Resources Connection Inc (RGP) 2009 Q2 法說會逐字稿

Good day, and welcome, everyone, to the Resources Global Professionals second quarter fiscal year 2009 earnings results conference call. Today's call is being recorded.

At this time, I would like to turn the call over to Ms. Kate Duchene. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for participating today. During this call we will be providing you with comments on our results for the second quarter of fiscal year 2009. By now you should have a copy of today's press release. If you need a copy, and are unable to access a copy via our website, please call Patricia [Marques] at 714-430-6314, and she will be happy to fax a copy to you.

Before introducing Tom Christopoul, our CEO, 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, 2008, 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 Tom, our Chief Executive Officer.

Thanks, Kate. Good afternoon everyone, and welcome to the Resources Global second quarter conference call. Joining me today here in Irvine are, Don Murray, our Executive Chairman, and our senior leadership team of Nate Franke, Kate Duchene, Tony Cherbak, and Karen Ferguson.

Let me begin by giving you a brief snapshot of our second quarter operating results. Total revenues for the second quarter of fiscal 2009 were $190.2 million, down 7.9% over the second quarter a year ago. Net earnings were 9.5 million, or $0.21 a share, compared to $0.27 a share that we reported a year ago this quarter.

Our second quarter revenues came in approximately 3.5% below what our computed run rate was for the first four weeks of the quarter. But despite the high level of turmoil and uncertainty in the global economy, our average weekly client service hours, excluding the holiday weeks, were relatively consistent throughout the quarter.

However, within the quarter we experienced significant movements in foreign currency exchange rates, which caused us to lose approximately $3.3 million in revenue from early in the second quarter through the end of the quarter, as the US dollar strengthened dramatically against a host of foreign currencies, most notably for us the Euro and the pound.

Second quarter gross margin increased 50 basis points to 39%, and that compares to 38.5% a year ago, which was flat sequentially with last quarter. Aggregate SG&A dollars decreased 3.7%, primarily the result of exchange rate differences from the first quarter. Nate will provide more detail on our second quarter financial results later in the call.

As many companies struggle to find financing in a difficult credit market, Resources continues to generate cash based on the strength of our business model. Our business model as you know, suggests that 70% of our cash costs are variable, and that is self-regulatory, and as our cost of revenue decreases, our revenue levels become less volatile. The variable nature of our business model dramatically decreases our risk profile.

Through the first half of fiscal 2009, we have generated approximately $31 million in cash from operations, and ended our second quarter with approximately $134 million in cash and investments, and no debt. Our ability to generate cash allows us to be opportunistic in returning cash to shareholders, or taking advantage of attractive investment opportunities as they present themselves in the global market.

Business today for Resources is definitely more difficult than it was 12 to 18 months ago, and it is obviously testing the strength of our business model, as well as the resolve of our people. We are quite confident that we will pass these tests successfully. As I have communicated to our people all over the world, extraordinary times require extraordinary effort.

Everyone at Resources is working harder today to develop business, and take advantage of every revenue opportunity that presents itself, while at the same time working efficiently to control discretionary costs. These efforts are reflected in our current operating results, and will also serve to make us a much stronger company, as we emerge from this phase of the current economic cycle. We will continue to stay focused on what we can control, and not be distracted by extraordinary events in the capital markets.

I would also like to take this opportunity to discuss with you some very recent organizational changes within Resources. These changes to our senior leadership team are not revolutionary by any means, but rather are designed to support the evolution of our enterprise in accordance with our long-term growth strategies, and the execution of our unique value proposition, which is the foundation of our competitive advantage in the marketplace.

Given the high levels of uncertainty in the markets these days, I will mention that these changes all involve very straightforward modifications to the accountabilities of the existing senior leadership of the Company, and in no way signals any significant restructuring or discontinuity of leadership at Resources.

First, Karen Ferguson will take on a new challenge as Executive Vice President and Chief Strategy Officer for Resources according to me. In this role Karen will be focusing most of her time leading growth initiatives and assessing market opportunities for the Company globally. In connection with Karen moving to this new role, I will take direct accountability for operations in North America, and accordingly the North American regional managing directors will report to me.

Separately, as my recent travels visiting our operations around the world have reinforced, we are very well-positioned to take advantage of growth opportunities in markets outside of North America. In order to provide appropriate management focus on these regions, I have asked Tony Cherbak to accept the role of President International Operations. In this capacity, Tony will shift a significant amount of his focus to leading our international practices on a day-to-day basis.

And finally, consistent with our ongoing strategy to serve large, multinational companies as growing clients of Resources, we have formed a strategic accounts team that will advance this important growth element of our strategy, led by Tom Schember. I believe these changes will provide the right leadership support of our growth agenda globally, and maintain focus on and results in three important areas of our Company activities, which are core to our success.

One, continued flawless execution of Resources practiced fundamentals with our clients around the world. Two, proactive and comprehensive account management of new and existing multinational companies, to support their global initiatives. And three, continued development of strategic initiatives, including acquisitions and internal capabilities, to deliver incremental growth.

With that, I will turn it over to Nate for a detailed review of our financial results.

Thank you, Tom. As mentioned, revenues for the quarter were $190.2 million, a 7.9% decrease from $206.6 million in the comparable quarter a year ago. On a sequential basis, second quarter revenue declined 8.2% from $207.3 million in the first quarter of fiscal 2009. Approximately 40% of the sequential percentage decrease relates to foreign currency exchange rate changes.

While Tony will discuss our international operations in greater depth, let me discuss some highlights of our revenues geographically. For the second quarter, revenues in the US were $134.4 million, a decrease of 11% quarter-over-quarter. On a sequential basis, US revenue decreased 8%. For the second quarter, total revenues internationally of $55.9 million, were approximately even with $55.6 million in the quarter a year ago, and on a sequential basis international revenues decreased 8.6%.

International revenue accounted for 29% of total revenues for the quarter, versus 30% last quarter. Europe's second quarter revenues were flat quarter-over-quarter, while the Asia-Pacific region saw second quarter revenues up 2% quarter-over-quarter. As you are aware during the second quarter of 2009, the US dollar strengthened against several foreign currencies.

As Tom mentioned, based upon exchange rates from the first few weeks of our second quarter, our second quarter revenues were reduced by $3.3 million. Additionally, on a quarter-over-quarter basis, th US dollar strengthened against most of the currencies of our foreign locations, and as a result international revenues would have been higher by about $4 million in the second quarter, using comparable fiscal '08 conversion rates. On a constant currency basis and excluding acquired business revenue in the quarter, international revenue was essentially flat quarter-over-quarter, a gratifying result in the current environment, which should not be overlooked.

Let me now discuss revenue trends for the third quarter of fiscal 2009. Weekly revenues for the first four weeks of the third quarter were $14.4 million, $14.1 million, $13.8 million, and $6.3 million, the latter of which includes the Christmas holiday period. While we are still compiling revenue data from last week, using the average of the most recent non-holiday weekly run rates over the remaining weeks of the first quarter, and adjusting for New Years and certain other holidays, we would achieve third quarter revenues of approximately $167 million.

Consistent with our historical practice and the operating philosophy of Resources, this computation is purely mathematical and does not consider increases or decreases in weekly run rates over the balance of the quarter, exchange rate changes, or other factors. As you also know, it is in no way reflective of any formalized budget or forecast. Now let me discuss gross margin.

Gross margin for the second quarter was 39%, compared to 38.5% a year ago, a 50 basis point improvement. Excluding reimbursable expenses, our second quarter gross margin was 39.9%, which compares to 39.3% in the second quarter a year ago. The quarter-over-quarter improvement stems primarily from continued improvement in bill versus pay ratio.

The average billing rate for the second quarter was approximately $131, and represents a 1.3% increase from approximately $129 a year ago. The average pay rate for the second quarter was approximately $67, which represents a 1% increase from $66 a year ago. On a sequential basis, our second quarter gross margin was flat with the 39% experienced in the first quarter of fiscal 2009.

Gross margin in the United States was 40.1%, and our international gross margin was 36.2%. And thinking about the third quarter of fiscal 2009, it is important to remember that we have historically experienced an approximate 150 basis point decrease in gross margin as a result of the winter holidays, and the resetting of certain statutory payroll taxes at the beginning of the calendar year.

Now to headcount. For the second quarter, average consultant FTE count was 2,938. This compares to 3,087 in the previous quarter, and 3,234 in the year ago quarter. Quarter-end consultant headcount was 2,854 versus 3,319 a year ago. The total headcount at the Company was 3,041 at quarter end.

Now to the other components of our second quarter financial results. Total selling, general, and administrative expenses including stock compensation for the second quarter were $54.4 million, or 28.6% of revenue, compared to $55.5 million, or 26.9% in the second quarter of fiscal '08. SG&A was $56.5 million, or 27.3% of revenue, in the first quarter of fiscal '09. The sequential improvement in SG&A primarily stems from foreign exchange rate changes.

As a percentage of revenue, our SG&A expense leverage was less than that achieved during the first quarter of fiscal '09, primarily due to the lower revenue base in the second quarter. Stock compensation expense was $4.6 million, or 2.4% of total revenues, versus $5.3 million, or 2.6% of total revenue in the second quarter of fiscal '08. While we continue to focus on our SG&A spending, excluding the impacts of exchange rate changes, we would anticipate SG&A expenses to be relatively consistent with our second quarter of fiscal '09 in the upcoming third quarter.

At the end of the second quarter, our office count remains at 89, 56 domestic and 33 international. Depreciation and amortization was $2.5 million for the quarter, up about 450,000 over last year's second quarter as a result of our increased asset base. Based upon our current asset base, we would expect similar levels of depreciation and amortization expense in the upcoming quarters. Interest income decreased by about $1.2 million to $380,000 in the second quarter, versus $1.6 million a year ago. Interest income decreased due to lower average interest rates earned on our invested cash in the second quarter of fiscal '09.

Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock comp expense, was 12.8% in the second quarter compared to 14.2% a year ago, and 14.1% in the first quarter of fiscal '09. Earnings for the quarter including stock compensation expense were $9.5 million, or $0.21 on a diluted per share basis, versus $13 million, or $0.27 per share a year ago. In the second quarter, the noncash pretax charge for stock compensation was $0.08 per share, versus $0.09 per share in the comparable quarter a year ago.

As we have discussed previously, the past treatment of our incentive stock options under FASB 123R, will likely cause continued volatility in our GAAP tax expense. During our second quarter we experienced a decrease in the number of ISOs exercised, thereby decreasing the tax benefit related to ISOs, for which we reported compensation expense of $1.9 million.

As a result, our GAAP tax rate was 46.1% for the quarter, versus 44.8% 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. Our tax rate before the impact of stock comp expense was approximately 40.5% for the second quarter.

Now let me turn to our balance sheet. Cash and investments at the end of the second quarter were about $134 million, a $27 million increase from the end of fiscal 2008. During the first six months of fiscal '09, we have generated approximately $31 million in cash flow from operations. We purchased 392,000 shares of our stock for approximately $6.3 million, at an average price of $16.04.

Our current Board authorization for our stock buyback program has approximately $41.6 million remaining. Throughout the balance of fiscal '09, we will continue to assess additional share repurchases in connection with the other capital requirements of growing our business. Our shares outstanding at the end of the second quarter were approximately 44.9 million.

Receivables at quarter end were $103 million, down by about $14 million from the previous quarter. Days of revenue outstanding were approximately 48 days, down 3 days from the prior year's comparable quarter, and 1 day lower than the first quarter of fiscal '09.

Now let me turn the call over to Tony for some additional commentary.

Thanks, Nate. I would like to take a moment to provide a bit more detail on our international operations. Total revenues for the Netherlands practice in Q2 excluding Domenica were $16.9 million, down 13% quarter-over-quarter. The UK revenues were down 31% quarter-over-quarter.

Approximately one-half of these percentage decreases were attributable to foreign currency changes, as the dollar strengthened against the pound and the Euro. Domenica's revenues during the second quarter were $4.7 million. Despite the economic issues impacting some of our practices in Europe, we continue to see encouraging signs from our Nordic region, as well as our offices in France, Italy, and Germany.

In November, we acquired [Competence Lucen], a small human resource consulting business located in Sweden. This acquisition adds a much expanded portfolio of human capital services to our Swedish practice, and presents cross-selling opportunities for all practice areas within our collective Swedish client base. We paid approximately $1.3 million for this company, with additional consideration payable upon the achievement of certain future operating results. Competence Lucen currently has annual revenues of approximately $3 million.

In Asia, we continue to be encouraged by the progress we are making in Japan through our offices in Tokyo and Nagoya. We are also committed to growing our newer practices in China, through our offices in Hong Kong, Beijing, and Shanghai, where we see significant opportunities with both our multinational clients, as well as domestic enterprises.

Let me talk for a moment now about our clients. In fiscal 2008, we had 340 clients for whom we provided services exceeding $500,000 in fees. Through the end of our second quarter on a run rate basis, we served the same number of clients at this level, as at the end of the second quarter a year ago.

Revenues from our Top 50 clients represented 36% of total revenues, while 50% of our revenues came from 113 clients. This is consistent with our past experience, and validates our strategy to target large companies with whom we can develop sustainable and repeatable client relationships.

Our business with financial services companies decreased 13.5% quarter-over-quarter. While demand from these clients has decreased from a year ago, we continue to enjoy significant client relationships in the financial services sector, 10 of which exceeded $1 million in revenue for the quarter. Our largest client for the quarter was approximately 3% of revenues.

Client continuity continues to be solid. Through our second quarter, we served all of our Top 50 clients from fiscal year 2008 and fiscal year 2007. 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, 48 of our Top 50 clients have used more than one service line, and 80% of those Top 50 clients have used three or more service lines. This service line penetration reflects the diversity relationships we have within our clients organizations.

I would like to turn the call back to Tom for some closing remarks.

Thanks, Tony. That concludes our remarks that are prepared. We are happy to answer your questions at this time.

Thank you. (Operator Instructions).

We will go first to Kevin McVeigh with Credit Suisse.

Hello. Oh, thank you very much. Nate, quick question. On the revenue guidance, assuming $167 million, I would be interested in your thoughts on the SG&A, just from a travel perspective. Obviously, it is a pretty significant run-off in revenue. Why the flat SG&A? Are there any levers you could pull? It sound like you are obviously going to keep the office footprint intact at this point. Just your thoughts on SG&A would be helpful.

Sure, Kevin. As we have mentioned earlier on the call, and as we mentioned last quarter, approximately 2/3 of our SG&A is the people costs that make up our offices. And then another 10% or so is the actual office footprint, the real estate cost, and related costs to that. So I think what we have to remember is when you look at that revenue run-off, a big portion of that is the two weeks and Christmas and New Year's, where we basically lose probably a little over a full week in revenue.

And so we are always looking at SG&A, and that is something that has continued focus. But we are not at the point where we are making drastic cuts or significant headcount reductions, which is ultimately where any significant SG&A dollars would come from, based on the components of our SG&A. Clearly we continue to monitor discretionary spend wherever it exists. But keep in mind that revenue run-off is something that is related to, obviously the holiday weeks here.

That is helpful. Real nice job maintaining the gross margins. By the way, Tom, one quick question for you. Have you seen any pickup in work around bankruptcy at this point? Or is that still in the relatively early stages?

Hi, Kevin. That is a great question. For us, it is still in the early stages. But there is no question that we are seeing lots of work coming to us. And I recall in the category of, well, just generally distressed activities okay, some of that is in the form of bankruptcy and restructuring inquiries that we have gotten. And some of it is related to as we said in past quarters the restructuring work that has been going on, as an example in the financial services sector, for several months now. That has turned into opportunity for us.

We have seen that in the money center cities where the disproportionate impact has been felt. So we are starting to see that. The conversion of that is a much less predictable type of work than the progressive change that we typically see in an up market. But I would say it is more than just a trickle at this point, and we are involved in those conversations.

I would add perhaps not in the category of distressed opportunities, but certainly consistent with what we see in the marketplace, we are also responding to requests, and presenting our business model to organizations who are taking advantage of the TARP program that the Federal government has promulgated. And we think that is probably going to continue, although again, how those opportunities convert, and the rate at which they convert, is a much less let's call it visible type of activity, than we would typically see in a normal environment.

That is great. One housekeeping item. I will get back in the queue. Nate, a tax rate for the third quarter? I know it is difficult given the volatility in share price. Do you have a range you can give us?

Well, I think a lot obviously is going to depend on, where it all depends is the number of ISOs that are exercised, and if you just look at the share price during the second quarter, to the extent that share price stayed the same, I think you would probably see roughly equivalent tax rate to what we experienced in the second quarter. Again, on a cash basis, that 40.5% we expect to remain fairly consistent.

Great, thank you.

You bet.

We will go next to Jim Janesky with Stifel Nicholas.

Yes. When you look at the fourth week being down more than 50% versus the third week of the quarter, last year when you reported you only had given us the outlook for the first three weeks, because it was earlier on the report date. I mean, is this the order of magnitude that you generally see from the third week to the fourth week of the third fiscal quarter?

Yes. It is consistent with the week that Christmas falls on.

Right.

Okay. So it is generally down about, but taking that into account, you still expect revenues to be down somewhere around 18% to 20%. Could you talk a little bit around what your clients are telling you now? I mean are folks more or less just frozen, in terms of pulling the trigger on using outside professional services? And if you could also just kind of add to that, have your clients given you any indication for the upcoming audit season? Do you feel that they will be turning to you as much as they had in the past, or are they going to focus more on using internal resources?

Jim, I don't think we indicated that our revenues were going to be down 18% to 20%. And if that is your takeaway based on computation, we will just remind you of what we always do, it is a reasonable question to ask as to how the beginning of the current quarter looks. So what we do is we report the facts. But I wouldn't tell you that that is either a trend or reliable in terms of a forecast. And any number of factors could change the weekly revenue in our business, as it ordinarily does.

But responding to your question, which is an important one on clients pulling the trigger, yes, absolutely. We are continuing to see what we have been seeing over the last 60 days, and especially as the calendar year has turned. A significant contraction of capital spending in business across the country, and across most segments of commerce in the country. Again that reduces visibility for us.

It may reduce immediate opportunity, but it doesn't necessarily reduce opportunity within clients, or with clients that we haven't worked with yet. And your second point, actually I think is a compelling one. And that is ultimately the value proposition that we are talking about with our clients, multiple times a day, every day around the world. And that is that the value proposition of Resources, compared and contrasted to as an example, a big four-type of engagement resource is a compelling one. And we expect that our clients will continue to see value in that differential.

All of that wrapped up in a package though, I put the bow on it that uncertainty seems to be the order of the day. And lots of clients, as you probably read in, not only in the paper every day, but at the close of business, close of market every day, lots of contraction and lots of infrastructure cutting ahead of what many of our clients expect to be a contracted revenue environment for some period of time.

Okay. Thanks. That is very helpful. And then, next question, stock buyback. What are your thoughts at the current levels?

As I mentioned in the prepared remarks, I think it is something that we would continue throughout the year. We would continue to try to be opportunistic, but I think we feel we have the capital structure that would continue to allow us to be in the market, obviously on a judicious basis.

Okay. Thank you.

We will go next to Andrew Steinerman with JPMorgan Chase.

Hi there. You mentioned what a typical gross margin decline is in a third quarter versus a second quarter. I think you said 150 basis points, and you gave the reason why. Are we in a typical environment? And if you could just go through gross margins in the quarter again. Obviously I know you gave the bill rate/pay rate. You guys did a great job in managing that in the second quarter. Do you think those sort of strong management capabilities could continue into the third quarter?

Andrew, as I mentioned just to answer, you had a couple of questions embedded in there. The gross margin in the second quarter was 39%, and that was basically consistent with the gross margin in the first quarter.

Now when we look at the third quarter, what has tended to happen over prior years and it is because of the number of holidays that occur in the quarter, despite our efforts that I think we have proven out, of really being able to hit our target gross margin, we do hit periods where we have a number of holidays that tends to reduce leverage to a certain extent, and therefore, has historically diluted that gross margin up to that 150 basis points that I gave. But I think going back, just in terms of that typical bill versus pay rate spread, again, that is something that our 89 offices continue to be very focused on pricing engagements. We feel that target gross margin is a very fair one, and remains competitive in the marketplace.

Yes. I mean, Andrew, if I got the essence of your question, while I would never characterize this environment as anything like normal, we would expect that same level of impact in sequential gross margin, barring any other management actions that we took. And that is something that we have been managing closely. You will continue to see us manage closely, and you will continue to see the results of that.

So I believe the final part of your question is, yes, we expect to be able to maintain that management focus on those levers in the business. If we see continued pressure, or if there is additional pressure, let's call it incremental pressure on bill rates, we will be responsive to that, and do the appropriate things with respect to pay rates. But right now, I wouldn't say that in spite of the environment that we are planning for that, or we are seeing disproportionate pressure, understanding that every day in this market is basically rules being rewritten again.

Right. So it sound like you are trying to target 37.5% if I was going to pick a number in the quarter. But what I am surprised you didn't say, I mean I remember part of your gross margin had some fixed cost in it. And on the lower revenue base, I thought there would be some deleveraging. I don't remember exactly what they are, but I do remember some quarters citing revenue getting tied to gross margins.

Well, Andrew, I think what you might be referring to is turning the clocks back probably a little bit over a year, was the gross margin clawing back some of the extra vacation that was given. And then there is clearly again part of it is, as you said, given the holiday pay, where our consultants are given holiday pay, where you have no revenue, and you have associated benefits as well, like the health care.

Right.

But I think that again if you just look at the historical basis, that is the basis for that 150 basis points.

Right. But I am just saying if you had that holiday pay, if you have this type of cost, you end up with a lower revenue base, it could be a bigger than normal drag.

Again, all we are giving you is not necessarily a forecast. We are just kind of stating that historically we have experienced an approximate 150 basis point decrease.

Okay. Okay.

And if you recall from last year same timeframe, we gave you the same historical information. And we were able to do a little bit better than that. Again as Nate said, it is just what we have seen on a historical basis.

Okay. Thank you very much.

Thanks.

We will go next to Paul Ginocchio with Deutsche Bank.

Thank you. Could you give me quarter end corporate headcount. I think I missed it. Second, it doesn't look like the bill pay rate spread helped your gross margins. I am wondering if the 50 basis point came from, if it lowered reimbursement? Thanks.

Paul, the total headcount at the end of the quarter was 3,741. Tom said I might have misstated that during the prepared remarks.

Thank you.

That was the total headcount. And Paul, what was the second part of your question?

The 50 basis point gross margin expansion, it doesn't look like it came from the bill pay rate spread. So was wondering where it came from? Was it a benefit from lower reimbursements as a percent of revenue?

Actually, I think if you look number one, those bill and pay rate numbers are rounded. So the biggest component is in that, and then that really is the big component. The rest is when we look at it is pretty inconsequential stuff. I think if you took, because what we did with the bill and pay rate are the rounded numbers.

Okay. Great. So you did get it from that spread?

There was just under 50 basis point from that.

Great. Thank you.

Thanks.

We will go next to Gary Bisbee with Barclays Capital.

Hi, guys. Good afternoon. I guess a couple of questions. Let me start on the SG&A. It sounds like you are obviously being careful with costs, and slow down with office openings. It also sounds like with the guidance, you are not looking to take a real aggressive knife to the amount of overhead. I guess if we are in a situation here where revenues continue to deteriorate for several quarters, how aggressively will you look to cut SG&A? I am curious that you haven't done it yet. What would trigger you to do it, or are you more likely just to say we are building for the long term, and leave the SG&A base relatively untouched, even if we have several more weak revenue quarters?

So you are asking a hypothetical question, right?

Yes.

Sure. Okay. I just want to be clear. Because I would tell you that we are managing costs as closely as you would expect us to in this environment. And your analogy of a knife is a good one.

And the reason I say it is a good one is because we don't at the moment appear, it doesn't appear necessary to us to consider taking costs out with that kind of an instrument. Now on the other hand, we have to respect the environment that we are in, and we feel like we are doing that. We are not taking what I would call a disproportionate action. Your hypothetical question is one that we think about.

The reality is that we believe what we say on the call. And we believe what our value proposition is in the marketplace. And what we have seen, although clearly a revenue deceleration in the business is not surprising, but what also isn't surprising is that we have been able very, very quickly as this market has changed significantly, to shift our work from what we call progressive change to regressive change very, very appropriately.

And that is important to understand, because that is the selling proposition that goes on in the office. And really, Gary, that is the reason why we wouldn't be motivated at least at this point, to go and take any assertive or aggressive, I should say, overly aggressive actions with respect to our costs, right.

Our business model allows us the luxury of doing the right thing for the business long term by both investing in it, as well as giving us a pretty clear connection and coupling of our variable costs to our variable revenue. Having said that, I don't know what 2009 holds. We are not economists, but we are not contemplating a robust economy anywhere in the future. So it is something that we look at pretty much on a daily basis.

Okay. I mean, I appreciate how you are coming at it saying hypothetical. But I point out that while it is not guidance, the $167 million is an 18% year-over-year drop relative to 8 this quarter. I would argue unless things change wildly we are in that environment, where it is happening. At any rate, I appreciate the color.

Let me move on to another one. Can you give us any sense, it sounded like things overall X the currency, we are still hanging in there pretty well internationally. Maybe more so in Europe than I would have guessed. Is part of that run rate we have seen through the first month of the third quarter, include a more, just a bigger falloff in Europe given all the data we have seen over there? Is that an appropriate thing to think is included in that?

I think we mentioned related to Europe, we did see a little bit of a decrease in our practices in the Netherlands, and also in the UK. Obviously a very tough economic situation in the UK like we are experiencing in the US. But that was offset to some degree by pretty good performances in France, the Nordic states, good revenue growth in some of our newer practices in Italy and Germany. So all-in-all, on a trim line basis, Europe will probably be down a little bit in the third quarter. But it depends on the pocket of offices that you are looking at, relative to specific performance.

Okay. And then I guess just the last one for me, is it right to say you haven't seen too many projects get canceled at this point? There continues to be what you talked about last quarter, sort of a hesitation to--?

You have got a couple of different things at play. When we look at practices, and this is both the US and in Europe, some of the newer projects that we are seeing could possibly be a little bit shorter in duration. Clients are look at things more with fixed budgets. Again as Tom said, very cautionary spending, CapEx budgets being monitored more significantly than they have in the past. It has been taking clients a little bit longer to make decisions. Some projects are being deferred when possible.

Some anticipated projects that otherwise would have occurred are being canceled. However, that is offset by some instances in which we have companies realizing that they have made pretty deep cuts in their organization, and they don't have the resources to now help with the year-end close, and are getting us back involved. So again, it is a little bit of a mixed bag. As we mentioned last quarter, it is going to take a little while for clients to sort out this new economy. But we will be there when they are ready.

Yes, Gary, I would say avoid as we do, the trap of thinking about this as a binary management lever, meaning you can control costs or you can't. You can cut heads or you hire, right? I mean, we should not leave you with the impression that we are ignoring the environment. We're being very, very, very cautious, and we are sharpening our pencils as you would expect us to.

But I want to go back to the example of the financial services client that I addressed earlier, who called us about a week and a half ago. And in connection with the massive layoffs that happened at this particular client, they were looking for between 8 and 10 of our consultants to help them, come in and do some audit and book closing work. That is exactly the type of call that we are prepared to take. And to the extent that there is nobody in the office to take that call, that is a bad outcome for us, it is a bad outcome for our shareholder, and it is a bad outcome for our clients.

Okay, that is a good example. Thanks. I appreciate it.

(Operator Instructions). We will go next to Mark Marcon with Robert W. Baird.

Good afternoon. I was wondering if you could talk about the bill rates, and how you think they are going to trend? I was noticing the change relative to last quarter, is there anything that is occurring from a geographic perspective that is impacting the mix? Or how should we think about that?

Mark, a couple of comments. Number one, keep in mind that the bill rate quarter to quarter related to the international piece is affected by the currency exchange rates.

Sure.

As we have pointed out in the past we have that natural hedge. While we lose revenues, our expenses are typically in the local currency. So we did not go through and recompute bill rates on a constant currency basis. But if you look at it on a sequential basis, clearly the bill rates were impacted by currency.

As I mentioned earlier in response to a question, we remain very focused on achieving our gross margin target. And I think Tom had kind of mentioned that, obviously there is what you might call some pricing pressure out there in certain clients. That said, what we continue to find is that we are very, very competitive, our rates are very competitive versus the typical competition we see out there, which are the other professional services firms.

And again because of our variable model, and this is really the third attribute on any new project, we are able to kind of renegotiate pay rates. So when you look at all of those pieces, it really has enabled us to maintain that gross margin, despite what I think we would all share as a very difficult last three months.

Okay. And you have absolutely done a great job in terms of maintaining the margins given the environment. I was just trying to get a sense, it sounds like it was primarily FX.

I think if you, and again you can do the FX every which way but sideways, but that is a huge chunk of the impact this quarter.

Okay. Can you talk a little bit about the consulting and how you are managing relationships with them during this period, if somebody comes off of an assignment, and there isn't something for them to do immediately, how do you keep them in the loop?

That is a great question, and I appreciate it. There are two pistons as you know in the Resources engine. There is the client service piston and the recruiting piston. And in an environment like this, where as you would expect there is not a ton of recruiting activity, or not a disproportionate amount of recruiting activity because there is still much activity around the enterprise, it is that part of the engine that really maintains the relationship with the client.

And in our model, we do our level best to ensure that that consultant is helping us help them by exploiting business opportunities with relationships that they have, at other place that may have worked, or at other clients that they may have worked with us for. It is really that side of the organization that continues to keep the continuity with the consultant base. And that has been very typical of our model, and how it has operated through cycles in the past. And one of the things that obviously we like about it in both as I like to call it, a rising tide and a receding tide environment.

Is it your sense, Tom, that the consultant engagement is remaining fairly healthy? Is there a length of time under which, if this downturn which is global in nature continues to a certain point, where some of the consultants might get a little bit insecure, and decide to go for something on a permanent basis. or --?

Sure, Mark. In this environment, I think that is a rational, anybody in that position would feel like that is a rational response. Now the reality is those opportunities don't seem to be available in the marketplace. So there is sort of a natural hedge against the risk. We are not particularly pleased that that is the case. But it is what it is. If the environment was different, I would be more worried.

Again, you have to remember our consultants are not the kind of individuals who are going to be compelled to go to work typically for one of our traditional, or at one of our traditional competitors, if that work was available. So in this environment, we do our best to ensure that they are maximally, let's call it marketed to our clients, or to clients that we worked with in the past, or who we haven't worked with thus far. But I would be remiss if didn't say that it was a challenge, and that the current environment was testing our model. It would be irrational for me to say so.

But I feel like we have done a pretty good job managing it. I feel confident that we will continue to manage it in the future. And we like everyone else, feel like the right way to get through this is not to shrink our way, as I said, through prosperity, but to grow it to the extent that we can in a very uncertain environment.

There are probably some new associates or new consultants, who are approaching you that haven't worked with you in the past, I would imagine, as well.

Yes. Sure. Absolutely. On balance, this is a robust recruiting environment.

Can you talk a little bit about the management responsibility changes, and how we should as investors think about what the goals of the changes are, and how that will change the client interface? In particular, I am curious about the heading of the account management, and how that would interface on a geographic basis, with an account manager who is in charge of a global account, drive the sales engine, and then Tony would work on an operational basis internationally, or how does that all fit?

So, I will just give you some color here. To me, this is a realignment of resources that is pretty, no pun intended, that is pretty consistent with how we already manage our business. And so I look at it as a realignment in that regard. The offices are still managed the way they were before. There is a managing director structure. There is a regional managing director structure. And then there is an executive structure. That hasn't changed.

And the development of the client, or what we call our business development functionality, is also not new. It has been in place since inception of the Company. It just requires what we believe is a bit more focused management. And this is in Tom Schember's organization. As you can imagine, a client's request to field, I am going to make up the numbers, 26 consultants in 6 different countries in 14 different offices, requires a fair amount of coordination. We have always coordinated that type of work in the past. What we are saying through the development of this structure, is that we are going to respond to the growth in that type of business, because, A) it has been growing, and, B) we expect it to grow that way.

Meaning we expect to grow our global client base over time, and we expect that global client base to require additional coordination, as we put more consultants in more of their locations around the world. That is really the functionality of that group. And it is the development of those clients, and the tending on this those clients as they become large and more global and complex, that is really a supplemental function to the management of the operations of the company, which have neither changed in structure, nor tenor, nor scope.

Really the leverage then on international is one that I was seeking, based candidly on my visits around the world, as I have gone to most of our locations outside of North America, I have noticed two things. One, as I have said before on this call, there is no question, right, that this contraction is global. And two, there remains huge amounts of opportunity for us outside of North America. So we would like to develop that business with more management focus.

And the idea here was to leverage Tony, not only over his existing accountabilities, but to really focus on developing large global clients, who happened to be domiciled outside of the United States. The way I think about this Company developing over time is having those large global accounts that not only would, US domiciled companies, but companies that are domiciled in Asia and in Europe, who happen to have operations elsewhere. So that is really the thought process there.

And the tought process with the strategy group is really being a little bit more, in my opinion, let's call it direct and focused on the development of particular capabilities around our practice areas, around opportunities in the marketplace that I have discussed earlier, such as compliance.

And then specific focuses on certain industry groups or categories, like healthcare, aerospace, financial services, technology, entertainment, as we become a more mature global enterprise. This is an appropriate, it seems to me, focus of our management team. So no change in the individuals, you know them all, they are the same people. Slight changes in accountability. But certainly no changes to the model, and no signal at all that we are changing our view of how we should grow, or our fundamental approach to the business or the model that we have come to rely on, and are very thankful we have.

Great. Can you just give a little color on the practice areas? How did the finance side do, how did RAS do, how did things looking from the change of management, et cetera?

Sure. Just to give you a little color on RAS, RAS was down 23% quarter-over-quarter, or about 17% sequentially. For the second quarter, it made up approximately 13% of our revenue. I would say that the other service lines, supply chain management obviously in this environment continues to be a pretty in-demand practice area, just because it involves helping companies take costs out of their business.

Sure.

Finance and accounting still our #1 core competency, and continues to do quite well. If you took RAS out of the mix, relative to the other practice areas, the other practice areas in aggregate would have been down about 5%, compared to the 8% overall decline in revenues.

Thank you.

Thanks.

We will go next to Scott Schneeberger with Oppenheimer.

Thanks. You guys mentioned last quarter in conversations with executives at financial services companies, that they, and obviously a lot had happened at this time and a lot has happened since, but they had said standby, standby, we have a lot coming. Just curious, how open is your dialogue with them right now? Do you see anything coming down the pike, or is it very, very paralyzed at the moment?

I would describe it as the same to similar, right, still having the discussions. Still expecting I gave the example of one that ultimately turned into an assignment. We continue to monitor that on a, if not daily, hourly basis, in those places. And as I say, it will take some time to cycle, for these changes to cycle through.

Once an organization lets go a significant amount of their infrastructure, there is a period of time that the remaining individuals in that organization adapt. Then the work that is not getting done demonstrates itself, and then presumably we have an opportunity to go in and help them accomplish that.

Okay. Thanks. On a different subject, you were asked earlier on the use of cash, had made some share repurchases, and are still open to that over the balance of the year. What is the acquisition appetite right now? And geographically, could you discuss how you are thinking about that as well?

Well, the world is our oyster. We think that there are opportunities. And we have continued to, Tony addressed two small ones that we have made outside of the United States.

We don't have a specific disproportionate view, that we need to do deals one way or the other, one place or the other. I wouldn't say that we have increased our appetite or we have decreased our appetite. We have been very, very circumspect in our approach to acquisitions, and that is what you should continue to expect from us.

On the other hand, because of the way, what has happened in the marketplace, there are probably more opportunities for us to look. We are going to continue to look and see what makes sense to us, both strategically and geographically. There is no strategy in place here, as you know Scott. We have been opportunistic and we will continue to be this way.

Sure. And how cautious would you be around doing something large right now in this credit environment with the cash balance you have? Obviously being opportunistic, but no too big a bite now?

I wouldn't expect us to take on any leverage to do any deals.

Okay. And then finally, just updates on IFRS,J-SOX, anything regulatory you may see coming out of the new administration? An open question on anything coming along that may be an opportunity for you.

Well, my own view is that we could probably help the SEC do what they are supposed to be doing, but that is a different issue. I think the reality is that we are expecting a more regulatory-intense environment. I have no predictions on that.

One thing that isn't really we don't think impacted by the current situation is the IFRS environment significantly, that is still we think coming. It is not something that is talked a lot about, because it has been pitched off of most people's lists, given the current environment and the news. But on balance, we are expecting what most people are, which is a more intensely regulated environment and on balance we think that is better for us than worse.

Great. Thanks.

We will take a followup question from Paul Ginocchio with Deutsche Bank.

Thanks. Looking at your quarter end headcount, year-on-year it is down about 14%. Typically I guess your associates would be off on the holidays, or taking a few-day break, wondering if you could give any indication about when companies have come back the last couple of days, when do you expect this sort of to know how this sort of beginning of the year started out? Is it next week, is it typically yesterday or two days ago, that you would sort of find out and get a good feel for the beginning of the year?

Well, no. Paul, we will know next week, because it will be the first full week that everybody is back at work outside of the holidays. So next week will be a pretty good barometer for us.

Okay. And is there any way, I mean again, your year-on-year, your quarter end headcount was down I think for your associates, down 14%. That is sort of is not too far off the minus 18 that some people are talking about. It seems like at least your associate count at the end of November, sort of was suggesting what the 167 number was also looking like. Do you think we should be looking at that?

I ama trying to understand, when you say looking at the --

As a leading indicator?

Yes.

Well again, when you look at that 167, it is purely a mathematical computation. And I mean, I would leave it to you Paul, to look at the different data points, and obviously derive your models. I think we tried to give you a certain color and certain data points of what is going on in the business. But we really don't, as we historically have not done, not given forecasts or anything that would become trend-type information.

I think, Paul, the way the business works it would not, I wouldn't call it necessarily a spurious calculation, I wouldn't call it an indicative one either.

Okay. Just looking at your international gross margin, I would have thought with branches starting to mature a little bit, do you think it is possible to get that international gross margin up? It seems to be sort of stuck at the 36% level for the last few years.

That is absolutely the goal. When we talk about some of the things that we are going to focus on international, it is going to be the basics of our practice. Revenue growth, gross margin improvement and operating margin improvement. I think it is absolutely possible.

I think we have talked before as our mix changes little bit, more towards our Asian practices, our Asian practices generally have gross margins that are a little bit in excess of our US practice, on Europe we have the opposite. So I think the big opportunity is to see what we can do with the European gross margin.

Thank you.

There are no further questions at this time. I would like to turn things back to our speakers for any closing remarks.

Okay. Well, thanks everyone for joining us. We look forward to talking to you at the conclusion of next quarter. Happy New Year.

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