CRA International Inc (CRAI) 2009 Q3 法說會逐字稿

Good day and welcome everyone to Charles River Associates third quarter fiscal 2009 conference call. Today's call is being recorded. You may listen to the webcast on CRA's website located at www.CRAI.com. In addition, today's news release is posted on the site for those of you who did not receive it by e-mail. With us today are CRA's President and Chief Executive Officer, Mr. Jim Burrows; Chief Operating Officer, Mr. Paul Maleh; and Chief Financial Officer, Mr. Wayne Mackie. At this time, for opening remarks and introductions, I would like to turn the call to Mr. Mackie. Please go ahead, sir.

Thank you. Statements made during this conference call concerning the future business, operating results, estimated cost savings and financial condition of the Company and statements using the terms anticipates, believes, expect, 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 expectation 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 are included in the Company's filings with the Securities and Exchange Commission, and in today's news release which is posted on the Company's website.

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. Let me remind everyone that CRA's fiscal year typically operates on 13 four-week cycles producing unequal quarters in terms of length. Q1, Q2 and Q4 are typically 12 weeks in length, and the third quarter we just completed being a 16 week quarter. In addition, let me remind everyone that we will be referring to some non-GAAP financial items on this call. I would encourage everyone to refer to today's earnings release for full reconciliation of non-GAAP items to their GAAP equivalents.

Our non-GAAP results for the third quarter exclude the results of our NeuCo subsidiary in 2008 and 2009, and a foreign currency gain attributable to a substantial liquidation of the Company's New Zealand operations in fiscal 2008. Lastly in our consolidated statements of operations we are now breaking out depreciation and amortization expense separately from selling, general and administrative expenses. We believe this presentation proves the usefulness of our reporting is more consistent with other industry comparables. Jim?

Thanks, Wayne. And good morning everyone. Thank you for joining us for today's call. The third quarter was the challenging and disappointing period for our Company. We exited Q2 with a bit of optimism about the remainder of the fiscal year. As it appears some of our key markets that have been mostly frozen are beginning to loosen up. However, the pickup in activity did not translate into revenue momentum and a number of our larger practices turned in lower than expected results. The underlying cause being clients' continued hesitancy to spend money. Our utilization rate for Q3 '09 was 69%, below Q2's rate of 71%, and the 71% we recorded in Q3 '08. In finance, many of our clients in the financial services industry are still carefully managing their cash and they're postponing discretionary expenditures. In life sciences the practice has delivered strong results in recent quarters. A major litigation case concluded and transition to new accounts has been slow. Global investor consulting practice revenue is down significantly in the third quarter compared to a year ago.

While work in the chemical sector in our North American GSE practice has been hit particularly hard year-over-year, results were up over the sequential quarter, led by an uptick in demand for chemicals related work, M&A activities, and the accelerated policy debate around climate change. In addition, we experienced some unexpected delays in obtaining signed contracts in the Middle East, for work that we had been awarded earlier. We now expect much of those revenues to be realized in the next few quarters. We continue to work on some sizable contracts in Saudi Arabia and activity in the Middle East remains high.

Revenues excluded NeuCo declined nearly $25 million year-over-year to $86.3 million. About $3.3 million of this decline was the result of foreign exchange movements, and about $2.3 million was the result of our exit from certain lines of business and geographies during the past year. These declines were essentially offset by revenues related to the Marakon acquisition.

Although our overall performance did not meet our expectations, we did experience encouraging performance in certain areas. Our forensics practice extended its early year momentum and climbed approximately 45% year-over-year and labor and employment revenues continued to grow steadily in Q3 compared to a year ago. Energy practice revenue was down about 5%, compared to a year ago, but registered a sharp increase from the second quarter of this year.

In early June we announced the acquisition of Marakon and the creation of a new value management practice. This transaction adds an entirely new dimension to our business consulting offerings. The integration of Marakon has been proceeding smoothly and the practice's contributions in the quarter were on plan. We are pleased with the early results of this acquisition and we look forward to capitalizing on this area going forward.

Over the past year we took aggressive steps to streamline our operations, to exit underperforming business areas and to right-size our workforce. Consultant headcount declined in the third quarter as the result of normal attrition of staff, and the decision we made early in the year not to replace many of the departing consultants. Excluding the 48 consulting staff we added with Marakon, we reduced our total consultant headcount by 25 positions in Q3. Total consultant headcount at the end of the quarter was 585, of which 423 are senior staff and 162 are are junior staff. Headcount during Q4 is expected to decline further as a result of normal attrition. At the same time, we are continuing to make key hires that we view as rain makers who can quickly generate new business after joining the Company. Paul will touch upon a few of these recent hires in his remarks.

We continue to aggressively reduce costs, particularly in the area of SG&A. The actions undertaken in the first half of this year, combined with the restructurings and divestitures completed in fiscal 2008, have us on track to realize annualized savings of approximately $18 million. Our non-GAAP SG&A costs alone this quarter were nearly $5 million lower than the same period a year ago. While both our gross margin and operating margin are lower than a year ago, we have ask been successful in limiting the effects of the $25 million revenue decline.

Excluding NeuCo, our gross margin in the quarter was 32.9%, compared with 33.8% in Q3 '08, demonstrating our ability to keep our gross margin relatively stable in a difficult sales environment. Similarly, our non-GAAP SG&A as a percentage of net revenue increased to only 23.1% from 22.4% in Q3 '08. Looking at our bottom line, excluding NeuCo, we recorded net income of $3.4 million, or $0.31 per diluted share. We also generated a significant amount of cash in the quarter. Even with the acquisition of Marakon, our cash and equivalents balance rose to $104.8 million, from $89.4 million at the end of Q2.

With that, I will turn the call over to Paul.

Thanks, Jim. The focus throughout this year has been on revenue building initiatives around raising general awareness in the marketplace about CRA's unique combination of functional and industry expertise, building strong client relationships, and as Jim mentioned, recruiting new consultants with solid books of business. I would like to describe several steps we took during the third quarter to support this focus and help position the Company for strong future performance. Several months ago, we conducted a series of focus groups to test the general awareness of the Company's brand name and logo with clients and prospects. Feedback confirmed that Charles River Associates, the Company's original name is a strong, positive brand and has greater recognition than CRA International. Based on these results and other considerations, we reclaimed the name Charles River Associates and are bringing meaning back to the CRA acronym. The brand value of Charles River Associates and the CRA acronym is uniquely ours. And we believe it is critical to differentiating ourself in the marketplace.

I would like to briefly summarize the integration taking place across the Company of our new value management practice which was created from our acquisition of Marakon Associates. We have a dedicated team focused on integrating our new value management capabilities into our offering and we are already seeing promising results. For example, a major specialty chemicals company retained a joint Marakon, GIC team to assist in the development of its go-forward strategy. This is a prime example of cross-team collaboration enabled by our collective capabilities. We will draw upon our industry expertise to provide the client with an understanding of such value chains, business models, and base of competitions across the chemicals and materials space and we will leverage value based frameworks to provide a basis for evaluating new and existing options across the client's portfolio.

In addition, many of the other practices delivered to CRA -- delivered to clients, CRA's unique combination of functional and industry expertise. For example, a team from our competition practice in London and Boston provided economic analysis on behalf of Centrica, in its acquisition of a 20% stake of British Energy, the UK's largest electricity generator. Our analysis drew upon our extensive experience in electricity market modeling as well as our expertise in the empirical assessment of horizontal and vertical merger effects. Our energy practice continued to work on several significant projects around the world, pertaining to both regulatory and strategy consulting issues. For example, in the US, the practice filed testimony before the Federal Energy Regulatory Commission and on behalf of PowerEx, the trading arm of British Columbia Hydro, and separately on behalf of Sempra in their ongoing dispute with the state of California that arose from the 2000, 2001 California energy crisis.

Within in our Global Industrial consulting practice, we are collaborating with our climate sustainability practice to help clients assess the implications of cap and trade for fuel and raw material pricing, price volatility, and asset competitiveness. In addition, we have focused on building a litigation support channel for our industry expertise in chemicals and oil and gas and leveraging CRA's brand reputation in litigation and relationships with major law firms. This has led to new engagements in large commercial litigation involving project conveyance, breach of contract and transfer pricing of intellectual properties. In each of these matters, CRA's ultimate client is a global chemical or oil and gas Company.

We continue to be active in recruiting consultants. With deep expertise and wide business networks to generate additional revenue across practices and region. Our transfer pricing practice added three notable hires, all of whom came to us with substantial experience and growing transfer pricing practices. The energy practice expanded its offering in clean renewable energy with the arrival of a new Vice President based in Boston. To expand our outreach to the legal community, Mark Winston, a former law firm partner and federal prosecutor has joined our New York office in a new role. He brings substantial business development experience in the consulting industry and has an extensive legal background in investigative, compliance and environmental work, areas in which we will continue to advise clients. With that, I will turn the call over to Wayne for his financial review.

Thanks, Paul. Let me start out by mentioning that we announced today the completion of an independent voluntary review of our accounting practices for acquisition earn-out payments. Results of our review is consistent with the preliminary announcement we made on August 14th, 2009. No material corrections are required to our previously filed financial statements. The Company will correct the immaterial errors in its previously issued financial statements by making adjustments to prior comparative period financial information beginning in its quarterly report on Form 10-Q for the quarter ended September 4, 2009. The immaterial corrections had no effect on 2009 results of operations, cash or cash flows from operations. Please refer to the 8-K we filed early today for additional details.

Briefly recapping our results, Q3 GAAP revenue declined approximately 20% to $89.3 million, compared to $111.2 million for the third quarter of fiscal 2008. The reconsolidation of NeuCo contributed approximately $2.9 million to our Q3 '09 GAAP revenue. Non-GAAP revenue for the third quarter which excludes NeuCo was $86.3 million.

As Jim mentioned, our Q3 performance was primarily the result of a slowdown in several of our largest practices. We believe that we are a lagging indicator of the recession. While the global economy as a whole is beginning to show signs of life, we are still experiencing stalled litigation, consulting project delays and a lack of spending in certain areas. We did experience some growth this quarter but it was primarily limited to some of of our smaller practices. Also, our Q3 2009 revenues were reduced by $3.3 million from the movement in foreign exchange rates since Q3 of 2008. In total, CRA's Q3 international business represented 25% of total revenue, versus 24% in Q2 and 21% in Q3 of last year.

Third quarter gross margin on a GAAP basis was 33.9%, compared to 33.8% last year. Q3 gross margin on a non-GAAP basis was 32.9%, compared to 33.8% in Q3. We are pleased with how gross margin percentage held up given the decline in revenue. Third quarter GAAP SG&A expenses were $21.7 million, or 24.4% of GAAP revenue. On a non-GAAP basis, excluding the effects of NeuCo, SG&A expenses were $20 million, or 23.1% of revenue in Q3, compared to $24.9 million or 22.4% of revenue on a non-GAAP basis in Q3 2008.

On a year to year basis, non-GAAP SG&A costs have decreased by approximately 22%, due to our aggressive cost control efforts, cutting both fixed and variable costs. While our team has done an excellent job during the past year, we are continuing to seek additional ways to lower our cost structure. For example, in some of our office locations we are still carrying extra space so we are examining what alternatives we have to address that issue.

Operating income was $6 million for the quarter, or 6.8% of revenue. Non-GAAP operating income was $6.2 million or 7.2% of revenue. This compares with GAAP and non-GAAP operating income of $10.2 million, or 9.1% of revenue in Q3 of 2008. The underlying factor here is the year-over-year decline in revenue.

In Q3 2009, GAAP interest and other expense was $989,000, compared to interest and other income of $460,000 in Q3 of 2008. The $1.4 million swing is attributable to a $672,000 foreign exchange gain in 2008, and lower short-term rates which produced less interest income this quarter as compared to the third quarter of a year ago. Our GAAP tax provision for the quarter was $2.6 million, or a Q3 tax rate of 51.8% compared to 60.9% in Q3 of 2008. Our non-GAAP tax provision for the quarter was $1.9 million resulting in an effective tax rate of 36.0% compared to 65% for the third quarter of 2008. Our third quarter GAAP tax rate would have been lower but for NeuCo having an unusually high tax rate that should not recur in the fourth quarter.

The lower effective tax rate -- the lower effective non-GAAP tax rate reflects anticipated improved operating performance in Europe and the Middle East region, including a positive contribution from Marakon. Our Q3 2009 GAAP net income was $2.9 million or $0.27 per diluted share, compared with GAAP net income of $4.2 million or $0.39 per diluted share for the same period 2008. Our Q3 2009 results include $0.5 million loss from NeuCo's operations. Non-GAAP net income for Q3 2009 was $3.4 million, or $0.31 per diluted share, compared with Q3 2008 non-GAAP net income of $3.5 million or $0.32 per diluted share.

Turning to the balance sheet, billed and unbilled receivables in Q3 were $79.0 million compared to $85.8 million at the end of Q2. Current liabilities at the end of Q3 were $69.8 million, compared to $62.0 million at the end of Q2. Total DSO in Q3 was 96 days as our collections continued to improve. This consists of 32 days of unbilled and 64 days of billed, compared with 98 days we reported in Q2, which consisted of 35 days of unbilled and 63 days of billed. Our goal is to continue to keep our DSO below 100 days.

Our cash flow was strong this quarter. Cash and equivalents stood at $104.8 million at the end of the third quarter compared with $89.4 million at the end of Q2 and $119.3 million at year-end. Cash flow for operating activities was $20.6 million in Q3 2009. Our capital expenditures totaled approximately $600,000 for the third quarter, compared with $4.2 million for Q3 of 2008. Depreciation and amortization was approximately $2.4 million for Q3, compared with $2.5 million for Q3 of last year.

Share based compensation expense was $2.2 million for Q3, as compared to $2.3 million -- it was $2.2 million for Q3, as compared to $2.3 million for Q3 of last year. We previously reported on August 19, we entered into an amendment of our loan agreement dated as of January 14, 2004, with RBS Citizens Bank. The amendment reduced the line of credit from $90 million to $60 million and extended the termination date of the loan from April 30, 2010, to April 30, 2012. Like many other companies, we are subject to higher pricing on our credit facility extension due to general credit market conditions. Since we rarely use the facility we were able to offset the overall cost increase of unused facility priced now at 25 basis points instead of 16.5 basis points by having reduced the size of the facility from 90 million to $60 million. With that I'll turn it back over to Jim.

Thanks, Wayne. Let me conclude our comments with some thoughts about our outlook. We expected our near term recovery will pick up momentum takes economy improves. We believe that the market positioning in the areas we serve is very strong. We continue to be a preferred provider for the types of services we offer. And as clients loosen their purse strings, we expect our revenues will grow. We believe that practices that have experienced good momentum in recent quarters will continue to grow. We are encouraged by the early contributions from Marakon and by the activity levels in our Middle East business where project leads and proposal streams remain very strong. We believe our finance practice will recover from the coming year and that our competition practice will deliver steady results.

During the next several quarters, we intend to pursue the three pronged strategy that we outlined in our Q2 conference call. We are aggressively pursuing topline growth within each of our practices. Second, we are seeking to improve our margins through continued cost controls. We have created a lean organization that will enable us to grow our profitability quickly as revenue growth returns. At the same time we are continuing to implement initiatives that will further increase our efficiency and productivity. And third, we will continue to drive operating cash flow. We are confident about the long-term outlook for our practices. We've already been retained on a number of potentially large assignments that have yet to get under way with significant buildings and that utilization of 69% we clearly have the personnel to capitalize on those opportunities as the broad economy improves and our markets normalize. We continue to generate a healthy operating cash flow and have a very strong balance sheet. As we move for the final stages of this economic downturn, we believe that CRA remains well positioned in the right markets with the right personnel. With that I'll ask the operator to open the call for questions. Operator?

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from Jim Janesky with Stifel Nicolaus.

Good morning. Jim, can you tell us what effect seasonality might have had on the business during the third quarter. So, for example, vacations, both in the US and Europe. Did that have any greater than expected effect than you originally anticipated after you reported your second quarter?

Well, it's hard to quantify but my feeling is the answer to that question is yes. Basically over the long years I've been in this business, I've found that in an off year, we tend to get much bigger impact in the summer than when business is really strong, both because clients aren't there much and because our staff tends to take more days. So it's hard to quantify, but summer is a difficult period and I suspect it has some impact in our results.

Okay. And shifting gears to merger and acquisition activity, obviously that's picked up even within the last week. Can you give us an idea of what your expectations are? Are some of the big cases that you said are going to begin, are they M&A cases? Will that happen as early as the fourth quarter? And then just give us an idea of broadly defined what merger and acquisition types of cases, what that is as a percentage of your revenues?

Okay. I don't know if I have an estimate of the percentage of revenue but it's -- it tends to be a significant piece of our competition business, which the portion that's mergers will fluctuate over time but it's probably roughly half of that line of business. And our merger -- our M&A work has actually been very strong throughout this whole period. We have not seen a big drop in billings in that area, even though M&A activity in the economy was down quite a bit over the past year. And in fact, we believe we probably increased share in Europe because some of our competitors have had revenue drops while we haven't over there. So our US business is strong. Our European business is extremely strong and I would guess as M&A activity picks up, we'll see more activity like that for us.

Now, when I mentioned projects we've been hired on, M&A work for us tends to happen very quickly. These don't tend to be assignments where somebody calls and says we're hiring you for this and we'll call you back in six months. Typically we get the work immediately because those are usually pretty fast burn assignments. So my comments in the script about being hired on projects and being put on standby for a while really remain more to the long-running litigation projects.

All right. Thanks. As a final question, what do you think on an order of magnitude you can get in additional cost cuts? Do you think that the majority of the cuts are behind you and that the incremental cost cuts will be kind of around the edges like you said with respect to office and real estate or could we see significant cost reductions going forward?

Jim, it's Wayne. We certainly have taken the most of I think what we expect. There's still going to be additional adjustments that we're going to make and I think we mentioned or Jim mentioned during the call, in the SG&A area in particular. But I'm not expecting the magnitude of the reductions we've achieved in the last year or two to yet come. What we've said a few times in discussions at analyst meetings and elsewhere is that our goal obviously is to get the top line moving. We've cut our costs very significantly, we believe, both in terms of SG&A and frankly in terms of headcount across the Company. And when the revenues do begin to come up, when this economy begins to turn, we're expecting a very positive leverage effect on our operating income as a result of that. So -- but we're not done and I think I've said that one or two quarters in a row you now, but the remaining reductions are not going to be anywhere near the 10 million, $20 million numbers that we've been able to cut out so far.

Okay. Thank up.

Our next question comes from Tim McHugh with William Blair.

I might ask Jim's question slightly different about the seasonality. My impression, based on your last call, was that the second -- I'm sorry, the third quarter started off at a decent clip for you. So maybe one way to ask it is when did you start to see the utilization rates and revenue start to track down, below what you saw and did that kind of continue even here as we moved to September or did you see something unusual kind of in late July and August?

Well, what happened was we had a little spurt in the beginning of the quarter and that cooled off as soon as vacation season started and we basically just stabilized at the level you saw, fourth quarter. The quarter ends right at the end of vacation season so it's a little bit hard to extrapolate.

Well, as you've come out of the vacation season in the last month or so, have you seen -- has that weakness continued or have you seen a--?

What's been happening is we've been getting very encouraging reports from the practices about clients being receptive to new work, new assignments, but it hasn't appeared in any major way in the utilization data yet. But that's not too surprising. There's often a stickiness there on the upswing. We get hired. There's some kinds of work that starts right away but other kinds of work might drag on for a while before you really see the billings effect.

And then to understand it correctly that the large practice areas where you saw the weakness, it was primarily the finance practice area, and then the Middle East operations?

Well, the places where the results were disappointing for us, one was in finance and that's an area where our traditional customers have been financial services companies and their problems haven't gone away. They're just not spending money as freely as they had in the past. I think that will turn around. In the Middle East it's strictly been an issue -- it's not been a lack of business. It's been an issue of getting contracts through and one of the issues in Saudi Arabia is that they -- one of our largest sources of funding there had an institutional change I talked about in other earnings calls and they're just getting their machinery up and running and it looks like it's now oiled but we were pretty confident we would have significant contract signings in Q3 and they just got delayed. But they seem to be back on track, so we think we'll be seeing a pretty nice recovery in the Middle East.

Okay. And then lastly, the earn-out payment and the 8-K, it mentions that you won't be paying that after all. I think that was related to the pricing.

Tim, there are two pieces. There was a $5 million payment made a couple years ago and that remains and that's what we mentioned in the 8-K that you probably saw earlier this morning. The additional $10.2 million that was paid into escrow, actually, and it sits in escrow, and based on our expectations of where that earn-out will go, it's a four-year earn-out, we expect the entire $10.2 million will be returned to the Company.

So my question was going to be about identification at that practice area which I believe was transfer pricing, must have weakened here as we moved for it to change that quickly?

Well, actually, the earn-out was based on some aggressive growth assumptions and the transfer price practice is doing quite nicely, it's just looking unlikely that they'll hit targets.

Okay. But what changed I guess throughout in the month, in the last three months?

Well, actually, nothing changed. What happened was the way the contract was set up for that practice, the trigger for putting the money in escrow was a fairly easy threshold but the trigger for making -- for earning the money was a stiffer threshold. And it's just become apparent over time that they're not -- that they're probably not going to make it. But there was no event in the last three months.

Okay. And that's not included in your cash balance right now; correct?

It's not.

Okay. Thank you.

And it won't be until it comes back.

Thank you. (Operator instructions) Our next question comes from Sean Jackson with Avondale Partners. Please state your question.

Thanks, good morning. Can you compare I guess this post recessionary environment in your business compared to other ones. It seems you've been kind of surprised by how slow it's taking for business to come through. Do you think that this is a fundamental change where perhaps the economic disruption is not turning into business, or is this just being delayed even more by the magnitude of the disruption?

Okay. Let me handle that. I've been in this business for 42 years and this definitely is the worst downturn I've ever seen in our market. And it has been slow to come out of it. We don't believe we're losing share. In fact, in some areas we think our share has actually gone up. So it's not that we're losing opportunities other firms are getting. In the particular missions in which we operate we still are the big name player and we still have our loyal clients and they still hire us. But some of those clients have just been very slow to spend money and there's just been less business to be had.

I saw some data recently that in business strategy consulting as a whole, not talking about our revenues, globally was down 30% in 2008 and was down some more even in 2009. What we're seeing is I think a global phenomenon in our particular lines of business, which are sort of fairly unique to us. But the other thing we're seeing is a lot more activity with clients in the sense of being much more receptive to talking to us about potential jobs, more litigation opportunities coming in, so I do think -- I don't think this is a permanent change in the way the market works. It's just a particularly deep cycle in the areas in which we operate.

Okay. And can you comment on what are the possible leading indicators that you're looking at in your business that you trust that will turn into revenue on your income statement? An are you seeing those leading indicators now? Are they as reliable now as they have in the past? Can you just talk about that?

I would categorize in two areas. One is in the litigation areas. We have never seen any metrics we could track that really relate much to what we do. You can track total case filings but that's -- there are huge numbers of case filings most of which don't use our kinds of services so all we can track there is what kinds of inquiries are we getting and we don't have a -- we obviously are aware of major new litigations but there's no particular metric to follow.

On the business strategy side, obviously we can track what's going on in the economy. It's pretty obvious that when the economy goes into a major downward correction, one of the first things that companies do is stop spending discretionary money. One of the easiest things to cut in the short run is consulting. And vice versa, when the economy picks up, that often reverses fairly quickly because the other things clients do is they tend to reduce their staff and we've seen lots of instances over the year where companies have eliminated their own staff and then they were caught short when they needed work done. So on that, you could track the general metrics in the economy and M&A work and things like that. But on the litigation side, I have never seen a metric I can track that seems to relate to our business.

Okay. All right. Thank you.

Our next question comes from Jim Janesky with Stifel Nicolaus. Please state your question.

Yes, I'm sorry, two follow-up questions, Jim. First, you mentioned something about the forensic business being -- did you say it was up year-over-year? And if so, why? I might have missed that, but if you could just kind of go over that again.

It was a little bit over 50%. That's a business that's primarily head quartered in London.

Right.

We do have a forensic evaluation practice in the United States but most of what they do is not really forensics, it's really damages and valuation. The London practice has a bigger forensic component and that is up.

You said 50%, 5-0?

From last year, from a relatively low base.

From a low base. There's nothing that stands out fundamentally; right?

I'm sorry, Jim, I didn't catch your last question.

There's nothing that stands out fundamentally that drove that practice much higher. It's just off the low base, would you say? I don't want to put words in your mouth but--?

That practice over there is very strong. They have a lot of business and we're actually at the top level, fairly staff constrained. I think the US market for that kind of work just judging from what's happening in the industry is not strong.

Right. And then following up on stock-based compensation, you said $2.2 million, Wayne?

I think -- let me -- it's 2.2 for Q3 of '09, 2.3 for Q3 of '08, Jim.

And is that going to continue at that rate for -- as we move forward, per quarter?

Will it continue at that rate? I didn't hear the rest of the question.

As we move forward, should we expect that stock-based comp is going to be roughly $2 million a quarter?

That's a reasonable estimate at this point. Not sure why it would change significantly.

Okay. And then Jim, final question. I mean, what are your expectations for holidays as we -- your November quarter is obviously over, it has the Thanksgiving holiday but it's over before the Christmas holiday and New Year's holiday. I mean, do you think -- should the expectation be that with the uncertainty still in the economy, that maybe we're going to have a greater than -- higher than historical seasonal effect?

Well, Q4 is always a low quarter for fringe time. The only significant holiday is Thanksgiving it is not a high vacation period. So it's not -- I'm sure that will happen again this year. It's a function of the calendar. So there will be more work days in Q4. Doesn't necessarily mean that utilization will be up but there will be more work days so we should get some benefit from that.

How about moving into Q1 which does have the major holidays. I'm just asking--?

Well, Q1 is--.

I'm just asking your expectations from your practice leaders in general. Is this going to be a time where there could be a greater than normal seasonal impact because of the economic environment?

Well, I think Q4 will be like Q4 is in past years, in terms of seasonality. Q1 is a little early to tell. It has from our point of view, it's a bad quarter, because it's got the two major holidays and people do take vacations around that time. So a lot depends on just how busy we are. Sometimes people put those off if they're really crunched. And -- but it's hard to foresee that one way or the other today.

Okay. All right. Thank you.

Thank you. Our next question comes from [Abe Patton] with the Citadel Group.

Jim, thanks for taking our call. I have a quick question, realizing that we don't want to get into guidance, clearly. But can you talk through what you're hearing in the field in terms of pipelines, in particular, maybe focusing on litigation and consulting areas that you said were slightly weaker than expectations, but maybe areas of incremental growth going forward? Thanks.

Well, first, the litigation side, that one's always a tough one to call because there doesn't tend to be a lot of pipeline of proposals. Typically, the first conversation is a conversation where we're being hired, quite often. And so that's not an area where we can say well, we have this funnel and it's so many projects have come to fruition over the last month and so many more over the next month. It just doesn't work that way. So I really hesitate to make any projection there because that environment is so uncertain today.

Now, in the business consulting side, we are definitely seeing more opportunities. There is a funnel there. The funnel is definitely bigger today than it was three months ago or six months ago. And that's both our traditional business, but also the Middle East where the funnel is really quite strong. So I think on that one, our expectation is that we'll see a pickup that should show up in Q4 and pickup in Q1 next year. I don't know how significant it will be but I think we will see a good momentum there.

Great. Thanks.

Ladies and gentlemen, there are no further questions at this time. I'll now turn the conference back over to management for closing comments.

Well, thank you, everybody. We look forward to speaking with all of you again on our fourth quarter conference call. That concludes today's call.

Thank you. Ladies and gentlemen, that concludes our conference call. Thank you all for joining us today.