Resources Connection Inc (RGP) 2007 Q2 法說會逐字稿

Good day, everyone and welcome to the Resources Global Professionals Second Quarter Fiscal Year 2007 Earnings Results Conference Call. [OPERATOR INSTRUCTIONS] This call is being recorded. With us today from the Company is Kate Duchene, Chief Legal Officer, Steve Giusto, Chief Financial Officer, and Mr. Don Murray, Chief Executive Officer. At this time I'd like to turn the call over to Ms. Kate Duchene, please go ahead.

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

During this call, we will be providing you with comments on our results for the Second Quarter of fiscal 2007. By now you should have a copy of today's press release in front of you, if you need a copy and are unable to access it via our website, please contact Patricia Marquez at 714-430 -6314 and she will be happy to fax a copy to you. Before turning the call to Mr. Murray I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements.

In other words, statements regarding future events or future financial performance of the Company. We wish to caution you that any 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 and uncertainties and other factors such as seasonal and economic conditions that may cause our business results of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I'll now turn the call over to Don Murray, our Chairman and CEO to give an overview of the quarter.

Thanks, Kate. Good afternoon, everyone. For the Second Quarter 2007 started out well and we continue to improve from there. Our revenue results for the quarter demonstrated strong demand for our services in a good execution by our professionals across many geographies in all of our service lines. While we still have a number of areas where we can improve during the remainder of this fiscal year, the financial results we're reporting today indicate that the momentum we felt in the first few weeks of the quarter has continued to drive our business forward.

For the quarter, our revenues were $182.8 million, which represents 16% growth over the comparable quarter a year ago, and sequential growth of 11% over the first quarter. Using the actual numbers before rounding, our earnings per share before stock compensation for the quarter grew by 18% year-over-year. Steve will provide additional detailed revenue and earnings trends in his review of operations later in the call. During this fiscal year, we began a new branding campaign aimed at executives likely to be interested our services. These advertisements have run in targeted magazines around the world. We believe our brand is built best by serving our clients well and the ads are another way we can make the marketplace aware of the capabilities of our Company.

Our branding initiative costs approximately $1.5 million during the quarter. It is our normal practice to give you an update on our growth strategies. Our first two strategies are to grow revenues from existing major clients and to add significant new clients. We've enjoyed considerable success with these strategies as a number of major clients we serve has grown consistently for many years. We continue to deliver on this strategy.

This year, at the half way point of fiscal 2007, we have 296 clients over $250,000 of revenue versus 238 at the prior year's half way point. 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. As we have said in the past, no one benefits from the wrong client solution as they would or could in a commission-based system. Revenues from our top 50 clients represented 37% of total revenues for the quarter and while 50% of our revenues came from 100 clients.

Our largest client during the second quarter was less than 3 % of revenues. In 2006, our largest client grew two quarters with just under 5% of revenue while we have never had any client concentration, we continued to experience diversification in our client base. Diversification does not mean we are any less focused on maintaining client continuity.

In client continuity continues to be a focus. During fiscal 2006, we served all of our top 50 clients from 2005 and in the first half of 2007, we have served all 50 of the top 50 from fiscal 2006. Looking back a number of years, over 80% of the top 50 clients from fiscal 2003 and 90% of the top 50 from 2004 are clients in 2007. Illustrating the effectiveness of our client service approach.

At the end of the second quarter fiscal 2007, we have served over 1700 clients year-to-date compared to about 1,500 in the prior year at this time. Major component of our growth strategy is to be relevant to our clients wherever they are in the world. To execute on that strategy we have been expanding our geographic foot print quickly.

Over the last six quarters we have opened a total of 18 new offices, some of which are extensions of existing practices while others represent totally new markets. Those that represent new markets generated revenues in excess of $3.2 million in quarter two. Most of that incremental revenue is from international markets. As we have expanded internationally the percentage of revenues coming from international practices has grown. This quarter, our international practices contributed 24% of revenues which is a new high.

Our fourth 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 RAZ service lines. All our service lines experience sequential growth in the second quarter.

One measure of the success of this strategy is the number of top clients who have engaged us in multiple service lines. Through half of fiscal 2007, 48 of our top 50 clients have used more than one service line and 82% have used three or more service lines. We address client needs as one coordinated company with six service lines, and then we also sell a Content Management Software solution policy IQ which we use internally for our own SOX requirements, for organizing and distributing intellectual capital as well as to manage our policies and procedures, training and client service initiatives.

Revenue from RAZ grew sequentially by 8% over the first quarter of 2007 and was approximately 23% of total revenues in the second quarter fiscal 2007. This is is the second straight quarter of sequential growth in RAZ. We still see demand from clients in the SOX area, including international companies who have are filing requirements with the SEC. We do expect some seasonal slowing in Q3 but we view RAZ as a long-term strategic component of our service offerings and we are pleased that demand for internal audit services has gotten even better while the other components of our business continue to expand.

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

Thank you, Don. Revenues for the quarter were $182.8 million versus a $158.1 million in the comparable quarter a year ago, and and $165.1 million in the first quarter of fiscal 2007. This represents year-over-year growth of 16% and sequential growth of 11%. Excluding the Thanksgiving week, our average weekly revenue during the second quarter was approximately $14.5 million. We entered the second quarter at about a $13.7 million per week run rate and by the week of November 4, we reached approximately $15 million per week, a level we maintained until Thanksgiving.

Now, let me discuss revenues geographically. Revenues in the U.S. were up considerably early in the quarter and continued strong through the balance of the quarter. We have experienced demand across all service areas and many but not all geographies. The last week of the quarter included Thanksgiving in the U.S., but our field personnel reported strong pipeline of opportunities in many U.S., markets even with the holidays approaching.

The overall revenue results from our international practices continued to be strong and this was a good quarter in most international markets. The last few weeks of the quarter showed good revenue momentum.

For the quarter, international revenues were over 24% of total revenues, the highest percentage yet. Revenues in the Netherlands for the quarter on a dollar basis were up by 21% year-over-year and 17% sequentially. Total revenues for the Dutch practice in Q2 were $18.4 million. UK revenues were 8% sequentially, a good result, and were down 2% versus the prior year second quarter due to the very strong results there a year ago. Both the Dutch and UK practices hit new weekly revenue highs during the last week of the quarter.

The Asia Pacific region had another excellent quarter with revenues up 87% year-over-year and 20% sequentially. Total revenues internationally were $43.8 million versus $33.1 million in the second quarter of fiscal 2006 and $36.9 million in the first quarter of this year. This represents year-over-year growth of 32% and sequential growth of 19%. While a portion of the international revenue increase was from currency exchange rates, international revenue grew year-over-year by 27% on a constant currency basis.

Let me now give you information about the first few weeks of Q3 which have been encouraging. The first week of the quarter was a record high of approximately $15.2 million. The second week of the quarter was even better at $15.7 million, and the most recent week was about $15.5 million. Our offices record a strong pipeline of work that is encumbered in some markets only by the challenge of attracting the right number and quality of associates.

As in the past, we expect the weeks of Christmas and New Years to be quite slow in Europe and in the U.S. We generally lose the equivalent of one weeks rev at that time. With that at an assumption if we were to maintain current run rates, revenue would be up modestly on a sequential basis in Q3 at around $185 million. Now to gross margins.

Gross margins were down ten basis points from the year ago quarter due to the impact of conversion fees and client reimbursements, non-managed components of our revenue. Conversion fees were only half a percent of revenues. On a dollar basis, conversion fees were half as much as the first quarter of this year. Client reimbursements were about 2.3% of revenues during the quarter, the same percentage as Q1. Absent these two revenue components, gross margins were above our target of 40%. International gross margins were 36.3% during the quarter versus 36.7% 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 39.7% for the quarter. Last year's second quarter gross margins were 39.8%. As a reminder, because of the impact of the holidays, you should expect our gross margin percent to be down sequentially in the coming quarter. Typically the impact of the holidays causes more than a point and a half percent reduction in gross margin in the third quarter.

Now to headcount. Headcount growth in the quarter was fairly consistent with revenue growth. For the second quarter, average associate FTE count was 3,054. This compares to 2,789 in the previous quarter and 2,733 in the year ago quarter. Quarter end associate headcount was 3,195 versus 2,883 at the end of Q1. The total headcount of the Company was approximately 3,960 at quarter end.

Now to the other components of our second quarter financial results. Selling, general and administrative expenses before stock compensation for the second quarter were $42.0 million or 23% of revenue. In last year's second quarter, SG&A was $36.8 million or 23.3% of revenue. SG&A was $40.1 million or 24.3% of revenue in the first quarter at fiscal 2007. Most of the dollar increase in SG&A in Q2 is attributable to our branding initiative that Don already described.

Depreciation and amortization was $1.8 million for the quarter, up about 8% over last year's second quarter as the result of a higher [after] phase. Interest income was $2.0 million for the second quarter versus $1.1 million 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%, the same rate as Q1 of this year but up a full point from last year's second quarter. Our operating margin before stock compensation expense for the second quarter was 16.8% compared to 15.2% in the first quarter of this year and 16.5% in the comparable quarter a year ago.

Earnings for the quarter, before stock compensation, were $18.5 million or $0.36 per share versus $16.0 million and $0.31 per share a year ago. We began recording stock compensation costs in accordance with FASB Statement 123R during the first quarter of this year. The pretax charge for stock compensation in Q2 was $4.7 million, the same as the first quarter.

As we had previously described, the tax treatment of our incentive stock option causes volatility in our GAAP tax expense. During Q2, we were unable to record the full tax benefit related to ISO's for which we recorded compensation expense of over $2.1 million. There for, our GAAP tax provision was 44.1% for the quarter. The after-tax impact of FAS 123R for the quarter amounted to $0.07 per share, and to be clear, the impact at 123R has no impact on the cash flows of our business. On a GAAP basis, net income for the quarter was $14.7 million or $0.29 per share down $0.02 versus a year ago quarter due to the impact of 123R.

Now let me turn to our balance sheet. Cash and investments at quarter end were were $199 million. 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 it's shareholders through good and bad business climates.

During the quarter, we evaluated but did not ultimately pursue a few acquisitions that could potentially have used a meaningful amount of cash and we therefore did not buyback any of our stock during the quarter. Receivables at quarter end were were $105 million, up by about $12 million from the previous quarter. Day sales outstanding were 52 days up two days from the previous quarter. As our business with large companies continues to expand, the overall collection risk of our receivable portfolio falls but the time it takes us to get paid is getting a little longer, a trend we aim reverse.

Despite this modest lengthening, we are comfortable with the overall security in our receivables portfolio. Now let me turn the call back to Don for some final comments.

Thank you, Steve. Our results for the second quarter of fiscal 2007 continue to demonstrate strong current performance against our long-term strategic goals. In particular, we are pleased to see revenue growing across all our service lines.

As we have strategically planned, our international practices represent a higher percent of our revenues than ever before. We believe that global demand for professional talent will out strip supply for many years to come and resources is well positioned to fill that void. As Steve mentioned, we continue to experience a good demand environment but we are also looking for additional geographic and service capabilities that could supplement our current practice. Well most of our past growth has been organic, we are searching for professional service acquisitions that provide a competitive advantage to addressing new markets or services and fit culturally into our business. We're currently exploring the best way of expanding in Asia and Europe.

During the quarter, we had our official grand opening of our Nagoya, Japan office and started in Edinburgh, Scotland office. We are pleased with the way the Company has been executing and our focus continues to be on executing our business model well. It starts with identifying the high quality associates who have the right skills and experiences to help our clients and as I've said in the past, my visits to clients, I continue to hear from clients that our people differentiate us.

We strive to exceed our clients expectations 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 and this relationship between defining the talents associates and serving high visibility clients is the key to our circle of quality. We believe the potential for the next five years remains attractive as our reputation, capabilities and strong performance continue to position us well in the rapidly evolving professional services market.

So we will be glad to answer your questions at this time. Thanks.

Thank you. The question and answer session will be conducted electronically. [OPERATOR INSTRUCTIONS] If you like to ask a question, you may do so by hitting star one on your phone. Star one for questions and we'll pause a moment to assemble our queue. We'll go first to Jim Janesky. Please go ahead.

Yes, good morning, or good afternoon, Steve, and Don. I have a couple questions about the RAZ revenues. You said that you started seeing a little slowing going into the fiscal third quarter. My understanding was with some of your past comments was that we've seen a compressed time period for spending on Sarbanes-Oxley and that compression period from my point of view would include the February quarter. Can you just comment on why you think there might be some seasonal slowing?

Number one, I don't think we said or I said that we've seen slowing in the beginning of the quarter for RAZ.

Okay. I misunderstood you, thank you for clearing that up.

What I said is we expect some seasonal slowing after the holidays. Now, most of our bigger clients where we're working on year two, year three RAZ-- I'm sorry-- year two year three SOX, the majority of that documentation in testing work is done before the year-end, so that work is going on during the fall. After the year-end, they're trying to close their books, their financial statements, etc, So the majority of the SOX work has been done and we may switch to helping them in the accounting and finance area, so that's the seasonality of it. For new SOX implementers, new public companies, etc, It's a different ball game, but for the majority of the clients, the big clients, they've got a process now and a majority of that process is being done before the end of the year.

Okay, and do you, Steve, on the spending side, do you see that the majority of the investments that you're making in programs such as marketing and headcount additions are behind you or do you expect that to continue throughout the rest of fiscal '07?

Well, our goal continues to be balanced in our approach so I wouldn't say that we're done and I would say for instance, in our marketing, it was a push to start the marketing campaign with a bang so the costs in our coming quarter are not expected to be as high as they were in the most recent quarter. We had a push a year ago in terms of getting headcount to a level in our offices that was able to support the higher revenue that we're achieving but we're not complete with that, so when we look through the rest of this year, the goal is to have not a ton of leveraging but at the same time , not a ton of growth in G&A that's not covered by revenue.

Okay, thank you.

We'll go next to Greg Cappelli with Credit Suisse.

Thank you, I won't call you Steve Giusto either. Hi, guys, Happy Holidays. I just wanted to ask a couple questions. First, Steve or, you guys mentioned in the opening remarks the hiring environment is constraining growth in certain markets. How much tougher is it? Is it tougher this quarter or right now than it was even a couple quarters ago? And is it more regions than before that it is constraining growth in?

Well, the majority of the tough hiring environment is still the coast. There will be East Coast and West Coast and we're also experiencing it in parts of Asia like Hong Kong and Japan, and I would say that it's a little tougher as the numbers and the demand starts increasing, we're out trying to get more people at the same time, so I would say it's a little tougher incrementally but not that much and it's still focused on the two coasts and also Chicago has done very well, so they are probably experiencing a little bit too.

And then Don, is that impacting your overall pay rate to any extent more than you thought it would?

No. We plan to continue to enhance our benefits to our associates to make it more attractive long-term hiring position for them, but it's not causing us an issue there. It's more when we compete, a lot of times we're competing where somebody is trying to decide between coming to work for us and becoming a project professional or going to work as a controller or CFO of a middle market Company, etc. So the incremental dollars really is not the issue. It's more the career choices.

Okay. And I know you put it in the queue, but do you have the bill rate pay rate handy?

Our bill rates were up 7% year-over-year and our pay rates were up a similar amount.

Okay. And then just one last one last one, when you guys think about the dollars that you're going to be putting to work in the coming year, in terms of investment, should we expect to see more, well most of that in Europe and Asia versus the U.S?

Yes. I'd say that's probably accurate.

And where do things stand in China right now? You guys have talked about getting Shanghai up and running at some point. Could you give us an update?

We have an offer outstanding for a managing director in Shanghai, so we're hopeful that she is going to accept and then we'll also looking at space, etc in Shanghai, so we would hope to have that open in the next quarter.

Okay, thanks a lot. Very nice job in the quarter.

And just to clarify, when we bring somebody on board like that to open an office, they're going to be training in existing offices, could be in the United States or could be in Tokyo or someplace. Hong Kong, for some period of time before they actually get on the ground in Shanghai and start opening the office.

Okay, that makes sense. Thank you very much.

We'll go next to Mike Fox with JP Morgan.

Good afternoon. Thanks for taking my question. With regard to the RAZ business, can you talk about how big of an opportunity it is given the strength and the IPO market and the amount of new companies that have to be 404 compliant and if that has been a larger part of your growth or if you expect it to be in '07? Thanks.

I'm not sure I'm not cognitive of what the strength in the IPO market is in the United States. From reading the papers, it sounded to me like we're losing a lot of IPO's to London, so I would say the growth of RAZ or our expectation growth is going to come from additional services outside of SOX, so as our larger clients have this process in place and keep refining it, we may get more SOX work from the newer public companies and we do work for a number of middle market public companies, but where we see the real challenge and the real opportunity is to get involved in a lot of co-sourcing for internal audit projects , special auditing-type needs like contracts royalty audit and things like that, so that's where we see the opportunity.

Okay, and can you talk about the pricing on those types of engagements versus the Sarbanes-Oxley that you-- work that you've done over the past few years?

I am not aware of any significant differences in pricing. We're very good at and disciplined at maintaining our margins and while we didn't jack-up our bill rates when people were really short of help for SOX, we conversely have not had to drop our prices either in many cases, so I don't think we're going to experience a major difference in pricing.

Okay, thanks a lot and congratulations on the quarter.

Thank you.

We'll go next to Andrew Steinerman with Bear Stearns.

Hi, Don and Steve. Would you talk about your six service lines being all up sequentially and you gave what RAZ was up, could you just go through your other five service lines, give just a quick quote, is it above average grower, is it a below average grower and where do you think kind of the relative opportunities are?

Yes, could you define average?

Average for the Company?

What's your average?

11% sequential growth was the average for the Company.

Well, I would say it would be --

Pretty high average actually.

Well, I would say --

[INAUDIBLE]. Which one? Okay, so your above and below average. And this is the sequential growth?

Right. Okay.

So accounting finance being our largest service line, while the dollars growth is the highest, the percentage is below average.

Got it.

Capital is way above average.

Got it.

IT above average.

Got it.

Legal is above average. RAZ is a little bit below average but again, the dollars are bigger because that's our second largest dollar, and supply chain management, way above average.

Got it. So it's basically a relative size is what seems to be driving these things?

Yes.

And then just a quick comment quick comment on the geographies, Don. You said recruiting is the toughest on the coast. I assume that also means the demand is highest on the coast and just any other observations that come to mind, demand or supply, geographically in the United States?

Yes. One of the things we've done, Andrew, is for about the last I think 18 months is tried to really focus on moving our associates around to meet demand, so I think, again, this is just my perception is our economy continues to become more financial and service-based, financial and service-based economies are strongest on the coasts, technology is strongest on the coast and West Coast, biotech is strong, the middle of the country is softer, so therefore we're doing a lot more moving associates from say the softer economies in the Midwest and parts of the south into the East Coast and West Coast, and I think a lot of it is just the way our economy in the U.S. looks today.

And is that a little different than maybe the proposition you made to associates in the past? I think one of the early stage propositions to resource associates was that you wouldn't have to travel as much and now it sounds like given some of these changes that you are asking some to travel. Do you think that's a challenge?

We give them the opportunity to travel.

Right.

So it's not like at a major consulting firm where you have no choice.

Right. I remember that one.

Yes, so someone doesn't travel, we still do our best to get them opportunities locally, but a number of our associates, and it's not 25% or 50% but a number of our associates, they are willing to work in New York area if they live in the south or in Southern California. People from Minnesota, they like to go to Southern California in the summer or Florida in the summer. I don't know why, or in the winter, so San Diego has done a very good job of bringing people in from Kansas City and Denver and etc, But it's not a big percentage like it is in a big consulting firm.

Sounds good. Thank you so much.

You're welcome.

We'll go next to Brant Sakakeeny with Deutsche Bank.

Thanks, hi, Steve and Don, congratulations.

Thank you.

First on the international locations, can you just talk a little bit about the ramp up speed of those locations? Are you finding that they are coming to sort of I guess maturity is not the right word but I guess ramping up at a faster pace than ones historically that you might have done and I guess related to that, do you have a goal ultimately as to what you'd like international to be contributing as a total percent of the rev?

Well, Steve always gets mad when I give you my goals.

[LAUGHTER].

Not my hope, but would be that our revenue outside the United States would be equal to or better than our revenue in the United States some time in the future.

Okay.

Okay? I would say that again, internationally, the ramp up demands on seriously how well we hire. When we hire really good people and are well networked, we're going to grow a lot faster and it also depends on the market so some markets in Europe are slower economies and the business model is not as accepted, etc, So while we think these are great markets, it takes longer to ramp up. So again, I think our ramp up is probably going the way overall we anticipated and if we looked at each market, we said okay, that one is doing better than we hoped for. This one is not doing as well. What do we need to do to make it better, but we've always believed that revenue outside the United States should be just as important as revenue inside the United States.

Right. And Don, I guess with that theme, what percentage of the clients roughly from these international Markets are U.S. customers who for whom you're doing work internationally versus sort of I guess native customers?

See, that's a tough one because a lot of our, you mean some of our largest clients in the United States are multi- national from outside the United States, so let's say two of our large car clients are Japanese car companies, and there for, what we tried to do is take the relationship we developed in the United States and develop that same relationship in Japan with them, but the majority of our work internationally outside of say the Netherlands, initially, is fueled by our existing clients somewhere else.

Okay. That makes sense.

And that gives us, that gives us the leverage, it gives us a strategic advantage when we start the business.

Okay. Thanks, now, Steve, on seasonality for the spring, anything we should be cognizant of as we look at modeling February and May, given just some of the volatility we saw last year, do you think there's been a fundamental change or shift in seasonality in the business?

Well, we hope so. I mean, we had very strong results earlier in the third quarter last year and it flattened some after the New Year and in discussions with our leaders in the field, their sense is that the demand environment is stronger currently than it was a year ago, but we're always a little anxious around the holidays because you just don't know if the momentum that you carry into the holidays will carry through once we get through the first of the New Year. We're expecting that but it remains to be seen. As we get into the spring, the spring quarter is generally our strongest and we'll obviously have more to say about that after the third quarter but if we continue the momentum that we have currently through this quarter, then spring should look very strong.

Okay, great. I'm sorry one final question. You mentioned that you passed up a couple acquisitions. Do you just want to comment on was it price? Was it cultural fit, anything we should we should think about?

The smaller ones were off cultural and we protect our culture and it's difficult for us to make acquisition of professional services because of that and some of the other ones that Steve alluded to, the ones that might use more cash, were still in the courting stage, if I can put it that way.

Okay.

And we think they are going to have strong results and so we will continue to talk to them, or try to.

I guess, , also I'd like to clarify that our comments were not to suggest that we are any different in terms of philosophy or acquisitions and that it's ever been the case. We're still cautious both in terms of cultural and price, but we did want to point out that we see some opportunities out there in the world that we think would be pretty interesting and if they fit all of our parameters we would pursue them.

Okay, great. Congratulations again.

We'll go next to T. C. Robillard with Bank of America.

Great, thank you. Just two quick questions. First on the margin side, sounds like you had some kind of ramped up expenses, particularly on the marketing side but were still able to show really strong leverage to the bottom line and good margin expansion. Is it fair to assume continued margin expansion through the rest of the year as some of those expenses kind of normalize or get more steady state or are there other expenses that are likely to ramp up in the second half that keep margins kind of stable at current levels?

If you assume that our revenues are going to continue to grow, then our margin or our net margin should continue to be strong, so it's the assumption of whether and how fast our revenue picks up after the holidays.

T.C., I would also just remind you and everyone else on the call that the third quarter tends to be somewhat margin constrained. It has been that way for many years, both in good and not so good demand environments, so we are optimistic about the margin characteristics of the business through the remainder of the year, but there will be seasonal factors that affect margins during Q3.

Yes, understood, sorry. I should have done a better job asking that. I'm looking at it more on a year-on-year basis so it would kind of net out that seasonality.

Yes, I mean, if you look at last year's third quarter and last year's fourth quarter and if, as Don said, we were able to maintain the sort of revenue momentum that we have, then there would be some opportunity for improved margins and I think that's always our response to the question. It's not so much around the expenses. It's around the revenues that drive the overall margin results.

And we're continuing to look for investing in the right people throughout our market, so it's not like we've stopped hiring internal people to drive the businesses so we are still looking for and we need to once a month even as a leadership group to prioritize all the higher requests to get the right people into the right markets.

Understood. And then just a quick follow-up. In terms of an acquisition, Steve, can you define what you guys would consider kind of a big acquisition in terms of revenue?

I would say anything that was over over $100 million would be pretty big in terms of either price that we pay or revenues. To date, our largest acquisition was the acquisition of the Ernest and Young business in the Netherlands and it was considerably smaller than that, so we're cautious about putting a lot of revenues at risk with acquisitions.

Okay. Helpful. Thank you very much.

We'll go next to Gary Bisbee with Lehman Brothers.

Hi, guys, good afternoon and congratulations on a good quarter.

Thank you, Gary.

I think you said in your comments that most of the international markets were very strong and it was strong overall. What could you single out the ones that weren't in many any reasons why or what the outlook is for them?

Well, we've got a lot of new international markets, so I would say that there weren't any that are particularly negative, but there are just some that will take longer to ramp up than others, and having said that not all of our international markets are there for yet profitable. We expect that the ramp to profitability comes generally within a year or two of opening and we've also said in the past that the volatility of those sorts of results is higher in international markets, so it's not that any particular market is struggling. It's just that we've opened as we said in the call, 18 offices over the last six quarters and I think it would be unexpected that all of them would be hitting the ball out of the park.

Okay. That's Fair. In terms of acquisitions, is it more trying to buildout geographically or there's some potential acquisitions that would add a new leg in terms of your product offering or your areas of expertise?

I would say it's a combination of both, so expanding geographically into say a large market that was not there and maybe the business has things that we don't think we have that could be exported.

I would say, by the way, geographically, most of our acquisition ideas are international, not domestic, and services is a more global approach to what might be interesting.

Okay. And then over the last quarter or two, there's been some commentary from you guys and some of your competitors that the Big Four accounting firms were occasionally trying to dip in at lower price points and compete, but I guess it was limited pockets in certain markets. Is that continuing to happen or and has anything changed competitively as you look at the last --

I would say yes, it's continuing to happen and two that I'd say the Big Four are even more aggressive in pushing out their services to the non-audit clients, so I think each one of the Big Four use the market as 75% of the market is not our audit clients so we can sell them any type of service and do any type of service for them, so I think they are all more aggressive about that, that's my perception.

And does that, is there anything you're doing beyond the branding campaign that you mentioned for this last quarter to try to deal with that or are you at this point just is the brand building on it's own well enough that you're not really too worried about that?

Well, some of the brand building that we're doing is really to try to indicate how professional we really are in these services, but the majority of our growth, dollar growth, comes from our existing fortune 1,000-type clients and I think we gave you some statistics about how we worked very hard to retain and service the clients year after year after year, so if you look at where our growth is coming from, it comes from the clients who are using us with a lot of numbers in a lot of different areas and we have proven ourselves that we're more effective say than the Big Four In our core competency so that's where the growth comes from and that's really where we focus attention.

Great. Thanks a lot.

We'll go next to mark Mark Marcon with R. W. Baird.

Good afternoon and congratulations on a great quarter. I was wondering with regards to Asia-Pac, obviously this tremendous growth over there. Can you comment a little bit about where are you seeing strongest or what's the source of the strongest growth? Is it the new offices or can you talk a little bit about some of the more established offices in Asia-Pac and the levels of growth that you're seeing out of those?

Well, we don't really have too many established offices in Asia Pacific because most of them are new. Our most established practice probably is Australia and Australia as far as the dollar market of revenue, from the same point of where you are going to see growth in the future is not going to be as robust say as Beijing or Shanghai or Tokyo. Where we are having, but Australia is doing very well but that's our only really, I would say seasoned office. Other than TY Pai which is one of the smaller markets, we're seeing very strong demand that's actually making some differences to us in Japan and Hong Kong, and we think both of those will be good stepping boards when we open up Shanghai. But we probably won't expect Shanghai to contribute any revenues that are going to make a difference to us for probably two years.

Got it. And then with regards to the U. S., can you talk a little bit about what you're seeing out of some of your larger say New York, Bay Area, LA, types of markets and what sort of same market growth rates you're experiencing in those bigger markets?

Without giving you the percentages, I would say both the Tri-State market and the Southern California market which is our number one and number two markets in the world, both have had new highs during the quarter. So they're continuing to grow.

Great. Super. And then did I calculate it correctly? Are your gross margins up in the U.S?

Gross margins are up a little bit, yes, for the quarter, but I wouldn't consider it anything meaningful that the gross margins that we've achieved across the Company are in line with our target.

Okay, terrific. And then with regards to SG&A, I know the question was asked in a different way earlier but is there anything that's going to occur on a sequential basis, aside from the normal adding of headcount, are there any sort of programs that are coming on board and obviously, you got the new office, can you give us any commentary on that?

There's nothing coming on during the third quarter that is unusual. We do add expenses as the size of the business grows.

Sure.

And there are as Don mentioned ongoing demands for incremental headcount in certain markets but other than that, there's nothing extraordinary.

Okay, terrific. Thank you.

Sure.

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

Oh, thanks. Good afternoon, guys. The only thing I have left to ask, I found all of your information on selling additional services to your top 50 clients very interesting. I was wondering if you could give anymore color on when you have two or more out of 48 of the top 50, what mostly those two are, is that typically a F&A and RAZ and conversely, is there any pattern to where those that have moved on to three services seem to be heading that might tell you how directional trends for the rest of your clients?

I would say the most common two services would be accounting and finance and RAZ or accounting and finance and technology, but just to give you an example, our largest client, we have six different distinct projects going for them, so they are using probably three to four different service lines in those projects and one of our, our third largest client, we have 17 different projects going for them , so it's really diversification of what we're trying to do for our clients and hopefully exposing them to our capabilities beyond accounting and finance.

Okay. If you have six practice areas at the moment, is there anything you could describe or define that might be seventh or eighth that you're considering?

Well, we're looking at things like regulatory consulting for financial institutions as well as broker dealers, hedge funds, etc. We see that that's a growing demand as the regulations become more complex. We already have a lot of those clients in accounting and finance and SOX, so we're looking at ways that we could expand into that. We find there's a lot of boutique companies doing that type of consulting so that's one area and another area that we looked at is government consulting where the government is basically trying to become auditable under GAAP and they are using a lot of outside consulting firms to get them ready to be audited by under GAAP, so we're looking at that as another potential area of expansion. Also, things around risk management and internal audit.

Okay, great. Thanks a lot.

Ladies and Gentlemen, as a reminder, if you'd like to ask a question you may do so by hitting star one. Star one for questions. We'll go next to Michel Morin with Merrill Lynch.

Yes, good afternoon. Congratulations on a very good quarter. I might have missed it but did you open any new offices in the quarter and could you also update us on your plans, I think Don last quarter you gave us a list of five or six places you were looking to open. I was wondering if there's been any change to that.

We opened Edinburgh, Scotland during the quarter and Nagoya which was in the process at the end of last quarter had a grand opening during the quarter, so there were two international markets that we opened during the quarter.

And I think we mentioned that we're hoping to have a Shanghai office opened hopefully in the next quarter, so that would bring our number, I think we said we look to open 6-10 offices and I think that would bring our number to, one, two, three, four, five plus Shanghai would be six, so our guidance is about the same.

Okay. And perfect, thank you. In terms of the new projects that you've been signing or starting in the last few months, has there been any change or have you noticed any change in terms of the type of work that you're doing? For example, there's been a lot of M&A activity. Have you seen any benefit from your involvement in that at all?

I would say that the best news that we would have from the quarter is the breadth of demand. It was not focused in any one particular area. It's broad based geographically. It's broad based in terms of services, and it therefore is broad based in terms of the types of things that we're doing for clients which has been the case for many years pre SOX and then during SOX, all of you folks on Wall Street got totally focused on one thing but we've always been capable and have been doing other things and so it's the strength of the quarter was built on a broad base.

Great. Thanks very much.

Okay?

And our final question in the queue is from Christina Woo with Morgan Stanley.

Hi. I was wondering if you could comment on your share buyback going into the next quarter and in your prepared comments, you stated that you didn't buyback any shares because you were looking at acquisition opportunities and it sounds like you continue to investigate acquisitions.

Yes, Christina, our approach to buybacks has not changed which is that we to date have been fairly opportunistic about our approach and that likely over time will not be the approach we take forever but that's been the approach to date and when looking at opportunities to allocate our cash in the most recent quarter, we thought that the more likely use of about the comparable amount of cash would have been towards an acquisition, so we declined during this quarter to buyback shares. We will continue to be opportunistic in the short run in terms of where we think the best use of capital is and at the same time, we're going to remain probably more conservative than many of you would like with regards to our balance sheet. We are still a young Company and we still think it's important to have a modestly over capitalized balance sheet.

Thanks.

Okay? Well, at this time I'd like to thank you all for your interest in our results and our interest in resources and we wish you all a peaceful holiday season and look forward to speaking with you again after our next quarter. Thanks.

Ladies and Gentlemen, this concludes today's discussion. You may disconnect your phone lines at this time.