Resources Connection Inc (RGP) 2002 Q3 法說會逐字稿

Good day and welcome to this Resources Connection third quarter 2003 earnings conference call. This call is being recorded. At this time, for opening comments and introductions, I would like to turn the call over to the Chief Legal Officer, Ms. Kate Duchene (ph). Please go ahead, ma'am.

Thank you, operator. Good afternoon, everyone, and thank you for participating today. Joining me are Don Murray, our Chairman and Chief Executive Officer of the company, and Steve Guisto, our Executive Vice President of Corporate Development and CFO. During this call, we will be providing you with comments on our results for the third quarter of fiscal year 2003. By now you should have a copy of today's press release in front of you. If you need a copy and are unable to access the press release on our Web site please call Cassandra Edwards (ph) at 714-430-6310, and she'll be happy to fax a copy to you.

Before introducing Don Murray, I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year-ended May 31, 2002, for a discussion of some of the risks, uncertainties and other factors such as seasonal and economic conditions that may cause our business, results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to Don to give an overview of the quarter.

Thanks, Kate. Well, welcome to our conference call for the third quarter of fiscal 2003. As you know, Resources Connection is a professional services firm originally founded as part of the big five, now the big four. In the United States, we are part of Deloitte & Touche and in the UK, part of Ernst & Young. We provide accounting and finance, human capital and information technology professionals to serve companies' internal consulting needs on a project by project basis.

Through our wholly owned subsidiaries, we also serve our clients with internal audit services including outsourcing and co-sourcing and risk consulting and compensation consulting. We provide our services to clients through 50 domestic offices and five international offices. We are best known for our accounting and finance services, and I've add added the additional service offerings to meet our clients' needs of the. Like the rest of American businesses, it has been an eventful few months for Resources, and we have a number of initiatives to update you with today.

First let me summarize the operating results in our third quarter of fiscal 2003. As indicated in our press release today, revenues in the quarter were 49.2 million. This revenue is higher than the third quarter of a year ago by 15%, but is sequentially lower by 2%. The sequential change in revenue reflects the impact on our business of the major holidays. As we described when we last spoke to investors, the quarter just completed included an unusual number of non-revenue days due to the number and timing of holidays during the quarter. Our quarter includes the Thanksgiving, Christmas, New Year's, President's Day and Martin Luther King day. The revenue and gross margin for the quarter was also affected by the unusual storms in the northeast and Texas that weakened results in the last week of the quarter.

However, our average weekly revenue in the non-holiday weeks was above the same measure in the prior quarter by about 4%. Included in our revenue is approximately $2.4 million from our subsidiary, the procurement center. We acquired the procurement center in the middle of the second quarter of this year. So this third quarter includes a full quarter of TPC's results. Steve will provide some additional detail of revenue trends during the quarter in his review of operations later on.

There are several contributing contributors to our revenue results. These included large projects at major troubled companies in the midst of restructuring. Some demand was caused in gaps in client staff because of previous downsizing. As we enter the fourth quarter, we're beginning to see particularly high demand from companies facing processes around the Sarbanes-Oxley act. We see stronger demand from our larger clients than the middle market, and we believe this validates our strategy and focus marketing for large big four-type clients.

Gross margins for the quarter were less than our 40% target due almost completely to the impact of the holidays. While you cannot ignore the negative holiday impact when annualizing the trajectory of our business, I believe it's important to note that margins in the weeks other than the holidays exceeded our target, and we expect gross margins for the year to equal or proceed our 40% target. During the third quarter, we began to see the impact of significant investments we have made in our business. During last quarter, we completed the purchase of the procurement center. In this new service added both revenues and profits during the quarter. Resources audit solutions, which provides comprehensive risk management in internal audit solutions to our clients is a business particularly appropriate for the current issues facing corporate leaders as they adjust to a new and more attentive corporate governance environment.

We have chosen to build this practice organically, yet our revenue run rate from this business is growing. We have a substantial number of significant opportunities not yet closed but in the pipeline. Most of these have to do with the effort companies are going to have to put forth to comply with Sarbanes-Oxley. While marketing efforts continue during the quarter as well. Last quarter, we were named one of Forbes best 200 small companies of 2002, and this quarter you may have noticed new full-page ads in Fortune. We estimate that our investment in our new service line, our marketing and our new offices had a P&L impact during the third quarter of approximately two cents a share. But we firmly believe in expansion and in investment in this economic environment to secure our future growth opportunities.

The accounting and finance project metrics we use to gauge the business continue to indicate that our clients are satisfied. Revenues from our 50 largest clients represented 43% of total revenues year-to-date. Fifty eight clients contributed 50% of revenue during the quarter, and our largest client was about 4% of revenue. Of our top 50 clients from the previous year, 49 still remain clients at the end of our third quarter. We hope that as companies continue to deal with the recession issues, that this type of demand will continue. Here's Steve with additional information on the results of the third quarter.

Thanks, Don. Revenues totaled $49.2 million for the quarter versus $43 million in the year-ago quarter and 50.2 million in the second quarter of this fiscal year. These results represent year-over-year growth in 15%, an expected slight sequential decline. Included in revenues for the 2003 third quarter is $2.4 million in revenue from TPC. Growth without TPC revenues was 9% year over year. Based on the holiday impact on revenues that Don previously described, I believe an important data point for understanding how our business is performing is the average weekly revenues during the non-holiday weeks of the third quarter. The average for non-holiday weeks in quarter three was slightly above $4.1 million per week. Average weekly revenue during the second quarter was $3.9 million. On that business - excuse me, on that basis, we are pleased that the revenue recovery we began to experience this year was not derailed during the holidays.

Non-holiday revenues per week during Q3 ranged between 3.9 and $4.5 million, and we ended the quarter at a run rate of $4.1 million per week. Four point one million of weekly revenue implies an annual run rate over $200 million. The final quarter of the year is traditionally one of our stronger quarters and is not plagued with the number of revenue-reducing holidays we have just experienced. We operate on a 52, 53-week fiscal calendar, and this year turns out to be a 53-week fiscal year. Therefore, the fourth quarter will benefit from an extra week of revenues. It will also include an extra week of expense.

Were we to continue at a pace equal to the average non-holiday week of Q3, revenues for the final quarter would fall between 55 and $58 million, and SG&A would likely be between 28 and 29% of revenue. This would result in annual revenues between 198 and $201 million for annual growth of between nine and 11%. So far this quarter, revenues have ranged from 4.2 to $4.4 million per week. We are currently planning our current fiscal year and will provide thoughts on fiscal 2004 revenues in our next conference call. Looming over all this planning are the unknown effects of the war and its impact on the economic climate.

Gross margins during the quarter were below our target but in line with our expectations for this quarter and the guidance we provided on the last call because of the negative impact of the holidays. Gross margins were slightly worse than the year-ago quarter because of the mid week holidays. Gross margin were 38.8% for the quarter compared to 39.2% in the year-ago quarter. To put this into perspective, gross margins were over 41% in February and we expect gross margins to be at or above our 40% target for the fourth quarter and for the year. Associate headcount at the end of the quarter was 1,181, compared to 1,003 a year ago, 1,221 last quarter, and 1,060 at the end of the 2002 fiscal year. The Northeast and Texas storms caused a minor headcount reduction at quarter-end, but the headcount was 1,220 at the end of the first week of Q4.

Now to the other components of our third quarter financial results. For the quarter, our spending levels were consistent as a percentage of revenues with the previous quarter. We continued strategic spending in the marketing area, made investments in our newest services, had a full quarter of costs from TPC and made strategic hires. During the last few conference calls, we confirmed that there would be ongoing marketing expense that would continue for some time. Given the changes goings going on in the professional services industry, we believe it is important for us to continue these types of expenditures now and we expect spending to improve our brand and to help us capitalize on new opportunities. We also added a total of 13 net professionals in our newly acquired subsidiary, TPC, in our newest service lines and in other offices.

SG&A for the quarter was $14.2 million. This was $1.9 million more than the year-ago quarter. SG&A as a percent of revenue was 28.8% for the quarter, just slightly better than the previous quarter. Our board continues to support the investments we are making. Depreciation and amortization were $626,000 for the current year quarter versus 347,000 a year ago. We completed the purchase price allocation for TPC and cumulatively adjusted amortization from the purchase date. Separately identifiable intangible assets from that purchase will be amortized over periods ranging from one to four years. The charge will be $140,000 per quarter through Q2 of our fiscal 2004, and then $75,000 per quarter through Q3 of fiscal 2006.

Interest income was 230,000 for the quarter versus $265,000 a year ago. Invested cash earned 1.6% during the quarter. We have had no interest expense this year, and interest income continues to be negatively affected by the very low interest available in current market conditions. Our pre-tax margin for the third quarter was 9.2% compared to 10.4% in the year-ago quarter. The decrease was due to the investments we have previously discussed, higher amortization and the negative gross margin during the holidays. Earnings for the quarter were$2.7 million or 12 cents per share versus 2.7 million and 12 cents per share a year ago.

Now let me turn to our balance sheet. Cash and investments at quarter-end was $61.5 million, demonstrating continued strong cash flow performance. At the end of the quarter, we made a partial payment on the TPC earn out based on achieving some of the financial targets set at the purchase date. Receivables at quarter end were $24.5 million and day sales outstanding at quarter-end improved to 44 days compared to 46 days at the end of Q2. This continues a two-quarter trend of improved DSOs. And overall, we are pleased with the strength and soundness of our balance sheet. Now let me return the call to Don for some final comments.

Thank you, Steve. Well, we have enjoyed good revenue growth in the previous several quarters. While encouraging, we speak to you at a particularly difficult time for our country. The impact of the war in Iraq on decisions by our clients are impossible to predict. The improving demand for help implementing Sarbanes-Oxley, and then the additional breadth of services we have developed over the course of this recession, position us relatively well. If we're able to capitalize on that positioning to continue the revenue progress of the last few quarters, we will develop the potential to improve our overall operating results in return to our shareholders.

As Steve mentioned, we also have a very strong balance sheet that affords us the opportunity to use our cash as a source of capital for expansion opportunities. These include potential acquisitions that would either develop new service lines or open up new international markets. The return on our TPC acquisition is substantially better than the returns available on cash, even before factoring in the growth possibilities from expanding that service across our marketplace. But our acquisition strategy is very disciplined, and unless we believe a potential candidate fits all of our criteria, we will not go forward. In this economy, we see many candidates that would be accretive to our business, but do not meet our strict criteria. We're looking for big four types of professional culture, a professional level of services and the ability to expand and grow. At this point, we'd be glad to answer your questions.

Thank you, Mr. Murray. The question and answer session will be conducted electronically. If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are on a speakerphone, please be sure your mute function is turned off to allow your signal to reach our equipment. We will proceed in the order that you signal us, and we'll take as many questions as time permits. Once again, please press star one on your touch-tone telephone to ask a question. And we'll pause to give everyone an opportunity to signal for questions. We'll take our first question from Andrew Steinerman of Bear Stearns. Please go ahead.

Hi, Don and Steve. Good work on building momentum in the tough environment here. My question has to do with just clarifying gross margin. Obviously you cued us in that it's within your expectations and also almost exclusively due to holiday effects. Steve, if you could just review for us the mechanics of why gross margins get hit in a third quarter and why we got hit in this third quarter more than the year-ago quarter, and then lastly, just bill rate and pay rate trends, you know, is there anything going on with that in gross margin?

Sure. Well, if you look at our gross margin percentage this year versus last year's holiday period, we're really within four basis points of where we were a year ago, so although it was slightly worse, it was only marginally worse than what we saw last year. During the holidays, and in this particular quarter, there were three paid holidays versus last year when there were two. We had Thanksgiving, Christmas and New Year's, each of which are dates that we pay our associates for time that they're not working, and as most of you know, that is not our typical business model, so during this period, we have substantial pressure on gross margins that is really not a result of how the business is doing, it just has to do with the calendar.

From a pay rate and bill rate standpoint, we continue to see our bill rates improve. They've improved over last quarter and they've improved over last year. We also correspondingly had some increase in pay rates as well, but we continue to expect that gross margins for the long term will remain north of 40%.

Right. But bill rates improved better than pay rates?

Bill rates went up about five dollars year over year and pay rates have gone up, what ...

Great. Thanks for the comments.

And we'll take our next question from Adam Waldo of Lehman Brothers. Please go ahead.

Good afternoon, Don and Steve. Nice work on continuing to diversify the practices. Couple of questions, if I could, just picking up on Andrew's point around bill rates. Can you give us the specific percentage increase in bill rates booked in the quarter, Steve, or would we need to wait for the Q on that?

The increase over last year, Adam, was almost 6% and the increase over the prior quarter as a little north of 3%.

Ok. Turning to the TPC acquisition and Resources Audit Solutions launch, both of which look to be tracking on schedule, can you give us a sense for the revenue contribution in the quarter from RAS, and is TPC now achieving gross margins consistent with the low 40% target for incremental practices?

Resource audit solution is not incrementally profitable yet on its own. It's an investment for us as we continue to add around the country high level audit risk management-type people from the big four, so we are - as I said, we have a very robust pipeline of major projects, and we have to have the in-house talent to address those projects. Actually some of those projects are worldwide, so we continue to invest in resource audit solutions, and we're doing it in a balanced matter. We're not hiring 30 people at one time, but we're adding incremental people in the different regions as we're responding to major opportunities. So at this point in time, it's going to be and continue to be an investment for us.

And Don, where was revenue booked from RAS (ph) in the quarter and where roughly are you in terms of available head count?

We're running about - I think right now about a business plan of about $3 million this year in RAS (ph) that we believe we will exceed, and our current run rate based on last week's billings is about five mill million to six million.

On a full-year basis?

Yes. Annual run rate.

OK, great.

... incremental growth opportunity for us.

Ok. And head count?

We haven't disclosed head count per service lines separately, Adam.

Right. Just thought I'd take a chance. Finally, if we could just turn over to a couple of other housekeeping items, in terms of corporate development strategy. Obviously the surplus cash balances effective interest rate continues to go down and that obviously raises the accretion threshold for buybacks. Historically, Steve, you've signaled that sort of 12, 13, 14 bucks a share and from both an IR MPV (ph) basis standpoint from an earnings accretion dilution standpoint makes sense for buybacks. Could you update us on your thinking on that under the seven percent authorization in light of current interest rates?

Yes, I would say, Adam, that it is not high on our agenda to actually make buybacks of our stock. It is still a relatively illiquid stock and we want to keep as much liquidity as available as we possibly can in the marketplace, and while mechanically the range of price that you suggested might make it much more accretive than cash, we have not established a target price at which we would suggest a buy back to our board. We consistently are looking for things that we can do with our cash that would be substantially better return to us than cash. As Don mentioned, TPC clearly has that attribute, and as we look for over things we might do with it, we're looking to return substantially better than what cash has to us in the last year or so.

Fair enough. Good thinking. Thank you.

And we'll take our next question from Brandt Sakakeeny of Deutsche Banc. Please go ahead.

Thanks. Hi, how are you? Couple quick questions. Steve, can you just rework some of these numbers you threw out quickly? You said you're running right now slightly above 4.1 million per week. Is that right?

As we entered the fourth quarter, the weeks of the fourth quarter have been between 4.2 and 4.4 million. So we completed the third quarter at about a 4.1% rate, and we've continued to make progress since then.

Ok. So 4.2 to 4.4 today, and what you said basically is the 55 to 58 translates to roughly 4.1 per week, is that right?

Correct.

Ok. And tax rate, should we assume basically consistent with 41% tax rate?

We expect a 41% tax rate for another at least three or four quarters and then we're hoping that we will be able to drive the tax rate down.

Ok. And again for modeling, do you anticipate ending the year as margins - gross profit margins that are in line or ahead of 40%, is that correct?

Yes.

Ok. Great. Can you just update us on the earn outs for TPC?

: In the TPC transaction, there were two sources of earn out. One was a calculation that we've completed at the end of the calendar year and we've paid out a portion of that. They have an opportunity if they grow to earn some additional amounts, and that will not be measured until the end of the 12 months after the purchase price.

Ok.

And it's also contingent on them hitting a higher gross margin.

Got it. All right. Any turnover amongst office leaders or anything?

Nothing that we didn't institute.

Ok. Great. Thank you.

You're welcome.

And we'll take our next question from Greg Capelli of CS First Boston. Please go ahead.

Hey, guys. It's Greg and Josh. I want to follow a question about the revenue per week trends. Steve, as you saw those improved throughout the quarter, you know, can you talk a little bit more about what types of situations might have been driving that? Don, I'm not sure if I heard you. Did you say that it was, you know, distress situations or certain types that were really providing an incremental boost there?

I would characterize most of our major projects today as work that would be in a more negative environment than a positive environment, so we are involved with a number of big companies, major companies in turnaround situations that require a lot of people to help them get through the filings and the turnaround issues. At the same time, we see a number of our clients who went through downsizing who also don't have the capabilities now of getting just some of the normal work done. So we're picking up work from that arena too, and that's primarily where the growth is coming from.

Ok.

We would anticipate if things continue the way we see them and we land some of these big risk management Sarbanes-Oxley projects that we will hopefully get some large project work out of that but that won't really hit for probably several months.

I understand. And how about the average length of assignment? You know, is that changing at all, you know ...

We don't believe it is, but what we - what is occurring is these big companies were not really - we're not really leaving these big companies, so we are constantly getting new assignments and a lot of times our people when they prove their worth at the client, helping them get through one fire drill, the clients will redeploy the people help to help them again. So we think that's our strength as client service.

Got it. Can you offer a little more - just a little more color on - this is more after long term question relative to SG&A. You talked about the fourth quarter in terms of where you might see that shake out as a percentage of revenue? Can you start to get some operating leverage on that going forward - excuse me - SG&A. Would you start to get some operating leverage on that as you go forward and hopefully we can see some actual cyclical revenue growth as well?

I would say this ...

I'm sorry, what do you mean by cyclical revenue growth?

Just cyclical revenue growth, revenue that would be more tied in to an economic recovery.

Let me answer the question about SG&A first and maybe I'll let - we'll see if we - how we answer the question on revenue. From an SG&A standpoint, we have certain expenditures in the fourth quarter that occur every year in the fourth quarter that tend to drive up our costs. We have an annual meeting with management and other things like that, so the fourth quarter will have some costs in it that are essentially in that quarter. From the longer term standpoint as we grow the revenue base, we would expect to releverage the infrastructure and lower SG&A cost as a percentage of revenue, but that won't likely happen in the fourth quarter of this year.

A portion of our G&A, we believe is investment for the future whether it's in RAS (ph) or whether it's in marketing or whether it's in the RCG group, and all of those new service lines including the IT and the human capital position us very well if there is some cyclical recovery. Right now we're doing this against the current on the economy.

OK Don, one final question. From the strategic marketing that you mentioned that you've been doing the last several quarters, where is that money being spent? Can you just give us a little flavor on what you're doing there? It sounds like it's going to be well worth the investment.

We're targeting media outlets that hit our influencer group, so we're spending the money, the Board of Directors, non-executive board members, Fortune Magazine types of things, and that's where we're spending the money where historically, we spent very little on advertising. We are now geared up to make our name better known. CIO magazine, CFO magazine, et cetera. And so we are constantly trying to get in front of board members, and also holding seminars. We had a seminar this week in the UK for a lot of influencers, and so that's where we're trying to put the money.

Ok. Thanks a lot, guys.

And we'll take our next question from Randy Mehl of Robert W. Baird. Please go ahead.

Good afternoon, Don and Steve. I wanted to go back to a question that was asked about the types of projects that you're winning and looking at. What is the relative size of these versus what you've seen historically, and I'm talking specifically about - you mentioned big risk management projects.

I would say the - on average, the relative size is growing only because the middle market types of accounts have shrunk. Historically, we've always gotten very large accounts and - I would say today we have more of those large projects than ever before, and we have less of the middle market projects. So the size of the projects are growing. The total, let's say, dollar size of any one project is probably about the same as we've experienced.

Ok. And what's been the contribution from some of your larger bankruptcy clients, and did that have an impact, a positive impact in the quarter?

Well, yes, very much so. I mean, that's where we're adding people. So I don't think we've - Steve is going to make me answer that, but we haven't disclosed that before, that type of thing.

Randy, without disclosing, total dollar amounts from ...

Or the clients.

... from individual clients or their names, four of our top 10 clients happen to be in reorganization. A number of those were clients before they were in bankruptcy, so we've continued to serve them through their difficulties and some will likely come out of bankruptcy and we hope to continue to serve the. others may not. But these are major companies so the tail on these projects is actually quite long, and I guess one indication of just the overall success we're having with large companies is that this year, as of nine months into the year, we've served 23clients that we've billed more than a million dollars, and last year at this time, there were 14, so we continue to make progress even through this recession in penetrating these major accounts and continue to develop business with them.

Ok. And just clarification on the numbers here. Four point one million, it sounds like in the final week of the quarter, then you started in the 4.2 to 4.4 million range in the May quarter; is that right?

Yes, I would say that that's factual and we're trying the caveat just a little bit because with the ongoing uncertainties of what's happening in the geopolitical environment, I wouldn't want to conclude that we're just going to ramp straight up, but we've certainly continued to see progress between the end of the second quarter, the end of the third quarter and now into the fourth quarter.

But the 4.1 million per week that was embedded in the guidance, that sounds like then it's conservative based on just not knowing, you know, how things are going to go for the next few weeks. Is that fair?

: It's conservative based on what we are accomplishing right now and in the last few weeks. How this war and the effect on the travel industry will have, we don't know because that will affect us too since we have several large airline and airline-related clients.

Ok. And just one last question, I'll turn it over. Any change in the competitive environment?

Not really.

I don't think so. I would say that we don't - we really haven't seen the big four backing off from some of the projects that they've been doing, which we had expected, so I would say it seems about the same, doesn't it?

Yes, I would agree with that.

Ok, good. Thank you very much. I appreciate it.

And we'll take our next question from Stefen Mikatovic (ph) of Pike Place Capital. Please go ahead.

Hi. Good afternoon.

Hi Stefan (ph).

A couple questions. I know Don mentioned something about a two cent hit from spending. Was that the additional marketing, was it the marketing plus the RAS (ph) plus new offices? If you'd clarify that.

It's basically the additional marketing that we are doing today that we didn't do last year at this time, and it's the investment in personnel for the new service lines like the resource audit solutions or a new offices that we've opened.

Ok. So it's all three.

It's all three, yes.

Ok. And then lastly, just on the revenue per week, I think in the previous - in the second quarter, you had said your average revenue per week was, I think, 3.9 million.

Correct.

Right? But it was actually that was also the second quarter also had an impact from some holidays. I think you had said on the last conference call it was 4.1 million on the non-holiday weeks for the second quarter.

: I think what you said is 4.1 at the end of the quarter for the non-holiday week. Whereas now we're about 4.3, 4.4.

The second quarter doesn't have any really significant holidays in it this year, so that would not have been ...

Didn't it have Labor Day or something?

Yes, Labor Day is not a huge impactor for us.

I mean, I think the summary here, Stefan, is that we continue to make progress on a week-to-week basis, and we're pleased with that. We're still pretty cautious because of all the various things that are going on in the economy and across the ocean. The variety of sources of new revenue are giving us some impetus to continue to build the company.

Right. I guess what I was trying to get as at is where is the - the sequential growth that you've seen in terms of the average weekly revenue, it looks like there's a few moving pieces. You've got TPC which added a little bit - you know, added 2.4 million in this quarter, versus 1.6 in the last.

Right.

You've got RAS (ph) ramping up, and then you've got your base business. So is TPC's run rate ramping sequentially also? Is their business growing, in other words, from when you bought it, and is the base business growing, you know, over the last few quarters as well?

The TPC business is doing just about what we expected, and we expect it to grow this year. The RAS (ph) business is clearly quite small and is continuing to grow, and the core business of accounting and finance, IT and human capital services in total continues to grow. So, what we've tried to do, I think, during the recession is build a broader base of services he so that you have a layering effect in terms of revenue growth, and that's what we're tending to see as we move forward, is the combined impact of all of those various sources of revenue will tend to push our revenues forward.

Ok. Great. And then finally, how many new offices were opened this quarter and what's the preliminary plan for next year?

Well, we actually haven't finalized our plan because we haven't really talked completely to the international offices yet. But in the quarter, we opened - where are we here? In quarter three, we will have been two offices in quarter three, one of them being a standalone resource audit solution practice, and the other one being a new - a completely new market for us.

Ok. How about the fourth quarter, though? What do you think you'll do there?

The fourth quarter, I think we're looking right now at one location.

All right. Thanks.

At this time, we have one question remaining in the queue. I'd like to remind everyone that if you would like to ask a question, or if you have a follow-up question, please press the star key followed by the digit one. And we'll take our next question from David Billick (ph) of Morgan Stanley. Please go ahead.

Hi. How are you guys doing today?

Hi, David.

I was hoping to get a little more detail about Sarbanes-Oxley. You spoke a little bit about on the call - maybe if you could detail a little bit where you've seen the business thus far coming in thus far in terms of which business lines, second, have you seen the difference between the size of your clients? Is it more the larger clients that are require more help with Sarbanes or smaller or medium? And you also talked about the pipeline, if you could talk a little bit more about what you see coming in the next few months, that would be really helpful.

The Sarbanes work is around a provision, I guess, the number is 404 having to do with the documentation and evaluation of internal controls, and the fact that the external auditors are supposed to come in and have to audit that documentation and certification of internal controls. There's been some question as to whether the external auditor can come in and do the documentation and certification. What we've seen is for the biggest companies, some of their audit firms are going in and doing that work anyway, even though we thought the way the Oxley act read, that they shouldn't be doing it, but they're doing it. Some companies are very sensitive to this either because of cost or because they're trying to draw the line on independents, and the biggest projects are Fortune 100-type companies, where we can go in and help them on that and we've been refunding RFPs and we probably have I think at least one major one that we've closed and maybe three or four in the pipeline.

So Sarbanes work is - the companies have to - them themselves have to have a document with all their internal controls in there, all their risks in there, and basically having evaluation and certification by the company as to whether they think this is adequate or not, and then the auditors have to come in and review that. Most companies don't have the internal ability to do that documentation and evaluation. So that's where we're getting these large projects. On an ongoing basis, there's probably going to be ongoing annual updates that have to be done to this, but it won't be as extensive as the first year.

Have you seen any kind of ancillary work where your clients are spending time dealing with Sarbanes-Oxley and then they realize everything that's going on and the greater amount of work that they have do, that you see this more other staffing work that you've been involved in as well, or is it really just focused only on the people coming in for this internal audit report?

Well, it's almost a reverse effect. The company that I believe we have secured the work for has been a resource client, so they're very comfortable with the quality of work that we provided them. So, you know, our base work has helped us land this project with the major companies. I would say that we try very hard to help clients solve their problems, whether it's the Sarbanes act issue or whether it's a technology issue in accounting where they're not getting the right answer.

So we believe that as we get new clients because of Sarbanes, we will sell more work to those clients and it will be on an ongoing basis. We also think that RAS (ph), over the years, as it grows, will become more of an annuity-type practice, where there will be a base amount of work that sort of is resold every year, because clients have to comply with Sarbanes and update their controls and test them, et cetera, so we think that RAS (ph) will give us, you know, a base of recurring work, which by the nature of our projects, we haven't had.

If I could just ask one last question. Within your looking at the pipeline and what you've already seen already, could you - do you have any estimates or any range for how much revenue you think could come directly this year from Sarbanes-Oxley in calendar 2003?

The head of our RAS (ph) group does, but I wouldn't give those to you. She's an optimist.

Fair enough. Thank you very much.

You're welcome.

At this time, there are no further questions. I'd like to turn the conference over to Mr. Don Murray for any additional or closing remarks.

Well, thank you, once again, for your time, and your continuing interest in Resources. We look forward to chatting with you after the conclusion of our fourth quarter, and hopefully everything is going to go well for the country. Thanks.

That concludes today's conference. We thank you for your participation and you may disconnect at this time.