Resources Connection Inc (RGP) 2004 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. And welcome to the Resources Connection Incorporated conference call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press the star key followed by the zero button on your touch-tone phone and you will be connected with an operator to assist you. As a reminder this conference call is being recorded. At this time I'd like to turn the call over to your host for today's call, Miss Kate Duchene, Executive Vice President of Human Relations, and Chief Legal Counsel of Resources Connection. Ms. Duchene, you may now begin.

Thank you, operator. Good afternoon, everyone and thank you for participating today. Joining me are Don Murray, our Chairman and Chief Executive Officer of Resources Connection and Steve Giusto, our Executive Vice President of Corporate Development and Chief Financial Officer. During this call, we will be providing you with comments on the results for the second quarter of fiscal year 2004. 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 copy on our web site, please call Margaret Porter she can be reached at 714-430-6363 and she will be happy to fax a copy to you. Before introducing Mr. Murray, I'd 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 want to remind you and caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10K report for the year ended May 31, 2003 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 the 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 Murray, our Chairman and CEO to give you an overview of the quarter.

Thanks, Kate. Well, welcome to our second conference call of fiscal 2004. Resources Connection is a professional services firm originally founded as part of the Big 5 accounting firms, which is now the Big 4. In the United States, in the Asia Pacific region, we were part of [ INAUDIBLE] and in Europe, 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 the wholly owned subsidiary, RAS, we also serve our clients with internal audit services, including outsourcing and co-sourcing and risk consulting. We also offer supply chain management services through our subsidiary, the procurement center, which we announced today has been rebranded as Resources Connection supply chain management practice. We provide our services to clients to over 60 offices worldwide. We are best known for accounting and finance and have added additional service offerings to meet our clients' needs.

As we have mentioned in our last two conference calls, we closed two international acquisitions during the first quarter of this year. So this second quarter includes a full quarter of results from our Dutch and Australian practices and from our policy in corporate governance compliance tool, policy IQ. First, let me summarize the operating results in our second quarter of fiscal 2004. As indicated in our press release today, revenues for the quarter were $74 million. This revenue is higher than the first quarter of a year ago by 47% and is sequentially higher by 24%. Excluding revenues from sources acquired in the last 12 months, revenue is higher by 21% in the year ago period. Steve will provide additional details of revenue trends during the quarter, in his review of operations later in the call, as well as a recap of domestic and international revenues.

This quarter we experienced improvement in revenues across many of our domestic markets. Revenues internationally continue to be impacted by the European economic slow down but we are pleased with the revenue progress our company made during the quarter. This progress contributed to improving operating margins and earnings during the quarter. And this momentum continued during the first few weeks of our third quarter before the holidays had hit. Strategically, we believe our recent progress reflects our efforts to become an international company with more diverse services in a real alternative to the Big 4. Our domestic business is growing. We believe that many of the investments we made during the recession are paying off. And further, we continue to develop true international engagements with well-known clients in the U.S. that now use our services internationally, as well. And these multi-national engagements are what we envisioned in making Resources Connection a worldwide business. We believe the steps we have taken to become a global provider of professional services will provide profitable growth and correctly position us in the future. Growth margins for the quarter were 39.8% domestically and about 34% internationally. Our overall gross marginin was 38.6%.

As we have previously reported, international gross margins are typically lower than the domestic business. So, a full quarter of international results in Q2 contributed to a small sequential decline in our overall gross margin performance. However, pricing across all markets remains strong. We had strong results across our service lines. Our accounting and finance business, which represents the majority of our revenue, grew 34%, including our acquisitions. Our newer services of IT, supply chain management, and resource audit solutions or RAS, all grew as well. As you might expect, engagements having to do with Sarbanes Oxley compliance were in high demand. And our finance and resource contribution and human capital practices all are adding revenues in this area. Some of our largest engagements continue to be for high profile clients and bankruptcy. Of our top 10 clients, two are currentfully in bankruptcy.

However, some of the work we are helping with at troubled companies is not necessarily tied just to the reorganization process. At a number of large clients, we're beginning to work on projects that were delayed during the recession. And as the economy and corporate profits improve, we believe clients will be more inclined to engage in projects related to growth and expansion. A positive trend over the next few months would be a good sign for the economy and our business. You know, revenues from our 50 largest clients represented 43% of total revenues during the quarter. And our largest client was almost 6% of revenues. Our client retention among our largest clients continues to be excellent.

The most significant strategic move we made in the last six months was the purchase of ETM in the Netherlands. Our Dutch practice struggled in the first few months after we acquired it with the slow economy and an expected seasonal downturn during the summer. European revenues during the fall did not recover quickly but in the last two months, our European practices have begun to strengthen as part of a global Resources Connection. In our Dutch practice it was mostly profitable during Q2 and the pipeline of work has been improving. We remain cautious about the impact this practice will have on our consolidated results for the year, but we are pleased that our efforts in Europe are resulting in improved results in client backlog. Now, here is Steve with additional information on the results of the second quarter.

Thanks, Don. Revenues totaled $74.0 million for the quarter versus $50.2 million in the comparable year-ago quarter and $59.5 million in the previous quarter. These results represent year-over-year growth of 47% and a sequential improvement of 24%. To help put this in context, let me give you some information on how weekly revenues progressed during the quarter. First, let me give you data excluding the Dutch operations. The average weekly revenue in the second quarter was above $4.7 million per week. Revenue during the quarter ranged from $3.7 million per week in the Thanksgiving week to $5.3 million per week. The average in the comparable period a year ago was not quite $3.9 million though last year's second quarter excluded the Thanksgiving week. The week of October 25, was the first week our company exceeded $5 million per week and we have seen fairly consistent improvements each week since then. The week before Thanksgiving was our highest ever at just over $5.3 million per week. This is the fifth quarter in a row with an improved weekly run rate. Since the end of the second quarter until the Christmas week, we have seen a continued improvement in revenues. In the weeks before Christmas, our weekly revenue run rate improved to about $5.6 million.

Now let me discuss the Dutch practice. While we are seeing a little improvement in the Asia Pacific region, our European practices are still facing a difficult economic environment and revenue growth has been difficult. In our Dutch practice, revenue for the quarter was down on a local currency basis 27% from the year-ago quarter, but due to the strong euro, only down 12% on a dollar basis. Revenue in the Netherlands was up sequentially by about 16% on a local currency basis and as Don mentioned, our Dutch practice is showing signs of recovery. As a tangible sign of this improvement, revenue from the Netherlands were about $12 million during the quarter. Revenues per week in total internationally averaged more than $1.2 million during the quarter.

Now let me give you weekly amounts on a fully consolidated worldwide basis. On a consolidated basis, revenues averaged $5.7 million per week during the quarter and we closed out the quarter at about $6.2 million of revenue per week. As we entered Q3, revenue per week on a consolidated basis continued to grow. There were three weeks between Thanksgiving and Christmas and revenues in those three weeks ranged from $6.2 million to $6.5 million per week. We have just completed the two weeks of Christmas and New Year's and as expected, revenue was about 50% of a typical two-week period. If we immediately returned to recent run rates, revenues during the third quarter would exceed $74 million.

Now let me give you some gross margin data. I will first discuss gross margins on a basis comparable with prior disclosures and then margins in newer, international operations. Gross margins were just shy of our annualized domestic target of 40%, at 39.8%. Conversion fees, which have a disproportionate impact on gross margins, continued to be very low, less than 1/2% of revenues during the quarter. As a comparison historically our highest month for conversions was about 5% of revenue. Also the second quarter is negatively impacted by the Thanksgiving and Labor Day holidays. We also are working on more engagements that include travel, which results in higher client reimbursement revenues that has no margin. Our international practices have historically maintained lower gross margins. Gross margins for these practices were 34.2% during the quarter. The reasons for a lower gross margin include a different employment model to fit the laws of custome in several of the countries. Gross margins for the coming quarter are likely to be impacted by all the factors I've just mentioned as well as the negative impact from the Christmas and New Year's holiday period. Therefore we expect to have a quarter with lower than normal gross margins. Associate head count at the end of the quarter was 1,665 compared to 1,221 a year ago and 1,468 last quarter. While we have been able to improve billing rates throughout most of the recession, growth and head count is the primary driver of revenue growth. Accordingly we are pleased that associate head count continues to improve.

Now, to the other components of our second quarter financial results. SG&A for the quarter was $20.5 million. This was $5.9 million more than the year-ago quarter. Increases in SG&A are primarily the result of internal head count additions from our newly-acquired businesses and in domestic offices where demand is the strongest. Although the dollars are up due to our acquisitions, SG&A, as a percent of revenue, was 27.7% for the quarter versus 28.9% in the year-ago quarter. Depreciation and amortization were $825,000 for the current year quarter versus $438,000 a year ago. The increase is due to the amortization related to the acquisitions previously described. We completed the purchase price allocation process after the end of the second quarter and have determined that our initial amortization estimate was a little low.

Therefore, we will prospectively adjust the quarterly amortization for the three acquisitions to $375,000 per quarter. This amount will be included in operations for four to five years. Interest income was $103,000 for the quarter, versus $270,000 a year ago. Invested cash earned 1.0% during the quarter. Interest income was negatively affected by the very low interest rates available in current market conditions and by lower cash balances as a result of the cash used in acquisitions. Our operating margin for the second quarter was 11.0% compared to 11.5% in the year-ago quarter. The decrease is due to the lower operating margins in our international practices. However, sequentially operating margins improved during the quarter by 50 basis points. Earnings for the quarter were $4.4 million or 19 cents per share versus $3.3 million and 15 cents per share a year ago. During the quarter, the Australian and Dutch operations contributed about a penny per share on an operating basis.

Now let me turn to our balance sheet. Cash and investments at quarter-end was $46 million, demonstrating continued strong cash flow performance. We used over $30 million during the first quarter for acquisitions that have already begun replacing that cash through our operations. Receivables at quarter-end were $42.5 million. Day sales outstanding at quarter-end were 46 days, compared to 41 days at the end of the previous quarter. The increase is primarily the result of rapid revenue growth during the second quarter and a few large clients who delayed payment until after quarter-end. We have had some very significant payments from large clients after the quarter-end. We continue to have a very strong balance sheet. Now let me return the call to Don for some final comments.

Thanks, Steve. Well, to summarize: We experienced good revenue growth from the previous few quarters. The strengthening of our domestic practice in the most recent quarter and into the early part of quarter 3 helped support our recently-acquired international businesses, affected by the local economy and as they adopt the resources culture and marketing approach. Internationally, we are working to penetrate some of the larger accounts where as part of the Big 5, the local practices had conflicts trying to serve those other clients. These conflicts have now been removed. And our growing international footprint is important to our positioning as a real alternative to the Big 4 for their non-core services. The improving demand for help, implementing Sarbanes Oxley and the additional breadth of services we have developed over the course of the recession positioned us relatively well.

During the second quarter, the combination of revenue growth and associated operating leverage helped us improve margins and generate strong earnings per share growth. And the company has made progress during this quarter and we're going to work hard to try and continue the progress in the future. We will continue to be opportunistic, to expand geographically in diversified services. This expansion may be from appropriate acquisitions or through organic efforts. We continue to believe there are services being performed internationally by divisions of the Big 4 that may no longer be viable or appropriate for them (INAUDIBLE). We are experiencing an unprecedented period of change in the professional services marketplace and this creates opportunity. So, we'd be glad to answer your questions now. Thanks.

Thank you. Today's question and answer session will be conducted electronically. If you'd like to ask a question, please do so by signaling star 1 on your touch-tone telephone at this time. We will come to the order that you signal and we will take as many questions as time permits. If you are using a speaker phone, please make sure your mute function is turned off to ensure that your signal reaches our equipment. Again that is star 1 for a question. We will go first to Greg Capelli with Credit Suisse First Boston.

Hey, guys, Greg and Josh.

Hi, guys.

Good job on the quarter. Hey, Steve, just quickly to start out with, you mentioned the receivables, did you actually collect most of what was the increase in delay after the quarter? Or is there still some balance there?

We haven't recalculated DSOs since the end of the quarter for this call, Greg, but suffice to say there were some fairly significant amounts paid after the quarter -- I mean in the millions, that would have significantly reduced our receivable balance.

Okay, so we--there is no reason to change expectations in terms of what -- what a DSO could be for the remainder of the year, then?

No, I think -- I think our expectation is -- is that, you know, particularly as revenues accelerate, it's hard to keep DSOs at the level we had earlier in the year, around 40, but that's our goal.

Sure.

You know, we'd prefer to have the faster revenue growth and deal with the DSO issue as a secondary issue.

Okay. You brought up Sarbanes, I'm wondering if you can help quantify a little bit more, how much, you know, section 404 might have contributed or at least give us some color on that? It sounds like it was very strong this quarter.

Do you have the number?

We don't break out the number for Sarbanes by itself, Greg, but, you know, I think it's fair to say that -- that as with many companies in the professional services area, the compliance with Sarbanes is creating a lot of opportunity and we're seeing some of that. You know, it's a very substantial incremental amount of our revenue, but it's only an increment, meaning that, you know, we're continuing to serve clients in many different ways. This just happens to be the latest and greatest substantial change in the marketplace that's creating demand.

Okay. And the Sarbanes work is intermixed with our resource audit solutions work, which includes internal audit assistance, co-sourcing into all the projects, et cetera. So we also think that a lot of the -- the projects are just beginning for the Sarbanes documentation piece of it.

Understand. Thank you. Just two more quick ones. When you -- can you just talk to us a little bit about the -- the tone of -- of your clients? You know, just it sounds like -- you made an interesting comment about getting some work back that was lost during, you know, the recession. What's the tone like for the clients in general? And -- and does it continue to change throughout the quarter?

Yeah, I think what we said was our clients are -- are beginning to complete or accelerate projects that they had put on hold during the recession. Some of those projects that are almost forced to do because the issues have become much more important to them to solve. You know it could be a regulatory issue that they have to, you know, make a rebate to a big customer group that has to be reconciled. It's different types of projects like that that were on hold or have been delayed and now they have to address them. So, we've seen that. We've seen one large client do a lot of positive things as they're expanding and investing in new systems throughout the country. That's one of our largest clients, has probably been our most positive type of activity. And as we help clients and get involved lets say with a Sarbanes project or internal audit project, we also try to prove our value to them so that we can help them in other areas as they see fit.

Okay. That's helpful, thank you. The last thing we have is on the Netherlands. I know you were a bit disappointed out of the box last quarter and it sounds like you are seeing some improvement there over the last couple of months. Is it -- is it also fair to say that retention, you know, from the key producers over there is in line with your expectations? And, you know, is there any other color you would add to the improvement over in the Netherlands?

I believe that we've retained almost all of our people as well as all the key people. Producers and management, et cetera. We think we have a very strong group of professionals in -- in resources in the Netherlands and we knew that there was a soft economy in the summertime and we expected softness. We didn't know how much the recession would affect them. But I think they're working very hard to get into clients where they had lost because of audit conflicts and they're working hard to get themselves back into those businesses and try to build relationships. At the same time, having a really strong group of professionals in Europe has helped us as we've been getting some major projects to help clients throughout Europe with not just Sarbanes, but with a lot of risk management type procedures and that really helps us, as I said, become an alternative to the Big 4. So, I speak for myself, but I'm really happy with our people. I think it's going to be a great investment for us and we just -- we're just feeling lucky that we're able to get a company like that.

Great, very helpful, thanks a lot.

We'll take our next question from Brandt Sakakeeny, Deutsche Banc.

Thanks. Hi, Don and Steve.

Hi, Brandt.

Also, congratulations on a nice quarter. Let's see, a couple of questions. Can you just comment broadly on the competitive landscape? Have you seen any changes any access or interest of anyone new on the competitive scene?

Speaking for myself, I would say I've seen some of the larger consulting firms say that they can do Sarbanes work though we haven't really come upon them as a competitor to us. But I've been out at major companies that have said that some of the big consulting firms have said they can do Sarbanes. I would say the biggest landscape change is -- I would say every month the Big 4 seem to become a little bit more cautious in the kinds of work they're doing for companies and clients.

Okay.

And we've actually gotten some referrals from some of those companies, ideas about how we can help their clients that we never would have gotten before. So, I would say that's the biggest change in the landscape and it's a moving change.

Okay. That's helpful. Steve, I'm sorry, I missed your head count number. Can you give that to me again?

1,665 at the end of the quarter.

Great. Do you have an organic head count number? Or at least maybe X-ing out the Dutch business and the Australian business?

Not in front of me. Why don't we do this, Brandt. We'll try to gather it while we're taking other questions and I will circle back to that.

Okay. That's great. And finally, let's see, just in terms of the international business, are you taking any U.S. clients who have operations overseas and starting to do work overseas? Or is the business right now just sort of stand-alone Dutch business, stand-alone U.S. business?

I think I said in our call that we are getting work now from an international client, primarily so far the United States-based clients where we're now doing work for them throughout Europe and Asia. And we're actually doing the same projects for them and we've come up with sort of an international management process so that we can manage an account in three different continents centrally and deal with the CFO for the parent company. On the other hand, we are getting, also, referral work from one of our London clients. We've done a lot of work in the United States for them and we are continuing working with our Dutch clients to help them where they have to comply in the future with Sarbanes.

Okay. Great, sorry, I missed that. Thank you.

That's okay.

We'll take our next question from Adam Waldo with Lehman Brothers.

Good afternoon, Don and Steve. Congratulations on a strong quarter!

Thanks.

A couple of quick questions. You know, you guys have been very opportunistic at board level in terms of the timing of your share buy back authorization in mid-October of '02 of about 1.5 million shares when the stock was down 13, 14 range. You haven't executed on any of that stock buy back at this point and your cash balances continue to pile up after the recent acquisitions. That occasions the question of how we should think about future uses of surplus cash as between share buy backs, dividends and additional complementary practice acquisitions. Could you maybe, Don, update us on your thinking there.

Yes, I would say we have a very experienced board of independent directors that provides us -- I would say very good guidance in that area and, you know, I would not think that at the current valuations and the current opportunities available to us that we would be buying any shares back right now. We do see a number of opportunities being presented to us by Big 4, opportunities that may use our cash. Instead of using stock for acquisitions. So, I would say that, you know, we will look for either organic growth, which will take investment, or possible opportunistic acquisitions versus buying back stock for the next quarter.

Just a follow-up on that, Don, so, would it be fair for us to surmise that future acquisitions are likely to be small complementary practices for cash and/or debt? Or would they be solely for surplus cash?

I'm not sure I understand...

In other words, would you use cash and potentially take on debt as opposed to issuing shares?

I would say we would probably not take on debt and if -- if we did an acquisition with a -- let's say from a Big 4.

Yeah.

The Big 4 in today's environment want to have shares of a public company, however, depending on how they provide equity to the groups joining us, we could be issuing shares to some of the employees that join us on a very restrictive basis to lock them into our company.

Very helpful. Thank you. And then just one quick follow-up, Steve, as we think about SG&A investment levels going forward in the back half of fiscal '04 by quarter, could you give us a sense for how we should think about that ramping in terms of new office openings, marketing investment and so on and perhaps some guidance around dollar level of investment?

It's typically been our practice in the third quarter of each year to have not a significant amount of new G&A investment. If you look back over the last three years, our SG&A has either been flat or down third quarter over second quarter and then we tend to invest during the fourth quarter as that is generally the quarter which has the most rapid improvement revenues as we get through the holidays and things like that. So, we're still feeling pretty strongly that that -- that there's an opportunity to leverage the infrastructure and therefore we're hoping that revenues continue to grow at a pace faster than our SG&A investments. That we will, if revenues continue to expand at the level they have been expanding, need to add head count to manage that expense.

And -- and where did you exit the quarter in offices? And how should we think about the balance of your office openings?

We have 52 offices in the U.S. and 14 internationally. We have -- we have plans for a couple more office openings during the year, though it's uncertain whether it will be during this quarter or the following one.

Thank you.

We'll take our next question from Chandy Smith with CIBC World Markets.

Thanks, congratulations on the quarter.

Thanks.

I wanted to first clarify what you said the gross in the Netherlands was. 15% in the last two months or 15% over the quarter?

The -- the sequential growth was 16% quarter-over-quarter.

Okay. And would you say that's being driven more by client growth or project growth at existing clients? And if you could provide any metrics around that?

I would say it's a mix, Chandy, though I'm not prepared to give you a metric right now on that in terms of what the mix is, but certainly we are seeing new sales. Now, whether they're to clients that were not clients during the recession are coming back to us or whether they're brand-new clients, I'm not 100% certain, but we're certainly seeing some new clients engagements and then we are seeing extensions of other engagements with clients as they continue to see the value of our services.

One--one of the issues, Chandy, they had in the Netherlands was that some of their largest clients had been auto clients of Ernst & Young and refused to use them for additional projects because of the independence issues. That has been turned around in a lot of those big companies and they're now getting new work from those companies.

Okay. And can you give some sense of the magnitude? I mean -- are we talking hundreds of clients that you can go back to and pitch now...

Yeah, I don't think there's hundreds of clients, you know, the major companies in the Netherlands, you know, there's probably, just thinking off the top of my head, 5, 6 major companies I've been to with our people there that were auto clients for Ernst & Young that we can go back and hope reacquire as clients. But they're very significant worldwide-type companies.

Okay. And then just one additional question on Sarbanes Oxley. Do you feel like the pipeline is still building and growing there? Given what the implementation deadlines are? Or do you feel like it's more of -- it's already there, it's just a matter of you addressing it and going out and pitching? Business...

I would say our pipeline, I would say, is still growing. There is a lot of companies that have, I think, put off the decision. It's like having a toothache and putting off going to the dentist until the last second and I think companies are just, you know, beginning to plan on how they're going to implement it and we're getting asked to help some companies and propose on -- on -- on the implementation assistance.

Okay, great, thanks.

And we'll go next to Dave Koning with Robert W. Baird.

Hi, Don and Steve, congratulations on a great quarter.

Thanks, Dave.

First of all, I'm just wondering, last quarter you gave the run rate of the RAS business at about $30 million. I was wondering if you can provide that for this quarter?

Let me -- I can tell you in a second, I think. It's -- it's -- again, right before the holidays? If you took the -- extrapolated the weekly run rate it was a little over $40 million , I think.

Thank you. And secondly, in the -- in the Netherlands business, just wondering a little bit on the operating leverage there? You did a nice job moving from a small loss last quarter to a profit this quarter. What could we maybe expect if that moved up a million dollars in revenue sequentially to go to the operating line?

Well, they're going to face the same engines that we faced during the quarter, which is the Christmas and New Year's impacts their business, as well. So, we're not expecting a substantial improvement in operating margins during this quarter from the Dutch. We would expect that improvements would come during the fourth quarter, both for our practice domestically and then for the Dutch specifically, you know, I mentioned during the prepared comments, the pressures that there will be on gross margins during Q3 and while we're pretty pleased with how our revenues are ramping, Q3 tens to be a tough -- a tough quarter for us in terms of margins unless the period immediately after the holidays are really, really strong. So, that will also be the case in the Netherlands. So, I would expect that you'll see the -- the operating leverage show up in Q4.

Okay. Okay. And what might that be in Q4? Like, for example, if you would ramp a million in revenue, what -- what might we see in Q4?

We will probably discuss that after Q3.

Okay. And then finally you mentioned conversions were very low in the quarter. Were there any trends throughout the quarter, for example, did they get incremently better toward the end of the quarter and into this quarter?

No, I would say that the trend has been, probably for the last 12 months, it's gotten worse. Not worse, it's -- it's declined. Conversion fees for us, are a good margin addition but it takes usually good people out of our -- out of our associate group. So it's definitely declined for us over the last two years, continued to decline. I think this is probably the lowest it's been at 1/2 of 1%.

There's two sources of revenue in our revenues that we don't manage. One is conversion fees, which have gone down and the other is client reimbursements which have gone up. And unfortunately the piece that's gone down has 100% margin and the piece that's gone up has 0 margin. We don't manage either of those because they're really the result of kind of serving our clients and the client reimbursement revenue has gone up because we're doing more complex transactions that happen to be global and require more travel. So -- so it's kind of the -- the -- the -- the result of some good things that have happened in our client base.

Okay. Thank you.

And we'll go next to Andrew Steinerman with Bear Stearns.

Hi there. Steve, could you just give us a sense of, you know, if we had sort of the normal lull during the Christmas and New Year's holiday as you suggested and what the handicap to gross marginin might typically be on a sequential basis?

Typically we've lost about 6/10 of a percent of gross -- at the gross margin line during the holidays.

That's the effect on the quarter?

Excuse me, generally that's been the case in the last few years and that's been the -- the case when we have, you know, this sort of kind of mid-week holidays. So... You know, if -- if we grow very rapidly through the remainder of this quarter that gets blended a little bit because you spread the revenues over, you know, a -- a bigger base and therefore spread the cost of the vacation and the holidays over a bigger base, but, you know, kind of conservatively, we would expect gross margins to be lower than they've been historically due to the combination of the international operations and the holidays.

Right.

And, you know, I -- Andrew, also when the holidays are in the middle of the week, we tend to have a lot more clients closed for the week.

Right.

Whereas if -- if it's on the weekend or at the end of the week, you know, especially the -- the -- after New Year's, depending on where it is, you know, we will get more work days.

Right, so the holidays work to our favor this year because they were on Thursdays.

Well, Thursdays, we had a lot of clients closed for the week.

The whole week?

Yeah, some -- a lot of our clients --

Not necessarily the Christmas week, but the following week, so, you kind of have the Christmas and then people didn't really come back until after the new year.

But people are in full gear now, right?

Yep.

And then the next question is about SG&A. I think I caught you saying, Steve, that you expect, at least for the near-term, for revenue growth to grow faster than SG&A, which you know, in this quarter, SG&A, before D&A was 27.7% of revenues, which is an all-time low, well, maybe not, but definitely on the lower side. So... With that statement, SG&A as a percentage of revenue before D&A will continue to trend down?

That's the expectation, yes.

Okay. And then last question for Don, if I remember back to my Big 4 days, this is -- this is the time when, you know, accounting busy season starts up now through middle of April. With that in mind, you know, don't you think that's -- you know, favorable backdrop for your business, from state of ramp?

Yeah, we do. For several reasons. One is their clients need more assistance than they're able to provide them in the current audit environment. In for instance, you know, we've had some people call us, some partners call us because their clients need help in doing their tax provisions and they're no longer--the auditors are no longer able to do the tax provision for the client. They have to just review it. This isn't a great amount of work because you can get the tax revision done in say a week, but it's still the type of incremental demand that's being created as the audit firms have to be much more conservative in what they do for their clients.

Uh-huh.

We also think that there's going to be more latent demand in Sarbanes because the audit firms won't have enough people to help their clients with the Sarbanes.

Uh-huh.

Now, in the marketplace, just to, you know, -- anecdotally I see the Big 4 audit sides hiring people.

Right.

And so right now they're trying to hire experienced people, they're trying to hire new college graduates, et cetera, because the audit side seems to have--is seeing the same demand.

Right. So, in other words, you expect it to be a busy, busy season at the Big 4 and you expect it to be a busy, busy season at Resources Connection.

We do.

Okay, thanks so much.

As a reminder, that's star 1 to ask a question at this time. We'll take a follow-up question from Adam Waldo with Lehman Brothers.

Just a quick couple of numbers follow-up, Steve, if I may. Can you just give us the benefit to revenue and EPS in the quarter of positive currency translation from the weak dollar?

The impact on -- on revenues was about a quarter million dollars, I believe, and the impact on earnings was negligible.

Okay. And then just to try to pin you down a little more precisely on U.S. versus domestic mix to revenue in the quarter, since you started disclosing that in the last 10Q, did you do about $15 million of total international revenues when you roll in Dutch ETM and Deloyd, Australia plus the small U.K. interim management business you guys bought out of the NY?

Yep.

Okay, and then TPC, about $3 million of revs, more or less?

We haven't disclosed TPC separately.

Right, but in the vicinity? Is that fair?

You know, that's I guess a reasonable guess.

Okay, thank you.

And there are no further questions. At this time, I'd like to turn the call back over to you, Mr. Murray, for any additional or closing comments.

Okay, I think Steve has an answer to one of the questions raised earlier by Brandt.

Brandt, the increase in head count on an organic basis was just over 200 people. About 210.

Okay? Okay. All right. So, let me, again, wrap it up and thank you for your time and your continuing interest in Resources. We look forward to chatting with you after the conclusion of our third quarter.

That does conclude today's conference. Thank you for your participation, you may disconnect at this time.