Resources Connection Inc (RGP) 2008 Q3 法說會逐字稿

Good day, everyone. Welcome to the Resources Global Professionals third quarter fiscal 2008 earnings results conference call. This call is being recorded. With us today from the Company are Ms. Kate Duchene, Chief Legal Officer; Mr. Nate Franke, Chief Financial Officer; Mr. Tony Cherbak, Chief Operating Officer; and Mr. Don Murray, Chief Executive Officer. At this time, I would like to turn the conference 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 is our CEO, Don Murray, our CFO, Nate Franke, and our COO, Tony Cherbak. Tony will speak first about the quarter's results, followed by Nate, who will discuss the financial details and then Don will conclude the remarks about the future plans of the Company.

During this call we will be providing you with comments on our results for the third quarter of fiscal 2008. By now, you should have a copy of today's press release. If you need a copy and are unable to access the copy via our website, please call Patricia Markes, she can be reached at (714) 430-6314 and she'll be happy to fax a copy to you.

Before turning the call to Tony, 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 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 Tony Cherbak, our Executive Vice President of Operations, to give an overview of the third quarter.

Thanks, Kate. Good afternoon, and welcome to the Resources third quarter conference call, where we will discuss the results of our operations and various other aspects of our business. Total revenues for the third quarter were 202.8 million, up 8% over the comparable quarter a year ago, and down slightly on a sequential basis. As we, as we have previously noted at a public investor conference on February 12, 2008, revenue levels during the Christmas and New Year's holidays were below our expectations and the first few weeks of January did not bounce back as quickly as we had hoped. The weekly revenue during the last five weeks of the quarter excluding Domenica ranged between 15.7 and $17.1 million per week. The volatility in the weekly revenue over the last several weeks of the quarter was primarily attributable to the timing of certain holidays in the U.S. and Internationally. Domenica, which was acquired December 18, 2007 contributed approximately $4.2 million of revenue during the quarter. Over the course of the quarter, 19 offices hit new weekly revenue highs, 9 Internationally and 10 Domestically. Nate will provide additional detail of recent revenue trends in his review of our financial information later in the call.

Now let me update you on our stock repurchase program. During our third quarter, we purchased approximately 744,000 shares of our common stock on the open market for approximately $13.7 million, or $18.39 per share. Cumulatively, we have purchased approximately 3,658,000 shares since the beginning of our fiscal year and have approximately $68.9 million remaining on our current board-authorized share repurchase program. We expect that we will continue to buy back our shares during the remainder of fiscal 2008. Including the special dividend that we paid in the first quarter, we have returned approximately $141.7 million to our shareholders over the first nine months of fiscal 2008.

Moving on to office openings for the quarter, in the third quarter we opened a new office in Richmond, Virginia. Richmond is approximately 100 miles south of Washington, DC and serves as the headquarters for 17 Fortune 1000 companies, including Dominion Resources, Genworth Financial and Circuit City. Other companies with significant back office presence in Richmond include Capital One, Wachovia, Philip Morris and McKesson. Just subsequent to the end of our third quarter, we closed an office in Grand Rapids, Michigan. The cost of closing this office was not significant.

I would now like to spend a few moments on our geographic footprint and the contribution our International offices are making to our operations. Having offices in key International cities is critical to our growth strategy of serving large multinational companies. Our goal is to serve our clients wherever they operate around the world. In our last call, we discussed our investments in new offices in certain International markets and how these investments were significant driver of the increase in our SG&A expenses. We thought it would be useful to share some highlights relating to the progress of the International offices we have opened over the last several years. In fiscal 2006, we opened six International offices. As of the end of our third quarter of fiscal 2008, most of these offices had been open for at least 24 months. Aggregate revenues for these six offices totaled 2.1 million in 2006, 15.1 million in 2007, and are on a $25 million run rate for fiscal 2008. The average contribution margin for these six offices is 8.3% at the end of our third quarter. Our goal with every new office is to achieve positive contribution as soon as possible. Our break-even point generally falls between 18 to 24 months from the date of opening. We then look to increase the office's contribution margin from that point through revenue growth in the leveraging of expenses.

Let's now contrast this group of offices with those that have been opened between 36 and 48 months. In fiscal 2004 and 2005, we opened a total of three International offices. Aggregate revenues for these three offices are on a $25 million run rate for fiscal 2008, with an average contribution margin of 18.7% at the end of our third quarter of fiscal 2008. As you can see from these offices, which are 12 to 24 months past the typical break-even period, a critical mass of revenue is being achieved to absorb their investment costs and return a reasonable contribution margin.

We are currently taking a more cautious approach to additional office openings in light of the current economic conditions and in an effort to improve SG&A leverage. We currently have no formal plans to open new offices in the near-term. That said, we will continue to be opportunistic in key areas of interest, such as China, Germany and Switzerland, as we continue to focus on the long-term growth objectives of the Company.

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 third quarter, on a run rate basis, we have served 8% more clients at this level at the end of the third quarter a year ago. Revenues from our top 50 clients represented 33% of total revenues for the quarter, while 50% of our revenues came from 124 clients. This is consistent with our past practice and validates our strategy to target large companies with whom we can develop sustainable, repeatable client relationships. Our largest client during the third quarter was just over 2% of revenues.

Client continuity continues to be solid. Through our third quarter of fiscal 2008, 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 third quarter of fiscal 2008, we have served 8% more clients than at the same time last year. Through the first nine months of fiscal 2008, all of our top 50 clients have used more than one service line and 86% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our client's organizations.

A word about service lines. Revenue growth in our non-RAS service lines totaled 16% quarter-over-quarter. RAS accounted for approximately 13% of total revenues in the third quarter of fiscal 2008 compared to 19% a year ago and 16% during the second quarter of fiscal 2008. RAS declined approximately 18% sequentially as the majority of our calendar year in-clients SOX work was completed at the end of the second quarter.

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

Thanks, Tony. Revenues for the quarter grew 8% to $202.8 million versus $187.5 million in the comparable quarter a year ago, but decreased 2% from $206.6 million in the second quarter of fiscal 2008. Our third quarter included several holidays in the U.S. and Internationally, including Christmas and New Year's, which fell in the middle of the week, in addition to certain other holidays in the last part of the quarter. We believe we lost approximately 1 1/2 weeks of revenue during the quarter due to these holidays. Additionally, as Tony previously discussed, our weekly revenues during the last five weeks of the quarter were inconsistent week to week.

Now, let me discuss revenues geographically. Revenues in the U.S. were at 4% quarter-over-quarter and were down 3% on a sequential basis. Total revenues Internationally were $55.8 million versus $45.4 million a year ago and $55.6 million in the second quarter of fiscal 2008, up 23% year-over-year and flat sequentially. International revenue totaled 28% of total revenues for the quarter versus 27% last quarter. Europe's revenues were up 22% quarter-over-quarter and 1% sequentially, while the Asia-Pacific region saw revenues up 12% quarter-over-quarter and down 5% sequentially. Total revenues for the Netherlands practice in Q3 excluding Domenica were 18.4 million, up 5% quarter-over-quarter and down sequentially by 5%. UK revenues were up 6% quarter-over-quarter and down sequentially 16%. On a constant currency basis, international revenues would have been lower by about $4 million in the quarter, using the comparable fiscal 2007 conversion rates. On a constant currency basis and excluding Dominica's revenue in the quarter, International revenue grew quarter-over-quarter by 4%.

Now, let me give you some information about the first few weeks of our fourth quarter. Total weekly revenue for the first three weeks of the fourth quarter came in at 17.3 million, 16.9, and 17.2 million respectively. Using the average run rate for the first three weeks of the quarter and given the fact that our fourth quarter comprises 14 weeks, we would anticipate Q4 revenues to approximate 226 to $229 million. This estimate anticipates that we will lose three to four days of revenue as a result of certain Domestic and International holidays during the fourth quarter. At the midpoint of this range, fiscal 2008 revenue would come in at about 831 million, representing annual growth of about 13%.

Now let me discuss gross margins. Gross margin for the third quarter was 37.3%, 120 basis point decrease from our second quarter of fiscal 2008 and a 90 basis point decrease from the comparable quarter a year ago. Historically the impact of the holidays has caused more than 150 basis point reduction in gross margin in the third quarter. The average billing rate for the third quarter was approximately $134 compared to $129 in the second quarter and $123 a year ago. The average pay rate for the third quarter was approximately $69 compared to $66 in the second quarter and $63 a year ago. We continue to make progress in passing reasonable bill rate increases to our clients and expect to continue to do so over the upcoming quarters. As is typically the case, gross margin in the U.S. of 38.1% was higher than our International gross margin, which was 34.9% during the quarter.

Now to head count, for the third quarter, average associate FTE count was 3183, this compares to 3234 in the previous quarter and 3119 in the year-ago quarter. Quarter-end associate head count was 3272 versus 3142 a year ago. The total head count of the Company was 4159 at quarter-end.

Now to the other components of our third quarter financial results. Selling, general and administrative expenses before stock compensation for the third quarter were 51.5 million, or 25.4% of revenue. And last year's third quarter SG&A was 23.2% of revenue. SG&A expenses were 43.6 million in the prior year third quarter and were 50.3 million in the second quarter of fiscal 2008. The sequential increase in SG&A cost stems primarily from the combination of the resetting of payroll taxes on January 1 and the in conclusion of Domenica's SG&A costs in our results for the third quarter.

As we have discussed in the past, approximately two-thirds of our SG&A is comprised of people costs. The majority of -- the majority of which work in a revenue-producing capacity, directly serving our clients throughout the world. We have invested in highly talented professionals as part of the buildout of our geographic footprint, which allows us to serve our multinational clients. Some of our recent significant new business opportunities validate this strategy. These investments have been the primary reasons for the increase in our SG&A costs over the past few quarters. That said, looking forward to the balance of the year, we are committed to containing our SG&A spend. Our current projections for aggregate SG&A, including stock compensation would suggest fourth quarter expense leverage will improve by at least 100 basis points, when compared to our third quarter. Remember; however, that our fourth quarter of this fiscal year contains 14 weeks.

Depreciation and amortization was 2.4 million for the quarter, up about 600,000 over last year's third quarter, as a result of our increased asset base. For our fourth quarter and beyond, we expect amortization expense to increase approximately 3 to $400,000 per quarter, resulting from the Domenica acquisition. Interest income decreased by 1.4 million to 1 million in the third quarter versus 2.4 million a year ago. Interest income decreased primarily due to a lower cash -- lower balance of cash available for investment after the dividend payment, stock repurchases, and the Domenica acquisition. The use of our cash and investments 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 expense was approximately 40.4%. Our operating, or cash flow margin, which we define as EBITDA before stock compensation expense, was 11.9% in the third quarter compared to 14.2% in the second quarter of fiscal 2008 and 14.9% in the comparable quarter a year ago. Earnings for the quarter before stock compensation were 13.5 million, or $0.29 per share versus 17.1 million, or $0.33 per share a year ago.

In the third quarter, the non-cash pretax charge for stock compensation was 6.1 million, or about $0.10 per share versus 5 million, or $0.07 per share in the comparable quarter a year ago. As we have previously discussed, the tax treatment of our incentive stock options under FASB 123R will likely continue to cause 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 ISOs or exercise in sold, depending on the date the ISO vested; therefore, we receive no income statement benefit for a portion of ISOs exercised in any given period. During the third quarter, we experienced a decline in the number of ISOs exercised, thereby further decreasing the tax benefit related to ISOs for which we recorded compensation expense of 1.8 million. As a result, our GAAP tax rate was 47.7% for the quarter versus 44.2% in the comparable quarter a year ago. 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 100 million. As previously mentioned, we used 13.7 million to buy back approximately 744,000 shares of our common stock. To date, we have utilized 81.1 million of the 150 million authorized by our Board of Directors in July, 2007. Don will address our current thoughts and capital deployment in his closing remarks.

Receivables at quarter end were 120 million, up by about 3.5 million from the previous quarter. Day sales outstanding were approximately 52 days, consistent with the prior year's comparable quarter and one day higher than the second quarter of fiscal 2008.

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

Thank you, Nate. During our third quarter, we continued to see (inaudible - background noise) ) over the worlds (inaudible) markets. In Europe (inaudible) trader perpetrated one of the largest (inaudible - background noise) financial -- in history, making [$70 million] of unauthorized derivatives trades that ended up costing his employer over 7 billion to our line.

As further evidence of the financial difficulties facing our capital markets, just recently one of the most vulnerable investment banks on Wall Street may be swallowed up by a rival at a mere fraction of its market cap just prior. These are truly unique times. But in spite of these unprecedented events, our people have done what they do best, which is serving the needs of our clients. Although the economy has been difficult, to say the least, we still grew our revenues by 8% during the third quarter and achieved an operating margin of almost 12%.

Our ability to operate profitably at a growth rate much lower than our historical average is a testament to our business model in which approximately 70% of our cash costs are variable. Our office leaders have been working hard to negotiate reasonable billing rate increases with our clients and we have seen some recent improvement in our overall gross margins. We are also committed to controlling our SG&A costs and taking appropriate steps to do so. Although, our approximately 12% operating margin is respectable, given the current economic environment and our investments in the long-term growth of the Company, we're still not satisfied and we're committed to improvement in the coming quarters.

As we mentioned in the second quarter call, we are committed to returning capital to our shareholders and we continue to evaluate the (inaudible - background noise) share buyback and regular dividend, or combination of the two. In the near-term, given the recent trading range of our shares, we intend to continue buying our shares on the open market, as we believe it is the most accretive use of our cash. One of the advantages of our business model that we generate strong cash flows from operations, which gives us many options. We will continue to keep you update order our thoughts around capital deployment.

After the economic events of the last several months, we are hoping for more stability in the global markets throughout the balance of our fiscal year. However, regardless of what occurs, our people will be hard at work, executing our business model for bringing the best professional service possible to our clients. We are extremely proud of the determination and passion with which our people approach their work each day and I am confident that these qualities will result in the further growth of our business.

Now, we would be happy to answer your questions.

Thank you. (OPERATOR INSTRUCTIONS). Our first question comes from Jim Janesky with Stifel Nicolaus.

Hi, good afternoon. Couple of questions. Don or --

Hello, we can't here you.

Can you hear me now?

Now we can, yes.

Okay. Sorry about that. I'm on a cell phone. Based on the recent trends that you have in revenues, do you think that you're taking market share or that on the margin, the economy's getting a bit better?

I don't see the economy getting better. We are getting some larger projects as some of our larger clients are trying to control costs on projects that have to get done. So we are taking some of those projects away from the big four type of providers, and that's been one of the drivers of our growth.

Okay, and on the gross margin -- on the gross margin comment that you made, do you expect an improvement from the third fiscal quarter, or how does that compare to the fourth quarter of 2007?

Well, bear in mind that in the past, our third quarter has generally been around 150 basis points behind our second quarter due to the holidays. We would definitely expect improvement over that in the fourth quarter.

Oh, that's--

We are making good progress. We are making some good progress on the gross margin, so we would expect them to come back to something more akin to the gross margin that we achieved in the second quarter and maybe do slightly better than that.

Okay.

Anything further, Mr. Janesky?

No, that will be fine, thanks.

Next we'll hear from Andrew Steinerman with Bear Stearns.

Can I ask about the bill rate achievements that you've been able to make? Do you feel like when you've had that conversation with clients to get to the bill rates you discussed, $134 an hour, up from 129, do you think that had any revenue trade-off? Meaning if you stayed at the previous bill rate, do you feel like you would have had more volume?

Andrew, we are not hearing that from, from the field necessarily. I mean I think there is still an amount of rate sensitivity out there, but I don't think we're hearing that we're giving hours up.

Okay, and you talked about SG&A leverage in the fourth quarter. Could you repeat what you said, and give us the drivers. Is it simply that you're not opening up any more offices and that's what's going to drive SG&A leverage in the fourth quarter, or are there some things in the expense base that you're cutting back on?

Andrew, what I had said was that we believe based on our current projections that our aggregate SG&A including stock comp, that the expense leverage would improve by at least 100 basis points. When we look at that, I think it's going to come from, from a combination of obviously leverage from the higher revenue base for, with regard to the growth, and also expense reductions.

Right, that's what I was asking. Where do you see expense reductions?

Yes, we--

We've cut out unnecessary meetings, reduced the number of conferences our people attend. We've tried to reduce unnecessary travel, especially Internationally, and those are the types of things we're doing to reinforce, yet we should have stronger expense control. And the second thing is we have, as Tony mentioned, slowed down the opening of new offices and focusing on getting the the critical mass up in China and Germany.

And I think one final thing, an we've also absorbed some of the normal attrition that we might have into our ongoing operations. We're trying not to replace nonessential positions and just reallocate those job responsibilities amongst the remainder of our staff.

That sounds very reasonable. Thank you so much.

And our next question will come from Scott Schneeberger with Oppenheimer.

Thank you. The -- I'm sorry. The share repurchase in the quarter, a little light relative to what you've done and in the fiscal first half, sounds like you're going to ramp that up again in the fourth quarter. But just any comments about why you slowed a little bit in the quarter? Was it just timing within the quarter of what you were seeing?

Yes, because we have a window that we impose on ourselves as to when we can buy stock and that window was also affected by the holiday season this year, too. So the number of days probably available weren't as many. That was probably the primary reason. And also our stock was acting so volatile, we decide we better take a breather and just see what settles.

Yes, the other thing, too, Scott, we did spend $65 million in the second quarter, so we made a pretty big move in the second quarter and we are committed to continuing to return capital to shareholders and we'll take a hard look at the buyback program in fourth quarter.

Sure, thanks. That makes sense. Just a couple others, more fundamental. The -- with all the volatility, with the credit crisis, do you see anything new emerging as, I mean maybe nothing as large as Sarbanes-Oxley-oriented thing, but are you seeing any new type of business emerging in the last few weeks, months, that looks like it could be a big stream of revenue for you going forward?

Well, on a short-term basis, there's a number of initiatives, especially in Europe, to do reviews of risk and some of the large financial houses there, so, again, an opportunity to propose on that and hopefully be part of some of those operations. We just had an SEC and regulatory conference for, with that at USC for Board of Director members and the SEC kept talking about the implementation of IFRS and how that's progressing. IFRS, as that moves along, should also provide impetus for more work that's going to be required work and not something that's discretionary. So those are the two probably biggest, I think movements that we see that could affect us. And one shorter-term, one longer-term.

And another area that we anticipated based upon some of these large issues in Europe, as well as in the United States related to the credit crisis is generally whenever we have these type of events, regulation tends to follow that. And that's being played out a little bit in the press these last couple of days. There was an article in the "Wall Street Journal" yesterday that talked about possibly more robust regulatory environment as a result of some of these events. So that will help us in the long-term as we try to help our clients navigate whatever the new regulations might be.

Okay, thanks. That's helpful. The -- specifically within the financial services sector and banking sector, are you, I guess we could say there's consolidation occurring. Is that hurting you, or is-- is the increased risk issues helping you on a net basis? I guess if you could address that domestically and internationally. Thanks.

Yes, I would say that as far as financial services go, I view that we're holding our own. Our large financial services clients are still doing a lot of business with us, still very strong. There's nothing as positive as a robust economy to help our business, but in the face of the problems today, I would say we are getting involved in risk areas, risk assessments, those are areas that these companies view as critical. If there's consolidation going on, we should get work out of that consolidation, as number one, you have turnover inside the companies, and two, there's going to be a melding of risk review programs, et cetera. So hopefully that will help us also.

Thanks, one more, if I could sneak it in. On your hiring plans, we know you're slowing down new office growth. You've mentioned padding out and in China, Germany, Switzerland. What should we see domestically in a broad for your FTEs over the near-term? Thanks.

Well, our FTEs on the associate side, the more growth we get, the better, because they are all doable. So they are going to grow in proportion to how much of our demand in hours grows. So that type of growth is very positive for us. So the more growth we get, the better the revenue is. On the other side, in the domestic and international internal side, we're trying to hold that as flat as we can and not make unnecessary hires.

Okay, thanks very much.

Our next question comes from TC Robillard with Bank of America.

Great, thank you. Good afternoon, guys. I appreciate the granularity in the examples you gave on the international side in terms of taking a look at the revenue ramps for your businesses. I'm just trying to get a sense, and maybe I'm being overly simplistic here, but should we expect to see your average contribution margin as offices that have been open for 24 months move to the next year being open for 36 months, to see a 1000-basis point improvement in the average contribution margin? I mean I know you're giving two different geographic regions and one was an aggregate of six offices versus three. But it seems -- if I'm reading between the lines correctly, you really should start to see a very dramatic acceleration as you get into offices being opened for three years or so. Is that fair?

Well, I think, what we're trying to portray in the example that we gave you is that, again, our break-even point takes us somewhere between 18 to 24 months for new offices. And what we were trying to display is that at that 24-month mark you should be pretty close to break-even if you haven't crossed the threshold of achieving a positive contribution margin. Then yes, on a go-froward basis when get out 36/38 months and sometimes it's going take a little bit longer, you should start getting a critical mass of revenue that allows you more easily to absorb the investments that you have made in the business. So you should see a nice ramp-up and that ramp-up over a period of maybe three, four, five years past the break-even date, should be headed towards what our goals are for operating margins, which are in excess of 20% in our International offices and in excess of 25% for our Domestic offices.

Okay, and considering how active you're managing on the cost side and you're looking to really kind of leverage offices that have already been open, how should we be thinking about the operating margin over the next several quarters as it progresses? Can we see you get back over into the double-digit area with reasonable timeframe, i.e..., two or three quarters, or do you think that there's a little bit more, a little longer tail for that as you need to get some of those international offices a bit more mature?

I think, I think it's going to be a bit of a mix. I mean we are optimistic that we will see continuing improvement in that, in that operating margin. And as Tony pointed out, we do have a number of offices that are getting to a very nice point in their maturity. We still have a number of younger ones that have a ways to go. And then obviously the overall economy and as Don pointed out, we will grow much more robustly in a good economy. But I think we should see a steady improvement in that operating margin in the coming quarters.

Okay, and then just a couple quick housekeeping items. Nate, can you tell us how much of fourth quarter guidance is coming from Domenica, and then can you give us cash from ops in the quarter and CapEx?

Yes, the, the CapEx was right around 3 million and we would anticipate a continuation of that run rate. Domenica, as Tony commented, yielded about 4.2 million in revenue for the ten weeks that they were in the quarter, so I think you can project a pretty similar run rate, again, with accounting for the additional weeks in the fourth quarter. And then the cash flow from operations was about 10 million.

Okay, great. Thanks so much.

Our next question will come from Mark Marcon with RW Baird.

Good afternoon. I was wondering, is there some seasonality that you would expect to slow down revenue in the back half of the quarter? It seems like the average weekly run rate that you're projecting for the remaining 11 weeks of the quarter are significantly less than what occurred during the first three weeks of the quarter.

You're talking about, you're talking about our fourth quarter?

Right.

Yes, it's -- the fourth quarter, it contains 14 weeks, but in this, in this fiscal fourth quarter, because of the way that our year end falls, it will include the Memorial Day holidays. So -- we've also got -- we will also have in certain of our International offices, around Easter time, there's a couple of days that are national holidays within the, within Europe and Asia. So that's, that's the hedge in revenues, Mark.

Okay, but that sounds like maybe a day in the U.S. and a couple of days Internationally, no?

Well, Memorial Day's normally more than a day, because people typically take off around Memorial Day to extend it into a vacation. Europe, I think the Netherlands has three holidays in April. A number of offices around the world, we see take off Friday and Monday around Easter. So that's the type of impact we get from holidays. The seasonality I would say comes into effect usually for us in July, where is where we see the most vacation time and sometimes it carries over into August, first weeks of August, that really seasonality comes into effect in reducing revenues.

Okay, and then it looks like, if we look at the gross margins, you made some good progress in terms of closing the gap relative to a year ago in this quarter. Would you not anticipate continued progress along that front, and when do you think the gross margins would, would be even with the, with kind of the year-ago levels? And do you think it can get back to 40%?

Well, our goal is to work towards, and getting back to that 40%. I think it's going to take some time to do that, but that is clearly our goal and we continue to try to progress on these rate increases. But I don't think that will happen, again, in one or two quarters. I think it's going to be a progression over time.

Do you think it might be, given the economic circumstances, more like a six-quarter, or five-quarter kind of timeframe?

Yes, I think if you probably looked out over, say, five quarters, that wouldn't be unreasonable. Again depending on the economic climate, but we are -- as we pointed out, we are seeing some progress.

Right.

And that 40% gross margin target is what we can manage internally. It doesn't include the reimbursable expenses, since we never can really predict what they are going to be. It is pure gross margin.

Great. And then can you talk a little bit about Internationally if I heard you correctly, constant currency ex Domenica, you had 4% year-over-year growth. Is that primarily just because of the decline in the Netherlands, or were there other areas that, where you saw some softening?

Well, I think, we mentioned also the UK, but I would, those -- for the most part with the exception of the UK, those sequential declines were not dissimilar to a year ago, and mainly due to the, again, the holiday factor. There have always been somewhat sequential declines in Europe for that quarter.

Is that -- or because of the holidays.

So the primary reason is because of the holidays in terms of the year-over-year--

That's our sense. I think in the UK, we've commented that, that we do feel there's some economic head winds there as well, but there's nothing that we would really point our finger at.

Okay, and then the average number of associates for the quarter end associates, that was down sequentially. How should we think about that? Has that picked back up here in the last three weeks?

That's really more a function of the total hours for the quarter, and because the total hours for the quarter were impacted by the Christmas and New Year's holidays, they would -- you would anticipate that that would be down just a little bit. So the -- if you look at just purely the FTEs going into the fourth quarter, we would anticipate a pickup.

Okay, great. And then what -- I missed it. You mentioned D&A is going to come down a little bit in the next quarter.

No, I'm sorry. It's -- what we had said is it will increase approximately 3 to 400,000 per quarter once -- and that really results from the Domenica acquisition and we are in the process of having that purchase price allocation finalized, where you have to set up the intangible assets once they are valued, and so that was just, it's our estimate of the impact of the purchase accounting. Yes, portion of those intangibles, will be amortizable intangibles apart from good will. That's where the 3 to $400,000 increase is coming from.

Great, thank you.

Our next question comes from Gary Bisbee with Lehman Brothers.

Hi, guys, good afternoon. So you are talking about the 14 weeks in the fourth quarter. Is it right to assume that that was 13 weeks last year?

That's correct, because it's all a function of where the year, where our year end falls in any given year, can be 52 or 53 weeks and about every third or fourth year, it's 53 weeks and that's why we've got the 14 weeks in the fourth quarter.

Okay.

What we will do in the fourth quarter to provide an apples to apples comparison is probably talk about revenues in terms of average weekly revenue and couch our growth in that manner.

Okay. So if I try to make somewhat of an adjustment for the extra week and back out the revenue for the Domenica acquisition, it seems like, it seems like the sort of internal normalized growth you're looking for is maybe 3, 3.5%, year-over-year growth. Am I thinking about that in the right ball park? I guess that's somewhat of a continued slowdown sequentially. I guess I just wanted to -- if that is the right way to think about it, probe what that is. Is that largely your sense that the slowing economy -- you referenced the UK but also the U.S. is starting to impact the business?

Well, I think what you have to remember is that forecast of revenue is really just a mathematical computation of the first three weeks of the quarter.

We don't really forecast revenue publicly, so I think what we have already done is given you the mathematical computation of saying this is what we're averaging, so if we average that for the quarter, this is what our revenue would be.

Okay. Then let me ask you another question, then. It seems like what that number would imply is slower year-over-year growth, and I guess also curious that the run rate the first couple of weeks of the quarter seemed to be a bit higher than the run rate numbers you gave for the last couple of weeks of this quarter you're reporting today. Is there some seasonal factor there, or have things gotten a little better, or how would you explain that?

The run rate that we gave you for the fourth quarter, for the first three weeks of the fourth quarter contains Domenica and if you recall from our comments during our prepared remarks, the last couple of weeks of this quarter, we couched those as excluding Domenica.

Got you, okay. That makes sense, then. The, I guess can you give -- I missed two numbers, the growth year-over-year in Europe and Asia-Pacific revenue. Do you have that?

Sure. The total International revenues were up 23% year-over-year and flat sequentially. Europe was up 22% quarter-over-quarter and 1% sequentially. Asia-Pacific was up 12% quarter-over-quarter and down 5% sequentially.

And anything in particular going on, going on in Asia? That seems to be somewhat slower growth than you've had.

[Buda] birthday, Christmas holidays, also in Asia celebrate (inaudible)-- it can take off anywhere from two days to a week in various offices. But that's seasonal.

Okay, yes. And one last question, a quarter ago, you were talking about having had to do a bunch of hires of sort of senior level folks to run offices or to expand the growth of offices in Germany and China and a bunch of places. How are those people doing? Are there any other sort of high level office level or regional people you need to recruit, or are things in pretty good shape at the moment from that perspective? Thanks.

I would say we've done most of the higher level hiring that we had set out to do. There's one or two offices where we're still looking for managing directors. Those tend to be in the United States. There's one in Europe. They are not large offices, but we are still looking for probably, anywhere from three to five managing directors for offices that are up and running right now.

Okay, thank you.

(OPERATOR INSTRUCTIONS) Next we'll hear from Michel Morin with Merrill Lynch.

Good afternoon, guys. First question is given that equity is a significant component of compensation for the MDs, have you had any trouble at retaining any of your senior personnel?

No, we haven't had any trouble retaining them, though we've had I would say a morale issue because of the, more because we didn't get a reload in the stock option plan, that we've had to explain to them that we're going to work hard this year in doing that. The stock price, I think it's a concern to all of our people that have their stock options that are under water, but the goal is to get everybody working hard to bring the stock price back up.

So part of that is under our control, which is to work hard and get the, get the matrix's back to where we want them to be and the stock price will take care of it's self. Part of that is to do a better job with the investors so they understand how important the stock compensation piece is to our employees. Given that the stock option expense is not a cash expense. So I would say it's been a morale issue and probably a morale issue because of the perception that they feel the investors have of the Company and therefore them.

All right, and then you mentioned that there was an office closing in Grand Rapids towards the end of the quarter. What was the rationale there and should we anticipate that maybe we might see a few additional closings in the quarters ahead?

I would not anticipate additional closings, although we're always evaluating office performance. I would say with Grand Rapids, when we looked at the operations there, it was a relatively small operation. We felt that we could absorb Grand Rapids into our Chicago offices and that taking some of the costs out of the structure would be appropriate based upon the revenue payback that we were getting. So I wouldn't read anything more into that being the precursor for additional office closings.

We're getting quite a bit of growth from our Detroit practice and really wanted to reallocate our resources where the growth was.

Okay, and then, Tony, I think you mentioned that in terms of non-billable head count, whenever some people are leaving, they are not initially being replaced. Should we anticipate that maybe the non-billable head count might decline in the fourth quarter and as we look ahead?

Again, I don't know that I would necessarily come to that conclusion as well, because as Don mentioned, there are a few MDs that we are still looking for and we will continue to always look to see if we can get the best talent into some of our areas where those positions are open at this point in time. But we are very much committed to controlling the SG&A costs and we will take whatever actions we can to continue that trend in the fourth quarter.

We're not going to do what I would say bad business decisions to keep the G&A level. We need to continue to invest in really good people in Shanghai, to build that practice, because as Tony illustrated these offices that we just opened, they are going to be the growth in 36, 48 months, 60 months. So we need to fill in some of the roles that we have in some of the existing new, larger markets, where we just have a small presence, like in Germany and like in China.

Great, and then just finally, would you happen to have the end of period share counts?

It's about 45.6 million.

All right. Thank you very much.

I'm sorry. 46.5.

Okay, thanks.

(OPERATOR INSTRUCTIONS) We'll hear from Mark Marcon with Robert W. Baird.

You mentioned there are approximately 19 offices that are hitting record levels, which sounds terrific. Can you talk a little bit about are there any other offices maybe that you're not going to close like Grand Rapids, but what percentage of the offices are performing slightly below plan or where you think there needs to be some additional work to get it up to speed?

I can give you kind of a good illustration on that, Mark. Number one, if you just look at our domestic offices for a moment, we only have two domestic offices and they are the ones that we opened in the second quarter and the third quarter that do not have a positive profit contribution. All of the other domestic U.S. offices have positive profit contribution. That said, we're always looking to do whatever we can to enhance the profit contribution. We want everybody to be up around 25%, between 25 and 30% in our domestic offices. So we are making money on those investments. It's just a matter of magnitude between the different pockets.

And if you went across all three regions of the U.S., again, as we mentioned, I believe it was 10 offices domestically hit new highs. In every region, we've got pockets in which we've got growth that's outpacing the Company average and we have some offices that are maybe a little bit more flattish and then I think we've already kind of discussed what's happening in Europe and Asia. So that's kind of how I would frame it.

So it's only two that aren't contributing positively.

That's, that's correct, but they are brand-new offices. Only been -- one open this quarter and one opened last quarter.

Great. And what's your sense in terms for pricing for some of the larger projects? Are you running into folks from Protiviti or Jefferson Wells to have a bench model and being a little more aggressive, or how should we think about that?

As far as losing to one of those two firms because of price, I'm only aware of one large project and that was actually in Europe. There is price sensitivity and we've seen price concessions made by the big four, by their internal audit groups to get work, so there's -- in this type of environment, there's always going to be price sensitivity. A lot of times, the price sensitivity comes not even from a competitor, but because of a procurement initiative to bring down all costs, et cetera, and so they will come back to us and say well, you provided X millions of dollars of services. We want a 5% or 10% hair cut on that for next year. So that's going on constantly, every day. So that's probably the biggest price sensitivity, not as much as from the competitors you mentioned.

It sounds like you've been, I mean based on the recent bill rate trends that you are able to more than offset that.

Yes, I mean we are offsetting it and part of it is because as we do higher level work inside of a company, it's easier to get stronger, stronger rates for them because they are comparing us to a big four or a major consulting firm. If we're lower down on the food chain and we got compared more to some of the staffing level firms you mentioned then the rates are not as easy.

Thank you.

And we have no further questions in the queue. I would like to turn the conference back to our speakers for additional or closing remarks.

I would just like to thank everybody for their continued support and interest in Resources and we look forward to our next update after the end of our fourth quarter and year end for fiscal 2008. Thank you.

That does conclude today's conference. We thank you for your participation. Have a great day.