Resources Connection Inc (RGP) 2006 Q4 法說會逐字稿

Good day and welcome everyone to the Resources Global Professionals Fourth 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. Stephen Giusto, Chief Financial Officer, and Mr. Don Murray, Chief Executive Officer. At this time I would like to turn the call over the Ms. Kate Duchene. Please go ahead.

Thank you, operator. Good afternoon everyone and thank you for participating today. Joining me, as you know, are Don Murray, our CEO and Chairman, and Steve Giusto, our CFO. During the call we will be providing you with comments on our results for the fourth quarter of fiscal 2006 and for the entire year. By now you should have a copy of today’s press release. If you need a copy and are unable to access a copy on our website, feel free to call Patricia Marquez. She can be reached at 714-430-6314 and she will be happy to fax a copy to you.

Before introducing Don Murray, I’d like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements, in other words, statements regarding future events or future financial performance of the company. We must caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10K report for the year ended May 31, 2005 for a discussion of some of the risks, uncertainties, and other factors such as seasonal and economic conditions that may cause our business, result of operations, and financial conditions to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I will now turn the call over to Don Murray, our Chairman andf CEO, to give an overview of the quarter.

Thank you, Kate. Good afternoon and welcome to our year end conference call for fiscal 2006. Fiscal 2006 has been a year of transitions and investments for us. While the overall demand for compliance services has transitioned as we had expected, the other services we provide have been in strong demand and this trend continued in the fourth quarter. Revenues in the fourth quarter were our highest ever and for the fiscal year our revenues grew 18%. This was the 15th straight quarter we have grown revenues year over year.

As we have previously indicated, we increased our paper investment and this contributed to the higher G&A expenses for 2006; however, we feel this was justified to help position us for continued growth in the future. During fiscal 2006 we have [considerably] expanded our international reach in both Europe and Asia while also reinvesting in high growth US markets. During fiscal 2006 we opened 13 new offices. New offices are a drag on our G&A as a percent of revenue until such time as they become break even. For the fourth quarter of fiscal 2006, revenues were at $165.9 million, up 4% sequentially and up 11% year over year. And for the year, our revenues grew 18% to $634 million. Steve will provide additional detailed revenue trends in his review of operations later in the call.

During fiscal 2006 we made progress against our growth strategies. Our first new strategy is to grow revenues from existing major clients and to add significant new clients. We believe our effectiveness in this area is enhanced by our client service model rather than the commission-based models of some of our competitors. No one benefits from the wrong client solution as they would in a commission-based system. The revenues from our top 50 clients represented 41% of total revenues for the year while 50% of our revenues came from 85 clients. During fiscal 2006 we served 113 clients that generated at least $1 million of revenue for us compared to 111 in the prior year. We had 239 clients with revenues over $500,000 for 2006 compared to 212 in 2005. Our largest client in fiscal 2006 was less than 4% of revenue while in 2005 our largest client was over 5% of revenue.

We believe that the most compelling testament to our client service model is our history of serving clients for extended periods of time and client continuity continues to be a focus. During fiscal 2006, we served all of our top 50 clients from 2005. Looking back three years, 90% of the top 50 clients from fiscal 2003 were clients in 2006, illustrating our client service approach verses the commission model. For the year we served close to 2,100 clients, our largest client count ever, and up more than 10% over fiscal 2005.

This year our geographic expansion efforts, the third leg of our growth strategy, were focused on building our international footprint in the three major regions we serve. During the fiscal year we opened offices in Denmark, Norway, Luxembourg, Belgium, Singapore, Beijing, Dublin, Brisbane, Louisville, Woodland Hills, Dubai, Grand Rapids, and have established a Bangalore world presence. The new Indian practice already contributed to our revenues and earnings in the fourth quarter. Our progress in developing the footprint of the company in fiscal 2006 is important to our long-term goal of serving multi-national clients wherever their needs may be. As we do this, we expect the percentage of our revenues that we generate to markets outside the United States will grow.

Our core 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 and we continue to examine other potential professional service offerings that fit our model. Consistent with our Big Four heritage, our most significant revenues continue to generate from the accounting and finance service line. When we developed our servicing strategy it was aimed at creating aggressive services that would make our revenue more sustainable through cycles. This is true in 2002 and 2003, when IT and human capital services grew though demand for attorney services was lower. It has also been true in the past few years when demand for regulatory services peaked and propelled strong growth in our internal audit subsidiary, RAZ. And it continues to be true now. As strong growth in our services other than RAZ have offset the expected decline during the second and third years of SOX compliance work.

We believe that successful engagement in any of our service areas lead to other service opportunities because our clients learn to trust us to provide them with high quality service. One measure of the success of this strategy is the number of top clients who engage us in multiple service lines. 98% of our top 50 clients have used more than one service line and 84% have used three or more service lines. We now address client needs as one coordinated company with six service lines. We also sell a policy management software solution called Policy IQ, which we use internally for our own SOX requirements and for organizing and distributing our intellectual capital, as well as to manage our policies and procedures.

The percentage of revenues from RAZ was approximately 23% of total revenues for the fourth quarter of fiscal 2006, compared to 39% during the fourth quarter last year. RAZ revenue for the year represented 29% of total revenue verses 40% last year; however, we still see demand from clients in the SOX area, including international companies who have filing requirements with the SEC. There are also pending international regulatory efforts similar to SOX, like J-SOX in Japan that could drive demand in the future.

As with all compliance efforts, clients are working hard to balance the cost of compliance against the risk of failure. These efforts are putting pressure on all service providers to be efficient and cost-effective. The competition in the particular area is fierce but we feel we are still winning our share of the work.

We are very pleased with the growth in our non-RAZ services. Recently RAZ revenue has been at about $150 million run rate. If we can maintain or better RAZ revenue levels while continuing the make progress in the other service areas then we expect to continue our revenue growth in fiscal 2007.

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

Revenues for the quarter were $155.9 million verses $150 million in the comparable quarter a year ago and $160.3 million in the third quarter of fiscal 2006. Our average weekly revenue during the fourth quarter was $12.7 million, consistent with where we started the quarter. Revenues for the year were $633.8 million and represent growth of 18% over the prior year. Our compound average growth rate since 2002 is 37%.

Now let me assess revenues geographically. Revenues in the US followed a similar pattern in [Q5] as we observed in Q3. Results were strong on the coast and not as strong in the middle of the country. The weekly run rate in the US averaged about $10.1 million during the quarter and while demand is solid, it does not compare to what we have experienced in the previous three years, so the run rate is a full $1 million a week better than a year ago.

International revenues were the highest in our history. For this quarter, international revenues were 21% of total revenues and our international offices continue to benefit from the delayed filing days for SOX compliance by non-US companies. Netherlands revenues for the quarter on a dollar basis, were up 13% year over year and total revenues were up 15% for the year. The UK had very strong results a year ago when demand from US clients working on SOX [speed] and against the very difficult comp, UK revenues were 20% lower than in the prior year fourth quarter but are up 37% for the year. The Asia Pacific region had a flat quarter but a strong year with revenues flat for the quarter but up 41% year over year. Total revenues internationally were $34.3 million versus $32.1 million in the fourth quarter of fiscal 2005. Total revenues for the Dutch practice in Q4 were $16.8 million, their highest yet. Revenue growth internationally in total for the quarter was 7% year over year and for the year international revenues grew over 30%.

Without the strengthening of the dollar since last year, international revenues would have been higher by about $2 million in the quarter and $6 million for the year. On a constant currency basis international revenue growth was 13% in the quarter and 37% for the year.

Let me now give you an estimation about the first few weeks of fiscal 2007. The first week of the year includes Memorial Day and was about 85% of a typical week. Revenue in the second week of the quarter was about $13.1 million, a nice improvement. Revenue was a little lower than that in the third week of the year. The remaining weeks until now have been flat other than that each of the most recent two weeks has been negatively impacted by the Fourth of July holiday, which fell on a Tuesday this year. Based on these results so far, and the typical August vacation month in Europe, we expect revenues for the first quarter to be sequentially flat or down slightly. Gross margins rebounded as expected after the holiday season and we achieved our gross margin target for the quarter. Domestic gross margins were 41.0% for the fourth quarter. Conversion fees were less than 1% of revenues and five basis points lower as a percentage of revenues verses the comparable quarter a year ago.

Client reimbursements were about 2.5% of revenues during the quarter. International gross margins were 36.6% during the quarter verses 35.6% a year ago. The international practices have lower gross margins due to differences in port customs, laws, and regulations in those markets. Consolidated gross margins were 40.1% for the quarter. Last year’s fourth quarter gross margins were 40.0%. Without the impact of client reimbursement and conversion fees, gross margins would have been 40.7% during Q4. For the year, gross margins were 39.3% verses 39.6% in fiscal 2005, the modest decline in margins is mostly the result of lower conversion fees as a percentage of revenues.

Now the head count. For the fourth quarter average associate FTE counts were 2,742. This compares to 2,728 in the previous quarter and 2,457 in the year ago quarter. Year end associate head count was 2,857 verses 2,639 a year ago. The total head count of the company was a little bit more than 3,600 at year-end.

Now to the other components of our fourth quarter financial results. Selling, general, and administrative expenses for the fourth quarter were $40.4 million or 24.4% of revenue. In last year’s fourth quarter, SG&A was 22.3% of revenue. SG&A was $33.5 million in the prior year fourth quarter and was $38.4 million in the third quarter of fiscal 2006. Included in SG&A costs during the fourth quarter of fiscal 2006 are certain costs that we do not expect to recur. These non-recurring costs detracted from earnings by about $0.01 a share.

Also included in our SG&A for the quarter were costs associated with newer international practices that have not yet reached operational stability. SG&A costs of new offices totaled approximately $1.8 million in the fourth quarter. As has historically been the case, the cost of these investments impact our financial statements ahead of the associated revenue growth. SG&A costs for the year totaled $149.7 million compared to $115.4 million in fiscal 2005 an increase of 29%. As Don previously described, it has been a year investments, including new head counts in both existing and start-up offices and infrastructure initiatives aimed at improving our long-term efficiency. We expect to selectively add internal head count into fiscal 2007 to fuel future growth, but we are focused on getting a return on the investments we have made during this past year.

During the first few weeks of fiscal 2007 we completed the rollout of a new operating system to our domestic offices. This effort is expected to improve the efficiencies in both our front and back office operations. We have also been developing a European service center to consolidate back office function across Europe.

Depreciation and amortization was $1.5 million for the quarter, up about $500,000 over last year’s fourth quarter as a result of a higher asset base. Interest income was $1.6 million for the fourth quarter verses $827,000 a year ago. Interest income is growing due to our higher cash balances and higher interest rates than in the prior year. Our tax rate for the year came in slightly higher than we had been estimating earlier in the year. The rate for the year ended up at 39.4% instead of 39.25%. This caused the rate in Q4 to increase to 39.8%. Further, due to new legislation in certain states that is expected to negate some of our current tax planning, we currently estimate our tax rate in fiscal 2007 to be 40%, exclusive of the impact of stock options, which I will discuss later.

Our operating margin for the fourth quarter was 15.7% compared to 14.1% in the third quarter of this year and 17.7% a year ago. Earnings for the quarter were $15.7 million, or $0.31 per share verses $15.7 million and $0.31 per share a year ago. For the year, operating margins were 15.7% compared to 18.0% in fiscal 2005. Earnings for the year were $60.6 million, 8% higher than 2005 or $1.17 per share, an improvement of 6% over 2005. Last year we earned $56.1 million or $1.11 per share.

Starting in the first quarter of fiscal 2007 we will be subject to requirements of FASB statement 123R which requires recording stock-based compensation estimates in the income statement. FAS 123R precludes estimating the potential tax benefits from exercises at incentive stock options, or EISOs. Because our historical stock option plans include a meaningful number of EISOs, the tax effect of these options will not be estimatable until all the historical EISOs are either exercised or retired. Therefore, our tax rate may change considerably from quarter to quarter, which will make the impact of implementing FAS 123R more volatile to our quarterly results of operations under Generally Accepted Accounting Principals than companies that have not issued EISOs. On a prospective basis, we may recommend to our board that we issue only non-qualified stock options which will reduce the potential volatility in our tax rates.

For purposes of describing our business to investors on a go-forward basis, we expect to report both income as calculated under GAAP and income before the impact of stock-based compensation. Because of the potential volatility I just mentioned, our primary analysis of results of operations will be made against income before stock-based compensation. This will make analysis of our historical and prospective results comparable and we believe, more meaningful.

Now let me turn to our balance sheet. Cash and investments at quarter end were about $185 million. During the quarter we repurchased 185,000 shares of our common stock at an average purchase price of $24.89 per share. Of the initial three million share buyback authorized by our Board of Directors, we have now repurchased an aggregate of 940,000 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. For the year, we generated operating cash flows of $70 million, about $10 million more than our net earnings. Receivables at quarter end were $90.7 million, down by about $2.8 million from the previous quarter. Day sales outstanding were 49 days, down two days from the previous quarter. Now let me turn the call back to Don for some final comments.

Thanks Steve. Our people have [drove] our results this year. We set a stretch goal for revenue growth and achieved most of that goal. We’ve been making important investments in strategic markets and services while also prudently spending our infrastructure to support our growth. Our strategy calls for these investments to generate strong revenue growth in future years. While making important investments in our future, we still generate operating margins above our long-term guidelines of 15%. This is the sort of balanced approach to managing the business that we have employed since inception. As Steve mentioned, revenues during the fourth quarter and into the new fiscal years are flattening. We continue to experience a good demand environment, but it is not as robust as we have been experiencing over the last two or three years. Our people are optimistic about our ability to build a company at a reasonable pace in fiscal 2007, and particularly after the summer months.

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 high quality associates who have the right skills and experience to help our clients.

In my business travels, I continue to hear from clients that our people differentiate us. We strive to satisfy our clients and 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 high visibility clients is key to our circle of quality. To improve our brand image, both with potential new clients and potential recruits, we will be rolling out a new advertising campaign that highlights our global professional reach. We expect the campaign to be more visible in the fall though the first new ad has already appeared in Corporate Board Member, a publication for directors of US public companies. We believe the potential for the next five years is attractive as our reputation, capabilities, and strong performance continues to position us as well in the rapidly evolving professional services market. Now we would be glad to answer your questions. Thanks.

[OPERATOR INSTRUCTIONS] Brandt Sakakeeny, Deutsche Bank.

Thanks and good afternoon Steve and Don. Question for you just in terms of the guidance with respect to the attention of the fourth quarter. I guess the question is, as you look forward, Don, you sort of presumed that the RAZ business would stabilize at 150. Can you give us a little color on the non-RAZ business and the growth rates you witnessed there and also can you give us a little sense too as the expectation of the 13 new offices that you opened, how those new offices ramp up over the next 12 months?

I would only expect probably one of those 13 new offices to be profitable in the first full year and that would be India. Those other offices I believe will take, it could be 12 months, it could be 24 months before we get a break even and start becoming profitable. So we don’t expect any real additions to profits from the majority of those new offices for a year or two because it takes quite bit of investment to get them going in today’s world.

I was asking more just in terms of the revenue growth rather than the prospect of the profitability.

I guess I would say that we’re optimistic about this year. We have not given an expectation for this year and we are not expecting to do that until we’re a little bit further on in the year, but when you look at the potential that the new offices have coupled with the existing strength in our practices, and then you’d asked, I think about services, the growth in our non-RAZ services during the year were very strong and we try to avoid doing this with and without calculations, but certainly if you were to do that you would see that growth during the year for our non-RAZ services was close to 40%, which we think is excellent.

Our largest service line is accounting and financing and that grew 39%, the other service lines all grew about 40%.

Great. That’s helpful, thank you.

Greg Cappelli, Credit Suisse First Boston.

Don and Steve, I know you’re not giving official guidance out, but coming off a year that 18%, even given what you’ve said about the last couple of weeks, is ‘07 a year that you could see 15% plus revenue growth? I understand it’s early, but can you give us any more color around that?

Our plan, which we try to be aggressive, is for that type of percentage or better.

Okay. I understand. Two questions on the margins -- on the gross margin, up about 10 points - - I imagine it was up some - - does that mean - - did you get a little bit of price this quarter as well?

We did, our prices are up a little bit, up about 4% year over year and a couple percent sequentially so we continue to have success pricing our work at rates to get these appropriate margins.

Just for clarification, pricing is an extent of the experience of the people needed on the assignment, verses us just pushing prices up. And in fact we do get a lot of more price competition, especially in the SOX and large RAZ engagement since we’re really competing with all the Big Four and all the Big Four had slowdowns in their SOX practices, so they’re looking for more work, too.

So in a sense you’re seeing them drop their price and become more competitive?

Yes. We’re still winning some shares but it’s a more competitive market than it ways two and a half years ago, when the Big Four were charging whatever they could get and we held to our pricing model.

Okay. I’m assuming you expect to continue to hold your pricing model going forward here?

Yes.

On the operating margin, should we -- given what you said, Steve about the non-recurring costs and whatnot, should we expect to see then some operating margin expansion in fiscal ’07?

I guess I would put it this way, our goal for ’07 is to have a balanced approach to revenue growth and SG&A growth so if we do that you should see no significant decline in operating margins and at the same time I wouldn’t expect significant leverage.

Okay, got it. One more quick one - - just on the RAZ line you mentioned, should we take the comment that you expect that to be about flat - - that’s sort of the early expectation here in ‘07? As a percentage of the total?

When we planned the year we planned that RAZ as a percentage of revenue would be similar to where it is at the end of the quarter, but that certainly is one of the big questions that we need to answer through this year is that we would like to see RAZ at similar levels or higher than it is today and at the same time, as we said, there continues to be as expected, a decline and pressure on the amount that people are spending in terms of the regulatory compliance costs. So, it’s a matter of how efficient we are at pursuing some of the other opportunities in the internal audit space.

Okay. Just as a follow-up to that Steve, are you generally seeing Fortune 500 companies pulling their horns some in terms of -- they’ve all spent a lot of money on professional services the last couple of years, are they backing off some here?

I would say they’re not backing off, they’re just trying to do everything they can to cut the cost and still comply. And so after you’ve done year one, you’re hoping and experiencing much less of an effort for year two, you’ve already learned how to do it, you’ve got a lot of the original documentation, so it’s an update and testing. So, I think all of our clients that I visit are looking for ways to continue to reduce their cost of compliance with SOX.

Thanks guys, appreciate the answers.

Andrew Steinerman, Bear, Stearns & Co.

Could you just give me some clarification on international? I realize you had a great year there but it sounded like fourth quarter decelerated. I didn’t quite catch why that happened.

The overall results internationally were up, there were-- the Asian practices were flat and the UK verses a year ago was down. The reason for the UK being down is that they were significant participants in a lot of SOX work at the end of the year a year ago, but our expectation for the UK is first of all, it has already strengthened recently and their goals for this year are significant growth so we’re not anticipating a negative year out of the UK or out of international in general, in fact we’re anticipating that, as we’ve said previously, that over time the percentage of revenues that we get internationally should increase. How much that increases or if it increases this year depends on a lot of things which we’ll just have to wait and see, but our broad expectation is that all of our international practices have significant potential which they’re just beginning to address.

Right. So, when I think about what you said about recent trends and August quarter revenue growth, is the only thing holding the company back from producing overall higher revenue growth, you know, when does SOX revenue bottom?

No. We don’t even look at it that way. When we serve these large clients we look for all the different ways we can help them and SOX has helped us get into large clients which I think—statistics, you look at it and say it equals the sum of our clients from 2003, our top 50 clients, we served them again this year. So 2003 we didn’t have SOX, so our goal is to constantly work with our clients on what their needs are and as their needs change from having to put all this effort into SOX and then they have other needs that they either postponed or that have come up because of SOX, we want to able to continue to help them. We’re looking at ways of how we’re going to continue to expand the service line of RAZ and make it a growing service line in the future, but I don’t know if our efforts will be successful this year.

Right. Don, let me try it one more way. When looking at year three SOX for US calendar year company, when do you think their year three efforts, which has to be done by the end of the this year, will start ramping up? August? September? October? What do you think is typical this year?

I think it’s going to be similar to last year, which it’s going to start later because it’s not the fire drill-- I think this year we saw SOX starting later for a lot of clients and I think it will be about the same, it will become more of a regulatory compliance timeframe like they do for their external audit.

Okay. Thank you very much.

Jim Janesky, Ryan Beck & Company.

A couple of follow-up questions to what Andrew said - - Don, you mentioned that SOX-- you expected to start later than it did this year than in initial compliance, and you folks have also commented that this year it ended-- the last two years it ended earlier than year one. Do you think that Sarbanes-Oxley compliance work on an ongoing basis is going to be compressed into just a couple of months at the end of the year into early of a new year, do you think that’s going to be a trend going forward?

I think what we said, and I expect this to be the case going forward, is that this year Sarbanes-Oxley became more routine for the majority of our large clients. However, they’re also looking for ways to continue to be more efficient. I think that routine will continue on in future years so that for the majority of companies, it won’t be as strenuous as it was two years ago for year one. So I think we’ll see similar timing in 2007 for us as we saw in 2006.

Okay, thank you. And when you’re looking at the investments that you made, there’s a two part question. The first is, Steve, you mentioned selective investments in headcount going into 2007 but not a significant amount of expectation for margin expansion, is that a change and is there other costs that might ramp up, or do you think you’re going to continue to hire aggressively in ‘07?

Well, I guess when we talk about head count additions, I would parsec between associate head count and internal management head count. So what I was suggesting is that as we look at management head count going forward, it will be more selective, we have made significant investments over the last year and we expect those investments to have a return and we have to give the people that we’ve hired in those positions time to create a return on investments. So as that happens we will look for offices or countries that are doing as well or better than they had expected and we will continue to invest in those markets. So it’s a balanced approach to making certain that we continue to fuel the future growth of the company while at the same time creating reasonable returns for our shareholders.

In 2005 we had a much higher operating income, which we talked about then as being too high for us to invest and sustain our growth and that we would bring it down because we’re going to basically retool in some of the large offices like the tri-state New York area, Southern California, Northern California, Chicago, et cetera, because they have been working so fast on year one stocks that they haven’t had time to really invest in more people. So the first half of 2006 we were investing in those markets as well as opening the new offices and those 13 new offices are still going to be a drain until they become more break even, so I think we’ve always said from the beginning that we would be running the company to fuel future growth, to make a balanced investment and we can do that to stay in an operating income of 15-16%, which has always been our target that we’ve given. So I think Steve’s comments meant that we’re going to continue on the road that we’ve gone down and we’ll continue to look for the prudent places to invest. At the same time we’re also looking not to expand G&A in areas that aren’t going to add to our future revenue.

Okay. And as a second part to that question, did you get any sense that the rollout of the European service center, the investments in technology and such, caused any distraction on the revenue generating side?

I think that our people would say that they probably did. Whenever you undertake an initiative like that or initiatives like that, there is an evolution and a change that goes on inside the company and changes can be distracting. How significant that has been is a subjective assessment. I think that our results speak for themselves, they’ve done excellent this year so I think our people work through those issues very well, but certainly whenever you go through that sort of change there is the potential and the actuality of some distraction.

It is fair to say that the rollout of our system in the United States caused distraction to the offices that were having it implemented for the time period it took as well as the year two service plan. So it’s kind of a cost of changing your systems and upgrading them.

Okay. Thank you very much.

Gary Bisbee, Lehman Brothers.

Hi guys, a couple of questions. Can you give us any sense that historically what’s been the average timeline or period of time between when a customer approaches you about hiring you for a project and you place in that person and start in to generate revenue? I guess I’m wondering with the comments that you feel good about the growth potential of the business then I think you said something along the lines of particularly once we get through the summer months. Is any of that backed up by dialogue that you’re having with clients or a sense that there will be an increase in hiring people?

Our business is not that we’re selling a Boeing jet where we have a big backlog of people ordering months in advance or years in advance. Looking at a list we have six or seven large proposal prospects that we’re working on right now that would go throughout the year. But most of our work comes from us being at our clients and getting reassignments as we’re finishing up something so that we go on to the next project. So we don’t keep a backlog type schedule because most of our work doesn’t occur that way. So it’s one of the reasons we put such a focus on client retention and client satisfaction verses a transaction-based business. So most of our revenue we may only get two weeks notice, sometimes we get six month notice but the majority of it comes up pretty fast.

Just to add on here, you asked about the summer. It has typically been the case that both clients and associates take a little bit of time off during the summer. I know, for instance, I’ve taken some time off during the summer, I think that’s pretty typical. So that they’re have been years when that has not been the case but usually that has been because there was some sort of deadline that was coming up, like SOX which caused people to work harder during the summer than they might otherwise work. There aren’t quite as many of those things happening right now and so the summer will be, in our estimation, typically a little bit slower than would normally be the case. So it’s not a matter of when the clients approach us, it’s just that normally during the summer people are taking a little time off.

Okay, that’s fair. Are you willing to give us any sense of what you think the magnitude of the pre-tax option expense will be? I understand the tax rate issue.

I would say that our best estimate right now, absent the tax effect that I talked about, is $0.06 to $0.07 a quarter on average. That doesn’t necessarily include all of the potential additional expense as we issue additional options to people who join the company and to any increment to people who are already here, but I think that’s a reasonable estimate on kind of a straight line basis, but as I mentioned during the prepared comments, there is significant potential for both upward and downward revisions of those costs, depending on how active people are at exercising their EISOs.

Right, okay. I guess I’m more curious than anything else, but have you guys gotten any business coming in or do you see this as a real opportunity with this whole issue going on over options backdating and having you be hired to help with some of these investigations as something to look into whether or not they’ve done this?

I haven’t personally seen any assignments, I’m not aware of every assignment in the company. I’ve seen a number of requests for stock option accounting specialists to help them implement these new rules. That seems to have generated some work for us immediately, but I’m not aware of anything big yet from the stock option accounting backdating issue.

I would say that I feel the same way Don does that most of the initial investigations are more legal in nature than accounting and our legal practice has not evolved far enough to be relevant to that quite yet. If, however, a company were to decide that it did have an issue and needed to restate then there’s a financial impact and when that occurs it’s likely that we would be engaged. But the initial investigation would either be with a law firm or a forensic accounting firm, which is not an area of particular expertise for us.

Okay. And then I guess just one last one. You gave us the full-time equivalent associate count, which is helpful, I think obviously we’re going to look at that versus your revenues and see what the revenue for full-time equivalent is, and if you just look at a trend over the last eight quarter you’ve given it to us, it was up 11% in the August ’05 quarter and trended down, to actually down 1% this quarter. Is there anything going on there? How should I interpret that change we’ve seen?

I don’t know. I don’t know that I would interpret that. The primary driver of our business is revenue and while we try to provide additional data that might help you analyze our revenue, that’s our primary indicator of how the business is doing, so--

Let me ask it another way, has the RAZ business historically been at a higher bill rate than some of the other businesses that may be filling in now?

Only modestly.

It probably hasn’t been higher than –

It’s higher than some and it’s lower than others so I wouldn’t consider that to be a big issue.

Okay. Thanks a lot.

Mark Marcon, Robert W. Baird & Company, Inc. 

Just wondering, how many offices do you think you might end up opening in ’07?

We haven’t really submitted a plan to the board yet, but I would say probably five. Might be more, but probably about five. I think we opened-- we’re in the process of opening Montreal already for this fiscal year and we’re looking at Shanghai and we’re looking at Edinburgh. So those are three right now that we’re looking at, but two of them are open. Oh, and Mexico. We’ve done a lot of work in Mexico, which has compelled us to open an office there to do the business sufficiently and comply with all the laws. So the Mexico office is right there so maybe my five is a bit low.

Okay. So maybe seven or eight or something like that?

Could be.

Okay. And so we will have those coming on, you’re also moving into your new headquarters building, right?

We’re starting to move in.

That’s happening this year, right?

Right.

Okay. What’s the impact of that going to be in terms of expenses?

Well, when we’re finally moved out of this building, it will be positive cash flow for us, which is how we view the business, how financially strong we are, but I don’t know, have you calculated--

The impact, Mark, will be to reduce our month-to-month cash outlay with regards to the lease here because we’ll have less space in the current location we’re in, we have depreciation expense on the building which is, for the most part, already implicit in our financial statements, there might be some increments based on the TI’s that we’ve put in; the net cash impact will be positive. And I think it’s too small of a transaction; however, for us to identify it separately as a publicly-disclosed number.

And the building itself, there’s a big portion of it that’s leased out, so our lease income from that is not much different than the money market rates in effect when we bought the building.

Okay. So it sounds like there’s not-- basically we’ll have less lease expense – the depreciation would go up just slightly and at the end of the day its’ not usually material.

Right.

No. But we think it’s a very positive thing for us, it strengthens the company.

Okay, great. And then, with regards to the practice areas, it sounds like the non-RAZ did grow nicely. Can you give us a little bit of color in terms of where you were seeing the strongest growth and which practices and I’m particularly curious about the new legal practice and what you’re seeing there. I know it’s early but--

I think we said that the majority of the practices, the supply chain management, IT, human capital, all grew about 40%, close to 40% or more.

For the quarter or the year?

For the year.

How about for the quarter?

For the quarter, it was higher than that in two of the service lines and slightly lower than that in two of the service lines and then legal, which is so small that our percentage base was very significant.

165% for legal.

Okay. But that’s really young. How many offices do you have legal in at this point?

Right now we just have legal in Southern California, the tri-state area, Houston, and the Netherlands, which we just introduced.

Terrific. In terms of –

We’re going to be looking to hire some legal professionals in other markets to roll that out, too.

Okay. So, I’m just trying to get a sense in terms of the expenses that we should end up adding this year. You talked about potentially, you’re not giving guidance, but if we have to think about something in terms of revenue growth for the year, maybe 15% and then it sounded like the operating margins would be roughly equivalent, so maybe operating expenses X options would go up about roughly 15% for the year, is that the way to think about it?

If we achieve the sort of balance that we wanted, if your assumptions that you just made were true, then you’ve answered your own question.

I’m asking if they’re true or not.

We’re not going to answer whether they’re true or not because we’re not doing guidance on this call.

Okay. How should we think about revenue per office?

I don’t think you should think about it at all. I think that revenue per office is an average and averages are dangerous. We have certain markets that are much larger than other markets and we have markets that have significant potential and calculating an average is a number but isn’t terribly meaningful.

I mean, if you look in the future we would expect our Tokyo office to become a major office in our company, so the average per office you’d attribute to Tokyo today is not anything near the expectation we have for it. Opening an office in India we expect a lot more out of it five years from now than from Shanghai. Revenue per office is not something that is meaningful to us, what’s meaningful to us is coming up with a target revenue plan for that particular office in its specific market.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] Jim Wilson, JMP Securities.

Any areas where you believe it might be useful to look at acquisitions, whether it be geographically or by new practice line, something you’re not in, something that might make more sense to acquire some leader, some local practice leader in one of those businesses?

We have been throughout the last five years and we continue to look at what we would call strategic acquisitions, an acquisition that would give us something we don’t have already. Whether it’s a service line or a geographic presence and we are actively looking at some of those today. Some of the things we talk about internally are things like regulatory consulting for the investment community, we look at actuarial services, we’ve looked at expanding and broadening our internal audit focus services and we might do that through strategic hires or we might do that through a small acquisition. So the answer is yes, we are actively looking at things.

And is the market-- do the opportunities look interesting to you, or is price a consideration or is it just finding the right type of people that would be a fit with your organization?

The number-one criteria that we try to address right up front is the people fit and the culture fit, do we think these people will fit into our culture it’s such a - - and then price becomes an issue. We walked away from an international acquisition just this month because the price expectations were completely out of whack with our analysis of what the company was really worth to us. And so we decided in this particular situation to just go and start the business on our own because number one, on the long term basis, it’s a lot better return on investments for us to start our own business and we think we can get the business going. I looked for over a year in Tokyo for a business to acquire, an accounting firm at acquire to get our Tokyo practice going and really the only firms we found, as soon as they saw that we were an American company, had dollar expectations that just weren’t in line with what we were willing to do so we started that one on our own. So we do look for those things and we’ve seen some things that we think are very interesting, whether we can bring it to fruition or not, I don’t know.

Great, thanks,

We’ll go back to Brandt Sakakeeny for a follow-up question.

Thanks. Steve, did I hear you right, did you say $2 million in exchange rate differences in the quarter or was that the year?

In the quarter, $6 million for the year.

Which will you expect going forward, is that going to start to reverse and work in your favor at some point in FY07?

I don’t know. I’m not a - - I hope so, but who knows what’s going to happen to the dollar. What do you think?

I think it’s going to.

Then the answer is yes.

Okay. And with respect to the cash balance that was more than $3.50 a share in cash at year end, I know you always get this question with respect to buybacks, but I’d like to hear it again. Obviously with that much cash on the balance sheet and Don based on your comments around the acquisition pipeline and the price, it seems like it’s still best to acquire your own shares and I’m wondering why you feel not particularly aggressive on that front.

Not particularly aggressive but we’re also sometimes limited by the number of shares we can acquire each day, by the limits. So sometimes we’ve put in a buy order and we’ve not been able to execute the whole amount for technical reasons. So we’re not as aggressive as maybe some of the analysts would like us to be but we’re probably more aggressive than it shows up. So there are technical requirements of how many shares we can purchase and when we can purchase them that sometimes precludes us from completing our whole anticipated purchase. So I anticipate we will be doing some purchases within the next few weeks and whether we complete them or not will be dependent on all these other things.

So can I take that to mean that you contemplate doing a tender as a more efficient means of buying back stock?

No.

Was that no?

No. In those cases of things that really distract a company’s management, when people start thinking about, and this is just my opinion, when you start thinking tenders and things like that to try and get your stock price up verses business that we think has such growth potential, we think our energies are much better off invested into our offices and trying to grow the business. I just spent two weeks in Europe visiting offices and going through business plans and things like that, so I think that’s what’s important to the growth of the company.

I guess I don’t view it as a vehicle to get your stock up but more as a more efficient use of capital and the drive of returns which ultimately might have that effect. But I see it more as just coming down to an appropriate balance sheet capitalization strategy.

Okay.

Thanks, that’s all I had.

Mark Marcon, Robert W. Baird & Company, Inc. for a follow-up.

Just wondering, I didn’t catch it all when you first went through it but the revenue trends per week, you’d mentioned that the Memorial Day weekend was 85% of the average that you had during the first quarter, then you went to about 13.1 and then the next two weeks, what were you saying?

They were a little bit below that 13.1, Mark, and based on the best data that we have available, the best guess that we can give as to the first quarter right now is flat sequentially or maybe down just a little bit.

So it would be on average through most of the quarter, up a little bit relative to the prior quarter but then when August comes around we’ve got the vacations in Europe and that has that effect.

The biggest effect probably in the quarter is the July 4th holiday, which was in the middle of the week, so it affected two week’s worth of revenue, and then Memorial Day effected the first week. So three of the weeks have been effected by holidays, I think. I think Steve was trying to imply that the trend we’ve seen, because there are holidays in the middle, really is not enough for us to give a stronger guidance on.

Great. And then with regards to - - I didn’t fully catch what you said about the UK. Was that down 20% year over year?

In the quarter it was down that much. For the year it was up almost 40%.

Our international revenue for the quarter was up for the third quarter.

Right. It was $34.3 million, right?

Yes.

Which was up 13% on a same currency basis?

Yes.

Okay. And how did Europe X Netherlands do inclusive of the UK?

Our two biggest practices internationally are the UK and the Netherlands and we’ve given you data on both of those. The remainder of the European practices are smaller than that so the net effect of those is not as significant, so I think we’ve given about all we’re going to give on Europe.

Thank you.

Follow-up from Gary Bisbee.

Just piggybacking on the last two people who asked questions there, you did a lot of color on the UK. Why was Asia flat? Anything in particular there? Currency or anything going on? With a couple of new offices in the year I might have thought it would be up.

Gary, it’s really the net effect. We were strong in one market and not as strong in another market and I don’t want to - - we’re going to start getting to where we’re disclosing every single country and that’s not really our practice so I don’t really want to go that far, but I would say that our long term perspective on Asia is very bullish and some of the softness in the fourth quarter was the result of tough comps. We’ve had some very strong growth in some of the Asian markets over the last year that make up for that efforts. That doesn’t mean we don’t expect them to grow some more but that’s really the reasons. So nothing structural.

Okay, and then just following up on Brandt’s question, on the share repurchase, any thought of paying a dividend at any point? Just looking at your acquisitions, with the exception of the Netherlands, I don’t think there’s been one that’s been more than $10 million so it doesn’t seem like you’ll work through that cash balance any time soon. That may be another vehicle to turn cash to shareholders.

All I can say is that we’ve discussed this at our Board and there’s not a consensus yet among the board as to whether we should or not, but it is an area we discuss regularly.

Great, thanks a lot.

That does conclude today’s question and answer session, I’d like to turn the conference back over to Mr. Don Murray for any additional closing remarks.

I just want to say thank you to all our investors that have shown long-term support for us and we continue to work hard to build value for the shareholders and ourselves. Thanks.

And that does bring to a conclusion the Resources Global Professionals Fourth Quarter Fiscal Year 2006 earning results conference call. Your participation is greatly appreciated, you may begin to disconnect at this time.