Resources Connection Inc (RGP) 2009 Q3 法說會逐字稿

Good day and welcome, everyone, to the Resources Global Professionals third quarter fiscal year 2009 earnings results conference call. As a reminder, this call is being recorded. With us today from the Company is Ms. Kate Duchene, Chief Legal Officer.

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

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

Before introducing Tom Christopoul, I'd like to read an important announcement about certain statements that we may make during this call. Specifically we may make forward-looking statements, in other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31st, 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'll now turn the call over to Tom Christopoul, our Chief Executive Officer.

Thanks, Kate. Good afternoon and welcome to the Resources Global third quarter conference call. Joining me today on the call are Don Murray, our Executive Chairman and members of our senior leadership team, Nate Franke, Kate Duchene and Tony Cherbak.

Let me begin by giving you a brief overview of our third quarter operating results. Total revenues for the third quarter of fiscal 2009 were $156 million, down 23.1% compared to the third quarter a year ago. Net earnings were $2.1 million, or $0.05 a share, compared to $0.19 per share that we reported the same period a year ago. As you would expect, third quarter revenues were adversely affected by the negative macroeconomic trends being felt all over the world. And discussions with our clients reveal that uncertainties in the credit markets, as well as the overall economy, are causing them to approach their business initiatives much more cautiously and either defer or downsize or eliminate projects that would otherwise commence under a more certain economic environment.

Third quarter gross margin was 37.2% compared to 37.3% a year ago. Historically, the impact of the holidays during this quarter have caused generally more than 150 basis point reduction in our gross margin, and this year was slightly more acute due to the deleveraging of certain employee benefit costs over a lower revenue base. Our SG&A costs declined $6.7 million or 11.7% quarter-over-quarter, and $3.6 million or 6.6% sequentially, primarily as a result of reduction in personnel costs, recruiting and business expenses, and also foreign currency exchange rate fluctuations. We will provide a more detailed report on this later and also on certain actions we are taking to further reduce our SG&A costs later in the call.

The critical area of focus in our Company today is business development. We have shifted virtually all of our activities, including those of many of our recruiters, to identify and capitalize on revenue opportunity at our clients. Many of our clients are pursuing significant cost and infrastructure reductions, and in the wake of those decisions, we continue to see much upheaval, displacement and consolidation.

Some of our more recent projects include helping clients with cost containment, supply chain and IT related initiatives. We continue to focus on share shifting, that is, shifting of a greater share of our clients' overall consulting spend to resources. We believe our value proposition, which combines superior and experienced consulting talent, with a lower bill rate structure, provides a compelling incentive to companies with critical initiatives to shift consulting spend from higher fixed cost service providers, to Resources. Against the backdrop of lower overall consulting spend in all of our markets, we are currently seeing continued progress in this area. And let me share with you three recent examples.

Here in the US, a global biotech company recently engaged us to deploy program managers to assist with merger integration activities. Our consultants are replacing those from a well-known large international consulting firm. After competing with a large public accounting firm, we were engaged to assist a financial services company to assess and implement process and control improvements to their regulatory process. And in another example, we recently won a project with a global manufacturing company to assist with the implementation of business intelligence software, winning the work over an international accounting firm and a traditional systems integration consulting firm. In each of these examples, our clients told us that we won the work because, first, our consultants were not only more experienced, but also an exact match for their needs, and secondly, our rates were more reasonable.

The current economic environment means there are fewer consulting opportunities today than there were 12 months ago, and where opportunities present themselves, there is attendant bill rate pressure. Our goal is to convert every potential engagement into revenue in the context of our value proposition while at the same time managing our gross margin, by negotiating fair bill and pay rates with our clients and consultants, respectively.

Following the 2002 recession, we assisted numerous clients that had downsized their employee base to meet business requirements that arose following the downsizing. In light of the current magnitude of employee downsizing being undertaken in numerous US and global companies, we believe similar demand will occur in the future, and we are obviously committed to remaining well positioned to meet those clients' needs.

Although our focus is and always will be on revenue growth, it would be imprudent for us to ignore our own infrastructure costs in light of the volatility we've seen in our own recent revenue trends. We have undertaken certain company wide actions which, when combined with those taken in our third quarter, will reduce SG&A costs by approximately $12 million on an annualized basis. These actions include the elimination of certain front and back office positions and the consolidation of seven offices into existing larger nearby offices. While consolidating these offices is not without risk, we do not anticipate a significant decrease in revenue from these activities. Our transition plans with respect to consolidating these offices will allow us to continue to serve our clients with the same level of quality and distinction that they expect from us all around the world. Nate will provide some additional financial details related to our SG&A costs in just a moment.

Under less than ideal market conditions, we continue to benefit from our business model where, as you know, about 70% of our cash costs are variable which in turn self regulates the cost of revenue even when revenue becomes volatile. We have discussed before how the variable nature of our business dramatically decreases our risk profile. Through the first nine months of 2009, we have generated approximately $47.7 million in cash from operations and we ended our third quarter with approximately $146 million in cash and investments with no debt. Our ability to build cash even in a difficult business climate allows us to be opportunistic in returning capital to shareholders and to take advantage of attractive investment opportunities as they present themselves.

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

Thank you, Tom. As mentioned, revenues for the quarter were $156 million, a 23.1% decrease from $202.8 million in the comparable quarter a year ago. On a constant currency basis, the quarter-over-quarter decrease was 20.1%. On a sequential basis, third quarter revenue declined 18% from $190.2 million in the second quarter of fiscal 2009. On a constant currency basis, the sequential quarterly decrease was 17%.

As we reported to you during our second quarter conference call in early January, the quarter began with weekly revenues trending downward from $14.4 million during the first week of the quarter, to $13.8 million in the third week. Following the winter holiday weeks, this trend continued, albeit somewhat unevenly during the last eight weeks of the third quarter. During this eight-week period, weekly revenue averaged approximately $12.6 million per week, with a range of $11.2 million to $13.6 million per week.

While Tony will discuss our international operations in depth, let me discuss some highlights of our revenues geographically. For the third quarter, revenues in the US were $111.7 million, a decrease of 24% quarter-over-quarter. On a sequential basis, US revenue decreased 16.9%. For the third quarter, total revenues internationally were $44.3 million, a decrease of 20.6% from $55.8 million a year ago. On a sequential basis, international revenue decreased 20.8%. International revenue accounted for approximately 28% of total revenues for the quarter, versus 29% last quarter. Europe's third quarter revenues decreased 22.2% quarter-over-quarter, and 21.1% sequentially, while the Asia-Pacific region saw third quarter revenues decrease 12.3% quarter-over-quarter and 18.1% sequentially.

As you are aware, during the third quarter of 2009 the US dollar remained volatile against several foreign currencies. Weakening early in our third quarter, but strengthening again during January and February. Just over one-half of the percentage decrease in international revenues for the quarter was attributable to foreign currency rate changes.

Let me now discuss early revenue trends for the fourth quarter of fiscal 2009. Weekly revenues for the first four weeks of the fourth quarter were $11.3 million, $11.2 million, $10.8 million, and $11 million. In light of the weekly revenue volatility we have experienced over the past few months, we will not extrapolate these weekly amounts to the quarter as a whole.

Now let me discuss gross margins. Gross margin for the third quarter was 37.2%, compared to 37.3% a year ago and 39% in our second quarter. Excluding reimbursable expenses, our third quarter gross margin was 37.9%, which compares to 38% in the third quarter a year ago. Historically, the impact of the holidays has caused about 150 basis point reduction in gross margin in the third quarter. The deleveraging of certain employee benefit costs, primarily holiday pay and healthcare costs over a lower third quarter revenue base caused the third quarter margin reduction to be slightly greater than what we would normally experience. The average billing rate for the third quarter was approximately $130 and represents a 3% decrease from approximately $134 a year ago. The average pay rate for the third quarter was approximately $67, which represents a 3% decrease from approximately $69 a year ago. Please remember, these hourly rates are derived based upon prevailing exchange rates during each given period.

We remain focused on working to maintain our gross margin at 40%, excluding the impact of reimbursable expenses. However, our fourth quarter gross margin may be impacted by reduced leverage on certain benefit costs. Gross margin in the US was 38% and our international gross margin was 35% during the third quarter.

Now to headcount. For the third quarter, the average consultant FTE count was 2,513. This compares to 2,938 in the previous quarter and 3,183 in the year-ago quarter. Quarter end consultant headcount was 2,363 versus 3,272 a year ago. The total headcount of the company was 3,211 at quarter end. In comparison to the third quarter a year ago, non-consultant headcount has decreased by approximately 4%.

Now to the other components of our third quarter financial results. Total selling, general and administrative expenses including stock compensation for the third quarter were $50.8 million or 32.6% of revenue, a sequential reduction of $3.6 million when compared to $54.4 million, or 28.6% of revenue in the second quarter of fiscal 2009. SG&A expenses were $57.5 million, or 28.4% of revenue in the third quarter of fiscal 2008. The sequential improvement in SG&A primarily stems from reductions in recruiting, compensation, and other business expenses, as well as an exchange rate benefit of approximately $600,000.

Stock compensation expense was $4.2 million or 2.7% of total revenue versus $6.1 million or 3% of total revenue in the third quarter of fiscal 2008. We would anticipate stock compensation expense to approximate the third quarter amount in the upcoming quarters.

As Tom mentioned, we recently commenced a plan to consolidate seven of our offices into nearby larger market practices. In conjunction with this activity, and other personnel actions, we will record a charge during our fourth quarter of approximately $3.4 million related to our estimate of lease abandonment costs including leasehold improvements and severance. As Tom mentioned, we expect these actions, as well as other cost reduction activities undertaken in the third quarter, will reduce SG&A costs on an annualized basis by approximately $12 million. Additionally, we do not expect any significant decreases in revenue directly resulting from these activities. The office closures will be effected in our fourth quarter. At the end of the third quarter, our office count remained at 89, 56 domestic and 33 international, but will decline to 82, based upon our recent actions.

Related to other components of our financial statements, depreciation and amortization was $2.5 million for the quarter, up slightly from $2.4 million over last year's third quarter. 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 $500,000 to $458,000 in the third quarter, versus $1 million a year ago. Interest income decreased due to the lower average interest rates earned on our invested cash in the third quarter of fiscal 2009. Our adjusted EBITDA or cash flow margin which we define as EBITDA before stock compensation expense was 7.3% in the third quarter compared to 11.9% a year ago, and to 12.8% in the second quarter of fiscal 2009. Earnings for the quarter including stock compensation expense were $2.1 million, or $0.05 on a diluted per share basis versus $8.7 million or $0.19 per share a year ago. In the third quarter, the non-cash after tax charge for stock compensation was $0.07 per share, versus $0.10 per share in the comparable quarter a year ago.

As we have discussed previously, the tax treatment of our incentive stock options under FASB statement 123-R will cause continued volatility in our GAAP tax expense. During the third quarter, we experienced a decrease in the number of ISOs exercised, thereby decreasing the tax benefit related to ISOs for which we recorded compensation expense of $896,000, for which we record almost no tax benefit. As a result, our GAAP tax rate was 60% for the quarter, versus 47.7% in the comparable quarter a year ago. Please keep in mind that our lower pretax income disproportionately magnifies the effect of ISOs on our effective tax rate. On a cash basis we will get a real tax deduction for all ISOs when they are exercised and ultimately sold. We estimate our tax rate before the impact of stock compensation expense will be approximately 41% for fiscal 2009. This rate has increased slightly due to foreign taxes and the relative impact of non-deductible expenses on lower pretax earnings.

Now let me turn to our balance sheet. Cash and investments at the end of the third quarter were $146 million, a $39 million increase from the end of fiscal 2008. During the first nine months of fiscal 2009, we have generated approximately $47.7 million in cash flow from operations. We purchased 320,000 shares of our stock for approximately $4.6 million or an average price of $14.50 per share. Our current Board authorization for our stock buyback program has approximately $37 million remaining. Throughout the balance of fiscal 2009, and into our next fiscal year, we will continue to assess additional share repurchases, maintaining a balance between other capital requirements of growing our business and fiscal prudence.

Today, more than ever, we believe our balance sheet offers a significant competitive advantage. Our shares outstanding at the end of the third quarter were approximately 45 million. Receivables at quarter end were approximately $84 million, down by about $19 million from the previous quarter. Days of revenue outstanding were approximately 47 days, down five days from the prior year's comparable quarter and one day lower than the second quarter of fiscal 2009.

I will now turn it over to Tony for some additional comments.

Thanks, Nate. I'd like to take a moment to provide a bit more detail on our international operations. Total revenues for the Netherlands practice in Q3 including Dominica were $17.6 million, down 22% quarter-over-quarter. On a constant currency basis the quarter-over-quarter decrease was 13%. UK revenues were down 45% quarter-over-quarter, and on a constant currency basis only about 25%. Dominica's revenues during the third quarter were $3.6 million.

Revenue in our Asia-Pacific region declined 12% over the comparable quarter last year, but on a constant currency basis revenues declined 17%, primarily from the strengthening of the Japanese yen. Despite the economic issues impacting our practices in Europe and Asia, we continue to see encouraging signs from some of our younger offices in Scandinavia, Italy, Germany, China and India. While still relatively small in comparison to our more mature offices, in aggregate these offices grew 13% quarter-over-quarter on a constant currency basis, a testament to the growing acceptance of our business model in these markets.

Since our last call, we have visited the majority of our European offices and met recently with all of the managing directors from our Asia-Pacific region. Although our international practices are finding a tough business climate like the one we are experiencing here in the US, our people are all working very hard to drive revenue in their respective markets. Significant efforts are being focused on meetings with clients that demonstrate our value proposition and identify opportunities to sell new work, as well as shifting consulting spend from our competitors to resources.

Now I'd like to spend a moment on a small acquisition that we made recently in the Netherlands. In January we finalized our acquisition of Limbus, a small consulting firm specializing in governance, risk, and compliance services located in the Netherlands. This capability when combined with the talents of our Resources compliance team, will allow us to take advantage of across the border opportunities in companies subject to greater regulatory scrutiny in response to the credit crisis. We paid approximately EUR1.5 million for Limbus with additional consideration payable upon the achievement of future operating results. Limbus had revenues of approximately EUR2.6 million their year ended December 31st, 2008.

Now a couple of words on our clients. In fiscal 2008 we had over 340 clients for whom we provided services exceeding $500,000 in fees. Through the end of our third quarter on a run rate basis we served 3.7% less clients at this level than at the end of the third quarter a year ago. Revenues from our top 50 clients represented 36% of total revenues while 50% of our revenues came from 114 clients. Our business with financial services companies decreased 31% year-over-year. While demand from these clients has decreased from a year ago, we continue to enjoy significant client relationships in the financial services sector, six 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 outstanding. Through our third 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 by our clients. Through the third quarter all 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 of relationships we have within our clients' organizations.

Now I'd like to turn the call back to Tom.

Thanks, Tony and Nate. That concludes our prepared remarks and we would be happy to answer your questions.

(Operator Instructions). And we'll go first to Kevin McVeigh with Credit Suisse.

Great. Thank you. Tom, if you already gave additional color on this I apologize, I missed the first couple of minutes. In terms of the office closures, I wonder what drove that decision to exit the seven offices, number one. And then, number two, if you could give us a little more color, how many are in the US versus international?

Yes, sure, Kevin. I'll give the second part of it to Nate. The first part was really driven out of analysis that we conduct, I would say on an ongoing basis, a little bit more, probably a little bit more frequently in the current environment than we do ordinarily on the revenue that's generated from offices and the opportunity to potentially service revenue out of closer geographic locations. You probably know from our past calls that our global footprint generally follows demand that our clients generate for us rather than strategically focusing on specific geographies. So as you would expect in an environment like this where revenue is challenged, we look at those markets as the demand goes and make a determination based on not only what we see today but potential revenue in the pipeline and try to determine whether or not we could just as effectively service that client demand out of a nearby office. So it's seven offices in total and ultimately these tend to be what I would consider secondary or tertiary markets, close to larger markets that probably preceded them in sequence.

So Kevin, the total of seven, they're five offices in the US, two international. And to give you an example, say the two international are actually suburban London offices that are an example where the goal is basically consolidate the client service out of our London practice. Another example is an office in the suburbs of Chicago, where we'll consolidate in the Chicago practice.

Great. And then just real quick, of the $12 million in annualized savings, how much of that is going to come in the fourth quarter, number one. And then number two, how much of that is savings from real estate versus personnel? Can we just talk about the components of that a little bit?

Sure. Probably the way to think of the $12 million is, as Tom had mentioned, it stems from actions that were taken, both in the third quarter and in the fourth quarter. And so if you wanted to look at how that may roll out, approximately 40% of the cost savings would be derived from actions that took place in the third quarter and the other 60% were derived from actions in the fourth quarter. And so if you go through the math, if you look at it being about $1 million a month, we'll probably see 2/3 of a quarter or approximately two months of savings rolling through in the fourth quarter and then the remainder coming in the first quarter of 2010.

And then I think the second part of your question was the components. Roughly 2/3, 70% is severance and the remainder is split between leaseholds and estimated lease abandonment costs.

Okay. Thank you.

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

Good afternoon. I was wondering if you could give a little color in terms of various sectors. You mentioned financial services obviously down a little, down more than what you're experiencing overall. I was just wondering, are you seeing any pockets of strength anywhere or is it fairly uniform across the globe now in terms of the weakness that you're seeing?

No, Mark -- it's Tom. Sure, we're seeing spots of opportunity. In fact, I would tell you that we're seeing spots of opportunity in financial services. I go back to the share shifting examples that I talked through. There's certainly examples that we could give you where we think we're positively shifting share in those institutions. That's of course against the context of a significantly reduced consulting spend. So, the opportunity that I'm describing is a relative one.

And as you go across the globe, whether you're going across the US or you're going through our international operations, I would say that, as you know from our business, there are certainly spots where we're seeing client activity that would buck let's say the trend. But again, because of the way that we're organized and the way that we attack our business proposition in the marketplace, that's always going to be more client-driven than it's going to be category-driven or industry-driven.

I'd say another area of strength that we see, especially in our European practices, is in public sector which is less affected by the recessionary pressures. In addition, supply chain management is an obvious area of strength for us because we see a lot of clients looking to take costs out of their own supply chain.

As you know, Mark, it's hard to map, as an example, supply chain to an industry category. It's going to be, as I said before, client oriented.

It looks like the last four weeks have been all in the same neighborhood. Would you say that the preceding four weeks, like the last month of the quarter, did that show stability or was it a constant, a steady downward drift?

I would say the latter part of the third quarter, which we alluded to in the prepared comments, had a certain amount of volatility in those, although I would say, as you point out, Mark, when you look at the first handful of weeks here in the quarter, some of the volatility that we saw in the latter part of Q3 seems to have subsided. That said, in the current environment, it's hard to say whether that points to a trend, although seeing the consistency is positive.

What's the tone in terms of order starts relative to terminations? Is it your sense that more clients are tightening up even further, above and beyond what you were seeing in March? Or do you think it's -- ?

I wouldn't say that we would say -- no, I would say the answer to that is no. But again, as you've heard us talk about, visibility into where our clients are going to begin initiate projects or complete them continues to be very, very challenging. For us, again, we don't manage our business this way and we're thankful that we have not invested a lot of time and attention in forecasting but the reality is that the visibility into our client's activities is opaque at best. But I wouldn't say that it's worsening. I wouldn't tell you that across the parameter or the landscape of the organization that it's getting significantly better. But it doesn't seem to be getting more difficult than it's been over the last, say, four to 10 weeks.

One of the areas specifically, like in terms of project extensions, are coming in a little bit narrow of a band these days, whereas in the past you might get a three month extension at the end of March. Now we're seeing them come in month to month increments but we are getting extensions and we are getting new project opportunities. They're just little bit longer decision making process and a little bit longer to close as a result.

And what was the revenue associated with the offices that you're going to close? I know that you're going to fold them in, but just -- ?

I would tell you, in many cases, like if you use the example of Chicago or even the UK offices, the revenue was actually not even separately accounted for in those offices. So I would tell you it's a very small amount and mainly, again, it was because they've always been accounted for as an office group in most cases.

Okay. Great. Thanks. I'll jump back in the queue.

We'll go next to Paul Ginocchio with Deutsche Bank.

Thanks. I'll be courteous and just ask one. What was the organic SG&A decline in the quarter? Thanks.

SG&A decline in the quarter.

It's the $3.6 million, Paul, we had anniversaried Dominica and the impact of the acquisitions is very small. They were very little companies.

Right. And excluding currency?

The currency impact on the expenses was about $600,000.

Negative; right?

Yes. So yes, that kind of reverse, the hedge against the revenues.

Great. Thank you.

We'll go next to Andrew Steinerman with JPMorgan.

Hi, gentlemen. When you think about the office consolidations to seven, what percentage of office staff throughout the system would this affect?

We estimate the impact of the -- well, Andrew, I guess I don't know the answer to that. We could probably break it down for you but it's about 6%, 6.1% of the overall let's call it non-consultant headcount that was impacted by the actions. As we said in the earlier discussion, a portion of those were directly attributable to the office closings, a portion were also attributable to just administrative headcount consolidation.

Is that 6% as of the end of the February quarter or 6% estimated at the end of the May quarter?

It's as of the February quarter.

And how about as of May?

Andrew, --

I don't know yet.

How about we just leave that one on the table. That's okay.

Yes. Want to ask that next quarter?

We'll revisit that next quarter. I just have a question about typical seasonality. I know there's not a lot happening typical here but it is worth at least a discussion here. April and May are usually very much up quarters from March. With your comments about opaque visibility, are you saying that the cyclical will totally overwhelm the seasonal, meaning no seasonal uptick? Or are you saying lower than average seasonal uptick and then my next question will be how does an April and May usually compare to a March, typically?

I'll answer the first question first and then maybe we'll hand to Nate the second part. I don't suspect that we can tell you whether or not the organic weakness in the market will overwhelm the seasonality. Presumably there is some continuing seasonality to the business that mimics other cycles, but the color here I'd give you, Andrew, is what I said before, which is in a world where our clients, especially the ones that require access to the capital markets to either operate or grow, very, very difficult for us to make that determination and what we really do is stay close to them on a daily basis, and I'll go back to the commentary I made about shifting share. With respect to our let's call it historical seasonality here, you're right to point out that we are coming into our stronger quarter. Did you have a specific question about that?

Yes, I just wanted to know, when you look back at the months of April and May, so not this year, look back at the months of April and May, how much better are April and May than a month of March, typically?

I would tell you, Andrew, that it's generally the same as March. We benefit from the fact that we don't have any significant vacations throughout our entire fourth quarter. We have some one-offs but there's nothing significant like the Christmas holiday or the New Year's holiday so we do benefit from the fact that we will not have any significant loss of hours in the quarter. But relative to March being differentiated from April or May, I don't think that the differences are significant.

Right. Right. And we'll call this a 13 week quarter, 63 days, right?

15 weeks.

15 weeks, 63 days, right?

Yes.

Thanks for all the color. Much appreciated.

We'll go next to Gary Bisbee with Barclays Capital.

Hi, guys. Good afternoon. You mentioned a competitive win over competitors and one reason being more reasonable price. How are you seeing the consulting competitors who have got the full-time staff reacting? Your bill rates and pay rates really haven't come down that much. Are you seeing them be a lot more aggressive?

Yes.

Relative to the discount at which you've always -- the value proposition you've always offered clients, are they coming into that territory or is there still with the modest declines that you're showing, are you still at a -- do you think going to be at a solidly advantageous price (inaudible)?

A couple of things. There's a few things in that question. I'll try to break it down. First of all, we are seeing I would call it an acceleration of rate pressure in the marketplace, as you would expect, in part because our more traditional competitors in some cases are on a fourth or perhaps even fifth round of reductions meaning headcount reductions, and so you would naturally see rate pressures accompany that. And where probably a quarter or two ago I would say those were in a select amount of markets around our practice, now we're seeing them probably with more frequency.

A couple things about our model obviously that insulates us against that is that we already enjoyed historically and traditionally a reasonably significant differential on rate and in some markets as much as 40%. So they've got to come down a fair amount for them to be really a significant amount of pressure on us. Having said that, where we see that, and we have in some cases, we would say significant rate pressure against certain lines of business or with respect to certain project professionals, we can maintain competitiveness, we believe, not only quickly but effectively by pricing our rate and bill, or by pricing our bill rates and pay rates in a real-time basis. So I would tell you that qualitatively we had to respond and reduce rates in some cases, but that is not the majority of our experience thus far. Thus far, I would say our rate differential that had existed historically has insulated against some of that. Where we go from here, Gary, I can't be sure, except that you would expect us to continue to manage that accordingly.

Okay. Thanks. You said earlier that critical focus of the organization has shifted on business development. Obviously that seems to make a lot of sense. Can you tell us how that's different. Are there people who had been doing a bit of a different role that you've now got calling clients? What have you done differently?

It's very straightforward and no magic. This is effectively a two piston engine, client service piston in our engine and a recruiting piston. In today's environment where it's clearly a recruiting rich environment, and in this case the supply of consultants exceeds the current demand, what we've done is we've brought our recruiting piston over more towards business development. So basically you've got people who are 100% dedicated against recruiting our consultants against work that was sold or serviced by our client service organization and they've now focused if not all, a significant portion of their time and attention on building client relationships and ultimately trying to convert opportunities into assignments for our consultants.

Okay. And then just one last one, if I could. The sequential decline in SG&A, you told us how much of that was currency. Was part of that these cost saving initiatives? And in addition to that, fixed costs that you're pulling out going forward, is there some piece of SG&A that's also volume driven that we would expect to ratchet lower in addition to that $12 million run rate, if revenue were to continue to decline for a while?

I think as I had commented when I was answering Kevin's question, in terms of the quarter 3 cost reduction efforts as it relates to people, it's relatively neutral, because the savings and the severance costs are relatively a net push. So as I mentioned the savings will -- I gave you the computation of the impact in Q4 and beyond. And then Gary, was there a second part of your question?

Given that, so it sounds like most of that is to come in the future, in other words, you didn't get it this quarter so then I'm wondering why the SG&A fell $3 million sequentially. Is that seasonality? You said $600,000 was currency.

Okay. So as we've been doing throughout the course of the fiscal year, it relates to reductions in almost every category of SG&A -- marketing, stock comp expense, business expenses. We've really tried to take a real hard look and make sure that we're cognizant in getting value for every dollar that we spend.

It's just what we would refer to as ordinary course conservative expense management of the business in a revenue constrained period. We're not managing this business for any specific interval of time. We're managing it for the long-term and so you would expect our management actions to reflect the fact that we're taking that long-term view and not necessarily an interval view.

Okay. So it's just been the belt tightening you've been talking about for a while, in other words, with most of that?

That's exactly correct.

We'll go next to Jim Janesky with Stifel Nicolaus. Mr. Janesky, your line is now open.

Yes, thank you. When you look at your international versus domestic revenues, you pointed out some interesting opportunities that you've had internationally, but would you say, when you look at the weakness in international versus domestic, is it skewed one way or the currently versus what it was either in the third quarter or in let's say the last couple of quarters?

I don't think it's skewed a lot differently. I'd say that probably the biggest areas of weakness right now in Europe are in our UK and our Netherlands practice. Obviously our two biggest practices. The UK has been, as you know, has been hit exceptionally hard. Probably the only other country in Europe hit harder than the UK is Ireland. But these statistics that we gave you relative to the declines in Europe related to the UK and Netherlands are probably the biggest areas.

That said, last week we started to see a little bit of a pick-up in the activity in the UK with a couple of new client wins and several proposals. You look at the balance of Europe and we still have some pretty good gains in our Scandinavian entities. With specific accent on Sweden and Norway. So they're still performing very well. If you look at Asia, our operations in Japan are still operating very well. They're being probably the most resilient practices in Asia relative to the recession. And then our Chinese practices I think are being hurt a little bit in terms of the capital market slowdown there but I think that as we start to emerge from the recession there's going to be an awful lot of pent-up demand in the capital markets and a lot of demand for our services, helping companies getting ready to go public.

What would you attribute -- I want to focus in on the UK wins -- is it more the stealing of market share than any kind of loosening up of the markets?

You know, again, it's a relatively small amount of activity but it was positive for the practice. It's attributable, I believe, to just the continued focus, the all hands on deck on business development focus that we have going across the country.

Okay. Shifting a bit to pricing, you mentioned that there was acceleration of rate pressure at your competitors. I would imagine those are the larger competitors. Is that correct?

Yes. You would consider the two competitive sets again, the big four on the one hand and traditional large consulting companies or systems outsources on the other.

And considering that historically you've always been a better value proposition with your pricing, do you expect an acceleration of rate pressure as well as customers come to you and say, "Listen, you know, you're going to have to continue to price an umbrella lower to now a lower rate," or what have you found or what have you experienced?

Well, certainly we have and we utilize and we leverage this ability to match pay and bill on a real-time basis. We keep talking about that because it's a real lever in our business. We generally don't have to use it in this type of a market but we can. You have to remember that that's only part of the value proposition of the company. The bigger part and the more relevant part, or at least we believe the more relevant part, particularly in this environment, is for the price even at parity. The consultant that the client gets is somebody who is generally going to have twice as much experience as the equivalently priced resource that's coming in from that traditional firm. That's not always the case, obviously, I'm making a generalization, but clearly that is very typical of our average engagement with our average client, and that's clearly something that we spend a lot of time talking about relative to rate parity.

I would tell you, again, without having a lot of visibility into being able to predict this, there is a level below which it just doesn't seem economically rational to go even in this environment, in part because our traditional competitors, although they may reduce their rates to keep their consultants on their bench busy, over the long term, if it's a money losing proposition for them, it's probably not long-term economically rational. So, draw whatever conclusion from that you will. I can't be precise in terms of rate but I will tell you that there's obviously, even in this environment, a level below which we would think it's probably not going to impact us significantly negatively.

Okay. Nate, what did you mention on the tax rate? Did you make a comment on what you expected it to be for either the fourth quarter or for all of fiscal 2009?

No, we did not. And it is something that it's just impossible for us to predict because it has to do with the level of ISO stock options that are actually exercised during the period and that's something that obviously we don't control. As I mentioned on a cash basis, is really what we focus on. It's 41%.

That's what you must have said.

On a GAAP basis, as I pointed out, this quarter it was 60% in comparison to 47% and it fluctuates because of those -- really because of those ISOs, as I mentioned.

You must have said the 41% for cash basis. Okay.

Yes, that's right.

All right. Thank you.

We'll go next to Tim McHugh with William Blair & Company.

Yes, first I wanted to ask about the trends during the first four weeks of the quarter. And ask a little differently about the seasonality. Do you have what those were during the first four weeks of the year-ago period, or at least can you remind us of that, to give a sense for the year-over-year growth decline?

Growth decline. That's a good way to put it.

They're in the $16 million category and some change. Roughly $17.3 million, $16.9 million, $17.2 million in the first three weeks. So you're looking at by category, somewhere in the 30% to 35% range.

Okay. And then on the SG&A, you mentioned that the sequential decline was really just the result of the belt-tightening across the organization. And I know you've done this restructuring charge but beyond that, where are you in that? Is there further room if revenue continues to remain weak just to tighten the belt or have you squeezed out the incremental cost that you can at this point?

First of all, Tim, I wouldn't characterize it as incremental. There are clearly -- these are offices that service clients and consultants, as well. You would assume, and it would be a correct assumption, that the disproportionate impact of revenue in these markets were felt in the offices that we made these decisions in. But I can't tell you where our sustained revenue is going and, therefore, I can't give you a specific view about SG&A. But I will tell you that this is an appropriate approach, given where we are. We are not prepared to make decisions in this company that are going to sacrifice what we consider to be our strategic assets. And certainly as you've heard, one of those strategic assets we believe is our global footprint.

So while a secondary or tertiary office market consolidation into a larger, close by one, is something that probably makes economic sense at the moment, beginning to peel back or otherwise contract our global footprint would put us at a significant competitive advantage. So barring revenue going to zero, which we don't contemplate it doing, we're going to continue to invest in that global footprint because, candidly, it's taken us quite a while to build it out and it's a significant source of strategic advantage for us in the marketplace. There's always obviously room to save money but you've heard me say on this call before that you don't shrink yourself to prosperity. So right now where we're focused is growing our revenue based on this share shift initiative and the good news is we are seeing that bear some fruit.

I was asking beyond the office count number, you had talked about marketing and corporate type expenses that you were trying to keep a careful eye on now. I was just curious, have you shrunk those to such a low level that we've seen most of the cost shrink there or is there room to further -- ?

Presumably Congress could require me to take $1 a year in salary, but short of that I think we're doing the appropriate thing. I'm trying to be responsive to your question but it's hypothetical and I'd speculate that there's always money to save but it depends on what the environment dictates.

Okay. Thank you.

We'll go next to Sarah Gubins with Banc of America.

Yes, it's David Ridley in for Sarah. Just two quick questions. First, should you see the typical gross margin lift that you get in the fourth quarter, this fourth quarter?

David, were you saying do we anticipate that? I didn't hear the front part of that.

Yes, do you anticipate that?

Yes, as I said, in the third quarter we're typically impacted because of the holidays, and that's typically 150 basis points. So I think what we said in our prepared remarks is that we would anticipate our gross margin returning to historical levels, subject to a slight loss of leverage on certain benefit costs due to reduced revenue. So I don't know that we'll be back up at that 39% level but we clearly will and should see an improvement just because of the lack of holidays in the fourth quarter.

Sure. And then when do you do your goodwill impairment test?

That's done on an annual basis at the end of the fiscal year.

Okay. All right. Thank you very much.

(Operator Instructions). We'll go next to Scott Schneeberger with Oppenheimer.

Thanks. Good afternoon. Could you guys speak to, in the past you've talked about your conversations with executives of financial services companies. Just on the theory that you may be an early responder when they begin to hire and fill some holes where heads were cut, I know the visibility is opaque right now but are you still having those conversations, and just any commentary you can share there. Thanks.

Absolutely we're having the conversations. We are getting work from some of the companies that have cut significant jobs currently, and I think we're also going to be the beneficiaries from, as the increased regulation hits the financial services sector, we will also do some of that work. We are seeing a little bit of that right now, both in Europe and in the US. So I would say if you looked at the decline in our financial services business over this last quarter, a fair amount of it was in the mutual funds with our mutual fund clients, and obviously they've had significant declines in their own revenue stream and have had to cut costs. We anticipate that that is creating somewhat of a pent-up demand as well. So when that hits, when those clients hit it's hard to say but we're still having the discussions and we will be the beneficiary of that work as it comes online.

Scott, there is no doubt about it. I was just in Asia with Tony. We had met with a number of regional CFOs for some large global financial institutions and we are having what I would characterize as very productive conversations with them about work that would otherwise be going to, in some cases, the big four, in other cases traditional consulting firms, to do everything from mundane assistance matters, because there's been obviously a tremendous amount of headcount reduction in those firms, to some fairly complex accounting on some derivative instruments that they might otherwise not have called us for. And again, those two things that I talk about, and we talk about a lot, which is the character, the qualifications of our consultant, combined with the way that we both bill and pay. So rather than a fixed fee arrangement, the client in this case can turn us on and off as they see fit. So those are obviously relevant conversations in today's marketplace. How and when those conversations convert is obviously what I refer to as opaque visibility.

Thanks. So it sounds like some of the skill sets that you're being asked to serve there are right in your wheelhouse. Just curious, are you actually hiring, do you have a hiring freeze, are you hiring anywhere or shifting your human capital to certain areas more than others in this current environment?

So I mentioned earlier that shifting our recruiting resources towards business development activities and that continues everywhere. We are hiring, actually. We are still looking. As I said before, it's a very recruiting-rich environment. We're taking the opportunity -- I don't want to leave you or anyone on the call with the impression that our recruiting resources are not doing any recruiting. We think it's a good opportunity for us to continue to build relationships with professionals that will be part of our virtual bench because we what expect, as we have seen in past cycles, for our business to respond prior to, in some cases, some of the businesses coming out of the cycle fully. So we want to be prepared for that and we're trying to take advantage of that, and I would tell you whether that means that we're hiring is kind of a question of when. We continue to recruit for specific skill sets. If we don't have them in our network we will absolutely continue to aggressively recruit for those skill sets when the question arises.

Thanks. And then just two housekeeping to finish. Could you give us financial services customers, a percent of revenue estimate at this point and also RAS percent of revenue. Thank you.

Yes, the financial services clients make up about 20% of our revenues and in the third quarter related to RAS, RAS revenues made up 12% of total revenue.

Thanks.

We'll take a follow-up question from Mark Marcon of RW Baird.

I was wondering if you could tell us what the sequential changes were in Asia-Pac in dollars and also Europe.

So last quarter to this quarter, is that what you're -- or most recently reported quarter, is that what you're asking, Mark?

Correct, fiscal Q2 to fiscal Q3.

Just bear with us one second. We'll get you that. Tony is actually calculating the exchange rate differential as we speak. Actually, he's actually pulled out a slide rule.

Roughly, as we mentioned, between what we -- we can give you the breakdown maybe after the call, Mark, but it was basically about $55 million international to $43 million or so.

Yes, I got that. I just meant as it related to Asia-Pac and then Europe.

Mark, at that level of detail, why don't we go offline and we can answer that after the call.

Okay. And then how would you characterize the geographic split ? In terms of what you're seeing in Asia-Pac, is it fairly uniform or is there pockets

I'd say that it breaks down between, the most resilient business in Asia-Pac really is in Japan, although some of our younger businesses we're still seeing some reasonable revenue growth. Shanghai has been doing very well for us, one of our newer offices. We have new leadership in our Singapore office. So we're getting back up to speed in that market. And then when you look across the balance of Asia-Pac, India is still doing fairly well but again, a relatively new office, and Australia is being adversely impacted primarily by a fairly significant currency decline. So it depends on the office.

Okay. Great. Thank you.

And that does conclude our question-and-answer session. I'd now like to turn the call back over to management for any additional or closing remarks.

All right. Well, thanks everyone for attending and we'll talk to you next quarter.

And again, that does conclude today's call. We do appreciate everyone's participation. You may disconnect at this time.