Resources Connection Inc (RGP) 2011 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to your Resources Global Professionals fourth quarter 2011 earnings conference call. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to turn the conference over to Ms. Kate Duchene. Ma'am, 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, 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 fourth quarter of fiscal 2011. By now you should have a copy of today's press release. If you need a copy and cannot access one via our website, please call Patricia Marquez at 714-430-6314 and she will be happy to fax a copy to you.

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 condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

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

Thanks, Kate. Well good afternoon and welcome to the Resources Global fourth quarter conference call. Let me begin by giving you a brief overview of our fourth quarter and year-end operating results.

Total revenue was $145.7 million, an 8.8% increase over revenue of $133.9 million in the comparable quarter a year ago and up 5.9% from our third quarter revenue of $137.6 million. Consistent with last quarter, we continue to experience significant quarter-over-quarter revenue growth internationally as our Asia-Pacific and European regions grew 54% and 32%, respectively. For the year, we grew revenue $46.5 million to $545.5 million, a 9.3% increase over the prior year. Fourth quarter gross margin was 38.1% representing a 110 basis point improvement from our third quarter. The 110 basis point improvement stems primarily from a relatively holiday-free calendar in the US during the quarter and a slight reduction in the impact of payroll taxes.

During the fourth quarter, our SG&A costs were $43.7 million, a $700,000 increase from the comparable quarter a year ago, but a sequential decrease of $1.6 million. The quarter-over-quarter increase stems primarily from increased marketing and additions of personnel in high-growth areas. We remain focused on tightly controlling our SG&A cost while investing for the long-term benefit of the Company.

During the fourth quarter we generated cash flow from operations and adjusted EBITDA of $11 million and $13.7 million, respectively. For the quarter our pre-tax income was $12.1 million, which includes $3.2 million of non-cash income related to a decrease in the estimated fair value of the Sitrick-Brincko contingent consideration. Our fourth quarter GAAP net income was $5.4 million or $0.12 a share and includes the impact of the contingent consideration adjustment of $0.05 per share and newly established tax valuation allowances of $700,000 or $0.02 per share related to two of our foreign subsidiaries.

Excluding the impact of the contingent consideration adjustment and the tax valuation allowances, our fourth quarter net income was $0.09 per share. During the fourth quarter, we returned $17 million to shareholders in the form of a stock buyback which encompassed about 1,017,000 shares and our regular quarterly dividend. In addition, our Board authorized a new stock buyback program totaling $150 million.

Now let's talk for a moment about revenue trends. As we reported in late March, weekly revenues during the first four weeks of the fourth quarter averaged $11.2 million. For the remaining nine weeks of the quarter, weekly revenues continued this trend, averaging $11.2 million per week. Weekly revenues during late April and early May were moderately impacted by spring break vacations. We ended the quarter with good momentum with weekly revenues increasing from $10.7 million in the first week of May to $11.5 million during the last week of the quarter.

Midway through our first quarter of fiscal 2012 our weekly revenues have ranged between $9.1 million experience during Memorial Day week and $11.2 million during the last week of June, averaging $10.4 million or up approximately 13% over the comparable six-week period from the prior year. Although recent Department of Labor employment data was weak we believe the demand environment for consultants at many of our large multinational clients continues to improve. Current client demand spans a large variety of project types, including regulatory compliance, financial and operational process improvement, IT system conversions and upgrades and other project management roles. We continue to believe our clients view our business model which utilizes consultants with greater experience as an alternative to branded consulting firms where much of the work is done by recent college graduates. Additionally, we believe utilization rates in many of the branded consulting firms are approaching normalized levels which should reduce some of the irrational prices we have seen on certain engagements in the past months and help us improve bill paying spreads during the remainder of calendar 2011.

In terms of the geographies in which we operate, we are very encouraged by the progress we are making in Europe where revenues grew 32% in the fourth quarter compared to a year ago. Continued revenue growth from our European offices is one of our key focal points for fiscal 2012.

In Asia-Pacific, revenue growth was once again very strong, up 54% and led by our practices in China and Japan. China once again saw very strong demand while Japan is rebounding nicely from the aftereffects of the earthquake.

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 $145.7 million, an increase of $11.8 million or 8.8% from $133.9 million in the fourth quarter of fiscal 2010. On a sequential basis, revenues increased approximately 5.9%.

On a constant currency basis, the quarter-over-quarter increase was 6.3% and the sequential increase was 4.6%. Highlighting certain geographies for the fourth quarter, revenues in the US were $103.9 million, up 0.6% quarter over quarter and up 4% sequentially. For the fourth quarter, total revenues internationally were $41.8 million, up 36.6% quarter over quarter and up 10.9% sequentially. International revenue accounted for approximately 29% of total revenues for the quarter compared to 27% in the third quarter.

Europe's fourth quarter revenues increased 32% quarter over quarter and 12.9% sequentially, while the Asia-Pacific region saw fourth quarter revenues increase 53.7% quarter over quarter and 8.4% sequentially. This is the third consecutive quarter our Asia-Pacific region has experienced greater than 40% growth quarter over quarter. On a constant currency basis, total international revenue increased 25.5% quarter over quarter and 6.1% sequentially. On a quarter-over-quarter basis, the US dollar was weaker against the major currencies in Europe and Asia-Pacific. As a result, Europe's revenue increase would have been 20.4% and Asia-Pacific's increase would have been 43.3%.

Following is some additional detail related to certain markets. Total revenues for the Netherlands practice in the fourth quarter were $9.6 million, up 18.5% quarter over quarter and up 11.6% sequentially. UK revenues were up 19.4% quarter over quarter and up 5.7% sequentially. Average weekly revenues of the Sitrick-Brincko Group were of $431,000 compared to a weekly average of $454,000 last quarter, a decrease of about 5.1%.

Let me now discuss early revenue trends for the first quarter of fiscal 2012. Weekly revenues for the first six weeks of the quarter, which included the Memorial Day and Fourth of July holidays were $9.1 million, $11 million, $10.9 million, $10.9 million, $11.2 million, and $9.3 million. The last week includes the Fourth of July holiday. In thinking about the remainder of the first quarter it is important to remember that we generally lose about 5% of weekly revenue due to vacations taken by our consultants from the US and Europe during the July through August time frame.

I will now discuss gross margins. Gross margin for the fourth quarter was 38.1% versus 41.4% in the year-ago quarter and 37% in the third quarter. The 110-basis-point increase in the sequential gross margin stems primarily from the absence of US holidays occurring in the fourth quarter and a slight reduction in the employer portion of payroll taxes. Excluding reimbursable expenses, our fourth quarter gross margin was 39% which compares to 42.3% in the fourth quarter a year ago. The average rounded billing rate for the quarter was approximately $131, an increase from $130 in the third quarter and down $1 from $132 a year ago. The average rounded pay rate for the fourth quarter was approximately $66, up from $65 in the third quarter and $63 a year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. Primarily due to the impact of summer vacations and the Memorial Day and Fourth of July holidays in the US during the first quarter, we would expect gross margins to decline by approximately 100 basis points.

For the fourth quarter gross margin in the US was 40.1% and our international gross margin was 33.1%. Our consolidated gross margin for fiscal 2011 was 38.6% compared to 39.1% in fiscal 2010.

Now to headcount -- for the fourth quarter, the average consultant FTE count was 2222. This is up from 2180 in the previous quarter and 2057 in the year-ago quarter. Quarter-end consultant headcount was 2249 versus 2067 a year ago. Total headcount of the Company was 2984 at quarter end.

Now to the other components of our fourth quarter results. Selling, general and administrative expenses for the fourth quarter were $43.7 million, or 30% of revenue, a quarter-over-quarter increase of $700,000 and a sequential decrease of $1.6 million. SG&A was $45.3 million or 32.9% of revenue in the third quarter of fiscal 2011. The increase in our fourth quarter SG&A from the prior year results primarily stems from the relaunch of our branding campaign and an increase in compensation and health care cost. We believe SG&A expenses in the first quarter of fiscal 2012 will approximate the fourth quarter level. Stock compensation expense was $2 million or 1.4% of total revenue, down from $2.6 million in the third quarter and from $2.9 million or 2.2% of total revenue in the fourth quarter of fiscal 2010. We would anticipate quarterly stock compensation to approximate the Q4 amount in the upcoming quarters.

At the end of the fourth quarter our office count declined by 2 from last quarter with a total of 80; 51 domestic and 29 international. The reduction stems from combining offices in New York as leases expired.

Related to our other components of our financial statements, depreciation and amortization was $3 million for the quarter, about the same as last quarter. We would expect depreciation and amortization expense for the upcoming quarters to approximate $3 million per quarter.

During the fourth quarter we also recorded non-cash income of $3.2 million, $2.2 million or $0.05 per share on an after-tax basis related to a decrease in the estimated fair value of the Sitrick-Brincko contingent consideration. Because of the inherent difficulties in projecting the future operating results of the episodic Sitrick-Brincko business we anticipate the estimated fair value of contingent consideration will continue to change in future recording periods, and future changes both up and down could materially impact our operating results.

Interest income was $107,000 for the fourth quarter versus $124,000 last quarter and $132,000 a year ago. Quarter-over-quarter interest income has declined primarily due to lower interest rates on our investments. Our adjusted EBITDA or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustments, was 9.4% and the fourth quarter, a 340-basis-point increase from 6% in the third quarter.

For fiscal 2011, our adjusted EBITDA percentage was 8.7% up from 5.5% for fiscal 2010. During the fourth quarter, on a GAAP basis we recorded a provision for income taxes of $6.7 million on pre-tax income of $12.1 million, representing an effective tax rate of approximately 55.5%. Our effective tax rate is impacted by our current inability to offset income tax in tax jurisdictions in which we are profitable with losses in tax jurisdictions in which we are not profitable. Additionally, during the fourth quarter we recorded newly established valuation allowances for two international subsidiaries aggregating about $700,000 or $0.02 per share.

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 mix of operating results between our US and foreign locations, each of which are taxed or benefited at different statutory rates and the offset of the tax benefit of losses in certain locations by valuation allowances. On a cash basis, our tax rate was about 42% and we would expect that rate to continue over the next couple of quarters.

In summary, our GAAP per-share income during the fourth quarter was $0.12. As Tony mentioned, the $0.12 per share includes $0.05 per share of non-cash income from the adjustment to contingent consideration and a $0.02 per share charge for the newly established tax valuation allowances. Excluding those items, our fourth quarter net income was $0.09 per share. For fiscal 2011, our GAAP per-share income was $0.53 versus a loss of $0.26 in fiscal 2010. Excluding adjustments to contingent consideration and newly established tax valuation allowances, our fiscal 2011 income was $0.23.

Turning to our balance sheet, cash and investments at the end of the fourth quarter were $144.9 million, a $6 million decrease from the end of the third quarter. The decrease stems primarily from cash generated from operations of $11 million, offset in part by share repurchases and dividends totaling approximately $17 million during the quarter. For fiscal 2011, we generated cash flow from operations of $26.1 million, a 240% increase from fiscal 2010.

During the fourth quarter we repurchased approximately 1,017,000 shares of our common stock at an aggregate cost of $15.2 million or $14.96 per share. For the fiscal year, we repurchased approximately 1,665,000 shares, representing about 3.6% of our shares outstanding as of the beginning of the year at an aggregate cost of $24.4 million or $14.66 per share. During fiscal 2011, in aggregate we returned almost $30 million to shareholders through share repurchases and dividends.

Our current stock buyback programs have approximately $152.2 million remaining. We will continue to return cash to shareholders through our regularly 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 fourth quarter were approximately 45.4 million.

Receivables at quarter-end were approximately $87.2 million compared to $85.2 million at the end of the third quarter. Days of revenue outstanding were approximately 54 days compared to 52 days in the prior year's comparable quarter and 54 days in the third quarter.

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

Thanks, Nate. In late May we held our annual client service meeting in Detroit. The meeting which focuses on bringing together our global client service teams as well as representatives from some of our largest clients, highlights and reinforces Resources' most valuable assets -- our people and our clients. Based upon our global client service strategy sessions completed in Detroit, I remain convinced our focus on retaining and serving our clients and retaining our best people will pay significant future dividends to our Company.

If you read down the list of our top 100 clients, you would recognize every one of them as a leader in their respective industries. These are the companies that Business Press has been writing about recently, describing them as carrying lots of cash and operating very conservatively in the current global economic environment. I continue to believe that as economic uncertainty diminishes and our government leaders are of focused -- are forced to begin addressing the factors holding back the US corporate investment, these large multinational companies will be the clients our competitors wish they had. I am certain some of the branded consulting firms agree, which is why we sometimes are faced with these firms periodically making irrational pricing decisions as they try to buy their way into a client relationship in order to improve their utilization rates.

Now, while each client situation is different, our belief is the overall pricing environment is beginning to improve. Although it is only anecdotal evidence, in late May we won a seven-figure engagement to assist a multinational financial services firm in assessing certain business processes, competing with the consulting arm of a Big Four firm. It was great to hear the clients say we won the award hands down because our consultants were more experienced and less costly. And I look forward to hearing this more often in the future.

Our meeting in Detroit focused on continuing to grow or business relationships with our large base of multinational clients. We also remain focused on largely improving our gross margin as we work to protect and expand our client base. I am confident we can increase the operating leverage in our business while continuing to invest in the business for the long term.

As the demand for professional services continues to improve, we believe our loyal clients, as reflected by the following data, provide an excellent foundation for the continued profitable growth. Client continuity is outstanding. During our fiscal 2011 we served all of our top 50 clients from fiscal 2010 and 49 of our top 50 from 2009. In fiscal 2011 we have served 221 clients exceeding $500,000 in fees representing an increase of over 9.4%, with 202 clients served at this level in fiscal 2010. Our top 50 clients represented 38.8% of total revenues while 50% of our revenues came from 92 clients. 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 2.3% of revenues. For fiscal 2011, all of our top 50 clients have used more than one service line. 72% of those top 50 clients have used three or more service lines. And this service line penetration reflects the diversity of relationships we have within our client's organization.

So this concludes our prepared remarks and we would be happy to answer your questions at this time.

(Operator Instructions). Sara Gubins, Bank of America.

Could you talk a bit more about recent conversations with clients, demand trends? And particularly in Europe, you mentioned that that is an area of focus, and I'm wondering how your clients are feeling there given the uncertainty in that region.

Right now, the demand profile in Europe is quite good. In Germany, Sweden, France, the Netherlands, the UK, Norway, all of those countries in the fourth quarter had very strong growth. Right now there is obviously concern relative to the debt crisis being experienced by various different countries, but it is not having that much of an impact on the demand that we are seeing. Now bear in mind that a lot of the demand that we get can emanate from US-based multinationals that are having us do work in Europe.

So the effect, like I say, at this point is not yet noticed relative to the banking crisis, but we are keeping our eye on it.

Okay, and then, Nate, I think you said that you are expecting gross margins down 100 basis points versus the fourth quarter in the first quarter of fiscal 2012. Did I hear that right, and if I did, can you talk about why that is?

Yes, that is exactly what I said, Sara, and the driver of that is the two paid holidays that occur in the first quarter which we spoke about, being Memorial Day and the Fourth of July.

Okay, and then just last, the pay rate was up 5% year-over-year in the quarter, and the bill rate is still on its way down, although less so than last quarter. Could you talk about what was driving pay rates up?

Yes, it's a handful of things. I think some of that can be -- is the mix of business, is certain other service lines that if I had higher growth than others, the pay rates for some of the specialized skill sets tends to be a little greater. We also commented that the percentage of the total work in -- internationally has grown in particular in Europe. As we talked about in prior quarters, you have a little bit higher average pay rates there as well.

Okay, thank you.

Gary Bisbee, Barclays Capital.

I guess my question is on the US. I guess I was surprised by the amount at which that decelerated. Obviously international was great, but how can we think about demand in the US in the short-term? Any commentary specific to that region?

Yes, I think one of the things that you have to remember about the US and I had mentioned it during Sarah's question, is that the US companies, where they are growing most significantly right now is in Asia-Pacific through -- predominantly in China. And a lot of the demand that we are getting for the work in China and the reason that we are growing so well over there is there is a lot of demand that is emanating from US companies where they are spending money. So even though the absolute growth rates for the US might be down, there is still a lot of work emanating from our US multinational clients; it is just ending up in some of our overseas locations.

Is there any way to read how that trends? I mean if sales start falling here, all of a sudden attaining the long-term margin goals you set out would be pretty difficult, I would think, given the base of the expenses you have got in the US.

You know we are not economists. We can tell you from talking to US-based multinationals, they are not investing less. So their investments are overseas, and the same thing with European multinationals. A lot of the companies that Tony and I visited when we were in Asia are either European-based or US-based multinationals.

So there is, again, I'm not an economist, so I don't know what's going to happen to the economy. We would hope that we do some positive things to get job growth growing in the US. but as far as I can see from the economic data, job growth is not happening. So we are doing, I think, a great job with our multinational clients in the US. The good thing about the US in some ways for us is that these big multinational clients in the US are not hiring. So as they do have issues and they do have demand, they have to go to somebody else to help them with them.

So it's -- we don't see a big economic recovery in the US that is fueling growth right now. We are hoping. But (multiple speakers) we are doing the best job we can selling into these clients.

And then I guess, Europe has been so strong. Is there any way to think about how that might grow once you lap this big, big increase you've had, or is it a little too early to have any thought process on that right now?

Well, I actually think we still have a ways to go. Because, if you recall throughout the recession, Europe suffered pretty greatly, and we had some pretty significant revenue decreases with a lot of our offices over there, and that is what we have been -- we've been waiting to see that sign. We saw it two quarters ago with Europe starting to increase, and it is just very encouraging right now to see the strength in their business.

So I do think we still have a ways to go with Europe, but we are very encouraged by their operations currently.

And then just one if I could sneak one last one in. I appreciate the increase in share repurchases, but I'm trying to understand why you would not be more aggressive with the stock having been down as much. You are sitting on more than a quarter of your market cap in cash. You are earning next to nothing on that cash. It's hard for me to believe that M&A is going to earn a higher return than buying your own stock if we do have a global jobs recovery and demand is solid the next few years. I appreciate the authorization, but last time it took 4 years to fulfill -- I guess you have not quite fulfilled the '07 authorization if there is 2 million left on it. How do you think about maybe being more aggressive?

Well, Gary, I think we will continue to be in the market. When we purchase in the open market, there are limits based on our average trading volume. And my sense is, had we legally been able to purchase more during the fourth quarter, we probably would have. But I think as we look out in the future, given the cash that we have, I think you will continue to see us return capital to shareholders, both in the form of the dividends and through share repurchases.

Okay, thank you very much.

Tim McHugh, William Blair & Co.

I apologize for the background noise, but I just wanted to quickly ask on the pricing pressure you mentioned. If you could talk a little bit about how you are responding to that. Are you having to be more aggressive with your pricing, or you can continue to stay disciplined and try and stick with the traditional model? I just want to hear how you are responding.

I would say on the pricing, we are just recently seeing less irrational pricing by competitors. And I think we touch upon that in our discussion, which is the major consulting firms or Big Four firms are reaching more traditional utilization rates so they have less excess capacity. And at the same time, we are making a concerted effort to keep pointing out our advantages to our clients so that we can move our gross margin up to where it was historically.

At the same time, we are still not going to give up a major client if we can help it through some small pricing concession. So our first goal is to keep our major clients because that is where our growth is going to come from, and our second goal is to get our gross margin moving up back to where it was historically.

Okay, and then my only other question is if you could comment on demand trends by practice area. Is information management still kind of the strongest area, and supply chain as well, or have you seen any change in the practice area?

Yes, information management is still strong; supply chain is still strong. We are getting a lot of -- a lot more human capital work, primarily along change management engagements that go right hand in hand with the IT work. So that has been an encouraging as well.

And then our accounting and finance practice is doing fine. It is up a bit in the fourth quarter, and that is primarily around finance transformation, fast-closed business process improvement type projects at our clients.

Okay, thank you.

Paul Ginocchio, Deutsche Bank.

Just a question about the tax valuations in those countries where you are unprofitable. Could you just discuss what countries those are, what percentage of your revenue are in those countries and sort of the path to getting back to profitability in those countries? Thanks.

Sure, Paul, the valuation allowance, the newly established valuation allowance were for small subsidiaries in the UK and the Netherlands, and they make up -- those legal entities make up a very low portion of our operations. Hence, the valuation allowance was only 7 -- the newly established valuation allowance was only $700,000. As Tony commented and you are seeing Europe turn around, predominantly these valuation allowances are in our legal entities in the various tax jurisdictions in Europe. And I think as we continue to see that revenue growth, these countries and tax jurisdictions will hopefully start returning to profitability.

So I think, given the revenue growth we have seen in the last couple of quarters, I think we are all hopeful that as we get further into 2012, we will see positive taxable income.

So just to be clear, so it sounds like the Netherlands and UK are still unprofitable. Any other major countries that are unprofitable?

You know, I would tell you that those are the major drivers. But, again, the ones we booked this quarter were what I would call very small entities. The overall Netherlands practice is not reserved. That business does not have a valuation allowance. The UK does in some of our other practices.

Okay. Just a quick question about the largest client. I think last quarter it was 3.6%; now it was just around 2%. Is that the same client and just the project end, or did something else change?

It's the same client, but again, it's also a function of the total revenues, and the denominator is a little bit bigger in this quarter as well at $145 million. So we are still doing a significant amount of work for that same client and we do all year round.

Great, thank you.

Jeff Silber, BMO Capital Markets.

I'm sorry to go back to the pricing issue. Are you seeing any changes or any discrepancy in pricing by your different service lines or by your different geography? Or, is it the same trends holding true throughout the Company?

No, I think pricing depends on the type of service and the competition for that service. Probably the most aggressive pricing is in sort of the accounting and finance area where the Big Four had staff utilization issues, which we think is basically gone. Staffing for legal services, I would say they have the best probably overall margin. The IT is an IM practice. Depending on the specialties involved, there could be no pricing issues, or there could be some pricing issues.

So it does depend on the project, the type of project and the competition for that project. So accounting and finance has probably been the most I would say aggressive pricing that we have encountered and we think that is winding down that crazy pricing.

And can you remind us what accounting and finance is roughly as a percentage of your total revenues?

It's about 60%.

Okay, great. Shifting gears to Sitrick, I know the trend's continuing down a little bit, and if I remember correctly that's a relatively high gross margin business. Can you give a little bit more color what is going on there and when you think that will turn around?

I think the key driver to the downturn is what I would call the lack of corporate bankruptcies. I think there has been a fair amount in the press about that with kind of the easy debt markets over last 12 months. I think the amount of corporate restructuring that we expected and others expected has not occurred. I think time will tell. We think long term, that will be a great business for us, but clearly the volume of corporate restructurings over the last year have been substantially down.

Okay, that is fair. Just one more quick follow-up. What should we be budgeting for capital spending in fiscal 2012?

In aggregate, it will be a little bit less than $4 million, of which about $1 million of it will be reimbursed by the landlords. So if you look at it kind of net cash to us, about $3 million.

Okay, great, thanks so much.

Kevin McVeigh, Macquarie.

I just wanted to get a sense of the timing mismatch between the bill and pay rates. Obviously, pay rate's up substantially, bill rate's down. Do you expect that to reverse, or is it -- again, I understand part of it's just a business mix issue, but pay rates are creeping up, bill rates are down. How does that play out over the next couple of quarters, would you think?

Kevin, what I would tell you is those are rounded numbers, so the actual differential between the increase in the pay rate versus the bill rate is like $0.10 or $0.15. So it is not -- on a rounded basis, though, they kind of tripped the rounding. So I think as Don mentioned, that is something that we are obviously very focused on. Unlike many of the other kind of branded professional services firms, we really only need to claw back $2 or $3 from our clients. I think as the environment is improving, our people are very focused on doing that.

So I fully expect as we get through 2012 here that we will see improvement in that so long as the current environment that we have seen over the last couple of months continues. And I don't have any reason to believe that it's going to change. So to us, it's not a significant thing for us to claw back.

Great, and then Nate, in terms of links of assignments, have they been generally increasing or are they still at the same level?

Yes, I would tell you they are probably at the same level. It is a fairly wide spectrum. I do think our clients, as we have commented in the past couple of quarters, they remain what I would call budget conscious. So we still see a lot of the projects having budgets and companies issuing the POs. But I don't think there has been any radical change in project duration.

Great, and then just a last question I apologize. The 5% decline in terms of around the holidays, does that factor in the first six weeks already? So is that for the full quarter, or would you expect another 5% for the remaining -- and I'm assuming it is a 13-week quarter -- the remaining seven weeks?

Yes, so, what you really see is, it starts kind of Fourth of July week. You start seeing the people starting to take vacation. So the 5% is yes, we will probably feel that during the remaining weeks. If you look at last year, that is pretty much exactly what happened.

Okay, thank you.

Kelly Flynn, Credit Suisse.

I have a couple of questions. First question, actually going back to what Kevin was asking about, relates to pricing and the resulting impact on gross margin. You are saying that pricing is stabilizing but it looks like clearly in the fourth quarter the gross margin decline widened, and your Q1 guidance calls for a couple of hundred basis point decline, fairly similar to Q4. I was just wondering, can you bridge that gap there? You're seeing stabilized pricing, but you're not guiding to that. How should we think about the rest of the year? Do you think by the end of the year, you should be flat gross margin, or generally how you are thinking about that?

Kelly, I think two different thoughts there. The comment we made about the first quarter and the 100-basis-point decline is really just factoring in what we know, and that is that our consultants get two paid holidays during the quarter with no revenue associated with them. So that in and of itself is that 100 basis points.

So we have not -- the guidance that we gave doesn't necessarily project where the market is going to head, in terms of where the pricing environment. As we commented, we think it's improving and our people are focused on working and clawing back those dollars. And as I said, as you get further out in the year in the current environment, and as Don commented, we believe we will work our gross margins back to historical levels. Nothing has really changed when you look at our competitive advantage that we typically had with our business model against our traditional competitors.

Okay, so you are basically saying, you are seeing some stabilization, but you're not assuming any improvement in the first quarter? Is that fair?

Yes, that is correct, in terms of the kind of comments we made about the upcoming quarter. The first quarter is affected by the holiday pay without -- (multiple speakers)

Right, but I'm looking at it year over year. I mean presumably last year's quarter was also impacted by that. So --

Yes.

I was just saying, the gross margin erosion year over year that you seem to be projecting is pretty much the same or slightly better, but pretty much the same as you saw in Q4. So it looks like you are saying pricing is stabilizing but you're not assuming any improvements, which I think is -- (multiple speakers)

Yes, in that 100 basis points, that is correct. I would also tell you, Kelly, is that when you look at negotiating these higher bill rates, it takes time because you have to do it typically on new engagements. And so it is as you have projects rolling. So typically that improvement takes place over a couple of quarters and you have to have your older engagements where you face -- where you might have given up that $2 or $3 you need to have those roll. So that's why it's -- that quarter-over-quarter impact is, you're just not going to get back there in one quarter.

Okay, fair enough. And I guess moving on to SG&A, I think you said in the first quarter it should be similar to the levels in the fourth quarter, but how should we think about the year progressing? I mean fiscal '11 pretty much increased as the year progressed. Should we be looking at much higher SG&A by the time we get to the fourth quarter?

We as we mentioned in our comments, our focus is really to keep SG&A as flat as we possibly can. The only real increases that you would see would be if we have to add any headcount to some of our higher growth areas. But again, the way that we look at it, we know that we have capacity within our business, so we will really look more to shift people around to those high-growth areas. So the focus is really going to be to keep SG&A as flat as possible.

Okay, fair enough. And then just moving on to talk about the tax rate, I'm confused about a couple of things. I'm hoping you can help. The $0.05 gain that you mentioned from the contingent consideration, how are you tax affecting that? Because it does not intuitively come out to $0.05. How are you getting the $0.05?

So the $3.2 million on an after-tax basis using our -- a US rate gets you to an after-tax of $2.2 million, and that is just dividing by the weighted average shares.

Okay, so, right, using the US tax rate, all right. And then a similar question related to the valuation allowance. I think you say it's $0.02. It's around $700,000. If you back that out, your tax rate is still 50%, right? So I mean you are kind of -- even if you back that out, you are still getting hit by higher tax rates for the kind of international reasons you cited. Is that right?

That's correct.

Okay. I think that is important because, if you had a normal tax rate, you would have done I think even better than $0.09. And then --

Our cash tax rate is roughly 42%, and that is what we are paying in cash. So relative to what Nate was talking about, the reserves on the deferred tax assets of the foreign subs, we cannot tax benefit the losses. So if you have losses in a foreign sub and you've got income in the US, you are paying income taxes in the US without the corresponding benefit, and that is what tweaks the rate a little bit.

Right, okay, but it is basically -- I mean it is more than $0.02? How you are being hurt by (multiple speakers)

Yes, we were just isolating those two individuals items. I think several of the analysts' models utilized that 42% tax rate, but on a GAAP basis is really what we were talking to, and then we always provide that cash rate.

Okay great. And last just quick question, for Sitrick, you mentioned the 5.2% decline. I just want to clarify -- was that year over year or sequential?

Sequential.

Okay. Do you have the year over year?

Not in front of me, but I will get back to you, Kelly, off line.

Okay, great, thanks for taking all this, I appreciate it.

(Operator Instructions). Scott Schneeberger, Oppenheimer.

I just want to go off -- you guys mentioned rate -- I think it was Tony -- that you had some strength in regulatory-related business. Could you elaborate on that, please?

Well, just regulatory consulting is one of the areas of our accounting and finance practice. So in addition to just some of the normal SOX work that we do that was part of our RAS service line, we are also seeing work over in the UK relative to hedge funds, investment advisors, mutual funds. So, again, it's just one of the normal service lines that we have.

Okay, is that affiliated with your largest customer? Is that something -- I guess I'm getting at -- would your largest customer discontinue? And can you elaborate if the answer goes in two different directions?

No, it's not. We might -- when you talk about our largest customer, we might be performing 12 to 15 projects at any given time with the largest customer. And at any point in time, there could be some regulatory consulting. It really has nothing to do -- I don't think anything should be read into a fall-off in business with our largest customer, because again, in this particular case we might have somewhere between 50 to 70 consultants at this particular client at any time during the year. And, yes, you are going to hit times in which certain projects roll off and new projects come on. But this customer is a longtime client, and the latest discussions we are having with them is they want to increase the amount of work we are doing for them because they think that we are a good value proposition.

Okay. And then could you speak to differentiating between -- it sounds like you're continuing to be very focused on servicing your existing clients. Can you touch upon progress with new clients? And is that causing any disruption with regard to the bill rate? Thanks.

No, relative -- one of our disciplines is always looking for new clients. That has always been part of our growth strategy. And we have robust targeting efforts in every office relative to new clients. I think when we talk about one of our greatest assets in the Company is our current client base because these businesses are so big and they have so many different functional departments and so many subsidiaries all over the world, that we have warm relationships. We are associated with the buyers. We can get introductions into other functional areas within that client. It is just one of the most robust areas of our future growth. So it is really not a distinction of either or; it is really both. We will always look for new clients in addition to serving our existing clients.

Okay thanks. And then just finally, you mentioned RAS before. Could you update us on what percent of total revenue that is? Thanks.

It's about 8%, which is very consistent with last quarter.

Okay, thanks very much.

Mark Marcon, R.W. Baird.

I wanted to go back to the US. Could you just break that down a little bit in terms of any color that you would have in terms of regions within the US or verticals? Or are you basically -- I imagine you are not seeing the same exact trends all over the place.

That is correct, Mark. Our central region has been probably the strongest region in the entire year, and that is on the strength of the oil and gas business and industry down in Texas. A little bit flatter on the coasts at this point in time. Relative to verticals, information management has been strong throughout the United States, all regions. Supply chain management has probably been the strongest in the central region because of a lot of supply chain work with these oil and gas clients. A and F, again, like I said, had been steady and we have seen just a pickup again across the board because of the IT emphasis in human capital and change management.

Great. And then, in terms of that discussion around -- with some of the clients that are just doing work internationally and going to the coast, if we think about some of your larger offices like around the New York region or Northern or Southern California, previously when you were selling into those clients, were they basically saying yes, we can utilize you in all sorts of different places? Or -- and the source of the engagements for your international offices came out of those offices? Or, how should we think about just the ground level, the engagements or the discussions between your key client-facing folks relative to where the engagements are?

Let me -- I will give you one example. A major entertainment company in Southern California, headquartered in Southern California, we helped them when they established their operations in Tokyo. We helped them when they established their operations in Hong Kong. They are now establishing a major operation facility in Shanghai, and we are following there to help them with that work. So we may get a project and that is sort of what we use to build our relationships at the client, and then we try to spiderweb throughout.

If we get an engagement where we are asked to provide assistance in another country, we ask our people in that country then to develop relationships with the local leaders of that business. So if we are working for a major auto company in the US headquartered in Korea, we want our people, if they get the assignment then, to work with the Korean leadership of those subsidiaries to build a local relationship, and that is how we have always done it.

In Europe, we have been very successful in transferring relationships from the US-based companies to European companies. When I was in Shanghai we met with one of the largest personal products companies in the world that is European, and our people built a great relationship with the European and Chinese leadership in China, and they are growing 40% to 50% a year. So we don't have to send a European over to deal with them. Our people locally have built a great relationship.

So that is what we are doing. We are trying to get the work and then follow the clients to where they are investing and then try to build a local relationship. Lately we have been doing a number of projects throughout South America as a number of our clients are now investing more heavily in South America. So that has always been our strategy and without a core returning service like an audit like the Big Four have, we have to use relationships and build those and transform.

That is what I thought, Don. I just wanted to get some clarification. Because it sounds like a lot of the people who are facing clients in the US -- I'm just trying to figure out exactly how they are looking at the rest of this year based on your earlier comments about a lot of the US clients basically saying, most of our investments are going to be overseas. Are you thinking that the US is basically going to be flat this year, or could you actually see declines for the full year?

Well, I mean honestly, if you tell me what you think the economy will do, I can tell you what we think we will do in the US, because it's very much economic driven. If clients think they are going to expand and going to be more profitable, they are willing to spend more money. So we just -- our job is to keep our penetration in these large clients and keep building those relationships.

We had one of our -- probably our smallest office in the US, it is our smallest office -- and they called Tony and they have basically got two or three projects over in Europe at one of their clients. And so they are selling those projects. Even though they are not going to get the revenue, they are working really hard to sell those projects. And that is what these big relationships mean to us, is that we can use our relationships, transfer them and grow them. So the US economy, we would love to see it improve slightly. We would like that. That helps us a lot. But from a longer-term strategy, our objective has been to keep investing, because we don't think the world is going to stand still. We don't think the economic growth in the world is going to stop. It is just shifting and we need to shift with it. And we do have these great relationships.

I met with several large manufacturers in the US and one of -- the CFO told me, he said we are considering shifting our business and re-headquartering it over in Asia, Singapore or Hong Kong, because we don't -- the way we feel the government is treating us we don't think we need to be treated that way. And all of our growth is coming from Asia and South America. So we have told -- at the highest level, we told the Treasury Department if you keep hounding us like this, we are going to move our headquarters.

And so we have to fight some of that thinking. Again, as companies are global, they are doing things like global IM projects now as they're trying to become more efficient, and then that is going to throw off work for us. A major oil company won't hire Resources to implement an SAP all around the world, but the local divisions of those oil companies in accounting and finance and treasury will hire us as they are going through that implementation to help them and get them through that.

I appreciate the color. Can you talk a little bit about your strongest growing region, in terms of AsiaPac, just in terms of the profitability levels over there? Is it profitable at this point if we take a look at some of your larger offices?

Our two largest offices in Asia would probably be Shanghai and Tokyo. Our margins are better and our profitability is better from those offices. So we are not having a problem with profitability in China like, say, other companies.

Great. And the gross margins there are equivalent to the corporate average or better?

Yes, they are better -- they are certainly better than the international average. They are probably between the international average and the US rates.

Great, thanks for the color.

Andrew Steinerman, JPMorgan.

Hi -- I don't think (inaudible) hear me. When you say SG&A flat in the first quarter, when you say SG&A is flat in the first quarter, do you mean in dollars or in percentage terms, percentage of revenues terms?

Dollars.

Right. And how long do you think you could hold SG&A flat? Don't we have our branded initiative coming up, ending soon?

Yes, so we will have -- as we get into the fall, we tend to slow down some of the branding in the summer months. So there will be some pickup later on in the year due to the branding. But if you go back to Kelly's question, over the entire year the spend in the branding will be comparable to what we spent in fiscal 2011.

Okay, thanks so much.

I'm showing no further questions at this time.

Okay, well I would like to thank everyone for their continued support and their interest in Resources. We look forward to our next update for the first quarter in fiscal 2012. 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.