Resources Connection Inc (RGP) 2007 Q1 法說會逐字稿

Good day and welcome everyone to the Resources Global Professionals first quarter fiscal year 2007 earnings results conference call. This call is being recorded. With us today from the Company is Ms. Kate Duchene, Chief Legal Officer; Mr. Steve Giusto, Chief Financial Officer; and Mr. Don Murray, Chief Executive Officer. At this time I would like the turn the conference over to 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 Chairman and Chief Executive Officer; and Steve Giusto our Executive Vice President of Corporate Development and CFO. During this call we will be providing you with comments on the results for the first quarter of fiscal 2007. By now you should have a copy of the today's press release. If you need a copy and are unable to access it on the website please call Patricia Marquez, she can be reached at 714-430-6314 and she'll be happy to fax a copy to you.

Before turning the call over to Mr. Murray, I would like to read an important announcement about certain statements that we make 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 need and wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31, 2006, for a discussion of some of the risks, uncertainties and other factors such as seasonal and economic conditions that may cause our business, results of operations, and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call. I will now turn the call over to Don Murray, our Chairman and CEO to give an overview of the first quarter.

Thank you, Kate. Good afternoon and welcome to our first conference call for fiscal 2007. Our results for the first quarter of the year were in line with our expectations and typical of the summer season. Relative demand for our services was good. Because of the typical summer vacation season revenues for the summer quarter have historically been flat or slightly below the seasonally strong fourth quarter. In this year revenues for the first quarter were up year-over-year by 10% and flat with the previous quarter. Steve will provide additional detail of revenue trends in his review of operations later in the call. It is our normal practice to give you an update on our growth strategies. Even though it's early in the year let me tell you how we're progressing.

Our first two strategies are to grow revenues from existing major clients and add to significant new clients. We've enjoyed considerable success with these strategies as the number of major clients we serve has grown consistently for many years. At the end of fiscal 2006 we had well over 200 clients for whom we provided services exceeding $500,000 in fees. Through the first quarter of fiscal 2007 on that run rate basis we have served 16% more clients at this level than at the end of the first quarter a year ago. 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. [Inaudible] benefits from their roll in clients solutions as they would in a commission based system.

Revenue from our top 50 clients represented 38% of total revenues for the quarter and 50% of our revenues came from 95 clients. Our largest client during the first quarter was less than 3% of revenues. In 2006 our largest client was just under 4% of revenues. We believe that the most compelling testament to our client service model is our history of serving clients for extended periods of time. Client continuity continues to be a focus. During fiscal 2006 we served all of our top 50 clients from 2005 and in the first quarter of 2007 we have served all 50 of the top 50 through fiscal 2006. Looking back three years, 90% of the top 50 clients from fiscal 2003 were clients in 2006 illustrating our client service approach versus the commission based model.

For the 2006 fiscal year we served close to 2100 clients. Our largest client count ever and up more than 10% over the fiscal 2005 total. Through the first quarter of fiscal 2007 we have served 15% more clients than at the same time last year. We had an active fiscal 2006 in terms of geographic expansion with the addition of 13 new offices. In the first quarter of fiscal 2007 we added another four offices including Montreal, Canada, Tijuana, Mexico, Napoli, Japan, and another Chicago area office. We plan to add possibly one or two more offices in the second quarter. As we have repeatedly stated, we are opportunistic and strategic when we open practices. As we normally follow our clients needs.

Our progress in developing the footprint of the company is important to our long-term goal of serving multinational clients wherever their needs may be. As we do this we expect the percentage of our revenues that we generate in markets outside the United States to grow. Our first strategy is 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 be generated from the accounting and finance and the RAS service lines.

One measure of the success of this strategy is the number of top clients who've engaged us in multiple service lines. After the first three months of fiscal 2007, 92% of our top 50 clients in the quarter have used more than one service line and 76% have used three or more service lines. We address client needs as one [Inaudible] company with six service lines. We also sell our content management software solution policyIQ which we use internally for our own SOX requirements, for organizing and distributing our intellectual capital as well as manage policies, procedures, training, and client service initiatives. The percentage of revenue from RAS was approximately 24% of total revenues for the first quarter of fiscal 2007 compared to 23% during the fourth quarter of last year. We felt good that RAS was up sequentially by 3%. We still see demand from clients in the SOX area including international companies who have filing requirements with the SEC.

In addition, demand for RAS, well, it seems to have stabilized. They are also pending international regulatory efforts similar to SOX like J-SOX 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 this particular area is fierce but we feel we're still winning our share of the work. Now, Steve will provide a more detailed review of our financial results for the quarter.

Thank you, Don. Revenues for the quarter were $155.1 million, versus $149.6 million in the comparable quarter a year ago and $165.9 million in the fourth quarter of fiscal 2006. Our average weekly revenue during the first quarter was $12.7 million. The summer quarter includes Memorial Day and the 4th of July holidays in the U.S., and as Don stated is also impacted by vacations. Although we have had summer quarters in the last few years in which demand was unusually high, it is more typical that revenues for this quarter are flat to down modestly from the normally strong fourth quarter. This is what we predicted at the end of last quarter, and our revenue results were in line with those expectations. We expect revenue to begin expanding early in the fall. For instance, as expected, the seasonal slowdown abated late in the first quarter and the last week of the quarter was our then highest ever at $13.7 million.

Now let me discuss revenues geographically. Revenues in the U.S. were down modestly on a sequential basis due mainly to holidays and vacations. The weekly trend was in a narrow band during the middle part of the quarter and revenue began to improve towards the latter part of the quarter. The coasts are still the strongest revenue areas for us, but we were pleased to see the south and Midwest beginning to show signs of growth. Our field personnel report a strong pipeline of opportunities in many U.S. markets.

International revenues were excellent despite seasonal weakness. The primary source of seasonal weakness typically comes from Europe where we experienced sequential declines in revenue in practices open more than a year during late July through August. This impact is not as prevalent in Asia Pacific. Also, newer international practices generated revenue that offset the seasonal weakness in incumbent practices and our overall international revenues grew by 12% year-over-year and by 8% sequentially. For the quarter international revenues were 22.4% of total revenues, the highest percentage ever. Netherlands revenues for the quarter on a dollar basis were up 4% year-over-year but down sequentially by 7%. Last year the U.K. had an unusually strong first quarter, therefore U.K. revenues were 19% lower than in the prior year first quarter. The Asia Pacific region had an excellent first quarter with revenues up 44% year-over-year and 54% sequentially.

Total revenues internationally were $36.9 million versus $34.3 million in the fourth quarter of fiscal 2006. Total revenues for the Dutch practice in Q1 were $15.7 million. We generated $2.3 million of revenue from international practices that did not exist in the year ago first quarter. International revenues would have been lower by about $1.1 million in the quarter versus Q1 a year ago on a constant currency basis. On a constant currency basis international revenue year-over-year growth was 8%.

Let me now give you information about the first few weeks of Q2. The first week of the quarter was strong despite being the week before Labor Day. We normally lose some revenue on Friday just before a three-day weekend, yet that week was our fifth highest ever at approximately $13.3 million. The following week includes Labor Day and was about 85% of the previous week. We were expecting a strong rebound after Labor Day, and we got it. That week was very strong and by far our highest ever, our first week over $14 million. At that run rate and given the likely impact of Thanksgiving week at the end of this quarter, we would achieve revenues of about $175 million in Q2.

Gross margins were up slightly from the year ago quarter. Domestic gross margins were 40.2% for the first quarter, conversion fees were 1% of revenues and 35 basis points higher as a percentage of revenues versus the comparable quarter a year ago, and client reimbursements were about 2.3% of revenues during the quarter. International gross margins were 37.1% during the quarter versus 37.8% a year ago. The international practices have lower gross margins due to differences in work customs laws and regulations in those markets. Consolidated gross margins were 39.5% for the quarter. Last year's first quarter gross margins were 39.4%.

Now to head count. For the first quarter average associate FTE count was 2,789. This compares to 2,724 in the previous quarter and 2,509 in the year ago quarter. Quarter end associate head count was 2,883 versus 2,630 a year ago. The total head count of the Company was approximately 3,650 at quarter end.

Now to the other components of our first quarter financial results. Selling, general and administrative expenses before stock compensation for the first quarter were $40.1 million or 24.3% of revenue. In last year's first quarter SG&A was 22.8% of revenue. SG&A was $34.1 million in the prior year first quarter and was $40.4 million in the final quarter of fiscal 2006. We benefited in the first quarter because there was some nonrecurring costs in Q4, but we also continued with our investments in new markets. Depreciation and amortization was 1.8 million for the quarter, up about 800,000 over last year's first quarter as the result of a higher asset base. Interest income was $1.9 million for the first quarter versus $972,000 a year ago. Interest income is growing due primarily to higher interest rates than in the prior year. Our tax rate before the impact of stock compensation expense was 40% as expected.

Our operating margin before stock compensation expense for the first quarter was 15.2% compared to 15.7% in the fourth quarter of last year and 16.6% in the comparable quarter a year ago. Earnings for the quarter before stock compensation were $15.1 million or $0.30 per share versus $15.1 million and $0.29 per share a year ago. This is the first quarter in which we have recorded stock compensation costs in accordance with FASB statement 123R. The pretax charge for stock compensation was $4.7 million, at the mid-point of our expectations. At our normal tax rate, that would equate to $0.06 a share. But as we described last quarter, the tax treatment of our incentive stock options will likely cause volatility in our GAAP tax expense. That was true in Q1, as we were unable to record the full tax benefit related to ISOs for which we recorded a compensation expense of over $2.5 million. Therefore our GAAP tax provision was 46.6% for the quarter.

The after-tax impact of FAS 123R for the quarter amounted to $0.08 per share, $0.01 higher than the high-end of our expectations due to the higher tax rate. The tax benefits we did not recognize this quarter are likely to be recognized in the future when the related options are exercised. When this occurs, some of the benefit may be recorded as a reduction of a tax provision while the remainder will be credited to additional paid in capital. To be clear, the impact of 123R has no impact on the cash flows of our business. Further, as a measure of how our employees feel about our prospects, shareholders should consider that many of our outstanding ISOs are vested and in the money.

Now, let me turn to our balance sheet. Cash and investments at quarter end were about $172 million. We made substantial bonus and estimated tax payments during the first quarter causing a seasonal reduction in operating cash flow. Another impact on our cash is our buyback activity. During the quarter we repurchased 600,000 shares of our common stock at an average purchase price of $23.55 per share. Of the initial three million share buyback authorized by our Board of Directors we have now repurchased an aggregate of 1.540 million 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 million, up by about $2.7 million from the previous quarter and day sales outstanding were 50 days, up one day from the previous quarter. Now let me turn the call back to Don for some final comments.

Thank you, Steve. We're off to a solid start to fiscal 2007. Early indications from the fall quarter are encouraging. We are focused on executing our business throughout this year. We're enthusiastic about the market opportunities available to grow our business and are moving with a sense of urgency to increase the global scope of our business while bolstering our capabilities in markets we serve for a number of years. This is a sort of balanced approach to managing the business that we have employed since inception.

As Steve mentioned, we continue to experience a good demand environment. The summer quarter does not generally provide a clear picture about the rest of our year, but the next few months will provide more clarity on how much we will grow this year. We are pleased with the way the Company has been executing over the last few years and our focus continues to be on executing our business model. It starts with identifying high quality associates who have the right skills and experiences to help our clients. In my business to clients I continue to hear from our clients that our people differentiate us. We strive to satisfy our clients. We work very hard to maintain their trust in us 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 the circle of quality.

To improve our brand image both for potential new clients or recruits we have begun rolling out a new advertising campaign that highlights our global professional reach. You should see the new campaign starting in influence or publications beginning with the October issues. The campaign will cost about $0.015 in quarter two, the amount we have included in our planning for this year. Given our growing capabilities around the world, we believe it is an appropriate time to invest in our brand. We believe the potential for the next five years is attractive as our reputation, capabilities, and strong performance continue to position us well in the rapidly evolving professional services market. Now we'd be glad to answer your questions.

[OPERATOR INSTRUCTIONS] We'll go first to Jim Janesky, Ryan Beck & Co.

Yes, two questions, Steve and Don. Can you first give us an idea of what you expect the SOX spending patterns are going to be this year in terms of percentage, let's say, of spending for a client last year and then what time frame you expect that to be compacted into?

Again, no real data here, but just from visiting companies, I expect that the Companies that did SOX the last two years right, they've got their processes in, will probably spend as much or a little bit less than last year. The Companies that have not been able to pass SOX or are still struggling to get the processes down will spend as much or more than last year, so I don't think that we're going to see a major change in U.S. company spending. It might be a slight decline, but not a large decline since most companies in the second year really worked on becoming more efficient and getting the processes in place.

And what time frame do you expect that spending to be in? Is it going to be like -- do you think it will already start in your next fiscal quarter?

Last year it peaked around December, January because the -- for major companies the auditors are coming in at 12/31 they are already in by the end of the year, and with the compacted reporting period required, the majority of the outside auditors are getting the work done in January/February, so the client has to be ready for them, so I would say probably similar to last year we'll see it in part of this quarter and the majority of it in this quarter. The peak.

Okay. And when you talk to your folks, your sales people in the field, are they at all hearing from their clients that any hesitancy in spending due to concerns about the impact of any potential economic slowdown?

No. Again, I think companies since the last -- the 2000 meltdown of the Internet companies, companies I think are more cautious, and they've been more cautious, but I don't see any more hesitancy about spending, maybe in the real estate area you would see it, but not generally.

Okay. Thank you.

We'll go next to Brandt Sakakeeny, Deutsche Bank.

First, congratulations on the share repurchase. Glad to see that. In terms of the business, can you talk a little bit about the international markets and just -- I guess specifically are you seeing a reacceleration in those markets as well or is it really just confined to the U.S.?

I am sorry, what do you mean reacceleration?

Well, from the weekly run rates. I think you gave a weekly run rate number that was up nicely from the summer, and so I am wondering, is that principally isolated in the U.S. or is that broad based across all your geographies?

It is generally broad based. Not every geography is up but it's generally broad based and I think as Steve indicated, our international revenues are growing at a faster rate than our U.S. revenues which we expected when we opened new international offices, and we expect them to ramp up and grow, so they're acting right now as we anticipated.

Okay.

I would add, Brandt, I mean, I mentioned in the call that we had some reasonably significant revenue from new practices that we've opened over the last years, so we're starting to get a little bit of revenue from those markets where we had made the investments, and at the same time we're seeing strength in -- throughout Asia Pacific and also in Europe where the only practice that has really struggled in terms of numbers is the U.K., but that was really because they were so strong a year ago, and they're still replacing some of the revenues they had a year ago, but the rest of the practices are just doing great.

Great. You also cited some strength again in the midwestern offices. Can you talk to any specific initiatives that you took to sort of turn things around there, and I guess just finally can you touch on conversion rates? Thanks.

Conversion rates remain 1% or less, so we haven't seen a pickup in conversion rates since the 2000 year when they dropped. Conversion rates are about the same, and in the Midwest we've focused a lot of things. We've done some management changes in offices, we've focused more attention on internal processes that we use to identify our potential clients and then once we have a client, to build a great relationship, so we -- those two things, management changes as well as working internally on the processes, and we're not really done with that effort. There is still a lot of work to be done in some of the Midwest offices.

Okay. Great. Thank you.

We'll now go to Greg Cappelli, Credit Suisse.

Hi guys, Greg and Jeremy. I guess, Don, you've mentioned it a number of times in your remarks, the fact that you're going to be -- you guys intend to invest in the business, invest in the brand. Specifically as it relates to the brand, is there anything new? Any new initiatives that you're looking for or as you kick off your new year here that we don't know about?

I mentioned that starting this month we've rolled out a new advertising campaign, and we're putting it -- placing it in what we think are global influencer publications, so over -- since May our people have been really focused on working with a new advertising agency and a new PR firm and a production company to produce these ads and to come up with the concepts and rushing to get it done so we would start them in October. So you will see that if you pick up Forbes magazine in October or The Economist, for instance, you will see our new campaign starting, and we have budgeted that this year, and we're spending quite a bit more money on it this year than we have in the past.

Okay. So from an investment standpoint, I guess, Steve, if we look over the next few quarters, are we likely to see more of the spending come over the next quarter or two than perhaps the back end of the year or should it be evenly spread?

Well, it starts now, and then it spreads throughout the year, and as Don mentioned, when we looked at how we were going to manage costs for the year, we built that expectation in, so even though there will be some additional investment dollars spent on advertising as well as on some of the newer markets that we mentioned we opened during the first quarter, we're expecting to balance the SG&A spending with revenue growth, so while you should expect that implicit in our SG&A spend will be these initiatives, we're not expecting it to be a material impact on our margins.

And we targeted -- and this will probably be our pattern, is we've targeted really doing the advertising throughout the year other than the soft summer months where so many people are on vacation, in Europe and the East Coast, et cetera, so it doesn't make sense to advertise when your clients aren't going to be around to see you and meet with you.

Okay. So we're unlikely to see any material spikes from the patterns we've seen I guess over the past year?

That's our plan.

Okay. And then just as it relates to the guidance you gave on the 175, I think I know what you're going to say here, but given what -- sort of what you indicated the last several weeks of, is that on the conservative side in your opinion?

[Laughter]

[Laughter]

I don't know any other way to put it.

I don't think we'll comment whether it is conservative or optimistic. It is Steve's estimated projection.

Okay. Then I know the answer. And then just one final question. When you think about the RAS business, it seems like last quarter would have been the bottom and that now you're getting some growth out of that again. What should we -- how should we think about that? Would you be pleased if that were a mid-to upper single digit grower for the rest of the year or what are the expectations internally there?

Well, we've initiated some programs to increase the scope of what we do in RAS. Those programs aren't going to have big pay-offs immediately. We would expect that we could get double-digit growth over the next few years from RAS if our programs are successful because we don't want SOX to continually be the main driver of RAS. We want a lot of the other services that clients need with their internal audit solutions and risk management services, so I would say for the initial time if we grow in the single digit, we would be happy, but if you look over three years and we're growing over single digits in RAS, we won't be happy.

I get it. But at least for this year that you're in now, this fiscal year, we should be seeing growth, not contraction, correct?

If we execute these programs, yes.

Okay. Okay, guys. Thanks a lot.

You're welcome.

Our next question is from Michel Morin, Merrill Lynch.

Good afternoon. Thanks for taking my questions. I was a bit surprised by the margins on the international front given particularly the growth is coming outside of Europe where my impression was that maybe the margin environment there was a bit better than in Europe. Is there anything that's going on there? Is there anything perhaps to do with reimbursable expenses that's impacting the number this quarter?

No. A year ago during the summer quarter there was less vacation time in the international markets than this year because there was intense focus on SOX, so during this summer season it was more typical, and even though broadly international is strong, you did see the typical seasonal slowdown in mainland, Europe and in the U.K., and when that occurs, it tends to have a modestly negative impact on our gross margins, so I wouldn't consider it anything other than a seasonal impact.

Okay. And then you had a number of IT related projects under way over the past year. I think that you were supposed to have completed that early this quarter. I just wanted to make sure that that indeed has been completed.

It has. The rollout which was a domestic rollout has been completed, and that system is working in all of our offices.

We've implemented as I said our policyIQ software to manage a lot of our internal knowledge base and manage our policies, our procedures, all of our manuals, all of our sign-offs, and it was quite an effort, and we think that alone will pay off as we demonstrate that to our own clients to show them how policyIQ can really be used to create knowledge bases that are easy to update and easy to manage.

Okay. Great. And just finally, am I correct in thinking that Nordic Spring, the earn out is due imminently?

Yes.

Could you remind us how much that's going to be, and how much of minority interest expense was included in the SG&A line this quarter?

They owned 20%. We're buying the remaining 20%. It was a de minimus amount in our earnings with regard to the Nordic interest. The payment is imminent. It is not material to discuss.

All right. Okay. Thank you.

Our next question comes from Andrew Steinerman, Bear Stearns.

Hi there. I definitely hear the enthusiasm about your new international offices, particularly Europe. I would think that one kind of maybe barrier that you have in selling in Europe might be that in the domestic offices there has been a growing distaste for the Big Four and so corporations are looking for alternative shops, but I don't think that same distaste for the Big Four exists in Europe because there wasn't any Sarbanes phenomena. Have you found that to be kind of one less selling gimmick that you have to get into Europe? Is this just not really so notable, or is this worth discussing a little bit?

Well, really, I don't think it is a gimmick.

Sorry. [Laughter]

It is not a gimmick.

Sorry.

I would say -- you remember the majority of our revenue comes from world class multinational 1000 type companies.

Right.

Which are all very, very concerned with independence.

Sure.

When you look at -- when we go -- I go visit our clients, whether it is in Japan or Hong Kong or in the Netherlands, or the U.K., they're still very concerned with independence, so it does limit the scope of what their particular audit firm can do. In Europe there is -- it is a lot more accepted to go to outsiders to manage problems in Europe. There is a whole industry when we started the practice of interim management, and we took that interim management, and we've sort of taken that and evolved it also into a project-based business like our own.

I remember that.

In Europe there is less barriers sometimes to using outsiders to manage an important part of the business or manage the problem. On the other hand, there is a lot more competition because it is a much more established business. I would say in Europe the Big Four has competition probably similar to what we see here.

Okay.

Their handicap is in a lot of cases if it's a medium-sized Fortune 1000 company or smaller, it is harder for them to sell into somebody else's audit base. If it is one of the big Fortune 50 world clients, they're probably already doing work some place, and then you compete with them. Europe is actually more accepting in a lot of ways to our business model.

Sounds good. I have just one comment on profitability of note. Steve, you were great in saying how much revenue got contributed from the new international units. I assume because the revenue sounds kind of off to the races, out of the gates that the profitability kind of relative to your own expectations is probably pretty good as well.

Some of the markets that we have opened are profitable already. Some are not.

Thanks for the comments.

I would say our operating margin is -- overall is good internationally or better.

Super. Thanks for the comments.

Our next question comes from Brett Manderfeld, Piper Jaffray.

I was hoping you could comment on the progress of the service center in Europe, the consolidation of the back office there in terms of when it might be complete and what kind of impact that might have on earnings for the rest of the year? Thanks.

That process is still in evolution, and I would think that it will continue to cost similar amounts for the next few quarters at which point I would expect that if successful we will begin to see some efficiencies out of that process, so it is currently handling the work of most if not all of our European practices. The expectation is that over time it will handle all of our European practices and that will evolve over the next year or so, but for the moment I would say that the initial progress is good.

Can you remind us, Steve, what the cost of that was on a quarterly basis?

I don't think we ever broke out that particular piece. It was a component of a variety of things that wer were doing, including the assist implementation here. I would say that, as Don mentioned, the operating margins that we're beginning to get in Europe are getting closer or are our similar to those that we get here in the U.S. with the service center that we have here. So I would say that the costs are implicit in our overall operating margins.

Okay. Very good. Thank you.

We'll now go to Gary Bisbee, Lehman Brothers.

A couple questions. It sounds like you're talking more about the policyIQ software offering than maybe you have in the past for people to use as they've gotten through Sarbanes a couple of times. Can you give us a sense as to how big that is as a percent of the mix now and then how big an opportunity you see from that moving forward?

It is not a big part of our business because we're not a software company, and we really don't even know how to sell software per se. We've been using it more as a tool to help clients get some SOX or help them implement companywide procedures like a new accounting manual or a controllers manual, et cetera. We're now just looking to how do we expand it and still keep it profitable so it doesn't lose money. We want to keep making money off it. It has not been a big money maker nor is it a big revenue generator, but it's created a lot of work for us as clients have used it. We've expanded how we use it internally.

When I saw what we've done with it, it was, just frankly, I was amazed at is the solution I always had looked for when I worked at the Big Four firms is how do you manage a knowledge base and keep it current, and so we think that by demonstrating this to our existing client base we're hoping that they're going to want to expand their use of it, and the ones that do want to expand the use of it we can also help them then implement it. Right now I can't quantify it because we don't have any real experience in trying to expand this type of software. We're going to take it to our clients and hopefully get some positive reaction.

So it sounds like you're using it almost more to drive the core business in some ways.

Yes. We use it -- it is amazing what we've done with it, and we call it resourcesIQ, and it has eliminated a lot of paper, manuals, it's eliminated a lot of the types of e-mail files that people would have and it is all accessible by everybody.

You mentioned a couple of I think what you called new programs that you're working on to drive the RAS business going forward. Can you give us more color on what exactly type of stuff that is? Is that just sort of outsourcing some of the internal audit stuff or is there more to it than that?

It is -- the primary drivers are going to be outsourcing projects around internal audit or different types of assessment programs, so if a large software manufacturer wants to ensure that all the customers are complying with the agreements, and that's something that we've gone in and done. It could be royalty audits. There is just so many different ways that we can expand this service. Another large -- very large client is trying to verify distribution processes and whether all the distributors are complying with the agreements and with the pricing, and so that's another project we've done, so it is things like that.

Okay. Any -- for more of a big picture sense, any change in the ability to recruit? In particular I was wondering about Asia. We hear from some of your competitors how they're seeing real strong growth there, too, and it sounds like to a certain extent a gaining factor is getting the right people. How are you looking at that and has that at all been an issue?

Well, recruiting is always an issue, because you're always under -- especially with us. We're always looking for the right person with the right skill sets. I would say in the United States recruiting is still an issue on the East Coast and the West Coast. Finding the right people. It is a tighter job market on the two coasts. In Asia it is not particularly an issue at this point because our offices are small enough. We're not -- once we get more critical mass, it may become an issue, but it hasn't really been an issue that's inhibited us in any major way. It is also the reason why we opened up the India practice and acquired the ability to recruit Indian professionals and have them work throughout Asia which we've done in the past.

Then just lastly, can you give us any sense as to what type of projects are really driving the -- what's been better weekly revenue trends? Is it just penetrating more clients or is there any particular area, M&A or whatever it is where you're seeing a lot of success lately?

I would say it is not any particular area. It's -- big projects range from helping clients with restatements, helping clients with stock option accounting, helping clients with probably stock option implementation of the new FASB. We're seeing in a lot of operating -- operation management improvement projects that clients are looking to do. Everybody is trying to become more efficient, and a lot of these projects become a trend around the world. If the U.S. is very successful in doing certain types of operating management improvement projects, we'll see that in Europe and then we'll see that in Asia as other companies do the same types of projects.

Okay. Great. Thanks a lot.

We'll go next to Jim Wilson, JMP Securities.

Thanks. Good afternoon, guys. Was wondering if you could give a little color on what of your, particularly non-RAS, all of your new business units and practices where the body count has grown the most or any kind of color where you've been doing the most hiring and had the most success adding people?

Well, Jim, the majority of the business still is coming from accounting and finance and RAS, and so that tends to be where we grow the head count the most. Having said that, we had strong results across most of our service lines, IT and supply chain in particular amongst the other service lines grew nicely, so we're adding head count there as well, so the nice thing about our business model is head count follows revenue very directly, so as the various service lines grow, we address the size of the needed head count in realtime, and that's one of the beauties, we think, of our business model. So as we continue to describe the evolution of our business across these service lines, you should expect that head count would grow in a similar fashion.

Is there any way of -- can you give us how much a percentage of either total or domestic head count is not finance and accounting?

I would say that the significant majority of our revenue continues to come from accounting, finance, and RAS, and while the other services are growing and growing at times faster than those two areas, the other four service lines, IT, human capital, supply chain, and legal are all considerably smaller.

Okay.

But RAS also contains people with IT backgrounds and human capital backgrounds even. So RAS is really resource audit solutions and with the clients need to get their risk assessment, internal audit projects done. We recruit from every service line into that service line because of the clients needs.

Okay. Great. All right. That's good. That's helpful. Thanks a lot.

[OPERATOR INSTRUCTIONS] We'll go next to Mark Marcon of R.W. Baird.

Good afternoon. I was wondering, could you talk a little bit about the bill rate trends that you are seeing?

Sure, Mark. Our bill rates were up again. They're up about 5% over the prior year, so that's another strong quarter of performance from a pricing standpoint. We think that as our talent continues to expand that our prices will continue to expand with it, and we continue to see that happen.

Terrific. How about pay rates?

About the same pace.

Okay. And what are you seeing in terms of Big Four pricing? How is that going? In terms of the pricing umbrella that you're obviously operating under?

I would say again it is all over the place. When the Big Four have excess staff as they do in the summer, they'll price it very aggressively for projects that aren't in their -- what I would call their core competency. So where there is a very competitive situation, we'll see the Big Four really drop rates where they have excess staff. As we're coming to more of the busy season, I would expect less of that behavior.

Okay.

Their multiples on salary are so much greater than ours that in most cases it is not a competitive issue for us.

Yes. Clearly. I am wondering with regards to the new offices that you've been opening and you mention that you might open another one or two here in the second quarter. Is there a way that we should think about in terms of for the full year, how many you might end up opening? I know it is all opportunistic and it depends on getting the right people, but if the circumstances work out in the ideal world, how should that end up looking?

Yes. I think in the past I may have said initially you can expect us to maybe open eight to ten new practices depending on as you know the opportunities. If we have an opportunity to do more, we will.

Sure. Okay. So are you currently up to around somewhere around 79 at this point?

Just about, yes. It's right about that.

Okay. Great. And then in terms of the revenue increase that you're seeing on a weekly basis, is that across the board, or is there a natural acceleration that would occur at a greater degree in the RAS work as some of your companies, prepare to go through the Sarb-Ox, the seasonal Sarb-Ox work ahead of the external auditors coming in?

I would say it is been across the board, and I don't have my -- the information directly in front of me, but my recollection is we've been hitting new highs in three or four of the new service lines, so it is across the board.

Part of it, Mark, is just the fact that the summer is over. It is not just SOX. It is as we said historically, the summer is seasonally soft, and then people really get back to work right after the U.S. Labor Day and there is a similar trend in Europe that July and August tend to be heavy vacation months, and then September everyone gets back to work. So it is natural that you would see some acceleration early in the fall.

Typical pattern.

We'll now take a follow-up gentlemen from Jim Janesky, Ryan Beck & Co.

Yes. Two quick questions. Steve, would you expect options expensing and its effect on the bottom line to be similar in the next three quarters as it was in this quarter?

The honest answer is I have no idea. The impact of ISOs on our tax rate is impossible to predict. The impact on our pretax basis we would expect to be fairly constant. Over time this ISO impact will abate because we don't use ISOs any longer, and so as the existing ISOs are exercised, this tax impact will get smaller, but for the moment it is one of the insidious results of this accounting is it is impossible to predict what our tax rate will be because it completely depends on how many people exercise options which is more dependent on what happens in the stock market than what happens in our business.

But $0.06 to $0.07 pretax is a good number to use?

On a pre-tax basis, yes, I would say that's fair.

Thank you. And, Don, when you said the impact of additional marketing expenses, was that $0.01 to $0.015 per quarter or for the year? I am sorry. I got distracted.

That was in the quarter.

Yes.

Okay. And you expect that to be kind of -- that you would expect that to continue through 2007?

Yes.

Okay. Thanks for the clarification.

Next is Gary Bisbee, Lehman Brothers.

Yes. Just one quick follow-up. In the past you've almost always given a sense as to your just generic top line revenue growth goal. Any willingness to comment on that for this year?

I think in our year end discussion we set a goal this year of 18%. So realistically, 15 to 18% is something that we're comfortable with, I think, and we're shooting for it.

Great. Thanks a lot.

Our final question comes from Brandt Sakakeeny, Deutsche Bank.

Thanks. Actually already answered.

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

Well, again, we would like to thank all of our investors and thank you for your interest in Resources, and we look forward to speaking with you again after the second quarter.

Once again, ladies and gentlemen, that does conclude today's conference. You may now disconnect.