CRA International Inc (CRAI) 2010 Q1 法說會逐字稿

Good day everyone, and welcome to Charles River Associates first quarter fiscal year 2010 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 and prepared remarks from the Company's Chief Financial Officer are posted on the Investor Relations section of the site.

With us today are CRA's President and Chief Executive Officer, Mr. Paul Maleh, Chief Financial Officer, Mr. Wayne Mackie, Senior Consultant to CRA and Professor of Economics and Law at Georgetown University Center, Dr. Steven Salop, and Vice President and Leader of CRA's Global Antitrust and Competition Economics practice, Margaret Sanderson.

At this time for openings remarks and introductions, I'd like to turn the call to Mr. Mackie. Please go ahead, sir.

Thank you, Claudia.

Statements made during this conference call concerning the future business, operating results, estimated cost savings and financial condition of the Company, and statements made using the terms anticipates, believes, expects, should or similar expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are based 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 are included in the Company's filings with the Securities and Exchange Commission, and in today's news release and prepared CFO remarks, which are 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, 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 a full reconciliation of non-GAAP items to their GAAP equivalents. Our non-GAAP results exclude the results of our NeuCo subsidiary, expenses related to restructuring activities, and foreign currency exchange loss related to the liquidation of our Australian-based operations.

Let me now turn it over to CEO Paul Maleh for his commentary. Paul?

Thanks, Wayne, and good morning everyone. Thank you for joining us on today's call.

Let me start by saying we were disappointed with our first quarter results. Despite the normal seasonality to our business, where Q1 revenue is typically below the revenue of other quarters, our first quarter results were well below our expectations. We are focused on recovering from the shortfall, but before I talk about the actions we are taking to address our performance, I would like to provide some historical perspective on our performance and strategy.

Until early 2008 we enjoyed a fairly robust period of growth. With the global recession, we needed to create greater focus in our portfolio and generate more efficiencies in our infrastructure. We embarked upon an aggressive program to reduce overhead costs, exit non-performing areas of our portfolio, close under-performing offices, and lower head counts. The market turned down dramatically in late 2008 and into 2009, with the steep economic downturn. And we had to broaden and accelerate our performance improvement activities to include further staff reductions to match demands levels.

As we reported last quarter, and as a result of the actions we took between 2008 and 2009, we lowered our annual non-GAAP SG&A cost by nearly 22%, or $19 million in fiscal 2009. We saw some early signs of demand recovery in Q2 and again in Q4 of 2009. However, as evidenced by our Q1 performance, these indications did not carry over into our first quarter. While lead activity and client inquiries in the first quarter were consistent with historical trends, our utilization and revenue lagged prior quarters. This trend took place across most of our practices.

We continue to focus on business development and client facing activities, including recruiting senior consultants. However, in order to more closely align our costs and staffing levels with our revenue, additional actions are required. These actions have been carefully targeted, so as not to jeopardize the longer term growth prospects in both our core and emerging practices. They include closing the Houston office and shifting key personnel to other locations, restructuring selective practice areas, better aligning staffing levels with our revenue, renegotiating leases in offices where we have excess space, the elimination or not filling positions in our administrative operations, and, finally, planning additional investments and improvements in our internal infrastructure to lower costs and boast productivity. As a result of the actions we are taking, we are anticipating -- we anticipate a reduction in total headcount of 47 positions, including 36 from our consulting operations. We expect these actions to result in a restructuring charge of between $4.9 million and $5.5 million in the second quarter of fiscal 2010, and approximately $8.9 million in annualized savings.

Looking at Q1 performance in more detail, the commonalities across both our Management Consulting and Litigation Consulting practices reflected the cautionary environments that our clients have been facing. Clients have been reluctant to spend, thus lengthening the time to close new engagements, and this has impacted all areas of our business. The momentum we began to see last quarter within our Management Consulting portfolio did not carry through to Q1. Our Management Consulting portfolio was hampered by projects that came to an end during Q4 and were not immediately replaced in Q1. However, we are seeing an active lead flow in Management Consulting and we are anticipating higher corresponding revenue in the quarters ahead.

With respect to our Litigation, Regulatory, and Financial Consulting related practices, the major financial meltdown work currently in our pipeline ramped up slowly, although we did see growing amount of fair lending, litigation, and credit risk management work. In addition, some practices experienced delays in existing projects proceeding with the court system and regulatory agencies.

There were some bright spots this quarter. Chief among them, our European competition group, where revenues were up both sequentially and year-over-year. In addition, several of our smaller practices, including Financial Economics and Options and Competitive Bidding, continued to perform well. However, the growth we saw in this subset of practices was not enough to make up for the declines we experienced across a number of our larger practices. As a result, our utilization rate was 60% compared with 66% for the sequential fourth quarter, and 68% for Q1 of last year.

Revenue for the first quarter of fiscal 2010 was $57.8 million on a non-GAAP basis. This compares with revenue of $64.3 million for Q1 of fiscal 2009, and $72.8 million for the sequential fourth quarter of fiscal '09.

We continue to aggressively manage SG&A in Q1. Our Q1 SG&A expenses were reduced by nearly 10%, or $1.5 million, compared to the same quarter of a year ago, and declined nearly 5%, or approximately $700,000, on a sequential non-GAAP quarter basis.

Consistent with our strategy which we outlined during Q4, during the Q4 earnings call, our focus is to ensure a strong and constant pipeline of new engagements by expanding our client outreach activities, developing collaborations across practices, investing in our people, particularly in the areas of business development and client service, and recruiting senior level individuals who can rapidly deliver revenue. For example, we welcomed six new Vice Presidents to our practices in the first quarter. Unanticipated slow downs in our practices are always challenging, because they require us to strike a balance between resolving short-term over capacity, while focus on building our core strength and maintaining the resources we need to capitalize on future opportunities. In that regard, we believe it is critical to focus on the continued development of our people to help grow our business. The commitment of our team is evidenced by the fact that 26 of the firm's top 30 revenue generators in 2007 are with CRA today. In addition, we have invested in the development of a number of new revenue generators who are now among our top performers. We are benefiting from the hard work and dedication of our people, and this reinforces one of the elements in our strategy to grow organically.

To further inform you about our business, we would like to highlight our Antitrust and Competition Economics practice on today's call. We have invited Dr. Steven Salop, a Senior Consultant to CRA, Professor of Economics and Law at Georgetown University Law Center, and preeminent expert on mergers and antitrust, and Margaret Sanderson, Leader of our Global Antitrust and Competition Economics practice, to share their observations with respect to industry trends and merger regulation, as well as our service offering in antitrust and competition economics.

Steve began working at CRA as a senior consultant in 1988. He helped us start up and expand CRA's offices in Washington DC. He was also a member of CRA's Board of Directors from 1998 to 2008.

Before joining CRA, Margaret Sanderson, head of the Economics unit at the Canadian Competition Bureau. She joined CRA in 1998, opening our office in Toronto and was appointed to lead our Antitrust and Competition Economics practice in December of 2006. Margaret?

Thank you, Paul. It's a pleasure to join today's call.

As Paul has mentioned, I've been asked to speak to the market trends that we see ahead for the competition practice, and I will also describe some of the marketing initiatives that we have underway. I will then turn the call over to Steve Salop who will provide more detail on our US initiatives in the merger area. And as well, Steve will speak to the important role played by senior consultants in our North American competition practice.

So to begin with the overall market. As Paul's already mentioned, there's little doubt that 2009 was a very soft year, with respect to total merger and antitrust case activity levels. Thomson Reuters reports that in the United States, overall M&A activity was down 21% in 2009 compared to 2008, in terms of the total value of target firms. As well, Law 360 reports the number of US antitrust case filings was down 39% in 2009, relative to the levels that existed in 2008. These aren't just US phenomena. Worldwide overall M&A activity was down 39% in 2009 from 2008, in terms of the total value of the target firms. It's unclear how 2010 is going to shape up in terms of total merger and antitrust activity levels. The general expectation is that activity levels will increase, given how low these were in 2009. But the extent and the timing of the recovery is still highly uncertain.

With respect to what we have seen thus far in 2010, Paul has already mentioned that our European competition practice continues to be a very strong performer. In terms of the significant cases where our involvement can be made public, we advised TF One, the main traditional French broadcasting channel, on its acquisition of two digital channels, which the French Competition Authority conditionally cleared. And we continue to advise ENI, the Italian energy group, on an investigation into strategic underinvestment in gas pipelines. Another area of considerable work for us in Europe relates to the commissions involvement in approving the recapitalization of banks and other emergency measures that have resulted from the financial crisis. We've been involved with assisting both national governments and banks in the United Kingdom, Ireland, and the Netherlands with representations to the commission on the economics components of these restructurings, and also undertaking competitive analysis of some of the emergency measures.

Our 2010 fiscal year in Europe kicked off with our annual competition conference in Brussels. Now in its seventh year, the Charles River Associates conference has truly become a must-attend event, thanks to the exceptional program that's put together by our European competition team, which is led by Cristina Caffarra. This year we had over 400 attendees at the conference, in addition to Europe's top regulators as speakers, including the director general of DG Competition, the European competition commission. As well Joe Farrell, Director of the Bureau of Economics at the US Federal Trade Commission, spoke about the US merger guidelines review. Reflecting the conference's importance among European regulators, a major policy statement is typically made at the event. And this year was no exception. As Damien Neven, the EU's chief competition economist, set out the commission's approach to evaluating state aid in the financial sector.

In the United States, the major policy initiative that's underway at the moment is reform of the US merger guidelines. In September of 2009, the US Department of Justice and the Federal Trade Commission announced that they would solicit public comments and hold five joint public workshops to explore the possibility of updating the horizontal merger guidelines that are used by the agencies to evaluate the potential competition effects of mergers and acquisitions. The goal of this initiative is to determine whether the current guidelines accurately reflect current agency practice of how they actually undertake merger review, taking into account legal and economic developments that have occurred since the last significant revision to the guidelines, which was in 1992. These reforms are a very significant action, which could have far reaching implications on how merger transactions and firms like ourselves interact with the agencies in the United States.

Our practice recognized the merger guidelines review process as an excellent marketing opportunity which we've pursued from several angles. First, we held workshops on the merger guidelines with select clients prior to the public comment deadline. Our internal workshops provided an excellent forum to discuss ideas for the forum with seasoned legal practitioners who are our clients. Second, a number of our consultants submitted detailed comments on a variety of policy and technical analytical issues related to merger review. And then finally, two CRA Vice Presidents and two of our senior consultants, including Steve Salop, were invited to participate as panelists at the public workshops that were held by the Department of Justice and the Federal Trade Commission.

One of the key analytical issues that's arisen in the discussion of the US merger reform exercise, is how best to assess the potential competitive effects of mergers that involve firms that produce differentiated or branded products. The current chief economists at the two agencies, the Department of Justice and the Federal Trade Commission, Carl Shapiro and Joe Farrell, are both former Senior Consultants with Charles River Associates. While they were academics, they proposed use of a test, known as the upward pricing pressure test, to supplement or to replace the traditional market share screens that are currently used in the guidelines. We've been extremely active in holding seminars with our legal clients on this new test. To date, we've held workshops and seminars or spoken to about 20 audiences in the United States and Europe about this test, its use, and how it may impact on US merger reform.

I'd like to ask Steve to elaborate further on the changes that are expected in the United States in the merger area. Steve is in an excellent position to do this, as he has led teams of consultants from Charles River Associates on a number of very significant merger transactions, including Proctor and Gamble's acquisitions of Gillette and Clairol, Miller's acquisition of Coors, as well as the merger of Sirius and XM.

In addition to his merger work, Steve's academic research and consulting practice focus on exclusionary conduct, which also places Steve in an excellent position to comment on the US agency's position with respect to enforcement of Section Two of the Sherman Act, which deals with monopolization and exclusionary conduct, or conduct that's designed to disadvantage competitors. In these areas, Steve's academic writings provided much of the foundation of what has come to be called the Post-Chicago Antitrust School of Analysis, which revitalized enforcement in this area. Steve has also written about the first principals approach to analysis of market power and exclusionary conduct, which downplays the rule of market definition and focuses directly on anticompetitive effects. With respect to exclusionary conduct, Steve has worked on the Microsoft case, the Intel matter in Europe, and the Kodak and Weyerhauser cases that went to the US Supreme Court.

So with that introduction, I will turn the call over to Steve.

Thank you, Margaret. And hello everyone.

I'd like to begin by providing some brief background about the Senior Consultant role in US antitrust cases. In large US antitrust cases, attorneys representing the companies often find it helpful to hire academics with well known reputations and solid credentials in competition theory to provide testimony. Similarly, in large or highly visible or potentially more controversial merger transactions, it's typically for the parties to ask academics to present their economic analysis to the enforcement agencies. Much of my practice involves this kind of merger work.

The relationship between CRA and its academic consultants is very symbiotic in this way. The academic consultants bring access to new ideas, cutting-edge research, and communication skills developed in teaching. CRA then brings specialized expertise in consulting and litigation, and top-notch economic support for the academics, especially with respect to large empirical and theoretical projects that often make a project really work. Through the years, I've been able to maintain relationships with some of the top antitrust lawyers in the country, and they sometimes call me for their cases. In this way, CRA and I can offer each other an additional channel of activity into the antitrust and merger evaluation market. So it's a symbiotic relationship that really works.

Let me now share a few views on the developments I'm seeing with respect to merger enforcement policy. I see two primary take-away points here. First, as the economy begins to rebound, companies may be more likely to proceed with their acquisition strategies. And, second, as Margaret pointed out, with the current administration in Washington, we're seeing signs of the regulators being more enforcement-oriented. They're asking more and harder questions. While we can generally resolve their concerns, their concerns imply the need to engage in additional economic analysis. And so both points bode well for economic consulting and, of course, CRA is well-positioned to benefit from that.

The chief economists at the US Department of Justice, the Federal Trade Commission, and the Federal Communications Commissions, as well, have all indicated an interest in a more rigorous merger review. All three have stated that the previous administration was too permissive in the merger area. In addition, their academic writings, prior to joining the agencies, all have been critical of the perceived lack of antitrust enforcement during the Bush administration.

As Margaret noted, we are also seeing stronger interest by those chief economists in unilateral effects analysis. That is, whether or not an acquisition can provide a firm with sufficient market power to increase prices, even absent any kind of tacit or express pricing coordination. The current effort to revise the merger guidelines reflects this interest. It's expected that the revised guidelines will refine the analysis of market definition, perhaps downplay market definition, and introduce new analytic techniques for unilateral effects.

All in all I believe that this approach likely will expand the role of sophisticated economic analysis, including the type of cutting edge theoretical and empirical analysis of pricing behavior that CRAI provided in transactions such as MIller/Coors and the XM/Sirius merger. More generally, I think that CRA's strong capabilities and our respective reputation, make CRA really well-positioned to respond to this new thinking. It's still too early to say exactly how much more aggressive the agencies' enforcement will be, but we are seeing signs of a more rigorous analytic approach, and that should bode well for CRA's competition practice.

That concludes my remarks. I'll now turn the call back to Paul.

Thank you, Steve and Margaret. We appreciate your contributions in providing our investors with greater insight into the Antitrust and Competition Economics practice.

On our next quarterly call we will focus on our Marakon practice, which was acquired in June of 2009. We have invited Mason Kissell, the leader of our Marakon team, to speak with you.

Before turning the call over to Wayne for his remarks, I'd like to conclude with a couple of thoughts. Our key challenge now is to effectively manage our business until the pipeline of activity begins translating into revenue generating assignments. We are taking comprehensive steps to address the drop-off we experienced in the quarter, while at the same time balancing these actions with positioning our core portfolio for long-term growth. Our lead flow activity is healthy and, until client spending stabilizes, we will be better aligning our structure to raise our utilization and improve our margins.

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

Thanks, Paul.

To remind everyone, today's news release and prepared CFO remarks are posted on the Investor Relations section of the Company's website.

As I did on our Q4 call, I want to call your attention to some key metrics and factors you should consider when assessing our performance for the remainder of 2010. We ended the quarter with a consulting headcount of 588, of whom 456 are senior staff and 132 are junior staff. The actions we have outlined today reduced our consultant headcount by 36 of our total headcount -- and our total headcount by 47 positions. Our utilization of 60% for the first quarter was well below our historical levels. Our goal is to achieve utilization in the range of 70% during the second half of fiscal 2010. Our recent headcount reductions are intended to help us achieve the goal.

The estimated restructuring costs of approximately $4.9 million to $5.5 million, announced today, will be reported as non-GAAP in our reconciliation of GAAP results in the second quarter of 2010. The estimated $8.9 million annual cost savings we expect to achieve from the actions announced today should occur on an approximately level basis, beginning immediately. We are now one-third the way through the second quarter. The remainder of the year we will continue to seek ways to improve our tax rate.

Although our first quarter performance resulted in a non-GAAP tax rate of 57.6%, which is above our plan, that rate was driven by low consolidated profit, coupled with relatively small losses in certain foreign countries. Our goal in 2010 is to repeat the gains in profitability outside the US that we experienced in Q4 of fiscal 2009. If we are successful in doing so, our non-GAAP tax rate would approximate the 40% rate we experienced in Q4 of fiscal 2009.

As we noted in our Q4 call, and detailed in my prepared remarks, we adopted a new accounting standard related to our convertible bonds. For the full year 2010, we expect to see an incremental non-cash interest expense of approximately $1.4 million, and we accounted for $317,000 of that in Q1 of 2010.

I hope these factor are helpful in better understanding and assessing CRA for the remainder of the year. That concludes my remarks.

Claudia, we would now like to open the call for questions.

Thank you.

(Operator Instructions)

Our first question is coming from Tim McHugh with William Blair.

Yes, can you give us some more details on the weakness in the business consulting operations, both maybe domestically versus internationally and then by some of the practice areas within that segment?

Sure. The weakness that we were seeing, as we tried to articulate during the script, is really on closing deals. The lead flow, both in Q4 all the way into Q1, was actually quite healthy, with high quality leads that we assigned high probabilities, in terms of conversion into revenue. But the time it is taking to close those leads has been lengthening. We've closed many of the deals during Q1 and hopefully, in the next couple of quarters, we will start realizing that revenue. International has actually been relatively stronger than domestic, with respect to lead flow and conversion of those lead flows into revenue.

ith respect to the practice level we typically don't give detailed information on the practice level, but the largest of our Management Consulting practices are our GIC practice, Marakon group, Life Sciences and our Energy group. And the performance and trends experienced were pretty consistent across those areas and across geographies of those two groups.

Okay.

And, can you talk about the uses of cash at this point, particularly with the stock being down, what's your view on share repurchases as a use of cash at this point?

Tim, we certainly will continue, as we have all along, to consider those. I think the opportunity to buy bonds is certainly one we've looked at and continue to look at. And so those are certainly on the table. But we also want to maintain our ability to take advantage of opportunities, acquisition opportunities that may present themselves. So that's our current thinking on the use of cash.

Okay.

And the last question. The headcount reductions, can you talk about where those are going to be? Are these across the board in every type of practice area? Or are they, in particular, you mentioned closing the Houston office, but are they targeted any more specific way than just broad-based cuts?

The Houston office is really driven by two main actions. One is the -- some restructuring that is taking place within our intellectual property practice. And restructuring across the oil and gas segment of our GIC practice. That was the impetus behind the Houston closure.

With respect to the remaining headcount reductions, all practice leaders sort of looked at their portfolio and tried to just more narrowly focus their offerings, and that's what ended up driving the incremental headcount reductions.

Okay. Thank you.

(Operator Instructions)

Our next question is coming from Joe Foresi with Janney Montgomery Scott.

Hi, guys.

I was wondering, do you expect more reductions going forward, or do you think you've kind of reset the business for 2010?

You know, that's probably one of the more frustrating questions. Not because you asked it, but in terms of the realizations that we're facing.

When we took actions a year ago in March, that was with the intention that those actions would be all we would be doing on the restructuring front. We are trying to stay ahead of any market decline, we are observing and maintain our operating flexibility. So right now, we assume that this restructuring activity is it. Of course, we are always going to look for efficiency gains, but if we continue to see market changes, we will try to respond quickly.

As you match the restructuring with what you've seen in the pipeline in the last two months, and maybe you could just talk about litigation, I'm sorry, utilization as well, maybe you could just, does the pipeline also reaffirm the fact that most of the restructuring's done or what does the pipeline tell you versus your reductions?

We've touched upon the pipeline for Management Consulting, and we think we are well-positioned to deliver on that pipeline.

On the litigation front, actually the utilization that we are experiencing across many of those practices were at a similar rates to what we experienced during Q4. So we didn't necessarily see any continued deterioration, but some of the same lingering issues that we had during 2009, in terms of lengthening of the retention period or securing the retention. And delays in spending, once retained, still seem to be issues that we are working with in the litigation segment.

So that hasn't really changed. The pipeline is probably stronger, but maybe you could just characterize the pipeline this year versus last year and break it between the two businesses.

I think right now if you look at the Management Consulting pipeline, where it stands and what we are looking at over the next several months, it is probably equal to or stronger than where we were at, approximately a year ago.

The litigation pipeline has been a little more difficult to peg. We have seen what we thought were inflection points during 2009, both in Q2 and in Q4. But yet see a sort of decline -- subsequent decline. We're trying to be cautious in providing guidance there. But the other thing, I think it's important to note, Q1 is typically a softer period across all of our business segments because of the seasonality. So we're hoping that we get some of a rebound, just coming out of the holiday season with lead flow and also revenue.

Has utilization tracked stronger coming out of the holiday season?

It hasn't changed substantially over the last two to three months. But we do -- we are a little bit cautious at this point. We don't want to prognosticate. But we do have, as Paul said, a number of opportunities, particularly on the business consulting side, that could help out substantially over the next few months.

One last question from my end.

I know we talked about M&A in the introduction. I wonder if you could talk about what would be the swing factors in M&A pick up, and then maybe what impact you think that that would have on your business?

Thanks.

Sure. Steve or Margaret, would you like to field that?

Well, I can.

It seems to me that when -- in the wake of the financial crisis and the recession, firms were reluctant to make acquisitions to some extent. Perhaps they didn't know exactly what they were buying. But as the economy comes back and as the financial crisis recedes, one would expect that M&A would tend to pick up.

Are you seeing that? I know it picked up towards the ends of 2009, but are you seeing that in your individual businesses yet, or is it still too early?

I would say that it's still pretty early to know -- or at least it's early for looking at what we've seen in terms of the first quarter. It's particularly early in the United States. Europe remains relatively -- Europe has remained strong throughout, in overall merger activity, and the case load that we have there has remained quite strong.

Okay. Thank you.

Our next question is coming from Andrew Fones with UBS. Please state your question.

Yes, thank you.

First of all, I'd just like to ask, I think what happened kind of since you last spoke to us, I think at that point it was mid-January you were about halfway through the quarter. So when I look at kind of the 20% sequential decline in revenue in Q1 from Q4, I'd just like to understand kind of how much of that was in the second half of the quarter versus the first half, in order to try and get a sense of if we hit, if we hit bottom here in terms of the run rate for revenues? Or was actually the second half of the quarter much weaker, and therefore the current run rate is lower than what we would expect from looking at Q1?

Thanks.

I mean actually I don't know whether I would characterize the second half being necessarily weaker than the first half, but what we typically experience in our business, is we experience a little bit of a rebound coming out of the holidays. So immediately following New Years, we typically see business pick up. Call lead flow, engagements, all start to move in the positive direction. What happened during this quarter is, we did not see that rebound. So I wouldn't necessarily saying that second half was weaker than the first half, but we did not see what we've grown to expect here at CRA, which is really a much stronger second half.

Just, Andrew, adding on to that, I think our call was about the 10th or 12th of January, and at that point we literally just coming out of the holiday weeks. And frankly, they were typically low. And the expectation is that the usual latter part of the Q1 activity would come along, and frankly it just did not materialize.

So if, just to kind of help me understand it, it sounds as though, based on typical seasonality, the weakness and the surprise was actually in the second half of the quarter rather than the first half.

I think that's accurate, yes.

Okay.

And so as you think about that, and you look at kind of the headcount reduction, I think 36 consultants would suggest you would be hoping to move back into a mid-60s type level. Is that really, is that a good assumption or would you say that, no, maybe less than that ,because the current run rate is actually weaker than the Q1 results would suggest?

We by no means are targeting a mid-60s run rate. Our medium to longer term aspirations are higher than that. We believe that the headcount will help on both utilization and profitability. But ultimately we need to deliver the revenue. The headcount reductions won't impact that driver. So the reason we are talking a lot about lead flow and time to closure, is because we think right now those are the two most important indicators for our near-term future.

Okay, I did want to touch on that. But just to finish up on the utilization point, you are saying that we shouldn't expect utilization to move up to the mid-60s based on this headcount reduction?

Andrew, just the last point you raised, what I said in the points that I made, was that for the second half of fiscal 2010, we're shooting for and driving to getting the utilization essentially that starts with a seven, which is more of the territory that we've been in historically. So this 60% utilization we experienced in Q1 was clearly out of bounds with what we've had for some time.

So I just don't want to leave you and others listening in with the impression that we are in any way expecting or want or anticipate or not going to take actions to try to drive that utilization rate up. It's a little hard to quantify exactly the impact that the reductions we've just announced will have, of the 36 folks from the consulting ranks.

Okay. Thanks.

So obviously to get to the 70%, it would sound as though you need some kind of rebound in revenue. Just kind of on that question, could you just help me first understand how you think about what is pipeline versus what's backlog, i.e. what is projects you're bidding on versus projects that you've won? And then within backlog, some projects that you've won, how would you quantify that number relative to like annual revenue? And I understand you may start those projects in a quarter or two, it could be sometime out into the future. But as I think of a dollar value, the backlog approximately, how would you quantify that relative to annual revenue, versus perhaps where you were two years ago, just give me an overall sense of what is the backlog up to?

Thanks.

We don't publish backlog information. As I think you know, roughly 90% of our revenue are time and material contracts to begin with. So they grow on, particularly on the litigation side. the process of cases as they play out.

I think the phenomenon that we've experienced over the last year or so, is that unlike if you go back a bit further, for a number of reasons clients and their attorneys have slowed down the speed at which typically cases would be taken up and activities would move forward. Frankly we have come to understand, because they are trying to manage as best they can in this difficult economy, their costs and their cash-flow and outflow as well. So that phenomenon is very difficult to quantify, but it's clearly having its impact and effect on our week to week, month to month operations. And our ability to, frankly, be clear and give formal guidance and so forth.

Sorry, I know I'm asking a lot of questions. I'll make this the last one.

But just to follow up on that, you've obviously -- there's been a consistent pattern here over the last 12 or 18 months of you saying that you are continuing to win projects but the [inaudible] has slowed down and the backlog is essentially building. I just wanted to get a sense of how big is that opportunity now, relative to how it would have looked two years ago?

I think going back two years, it's a very different world. What I can say is, the backlog that exists right now is every bit as large as, say the backlog that existed approximately a year ago. The exact dollar amount, we don't provide that to our, the investing world. But it's also been frustrating, in that we just haven't seen the direct translation of the backlog into revenue. So we don't necessarily think that it has been depleted by any means. But the timing of one that we realized is very difficult to gauge.

Okay. Thanks.

(Operator Instructions) At this time, we've reached the end of the Q-and-A session. I will now turn the conference back over to management for any closing or additional remarks.

Thank you.

Again, I just want to say thank you to everyone for joining us on this morning's call. We appreciate your time and attention, and look forward to updating you on our second quarter conference call.

With that, that concludes today's call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect at this time. Thank you again for joining us and have a wonderful day.