Resources Connection Inc (RGP) 2005 Q3 法說會逐字稿

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

Thank you, operator. Good afternoon everyone and thanks for participating with us today. Don and Steve and I are glad you have joined us. During this call we will be providing you with comments on our results for the third quarter of fiscal 2005. 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 it on our Web site, please feel free to call Margaret Porter at 714-430-6363, and she'll be happy to fax a copy to you.

Before turning the call over to Don Murray, I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events, or future financial performance of the Company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31, 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 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.

Well, welcome to our conference call for the third quarter of fiscal 2005. As we announced last quarter, we have changed the name of our operating units around the world to Resources Global Professionals. And this is the first quarter we will report to you with that Global brand. Resources Global Professionals is a professional services firm originally founded within the Big Five accounting industry, which is now the Big Four. Our strategy since we started has been to expand our service lines in geographic locations to serve our client base with professional services where clients need internal help to fix problems and complete internal projects. We provide a professional alternative traditional consulting firms and the Big Four for internal consulting and projects.

Our service lines currently include accounting and finance, our resource audits solutions, which we refer to as RAS, information management, human capital, supply chain management and legal services, which is only in a few offices. We will sell corporate governance and policy software under the trade name "Policy IQ." We have expanded geographically to more than 60 offices worldwide, including 49 in North America and 9 in Europe. And five in Asia-Pacific, and we have recently entered a joint0enture relationship with a Chinese accounting firm in mainland China to better serve clients with needs in China, and we expect a-- expect a continued expansion, focusing on introducing our newer service lines to established offices as well as opportunistic expansion geographically.

The third quarter of fiscal 2005 was another quarter of strong year-over-year growth. The economic and regulatory trends that began in the middle of fiscal 2004 have continued into the latter part of fiscal 2005, although we did experience typical seasonal slowing during the holidays. Let me summarize the operating results in the third quarter of fiscal 2005. As indicated in our press release today, revenues for the quarter were $135.2 million. This revenue is higher than the third quarter of a year ago by 54% and down sequentially by 1% due to the holiday season. Our results are consistent with the expectations we discussed at the end of the second quarter, and this quarter includes the holiday week of Christmas and New Year's as well as the Martin Luther King and President's Day national holidays in the United States, which is our largest market. Excluding the impact of holidays, our revenue results reflects continued strong demand for our professional services.

On a consolidated basis, revenue in the last non-holiday week of the quarter set a new record. So, despite a holiday weekend middle of the quarter, we ended the quarter with a positive trend in revenue that has carried over to the first few weeks of this quarter. In addition, we saw improvement internationally. In dollar terms, our international practices were up 45% year-over-year and sequentially by 14 %. And Steve will provide additional detailed revenue trends in his review of operations later in the call.

As in our prior calls, I will update you on our progress of the four key components of our growth. First, regarding our goal of client penetration, we believe we are now better known and have enhanced accessibility of our services at several large clients because of our SOCS 404 engagements. We are working hard to build relationships in new areas within our existing, expanded client base. Revenue from our 50 largest clients represented about 40% of total revenues during the quarter, and our top 80 clients accounted for 50 % of revenue. Our largest client in the quarter was about 5% of revenues and our largest client year-to-date is less than 3% of revenues.

As of the end of the third quarter, all 50 of our 50 largest clients in fiscal 2004 are clients this year. We currently have approximately 80 clients with the year-to-date revenue of $1 million or more. At the same time last year, we had 28 clients with $1 million. To progress against our goal of adding significant new clients, we have added 21 new Fortune 500 clients year-to-date. We specifically target these larger clients, since they provide a base of sustainable, repeatable revenues. Year-to-date, we have served about 1600 clients, compared to 1500 at the time last year.

Some of our new clients have been referred by the 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 has allowed us to demonstrate our value proposition to them on an accelerated basis. Third, we continued our geographic expansion that enables us to become more relevant and useful to major multi-national clients. During the third quarter, we opened a practice in Paris, France, and we have just opened an office in Calgary to address client needs,, primarily in the Oil and Gas industry. We are exploring additional expansion to Copenhagen, in Brussels, Singapore, and India. We're opening a practice in Birmingham, Alabama, where we already have a large client.

And our fourth strategy of expanding revenues and various service lines continues to progress. In the latest quarter, as clients began to move past our focus on SOCS compliance, our accounting and finance services grew sequentially, even with the holidays. While the RAS revenue was down sequentially low. Further, much of the work we are doing in our RAS subsidiary would previously have been classified in the Accounting Finance or Information Management sector, had we not separately branded and developed RAS. We also ave potential for expansion as we expand the footprint of our supply chain practice in private services and the legal area. All service lines create layers of potential revenue for the future.

These are the four components of our growth strategy: We continue to look for ways to improve our client service and become more useful to our clients. And we do this without the burden of independence necessary for a Big Four audit firm. Gross margins for the third quarter with-- are typically lower than our targets due to the impact of the holidays. Overall gross margin for the quarter was 38.7%, consistent with expectations for the holiday period. Gross margins continue to be reduced by a low conversion fees, compared to the pre-recession levels. Again, less than 1 % of revenues, in our high reimbursable costs. Neither of these factors affects our pricing and overall prices was up.

All our service lines have grown this year. In quarter 3, accounting and finance services continued as our largest revenue service line. Of our other services, resource audit solutions, which was formed in June of 2002, has grown approximately 500% year-to-date and it represents approximately 30% of revenues year-to-date. Not all of this revenue is related to Sarbanes. We continue to experience strong demand from engagements dealing with Sarbanes-Oxley compliance, though. Many of our clients are discovering that the time and effort required to comply initially and on-going with Section 44 is substantially more than originally expected. Large remediation projects may be needed to correct deficiencies identified in the 404 process.

We have only limited experience for clients' demands after initial Sarbanes compliance, but we do have some examples that are encouraging. For instance, the year-two process for the biggest of our Sarbanes clients, a Fortune 50 diversified company, has resulted in larger needs for our services in year two compared to year one. In another instance, we continue to serve our Fortune 100 insurance company at levels above what was required during their initial Sarbanes compliance efforts, even though they did not have large year-two Sarbanes needs. While these two examples are not a proxy for our entire client base, they are indicative of the potential we have to continue developing relationships and revenues from clients who we serve for Sarbanes compliance.

It has been a full year since demand for our services began growing rapidly. We expect our growth percentage to be less robust than it has been recently. However, revenue in recent weeks after the holiday period continued to grow, and our people are working hard to anticipate a lessening demand for SOCS help and position work to other client demands. Our most important motivating factor is to keep our A-Player associates busy.

Recently, we have several large opportunities involving significant M&A activities: Accounting investigations, cleanup, and internal control assessment and remediation efforts. We can not yet predict the impact on our business, as these opportunities are pending. This sort of activity is consistent with our expectation that clients will move past just SOCS compliance and into other needed projects. Now, here is Steve with additional information on the results for the third quarter.

Thanks, Don. Revenues totaled $135.2 million for the quarter, versus $87.8 million in the comparable year-ago quarter, and $137 million in the previous quarter. These results represent year-over-year growth of over 50%. Because there were so many weeks impacted by holidays, it was difficult to see a strong trend during the middle part of the last quarter. As expected, the week between Christmas and New Year's was slow and we then did not experience a quick rebound after New Year's. Only later in the quarter did we return to weekly revenue levels similar to the end of Q2. Revenues at the end of the third quarter and in the early weeks of Q4 have been strong. The average weekly run rate during the last period of Q3 was $11.2 million.

Now let me discuss revenues geographically. Results in the U.S. were strong. The U.S. practice averaged $9 million a week, absent the holiday impact, versus $8.7 million in the previous quarter. International revenues grew during the quarter, despite the holidays. Revenues for the quarter on a dollar basis were up sequentially by 15% in the Netherlands and by 12% in the UK. Because of the recent dollar weakness, the improvement on a dollar basis was slightly better than in local currency. Our Swedish practice performed as expected and was profitable. And the European markets have not yet benefited in any meaningful way from either a European recovery or a regulatory demand driver analogous to Sarbanes Oxley that's helped in the U.S., but the revenue results in Q3 were encouraging. In Asia-Pacific, revenue was up marginally on a revenue basis, but up considerably year-over-year. Total revenues for the Dutch practice in Q3 were $3.3 million and total international revenues were $27.7 million, 20.5 % of total revenue.

Consistent with our past practice, let me give you information about how revenues in the fourth quarter are shaping up. As we enter the final quarter of fiscal 2005, revenue per week on a consolidated basis was above the average of the third quarter. There had been three weeks since the end of the third quarter and revenues have continued at a run rate above $11.5 million. The fourth quarter is typically seasonally strong and we are encouraged by recent revenue trends as well as some sizable possible engagements that are unrelated to Sarbanes. The last two weeks of revenue before the Easter holiday have been all-time highs. We are currently trending towards revenue results ahead of analysts' consensus for the quarter, and ahead of virtually all analysts' expectations.

Now let me discuss our gross margin. Domestic gross margins were 39.3 % for the quarter. This is consistent with seasonal norms. Convergence fees, which have a disproportional impact on gross margins, were till less than 1 % of revenue during the quarter, similar to last year. Client reimbursement revenue, which is just a pass-through of out-of-pocket costs to our clients and reduces overall gross margin was 3 % of revenue during the quarter.

Our international practices have historically maintained lower gross margins. Gross margins for these practices were 36.3% during the quarter. As we have previously stated, the reasons for our 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 intramanagement practices. Consolidated gross margins for the quarter were 38.7%. After adjusting for the impact of conversion fees and client reimbursements, gross margins would have been 39.3%. In the seasonally-stronger fourth quarter, we estimate that gross margins will return to levels similar to Q2. Associate head count at the end of the quarter was 2,582, compared to 1,980 a year ago, and our total head count is over 3,000.

Now, to the other components of our third quarter financial results. Selling, general, and administrative expenses for the quarter were $29.6 million or 21.9% of revenues. In the year-ago quarter, SG&A was 25.9 % of revenues, and in the most recent previous quarter, SG&A was 20.6 % of revenues. During the third quarter, our own Sarbanes compliance efforts kicked into high gear, adding new costs to SG&A. We will continue spending in this area through Q4, and likely into Q1 of fiscal 2006. We also are making ongoing investments in our infrastructure, both in new offices and in additional head count needs and existing practices, as well as at our two service centers. Because of our year-end in May, it is still a little early to precisely estimate the aggregate impact of Sarbanes and related infrastructure expenditures, but we currently believe these costs will reduce earnings by about $0.01 a share We have a long-term operating margin target of 15% while continuing to invest for future growth. Because of strong revenue results, we have exceeded 15 % for the year, but over time margins may move towards our target. Increases in the dollars of SG&A are primarily the result of internal head count additions. SG&A was $22.7 million in Q3 a year ago, and was $28.2 million in the second quarter of this fiscal year.

Depreciation and amortization were just over $1 million for the current quarter, consistent with last year. Interest income was about 600,000 for the quarter, versus $147,000 a year ago. Invested cash earned 2.3% during the quarter. Interest income is increasing due to higher cash balances and is improving as interest rates available in current market conditions begin to rise. Our operating margin for the third quarter was 16.8% compared to 12.2% in the year-ago quarter. Earnings for the quarter were $13.2 million or $0.26 per share, versus $5.8 million and $0.12 per share a year ago.

Now let me turn to our balance sheet. Cash in investments at quarter end were $109 million. The improvement in revenues that accelerated soon after the beginning of the past calendar year is now resulting in strong cash flows. Cash is up significantly from year-end and it has continued to increase into Q4. Receivables at quarter end were $80 million, up 33% from year end. Days sales outstanding were about 50 days. Even though cash collections have been strong, DSOs tended to go up briefly during the holiday quarter. Last year at a similar time, DSOs were just about the same. We have had very strong cash collection since quarter end, and believe our receivable aging is as good as it's been for some time. We're generally pleased with the strength and soundness of our balance sheet. Now let me return the call to Don for some final comments.

Okay, thanks, Steve. Well, our business continues to perform well. And after a short holiday break, we continue to experience strong demand for our professional services. We remain internally focused on how to capitalize on the long-term trends that make an alternative professional services firm valuable to their clients. Our employees are proud of what they're accomplishing and look forward to the growth challenges ahead. We believe Resources is positioned to capitalize on the increase in demand for professional services and the independence issues that have affected the Big Four.

Our services to clients are driven by the great people throughout our organization. During the last year, we have added many new people to our company and we are continuing to work hard to add the sort of talent and enthusiasm that builds long-term client relationships. If we were able to do this easily, growth could be, would be, even stronger, but it is difficult to find people who meet our standards. In the short-term, that means we may not be able to address every potential client need in the marketplace. While this is a good problem we have, we are focused on adding to our employee base as demand warrants. To help us maintain our culture and train all the internal management to quickly make them effective, we have launched a Resources academy led by one of our strongest client-service office directors and we are formalizing the curriculum and are formalizing the best practices.

Our continued success is subject to on-going business, economic and political risks and we live in an uncertain world. We're building a business with the goals of building long-term value for our clients, our employees and our shareholders. The business model is continuing to evolve into a true multi-national and multi-services one. A long-term growth targets continue to be 20% to 30 % revenue growth per year with a similar growth in earnings. During better demand environments, like those we are currently experiencing, we may grow faster. And during portions of an economic downturn, we may not grow, but our services are continuing to experience strong demand that is not limited to the highly-visible SOCS work. And because these demands tend to be client-specific, they can not be easily characterized.

As we said earlier, as clients wrap up their Sarbanes efforts, both remediation work identified in that process and the other delayed projects that were on hold due to Sarbanes, may accelerate. It is not possible to measure the potential impact from those demand drivers. To address longer-term opportunities for Resources, our plans include continuing to rationally build out our infrastructure to support our growth strategies. We made a lot of progress in both our geographic and services strategies during the recession and we have been adding people to address the recent demand. We currently are hiring for several important positions throughout the Company and these include: Local RAS directors and leaders and newly-established supply chain management and legal services positions. We are considering new offices in North America, Europe, and Asia. As we make these investments, our operating margins may be lower than the last two quarters.

And our business is helping clients with change. As we have previously pointed out, clients have only so much budgeted for accounting assistance projects and change. A disproportionate amount, since SOCS has been spent for regulatory compliance. Some part of this may be a permanent cost of being public and should create repeatable projects. We're already planning the SOCS update work and testing at some clients for next year. We expect clients continually to have needs that we can help fix and they will have budgets to deal with those 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 build on our strategic progress, 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 see unprecedented changes in the professional services market and this creates our opportunity. We'd be glad to answer your questions as this time.

Thank you, Mr. Murray. [Operator Instructions] We'll go first to Greg Capelli with Credit Suisse First Boston.

Hey, guys. It's Jeremy Davis, in for Greg.

Hi, Jeremy.

Hi. Could I just drill down a little bit? You had mentioned something about seeing the Sarbanes specifically -related demand low a little bit, but I wasn't sure on the timeframe around that. If it was just during the quarter in general or if it was more toward the end of the quarter. And if, if you're happening to see any or how much you're starting to see clients, starting to transition more toward remediation and 409-type projects now that the deadlines for 404 are starting to pass, or if you're starting to see companies take a breather for a couple months?

Let me address your various questions. What we've seen is some of the SOCS work start to decrease during the quarter, throughout the quarter, and the accounting and finance were picking up actually quicker than the SOCS work was decreasing. And some of that work, I think we told you, we're involved in some very large M&A opportunities, some big remediation efforts. So I would say there's a little bit of a transition from companies being focused on SOCS and getting their other projects done. At the same time, a lot of the major Fortune 500/1000-type companies, their SOCS deadline, I think has come up or is coming up very, very soon, and yet, we continue to be at new highs for revenue, which tells us that we're continuing to pick up new projects and new clients. We're not as concerned with, are we doing more SOCS work or less work? We're really concerned with, are we doing more work at our clients? Which so far, we are.

And the new S& A business that seems to be growing and replacing the SOCS work that's coming on, are those projects that had been temporarily crowded out a bit, just because of the demand environment being intense or how would you characterize that business?

What we'd say is we help our clients with change, and when you read in the marketplace about a lot of big changes that are occurring, we try to get involved with those or we're asked to get involved with those. And those changes right now, some of those are M&A work, which I don't think any company put off doing an M&A project because of SOCs. Others are remediation and new systems work, et cetera, that they may have put off because of SOCS, or were identified in the SOCS process.

Okay, that's very helpful. Thanks a lot, guys.

We go next to Andrew Steinerman of Bear Stearns.

Hi, Don. I'm just gonna jump in on just the clarification. You're saying that the RAS work is tailed down a little bit and some remediation, amongst other things, have tailed up. Would you say that the remediation is a result of the Sarbanes-Oxley projects? And these Sarbanes-Oxley projects have probably unearthed a lot of F & A projects that will I think take a long time to resolve.

I don't even think, Andrew, we've seen that much work yet. I think it's just coming out now. Clients that are getting you know, deficiencies noted in their reports or failing their SOCS. You know, every day there seems to be a new company listed. I saw a brief memo this morning that one of the big areas of concern is the tax departments in our Fortune 1000-type clients, because they've never had much internal audit focus. And so, a lot of clients are looking at how to, number 1, try to put in more controls and procedures over their tax departments and how to get more internal audit focus on it, so we think that there will be a demand for tax-related professionals to help in that area. But a lot of the remediation work, I think, is, while it's been growing, I think some of it is -- a lot of it's just being uncovered right now.

Right.

And like you said, it will take years for some of these projects to get finished.

One service line that I think you mentioned is you know, IT Services practice, which I know you've positioned very close to the accounting systems and in our research, I've heard a lot about sort of year 2 involving a lot of IT Services staff. How well have you addressed that opportunity? Have you seen the benefit-- again, this is Sarbanes-Oxley-oriented question-- in your IT Services practice, and is that sort of just the beginning of what might be meaningful, or maybe correct me, and maybe it's just not so meaningful in the context of IT Services?

I think our IM practice has actually grown tremendously, but we split off the risk-related IM work and put that into RAS.

Oh, I see.

So a lot of our professionals that would be normally classified in IM have been classified lately in the RAS subsidiary because so much of the RAS focus at client is on the system, because that's the main control area, that's where a lot of weaknesses are. I agree with you that I think there's going to be a lot of demand for IM changes and IM people, as we go through the next year. I think that some of the remediation efforts will require IM changes. I also think some companies have slowed down, including ourselves, our own implementation of our IM processes until we get through Sarbanes, before we then implement a new system. So, I agree with you. I think that should be a focus for us, and we're looking for some new IM managing directors as we speak.

Are you sure your clients think of you in that regard, just an a accounting shop, but maybe not as well known as maybe an IM shop?

It depends on the client and where their focus has been. One of our, I'd say top five clients, the past two years, has been basically all IM-focused and all in operational improvement systems.

Okay, that sounds good. Thank you.

Our next question comes from Jim Wilson of JMP Securities.

Thanks. I was wondering if you could talk a little bit about the-- whether there is any pricing or gross margin difference you'd expect to see, given the ongoing business mix change;, if some of the M&A work, any of the new systems or anything might actually, you might actually be charging more for on the margin or see better margins than you did out of the historical mix?

We do not try to take advantage of, let's say, a slight demand change to increase margins. We really want to focus on giving our clients a very consistent pricing strategy and margin. Number 1, it's a very small marketplace that we deal in. We're talking about Fortune 1000 companies. CFOs talk to each other; controllers talk to each other. Some of our people talk when they're our clients. So, if you spiked up rates at one client, and another client is getting a much lower rate for the same people, you start creating some credibility issues with your clients. So, our pricing targets remain the same. Our pricing has been increasing, but because -- more because of the level at the clients that we're doing work at is increasing.

Okay, and then--

Yeah, so I'd say, I think Steve, what did I-- our price go up this quarter, do you think?

Our price went up about 3 % this year-- quarter, about 9% year-over-year, and as Don said, it's relatively constant across all service lines and our gross margins are relatively constant across all service lines, because that's how we want to treat our clients.

Okay, and then just one other question. On the SG&A side, just so I'm clear, because obviously I understand and appreciate the dollar, the dollar amount going up as you continue to grow your business lines, but as a percentage of revenue, Steve, which is I guess what I'm thinking anyway, but should starting with this quarter that percentage of revenue be higher year-over-year? Is that a reasonable way to think about--

Well, I think the way to look at it is still that on a dollar basis we are constantly trying to increase the size of our infrastructure to support the new size of our business, which is larger than it has been. So it's not precise, but if you look back over a number of quarters, we increased the dollar amount of SG&A each quarter more or less within a reasonable boundary, and then what differs is how quickly revenue grows. So when we've been growing revenues at a much, much faster pace, the percentage of SG&A has fallen, and to the extent that the opposite were to happen, yeah, you might see SG&A as a percent of revenues go up.

We have said in our prepared comments that we have an operating margin target that is lower than where we've been and that we might trend towards that, but it all depends on where the revenue line comes out and not as much on where the SG&A line comes out, because our SG&A spending is gonna continue to grow as we build out the services and build out the offices.

Remember, when we invest in new offices, which we had been doing and accelerating, and when we invest in new service lines like legal services, the investment is really adding expenses before they generate revenue, so a lot of our new offices, especially in the international area, you know, we don't expect to get significant revenue for several years, but for us, it's how we're gonna grow five years from now with all these new service lines and new offices.

Okay, fair enough. Great, thanks.

Our next question is from Brandt Sakakeeny of Deutsche Bank.

Hi.. This is Adrienne Colby, actually, for Brant. Last year you mentioned wanting to open four new offices in the U.S. and one internationally. I was just wondering can you update us on those projections?

I think we said we were going to open four new offices in North America, and I think we've opened this year Florida, Calgary-- South Florida, Calgary, Birmingham, Alabama, right? And we're interviewing for directors in one or two other cities. So that is going fine. And internationally, we have opened, we said, our Paris office, and we're looking internationally at another Scandinavian country. We're very close to announcing something there, and we're looking in western Europe at another office and possibly another office within the UK sphere of business. So we're right on track.

Great. So do you think that Scandinavian office might be before fiscal year end '05?

Yes.

Great. I was wondering if you could give us a brief update on what you're seeing in the Dutch marketplace? You had closed -- you had consolidated two offices. I was wondering if you could provide color on what you're seeing over there.

Yeah, our Dutch offices, we had seven and we have five now, but our Dutch offices, there's really one main office, and then the others are smaller offices that were all part of the Ernst & Young infrastructure, and we didn't think we needed seven offices to cover the Netherlands. So it wasn't an issue of demand; it was really what we needed to cover our client base. So we just consolidated some of those offices and got out of some of that Ernst & Young space.

We have seen our Dutch practice strengthen significantly, I would say, over the last six months. We are very focused there. We've made changes to our business model. We've made some changes in the leadership focus, and it's actually -- even though their economy hasn't picked up, our business has picked up. So we're actually very -- I think we're very pleased with what's going on there.

Great, that's helpful. And just one last question, if I could. As far as next quarter goes, should we think, be thinking about gross margins in the U.S. again around 40% and 35 % in the international?

What we said in the prepared comments is that we expect gross margins to come back closer to the Q2 level that they were at three or four months ago.

What was Q2?

40.2%.

Overall?

Yeah.

So, we would expect to be 40% overall.

Great. Thank you very much.

We go next to Mark Marcon with Robert W. Baird.

Good afternoon. I was wondering if you could talk a little bit about what you're seeing on the supply end of things as it applies to recruiting of associates, particularly in the U.S.?

Recruiting for the last year in the areas where the demand is has been strong and tough. Every major company I've visited wants to hire more internal audit people and risk management people. Every one of the Big Four firms wants to increase their Sarbanes practices and internal audit capabilities. I've also been told that the turnover rate at the Big Four-level is probably the highest it's ever been on that side of the business. So, you know, we don't find every person we need, but we're able to find people and add people. We're doing more innovative things in recruiting. So. while it's a good business problem to have, and we had it during the recession, it is right now not a critical business problem.

Okay, what are you seeing in terms of your pay rates?

Our pay rates are going up, which is one of the reasons why our bill rates go up.

Mm hmm. How much are they going up on a year-over-year basis?

During the quarter the pay rates went up at a slower pace than our bill rates went up.

And bill rates were up 9%?

Year-over-year, yes.

Okay, great. And then you did say that you were running around 11.2 million a week during the last few weeks. Are you--

No, no, I think what Steve said is 11.2 % in the last few weeks of the quarter. Since the quarter ended, it's been higher.

I'm sorry what did it go up to?

Let me clarify, Mark. The average weekly revenue rate in the last period of Q3 was $11.2 million.

Right.

The first three weeks of Q4 have been above 11.5 million.

And would you suggest that we, you know, excluding a few holiday days, use that sort of rate for the entire quarter or with you expect a little bit of a dropoff after March ends, as the 404 deadline passes for some companies?

Well, that seems to be everyone's concern, isn't it? And I mean, we believe that we're on a good trend and we've seen strong demand from most of our markets, but what we've tried to do is give you a sense of how the early portions of the quarter are trending without trying to guess at what might happen towards the end of the quarter. If you extrapolate what we've been doing early in the quarter, you get one result. You know, we've just finished an Easter week, which is off a little bit, particularly in Europe where they take a couple days off for Easter.

Sure.

So you have all those different factors, but what we tried to communicate is that, you know, what we're seeing in the marketplace is continued strong demand broadly.

So your account managers are saying the work is going to continue to be there in April and May?

We're optimistic that we're continuing, that we'll continue to get growth. We have some very large, pending projects. They don't always come through. That's why we said the outcome on how it affects us won't be known, but these are projects that could last several years that are a lot of people, so we've got a lot of demand-type things we're working on.

Okay.

We're working on a lot more demand-type things than we are worried about people dropping off.

Okay, great. Thank you.

We go next to Michel Maron of Merrill Lynch.

Hi. Yes. Thanks for taking the question. Just a point of clarification, actually. Just in terms of head count numbers you provided, the associate head count. I just wanted to clarify. You said 2,582 at the end of the quarter, is that right?

Yes.

And last year, 1580?

1980.

1980. Okay. So you actually saw a sequential decline this quarter, if I'm not mistake? The previous quarter you had 2645?

Yes. That's correct.

So are there any specific issues in terms of what you're targeting in terms of, obviously you just talked about the difficulties at recruiting. What kind of assumption should we make there in terms of the run rate that we should expect going forward?

Well, I guess I would put it this way, as Don described, it is difficult to recruit. It's always difficult to recruit, and particularly difficult to recruit when one of the differentiating factors for our business is the quality of our associates. Having said that, we also mentioned that the two weeks just before Easter were record weeks for us. So, clearly, we're able to generate higher revenues with what we've got. So, we're continuing to look for new associates and for new people internally to continue to address demand, but whether that's an issue or not doesn't seem to be affecting our revenues at this point.

Okay, great. Thanks.

We go next to Andrew Foote of Steadfast Financial.

Hello. Just wanted to follow up on this revenue question that I didn't really understand. It's probably an elementary problem. Are there 12 weeks or 16 weeks in your last quarter?

There's 13 weeks in our last quarter.

Okay. So there's 13 weeks. So, if you're on an 11.5 run rate then that gets you to where the analysts are. If you assume it grows a little bit, than that's why you are confident in saying that you will be above what all of the analysts have projected? If I assume there's 12 weeks, then you're not above what analysts are projecting, correct?

Well, if you assume 12 weeks, you assume that we don't have a full quarter.

Right. So it's 13, but you actually have to grow a little bit from an average run rate of 11.5 to beat what all of the analysts have?

You know, I'm not gonna comment on specific analysts' estimates.

Okay. Well, you did already though--

Right. Right.

--because you said that it was did already though, because you said that it was above all of what the analysts have out there.

And I guess what you're asking us to do on this call now is do math with you and we're not gonna do that on this call.

Are you talking about all of the analysts or the consensus of the analysts?

Both.

I thought what you said is "all of the analysts," but if you meant consensus, then I understand what you said. Trying to respond specifically--

No. I understand. Let me restate exactly what I said--

Steve, You wouldn't know what all the analysts have. We don't get all of the analysts' reports.

What we said is we expect to be ahead of the analysts' consensus that was available yesterday, and ahead of many of the individual analysts' estimates as well.

Okay. Thank you for clarifying that.

Sure.

I had just a follow-up question. What did you say the currency impact was this quarter versus last year?

We did not -- We did not specifically state it. It was nominal.

Okay, so it's not a significant number? It's just from your international operation?

Yeah, it's not a significant number. It's not-- you know, we've had some benefit this year from the weakness in the dollar, but not enough to make a big difference.

Okay. And I might not be up to speed. I remember you guys had commented on this some time previously, I just don't remember exactly what you said. Where do you stand in terms of expensing options or what is your plan to expense options going forward?

We will expense options when we're required to by the accounting rules. So we're not expensing them during this quarter or the next quarter. We will expense them as required by the accounting rules.

What we said publicly is that we expect to begin in the first quarter of our next fiscal year and that the effect, essentially, is one of geography. It moves from the footnotes to the face of the P&L, but our historical financial statements include disclosures of what we would have been had we previously adopted that accounting.

Okay. Do you know yet what the effect was this quarter?

We are in the process of completing that analysis for filing our Q. It will be somewhere between probably $0.04 and $0.06.

Okay. Thank you.

Once again, if you would like to ask a question, please signal by pressing star 1. We'll go now to Doug Demast (ph) with Green River Management.

Hi. I'm not sure if i missed this. Did you tell us what RAS revenue was as a percentage of total?

Yeah, we said it was about 39% of total.

Very good. Thanks.

We'll return to Mark Marcon with Robert W. Baird.

Just a clarification on the last question. You mentioned it was 39 % of year-to-date, right?

Mm hmm.

Okay, great. And obviously, you've got a big cash balance that's building. You've been you know, fairly conservative with regards to acquisitions thus far. Can you talk a little bit about-- are you seeing more things or what are the plans for that cash?

Are we seeing more things? You mean potential acquisitions?

Right.

Yeah, I mean, the last 18 months we've seen all kind of things. And what are our plans for the cash? At the Board level we talked strategically. What we're going to do is we continue to build cash with that. At the present time, we don't think we're overcashed balance for our operations or potentials. We still think there may be some shake outs of Big Four business lines, and we're interested in some of those. And if you buy something from the Big Four, they don't want stock; they want cash, which is okay with us. So, we're just keeping our options open. You know, we've considered internally, talking about dividends, we've talked about other types of uses of the cash, and we will continue to do that.

All right. Thank you.

We return to Doug Demast (ph) of Green River Management.

Sorry, I misunderstood, did you tell us what RAS was in the quarter?

About the same as year-to-date.

About the same as year -- just as a comparison, what was it in the comparable quarter a year ago?

Well, it's grown about 500% year-over-year, so it was considerably smaller a year ago.

So the quarter-over-quarter is 500% growth?

The year-to-date growth in RAS is about 500%.

Do you have the--

and the year over-- the quarter-over-quarter is I think close to 400%.

Perfect. Thank you.

At this time there are no further questions. I'd like to turn the conference back over to Mr. Murray.

Okay. Well, thank you again for your time today and the continuing interest in Resources Global Professionals, and we look forward to talking to you after the end of our fiscal year. Thanks.

At this time our conference has concluded. You may disconnect at this time. At this time our conference has concluded. You may disconnect at this time.