Resources Connection Inc (RGP) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Resources Global Professionals first quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. Later we'll conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded. I would now like to have the conference over to Michelle Gouvion, Senior Counsel. Ma'am, you may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for participating today. Joining me on this call today are Don Murray, 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 first quarter of fiscal 2011. By now you should have a copy of today's press release. If you need a copy and are unable to access it from our website, please call Patricia Marquez at area code 714-430-6314 and she'll fax you a copy.

Before introducing Tony, I would like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 29, 2010, 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 conditions to differ materially from the results of operations and financial conditions expressed or implied by the forward-looking statements made during this call. I will now turn the call over to Tony Cherbak, President and Chief Operating Officer.

Thanks, Michelle. Good afternoon and welcome to the Resources Global first quarter conference call. Let me begin by giving you a brief overview of our first quarter operating results. Total revenue for the first quarter of fiscal 2011 was $123.7 million, a 4.6% increase over the comparable quarter a year ago and a decrease of 7.6% over our fourth quarter revenue of $133.9 million. Included in our first quarter results is revenue of $6.2 million attributable to the Sitrick Brincko Group. First quarter gross margin was 39.8%, a quarter over quarter improvement of 160 basis points and a decrease of 160 basis points sequentially, the result of two national holidays in the US during the quarter.

During the first quarter our SG&A costs were $40.9 million, a $3.7 million decrease from the comparable quarter a year ago after excluding prior year severance costs. Sequentially, SG&A decreased $2.1 million or 4.9%. In Q1, we generated cash flow from operations and adjusted EBITDA of $7.1 million and $11.1 million respectively. For the quarter, our pretax income was $4 million which included a noncash expense of $1.3 million or $0.01 per share related to an increase in the estimated fair value of the Sitrick Brincko contingent consideration. Including the aforementioned items, our GAAP in net income was $1.2 million or $0.03 per share. Nate will provide more details on each of these items later on in the call.

A couple of words about about revenue trends. As we reported in July, weekly revenue during the first six weeks of the first quarter averaged $9.2 million but included two national holidays in the US. During the following seven weeks weekly revenues ranged from $9.5 million to $10.2 million which we recorded in the last week of the quarter. The average weekly revenue during that seven-week period was $9.7 million per week.

We continue to compete for and win our fair share of projects Companywide with our information management and supply chain practice areas recording solid year-over-year gains. As we begin our second quarter we're pleased to see improving revenue trends with non-holiday weekly revenues ranging between $10 million and $10.7 million thus far in the quarter.

Geographically Asia Pacific has performed very well on the strength of our business in Japan and China and although business in Europe is still a little bit tough, we're seeing some signs of stabilization and are confident that our practice leaders there will improve their operations throughout the balance of 2011. In North America business has been pretty consistent across the continent with all of our regions performing well.

We remain focused on growing our business worldwide and are encouraged by these early trends of the second quarter. 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 $123.7 million versus $118.3 million in the first quarter of fiscal 2010, a quarter over quarter increase of 4.6% but a sequential decrease of 7.6%. As anticipated, our first quarter revenues were somewhat impacted by summer vacations both in the US and Europe. On a constant currency basis, the sequential decrease was 7.1% and the quarter over quarter increase was 5.4%. Average weekly revenues of the Sitrick Brincko Group were $477,000 compared to a non-holiday weekly average of $615,000 last quarter. It is important to remember that Sitrick Brincko's revenue can vary significantly week to week due to the episodic nature of much of their work.

Now let me discuss some highlights of our revenues geographically. For the first quarter, revenues in the US were $95.5 million, up 8.5% quarter over quarter and down sequentially by 7.6%. For the first quarter total revenues internationally were $28.2 million versus $30.3 million in the first quarter a year ago, a decrease of 7.8% sequentially and 6.9% quarter over quarter.

International revenue accounted for approximately 23% of total revenues for the quarter, the same as last quarter. Europe's first quarter revenue decreased 17.2% quarter over quarter and 13.6% sequentially while the Asia Pacific region saw first quarter revenues increase 10.8% quarter over quarter and 7.5% sequentially. As we closed out the summer vacation season, it is encouraging to note the improving weekly revenue trends across all of our geographies.

On a constant currency basis total international revenue decreased 5.6% sequentially and 3.3% quarter over quarter. On a sequential quarterly basis the US dollar strengthened against the major currencies in Europe while it was weaker against currencies in Asia Pacific. As a result, on a sequential constant currency basis Europe's revenue decline would have narrowed to 10.2% and Asia Pacific sequential's revenue increased would have been 6%. On a quarter over quarter basis, Europe's revenue decrease would have been 10.2% and Asia Pacific's increase would have been 6.2%.

I will now give some additional revenue detail related to certain markets. Total revenues for the Netherlands practice in the first quarter were $6.9 million down 14.8% sequentially and 38.9% quarter over quarter. On a constant currency basis the Netherlands experienced a sequential decrease of 9.9%. UK revenues were down 9.7% sequentially and 26.3% quarter over quarter. On a constant currency basis, the UK's sequential revenue impact was not significant.

Let me now discuss early revenue trends for the second quarter of fiscal 2011. Weekly revenues for the first four weeks of the second quarter were $10 million, $9 million, which was Labor Day week, $10.6 million and $10.7 million. Included in these amounts are weekly revenues of the Sitrick Brincko Group which averaged $436,000 per week. In thinking about the second quarter, it is important to remember that in addition to Labor Day we will lose about two days of revenue in the US due to the Thanksgiving holiday in November.

Now let me discuss gross margins. Gross margin for the first quarter was 39.8% versus 38.2% in the year ago quarter and 41.4% in the fourth quarter of fiscal 2010. The sequential decrease in gross margin was slightly better than our expectations. The anticipated impact from two holidays occurring during the first quarter was offset in part by lower costs incurred within our self-insured healthcare plans. Excluding reimbursable expenses, our first quarter gross margin was 40.7% which compares to 38.8% in the first quarter a year ago.

The average billing rate for the quarter was approximately $128, a decrease from $132 in the fourth quarter and the same as a year ago. The average pay rate for the first quarter was approximately $62 versus $63 in the fourth quarter and $65 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each period. The sequential decline in bill rates stems in part from sequentially lower Sitrick Brincko revenues as discussed previously.

In thinking about gross margin in the second quarter of fiscal 2011, we would expect gross margins to remain fairly consistent with what we experienced in the first quarter. For the first quarter, gross margin in the US was 41.6% and our international gross margin was 33.9%.

Now to head count. For the first quarter the average consultant FTE count was 2,025. This compares to 2,057 in the previous quarter and 1,911 in the year ago quarter. Quarter end consultant head count was 2,072 versus 1,945 a year ago. The total head count of the Company was 2,785 at quarter end.

Now to the other components of our first quarter results. Selling, general and administrative expenses for the first quarter were $40.9 million or 33.1% of revenue, a sequential improvement of $2.1 million when compared to SG&A costs of $43 million in the fourth quarter of fiscal 2010. Recurring SG&A was $44.6 million or 37.7% of revenue in the first quarter of fiscal 2010. The sequential improvement in SG&A stems primarily from reduced compensation expense due to the impact of vacation accrual usage and certain other seasonal factors.

While we will continue to invest in our business as needs and opportunities dictate, we continue to believe our existing infrastructure can support revenue growth in the 20% to 30% range. Consequently, we believe a substantial portion of the gross margin associated with incremental revenue growth will acreet to our operating income. Because of the seasonal benefits impacting first quarter SG&A spend, we believe SG&A expenses in the second quarter of fiscal 2011 will be roughly comparable to that of the fourth quarter of fiscal 2010.

Stock compensation expense was $2.7 million or 2.2% of total revenues versus $2.9 million or 2.2% of total revenue in the fourth quarter last year and $3.7 million or 3.1% of total revenue in the first quarter of fiscal 2010. We would anticipate quarterly stock comp expense in the upcoming quarters to approximate the amount recorded in the first quarter. At the end of the quarter, our office count remained at 82, 53 domestic, and 29 international.

Related to other components of our financial statements, depreciation and amortization was $3.1 million for the quarter compared to $3.3 million last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $3.1 million per quarter. Additionally, during the first quarter we recorded a noncash expense of $1.3 million or approximately $0.01 per share related to an increase in the estimated fair value of the contingent considerations stemming from the Sitrick Brincko acquisition.

The expense stems from recording the time value of money or interest component of the estimated fair value of the contingent consideration. The amount of the adjustment is greater than past quarters due to declines in benchmark interest rates. We did not record any additional amounts to the employee portion of the Sitrick Brincko contingent consideration. Our acquisition agreements with Mike Sitrick and John Brincko stipulate that a portion of the purchase price otherwise payable to the selling shareholders will be allocated to the Sitrick Brincko Group employees based upon the achievement of EBITDA levels during the four-year contingent consideration measurement period. Under US GAAP the estimated employee portion of the contingent consideration is recorded as expensed during the service periods in which specific performance conditions were met.

Interest income was $128,000 in the first quarter versus $132,000 last quarter and $179,000 a year ago. Quarter over quarter interest income has declined primarily due to average cash balances. Our adjusted EBITDA or cash flow margin which we define as EBITDA before stock compensation and contingent consideration adjustments was 9% in the first quarter compared to negative 0.5% a year ago and 11% in the first -- fourth quarter of fiscal 2010.

Our pretax income was $4.1 million for the quarter. During the first quarter we recorded a provision for income taxes of $2.9 million representing an effective tax rate of approximately 70%. In the first quarter, the noncash after tax charge for continuing employee stock compensation was $0.04 per share versus $0.07 per share in the comparable quarter a year ago. Our effective tax rate is currently impacted by our inability to offset income in tax jurisdictions in which we are profitable with losses in several tax jurisdictions in which we are not yet profitable.

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 each of which are taxed or benefited at different statutory rates and the offset of the tax benefit of foreign losses in certain locations by valuation allowances. In summary, our per share income of $0.03 during the first quarter includes a negative $0.01 per share impact associated with adjustments to the selling shareholder portion of the contingent consideration for the Sitrick Brincko acquisition.

Now let me turn to our balance sheet. Cash and investments at the end of the first quarter were $144.5 million, an increase of $3.6 million from the end of fiscal 2010. The increase stems primarily from cash generated from operations of $7.1 million and employee stock purchases of $2.7 million offset in part by share repurchases.

During the first quarter we repurchased 479,000 shares of our common stock at an aggregate cost of $6.1 million or $12.69 per share. Our current Board authorization for our stock buyback program has approximately $20.5 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases while maintaining a balance between the capital requirements of growing our business and fiscal prudence. Our shares outstanding at the end of the first quarter were approximately 46 million.

Receivables at quarter end were approximately $73.2 million compared to $73.9 million at the end of the fourth quarter. Days of revenue outstanding were approximately 49 days compared to 55 days in the prior year's comparable quarter and 3 days lower than the fourth quarter of fiscal 2010. Our days of receivable outstanding can be impacted by Sitrick Brincko as they have historically had longer repayment trends. Now I would like to turn the call over to Don for some closing thoughts.

Thank you, Nate. We believe our continued focus on the fundamentals of our business has and will continue to drive our long-term success. We believe the improvement in our core operating metrics over the past couple of quarters reflects the strength of our business model. We ended the quarter in a stronger position than we started, generating net cash of $3.6 billion (Sic) after repurchasing $6.1 million of our stock. Additionally, we are pleased to pay our first regular quarterly dividend a couple of weeks ago. We remain committed to providing the superior value to our clients, rewarding our employees for their achievements and providing the solid return to our shareholders.

Let me now share some additional statistics which we believe reflect the health and strength of our business. Client continuity is outstanding. During our first quarter we served all of our top 50 clients from fiscal 2010 and 49 of our top 50 from 2009. In fiscal 2010, we had 202 clients for whom we provided services exceeding $500,000 in fees. In the first quarter of fiscal of 2011, on a run rate basis we have served 209 clients at this level. In addition, our top 50 clients represented 42% of our total revenues and 50% of our revenues came from 78 clients. Our loyal client following is reflective of our client service approach and the quality of the work performed by our consultants.

Our largest product in the quarter was approximately 4.5% of revenues. Through the first quarter 92% of our top 50 clients have used more than one service line and 60% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our client's organizations. Our clients continue to be a tremendous asset of resources. As the global economic outcome improves, it gives us great confidence in our Company's future. This concludes our prepared remarks. We'll be happy to answer your questions at this time.

Thank you. (Operator Instructions). Our first question is from Sara Gubins from Bank of America.

Thanks. Good afternoon. I was hoping to talk a bit about client demand trends in terms of the kinds of projects that they're either choosing to start or to continue, and also the trends that you're seeing in terms of end markets and any interesting variation there?

As we talked in the prepared remarks, Sara, that our information management practice areas as well as supply chain management were exceptionally strong on a quarter over quarter basis, so those areas of our practice are doing quite well. Accounting and finance is solid but it is probably a little bit flat on a comparable basis. We are also encouraged by gain that is we had quarter over quarter in human capital and legal as well where as also remains a little bit flat sequentially down on a quarter over quarter basis.

In terms of geographies, Asia Pacific as we mentioned has been very, very strong this last quarter and we expect them to be in the future. We're starting to see some stabilization in Europe and we're encouraged by some of the progress we're making and across the continent in North America I think all of our business units are performing very well especially our central region.

The types of large projects we're getting typically are productivity type endeavors, companies are trying to become more productive, i.e. reduce their costs or recover costs from previous transactions, so there is not a lot of growth type of projects. There is more productive type projects.

Okay. In terms of the type of client, any variation there? Meaning the industry that they're in?

No. I would say it is kind of near the economy we're picking up in financial services and as that area strengthens and manufacturing is okay and oil and gas is another strong area for us. We're hearing a lot of talk around healthcare, all the changes coming in healthcare, and people are a little bit I think still on the fence as which way to go with the healthcare changes, but we think that will be potential area of growth in the future.

Great. Thanks. If I heard correctly, was your FTE head count down versus the fourth quarter?

The average count was 2,025 versus 2,057, and some of that is just going to be due to the computation and the vacation impact.

I guess I am wondering given the strength that you're seeing in the recent weekly trends if you would expect that to trend up over the course of the second quarter?

Absolutely.

Okay. Great. Thanks very much. I will turn it over.

Thank you. Our next question comes from Gary Bisbee from Barclays Capital.

Hi, guys. Good afternoon. The last couple of quarters you talked about I guess you said just you have been having good dialog with clients about potential projects that could come online and mention a couple of times some uptick in new engagements. I guess from your comment that you expect revenue to grow throughout the year and in a bit better start to this quarter, those that dialog is starting to lead to projects. Can you give us a sense is there still an awful lot more talk than there are engagements coming online and I guess how do you get comfortable that you will see the revenue growth throughout the rest of the year?

We're doing -- each quarter we're continuing to just kind of grind it out. There hasn't been any major movement within the economy, but I think that we're doing a better job getting to the right people at our clients. We continue to put projects on the board. As we talked to you in the past, our key element to grow incrementally is to make sure in the current environment that we add projects quicker than we have roll offs, and that's really what our goal is, but our people throughout the world I think are pretty optimistic that they're still seeing quite a bit of demand and continuing to win our share of those projects.

Clearly I think if you look at the rates really since we came back from the summer vacation you look at the you see the nice upward trend and I do think that is somewhat stemming starting in on some of the work that Don talked about they might have been deferring while they kind of watch what was going on in the global environment. You obviously can't do that forever.

I guess just on the Sitrick Brincko business, I guess like you predicted, eased a bit sequentially. Is that a similar trend around summer vacation and the slowdown or is that more project based? Some of the big projects over the last year or so are ending and is that a good number to think about and in the next quarter or two or would that likely strengthen after the vacation a bit?

Well, I would tell you that again as we said, it is really episodic. If you look at the -- we're now nine months into it, and what we saw in the first quarter was a revenue level pretty consistent with the first three months of buying was pretty consistent with what we experienced in our quarter that we're just reporting on. We had some big projects that occurred last quarter that came to an end and so I think we are just going to see these some of these peaks and valleys and it is just consequence of the types of work that they get involved with. It is very hard for us to predict.

Just one last question. From a high level strategic view point, do you see a need in your business to maybe add a segment that has somewhat less lower skilled labor or are there any sort of strategic holes that as you see things come back right now you wish you had a certain business because obviously you remain really well capitalized and just wonder if there is anything you're looking at that might make sense to grow the business?

This is Don. I will answer. We don't have any ambition to have a lower level service line with lower level service line comes a more of a commodity type of business and we really work hard not to be a commodity to our clients. Commodity type businesses have much less margins. What we don't currently have a good strong practice that we would like is federal government contracting type services. If we look around the consulting world in the United States, probably the only real level of strength is in the federal government contracting, and we understand that some of the bigger firms are hiring hundreds of people a month on these federal contracts and we don't have a good platform to get that work. We did own the work. We are a GAL approved professional services firm, but you need a lot stronger long-term relationships, so we have been looking at acquisitions when they come around, but we have not found the right one.

I would say just our value proposition adding onto the first comments that Don made our value proposition to our client is to provide exceptional talent at a fraction of the price that the big four charge, and that's what we will continue to do. It does not really lend itself to using very young or say less experienced professionals.

Thank you.

Our next question comes from T.C. Robillard from Signal Hill Capital.

Thank you. Good afternoon, everyone. Just I guess along similar lines to what Gary was asking about as the longer term picture, the thematic stuff, I am just trying to get a sense as to outside of just economic growth, what can help drive top line in your business and do you really need the finance sector to really come back for you guys to start seeing those high teens type of top line growth? Have you been able to shift your mix significantly so you're not as we wed to that segment of the economy? Just trying to get some sense as to what may have changed underneath the surface here as we're looking forward and as growth hopefully accelerates?

Okay. Let me just -- this is Don. From a strategic standpoint, I would expect over next five years for significant growth to come from Asia Pac region and also moving into areas like Brazil. I would expect like a lot of global companies that were going to grow our global footprint and our global business with the fastest growing economy such as China, India, Brazil, so we would expect to drive growth from our operations in those countries as well as in Germany which is a new market for us. So strategically we don't need the economy in the United States to grow a lot for us to start growing as long as we can execute our business model outside the United States in the faster growing areas, so that's how I look at it strategically.

The other I think key thing is when we look at one of our biggest areas of growth it exists right in our own client base, so we have been taking a very, very focused approach in our top 100 clients and I think Nate or Don said earlier that 50% of our revenue this is last quarter came from 78 clients. If you looked at a cross-section of our top ten clients, it might range from anywhere from 20 consultants at a client to in excess of 70 consultants a client, and they're diversified throughout very different functional areas within the client doing some very sophisticated project work across all spectrums of the organization whether it be in IT, helping them with productivity measures in supply chain management, helping them take costs out of their organization, and/or in the finance and accounting areas in right in our sweet spot which is helping with SEC reporting requirements and implementation of new accounting pronouncements, so it is a lot of opportunity within our own client base as well as what Don mentioned in terms of expanding our global footprint.

Okay. Thanks. That's very helpful. Don, just wanted to follow up as you're thinking about your presence right now in Asia Pacific and Brazil and as far as executing on the strategy. How much of that strategy or how much of that execution is going to come from adding head count there or do you feel you have the presence there as much just weeding your way through and getting into the clients and growing the business organically from that standpoint? I am trying to balance current size versus your desired size.

I believe that we're adding head couldn't in Asia Pacific as well as our Latin America practices. We're adding them probably behind the growth that's occurring. Same thing with Germany. The more head count competent people that we had internally in those countries, the faster we expect the growth to be. We have brought on senior people in China and Singapore. We have added to our Mexico city staff, so we are going to increase head counts in these faster growing practices but right now we have been adding it I would say after the growth rather than before the growth.

That's great. Thank you. Thanks so much for the commentary.

Okay.

Our next question is from Kevin McVeigh from Macquarie.

Thank you. Tony, I wonder, what percentage of clients are you doing business with today if you're using client base because I know that has always been a big opportunity versus you weren't doing business with last quarter? Trying to figure out is how much of your existing client base started to pick up again?

I would just tell you I can't tell you off the top of my head the brand new clients that we have as a percentage of our overall, but I would tell you that in the current quarter a lot of that growth is coming from existing clients starting new projects to (inaudible) and already know what we can do and they know who we are and they know what our capabilities are, so it is getting more opportunities and winning those opportunities in advance of the roll offs.

And are you at the point now where you have more consultants coming on assignment than coming off?

Yes, Kevin, absolutely. If you look at just those weekly trends that I gave for the first four weeks of September, that movement from $10 million in the first week to $10.7 million in the fourth week is all incremental new projects starting in excess of projects that may have ended in that period.

Great.

So clearly we're adding to the consultant base to absorb that incremental revenue.

Great. Thanks. Just real quick, I know you mentioned but what percentage of revenue was [RAS] in the quarter of total revenue?

About 9%, approximately 9%.

Thank you.

Our next question comes from Kelly Flynn from Credit Suisse.

Thanks. I just want to check some of my math on these early quarter revenue trends. Using what you said last quarter -- last year on this quarterly call, I am calculating that your average weekly revenue was up 11% year-over-year in the first four weeks of the quarter. I am just wondering is that kind of the right way to look at it or would you point out anything weird about lark day timing or anything that might make that kind of a misrepresentation?

Labor Day was exactly the same week as it was last year in the quarter. It was the second week. Your calculation is correct.

Okay. And then you mentioned Thanksgiving issue. Can you just go into a little more detail on I guess how that should impact our models, how it compares to the timing last year, et cetera?

Well, I mean, the Thanksgiving week we tend to lose two days of revenue that week as people take that Thursday and Friday off, so depending on how you extrapolate the current weekly trends, I would just tell you that last week of the quarter that you kind of have to hair cut it for a couple of days.

On a year-over-year basis it should not impact the growth, is that fair?

Sure, yeah.

Okay. And then just I want to ask another question about kind of I guess the tone that you're taking with respect to what seems to be somewhat of an inflection point in the business. I had noted last quarter you described the recovery as gradual and you noted basically new business activity picking up but conservative client spending on ongoing assignments. I was wondering if you could just kind of update those three points. Is it still gradual or are you seeing an inflection point and then maybe revisit the new business versus the ongoing assignment specifically?

Yes. I think it is still gradual. Like I said, I don't think that we're seeing any particular signs in the economy that are overwhelmingly different than we did last quarter. Again, I think this is more we're grinding out the process of getting at the clients, selling new projects and I think relative to the tone, I think one of the differences is that we're starting to see stabilization in Europe. We're encouraged by what we have seen in the latter part of the first quarter and into the second quarter relative to multiple offices over in Europe. We still have aways to go with a couple of them but when you combine that with the increase in terms of revenues coming from Japan, and in just what's going on over in China, for our Asia Pacific region and then add that to the US operations, which I think all across all regions we're doing quite well, it is a very encouraging sign.

Just on the new business, is it just as solid as last quarter or any notable changes there?

Most of our new business comes from our existing points, so we spend a lot of time with our client base. It is probably one of our critical strengths is that we have 80% of the Fortune 100 around the world as clients, so we are constantly getting new assignments, but offsetting that as Nate said earlier is that we have assignments ending, too, so previously assignments would drag on and get extended and they don't get extended as much today so we're constantly selling new projects getting new types of assignments but the majority of that is with our existing international type clients.

Okay. Fair enough. I just want to check on the tax rate, is it right to calculate that was about a $0.02 hit in the quarter and what should we use going forward?

Well, the what I tend to tell folks is I will let everybody how everybody wants to build their individual models, but the GAAP effective tax rate is going to remain fairly volatile over the next handful of quarters. I think as we continue to see the improvements in some of these international markets that Tony talked about that that will help bring that tax rate down. It will be volatile just because of locations where you have income and need to provide for taxes and may not be able to benefit for losses in other areas. not be able to benefit for losses in other areas. On a cash basis I think somewhere 42% to 43% is probably where I would be.

And getting $0.02 hit from the higher tax rate, is that what you guys are calculating as well?

I think that's about right.

Thanks a lot. I appreciate it.

Our next question comes from Tim McHugh from William Blair and Company.

I wanted to ask you, you mentioned some stability in Europe and following up from last call when you mentioned you made changes to the UK office, can you give us an update on whether what those changes ended up being and then the effect of those and are you satisfied that you kind of fixed whatever the challenges were there?

Relative to the UK, there have been a few personnel adjustments. I think our ongoing team at this point which we added a couple of people and taken a couple of people out of the practice, I think we're satisfied at this point that we have a pretty good go forward plan with them.

Relative to the balance of Europe, Don talked a little earlier about Germany. Germany is doing a great job. France has come way back since the height of the recession which is really positive. Again, we still have a couple of offices that is we have our eye on that we're working on and working with. The other area that I would say is very resilient is Scandinavia with our practice in Sweden doing exceptionally well and actually has been throughout the bulk of the recession, so we are encouraged with Europe. That was one of the areas that we really needed to see a turn around, and we're starting to see the initial signs of it, so it is positive.

Nate follow-up on stock comp, can you repeat? I missed what you said to expect for that line for this year.

If you look out for the next couple of quarters, it should remain fairly consistent with the $2.7 million that was reported in the first quarter.

Okay. Thank you.

No problem, Tim.

Our next question comes from Mark Marcon from Baird.

Good afternoon. I was wondering if you could inherent a little bit with regards to what you're seeing on pricing trends. It obviously was flat on a year-over-year basis but sequentially down two quarters in a row. Is there some seasonality there? Are you seeing any signs that pricing pressures might be easing up? How should we think about that?

We don't see any signs of pricing pressures easing. It is a very competitive environment, and we're trying to be very competitive with quality clients and quality projects on that we stay in these clients. Our pattern has been if we get a project and a major company, our people are so good that they really impress them and we'll get projects and we'll get less pricing pressures, so it is still a very competitive environment, and we're trying to be as competitive as ever and more competitive on quality projects and quality clients.

And are you seeing continued trends as it relates to the usage of VMS or MSPs at your clients or should with you they think about that?

It comes and goes. VMS has been a trend since probably 2000. We have clients that adopt it and then we get frozen out and then the users become very unhappy with the VMS providers and then we get brought back in, we have seen that over and over again. So it is a trend I would say nothing unusual about it compared to previous years. It is an issue we deal with and it is an issue we work to get classified in the correct buckets at these VMS trends, but I would say it is there and something we deal with and most of the time it is very inefficient process for the client user and a lot of times we get asked to come back around and come back and fix what the VMS provider's people gave them, so it is an issue that we have been dealing with I would say for about nine, ten years now.

And how are you thinking about or what are you seeing in terms of project lengths? Are you seeing that they're still halting right at the end of the budget period or the assigned length or getting some that are getting extended?

I would say there is continuing pressure to finish projects on time at major companies and most of our clients do have very strong oversight on use of outside consultants and making sure it is efficiently done. I don't see any lessening of that effect.

I think that's right. I think the big key for us will be when we get back to an environment in which we can complete a project but because the client might have six or seven different things to do that they can go back and find the budget to do those six or seven things. As Don said, that discipline right now in corporate finance officers environments are basically staying very, very strict to a budget and to a timeframe for a particular project.

Bill rates aren't going up, project times aren't lengthening but the improving trends are basically due to more projects coming on or are you seeing a reduced capacity or excess capacity at the big four or do you just think corporate budgets are being freed up a little bit more?

One of our areas of growth we execute properly is where our core strength is, is not the big four's core strength, so there isn't a lot of clients doing work with less experienced people who basically are much less efficient and are billed more than our people, so some of our work that we're getting is because our larger clients recognize our value and are replacing some of the big four project people with our people, so that's one area that I think you're going see us continue to emphasize.

You're gaining share?

We're gaining share, yes.

And, Mark, I think it is also coupled with you are seeing a number of obviously the net new projects coming on are starting to be in excess of project that is are ending, and I think that is reflective of clients starting to spend more and start in on some projects that they had deferred I think as the environment even in the stable environment we're going to see -- economic environment we're going to see more of that and we hear from a number of different folks that just that bunker mentality that probably was out there in a number of markets is starting to subside.

How much of your business now is financial services and are you seeing any signs there that things may be freezing up again?

Financial services is still hovers around 20% of our business and if you looked at it quarter over quarter, from last year, it is up 8%, down a little bit sequentially just because of the seasonality but up 8% quarter over quarter.

And the weekly trends are continuing?

Yes.

Great. I will jump back on later. Thank you.

Our next question comes from Scott Schneeberger from Oppenheimer.

Hi. Good afternoon. This is Jim for Scott. As far as your gross margin coming into this quarter, you suggest that had we should expect a 250 basis points drop but you came in I guess 100 basis points better than that. I guess if you could talk about what drove that out performance relative to what you were modeling a couple months ago?

I think part of it, the biggest contributor to the improvement was as we mentioned in the prepared remarks is our healthcare costs have been falling and so that clearly benefited what we had fought. Those costs are obviously hard to predict. As I commented, we have a self insurance plan. As we have added consultants, I think we're all aware we get to participate in what I would just refer to as somewhat of a FICA holiday that for one of the programs from the government that helped a little bit as well, so those are the two primary components.

Thanks, and again, last quarter you cited three large companies providing you a preferred provider status. I was wondering if any of those led to correlated revenue this quarter or if you are anticipating incremental revenue in the coming quarter or two?

I would tell you nothing in the first quarter. I think we expect to start a couple of things in the upcoming weeks.

And how many clients if you disclose this, how many clients do you have this preferred provider status with?

You talk about where there is like a VMS agreement or when you say preferred provider, and in these couple of clients they were going through a rationalization process when you looked at our top 200 clients I would tell you it is a very small percentage of them that actually for our types of consultant consulting have preferred provider lists.

Okay. Thank you.

Our next question comes from Paul Ginocchio from BMO Capital Markets.

Just a quick one. I wondered if you could give an example of what kind of project you might get that is related to something that would be related to the healthcare legislation? You spoke about that earlier and I wondered when you might see clients start needing to ramp up in doing this work?

Some of the healthcare issues that we're seeing in the marketplace is there is going to be a whole revamp of the coding for Medicare which will also change the coding for the insurance companies which is a lot of work by all the healthcare providers. All of the healthcare providers are looking for some type of integrated medical information system, and we're doing a number of projects with the healthcare providers helping them evaluate the system, evaluate the RFPs, et cetera, so those are the two things that are very hot right now. Even a lot of the hospitals are forcing the medical groups to put in a medical information system that links to the hospital and what we hear from the medical doctor groups is they don't have a way to recoup the cost of that because they can't raise their rates and yet the hospitals are requiring them to interface so there is a lot of issues out there, and looks to us like the next three years is only going to grow.

Okay. Some of these work started already?

Yes. Some of the work started. Two of our clients were actually working on these very things.

Just one more. Your capital expense expenditures for the first quarter and then if you can give any second quarter expectations that would be helpful. That's it for me.

For the first quarter the CapEx was about $450,000. At the beginning last quarter I think what I said is probably for the year expect something around $3 million in probably just model it spread throughout the quarter, so I think that aggregate number for the year is still good. There is always a little bit of timing with some of those expenses, so $800,000 or $900,000 a quarter for the remaining three quarters here.

That's all my questions. Thanks.

Thank you.

(Operator Instructions). I am showing no further questions at this time. I would like to hand the conference back over for my closing remarks.

This is Don. I want to thank you for your continued support and interest in resources and we look forward to our next update in January for the second quarter of 2011. Thank you.

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.