Resources Connection Inc (RGP) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Resources Global Professionals' first quarter fiscal year 2008 earnings results conference call. Today's call is being recorded. With us today from the Company is Ms. Kate Duchene, the chief legal officer, Mr. Tony Cherbak, acting Chief Financial Officer, and Mr. Don Murray, Chief Executive Officer. Now at this time for opening remarks and the introductions I would like to turn the call over to Ms. Duchene. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me, as you know, are Don Murray, our Chairman and Chief Executive Officer of Resources, and Tony Cherbak, our Executive Vice President of operations and acting Chief Financial Officer. During this call we will be providing you with comments on our results for the first quarter of fiscal year 2008. By now you should have a copy of today's press release. If you need a copy and are unable to access one via our website please call Margaret Porter. She can be reached at 714-430-6363 and she'll be happy to fax a copy to you.

Before turning the call over to 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 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, 2007, 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'll 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 of fiscal 2008. The revenues for the first quarter of the year were up 18% year over year and down slightly from the fourth quarter of fiscal 2007. Because our summer quarter includes Memorial Day and fourth of July in the U.S., as well as the heavy vacation season in the U.S. and Europe, revenues have historically been flat or slightly below the seasonally strong fourth quarter. Although demand for our services was steady throughout the summer quarter, we felt some revenue in margin impact from the greater than normal vacations in the U.S., as well as the enhanced vacation benefit we introduced for U.S.-based associates this year. Recent revenue levels have now returned to our presummer levels. Tony will provide additional detailed 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 to add significant new clients. We have 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 2007 we had over 300 clients for each of whom we provided services exceeding $500,000 of fees. Through the first quarter of fiscal 2008 on a run rate basis we have served 17% 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 model of some of our competitors. No one benefits from the wrong client solution as they could in a commission-based system. Revenues from our top 50 clients represented 35% of total revenues for the first quarter while 50% of our revenues came from just 113 clients. Our largest client during the first quarter was less than 3% of revenues as was our largest client for fiscal 2007.

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 2007 we served all of our top 50 clients from 2006, and in the first quarter of 2008 we have served all 50 of the top 50 from fiscal 2007. Looking back three years, 94% of the top 50 clients from fiscal 2004 were clients in 2007, illustrating our client service approach versus a commission model. For the 2007 fiscal year we served over 2,200 clients, our largest client count ever. Through the first quarter of fiscal 2008 we have served 9% more clients than at the same time last year.

Now our third strategy is to expand our geographic footprint to serve our multinational clients. In fiscal 2007 our geographic expansion included nine new offices of which all but one were international. In the first quarter, and included in our previously-announced acquisition of Compliance Solutions, we have two new offices just outside of London serving the compliance needs of our financial institution clients. In our second quarter we plan to add an office in Tulsa, Oklahoma to serve our oil and gas clients, an office in Frankfort to serve the financial services sector, and possibly one or two more offices in the northeastern United States. As we have repeatedly stated we are opportunistic when we open practices as they normally follow client needs. Our progress in developing the footprint of the Company is important to our long-term goal of serving multinational clients wherever they 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. We are currently addressing seasoned -- I'm sorry, where are currently adding seasoned professionals to help manage our newer offices in China and India.

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 services offerings that fit our model. Consistent with our big four heritage, our most significant revenues continue to be generated from the carrying and finance service line. One measure of the success of this strategy is the number of top clients who have engaged us in multiple service lines. After just three months of fiscal 2008, 100% of our top 50 clients have used more than one service line and 80% of those top 50 clients have used three or more service lines. We address client needs as one coordinated company with six service lines. We also sell a content management software solution, policyIQ, which we use internally for our own SOX requirements, for organizing and distributing intellectual capital, as well as to manage our policies and procedures, our training and client service initiatives.

[RAS]. Well, RAS was approximately 16% of total revenues in the first quarter of fiscal 2008 compared to 24% in the comparable quarter a year ago and 15% during the fourth quarter of last year. RAS revenue grew 1% sequentially, aided by the addition of $1.1 million of revenue from our newly-acquired compliance business in the UK. Although our clients continue to streamline their SOX process in accordance with newly-released regulatory guidance we still see demand from the clients in the SOX area, including international companies who either have filing requirements with the SEC or are subject to regulatory efforts similar to SOX, like JSOX.

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

Thank you, Don. Revenues for the quarter grew 18% to $194.1 million versus $165.1 million in the comparable quarter a year ago and $200.5 million in the fourth quarter of fiscal 2007. Our average weekly revenue during the first quarter was $14.9 million per week compared to $12.7 million per week during the first quarter of 2007. As Don mentioned, our first quarter includes two national holidays in the U.S., as well as the heavy vacation schedule of summer. In our last call we noted that vacations were starting a little earlier than normal and that we anticipated a significant vacation effect throughout the remainder of summer. In fact, PTO hours taken in our first quarter for the U.S. offices increased 23% over the comparable period in the prior year, causing our revenues to come in a little under where we had planned them to be.

Now let me discuss revenues geographically. Revenues in the U.S. were up 14% quarter over quarter and down a little under 5% on a sequential basis, due mainly to the holidays and vacations. The weekly revenue trend was relatively consistent during June and July and decreased slightly in the latter part of August before rebounding post Labor Day. The coasts are still the strongest revenue areas for us, with the south and Midwest a little softer. Our field personnel report an improving pipeline of opportunities in many U.S. markets.

International revenues grew by 31% year over year, by 1% sequentially, and were 25% of total revenues for the quarter, the highest percentage ever. Europe's revenues were up 28% year over year and flat sequentially, while the Asia-Pacific region saw revenues up 28% year over year but down 5% sequentially, due to the completion of two major engagements in our Japanese practice late in the fourth quarter of 2007. Netherlands revenues for the quarter on a dollar basis were up 5% year over year but down sequentially by 4%. UK revenues were up 20% year over year and 13% sequentially. Total revenues internationally were $48.3 million versus $36.9 million a a year ago and $47.8 million in the fourth quarter of fiscal 2007. Total revenues for the Dutch practice in Q1 were $16.5 million. International revenues would have been lower by $2.5 million in the quarter on a constant currency basis. On a constant currency basis international revenue year over year growth was 24%.

Now let me give you some information about the first few weeks of Q2. We saw an uptick in the first week of the second quarter, despite being the week before Labor Day. We normally lose some revenue on Friday just before our three-day weekend, yet that weekend -- yet that week came in at $15.4 million, an improvement of $500,000 over our weekly average of $14.9 million in the first quarter. The following week included Labor Day and revenue was about 88% of the previous week, very strong considering the holiday. Revenue for the first full week after Labor Day was our highest ever at $16.1 million. At that run rate, and given the likely impact of Thanksgiving week at end of the quarter, we would expect revenues in Q2 of about $200 million.

Now let me discuss gross margins. Gross margin for the quarter was 37.9%, 160 basis points lower than the year-ago first quarter. The decrease in gross margin is primarily attributable to the impact of improved benefits for our associates. As we discussed on our last call, we initiated an increase in the associate PTO by one full week at the beginning of the first quarter. We believe that continuing to balance our long-term financial goals with improving our benefits for associates is an important trade off as we continue to attract and retain the best talent. While our offices are working hard to increase revenue streams to pay for these benefits, we believe it will take a couple of quarters to pass on bill rate increases to cover these costs. Also contributing to lower gross margin was an increase in the percentage of revenues attributable to client reimbursements, which have a 0% gross margin and a decrease in conversion fees, which have a 100% gross margin.

Client reimbursable expenses were 3.5% of revenues during the quarter versus 3.2% a year ago. Conversion fees were 0.4% of revenue, 60 basis points lower as a percentage of revenue versus the comparable quarter a year ago. Let me reconcile the 160 basis point decline in gross margin from our year-ago quarter. 70 basis points was due to higher associate compensation, primarily the PTO that we'd previously discussed, 60 basis points was due to lower conversion fees, and 30 basis points was due to higher reimbursable expenses. As is typically the case, gross margins in the U.S. were higher than our international gross margins, which were 36.7% during the quarter.

Now to head count. For the quarter average associate FTE count was 3,110. This compares to 3,180 in the previous quarter and 2,789 in the year-ago quarter. Quarter-end associate head count was 3,206 versus 2,883 a year ago. The total head count of the Company was approximately 4,068 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 $47 million or 24.2% of revenue. In the last year's first quarter SG&A was 24.3% of revenue. SG&A was $40.1 million in the prior-year first quarter and was $45.8 million in the final quarter of fiscal 2007. Although we are continuing to make opportunistic investments in new offices and high-caliber people to build our Company for the future, we are carefully monitoring the hiring of open positions and giving priority to client-facing positions in our most significant growth markets. Depreciation and amortization was $2.1 million for the quarter, up about $300,000 over last-year's first quarter, as the result of a higher asset base. Interest income was $2.5 million for the first quarter versus $1.9 million a year ago. Interest income grew primarily due to high interest rates than in the prior year.

Our tax rate before the impact of stock-compensation expense was 40%, as we expected. Our operating margin before stock-compensation expense for the first quarter was 13.6% compared to 16.6% in the fourth quarter of last year and 15.2% in the comparable quarter a year ago. Earning for the quarter before stock compensation were $16.1 million or $0.31 per share versus $15.1 million and $0.30 per share a year ago. In the first quarter the noncash pre-tax charge for stock compensation was $6 million or $0.08 per share versus $4.7 million or $0.08 per share in the comparable quarter a year ago. As we have described previously, the tax treatment of our incentive stock options under FASB Statement 123(R) will likely cause continued volatility in our GAAP tax expense. The tax benefit for incentive stock options gets allocated to the balance sheet as paid in capital, or to the P&L as they are exercised and sold, depending on the date the ISO vested. Therefore, we receive no P&L benefit for a portion of the ISO's exercised in any given period. That was true in Q1, as we were unable to record the full tax benefit related ISOs for which we recorded compensation expense of $2.1 million. As a result, our GAAP tax rate was 44.5% for the quarter. On a cash basis we will get a tax deduction for all ISOs when they are exercised and ultimately sold.

Now let me turn to our balance sheet. Cash and investments at quarter end were about $158 million. We make substantial bonus and estimated tax payments during the first quarter, causing a seasonal reduction in operating cash flow. In addition, this year we used $61 million to pay the special dividend we discussed with you on our last call and $2.3 million to buy back 73,500 shares of our common stock at an average purchase price of $30.68 per share. Our board and management continue to analyze 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 $110 million, up about $5 million from the previous quarter. Day sales outstandings were 48 days, the same as our previous quarter.

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

Thanks, Tony. Well, much has been written recently about the U.S. economy and the fall out from the credit crisis and the meltdown of the subprime sectors. Naysayers speculate that these recent event will most certainly bring about a recession. There is not much that we can do about the economy. What we can and will do is focus on our clients and associates and continue to execute our business model. This starts with identifying high-quality associates who have the right skills and experience to help our clients with their business issues, regardless of the economic conditions. Although a strong and vibrant economy is better for our business, we believe that we can ultimately grow even in a down economy, given the strength of of our client base and the superior skill sets of our associates.

When we assess our client base, we see that our revenue is primarily from Fortune 1000 companies, which is very different from our client base during the recession of 2001 and 2003. Our client base during the last recession included over 250 .com companies, companies with interesting ideas but no historical substance. Even then the lowest operating margin in the recession we achieved was 10%. I continue to believe that it is our people and culture that make a difference in the marketplace, and today with our blue chip client base we are much stronger and well positioned to face an economy in flux. Our plan to address the economy is to continue to focus our people on executing the business model and serving our clients. We help clients deal with change, even if it is negative change.

As to our search for a permanent CFO, we have interviewed several candidates over the past few weeks and have follow-up interviews scheduled with certain of our independent board members. We have at least two strong candidates that we feel positive about and anticipate filling this role over the next six to eight weeks, but no later than the end of the calendar year. In July we announced that our board of directors had authorized repurchase of up to $150 million of our shares. We are committed to returning capital to our shareholders at levels that allow us to maintain the flexibility to accomplish any reasonable strategic objective. We anticipate being active in the market throughout the remainder of the year as conditions warrant and together with our board we'll continue to examine ways of returning capital to our shareholders.

We'd be glad to answer your questions at this time. Thanks.

Thank you, sir. (OPERATOR INSTRUCTIONS) And we'll go first to T.C. Robillard with Banc of America Securities.

Great, thank you. Just a couple of quick questions. First, if I look at your revenue guidance, you see a strong deceleration in your revenue growth rate. Was just wondering if you could talk to that? And then secondly, on the SG&A front you saw a 17% increase in SG&A year on year, which was slightly below the revenue side, so there's still a little bit of incremental margin there, but that's a pretty big growth on the SG&A side. If you could give us some sense as to -- and I'm looking at SG&A excluding the stock comp -- if you could give us a sense as to what was driving that and how we should be thinking about that through the rest of the year?

Okay, I think just -- relative to the SG&A growth, the majority of the SG&A came through investments in our people, and the investments in our people are ones that we have deployed into our strongest growth regions, so those would be on the East Coast and the West Coast of the United States. So that would be the majority of the SG&A growth. I'd say that we will -- although we monitor our positions pretty heavily, we will continue to invest in our growth regions as we go through the balance of the year. Depending on how our revenues react will determine whether we get any leverage out of it.

And I think your other question related to the revenue growth, and although we anticipate our revenues to accelerate somewhat, I think right now, given everything that is occurring within the economy, the best guidance that we can give you is where our trend rate is right now. We're very pleased to see the revenues rebound from the Labor Day and the holidays prior to Labor Day and we hit $16.1 million last week, but for the balance of the quarter I think that we're going to fine out over the next four or five weeks if those revenue trends are continuing to stay the same or whether they're going to accelerate for us.

Have your seen anything that makes you cautious with that or is that just on -- just kind of your historical understanding of your model? How did you guys arrive to that and are going to decide whether or not that that's an aggressive target or a conservative target?

Well --

We've never really given guidance. I think at the end of the fourth quarter we've told our investors what our goal was for the year and I think in the past we've always basically projected out what we thought the revenue trend was and said use that as a guidance for the quarter. As far as what we've seen, our -- I would say our demand has been strong, but when we talk to investors in New York and investment bankers they all seem to be pretty negative about the economy, so we're cautious about the short-term economic risks. But so far it's not showing up in our demand level.

Okay. Great. That's helpful color. Thank you.

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

Hi, gentlemen. Could you just tell us how that one week of additional vacation was accrued? Was that one quarter accrued, one quarter of a week accrued in the quarter, or is that the whole year an extra week of vacation accrued into this one quarter? And then, of course, what's the implication for gross margins in the November quarter?

The biggest effect, Andrew, would be that our associates took a lot more vacation this summer than they did in the previous summer because they were given this extra week for the year. So the biggest effect we probably had was the decrease in revenue from the extra vacation that they took while we still had the salary expense and we would have accrued one quarter of the expense of a week during the quarter since it's ratably accrued during the year.

Right. And so how do you see gross margin shaping up next quarter and is the Company ongoing gross margin goal still around 40%?

Yes, and I'll address it first and then Tony can add his thoughts. I think when we announced this in the last quarter, we -- I thought I made it clear that we can't recover the immediate cost in bills and billing rates but we have to factor those in as our associates get rolled to new engagements or as we get new contracts, but we couldn't go back and retroactively increase the bill rates for projects already in effect and that it would take several quarters for us to get this added cost into our bill rates. And so we still anticipate that that's occurring and we believe from what we've seen in the field that there's an effort to recover those costs over the next few quarters. Tony?

One other thing, Andrew, as we mentioned in our remarks, 60 basis points of the difference in the gross margin between the first quarter this year and the first quarter last year was related to the lower conversion fees, which have 100% gross margin. I think that was a little bit of an anomaly in that in subsequent quarters in fiscal '07 that was more around 0.5%, 0.6%, so I think the conversion fees were unusually high last year in the first quarter, so I think that that effect, which is more of a revenue mix impact will abate as we go forward into 2008.

Could you give us a sense where gross margins will be in the November quarter?

I don't that know we want to get into a specific gross margin, but I would say that it would be reasonable to expect a positive impact from where we are today at the 37.9%. Again, we might not get all the way back to like 39,5%, but -- which we believe it will probably take a couple of quarters to get this vacation impact back, but I think that you'll see something -- something north of 37.9%.

Okay. Thank you very much.

We'll go next to Jim Janesky with Stifel Nicolaus.

Yes, thank you. A couple of questions. You talked a little bit about expectations for Sarbanes Oxley in the upcoming quarters. Are your clients starting to talk about that or -- and getting prepared? And is most of the growth going to come from the international front or do you expect any relief on the U.S. front?

No. I would say most of our dollar growth would come from the U.S. but not necessarily from Sarbanes Oxley. Sarbanes Oxley for most of our clients has become a very routine process, and while the first year and into the second year it was done more of a crisis mode, it's now become a normal routine process. What it's done for us is it's given us a recurring level of projects, where it's a project that doesn't necessarily have to be resold every year because clients are going to call on us to help them with their Sarbanes Oxley efforts, it's just less effort is required for our client base. We are increasing our emphasis to add other services in RAS, including the compliance solutions practice as well as things like royalty audits and licensing audits, et cetera. So I view Sarbanes Oxley from the standpoint of a recurring level of business as a very positive thing for us, even though it's no longer a crisis for our clients. But I would expect the majority of our dollar growth will come from the U.S. as it has in most of our years.

Your overall dollar growth, right?

Yes, the percentage will be higher hopefully in international.

Okay. And can you give us a sense -- you said that while you're being somewhat conservative in your approach to the revenue outlook for the November quarter and clearly that conservatism comes through because you're expecting about 3% sequential growth this year versus -- you turned in about 10% next -- or last year -- I'm sorry. But give us a sense -- you said your field people are not really experiencing a pullback in demand quite yet and customers aren't getting cautious. If the economy were to slow, how long do you think that would take to flow through to your revenues?

I don't know. I have the experience from the 2001 recession and if you look at our revenues in 2001, we first felt the effect in July and then August. And then as August started to grow again, we had September 11th and so we had the double whammy of all of our financial institution New York clients basically closing down, yet we still paid all of our associates so that we would keep the associate base. But we still achieved, I think, a 10% operating margin and you can go back and look and see how fast we started growing again. So if you look, we had something like six or seven, eight quarters of consecutive growth once the recession flattened out after a quarter or two. So I view that our business is helping our clients with change. Our large client base is different than it was in 2001, where a lot of our clients in 2001 just disappeared, especially in Boston and Silicone Valley. We don't have that type of client base anymore. What major companies do in a recession is they usually free hire -- freeze hiring and they freeze projects and they basically lay people off, and then as the issues bubble to the top they bring in more people than before to help them fix the problems and I think that's what we experienced during the last recession.

Okay. Thanks. That's very helpful. Last question, Tony, can you give us the U.S. year-over-year growth that you reported in the fourth fiscal quarter of '07?

We'll get that for you.

Okay. Thank you. I appreciate it.

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

Hi, guys. The question is on your SG&A spend, understand that you plan to continue to spend in the growth areas of this, but how much do you think or will you think about potentially slowing down the growth in absolute dollar terms of that cost line, based on -- based on at least the near term slower revenue growth outlook?

I think we have slowed it down. If you look at the -- in the last, say, 18 months, you'll see that we have slowed down the percentage of G&A so that it started to fall below the revenue growth last year and we take a hard look every quarter at the hire list that's submitted by the offices and have taken a centralized view of balancing the investment so that we're only making investments where we see a high growth opportunity. So we'd much rather invest in a major marketplace like tri-state than a smaller marketplace. Nevertheless, we will get clients' requests that say if you open this office we have a lot of -- we have projects that need to get done and so we'll continue to make those investments. But we have really proactively for about the last 18 months tried to drive down the G&A percentage increase.

And I think a lot depends -- what our investments will reflect is what we see in terms of revenue. If we see revenue start to accelerate, then we'll continue to invest in people, but if we do not see that fact pattern, we will not.

And the people you're referring to, is that -- is that investment your managers and your recruiters and what not, the people who are handling your associates and managing them? Is that how we should think about that?

That's who it is. It's basically the people that serve clients and recruit people. When you look at how we open offices, we opened in China, we opened in Beijing and we opened in Shanghai. All those expenses of the people that we're hiring for Beijing and Shanghai are immediate expenses, their salaries and benefits, et cetera, the rent. If we had gone out and bought a Chinese accounting firm and paid a high multiple for them -- which we looked at two of them -- we would not have had the same "level" of expense but they weren't a good use of our money because we get the best ROI on our own offices that we open. So, some of it has to do with how do you account for startup operations and in our case startup operations are basically expense.

Okay. And then just two questions on the cash flow. Is it safe to assume that CapEx for this year is similar to last year and basically flattish year over year?

I'd say it would be -- it would be less than last year. It'll be relatively flat with the first quarter and the first quarter -- CapEx in the first quarter was about $3 million. So on an annual basis it'll be probably a little bit less than $12 million.

Okay, great. And then just lastly, I think last quarter you told us that you certainly expected cash flow -- like free cash flo --, to be solidly ahead of net income. Is there anything that would change that or is that still your expectation for this year?

I think the statistic was operating cash flow is typically in excess of net income and we would expect the same in the current year.

Okay, great. Thanks a lot.

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

Thanks. Hi, Don and Tony. Tony, just wanted to drill a little bit more on the conversion rates. I think we had adjusted for the gross margin impact on the vacations but not the change in conversions. Can you read anything into the tone of business, given the conversions or was it simply just a tough comp?

Well, again I think it was -- It think it was more of a tough comp, and bear in mind the conversion rate is not something that we manage as a business. We would rather see a lower conversion rate because then we hold onto the associates and we get the benefit of their revenue throughout the year. A good example would be is the average conversion rate's probably around $24,000 and that is pure margin. But if you took the average associate working at our average bill rate throughout the year, the gross margin impact is closer to $100,000, so for us it's a lot better not to have any of our associates converted. But I think relative to the impact on the margin in the first quarter is purely -- it was 1% of revenues in the first quarter of '97 and it was 0.4 of a percent in the first quarter of '08, so it had a pretty big impact (inaudible) the percentage.

Okay. And as you look into the November quarter, what's your sense? That it should look much more like the August quarter or much more like last year?

I think it would look more like last year.

Okay. Okay. And then --

Related to conversion fees.

Well, but the August quarter was similar to last year? Our August quarter this year was low, very similar to what our second quarter last year was because our conversion rates last year except for the first quarter were pretty modest, right?

No, that's right. That's right. It would -- it'll be more similar to the quarter subsequent to last year's first quarter, the second, third, fourth quarter.

Okay, okay. So it's a neutral impact vis-a-vis the year-over-year gross margin from a conversion standpoint?

Yes.

Okay.

When we look at the gross margin, our biggest hit on the gross margin really was the -- a lot more vacation taken this year than last year as a percentage of the hours and that hurt gross margin.

Yes, yes. Okay. And then, I guess with respect to buybacks can you just update us where you are on the buyback authorization and things like that?

Well, as you know, we have a new buyback approval that we got in July from our board of up to $150 million and we are looking prudently as to when is the best time to do and how much to do and so that's up to management's discretion. So I think you can see us being active in the market in the near future.

Okay. All right. That's all I have. Thank you.

Our next question comes from Mark Marcon with Robert W. Baird.

Just a quick clarification from Brandt's earlier question. So you haven't bought anything back as yet under the current authorization of $150 million?

73,500 shares in the first quarter.

Okay. And then can you talk -- just in terms of the gross margins in the U.S. it looked like you had the biggest impact of the PTO and the conversions in the U.S. Is that a correct assumption?

That's correct because the additional week of vacation benefit went only to the U.S. associates.

Okay. And this was the first quarter where we really saw that, right?

This is the first quarter that you saw the costs related to it, and as Don stated, given the summertime a lot of the associates took advantage of that additional week of vacation and vacation hours were up 23% in the U.S. during that time frame.

But the way that you accrued for it was you basically took -- you took a week's additional vacation and you're basically applying a quarter of it in terms of --

Yes, we accrue it ratably throughout the year?

Right. So isn't it fair to say that in the U.S. we've got another three quarters to go before we annualize this impact?

Not quite. Obviously the cost is going to continue to be accrued as we go forward, but we anticipate that we're not going to have nearly as many people taking vacation in the subsequent quarters and in addition -- in addition, the gross margin impact of the increased vacation is obviously greater in the summertime months.

We would anticipate that this cost that we're going to be accruing over the next three quarters is going to be offset by modest increases in the billing rates as our contracts come up for renewal or we get new projects. So our people in the field are well aware that we have to pay for this benefit. We knew -- and I think we explained in our last conference call that it takes a while to get the bill rates up to cover those costs because our contracts just don't end at the end of the year and start over again. And so it's a methodology of increasing our bill rates to cover the costs and there's a lag time and our people are pretty focused, I think, of getting this done. So I would anticipate that this effect of the extra week -- the gross margin effect will start decreasing, if it hasn't already.

Okay. And just on the pay bill question, how much were your bill rates up this past quarter relative to a year ago and how much were the pay rates up?

The bill rates were up 6.2% and the pay rates were up 6.8%.

Okay. And then would you expect any pickup in your RAS work in this current quarter from a seasonal perspective?

Our RAS work is going to be seasonally strong in the calendar fourth quarter and first quarter, which would be our second and third quarter, so we do anticipate a little bit of pickup as companies start to prepare for their year-end audits.

Okay. And that's -- so wouldn't you -- is it possible that we could end up seeing a little bit better than the 16.1% run rate that you're running or would you anticipate that there's probably some other aspect that might fall off?

Well, again it depends on what our overall revenues do. I would say that that's probably a -- somewhere in the 15% to 16% range is probably a safe bet, but again when our -- when we do not have the associates deployed on RAS engagements they're quickly redeployed on engagements in some of our other service lines. So I don't know that it's necessarily a huge fact as to how our revenues are going to go based on what happens in RAS.

Great. Thank you.

We'll take our next question from Mike Fox with JPMorgan.

Good afternoon, guys. Most of my questions have been answered. I was just wondering if you could talk about the current acquisition environment and given that -- sounds like you have been having discussions with investment bankers based on what you said earlier about the comments regarding the economy. If we do have a potential downturn, would you guys be more inquisitive or less inquisitive? Thanks.

I would think if we had a downturn we would be more aggressive in the acquisition front because the values might be better for us. We looked at several acquisitions over the last six months, some of which we talked about, and we passed on them. We have one that we're any discussions with that looks promising, but it's not a very large company. It's kind of a boutique. So we're always looking to acquire something with a similar culture, with services or geography that we don't have. We're not looking to buy a company just to get the revenue. So I would say if there's a real downturn, then it might be even more attractive to find companies that want to align themselves with a larger company that's growing.

Okay. Great. And then with regard to that one company you're looking at, can you give us an idea if it's in the international or U.S.?

It's an international company.

Okay, great. Thanks a lot.

We'll go next to Christina Woo with Morgan Stanley.

Thanks. We've talked quite a bit about the vacation benefit and the costs. I was hoping that you could address some of the benefits to Resources Global Professionals. Maybe you could first start by talking about how you measure employee satisfaction and then any change that you've seen over the last quarter?

Well, one of the ways that we measure the satisfaction is that we do a survey of our associates on an annual basis and we'll generally look at two or three or four of the top items that they have on the survey that they would like to see as part of the culture. And one of the things that has come up the last several years has been an increased PTO benefit. So we want to get the input from the associates and we want to try to help to evolve the benefits in the direction that they'd like to see them and this is how we arrived at the conclusion to grant the additional week of PTO. I think the ultimate benefit, obviously, or the ultimate goal of this program is the retention of the talent that we spend so much time recruiting.

So it's too early to tell whether it's been effective in increasing that retention rate?

Well, it's only about three months old at this point, so based upon the input that we have received on our most recent survey, they did note that is something they were very pleased about. In addition, as we go out and we visit the various offices throughout the world -- and in this particular case in the U.S., -- we have got positive feedback from the associates about the extra week of vacation. So it seems preliminary to be met with a good review.

Okay. And then second set of questions having to do with your government services practice. You've recently invested in that. Can you maybe give us an idea on the size of the opportunity and also address whether the rates that you're able to charge the government are similar to rates charged to companies in the private sector?

I would say at this point it's probably a little bit too early to tell. Our investment has been very minor at this point. It's only been a total of two people. We believe that there are good opportunities in the government, but you have to pick your spots. We believe that the margins that can be thrown off can be substantial. However, we would expect that the average bill rates to be maybe a little bit lower than our current average bill rate, but also pay rates possibly for associates doing the government work might be a little bit more in line with the actual bill rate.

Okay. Thanks so much.

We'll go next to Scott Schneeberger with CIBC World Markets.

Thanks, good afternoon. Following up with the acquisition questions. Would you say the main deterrent to not doing more recently is the multiples that are being commanded out there, and if not, what other reasons are they looking less attractive to you right now? And also just if you could speak I guess specifically quantifying any multiples you see in particular segments? Thank you.

Okay. I would say that the main deterrent has not been the multiple. It's been a company's culture that we didn't think would fit correctly with ours. There's one company where we thought their services might be -- might create some issues with some of our clients since they did more of an adversarial type of consulting. But it's mostly been around culture and the ones we've looked at -- and we have had several that we look at -- financially would have worked for us, but we walked away because of culture. Why I think the economy, if there's a downturn, would be helpful is because there are some companies that are really good service providers. They have great cultures that have not -- things are going well in an up economy, so they're saying well, why would I want to associate with a larger company right now because things are going so well for us? So if the economy wasn't as strong, those companies might want to seek out a larger partner to help them continue their business growth and those companies would be the type that we would be interested in.

Okay, thanks. Changing up a little bit, I believe for the 10-K your average bill for rate for all last year was about -- an increase of about 7.3% and then I think you just mentioned about 6.2% in the first quarter. Is there any comp or seasonality or anything that we should think about related to that drop? Is there any reason to be concerned there?

It's not so much seasonality as it is just continuing to -- when you have increased pay rates with your associates or you have increased benefits it's going back to the clients to negotiate the bill rates upwards. There's a relative sensitivity to those numbers that we gave you. We said that the bill rate increased 6.2%, the pay rate increased 6.8%. $0.75 difference on the bill rate gets that in excess of the actual pay rate. So this is more again, as I think Don previously mentioned, many of our office are having these discussions as we speak to increase bill rates so that we can pay for these additional benefits and also meet associate expectations going forward.

And typically in the summer you have less new projects starting. A lot of the financial industry is very slow in the summer and so when you have less new projects, you have less new groups of higher bill rates. So there is a -- probably a little bit of seasonality to that.

Okay, thanks. One final one. On your share buyback -- stock buyback, that's $150 million authorization, over how many years is that? And regardless of that, do you intend to try and do most of that within this fiscal year or are you going to spread it out over the longer period? Thanks.

I don't think there's a time limit associated with it and I wouldn't anticipate that we would spend a whole $150 million authorization this year.

Okay. Thanks very much.

(OPERATOR INSTRUCTIONS) We'll go next to Michel Morin with Merrill Lynch.

Yes, hi, guys. On the -- just wanted to go back to the gross margins for a little bit. The reimbursements, I just wanted to double check the numbers. You said it was 3.5% of revenues and I think for last year you said it was 3.2%?

That's correct.

Okay. I had different numbers there. How does that 3.5% -- actually would you mind sharing what the numbers were for the rest of '07?

Which numbers?

The reimbursement revenue as a percentage of total?

I don't have that right off hand, Michel, but it was 3.5% of revenues during the current quarter versus the 3.2% a year ago.

And is the 3.5% -- how does that compare historically? Are you -- is this a new high level? Is there anything --?

No. Well, they can -- reimbursable expenses as revenues go up are going to tend to rise a little bit because we're going to have situations in which we may not have associates in a particular market that are relevant to a particular project and sometimes we'll need to bring them in from another geography. The greatest attempt is made to get associates in the market in which the project is to work on the project, but just like any consul -- other consulting business, we might have to bring in people from the outside depending on the nature of a project.

Right. Okay.

I'm looking at our reimbursable expense percentage for all of last year and this quarter was higher than any of that we had last year.

Yes.

2007.

I had 2.3% a year ago, so maybe I had incorrect data, but I'll double-check that. And then --

It was 3.2%.

Yes, okay. And, Don, I also just wanted to clarify -- I think in response to the earlier question on how the costs related to the vacation is allocated pro rata it seemed basically to -- you were essentially saying that the real impact on margins the lost revenue. Are we to take away from that that if these consultants had not taken their vacation time or as much vacation time, there would have been work there for them to do and for you to bill out and we would have seen the top line perhaps a bit, as you mentioned in your prepared remarks, closer to your original expectations?

Yes. I think our vacation went up 24%?

23%.

23% and if it let's say had been similar to last year, we would have had maybe 6%, 7% more revenue.

Right.

Because those associates would have been working and billing, so -- and I think at the end of the -- well, actually when we had our last conference call, I believe we had mentioned that we saw vacations starting earlier this season, so it was hard to know how much vacation people are going to plan. Since our associates are all pretty mature people a lot of them have school age children, so they're going to be taking their vacations when their kids are off and they just took more this year.

Right. Okay. And then just quickly on the international segment, I think in your prepared remarks you mentioned that there was a couple of projects in Japan that ended and that were significant. Can you give us a bit more color as to what those were and what the impact was?

They were a couple of fairly large SOX projects that ended in the fourth quarter of last year and that revenue was not recurring in the first quarter related to those clients. But in talking with our Japanese group that revenue should return to normal levels in the second quarter.

Okay.

It will have replaced that revenue in the second quarter.

Okay. And we're talking U.S. SOX or JSOX?

U.S. SOX for Japanese companies that have SEC reporting requirements.

Great. Thanks very much.

There appear to be no further questions at this time. I'd like to turn things back to Mr. Murray for any additional or closing comments.

Well, I just want to thank all of our investors for their continued support and interest in Resources and we look forward to our next update at the end of the second quarter of fiscal 2008. Thank you.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.