FTI Consulting Inc (FCN) 2006 Q4 法說會逐字稿

At this time, I would like to welcome everyone to the FTI Consulting 2006 fourth-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (OPERATOR INSTRUCTIONS)

Thank you. Mr. Eric Boyriven, you may begin your conference.

Good morning. By now, you should have received a copy of the Company's fourth-quarter 2006 press release. If not, copies of the press release can be found on the FTI website at www.FTIConsulting.com. The conference call is being simultaneously webcast on the Company's website, and a replay will be available on this site for 90 days.

Your hosts for today's call are Jack Dunn, President and Chief Executive Officer; Dennis Shaughnessy, Chairman; Dom DiNapoli, Executive Vice President and Chief Operating Officer; and Ted Pincus, Chief Financial Officer. Management will begin with formal remarks, after which they will take your questions.

Before we begin, I would like to remind everyone that this conference call may include forward-looking statements that involve uncertainties and risks. There can be no assurance that actual results will not differ from the Company's expectations. The Company has experienced fluctuating revenues, operating income, and cash flow in prior periods, and expects that this may occur from time to time in the future. As a result of these possible fluctuations, the Company's actual results may differ from our projections. Further preliminary results are subjected to normal year-end adjustments.

Other factors that could cause such differences include pace and timing of additional acquisitions, the Company's ability to realize cost savings and efficiencies, competitive and general economic conditions, retention of staff and clients, and other risks described in the Company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Jack Dunn, President and CEO of FTI. Jack, go ahead.

Good morning, and thank you very much for joining us for our discussion of our fourth-quarter and year-end results for 2006. 2006 and the fourth quarter produced powerful results for our Company. On the financial side, we produced record revenues, exceeded estimates, and either met or exceeded our guidance on a pro forma basis for the year and the quarter.

More importantly, we validated our position as a leader in our industry. Our platform is the broadest, with a global footprint that includes profitable operations in over 45 offices and 22 countries in all of the major financial capitals of the world.

Our breadth of services in the widest in the industry, bringing a full suite of services to the top law firms, corporations, and financial institutions in the world. We are the trusted advisor they turn to to address not only the latest issue that affects them, but the next one as well. As we help them look at not only stock options, backdating issues, derivatives accounting, finite reinsurance and the latest M&A strategy, but also help them anticipate how to prevent the next big thing -- how to handle their documents, the latest protocols under the federal rules of evidence or the latest rules making pronouncements from a host of governmental and regulatory agencies.

Our depth of experience is second to none. Through our employee retention plan, our top producers are committed to us practically and really for the rest of their careers. Whether it is the top two competition policy economists in the world, the leading restructuring practice in the United States, the technologists who provide that think tank advice to the promulgators of the federal rules, a network of investigators worldwide, or the top strategists in four continents on strategic communications, we are the thought leaders that the thoughts leaders in business, industry, and finance turn to to find the answer, preserve their reputation, and enhance their success.

What does this translate into? On a real basis, it turns into the fact that we were advisors to four of the largest IPOs coming out of Europe and Asia last year. We handled billions, literally, of pages for the top companies in America in terms of their most sensitive documents on our hosting software. We restructured many of the tier one and tier two auto suppliers in Detroit, given the upheaval in the auto industry. And we led significant investigations throughout the world through our investigations practice in Europe and Asia and United States.

In short, 2005 and 2006 saw us build a platform that is the leader and the largest. In our clients' eyes, we are not a startup or a rollup, but a powerhouse, a recognized leader with a place at the table and a growing brand presence. In 2007, our job will be not only to confirm that perception in their eyes as reality every day in everything we do, but also to convert that and bring that value of that enviable position to our shareholders and to our employees.

Now let's look at the quarter. In terms of highlights for the fourth quarter, revenues exceeded expectation, coming in at $216.8 million, a 30.8% increase from 165.8 million last year. Remembering that the fourth quarter of 2005 recorded a onetime success fee of $22.5 million, which dramatically skews the year-over-year comparison. Our growth year-over-year, apples to apples was more like 52%.

Fourth-quarter adjusted EBITDA increased 29.7% to $54.2 million or 25% of revenues from $41.8 million or 25.2% of revenues that we reported last year. We reported earnings per share of $0.42 for the fourth quarter, which included approximately 5% in stock-based compensation expense. Last year, we reported $0.46 per share, but that included not only the results of the success fee that I talked about, but also there was no deduction last year for stock-based compensation. So on a like-to-like basis, if you will, we think that our gross in true operating results was more like 20%.

The quarter was also an exceptionally strong period of cash flow for us. As you may recall from our last conference call, collecting our accounts receivable was a major focus for management in the fourth quarter. I am pleased to say that we were extremely successful in that effort. We generated $96.4 million of cash flow from operations in Q4, and in doing this, brought down our days outstanding from 103 at the end of the third quarter to 75 days at year-end, which was also the same as in 2005. We also repaid $40 million to eliminate any amount drawn down on our revolving credit facility. And we exited 2006 with cash of $92 million. So we feel that we are in a very strong position financial position to execute our business plan, and that our balance sheet is extremely healthy given these ratios.

Looking at the segments, clearly this was another strong quarter of performance for FTI. And we were very pleased that it wasn't just one division carrying the load, but it was really across the board. As in the third quarter, the fourth quarter saw strong results across all of our segments, and each performed in line or well ahead of our expectations.

Our forensic and litigation consulting segment continue to perform very well in the fourth quarter, which saw revenues increased by 20.5% to $51.2 million and adjusted EBITDA increase 36.1% to $15.6 million, or approximately 30.5% of revenues. Results were driven by strong demand for this segment's services across a number of fronts, including trial services, international investigations, and as we noted before, the contributions of BKS, which is our construction consulting division, which we acquired in October of 2006, and has been integrated very smoothly into the rest of our business.

On the technology front, FTI has established itself as a leader in the market for electronic document management, database management, and e-discovery services. As a result, we have seen excellent growth within our technology business over time, as demand for these services continues to build in the marketplace. The market in this area is exploding, as is our market share of this market.

This trend continued in the fourth quarter as revenues in our technology segment grew 50.8% to $31.2 million, and EBITDA for the segment increased to $12.7 million or 54.9% over levels a year ago.

We couldn't be more pleased by the growth we've seen in the segment. Four years ago, we had a dream and a plan to be a $100 million player in this field by the end of 2007, or possibly the middle of 2008 on a run rate. The fact that we have been able to do this ahead of schedule is a tremendous accomplishment and a testament to the positioning of our products in the marketplace. It's also important to note that in this business, we not only have what we think are the greatest people, but also our software has proven to both a technological and a competitive advantage, as our Ringtail hosting software is now recognized as one of the three top platforms in the field as evidenced by the fact that probably more than half the revenues in this division at this time are from our hosting business, which gives us a nice annuity-type business, as opposed to our usual incident-driven revenues.

With regard to Corporate Finance/Restructuring, when you back out the success fee from a year ago, for which they were the beneficiary, revenues rose 9% to $57.9 million in the quarter. This is outstanding performance, especially given the challenging nature of the restructuring market that affects a part of that core business.

As we have said in the past, however, we're not sitting around waiting for the market to come back. And the testament to that is the fantastic Transaction Advisory Services business that we have built within that practice. Many of the same practitioners who are the lead restructuring people in the U.S. have combined their talents that we now are able to do due diligence services for many of the private equity sponsors, including the biggest names in the business, often competing with or even beating out the big four in those jobs. I think it's a testament to that business, and it's an area where we can continue to anticipate great growth, and will be a major focus of our hiring as we go forward.

EBITDA in the segment was $15.1 million or 26.1% of sales. Given the anomalies in the fourth quarter of last year with the success fee, probably a comparison sequentially is instructive as well and we had strong sequential improvement in this area from the third quarter as EBITDA rose 30% on a 14% increase in revenues in that segment, driven by the continued growth of Transactions Advisory Service, as well as the cost savings and the restructuring initiatives that we undertook in the period.

Going forward, M&A activity appears to be strong with $1.5 trillion unlevered in the hands of the equity sponsors. And this bodes well for the Transaction Advisory Service. Although it is difficult to predict when a pickup in restructuring activity might begin, we have retained the top people in the marketplace, and we're poised and well-positioned when it does happen, which it will.

The economic consulting segment had an outstanding quarter as revenues increased 32.5% to $35.8 million, and EBITDA more than doubled to $11 million from a margin of 30.7. This performance was certainly generated by broad-based growth across most pieces of the business, and of course, we had the Compass Group which was in there for the year, and have done an exceptional job during the year in growing their business. The only dark spot in that practice would be our network strategies group, which is still hampered by a delay in Surface Transportation Board rulemaking, and we expect that to break apart and get loose during the middle of the year.

Our newest segment, Strategic and Financial Communications, also had an outstanding quarter, with performance that greatly exceeded our expectations. It had an unusually strong quarter, generating revenues of $40.7 million on EBITDA of $14.3 million for the three months that we owned it. Of FD's revenues for the period, approximately $5.7 million was related to third-party pass-throughs of expense. So in terms of analyzing that, you have to remember that they, like we, now calculate their revenues on a gross basis and don't do a net revenue basis, subtracting the pass-throughs.

The remainder of the outperformance reflects the current active capital markets in both the U.S. and Europe as well as a record quarter for their M&A practice. Typically, as we go forward and do our modeling, we look at strong performance for FD in the fourth quarter that was even further helped by the just tremendous amount of M&A activity that took place in the quarter.

In looking at 2006, as I mentioned, it was an enormously productive year for the development of the business development of the business. For example, with the acquisition of FD, we added a fifth business segment for the Company, Strategic and Financial Communications, that is not only a compelling stand-alone business and a great contributor, but as it extends across all our other businesses, it is one that is very leverageable and serves as a bridge between many of our other practices. In a real sense, some of our other practices are rallying around the communications aspect and I've never seen cross-selling activities at the height that they are right now.

Our strategic acquisition program saw other successes during the year as well, including the closing of the Compass acquisition that I mentioned; the purchase of International Risk; BKS and G3, which completed our platform in the UK for the offering of our hosting electronic evidence business. We're very pleased to be results of each of these acquisitions, all of which have contributed to enhancing our position in the marketplace.

With the acquisition of International Risk and just recently in the first part of the year, Holder International, and of course with FD, we built on our existing capabilities within FLC to create a leading investigations practice that is now operating in the United States, South America, Europe, and Asia.

At the macrolevel, we have deep management talent; exceptional people who attract others in terms of our professionals; a model that is the best in the industry and is applauded; a strong balance sheet; and anticipated significant strong cash flow. We're well-positioned to continue to expand this platform, both through the hiring of the best individuals in the business, and through an acquisition program.

At a more granular level, we follow through on our commitment to secure the talent that is so valuable to our Company. Over the summer, we announced that we had re-signed 28 senior managing directors in the Corporate Finance/Restructuring practice, and I'm pleased that we recently re-signed 23 SMDs in our FLC and Technology practice. Essentially, these people have dedicated the remainder of their careers to FTI as equity holders and as proud promoters of the Company. This further validates our business model, and is a message to a lot of constituencies about the dedication that we have at FTI. Those constituencies include our clients, our employees, and to our shareholders, that FTI is, as we have always said, a place that is built to last.

As I mentioned before, 2006 really capped a two-year program in which we established the platform that places us in a unique position in the consulting industry. Put simply, no one offers the breadth of experience, depth of intellectual capital, or capabilities that FTI does on such a global scale.

I will close with some comments about our guidance for 2007. As you can see from our earnings release, we have changed the format of how we are setting guidance for the next year. And I hope you can appreciate from what I said about integrating what we do, that we are having our people shift their focus to companywide client and revenue opportunities, which means that many of our traditional metrics that we have guided to in the past will become less meaningful as we go forward. So we are setting expectations for the market based on more corporate measures of performance rather than individual performance.

For 2007, we're looking to achieve revenues of between 905 and $929 million, which represents growth of at least 28% over 2006. This incorporates a full year of revenues from our acquired businesses and organic growth of somewhere in the neighborhood of about 11.5%, which we think we can achieve based on the opportunities we see in the marketplace. And I would note that many of you who have followed us for a while, that is typically our corporate target, and we have been able to meet or exceed it in each of the last three years.

We expect EBITDA to be between 204 and $214 million, which represents an EBITDA margin of between 22.6 and 23%. This translates into EPS of $1.74 to $1.84, compared to $1.36 in 2006, excluding the restructuring charge.

Since finally, both periods will now have the impact of share-based compensation expense, we will be able to give good apples-to-apples comparisons that are meaningful next year as we begin to compare quarters that have comparable charges in them.

As I close, I would just like to say that 2006 was a great year and we entered it with a tremendous amount of momentum in all of our businesses. We see a significant amount of opportunity in front of us, and we have an extraordinary array of talent and capabilities to pursue them.

We recently pulled forward the timeframe for reaching our goal of $1 billion of revenues by year 2008. As we've mentioned before, our technology platform is running way ahead. We're now literally the go-to people in most of the major matters that face corporate and financial America. And we have never been more confident about achieving our goals for the future.

With that, I would like to end the formal remarks. And we would be happy to take your questions.

(OPERATOR INSTRUCTIONS). Tobey Sommer, SunTrust.

Congratulations on a good quarter, and what looks like favorable outlook for 2007. I was wondering if you could tell us about the corporate finance and restructuring. It looks like you had a nice sequential uptick there, and I was wondering if you could maybe identify what the specific drivers were -- if there was something special in the quarter, or kind of give us some more color on additional ways that you're broadening out the revenue streams?

Yes. First of all, in the restructuring part of the business, they did have nice results. There are a number of cases that we've mentioned before that have come in in the retail sector in the homebuilding sector. In addition, we still have the follow-through of many of the automotive cases, the ripple effect coming out of Detroit.

Also, I think we can't underestimate the fact that our transaction advisory services business is really getting momentum in catching stride. Our roster of clients include the biggest equity sponsors literally in the world who are expanding their [service] -- their viewpoint, not only here, but abroad. We worked on a number of transactions. In terms of a run rate, we're probably well above 40 million in that. We also have worked for the hedge funds now.

So that practice -- as I mentioned, it was very important that we not sit and wait for the return of the core restructuring business. And so we have done a nice job of diversifying that practice. And typically, at year-end, you see a result of a number of transactions that -- there's a hurry-up to get the year-end done. The good news here though is that many of those transactions are continuing into the first quarter. So we believe we have a nice momentum there.

And then turning to the FD and kind of how you are integrating that, have you come across some examples already of your ability and FD's ability to kind of cross-sell and introduce you to clients and get engagements from your other consulting practices because of the acquisition?

Yes, we really have, Tobey. It's been a very interesting exercise. First of all, it's a tribute to the people at FTI and FD. But let me say about the legacy FTI people -- I have never seen them embrace a group the way they have FD, because of some of the excitement and the electricity that FD has brought to us in terms of access they have to multinational clients at the highest levels throughout the world. We have had a task force that's been headed up by senior people (multiple speakers) from each side who have looked at probably 40 activities where we're making joint pitches. As you saw from our press release, recently, we collaborated on bringing Dick Gephardt in to be an advisor to our Company. His ability to work across all phases of our company from the strategic communications to on a very real-time basis, helping the restructuring folks with looking at issues that involve everything from labor to government policy is really almost an embodiment of the types of assignments that we have looked at on a [cross-pollenization] basis.

Where the rubber meets the road, we -- probably one of our larger options backdating cases came to us from FD. We have been able to through Palladium Partners, introduce FD into a number of situations where we are the interim manager, and where the issue is not whether the Company is going out of business, but looking at performance improvement. And where those companies have brands and where they have issues with their own employees, strategic communications is an integral part. So we have had a nice response there. And in addition, with the roster of the kind of clients we both have that you know from all of our presentations, the 97 of the top law firms, the 67 of the Fortune 100 -- there is a nice opportunity there to make introductions that will bear fruit later on.

If I can turn to one numbers question, and then I will get back in the queue -- you do have a $50 million authorization to repurchase shares. Does that suggest that you are going to do more than just try to offset dilution?

Really, our game plan is to try to offset the dilution. We begin with that. Secondly, we do have the strong cash flow. Our debt -- we're not really able to buy back any of our debt until 2009. So we will look judiciously beyond that for an opportunity to repurchase shares. For example, there was some weakness in the stock during the third quarter going into the fourth quarter. We were basically held out of the marketplace because we're working on the FD transaction, so we weren't able to use our dry powder, if you will. But with the kind of cash flow you saw in the fourth quarter, we are able to certainly attack the dilution side. And then with what's left over, we will be judicious about deciding whether additional purchases of shares are good or -- because the platform right now, because of its built out in a number of areas, whether we can't do better by continuing to do the tuck-in acquisitions and the things that will establish our Company for years to come.

Andrew Fones, UBS.

I had a question on investing. Having just completed the budget process, I was wondering if you could walk us through the areas you are looking to kind of invest significantly in 2007 please?

It's Dennis Shaughnessy. I think we tend to average internally about a $20 million CapEx budget. So just starting there, the bulk of that 14 to $15 million tends to be invested to support our rapidly growing technology division. And that would be everything from increased hardware for our hosting operation as more and more companies sign up for us under three-year contracts to host their sensitive documents to obviously continued purchases of equipment to support that rapidly growing business. So that would be, obviously, primarily investment number one.

On top of that, we will continue to be very aggressive in the purchase of tuck-in acquisitions as we build up around the world our individual practices. I think the announcement of the Holder acquisition in January is a perfect example of that. We were very aggressive in '06 in putting together a specialty investigation and due diligence practice in Asia and the United States and the acquisition of Holder, whose operation focuses on Latin and South America, and is based in Argentina and in Brazil, really complements that.

So I would see us doing more of the Holder type of acquisition -- that is, sort of 8 to $15 million revenue-based businesses that would either increase our domain expertise in a certain area, such as BKS did in our construction practices, or would broaden it out geographically, such as International Risk in Asia or Holder in Latin America. So I think we will continue to be aggressive in building the domain expertise through not only group hires, but also acquisitions of other companies.

Okay. And then, I noticed any quarter, the corporate expense line actually jumped up quite significantly. And annualizing that, I get to a number that's higher than the corporate expense that you are budgeting for the year in '07. Can you kind of explain (multiple speakers)

It's Dennis again. There are basically three elements in that fourth quarter and I would not annualize it. Number one, is the fact that there is a discretionary bonus in there for the top management that was based upon the Board's assessment of the results. And that clearly is not an annualized charge.

Number two is that almost the bulk of the initial integration expenses for FD -- the travel, the professional fees -- were booked in the fourth quarter, and arose through the fourth quarter. And then we had some cleanup activity in our technology group on licensing of various products, often which are done on a retro basis. And given the growth that was there, some of the accruals did not keep pace with the growth of the topline. And so we had some catch-up payments on technology licensing from other companies, which, again, we would not view as repetitive type of payments.

So it would be in those three areas, Andrew. It would be the bonus -- the increased bonus on a discretionary basis. But a very large part of it was as we had anticipated, the bulk of the initial acquisition cost, as well as the initial integration costs for FD would hit in the fourth quarter. And then finally, we had some fine-tuning of our software licenses in view of the very rapid growth of the technology division.

Dan Suzuki, Merrill Lynch.

Just first, to start off on retention, can you talk a little bit about how that's going for you versus -- I think you had 17% last quarter?

Yes, actually, it was about 13% turnover in the fourth quarter, bringing our year average between 15 and 16% on a voluntary basis, not including the reduction in force we had in the third quarter.

Great. And then, as you look at the -- I think you touched a little bit about the Financial Dynamics and the cross-selling you're seeing there. Can you talk a bit directionally about if you are seeing -- how much of the cross-selling is happening with a focus on -- from the core business cross-selling to FD services or vice versa?

It's been a nice mix to this stage. First of all, we're trying more to productize it, if you will, rather than just to make it a referral service or something like that. So we really are putting together teams of folks who work on -- FD's business model is organized along business lines. So given the deep domain expertise that we have, it's very easy for us to hook up, for example, our telecom folks with their folks, our governmental affairs with their governmental affairs -- so that we really are putting teams together to do it. That's the joint pitch side.

And on the place where we have just had cross-referrals, it has really so far been a very even match at this stage, with business going both ways because of -- clearly, FD is brought in on the jugular issues that affect the companies. And we are already in those issues, and the services go hand-in-hand. So I don't think there's an imbalance at this point on who is helping whom.

Okay, and can you remind us how the compensation is laid out for the cross-selling efforts there?

I'm sorry, say again --?

Can you remind us how the consultants are compensated for the cross-selling efforts they do there?

Yes, at this point, we made a conscious effort not to put in a discrete incentive plan for that at this stage. We have a team looking at that right now, and we will put something in. But for right now, what has happened, because each side has been giving as good it gets, it's been lucrative for both sides, and its been a fruitful -- it's kind of been self-fulfilling, because everybody's getting work out of it.

I'd also mention that most of the activities to date have taken place inside the U.S. We look forward to expanding the cross selling and the branding process outside the U.S. The one exception would be in the investigation area where, since FD is vitally concerned with reputation and our investigations business is vitally concerned with reputation, they have been working hand-in-glove in the referrals there in terms of everything from IPO candidates that are coming out of Asia and Europe and Russia to other issues. There has been a wonderful amount of cross-referral there, so much so that I think our offices have moved in together in Tokyo. And that's really an area where we've seen a lot of gratifying results in the cross-selling.

Okay, great. And then lastly, to follow up on the corporate finance and restructuring business, if you look at the restructuring business and then the TAS, the Transaction Advisory Services business, would you characterize yourselves as something happening going with the market or taking marketshare?

Well, clearly in transaction support, it was a gleam in our eye two years ago. And now at $40 million of results, a run rate that's higher than that - I think we're definitely taking market share. I don't think anybody is afraid of us yet at that level, because it's a -- clearly, at least a $1 billion business.

So I don't think anybody -- we're kind of creeping up on it, but if you look at the blue chip roster of clients we have, the Bains, the [Carlisles], the Cerberuses, people like that -- I think we're really making our mark. And in this business, as you know, you are known by the company that you keep, so we're very optimistic that as we do a good job for those folks, that our dance card will fill out.

It's an area where, as I say, we're actively hiring there, and we plan to emphasize that. Dom DiNapoli mentioned that when he came over several years ago from PricewaterhouseCooper's, at that time, their restructuring practice was probably one of the most profitable two years before that in the height of the investment of the late '90s and early 2000s. I think probably one of the most profitable practices there was the TAS. So it's that kind of potential for that business, especially in the atmosphere we are now.

This is Dennis again. There are two dynamics that are clearly influencing that market. One is simply -- it is an absolute net growth marketplace in work because of the amount of capital unlevered that's sitting in the hands of the private equity firms and the hedge funds.

Number too, we, as we are growing, our capability -- do not have the conflicts problems that the final four do who represent the major competition in this area. Clearly they have -- they not only have the normal conflicts problems, but they also have the fund auditing problems. And I think that we expect that we would be in a very good position as this market continues to grow and we continue to grow to take advantage of the fact that we can be a go to firm with no entanglements.

Dennis raises an excellent point. As we grow our business and try to move more towards scalable repetitive business -- you see that evidenced in our FD, where 80% of their business is repeat or referral retainer based. You see that in our hosting business where, again, in technology, we have now lapped the incident-driven business to be repetitive, annuity-type business.

When we add companies like FD, and when we have practices like Transactional Advisory Services, these are the practices where we not only get a job, and we may be the leading incident-driven business in the country, but we get a project where we can stay behind and do additional things.

When you do transaction support on a merger or acquisition or on an IPO or on a lending, you have the opportunity there to introduce yourself and the other services or the rest of our suite of services in for ongoing lasting relationships, to do merger integration after the merger; to do process improvement; to do the PR work, the IR work if the exit vehicle is a public offering.

Similarly, when FD gets a client, they have them, and they are there on a retainer basis year after year so that as incidents come along, they can introduce the other services that we have. So we think that in terms of our strategy of segueing from strictly an incident-driven business to one where we have repeat clients like our models, McKenzie and Goldman Sachs, we're making 2006 really mark a watershed for us in terms of being able to do that. And hopefully you'll see more and more retainer-based business for us as we go along.

David Gold, Sidoti & Co.

That queue is getting longer and longer.

(laughter) You've got to be quick.

We try. A couple of questions --

(laughter) That's a good thing, David.

Yes, no, I think it is. More people certainly care these days, which is good -- for good reason. A couple of questions for you. On FD these days -- you've obviously made a lot of progress there. But from your perspective, what's kind of left from an integration perspective? What can you say there?

I think it's interesting. What's left is we have to complete the systems integration of the outside the U.S., which was certainly a first half of the year job for us. In the U.S., it's not sufficient to say that all of the systems are done until the people who are the beneficiary of those systems, our new friends at FD are happy with how they work and are facile with that so that their information flow is just is good. So there's a continuing education process and a refining process that will go there.

Interestingly, I think if you talk to Declan Kelley and Charles Watson, the leaders of FD, I would think that what's been great about this is that the integration at the business level, where we are out with the producers, with their fine professionals and the fine professionals from our legacy business -- that's going along swimmingly. So we have the bugs to iron out and the systems -- moving their email system to a different system, and getting them on our reporting system and all that. We made great strides with an initial push, but the important thing is not to lose the momentum there, and make sure that just because you have the systems, we have got to make sure they are user-friendly and are used. So I think that's left to do.

So from a sales perspective then, everyone is talking.

Pardon?

In other words, from the perspective of going out there, basically, everyone FTI-wise and FD-wise, as well -- sort of everyone basically knows the offerings these days (multiple speakers)

It's certainly -- we really tried to step the phasing in. It is very, very integrated in the U.S. There's been an awful lot of joint development. We've linked up the industry groups that we have to their industry groups. There's a lot of joint pitching that's going on in some very high stakes jobs.

In Europe, we actually are awaiting sort of a final country-by-country detailed marketing plan, which we will then roll out into -- some countries, as you can imagine, are going to be more receptive to some of our offerings than others. Some of it is based on their legal structure, their cultural structure. And I think clearly, the low-hanging fruit is so great that we really don't want to waste our time in the beginning being missionaries. We want to address the needs of the various marketplaces, and we would expect to have that marketing plan finished and in place by the end of the quarter, and then executing on it for the balance of the year.

So I think as Jack had said earlier, the initial emphasis was clearly in the U.S. It was easier to do. We could hit the ground running faster. The follow-up clearly will be now to roll out the appropriate services on top of the FD platform and our other platforms -- Holder and International Risk, because we're doing the same things in their foreign operations, and really trying to hit the ground hard and running in the second quarter through the balance of the year.

Okay, good deal. And then, if we look back about a year ago, one of your themes going into '06 was you were going to do some investment in the business basically infrastructurewise to support that $1 billion of revenues that you were targeted. Presumably, for the most part -- where you needed to step up there, we are done, would you say? I mean, basically, now the infrastructure is in place, and we certainly can do (indiscernible)?

Well, I think number one, at corporate, the bulk of the heavy hiring has been done. We have brought in and we have totally reshaped our conflicts management system. We've reshaped our legal system. We've reshaped our corporate development and external growth operations by bringing in very senior executives and then adding the appropriate staff and systems.

I think we clearly over the next two years will be developing a worldwide knowledge management system that we think will be integral in managing the Company, and more importantly, David, empowering the people around the world to effectively utilize the great intellectual capital that we have resident in all aspects of the business.

So that will be an ongoing project. I think at the top at corporate, we feel pretty comfortable that we have put the foundation in place. Anything else now I would view as just sort of some fill-in.

(multiple speakers) fill-in -- we're opportunistic. There's always given that we are now a major tenant in all of the financial capitals of the world, with plans to grow, there will be occasion where we will have a chance to rationalize our platform there and do things like that that we will take advantage of -- as I say, on an opportunistic basis.

Yes, a good example, David, which I think could show some earnings leverage as you go forward is we are obviously now -- two years ago, we were in one country. Now we are in 20. We are a much more complex tax animal than we ever were. So we have had to make significant investments in the last quarter in beefing up our internal tax structure, but hopefully, with the end result of a more efficient tax rate than we are looking at right now. So, no promises there obviously. But I think clearly we have to address the fact that we now operate across the world in 20 different areas. And that probably causes us some angst, but also probably gives us a lot of interesting opportunities for tax planning.

And then also, from a headcount perspective, so we have changed the way kind of we're getting out of guidance, but to the extent that the businesses that count from a headcount perspective, you can talk, even if it's loosely, on sort of goals maybe for adds say for the next year?

I think you can safely say that if we're planning for organic growth in the 11 to 12% rate, that it's still the old paradigm, which is you have to assume rate increases of x -- call it 5 or 6%, and the balance comes in headcount increases.

And David, thank you for the question, and as we have done successfully in the past, if our competitors are listening, and you're a GAAP accountant or a technologist, please call. (laughter)

Operators are standing by. Terrific.

Brett Manderfeld, Piper Jaffray.

Dennis, you touched on some of the smaller acquisitions that you made. Is that going to be kind of the key way to grow in Europe going forward, or do you see more organic opportunities, and particularly as you kind of leveraged the FD platform?

I think we view tremendous organic opportunities for exactly the reason you just said. And the other thing you now have, Brett -- you have some serious scale at 11% growth on a $900 million base is larger than some of our smaller competitors' annual sales. So I think that clearly, the organic growth opportunities will come from leveraging this platform. And it is a major focus for us to accomplish that.

I think the FD acquisition on itself is a great acquisition. As Jack clearly said, we were very pleasantly surprised that our expectations were significantly exceeded in the first quarter, and we look for them in their own right to have a great year.

The real magic here is to be able to utilize obviously their position with the intermediaries in all of these other foreign capitals, be it the international law firms, the investment banks, commercial banks, and just the general financial community, to help move our other services into it. So I think you will see significant organic growth. And I think the bulk of that organic growth probably starting to build rate in the second half of the year will start coming overseas.

We still, though, will be aggressive in I think looking for opportunities to build domain expertise through acquisition; group hires, which often look like an acquisition, because oftentimes they port business with them; as well as just stepping out geographically where we may have some fill-in-the-blanks type of areas still left in Europe. And I think both FD and ourselves are looking at the maps and where we need to strengthen the franchise. And the interesting thing here is in some of the areas, we are actually looking at a joint development plan to either buy, build, or both in certain areas.

So I think it will be all three, but you're absolutely right. We view the international platform as having tremendous organic growth opportunities, and we would expect that we would be able to start to report more tangible results from that. And we're seeing it already. So it's not as if we're not getting -- but we haven't, in all honesty, emphasized it yet. But the big push will start coming at the end of this quarter.

Very good. And switching gears, just thinking through kind of the ebbs and flows quarter to quarter in the business, obviously very strong revenues here. And it looks to be excellent guidance as well. Were there any kind of big projects that had an influence in the quarter? Or was this more kind of just -- not to say blocking and tackling, because big projects come along, but was there anything that had a big influence this quarter that maybe will go away looking at the beginning of next year or --

I think one of the things we've learned in -- and we knew a little bit about it in due diligence, but obviously having had the experience of being partners with FD for a quarter, we now know it a lot deeper. Their fourth quarter is significantly on a seasonal basis their best quarter. It tends to be driven frequently by year-ending fees that are linked to M&A activity as well as some fees that would be adjusted based on their retainer basis. And so the fourth quarter for them is their strongest quarter. There wouldn't be one specific project, but they were just very, very busy in Europe and Asia on an M&A basis. And it's always dangerous to try to annualize that. But clearly, it was a great quarter for them. But their fourth quarter traditionally as you model going forward should be their best quarter.

Okay. That's great to know. And one final question --

Let me just remind you and all of the other analysts that are on the phone of -- we talked about this before in a seasonal. Our first quarter -- and it's heavily influenced by, obviously, the U.S., has in it on a seasonal basis a significant onetime seasonal expensing. And that's made up primarily of the following. We pay all of our Social Security, just about, match in the first quarter. We pay all of our 401(k) match just about in the first quarter. We pay the discount on the employee stock purchase plan in the first quarter. And as you guys know better than we do probably now, because most of the states have moved away from a use it or lose it vacation policy, we have to true up and pay for unused vacation in the fourth quarter in many of the states that we operate in.

That tends to be a number that looks something like $0.06 to $0.07 a share. Unfortunately, GAAP does not allow us to spread it equally. So you will see that as what I would call a definite quarterly anomaly. It hits as every year. And I know we always remind everybody every year, but since you asked me, I will take the opportunity to remind you guys again that it is something just given the high income nature of our people in the U.S., that everything seems to accelerate into the first quarter.

That's a great reminder. Thank you. And the final question I had is -- great to see that you signed up another chunk of the senior MDs in January. Can you remind us whether or not there are a couple of other tranches here that we should look forward to in early '07 or as the year progresses?

This is the best platform with the most stickiness we've ever had. I really mean it seriously. The leaders in our Company really have dedicated their careers here. While the actual terms of the agreements that the leaders have signed look like six-year, they are really in effect the real benefit is a 10-year agreement. So they have made this the place that they're going to be.

So either through strict contractual relationship or through some of the acquisitions we have done that have earnouts that would linger or whatever, financially joined at the hip with these people, we really have no other tranche of people. We look forward to inviting others into the senior leadership as their performance warrants. And we also believe that the program we have built is so good that those that are the protectors of it will jealously defend it, so we think that aligns them with the shareholders. You have to carry your weight to become that, but we think it's a prize that's worth winning now.

So as a business model out there to not only be a symbol to our own people, but to attract other professionals, I think we have really hit right this time, and it's really a tribute to Dennis and some of the other people -- Dom and all that worked so hard to put the plan together. So I think it's in great shape, and there is not another tranche that would come along.

Jim Wilson, JMP Securities.

Just quick maintenance on your guidance, and then I had a more strategic question. Interest expense and tax rate that you might be thinking about in '07?

I think we're looking at about -- subject to planning that might help minimize this a bit, we're looking at least 46% overall effective rate, Jim.

And then interest expense -- is the fourth quarter a good run rate or --

It's a little higher in the fourth quarter because we have $40 million of revolver outstanding during the fourth quarter that we paid back before the quarter's end. So it's a little higher than what you would expect in '07.

Got it -- okay. And then, I was looking at the Technology Consulting. And I noticed your guidance in '07 has EBITDA margins lower than you have seen recently. And I was wondering if that would imply more of a service component that you might expect going forward than actually software sales. Could you give a little color on what you see out there, what people are looking for and kind of what has gone into the thought process on the assumptions?

I think a lot of it represents the collateral work that goes into building a platform. Obviously, you can capitalize some of that. But we're talking about major hosting operation in the UK now outside of London. We're talking about rebuilding some of those platforms in some of the areas.

As we have talked about, one of our great advantages competitively is not only the software program we have, but the fact that we actually have sites around the world to handle the actual document analysis and hosting. Some people have made a misstep in thinking that you can house all of that stuff in the U.S. There is an extremely difficult and labyrinthine dance that has to be done to move intellectual property -- i.e. the documents and the intellectual property across country lines, so that we're going to build out that platform to try to keep the growth coming that we have. And obviously, you have issues of privacy and all the rest of it.

So there's a little bit of an expense -- as you know, when we do that stuff, unlike other companies, we aren't bricks and mortar, necessarily. It's a lot of intellectual firepower that goes into doing it. So that's why the expense will be a little higher. But it's laying significant groundwork for the future.

And then just one final one. Your economic consulting margins obviously were very good Q4 even compared to kind of any quarter in the past couple of years, and your guidance is similar. Is there a mix of business that is positively affecting that, or what might cause that?

It's really -- I think it's the influence of the Compass acquisition on the overall economic practice. I think that they are extremely busy on M&A activity, antitrust activity. We very happily just completed the AT&T/BellSouth transaction, and they are working on numerous others, not only in the states, but around the world. And we did take the opportunity when we did the RIF to go into the economic division. We had one group that was truly underperforming. And we decided to terminate all of that, put them in the RIF back in August, and move on from that operation. So I think you would see that benefit continuing in the margins.

Bill Sutherland, Boenning & Scattergood.

I think the good questions have been asked -- just a real quick model question. The FD international revenue guidance, Ted -- does that include just an element for pass-through every quarter?

Yes, it does now, Bill. Once we got to know FD a little better and saw the internal structure of their revenues, we recognized that it had to be grossed up to U.S. generally accepted accounting principles, which added nearly $6 million to the fourth quarter of revenue, but just pass-throughs. And so what you are seeing is the effect of the passthroughs in 2007 as well.

Okay. And then lastly, intangible amortization -- kind of what level is that going to be running at?

Amortization of intangibles?

Yes.

I think you can use the fourth quarter as a good analog for that, Bill -- with a little bit more, obviously, since we made another acquisition right at the beginning of '07.

(multiple speakers) Q4 was almost 3 million, right?

Yes, it was.

Okay, so that kind of level. Okay. Great quarter.

Chuck Ruff, Insight Investments.

We've got potential earnout payments for FD of $80 million. We all hope that those guys earn it. Can you tell us where other potential earnout payments are?

(multiple speakers) There are downpayments that reside in Compass. There are earnout payments that would reside in -- very small ones in International Risk and Holder. The Compass one would be the most significant next to FD. The others would be much smaller an impact.

Can you share the amount?

Some of them are open-ended, but they are driven by a moving preference return that we have on the earnings. I don't have the exact calculation in front of us, but Ted can provide that to you off-line.

And a couple of other quick numbers. The EBITDA guidance, I'm assuming, includes option expense.

Yes, the guidance itself has been reduced by option expense.

Okay, great. And what do you expect the option expense to be this year?

A little bit more than last year, but about the same percentage -- 13 to 14% of pre-option EBITDA. It's about $14 million, I believe. This year, it was about $11 million.

Yes, I think 14 to 15 will be the number, and that goes up primarily as a result of signing the 23 FLC senior performers to the long-term contracts and putting them in the SMD retention program.

Okay. And what fully diluted share count are you using?

We're still using 41,500,000 for internal purposes.

Okay. That's got to be low, though, right? Given how many shares you have outstanding at December 31 --?

No, not really.

Okay. Well, you're already -- you didn't assume any dilution for the convert, right?

That would depend on our stock price for the rest of the year. But at the moment, we did not assume any dilution for the (multiple speakers). That is correct.

(OPERATOR INSTRUCTIONS). There are no further questions at this time. Management, are there any closing remarks?

Yes. First of all, again I would like to thank everybody for being part of the call today. And for those of you have followed us a while and have seen Dennis or Ted or myself speak, you know that we're -- the number one thing in our Company is our great people and the great professionals and it's easy to talk about the number one economist in the world and to talk about the leading restructuring practice and all the great professionals that are the intellectual thought leaders in their professions.

I would be remiss if I didn't take a minute, apropos of the question that was asked earlier, and thank all of the people who in our fourth quarter had the job of not only rationalizing three or four acquisitions plus the FD transaction, and all of the work that went into the systems integration -- the teams of Ted and Sanjay, Barry Kaufman, [Jennifer Doi], John Quinn, [Ruby Walya], Greg Wills, [Joan Boufman], [Tessa Bonadura], [Liz Berman], [Heather Clink] -- to all those people who are really the unsung heroes of our quarter this year, we got our numbers done on time and on or better than budget, and at the same time, took that bite. We think it's a testament to the fact that we have become very good at doing these acquisitions and that we're very optimistic about the talent team we have and our ability to move forward. So with that, thank you all very much.

This concludes today's conference call. You may now disconnect.