Resources Connection Inc (RGP) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Resources Global Professionals Q2 2011 earnings call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions) As a reminder, today's call is being recorded.

At this time I would now like to turn the conference over to your host, Ms. Kate Duchene. You may begin.

Thank you, Operator. Good afternoon, everyone, and thank you for participating with us today. Joining me on the call are Don Murray, our Chairman and Chief Executive Officer, Tony Cherbak, our 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 2011. By now you should have a copy of today's press release. If you need a copy and are unable to access it via our website please call Patricia Marquez at 714-430-6314 and she will be happy to fax or PDF a copy to you.

Before introducing Tony I'd like to read an important announcement about certain statements 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, or financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I'll now turn the call over to Tony Cherbak, our President and Chief Operating Officer. Tony?

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 2011 was $138.5 million, a 14% increase over the comparable quarter a year ago and a sequential increase of 12% over our first quarter revenue of $123.7 million. Included in our second quarter results is revenue of $6.7 million attributable to the Sitrick Brincko Group which we acquired one year ago. second quarter gross margin was 39.5%, a quarter-over-quarter improvement of 140 basis points and a decrease of 30 basis points sequentially.

During the second quarter our SG&A costs were $42.7 million, a $1.5 million decrease from the comparable quarter a year ago. Sequentially, SG&A increased by $1.8 million. The sequential increase stems primarily from first quarter SG&A benefiting from PTO being charged to our vacation accrual during the summer months which we highlighted during last quarter's call. During the second quarter we generated cash flow from operations and adjusted EBITDA of $4 million and $14.6 million, respectively.

For the quarter, our pre-tax income on a US GAAP basis was $32.6 million which includes non-cash income of $23.7 million related to a decrease in the estimated fair value of the Sitrick Brincko contingent consideration. As you recall in addition to the initial purchase consideration of $44.9 million, the terms of our agreements with Sitrick and Brincko include contingent considerations payable after the fourth anniversary of the close of the acquisition.

To the extent the average EBITDA of the four successive annual periods following the date of acquisition equals or exceeds $11.3 million, Sitrick and Brincko will be entitled to an earnout payment equal to 3.15 times the average annual EBITDA. Sitrick Brincko's EBITDA for the first annual measurement period was $8.9 million, approximately $2.4 million below the required base. Based upon the first year actual results and an updated probability weighted assessment of various projected EBITDA scenarios of the Sitrick Brincko Group for the three years remaining in the earnout period, the current fair value of the contingent consideration payable to Sitrick Brincko was estimated to be $46.2 million, representing a decrease of $23.7 million from our previous estimate. On an after-tax basis, the fair value adjustment increased our net income by $14 million or $0.30 per share.

Accounting standards require us to record both increases or decreases in the estimated fair value of the contingent consideration to earnings. Although Sitrick Brincko's first year EBITDA was below our initial estimates due to the relatively low number of large corporate bankruptcy filings during 2010, we believe this business will provide significant growth opportunities to us over the long term. Because of the inherent difficulties in projecting the future operating results of the episodic Sitrick Brincko business, we anticipate the estimated fair value of the Sitrick Brincko contingent consideration will continue to change in future reporting periods and future changes both up and down could materially impact our operating results.

During the second quarter we also recorded a non-cash charge of approximately $769,000 or $0.01 a share for valuation allowances against previously established deferred tax assets of certain foreign subsidiaries. In summary, our GAAP net income per share of $0.38 includes $0.30 per share related to the contingent consideration adjustment partially offset by the $0.01 per share charge related to the establishment of tax valuation allowances. Absent the impact of these two items, our net income per share was $0.09.

Now let's talk for a moment about revenue trends. As we reported in September, non-holiday weekly revenues during the first four weeks of the second quarter averaged $10.4 million. During the following eight weeks, weekly revenues ranged from $10.7 million to $11.2 million with the last week of the quarter being Thanksgiving week at $7.9 million.

As we begin our third quarter, we are very pleased to see continued improvement in revenue trends with holiday weekly revenues ranging between $11.2 million and $11.7 million. As Nate will detail further, we are experiencing improved revenue trends across all geographies. North America and Asia Pacific have been very strong and Europe grew sequentially by 33% in the second quarter. We continue to see new projects spanning all of our service lines especially in supply chain and information management. While our third quarter is impacted to some degree by the winter holidays we remain very encouraged by the current revenue trends we are experiencing in our business.

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

Thank you, Tony. As mentioned, revenues for the quarter were $138.5 million, an increase of $17 million or 14% from $121.5 million in the second quarter of fiscal 2010. On a sequential basis, revenues increased 12%. On a constant currency basis, the quarter-over-quarter increase was 14.6% and the sequential increase was 10.3%. Average weekly revenues of the Sitrick Brincko Group were $513,000 compared to a weekly average of $477,000 last quarter, an increase of 7.5%. 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 business.

Let me now discuss some highlights of our revenues geographically. For the second quarter revenues in the US were $101.6 million, up 16.2% quarter-over-quarter and up 6.4% sequentially. For the second quarter, total revenues internationally were $37 million, up 8.5% quarter-over-quarter and up 31.2% sequentially. International revenue accounted for approximately 27% of total revenues for the quarter, up from 23% in the first quarter. Europe second quarter revenues increased 33.1% sequentially, but decreased 6% quarter-over-quarter while Asia Pacific saw second quarter revenues increase 41.9% quarter-over-quarter and 22.2% sequentially. It is encouraging to see the improving revenue trends across all of our geographies.

On a constant currency basis total international revenue increased 23.8% sequentially and 10.3% quarter-over-quarter. On a sequential quarterly basis, the US dollar was weaker against the major currencies in Europe and weaker against currencies in Asia Pacific. As a result, on a sequential constant currency basis, Europe's revenue increase would have been 24.2% and Asia Pacific's revenue increase would have been 16.7%. On a quarter-over-quarter basis, Europe's revenue decrease would have been 0.8% and Asia Pacific's increase would have been 33.9%.

Following is some additional revenue detail related to certain markets. Total revenues for the Netherlands practice in the second quarter were $9 million, up 30.4% sequentially and down 22.4% quarter-over-quarter. On a constant currency basis the Netherlands experienced a sequential increase of 21.7%. UK revenues were up 32.1% sequentially and down 11.9% quarter-over-quarter. On a constant currency basis, the UK's sequential revenue impact improved 25%.

Let me now discuss early revenue trends for the third quarter of fiscal 2011. Weekly revenues for the first five weeks of the third quarter were as follows. $11.2 million, $11.7 million, $11.5 million, $7.9 million, which was Christmas week, and last week which was New Year's week $5.9 million. In thinking about the remainder of the third quarter, it is important to remember 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%.

Now let me discuss gross margins. Gross margin for the second quarter was 39.5% versus 38.1% in the year ago quarter and 39.8% in the first quarter. The 30 basis point decrease in sequential gross margin stems primarily from the increased percentage of our international revenue which currently operates at lower gross margins. Excluding reimbursable expenses, our second quarter gross margin was 40.5% which compares to 38.8% in the second quarter a year ago.

The average billing rate for the quarter was approximately $131 per hour, an increase from $128 in the first quarter and $130 a year ago. The average pay rate for the second quarter was approximately $65 versus $62 in the first quarter and $65 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. In thinking about gross margin for the third quarter of fiscal 2011 and consistent with prior years, we would expect gross margin to decline by approximately 150 basis points primarily related to the resetting of payroll taxes on January 1 and the impact of the winter holidays. For the second quarter, gross margin in the US was 41.5% and our international gross margin was 34.2%.

Now, to headcount. For the second quarter, the average consultant FTE count was 2,180. This compares to 2,025 in the previous quarter and 1,931 in the year ago quarter. Quarter end consultant headcount was 2,268 versus 2,019 a year ago. The total headcount of the Company was 2,978 at quarter end.

Now to other components of our second quarter financial results. Selling, general and administrative expenses for the second quarter were $42.7 million or 30.8% of revenue, a quarter-over-quarter decrease of $1.5 million or 3.4%. SG&A was $40.9 million or 33% of revenue in the first quarter of fiscal 2011. As mentioned, our first quarter SG&A benefited from reduced compensation expense due to the impact of employee vacations charged against our vacation accrual during that quarter. Primarily driven by the reset of payroll taxes and to a lesser extent the relaunch of our branding campaign, we believe SG&A expenses in the third quarter of fiscal 2011 will increase approximately $2 million from the second quarter level.

Stock compensation expense was $2.6 million or 1.9% of total revenue versus $2.7 million or 2.2% of total revenue in the first quarter and $3.5 million or 2.9% of total revenue in the second quarter of fiscal 2010. We would anticipate quarterly stock compensation expense in the upcoming quarters to approximate the amount recorded in the second quarter.

At the end of the quarter our office count remained at 82, 53 domestic and 29 international. Related to the other components of our financial statements, depreciation and amortization was $3.2 million for the quarter compared to $3.1 million last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $3.2 million per quarter.

As Tony discussed during the second quarter we recorded non-cash income of $14 million net of tax or approximately $0.30 per share related to a decrease in the estimated fair value of the contingent consideration stemming from the Sitrick Brincko acquisition. Throughout the remaining earnout period of three years we will continue to record adjustments to the estimated fair value of the contingent consideration. Increases to the estimated fair value will be recorded as an expense while decreases are recorded as income. During the second quarter, we did not record any amounts to the employee portion of the Sitrick Brincko contingent consideration.

As you remember 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 actual EBITDA levels during the full year contingent consideration measurement period. Under US GAAP, the estimated employee portion of the contingent consideration is recorded as expense only during the service periods in which specific performance conditions are met.

Interest income was $114,000 in the second quarter versus $128,000 last quarter and $167,000 a year ago. Quarter-over-quarter, interest income has declined primarily due to lower average cash balances. Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustments, was 10.5% in the second quarter, an improvement from 4.6% a year ago and 9% in the first quarter of fiscal 2011. Excluding the impact of the estimated fair value of contingent consideration, our pre-tax income was $8.9 million for the quarter.

On a GAAP basis, we recorded a provision for income taxes of $15.2 million on GAAP pre-tax income of $32.6 million representing an effective tax rate of approximately 46.5%. This amount includes the impact of the aforementioned contingent consideration fair value adjustment and a $769,000 or $0.01 per share charge for newly established tax valuation allowances. Excluding these adjustments in our pre-tax income, our provision for taxes would have been $4.7 million and our effective tax rate would have been approximately 53%.

Our effective tax rate continues to be impacted by our current inability to offset income tax and tax jurisdictions in which we are profitable with losses in tax jurisdictions in which we are not 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 and certain locations by valuation allowances.

In summary, our per share income of $0.38 per share during the second quarter includes $0.30 per share associated with the adjustment to the estimated fair value of contingent consideration partially offset by $0.01 per share reduction related to the establishment of tax valuation allowances. Excluding the impact of those items, our per share income was $0.09 per share.

Turning to the balance sheet. Cash and investments at the end of the second quarter were $146.7 million, a $2.2 million increase from the end of the first quarter. The increase stems primarily from cash generated from operations of $4 million and employee stock purchases of $1 million offset in part by share repurchases and dividends totaling approximately $3 million during the quarter. During the second quarter, we repurchased approximately 78,600 shares of our common stock at an aggregate cost of $1.3 million or $16.16 per share. On a fiscal year to date basis we have repurchased approximately 557,600 shares at an aggregate cost of $7.4 million or $13.18 per share.

Our current Board authorization for our stock buyback program has approximately $19.2 million remaining. We will continue to return cash to shareholders through our regular quarterly 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 second quarter were approximately 46.1 million. Receivables at quarter end were approximately $80.3 million compared to $73.2 million at the end of the first quarter. Days of revenue outstanding were approximately 51 days compared to 58 days in the prior year's comparable quarter a year ago and two days higher than the first quarter. Our days of revenue outstanding can be impacted by Sitrick Brincko, as they historically have longer repayment trends.

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

Thank you, Nate. Our recent operating trends are consistent with our previous statements that we thought the recovery would be slow but allow us to grow revenues back to more acceptable levels. As Tony discussed, while we reduced the estimate of the fair value of contingent consideration related to our acquisition of Sitrick Brincko, we remain convinced of the long term strategy underlying this transaction. Sitrick Brincko's EBITDA over the last 12 months was $8.9 million or 33.8% of Sitrick Brincko's revenue. Calendar 2010 was not a high volume year for corporate advisory firms for a number of reasons. While our transaction structure is designed to protect the Company from lower than anticipated performance, we believe our longer term the capabilities brought to resources by Sitrick Brincko Group will continue to benefit our reorganization.

On a broader scale I believe we are beginning to see the reward for retaining our client service infrastructure during the economic downturn over the past couple of years, and this quarter's results reflect the operating leverage that exists within our business. We will continue to invest in our business as warranted but we remain committed to achieving our long term target of a 15% adjusted EBITDA margin. We ended the quarter in a stronger position than we started the year. Increasing our cash and investments $5.8 million since the beginning of the fiscal year after repurchasing $7.4 million of our stock and paying a quarterly dividend of $1.8 million. We will continue our objective to provide superior value to our clients, rewarding our employees for their achievements and providing a solid return to our shareholders.

Recognizing that our strong base of continuing clients is a critical advantage for us, these additional statistics reflect the health and strength of our business. Client continuity remains outstanding. During our second 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 second quarter of fiscal 2011 on a run rate basis we have served 225 clients at this level, representing an increase of over 11%. Our Top 50 clients represented 40% of total revenues while 50% of our revenues came from 87 clients. So our loyal client following is reflective of our client service approach and the quality of the work performed by our consultants. Our largest client for the quarter was approximately 3.9% of revenues.

Through the second quarter, 96% of our Top 50 clients have used more than one service line. 70% of those Top 50 clients have used three or more service lines. This service line penetration reflects the diversity of the relationships we have within our clients' organizations. Our employees and our deep base of global clients remain a tremendous asset of resources. These clients give us a great platform for growth as these companies respond to a changing global landscape in order to adopt a more variable cost workforce within the organization.

So this concludes our prepared remarks. We will be happy to answer your questions at this time. Thanks.

(Operator Instructions) Our first question comes from Jeff Silber with BMO Capital Markets.

Thanks so much. I was wondering if you could give us a little bit more color by the type of clients in terms of where you're seeing business. You mentioned you saw growth across all geographies. If we can get a little bit more color by industry that would be great.

In terms of industry we're seeing a very nice uptick in financial services. We're up about 17% quarter-over-quarter in our financial services practice. If we look at some of our service line verticals, clearly there's much more of a spending pattern developing for IT services. Our information services were very strong during the quarter, quarter-over-quarter growth about 36%. Supply chain continues to be very, very strong for us, up 40% quarter-over-quarter. But we're seeing a lot of projects across the other service lines as well as finance and accounting, including things like a fast close process at a company, shared services implementations. In the human capital segment, we're seeing a lot of change management programs as well as even in RAS, more internal control work especially around SOX.

Okay, great. That was helpful. Don, you gave us a lot of color regarding the client concentration, how it compared to prior years. Can you talk about new clients, how those have been trending, what do you expect from those over the next few quarters or so?

I would tell you a lot of our growth is coming from what we think is our strongest growth platform which is our existing clients. We continue to get new clients and we get new clients in all industries but clearly where our growth is coming from is most significantly related to existing clients that reflects our concentration on Fortune 100, Fortune 500 type clients. A lot of different spending patterns across functional areas within those clients and in any particular big client we might be working in maybe 12 or 13 different projects within a big organization.

And just one quick numbers question. What should we be forecasting for capital spending for the rest of the year?

Jeff, my guess is probably about $500,000 to $600,000 each of the next two quarters. Some of that might move from quarter to quarter but that's roughly how it would pan out.

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

Our next question comes from Sara Gubins with Bank of America.

Hi, thank you. As we start the 2011 calendar year budgets, what's the chatter been from your offices? And specifically I'm wondering if you're seeing any more IPO related work from private equity clients or more acquisition related work?

I would say that the 2011 chatter is probably the same thing you've been reading in the paper which is Wall Street Journal reporting that a lot of companies have cash. They're looking to spend maybe a little bit more freely than they have in the past. We haven't seen a lot of IPO work in the United States that I'm aware of, nor any major M&A work. We do get that type of work more now in Asia which is looking for us as a real growth area for us. Tony?

That's right. Especially in the China region there's a lot of companies trying to access the capital markets there and a lot of our work has been helping them prepare for their IPOs or prepare for potential M&A type transactions. We have seen a little bit of business on the M&A side, especially in the area of divestitures, especially along the financial services companies that are trying to dress up some of their segments for either spinoff or to take IPO in an effort to pay back their TARP money.

Okay, and then in terms of bill rate increases, do you think that there's potentially more room for further increases as the big four players see utilization rates normalize?

I don't think on a short-term there's going to be less competitive pressure on rates. A lot of times the bill rates reflect the type of work we're doing. So as we get involved with let's say IPO work, we would probably expect to have higher bill rates because the level of sophistication of what we're doing goes up. As we get into more just helping people with some of the crisis work, it's a very competitive environment. So I don't think the bill rates are going to have much upward mobility because of competitive pressure. Maybe more from the level of project that we get.

Okay, and then just last question. Any plans to increase the levels or to become more aggressive on share repurchases this year?

It's something we look at quarter to quarter and I would just say I think we'll continue repurchasing stock but we don't necessarily have at the present time any type of fixed plan.

Okay, thank you.

Our next question comes from Tim McHugh with William Blair & Company.

Yes, I was wondering if you could give us a little more color on the international businesses, particularly the Netherlands and the UK which seem to have really turned the corner. Is there anything in particular you would call out that you're seeing or is it just broad based strength and some of the leadership changes you made?

Sure. We were very, very pleased to see -- I think we talked in the last conference call about starting to see Europe emerge from the recession, business was picking up there. Second quarter that certainly played out. Our international business as we mentioned in our prepared remarks was up over 30% on a sequential basis. The Netherlands was up 30% sequentially, the UK was up 32% sequentially. Other parts of Europe including Norway and Sweden were very solid.

And then when we look at Asia Pacific, again as we reported in the first quarter, their business was looking pretty solid in the first quarter. It was even more solid in the second quarter, up 42% quarter-over-quarter and up sequentially 22% on the strength primarily in Japan and China. And China especially was very active. We're very, very pleased with it and we had an all-time high in our Shanghai office and just had a lot of very interesting project work. So we're very pleased to see both of our major regions, Asia Pacific and Europe, really start to get stronger for us and contribute to our revenue growth.

Is there anything you would attribute it to in Europe, because just looking at the headlines and other commentary, the strength that you're describing is much stronger than I would have expected, which is great to see but just trying to understand.

Again, bear in mind, a small piece of the sequential growth relates to the comparison too between first quarter which includes the summer holidays. But aside from that, their business has picked up based upon increased referrals not only from the US multi-national clients but also increased referrals across border within segments of Europe. So I think really what you're seeing is Europe has been down for an awful long time due to the global recession and we're starting to see it emerge. I think some of the debt concerns for some of the countries like Greece and Spain and Portugal and Ireland and Italy are still out there but the rhetoric seems to have calmed down quite a bit and we do see a little bit more spending. We still have a long way to go in Europe but it's great to see them starting to emerge with a little bit of growth.

Okay. And then last question is the headcount really ticked up nicely this quarter and it seems based on the quarter end headcount that continued through the second half of the quarter. Is that a number you would expect to see to continue to climb or is that at an abnormally high level that you might see that step back a little bit going forward?

Tim, when you look at that headcount number, the growth is 100% driven by consultant growth and I think as revenue continues to improve, we would obviously continue to see that consultant headcount number increase in the future.

Thanks guys.

Our next question comes from Gary Bisbee with Barclays Capital.

A couple questions. On the Sitrick Brincko with the business, Tony, one thing I think I heard you say was a low number of large corporate bankruptcies in the year. It seems to me that that could well play out over the next three years too, so can you give us just a little color or talk us through how you think you accomplish growing the business in a stronger economy. What's in the works to get this growing from this level? Thanks.

This is Don. I don't think the economy is a lot stronger, because we get the feel from our clients that there's still a lot of issues in the economy. There's just not a lot of conditions that would allow a lot of bankruptcy restructuring where people can get new debt and continuing business, so a lot of the banks are still in forbearance. But we plan to grow the business because we still think there's a lot of advisory services around changes in prices. And so we're focused on, number one, building an advisory restructuring team that can help people before bankruptcy using the contacts of the Sitrick Group to go out and meet the law firms, et cetera. We're seeing a pick up in potential work and actual work around mitigation support and expert witness testimony. And as you can see, you see a lot of these large class seats being filed around the credit crisis of a few years ago, they're just starting now to be filed. So we're looking at litigation support as another growing area.

And if you look at in our history, our biggest bankruptcy clients where we did a lot of the forensic accounting and such, they weren't from financial issues. They were more from financial reporting irregularities that came up all of a sudden. So no one predicted in the beginning of the year 2000 that Enron was going to file bankruptcy by the end of the year or that Global Crossing was going to go out of business, or that you had those myriad of scandals that no one knew about. So those things are going to percolate and we're going to try to be in line to help clients through those troubles.

I think the other thing to keep in mind is even though the Sitrick Brincko Group did not hit the first threshold for their earnout, they still contributed $9 million of EBITDA which is about a 33% cash flow margin. So the business from that regard was very strong. They do do an awful lot of crisis communication work and they've still been selling a lot of work in that area. I think to the extent, as Don mentioned, if we can ramp up some of this advisory work that will be more like the gravy on the rice.

Okay. And I know its been competitive, very competitive on price and other things during the downturn but if you forget about demand being down and the impact that had, was there any major change in the competitive landscape in this downturn? And do you feel like you are better positioned? Is it really the same? How have things changed now that we're starting to come out of the last couple of tough years?

I would say that the direction that I've given the Company is that we don't want to lose any quality projects or quality clients because of rates. So if we're competing against the Big Four or one of the big professional consulting firms, we want to get that work, so we will take a competitive rate to keep somebody else out to keep our work. I don't see that changing yet. We believe that the Big Four accounting firms are all going into their busy period now where they have their 12-31 audits. We believe that a lot of them are short of people, but that's only on the audit side.

On the consulting side and their other advisory services, they probably still have a lot more capacity. So we'll probably get less competition from the accounting and assurance side over the next four or five months from the Big Four but we're hoping that they aren't going to do crazy rate structures anymore unless it's something they really want to get into.

Okay. And then just lastly, you gave us some growth rates for some of what I think historically has been smaller practices, tech, supply chain, et cetera. Can you give us a sense of the mix of the Company's revenues today coming from some of those areas? Is this still predominantly finance and accounting and these have grown real fast but tiny, or have they gotten more significant over the last year or two?

Because so many of the different projects overlap the different service lines, we don't break out specific revenues but obviously the accounting and finance practice is a bit over half, and then that would be followed by the IM and supply chain practices. And those are becoming more and more substantial practices. The practices that are more in their infancy and that I would say are relatively small but growing are the legal and human capital practices.

Okay, thanks a lot.

Our next question comes from Andrew Steinerman with JPMorgan.

Hi. Could you talk about corporate budgets, calendar year corporate budgets? Do you feel like there have been accounting projects that have been on hold for a while and with the new calendar budgets, meaning right now, that your business will naturally pick up from the weekly revenue trends that you gave at the tail end of the calendar year?

What I'm hearing from the field is that, and I think Don had commented on this, that clearly a lot of our clients are starting to invest in their businesses again. So I think if you turn the clocks back a year ago where I think we talked about quite a bit of pressure with the budget system, that appears to be opening up, clients are talking about doing more work. And I think the other phenomenon is with some of the uncertainties, they're looking for more help on a variable basis. And I think over time, that's going to really bode well for us. So I think that there is an opening of the budgets. We're seeing that, especially as Tony mentioned, a lot of the cross border referral work. A lot of that is stemming from US based multi-nationals. And it's because of that increased budget and starting to need to invest back in the business.

Particularly on the accounting side, right?

We're seeing a lot of accounting projects but we're also seeing it in IM, we're seeing companies starting to do software upgrades again, new installations. So it's crossing different service lines as well.

And the supply of people, you mentioned that the Big Four, at least in the audit practice, was quite constrained. At any point do you feel like the supply of people either will be inflationary or a constrain as you think about this calendar year?

I would say on a macro basis, there's going to be people out there that we're looking for that we'll find that are high quality people. On an assignment by assignment basis we're going to have a hard time sometime in the skills that people are looking for that are so specialized. What has occurred because of the recession is clients are much more stringent in the type of person they want on their assignments. So where before we could give them eight players we knew would fulfill their expectations and do a great job, today they want a specific software experience person or a specific accounting issue person or specific industry issue person. So we're spending a little bit more time than we did a year ago and I think that's going to continue. But for us that's a good problem because we're really good at recruiting. That's a good core competency of ours.

Sure, that makes total sense, thank you.

Our next question comes from TC Robillard with Signal Hill Capital.

Good afternoon, gentlemen. Just a couple of quick questions. Can you give us any sense on engagement types? I know over the last couple of quarters you've talked a lot about your existing clients doing a lot of efficiency projects or cost containment type of projects. Are you seeing evidence of growth projects investing? I know you touched on that a little bit earlier. I'm just trying to get a sense if you're seeing some real hard evidence of that in terms of project type?

Absolutely, and that's what we've referred to when we talked about some of the information management projects, companies that are doing new ERP implementations or they're installing a piece of software to get two other pieces of software to talk to each other. So that's where we're seeing the growth initiatives within the companies. Again we're still seeing a lot of supply chain management. Anything from inventory level optimization to plant utilization, as well as other projects around accounting and finance, whether it be fast closed shared service center, quarterly and annual financial reporting health and the like. So definitely starting to see more of the growth area type projects at clients as opposed to just trying to wring cost out of the organization.

Just to touch on our plan with clients is that we get a Fortune 100 type of client, so we have about 85 of the Fortune 100s which is good penetration. When they only do a small project that our client service focus is to go in there and build that relationship, at the same time over the years we've built a global footprint. Now, luckily for us, a lot of our global footprint is in Asia now.

And one of the newer technology companies, the household name that we got a few years ago that's been not a significant client has become significant because we're doing assurance type services for them over in China and throughout Asia. And those projects are quarterly and they are recurring projects. The demand changes depending on how much assurance they need, but that's the type of client where we're doing work in the US and we're able to transfer that relationship to Asia. And because of our global footprint, we're doing the kind of work in China that they would have used the Big Four for.

So as we do that shift sharing, we call it, where we're getting work that the Big Four used to do, that really helps our revenue growth and helps our margins.

Okay, great. And then any comment around project length? I know over the last several quarters you've talked a lot about clients sticking very meticulously to their time lines and ending projects on time and not really extending or seeing those bleed over. Are you seeing any project length extend?

No, I don't think so. I think the clients are still disciplined.

I think clients are exactly as Don said, still very disciplined. However, with the growth that stems from obviously clients taking on additional projects. But clearly, I think most of our clients are still operating with budgets and time lines. I don't think in this environment that that phenomenon is necessarily going to go away. We do the same thing internally here.

Got it. And then just a quick numbers question, Nate. RAS revenues in the quarter?

They are about 9.5% of total revenues, which was compared to about 9% last quarter.

Okay, great. Thanks so much.

Our next question comes from Kevin McVeigh from Macquarie.

Great, thanks. Just a couple of housekeeping questions. Are we assuming 13 weeks in the third quarter? Is that a fair assumption?

Yes, it is.

Okay, great. And then just it sounds like you're seeing a nice pick up in financial services. What percentage of total revenue is that now? And could you help us just directionally over the last couple quarters the way that's been?

Its been pretty consistent at just over 20%, Kevin.

Great, great. That's all I had. Thank you.

Our next question comes from Mark Marcon with RW Baird.

Good afternoon, everybody. I was wondering if you could talk a little bit about your internal capacity? As things are starting to improve when we look at your US business and when we think about your international offices, at what stage would you start needing to add headcount to your internal staff in order to continue growing?

Mark, we clearly still have capacity in what I would call the overall Company. As you start going down in particular offices, we're getting to the point where you're probably reaching capacity and we would look to add people. I don't necessarily see that right now as a big driving increase of SG&A. So there's still capacity there but again it does vary market to market.

So you've done a great job in terms of maintaining SG&A here at a fairly disciplined level. How should we think about that scaling with revenue?

I would say that Nate is very diligent on monitoring the SG&A so it doesn't grow with revenue. And I wouldn't expect that to change over the next six months plus. We would add SG&A if we saw something that would give us another critical advantage, a practitioner on the market or somebody with a client base if they could bring in that we don't have but I would say we're going to continue to be disciplined on the SG&A.

And Mark what I would tell you is that going back, we would really like to get back to that 15% adjusted EBITDA margin. That continues to be a goal. Obviously, there are things like the resetting of payroll taxes and some of those things that we will invest in the business but we're very focused at working to get back to that level and we think that's an important level for us to get back to.

Can you talk a little bit about the gross margins, just as we think about those, it sounds like the pricing pressures are constant within various areas but just the mix is improving. Is that correct?

When you say the mix, the overall gross margin--

Supply Chain, IM.

Right. Yes, yes. I think the gross margin on this, it's actually interesting, if you look back over the last 12 or 18 months which have been obviously a difficult period for everybody operating, I think overall, we've done a pretty good job at maintaining our gross margins despite the pressures that are out there. I think our comments are those pressures are still there but I think our folks and the value that we try to deliver have yielded the results we've had. So aside from some of the seasonal impacts, we're working to maintain that 40% goal, but there's always bumps along the road. As Don commented about not wanting to lose projects at our existing clients but we really haven't seen a lot of that to date.

Great. And can you remind us in terms of what you typically end up seeing in the second week of January through February relative to what you saw in the pre-holiday weeks just in terms of what that normal trend is? Because typically, a lot of clients end up working with their general assurance auditors, so how should we think about that this year?

How it's going to play out this year we don't know yet. We don't have that handle. We will maybe get a feel for it next week or two. In the past, compared to this recessionary time, the amount of weeks it's taken to get back to the pre-holiday revenue levels has lengthened. So we used to be up to probably pre-holiday revenue levels by the third week of January. So we have two weeks in January building up to that. Last year, probably in the last few years, it hasn't been until the first week or so of February. So that time period has lengthened because people have been more cautious about how they are spending money. We don't know how it's going to play out. We don't have a feel for it yet but we will in a few more, another two weeks, we'll know.

In terms of the cash that you have, is there anything that you're thinking we really need to buy or has the experience with Sitrick Brincko in terms of thinking about where things stand in their individual cycles, maybe we still need to digest that? How should we think about investments outside of just the core offices and your core infrastructure?

We're continuing to look for businesses that fit our resource culture that give us something we don't have. We haven't identified anything but we're looking for our government contracting type business. We have been for a little bit of time. We're looking for businesses in international markets where we don't have critical mass and we want to start a business. So we are continuing to look for ways to invest that money into something that's going to help us with our strategy of being a global professional services provider and continuing to increase the scope of services.

Don, you're still interested in government contracts with all of the budget cutbacks that are coming back? Everybody else that we follow that has government contracts are seeing cutbacks.

It depends on the type of contracts. The government contracts that are in our core sweet spots are the ones in the accounting and finance area. I don't think those are going to be cut back. I think that government agencies are going to have to become more accountable which means their systems and accounting has to be better and has to be stronger. And they don't have the internal ability to do that. So I don't see our core sweet spot decreasing because our type of government contracting won't be related to a program that could get cut. What we do is related to the real infrastructure of the government.

We have very specific criteria, Mark as we look at the government businesses and it would have to be a business that yielded the appropriate gross margins and that was very complementary to our other service lines. So it's really a very specific piece of the government business that we're looking for, not just anything.

Okay, great. I'll follow-up offline on that. Thank you very much.

Our next question comes from Paul Ginocchio with Deutsche Bank.

Thanks. Just a question about the service line disciplines. Maybe which one grew or accelerated the most over the last three months. And secondly, I didn't hear it in the call but I just want to make sure I didn't miss it. There's really no regulatory drivers out there that are driving any businesses. Is that correct? Thanks.

Couple things on the service lines. In terms of quarter-over-quarter growth, certainly supply chain and information management led the pack. On a sequential basis, pretty much across-the-board the service lines were all pretty strong. Some good growth in accounting and finance which is our biggest service line, but on down the road through human capital, information management, and our RAS service line. Relative to regulatory changes, there are constant new accounting regulations coming out.

There's a couple of big ones out on the horizon that we believe that our clients will need assistance in implementing. One being the new lease accounting rules, if they ultimately change the method for reporting cash flows, that could be big. Just the financial statement categorization, those types of things could possibly provide some business also. And that's discounting the time line on IFRS, which, again, I think if that hits that would be very significant but we're not anticipating that for a while.

Yes, and I would say this last quarter, our growth wasn't driven by regulatory changes for the most part.

Great. And so Tony it sounds like there wasn't any stand out when it comes to accelerating revenue trends among the service lines?

In terms of accelerating, I think, as we've mentioned throughout the call, information management I think is very, very hot and will continue to remain that way, so if you had to categorize it in one of those it would be information management, probably supply chain management secondarily.

Perfect. Thanks very much.

Our next question comes from Gary Krishnan with Credit Suisse.

Thank you. I have a couple of quick questions. On pricing, could you make maybe a distinction between pricing trends in the US versus Europe and Asia-Pac?

Pricing, again, as Don has mentioned, pricing is still something that we have to contend with in the US. The discipline within the CFO's office at most of our corporate clients is still pretty strong and price is something that we deal with every day that we respond to an RFP or that we bid on an assignment. I would tell you in Asia Pacific, based on the current projects we've been working on, it's become a little bit less of an issue but you still, in Asia-Pac the Big Four have been a little bit less willing to downsize their practices and therefore they are trying to offset their fixed costs by making sure they win any assignment they can even if it's below the rates at which they wish to make money. So universally, pricing is still pretty competitive but it, again, depends on the pocket whether it's Asia-Pac, Europe or the US. And it depends on the project to a large extent.

Okay, and just sequentially when we see the increase in bill rates, I guess indirectly it maybe refers to mix, but how much of the increase was attributable to maybe higher IP content required on projects versus just pricing or adjusting to more rational levels from before?

We don't necessarily quantify that but I think as Don mentioned and if you look at some of the projects that clients are taking on, in many cases, we're recruiting a higher, deeper specialized skill set and that would tend to drive both the pay and bill rates upward.

When clients recognize the IP capability of our consultants versus anybody else, we win and we have much less fee pressure. A client gets a bid from let's say a major accounting firm, Price Waterhouse or Ernst & Young and they get our bid, they think Ernst & Young and Price Waterhouse have higher intellectual property when in fact we do because our people have got intellectual property in their heads. They've done it, they don't need checklists. They can react to changes that they see while they are doing the work and get the fix done, whereas the Big Four firms and a lot of the big consulting firms use these checklists that they call intellectual property.

I'll just give you one example. One of the clients I was at which was a big quasi government project that we're doing, and we split the work at one of the Big Four firms and in the different places around the country, we actually shared conference rooms with them. And the client told me that when they ask questions to the people from the Big Four, they were all accountants, and the accounting question, they all say to them, "Not my pay grade, you'll have to call the partner," who they never saw. He said when I talk to your people and I ask them accounting questions, they have the answer and they get me the answer. So we have a lot more IP than we're really known for, and one of our goals for our media program is to try to make that better known.

Okay. And have you begun to generate revenue from the preferred provider contracts that were signed or do you expect that to start generating revenue in Q3?

In a number of them, yes we have. I think Tony might have mentioned indirectly when we get into these new big clients to start them one or two consultants on a project but where we mentioned I think a couple of quarters ago, we now have folks deployed at a number of those businesses.

A lot of those businesses have been clients, so they basically have been clients for five years or more. But you have to have a preferred provider agreement to keep them as clients, so we go through a lot of work negotiating these things. And we may not get new work from the standpoint of the new client but it allows us to continue to do work with the same clients.

Right, and maybe one last. You spoke to preliminary revenue trends and I didn't quite catch if you disclosed the Sitrick Brincko revenue over five weeks?

No, we did not, and we now lapped that on an annual basis. So we will disclose that at the end of the quarter but we didn't include it in those earlier run rates.

Okay. All right, that will be all, thank you.

Our next question comes from Scott Schneeburger with Oppenheimer Funds.

Thanks, good evening. I'll keep it quick. Two of them. First one, it sounds like you certainly have been very defensive with regard to retaining your current clients and pricing to hold them. Could you just differentiate a little bit more on regard to new business and pursuing it, how you're thinking about pricing? Is the environment just that you're willing to let some go and stay conservative? Just if you could take us a level deeper on that, thanks.

We're trying to, as we compete for new business, there is a certain level that's going to win the business and a certain level that's not so we have to assess our competition. We talk to the client and try to understand how the client values the project and how important it is to them, what type of skill sets it takes and we price our bill rates based upon all of those criteria. So we're trying to be competitive, we're trying not to lose good assignments with our clients, we're trying not to lose assignments that will be attractive to our consultants. And especially if we have a consultant that is available for work, we have found in the past that it's much better to have one of our consultants deployed even if we have to take a little bit of a lower billing rate because that generally has more projects down the road or it adds to the deployment of consultants on a given project.

Thanks. It sounds like for the next six months you'll be fairly conservative and continue to be conservative on watching costs. I'm just curious, you have added headcount. I may have missed it, I'm not sure if you broke out where that was but it sounds like you're looking to be aggressive in Asia. Your branches stayed the same period over period. Do you think that you're going to run with the same branch level or are there areas, particularly in Asia, that you're looking to expand, just headcount or branches as well, thanks.

We feel pretty good about the office complement that we have currently in the United States. In Asia-Pac we've got our eye right now on one particular geography that we're noodling around between our management group. In Europe, again I think we're pretty comfortable right now although if we do add offices in the future, they're most likely going to end up in Germany. And at some point in time we will make a foray into Latin America, possibly into Brazil or one of the other South American countries. But nothing concrete right now other than one particular area that we have our eye on in Asia.

When you look at the headcount that we've added, most of it, the new headcount has been in places like Germany where we're trying to build critical mass or in China where we're trying to build critical mass. So we will continue to be adding headcount in these new large markets. Once we think we have enough critical mass in Shanghai, then we'll look for other Chinese markets to open new offices at that can benefit from the Shanghai critical mass.

Thanks.

(Operator Instructions) Our next question is a follow-up from Tim McHugh with William Blair & Company.

Hi. I'll be quick here, but I just wanted to follow-up on your comment earlier about picking up branding spending going forward. Can you give a little more color on what your plans are, how significant those are, and what's the thinking behind it?

We'll let Kate address the types of branding and things we're doing without talking about specific dollars.

Yes, we've relaunched a new branding that will debut this month through the balance of the fiscal year. And we're focused on print advertising, online advertising and some outdoor airport advertising to build awareness in our client base and also in our consultant group. And we're also adding radio to certain targeted markets during the same time frame, and that's really to build awareness of our type of consulting model.

Is this a return to what you used to do or is this a more elaborate campaign? Can you at least talk about that?

A lot of it is what we were doing about three years ago that got cancelled and so we have to restart it all. And some of it's brand new like a lot of the online ads, and the airport dioramas that we are doing is new for us.

Thank you.

I'm showing no further questions on the phones.

All right. Time to wrap it up and thank you for your continued support and interest in Resources and we look forward to our next update for the third quarter of 2011.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone have a great day.