Huron Consulting Group Inc (HURN) 2009 Q4 法說會逐字稿

Welcome to the Huron Consulting Group webcast to discuss results for the fourth quarter and full year 2009. (Operator Instructions) Before we begin, I would like to point all of you to the disclosure at the end of the Company's news release for information about any forward-looking statements that maybe made or discussed on this call. The news release is posted on Huron's website.

Please review that information along with the filings with the SEC for a disclosure of factors that may impact subjects discussed in this morning's webcast. The Company will be discussing one or more non-GAAP financial measures. Please look at the earnings release and on Huron's website for disclosures required by the SEC including reconciliation to the most comparable GAAP numbers. Now I would like to turn the call over to Mr. Jim Roth, Chief Executive Officer for Huron Consulting Group. Mr. Roth, please go ahead..

Good morning and welcome to Huron Consulting Group's fourth quarter and 2009 year end earnings call. With me today are David Shade, our President and COO, Jim Rojas, our CFO and Mary Sawall, our Vice President of Human Relations.

I'm very proud to announce solid financial results to conclude what has been a challenging year for our Company. The strength of our fourth quarter results reflect the tenacity of the people in this Company who stayed focus during trying times and a clear recognition in the marketplace that our people consistently deliver value to our clients. During the course of the last two quarters there were many predictions that our most talented people would leave due to events of this past summer. In fact our retention levels have been among the best we have ever had. Others predicted that our clients would leave us, instead they sought Huron services at record high levels.

In a few minutes I'm going to turn the call over the Jim Rojas to discuss our financial performance for the fourth quarter and 2010 guidance. But before I do so I want to provide my thoughts on why we performed so well despite the marketplace challenges. The first reason that we have thrived in a difficult environment relates to our areas of strategic focus. Approximately 80% of Huron revenues come from three specific industries, healthcare, education, and legal consulting services. In those industries we hold the number one, or number two position in terms of market presence. Our strategic focus on supporting those specific professions legal, health and education, has provided us with a unique market advantage in industries that impact a significant portion of the US GDP

In our financial and consulting practices where we don't have the same market penetration we have array of services that are flexible and responsive to the event and transaction base needs across multiple industries. Collectively the Huron portfolio has demonstrated that our strategic alignment presents a portfolio of service offerings that are profitable and relevant in key areas of our economy. The second reason for our continued success relates to our personnel. What separates one professional service company from another is the ability to recruit and retain high caliber professionals that are relevant in their respective markets. Huron has strategically assembled very talented professionals across specific industry verticals complemented by equally talented personnel in practices that offer event and transaction services across multiple industries.

Over the past six months one of the most frequent external concerns has revolved around whether our best performers would leave the Company. Although we lost some managing directors in our disputes and investigations practice where the impact of the restatement was more direct, the voluntary departures within our health and education and legal consulting segments was almost nonexistent . In those two segments only two managing directors voluntarily resigned since August 1, out of a total of nearly 100. From my perspective the issues and concerns regarding the restatement never materially impacted our legal and health and education segments and the impact on our financial consulting segment is now largely diminished. One of my priorities at Huron is to create a environment that is fertile for the retention and recruitment of personnel. There are several attributes that I want to highlight that contribute to helping make Huron an attractive place to work and provide us with the stability that is necessary for future growth.

First, in a very difficult economy the benefits associated with being in a market leading position are substantial. Most of our employees strongly benefit from the presence that we have in our core markets. Our people, particularly our analysts through the manager ranks recognize the skill and experience development opportunities that can accrue to them with our market leading positions. It certainly makes it much easier to be successful in the market when you have such strong credentials and experience as part of your go to market team.

Second, we recently revised the compensation structure for managing directors. The revised structure will further enhance our ability to make certain that the top performers are rewarded commensurate with their contribution. Third, although we are far from perfect we have a collaborative culture within Huron that enables us to be more effective in how we go to market. While the collaborative nature of our work force is first and foremost beneficial to our clients, it is also a lot more enjoyable for our people to work in such an environment thereby aiding in retention of key personnel.

This collaborative culture is recognized even among some of our competitors who occasionally comment to me that they recognize this as one of Huron's core strengths. Finally, while it is reasonable to anticipate that some people will leave Huron it is also important to recognize that we have not lost our ability to recruit talent. We have been active in the recruiting process and will continue to add talent at all levels. We have a fertile environment for growth and career progression that will enable us to retain our best people and attract others, helping us achieve levels of growth and profitability consistent with our corporate objectives.

In summary, we are neither down nor out. We have gone through turbulent waters with strong results. The strength of our people and service offerings will enable us to build upon our solid reputation in the marketplace. Before I turn it to Jim Rojas I want to mention the status of the SEC and related inquiries as well as the securities class action and derivative litigation suits filed subsequent to our restatement during the third quarter of 2009. We are not aware of any developments in connection with these matters since our last public filing except consolidation of the various class action lawsuits in to one suit. A full disclosure of these matters is included in the 10-K which will be filed later today. Now, let let me turn it over to Jim Rojas for a review of our fourth quarter and year end

Thank you, Jim. Good morning everyone. Before I begin, I want to preface by saying that my comments regarding our financial results during today's call will have an added level of complexity resulting from our need to discuss continuing and discontinued operations. During my discussion of our financial results, all comparisons will refer to our restated financial results and the adjustments that were made to net income, earnings per share, and EBITDA for the affected periods. Also, I will be discussing non-GAAP financial measures such as adjusted EBITDA, adjusted net income and adjusted EPS.

Our press release and our website have reconciliations of these non-GAAP measures to the most comparable GAAP measures as well as discussion of why management uses these non-GAAP measures. So please bear with me as I go through my prepared remarks and I will be happy to clarify and answer any questions you may have during the Q&A session. Before I dive into our 2009 results, I want to spend a few moments updating you on two strategic decisions that we undertook during the fourth quarter of 2009.

First, as you are aware we completed the sale of our Galt Strategy Group which was a component of our corporate consulting segment back to its original three principals. While the strategy group was a solid business for Huron, it did not deliver the synergies we had hoped for when we acquired the business in 2006.

The sale of the group back to its principals assured the least disruption to our clients who have ongoing matters that were being handled by that practice. The terms of the sale were not disclosed due to the confidential nature of the transaction and the fact that the size of the transaction was not material to Huron. However, I will say that as a result of this transaction we recognized a non-cash loss of approximately $400,000. Second, during the fourth quarter, we committed to a plan to divest our operations in Japan, which is primarily a component of our corporate consulting segment. We expect that a transaction would be completed during the first half of 2010. So this means that our Japanese operations are classified as held for sale at the end of the year and we wrote down the related assets to fair value, recognizing a loss of approximately $2 million.

Both of these transactions will further our efforts to focus Huron on our core businesses, and the decisions have positive strategic and financial implications.

For financial statement presentation purposes the results of both businesses are classified as discontinued operations. Prior year financial statements have also been reclassified to conform to this presentation. Unless I specifically flag an item, the discussion of our financial results this morning will be based on continuing operations, that is without the results of the strategy and Japanese groups.

Now I will walk you through this quarter's numbers. Revenues for the fourth quarter of 2009 increased 3.5%, to $157.1 million., from $151.8 million in the same quarter of 2008. Operating income increased more than 17%, to $21.1 million in the fourth quarter of 2009 from $17.9 million in the comparable quarter the year before. Operating margin was 13.4%, for Q4 2009, versus 11.8%, for Q4 2008.

This improvement was primarily attributable to lower SG&A expense, lower intangible asset amortization expense and no non-cash compensation expense. During Q4 2008, we had significant rapid amortization that stemmed from the Stockamp acquisition. The improvement in operating margins was also due to other gains recognized during 2009 that we did not have in 2008. These favorable items were partially offset by restructuring and restatement related charges totaling over $5 million for the quarter. Net income from continuing operations was $12.4 million in the fourth quarter of 2009, or $0.61 per diluted share compared to $1.7 million, in the comparable quarter of 2008, or $0.09 per diluted share. It is important to note that this significant improvement was due to some non-operating factors. In addition to the factors I just mentioned, lower nonoperating expenses such as interest and FX conversion, and a decrease in our effective tax rate also contributed to the higher margins.

Our effective tax rate for Q4 2009 came in at 33% compared to 85%, in the fourth quarter of 2008. We experienced an unusually high tax rate in Q4 2008, primarily due to non-cash compensation expense of $5.6 million, which is not tax deductible as we did not expend any cash. Also contributing to the higher tax rate although to a lesser extent was a mark to market loss on our investments that are used to fund our deferred compensation liability. On the other hand, we did not record non-cash compensation expense in Q4 2009, and we recognized a mark to market gain on our deferred compensation investments. Lastly, a portion of the goodwill impairment charge is not tax deductible and hence increased our tax rate in 2009.

Total Company net income was $14.4 million in 2009, or $0.71 per diluted share versus $3.5 million or $0.17 per diluted share in the 2008 quarter. Included in this total, is income from our discontinued operations of $2 million, in Q4 2009, compared to $1.8 million in Q4 2008. Now I will turn to some comments about our business segments. Again, unless otherwise noted my comments pertain to our continuing operations only.

The health and education consulting segment, our largest segment, generated 58% of total Company revenues during the fourth quarter of 2009.

Once again we were pleasantly surprised by a healthy level of contingencies from each healthcare practices. The engagements that contributed to these oversized contingent revenues are now winding down or have ended in Q4 2009. Our health and education segment had $25 million of contingent fee revenues in Q4 2009. This segment posted revenues of $90.7 million for the fourth quarter of 2009, increasing modestly from $88.4 million, in the comparable quarter in 2008. This segment continued to enjoy strong revenue gains from the health care practices in the segment, however, revenues from the education and life sciences practices were soft during the quarter. The operating income margin for health and education consulting decreased 260 basis points to 38.1%, for Q4 2009 from 40.7% for the comparable quarter in 2008.

Margins in Q4 2009 were negatively impacted by higher bonus accruals but were favorably impacted by lower non-cash compensation and intangible assets amortization. Our legal consulting segment generated 20% of total Company revenues during the fourth quarter of 2009. This segment posted revenues of $31.4 million in the fourth quarter of 2009, up nearly 14%, from the $27.6 million in the comparable quarter in 2008. The operating income margin for our legal consulting segment decreased 140 basis points to 18.2%, for Q4 2009 from 19.6%, for Q4 2008. Legal consultings margins in Q4 2009 were also slightly impacted by higher bonus accruals during the quarter and a shift in the consulting mix. Our e-discovery business which has a lower gross margin now represents a larger percentage of the total segments revenues.

During the fourth quarter of 2009, our accounting and financial consulting segment generated 16% of total Company revenues. This segment posted revenues of $25.7 million, in the fourth quarter of 2009, a 5.8% decline from the $27.3 million, in the same quarter of 2008. The operating income margin for accounting and financial consulting increased to 38%, for Q4 2009, from 15.3%, for Q4 of 2008. Margins in Q4, 2009, were favorably impacted by lower compensation expense. Frankly, the results that we expected from our restructuring initiatives. Also contributing to the improvement in margin was other gains recognized and the absence of non-cash compensation expense in Q4 2009 compared to $812,000 in Q4 2008.

I think it is important to note that even after adjusting for these factors and including an adjustment for stock compensation, this segment's operating margin increased to almost 31%, in Q4 2009, from 24.8%, in Q4 2008. Additionally, this segment's average billing rate increased to $261, from $247. And utilization increased to nearly 59% from 55%. As you can see, this segment's financial results and operating metrics are all moving in the right direction. As I previously mentioned, our Galt Strategy Group and a significant portion of our Japanese operations were practices within our corporate consulting segment. The results of these practices are now classified as discontinued operations on our financial statements.

With that said, our corporate consulting segment generated approximately 6% of total Company revenues during the fourth quarter of 2009. The corporate consulting segment posted revenues of $9.3 million, from continuing operations in the fourth quarter of 2009, compared to $8.5 million, in the same quarter the year before, representing a 9.3% increase. Including discontinued operations, results of our corporate consulting segment's revenues decreased nearly 30%. This decline highlights the recent challenges that our discontinued operations have been experiencing. The operating income margin for our corporate consulting segment was 25.6%, in Q4 2009, compared to a negative margin of 6.5%, in Q4 2008. Our Q4 2008 margin was negatively impacted by some significant reserves taken in our restructuring and turnaround practice.

So to recap on the results. Our healthcare consulting practices finished the year strong, restructuring and turnaround e-discovery and document review are continuing to meet our expectations. Plus we are seeing positive results developing in accounting and financial consulting. However, we continue to experience soft demand in our higher education and legal operational consulting practices. Jim Roth will provide you with more color and his perspective on the outlook for each of our segments in a moment. The financial results that I just provided were presented mostly on a continuing operations basis. For the sake of comparison I will now give some additional information regarding our adjusted non-GAAP results on an all inclusive basis. That is, including our discontinued operations.

Also I will be discussing full-year results so that we can compare them with the guidance that we provided in November during our third quarter earnings call. Let's begin with revenues. Revenues grew 7.9% from $615.5 million, for 2008, to $663.9 million for 2009. This level of revenues is on the high end of the revenue guidance range that we provided of $650 million to $665 million. Adjusted EBITDA was $144 million, for 2009, compared to $150.7 million a year ago. As with revenues, adjusted EBITDA came in at the high end of the adjusted EBITDA guidance range that we provided which was $138 million to $144 million. This calculation excludes the items outlined in our guidance in the press release.

For the year, we have incurred higher than anticipated costs associated with the restatement as these items are difficult to predict given the continued fluid nature of the event. The restructuring costs associated with our $30 million cost savings plan were in line with expectations. Our EBITDA margin on an adjusted basis was 21.7% for 2009, compared to 24.5% a year ago. Our margin was affected by the shift in legal consulting that I just discussed and accounting of financial consulting's margin challenges which I previously mentioned have been improving since our restructuring program was implemented in the second half of the year.

While the margins for these segments declined, the margins for health and education consulting and corporate consulting held up in 2009 compared to 2008. Finally, adjusted EPS decreased from $3.47 in 2008, to $3.24 in 2009. This compares to our guidance range of $2.85, to $3.05. The improvement over our guidance is mainly due to our lower effective tax rate.

Now turning to the balance sheet and cash flows. During the fourth quarter we were more proactive and refocused on collections. Our efforts were successful as DSO came in at 60 days at the end of the fourth quarter. A very nice improvement from the 75 days at the end of Q3. We are also very pleased by our generation of $68 million of cash flow from operations during the fourth quarter which brought cash flow from operations for the year to more than $120 million, with $107 million in free cash flow. Subtracting the earnouts that we paid during the year, our adjusted free cash flow was approximately $58 million.

Lastly before turning to guidance, I want to make you aware of a couple of changes in 2010. First, effective January 1 we have reorganized our practice areas and service lines. Under our new organizational structure we will have three operating segments--health and education consulting, which remains unchanged, legal consulting which also remains unchanged, and financial consulting. This segment is essentially the combination of our accounting and financial consulting segment and the two remaining practices in corporate consulting. Financial consulting now includes the following practices; accounting advisory, disputes and investigation, restructuring and turnaround and utilities.

The second change is that we will no longer adjust for share based compensation when we calculate our adjusted EBITDA and adjusted net income non-GAAP measures. With these housekeeping items out of the way I will now summarize our guidance that was included in the press release this morning. For full year 2010 we anticipate revenues before reimbursable expenses in the range of $600 million to $640 million. I will remind you that this revenue range of course, does not include the strategy group or the estimated results of our Japanese operations. Adjusted EBITDA in the range of $107 million to $114.5 million. Adjusted non-GAAP net income in the range of $42.5 million to $46.5 million, and between $2.00 and $2.20 in adjusted non-GAAP earnings per share.

Based upon our existing engagements and the pipeline of new proposal opportunities currently in front of us, as well as the current economic environment which Jim Roth will discuss in more detail shortly, the revenue range that we are projecting reflects a cautious revenue range of plus or minus 3% from our 2009 continuing operations revenue level. For 2010, we do not expect the same levels of contingent revenues that we've experienced in Q3 and Q4 of 2009. For modeling purposes even though we are not giving you quarterly guidance you can assume revenues will be back end loaded this year due to the life cycle of larger health care projects, many of which ended in Q4 or early in Q1.

With respect to adjusted EBITDA, net income and EPS, there are several items you will need to consider when reconciling these non-GAAP measures to comparable GAAP measures. The reconciliation schedule that we included in our press release will help walk you through these reconciliations. I will also comment on some other modeling assumptions. We are forecasting cash flows from operations of approximately $60 million at the midpoint of the range and capital expenditures of approximately $15 million. As you will see later today in our 10-K filing earnout payments earned during 2009 totaled approximately $65 million. We are estimating 2010 earn outs to be in the range of $30 to $40 million and between $40 and $50 million in 2011. Noting that these amounts are paid in Q1 of the following year they are earned.

We expect that our average utilization rates will approach 68% for the full year, and average hourly billing rates are expected to be approximately $270 for the full year. Assuming the mid point of our revenue range for the year our full time billable consultant head count will average approximately 1300 professionals for the year and average full time equivalents for the year will be about 980. Weighted average diluted share counts for 2010 are estimated to be approximately 21.2 million for the full year. And finally, with respect to taxes, you should assume an effective tax rate of approximately 46% for the year. I appreciate your patience and attention during this discussion. I understand that it can be challenging to follow, almost as challenging as it was to prepare the comments. I will turn it back to Jim Roth for his thoughts on the year ahead of us.

Thanks, Jim. I would like to provide some color on 2010 revenue guidance. The 2010 economic environment remains uncertain, early in the year, guidance is more art than science. In preparing our 2010 revenue guidance we listened to our clients, tried to read the tea leaves in the economy and we communicate frequently with our managing directors who are in the market every day. On the one hand we hear some people signal that activity is picking up and that our clients are becoming less risk adverse. On the other hand we have sensed that it is difficult for our clients to make decisions regarding consulting spend given their own uncertainties over the economy. Although our internal plans for each practice are set with higher expectations, our 2010 revenue guidance is set trying to balance these competing perspectives.

There are four primary reasons why we believe it is prudent to temper our estimates at this point. First over half of our revenues come from governmental entities such as public universities and hospitals and other not-for-profit institutions. These institutions face great uncertainty in some of the future funding sources. While pressure on their funding sources creates opportunities for our services, it also creates an environment where the decision making process takes longer. Second, as Jim Rojas indicated our health care practice had much higher contingent fee revenue in the fourth quarter than we originally anticipated, particularly from the Stockamp practice. The ebb and flow of contingencies is very difficult to predict and some revenue that we initially thought would have been earned in the first quarter of 2010, in fact was earned in the fourth quarter of 2009, contributing to our above guidance revenue for the quarter.

As we look to the remainder of 2010 we are unable to predict with confidence the level and timing of future contingent fees. We strongly suspect, however, that 2010 contingent fees will be significantly less than they were in 2009. Third, we are currently proposing on a major healthcare project that has a multiyear tail. Our success in winning this work is unknown at this time. Finally we are anticipating continued involvement on a significant project with a US Government agency. Our plan reflects our belief that this work will continue at a sizeable level through the year, but because of a high degree of uncertainty and the flow of work stemming from this project, we are inclined to be cautious in estimating future fees for this client.

We are watching these matters closely, how they eventually play out during the first and second quarters will enable us to refine our guidance range as the year progresses. Put plain and simple we are operating in a very difficult economy. I have great confidence in our ability to deliver across all of our service lines but given the uncertainties that I have mentioned, we believe it is prudent to temper our revenue forecasts until we get some more clarity. Finally, I want to emphasize that our first half results will not reflect the growth that we expect in the second half of the year. Despite what we expect to be a weak first quarter for us, we are anticipating a gradual pick up in activity starting in the second quarter and carrying through for the remainder of the year. The slower start in 2010 is primarily attributable to several sizable deferred projects across segments and a prolonged decision making process on some large projects as discussed previously.

In addition, as we indicated earlier the cycle of contingent fees is unpredictable but we are expecting far less contingent fee revenue in the first quarter than we have received in the prior two quarters. I want to emphasize we do not expect that our first quarter results will be indicative of growth or profitability in subsequent quarters. I will now discuss our three segments including a brief summary of how each segment ended the year and an indication of how things look for 2010. First let's discuss our healthcare and education segment. This segment which was 59% of our total revenue in 2009, contains three practices -- our two healthcare practices Wellspring and Stockamp and our higher education and life sciences practice. This segment is comprised of industry leading practices that focus on the business of healthcare and education.

When people ask what it is that we do within our healthcare and education practices I often comment that it is easier to describe what we don't do. We don't teach, we don't treat patients, we don't conduct research, what we do is help management improve the financial and operational performance in the very complex world of hospitals, academic medical centers and research universities. Our focus on providing a demonstrable financial return for our clients as a proportion of our fees has proven to be very attractive for our clients as they face their own challenged operating environment. Let's talk about healthcare first. The most discussed question in 2009 was what impact will health care reform have on our health care practice. As you are all aware the President's health care reform initiative was dealt a major setback about one month ago.

As I mentioned, throughout 2009, I believe that the fundamental economics that have caused hospitals to be under such significant financial pressure would have remained the same irrespective of whether healthcare reform legislation passed. Put another way, I didn't see anything coming from healthcare reform that would have enhanced the margins for the provider market. I certainly don't see anything now that indicates more stable financial conditions for hospitals in the near future. In fact without a pathway to expanding healthcare insurance coverage for broader segments of the population it is possible that hospital finances will continue to deteriorate for some time to come. With such uncertainties surrounding whether any healthcare reforms will be enacted my sense is that our healthcare practice will have a very active market for helping our clients enhance revenue recovery and reduce costs.

Our view of the healthcare market and the stresses within the market have not changed keeping us confident about the future for this practice. Our Wellspring and Stockamp practices, which are increasingly integrating their activities in the marketplace, have emerged as the market leaders and hospital operations improvement. These services are in particular demand given that rating agencies have cast numerous negative outlooks on hospital financial performance. Now, let me turn our attention to our higher education and life sciences practice. Many of our higher education clients are nearing the end of their 2010 fiscal year. Most of the larger research universities, our core market and education, reported that the value of their endowments fell by over 20% last fiscal year. For institutions that are heavily dependant on endowment payouts to support operations, this has been a very difficult year.

Further complicating matters, is that many of the endowment payouts are determined on a three year moving average, essentially meaning that rough roads are still ahead. Revenues for our higher education practice were essentially flat for 2009. Increased demand for our services related to research administration and ongoing operational restructuring at many of our clients, was offset by hesitancy among some universities to spend on infrastructure given their significant reductions in operational funding. There are, however, some reasons to be positive about 2010 most notably the need for our clients to address operational and infrastructure needs that have been deferred over the past 18 months.

And, a continuing demand for our services internationally. Our backlog is at a favorable level and I am confident that our very deep market penetration and the unique set of experience and skills that we bring to market should enable us to return to a more favorable growth trajectory in 2010. Our life sciences practice continues to see solid growth. We have provided services to many of the top 50 pharmaceutical and medical device manufacturers and we also have a very strong practice focused on providing clinical compliant services to academic medical centers. Driving demand for these services is the sustained focus by regulatory agencies and Congress on issues relating to fraud, abuse and waste in the pharma and medical device industries. Many of our clients are proactively trying to improve their business and compliance practices while also responding to new regulations imposed by State and federal agencies.

Next I will discuss the legal consulting segment. The legal consulting segment faced a fairly challenging environment in 2009. The downturn in litigation, one of the core drivers of the legal consulting business, was partly offset by an increased need among corporate law departments to improve the efficiency of their large scale litigation processes. Similar to the events impacting the higher education practice, legal consulting was hurt by severe external market conditions. Yet those difficult economic conditions play right in to the core competency of this practice.

The consulting part of the segment where we helped corporate law departments and law firms reduce costs bore the brunt of the downturn, although many of our clients could have benefited from services aimed at reducing costs, the consulting spigot was reduced to levels not seen in many years, as some of our clients either postponed projects or opted to do the cost cutting using internal resources. Helping mitigate the loss of revenue in the consulting practice in 2009 was the continued strength of our document review and discovery practice including continued success with our velocity solution. Our strategy of obtaining master service agreements with large corporations and heavily litigious industries, has proven to be highly affective.

There are several reasons that give us confidence that more substantial growth in this segment can resume in 2010. First, potential pent up demand on the litigation front coupled with continued efforts by large corporations to reduce the cost of litigation and overall legal cost bodes well for our core service offering in this practice. This year we are also rolling out our integrated solution called Impact for these clients. Second, our recent expansion into Europe will enable us to better serve large European companies and the European affiliates of large US companies. While we expect the consulting part of this practice to improve over 2009 performance, I expect that a bulk of the growth in 2010 will come from document review and discovery services. Our third segment now called financial consulting consists of three practice areas, disputes and investigations, accounting advisory and restructuring and turnaround.

Since we haven't presented comparable historical data today to contrast the results of these individual practices with their past performance, I will provide a high level view for each practice. The restructuring and turnaround practice had a solid 2009 and ended the year on a strong note. This practice was focused on the mid tier market which is likely to remain troubled for the foreseeable future. While there is likely to be some easing in the credit markets a slow recovery with limited access to capital will provide opportunities for this practice to grow as mid market companies and larger companies in certain industries feel the brunt of the recession.

Our disputes and investigations practice had a difficult 2009, similar to the experience of some of our competitors the number of investigations and disputes were lower than in prior years. Although this declining trend has been evident since late 2007. This practice enters 2010 at roughly half the size it was at the start of 2009. We have worked closely with the managing directors in this practice to demonstrate our ongoing commitment to the practice and we've expressed our desire to grow and invest in the practice during the coming year.

The accounting advisory practice had a solid 2009 dominated by a large assignment with a US Government agency. The accounting advisory practice goes to market with a flexible and scalable work force prepared to respond to large and rapidly evolving events that institutions and corporations are unable to handle internally. Given the significant head count reductions in the corporate world, our ability to help address resource intense demands with a flexible, yet highly experienced work force provides us with solid growth opportunities for this practice.

In summary, we are cautious about our prospects in 2010. We have more near term opportunities that we have seen over the past 18 months. But, we temper our enthusiasm due to uncertainty of the pace and extent of recovery in our key markets. Most of our clients and the respective markets are undergoing substantial change. The burning platform for our services has never been greater. Our success in 2010 is not guaranteed but I couldn't be more confident that we have the best team to respond to the challenging conditions and the needs of the marketplace, I would now like to open the call for questions. Operator?

Thank you. (Operator Instructions) Our first question comes from the line of Tim McHugh from William Blair and Company. Please proceed.

Yes. First wanted to ask about-- you briefly mentioned a major health care project that you're in the process of working on, can you elaborate a little more on that-- what's the nature of it, how big it is and where exactly in the stage of pursuing that you are.

Tim, this is Jim Roth, we are not going to talk specifically about the proposal process right now, we have already proposed, they are in the decision making process right now it's part of our-- we got many proposals we are proposing on at any given time. This a particularly large one, but given all the uncertainties about it, and our reluctance to talk about specific clients, I prefer not to get in to more detail on that, Tim.

Okay. And then, can you touch on just the first quarter here. You mentioned that it's off to a slower start because of the deferral of some projects and decision making. Can we get more color there, is that across the business segments or was it in any one segment, for example the document review versus health care and so on?

I think so far the way we are seeing things now the health and education segment which had a very strong fourth quarter is probably the one that's weaker in the first quarter so far. Legal consulting and the financial consulting practices are performing pretty close to plan. As we indicated we are expecting for the reasons outlined in the call, Tim, we do expect the pick up in activity in health care beyond certainly our internal plans, are stronger but at this point in time, given some of the uncertainties that we outlined, we are being cautious in our approach right now.

Tim this is Jim Rojas. I will add to that, in my comments I mentioned that some of our larger health care projects that drove some of the significant contingent fees that we saw in Q4 had ended either in Q4 or early in Q1 and it's the ability to rapidly replace those consultants who were working on those jobs on these new engagements and I believe that's where the comment that Jim had that tied in, that we are seeing some delays in decisions it's getting those people immediately busy on new engagements is what we are seeing early in Q1.

So I mean just to understand, this is something that you guys talked about in the past and earlier in the year you have to especially I guess more so for Wellspring you have to find new engagements to work on as you tend to ramp up at year end. But what you are saying is you are seeing a slightly longer sale cycle to replace those engagements, is that fair?

I think that's fair. This is Jim Roth. As we particularly in health care, we have had as we-- as new projects come on line as we proposed on new project as variety of events that occur. Number one, we can't predict which projects are going to go for contingent fees versus fixed fees. That's one level of uncertainty that we get. Then once we do get the engagement that is going to be based -- have a contingent fee element to it, we can't always predict early in the year, the extent to which that's going to pan out. A lot depends on the results of the particular client. That makes this a difficult process for us to forecast. Particularly coming off the fact we had such strong results in the fourth quarter on contingencies. This is a cycle here that is normal for us, just hard one to predict.

Thank you.

Dave Shade wants to make a comment.

This is David Shade one more comment in that regard. One of the things we do, and we do it every week, is we basically track the pipeline for (inaudible) we have in the Stockamp and Wellspring segments. As we look at the pipeline, the pipeline is very strong. It's just it's more an issue of timing and closing some of the major engagements, and basically replacing the engagement cycle as Jim Rojas has said. The pipeline is stong that's the ultimate indicator for us.

Next question comes from the line of Andrew Fones with UBS. Please proceed.

Yes, thank you. I just wanted to ask you to compare and contrast 2010 expectations with 2009 it looks as though, excluding reimbursables, you are looking for revenue to be about flattish, obviously sounds as though that's due to caution around contingent fees that are available. But , in terms of EPS, you are looking for about $2.00 to $2.20 versus non-GAAP earnings of $3.24 in 2009. So over a dollar per share decline, is that purely or mostly due to if you like lack of visibility in to contingent fees at this point or are there any other factors we should be thinking about there,

Andrew, clearly the contingent fees do drive profitability from one year to the next, if you look at in our health and education segment we had $27 million in Q3. And we said that those were significantly larger than what we expected or our run rate and then in Q4 we have an amount that's very similar in terms of $25 million. What we are anticipating is that for 2010, is that we will return in Q1 and Q2 to numbers that are commensurate with an average.

We spent time talking about the cyclicality and that we don't have cyclicality, it's not necessarily the calendar and the purchasing timing that's going on with our clients, it has more so to do with-- just when projects-- just the coincidental nature of when the large engagements had started. So that does drive some of the improved or some of the change overall, the other thing that frankly is changing significantly is our stock compensation.

That's a change that we made year-over-year by not adjusting that out of adjusted non-GAAP. We listen to a lot of investors and they had many questions about it and we had an opportunity to change that, and we've done that. If you look at our numbers year over year for what we're estimating in terms of stock comp in 2009, we had significantly lower stock comp because of the fact of senior people leaving and shares in amortization being reversed. In 2010 we are returning to a more normal level of what stock compensation would be and I think those are the two biggest factors that change year-over-year in terms of our EPS.

Thanks. Can you actually quantify what you anticipate the stock comp issue versus '09? Thanks.

We don't -- Andrew, maybe I can get back to you on that question. Let me do some research before the end of the call to see if we can comment on that.

Okay. Thanks, in order to give us a little bit of help here in the near term, perhaps if you could help us understand what you see as being more of a normalized level of contingent fees, I think you said $15 million of higher than expected contingent fee than Q3 which would suggest in the range of 10 to $15 million was expected. But, is that more of a second half number and in the first half of the year do you expect that quarterly amount to be lower? As a follow on to that do you expect to be profitable in Q1, thanks.

To answer your questions-- and if you go to our press release in terms of our share base compensation we did specifically disclosed the amounts previously if you look for 2008 we had $26.8 million of share based compensation in 2009 we had $19.9. What we are saying is for 2010 we will return to a level that's closer-- that's above-- slightly above the 2008 run rate amount. That gives you some insight in to that number. In terms of our contingent fees in the first half of the year per quarter, we are looking at somewhere between $10 to $15 million per quarter in terms of contingent fees. In the second half of the year we are estimating higher levels right around the $18 to $20 million per quarter, but it will be less than the $25 to $27 that we were running in 2009.

Thank you that's really helpful. Just a final one. You would expect to be slightly profitable in Q1?

We don't give quarterly guidance. But we are expecting to be slightly positive EPS in Q1.

Thanks.

Next question comes from the line of Jim Janesky with Stifel Nicolaus. Please proceed.

Yes, thank you. Good morning. When you look at the health and education segment and success fees not to beat a dead horse, but this has been something that the success fees and fixed fee versus contingent fee type of services have moved around a bit and affected profitability, and one time we were told to believe they were back end loaded as they are going to be this year and sometimes we have front end loading. Has there anything that's changed with your business in the Stockamp and Wellspring or is it really a matter of timing and this volatility is going to continue to be harder to predict or hard to predict as we move forward.

Jim, this is Jim Roth, I don't think there has been anything material in terms of the type of market that we are facing or the kinds of projects we are getting. Our practice has grown and we find ourselves exposed to larger and larger opportunities and again as these things roll out as we go back and look down the pike for the rest of the year and you start proposing the clients often will make the decision as to whether they want to go with a fixed fee arrangement or a contingent fee arrangement and that's reflective out of a lot of things on their part. In part it's our pricing, but it's also going to be their comfort level in terms of how much they want us to be at risk. That makes it difficult for us to project. Furthermore, I think, as their own financial situation remains uncertain, you're going to find a lot of different organizations that are trying to be make significant improvements.

The one thing we had talked about in prior quarters if there has been any change at all is there has been a tendency-- a slight tendency for some organization to not want to go for a comprehensive operational assessment and right off the bat they've tended to parse it up a little bit so instead of getting major chunk we may get a more refined chunk but do it over a longer period of time. So when you put all of those together a different mix of clients and certain mix of clients, a different approach to how they might be using our services. it creates a loft uncertainty on our part in terms of how to begin to focus it.

I think, just following up on Dave Shade's comments, the part that gives us confidence is If you look at the backlog-- if you look at the opportunities the that are before us right now that we are pursuing, there is a lot there, it's a very challenged market and we are very prominent in terms of being front and center on major opportunities. It's the pace of the way the projects come to us and the extent of the decision make progress says that drags us out longer. It's a long way of saying I don't think there has been anything material in the way we are going to market nor in the way the clients are buying our services.

From my point of view, Jim, the one thing that's change second that people often ask, well, who are your major competitors. I would tell you, it's our experience particularly if the last year, or year and a half, our primary competitor is the hospital trying to do the work themselves. One of things we are seeing is that a lot of that has worked itself through to the point now where people are approaching us with a significant since of urgency, where they gone through, let's try to do it ourselves and it hasn't worked.

So that's affected the buying cycle a little bit. The other aspect is it gets back to the fixed fee versus incentive mix and it's just very very difficult to predict as Jim Roth said exactly how that's going to come down in the perspective clients mind , there is a lot of discussion a lot of interest in the incentive arrangements we tend to do very well in the incentive mode but it's a very difficult field to predict. We don't know until we get through the assessment into negotiation the implementation exactly how that's going to work

Okay, thanks. That's very helpful and a detailed explanation. Shifting gears a bit to the accounting and financial segment, Jim, from the margins in that segment were very strong in the quarter. I know you made a number of changes there, do you think-- should we expect that those margins are sustainable or could they move around or what are your thoughts?

This is Jim Roth we are coming off of a period of time where they had been weak for a while we made a lot of changes during the course of the last six months or so that I think has really strengthened the practices this that group. We are now at a level where we feel comfortable with our cost structure, we feel very comfortable with our personnel and their go to market strategies. And I would expect there to be improving margins over time in those practices.

Okay. Thank you.

Next question comes from the line of Joe Foresi of Janney Montgomery Scott

Hi guys. I guess I'll ask my requisite question about contingency fees. On the back end loading I wonder if you could talk about has there been change in the conversion rate for the pipeline for health care?

I don't think there has been anything material in the conversion rate at all. I think the reality is I think we have a very, very high success once we're asked to come in and do an assessment we have a very high success rate in terms of converting those to the longer term assignments. It's part of the value equation we reference which is really one of our primary strengths in the sense that once we do an assessment and we get comfortable with the opportunity that's ahead of us, we are comfortable at that stage, that we can deliver and willing to put it-- to go at risk which is what generates our contingent fees, just to demonstrate our confidence. So there is nothing that's changed at all in terms of our conversion rates and gives us again great comfort we are getting the first thing we look for, are we getting at bats we are getting a lot of at bats, the next question is how many can we convert and I think it remains at a very very high level.

Are you getting more at bats this year versus last year at the beginning of the year.

As Dave Shade indicated we have a lot of opportunities out there right now. The market itself is very troubled. It's a very very difficult market for our clients and so we have as we grown we got more sophisticated in terms of our go to market strategy, we're able to cover more ground.

That helps a lot from marketing and sales perspective but probably the thing that contributes most to ability to get at bats is our historical results. We have performed very well for our clients, and we got a great set of references when somebody comes along and say we need to take $30 million out of our operations or $20 million out of our operations the first question they want to ask of a potential consultant is where have you done this before we have a strong case to be made and a long list of client references that are more than willing to go back and demonstrate the value of the results we've achieved for them. And that more than anything helps us out in the long run.

Our opportunities as significant as any, but the real issue for our clients, this is probably true in higher education as well as much as in health care-- that is , if you got strong needs at this point in time for anybody it's tough to commit to writing a big check, so you have to have from a client's perspective, you have to have tremendous confidence that the consultant you are going to spend money on is in fact going to be able to deliver and that's the value of our position and the value we provided the marketplace and helps out a lot in that

Would it be difficult to commit in having that confidence do you think the sales cycles are getting a little bit longer than usual because people are being careful with their cash.

It is getting a little bit longer but we also -- there is no question about that it's hard to convince others you should be cutting a big check. Having said that I think we are balancing that-- as we grown get increasing number of opportunities. So we have more opportunities that are in the works or already proposed on and so that larger number of opportunities will hopefully offset what ever softer decisions making process we're finding in the marketplace.

Any more divestitures planned and maybe you guys could talk a little bit about the disputes practice and how it's viewed today versus a year ago.

We don't have any other divestitures planned at this stage. In terms of disputes and investigations obviously that groups have been through a lot -- I think over all disputes and investigations to the extent you can call it an industry, including many competitors has been challenged over the last 18 months or so or maybe even two years. But that practice has as we kind of approached it from a different perspective over the last six months we've certainly lost some people as we talked about, but got it down do a point where we think the cost structure is commensurate with our ability to generate revenues, so we now have retrenched and focused on growing and investing in that practice.

It has in the past been extremely profitable it is capable of being extremely profitable our objective is and has been was to get the cost structure in line so we are not too far out in terms of waiting for revenue to come in the door that we are properly sized for a steady growth rate and that we are able to take advantage of a large opportunity if one were to come along without getting too far down the line on the cost structure. So I think it's properly balanced right now and we have had a lot of internal discussion, with that group. Our hope is we will continue to grow and invest in that practice and return it to margins and a growth rate we seen historically.

I want to sneak in one last quick one. I think you guys talked a little bit about compensation going up for some of your higher performers. Can you help us understand that versus what the margin profile looks like in this quarter and what it looks like going forward, thank you.

Part of our MD compensation strategy was not just necessarily to raise total compensation expense but the theory behind it was to overall keep it at the same level but to be able to reward our top performers more and by doing that meant we had to adjust our base compensation for people. So overall that it was anticipated and the other component of the it is adding equity to our managing directors across the board not just concentrated at the top end. One thing we did mention is that we would see higher compensation expense because of our retention program but as we said all along that our cost savings plan was there to mitigate that expense so I believe what you will see in terms of margins going forward will be similar to what we are proposing for 2010.

I want to add culture to the change we had in managing director composition plan, it was a big deal for us The fundamental premises was actually quite simple, and that was we have an option to either pay for potential or pay for performance and I think we got on the the point where in some cases we were paying for potential. The problems is that the potential for certain individuals doesn't pan out you end up reducing your flexibility to have variable pay you can make for those that perform very well. We have made modifications to our managing director compensation structure that is going to be very beneficial.

We spent a lot of time with our managing directors explaining to them the rationale and explaining to them the construct of the whole program, and I think by in large they have been very much on board. It was not a cost reduction effort at all it was a way of making certain that at the end of the year we had sufficient flexibility within the margin expectations that we set out in order to properly reimburse and pay our top performers commensurate with the value they added we were lacking that that historically we believe we are going to be in a position to get that. It's been well received among our group.

Thank you.

Your next question comes from the line of Scott Schneeberger with Oppenheimer, please proceed.

Thank you, good morning. I just like to ask a little deeper on you mentioned the major government-- the government agency contract and AFC, it sounded like a bit of lack of visibility or lumpiness, could you take us deeper as to what to expect there. And then how sizable is that as a percentage of our new financial consulting segment, if you don't want to get in detail, something to give us directionally some magnitude, thanks.

To answer the questions in the order you asked them. I think it is a -- first of all, we kind of made a decision a while back we are going prefer not to talk about individual clients for a couple of reasons, one is many of our clients actually don't like to be talked about. We prefer to maintain the confidence level they expect from us. Secondly we end up having to report on the status of individual jobs as they go along for better or worse, it just makes that much more complicated and sensitive for us. I want to explain why we are hesitant to talk about clients in any great detail. I think from the accounting and advisory it's a sizeable project for them and it's one we have been performing very well with over the last year or year and a half or so.

But the project is of the nature that our expectation is that it will continue fairly strong for the year. Certainly in a government agency environment there is all kinds of things that can happen and we are hesitant to predict too far in advance this is going to go on forever. We are being a little bit cautious on that. We contrast that a little bit to perhaps a corporate client where you can get a little closer to the decision making process. Here it's just environment where it makes it difficult for us to judge longer term where it's going to go. But it's been a real sizeable project for us, we have been performing very well, we know the climate is very happy, we are very hopeful it will continue along this pace for a bulk of the year but we just can't say that with great certainty.

Scott, this is Jim Rojas-- the only thing I will add is-- it is a top 10 client for us overall but it will not be a client that raises to above 10% of our fees for the year.

Thanks, that's very helpful from both of you, if I could with regard to the guidance very helpful, good in detail, what are you thinking from managing directors, I think you are at 170 at the end of third quarter, please correct me if I'm wrong, where were you at finish of the year-- if it's in the press release I apologize. What are you thinking for 2010 as far as top level people, how big you are going to be as an organization. Thanks.

Mary Sawall, can you comment? Do you know how many we have at the end of the year.

At the end of the year we had 152 billable managing directors and going through this year we have some aggressive plans to hire top talent in all of our business,.

I agree, we are anticipating to be in a growth mode. We have as I indicated earlier in comments we made retention and recruitment to be one of my top priorities, retention is obviously key. We want to make sure we keep our best performers and so we try to do as much as we can there but we have been and will continue to be very aggressive in recruitment of new managing directors. This-- having been through this for a long time it's one thing to say we are going to get a bunch of managing directors that we have to be sensitive to all kinds of issues in terms of growing them so we're trying to gauge how quickly our practices are going. But, any time we can get access to the possibility of recruiting top talent in areas we believe will be strategic to us we will probably be very aggressive in going after them.

This is Mary, I just want to make one more point. The change in the number of managing directors between Q3 and Q4 was not voluntary. The majority of the reduction was not voluntary.

Our internal plans are higher than our guidance, I explained why we are being cautious in terms of that but our internal plans certainly do contemplate hiring across the board not just managing directors and so it's going to be our objective as to monitor that as we go along we want to make sure we can grow, we want to also make sure we can deliver the profitability expectations that we have laid out and so that's the process we go through and that's day by day, week by week process we have. We are trying to be cautious, cautious about where the economy is going but at the same time making certain we are positioning ourselves to grow if the opportunities come about.

Thanks so much for the color.

Your next question comes from the line of Tobey Sommer with SunTrust Robson Humphrey.

This is Frank in for Tobey. Wanted to ask a little bit of a question about the operations in Japan that were discontinued or planned to be divested. Any color you can give us there on margins or growth rates so we can kind of or strategic decision so we can kind of better model the segment going forward.

One of the things that-- and I mentioned it in my comments on corporate consulting is-- that it has been challenging. The economic environment in Japan has been as challenging if not more challenging than in the US. So we don't disclose any of the financial information on the underlying operations as well as the fact that we are in negotiations with potential buyers for that practice as well so we are trying to keep that information somewhat sensitive. But what you do have in our financial consulting practice then, you have accounting advisory, D&I, restructuring and turnaround and also utilities, is the practice we have going forward in financial consulting

Okay, great, that's helpful. Could you talk a bit about strong cash flow during the quarter $68 million, your use of cash going forward either to pay down debt or perhaps repurchases, what is your thinking there?

Our current thoughts are is that we will continue to pay down debt as we have in the past.

Okay, great. Finally I guess on the legal side, utilization came down a little bit, and you spoke about the mix shift to document review, but can you talk about the utilization number there and what you see going forward and maybe initiatives you have in place.

We did have-- 2009 was softer than we had planned and I think we are we are as that velocity project has really done very well for us, the consulting has been-- has not performed as well. The reality is there is some crossover in materials of utilization among the people that primarily focus on consulting that are capable of selling and helping to manage some of the velocity project.

So we are looking at the mix of people we have in there and are trying to figure out how we can get those margins up a little bit more and increase the utilization of that business. That is certainly one of the things we are working on right now . But the mix-- we seen that mix evolving I think what happened was over the course of the last year is the economy really tightened the consulting the traditional consulting work did quiet down a little bit as people tried to do it on their own or didn't do it at all and deferred it . And so, we still think that's actually quite a viable marketplace the need is there.

We are hoping it can pick up. For us it's a balancing act right now trying to make sure the utilization of margins improve but at the same time being capable of responding to what we think is going to be an industry-- an area that opens up for us a little bit more in 2010 than it did

Great, thank you very much.

Next question comes from the line of Sean Jackson from Avondale Partners.

Thanks, good morning. I wanted to drill down more on thing health care side of things and have you seen the impact of the high-tech act as hospitals have put more of emphasis on the big technology projects has it distracted them at all from some of your strategic work that you've seen or even your revenue cycle management projects.

This is Jim Roth I don't know that it's been a distraction. I think there maybe more funding for that as well but I think that doesn't have, the thing that our clients are facing are more near term needs to improve financial performance.

And I think the high-tech aspects of these are things they look at strategically for a longer term our efforts have been primarily focused on certainly on short-term and intermediate term financial needs, hopefully those things that were helping to implement will have and benefit the longer term operations but long way of saying I'm not sure we seen an impact to our business as a result of the high-tech focus from a funding perspective. .

Thanks, Going to the dynamic of education segment again as far as possible expectations for your hospitals to start some of these operational projects in light of the lower endowments

Well, the endowment picture is a little bit different, the endowment at a lot of the universities the endowments are drop off doesn't necessarily impact the hospitals which tend to operate separately. What does sometimes impact the hospitals is declining margins and the hospital's ability to contribute back to the overall medical center.

So one of the reasons we have an affective practice in this area is that the dynamics economic dynamics let alone the political, economic dynamics within a broad academic medical center which includes a hospital, a practice plan, medical school, they are very complex and in general across the board those economics have been deteriorating.

So the declining endowments have tended to hurt the universities more so coupled with the fact that in some cases with the hospital was providing subsidies to the medical school or the medical center, those too have been hurt. For universities it was a double whammy. But I think at this point the endowment issues are impacting more on the university side than on the provider the hospital side. Okay. Thank you.

Mr. Roth, we have concluded the allotted time for this call. I would like to turn the conference back over to you.

Thank you very much. We appreciate the time you spent with us today and look forward to speaking to you again in a few months when we report Q1 2010 earnings. Thank you very much and have a good day.

That concludes today's conference call, thank you everyone for your participation