Resources Connection Inc (RGP) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to today's Resources Global Professionals Q2 2010 earnings conference call. Today's call is become recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Kate Duchene. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for participating with us today. Joining me on this call today are Don Murray, our Chairman and Chief Executive Officer, Tony Cherbak, President and Chief Operating Officer, and Nate Franke, our Chief Financial Officer. During this call we will be providing you with comments on our results for the second quarter of fiscal year 2010. By now you should have a copy of today's press release. If you need a copy and are unable to access via our website, please call Patricia Marquez at 714-430-6314 and she'll be happy to fax a copy to you.

Before turning the call over to Tony, 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 30th, 2009, 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 Tony Cherbak, President and Chief Operating Officer.

Thanks, Kate. Good afternoon and welcome to the Resources Global second quarter conference call. Let me begin by giving you a brief overview of our second quarter operating results. Total revenue for the second quarter of fiscal 2010 was $121.5 million, a sequential improvement of 2.7% over our first quarter revenue of $118.3 million. For the quarter, we were close to breakeven of a pretax basis with a pretax loss of $331,000. On an after tax basis our net loss was $1.9 million or $0.04 per share. Because complex accounting rules can sometimes distort financial results, we view our cash flow from operations and adjusted EBITDA, which for the quarter totaled $5.1 million, and $5.6 million respectively, as more indicative of the strength of our business.

As you are aware, we closed the Sitrick and Brincko acquisition on November 20th, 2009. So our financial results for the second quarter include the operations of the Sitrick Brincko group, for the last week of the quarter, which was Thanksgiving week. As a result, the acquisition was insignificant to our results for the quarter overall.

Second quarter gross margin was 38.1%, which was very similar to our first quarter gross margin of 38.2%. During the second quarter, our SG&A costs were $44.2 million, and included approximately $600,000 from the acquisition related costs of Sitrick and Brincko. Excluding the acquisition related costs in Q2, and the severance costs that we recorded in Q1, our SG&A cost declined $1 million sequentially. Nate will provide more details on each of these areas later in the call.

Now let's talk for a moment about our revenue trends. As we previously reported, our revenues for the first four weeks of the second quarter, which included Labor Day, ranged from $8.2 million, to $9.6 million per week. During the following eight weeks of the second quarter, weekly revenue increased from $9.3 million during Columbus Day week to $10 million during the week prior to Thanksgiving. This $10 million weekly revenue, our high point for Q2, represents an increase of 17.6% from our non-holiday 52 week low of $8.5 million experienced last August. Additionally, we are pleased to see continued improvement in our weekly revenue as we enter our third fiscal quarter. Over the first three weeks of the third quarter, we averaged $10.5 million per week in revenue on a consolidated basis, and $10.1 million per week excluding the revenues of the newly acquired Sitrick Brincko group.

In early October we said that we were encouraged by several things that we saw in our business. First, that our people have retained their passion and enthusiasm for our business model and second that there was a consensus that the business outlook was becoming a bit more optimistic. While I think we can all agree that the current business climate remains somewhat cautious, recent US economic data points to a more optimistic economic outlook, and it correlates to was we are seeing within our client base.

Our biggest area of operational strength during the quarter came from North America, which grew weekly revenues just over 8% from the week following Labor Day to the week prior to Thanksgiving. Europe and Asia-Pacific are still a little bit slower than North America, but starting to see some improving trends. Europe and Asia-Pacific lagged North America into the recession by four to six months and we suspect that it will be at least another three months until those regions start to see some tangible momentum.

Pricing pressure, which is currently being felt more in some of our international businesses, continues to be an issue, but we are being competitive while holding onto a reasonable gross margin. We believe much of the recent improvement in our business stems from our clients continuing their shift from survival mode to a time to react mentality. Clients are beginning to determine methods to execute business initiatives and strategies required to better compete in what may be a more capital constrained and slower growth environment in the overall global economy.

Although global unemployment continues to be a drag on economic recovery, we expect to grow our revenues gradually throughout the balance of fiscal 2010. As companies continue to free up their spending on business improvement initiatives, and to meet increased peak period personnel needs brought on by a significant headcount reductions, we are well positioned to assist them with their business initiatives with more highly qualified personnel than our traditional competitors like the big four and other traditional consulting firms. We also believe that we continue to be a much more cost effective alternative as well.

A few recent project examples confirm our belief. While initially engaged to work along side a big four firm to assist a client preparing for Sarbanes 404 compliance requirements, we have recently been awarded initiative-based work to help the client design and implement financial reporting and control processes around new hedging strategies and to streamline and improve the financial and management processes related to their leases. We've also been asked to submit a proposal to provide project leadership in certain aspects of developing a shared services organization, which would consolidate its procurement function as a strategy to achieve better economies of scale when purchasing goods and services. Each of these client's initiatives share a common theme, consistent with the current economic climate, to implement focused strategies to reduce operating costs and risk. Our client has told us that our expanded role stems from the depth of experience our consultants deliver in comparison to the big four and our focus on the execution element of these initiatives.

In late November, we displaced consultants from a big four firm working on high level business initiatives at two large multinational companies. One project relates to developing more robust methodologies to evaluate product and business line profitability. The goal of the project is to enable the CEO and others to make improved product investment and pricing decisions so that they are better positioned to react to a more demand-constrained environment. Our second initiative, where Resources took the overall project leadership role, relates to a software implementation project which is anticipated to streamline and improve the consolidation process at the client's worldwide operations. In each case, the client replaced roles originally filled by the Big-Four firm, based on the determination that the respective Resources consultants' skill sets were more directly aligned with the specific initiative requirements.

Last quarter, Don spoke about a meeting with the tax director of a large consumer product Company that had just carried out a significant reduction in corporate personnel. At that meeting, we were told that as a result of the reductions, there was no longer sufficient personnel to complete the Company's multi national tax filings at year end. We currently have four consultants working on various tax projects for this client. Although we are still in the early stages of economic recovery, we remain optimistic with respect to our business over both the near and long term.

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

Thank you, Tony. As mentioned, revenues for the quarter were $121.5 million, versus $118.3 million in the first quarter of fiscal 2010. An increase of 2.7% sequentially, and a decrease of 36.1% on a quarter-over-quarter basis. On a constant currency basis, the sequential quarterly increase was 1.5%. As we reported during the first quarter conference call in early October, the second quarter began with weekly revenues ranging from $8.2 million to $9.6 million during the first four weeks of the quarter. The middle weeks of the quarter saw revenue range from $9.3 million to $9.8 million, and then increased slightly to above $10 million the week prior to the Thanksgiving holiday. Revenues during the Thanksgiving week were $7.3 million.

Now let me discuss some highlights of our revenues geographically. For the second quarter, revenues in the US were $87.4 million, roughly flat sequentially and a decrease of 35% quarter-over-quarter. While we have experienced sequential weekly revenue improvement in the US, the impact of the Labor Day and Thanksgiving holidays both occurring in the second quarter negatively impacts the sequential comparison. For the second quarter, total revenues internationally were $34.1 million, versus $30.3 million in the first quarter, an increase of 12.5% sequentially and a decline of 39% quarter-over-quarter.

International revenue accounted for approximately 28% of total revenues for the quarter, versus 26% last quarter. Coming off the summer vacation season, Europe's second quarter revenues increased 17.2% sequentially, and decreased 40.3% quarter-over-quarter, while the Asia-Pacific region saw second quarter revenues decrease 4.6% sequentially, and 36.1% quarter-over-quarter. On a constant currency basis, total international revenue increased 7.9% sequentially, but declined 42.6% quarter-over-quarter on a sequential quarterly basis, the US dollar weakened against the major currencies in Europe and Asia-Pacific. As a result, on a sequential constant currency basis, Europe's revenue increase would have been 12.6%, and Asia-Pacific's revenue decrease would have been 7.7%.

On a quarter-over-quarter basis, Europe's revenue decrease would have been 43.6%, and Asia-Pacific's would have been 41.2%. Following is some additional revenue detail related to certain of our markets. Total revenues for the Netherlands practice in the second quarter were $11.6 million, up 2.7% sequentially. On a constant currency basis, the Netherlands experienced a sequential decrease of 1.8%. UK revenues were up 10.5% sequentially, the same as on a constant currency basis. Let me now discuss early revenue trends for the third quarter of fiscal 2010.

As Tony mentioned, we continue to experience sequential improvement in the non-holiday weekly revenues. Weekly revenues for the first three weeks of the third quarter were $10.5 million, $10.7 million, and $10.5 million. The winter holidays impacted the results for the fourth and fifth weeks of the quarter and revenues during those weeks were $5.8 million and $5.2 million. Included in these amounts are weekly revenues of the Sitrick Brincko group, which averaged about $410,000 per week during the non-holiday weeks. And thinking about the remainder of the third quarter, it is important to note that Martin Luther King and President's Day holidays occur in January and February, historically our weekly revenues during those weeks are impacted by about 10 to 15%.

Now let me discuss our gross margins. Gross margin in the second quarter was 38.1%, relatively consistent with the 38.2% we experienced in the first quarter but it was 90 basis points lower than a year ago. Excluding reimbursable expenses our second quarter gross margin was 38.8%, which compares to 39.9% in the second quarter a year ago. The primary driver of the gross margin decrease from a year ago is the deleveraging of certain consultant benefit costs and to a lesser extent, a 55% decline in conversion fees, which reduced our gross margin by 20 basis points. The average billing rate for the second quarter was approximately $130 per hour, an increase from $128 in the first quarter, but a decrease from approximately $131 a year ago. The average pay rate for the second quarter was approximately $65, equivalent to the first quarter, but a decrease from approximately $67 a year ago.

Please remember, these hourly rates are derived based upon prevailing exchange rates during each given period. Average bill and pay rates during the quarter were not significantly impacted by the Sitrick Brincko acquisition, due to the transaction closing very late in the quarter. We believe our gross margin will improve modestly in the upcoming quarters, as a result of the Sitrick Brincko acquisition. But sequentially, gross margin will be slightly impacted by the resetting of payroll taxes on January 1st, as well as unemployment tax increases recently enacted by several states. For the second quarter, gross margin in the US was 40.2%, and our international gross margin was 32.8%.

Now for some headcount statistics. For the second quarter, the average consultant FTE count was 1,931. This compares to 1,911 in the previous quarter, and 2,938 in the year-ago quarter. Quarter end consultant headcount was 2,019, versus 2,854 a year ago. The total headcount of the Company was 2,778 at quarter end.

I'll now discuss some other components of our second quarter financial results. Excluding acquisition related costs of approximately $600,000, selling, general and administrative expenses for the second quarter were $43.6 million, or 36% of revenue, a sequential reduction of $1 million when compared to recurring SG&A costs of $44.6 million in the first quarter of fiscal 2010. SG&A was $54.4 million or 28.6% of revenue in the second quarter of fiscal 2009. While we will continue to invest in our business as needs dictate, on average, we believe our existing infrastructure can support revenue levels experienced about a year ago. As such, we believe a substantial portion of the gross margin associated with incremental revenue growth will increase our income from operations. It should be noted that with the Sitrick Brincko acquisition and the resetting and increase of certain payroll taxes in January, we would expect our quarterly SG&A expenses to increase modestly in the third quarter.

Stock compensation expense associated with active employees was $3.5 million, or 2.9% of total revenue, versus $4.6 million or 3.4% of total revenue in the second quarter a year ago. We would anticipate quarterly stock compensation expense to approximate this amount in the upcoming quarters. At the end of the second quarter, our office count was 85, 55 domestic and 30 international. The increase stems from the acquisition of Sitrick Brincko. Over time, we anticipate consolidating certain of these offices with Resources offices and have already done so in San Francisco.

Related to other components of our financials, depreciation and amortization was $2.6 million for the quarter, roughly equivalent to $2.5 million a year ago. Based upon the acquisition of, we would expect depreciation and amortization expense to increase to approximately $3.6 million per quarter for the upcoming quarters. Interest income decreased by about 56% to $167,000 in the second quarter, versus $379,000 a year ago. Interest income decreased due to lower average interest rates earned on our invested cash in the second quarter.

Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation was 4.6% in the second quarter, compared to 12.8% a year ago, and to negative 0.5% in the first quarter of fiscal 2010. While our pretax loss was $331,000, our provision for income taxes of $1.6 million resulted in a loss in the quarter of $1.9 million, or $0.04 a share, versus a net loss of $7.2 million or $0.16 per diluted share in the first quarter of fiscal 2010, and earnings of $0.21 per share a year ago. In the second quarter, the non-cash after tax charge for continuing employee stock comp expense was $0.06 per share versus $0.08 per share in the comparable quarter a year ago.

Our GAAP tax rate for the second quarter was approximately 477%. Our tax rate during the quarter reflects the provision for taxes in the US, and other tax jurisdictions in which we are profitable, offset in part by tax losses in certain foreign jurisdictions for which tax rates are significantly lower than in the US, or in which no tax benefit is recorded, as well as the continuing impact of incentive stock options, for which no tax deduction could be recorded during the quarter. It should be noted that each of these items which cause variances from the standard Federal and state rates, are magnified by our low, near breakeven pretax results.

Our GAAP tax rate for each of the upcoming quarters is difficult to predict and could be volatile as the rate will be dependent on several factors, including the operating results of our US and foreign locations, which as I mentioned, are taxed or benefited at different rates, as well as the number of incentive stock options exercised each quarter. Additionally, in accordance with US GAAP requirements, we will continue to assess deferred tax assets in certain foreign jurisdictions in which we are incurring losses. As we have previously discussed, US GAAP generally requires the recording of a valuation allowance against deferred tax assets associated with each tax jurisdiction, in which tax losses are incurred for three consecutive years. As of the end of our second quarter, we have approximately $3.8 million of deferred tax assets in foreign jurisdictions which could be subject to the recording of a valuation allowance.

On to our balance sheet. Cash and investments at the end of the second quarter were $135.7 million, a $28 million decrease from the end of fiscal '09. The decrease in the six month period stems primarily from the use of $28.6 million for the acquisition of Sitrick Brincko. During our second quarter, we generated cash flow from operations of $5.1 million.

The restricted stock portion of the Sitrick Brincko acquisition was in part determined by the average trading price of our stock prior to the acquisition. As such, we did not repurchase shares during the quarter. Our current Board authorization for our stock buyback program has approximately $35.6 million remaining. We will continue to assess strategies associated with returning cash to shareholders while maintaining a balance between the capital requirements of growing our business and fiscal prudence. We continue to believe the strength of our balance sheet offers us a significant competitive advantage.

Our shares outstanding at the end of the second quarter were approximately 46.4 million, an increase of approximately 979,000 shares, stemming from the issuance of 822,000 shares for the Sitrick Brincko acquisition and 157,000 shares associated with stock option exercises. Receivables at the end of the quarter were approximately $72.6 million, up about $10.7 million from the previous quarter. The increase stems primarily from $6.7 million of receivables recorded as part of the Sitrick Brincko acquisition.

Days of revenue outstanding were approximately 58 days, up 10 days from the prior year's comparable quarter and three days higher than the first quarter of fiscal 2010. Our days of revenue outstanding was impacted by the Thanksgiving holiday during the last week of the quarter. During the first couple of weeks of the third quarter, cash receipts of about $20 million brought our days outstanding down to more normal levels. However, it should be noted that Sitrick Brincko can have extended collection periods due the nature of their business.

I'd now like to turn the call over to Don for some closing thoughts.

Thank you, Nate. Well, as we have said in the past, Resources' business has been built supporting client requirements during periods of change. As companies throughout the world continue to device and execute their strategies to react to the economic and regulatory landscape, I believe that our business model positions us to support our clients' initiatives much more effectively than traditional consulting firms, with generally rely on less experienced professionals to conduct the majority of of work performed at our client. As we look to calendar 2010, I believe the types of client stories Tony described, where we are helping our clients become more efficient and react to global change will repeat themselves again and again.

Our acquisition of Sitrick and Company and Brincko and Associates should also provide us opportunities to serve clients in new ways. By combining the specialized skill sets of these two businesses with Resources' consulting capabilities, geographic footprint and client base, we believe that we will greatly increase our ability to assist clients during these challenging periods in a more cost effective manner than currently offered by traditional consulting firms. Additionally, the acquisition of Sitrick and Company significantly enhances our first in capabilities as corporate issues arise.

Execution of our client service strategy is paramount to our success. And our success in this area is best measured by our client retention data. Let me share some of the second quarter statistics. In fiscal 2009, we had 293 clients for whom we provided services exceeding $500,000 in fees. In our second quarter of 2010, on a run rate basis, we have served 210 clients at this level. Our top 50 clients represented 41% of total revenues, while 50% of our revenues came from 83 clients. Our largest client for the quarter was less than 4% of revenues.

Client continuity continues to be outstanding. During our second quarter of fiscal 2010, we served all but one of our top 50 clients from each of fiscal year 2009 and 2008. Our loyal client following is reflective of our client service approach, and the quality of the work performed by our consultants. Through the second quarter, 90% of our top 50 clients have used more than one service line and 72% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our client organizations. This concludes our prepared remarks. We will be happy to answer your questions at this time. Thank you.

Thank you. (Operator Instructions). We'll go first to Sara Gubins with Banc of America/Merrill Lynch.

Hi, thanks, good afternoon. Could you talk a bit about trends in pricing? It looks like bill rates improved a bit versus last quarter, and I'm wondering if this now looks like a reasonable run rate, or if you think that continued concessions might drive it down further?

Well, first of all, pricing, the biggest factor in pricing is the nature of the projects. So the projects that require a more senior intellectual capital type of consultant are going to have higher bill rates. Irregardless of the margins in some respects. So we're seeing projects that are a little higher in nature than they were at the -- probably the deepest part of the recession so that's one of the reasons the bill rates you see are going up. We've been doing a pretty good job controlling the natural gross margin, the pricing, and I don't anticipate that's going to change significantly. And we do expect our revenue trend to continue to inch upwards. We think we've seen the worst and believe that we'll continue to grow probably modestly for the rest of the year.

Just in terms of geographies, I'd say that we're seeing a little bit more pricing pressure in our international businesses versus in North America as well.

Okay. And then if I got the number right, I think the number of FTEs ending the quarter was up versus the average. And I'm hoping you can just provide a little bit of color about whether or not -- if that's you adding in response to seeing better demand or if there's anything seasonal about that?

What I would correlate to is you go back to some of the weekly revenue statistics that were in the prepared remarks. During the second quarter, we saw somewhat of an uptick as we left the Labor Day week and came through the weeks beginning the week prior to Thanksgiving. So the increase in that consultant count was obviously I think very similar to the revenue increases during those weeks.

Okay.

So clearly, an improvement in the demand that we saw in the quarter.

Okay. And then last question. I was just hoping to revisit your gross margin comment. I think that you mentioned that you expect gross margins to improve slightly related to the acquisition, but that then payroll and unemployment taxes would hurt margins, so I'm just wondering on the whole, what are you expecting for gross margins in the rest of the year versus where you were in the second quarter?

If you look at the past, and this would be absent of the Sitrick Brincko acquisition, the resetting of the payroll taxes and the impact of the holidays in the third quarter have probably impacted gross margins by about 1.5%, 150 basis points. And if you then now in the current period with the full quarter of Sitrick Brincko, they will probably offset, that acquisition will probably offset the impact of the holidays and the payroll taxes. The only diminishment will be as I think 33 states have announced increases in unemployment taxes, so we could see a 10 or 20 basis point impact in the third quarter as a result of those unemployment taxes. The thresholds of salary that you have to pay are fairly low and so the limits are typically met within three or four months for a number of our people.

Okay. So it sounds like third quarter kind of flattish to maybe down a little bit versus second quarter is a reasonable way to think about it. And then in the fourth quarter you don't have the issue around the holidays negatively impacting you?

I think that's a good summary.

Okay. Thanks very much. I appreciate it.

We'll go next to TC Robillard with Signal Hill Capital Group.

Great. Thanks. Good afternoon, everyone. Just wanted to dive in a little bit more on the $10.5 million weekly run rate you saw in the first three weeks of the quarter, obviously the holidays are unique beasts. I just wanted to get a sense as to your viewpoint. Is that $10.5 million a decent enough rate or was there anything unique with year-end projects driving that? I'm trying to get a sense as to how we get into the, as we cross over into the calendar year, how we thing about the business in a historical context?

Historically, we would expect to see those rates returning sometime in mid to end of January. As the projects start ramping back up again. We are hopeful that we'll start to see continuous incremental growth for the rest of the year by the week toward the end of the second quarter, every week we were hitting a high compared to where we were in the spring and the fall, the spring and the summer. So we're hopeful that that trend's going to continue.

I think as we talked in the last conference call, what we were experiencing last quarter and what we experienced in the current quarter were gradual improvements in our revenue base and that's what we anticipate throughout the balance of fiscal 2010. Obviously, the Sitrick Brincko group is going to add some incremental revenue to us. Their business is more episodic in nature and it will depend upon the types of projects that they retain, as to whether we get any enhancement out of that.

And Tony, not to dance with semantics here, but I just want to make sure. Is a 10.5 run rate, actually, about 10.1 if we exclude the Sitrick contribution, relative to where you were as you ended the quarter I guess was at kind of the mid-nine level, high nine level, is that a fair assessment of gradual, call it $0.5 million a week in terms of relative to where you ended the last quarter and where you are, excluding Sitrick.

Yes, I think so. Our goal for ending the second quarter was to get to $10 million, and we were happy that we did and our anticipation was that we would grow from there. So I think the $10.1 million, we had one week of $10.2 million, excluding, I think Sitrick, those are gradual improvements, along with our expectations.

Okay. Great. Just real quick, last one, I'll jump back in the queue. Nate, on the gross margin, based on just kind of how it works and kind of the delevering that you guys had seen, honestly I would have expected a slight improvement quarter-to-quarter given that revenues actually did improve quarterly. How am I thinking about that incorrectly there? Because I would have figured you guys would have gotten a little bit of some leverage there with revenues improving.

Yes, the other impact was you have the impact of holiday pay, of having both Labor Day and Thanksgiving day in the quarter, so but you are, I do agree, I think you're right with the premise that as you get into periods where we don't have as many holidays and with the modestly and gradual improving revenues, the leverage on the benefits should improve.

Also, you know, we're in a very competitive environment and we're not afraid to get concessions to our best clients to keep the clients. So I think we're actually doing a very good job compared to some of the competition that we're seeing in these major clients where the big four firms, if they're overstaffed, will give their people away. We're not doing that. So I think we're reacting to a competitive environment and I think we're doing a really good job keeping our clients. The strength of our business is our client base. And I've said it before. We have not lost our major clients, and that's really what's going to help us continue to grow is our major clients start freeing up some of these project money, we will get our share of it, and that will help us continue to grow, we hope, for the rest of the year.

That's very -- that's some great color. Thanks, Don.

We'll go next to Andrew Steinerman with JPMorgan.

Hi, just as a clarification, those ending consultant count numbers that we had for the quarter, do those include Sitrick Brincko or are those just core Resources numbers?

Those are just core Resources.

Okay. And then also, I think you've answered this but just to clarify. When we talk about modest sequential growth for the rest of the year, I would assume that by the time we get to the May quarter, that would end up being higher sequential growth just because it's not handicapped by any holidays and so what your comment really was on a non-holiday basis when we have a quarter like a May, you could actually have more sequential growth than we just had; right?

That's correct.

Okay. And then lastly, obviously you gave us some historical numbers for Sitrick Brincko. Are you able to give us any thought on how much -- and I know you said in the quarter obviously just ended the last couple of weeks, but for the calendar year 2010, what kind of EBITDA contribution Sitrick Brincko could have on the overall Company?

Yes, Andrew, we don't really give that type of forward-looking projections. I think with the 8-K that was filed yesterday, yes, I think you can take a look at the pro forma financial statements in that and make your assessment of that. But we're not, and consistent with our long-term past practice, aren't really going to give that type of forward guidance.

Okay. Thank you very much.

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

Hi, guys. Good afternoon. Let me take another crack at Andrew's question there. We saw the -- . Do you envision making any major investments there to try and ramp up the growth that might depress the profitability from what was in those numbers? And I guess can you give us any sense how significant those investments might

Go ahead.

Our plan with is for us to add the -- Mike and John to add from high level Resources in the corporate advisory business, the restructuring business. That's something we have to execute if we're going to get significant growth out of it. We hope that those investments basically will be paying for themselves as we're putting projects on-board and to date we're looking at different people that we might add to Sitrick Brincko, but as such, we don't have any real firm agreements to add significant overhead yet. We're not going to add significant overhead without the good probability of revenue and the guidance that Mike has in his incentive, the earn-out that he has is basically not to out-spend his growth. So yes, we have to execute and add people and for the same time for Mike and John to hit their earn-out, those people have to be paying for themselves.

It would be a very disciplined approach to adding any incremental cost.

Another thing I thought was interesting in the 8-K was there was an estimate of what the potential earn-out payment could be. It appears from that, I know that's just an estimate you're making, but it appears from that that you're expecting pretty significant growth in the business over the four year window. Can you help us understand how you get to that number, how you're thinking about it, is it about -- mostly about adding headcount as you just talked about or what gets you comfortable with that number?

Well, we're not comfortable with the number, per se. The GAAP requires you to do some estimates. All these estimates are based on what the future's going to hold. We can't predict the future but under GAAP we have to do this estimate and Mike and John are very hopeful and feel strongly that they're going to be able to build the business. We will add the majority of our consultants will come from our regular resource pool. So they don't have to do a lot of hiring of consultants. We will do that.

What they have to do is get the big projects and get the chief restructuring officers. But as far as the number, that number is what compromised number that Mike and John are shooting for, but there's no way to put a probability on it. So this accounting rule to me just makes no sense at all, but it is the accounting rule and you have to live with it but it's kind of nuts because you do an earn out, you don't know what the results are going to be and you want to reward and pay people for their business, if they're business is going to do what they say it's going to do but you don't want to prove it on day one.

If you recall from all of the years prior to the time that the new purchase accounting literature was introduced, you recorded the earn-out payment when that earn-out payment came to fruition. And as Don says, the reason that you put in earn-outs are to protect the shareholders based upon making sure that an acquisition does what you think it is going to do, so as Don has mentioned, it's the best guess at this point in time what that earn-out may come out to be it obviously could be volatile.

Okay. And appreciate the commentary. I guess I'm just trying to understand exactly what the growth model is. I guess it's about headcount at the senior level and those people increasingly utilizing the core Resources associates.

That's exactly right.

We have the capability in our current Resources model to absorb a lot of the growth that they can bring in with big turnaround projects. Our largest project probably in any one year in our history was the WorldCom MCI restructuring and at one time we had 120 consultants on that project. But we didn't have anyone at the higher level like in John Brincko. If we had had a John Brincko type involved in that project earlier, we would have probably had a lot more people and been there a lot longer. So that's the type of synergy and growth we're hoping to get from this.

Okay. And just one more question, if I can, on the core business. You've talked over the last couple quarters about having some optimism that you would see corporate budgets begin to open up a bit once we get into the new calendar year. Any sense on that? I know we're only a week in, but any sense in your discussions if that's likely to be something that happens?

Yes, I think Tony gave some good examples of some projects that are -- seem different in nature than at the depth of the downturn, so we are seeing more corporate projects coming versus the very the reactionary projects that we had at the downturn. So we are seeing that. We are seeing dollars freed up. Our strength is that we have again maintained our client base. We still have this Fortune 100 base clients and as they free up the money to get projects done, and they also at the same time have less staff to do them, we hope to get our share of that work. We are seeing that. We are seeing that as we visit some of our major clients.

I can give you a good example too. In one particular area where we're seeing a little bit of strength is in financial services. The spending has come back a little bit in financial services. Our financial services revenues were up 6% sequentially in the quarter and if we look at just an example of four clients that we have in the Northeast, we've got roughly 130 people on these four clients, all within the financial services industry working on things from preparation of carve-out financial statements, helping them with M&A, working on an SAP implementation, working on complex financial reporting and SEC disclosure, BASEL-2, implementing tax reporting systems and so on. So it's a varied look of the different projects that are coming out.

Great. Thanks for all the color.

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

A couple of questions. First, on -- you're talking about companies cutting quite substantially, going into this recession, and going through the recession. What are your clients telling you or what are your thoughts on bringing back people, rather than using project oriented individuals? Do you think that that might go on longer in this cycle, and I guess just overall what are your clients' overall feelings about hiring?

I think in the financial services area, which is probably our biggest core business, a lot of the -- there's two trends. One trend is that some of these financial institutions that have paid back their TARP money have to have a plan going forward where they're not increasing a lot of overhead, because the government is very concerned with them continuing to have a strong capital base. So we're hearing from some of our clients that have paid back the TARP money that they're going to continue to be really tight on some of the overhead. Therefore, they'll need more assistance. On the other hand, we also have clients in tri-state that are hiring back positions that they had laid off just six months ago, and they're hiring back faster than they originally had anticipated. So you see both trends going on. We're not too concerned with the clients wanting to hire people back for core roles in their businesses because we do much better when we're doing discrete projects and helping them get those projects done, and we don't think they'll be hiring permanent employees as a trend to do discrete projects.

Okay. And is there any -- are you seeing any differences in trends within sizes of businesses, for example, small to medium versus larger businesses?

In terms of you mean client demand?

Yes, demand, exactly, on projects mostly.

I would say that our growth has always come from the Fortune 1000, that's really been our core strength. As far as mid-market, I don't see any strong positive trend in the mid-market.

Okay.

Do you, Tony?

I think, again, some of the statistics that we went through in the prepared comments, I think bear that out. 50%, we had something like 80 clients that made up 50% of our revenues for the quarter, which reflects our focus on the larger clientele and it's always -- it's been the strategy of the Company to focus on bigger clients because they're sustainable and repeatable, they have many more departments in which we have numerous buyers and more points of contact so our view is getting into a big client, we'll get into the accounting and finance department and try to get introductions into capital, into IT and other departments within that client. So that's really been our focus over quite some time.

I would say our clients are still very tentative about this recovery. So they're not rushing out to do for the most part a lot of hiring.

Okay. And then can you just remind us how the -- I know this is in the fourth fiscal quarter of May, but how does -- what happens around the Easter holidays to revenues? Is it similar to what happens around President's Day and Martin Luther King.

Probably much more similar. It's not obviously nearly as big of an impact as the winter holidays.

Okay. Thank you.

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

You used to give a revenue calculation. Just wondering if you're going to go back to that practice. I know it's not guidance. But it was something to think about. Is the recovery still too tentative in your view to give that or what's holding you back? Thanks.

We just -- we've not done that over the last couple of quarters, just because of the volatility within the market. So we may go back to that at some point but we have chosen not to on this quarter. Again, I think that you can just -- you can rely on the remarks that we have made just relative to what we're currently seeing in the business and that's kind of a gradual growth trend and if you look at the first quarter or the first part of the second quarter, we're at 9.5, 9.6, we ended up at 10 million. We're $10.1 million, $10.2 without Sitrick Brincko in the first part of the third quarter. That's the most complete view we can give you at this point. What happens throughout the rest of the quarter, we think we're going to grow but again we think it's going to be gradual.

Those numbers you gave me seem pretty gradual and consistent, not volatile. Again, the question why you wouldn't go to it this quarter.

It's simply a mathematical calculation that any of you can do and we don't see any real benefit for us doing it because it could take on more significance than it really is if we do it on a conference call, especially in this kind of an environment. So more legal reasons than anything else.

Okay.

We'll go next to Scott Schneeberger with Oppenheimer.

Thanks. Good afternoon. Sounds like it's pretty strong pickup recently, I think you said 8% quarter-over-quarter in financial services. Could you guys address perhaps some other verticals that are doing well? And then the second part of the question would be I'm guessing financial accounting is where you're seeing most of the strength but other business lines where there might be pockets of activity. Thanks.

Actually on financial services it was 6% sequentially and that's really -- just because we get questions about that all the time, we've accumulated that information for that particular industry group. Relative to our service lines or our practice areas, as we talked about a little bit in our prepared remarks, anything around helping clients with reducing their costs like Supply Chain Management has been very, very strong for us. So during the second quarter, Supply Chain Management was up a little bit over 10%. In other areas, accounting and finance, that has always been one of our key service lines, it's what we lead with in most of our offices. That always tends to be pretty strong. We're also seeing some pretty good traction in information management with a lot of new ERP projects going on at our clients. And then even though legal is relatively small, that has continued to be an area of strength for us.

Thanks. Switching gears, actually one, RAS, what percent of revenue was that?

12%.

Switching gears now, SG&A, a lot of talk of gross margin. You mentioned a little bit of investment to grow some of the new businesses acquired. What are we going to see for trends in SG&A? I know you wanted to keep the office structure and if you could work in a little bit of the impact of blending the two, the acquisitions with your offices. Thanks.

Sure.

I think Nate said that we'll have a slight increase in SG&A because of the Sitrick Brincko acquisition. We're doing I think a good job here of keeping the SG&A down in the core business and over time we plan to combine the Sitrick Brincko existing offices with Resources offices, have already done that in one geography. We're looking to do it in one of the biggest geographies, so we would expect that we would be able to impact at least their rent costs over time and bring those down as they come into our space. But we didn't quantify it but Nate said we anticipate a slight increase in SG&A because of the Brincko acquisition.

Okay. Thanks. And then finally, on the heels of that acquisition, what's your mindset on use of cash going forward?

We don't anticipate needing a lot of cash because of that acquisition. And so we will look at uses of cash, we'll talk about our next Board meeting about other ways to return cash to shareholders, as well as looking at probably going back into the market and repurchasing shares as we have in the past. We couldn't repurchase them in the last quarter because of the acquisition that was pending, and the fact that we didn't want to affect the share price, and because of the acquisition, and we needed to get that acquisition and the shares issued under the formula without us doing anything artificially to adjust the share price. So we'll probably go back into the market and we anticipate looking to return cash to shareholders.

Okay. Thanks. And real quick, finally, just acquisition pipeline, are you going to take a breather for a while, or is that something you're looking to build?

We're still looking at lots of different types of businesses. We look at a lot and we're very slow to close, and we're very cautious. So we are continuing to look in this marketplace because it's a good time to do an acquisition if it's the right acquisition for us. But we don't -- we're not looking at anything of significant size at all.

Okay. Thanks very much.

We'll go next to Mark Marcon with RW Baird.

Good afternoon. Was wondering if you could -- we went through the 8-K and there's just a few items that are a little confusing in there and so I was just wondering, could you talk a little about exactly how much you would think the -- not exactly but roughly how much you think SG&A is going to increase sequentially.

Yes, go back on the 8-K, I think what you'll find is that after you take out the pro formas, the Sitrick Brincko acquisition, probably layer on about $2 million a quarter. Give or take a little but that's probably a reasonable number looking forward in the near term.

Okay.

And then as I mentioned in the prepared remarks, you also have just with the core Resources with the resetting of the payroll tax --

Sure.

You have the impact of that which will add to it.

That would be about 70 bips; right?

Yes. That would give you a frame of reference, Mark.

Yes, but I mean roughly just on the core Resources if we thing about what payroll taxes average, and then think about your structure in terms of the comp as a percentage of SG&A relative to rent and other things, et cetera, that we're basically looking at around 70 bips.

Yes.

Sequentially. Okay. And then when we -- was there any other -- when we look at the division just between -- are you going to -- when we take a look at the 8-K and we take a look at the division between how the expenses are allocated, particularly the direct cost of services, should we -- is that the way to look at it, or are there going to be some adjustments to that?

Well, I mean, are you referring to the historical statements that were in the 8-K for Sitrick and Brincko?

Yes. Not the audited, the old financial statements, I'm just talking about specifically the unaudited pro forma condensed statements.

Right. So those were cast in the historical statements of Sitrick and Brincko did not have -- disclose a gross margin so to conform them with Resources they were recast looking at each of their people that provided client service and derived revenue. So those should be a good - again, a proxy of recasting the historicals and wouldn't have a belief on their core business that those odds are good proxy going forward. Obviously as new projects come on, we deploy consultants from the Resources side, that could change, but that was recast to conform to Resources' financial reporting model.

Okay. Great. And then can you talk a little bit more about the comments on the big four in terms of what you're seeing. Are you getting the sense that they're finally stabilizing their pricing or do you think that that pricing is going to continue to be under pressure for them and therefore the umbrella comes down a little bit?

What we understand is that the coming into the busy season and they probably have on some of their core businesses have cut pretty deeply, so we don't anticipate that they're going to be out aggressively trying to put people out during this next two months. What we hear in the field is there's some of the big four or at least one of them that we know of is still layoff in December, we did a layoff of their people right before Christmas, so Merry Christmas. And so they think they're right-sized going forward. If they're right-sized, they don't discount unless it's a strategic client they're trying to get into. So we would anticipate that that big four pricing probably has stabilized at least for the next few months. And the pickup even if it's a modest pickup, they're probably going to be getting a modest pickup too, and as some companies start doing IPOs and M&A type transactions then they'll see a pickup in their business, which again will moderate any aggressive pricing that they have.

Great. And then can you talk a little bit about the quality of the people that you're seeing that are flowing through your offices an consultants at this point? It would seem to me that with as many high quality people being out on the street, that it's probably much easier for you to recruit and fill good positions than it has been in the past.

I would say that's an accurate statement and just in the last -- I would say the last four weeks, not counting the holidays, we've had -- offices have actually had to go out and recruit again where before they had a pipeline of people that had already been screened, waiting for work, so recently we've had in some of the markets we've had to actually go out into the marketplace and recruit again for specific skill sets, as those markets picked up a little bit. So but the quality of people is very strong, especially in the financial services area and the financial services cities.

Mark, one of the things that we do when we do our office visits is virtually every visit involves meeting with our consultants and quality of our consultants is absolutely outstanding. In fact we got an e-mail last week from a particular client who was raving over the fact that several of our people in different geographies kind of came together to help them solve a pretty significant inventory problem within their Company on an expedited basis, so those things are not unusual. Those types of messages from clients are not unusual. So we've got outstanding consultants from our perspective.

Good to hear. Thank you.

We'll go next to Kelly Flynn with Credit Suisse.

Thanks. Couple questions. Back to Mark's question about G&A, I just want to clarify again. First of all, do your comments about a few million increase sequentially, is that before considering the higher depreciation and amortization line?

No, that's just the SG&A line.

Okay. So then we would layer in an additional increase on the D&A?

Right, for the Sitrick Brincko acquired intangibles, correct.

Right. Okay. And then also, just going back to the SG&A, can you just clarify again, it's a few million increase but then you would expect an additional increase from the unemployment tax issues you cited so it would actually be probably more like $2.5 million increase or something like that, is that the way we should think about it sequentially?

Well, I think if you look at it sequentially, I would probably -- as I said, Sitrick Brincko would be -- is a couple million of SG&A, and then the resetting of the payroll and increased payroll taxes, hard to completely compute that but that could be probably between 750 to maybe $1 million spread out. Again, as limits are hit and the thing that makes it difficult is each state has different limits, so it starts in January and we probably have most of that behind us as we get to March.

Okay. Great. And then also revisiting prior comments that the sequential growth you expect for the next couple quarters, can you just revisit that comment? Did you say you expect sequential growth in the third and the fourth quarter and can you clarify if that's inclusive of the acquisition or if the acquisition would be incremental to that?

Well, we anticipate to gradually continue to grow our revenues and let me clarify that. That would be on like non-holiday weeks, obviously, we'll continue to grow our revenues on a gradual basis, both in our core business as well as with Sitrick Brincko adding incremental revenue on a weekly basis.

Okay. But did you say you expect sequential increases in revenue in each of the next two quarters or am I misinterpreting that?

We do in non-holiday weeks.

Okay. But this -- can you just kind of speak through the seasonality, reflecting seasonality/holidays, are you saying you expect sequential increases for the next two quarters or would that be misinterpreting.

I think what we have said and what we'll just reaffirm is that we expect throughout the balance of the year to grow our revenues on a gradual basis. That's what we've stated.

Okay. Got it. Thank you. And then what's the right share count for the third quarter?

Excuse me, Kelly.

What's the right share count. Yes.

We ended the quarter with an outstanding share count of 46.4 million.

Okay. Great. And then finally, just on the acquisition, was there any more detail you can provide on the modest accretion that's expected?

No, I mean, again, I think we made earlier comments. Again, I would refer you back to the Form 8-K that we filed yesterday and the pro formas. I think those give pretty decent portrayal of layering the existing business on, and then again, you have to keep in mind the strategy around that acquisition is -- each party brought something very significant to the table that each party kind of needed to build a capability, so as Don mentioned, we need to execute, but that brings us some new capabilities and it's in a space that we have participated in and we need to execute.

Okay. Perfect. Thanks a lot. Appreciate it.

We'll go next to Joe Alkire with William Blair.

Yes, hi, most of my questions have been answered but maybe for Nate, did I hear you correctly earlier, did you say that the acquisition will impact the gross margin line by about 150 basis points? Is that right?

Well, what I said is on a -- yes, if you go back again to the 8-K, that's what the pro forma results would suggest from the pro forma financials and the 8-K. Again, in the third quarter, that positive impact will be negated by the resetting of the payroll taxes and the like.

Right. Right. Okay. Thank you.

And once again, that is star one if you do have a question. We'll go next to TC Robillard with Signal Hill Capital Group.

Just one quick question on Sitrick Brincko. Have you guys been able to cross-pollinate on engagements yet with some of the Resources consultants? In other words, have you won any projects where you're going to be able to start to use the Resources consultants or is it still kind of too early?

Yes, I don't think we really want to discuss that yet since we just completed the acquisition and we've been -- Mike and John have been on a road show basically, so we're still laying the foundation. We have gotten new work, I have to say, but it's too early to talk about how it's affecting our core business.

Fair enough. Thanks.

We'll go next to Mark Marcon with RW Baird.

You know, 404 work has been in the news a little bit more lately. Obviously there's some considerations going on there. Just wondering, can you talk a little bit about, obviously it's fallen off as a percentage of your revenue but in terms of that particular aspect of it, do you anticipate that that's stabilized at this point, or do you think it's going to continue to fall off?

As long as there's a requirement, it's probably stabilized because it's kind of a routine part of the year end audit and year end close. What we think might occur is that because clients results are quite a bit off of the previous years, that the scope of what they might have to look at under SOX might increase. So some of the locations they had which were insignificant or immaterial might become more material because their earnings have dropped quite a bit. But we haven't seen any significant change really one way or the other right now. We're still picking up and as far as a new area, we're still picking up some new engagements on international accounting standards, as clients around the world work towards that as they believe the majority of the world will have the same accounting standards. So we are getting more projects on that.

Great. And then just a point of clarification. With regards to Brincko Sitrick, the royalties that was a little bit confusing. Can you discuss a little bit how much of that recurs or doesn't recur?

None of it. That was basically internal mechanism in the old Company, as a means of paying the shareholder owner.

Got it. And so just think of that as going away?

That's correct.

Okay. Great. Thank you.

And there are no other questions at this time. I'd like to turn the conference back to our speakers for any closing remarks.

Just want to thank all of our investors and all of you for your continued support and interest in Resources, and we look forward to our next update in April for the third quarter. Thank you.

Thank you, everyone. That does conclude today's conference. We thank you for your participation.