Resources Connection Inc (RGP) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Resources Global Professionals quarter 2, 2013, earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions)

Today's conference is being recorded. I would now like to turn the conference 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 second quarter of fiscal year 2013. 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 714-430-6134, and she will 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 Form 10-K report for the year ended May 26, 2012, for a discussion of some of the risks, uncertainties and other factors, such as seasonal and economic conditions, that may cause our business, results of operations, and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

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

Thanks, Kate. Good afternoon and welcome to the Resources Global second-quarter conference call. I'm going to begin by giving you a brief overview of our second-quarter operating results. Total revenue for the second quarter of 2013 was $141.2 million. An increase of 3.1% sequentially and a 2.6% decrease from the comparable quarter a year ago. We believe that we lost approximately $1 million in revenue and about $0.01 per share due to the impact of Superstorm Sandy. The total financial impact of Sandy on our operations is hard to measure, as we lost a week or more in marketing efforts to sell new work in our tri-state region.

Second-quarter gross margin was 39.1%, representing an increase of 120 basis points from the comparable quarter a year ago and a sequential increase of 10 basis points. During the second quarter, our SG&A costs were $42.3 million, a $700,000 decrease from the comparable quarter a year ago and up $200,000 from $42.1 million in the first quarter of fiscal 2013. In Q2, we generated adjusted EBITDA and cash flow from operations of $14.7 million and $1.4 million, respectively. For the quarter, our pre-tax income was $11.3 million. Our GAAP net income was $5.9 million, or $0.14 per share. Our GAAP net income reflects an effective tax rate of 48.2%. While our cash tax rate remains at approximately 42%, an impact of $0.02 per share. Nate will provide more detail on each of these items later in the call. During the second quarter, we returned $9.5 million to shareholders in the form of a stock buyback of approximately 545,000 shares and a regular quarterly dividend.

Now let's talk about revenue trends. As we reported in early October, weekly revenue following the Labor Day holiday week was $11.4 million. Our weekly revenues remained stable throughout October, averaging $11.4 million per week. During the first week of November, the week following Superstorm Sandy, our revenue decreased by $1 million to $10.4 million, but quickly bounced back to $11.4 million during the next two weeks leading up to the Thanksgiving holiday. Given the extended impact that Sandy had on several of our clients, we are pleased how quickly our business recovered.

For the second quarter, our US revenues increased 2.9% quarter over quarter, while our European and Asia-Pacific revenues decreased 16.9% and 5%, respectively, on a constant currency basis. Having just returned from both Europe and Asia, I can tell you that the continued Euro debt crisis has impacted our business there and in comparison to a year ago. Some economists are predicting further contraction in the Eurozone economies in 2013. These fiscal difficulties in Europe, and the continued uncertainties over the fiscal cliff in the US, are bleeding over into Asia, as many multinational companies operating there have implemented austerity measures whereby they are limiting spending only to their most critical business initiatives. These initiatives tend to revolve around compliance and improving business efficiencies.

Our European and Asian leaders are working hard to stay in front of our clients, articulating our value proposition as a cost-effective and independent alternative to the Big Four, as we aggressively pursue any and all projects within our scope of services. These efforts recently resulted in winning a business process improvement project for a large Asian conglomerate where we competed against the Big Four. While economic conditions in Europe and Asia remain challenging, we believe that our business in those geographies is reasonably stable.

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

Thank you, Tony. Revenues for the quarter were $141.2 million, versus $136.9 million last quarter, and $145 million in the second quarter of fiscal 2012. This represents a sequential increase of 3.1%, and a quarter-over-quarter decrease of 2.6%. On a constant currency basis, revenue increased 2.4% sequentially, and decreased 1.9% quarter over quarter.

I will now discuss some highlights of our revenues geographically. For the second quarter, revenues in the US were $105.9 million, up sequentially 1%, and quarter over quarter by 2.9%. For the second quarter, total revenues internationally were $35.3 million, an increase of 10% sequentially, but a decrease of 16.2% quarter over quarter. On a constant currency basis, total international revenue increased 7.2% sequentially, but decreased 13.8% quarter over quarter. International revenue accounted for approximately 25% of total revenues for the quarter, compared to 23% last quarter. Europe's second-quarter revenues increased 19.5% sequentially, and decreased 20.1% quarter over quarter, while the Asia-Pacific region saw second-quarter revenues decrease 5% sequentially, and 5.9% quarter over quarter. On a constant currency basis, Europe's sequential revenue increase would have been 15.3%, and the quarter-over-quarter decrease would have been 16.9%. In Asia Pacific, the sequential decrease would have been the same as actual, 5%, and the quarter-over-quarter decrease would have also been 5%.

Let me now discuss early revenue trends for the third quarter of fiscal 2013. Weekly revenues for each of the first three weeks of the third quarter were $11.8 million, representing a $400,000 increase in the non-holiday and Sandy weekly averages from last quarter. In thinking about the remainder of the third quarter, it is important to remember that we typically lose about one week of revenue, primarily due to the winter holidays in December. Additionally, it can take a couple of weeks following the New Year's holiday to ramp back up to pre-holiday weekly levels.

On to gross margins. Gross margin for the second quarter was 39.1%, versus 37.9% in the year-ago quarter, and 39% in the first quarter of fiscal 2013. The quarter-over-quarter increase of 120 basis points stems primarily from improved bill pay spreads. Excluding reimbursable expenses, our second-quarter gross margin was 39.9%, which compares to 38.8% in the second quarter a year ago. The average billing rate for the quarter was approximately $127, compared to $126 in the first quarter, and $129 in the year-ago quarter.

The average pay rate for the second quarter was approximately $63, the same as the first quarter, and down from $66 one year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period. We would expect gross margin in the third quarter of fiscal 2013 to decline sequentially by about 150 basis points, which stems from the resetting of payroll taxes on January 1, and the impact of the winter holidays.

For the second quarter, gross margin in the US was 40.7% and our international gross margin was 34.4%. Related to head count, for the second quarter, the average consultant FTE count was 2,295. This compares to 2,270 in the previous quarter, and 2,334 in the year-ago quarter. Quarter-end consultant headcount was 2,358, versus 2,359 a year ago. The total headcount of the Company was 3,058 at quarter end.

Selling, general and administrative expenses for the second quarter were $42.3 million, or 30% of revenue versus $42.1 million, or 30.7% of revenue, in the first quarter of fiscal 2013. SG&A was $43 million, or 29.7% of revenue, in the second quarter of fiscal 2012. We continue to stay focused on further leveraging our SG&A, while continuing to invest in our business. As a consequence of the resetting of payroll taxes on January 1, we do anticipate SG&A expenses will increase by approximately $1.2 million in the third quarter. Stock compensation expense was $1.8 million, or 1.3% of revenue, similar to amounts recorded in the first quarter. We would anticipate quarterly stock comp expense in the upcoming quarters to approximate the amount recorded in the second quarter.

At the end of the second quarter, our office count remained the same, at 77. 50 domestic and 27 international. Related to other components of our financial statements, depreciation and amortization was $1.6 million for the quarter, the same as last quarter. We would expect depreciation and amortization expense in the upcoming quarters to be similar to that of the second quarter. Our adjusted EBITDA, or cash flow margin, which we define as EBITDA before stock compensation and contingent consideration adjustments, was 10.4% in the second quarter. An increase from 9.9% a year ago, and 9.6% in the first quarter of fiscal 2013.

Our pretax income was $11.3 million for the quarter. During the second quarter, we recorded a provision for income taxes of $5.5 million, representing an effective tax rate of 48.2%. Our effective tax rate is impacted by our current inability to offset income in tax jurisdictions in which we are profitable with losses in several tax jurisdictions in which we are not profitable. Our GAAP tax rate for each of the upcoming quarters is difficult to predict, and could be volatile, as the rate will be dependent on several factors, including the operating results of our US and foreign locations, each of which are taxed or benefited at different statutory rates. And the offset of the tax benefit of foreign losses in certain locations by valuation allowance. On a cash basis, our tax rate was about 42% and we expect that to continue over the next couple of quarters. In summary, our GAAP per share income was $0.14 during the second quarter. On a non-GAAP basis, but consistent with some analyst models which utilize a tax rate of 42%, our per share income would have been $0.16 for the second quarter.

Now, to our balance sheet. Cash and investments at the end of the second quarter were $113.9 million, a $9 million decrease from the first quarter of fiscal 2013. The decrease stems primarily from share repurchases and dividends totaling approximately $9.5 million during the quarter, partially offset by cash generated from operations of $1.4 million. Our operating cash flow this quarter was impacted by an increase in our accounts receivable, which I will discuss in a moment. Capital expenditures were $820,000 during the quarter.

During the second quarter, we repurchased approximately 545,000 shares of our common stock at an aggregate cost of $7 million, or $12.79 per share. Our current Board authorization for our stock buyback program has approximately $90.9 million remaining. We will continue to return cash to shareholders through our dividend and share repurchases, while maintaining a balance between the capital requirements of growing our business and fiscal prudence. Our shares outstanding at the end of the second quarter were approximately 41 million.

Receivables at quarter end were approximately $93.5 million, compared to $86.2 million at the end of the first quarter. Days of revenue outstanding were approximately 58 days, up three days from the first quarter, as we did experience some payment delays in the quarter due to Superstorm Sandy's impact at several of our clients located in the tri-state area.

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

Thanks, Nate. From a revenue standpoint, the results of our second quarter are indicative of the uncertain global economic operating environment our clients face. With elections over in the US, and hopefully resolution of the fiscal cliff issues occurring soon, some of the uncertainty in the environment will diminish. I believe the election brought increased certainly to the future regulatory environment, especially as it pertains to Dodd-Frank. And that should help our business during 2013.

Additionally, the election also brought certainty to healthcare reform. We believe our healthcare practice will benefit in 2013 as healthcare providers react to the changes healthcare reform will bring to their operations. The results of our second quarter are also indicative of our continuing efforts to improve our operating metrics. And, as Nate detailed, we continue to improve our gross margin and EBITDA margin on both a sequential and quarter-over-quarter basis.

It goes without saying that Superstorm Sandy was devastating to numerous communities along the East Coast. It continues to be, even today. While several of our employees experienced major property damage, and many of our clients found their offices significantly damaged, I am pleased how hard our East Coast teams worked to help our people and our clients through the aftermath. And to return our business to pre-Superstorm Sandy levels after just one week or so. From what we can quantify, Superstorm Sandy reduced our net income per share by about $0.01. That seems inconsequential to losses faced by many along the East Coast. To assist our consultants in this crisis, we paid them for the work hours they lost resulting from Sandy. With the many efforts of our people, I also know we strengthened our relationship with numerous clients and our employees based upon our response in the weeks following the storm.

So, let me now share some additional statistics which we believe reflect our focus on client service, and the continuing health and strength of our core business. Client continuity remains outstanding. During our first half of fiscal 2013, we served all of our top 50 clients from 2012 and 2011. In fiscal 2013, we have 218 clients for whom we provided services exceeding $500,000 in fees on a run rate basis, down slightly from 229 in 2012. In addition, our top 50 clients represented 42.8% of total revenues, while 50% of our revenues came from just 75 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 5% of revenues, and through the second quarter, 92% of our top 50 clients have used more than one service line, and 68% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our clients' organizations.

That concludes our prepared remarks. We would be happy to answer your questions at this time.

(Operator Instructions)

Jeff Silber from BMO Capital Markets.

In your prepared remarks you talked a little bit about the uncertainty facing some of your US clients. I'm just wondering, in terms of ranking order, is the fiscal cliff the chief uncertainty that most of these folks are facing?

I would say no, but it adds to it. A lot of our clients looking at possible consequences of the fiscal cliff have maybe frozen consulting, frozen hiring to see what happens, et cetera. But the biggest uncertainty is where the US economy is going to go. If they're large Fortune 500 type companies, typically they are not having the success in the US in growth that they are in other parts of the world, like China and Indonesia and South America. So, Fortune 500 clients would really make up the core of our revenue base are investing overseas more than they are investing in the US. And that uncertainty, I think, is -- what's going to happen in Europe, what's going to happen in the US, how much more regulations are there going to be, et cetera. Certainly, we hope that the fiscal cliff will be resolved, and that takes another element of uncertainty out of the equation.

Okay, great. That's helpful. I'm also wondering if you are hearing from clients about longer-than-expected furloughs this year? Meaning, it may take a little bit longer than expected to ramp up some projects, as we had after the new year.

Jeff, we haven't really heard clients having extended furloughs any more than years past. And that's why I think I had commented that it can take a couple of weeks to ramp back up. But we haven't heard that in any of our larger clients.

Okay, great. I'll jump back in the queue. Thanks so much.

Paul Ginocchio, Deutsche Bank.

I heard from another risk consultant, internal auditor that they didn't feel like there was much to do around the conflict minerals legislation within Dodd-Frank. Then I'd heard maybe second-hand that one of the Big Four had ramped down what they thought was going to happen in conflict minerals and lowered their effort. I was wondering, I saw you recently launched yours, I was just wondering what you are hearing, which is maybe different than what maybe these two other firms are hearing. Thanks.

Paul, I would tell you that, going back to one of Jeff's comments around things that are driving decision-making. I think a lot of folks were waiting for the results of the US election. Obviously, I think the Republican party or Romney was basically running on a platform of repealing healthcare reform and Dodd-Frank. So, I think that added a question mark for a lot of companies. I would tell you we are doing an awful lot of outreach with companies, doing business roundtables, and finding them very well attended. I would tell you, this is a little bit of a sleeper issue in Dodd-Frank. But we are actually seeing a bit of interest in terms of companies starting to figure out how they are ultimately going to comply.

Okay. So, it's still in the incubator stage. You are not seeing revenues yet.

Small amounts of revenue. But I think in calendar 2013 is when a lot of this work will probably kick off.

Okay. Thank you.

Gary Bisbee from Barclays Capital.

This is Theresa Chen in place for Gary. I just wanted to ask about the trends in Europe. They don't seem to be getting better any time soon. That doesn't seem to be any sort of near-term solution for t his. I was wondering if there's any structural changes that you can do for your business that can help fend off some of these headwinds.

Don and I were just out in Europe. What we asked our people to do is, the clients are spending money somewhere, so go out and find where they're spending and see if you can develop a niche within our service lines to take care of them. We've recently just gotten an eight-person project in the Netherlands, so we're happy about that. And we've seen positive trends in Sweden on the order intake. Relative to our Germany business, our Germany business has been very strong. And that encompasses also Switzerland. our German leaders run both Germany as well as Switzerland. And we've seen that business up quite substantially. So, we are trying to find the spend and that's how we are approaching a.

Great. And also, just switching gears, on the SG&A line, the margin picked up a little bit on a year-on-year basis this quarter. And I was just wondering if there is a change, in addition to what you had said about Q3 expectations. But even looking beyond that, is there a change to how you think about this? Any more increases in the margin to come?

Obviously we are very focused on growing revenues. So, obviously as we grow revenue, that operating margin will improve. Our goal is to really try to leverage our existing SG&A, absent some of the seasonal movement in it. I think we are pretty pleased, the progress we've made in gross margins. But I don't know that there will be longer-term, super large increases in the gross margin. We are very focused on areas of revenue growth.

Got it. And then I just have one follow-up to Paul's question earlier on the conflict minerals legislation. Do you have any idea or sense of how big this market opportunity could be for your?

What I would tell you is, when the SEC put out the rules towards the very end of the summer, as part of any new regulation, they are required to do an assessment of the cost, how many companies are impacted. And in the SEC's report, if I recollect, they estimated that about 6,000 public companies would need to comply with the rule. Now, each one of those companies, the amount of work could be very different. In the very large consumer product companies that have extended product lines, the work is quite extensive. In probably some of the smaller registrants, compliance is probably a little bit easier. But that's why I would refer you to probably the best data.

Great. Thank you very much.

Kevin McVeigh from Macquarie.

Nate, to be clear, it sounds like you folks -- and it was admirable -- paid some folks while there was some down time given the disruption from Sandy. Was that all included in the $0.01 in terms of impact from Sandy? Or was that above and beyond the $0.01?

What I would tell you, the core financial impact from the payment for the downtime is that $0.01.

Okay. And again, just so I'm clear on that, did that $0.01 include the lost revenue or just the downtime from employees?

It's really the downtime. And that gets you to what would be a gross margin impact. So, no, it doesn't add in, what I would say, the revenue. It's just the financial impact.

You have to understand that when the consequences of Sandy -- we lost revenues that you can't 100% book and say that's what we lost. We also lost a week-plus of serving clients, marketing our business, selling new projects. Because, as you know, back East, there wasn't anybody to market to because people couldn't get to work. All of our people that basically could work were trying to work out of their home with a cell phone. So we lost a lot of development, too. So we can't really estimate this is the revenue we lost, these are the new opportunities we lost, et cetera. I think what Nate said is we just accounted for our direct costs that we incurred because of Sandy.

Got it. And then, in terms of thinking about the revenue run rate, Nate, if I heard you right, $11.8 million has been the range. Is it fair to assume a 12-week quarter as opposed to 13, just given the holiday impact, to just try to come up with some type of range on revenue?

Kevin, I think that's accurate. The only thing I would add is maybe, on a global basis, incremental one more day or so for that ramp-up post-holiday that we always experience. Typically when we come back from the first, January 1st, it can take a couple of weeks, just because you have some companies that, because of furloughs and the way the calendar works, don't necessarily open back up. So, my guess is we could lose about six days of revenue maybe.

Got it. That's helpful. And then, if I could just sneak in one more. Tony, the types of projects, have they been relatively consistent? Or are people focusing a little bit more on cost-save as opposed to revenue-generation? Or has it been pretty consistent quarter to quarter?

I would say it would be primarily in the information management area, we are seeing a lot of business there. I think there's a lot of companies that are trying to improve their productivity using technology. So, if there's any one emphasis on the types of projects that we're seeing, it's in information management.

Super. Okay. Thank you.

Kelly Flynn from Credit Suisse.

I have a couple of small questions. Related to Kevin's question, that $11.8 million, I just wanted to clarify, and the trends you were talking about for the first three weeks. You were saying it was $11.8 million for each of the three weeks?

That's correct.

Okay, great. And, then, I think that's down about 1% year-over-year versus the trends you gave last year. What was that in constant currency? Can you give us an estimate of that?

Kelly, I'm not sure I understood your question. Are you saying on a constant currency on the 11 -- the first three weeks of the third quarter?

Yes, I'm trying to figure out the currency impact basically that you expect for this quarter. We took the three weeks you gave a year ago and then calculated the growth rate versus the three you just gave out on the call, and it looks like it was down about 1%. I wanted to see what that would have been in constant currency.

Kelly, we haven't looked at the currency impact for the first three weeks. I would say -- I'm just doing this from memory -- there was probably some impact. But we, just quite honestly, haven't looked at that. My guess is it's not as significant as it would've been a couple of quarters ago.

Okay. No problem. And then, on the revenue days, how will the third quarter compare year-over-year in terms of revenue days with last year?

What I would tell you, in building on what I had said earlier to Kevin, is the total number of days in the quarter is 65. One of the things that impacts us is when the holidays fall. This year Christmas and New Year's is on a Tuesday so we are probably going to lose a few more days. My guess is that we will lose probably about six days of revenue globally because of the holiday period and the ramp-up post-holiday.

Okay. I heard what you said to Kevin but I just wanted to -- that compares you to the second quarter. I just want to make sure year-over-year I understand what you're saying.

Yes. I would tell you that because last year, a year ago, Christmas was on a Monday, probably the impact would be a little bit less last year.

Okay. Great. And then -- sorry to ask this one -- but on the margin, gross profit margin comment you made, did you say 150 basis point decline -- 1-5-0? Or was is 115?

1-5-0. 150 basis points because of the reset of payroll taxes as of January 1.

Okay, great. And then what percent of revenue was Europe in the quarter?

It was about 15%.

Okay, great. Thanks for taking all those, I appreciate it.

Andrew Steinerman from JPMorgan.

This is Jeff Volshteyn for Andrew. I wanted to follow-up on the information management point that you made. I think last quarter you also mentioned that you've seen a steady volume of European implementations at your clients. Have you seen any changes in the way they invest in the projects that have already been started? And what does it mean for your non-IT work, perhaps in finance and accounting and other areas, as an overflow work?

I would say we haven't seen any significant trends and changes. We get new projects that start. Companies get worried and they freeze their projects. But it's not one significant trend that we see. People are upgrading ERP projects. They're trying to get more out of their systems, so they have less people. But it comes and goes. Recently, in one of our large farm projects outside the United States, a new CEO came in and decided to freeze all consultants and throw out all the consulting firms. So now the CFO and the CIO have to get the work done with their own staffs, and they are all worried that they can't get it done. In that situation, typically, we'll be brought back in a few months when they can't get progress on what they're trying to do. So, there's no specific trend, other than, I would say, what we mentioned earlier, which is the trend of uncertainty.

And what about the related work in non-IT area?

Related work in --?

Non-IT. So finance and accounting. Is there any overflow work related to the type of projects that we might see a few quarters down the road?

I think as Don pointed out, some of these companies are trying to do it more internally. As they run into bottlenecks, if, say, the controller has been put on the implementation, there's always room to backfill those types of positions. One of the things I would also add to Don's comment is, one of the things we are finding in these implementations is that companies, where they used to just go to maybe one vendor, one of the branded companies that do the large-scale implementations, they're actually -- and this, I think, has benefited our IM practice and some of our other service lines -- in many cases now they're using multiple firms and trying to find the best skill sets. We are doing a lot of change management work around those ERP implementations. They like our model because the change management tends to be much more complex and lends itself to a much more experienced consultant than the branded folks probably have on average.

Makes sense. If I could ask one more on the healthcare opportunity. I think you mentioned previously it was about 5% of revenue some time ago. Can you update us on where it is as a percentage of revenue and how big would you like it to be, let's say, over the next one to two years?

I'm sorry what area was that?

Healthcare.

I would say that 5%, what you are referring to, is what we would label our more traditional project management problem-solving in healthcare clients. And we have very significant healthcare clients. What we've recently launched is a healthcare solutions group, which is developing specific software-based solutions for healthcare companies for all the new regulations and healthcare reform act. So that Company project is not generating any significant revenue yet, but they are signing up clients. And we would expect to see some revenue being generated in probably the second calendar quarter. We would expect and hope that that business line will grow extensively over the next few years, as all these healthcare chains have to deal with these new regulations and new issues. Nate oversees this new business line for us.

Thank you very much.

(Operator Instructions)

Mark Marcon from Robert W. Baird.

I was wondering if you could talk just a little bit more about the gross margin expectations. It looks like the pace of the year-over-year increase that you've been seeing over the last couple of quarters is going to slow down a little bit. Would you expect there to be a material improvement in revenue because of that, in terms of the potential revenue growth rate? Or is it just that the competition is getting a little bit tougher?

Mark, what I would tell you, is if you look at long-term with our Company, we have always had a long-term goal of, on average, trying to price engagements at a 40% gross margin. If you turn the clocks way back, in the height of Sarbanes, we take a long-run approach with our clients. So, we didn't necessarily gouge them when probably some of the other providers may have. Obviously, during the downturn, we had the margin pressures because of competition. We don't have a plan to increase our target average gross margin. So, we are getting close to where I think we want to be in our space in the market. So, my comment about is there a lot more leverage that will come out of gross margin improvement, there's some but it's probably not going to be what it's been the last couple of quarters in terms of the quarter-over -quarter improvement. There is good leverage with the revenue growth, if we can improve the revenue growth in our service platform. So, that's where I would see, as we get into 2013, the bulk of the operating leverage coming.

Great. With regards to Europe in terms of the markets, was the Netherlands still one of the weaker regions?

Between the Netherlands and Sweden, they are our two biggest practices in Europe. But the Netherlands has suffered somewhat, a little bit more so than some of the other countries, just with the downturn in the economy. That said, just recently -- I think I mentioned this already -- we just got a real nice project from one of the financial institutions that will start in January.

Are you seeing some early signs of basing over there? Or is the uncertainty too great to come to that conclusion?

Europe is not just really one market. So, while the Netherlands, we are seeing some project improvement in the Netherlands, we see more uncertainty in France because of the new government and things going on there. And people moving out that are high wage earners, et cetera. It's a whole bunch of different markets. One of our more positive areas, where we don't even have offices, is in Eastern Europe, in Poland. So, we are establishing an Eastern European desk over there to help get those projects done for our clients. So, I would say, while Western Europe is suffering, some of the benefit is going to Eastern Europe.

Virtually all the Western European economies, with the exception of Germany, are in recession. I think the economists -- what I've been reading in the papers is that the economists expect further contraction over there in fiscal 2013. But that said, people are spending money somewhere. And that's what we've asked the European leaders to go see if they can find. Just to spend time at their clients, make sure that they are aware of our value proposition, and see what business they can come up with.

And with regards to Asia-Pac, how would you describe the trends there, particularly in China?

In Asia-Pac, you look at two countries that make up 85% of our revenues. That's Japan and China. Japan continues to do well in a recessionary environment. In China, one of the things that we are struggling with is the lack of IPOs. We used to help many of the Chinese companies that wanted to list in the US get ready for the IPO process. For all of the reasons that have been in the paper lately with the problem with some of the restatements and some of the financial information they are getting out of China, that market has fallen off quite a bit. Now, that said, our Chinese practice continues to hang in there. And they are doing as well as they can in that environment. I expect that that will improve as we go into 2013. Probably the latter half of 2013, as they iron out some of those issues.

Great. And can you talk a little bit about the supply chain and the human capital practices, how those are going?

Mark, those are flat practices, I'd say, quarter over quarter. The supply chain practice, as well as the finance and accounting practice, we believe will be beneficiaries in 2013 with the conflict minerals. One of the things that I think really helps us is that supply chain specialty that we have to offer the clients for conflict minerals.

Great. Appreciate the color.

Kelly Flynn from Credit Suisse.

I just want to make sure I'm properly interpreting the tone you're taking on the global economy. You said in the press release things are highly uncertain, but then you referenced some stability in Europe in your prepared comments on the call. And then last quarter, I think your tone was basically saying things were fairly stable. So, I just want to understand. Are you striking the same tone that you were last quarter? Or are you saying things have gotten more uncertain, given the fiscal cliff and various other things going on?

I think we are seeing the same thing. It is stable. The business is not going over the cliff. But, that said, we recognize the challenges that they are having in that particular market.

So we should interpret it, similar tone to last quarter?

We were up, basically, on a sequential basis. So I think that's what we were saying last quarter, is that we didn't see our business falling off significantly. But on a year-to-year basis is where we are seeing the declines. Just going forward, like for the next quarter, I think that we are not going to lose any market share. But it remains to be seen how well we will do.

Okay. Got it. Thanks a lot.

There are no further questions. I would now like to turn the conference back over to Don Murray.

Thank you. I just want to mention that one of our real strengths -- which is why we basically, except for one quarter, have always been cash profitable -- is that we have an incredible client base of what I would call Fortune 500 type-based clients where the majority of our revenue comes from. And that we have served year after year after year. Those clients are the ones most affected by regulatory environment, by the trends you see around the world. And they are all very cautious on projects, very cautious on spend. At the same time, they are not hiring people, and typically they are laying off people. So that will create new opportunities for us. We do very diverse projects at these major clients. So, that's our strength.

Our challenge is to try to grow at a faster pace than we have grown. And to do that, we need different initiatives, like our Resources healthcare solutions initiative, which will bring us a new source of revenue at clients we are already serving. And, at the same time, try to have a middle market initiative that gets us into the middle market, which doesn't have the same challenges as the Fortune 500 base. So, we recognize that our job is to try to grow the business faster, at the same time we maintain our metrics and improve our metrics. So, we all think everybody for being patient with us in this economy. We are doing our best to get to where we need to be. So, look forward to our next call.

Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.