Resources Connection Inc (RGP) 2005 Q2 法說會逐字稿

Good day and welcome, everyone, to the Resources Connection second quarter fiscal year 2005 earnings results conference call. This call is being recorded. With us today from the Company is Miss Kate Duchene, Chief Legal Officer; Mr. Steve Giusto, Chief Financial Officer; and Mr. Don Murray, Chief Executive Officer. At this time, I'd like to turn the call over to Miss Kate Duchene. Please go ahead.

Thank you, Operator. Good afternoon, everyone, and happy holidays. Joining me are Don Murray, our Chairman and CEO, and Steve Giusto, our Executive Vice President and Chief Financial Officer. During this call, we will be providing you with comments on our results for the second quarter of fiscal 2005. By now, you should have a copy of today's press release. If you need a copy and are unable to access the copy on our website, feel free to call Margaret Porter. She can be reached at 714-430-6363 and she will be happy to fax a copy to you.

Before turning the call over to Mr. 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 10K report for the year ended May 31, 2004 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 conditions to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I will now turn the call over to Don Murray, our Chairman and CEO, to give an overview of the quarter.

Welcome to our conference call for the second quarter of fiscal 2005. Resource Connection is a professional services firm, originally founded within the Big Five accounting industry, now the Big Four. Our strategy since we started has been to expand our service lines in geographic locations to serve our client base of professional services, where clients need internal help to fix problems and complete internal projects. We provide a professional alternative to traditional consulting firms in the Big Four for internal consulting and projects. We have expanded our service lines to include accounting and finance, information management, human capital, Supply Chain Management, Resources Audit Solutions, and we have recently launched legal services. We also sell corporate governance and policy documentation software under the trade name policyIQ.We have expanded geographically to 63 locations, offices worldwide, including 49 in the United States, nine in Europe, including a new startup in Paris, and five in The Netherlands after we consolidated two of the Dutch offices, five in Asia-Pacific, and have recently entered a joint venture relationship with a Chinese accounting firm in mainland China to better serve clients with needs in China. We expect to continue expansion, focusing on introducing some of our newer service lines to establish offices as well as opportunistic expansion geographically. While the second quarter fits with 2005 as the seventh quarter in a row with sequential revenue growth. The economic and regulatory trends that began in the middle of fiscal 2004 have continued into the middle of fiscal 2005. Let me summarize the operating results. As indicated in our press release today, revenues for the quarter were $137 million. This revenue is higher than the first quarter of a year ago by 85 percent and is sequentially higher by 19 percent. This quarter included two national holidays in the United States, our largest market. And these were Labor Day and Thanksgiving. These revenue results reflects the continued strong demands we have been experiencing. Our domestic practices continued to grow through the quarter. We have not seen any significant change since quarter end. There has been some improvement internationally as well. In dollar terms our UK practice revenues were 275 percent greater than the prior year's comparable quarter and higher sequentially by 32 percent. Our Dutch practice revenue was better than during the summer months when it was up sequentially by 22 percent in dollars. The revenue from our Asia-Pacific region was up a little sequentially and over 160 percent year-over-year. These regions were also up when measured in local currencies but favorable exchange rates created a greater increase when measured in dollars. Steve will provide additional detailed revenue trends in his review of operations later in the call.Previously, we have discussed the four key components of our growth strategy. First, against our client penetration goal, we have created enhanced visibility of our services several large clients because of our engagements to assist companies complying with section 404 of Sarbanes. We believe we are now building new relationships in new areas within our existing expanded client base. Revenues from our 50 largest clients represented 40 percent of total revenue stream the quarter with our largest clients in the quarter at about 2 percent of revenue. As for the end of the second quarter, all 50 of our 50 largest clients in fiscal 2004 are still clients this year. Of our 50 largest clients so far this year31 were in last year's top 50 and we have added 19 newer clients to the top 50. 50 percent of our revenue year-to-year came from -- year-to-date came from 77 clients.Second. Against our goal of adding two significant new clients. During this yearwe did add new clients including a number of Fortune 500 companies. At this time a year ago we had served over 1,000 clients year-to-date and this yearwe have served over 1300. Some of our new clients have been referred by their current audit firm or by existing clients primarily to assist these companies internally with their risk management. Many of these new clients were already targets but their current regulatory needs have allowed us to demonstrate our valued proposition to them on an accelerated basis.Third. We continued our geographic expansion that enables us to become more relevant and useful to major multinational companies. After the end of the second quarter, we opened a practice in Paris, France. Under the leadership of 2 ex-Big Four consulting partners, we now are establishing new capabilities in one of Europe's largest economies. In Asia, ship we have established affiliate relationships that allow us to serve India and mainland China. While neither of these developments will impact our operations significantly in the short term, they do aid the groundwork for further international progress in years to come.Fourth, our services strategy is developing well. The percentage of our total revenues derived from accounting and finance is decreasing, as we diversify our revenues based across our six services and expand our services to clients in a variety of professional areas.Accounting and finance is still our largest service model and it, too, continues to growth. Further much of the work we are doing in our RASsubsidiary would previously have been classified in the accounting and finance or the information management sector had we not separately branded and developed RAS. We also have potential for expansion as we expand the footprint of our supply chain practice and private services in the legal area. All service lines create layers of potential revenue for the future. These are the four components of our strategy that focuses our growth efforts. We continue to look for ways to improve our client services and become more useful to our clients. We can do this without the burden of independents necessary for our Big Four audit firm. Gross margins for the second quarter were about 40 percent domestically and about 35 percent internationally. Overall growth margin for the quarter was over 40 percent, a full point higher than our stated target of 39 percent. Growth margin continues to be reduced by low conversion fees, compared to prerecession levels again less than 1 percent of revenues and high reimbursable costs. Neither of these factors affect our pricing and overall pricing remains fine. All of our service lines continue to grow. Accounting and finance services continue as our largest revenue service line. Of our other services, Resources Audit Solutions RAS -- which was formed in June 2002 -- continued its rapid growth. It represents approximately 38 percent of revenues year-to-date. In fact, not all this revenue is related to Sarbanes. We continue to experience strong demand from engagements dealing with Sarbanes-Oxley compliance. Even though the first-year deadlines are approaching for many of our clients we still have a lot of work to do and Resources is doing all we can to get as many clients as possible through the process. Many of our clients are discovering that the time and effort required to comply initially and then ongoing with SECTION 404 is substantially more then they had expected. There may be many companies who will need more time than anticipated to complete the 404 compliance process. This extra effort may extend beyond the year-end deadline. There's speculation in the media that many companies may not receive a positive certification from their independent auditors. Large remediation projects may be needed to correct deficiencies identified in the 404 process. We have only limited experience with our clients demands after initial Sarbanes compliance. But we do have some positive examples that are encouraging. For instance, we are beginning the year two process at one of the biggest Sarbanes clients, a Fortune 50 diversified company. They had told us that we should expect similar needs for our services in year two as in year one. In another instance we continue to serve a Fortune 100 insurance company at levels above what was required during their initial Sarbanes compliance efforts, which are substantially complete for year one. While these two examples are not a proxy for our entire client base, they are indicative of the potential we have to continue developing relationship and revenues from clients who we served for Sarbanes compliance. Substantial improvement and demand for services occurred in early January of this yearand as we approach Janeway 2005, we have not seen any significant slackening of demand. But we are entering periods when year-over-yearcomparisons will be challenging. There are numerous potential demand drivers that can help us maintain reasonable growth. But the possibility exists that some work related to SoX will end faster than we can replace it with new projects. Many companies may need help when complying with Section 409 of the Act which mandates much shorter deadlines for financial and regulatory filings. Other regulatory changes may also increase demand such as the New York Stock Exchange mandate requiring internal audit department.Now here is Steve with some additional information on results of the second quarter.

Thanks Don. Revenues totaled $137.0 million for the quarter versus $74.0 million in the comparable year ago quarter and $115.4 million in the previous quarter. These results represent year-over-year growth of over 8 (ph)percent and a ssequential improvement of 19 percent. Revenue trends on a consolidated basis was positive through most of the quarter, with the exception of weeks that have a holiday. The average weekly revenue in second quarterwas approximately $10.5 million per week. This is a sequential improvement of about $1.5 million per week. Revenues in the last full week of the quarter were above $11 million.

Now let me discuss revenues geographically. Results in the U.S. were strong. U.S. practice averaged $8.7 million per week versus 7.5 million in the previous quarter. The domestic business improved through the quarter. International revenues rebounded from the expected summer slowing in Europe. Results in The Netherlands and the UK for the second quarterwere somewhat better than we had expected. Revenues for the quarter on a local currency basis were up sequentially by 19 percent in The Netherlands and by 36 percent in the UK. Because of the recent dollar weakness, improvement on the dollar basis was slightly better than that. Our Swedish practice performed as expected and was profitable. The European markets have not yet benefitted in any meaningful way from either a European recovery or a regulatory demand driver analogous to Sarbanes-Oxley that has helped in the U.S. But the revenue results there in Q2 were encouraging. Growth in Europe is not expected to match the pattern we had seen domestically. In Asia-Pacific, all four of our practices experienced revenue growth. Total revenue for the Dutch practice in Q2 were $13.3 million and total international revenues were $24.2 million, 18 percent of total revenues.As we entered the third quarter, revenue per week on a consolidated basis was above the average of the second quarter. There have been two weeks since the end of the second quarter and revenues have continued at a run rate above $11 million. We are just entering the slowest weeks of the year and while our pipeline of work is solid, we are always cautious about how quickly revenue rebounds after the holidays.

This year, Christmas and New Year's Day fall on the Saturday. While that may be a positive there's also the real possibility that clients (technical difficulty) associates may take a breather during the intervening week. If that were the case, the third quarter could essentially include just 12 weeks and, at current run rate, revenues for the third quarter could be slightly lower than the second quarter.

Now let me discuss our gross margin. Domestic gross margins were 41.1 percent for the quarter. This is above our 40 percent gross margin target. Conversion fees which have a disproportion impact on gross margins were still less than 1 percent of revenues during the quarter, similar to last year. Client reimbursement revenue, which is just a pass-through of out-of-pocket cost to our client and reduces overall gross margin, was about 3 percent of revenue during the quarter. Our international practices have historically maintained a lower gross margin. Gross margins for these practices were 36.3 percent during the quarter. As we have previously stated, the reasons for lower gross margin internationally include a different employment model to fit the laws and customs of several of the countries as well as more established management practices.Consolidated gross margins for the quarter were 40.3 percent, higher than the blended 39 percent rate we had planned.

Associate headcount at the end of the quarter was 2,645 compared to 1,665 a year ago and 2,370 last quarter. Our total headcount is now over 3000. Now to the other components of our second quarter financial results. Selling, general and administrative expenses for the quarter were $28.2 million or 20.6 percent of revenue. In the year ago quarter, SG&Awas 27.7 percent of revenue and in the most recent previous quarter SG&A was 21.8 percent of revenue. We had mentioned in the past that, in periods of rapid revenue growth, we expect to leverage our infrastructure but that we will continue to make appropriate investments to support our long-term growth. We have a long-term operating margin target of 15 percent, while continuing to invest for future growth. Because of good revenue results, we continue to do considerably better than that but over time, margins may move towards our target.

SG&A levels in the second quarter reflects sequential dollar increases to support growth and a slight improvement sequentially on a percentage basis. Increases in the dollars of SG&A are primarily the result of internal headcount additions. SG&A was $20.5 million in Q2 a year ago and was $25.2 million in the first quarter of this fiscal year.Depreciation and amortization were just under $1 million for the current quarter versus $825,000 a year ago. Interest income was about $400,000 for the quarter versus $103,000 a year ago and invested cash earned 1.9 percent during the quarter. Interest income continued to be negatively affected by the very low interest rates available in current market conditions. Our operating margin for the second quarter was 19.7 percent compared to 11 percent in the year ago quarter. Earnings for the quarter were $15.6 million or 62 cents per share versus 4.4 million and 19 cents per share a year ago.

Now let me turn to our balance sheet. Cash and investments at quarter end were $98 million. The improvement in revenues that accelerated soon after the beginning of this calendar year is now resulting in strong cash flow. Cash is up significantly from year end. Receivables at quarter end were $72 million up 19 percent from year end; and day sales outstanding with 47 days consistent with last quarter. DSOs may start to trend toward lower levels as cash flows continue to catch up to revenue growth. We are generally pleased with the strength and stamina of our balance sheet.

Now let me return the call to Don for some final comments.

Thank you, Steve. While our business continues to perform well, we continue to perceive strong demand for our professional services. We remain internally focused on how to capitalize on the long-term trends that make alternative professional services firm valuable to our client. Our employees are proud of what they are accomplishing and look forward to the growth challenges ahead. We believe Resources is positioned to capitalize on the increase in demand for professional services in the independent issues that affected the Big Four. Our continued success is subject to significant ongoing business, economic and political risks. And we live in an uncertain world. We are building a business with the goal of adding long-term value for our clients, our employees and our shareholders. The business models continue to evolve into a true multinational and multiservices one. Our long-term growth target continues to be 20 to 30 percent revenue growth per year with similar growth in earnings. During better environments like those we are currently experiencing, we may grow faster and during portions of an economic downturn we may not grow. Our offices are continuing to experience strong demand but that is not limited to the highly visible (inaudible). Because these demands tend to be client-specific they cannot be easily characterized. As we have said earlier as clients wrap up their Sarbanes effort both remediation work identified in our process in other delayed projects that were on hold due to Sarbanes may accelerate.

It is not possible at this time to measure the potential impact from these demand drivers. To address longer-term opportunities for Resources, our plans include continuing to rationally build out our infrastructure to support our growth factors. We made a lot of progress in both our geographic and services strategies during the recession and we have been adding people to address recent demands.

We are currently hiring for several important positions throughout the Company and these include local RAS directors and leaders in newly established Supply Chain Management and legal services positions. We are considering four new offices in North America and another office in a major European city. As we make these investments, our operating margins may be lower than the last two quarters. Our business is helping clients with change. We believe clients have only so much budgeted for accounting and systems projects in change. A disproportionate amount may be going to regulatory compliance. And part of this may be a permanent cost of being public and should create repeatable projects. We are already planning the (indiscernible) update work and testing at some clients for next year. And we expect clients will continually have other needs that we can fix and they will have budgets to deal with these needs.

I believe the Company continues to make excellent progress. We are still not broadly known, but the clients who have experienced our professional services have enabled us to prove our worth as a better value provider for internal projects. To enhance our name recognition we will shortly be changing our operating name to Resources Global Professionals, which more clearly reflects what we do for clients.

To build on our strategic progress, we will continue to be opportunistic to expand geographically and diversify services. This expansion may be from appropriate acquisitions or through our own organic efforts. We continue to see an unprecedented change in the professional services marketplace and this creates opportunity.

At this time, we will be glad to answer your questions.

(OPERATOR INSTRUCTIONS) Brandt Sakakeeny. Deutsche Bank.

This is Adrienne Colby, calling for Brandt actually. We were hoping you can give us color on Europe? What led to the turnaround? If it's project related work for the U.S. or if it is new projects?

Well it is a lot of things. One is the biggest opportunity in Europe is, of course, the Netherlands. The Netherlands had to go through some change -- one, organically, to convert to a resources company from an Ernst & Young Company so that takes people's effort internally versus externally. At the same time, some of the integration projects has helped them. So it's the two things that are now I think smoothing the integration and becoming part of Resources. They're more externally focused and we're working as a global company better. The economy there has not improved yet.

I was hoping you could comment a little bit on the recruiting and retention of associates in the United States?

Again without giving statistics I believe our retention of associates from the statistic of convergent fees is still very strong. Our convergent fees remain at close to historical low levels, which means our associates are not taking jobs at clients' and we're able to recruit people, otherwise, it wouldn't be growing. So while recruiting is always a challenge, especially in this type of an environment, I believe we are doing a good job keeping up with our demands.

Great. That helps. One more quick question if I could? How much business are you seeing with smaller size companies like in the U.S.?

I would say smaller size companies for us has never been a major revenue area, though it is the greatest number of clients or what you'd call middle market clients. But the majority of our revenue always comes from Fortune 1000. So we don't particularlytarget market -- middle market companies. We get middle market companies as clients because we do target Big Five alumni as associates as well as clients and so the Big Five associates are at a middle market they will come to us for help. So I would say we're not seeing as much growth in middle market as we are in Fortune 1000; but we have always focused our efforts on Fortune 1000 type clients.

One last question too. Your work in the U.S. would you say it's skewed a little bit more toward bankruptcies sort of downmarket scenario or more upmarket scenarios like IPOs and (indiscernible)?

As we said our fastest-growing work has been risk management and Sarbanes-related work but not all direct Sarbanes projects but risk management, internal audit, cosourcing, etc. We also see major projects in what I would call organizational operational improvement. And some of those we are able to bring 3 or 4 service lines into help a client. So I would say operational improvement is an area we see as a growing area in the United States.

Randy Mehl from Robert W. Baird.

Good afternoon, Don, it's Steve. Great job on the quarter. Outstanding results obviously. Wanted to just go over a couple of things. Gross margin was impressive. Had trouble understanding what your expectations are there. And maybe with that, you can explain the bill rate change and the wage change and how much the improvement was related to the spread?

We're not doing anything to "control wages". So we're not trying -- not to give our people increases. We do give our people increases and we are helping them in that area in adding benefits. So it is not our gross margin increase doesn't come from any effort to hold the wage or pay raise down.Steve can talk maybe in more detail with you but from an organizational standpoint we look to have a 40 percent plus growth margin in the United States. And we have a 35 percent gross margin in the other multinational operations, primarily because of the business models and a lot of them are the types of laws we deal with. In the United States we had been able to maintain more than 40 percent this year and we have actually been a little bit better internationally also. And one of the reasons is we are doing some higher value projects and the projects have not been as competitively priced as in the past.It is not a conscious decision to, again, as I said hold down salaries. Steve.

The only thing I would add is when we have such strong revenue growth and when we have that big a base to cover cost, there are certain semi-fixed components of our cost structure which gets spread over a bigger base so that helps in the margin comparison. So as Don said, we have been successful at passing through any changes in our compensation to our clients while at the same time spreading our cost more broadly across the bigger base. So all that works in our favor.

So it sounds like (MULTIPLE SPEAKERS)

If there was a spike in conversion similar to what we saw in '99 and 2000, we would expect our gross margin would come up because of that additional conversion revenue, but we haven't seen that yet.

Given the demand in the market why haven't you seen that, do you think?

Again I can give you an opinion; it is not supported by fact. It is my perception is when I meet with our associates and I have been to a lot of our associate meetings this holiday season, our people are pretty happy. And some of the clients that we are working at their people aren't that happy. And so right now a lot of the big demand is by the Big Four, are looking for people as well as major companies are looking to try to increase internal audit hires, etc. Well a lot of our associates don't want to be internal auditors as a career. But they will do internal audit projects as based as part of their project career path. So they like the diversity of projects they are doing, they like the income stream, they don't like being involved in big corporate politics so a lot of them are resisting offers from clients. Whether that will continue or whether they will start upping the financial ante to hire people I don't know. But our people seem pretty happy.

Andrew Steinerman from Bear Stearns.

I particularly want to draw down with you a little bit on the SG&A comments. And, obviously, I heard what you said. When looking at SG&A in the quarter it came up about $2 million and, obviously, know there was a huge amount of sequential revenue growth behind that, but in general when you think about the amount of SG&A spending that you did in the quarter do you feel like the Company was just growing too fast? And we couldn't do as much as we would hope? Or would you say, maybe $2 million sequentially in the November quarter is normally what SG&A should come up?

I guess I would say that is not the SG&A to focus on, it is the revenue to focus on. Because when revenue grows as fast as it grew in this quarter, that is what drives the percentage down, not the actual G&A spin. We have a fairly balanced approach to how we build the SG&A. We have a balanced approach to how we hire people and those things tend to take time; and by the same measure I think we are making substantial progress against our goals, continuing to build the infrastructure out to fit the size of our business. But the primary driver of why SG&A continues to slip as a percent of revenues is not SG&A spend. It's revenue growth.

Right. So, do you feel like and as you set out a goal in the last couple quarters to hire people in say infrastructure, but as you said it takes time that you think it is happening at normal rate and there is no holdback on that?

No, we're not holding back at all. I think the only thing I would say is that the flip side of this is when and if revenues don't wrote as quickly you are still going to see us investing in SG&A where we need to and that is why we continue to mention that there is a potential for our operating margins to go back the other way when the paradigm shifts.

Right.

A lot of this growth would not have been possible if we hadn't continue to invest in G&A hires during the recession. So during recession when you saw our SG&A go up as a percentage of revenue and you saw our operating margins go down, it was because we were investing in these types of people for the future.

Right. Let me just take one last cut and I will leave it alone. In the Q, you talked about SG&Anormally being at about or typically being at 25 percent of revenues. Would you throw that in as typical. I assume that means sort of over time but not particularly over the next couple quarters. Right?

I think that's fair. I think that we try to communicate is that if you look at the sequential dollar increases in SG&A, they're relatively similar from quarter to quarter. They are not identical. But they are relatively similar and so the difference is derived from what has happened to revenues. So we have been experiencing 80+ percent year-over-year sort of revenue growth and, frankly, it would just be probably impossible and certainly irresponsible for us to spend that G&A (ph) at that level.

Marta Nichols from Bank of America Securities.

Good afternoon and let me add my congratulations as well. I'm wondering, back to Don's comments about New York Stock Exchange rule and SOX 409, do you have any sense of where we are in the implementation of those at this point? I was under the impression that a lot of companies that need to do that are already sort of in process or may have completed addressing those issues. Do you have a sense for what the timing of full implementation of both of those issues is?

One impression, Marta, is a lot of companies haven't even come close to the 409 implication, which is basically shortening the reporting period. And in a lot of the clients I talk to, which are major companies, are almost at a loss like I can't even think about this right now. I don't know how I'm going to get it done. We are hoping that they change the rule. Because they don't think it makes sense. They are saying why if you're worried about improper reporting, why would you want people to report even faster where you can make more mistakes? And if you are going to report numbers that are bad on purpose, you can just report (indiscernible)on purpose. So there is a lot of sentiment at our client base for this rule doesn't make sense, please postpone it. I don't get the feeling a lot of companies are prepared for it.

What about the New York Stock Exchange rule? Is that something that companies -- do you have any sense for what the issues around that window are, when do they have to prove they're in compliance etc.?

Well they have to have an internal audit department. I'm not sure I just saw, I didn't read it, I just saw something come out by our RAS group about that with a list of New York Stock Exchange clients. I know that I was out of the company, high-tech company just hired a chief internal auditor and he doesn't believe he is going to be able to hire an internal audit staff. It is not that very large a technology company so he is going to use us as his cosourcing partner to do the internal audit. So we expect to see that some of that demand and we're trying to work with clients to serve it.

Okay, and Don, I think you also noted that there has been a lot of speculation in the media about whether not companies will get positive certification and whether there will big remediation projects. Do you have a view on that? You have a sense for among the clients you are looking at what the level of concern is? Either among your associates or among the clients system you're working that they may not be prepared to give all the paperwork to their auditors in time?

Well I will tell you, that my experience lately is I have met with some of our largest clients who are also some of the best controls. So therefore they are in really good shape. They tell me, there are some companies that really -- still behind the start line. We know, I mean, there are some clients we have we know they are not going to meet the deadline. We know that. So we are continuing to work with them on that. The best estimate I hear over and over again from my clients is a lot of these were either the chief risk officers, or chief internal auditors of major companies. The number seems to be 30 percent that is thrown out there.

And then I think you mentioned that not all of RAS is SOX and I don't know if you qualified that at all. So if I missed it can you give us any sense for how much of RAS is SOX?

No. We are not disclosing that, per se. One, we really don't capture it in RAS we don't capture. We don't have a code that says this is SOX or non SOX -- so we don't what really have that number. We have to do a survey at any specific time to try to get it and it's probably not worth our time internally for that information. What we're more trying to do is trying to convert the work we're doing at SOX into ongoing work to help with internal audit, cosourcing, remediation projects and again we are starting to see the second round for very competent clients, who have been through the first round of Sarbanes. We are now getting into second round where we are helping them with procedures and designing the testing for year 2. So for us that is the really -- this is the a first time we've ever had repeatable projects. So we are excited by that.

And finally, on the office count numbers, I think The Netherlands actually closed a couple of offices in the first quarter and I think you mentioned just now that you are looking at opening as many as four or five offices in a relatively short term. I guess one question is should continue to expect that 4 to 8 a year is the right way to think about it and, two, the 5 that you're considering opening, is that imminent? I mean are we talking this quarter and next quarter? Could you give color on that?

I would say the majority of those -- of the 5 offices will probably be hopefully be open before May 31st. The one European city we are looking into -- do something in Europe takes us a lot longer because we don't have an infrastructure in this country to support it. You know, in the country we're looking at so we have to find the right people and the right language skills etc. So that will probably take longer unless we're lucky. The North American offices -- we're actually two of those locations are actually doing work for large clients already which is one of the things that making us open the office. So as soon as we find the right leader we will open the office.

Okay and 4 to 8 a year is kind of the right way to think about it?

I would say, right now, yes.

Greg Capelli. Credit Suisse First Boston.

Don, you just mentioned year two (technical difficulty) of Sarbanes. Could you just clarify -- you're getting -- consistently getting indications from them about year two project work. Can you just go on into a little more detail about what that entails? Is it as much as 75 percent of the testing in controls or -- talk a little bit more about that?

I can talk to you about individual conversations I've had which may not be indicative of all of our clients. We believe our largest Sarbanes client, that we will have just as many hours, just as much work in the second year as we did the first year. No. 1. That is our belief from (indiscernible). Otherwise clients have been out to -- they tell me, we're going to hire a Sarbanes compliance staff. We are going to hire (indiscernible) audit people so we can't tell you how many we need until we see whether we can hire these people.My personal belief is, there is not -- there aren't internal audit people to hire. Every major company wants to hire a big internal audit staff. I don't think that's what happened. The Big Four don't have enough people to get the work done. So for clients that are going to try to do it internally we keep in touch with them and they have us as their virtual staffing arm if they don't hire enough people. But a lot of the large clients I've been at, that's what we talk to them about is scheduling it for next year. Right now some of these large clients is just as many hours. One of the things they did with Sarbanes with materiality they scope it just like anything else and this year not only do they have to go back and test some of the major systems, they have to go back and test foreign countries or divisions they didn't test the first year.The second thing is, I guess, there is a materiality factor for Sarbanes; and if your earnings change in a year the materiality factor changes and you may have to test more than you did the first year. So it is a moving target all the time. So we are pretty encouraged at least that some of the work is going to be a base repeatable work for us.

Okay, that's helpful. I know you have mentioned that you are taking on some work from the Big Four. Is that still an immaterial amount in respect to the total maybe less than 5 percent or something?

Yes it is less than 5 percent. I would say that one of the Big Four I think are in our top 10 clients. We do different types of projects for them. But the total for the Big Four is less than 5 percent.

Okay and then just, Steve, when you think about headcount, you mentioned for modeling it over the next few quarters, any additional thoughts there?

I think that that revenue follows headcount and so, as you're looking at how our revenue has expanded, you can track it pretty closely to how headcount has expanded it. If you're talking about the associate base, clearly the headcount in order for us to continue growing would also have to grow and it will grow directly in line. In terms of internal headcount, as I was mentioning with regards to Andrea's question, we are pushing forward with investments in our infrastructure that include headcount additions as rapidly as we can find the people to fit the specific criteria that we have for talent and enthusiasm and things like that that are part of our culture. So I wouldn't want to get too precise on it, because it is -- really depends on a lot of individual circumstances but certainly it is our intent to keep growing headcount.

One last quick one for Don. (indiscernible) if you mentioned this upfront I missed it, but as far as Europe is concerned, where do things stand the best of your knowledge in terms of some formalization of some legislation that may be similar to Sarbanes? I've heard that France had something that they have worked on. The Netherlands has policy they are putting in place but I haven't heard of EU formalizing anything. I am just wondering if you could bring us up to speed with what you know?

My belief is that France already has a corporate governance law and the Dutch have it and the UK have it but now that there is a lot of sentiment to formalize one for all the EU, it seems like the sentiment is that we will have some type of global standard ove the next five years. That would be agreed to by the European Community as well as the United States and SEC. So they're talking about standardizing accounting principles. They have a workshop doing that; and they will, of course, with the Sarbanes type legislation, they will be trying to standardize that in Europe and then negotiate with the United States to have standardized procedures between them. So that is right here. We are going to go over there. We have a European wide meeting in a little over a month with all of our European leaders. So we will probably have a good sense for what they hear after that.

Very helpful. Thank you.

Thatcher Thompson, CIBC World Markets.

Looks like the 3 percent sequential growth estimate last quarter proved a little conservative.

Well, yes, one of our models with our clients is that we like to underpromise and overdeliver. We never try to sell work by overpromising anything to our client. So our goal is to always try to exceed expectations.

Just two quick questions. Steve, I think you had mentioned 11 million of weekly revenue in the first two weeks of December. Can you run me through what you said precisely again? We've got the holidays on Saturday this time around.

Right. We have holidays on Saturday -- both Christmas and New Year's and what I said is that because of that it was unclear whether that would be a good thing, because it will not be during a workday; whether or not that would create perhaps an entire week that essentially is more or less lost revenue. And that at the run rate that we see currently going into Q3 if that run rate were to continue and if we were to only see 12 weeks of revenue in the quarter, effectively, that revenues could be down sequentially a little bit from Q2. I think to expand on that a little bit, we always have challenges to the holiday. That is the weakest area that we face in any year; and there are many moving parts right now. It is unclear whether or not people will continue to work because they're cranking to finish Sarbanes projects or as I said whether or not there might be kind of a cooling off period because of when the holidays fall. And so once again we are trying to provide some reasonably cautious outlook on what the quarter might look like from a revenue standpoint and time will tell.

So what you're asserting there very specifically is, if everybody takes that week off in the Company you've got 12 weeks instead of 13 weeks and in that case revenue could be down slightly sequentially?

Presuming that we continue at the run rates that we saw early in the quarter.

And, second question. The public company accounting oversight board in the last couple of weeks has been -- there's been a lot of scrutiny of the mix of audit and tax work which, historically, in the Big Four has always been most often paired together. How much work do you guys do on the tax side and is that an opportunity for you?

I don't think we do a lot on the tax side. We do help -- in fact, we help a lot of some of the Big Four in the tax department as well as some of our corporate client. What I believe is is the issue in the Big Four is the types of services that are in question are the tax what you would call more the strategies in the creative services. Not the tax compliant services. And so, the tax creative services are typically sold by the senior type partners as well as lawyers and law firms. That's not typically the project we would do. We would not commend to try to create tax strategies for clients. We are more the implementers.

How about on the tax compliance side? Is there any thought of verticals you can target there?

I would say not. We don't do that much tax per se. The Big Four's tax compliance were -- or a lot of that has actually been offshored. One of the firms has their tax compliant center in India. I heard another one was moving their tax compliant center to India. I've heard two of the Big Four are considering sending their tax departments out. Those are all rumors I've heard. I would say for us it is part of our competency but it is not our core competency.

Nice quarter. Thank you.

Mark Marcon (ph), Wachovia Securities.

Let me add my congratulations. Outstanding. What was the contribution from acquisitions?

Effectively zero. The Swedish acquisition is a very small piece of the business and that was the only noncomparable piece quarter over -- year-over-year. Excuse me. So we haven't broken it out, it's just too small but it's effectively very small.

The bill rate change year-over-year? I missed that.

We didn't give it. It will be in the Q. Our bill rates went up about $5 an hour.

Went up by about $5 an hour?

A little less than $5 an hour -- just about $5 an hour.

Where were they the prior quarter?

About $100.

What was the contribution from currencies for the quarter?

I don't know if I've got that in front of me, Mark. It was not -- certainlywe saw the dollar weaken and so there was a modest improvement in revenues and earnings from our foreign operations because of currency. I can give it to you after the call. I don't think it's material information but I can give it to you after the call.

Then is F&A still 50 percent plus of the business?

No. F&A is -- while it is growing the other service lines are growing faster so (indiscernible) is a positive thing. Mark Marcon:,Sure. Can you characterize the growth in supply chain and information management and HR?

They all grew. Certainly it has been a phenomenal run for our RASsubsidiary and so the other components in the business get a little short shrift, but if you look at all of the other components of our business they are going at rates that we would consider reasonable in any environment. So it is interesting because so much of the focus tends to be on the area where we are growing the fastest while in the meantime all of our historic service lines continue to grow at a very nice pace.

We've actually carved out part of our information management practice which is in RASnow. Because there is such a high demand right now for people who know internal control in a technology environment. So it is a very large demand that we don't see being served yet. So information management, probably, is the growth is probably two to three times what we show internally because we did carve pieces of it out and stuffed it into RASbecause it's under this risk assessment as well as internal audit process.

With regards to the question in terms of second round year to post 404 compliance (indiscernible). For the typical company you mentioned a couple but, typically, as you think about it for next year, what do you think the typical scope would be, compared to the original 3 404 compliance? For the average company (MULTIPLE SPEAKERS)

Ernst & Young estimated about 70 percent effort. And I think there is another study published by some internal audit group, chief internal auditors that estimate about 70 percent effort.

You think that would be primarily done by contracting with yourself?

We would hope so. We'd hope that we prove our worth to our clients. I would say the way clients are handling this is different across the board. Some major companies believe that Sarbanes compliance is a management function so, therefore, the compliance part, the documentation part and the testing part is part of management because they have to come to the conclusion and internal audit should be separate and report to the audit committee and be independent. Other companies, the chief internal auditor is taking responsibility for Sarbanes compliance and would like to do it with his internal audit staff. I don't know what that will do to his normal internal audit schedule. So what we do see is most almost all the clients are establishing a project management office some place in the business to do Sarbanes on an ongoing basis. And not all of our clients but we hope that many of our clients, we will continue to do that work with them.

Last question. Last year, going just from fiscal Q2 into fiscal Q3 you had a 18.6 percent sequential increase. Can you tell us a little bit about the differences then vs. now in terms of as we try to think about in the very short-term what this next quarter's revenues could be like just in terms of differences (inaudible) (MULTIPLE SPEAKERS)

Mark, let me answer that. I think that the Q that we're going into last comparable period a year ago was the first period in which we really saw a very rapid improvement in our revenues. So the trend between Q2 and Q3, last year, was unusually strong. Because we were coming out of a recession and at the same time it was the period what we first saw a very rapid ramp up in the amount of Sarbanes work that was being required from our client. So the differences between that year and this year are clearly further down the path with regards to Sarbanes, and so the ramp up period is done and where they were in the period of serving as many clients as we possibly can in that area as well, as Don has said, continue to develop the relationships longer-term. So it is a significantly different environment. It is still quite positive; but it seems to me unlikely that you should expect the same sort of sequential ramp up that we saw a year ago.

And obviously the revenue base was a lot smaller.

Right. Mark Marcon: -- at that point as well. Just trying to get a sense in terms of holiday and that sort of deal. Thank you very much. Congratulations again.

Jim Wilson from JMP Securities.

Must a my questions have been answered but I was wondering, Steve, I think the comment earlier about RAS's percentage of revenue for the year to date one said 38 percent. Did I get that right or (MULTIPLE SPEAKERS)

You're right. You got that right.

So if I back into it in Q1 from my notes was 30 percent hence I get in the neighborhood of RAS being 35 million Q1, 60 million Q2. Is that somewhere in the ballpark?

Let me just make certain you got a good estimate there. Little less than that in Q2, Jim, but not a heck of a lot less.

Okay and what I was trying (indiscernible) I know it started in back in a non RAS growth rate for the quarter so that looks like maybe 15, 20 percent? Is that -- ?

Yes I would say as I mentioned the growth in our other areas continues to be at a pace that we think is pretty reasonable. Certainly not the same pace as we had seen in the last year in RAS. But on the other hand it's a weird thing to punish us for us. We found the right business at the right time and it has grown very rapidly while the remainder of our business continue to grow quite well.

Yes and I guess I was just looking at that, particularly,that remainder business I think the growth rate of the last couple quarters maybe get just a reflection of a base just like it is in RASbut the growth rate in the last couple of quarters year-over-year in non RAS was quite a bit higher but if -- anybody kind of color that put it in perspective. Is that because the base was so low to begin with -- some of those as well?

One of the issues we have with some of the other growth is like information management. We have so much pent-up demand, I think for clients for information management projects, remediation of information management issues, the -- lot of clients have put information management changes on hold so they get (indiscernible) Sarbanes; and there's such a demand at our client base as well as with our Big Four firms for information management people. People that know the internal control processes around information management. My belief is that without Sarbanes demand, we would've had a much stronger growth in our information management practice, because we would have had those people that we diverted into RAS, we'd would have been marketing them in information management projects. So in some ways, you have your group of associates is sort of a zero sum gains how you use them. And some of our information management associates that would be doing normal information management projects have been transferred into the RAS arena, where the demand is the strongest and operating under a crisis mode. So I think that we will see information management systems doing even better once, if -- if -- the RAS Sarbanes demand drops. But then we will see another demand coming from information management auditors.

So you look farther forward in your fiscal '06 sort of I guess what I am thinking about is that the contribution per associate where it comes from will probably shift to some degree just shifted upwards into RAS it might shift out and into information management or other services. But still your growth potential is still significantly a function of your number of associates?

Yes. Exactly. And where the demand is the strongest is sort of how they get characterized.

So they don't just -- as RAS goes away they just don't all of a sudden have nothing to deal. They would shift to other work and their utilization would be fairly similar to what it is now?

Right. Well we hope so. One of the strengths about our model is we haven't hired hundreds of internal auditors who all they know how to do is internal audits. We have project people who like doing projects and would never want to be, say, career internal auditors but doing it a three-month project for Sarbanes or a three-month internal audit (indiscernible) project for them is just a project. So we probably are able to staff this with people that are more competent that like doing this work easier than somebody who is trying to build an internal audit company. Jim Wilson:Thanks a lot. Then one final question is, looking at -- not really guidance but this discussion that operating (indiscernible) and leverage could fall back over time. Could you give a little color on what kind of incremental investments you talk about making more investments to the business you might make other than offices driven or what other types of infrastructure investments training etc. that you are really thinking about that you might expect to have to add into the business?

I think we gave you the number of offices that we're looking to open, hopefully, by the end of this fiscal year. We just opened our Paris office which will be an incremental expense until we get up to some revenue run rate that covers our costs. And as I said we hired two ex Big Four consulting partners to run this office who both worked at the (indiscernible) in France in consulting for a long time for their careers. We are looking in the United States. We've got offers or made or hires in the new legal services practices. So in fact, we're back in New York last week and Kate was interviewing attorneys to come in and do that practice for us in New York in the whole Tristate area. We hired in this last quarter I think two or three supply chain management leaders in new marketplaces. So they are not developing projects yet because they just started with us. So that is what we're looking to do. Bring in these new service line leaders that are culturally fit but will create revenue in the future for us.

Michel (ph) Mora, Merrill Lynch.

Most of my questions have been answered but was wondering if you could talk a bit about stock option expensing and if you have changed at all your -- the amount of options that you are granting or planning to grant and if you can give us a sense of what the impact on earnings within this quarter? Thank you.

As far as what our plans are for the future, we will be discussing that at our board meeting in January. We do have plans to, regardless of stock option expensing, we do have plans on reducing the grants per se just because stock value is higher. So the board of directors at the Company has hired an outside firm that is giving us advise that we have -- that we are acting on. So we can tell you that we will be probably changing the number of grants for sure, reducing that because of the value of the stock.

And as we continued to disclose the impact of stock options each quarter, when we actually implement the new FASB which will be as late as we possibly can and we don't think it is good accounting but it looks like it is going to be a lot of land. It will move from a footnote onto the face of the P&L. Had we reported earnings this quarter and expense stock options, our earnings would have been 51 cents.

Due to time constraints, we will take our last question from David Gold from Sidoti and Company.

(Questions have been answered.)

Mr. Murray, I'd like to turn the callback over to you for any additional comments.

I just want to again we really appreciate our investors and the people that have faith in us and have had faith in us and we thank them for their continuing interest and support and we look forward to, hopefully, everybody having a great holiday season. So thank you.

Ladies and gentlemen, this does conclude our conference today. We do thank you for your participation. You may now disconnect.