Resources Connection Inc (RGP) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. And welcome to the Resources Global Professionals' third quarter fiscal-year 2012 earnings conference call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions)

As a reminder, today's conference may be recorded.

Now, I'll turn the program over to Kate Duchene, Chief Legal Officer. Please go ahead.

Thank you, operator. Good afternoon, everyone, and thank you for participating today. Joining me on this call are Don Murray, our Chairman and Chief Executive Officer; Tony Cherbak, President and Chief Operating Officer; and Nate Franke, our Chief Financial Officer.

During this call, we will be providing you with comments on our results for the third quarter of fiscal-year 2012. 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'll be happy to fax a copy to you.

Before introducing Tony, I'd like to read an important announcement about certain statements that we may make during this call. Specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the Company. We wish to caution you that such statements are just predictions, and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 28, 2011 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 the results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

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

Thanks, Kate, and good afternoon, and welcome to the Resources Global third quarter conference call. Let me begin by giving you a brief overview of our third quarter operating results. Total revenue for the third quarter of fiscal 2012 was $143.3 million, a 4.1% increase over the comparable quarter a year ago, and a sequential decrease of 1.2% from our second quarter revenue of $145 million. On a constant-currency basis, using average exchange rates from the second quarter of fiscal 2012, our third quarter revenues would have been $144.4 million.

Third quarter gross margin was 37.4%, an increase of 40 basis points over the comparable quarter a year ago. During the third quarter, our SG&A costs were $43.4 million, a quarter-over-quarter decrease of $1.9 million, and a sequential increase of $400,000. During the third quarter, we generated cash flow from operations and adjusted EBITDA of $12.8 million and $12.3 million, respectively. Additionally, we returned $13.1 million to shareholders during the third quarter in the form of share repurchases and dividends. Our pretax income on a US GAAP basis was $8.4 million. Based upon an effective tax rate of 48.6% during the third quarter, our net income per share was $0.10 versus $0.02 in the third quarter of fiscal 2011.

As we reported in early January, non-holiday weekly revenues during the first four weeks of the third quarter averaged $11.4 million. Following the New Year's holiday week, weekly revenues for the last seven weeks of the quarter ranged from $11.1 million to $12.1 million for an average of $11.7 million. Our weekly run rate during January and February was somewhat volatile due to the various holidays occurring during this period.

Asia-Pac revenue was up 3.2%, primarily due to the strength of our business in Japan. China, up against a tough comparable from the prior year when they were up over 100%, was down 26% quarter-over-quarter, offsetting the increase in Japan. We continue to make progress in Europe as quarter-over-quarter revenue increased 5.8%, with our offices in Sweden and Germany performing especially well.

Through the first four weeks of our fourth quarter, our weekly revenues have totaled $45.6 million, representing a 2% increase from the first four weeks in the fourth quarter last year.

Nate will now give you some additional details of our third quarter operating performance.

Thank you, Tony. As mentioned, revenues for the quarter were $143.3 million, an increase of $5.7 million or 4.1% from $137.6 million in the third quarter of fiscal 2011. On a sequential basis, revenues decreased 1.2%. On a constant-currency basis, the quarter-over-quarter increase was 4.3%, and sequentially, revenue approximated that of the second quarter.

I'll now discuss some highlights of our revenues geographically. For the third quarter, revenues in the US were $104.7 million, up 4.8% quarter-over-quarter, and up 1.7% sequentially. For the third quarter, total revenues internationally were $38.6 million, up 2.4% quarter-over-quarter, and down 8.3% sequentially. International revenue accounted for approximately 27% of total revenues for the quarter, down from 29% in the second quarter. Europe's third quarter revenues increased 5.8% quarter-over-quarter, and decreased 10.2% sequentially, while the Asia-Pacific region saw third quarter revenues increase 3.2% quarter-over-quarter, but down 3% sequentially. The sequential decrease in revenues across all our geographies is primarily attributable to the impact of the Christmas and New Year's holidays.

On a constant-currency basis, total international revenue increased 2.9% quarter-over-quarter, and decreased 5.9% sequentially. On a sequential quarterly basis, the US dollar was stronger against the major currencies in Europe and Asia-Pacific. As a result, on a sequential constant-currency basis, Europe's revenue decrease would have been 6.7%, and Asia-Pacific's revenue decrease would have been 2%. On a quarter-over-quarter basis, Europe's revenue increase would have been 7.5%, and Asia-Pacific's would have decreased 1.1%.

Let me now discuss early revenue trends for the fourth quarter of fiscal 2012. Weekly revenues for the first four weeks of the fourth quarter were $11.4 million, $11.3 million, $11.4 million, and last week $11.4 million. In thinking about the remainder of the fourth quarter, we will be slightly impacted by Easter and spring-related holidays in many locations. Historically, we have lost approximately 1.5 days of revenues due to these holidays.

I'll now discuss gross margins. Gross margin for the third quarter was 37.4%, a 40-basis point improvement from 37% a year ago, and down 50 basis points from 39.9% in the second quarter -- 37.9% in the second quarter. The 150-basis point decrease in sequential gross margin we typically experience during the third quarter was partially mitigated from a sequential improvement in bill pay spreads. The increase in bill pay spreads stems primarily from lower pay rates primarily in international markets, and the decreased percentage of our international revenue to total revenue.

The average billing rate for the quarter was approximately $128 compared to $129 in the second quarter and $130 a year ago. The average pay rate for the third quarter was approximately $64 versus $66 in the second quarter and $65 one year ago. Please remember, these hourly rates are derived based upon prevailing exchange rates during each period.

Excluding reimbursable expenses, our third quarter gross margin was 38.2%, which compares to 37.9% in the third quarter a year ago. In thinking about gross margin in the fourth quarter of fiscal 2012, and consistent with prior years, we would expect gross margin to improve approximately 100 to 120 basis points primarily due to the absence of compensated holidays in the US. For the third quarter, gross margin in the US was 38.8%, and our international gross margin was 33.6%, representing a quarter-over-quarter improvement of 30 basis points in the US, and 60 basis points internationally.

Now to headcount. For the third quarter, the average consultant FTE count was 2,297. This compares to 2,334 in the previous quarter, and 2,180 in the year-ago quarter. Quarter-end consultant headcount was 2,300 versus 2,266 a year ago. Total headcount of the Company was 3,013 at quarter-end.

Now to other components of our third quarter results. Selling, general and administrative expenses for the third quarter were $43.4 million or 30.3% of revenue, a quarter-over-quarter decrease of $1.9 million. SG&A was $43 million or 29.7% of revenue in the second quarter of fiscal 2012. The sequential increase of $400,000 in SG&A for the third quarter was less than anticipated, as the impact of the reset of payroll taxes was partially offset by reductions in numerous categories of SG&A, including occupancy cost, professional fees, travel, and approximately $365,000 stemming from the sequential strengthening of the dollar. We believe SG&A expenses in the fourth quarter of fiscal 2012 will increase approximately $500,000 from the third quarter level.

Stock compensation expense was consistent with the second quarter at $2 million or 1.4% of total revenue, and down from $2.6 million or 1.9% of total revenue in the third quarter of fiscal 2011. We would anticipate quarterly stock compensation expense in the upcoming quarter to approximate the amount recorded in the third quarter. At the end of the quarter, our office count was 80 -- 51 domestic and 29 internationally.

Related to other components of our financial statement, depreciation and amortization was $1.9 million for the quarter compared to $2.7 million last quarter. The decrease results from certain intangible assets becoming fully amortized last quarter. We would expect depreciation and amortization expense for the upcoming quarter to approximate $2 million.

Interest income was $51,000 for the third quarter versus $65,000 last quarter and $124,000 a year ago. Quarter-over-quarter, interest income has declined primarily due to lower average cash balances and lower interest rates. Our adjusted EBITDA or cash flow margin, which we defined as EBITDA before stock compensation and contingent consideration adjustment, was 8.6% in the third quarter versus 6% in the third quarter of fiscal 2011, but down from 9.9% last quarter.

During the third quarter, on a GAAP basis, we recorded a provision for income taxes of $4.1 million on GAAP pretax income of $8.4 million, representing an effective tax rate of approximately 48.6%. Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we are profitable, with losses in tax jurisdictions in which we are not profitable. Our cash tax rate continues to approximate 42%.

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 and benefited at different statutory rates, and the offset of the tax benefit of foreign losses in certain locations by valuation allowances.

In summary, our per share income was $0.10 for the third quarter. On a non-GAAP basis, that's consistent with many analysts' models which utilize a cash tax rate of 42%, our per share income would have been $0.11 per share.

Now for the balance sheet. Cash and investments at the end of the third quarter were $121.4 million, a $700,000 increase from the end of the second quarter. The increase stems primarily from cash generated from operations of $12.8 million, and $1.9 million in proceeds from employee stock purchases, offset in part by share repurchases and dividends totaling approximately $13.1 million during the quarter.

During the third quarter, we repurchased approximately 913,000 shares of our common stock at an aggregate cost of $10.9 million or $11.91 per share. On a fiscal year-to-date basis, we have repurchased approximately 3,375,000 shares at an aggregate cost of $38.4 million or $11.38 per share. The shares repurchased represent 7.4% of our outstanding shares as of the beginning of the fiscal year. Our current Board authorization for our stock buyback program has approximately $113.8 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 third quarter were approximately 42.5 million. Receivables at quarter-end were approximately $90.6 million compared to $87.9 million at the end of the second quarter. Days of revenue outstanding were approximately 56 days compared to 54 days in the prior year's comparable quarter a year ago, and the second quarter.

Now, I'll turn the call over to Don for some closing thoughts.

Thank you, Nate. As we have said in the past, our client relationships and our people are tremendous assets of our Company. I am pleased with the progress we're making on many fronts in this economy. First and foremost, our focus on client service and our client relationships is reflected in the following statistics. Client continuity is outstanding. Through the third quarter, we served all of our top-50 clients from fiscal 2011 and 2010.

In fiscal 2011, we had 221 clients for whom we provided services exceeding $500,000 in fees. Through the third quarter of fiscal 2012 on a run rate basis, we have served 218 clients at this level, similar to last year's level. Our top-50 clients represented 41.1% of total revenues, while 50% of our revenues came from 78 clients. Our loyal client following was 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% of revenues. Through the third quarter, 100% of our top-50 clients have used more than one service line, and 84% 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.

We're confident that the investments we have made in our client relationships will pay dividends over the long term. For example, while our financial services clients were focused on costs during 2011, and remain so today, we're just beginning to see an uptick in requests from financial services clients for assistance in complying with aspects of Dodd-Frank regulations. While we spent much of 2011 watching various government agencies delay issuing many of the former regulations called for by the Dodd-Frank legislation, many of these regulations are beginning to be released, with more to come later in 2012.

For example, we believe that SEC will release new disclosure requirements by public companies concerning complex minerals. Specifically, we expect companies will be required to conduct a supply chain audit, and disclose annually whether they use complex minerals that are necessary to the functionality of production of a product that they either manufacture or contract to be manufactured that originates from the Democratic Republic of the Congo or adjoining countries. Minerals, one of which is a component of solder, are essential to many products from jewelry to electronic components and devices.

We remain focused on increasing our growth rates across all geographies. Each of our service lines offer significant growth opportunities as the economy continues to improve. We're particularly excited about the addition over the past several weeks of approximately 10 individuals with extensive backgrounds in healthcare compliance and information technology. These professionals extend the depth of services we can provide to new and existing healthcare clients, such as the critical application implementation and ICD10 compliance, and payer and provider accreditation assistance. In light of the changes facing the healthcare industry, I believe this is an area we will continue to invest opportunistically in.

In addition to our focus on growing revenues, we also remain attentive to the continued improvement of our financial metrics. I believe our third quarter results reflect this focus. I am also very pleased with the progress that our European offices are making. Despite difficult economic conditions in the region, Europe continues to grow revenue and improve their operating results.

Our business continues to allow us to return our capital to shareholders. Year-to-date, we have returned $44.6 million to shareholders through our regular dividend and our share repurchases. We believe our cash balance of over $120 million at the end of the third quarter, and our cash generation capabilities, will allow us to continue to return capital to shareholders while continuing to invest in our business opportunistically.

So, that concludes our proposed remarks. We'll be happy to answer your questions at this time.

Thank you, Sir. (Operator Instructions) Our first questioner in queue is Tim McHugh with William Blair. Please go ahead. Your line is open.

Thank you. First, just a numbers question. Do you have the revenue from Sitrick?

Yes. Revenue from Sitrick was up about 16% or 17% and --

Year-over-year?

Yes. Actually, that was sequentially. It's down year-over-year about 13% and for the quarter they were about $5.1 million.

Okay. All right. And then I guess can I ask you to elaborate a little bit more on Europe? You touched on how you're still growing in a tough market. I guess exactly how much cost pressure or I guess hesitancy from clients are you seeing at this point? I know revenues were down sequentially but how much is that just timing or are you seeing an impact from the macro environment at all?

Well, the macro environment except for Germany is not very good in Europe. What we see in Europe is a lot of the clients we have in Europe are very hesitant to hire people. So, there really is kind of a depressed hiring marketplace which creates more opportunities for us in these large clients as they have to get stuff done but they don't want to hire the people to do it. So, we're seeing some demand just because of the depressed hiring environment. We're also seeing some demand with global projects that were originating maybe in China, maybe in Japan, maybe in the US. So, those are the two things that are driving demand right now for us there. We're heavily dependent in certain of our markets on financial services and there's more and more regulations, both in Europe and the US, that affect them. So we're helping them with those regulations too.

Okay. And then on the other side of the coin, I'd be curious your thoughts on what you're seeing generally from US clients. The data would suggest that perhaps there's even -- there's some improvement in the US environment. I guess your weekly revenue trends suggest they've been kind of steady in the last couple months, but are you seeing any signs of that yet in the business that makes you more optimistic?

My understanding in reading various economist's reports is right now kind of the growth in the US is being driven by retail sales and the large clients that we have for the most part are dealing with increased regulations and how to deal with them. A lot of their spend right now is going to things like ERP systems as well as how to deal with regulations. We don't see exactly a robust region in the US, per se. So, we're just working our large clients. We're not in the middle market in a big way. We're really focused on the Fortune 1000. If I look at our 10 largest clients in the last quarter, six of them were financial services companies, one was an energy company, one was a big world agri business, another was a defense contractor, another was one of the largest tech companies. Six of our 10, 60% is financial services companies and they're heavily impacted by these new regulations so we expect that we will be getting a lot of work from that and we're doing a lot of training on Dodd-Frank compliance in our tri-state regions.

Okay. Thank you.

Thank you, Sir. Our next questioner in queue is Gary Bisbee with Barclays Capital. Please go ahead. Your line is open.

Hi, guys. Who do you view as your primary business competitors? I know there's been periods of time in the past where you've defended that you're really not a staffing company or at best sort of a really niche specialized one. When I compare your revenue growth to some of the professional staffing companies and to some of the consulting companies, I can't help but notice that it's been lagging a lot of those. I'm trying to understand what peers we should use to compare your revenue performance to and if you think that's an unfair question, that's fine, but that's the question that's fine, but that's the question.

Well, my answer is the competitors we see in the marketplace the most are the Big Four firms. So, you take the Big Four firms and what we do as our core competency, we run up against them all the time. My feeling is that the big firms being an (inaudible) and an IBM consulting are growing because of these global ERP systems. We don't really implement a global ERP system nuts to bolts for our clients. We get involved in ERP system when they're implementing the ERP system and it affects typically the accounting, the finance and treasury groups and that's where we generate our work. So, typically we have a lag between when a major Company starts an ERP system and when we get called in to help them implement in their accounting, finance departments, but we come across the Big Four all the time. I guess one of our strengths which also makes us vulnerable to the Big Four is that we have a client base of Fortune 1000 companies and they're after the same client base. So, that would be the answer. Staffing firms grow for a lot of different demand reasons that don't affect us because we're not in manufacturing, staffing or clinical staffing, et cetera.

If you look at our top 10 clients as we mentioned I think on the last call, every one of them has some sort of IM project going on generally some type of ERP implementation, software upgrade or business intelligence projects which we're working on.

Okay. And would your business model have room to start to dabble down below the Fortune 1000 in some of the middle market customers or would that need a lot more administrative infrastructure? And the reason for the question is just if you look at trends in US employment over time, the largest tier of companies even if you go over the last full economic cycle have not been net hires of any significant amount where as mid-market companies have done a lot of hiring and small business customers have done a huge amount of hiring. I guess I wonder if there's any ability of your business model to move down market a little bit to maybe position yourself where there might be some more demand and some more growth in some of those businesses?

About 70% of our clients are what we would call middle market.

Okay.

70% of our clients. But the majority of our revenue comes from Fortune 1000 where our critical strengths are being able to do worldwide projects for them and projects of scale create a lot more revenue, but we don't ignore the middle market from the standpoint of getting clients, et cetera. They're just not typically repeatable, sustainable clients because they come in and out of the demand curve. Where we know if we have a major financial institution or a major car manufacturer, they constantly have needs but those needs, the demands vary according to the internal economy that they're dealing with but we always have business there. 70% of our clients are middle market and the majority of our offices in the US are going to be in kind of middle market cities.

Okay. And then just one other quick one if I could. I notice that head count was down a couple of percent and it looked like it was both associates and administrative. Is that just you reacting to either seasonal or you reacting to how you're seeing the demand or is there something more specific going on there?

No, I think it's really just timing. When you look at the non-consulting head count we're within four, five people overall for the last couple of quarters. The consultant head count is just the -- if you're referring to the average, it really just kind of tracks the slight sequential decline in revenues.

Okay. Thank you very much.

You bet.

Thank you, Sir. Next questioner in queue is Sara Gubins with Bank of America. Please go ahead. Your line is now open.

Hi. Thank you. First question. I'm just hoping you could give us some more color on healthcare. How big is healthcare in your revenue and do you see that really ramping up?

I didn't hear the last part, Sara. Excuse me.

I was wondering how big is it. Do you see healthcare ramping up as a percentage of your revenue?

Well, I think it's something that as we look out into the future, we see that as a very significant growth opportunity. We have several healthcare clients primarily in the US and this group that we brought in basically expands the type of skill sets that we can take out to our existing clients and then obviously hope to build that practice over time. We do see it as a real growth opportunity for us. We had entered a letter of intent with a healthcare consulting business. That didn't work out right now. We're still keeping in touch with them. So, we're looking to be more opportunistic in acquisition in healthcare consulting area, too, because we do see it as a -- it's going through major transformation and that's what we can help with.

And is healthcare of any significance in your revenue now?

Yes, I would tell you if -- I don't have the exact percentage in front of me but it's probably in the 5%-type range.

Okay. Great. And then could you give us some more or some color on whether or not you're seeing any change in the lengths of your projects?

I would say it's pretty much the same. I would say that, again, as we said the last couple of quarters that our client base remains very focused on spend in their budgets, but I don't think there's really been any change in duration.

Okay. And then just last one. Could you talk about what's still driving the bill rates down? Was that maybe something dealing with mix in the quarter or is the competitive environment still such that you're needing to take pricing down?

Well, what I would tell you, in the US we actually had a -- the numbers I gave were obviously -- were blended. In the US we actually had a slight increase in the bill rate. Most of the spread, though, that I commented on came from international and I would tell you that that's just a focus on improving the gross margins especially in these countries that we described in the past where the folks have these personal service corporations and we're trying to negotiate much tougher with them to improve our margins overseas and so I think the decline in the pay rate is really stemming from those efforts overseas. Part of it also the US dollar strengthened so, therefore, the bill rates in Europe, in Asia when you compare it to the US dollar looks less than they were in the last quarter before that, so that's a slight piece of it as well.

Okay. Great. Thanks very much.

You bet.

Thank you. Our next questioner in queue is Paul Ginocchio with Deutsche Bank. Your line is open. Please go ahead.

Hi, thanks. Just on the European gross margin, it's a couple hundred basis points below where it was a few years ago when times were better. Is that just a mix shift? Is that maybe different exposure geographically or is that pricing and can you get it back up to sort of 36%, 37% level that it was sort of back '06, '07? Thanks.

I would say the primary driver of that change is two-fold. One is our UK business which had better gross margins was really affected in the recession in 2008 and '09. We're just rebuilding that business now. We changed readers. So, as that business can grow faster than the rest of Europe, that's going to help our gross margin. On the other side, we had great expansion in Scandinavia and our Scandinavian practices which can be profitable at lower gross margins, it's a lower gross margin environment. So, it's those two things. And we grow Germany and we grow the UK back, I expect you'll see our gross margin creeping up, but those are the two primary reasons.

Great. Would you disclose the Dutch revenues in the Feb quarter?

The Dutch revenues quarter-over-quarter were down about 12.5%. That would contrast with, as Don was mentioning, the UK quarter-over-quarter was up a little over 4% and he mentioned the Scandinavian countries, Sweden was up 15%.

Thank you.

Thank you, Sir. Our next questioner in queue is Andrew Steinerman with JPMorgan. Please go ahead. Your line is now open.

Good evening, gentlemen. As we entered the January, February period which is a new calendar year for most of the companies, have you seen any uptick in the US for types of projects other than Dodd-Frank?

Andrew, I think we continue to see pretty good demand in the IM space. I think in our healthcare clients, we're seeing demand with ICD10 and clinical application stuff. We continue to do quite a bit of supply chain work, especially in our energy companies. So, I would tell you it's pretty -- we see as we look out in our financial services clients as well as our manufacturing clients when we look at conflict materials, that portion of Dodd-Frank we see good demand. If you look at the types of project types that we started since the first of the year, it's pretty broad-based.

We're also doing some M&A integration, PMO assistance, change management, financial statement preparation as well as continuing to support our A&F business through finance transformation, shared business services and fast close.

Okay. And a second question. This is normally the period of seasonal ramp. I know you're going to remind me of the caveat of Easter, but when you look historically at a May quarter for resources, it's usually sequentially the fastest growing quarter. Do you feel like there are still headwinds that can prevent you from having a normal seasonal ramp here in this May quarter?

I don't see that the headwinds are any different than they've been the last two years. We're not -- we don't see any real help from the economy, so we're trying to adjust our services to where we do see the demand like in healthcare, regulatory environment, et cetera, but I don't see any different headwinds this year.

Okay. Thank you very much.

Thank you, Sir. Next questioner in queue is Kevin McVeigh with Macquarie. Please go ahead. Your line is open.

Great. Thanks. Could you give us a sense how much the financial services overall represent, percentage of revenue, and just any other verticals you could comment on as well?

Financial services is a little over 20%, Kevin, but we don't break out -- we generally don't break out those numbers.

Great. And then in terms of the normal seasonal uptick, just to kind of follow on Andrew's question, should we expect that, number one? Number two, with these healthcare consultants coming over, is there a certain amount of revenue associated with them and was this kind of a platform hire or were these just folks that came over on their own, any kind of cost associated with that?

Well, yes, Kevin, they came across as employees so there will be incremental salaries. They weren't necessarily all from the same place but there was some linkage with them. They did not necessarily bring existing client work but clearly have brought, as I mentioned, earlier the capability to expand the depth of services within our existing client base which we're already somewhat working to exploit.

We basically hired what we think is a very great leader and all of these people have had worked with her before, wanted to work with her again in a new environment. So, right now with the focus on building some tools to help with all these compliance issues that hospitals have to deal with and also going out and talking to the network. They do have extensive network themselves, so that's what they're doing. We're happy to get them and lucky that we got them.

So, Don, was this kind of driven by the demand around ICD10 or was it just healthcare overall?

I would say it's first our focus was healthcare overall, how to get involved more extensively with our large healthcare clients and so our people are on the lookout all the time for either acquisition candidates or people to hire. So, one of our healthcare professionals, he identified and basically talked to this young lady and that's how we got her. So, we're looking at all different aspects of healthcare consulting to expand and it was very opportunistic for us to meet her and get her to join us.

Understood. Thank you.

Thank you, Sir. Next questioner in queue is Jeff Silber with BMO Capital Markets. Your line is open. Your questions, please.

Thank you so much. In your prepared remarks you talked a little bit about China. Can you just remind us roughly how large China is for you as a percentage of business? And in terms of the decline, was it just because the comps were tough last year or is there something else going on that we need to be aware of? Thanks.

Yes. They were up over 100% last year, so down 26% not so bad. China continues to be a great area of growth for us and I suspect that throughout the balance of this year they'll come back.

In terms of just the rough order of magnitude, how large that business is?

It's about $13 million.

Okay. So relatively small still.

Yes.

Great. And then also just in terms of helping us model the current quarter, can you remind us the Memorial Day holiday, is that in your fourth quarter or is it in the first quarter next year and where was it last year as well?

So it was in the first quarter both years. I guess the way I would look at the quarter is there's basically 65 days, we'll lose a day-and-a-half as I mentioned just because of the various Easter and spring holidays that occur throughout the world.

Okay. Great. Also from a share count perspective given the buybacks, what kind of share count should we be using to model the current quarter?

As I had mentioned, we ended the quarter with about 42.5 million shares outstanding.

Okay. Have there been any buybacks since the quarter's ended?

No, we're in a blackout period through today.

All right. Great. All right. Thanks so much.

You bet.

Thank you, Sir. Next questioner in queue is Mark Marcon with R.W. Baird. Please go ahead, your line is now open.

Good afternoon. I was wondering first of all just on the sequential trend as the quarter progresses, can you remind us what the normal progression is from the first four weeks to -- aside from the Easter holiday effect and the spring breaks, like what do you typically see a stronger last two-thirds of the quarter relative to the first?

Well, Mark, what I would say is typically in March we have -- the last couple of years, we tend to bounce around a little bit just because of the impact of spring breaks through different places primarily in the US and so once you kind of get past Easter historically that's -- you kind of remove that what I would call that spring break volatility. In prior years that's where our -- last couple of years, that's when we see some of the growth.

Got it. All right. And then with regards to the pay rates, is that having any impact with regards to the quality, the types of people that you can recruit? Is there any -- are there any areas of scarcity that you're running into that may lead to pay rates going up again or how should we think about that?

No, I would say that the pay rate change was not very significant. Part of it's a mix and part of it is the currency. There is a tough market right now to bring in people with healthcare. I would say healthcare ERP system experience. That's one area. PMO is another area that's been hard to recruit in the last year or two and we're doing our own certification program internally but I don't expect the pay rates to automatically jump up again. We don't see that kind of a market.

Great. And then what about the level of SG&A growth that we've been seeing? How much more capacity do you have in the system? How should we think about a longer term path as it relates to SG&A?

We're doing everything we can to keep a lid on SG&A unless we see a real payback as an investment for the SG&A. So, when you look at the slight increase in SG&A, percentage-wise, we also at the same time have invested in a group of 10 healthcare consultants. We continue to invest in markets like Germany to grow. We're looking to invest in -- continue to invest in legal services. So, we're trying to keep a strong control over SG&A and make sure that we're allocating our SG&A dollars in the correct manner. We put in controls that could basically -- I have to approve, Tony has to approve all hires in all new positions. So, we're controlling that very well but at the same time we are making selective investments like in the healthcare group.

Got it. So, as we think out longer term, how much capacity do you still have in the system in terms of the current practice areas?

Right now? Go ahead, Nate.

I would probably say there's at least, on average, and I think Don pointed out in certain markets in certain areas, but there's still room for, I'd say, 20%-type growth, maybe a tad more in some of the markets.

Great. And then can you give us a sense for -- you've mentioned IM several times in the last few quarters. Can you just talk about the relative sizes of the practice areas. I know that's not how you go to market and it's hard to say but just generally speaking how should we think about the diversity of the types of consultants that you're putting in?

Well, I would tell you that specifically on the IM practice and, again, you have to be very careful with these percentages because so many of our projects overlap multiple service lines and they tend to only get categorized into one but our -- obviously the largest one is the finance and accounting and that's typically in any given quarter between 50% to 60%. IM follows usually at around 20% and then the other ones are kind of split in the remainder, although legal is very small. It's in its relative infancy and is only offered in really only our largest practice offices.

If you look at our IM practice as well as any of our other practices and you compare it to the large consulting firms like Accenture or an IBM consulting, they're a real pyramid. That's their business model much like the Big Four and that pyramid means they have a lot of inexperienced people at the bottom of the pyramid. They bill out a lot of money per hour for the experienced level the client's getting, but they'll have a lot more people on an assignment with this pyramid structure. Where our average consultant in the US is a 20 plus year experienced person, we're not going to have a lot of people at the bottom because we don't have those people. So, our people always go in to do something meaningful, one reason when the demand starts picking up for ERP systems they're going to have huge revenue gains from that pyramid structure versus we think we have a huge value opportunity from those demands.

Makes sense. How big is RAS? When you're saying the rest is split between equally between -- .

RAS is about 7%.

Great. Lastly, can you talk about CapEx just in terms of what you spent this past quarter, how we should think about the budget for the year and then how sustainable is that level or should it go up?

So, CapEx in the third quarter was about $675,000. That number, mainly just because of timing, will come down probably in Q4 to I would bet somewhere around $400,000. If you look out to our fiscal 2013, it's probably about $3 million, but a good chunk of that will be reimbursed from landlords and that estimate is also contingent on certain lease negotiations. So, that kind of gives you a ballpark, Mark.

Great. Thanks a lot for the color.

You bet.

Thank you, Sir. (Operator Instructions) Next questioner in queue is Giridhar Krishnan with Credit Suisse. Please go ahead, your line is open.

Hi. Thank you. I think last quarter you talked about how when you looked across your Fortune 500 client base there was a noticeable unwillingness to bring consultants on and I'm just wondering with the improving backdrop if you've seen any noticeable changes in their willingness to bring consultants across the different service lines?

I would say that most big companies, clients, have pretty strong controls over spend but there's also things that they have to get done. They're not hiring people. I was in New York all last week meeting with clients and contacts and I think one of the big investment bankers last week laid off another 3,000 people. So, I would say that there's not a willingness to spend but there's a necessity to spend to fix some of these issues and help them with regulations and that's what we're seeing.

Okay. And can you update us on your branding initiatives? How are they working and also in your comments you mentioned a slight tick-up in SG&A. Does that capture -- is some of that also due to branding?

I would say the slight increase in SG&A was probably due to bringing on these consulting groups that we brought on without the revenue where they have to build the revenue. Kate really oversees our branding initiatives with Tonya. Would you like to comment?

Yes. In terms of the question about --

Branding.

Yes, we're still working on our branding initiatives with respect to print advertisement and radio spots. We're working a lot on that as well as launching our social media sites. We've done that this quarter. And we're also working internally on various marketing collateral for use with our client service folks in the field related to the projects that we've already talked about, whether it's healthcare initiatives or Dodd-Frank, complex minerals, et cetera.

I would say our branding is being focused on three primary areas. One is in the airports. We think our very high volume business airports with the diorama billboard-type things. We're also focused on major markets on the news, morning news talk shows, morning news shows as far as being -- supporting that and then the third thing is our -- basically our Internet media and really trying to get more of a bang for that.

Okay. Thank you.

You bet.

Thank you, Sir. We have one other question, it comes from Gary Bisbee. Your line is open.

Hi, guys. Just two follow-up questions. Any more color you can give on the recent pace or trend of new bookings? And I guess I'm trying to think about how revenue might trend from here. Normally you've gotten a seasonal lift. I realize there's less holidays. But it doesn't sound like things have accelerated a whole lot, in fact maybe decelerated a little bit from the pace at the end of last quarter. Any commentary on how that's trending?

Yes, I think obviously those weekly numbers speak for themselves. I do think a little bit of that is from the spring break. I would tell you from what we hear from most of the offices, there is continued good dialogue with the clients but there's still that degree of cautiousness in terms of starting projects. I think Don touched on some of those. We see the current environment kind of -- we don't see it necessarily decreasing. We just don't see necessarily super growth but I do think that as we see more elements of the Dodd-Frank, we have lots of clients talking about that but they're obviously not willing to pull the trigger until the rules are actually entered into.

And then the second follow-up. Regarding these healthcare hires, is this a different of model where you're bringing on more full-time staff as opposed to the bringing them on, on a project basis or do you have a lot of staff like that who are more in charge of getting the projects and then you put the project-based folks on it? I guess I was just trying to understand how to think about it.

It's a combination. We have used and we are using more but not a high percentage of our employees, but we are using very specialized people who can sell work and also manage and bill for the work at the same time. So, that's kind of what this model's about. So, if we can sell the work because of the person's credentials, they'll actually work on a project as well as help us market other companies. So, we've already been doing that and it's just another extension of that.

Okay. Thanks.

And the plan would be to continue to leverage our existing with these type folks.

Okay. Great. Thanks a lot, guys.

You bet.

Thank you. And it appears to be no additional questioners in the queue. I'd like to turn the program back over to Don Murray, Chief Executive Officer.

Okay. Well, I'd like to thank you all for your continued support and interest in resources and we look forward to our next update for the year end of fiscal 2012.

Thank you, Sir. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.