reasonable royalties. During the quarter CRA also held its fifth annual conference of economic developments in European competition policy in Brussels on December 13. Over 300 attendees were at presentations on topics such as developments and anti-trust, merger analysis and policy, the role of competition authorities and fines and anti-trust damages.

Intellectual property net revenue was down more than 10% for the quarter compared with Q1 '07. As we have referenced in our past several calls, we are taking a number of actions to expand our business in IP consulting. We are increasing our cross selling efforts with other CRA practice areas in which IP issues often intersect with our client needs such as transfer pricing and business consulting. We are seeing signs of an uptick in utilization for Q2 that we anticipate will result in increased revenue. With respect to IP litigation activity in Q1, CRA worked for Exide Technology to devoid certain trademark licenses with [Intersis] and for Boston Scientific in patent dispute with the University of California in microtherapeutics related to endovascular coils. As is the case for many patent disputes, the Boston Scientific project involved antitrust claims as well as patent infringement claims and our competition practice collaborated with the IP practice in this case.

After four quarters of excellent growth, revenues for our transfer pricing declined nearly 10% from the first quarter of 2007. The decline was driven by a slow down of several projects, some of which have been backed by some smaller projects. We believe that time spent on compliance with FIN 48, a recently enacted tax accounting rule, we have pulled some of our clients away from transfer pricing to meeting these requirements. It is also possible that we are feeling the impact of the slowing economy, although our experience has been that transfer pricing holds steady regardless of rescissions. Q1 transfer pricing revenues were driven by a significant APA negotiation and work on behalf of significant pharmaceutical, automotive, luxury goods, and software clients. Our labor and employment practice recorded its third consecutive quarter growth as it continued to steadily expand its client base. In Q1, the practice of assisted clients and implementing the requirements of multiple settlement agreements.

In addition, the practice also assisted several clients with internal equity audits of compensation practices. Practices being engaged in consulting matters involving equal opportunity, equal employment opportunity and wage and hour litigation. Turning to our business consulting platform, revenue was down less than 5% for first quarter, reflecting declines in energy environment, life sciences and capital projects, offset in part by gains in aerospace and defense and other smaller practices. Chemicals & Petroleum revenue was flat in comparison to Q1 of the prior year. The strong performance in North America offset the decline in revenues in Europe and the Middle East. As I mentioned earlier, this practice was adversely affected by the phase down of several long-running projects in the Middle East combined with the impact of holiday down time. The notable assignments in our C&P practice in Q1 included work in a variety of projects involving alternative energy renewals including a coliquid plant in India, a wind energy project in Jordan and a European (inaudible) project, continuing of our long-running assistance to Saudi Arabia and its industrial development strategy, and work for private equity firms and applying chemicals, petroleum exploration, and petroleum refining.

Energy and environment practice revenues declined about 5% due to weakness in Asia-Pacific which was primarily related to relocation of our staff from Australia and New Zealand to establish an E&A presence in the Hong Kong office. Q1, E&A worked in a broad range of projects including assistance in the reorganization of the federal electricity and water authority in the United Air Emirate. Advising energy companies in connection with the financial implications of climate change policies in our operations, more than a dozen projected related to electricity capacity markets. Auction services work for RWE, the large German electric utility, in connection with a series of quarterly auctions that sells power directly from power plants to its customers. One of our -- one of our smaller practices, aerospace and defense, grew more than 65% over the same quarter last year. The steady growth in aerospace and defense reflects the accelerating globalization of this industry and the breadth of CRA's relationship with some of the key businesses driving this trend.

Notable assignments for the first quarter included work for a major defense contractor assessing market trends for strategic plan, strategic assessment of the space sector for global air space company, and a regulatory strategy for a private equity company related to the supply chain for military vehicles. Turning to our finance platform, overall revenue was flat for Q1 as work within our primary finance practice leveled off as a result of several large cases settling in the quarter. While there has been some reduction of the litigation work, many of the larger ongoing engagements continue. We are also seeing increased levels of financial consulting, including analysis of revenue record internal controls and risk management. With respect to subprime activity, we are working on a number of significant engagements for large financial institutions. We are consulting on client investment portfolios, providing risk management and analytic assessments, and reviewing accounting and reporting implications. We are also working on litigation related engagements dealing with Governmental investigations and inquiries as well as a significant number of civil lawsuits. We believe that subprime and overall credit crunch consulting and litigation demand environment continues to grow and we are expanding our tool kit in this area.

Finance practice has been retained in a number of new engagements in the past quarter and we expect that utilization in revenue of this practice will increase in Q2. Revenues of our forensic accounting practice grew nearly 20% compared with Q1 of last year. This was in large part attributed to the continuing demand for services in the international arbitration arena and a significant arbitration going through a final hearing in January 2008. Forensic practice continues to assist on portfolio international arbitration matters and a number of other litigation investigation assignments. Looking across all of our platforms, underlying demand for our core businesses remains healthy and we continue to win significant number of projects. We are in a rebuilding situation in the Middle East, we are optimistic about the lead stream in that region. Our focus going forward will be to better align our practices and our cost structure with the size and areas of strength in our business, particularly overseas. For the near term, we are concentrating our resources on promising opportunities such as finance projects related to the subprime credit crisis as well as financial accounting and valuation consulting.

At the same time, we are looking closely at every possible means of reducing our operating expenses, raising our utilization rare and ultimately improving our margins and profitability. In a position to reallocating to our most practices and locations, utilizing staff attrition to improve utilization where appropriate, we have implemented a reduction of our employee work force. This will result in approximately $2 million in restructuring cost in Q2 while generating an estimated annualized cost savings starting in Q3 of approximately $7 million. As we mentioned, during our year-end conference call, we have initiated a business process improvement review through an outside consultant who is helping us craft a plan to reduce SG&A expenses in a number of areas. Included in this review is an evaluation of our current administration practices and infrastructure. The objective is to identify opportunities for further cost reductions, including our travel policies, changes in procurement methods and other adjustments.

Along these lines, in the second quarter, we plan to close offices in Palo Alto and London as we consolidate those offices, a process already underway in London. These actions are expected to result in a Q2 charge estimated at approximately $4.1 million and an estimated annualized cost savings starting in Q3 of approximately $2.4 million. Terms of practice realignment, as previously mentioned, we have already exited our forensic investigation business and we eliminated our underground transfer price capability in Australia. We have scaled back a portion of our forensic computing business. Our first quarter results included approximately $600,000 in restructuring costs related to these initiatives. We are in the process of divesting the majority of our Australia and New Zealand-based operations which generated approximately $12 million of revenue and small operating loss in fiscal 2007. We expect a divestiture of these operations to be completed in the second quarter and to result in an estimated charge to operating income of approximately $3 million. I will now turn call over Wayne for the financial review.

Thanks, Jim. Let me remind everyone that CRA's fiscal year operates on 13 full 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 Q1 results. Revenue grew 3% to $86.1 million compared to, compared with $83.3 million in the first quarter of fiscal 2007. First quarter gross margin was 34.6% compared to 38.0% in the first quarter of 2007. The decrease in gross margin from a year ago is primarily the result of approximately a 40% or a $3.6 million increase in revenue from reimbursable expenses that contain little or no margins. In Q1 of 2008 reimbursable expenses were approximately $12.5 million or 14.5% of net revenue compared to $8.8 million or 10.6% of net revenue in Q1of 2007. Our overall reimbursable rate in Q1 was above our historical average with reimbursables outside North America representing approximately 22% of international revenue for the quarter.

Gross margin was also impacted by approximately 600,000 in separation costs related to some of the actions Jim mentioned earlier in our forensic investigation and computing and Australia transfer pricing practices. SG&A expenses for the first quarter of 2008 were 27.8% of revenue compared to 24.0% of revenue in the first quarter of 2007. The high percentage was partly a result of lower than anticipated revenues. In addition, we experienced a 36% increase in rent expense or a 1.4% point increase as a percentage of revenue and certain higher general operating costs. In regards to the rental expense, as Jim touched on, we are taking action by exiting office space in Palo Alto and London. The London office had been in the process of shifting to a new location, and we have been carrying double rents while that buildout was happening. These two office closings will result in an estimated $4.1 million charge in Q2, expected annualized savings starting in Q3 of approximately $2.4 million. We are, we were also impacted by other operating cost increases as a percentage of revenue of 2.4 percentage points, including compensation expense, performance payments earned by outside consultants, professional, legal and recruiting fees.

First quarter 2008 operating income was 5.8 million compared to $11.6 million in Q1 of fiscal 2007. Operating margin for Q1 2008 was 6.8% compared to 13.9% for Q1 of last year, reflecting a revenue short fall, higher than anticipated expenses and other factors previously mentioned. Interest income was $1.2 million in Q1 2008 compared to $1.6 million for Q1 a year ago reflecting primarily lower cash balances resulting from our share repurchase program during fiscal 2007. CRA did not purchase any shares under the share repurchase program during the first quarter of 2008. CRA has approximately 585,000 shares of remaining capacity under its existing share repurchase program approved by its board. Our effective tax rate in the first quarter was 50.8% compared to 41.3% in Q1 of 2007. The higher tax rate in Q1 was primarily due to losses outside of North America and locations against which we could not record tax benefits. First quarter fiscal 2008 net income was $3.1 million or $0.28 per diluted share compared with net income of $7.1 million or $0.56 per diluted share for the same period of 2007. The calculated Q1 '08 earnings per share using 11.4 million weighted average diluted shares outstanding compared to 12.6 million shares outstanding in Q1 last year. Reduction in outstanding shares is the direct result of the company's share repurchase program during fiscal 2007.

Turning to the balance sheet. Billed and unbilled receivables in Q1 were $114.3 million compared to $131 million at the end of Q4. Current liabilities were $76.3 million at the end of Q1compared with $98.8 million at the end of Q4 reflecting the payment of fiscal '07's staff bonuses. Total DSO, days sales outstanding, were 107 days. This consists of 41 days of unbilled and 66 days of billed versus 109 days in Q4 which consisted of 37 days of unbilled and 72 days of billed. We have seen some signs of improvement in DSO reductions occurring below 100 days earlier in the quarter; however, we still expect to see sustained improvement from DSO program that was fully implemented in Q4 of last year. We continue to target total DSO below 100 days. Cash and equivalent stood at $101.4 million at the end of Q1, up from $100.5 million at the end of Q4 2007. Our capital expenditures totaled $1.5 million for quarter compared to $1.2 million in Q1 of fiscal '07. The higher capital expenditures reflect our investment London's new space. Depreciation and amortization expense was approximately $2.4 million in Q1 compared to $2.3 million in Q1 of last year. Now back to Jim.

Thank you, Wayne. Let me just conclude my comments by repeating what we outlined in today's press release as it relates to guidance. Fiscal 2008 our focus will be on better aligning our cost structure both North America and overseas in order to raise our utilization rates and improve margins. Visibility into our business will be limited until we begin to see impact of these initiatives. Although our North America business is performing at acceptable levels and positive trends in some international practice areas, applying visibility particularly in our international practice areas limits our ability to provide financial guidance at this time. Summarize my comments this morning, we are taking comprehensive steps to address the margin pressures we experienced in the quarter while at the same time strengthening our prospects for long-term growth. Our target markets are active with potential projects. CRA remains one of the most recognized and respected names in our field. Demand for services, particularly domestic businesses, remains fundamentally strong. With that, I will ask the operator to open the call for questions.

(OPERATOR INSTRUCTIONS) We will go first to Tim McHugh, William Blair and Company.

Yes, wanted to ask first about the Chemicals & Petroleum practice. What type of projects were those that fell off quicker than you had thought? Can you give us a little more detail on that situation?

Yes. We had some large engagements in the Middle East related to economic development initiatives, our largest single project was in Saudi Arabia where we have been engaged in a number of initiatives to help industrialize that economy. The work did not, it phased out much more rapidly than we thought it would. Follow on business didn't come in on the same schedule we thought it would.

Okay. And then as you look forward here, are you still looking for new work there? And you mentioned you're optimistic about the potential improvement of that business. Does that reflect any change since the quarter has ended or is this just hope for what you see down the pipe for rest of the year?

We see quite good prospects both in Europe and the Middle East. Those are sort of managed as one unit and we have taken a comprehensive look at the work that we have and the work coming in, and we do expect to see an improvement.

Okay. And then, two quick ones if I could. I know you are not giving guidance. Can you give us any sense of where perhaps utilization is trended thus far this quarter so we get a sense of whether the, how that compares to the 70% which is impacted by some seasonality, I recognize?

It is a little -- a little early in the quarter to have a firm grasp, but we definitely are seeing an uptick and we expect it is quite possible the quarter will end up with a much better utilization than we saw last quarter.

Okay. Lastly, do you have operating cash flow and CapEx for the quarter?

Yes. Tim, let me pull it out. CapEx for the quarter was $1.5 million. I don't think we have published the operating cash flow yet. Do we have it here? The operating cash flow was $1.3 million as well. We had of course the pay out of the bonuses that was a major piece of Q1 that would impact that.

Okay. Thank you.

All right.

We will go next to Randy Hugen, Piper Jaffray.

Thanks. Just so we are clear, are those consultants who are working on the Middle Eastern oil engagements still on the bench now?

We are not fully utilizing that area, but there is work. So we are continuing to work projects we have. We have work coming in. We have good projects in Europe and, as I mentioned, we have a number of leads in the Middle East we expect to convert over time.

So, looking out to maybe six months or a year from now, you expect demand in that area to be similar to where it had been trending for the prior few quarters before Q1?

We certainly see very good prospects. That is a little far in the future to, to make a projection, but as, there definitely are good prospects and we are still very confident in our investment in that region and we think that we will see the benefits over time.

All right. And what areas didn't see the typical mid quarter rebound that you were expecting?

I think we mentioned that IP was down a bit for the quarter. Transfer pricing, those were a couple of the areas, but other areas the company did quite well. So they were sort of offsetting effects.

Okay. Then you mentioned increased recruiting costs. Why were they higher and what specific areas were you recruiting for?

I think what happened in the quarter was that there were recruiting fees. These were individuals they recruited earlier or during last year when they came on board and we were subject to recruiting fees.

Okay. And then, you mentioned the subprime crisis a possible driver for the finance practice. Are there other practices that might benefit from that as well?

We have, we have different, different aspects of the plans practice. The securities litigation. There's the forensic accounting. We also have a risk management group that has been quite active in that area and we have a group that gets involved with litigation related effects. So, a number of different practice areas in the company are already seeing favorable trends from that.

And then realizing that pace of litigation is extremely difficult to predict, when could you see a more significant level of work from credit crisis related engagements?

Well, we are already seeing it. We think it will increase over time.

All right. Great. Thanks.

We will go next to Jim Janesky, Stifel Nicolaus.

Yes, a couple of questions, Jim. You mentioned in your prepared remarks a number of areas where projects kind of wound down or didn't start up or didn't rebound as quickly as expected. Is there something unique about the market right now that this has occurred to where historically you have been able to back fill in those projects to utilization was still in the mid 70s. Is there something you anemic that you are not able to back fill in the projects?

No, I don't think so. These were unrelated events. The fact that they happened around the holiday season made it more difficult to immediately adjust. For example in (inaudible), we had one project settled that has been a long-running project literally a number of years and it just settled. It was expected to continue on for at least another year. It happened right before the holiday season hit. Even though we had other projects in the pipeline, it takes a while to reallocate the staff. In the Middle East, again, the timing was just unique to that set of projects. I don't think there's any generic indication. We see nothing to suggest that a change in the market environment.

Okay. Sequentially, based upon excluding the New Zealand practice which, how much of, how much will come out of the, of the May quarter because of the, you said it is $12 million on an annualized basis. What do you think will come out of the May quarter for revenues?

I don't have an estimate but 12 million was the run rate. So I think you can take a reasonable inference from that.

Rough order of magnitude might be $3 to $4 million, no higher than that I would expect. That's the combined Australian New Zealand divestitures we are talking about for the quarter.

X that, would you expect to, based upon utilization trends that you mentioned, would you expect to be up sequentially in revenues on an organic X the New Zealand Australian revenues?

I am not sure, do you mean, do you we expect we would recover the 3 to 4 million or if we just take that out?

Right. If you take that out would you expect revenues to be up sequentially?

That's certainly our plan and we see, we certainly see variable trends in most certain major business areas.

Okay. Two questions on first of all, the tax rate, Wayne, what do you expect it to be for the rest of the year?

We are, our challenge, of course, is changing the mix of the income a bit and getting some of the foreign operations that created the higher tax rate into at least breakeven and ideally profitable. Our goal is to get back to a more normalized rate in the low to mid-40s area. It does not appear that that will happen for the balance of the year but this 50% rate that we had in this quarter is, it is particularly problemsome? We will, as I think you heard, few of the non-recurring items we talked about the lease terminations, a large portion of which is in London and the U.K., some of the Australian New Zealand of course is outside North America. So some of those items will be, will aggravate, if you will, the ability to get the whole year and, therefore, the tax rate outside of North America where we would like it to be. Those are some of the challenges we are working. Hard to say exactly where it is going to come out but, it is not going to be for the full year as where we started at the 42.5% rate.

You started where? I mean you started you just started the year at 51%. So is that going to continue for the rest of the year?

No. I think it will be some what but we are not sure exactly where it is going to be. It will not be stacked at the 42% rate for the rest of the year though.

Right. Okay. And what was stock-based compensation in the quarter and how much did you, how much was the loss internationally?

We haven't published the actual amount of the loss outside of the U.S., but it clearly is what drove the results for the quarter. So, again, we haven't published a specific amount for it. Let's see if we have the stock compensation number, we are trying to add that up right now.

Okay. When you get it just if you would let me know. Thank you.

It is about $1.5 million.

Okay. Thanks.

Sure.

We will go next to Andrew Fones, UBS Securities.

Yes, hi. I was wondering if you could tell me what the utilization trend was through the first quarter and how that compares to other first quarters versus what the normal trend would be? Thanks.

Well, we had as we always do going into the holiday season and then coming out. The difference was the normal pattern is usually for a good January and this year it just sort of stayed at, it stayed around the 70% mark. But the middle of the quarter is always quite bad. The first and third periods are the ones that have to make up for that.

Okay. And then the February period, did you see any improvement there?

I think I mentioned earlier that we have seen some uptick. It is early to make a judgment because we only have partial data but we believe we will, we will perform closer to normal levels in Q2.

Okay. Thanks. In terms of the head count reductions, can you tell us roughly overall how many people you are looking to cut and what practices they may come out of.

One thing I should say is that this action has essentially happened and I actually doubt, I don't have the total number. I know, I don't know if we have with us the reduction but it is a reasonably material number. Do we have that, Wayne? I am sitting in London.

Yes, Andrew. The reductions have been communicated to all of the individuals involved and it is frankly across the board. It includes both principally people from the consulting practices, but it also includes support people in the company as well. So, I think you can see from the magnitude of the annual effect roughly what the impact would be on a full year once it rolls in.

Okay. Can you tell us what practices at least were most impacted?

It was, it was more or less spread throughout the company.

Okay. Thanks. And just to clarify the prior question on the tax rate. Is there anything that would make you think that we couldn't get back to that kind of 42, 43% level perhaps by Q4, once you are through with the all of the, the charges and so forth?

The challenge is because we have some of these non-recurring items in particular I mentioned this real estate write up that we will have in the U.K., that's going to make it a challenge. Of course, with what we are doing on the Australian New Zealand activities, that part of our effective tax rate is going to have a small influence in the balance of the year. It is really going to be how well the earnings of the EME sector of the company come back in terms of getting the rate down but that's clearly our goal is to get the rate right back into where it normally would be by getting a, a balanced degree of earnings and performance out of all the sectors in the company.

Okay. Thanks. Then on the convertible, I guess that is under water now. Any thoughts in terms of the convertible, maybe calling that back, and then also the cash balance you have and where the stock price is, any kind of thoughts in terms of share buy backs? Thanks.

Well, certainly, as I mentioned on the call, we have just under 600,000 share that are remaining in the authorization we have from our board and as you point out depending on the stock price and other considerations, that certainly is something we will be looking at and we would be able to purchase shares as early as beginning this coming Monday under our policy. As to whether we would purchase bonds on the open market or stock, we haven't made our decision on that, but certainly the possibility is to purchase, use some of the cash we have with the prices of both securities where they are.

Okay. Thanks. And then, finally, in terms of hiring plans, can you give us any sense given obviously the head count reductions but potentially maybe still some hiring particularly within the finance practice, you mentioned you are still looking to build out your target where head count may come in the year. Thanks.

We continue to have a hiring window open for anybody we can bring in to help us pro revenue. Obviously there are certain areas like finance which we think will continue to grow. Where we won't be doing a lot of additional hiring is in the middle and junior ranks. We feel we have the right amount of staff today for the business we have. If our business picks up significantly, we will be back in the hiring business, but I think as of now we think we have just about the right balance of staff. But there are always shortages. There will always be some situations where we have a specific need. And we are always are recruiting at the very senior levels. The other thing I want to point out is that we do have, hiring has already been done at the junior levels for the third and fourth quarter. So we will have some growth in staff from that that has been factored into our analyses. I would guess on a net basis, there won't be a lot of growth in head count for the year.

Okay. Thanks.

(OPERATOR INSTRUCTIONS) Next we will go to Matt [McGeary], Sentinel Asset Management.

I was hoping you should shed a little more light if possible on what happened in the Middle East, Middle Eastern infrastructure type projects are pretty good place to be. I am just curious what you think happened there and why you think uptake of those consultants didn't happen as quickly as you anticipated, and what gives you confidence given it sounded like it came as a surprise to you. What allows you to say with any degree of confidence that you think you will be okay over there in the near term?

All right. Well, you are correct, it is a good place to be. We've had many, many opportunities. The issue I ran into last year was a classic one. You get in consulting where you can be so overloaded with business that you can't pursue all your marketing opportunities. That happened last year. I was in that office in October, December-October and people were flat out and complaining that they couldn't really property market where we had very strong opportunities. The work that we had was work we were getting follow-on revenue. There was a reorganization on the Saudi side, especially the follow-on funding just slowed down. That was not anticipated. That happened during the quarter quarter. We do have proposals for very, very substantial pieces of work that are quite related to what we were doing. Given the way things work in that region of the world, those new very substantial projects that they come we are very optimistic, probably won't hit us until much later this year. So in the meantime we are back dealing with the other opportunities and there are a number of them but it will just take a while to sort of dig into that. Meanwhile, we do have a significant uptick in our European business. We do have project that is still are coming in in the Middle East area. So we think we can remain reasonably buildable until we see the upsurge later in the year.

Okay. And granted your business is just inherently difficult to forecast sometimes, but I wonder if some of the restructuring that you are doing now, do you think any of that is going to help you with forecasting a little bit? I mean you guys have, five of the last seven quarters now you have missed expectations and I just wonder if some of these changes might be structural in the sense that it will help you get a better handle on things so you can inform the street a little better.

Well I think what we have done is we have down sized in the areas which were not core to our business and were a management distraction and where on inspection we didn't feel we had growth opportunities anyway. So we are focusing now on the core business I think in a much more aggressive way. I think we will be able to have a better handle on what trends are.

Okay. Good. Thanks, guys.

We will go back to Jim Janesky, Stifel Nicolaus.

A couple of follow up questions. Was that 772 head count quarter end for consultants?

Yes.

So that's after the reductions?

No, they would show up in the first part of this quarter.

Oh, okay. All right. What were the number of head count reductions? What should we kind of use as a basis for head count in the May quarter?

We haven't said but roughly, Jim, the order of in the consulting side, 40 people is what we are talking about.

Okay. Jim, with respect to turnover and with a lot of things going on at the company, has turnover increased in the near term and/or after you paid bonuses? What are your thoughts there?

I don't believe it has increased. It's been holding. I don't know what it has been at.

Okay. When were bonuses paid out again, was it March?

No. Bonuses were paid just the very end of Q1. So, they were reflected in the a good portion of them were reflected in the cash balance that we have here at the end of Q1, it is a remaining piece that will go out in the next week or two.

Okay.

I am looking at the numbers right now. The turnover in Q1 this year was about the same as Q1 of last year. It actually dropped significantly lower than it was in last couple of quarters. So there has not been any real movement.

Okay. Thanks.

We will have a follow up from Tim McHugh, William Blair and Company.

Yes, I was wondering can you just give us a little more detail on what you viewed as the problems with the Australian business as well as the head counts you said the reductions you made to the forensic accounting businesses. Was that demand issues? Was that being a non-core business? Just a little more detail would be helpful. Okay. First in the Australian business is what you have to recognize is that Australian and New Zealand are not large economies relative to United States and Europe. Those are very large land masses. We have five offices, actually four offices plus one individual working in a service office location in the fifth office. So right off the bat for small operation there is pretty high overhead costs. It is not a high rate market, high billing rate market, so it is hard to get good gross margins on projects. We felt in the areas we were working in we didn't see good growth prospects. There's nothing wrong with the business. It is a fine little business but wasn't generating either growth or margin for us. So at the end of the day we had to ask how much management time do you want to spend on something that's 3% of our revenues and 0% of our profits where the growth potential isn't significant. So I think we felt, and the board agreed, that we were better off focusing on our management resources and investments elsewhere and we could exit gracefully, which we did. Now, the other question was on the forensic side. We have -- we were operating a forensic investigation practice that was really variable on a scale. It was really quite small. It is not a core business, it is just not clear we should have been in it anyway as a company. We dropped that and then we had a forensic computing business that some parts were related to what we do, some parts that weren't. Again, we were just below scale. It wasn't a question of market. Either we had to make a significant investment and expand the scale a lot or just get out. So we decided to get out.

Okay. Clarify. Did you sale the Australian business or are you just exiting it?

Tim, we actually sold it. The way it worked is we sold the assets to and they assume the liabilities to a group of the management team that is down there.

I should add that we do have an ongoing business there in the utility consulting area we retained because we are making a push into the Asian market in the electric utility area based in Hong Kong. This was an essential part of that client business. We are not totally exited from Australia, but we basically exited from the bulk of the revenues there.

Okay. And lastly, can you have you ever quantified or would you care to quantify how much of your Middle Eastern revenue is from Chemicals & Petroleum?

Let us get back to you on that. We are trying to pull it out. As a percentage, it is less than half.

I would say significantly less than half. The other thing I would mention is a lot of the Middle East work isn't Chemicals & Petroleum. It is generalized consulting. So that business had been running at less than 5% of our revenues. It is not entirely Chemicals & Petroleum consulting.

Okay. Thank you.

At this time, we have no further questions. I will turn the conference bag over to Mr. Burrows for additional or closing remarks.

Well, thank everyone. We look forward to speaking with you in our second quarter fiscal 2008 conference call. This concludes today's call.

You may disconnect at this time. We do appreciate your participation.