Resources Connection Inc (RGP) 2006 Q3 法說會逐字稿

Welcome everyone to the Resources Global Professionals third quarter fiscal year 2006 earning's 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 call over to Ms. Kate Duchene. Please go ahead.

Thank you, operator. Good afternoon everyone and thank you for participating today with us. Joining me as you know are Don Murray, our CEO and Steve Giusto, our CFO. During this call we may be providing you with comments on our results for the third 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 cannot access it via our website please call Patricia Marquez at 714-430-6314 and she will 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 want to remind you and caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31, 2005 for a full discussion of some of the risks, uncertainties, and other factors such as seasonal and economic conditions that may cause our business, results of operations, and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I'll now turn the call over to Don Murray, our Chairman and CEO to give an overview of the third quarter.

Thank you Kate. Good morning or good afternoon and welcome to our third conference call of fiscal 2006. We continue to experience strong demand for our services in the marketplace. The third quarter includes both the Christmas and new years holiday as well as Martin Luther King day and Presidents day in the U.S. and therefore tends to be seasonally weak. Despite typical seasonal slowing, revenues in the third quarter were our highest ever. Year-to-date our revenues have grown in excess of our 20% targeted growth rate this year. Our revenues have continued to grow in existing offices and service lines.

For the third quarter of fiscal 2006 revenues were $160.3 million, up 1% sequentially and up about 19% year-over-year. For the entire year we have grown revenues 21%, slightly ahead of our 20% target for the year. Steve will provide additional detailed revenue trends in his review of operations later in the call. As is our normal practice I will update you on our four key components of our growth strategy.

Our first two strategies are to grow revenue from existing Fortune 1000 clients to add significant new 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. No one benefits for the wrong client solution as they would in a commission based system. Revenues from our top 50 clients represented 43% of total revenues year-to-date. While 15% of our revenues came from 79 clients. Our largest client year-to-date represents less than 5% of revenues. Client continuity continues to be a focus. During fiscal 2005 we served 100% of our top 50 clients from 2004 and 94% of our top 50 clients from fiscal 2003 and we continue to do work in 2006 with all of our top 50 clients from last year.

We currently have almost 200 more clients after three quarters of the year than we had served at the comparable time last year, which demonstrates momentum in adding new clients. We also have a long-term strategy to continue expansion of our geographic reach. We serve clients in three major regions, North America, Europe, and Asia Pacific. Since the first quarter we have started practices in Belgium, Luxembourg, Ireland, Beijing, and Singapore. All of these new practices generated revenue in Q3 and our Beijing practice was profitable after only a few months in business. On April 1, we will complete the acquisition of our affiliate in India, and that practice is expected to provide access to world class talent needed within the Asian practices.

Our fourth strategy has been to diversify our scope of services and market the various services to our larger clients. We provide services in six different professional areas. We are reaching new revenue highs in all service lines other than [RAZ]s. Consistent with our big four heritage our most significant revenues continue to be generated from the accounting and finance in the RAZ service lines and we continue to experience a shift of revenue from the RAZ peak of fiscal 2005 towards our other service areas. 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. Many of our RAZ Associates are easily deployed on accounting and finance projects and prefer to view themselves as project specialists rather than just SOX or internal audit professionals. Many of these engagements lead to other service opportunities and information management, human capital services, supply chain management, and legal services.

We now address client needs as one coordinated company with six service lines. We also sell a policy management software solution called policyIQ which we use internally for our own SOX requirements as well as to manage our policies and best practices. Another measure of client penetration is the number of top clients who have engaged us in multiple service lines. Of our top 50 clients 49 have used more than one service line and 42 have used more than two service lines. The percentage of revenue from RAZ was approximately 27% of total revenues in the current third quarter compared to 40% during the third quarter of last year.

We are still seeing demand from clients in the SOX area. Clients are working hard to make SOX compliance systematic, and we expect that the overall cost compliance will continue to decline over time. Our opportunity is to help our clients recognize cost savings and regulatory compliance. When clients believe they have received significant value for their service dollars our experience is that they are inclined to engage us for future work both for internal audit and other project needs. The growth we experienced this quarter and for the year provides evidence that a breadth of professional services expertise tends to hedge against any particular service area falling out of favor. Now Steve will provide a more detailed review of our financial results for the quarter.

Thank you Don. Revenues for the quarter were 160.3 million versus 135.2 million in the comparable quarter a year ago. And 158.1 million in the second quarter of fiscal 2006. We had a fast start to the quarter with weekly revenues accelerating from just over $13 million at the end of Q2 to 13.6 million in the first few weeks of Q3, our three highest weeks ever. We had an expected slow down during the holiday weeks at the end of the calendar year. The subsequent five weeks of the quarter were lower than the very strong first three weeks of Q3 and weekly revenues stayed in a range of 12.9 million to $13.3 million. This trend was similar to the trend in Q3 a year ago. The last few weeks of the quarter revenue declined though a portion of that decline was due to the President's day holiday during the last week of the quarter.

Now let me discuss revenues geographically. Revenues in the U.S. were strong on the coasts and not as strong in the middle of the country. The U.S. practice was operating at a weekly run rate of about $10.7 million late in Q3, but has declined early in Q4 to about $10.4 million per week. International revenues were strong in the first and second quarters and revenues for the third quarter maintained levels similar to the first half and were up a little on a sequential basis. For the quarter international revenues were 21% of total revenues. Netherlands revenues for the quarter on a dollar basis were up 3% year-over-year. UK revenues were 31% greater than in the prior year third quarter and elsewhere our Asia Pacific practices grew 52% year-over-year.

Total revenues internationally were $33.4 million versus $27.7 million in the third quarter of fiscal 2005. Total revenues for the Dutch practice in Q3 were $15.8 million, their highest yet. Revenue growth internationally in total was 21% year-over-year. Further, without the strengthening of the dollar since last year's third quarter international revenues would have been higher by $2.7 million and consolidated earnings per share would have been higher by a little bit more than $0.01. On a constant currency basis international revenue growth was almost 30%.

Let me now give you information about the first few weeks of the fourth quarter. Revenue in the first weeks of the fourth quarter has been below our expectations. A year ago we saw strong demand early in the calendar year turn into strong revenue in the last few weeks of the third quarter and into the fourth quarter. This year the cycle seems longer to snap back from the holidays. At our current weekly run rate of approximately $12.7 million revenues for the fourth quarter would be higher than the third quarter and would grow in double digits year-over-year. Our current run rate is about $1 million per week higher than the same week a year ago. Were that run rate to continue unchanged through the end of the year we would achieve growth for the year near our 20% objective for the fiscal year.

Gross margins were slightly lower than the comparable quarter a year ago due to higher benefit costs and slightly lower conversion fee percent versus last year. In any year gross margins tend to be lower during the third quarter due to the impact of the holidays. Domestic gross margins were 38.9% for the quarter. Conversion fees were less than 1% of revenues and client reimbursements were about 2.5% of revenues during the quarter.

International gross margins were 34.9% during the quarter. The international practices have slightly lower gross margins due to differences in work customs, laws and regulations in those markets. Consolidated gross margins were 38.1% for the quarter versus last year's third quarter gross margin of 38.7%. Without the impact of client reimbursements, gross margins would have been 39% during Q3.

For the third quarter average associate FTE count was 2728, this compares to 2733 in the previous quarter and 2308 in the year ago quarter. Quarter end associate head count was 2682 versus 2582 a year ago.

Now to the other components of our third quarter financial results. Selling, general and administrative expenses for the third quarter were $38.4 million or 24.0% of revenue. In last year's third quarter SG&A was 21.9% of revenue. SG&A was $29.6 million in the prior year third quarter and was $36.8 million in the second quarter of fiscal 2006. The largest component of the increase in SG&A is investment in client service and recruiting professionals in high performing regions as well as in our new international offices. 85% of the net new hires in the quarter were for recruiting and client service professionals. As historically been the case the cost of these investments impacts our financial statements ahead of the associated revenue growth. We expect to selectively add internal head count throughout fiscal 2006 to fuel future growth. The the total head count of the Company was just under 3400 at quarter end.

We continue to throw out new operating system to our offices. This effort is expected to improve efficiencies in both our front and back office operations. Currently we have completed approximately 70% of the rollout to our U.S. practices. We are on schedule to complete the rollout early in fiscal 2007. While we are currently achieving some efficiencies from the system the biggest impact will come after all offices are on the system. We have also been developing a European service center to consolidate back office functions across Europe. Infrastructure initiatives have totaled approximately $0.01 per share per quarter for the last two quarters and will cost a similar amount per share in the fourth quarter.

Because last quarter we received a number of questions about our SG&A investments I'm going to spend a little extra time on this area. In our fiscal years 2004 and 2005 we grew revenues cumulatively 165% yet during that same period we grew SG&A at less than two thirds that pace. So far this year we have grown revenues 21% and SG&A by 32%. As we have been describing for a number of quarters our investments in people and systems are aimed at building infrastructure and business development capacity to accommodate our growth plans for the future. A portion of the increase is for nonrecurring cost of our new system and service center. When we think about the size of the market opportunity that we continue to develop this seems to be a prudent use of our cash and we are willing to give up modest amounts of our short terms results to invest in our future.

Depreciation and amortization was $1.3 million for the quarter. Up $300,000 over last year's third quarter as the result of a higher asset base. Interest income was $1.3 million for the third quarter versus $586,000 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 39.25%, consistent with our expected tax rate for the year. Our operating margin for the third quarter was 14.1%, compared to 16.5% in the second quarter of this year and 16.8% a year ago. Earnings for the quarter were $13.8 million or $0.27 per share cents per share versus $13.2 million and $0.26 per share a year ago. Now let me turn to our balance sheet.

Cash and investments at quarter end were about $150 million. During the quarter we repurchased 500,000 shares of our common stock at an average purchase price of $27.02 per share. Of the initial 3 million share buyback authorized by our Board of Directors we have now repurchased an aggregate of 755,000 shares. Our Board and management continue to examine all relevant uses of cash to achieve solid returns on capital while maintaining a balance sheet that has superior strength and liquidity to protect the Company and its shareholders through good and bad business climates. Receivables at quarter end were $93.5 million, up by about 5.8 million from the previous quarter. Day sales outstanding were 51 days, up two days from the previous quarter. Now let me turn the call back to Don for some final comments.

Thank you Steve. Well, our results so far this year are in line with our expectations and our plan entering the year. We have been making important investments in strategic markets and services while also prudently spending our infrastructure to support our larger size. Our strategy calls for these investments to generate strong revenue growth in future years. This is the approach to managing the business that we have employed since inception.

Part of our focus on balance comes from the long-term perspective on our business. When we went public five years ago we set growth and margin framework for our business that we believed would be sustainable through business cycles. and the necessary investments to achieve our objective. The primary components of that framework were average revenue growth of 20 to 30%, gross margin targeted at 40%, and operating margins of about 15%. Since going public our five year compound average growth rate for revenues has slightly exceeded 30%. Our gross margins have been slightly above 40% on average, exclusive of reimbursable expenses. In the aggregate operating margin has been 14.5%. We believe that this balanced approach to creating value for clients, associates, and investors is a prudent way to build a professional services firm that has sustainability. As we prepare our company for the future this will continue to be our focus.

As Steve mentioned, revenues entering the fourth quarter have slowed, primarily due to decreased need for SOX help in the years two and three. But our practice leaders report a pipeline of significant new opportunities. We're optimistic about our ability to capture those opportunities through the remainder of this fiscal year into our fiscal 2007. This year's performance comes on the heels of two strong years before. 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 experience to help our clients.

In my business the clients, I continue to hear from them that our people differentiate us. We strive to satisfy our clients. We work hard every day to maintain their trust in us and in our business model. That in turn allows us to offer interesting assignments to our people. This relationship between finding talented associates and serving client visibility to clients is key to our circle of quality. We believe the potential for the next five years is attractive as our reputation, capabilities and our strong performance continues to position us as well in the rapidly evolving professional services market. We would be glad to answer your questions at this time. Thanks.

[OPERATOR INSTRUCTIONS] We go first to Brandt Sakakeeny with Deutsche Bank.

Thanks. Hi, Steve and Don. Steve, just wanted to drill down a little bit into the weekly run rate. It obviously started a little softer I think than we had hoped. Can you just provide a little more color there in terms of demand areas which are strong and maybe some areas that are softer than usual, is there anything different, and I guess expectations for how that would ramp up through the quarter consistent with how that's happened in the past, thanks.

Well, I think that we continue to see strength in all service lines except RAZ. And we have had very strong growth throughout the practice, except for RAZ during this year. But that was completely consistent with what we had laid out as an expectation for this year. In terms of expectations for the remainder of the quarter and into fiscal 07, we have mentioned our optimism about the opportunities that we see in the pipeline and what we're doing is working very hard to continue building the additional capabilities that we have in internal audit coupled with the strong momentum that we have in our five other service lines.

Okay. And how about in terms of share repurchase, I missed that, can you remind us what you did this quarter and sort of what you have left in the authorization.

Yes, we bought 500,000 shares this quarter. We have cumulatively bought 755,000 and we had a 3 million share authorization, so it's got 2.2 left.

Okay, great, thank you.

We will go next to the site of Greg Capelli with Credit Suisse.

Hey guys. First question Steve, gross margin line, maybe a little more color what happened there, was that a result of stocks falling off more than -- I'm guessing stocks fell off more than you had anticipated. I think you even mentioned that. And then -- well, was it that or was it seasonality or just give us some more color on that.

Sure. Most of the change in gross margin comes from seasonality. We always tend to lose at least a full point, maybe a little bit more in this quarter because it's the only quarter in which we pay associates for time not worked during the holidays. We also had slightly lower conversion fees which when conversion fees get higher you see an improvement in gross margins. So a slightly lower conversion fee percent also contributed to the change, and then we had slightly higher benefit costs in this quarter as we ramped up some additional things for our associates that we thought were important to retaining them as long-term employees.

So is it fair to say then the bill rate pay rate is not -- in the quarter did not move substantially from the quarter before?

Both bill rate and pay rate improved or went up during the quarter.

Okay. Got you.

And the bill rate went up a little bit more than the pay rate.

Okay. And then just in terms of -- in terms of the slow down versus your expectation, when you -- other than what you talked about, is there anything else you can put your finger on that might have, that might have caused things to start out a little bit slower versus your expectation?

Well, we think that the Sarbanes work was -- has been moved to different months now. It's not like the year one where it was all compressed to get it done right before you filed your 10-K

Right.

So the Sarbanes work was probably more spread out this year. And so we didn't have the peak in February that let's say we did last year. Our revenue has not been flattening since the holidays, after the holidays it started again, but it hasn't grown like it did last year. But we're still seeing a positive trend in revenue since we came back out of the holidays. It's just not as high as the peak we had in December when probably a lot of the Sarbanes work peaked.

So you guys have talked about longer term goals, I know you're not giving '07 guidance or anything, but in terms of your mid teen revenue goals I'm guessing nothing has changed there.

No, nothing has changed. We have the same target of 20 to 30% revenue growth for the next few years.

Okay. Then one final one, just on India that you guys mentioned, what are your expectations coming out of there and when would you, talk to us about how you expect that practice to ramp up from a sourcing capability standpoint.

Oh, well, from a sourcing capability our belief is that there are a lot of world class financial and accounting people in India who are available for projects primarily around Asia Pac. And we will start recruiting and training associates, we have already had a request to train potential associates on corporate governance and SOX things in India, and as we get projects in Asia where you need world class type intellectual capital in those areas that's not available we believe we can fill those with Indian professionals. And that would include even Japan.

Okay. So that will start to be in your head count number?

April 1.

Okay.

It's taken from July to April 1, to close this.

Okay. Thank you guys.

We go next to Andrew Steinerman with Bear Stearns.

Hi there. I think you spoke too fast for me about the essentially 20% goal for the year. With the slower start to the quarter is that off the table or on the table?

We still think our revenue is going to be, it depends on what happens in the fourth quarter

Right.

But I still think we are going to be near 20%.

Right. But near 20%, if we say a number like 19% would imply like $172 million of revenues for the fourth quarter and given the start to the quarter it doesn't seem like we're in that vicinity, right?

I think what Steve gave you was that the current run rate is 12.7 million

Right.

That if that continued and stayed flat for the quarter we would be near our 20% growth. I haven't calculated that out.

And then 12.7 times 13 is 165, then you have to handicap it for holidays, right Steve?

There's not much holiday impact during this quarter, Andrew. So my expectation is that we will be at that level or slightly above it.

Okay.

Not at 20%, but the number that you just calculated.

Yes, okay, I understand 165.

We're not giving guidance for what we think will happen to the revenue in the quarter.

Right. But essentially by setting the goal close to 20% for the year you are by sort of sticking to it, you are getting close to it.

Yes, we think we will be near 20%. We could be under it, we could be over.

The second thing that reminded me is worth a question, there was an earlier question about was gross margins affected by lower SOX work, I just wanted to revisit, do you feel like in the past when resources have done SOX work it was at above average gross margins so as SOX work comes off and we replace it with other work, is that any challenge to gross margins or do you think lifetime professionals, different service line, similar growth margins are not a challenge.

That isn't the challenge. I think last year in fact I think last year at this conference call for this quarter we discussed this, because some of the analysts were asking us why we didn't jack up the gross margins or the initial SOX work since people were kind of desperate. I think I replied then that our overall strategy is to treat the client fairly all the time. So we didn't experience a greater gross margin say like some of the accounting firms did for our SOX clients. We tried to price it similar that we do all of our services, which is I think one of the reasons we are getting a lot of follow on work. So that's not the challenge. Frankly, the challenge with gross margin is when you deal with big multinational companies and they're always trying to put in a purchasing system and vendor management systems, for any type of services, that's always the challenge.

Yes, try to duck below those. Thanks for all the comments, I appreciate it.

You're welcome.

We go next to Gary Bisbee, Lehman Brothers.

Hi guys, good afternoon. A couple questions, were there -- what were the -- I think you might have mentioned this last quarter, but what were the extra costs that you had in the model this year versus last year due to the new building.

Oh, the costs are really not the new building, they're really the cost of rolling out our operating system and rolling out the European service center. And those have cost us about $0.01a quarter for the last couple quarters, it will be about that much in the coming quarter. And then most of that ramps down immediately after the end of this fiscal year. So I mentioned briefly that the increment of SG&A that we have spent this year over a ratable increase in relation to revenue has really not been that much. So we're pretty comfortable that we are continuing to use shareholders money carefully and prudently to build capacity for growth. And on, I know it's a minor number, but on the depreciation it sort of bumped up quarter over quarter, is that--? That is, that's a combination of two things. One, the addition of the new building and then also the addition of the capitalizable portion of our operating system.

Okay, all right. Any change in the ability to recruit associates with unemployment rates continuing to trend down?

There's no change. It's been I would say on the East Coast and West Coast it's been difficult since over a year ago and I think we have talked about that in other quarters. It's been softer in the Midwest and most of the south. So we continue to deploy our associates and have them travel as much as they are willing to to fulfill assignments on the East Coast and West Coast. I was in the Bay area last week, and I met with associates and one of our associates told me this is the third time he's heard my presentation because he's been in Houston, and he's been in San Diego and now he's in San Francisco doing a project. That's one of the ways we're trying to handle the tight labor market.

And you also said earlier in the call I think that in terms of business, the middle of the country is not quite as strong as the coast. So the recruiting is the same, the same way or you're saying there's more ability to recruit people in the Midwest and you're trying to send them to the coast.

Right, we have more capacity, people capacity in the Midwest and south than we do in east and west.

Is there any sort of macro trends or anything that you think drives the conversions or how do you think about the change in that, what are the big drivers of that?

Of conversion fees?

Yes.

Well, I'm frankly surprised that conversion fees haven't gone up because we see such a tight labor market. In April 2000 our conversion fees were about 5% of revenue and last quarter as Steve said they actually were down less than 1%. So I have -- I would like to say we're doing a great job retaining our associates and making them happy here, but I don't know exactly why it's not higher. I know our associates are getting offers from clients because I have been told that by clients, but a lot of them are choosing to stay and work for Resources as their career.

Okay, great. Then just one last one. What is the revenue base of this India partnership today that you're acquiring.

It's very small, it's very small. In fact, part of their business was audits and we did not want to acquire the audit practice, so that is, that's going to I think one or two audit partners. So the revenue base from the project type work is not something we're disclosing because it's too small to really disclose. We're really buying it for a platform, not to get immediate revenue.

Okay, great, thanks a lot.

We go next to Jim Wilson with JMP Securities. Once again Mr. Wilson, your line is open. Mr. Wilson, are you there? Hearing no response we will move to the next. We will go to Michel Morin with Merrill Lynch.

Yes, good afternoon. A couple questions. First, I was wondering if just, Don if you could clarify for us, when you talk about operating margins longer term target, are you talking in EBITDA terms before depreciation, amortization?

Yes, yes, that's our operating margin.

Okay. And then secondly, given maybe the slightly weaker start to the quarter than you had anticipated, should we expect that at some point you might ramp up a more aggressive branding or advertising campaign? We are working on that irrespective of the slow start to the quarter. So the two aren't related, because I don't think we get direct revenue from advertising and marketing, I think what we do is build our brand awareness and we have just hired a new firm that we believe is going to give us some great new ideas. So we started and stopped with that in the last year and we also have hired a new director of our advertising and marketing efforts too, so we are looking to improve that. And that's something that we should be thinking about maybe for '07?

Yes. Yes, we would start probably any, our goal is to start an ad campaign in influencer publication right around September, because that's when we feel a lot of the financial technology people come back from summer vacations.

Okay. Then just finally on the operating system, is it correct to assume that you will be done in Q4, so it's another $0.01 in Q4 and then you're pretty much finished after that.

We have one group of offices that will be completed early in the first quarter of fiscal '07, but it's early in the quarter so I would say that there will be a little cost associated with fiscal '07, but not a lot.

One of the costs of internally operating system is the distraction to our people internally. There's no way we can measure that other than in this quarter we had some big operating groups go into the system, so we did take time away from their practices as they have to be involved in the data conversions and making sure it's correct and involved in trading. So that's probably another factor that we probably took our people's time away from directly serving clients.

Right. Okay, perfect, thanks very much.

[OPERATOR INSTRUCTIONS] We go next to Mark Marcon with R. W. Baird.

Good afternoon. I was wondering with regards to the revenue trends, you mentioned domestically it sounds like the mid, middle part of the country and the southeast is a little bit slower. Does that -- would that imply that on the coast you're seeing different trends? Or in terms of it actually picking up or being stable with the ending weeks of the last quarter?

I would say our coasts are stronger than the middle of the country and continue to be. During the quarter our tri-state practice hit a new high for the, forever, since we have been in business, that was kind of exciting. Our northern California practice for the first time went over $1 million a week in revenue. So we're seeing strong demand on the coast. And we still see softness and we're working hard at trying to turn that around in some of the bigger Midwest southern cities.

And how should we think about the weekly revenue trends in Europe?

They have been good. They have been good. We just came back from Europe and they are a very optimistic group. So we just missed the riots too.

That's good.

We flew out just as they were starting. But no, I would say our European group is optimistic. We said this before, we have seen lots of opportunities, we just have to execute on them.

Great. And I would imagine given the growth rate that you mentioned in Asia Pac that weekly revenue trends there are also positive.

Yes. For the most part, yes.

So it sounds like the only area where you're really seeing softness globally in terms of weekly revenue trends would be the Midwest and the southeast, is that--?

The Midwest and southeast. Remember as these RAZ projects have been compressed this year compared to last year we're selling work to make up for that RAZ peak of last year. So I think last year at this time RAZ was over 40% of our revenue and this year in the quarter it's 27%. So we made up not -- only that our revenue is $1 million a week higher. So you can see we have made up a lot of other services to offset the RAZ work.

In terms of the RAZ work, where do you think that settles out? You had, a peak at around 57 million based on what you indicated it sounds to me like it came in around 43 million for this quarter.

Yes, what we're doing right now is strategically looking to improve the breadth of the services of RAZ. Because last year we were so focused on the Sarbanes opportunities and helping clients get through that for the first year, now that we have sort of a breathing room in RAZ, they have capacity, now we're asking them to increase the breadth of services. We don't think RAZ really has a bottom line number that they're going to drop to and stay there. We believe it's clearly a real growing practice for us once we introduce and figure out how to provide these other services.

Okay. And then with regards to the SG&A increasing, should we just anticipate that the sequential trends on SG&A are going to continue as what we have seen in the last few quarters?

I would say that we're -- we have done the bulk of a lot of the hiring that we had to do to catch up, and to open new offices. So I would expect that the number of new hires in the next quarter, will be less and we'll trend downward, unless we have some big opportunity that comes upon us.

So sequentially we should see a little bit of a decline in terms of the quarter over quarter delta and SG&A.

Yes, Mark, if you look at last year's fourth quarter we had a very significant increase in SG&A and coupled with a very large increase in revenue. I would anticipate that the dollar increase in SG&A during this fourth quarter would be lower than that. It's not going to be zero, I mean we have got things that we're continuing to do and we would expect some modest amount of growth in SG&A. But I think that -- my hope is that by the end of the year the percentage change in SG&A year-over-year is lower than it has been so far year-to-date.

Just today I got an e-mail that we have made a hire to open another new office domestically will open probably around May 1. So that again, every time we open a new office we have to get people in there recruiters and client service and admin people before we have revenue

Right.

But we're pretty high on this particular location.

Would you anticipate opening two or three offices during this quarter?

I don't think so. No, I think that's probably the only one unless -- as I've always said we're opportunistic. Sometimes things come to us where a client wants us to start a project and we have to open an office, et cetera, so right now we had a discussion yesterday because we're getting demand in Mexico, so should we open a real office in Mexico or not, we have decided to postpone that decision for awhile. But that's surely an opportunity that's coming.

So one or two and then India opens or becomes fully incorporated--.

April 1.

Is that profitable.

Yes. We have never bought anything that isn't profitable have we. I don't think so.

Then last question, and then I'll hop off and let somebody else ask a question. But in terms of April and May last year, how did they trend relative to March?

Up.

They were up.

Is there -- are there any sort of dynamics that would, that are normal that would cause that to potentially occur again this year or?

I think last year was somewhat of an aberration because a lot of companies, bigger companies had Sarbanes issues that had to be remediated and redocumented and retested. And not all companies were able to get Sarbanes done on time last year. So the Sarbanes period peaked a lot later than what we have seen this year. So I would say that -- so part of the growth last year was because of the Sarbanes efforts that companies were putting in last year to get it done the first year.

Is there -- I guess the other way to ask the question is aside from continuing to do a good job of penetrating your clients, is there anything from a seasonal perspective that would lead you to believe that revenues on a weekly basis should naturally trend up over the course of the remainder of the quarter?

The fourth quarter has always been our seasonally strongest quarter. History is not necessarily a portent of things to come, but we have always had strong fourth quarters, so we're pushing hard to have another strong fourth quarter.

Great, thank you.

We go next to Brett Manderfield of Piper Jaffray.

Steve, it sounds like the RAZ revenue will be down in the May quarter. I'm curious as to whether you think the May decline will be sequentially similar to the February decline? And then related to that, should we expect the RAZ revenue to kind of flatten out in August versus May given it sounds like some of the companies that you're dealing with, their spending patterns appear to be coming more linear throughout the year? Thanks.

I mean the short answer is we're not certain. I don't think that you -- I think the biggest cottage industry in this whole area is guessing at what demand there will be for internal audit services through this period and one of the reasons that we have a diversified public service it to hedge against any change throughout our service capacity. So people have asked me this before to predict what rate RAZ slows down and at what point it flattens out, I don't think we're really going to do that. What we're going to try to do is continue to grow the whole company understanding that this strength in other areas of the business is going to overcome any expected weakness that we have been predicting for some time around RAZ. So I don't think that we're going to get more specific than that.

Okay. Fair enough. Just related to head count, I think if I remember correctly the head count at the end of last quarter jumped pretty significantly. I know the average is very similar to this quarter, but it sounded like it had jumped at the end of the quarter, but the head count here at the end of this quarter if I'm doing the math correctly would be down about 7% from the end of last quarter. Is there something happening there?

I think it's logical is that the FTE count pretty much follows the trend in revenue sequentially and the change towards the end of the quarter reflects what we just discussed around the trends and revenues towards the end of the quarter. I don't think there's any magic to it. Certainly our long-term goal continues to be to build head count because that's what drives our revenue. So I think what you hear in terms of the numbers of people in the Company is completely consistent with what we have said about how revenue trended during the quarter.

Okay, very good, thank you.

The next to Jim Wilson with JMP Securities.

Oh, thanks, can you hear me this time.

Hi Jim.

Working a little better All right. I guess two questions really related to -- one, the investments being made and the dollar amount, I guess if you think through '07 do you have any reason to think that your operating margin expectations would dip below your 15% long-term goal based on expenditure pattern? Obviously you don't know what your revenues will be yet.

No, I would anticipate that we will plan and try to execute the 15% or better.

Okay. And then--.

I was going to just add one thing.

Yes.

Our investments, not only are they new people, I think we said 85% of our hires in the quarter were really directly related to client service or recruiting and developing our national recruiting abilities, but right now we have a team of some of our best RAZ people in Asia and they're doing seminars in China on corporate governance, seminars and I think they're on their way to Hong Kong to do a seminar, they did one in Shanghai, Beijing, et cetera, so those are all investments that as a less mature company three years ago we never would have been doing. And so these are all more mature type of investment activities, marketing activities that we're doing to hopefully build our brand name.

Okay. And then the other question is looking at -- for us to measure or see where or how those investments are paying off, can you give us any color on the size by consultants or by revenue base of any of the other new practices that you have been building, that you have been building up and where they have progressed to, so we have some sense of how successful the new dollars so far being deployed.

Sure. I think first of all it's probably wise to mention that some of the investment is back into existing practices that have been growing very quickly. So it's not all in the new market. In new markets we tend to become profitable within six to 12 months of opening and as we mentioned with regards to Beijing which is really a brand new office we can become profitable more quickly than that if things go well. So generally our return on investment on people investments is very quick. And it tends to be also very strong. So if you look back through the history of the Company our best ROI is when we open new practices and build them greenfield. So we're optimistic about the ability to have strong ROI on all of the things that we have done this year, particularly with regards to adding capacity. Effectively for the last two years we have grown about as fast as we could physically handle it. And then as we've continued to build the infrastructure we're now creating capacity in those fast growing markets that gives us a platform for continuing to grow at this pace into the future,

And I guess -- actually what I was really thinking is any of the other segments as opposed to geography, can you give us any color on how big the supply chain business, either revenue or body count or information for anything that has become at this point and sort of just from a growth perspective?

Well, Jim, we have to date, other than in RAZ not disclosed the size of any of our segments other than to say that this year so far all of them have reached new highs. So we're expanding in all five service lines besides RAZ at a nice pace and the margins in those businesses, the gross margins tend to be similar across all practices, so therefore the return is similar to what you see in the entire business.

Okay. All right, thanks.

[OPERATOR INSTRUCTIONS] We'll take a follow-up from Michel Morin with Merrill Lynch.

Yes, thanks for taking the follow-up. A couple of questions, I was wondering in talking about the largest client being about 5% of revenues, I think it's been about that level for some time. Has there been any change in terms of who that largest client is or is it pretty much always the same client that we're referring to?

It's a different client this year than last year. So this year our largest client was not the largest client in last year. Our largest client last year is still one of our largest client.

And then relative to Q2 is that the same kind of thing, it's a different client?

I'm looking at the numbers year-to-date. So it's been a growing account for us.

Okay. And then on the head count issue, is there any, you can see there's some seasonality in Q3 also as it pertains to head count, and would you say that maybe the number we saw at the quarter end has more to do with people, with turnover than it does with your actual recruiting efforts?

I don't think so. I mean I think our, as I said earlier our revenue for the year I think we had the highest week before Christmas which was really I think the peak of the Sarbanes efforts. And since then, while we're building from a lower base back up again. So I don't think it was any aberration, it's just that we -- our goal for the fourth quarter would be to continue to build revenue from our current base. Which would mean we would continue to add associates FTE's as we need them.

And then therefore there is no real seasonality in Q3 head count-wise.

At the end of the quarter? No

No I'm looking at a year ago it also looks like the actual number had declined in Q3. I'm just wondering if that's something that we should anticipate in the third quarter, maybe early in the calendar year is when you might tend to lose more people.

Well, as I said earlier to another question, I think most of the time head count follows directly with revenue. So when we describe the trends in revenue you can almost be certain that the trends in head count are similar, because that's how the business model works. So -- and the third quarter tends to be the seasonally slowest. So I don't think there's any inconsistency or aberration in what's there.

Okay, all right, thank you.

We will take our final question from Andrew Steinerman with Bear Stearns.

Thanks for the follow up. Just to square away the point about the recent revenue dip, is it the Company's view that the main culprit is SOX roll-off, and if you looked at non-RAZ business do you feel like it's undergoing the normal seasonal pickup in the May quarter?

I can't talk to the May quarter because we're not really there yet.

So far in the May quarter.

I'll say again during the quarter, we had new highs in almost every service line other than RAZ. During the third quarter accounting and finance, IT, the human capital and supply chain and legal services and of course some of those are smaller service lines that we want to grow much faster. But they all hit new highs in the quarter while RAZ dropped to 27%, so that tells you that we are growing the other service lines. And I continue to expect that that's what I would see in the next quarter.

Right. And Steve last question, just give us what you think a normal seasonal pickup might be on gross margins given that February is a seasonally low period?

I think generally in the fourth quarter our margins returned to the mean essentially. So our gross margins are still trending at about our 40% rate if you take out conversion fees and client reimbursement. So I don't see any reason that we wouldn't be back at that level again this quarter. And that we would be trending towards therefore a totally blended gross profit margin just slightly below 40% because of the effect of client reimbursement and conversion fees.

Sure. That's clear. Thank you so much.

Ladies and gentlemen, this does conclude the Q&A session. At this time I'd like to turn the conference back over to Mr. Don Murray for any additional and/or closing comments at this time.

Okay. Well just wanted to thank everyone for their interest in Resources. We look forward to speaking with you again after the end of the final quarter for fiscal 2006. Thank you.