Huron Consulting Group Inc (HURN) 2010 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Huron Consulting Group's webcast to discuss financial results for the fourth quarter and full year 2010. At this time, all conference call lines are on a listen-only mode. Later, we will conduct our question-and-answer session for conference call participants, and instructions will follow at that time. As a reminder, this conference call is being recorded. 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 may be 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 all of the disclosures required by the SEC, including reconciliation to the most comparable GAAP numbers. And now, I would like to turn the call over to Jim Roth, Chief Executive Officer of Huron Consulting Group. Mr. Roth, please go ahead.

Good morning, and welcome to Huron Consulting Group's fourth quarter and full-year 2010 earnings call. With me today are Dave Shade, our President and COO; Jim Rojas, our CFO; and Mary Sawall, our Vice President of Human Resources.

Thanks for joining us this morning. I am going to spend a few minutes talking about fourth quarter performance and will then discuss our 2011 guidance. After my overview, Jim Rojas will walk you through the numbers and provide color around the key operating metrics. Let me start with the fourth quarter. We finished 2010 on a strong note, with year-end revenues exceeding the high end of our guidance range.

Our legal consulting segment had a very strong Q4, exceeding a solid Q3. Legal consulting had a spectacular second half, fueled primarily by some large electronic discovery projects across an array of industries and clients. This business continues to broaden its penetration into large global clients helping us to diversify our market presence and limit the risk associated with the concentrated client base. Our health and education segment was flat sequentially, but the foundation has been set for solid growth in 2011 in this segment.

Starting earlier in Q4, we saw a notable pickup in demand for both the health care and higher education practices. I will have more to say about market demand in the segment when I talk about 2011 guidance. But suffice it to say that we ended Q4 on a strong note in this practice, and we are confident that the momentum will continue into 2011.

The fourth quarter results for our financial consulting segment were down from Q3, reflecting some softness in demand from one of our larger government clients. The restructuring and turnaround practice was steady, reflecting ongoing challenges for our middle market clients. Accounting advisory was challenged as it transition to new areas of focus beyond its existing large government agency client. Utilization remains strong in all segments and practices, as we continue to closely match growth in our employee base with marketplace demand. We are in a recruiting mode across all of our segments, targeted in areas where we see the best opportunities for organic growth. Our utilization has been running fairly high in our health and education segment, so that is where we are most likely to see the greatest amount of recruitment in 2011.

I'll now spend a few minutes talking about our guidance for 2011. We're projecting our revenue for 2011 to be between $580 million and $620 million. There remains a lot of volatility in the market, but we feel comfortable with the range of revenue provided in our guidance.

There are several important aspects of our guidance that warrant some further discussion. First, with respect to our health and education consulting segment, we've entered 2011 with strong backlog. Given the impact of the still evolving health care reform initiative, the severity of federal and state fiscal issues impacting our health care and education client base, and the strength of our current hard backlog, we feel comfortable projecting about approximately 15% growth for the health and education consulting segment in 2011. Driving the demand will be some of the same topics we have been discussing for a while now.

First, in the health care space, although there remains uncertainty over the direction and pace of health care reform, the reality is that our clients are assuming the inevitable that they need to be moving toward a business model where reimbursement is made, based on quality and outcomes rather than the traditional Fee-For-Service.

While the timing may be uncertain, the trend is not. Hospitals and academic medical centers seeking to strategically and operationally respond to the immediate and long-term challenges are increasingly relying on Huron to work with them, as many aspects of their business model undergo fundamental change.

Adding to the challenging operating environment for our clients is the steadily deteriorating reimbursement trends for the primary entitlement programs, Medicare and Medicaid. As the federal and state governments address entitlements, there is a clear trend toward lower reimbursements for these government programs. We are well positioned with experienced personnel as this story evolves.

Similar challenges are facing our higher education clients. While the higher education academic environment is not subject to anything as overarching as health care reform, in many respects the state fiscal issues are more substantial, particularly for public universities. For research universities, many of which have academic medical centers, the financial challenges in the medical center are increasingly compromising the ability of the hospital to support the university's academic and research mission. For public universities, we are also seeing very severe and immediate reductions in public financial support. This environment has placed substantial pressure on many educational institutions to make deep budget cuts in their operations and to find ways to operate more efficiently, impacting both administrative and academic areas.

Our strategic and operational consulting business has been very busy with a healthy array of public and private universities, while our technology practice which has remained very strong throughout the economic downturn continues to look vibrant in the coming year. Our life sciences practice within the health and education consulting segment also had a good year. This practice is benefiting by an array of state and federal regulatory programs impacting the pharmaceutical and medical device manufacturers.

The trend toward increased regulation, a significant focus on compliance, and ongoing complexities associated with pricing for drugs and devices has created a healthy environment for our life sciences practice. Although much of the discussion around health care reform centers and providers, the pharmaceutical and medical device industries are also deeply impacted, particularly as the government focuses on drug pricing and the elimination of conflicts within the health care industry.

Let me now spend a few minutes on the legal consulting segment. Approximately 75% of the revenue in this segment comes from our V3locity electronic discovery work, while the remaining 25% comes from helping corporate law departments and law firms manage their legal operations more efficiently and effectively. The V3locity and electronic discovery work is primarily transaction-based, and somewhat difficult to predict. As you know, we had a very strong second half of 2010 in this segment, and we want to be clear that we are not predicting similar growth rates for this business in 2011. We are, however, optimistic about the way our products and related services continue to be received by our global client base. While we are confident that we will get our fair share of work as our clients are exposed to regulatory and litigation challenges, what we can't do with any meaningful reliability is predict the size or timing of those events.

We are entering 2011 with solid backlog and a healthy stream of new work, but these cases can end as abruptly as they can begin. We do feel that as demand rises, we will get a decent portion of the work. The advisory side of the legal consulting segment has a very different business model as compared to the electronic discovery business. Our work in this area focuses predominantly on large corporate legal departments, helping them reduce costs and increase efficiency consistent with broader corporate cost reduction efforts. Some of the corporate legal departments have become quite large over the past decade, and given the current economic environment and shareholder pressure, we are seeing strong demand to help legal departments achieve efficiencies consistent with the other corporate functions.

Coming off a strong Q4, we expect some softness in Q1 2011 as certain large projects end and others begin. However, we are guiding towards flat to 5% growth in the legal consulting segment for 2011. While the market continues to expand, the competition throughout the legal consulting space has also increased, making us cautious in predicting the future growth until we get a little further into the year. Finally, let me spend a few minutes on our financial consulting segment. The revenues in this practice are roughly split evenly between our restructuring and turnaround and accounting advisory businesses.

Restructuring and turnaround, which historically has focused on the middle market, continues to penetrate some of the larger bankruptcies, a clear indication of the caliber of personnel in this highly competitive practice. The R&T practice had a solid finish to the quarter, and although revenues were up slightly sequentially, we were able to build a book of business that will carry us strongly into the first quarter of 2011. The market drivers for this business continue to be the financial challenges hitting many industries and difficulties in getting access to capital.

Adding to our growth prospects for R&T in 2011 will be our recent addition of a managing director focusing on hospital turnarounds and merger integration. We expect the market for M&A work in the health care segment to be vibrant, so adding personnel who are able to capitalize on our existing health care strengths bodes well for the R&T practice in the coming year.

Our accounting advisory practice missed our targets in Q4 primarily due to ongoing uncertainties around the timing and demand for our large government agency. It remains quite difficult to predict the buying patterns associated with this opportunity, and while we continue to pursue other avenues for our accounting advisory service offerings, we expect challenges to growth for this practice in 2011. We are predicting flat to minimal growth due to these uncertainties for the financial consulting segment in 2011.

Finally, I want to make a few comments about the executive team changes that we announced this morning. When I became CEO in July, 2009, we had an executive team that did not have a long history of working together. Although I had worked with each member of the executive team, no one could have predicted that we all would have ended up in the same boat, let alone under those circumstances. Little did I know how fortunate I was to have a caliber of expertise, the leadership capabilities, the team-oriented approach, and most importantly the sense of humor that I found among Dave, Mary, Jim, and Natalia. We came together very well as a team. We created an environment where differing points of view among us were acceptable, and often encouraged, and we had fun working through some fairly tough times.

Having reached a level of stability in our organization, Dave Shade has informed me of his intent to retire later this year. And Mary Sawall had previously announced that she would be leaving at the end of March. Natalia Delgado will change roles and will be providing strategic advice directly to the Board on certain corporate matters. I will miss working with all three of them, and I'm greatly appreciative for what they taught me and what they have contributed over the years to make this organization what it is today. Jim Rojas, who has done a stellar job as CFO for the last 18 months, who also will be taking over the COO, the Chief Operating Officer role from Dave at the end of March. Jim and I have been working side by side in our roles, and I know that Jim will continue to provide great leadership as he takes on new responsibility for Huron's operations.

We are in the process of beginning a search for a new CFO, and Jim will plan to transition those responsibilities to the new CFO when he or she comes on board. Diane Ratekin who has been serving as our Deputy General Counsel will take over as the General Counsel effective today. I have worked with Diane for nearly six years, and I am very much looking forward to having her as part of our executive team. Finally, Patty Olsen has been promoted to lead our HR Department. She has been with Huron for five years in HR positions of increasing responsibility, and I am confident that she is able to handle the challenges associated with running an HR department in a professional services company.

Now let me turn it over to Jim Rojas to discuss our fourth quarter results.

Thank you, Jim. And good morning, everyone. Before I begin, I want to call to your attention a couple of items that impacted our financial statements this quarter. As previously discussed, during 2010, we divested certain businesses in the financial consulting segment. The financial results of these divested businesses are classified as discontinued operations. To provide meaningful comparisons, I will be discussing our financial results primarily in the context of continuing operations during this call.

Also, as previously announced, during the fourth quarter, we reached an agreement in principal with the lead plaintiffs in the pending securities class action lawsuit related to the restatement of the Company's financial statements in 2009. As a result, we recorded a pre-tax charge of $12.6 million, which had a $0.36 negative impact on diluted EPS.

Additional details pertaining to the proposed settlement can be found in our 10-K which will be filed later today. In addition, in response to our evolving business, coupled with the continued review of our office space, during the fourth quarter, we closed our San Francisco office due to excess office capacity in that geographic region. As a result, we recorded a pre-tax restructuring charge of $2.6 million, which primarily consisted of lease termination costs.

Finally, during this call, I will be discussing non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted net income, and adjusted EPS. Our press release, website, and 10-K, have reconciliations of these non-GAAP measures to the most comparable GAAP measures, as well as a discussion of why management uses these non-GAAP measures.

So with that as background, I will walk through some key financial results for the quarter. Revenues for the fourth quarter of 2010 increased slightly to $144.2 million, from $141.9 million in the same quarter 2009. Revenues were flat sequentially from Q3. But Q4 exceeded our expectations, and we ended the year with revenues above our guidance range. Our EBITDA for the fourth quarter of 2010 was $7.3 million, compared to $22.6 million a year ago. Adjusted EBITDA was $26.9 million, or 18.7% of revenues in the fourth quarter of 2010, compared to $27.2 million, or 19.2% of revenues in the same quarter last year. Adjusted EBITDA excludes a number of items, which are listed in our press release. Our adjusted EBITDA margin for Q4 of 2010 was impacted by lower performance-based fees compared to Q4 of 2009, and I will talk about that in more details in just a moment.

Operating income was $1.3 million in the fourth quarter of 2010, compared to $16.2 million in the comparable quarter the year before. Net loss from continuing operations was $4.9 million in the fourth quarter of 2010, or $0.23 per share, compared to income of $9.5 million in the comparable quarter of 2009, or $0.47 per diluted share. On an adjusted basis, non-GAAP net income from continuing operations was $8.4 million, or $0.40 per diluted share, in Q4 of 2010, compared to $13.6 million, or $0.67 per diluted share in the same quarter of 2009. As expected, both adjusted net income and adjusted earnings per share from continuing operations, in the second half of 2010, were up significantly over the first half of the year. For the fourth quarter of 2010, we recognized tax expense of $2.6 million, on a loss from continuing operations of $2.3 million, resulting in an effective tax rate of 111%.

Several factors affected our tax rate this quarter, including the proposed settlement charge, which reduced our pre-tax income and certain foreign losses with no related tax benefit, as well as higher state taxes. For the fourth quarter of 2009, the effective tax rate was 30.3%, which was lower than the statutory rate primarily due to the recognition of additional foreign tax credits and a release of the valuation allowance related to our Japanese operations. Now, let's look at how each of our business segments did in the quarter.

The health and education consulting segment generated 61% of total company revenues during the fourth quarter of 2010. This segment posted revenues of $88.5 million for the fourth quarter of 2010, off slightly from the $90.7 million in the comparable quarter in 2009. Excluding the impact of performance-based fees recorded in Q4 of both years, this segment's revenues increased almost 15% in 2010, compared to 2009. Performance-based fees were $13 million in Q4 2010, compared to $25 million in the fourth quarter of 2009, which had been higher than expected, due to a few engagements that resulted in significantly higher-than-anticipated contingent fees.

The health and education consulting segment's operating margin was 34.4%, in the fourth quarter of 2010, compared to 38.1% in the same period last year. The profitability in this segment declined primarily due to the lower performance-based fees this quarter, as I just discussed. Also, during the second half of 2010, we hired approximately 80 net new consultants at all levels, to support this growing business.

Our legal consulting segment generated 28% of total company revenues during the fourth quarter of 2010. This segment posted revenues of $39.8 million in the fourth quarter of 2010, an increase of 27%, from the $31.4 million in the comparable quarter in 2009. We continue to see good momentum in our electronic discovery practice, and the advisory side of this segment also saw an increase in revenues, quarter over quarter. The operating margin for our legal consulting segment improved to 27.2%, from 18.2% compared to Q4 last year. This was mainly the result of higher utilization, and billing rates for our billable consultants in this segment, as well as higher revenue per full-time equivalent.

During the fourth quarter of 2010, our financial consulting segment generated 11% of total company revenues. This segment posted revenues of $15.8 million in the fourth quarter of 2010, compared to $19.8 million in the same quarter of 2009. Our restructuring and turnaround practice continues to improve its position and performance in its niche market, medium-size companies with critical turnaround needs while still winning large engagements. Restructuring and turnaround generated revenues that were comparable to 2009, while our accounting advisory practice generated Q4 2010 revenues that fell short of the comparable period last year. As we previously mentioned, our largest client within this practice has changed its strategy for using consulting resources, which has resulted in revenues that are difficult to predict.

Segment operating margin for financial consulting was 32% in Q4 of 2010, compared to 36.3% in the same quarter of last year, largely attributable to higher cash compensation as a percentage of revenues.

So to recap the segment's results in the quarters, our health and education consulting segment continues to deal with the upheaval affecting hospitals and universities. We believe there is significant potential for our business as these challenges evolve.

We witnessed solid performance within our legal consulting segment and are focused on both the electronic discovery business and our goal of expanding our service offerings to corporate legal departments. Within financial consulting our restructuring and turnaround practice finished the year strong, while accounting advisory continued to show some weakness in demand for our services.

Now, a couple of statistics for those of you who track them. DSO for the fourth quarter came in at 62 days, and cash flows from operations almost $39 million for the quarter, and $50 million for the year.

Quickly, let me summarize the guidance that was included in the press release last night. For full-year 2011, we anticipate revenues before reimbursable expenses in the range of $580 million to $620 million. Adjusted EBITDA in a range of $101.5 million to $111.5 million. Impacting our range is an incremental $6 million of investment in upgrading our health care technology platform, the costs of which are not capitalizable. This translates to an approximate 100 basis point unfavorable impact on our margins. The anticipated benefits of this upgrade are not expected to occur until 2012 and beyond.

Continuing on, we are anticipating adjusted non-GAAP net income in the range of $41 million to $46.5 million and between $1.85 and $2.10 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 discussed earlier, the revenue range that we are projecting reflects a 5% to 12% increase from our 2010 continuing operations. 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 the comparable GAAP measures. The reconciliation schedule that we provided in our press release will walk you through these reconciliations.

And lastly, here are a few other modeling assumptions. We are forecasting cash flows from operations of approximately $90 million at the midpoint of the range, and capital expenditures of approximately $15 million. As you will see in our 10-K filing, contingent acquisition payments earned during 2010 totaled $22 million, which we will pay in Q1 of 2011. We are estimating 2011 contingent acquisition payments to be in the range of $25 million to $30 million. These amounts will be paid in Q1 of 2012 and will be the last year of our existing earn-out agreements. We expect that our average utilization rates will be approximately 74% for the full year, and average hourly billing rates are expected to be approximately $250 for the full year.

Assuming the midpoint of our revenue range, we expect that our full-time billable consultant head count will average approximately 1,175 professionals for the year, and average full-time equivalents for the year will be about 980. Weighted average diluted share counts for 2011 are estimated to be approximately 22.1 million. And finally, with respect to taxes, you should assume an effective tax rate of approximately 45% for the full year. Thanks for your continued support. And now I will turn it back to Jim Roth for his final thoughts.

Thanks, Jim. It is hard to have accurate predictions about future business performance when the global and domestic environment gets increasingly less predictable. As I've said before, providing revenue and earnings guidance involves more art than science. Having said that, it is our job to be responsive in the market and effective in managing our business. The professionals within our organization have steered through a lot of uncertainty, and the business has emerged with increased market share. We have a great reputation in all of our businesses, and an internal culture that is ready, willing and able to tackle whatever comes next. We are not perfect and we will make our share of mistakes, but I am confident that this Company is as prepared as any to achieve profitable growth throughout the year.

I would now like to open it up to questions. Operator?

Thank you. (Operator Instructions) One moment for our first question please. Our first question comes from the line of Tim McHugh of William Blair & Company. Please proceed.

Hi, yes, guys. First, I wanted to ask about the spending, the incremental $6 million of spending on Stockamp's IT. Can you give us a little more color on why do that now? How long would you expect those expenses to go on? And kind of what type of improvements to the product might you see?

Tim, you know what? Why now, I guess is the first question, we will break it up into parts. I mean, what we did is we relied on our people who lead the practice to determine when they thought that the current technology that we were using, when we thought it was best to upgrade it and we upgraded a system that has been in place for a significant period of time. So, we felt that this was the absolute right period of time to do that. One thing I will say is that the investment did start in 2010, and will be completed in 2011. It may spill into early 2012. But we do plan to pilot the new software later on this year.

Is the $6 million, the 2011 cost or if you started in 2010, just unclear on that? Were there expenses in 2010?

We're always spending dollars in our technology. What we really wanted to highlight over previous years and what we look going forward, what the true incremental spend will be, and that is what the $6 million represents.

Okay. Thank you. And then can you give us -- what are you expecting for contingent fees in 2011?

When we sat here last year, at this time, we said the amount would be $60 million, and it came in at $58 million. I would like to think that we have perfect visibility into those numbers, but some of it is, as Jim has said, it is more of an art than it is a science. We think the number for 2011 will be approximately $80 million. Probably, a little bit more back-ended, but not much. And it should be fairly even over the year, but I would say a couple million more in the second half.

And you mentioned the visibility. I guess with contingent fees down, and Jim Roth, you made a comment about the hard backlog you're seeing at this point. How can you compare the visibility you have into the, I guess particularly maybe just the health and education segment today, versus maybe a year ago, when you guys were giving guidance?

Tim, it is Jim. I think we -- as I indicated, we started building some pretty decent backlog in Q4, and I think it is obviously -- it is stronger than it has been in the past. I think that is partly a reflection just of the nature of the activity in the marketplace, and partly a reflection of the ebb and flow of the kinds of projects as we move from assessments into implementations, you tend to get a little bit more visibility. An assessment gives you short-term visibility, but a high degree of potential. When you move into the implementation phase, those tend to be longer projects, and the certainty or the reasonable certainty of a bigger chunk tends to be there as well. So, I think it is partly a reflection of market conditions, and just the ebb and flow of assessments versus implementations.

Have you guys sold most of the new type of projects that you're starting up on for 2011, at this point? Or is it still -- I'm just trying to get a sense for how significant that hard backlog is as we look forward.

Tim, as we've talked about before, most of our health care assignments are in the nine to 12-month range. So, you would say at any one period of time you'd probably have half the year sold into. So, in terms of visibility, not that is our entire business, but you do have some pretty good insight into what is going to happen into the first half of the year. I mean we still need to sell those projects that we're going to be completing in the third and fourth quarter, but at least with the longer-term contracts, we do have better visibility.

Okay. Thanks, guys.

Your next question comes from the line of Dan Leben of Robert W Baird. Please proceed.

Great. Thank you. Good morning. Just first on the legal business. Obviously, very kind of volatile. Things can come in and out of this business very quickly. But do you feel like over the course of 2010, the kind of more recurring base of this business is moving? Give us just your sense of how that has moved higher.

Dan, this is Jim Roth. I think what has really evolved in that practice has just been a broader base of clients from which we're working in, all of which have their own sets of events that are taking place. I think that is really what is driving our business, is that we've got a broader market penetration, and that -- and therefore, us through our clients are exposed to greater opportunities. And I think that is really what is driving it. As we noted I think at the end of our third quarter call, that we had seen a much larger share of -- or broader share of clients, I think we had -- I forgot the number, 20 clients were over a $1 million, at that stage. And that is really something we had not achieved before. I think that practice, that pattern is going to continue into 2011, as we continue to broaden our corporate client base and I think that bodes very well. That's why I made the comment about us being very satisfied with the diversity of our market share within that business.

Great. And then on the accounting advisory practice, obviously one very significant government client that drives the bulk of that, a good chunk of that business. As that client's demands start winding down, as the economic environment improves, what is the future of that business? Are there other places where you can put those assets and be successful or is this something that probably needs to be scaled down?

Well, keep in mind that a majority of our efforts in that practice are really variable in the sense that they are really not full-time employees with Huron. So, we rely heavily, as we always have in that business, on contractors. And so, that gives us a tremendous amount of flexibility to move up and down. There are other -- irrespective of what is going to happen to our large contract in that business, we are making further inroads into a number of other industries, financial services, there is a lot of other things we can do in financial services, above and beyond the current work that we're doing. We're making similar efforts into the health care industry, which is obviously an area we already have expertise. And then there are other products and services that we can offer, particularly as it relates to IFRS, and also helping a lot of clients through with their M&A challenges. So, we have various strategies that we're deploying to try to get ourselves balanced in that business, kind of as we do expect that other businesses begin to wind down. It is going to be both an industry focus and also taking on new services that we can offer. But the key point there I think is that a majority of it is going to be done through variable labor.

Great. Thanks, Jim.

Your next question comes from the line of Paul Ginocchio of Deutsche Bank. Please proceed.

Thanks. Just on the fourth quarter, just want to be clear, you came in above your revenue guidance and it looks likes EPS is toward the bottom and is that because of the lower performance fees you didn't expect in the fourth quarter? And then second, the new consultants? And then my second question, the $90 million of free cash flow, or of operating cash flow. It is above what I was expecting, can you just talk about maybe stock comp in the year, and -- or equity compensation expense in the year, and networking capital, I think those are the two differences? Thanks. Versus my expectations.

Paul, do you mind -- do you mind repeating your first question? It was kind of hard to hear.

I'm sorry. The first question was about the fourth quarter EPS, your revenues were above your range, it looks like EPS was towards the bottom, I am just wondering if that is because of the lower performance fees than expected in health care and the 80 new consultants.

I will take the EPS question. I mean one thing that impacted us in the quarter was the fact that our taxes were higher than anticipated. I believe if you look at our EBITDA range for the quarter, we were at the high end of the range for EBITDA. It was those items that are below where we were impacted somewhat. We had some amortization that was associated with the acquisition we did of Click. We had some taxes which were higher. So they were more so non-run rate items that impacted EPS than I would say otherwise.

Great. And then the second question was on free cash flow. I think you said $90 million was the guidance. It was higher than I expected. I'm just trying to look at some items that maybe to reconcile my expectations versus yours.

I mean, so, the $90 million is operating cash flow, so -- and $15 million of CapEx, to get you to somewhere right around $75 million of free cash flow. So, I'm not sure which number you are comparing to but I believe our estimate for 2011 is that stock comp is going to be flat from 2010 to 2011 at right around $20 million.

Are you expecting any working capital consumption?

Capital --

Sorry, working capital.

Oh, working capital? Our assumption on working capital is that we're going to be flat in terms of DSO. So, you will see some increase just because as the business grows.

Right. And final one, do you have any NOL's or any difference in your cash tax and your reported tax rate?

No. No, we do not.

Okay. Thank you.

Your next question comes from the line of Scott Schneeberger of Oppenheimer. Please proceed.

Thanks. Good morning. Could you guys speak to the timing in V3locity? It sounds like obviously a second half of 2010 but it sounds like a bit of a cautionary tone into this first quarter. And Jim, I think you said 20 clients over a million were in V3locity. Please confirm that factor, as to just what is happening here and a lot of big projects coming off?

You know what Scott? When we finished Q3, we said that Q4 was not going to be as strong as Q3, and we end up having a quarter that was $3 million or $4 million even stronger than that. I mean what we saw is some of our larger MSA clients just had projects that they needed our involvement, that was unanticipated, that really continued to drive some good revenue. What we're not predicting is that, that's going to happen again for the third quarter in a row. So yes, it is somewhat cautionary. But some of it is based on what we're seeing starting at the beginning of this quarter, but we -- as Jim said in his comments, we feel like we will see some strong demand throughout the year, and we will be at that flat to 5% growth for the year.

Thanks. And how would you term the competitive environment there? It seems like maybe getting a little bit more crowded. You guys are obviously there early, and very strong. If you could just speak to that, please.

Well, this is Jim Roth. I think the competition has been building for a while. I feel we've got a pretty -- we're very confident that our range of services provides kind of a more comprehensive set of services for our clients that they need, and that gives us confidence, I think that we're going to be very attractive against these large global clients. They've seen us work. They have been through the whole cycle with us before, it is a lot easier to work with one vendor, and as a result, I think we're going to be well positioned to meet the competition. There will be -- there has been competitors that have taken up portions of the whole cycle, the whole process for electronic discovery and some will try to focus in certain areas. Our kind of comprehensive solution, really I think, ends up being a lot easier for our clients to deal with and it seems to be bearing itself out in the market, so far.

I think just maybe just speaking to the difficulty in predicting these things. We had, I think it was back in the third quarter, we had one instance where a client sent us a tremendous amount of information on a brand new case over the weekend and we received the data before we were even told about the award. So, that stuff is just going to happen and I think this is going to be part of the business. Our focus can only be to make sure that we are penetrating the corporate clients in a way that is very aggressive and making certain that we deliver value and I think the rest of it is going to take care of itself. And so far, I think that is bearing out pretty well for us.

Thanks. Just a couple more if I could. Across all segments, you mentioned looking to get a little bit more aggressive with hiring this year, particularly in health care. How much acquisition activity are we going to see from you -- tuck-ins are you looking to do anything transformative? And what's the environment out there with regard to multiples and activity?

Scott, we always continue to look for acquisition opportunities. We are not building any acquisitions into our current guidance. So, it is all organic growth is what we're anticipating at this point. But we will always be -- we are always out there looking for acquisitions that we feel like fit our current strategy, and that we can tuck in. And we feel like there are a handful of good opportunities within the health care arena that we want to get into, and will continue to look for them.

Thanks. And just finally, what percent of the business right now is international? And how has that changed recently? And how may that change going forward? Thanks.

I don't know, it's probably 4% or 5% would be my guess, Scott that's international right now. I do expect that to go up over time. How fast, it depends. But I think we have, I think the application of our services on a global market is something we should easily be able to achieve. A lot of our domestic clients are looking for global services. And the reputation we have here in the US, I think we know for a fact, translates very well over seas. So, I expect that to be increasing over time. How quickly and how fast will depend upon a lot of events. But right now that is certainly part of our strategy to grow our global business.

Great thanks.

Your next question comes from the line of Tobey Sommer of SunTrust. Please proceed.

I was wondering if you could describe the mix of large hospital system engagements versus more traditional community hospitals? Thanks.

Toby, I think, that's a good question. I don't know that I have the answer to that right now. I would say a majority of our work today in the health care space is probably done with large health systems and academic medical centers. And what percentage that is, I don't really know. It is a good question if I had to guess right now, I might say that maybe two-thirds of it are coming from large health systems and academic medical centers, and that probably one-third would be coming from medium or smaller community hospitals. That's just a guess. But it is my sense.

Okay. Thanks. And then, I read a little bit about a trend of more direct employment of physicians at hospitals. And wondering, how that may be impacting your customers' financials? And then if you're seeing any related impact on demand for your services as a result.

Well, certainly, there has been a significant trend for hospitals hiring physicians. And the reason they're doing that is because they need to, as they kind of go towards more of a so-called accountable care, or they try to get back to the point where they're having to be measured on quality. If you don't control the physicians, it is very hard to be able to do that. So, that explains the trend that is in the industry. A lot of our work right now is helping our clients get from where they are today, which is where many of the physicians are in fact not employed by the hospital. And getting them to the point of actually transforming their whole clinical operations. So, that they can better manage towards quality and manage towards outcomes, which is something they can't do today.

We see this, what we're calling clinical transformation, as a major part of our growth strategy for the health care business. And that is helping hospitals making this transition from essentially a Fee-For-Service environment towards one that is going to be outcomes based. There is also a lot of productivity and incentives that are going to be built into the systems by the hospitals. The physicians need to be a part of that. So, figuring out exactly what those incentives are going to be. How that affects hospital operations and margins is a very complex question; and that's part of the work that we're doing right now.

Terrific. Thank you. And then was wondering, you talked about the breadth of customers in the legal consulting business. I'm wondering if you are still driving -- or generating that breadth from being short listed, contractually, directly with the end customer? Or if some of that diversification is coming via external law firms? Thanks.

A majority of our work is really going down -- our strategy is to go down to the corporate and to work with the corporate law departments. They're the ones that seem to be increasingly in charge of the litigation process. And as the corporations themselves have had to manage costs better. So, our strategy is clearly there. And that's why we do have a strategy of trying to get MSA's, so that at a minimum we are considered for any big opportunity that comes up. It is rare that we're going to be the sole source on these things, although it does occur. But we do try to get ourselves set up so that when an event does come up, we are on the absolute short list. Our strategy clearly is to deal much more with corporations rather than law firms.

Okay, thank you. And then two numerical questions. One, could you quantify the contribution from acquisitions to the 2011 guidance? And I mean, historical already consummated acquisitions, not prospective ones? And then, if you could give us a sense for what free cash flow may be in 2011, based on the guidance. I think you have an earn-out payment, if I remember correctly. Thank you.

Well, Tobey, it's -- we had $90 million of operating cash flow, $15 million of CapEx. So, that is $75 million. We've said that our earn-out payments are going to be $22 million, $23 million. So, you're looking at about $53 million of free cash flow.

And then is there a contribution from acquisitions imbedded in the 2011 guidance?

There is. We have not provided what the financial results were for the companies that we acquired. Suffice it to say that, the amounts were small. I know you can take a look at in terms of what we paid for the companies, and you can sort of back into what you think the revenue is, but the amounts are not that significant. So, we have chosen not to disclose it.

Okay. Thank you.

Your next question comes from the line of Joseph Foresi of Janney Montgomery Scott. Please proceed.

Good morning. I was wondering if you could give us a little bit more color, I know just maybe you could compare the environment heading into 2011 versus 2010. I know last year, we talked a lot about delayed decisions. We talked about some larger contracts. I wonder if you could bring us up to speed. Obviously it sounds like in the decision process, there are no delays and it sounds like some of those larger contracts have been signed. I wonder if you can just give us some more color on that.

Well, Joe, it is tough to answer across all of our segments. In general, and I think particularly for our larger businesses, I think we're finding that there was a period of time probably in 2010 where there was a lot of uncertainty. I think what we have seen, probably beginning over the last six month or so, is that clients seem to be a little bit more comfortable with recognizing that they have to begin to make decisions. And so, we actually saw some of the kind of delays and deferments that we saw earlier in the first part of 2010 begin to ease up a bit. And so I don't -- there is still -- it is very difficult for our clients to be kind of gauging how deep things are going to go, how severe they're going to get. But having said that, we have seen more institutions now becoming ready to take action, and I think that has benefited us so far. We're seeing a slight -- from our perspective, in terms of their willingness to buy and make decisions, and buy consulting services. We're seeing that ease a little bit right now. And it is for our benefit.

And I think you talked last year, maybe about two large engagements. Have those been started? And can you just bring us up to speed on those?

Joe, this is Jim Rojas. I think we've previously mentioned that the one large one in health care that was anticipated to start in January did start in May. And the other client that we had mentioned is one where you have beginnings, and starts, and ends. And basically, we saw some of the increases in the mid year that we had anticipated that we would. So, to answer your question. Yes, both have started.

Okay. And then given the guidance range, maybe you could give us some color on what would get you at the higher end of the guidance range. And what would get you at the lower end of the revenue side. What are the swing factors, besides obviously the contingency fees?

I guess there are a couple of things. I mean I think certainly, we've told -- we said that, particularly like in legal consulting, we're guiding towards flat to 5%. I mean what could happen would be that there would be a big pickup, and we would get back to a pace that was somewhat similar to what we experienced in the second half of 2010. So, that would get us toward the high end. If those things don't materialize, I think that would bring us down towards the low ends. I think similarly, with health and education. I think somehow there was a -- if there was more fiscal instability among some of our public university clients. If there was somehow some greater uncertainty put into the health care reform initiative, that could lead possibly toward institutions making some -- or deferring some decisions, and that could slow things down. That part, as I indicated earlier, we don't really see that happening right now, as I think they're beginning to make some of these tough decisions.

Going on the upside, I think that there is a lot of turmoil out there for our clients. And I think they're having to respond to it. I think that bodes well. So, if we're going to go towards the high end, it is going to be our core client base making some decisions to move forward with the initiatives that they know they need to do to be able to meet their objectives. In our minds, those are the swings. We are putting in a range right now that we feel comfortable with, given all of these uncertainties. Could we see it going higher? Yes. Could we see it going lower? Yes. And that's why I think we're pretty comfortable with the range we've providing right now.

Just on the operating metrics, a couple of quick one, on the health care practice, how high -- when do you feel like you're running that business a little bit hot from a utilization standpoint? And I know that you've done some hiring. Maybe you could give us some color on where that hiring is coming from. And any changes in the cost of labor in that particular group.

This is Jim Roth. I don't see necessarily any changes in the cost of labor. I think we're approaching a point where it is a little bit too hot. I mean really when you get above 80% for any prolonged period of time, you essentially begin to lose some of the flexibility that you need and it really is very hard to operate at that level for a while. So, the mid to higher 70s is a better position for us in that area. So, I think the answer to your question is, we do think it is a little bit hot right now. We have -- there are a number of opportunities for us to be recruiting into. There are people in industries, and there's competitors, there's all kinds of opportunities for us to be hiring into. So, it is -- for us, and it is probably true for all consulting firm, the challenge is not necessarily finding people that are knowledgeable in the business. The challenge is finding people that are knowledgeable in the business, and willing to do what a consultant does. Which is largely travel and be on-site, and that's always been the hardest thing for us, and probably all of our competitors as well.

Okay. And then just the last question for me. I think, I don't know if you have already gone through the process of putting through price increases but have you haven't, I realize that you've given the $250 number for the full year but make you could just talk a little bit about any price increases or decreases across any of your businesses. Thanks.

We look at each one of our businesses in terms of analyzing the value that we provide versus the fees. And in some respects though, in many of our businesses, we're providing services that have a return on the savings that we provide. And that's the contingencies that drive the revenue that we earn. So, it is really difficult to predict where you are going to be from a rate per hour when have you so much that is invested in the contingency. So, that's one thing that makes it challenging. But we do look at it. For some of our services that are more product ties, that we're selling them not on a contingency basis. We've looked hard and in some areas we are raising prices. I'm not necessarily sure that will immediately show up in an increase in rate per hour, but we have take an hard look, and in some select areas we are taking pricing increases.

Okay. Thank you.

(Operator Instructions) Your next question comes from the line of Bill Sutherland of Boenning. Please proceed.

Thanks. Most of them have been asked. Jim Rojas, really just a bottle question here. Is there anything on quarterly phasing that we should be aware of for 2011?

In terms of revenues for the year, I would say a little bit back end loaded. But it is not a hockey stick. We'll see and I mean maybe it is 45/55 as the year pans out but it is not a significant increase in the second half.

Okay. And I noticed that if your financial consulting segment, if you come in flat, that will be requiring some sequential pickup. Would that be kind of a steady progression? In your mind?

It will be.

Okay. All right. Not to dwell on that. And then finally, Jim, on the reconciliation with the restructuring and restatement at $7 million estimated. What is that specifically for, or is it a combination of things?

No, it is a combination of things. I mean one of the things that was disclosed, will be disclosed in the K and I think was also disclosed when we settled the class action suit. Is that cost of the ongoing SEC investigation going forward will be borne by us because the insurance companies have tendered their entire policy. So, there will be costs going forward this year. Associated with the investigation. And so, that is a lion share of what those dollars are. But we will continue to look for cost savings opportunities. Like every company in the US is, and each one of our competitors, we will continue to look at space like we did in the fourth quarter, with San Francisco, to make sure that our space footprint matches what our revenue and people geographically are. So, it will be primarily the combination of those two things.

So Jim, I guess, as long as the investigation continues, there will have to be a reconciliation line for it?

Yes.

Okay. Thanks, everybody.

Thanks, Bill.

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

Thanks for taking time out this morning to discuss our fourth quarter results and 2011 guidance. I want to close by thanking our employees who stayed focused on the market and provide tremendous value and quality to our clients. Without them, none of this is possible. We look forward to speaking with you again in April when we announce our first quarter results. Good day.

This concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.