Resources Connection Inc (RGP) 2006 Q1 法說會逐字稿

Good day, everyone, and welcome to the Resources Connection first-quarter fiscal year 2006 earnings results conference call. This call is being recorded. With us today from the Company is Ms. Kate Duchene, Chief Legal Officer; Mr. Steve Giusto, Chief Financial Officer, and Mr. Don Murray, Chief Executive Officer. At this time I would like to turn the conference over to Ms. Kate Duchene. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me, as you know, are Don Murray, our Chairman and Chief Executive Officer, and Steve Giusto, our Chief Financial Officer.

During the call we will be providing you with comments on our results for the first quarter of fiscal 2006. 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 website, please feel free to call Patricia Marques (ph). She can be reached at 714-430-6314, and she will be happy to fax a copy to you.

Before introducing 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 10-K report for the year ended May 31, 2005 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, our Chairman and CEO, to give an overview of the quarter.

Thanks, Kate. Good afternoon and welcome to our first conference call of fiscal 2006. Our first-quarter operating results for fiscal 2006 reflect a continuing strong demand despite the traditionally slower summer. The summer quarter is softer due to the heavy indications in the holidays, but we did maintain some of the momentum coming out of our strong fourth quarter of 2005. In particular, revenue results in Europe (technical difficulty)-- what happened?

Operator?

What happened? Hello. Okay. I don't know what the music was, but I guess we are celebrating. So in particular revenue results in Europe were strong given the traditional summer vacation season. The summary of our operating results for the first quarter was reported earlier in our press release.

For the first quarter of fiscal 2006, revenues were $149.6 million. The quarter's revenue level was about the same as the actual of the previous quarter and represents year-over-year growth of 30%. The first quarter included two significant holidays in the United States, Memorial Day and the Fourth of July, as well as the heavy vacation season.

As expected, revenues during the holiday weeks were considerably lower than the other weeks of the quarter. Steve will provide additional detailed revenue trends in his review of operations later in the call.

Most of the trends we discussed in our last conference call continued into the summer. We continue to experience a shift of revenue towards our accounting and finance area and away from RAS. As we have anticipated, work done for clients who initially engaged us to help with Sarbanes compliance has led to several follow-on engagements in other areas. And further, it is sometimes difficult to precisely differentiate the (inaudible) we count in finance engagements in our RAS engagements. Many of our RAS associates are easily redeployed on accounting and finance projects and actually prefer to view themselves as project specialists rather than just Sarbanes-Oxley or internal audit professionals.

As is our normal practice, I will update you on our progress towards the four key components of our growth strategy.

Our first strategy is to grow revenues from existing Fortune 1000 type clients. We believe our effectiveness in this area is enhanced by our client service model rather than commission-based models of some of our competitors. Revenues from our top 50 clients represented 44% of total revenues during the quarter. 50% of our revenue came from 71 clients.

During the first quarter, two clients contributed revenues of 5% or more. Client continuity continues to be a focus. During fiscal 2005 we served 100% of our top 50 clients in 2004 and 94% of our top 50 clients from fiscal 2003. So far in fiscal 2006, we continue to do work with all of our top 50 clients from last year.

Our second strategy is to add new clients. Last year we added more than 300 net new clients, some of which were million dollar accounts. We are early in fiscal 2006, so aggregate new client metrics for this year are not meaningful. But during the first quarter, we had initial engagements with two new Fortune 100 clients. We are continuing to look for new relationships with significant companies with high potential for significant revenue.

Third, our geographic reach continues to expand. During the quarter we opened a U.S. office in Louisville, and internationally we proceeded with the official opening of our practices in Denmark and Norway. We are currently working to open new practices in Beijing, in Ireland, Belgium, Luxembourg, Montreal and Singapore. We are working closely with our affiliated firm in China and working on a letter of intent to complete the acquisition of our smaller affiliate in India.

Our fourth strategy is to diversify our scopa (ph) services and market the various services to our larger clients. During fiscal 2006 already each of the service lines other than the RAS service line has hit new 52-week high revenue weeks. Our most significant revenues continue to be generated from return and finance and then the RAS service lines, and many of these engagements lead to other service opportunities in information management, human capital services, supply chain management and legal services. We now address client needs as one coordinated company with six service lines. And we also sell a project management software solution called policyIQ, which we use internally for our various SOX requirements.

As we reported in a recent press release, our survey of large companies showed that over 50% of companies have not institutionalized their SOX compliance efforts, and we expect some of these new companies will continue to rely on us in this area. The percentage of revenue from RAS was approximately 35% of total revenues in the first quarter, down from a high of 40%. The date for accelerated SOX filers with calendar year-end has now passed. But we're still seeing the demand for clients in the SOX area. Some of the demand is coming from non-accelerated filers, including major international companies who must comply with SEC rules, while other demands are coming from companies already working on year two compliance, as well as those accelerated filers with non-calendar year-end.

We have several engagements where we are helping clients to remediate issues identified during the SOX process. We see SOX compliance as one component of a larger opportunity in the internal audit market. We also expect that clients will be working on corporate governance, risk assessment of control and operational audits. We believe we're well positioned to help them with those source of initiative. We invested internally in several experienced high-level RAS directors and instituted special certificate training for SOX and control specialists. Gross margins for the first quarter tend to be lower than normal because of the two holidays in vacation. And gross margins for the quarter were 39.4%, the same as the comparable quarter of fiscal 2005 a year ago.

Now Steve will provide a more detailed review of our financial results for the quarter and the year. Steve?

Thanks, Don. Revenues for the quarter were $149.6 million versus $115.4 million in the comparable quarter a year ago and $150 million in the fourth quarter of fiscal 2005.

Weekly revenue results through the first quarter were stronger than expected for the summer months. As we previously reported, we finished last quarter at about an $11.7 million weekly pace and then accelerated during the first few weeks of the quarter to between $11.9 and $12 million per week. Revenues in the latter part of the quarter were not as high as that. The average weekly revenue in August was about $11.6 million. Excluding the two holiday weeks which were substantially lower than the other weeks of the quarter, the average weekly revenue during the quarter was approximately $11.8 million.

Now let me discuss revenues geographically. Revenues in the U.S. were strong. The U.S. practice averaged just about $9 million per week in the summer quarter. Given the effect of the U.S. holidays and the vacation periods in August, the fact that revenues were essentially flat with the very strong fourth quarter of 2005 is encouraging.

International revenues accelerated during the latter part of the previous quarter, and this momentum continued into the early part of fiscal 2006. We experienced strong revenues across most international practices, and a number of our international practices were operating at their highest levels. As expected, the latter part of the quarter was affected by annual vacations but was stronger than last year. International revenues in August were approximately 20% of total revenues, and for the quarter, international revenues were 22% of total revenues.

Netherlands revenues for the quarter on a dollar basis were up 38% year-over-year. UK revenues were 136% greater than in the prior year first quarter, and elsewhere our Asia-Pacific practices grew 86% year-over-year and were profitable.

Total revenues internationally were $33.1 million versus $18.5 million in the first quarter of fiscal 2005. Total revenues for the Dutch practice in Q1 were $15.1 million. Revenue growth internationally in total was 79% year-over-year.

Let me now give you information about how revenues in the second quarter of fiscal 2006 are progressing. The first week of Q2, the week ended September 2, was our second-highest revenue week ever and the highest ever for purely hourly revenue. Revenues for that week were about $12.1 million.

The second week of the quarter is impacted by a Labor Day holiday in the U.S., and revenues for that week were considerably lower. The third week of the quarter ended September 16 was substantially higher than the first week and was another new all-time high. Revenues for that week, the last for which we have results, were about $12.6 million, a quarterly run-rate over $150 million.

Last week our Texas practices were affected by Hurricane Rita. A week ago Wednesday our Houston office closed, and it is not yet back to normal. Now that the hurricane has passed, we believe that all our employees in that region are safe, and they are endeavoring to get back to work as soon as practicable. The loss of revenue from the Houston closure will reduce revenues during Q2 by as much as $1 million or more. The effects of the hurricane will also affect our gross margin as we will pay our Houston area associates for some time lost due to the storm.

Also, the final week of this quarter will include the Thanksgiving holiday week in the U.S.

Now to gross margins. As expected, gross margins were lower in Q1 than Q4 of fiscal 2005. Domestic gross margins were 39.9% for the quarter. Conversion fees were less than 1% of revenues, and client reimbursement is about 3% of revenues during the quarter. These percentages have been consistent for sometime. As a reminder, conversion fees generated 100% gross margins, and client reimbursements that pass through out-of-pocket costs generate 0% gross margins.

International gross margins were 37.8% during the quarter. As discussed previously, the international practices have slightly lower gross margins due to differences in work customs, laws and regulations in those markets. Consolidated gross margins were 39.4% for the quarter, flat with the year ago first quarter. Without the impact of conversion fees and client reimbursements, gross margins would have been 40.2% during Q1.

As we mentioned last quarter, starting with this call, we will disclose associate headcount numbers on a full-time equivalent or FTE basis. We calculated full-time equivalents based on all hours paid during the period, including vacations and holidays. To provide historical context, we have posted FTE counts for each of the quarters in the last two years on our website.

For the first quarter, average associated FTE count was 2509. This compares to 2332 in the previous quarter and 2157 in the year ago quarter.

Now to the other components of our first-quarter financial results. Selling, general and administrative expenses for the first quarter were $34.1 million or 22.8% of revenue. In last year's first quarter, SG&A was 21.8% of revenue. SG&A was $25.2 million in the prior year first quarter and was $33.5 million in the final quoter of fiscal 2005.

We have begun the rollout of a new operating system to our offices. This effort is expected to improve efficiencies in both our front and back office operations. Most of the capital expenditures for this system have already been made. We will incur certain incremental operating costs for training and transition of data during the remainder of fiscal 2006 and into fiscal 2007. These non-recurring costs may have a modest impact on our earnings over the next three to four quarters.

We also continue to add internal headcount as we bolstered our management team to address the ongoing demand we see in the business and to invest in new services and offices. We expect to continue adding internal headcount throughout fiscal 2006 to fuel future growth, and this may continue to impact short-term operating margins.

Depreciation and amortization were $900,000 for the quarter. Last year's first-quarter depreciation and amortization was also $900,000, and it was $1 million in the most recent previous quarter.

We anticipate completing the purchase of an office building in Irvine, California in the coming weeks. We plan to move our corporate office and domestic service center to that location. The purchase price for the building is $9.3 million. We anticipate making some leasehold improvements and moving our people in over the next two years as our corporate lease here expires. We expect a modest to long-term increase in depreciation expense, but we expect operating cost savings in excess of the new depreciation amount. Approximately 50% of the building is leased out and not needed by the Company at this time, so it will provide a modest cash return above and beyond the projected future rent savings.

Interest income was $972,000 for the first quarter versus $304,000 a year ago. Interest income is growing due to our higher cash balances and slightly higher interest rates than in the prior year. Our tax rate was 39.5%, lower than we had estimated due primarily to better results internationally. If our international practices continue to perform as they did during the first quarter, this lower tax rate should be sustainable.

Our operating margin for the first quarter was 16.6% compared to 17.6% a year ago. Earnings for the quarter were $15.1 million or $0.29 per share versus $11.6 million and $0.23 per share a year ago, representing earnings growth of 30%.

Now let me turn to our balance sheet. Cash and investments at quarter-end were $141 million, receivables at quarter-end were $83 million, up by about 3 million from the previous quarter and up about 30% from a year ago, and days sales outstanding were 47 days the same as a year ago and improved by one day since year-end.

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

Thanks, Steve. While we continue to be optimistic and see numerous opportunities for growth that we are pursuing for the short and the long-term, we believe the long-term trends in the professional services industry are in our favor. To capitalize on these opportunities, we must continue to invest and create a stronger multinational firm that will lead to greater revenues and profits in future years. And most of these investments are in new offices and in additional people in existing offices and service lines. We see opportunities in almost every service line to help our clients solve the problems they face from today's world of increased regulation and global competition.

I continue to believe that it is our people and culture that make the difference in the marketplace for resources. Steve described our investment in technology, and this should provide our people the tools to improve their efficiency and productivity.

We felt the first quarter was in line with our growth objectives for the year, though the direct impact from the recent hurricane was not anticipated, but so far we can deal with it. Any indirect economic impact is hard to predict. Our biggest challenge in the U.S. is recruiting and retention, especially on the East and the West Coast, and this is always an issue in a strengthening economy.

Our focus continues to be on executing our business model well. It starts with identifying the high-quality associates who have the right skills and experiences to help our clients. I visit major clients as I visit offices, and I believe from these client visits that our people differentiate us in the marketplace. We strive to satisfy our clients. We work hard everyday to maintain their trust in us and in our business model. That in turn allows us to offer interesting assignments to our people, and this relationship between finding the talented associates and serving high visibility clients is key to our circle of quality. Our people are enthusiastically pursuing the numerous opportunities we see in the marketplace for the continued development and evolution of the resources business.

And now we would be glad to answer your questions.

(OPERATOR INSTRUCTIONS). Greg Capelli, Credit Suisse First Boston.

Don, just on that last point that you made on the recruiting front, it sounds like that is the biggest challenge and that the demand environment really continues to be a good talent. What is actually happening on the bill rate pay rate right now? Where do you see that perhaps going, or I guess what might be embedded in the guidance going forward if you can talk about that?

Well, I will let Steve maybe talk about the number, but our business model is such that we think we need to pay our people what they are worth in the marketplace. In this kind of an environment where you have so many companies trying to bolster their internal audit department or build the Sarbanes compliance department, there's a lot more emphasis on control-oriented experience. So we are more aggressively reviewing our employees' pay rates and adjusting them to what we think the market is and at the same time adjusting bill rates as the contracts allow us to. So I would say from a margin standpoint we would belive that we can maintain our target. Steve?

Our experience continues to be that we are able to get modest billing rate increases. Our billing rates were up essentially consistent with pay rates in the last quarter on a year-over-year basis, and overall bill rates are up just a little bit more than 10% year-over-year. So we are continuing to evolve.

Okay, great. And then just in terms of -- I wanted to ask on the nonaccelerated filers that you mentioned, how long do you see the tail lasting on that? Do you have an idea much like the initial ramp-up of the initial 404 filers?

Well, some of these are very large multinational companies headquartered in Europe. So the Sarbanes compliance for those particular companies will probably last nine months or so on some of those companies. But the key for us is being useful to them in year twos and threes, etc. You know, most companies I don't believe are going to be able to hire enough Sarbanes-Oxley specialists internally to take care of all their needs. So we want to be able to keep partnering with them and have a recurring base of work from the compliance of Sarbanes.

We look at our own efforts for next year that we are going to have to do internally, and we don't really see a big decrease in effort. You know unless the auditors' guidance changes, we will probably have to do just about as much work as we did this year.

Okay. Great and then just one final one. In terms of you talked about last quarter shooting for 20% growth revenue for the year, I am assuming that is still the case. Given the quarter you just put up, I'm not sure. You said the hurricane I guess could affect about a $1 million or so. But I guess is that still the goal? And then with that in mind, what percentage headcount increase do you think you need to see to get there?

The 20% goal is still the case. It is still our objective, and we feel okay about it. And Steve has his percentages of what we need to do. I'm not sure he is going to share them.

Well (multiple speakers)

Is it bigger than a bread box, Steve?

I would say that we don't need 20% headcount from where we are growth to achieve 20% headcount for the year. We essentially are tracking towards that 20% target with headcount that has already grown since year-end. And that said, when we plan our year, we tend to plan mostly for growth in volume and not growth in rates. So even though we mentioned that our rates continue to expand, fundamentally we plan to build volume at a rate similar to the growth in revenues, and to the extent that we are successful in also improving our rates, that is just added benefit. So you certainly can for modeling purposes use a reasonable indication of what the size of our headcount would need to be in terms of what the revenue would need to be to achieve that 20% for your own modeling purposes.

Okay, that is what I was after. Thanks a lot, guys. Appreciate it.

Mark Marcon, Robert W. Baird.

Good afternoon and congratulations on the results. I was wondering would you expect that the gross margin should return to the rates that you saw in the second quarter given the absence of the holidays in Europe?

We expect it to. The only thing that is going to impact in this quarter is the hurricane effects because we will pay a portion of our associates' time that they lost through no fault of their own to the hurricanes. We did it with other disasters, and we will do it again this year. But we expect overall that we try to maintain in the United States at least a 40% gross margin, and we have been able to do that. And so we would expect to do that this year.

Great. And then with regards to the press release, there was a mention of some particularly large assignments in Europe. I'm wondering if you can give us a little bit more commentary there in terms of what the impact was in the quarter?

Well, I mean we're not going to disclose the dollars because I don't think that is our practice, but two very large I think multinational engagements for Sarbanes compliance. They are both nonaccelerated filers that are striving to file. One of them we have done work for in non-Sarbanes areas, and so this is sort of hopefully a continued development of our relationship with them.

So what it did for us in Europe is even though there were still a lot of vacations and a lot of -- almost -- a lot of our management that has children go on their holidays in Europe, but a lot of the associates had these projects to keep them busy, and that has really helped the momentum there.

Great. And then with regards to the retention that you mentioned in terms of the initiatives, have you seen -- have you experienced any of your associates being pulled away in a more meaningful manner by clients than what you have seen in the past? What are you seeing in terms of just retaining your existing associates?

Well, I think one of the revenue statistics Steve gave was that our conversion fees for the quarter were less than 1%. You know, just in 2000 our conversion fees were up to 5%. That 5% represented a large, larger turnover where our clients were hiring our people. So the fact that it is below 1% would say that we're not losing a lot of our experienced associates to our clients.

Do you always get a conversion fee?

As far as I'm aware, we do.

Okay.

We don't have any policy that we wave it. You know, we're not like if you do X dollars, we wage your convergent fee. We don't do any of that stuff.

So the level of convergent fees are still at historical lows. I think where we see real competition is in the newest associates who may have been interviewing with other firms or may have been interviewing with a big four firm, and those firms keep at those newer associates to try to hire them away. And so that is where that I think a lot of competition is right now. And also for new associates that we may not get because they are going to a competitor or a big four firm.

But this type of competition to me is good. It shows the strength of the economy. We feel pretty confident in our business model that the type of associate that stays with us, that this is a very attractive business model for them. So as long as we do the right thing. And we are doing an internal study to see how we can even enhance the benefits that we give the associates to make it even more attractive. Every year we do a survey of the associates, get their concerns and take those. We have done a very good job at addressing those concerns, which we're doing right now again.

Great. And the last question, you mentioned a number of initiatives in terms of investments. Given what you're currently seeing in terms of the revenue growth, would you expect that maybe you will get -- you will arrive at your targeted operating margin rates potentially by the end of this year, or is that still potentially off in 2007?

(multiple speakers). Well, Mark, the fact that we have an operating target of 15% that is lower than where we are operating does not mean that we are trying to drive our margins down. It does mean that we will continue to make appropriate investments that may or may not match up exactly with when revenue occurs, and so we just try to be conservative when we talk to you guys on Wall Street about what might happen so that there are no surprises. But I think you have seen the results of the first quarter where really the only impact on our operating margins came from the holiday impacts on gross margins.

So if you look at the aggregate amount that we spent in Q1 including on taxes, which is where we got some benefit, we spent less in Q1 than we spent in Q4. So we're going to continue to be prudent about this, but we have to, as Don mentioned in the prepared comments, continue to make good investments to build the long-term success of the Company.

Andrew Steinerman, Bear Stearns.

Throughout the 160 revenue run-rate plus which comes off of the 12 six-week, just remind us, first of all, what week was that? I think you said that was September 16. Does that include the hurricane effect that you said right after that? And then by throwing out a $160 million revenue run-rate, you know thinking about the whole quarter, isn't this a quarter that has two holidays in it, Thanksgiving and Labor Day?

The answer to your first question, Andrew, is that the week of $12.6 million was the week before the hurricane. The run-rate in terms of the $160 million is purely a mathematical multiplication of that weekly run-rate times 13. The implications for the quarter as we mentioned are that we will have some modest reduction in revenues in the broader Texas area because of the hurricane --

That is a million for the whole quarter, right?

Yes. And we will, of course, have the impacts of Thanksgiving in the last week of the quarter. So you know we like to tell investors what our run-rate is on a weekly basis because it tends to give you the trajectory of the business. It does not necessarily compute exactly to what the quarter might be.

Okay. And could you just give a comment on the SG&A sequential growth in dollars in the August quarter? Is that about the growth rate of SG&A dollars that we would count on going forward?

We would expect that the dollar amount of G&A growth from quarter to quarter should continue to be reasonably consistent. In the first quarter, we hired a number of people. We had the other initiatives that we spoke about, and yet we were able to nonetheless manage the SG&A we think pretty efficiently. But also as we have said, when we find good people, we hire them when we find them. And so it is not always a precise measurement in terms of when we will have the new SG&A.

Okay. That makes a lot of sense. Thank you.

Jim Wilson, JMP Securities.

I was wondering if you could kind of describe or quantify how much -- because the international growth was obviously very good -- how much of that has come from or tends to come from the U.S. clients or start with work you have done for U.S. clients that leads to work abroad or actually conversely moving the other way around?

It depends on the country. Typically when we launch a business in a country, the majority of the revenue the first year is going to come from our multinational referrals from the United States. That was true in the UK. But now the UK is generating a lot of its own revenue from UK-based clients and is actually referring work back to the United States.

So what we try to measure is our clients continuity. So if we do work for a multinational in the U.S., in the UK or in Japan that hopefully we continue doing that work for the local client, as well as for the headquarters, which we think is one of our strengths. So we don't really try to measure how much of it comes from the U.S. versus that. We really try to work as one worldwide team without a "scorecard" where people are trying to take credit.

But I would say the UK, which was about three or four-years-old, is doing a great job generating its own revenue and actually referring work to us. And even with our fledgling joint venture operation in China, we have gotten work referred back to us from that -- our Chinese affiliate, for companies that are trying to do activities in the United States. So we look at the whole thing as one team and one connected team.

And in any particular -- anything new that in the international front that looks akin to the Sarbanes-Oxley legislation that might be upcoming?

Not that I know of. I mean every place -- every country you go you here discussions about corporate governance and strengthening corporate governance. In China there is a lot of discussions about improving transparency and financial reporting, etc. So I would say that it is an issue that is getting attention throughout the world. I think our French colleagues told us there is a law in France that is very similar to Sarbanes-Oxley.

So you see though, but I think it's more the trend of my personal belief is we are moving towards a global capital market which means we are going to have to have global standards of corporate governance and financial reporting. And how long it takes to move there, I don't know, but I think that is the way I see all the major markets moving.

Gary Bisbee, Lehman Brothers.

Two quick questions if I could. First of all, you mentioned a couple of times building headcount to support your growth going forward. Can you just help me understand exactly what types of people you are talking about here? I assume that this is managers and what not that are salaried in addition to just continuing to expand your base of associates.

Yes, I will give you like a really simple example. I just came back from Asia. I interviewed a candidate to open a brand-new Beijing office. I interviewed candidates to open a Singapore office. We don't have any revenue in Beijing. We don't have any revenue in Singapore. So when we hire a managing director and a recruiting person for Singapore and for Beijing, there are going to be additional costs before the revenue hits. And that is -- and the same thing has occurred when we hire say a RAS director in a major market where we don't have a RAS director. They are not coming in with a base of business. They are coming in to build a base of business. So it is an investment upfront. We typically don't have an investment for associates upfront that are not working. It is more the internal people who are going to build the future business.

Okay. Thanks. And so I think a quarter ago you mentioned about having hired four former partners from big four firms. Is that the type of hiring you were talking about there, people to manage a practice or open an office?

Yes, yes.

Okay, great. Thanks. The second question, can you give a little color on what exactly it is you are referring to when you talk about the legal services opportunity? Is a lot of that really driven from your finance and accounting business, so risk assessment, that type of thing? Or is it much more people with lawyers, people with a legal background?

I will let Kate Duchene answer that. As you know, she is our Chief Legal Counsel and was really the brainchild of starting the business, so Kate?

Yes. To date what we have experienced is that we are placing mostly lawyers and paralegals into in-house legal departments to help them purely with traditional legal needs. A lot of contracting and general corporate work.

Okay. Do you have any sense or can you give me a sense as to how big you think that opportunity is and how quickly you are investing in going after that opportunity?

Well, we think it is huge. I do think that the legal firms are slower than accounting and finance firms have been to recognize that there are new ways to solve their business problems. So a lot of it is market education right now. But if you look at the statistics on the use of contract lawyers and needing to build this resource and to keep budgets down, we really think it will be huge.

I think, Gary, that one of the things you should recognize, though, is that it is still a very small piece of our revenue and what it provides is a long-term source of future growth. So when people ask us where we see opportunities for future growth, we look at these newer service lines for us where we see significant opportunity, and I would not expect that it would have any significant impact, for instance, on this year's operations, but in the years to come, it could be, as Kate said, very substantial.

And we ought to be clear that we are not practicing law. Just like when we place CPAs out at clients in the finance department, we're not acting as a CPA to certify anything. So our lawyers are really working in-house at clients, and in fact, even in resources, we use associate attorneys to help us when we have peak overloads reviewing contracts or leases, etc. So it is really a very similar business model to accounting and finance and not really competing directly with lawfirms for their core competencies.

Okay. And how many of your offices is that offered out of at this point? Is it still only a handful?

I think it is probably tri-state --

It is five.

Five.

We're on the East Coast, in Texas and California.

It is five.

Brandt Sakakeeny, Deutsche Bank.

It is Stephen Gunn. Can you hear me okay? Sorry for the connection. Just a question going back to the supply vote. Can you talk to sort of how you have been finding people and also potentially who you're competing with with respect to hiring people? Is it mainly the big four, or is it also non-traditional accounting and finance players like yourself?

It is both, exactly. And it is also clients. You know, a lot of our people have offers to go to work with XYZ in their internal audit department or in their Sarbanes department, or they are coming out of that because they don't like the culture. So you know competition comes from every direction in a market like this where there is a real supply crunch for certain types of skillsets.

So I would say it comes from all of those areas. And I would not say there is one that is overwhelmingly greater than another. It's just a nice market if you are an intra-audit specialist.

And with the sort of annual wage rates that you have been witnessing over the last year or so, have you seen the supply of auditors increase? I mean have folks who have maybe exited the business in the last year or two for whatever reason decided to come back in attracted by the higher wager rates or not yet?

I would say there is some of that. What I find is a lot of our associates really don't like to be referred to as an internal auditor or Sarbanes specialist. They like to be referred to as a --. And they have a lot of skillsets because they have been controllers or they have been internal auditors maybe 10 years ago, etc. that is very relevant to doing a great job, but I don't think it is right now still a profession that is attracting a lot of applicants. So I think our model really works well to get experienced people to do the work.

Great. Thank you. And just one final question on the balance sheet. I missed the cash flow numbers for the quarter. Can you just give us that and the cash? Also, just in terms of use of cash, I mean, thoughts continuing buyback dividend, obviously the building purchase, just thoughts behind that. Thanks.

We did not give a cash flow number, so it will come out in our Q that the cash did increase from 134 to 141. During the quarter we pay out our annual bonuses. So they are -- and we also make estimated tax payments during the first quarter, so there are substantial seasonal impacts on our cash during the first quarter.

In terms of our ongoing use of cash, we continue to look at what best uses of our cash might be. The investment in the building, for instance, is a small use of our cash, but nonetheless one that we think makes good economic sense.

In terms of how we would get money back to shareholders, that is a discussion that we continue to have periodically with our Board.

Okay, great. Thanks. Congratulations on the quarter.

At this time I would like to turn the conference back over to our speakers for any additional or closing remarks.

Well, I would like to again thank all of you for your interest in Resources, and we also like to thank our investors as a lot of them have been with us from the beginning, and we continue to look forward to building a great company and speaking with you again after our second fiscal quarter. Thanks.

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