Resources Connection Inc (RGP) 2008 Q2 法說會逐字稿

Good day, and welcome, everyone, to the Resources Global Professionals second-quarter of fiscal year 2008 earnings results conference call. Today's call is being recorded. With us today from the Company is Ms. Kate Duchene, Chief Legal Officer; Mr. Nate Franke, Chief Financial Officer; Mr. Don Murray, Chief Executive Officer; and Mr. Tony Cherbak. At this time, I would like to turn the call over to Kate 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; Tony Cherbak, our Executive Vice President of operations, and our new Chief Financial Officer, Nate Frankie. Tony will speak first about the quarter's results followed by Nate, who will discuss the financial details and then Don will conclude with remarks about the future plans of the Company.

During this call, we will be providing you with comments on our results for the second quarter of fiscal year 2008. 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 call Margaret Porter at 714-430-6363 and she will be happy to fax a copy to you.

Before turning the call to Tony Cherbak, 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 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 will now turn the call over to Tony Cherbak, Executive Vice President of Operations to give an overview of the second quarter.

Thank you, Kate. Good afternoon and welcome to the Resources' second-quarter conference call, where we will discuss the results of our operations and various other aspects of our business.

Revenues for the second quarter were $206.6 million, up 13% from the comparable quarter a year ago and 6% sequentially. The first five weeks of the quarter saw accelerating revenue and included three consecutive weeks where we experienced record revenues. The middle part of the quarter flattened out just a bit with weekly revenue ranging between 16.5 to $16.7 million per week before we achieved our high point for the quarter with a record weekly revenue of $16.9 million a couple of weeks prior to the Thanksgiving holidays. Over the course of the quarter, 20 of our offices achieved weekly revenue highs, 10 internationally and 10 domestically. Nate will provide additional details of recent revenue trends in his review of our financial information later in the call.

In our last call, we indicated our intent to be active in the market with our share repurchase program and we were. During our second quarter, we repurchased 2,840,433 shares of our common stock on the open market for approximately $65 million or $22.94 per share. Cumulatively, we have purchased approximately 2,914,000 shares since the beginning of our fiscal year and along with the $61 million special dividend paid in Q1, we have returned approximately $128 million to shareholders over the first two quarters of fiscal 2008. We have approximately $83 million remaining in our current board authorized share repurchase program and expect that we will continue to buy back shares during the remainder of fiscal 2008.

On December 18, 2007, we completed the acquisition of Domenica, a 16-year-old Netherlands-based company that provides actuarial services primarily to pension and life insurance businesses. Domenica was originally part of Ernst & Young in the Netherlands but was spun out in 2004 over independence concerns much like the ETM practice we acquired in the Netherlands from Ernst & Young in 2003. We paid an initial cash purchase price of EUR13.5 million for 100% of the outstanding shares of Domenica and agreed to make additional earnout payments based upon the achievement of certain financial metrics for Domenica's calendar years ended December 31st, 2007 and 2008. A portion of the purchase price will be placed in an escrow account and paid to the sellers in May of 2009 net of any claims. The initial purchase price was based on a multiple of EBITDA that is lower than our current EBITDA multiple and approximates one times Domenica's 2006 revenue. This transaction is expected to be accretive to Resources in fiscal 2008.

We believe that there is high demand for actuarial services in the Netherlands and that such services are complementary to those of our existing Netherlands practice. This new service offering will allow for increased penetration of our collective client base and we already share some large common clients in the insurance and pension area.

Resources' business model has historically generated a significant amount of cash from operations. Our ability to generate cash gives us the flexibility to be opportunistic when we identify an attractive acquisition candidate as well as to return capital to our shareholders. After utilizing approximately $154 million of cash through the first seven months of fiscal '08 on such activities, our cash and investment balance today is still in excess of $100 million.

Now let me focus on some information regarding our clients. In fiscal 2007, we had 300 clients for each of whom we provided services exceeding $500,000 in fees. Through the end of our second quarter, on a run rate basis, we have served 13% more clients at this level than at the end of the second quarter a year ago. Revenues from our top 50 clients represented 34% of total revenues for the quarter while 50% of our revenues came from 120 clients. This is consistent with previous years' experience. Our largest client during the second quarter was just over 2% of revenues.

Plan continuity continues to be solid. During our second quarter, we served all of our top 50 clients from fiscal year 2007 and 2006. Our loyal client following is reflective of our client service approach and our basic principle of always doing the right thing for our clients.

Through the second quarter of fiscal 2008, we have served 9% more clients than at the same time last year. Through the first six months of fiscal 2008, all of our top 50 clients have used more than one service line and 82% of the top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships that we have within our client organizations.

Turning to geographic expansion for a moment, during our second quarter, we relocated our temporary office in Dusseldorf to Frankfurt, Germany to serve the financial services sector there and open an office in Tulsa, Oklahoma to better serve our oil and gas clients. Both Tulsa and Frankfurt already have revenue. Internationally, a key focus throughout the balance of fiscal 2008 will be to grow our newer offices, including those in Frankfurt and Shanghai. Domestically, we anticipate opening two to three new offices throughout the balance of 2008 to serve existing high-growth regions like in the northeastern United States.

A few words about our service lines. From a service line perspective, we, once again, saw strong quarter-over-quarter growth in all service lines except RAS. RAS accounted for approximately 16% of total revenues in the second quarter of fiscal 2008 compared to 23% a year ago and 16% during the first quarter of fiscal 2008. RAS grew approximately 8% sequentially. Revenue growth in our non-RAS service lines totaled 24% quarter over quarter.

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

Thank you, Tony. Revenues for his the quarter grew 13% to $206.6 million versus $182.8 million in the comparable quarter a year ago and $194.1 million in the first quarter of fiscal 2008. Our average weekly revenue during the second quarter was $15.9 million per week compared to $14.1 million per week in the second quarter of last year. Our second quarter included two national holidays in the U.S., Labor Day and the long Thanksgiving weekend.

Now let me discuss revenues geographically. Revenues in the U.S. were up 9% quarter over quarter and were up 4% on a sequential basis. International revenues grew by 27% year over year and 15% sequentially and totaled 27% of total revenues for the quarter, the highest percentage ever. Europe's revenues were up 28% year over year and 18% sequentially while the Asia-Pacific region saw revenues up 12% year over year and 5% sequentially. Total revenues for the Netherlands practice in Q2 were $19.4 million on a U.S. dollar basis of 6% year over year and up sequentially by 18%. UK revenues were up 19% year over year and 6% sequentially. Total revenues internationally were $55.6 million versus 43.8 a year ago and $48.3 million in the first quarter of fiscal 2008.

On a constant currency basis, international revenues would have been lower by about $4.9 million in the quarter using comparable fiscal 2007 conversion rates. On a constant currency basis, international revenue grew year over year by 16%.

Let me now give you some information about the first few weeks of Q3. The first week of the third quarter, despite following the long Thanksgiving weekend, came in at $17.1 million, our highest weekly revenue ever. The second and third weeks' revenue were 17 and $16.8 million, respectively. At that run rate and given the likely impact of the winter holidays this quarter, where we typically lose a little more than one week of revenue, we would anticipate Q3 revenues similar to Q2, excluding the impact of revenue from Domenica. We would anticipate Domenica's revenue contribution to our third quarter to be in the 3 to $4 million range.

Now let me discuss gross margin. Gross margin for the second quarter was 38.5%, a 60 basis point improvement from our first quarter of fiscal 2008 and 120 basis point decrease from the comparable quarter a year ago. The average billing rate for the second quarter was approximately $129 compared to $125 in the first quarter and $120 a year ago. The average pay rate for the second quarter was approximately $66 compared to $64 in the first quarter and $62 a year ago. Our offices are working hard to obtain reasonable bill rate increases to cover the additional cost of associate benefits we discussed in the last call. As is typically the case, gross margins in the U.S. were higher than our international gross margins, which were 36.1% during the quarter. Because of the impact of the holidays, we expect our gross margin percentage to be down sequentially in the third quarter. Historically the impact of the holidays causes more than a point and a half reduction in gross margin in the third quarter.

Now, to headcount. For the second quarter, average associate FTE count was 3234. This compares to 3,110 in the previous quarter and 3,054 in the year ago quarter. Quarter end associate headcount was 3,319 versus 3,195 a year ago. The total headcount on the Company was 4,203 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 $50.3 million or 24.3% of revenue. In last year's second quarter, SG&A was 23% of revenue. SG&A expenses were $42 million in the prior-year second quarter and were $47 million in the first quarter of fiscal 2008. The increase in SG&A cost as a percent of revenue primarily stems from personal costs in our international markets, including our newer offices in China, Germany, and India. We will continue to monitor our hiring and will focus on our greatest growth opportunities.

Depreciation and amortization was $2.1 million for the quarter, up about $300,000 over last year's second quarter as the result of our increased asset base. Interest income decreased by $400,000 to $1.6 million in the second quarter versus $2 million a year ago. Interest income decreased primarily due to the reduction of cash and investments that were returned to shareholders this year. The use of our cash and investment to repurchase our stock as well as anticipated reductions in investment returns in light of the current interest rate environment will reduce interest income for the remainder of fiscal 2008. Our tax rate before the impact of stock compensation was 40%, as expected. Our operating margin, before stock compensation expense for the second quarter was 14.2% compared to 13.6% in the first quarter of fiscal 2008 and 16.8% in the comparable quarter a year ago. Earnings for the quarter before stock compensation were $17.3 million or $0.35 per share versus $18.5 million or $0.36 per share a year ago.

In the second quarter, the non-cash pretax charge for stock compensation was $5.3 million or about $0.08 per share versus $4.7 million or $0.07 per share in the comparable quarter a year ago. As we have discussed previously, the tax treatment of our incentive stock options under FASB Statement 123R 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 income statement as they are exercised and sold, depending on the date the ISO vested. Therefore, we received no income statement benefit for a portion of ISOs exercised in any given period. Consistent with previous quarters in our second quarter we were unable to record the full tax benefit related to ISOs for which we recorded compensation expense of $1.7 million. As a result, our GAAP tax rate was 44.8% for the quarter. On a cash basis, we will get a real 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 $121 million. As previously mentioned, we used $65 million to buy back approximately 2.8 million shares of our common stock. To date, we have utilized $67 million of the $150 million authorized by our Board of Directors in July 2007. Don will address our plans for future capital deployment in his closing remarks.

Receivables at quarter end were $117 million, up by about $7 million from the previous quarter. Days sales outstanding were 51 days, up about three days from the prior quarter, but consistent with the prior year's quarter as revenue ramps up after the summer. Now, let me turn the call over to Don for some final comments.

Thanks, Nate. In summary, during this quarter, the United States experienced a continuing softening in the economy when driven by the credit crisis. Many of the large financial institutions have had economic issues and announced downsizing and layoffs. Yet through all this turmoil, we still grew 13% over the previous year and 6% sequentially. And this quarter also included the Labor Day and Thanksgiving holidays in the United States. During the conference call in July, we announce that we had improved the vacation benefit for our associates in the United States and would start accruing it in the first quarter. We also experienced greater vacation taken during the summer, which demonstrates how much our associates desired this enhanced benefit. And we also indicated that it would take several quarters to adjust our pricing to reflect this added cost, and our client service directors are working hard and are adjusting bill rates at the appropriate time.

We continue to have a balanced approach to building our Company. We invest in the future, achieving the appropriate return for our investors. I believe we have three constituencies critical to our success and these are our employees, our clients, and our investors. Without great employees, we will not have great clients and results. And the quality of our employees is our most critical advantage. We stress compensation plans that align our employees' goals with our shareholders [and instilling in] them a strong sense of teamwork.

We also a have programs to help our employees through difficult times like the hurricanes in 2005 and most recently, the southern California fires. I hope our investors recognize the importance of keeping our great people and supporting our efforts at retention when there is a short-term cost. We remain committed to building a valuable professional services firm of great people. As was mentioned earlier, we have returned $128 million to shareholders this year. It is our intention to continue the practice of returning excess cash to shareholders. We will continue to look at share buyback and we will explore the adoption of a regular dividend. We hope this will be discussed and considered at our next Board of Directors meeting. We need to develop a program to submit to the Board that will include a reasonable and appropriate amount for them to consider.

I'd like to thank Nate for joining us. He's been a very valuable addition to our team. And our plans are to continue to strengthen our management team to enable us to grow outside the United States. We expect to add senior people in IT in international finance to help us manage these important strategies. Around the globe, we are excited about the great people we are adding in China and India and believe they can over time build significant businesses. In Europe, we have opened our first office in Germany and have chosen Frankfurt to start and build our German practice. Over time, we expect to have several offices in Germany, which is the largest economy in Europe. We believe we are doing the right thing in winning the framework for continued growth in the future, but it is up to us to execute the business model. I'm proud of our people, how they have performed in the quarter given the distractions of the stock market, the economy and the change in the CFO. So we'll be glad to answer your questions at this time.

(OPERATOR INSTRUCTIONS). Christina Woo, Morgan Stanley.

Thanks for taking my call. Given the weakness in the macro environment, you even refer to it in your press release and prepared comments. What's your strategy in terms of growing revenues? Are you willing to potentially cut margins in order to grow the top line?

I would say generally we're not willing to cut margins and in fact we're trying to increase our margins slightly to cover the additional vacation expense. So I don't think we've seen a general need to cut margins, and, in fact, at the appropriate time, we've been trying to raise the margins.

Now some of our contracts are a year at a time and we have master agreements, so we can't just arbitrarily raise rates. We have to wait till the appropriate time till a contract is coming up for renewal or the people are being reassigned to get those rates up.

Okay. And if it turns out that we are actually at the beginning stages of a prolonged recession, what's the worst-case scenario in terms of revenue growth?

I would think of it as really a prolonged deep recession. What we've experienced in the last recession is that our revenues flattened out and then our revenues picked back up again as clients bring us in to help us fix the issues that are created when they freeze their hiring and lay people off. So the nature of the work changes and the nature of the work becomes more helping clients just get through the everyday things so that they can do their SEC reporting and their financial statements. Whereas today, we're involved much more in risk management projects and other things that are more additive to a company.

And one more thing, Christina, related to your question on rates and whether to cut rates or not. I think that we're still a pretty good bargain when you look at our competitors at an average billing rate of $129 an hour, and the experience level of our associates that we bring to our clients, it shapes up pretty -- it's a pretty good comparison when you look at some of our other competitors that are over a couple hundred bucks an hour. So I don't think there is really going to be the need to do anything on the rate side aside from what we're doing right now, which is trying to increase the rates.

So I seem to recall that a few years ago some of your competitors were lowering their rates given some of the softness in the environment. So you wouldn't expect to see that this time around?

If they were lowering their rates a few years ago, I don't think we responded to it with lowered rates also. So I don't -- we don't view that as our biggest challenge is being say lowballed by another firm. Because most of our clients are very large companies that have been with us for a proven time period, and they really, I think, appreciate how great our people are. And I was at two major financial institutions last week in New York and both of our clients just raved about our people. So I don't anticipate that will be a big issue for us.

Okay, then what is your biggest challenge?

Our biggest challenge today would be finding the right people to lead some of our offices. So it's more the internal recruiting of great managing directors and certain offices where we've struggled to find the right people. That's probably our biggest challenge.

Okay, thanks so much.

Andrew Steinerman, Bear Stearns.

Good evening, gentlemen. I know you mentioned something about the SG&A lift in the quarter being more international professionals and managers. If it's up $3 million sequentially and you really only opened up one office, is the $3 million raise just the buildout of other offices internationally?

I think that included in that $3 million and included in the international investments are we hired, during the period, new managing directors for Shanghai and Beijing as well, so trying to build out some of the significant offices and opportunities that we have in Asia have certainly contributed to it. Germany, again, we have just -- we moved the headquarters in Germany from Dusseldorf to Frankfurt. That didn't really result in any new headcount there, but we also added an additional person in India.

We did hire a new managing director in Frankfurt.

No, we did. I said aside from Frankfurt.

And if you look at the -- we've hired people for Tokyo. We've hired for [Deguoia]. We've hired people for Singapore. So that's where you see the investment. When we opened an office in Shanghai, which is a city of probably 30 million people and huge, huge economy, we started out with one person and now we're trying to fill in around that managing director and fill in a client service team that's going to help us grow the practice. So we are adding people in these major markets like Beijing and Shanghai, etc.

And I think relative to the SG&A, what you'll see us really focus on I'd say over the next 12 months is probably more so on building out those office opportunities that we have already invested in as opposed to opening a significant amount of more offices. I suppose there's -- we always like to be opportunistic, but I would say that our concentration will really be on building out what we have right now over the next 12 months.

Right. And the last couple of quarters, November quarter, August quarter when we've been underway in that process, SG&A before D&A has been over 24% of revenues. Is that sort of the level of SG&A spend that will continue as a percentage of revenues?

I think that the 24% of revenues would be the right way to think about it.

Okay. And just lastly, when you think about these investments of managing directors in Shanghai, Beijing, etc., how long do you think it takes to get a return on those investments?

Well I think our goal is for some of these new international markets just to try to get them breakeven in 18 months. If we are lucky, we will turn profitable faster depending on how much inbound work we're getting. But our goal is to look for an international office to break even 18 months.

Okay. Thanks for all the color.

I think a good data point on that, too, is we opened Beijing 24 months ago. Beijing has a 30% operating margin today, and that's only 24 months down the road, so they were profitable a lot quicker, so it just depends on the market.

Thank you so much.

Brandt Sakakeeny, Deutsche Bank.

Thanks. Nice quarter, gentlemen. Question for you just on the gross profit margin. Can you talk a little bit about what our expectation should be for the February quarter given on the plus side the ongoing -- the ongoing price increases as you offset the vacations, but then coupled with the fact that arguably you might have a few more vacations next week and the impact that that's going to have, as well as also too the impact of the new acquisition.

I would say, Brandt, and I will let Tony talk more about it, or Nate, but usually the third quarter in normal times is our weakest gross margin quarter because of the Christmas and New Year's holidays and the vacation that is taken, so we would expect that trend to continue, so I would expect that we will have some real gross margins creeping up as we keep improving the bill rates for clients as people become available offset by the additional holiday softness in the vacation.

No, I would agree with that, Don. In talking to a lot of our regional managing directors, we are definitely making progress going out to clients and getting bill rate increases. So that will mitigate to some degree the seasonal effect of what we generally see in Q3 with the Christmas holidays. Relative to our acquisition in Domenica, given its size, it's not going to have a real impact. I would tell you that the margins at Domenica, the gross margins at Domenica, would more closely resemble the margins that we get in our other European offices. However, the net margins are much higher than we get in our other European offices. So I don't think Domenica will have a real impact, but we continue to strive really hard to go after these bill rate increases, and we're certainly hoping that that will be reflected in Q3's results.

Okay. So just to make sure, so sequentially certainly down, but year over year should be flattish. Is that what I'm hearing for February gross margins?

I don't know if you could say year over year it would be flat because in 2007, the third-quarter gross margin was 38.2%. We are at 38.5% in this quarter and generally we see a 1.5 point decline overall, so it's really going to be determined based upon how much we are able to claw back in terms of billing rate increases. But I wouldn't necessarily go as far as saying it's going to be 38.2 like it was last year.

Okay, great. That's helpful. And then, just on the color on the SG&A spend, it sounds like from your commentary that given the currency impact, you've had to invest in hiring those individuals and you actually get negatively hit by the impact of the dollar in terms of the cost side, but you don't necessarily get the revenue impact immediately because those are sort of characterized as investments. Is that a sort of fair way of looking at the SG&A?

That's correct. And our newest office in -- we opened in Italy, our office in Germany, those offices are still losing money till we get to a breakeven.

Right, right, but the dollar actually works against you.

Right. On profitable or with sizable revenues there's a natural offsetting hedge, but in these immature offices or newer offices, you're exactly correct.

Okay, great. And just in terms of the buyback, I'm sorry you said -- how much remaining, 85 million?

We have $83 million remaining in the board authorized buyback.

Great. And where did you end the quarter with quarter-end share count?

$47.3 million.

Great. That was the November 28 number?

Right.

Perfect. Thank you.

Gary Bisbee, Lehman Brothers.

Good afternoon. I guess the first question, can you provide a little bit of color around the actuarial service business you acquired? And I guess I'm wondering how much synergy is there really with the rest of the customer base? And then is this a business that you would likely want to get into in the U.S.? If so, is it something you are going to grow organically or would it likely be something that you want to acquire some assets? Thanks.

Okay, I would say that -- I went and visited and did some due diligence -- we did our financial due diligence and our operations due diligence and then I went over there and actually visited one of their largest clients with them, and where the synergy is, is their largest clients are very large clients of ours in the Dutch insurance and pension areas. And their client that they work for happened to be the same people that we work for. So they like the idea of us integrating this and being able to bring them not only just accounting, finance, risk people but also actuaries. Actuary market is a very tough market to recruit in. It's a very supply constrained. It's not demand constrained. It's supply constrained. And Domenica has very unique processes that they have developed to train new actuaries while they are on the job and getting paid for it. So they can create new actuaries. A lot of times those actuaries end up getting hired after they pass all their tests by our insurance clients, but they do have a methodology and a process to keep their supply coming.

It would be a great service for the U.S., but we don't think there's enough actuaries available on the market for us to build the business around because they are in very high demand and we've tried to recruit actuaries in the past and have not found any in the marketplace really. So if there's any crossover to the U.S., and I don't know enough about it, it might be that after some period of time, we could implement the same process they have in training actuaries and getting them out [of] that client. So I think it is more applicable to the rest of Europe though, so we may be able to export it to France or the UK, etc.

Okay, thanks. What should we expect around amortization expense coming from this deal? Any sense at this point?

Nate?

Yes, I think it's early to tell. Clearly, I think it won't be a huge number, given that we are really purchasing a workforce that becomes part of goodwill. But we are still working on the allocation of the purchase price.

Yes, after any acquisition like this, you have to, per the accounting rules, you have to get a valuation of all of the different intangible assets, the goodwill. That has to be done. That will be done sometime I would say within six to nine months from now.

Okay. And then just last one the acquisition -- is there any major seasonality of the business? Are these people real busy at certain time of the year or is this --

They are pretty busy throughout the year. Again, like Don said, this is a very high demand, low supply business, so they are generally fully utilized throughout the year. So the real synergy to this game is if we can ultimately assist Domenica with some additional recruiters and increase the supply of people doing this type of work.

Okay, thanks. And just one last cleanup question. Do you know offhand what the revenues in the quarter were from the Compliance Solutions acquisition you did last quarter?

A little over $1 million.

Okay, thank you.

Jim Janesky, Stifel Nicolaus.

Thank you. A couple of questions. First, on the U.S. revenue growth, Don, would you say that the market is growing at 9% or do you feel it's growing slower and you are taking share?

I would say in -- the market is kind of fractionalized. So where a lot of our growth has come has been on the East Coast in Tristate, and we are growing to the size of our practice, we're growing very strongly there, and my guess is there, we're taking some market share and we are continuing to get very strong demand from our large clients there. The rest of the country is, the West Coast, we're holding our own; Chicago, we're holding our own; and then we're trying to work hard on building at least the Southern states that are in the oil producing area like Houston and also in Dallas. So it's not an across-the-board demand. So, but the demand that we are getting, it's very strong in Tristate and East Coast.

Okay. And with respect to pricing, when you do approach -- I know -- we can appreciate that you said contracts are sometimes on an annual basis and as you move consultants around. But when you are approaching clients, are you getting any degree of pushback because of some softness in the economy?

I would say that there's pockets, that you're always going to get a little pushback, but when you meet face to face with the client and you go through the reasons for the price increases, they are probably experiencing the same thing in their business just in terms of business, in terms of costs. And again, when they look at the value proposition, they look at what they're getting from our associates, increasing a billing rate that's $125 an hour by 5 or $10 an hour, it's not a huge increase, especially when big four firms average billing rate is somewhere, on a blended basis, it's $220 to $250 an hour. So it looks pretty good when you're comparing it to some of those types of rates.

And the big four are raising their rates quite a bit this year to basically replace some of the Sarbanes-Oxley revenue that's gone down. So they are trying to make up some of that decrease with fairly large rate increases.

Okay. Do you expect further declines? Is Sarbanes-Oxley -- we didn't really talk about it much. But what do you find that clients are doing with the spend there? Is it down year over year?

Oh, yes, I would say Sarbanes-Oxley is now a routine process in most companies. So when we are doing Sarbanes-Oxley, it's repeatable work, but it's repeatable at a different level than when there was a crisis. So the only really large crisis type projects is where a major company let's say has failed Sarbanes-Oxley and has to go in and try to fix a bunch of things and retest everything and really get it down for the next audit cycle. But from our big clients, it's a very routine process and we become part of their routine to get the work done.

And Jim, I would say that the thing that you can see from our business on the RAS side over the last several quarters is as RAS has declined, our other service lines have grown above what our average growth is. So it's redeploying some of the associates that might have worked on RAS projects into the other service lines like accounting and finance and information management.

Sure. Okay. Final question, can you give us cash flow from operations and capital expenditures?

CapEx is approximately a little bit over $3 million. I think it's consistent with what we indicated last call. I think CapEx total for the year is going to be somewhere around $12 million. And cash flow from operations is a little bit over $18 million.

Okay, great. Thank you.

T.C. Robillard, Banc of America Securities.

I'm sorry but I'm still having a really hard time connecting the dots here with respect to the SG&A spend. And I just wanted to follow up on the earlier question. I completely understand the foreign currency headwinds you guys have in new offices that open up internationally. I understand the amount of offices that you are opening up internationally. But when you look at those offices relative to your total office count, it's pretty small, especially if you go back to fiscal '06 when you had a lot more offices opening. Now those offices that you opened back in fiscal '06 should really be hitting stride right now, which should easily be able to absorb new investments. And if you look, your SG&A is accelerating a lot faster than revenues; your return on invested capital is coming down pretty substantially; and I'm trying to figure out where the disconnect is because right now you should be at a sweet spot with some of your international markets that should absorb new office openings or new investment. So can you just kind of help me reconcile those?

I think what -- I think the previous comments that Don made are very accurate. The average length of time that it generally takes a new office to get up to profitability is roughly 18 to 24 months. So in some cases, it's a little bit quicker. In some cases it could be a little bit longer. But take an example of like China, for example. We hire a great new managing director for Shanghai and we have been training that person and paying that person for the last three months in our Tristate office so that when they get over to Shanghai, they're going to hit the ground running. So it's investments in these emerging markets that we think are going to be great markets for us but the expense comes prior to the revenue and if you think of a time period of 18 to 24 months to get to breakeven, all of your investment is hitting your P&L prior to making a profit. So --

And it's not just new offices. It's offices that we've opened where we are adding senior professionals like in the UK where we're trying to build a financial services practice. So in these offices that have high potential, we are adding people during a quarter who aren't creating any revenue yet, and it may take them six months to create revenue. But it's the only way that we are continuing to get growth out of a large marketplace like London or Ireland or some other city where we are already established. But we need to keep bringing people on board to keep the revenue growing.

So are you -- I guess maybe another way to look at it though, it doesn't look like your headcount has been increasing any more rapidly than it has over the last couple of years. So that's where I'm just trying to understand. Are a couple of big international offices where you've put a lot of headcount investment in early because of the opportunity potential and therefore it is a disproportionate impact coming from a couple of offices?

To me, I'm sorry -- it still just is not reconciling with the numbers. You should be at a point now where you are hitting stride with investments from 18 or 24 months ago that should easily be able to absorb new investments and really shouldn't be drawing down your return on invested capital.

Just to give you kind of a comparison, current quarter versus prior-year quarter in terms of headcount, internally, it's gone from 766 to 884 people. So again, that's a fair increase; that's like a 15% increase.

But in your example of talking about our current markets, our current foreign offices that we are just starting to open and establish, a lot of times these are a little bit higher paid individuals that, again, we train upfront and this is prior to revenue. So again, take China -- hired the person three months ago. We're paying them. We're training them. They have not opened that -- they have not really been in that market yet generating revenue. Our other offices, as we mentioned, the other offices that we made investments in 24 months ago, we're pretty pleased with the progress that they have made. But again, you see the potential in these markets, but it takes a certain period of time to get them to breakeven and then ultimately profitability. So.

Okay, and what's the driving the substantial increase in kind of the corporate administrative headcount that you just mentioned?

Most of those people are in the field.

Yes, they are in the field.

The client service directors, recruiting directors, managing directors in the field, including a number of people that we brought in during the summer in Italy. So the majority of that headcount is our internal people who sell the business, recruit the people, manage the processes to take care of clients.

They're all revenue-facing individuals, revenue-facing professionals. We go through a very vigorous process relative to adding any headcount, but where we are typically going to give the additions to is our high-growth potential new markets and our existing markets like in the Northeastern United States, especially up in the Tristate area, they will get allocated the resources before other offices that have not been growing as quickly. So it's not only -- we're not just saying that this SG&A increase relates to foreign offices because there's certainly a component that we have in domestic offices. But it's the foreign offices say that's the biggest concentration this particular quarter.

Okay and then just one last quick one. Have you guys bought any stock since the end of November?

No. We've been in our quiet period. So our internal trading rules don't allow us to.

And when -- do those rules come off as soon as this call is done?

Opens tomorrow.

Okay. Great. Thanks so much, guys.

Mark Marcon, R.W. Baird.

I just wanted to make sure I understood something clearly in terms of the revenue guidance. You essentially said that the revenue should be roughly equal in the third quarter to what it was in the second quarter other than essentially Domenica. Is that correct?

That's correct.

That's correct.

Okay. So this roughly -- if you assume that you are not getting any revenue during the week of Christmas, which obviously you will, but essentially it basically assumes kind of a flat-lining of the weekly revenue run rate?

I think traditionally we have lost about a week and a half of revenue during the holidays and it's during the three weeks -- it's like the week before Christmas, the Christmas week and then the week after are generally impacted to some degree from our relative run rate and then the first full week in January after the holidays tends to return more to normal.

So on those normal weeks, you are assuming that you're going to continue to grow?

That's what our assumption is.

Great. And then what's your -- can you give us a feel for your level of exposure to financial services generally speaking? That's something that just keeps coming up and --

I can give you a good comparison because we did take a look at that this quarter. Our growth in financial services exactly equaled our overall growth, was about 13%. So it certainly plays a big part of our business, but it has been in project areas that many of which are non-discretionable at helping companies with 10Qs, 10Ks, implementing new accounting standards, helping them with their SOX work, those types of projects. So that business remains very strong for us.

How big is that?

How big is what?

Financial Services.

I would say that it's somewhere around 20% or so of our revenues.

And I'm sure you've talked to your managing directors, I mean just given all the headlines that are out there, and the press -- basically the quarterly reports that have come out this week, what are your managing directors hearing from those clients just -- there's obviously layoff announcements that are coming up. So what are they telling you in terms of their usage going forward?

I visited two of our largest financial services clients in New York last week. Two of our largest clients in the Company, not just financial institutions, and both of them have more needs. So while we are there, both of them had more issues that they wanted us to try to help them with.

So when they look at us and they look at what are their alternatives, their alternatives are going to a big four firm. And one of the people I met with is the senior vice president, controller of one of the largest insurance and investment companies in the world, and he's our direct client and he told me that he couldn't get by without our people helping him in all these different areas.

So I think the areas that we're working in right now are very important areas to these companies. They are not discretionary projects. One of the biggest financial institutions that has been in the paper, a lot of our work is around their risk management programs, strengthening them. So those aren't things they are going to cut back on. So I don't think we are hearing that they are going to stop a lot of the work that we're doing.

That's great. And in terms of the SG&A expense on a good forward basis, did you say it's going to trend around 24% or shouldn't it pick up a little bit more sequentially with the addition of Domenica?

You've got the -- you've got Domenica's SG&A expense; you've also got their revenue in your base.

And Domenica is not that large that it's going to affect SG&A too much. Remember our SG&A goes down rapidly when we have rapid growth and then the SG&A slows and goes up as our growth decreases. So we have a plan that we try to stick to as far as we're going to continue to invest in markets. And if you remember, when we had very high growth, our SG&A dropped very rapidly because we didn't try to spend more money. We kept with our investment plan. So I would say we are continuing with our investment plan; we have parameters of where we want to invest and we keep that up.

Great. And last question, in terms of getting the gross margins back on a year-over-year basis, do you think you could do that by the May time period?

That's certainly our goal, Mark. We're hoping that we could even do it a little bit quicker than that. But it's -- we know that we will get them that. It's just a matter of how quickly we can institute all of these bill rate increases with our clients.

Great.

Everybody in the field is focused on this very effort.

Super. Thank you.

Scott Schneeberger, CIBC.

With this recent acquisition, how is the pipeline looking now? It's -- I inferred at the end of last quarter that you only had one or two things you were looking at. So how are we looking and if there are a bunch of things, where geographically and what services?

The pipeline for acquisitions? Is that what you mean?

Yes.

The pipeline for acquisitions, we don't have anything hot on the radar right now. We continually get things to evaluate and we evaluate them and but this one was the one that was -- the one we were working on last quarter, been working on it for about six months probably. So there's nothing right up there on the burner. We had another one that we looked at but we decided not to go forward with.

Okay, thanks. On Domenica, I imagine especially with the supply and demand that you spoke about, that the bill rate is probably pretty high per employee. Could you speak at all to that -- just put a little color around that?

I would say the bill rates are similar to what we're experiencing in Europe. The mix of people is different in that the very experienced actuaries are operating as independent consultants just because that is the business model in the Netherlands. If you are a very experienced person, say 45 years old and older, you operate as your own professional services company.

And the less experienced people, the people that are being trained as actuaries that are working at clients and being billed, their bill rates are quite a bit lower because they don't have all their certifications yet. So it's actually a nice mix of one-third very senior people, two-thirds less senior, but employees.

Now what happens is a lot of those people when they get their certifications turn into the senior people and either take other jobs with one of the big insurance companies or will become their own professional services company.

Thanks very much.

(OPERATOR INSTRUCTIONS). Michel Morin, Merrill Lynch.

Just on the gross margin topic, did you actually provide the U.S. number? I might have missed that.

No, we did not. We gave you an overall number.

Could you provide that please?

No.

Okay.

Well, wait a minute.

The U.S. number was 39.4%.

Okay, great. So pretty good improvement from I think 38.2 last quarter. Okay. Last quarter I think you had also talked about the impact of conversion fees and reimbursable expenses. Can you walk us through the puts and takes (technical difficulty) items on gross margin?

The conversion fees, as we predicted, we thought that the conversion fees would normalize in the second quarter, and they did. Conversion fees in the year-ago quarter were roughly 0.5 percent and they are roughly 0.5 percent in this quarter.

Relative to the expenses, we did have a year-over-year increase in the reimbursable expenses that had an impact on the margin. But, however, as we've described before, the reimbursable expenses are basically a net. They do impact your margins relative to your P&L, they are a net wash.

Okay. And going -- (technical difficulty) vacation policy it was very noticeable increase in the amount of vacation time taken in this quarter. I think last quarter you had said it was a 24% jump.

Yes, I don't -- you are talking about the third quarter with the holidays?

Yes.

So far our indications are that it looks like a traditional pattern of holiday vacation. So --

In the actual second quarter?

No, the second quarter --

-- is flat.

Is flat. So the quarters that we would expect it to really kick in are when people's children are off school because that's -- that's when vacations all get bunched up. And so the summer, there's a huge increase and a huge demand and people want to be with their kids on vacation. The holidays, their kids are off typically around the holidays and our vacation pattern coming up for the holidays seems similar to the previous year.

Right. Okay. And I know it's still pretty early in the game, but have you seen any change in turnover at all or any metric that you can provide that would tell you that you've done the right thing here?

I'm constantly getting letters and e-mails from our associates and I was at the associate meeting last week in New Jersey, the week -- about two weeks before I was at the associate meeting in southern California and they are all very outspoken in thanking us for doing the right thing for them.

Great. And just finally, the revenue growth in the U.S., which came in just under 9% it seems, that's the slowest number in a long time. Is that predominately the economy having an impact or is there something else there like a large project or something that rolled off?

No, I think it's predominately the economy. I don't think -- if anything, our large projects seem to be very strong.

I think like Don mentioned earlier, Michel, that you take a look at a region like Tristate, Tristate is growing significantly in excess of that 9%. In fact, their growth rate was up more towards 20% quarter over quarter. It's just in some of the regions, the growth is a little bit flatter. We're making a lot of nice progress and seeing a lot of progress out of offices like Houston, but again, it's kind of in pockets.

Okay. And just the first three weeks of this quarter, kind of moving in the wrong direction. Is that kind of the beginning of the impact of the vacation time or --?

No, I talked on --

The first week was $17.1 million. The second week was 17.0. The third week, which is what you're referring to, we believe that the significant impact there was the pretty horrible weather throughout the United States last week. At least that's what we hear from the offices. There were a lot of places that were snowed in, iced in, and that prevented associates from getting to their clients in the latter part of the week. So I think that our expectation is that after the holidays, that that trend will revert back to what we saw in the first couple of weeks of the quarter.

Great. That's all I had. Thanks very much.

Brandt Sakakeeny, Deutsche Bank.

Thanks. Actually I'm all set.

Okay. All right. There's no more questions at this time, so I would like to thank everyone, thank all our investors and thank our analysts for your continued support and interest in Resources. And we look forward to our next update at the end of the third quarter. Bye.

Thank you, everyone. That does conclude today's conference. You may now disconnect.