FTI Consulting, Inc. Q3 2008 Earnings Call Transcript

FTI Consulting, Inc. (FCN)

Q3 2008 Earnings Call

November 5, 2008 5:00 pm ET

Executives

Eric Boyriven – Investor Relations

Jack Dunn, IV – President, Chief Executive Officer

Dennis Shaughnessy – Chairman of the Board

Dominic DiNapoli – Executive Vice President, Chief Operating Officer

David Bannister – Executive Vice President, Chief Development Officer

Declan Kelly – Executive Vice President, Chief Integration Officer

Jorge Celaya – Executive Vice President, Chief Financial Officer

[Unidentified Executive]

Analysts

Arnold Ursaner – CJS Securities

Frank Brown – SunTrust Robinson Humphrey

Tim McHugh – William Blair & Company

Michel Morin – Merrill Lynch

James Janesky – Stifel Nicolaus

Paul Ginocchio – Deutsche Bank

Andrew Fones – UBS

David Gold – Sidoti & Company

Scott Schneeberger – Oppenheimer & Company

Kevane Wong – JMP Securities

Presentation

Operator

Good day and welcome to the FTI Consulting Third Quarter Conference Call. As a reminder, today’s call is being recorded. For opening remarks and introductions, I'd like to turn the call over to Eric Boyriven. Please go ahead.

Eric Boyriven

Good afternoon and welcome to the FTI Consulting 2008 Third Quarter Conference Call. Management will begin with formal remarks, after which we will take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements that involve uncertainties and risks. There can be no assurance that actual results will not differ from the company’s expectations. The company has experienced fluctuating revenue, operating income and cash flow in prior periods and expects that this may occur from time to time in the future. As a result of these possible fluctuations, the company’s actual results may differ from our projections. Further, preliminary results are subjected to normal year-end adjustments. Other factors that could cause such differences include the pace and timing of additional acquisitions, the company’s ability to realize cost savings and efficiencies, competitive and general economic conditions, retention of staff and clients and other risks described in the company’s filings with the Securities and Exchange Commission.

We define EBITDA as operating income before depreciation and amortization of intangible assets plus litigation settlements. We use EBITDA in evaluating financial performance although EBITDA is not a measure of financial condition or performance determined in accordance with GAAP. We believe that it can be useful operating performance measure for evaluating our results of operation as compared from period to period and as compared to our competitors. EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies to value and compare the financial performance of companies in our industry. We use EBITDA to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine employee bonuses.

We also use EBITDA to value the businesses we acquire or anticipate acquiring. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. This non-GAAP measure should be considered in addition to but not as the substitute for or superior to the information contained in our statements of income. Reconciliations of EBITDA to net income and segment EBITDA to segment operating income are included in the accompanying tables in today's press release available at www.fticonsulting.com.

With these formalities out of the way, I’d like to turn the call over to Jack Dunn, President and Chief Executive Officer of FTI Consulting. Jack?

Jack Dunn, IV

Thank you, Eric. Good evening and thank you for joining us to discuss our third quarter results. With me on the call are Dennis Shaughnessy, our Chairman; Dom DiNapoli, our COO; Dave Bannister, our Chief Development Officer; Declan Kelly, our Chief Integration Officer; and Jorge Celaya, our CFO.

I hope you've had the chance to review our press release. If not, as always, it is available on our website. I apologize for the timing of the call but we wanted to be in the position to speak at a conference tomorrow morning. As you know we have been constrained of late by our quiet period relating to the proposed IPO of the technology segment but we will now be able and available to entertain your questions this evening and going forward.

What we would like to accomplish this evening are the following: First, we'd like to give you a brief overview of the last 100 days from the macro perspective and what it means to our industry; next, we would like to review our performance for the quarter and follow that with a discussion of the outlook for each of our segments given the sea change that has occurred in the global economy over the last 60 days; most importantly, we would like to then take your questions.

As you have seen from our press release, we have decided to delay borrowing of the IPO of our technology segment. The unprecedented decline and volatility of the capital markets over the last several months dictate prudence around the timing of such an offering and strategic positions relating to this highly valuable asset. We will carefully monitor market conditions and we'll continue to aggressively grow and improve this market leading segment regardless of the ups and downs of the capital markets. We will keep you informed as our thinking evolves.

Since 2003 we have worked diligently to build a balanced portfolio of products and services that would stand as some good stead through all types of markets and every type of cycle. From a business that was 80% restructuring in 2002, today we are still the number 1 restructuring practice in the US by an order of magnitude. But we also have five segments and infinitely more practices that have changed this former bad news bull into more of a company for all seasons.

The third quarter was not a season, however. It was a tsunami. It was marked by volatility never before seen in the world economy with a loss of wealth and freezing of capital that no one I know in any field has ever seen the likes of it before.

Volatility is measured by the CBOE Volatility Index or the VIX which had unprecedented levels in September from what we're already elevated levels caused by distress in the mortgage markets. Through the entire period, it has significantly exceeded its peak in 1998 when the markets were disrupted by the crisis in Asia and the implosion of long-term capital management. The sheer decimation of the financial sector demonstrated by the sharp decline in the Dow Jones Financial Services Index essentially cut in half over the past six months. In the past year, global stock markets have lost approximately $32 trillion in notional value. Twelve trillion of that has been destroyed in the month of October alone.

Finally, the TED spread or the difference between US Treasury rate and the Euro-dollar lending rates which is a proxy for credit risk in the economy like the VIX is at levels we've never seen before, not in 1998, not even in 1987 when the stock market crashed. With regard to credit, even anecdotally, if not appropriately, the stories are legend. The company is unable to roll commercial paper, utility first mortgage bond going unsubscribed and investment-grade companies being told by their banks that if they dare draw down on their lines, they’ll never borrow again.

For FTI, the past quarter mirrored the events of the global market place. In corporate finance restructuring, we’ve performed in excellent levels with a record period in new business generation. In addition, previously discussed clients named like Lehman Brothers, SEI Trust, WCI Communities and WaMu filled our roster of new clients. The outlook for this segment for the next 24 to 36 months is exceptional.

At the other end of the spectrum were those businesses with some dependence on credit availability and market transactions such as real estate and strategic communications. While both of these practices have strong routine or base elements, they do rely on market activity for part of their revenue.

Usually in real estate, whether the market is (inaudible 00:09:08) or forced there are transactions. And when there are transactions, no matter what the price, our services are required and may benefit. As we noted in our press release, the market for real estate transactions in New York alone was down 60% during the period. This market went downhill so fast that it went through the poor of the lender poor sales as all the lenders but jump up and down, there was no capital to take advantage even of incredible bargains.

In strategic communications, in addition to capital markets effects, we are also facing a currency adjustment between July and December of over $7 million as the pound went from $1.99 to $1.56. It is a tribute to this group that they have made up for much of this was substitute work.

Finally, as valuable and strategically important as the vast majority of our services are to them, our clients are clearly not totally immune to those rare gear in the headlights moments like this, when decisions on critical initiatives are put on hold as panic sets in. This was the case in the third quarter. In that period, people basically froze looking at their screens and everyone was impacted. And that was a phenomenon that affected all of our businesses.

With regard to the quarter, revenue increased 28.5% to $325.5 million from $253.3 million a year ago. The increase was about evenly split between organic growth and acquisitions with all of our segments generating at least some positive organic revenue increases during the period.

EBITDA increased 16.7% to $66 million or 20.3% of revenue, up from 56.6 million or 22.3% of revenue last year. Net earnings were up 19.6% to $27.5 million while earnings per up slightly to $0.51 compared to $0.50 last year which included an increase of more than 19% in shares outstanding over the prior period.

We had an excellent quarter for cash generation with cash flow from operations approximately $51 million compared to $32 million in the same quarter last year and for the nine months; we generated approximately a $109 million from operations. We exited the quarter on a strong and liquid financial position after spending $90 million for acquisitions in the quarter, most of which was the purchase of the Attenex.

We had cash and equivalents at September 30 of a $146 million, total debt was approximately $568.5 million and no amounts were outstanding under our credit line. As you would expect, the key positive drivers of performance in the quarter were activities that prevail in the downside of the economic cycle. So the segments that did well were those heavily biased towards restructuring and turn around, such as corporate finance restructuring or like economic consulting which was involved in the industry consolidations that are being forced in the financial services arena by the government and competitive pressures in such industries as their alliance, automotives and the like.

Both corporate finance and econ maintained a strong momentum that they experienced in the first half of the year. This was aided by a number of signature assignments such as winning the role as financial adviser to the creditors committee at Lehman Brothers. With respect to the segments and corporate finance, the global credit and liquidity crises continue to be the storyline. Revenue increased 46% to $91.8 million from $62.9 million in the prior year period.

Organic growth was again robust at 29% and the balance of revenue was contributed by the Schonbraun McCann Group or SMG. EBITDA increased 44% to $25.5 million. The EBITDA margin at 27.7% was down slightly from 28.1% last year. However, margins at the core US and UK corp tin practices were actually up 50 basis points but were offset by the addition of SMGs results which carry a slightly lower margin than restructuring.

Our long-standing view that the impact of the credit crisis would broaden is indeed playing out and we are active across multiple fronts. Financial services remain a source of significant work for us and given developments of the past few weeks, we expect this only to increase.

Retail and consumer is another area of the economy where we are increasingly active and recent statistics are showing consumer confidence plummeting to record lows, rising unemployment and continuing slippage in housing prices, all of which bode ominously for consumer spending. Retailers are facing distress going into the holiday season and we are watching a number of cases which we think could be vulnerable.

We expect the retail sector to be a good source of opportunities for us going forward and beyond retail; other emerging areas would include media, hospitality, food and beverage, especially the grocery chains and transportation.

The economic consulting segment increased its revenue by 23% to 56.4 million from $45.9 million in the prior year period. All of this growth was organic. Segment EBITDA increased 30% to $15.8 million from $12.1 million a year ago. Margins in the quarter increased 27.9% of revenue from 26.5% a year ago.

Strategic M&A work continued to be a driver of economic consulting strong results in the quarter but in addition, momentum has become to pass to the Financial Economics Group which has seen strong demand begin to build for stockholder’s transaction and other economic engagements arising out of the turmoil in the financial markets, and for traditional and anti-trust litigation in areas such as price fixing and alleged illegal tying as company seek to mitigate pressure from an increasing hostile economic climate.

While it occurred after the quarter, we were very pleased to have launched our new auction solutions practice under the leadership of Paul Milgrom and David Salant. The auction model is becoming increasingly attractive for market such as media for selling online in advertising space, carbon trading, the airline industry for landing spots and railroads for allocating traffic.

With Paul and David on board at FTI, there will be no one who has more expertise or experience in the design and implementation of auctions than we do. The team has already begun to collaborate with our media and network industries practices within economic consulting, on opportunities to implement the auction model and the performance enhancing strategies. This is yet another example of our ability to attract rock stars in compelling areas to build our capabilities to bring value to clients.

The strategic communication segment, as I’ve mentioned earlier, put in a solid performance in the quarter despite frozen capital markets and the material impact from currency as revenue increased 24% to $56.1 million from $45.1 million from the prior year. The revenue increase was split almost evenly between organic growth and contributions from businesses acquired over the past year.

EBITDA increased 12% to $13.2 million or 23.5% of segment revenue from $11.8 million or 26.1% of revenue last year. Margins were impacted by the lack of significant highly profitable M&A work and a reserve taken with regards to work performed prior to the acquisition by FTI.

As the most global of our segments, strategic communication was hardest hit by the rapid appreciation in the dollar against foreign currencies, in their case, primarily against UK’s Sterling. Foreign exchange had an impact of about $1.5 million on revenue compared to rates that prevailed in the second quarter or little over 3% on organic growth.

The breadth of the communication segment has become an asset in this market where we have reduced its concentration in the Core UK and US capital markets activity. We have consciously diversified the business over the past several years across geographies and service offerings. That diversification put them in very good state in the quarter for there was a little capital markets work for IPOs and M&A transactions compared to the same period last year.

The successful development of prices communications adviser resources has allowed this segment to replace the lost revenue from M&A work and the Core UK and US markets. They maintained previously strong momentum in the Gulf State, Australia and Asia. The proof of their accomplishments in Asia came from FT, recently being named by the Financial Times and Merger Market as the Asia Pacific PR Firm of the year.

Revenue in the Forensic Litigation consulting segment increased 20% to $65.8 million from $54.6 million in the prior year. Revenue increased in the quarter primarily due to contributions from acquisitions. The segment also saw healthy activity in regulated industries such as insurance, healthcare and pharmaceuticals and healthy activity in the segment’s areas of domain expertise such as intellectual property and construction.

FLC’s EBITDA increased to 14.9% or 22% of segment revenue from $14.5 million or 26.6% of segment revenue in the prior year. Margins in the quarter were impacted by lower utilizations and the integration expenses related to a recent UK acquisition.

What we’ve seen in the market is a general reluctance of companies to spend money to pursue litigation and because of the electoral cycle and overall lack of regulatory enforcement activity by federal government. FLC has held in its own in this climate and we are continuing to hire good people. We believe we are increasing our market share.

We are focused on attracting the best talent to FTI in courting the best clients and using our size and financial strength to submit our competitive position and prepare ourselves to maximize the opportunities when the market inevitably returns as it will. With the election now over and political uncertainty perhaps being resolved, we’ll expect to see the resumption of the regulatory enforcement actions or at some point an acceleration and litigation surrounding our financial crisis.

Regime change usually brings the best and the brightest to at least to most ambitious to win their and is almost always spells regulatory active business. The anti-Wall Street climate especially in light of the recent publicly unpopular bail outs has already given rise to a number of lawsuits. Our economic consulting practice is seeing needs at the early strategic base; we would expect FLC to see them as they mature to the investigative accounting and damage phases.

The technology segment had a challenging quarter impacted by the confluence of circumstances around the slow litigation and regulatory environment due to the credit crisis and economic slowdown, the implosion of financial services sector in a more competitive market, all while beginning to integrate the largest acquisition in its history and investing in the businesses to support its growing size and breadth.

From the strategic standpoint, the defining moment during the quarter for technology was the closing of the Attenex acquisition in early July. As we have discussed with you in the past, Attenex brings to FTI a sizable portfolio of intellectual property, a cadre of the most talented software designers in the E-Discovery Space and a great roster of clients.

When we complete the integration of the Ringtail and Attenex software platforms and roll it out early next year, the combination will create the most robust end-to-end solution in the market. To accomplish this, we expect to continue to invest heavily on R&D through early 2009 to accelerate our product development to exploit the opportunities that our enhanced scale brings and our building out the infrastructure to enable us to support a much larger business base and manage our growth.

The credit crisis and growing recessionary pressures caused a general paralysis in litigation decisions, especially in the large cases where tech is so well-positioned. More acutely and at the same time, technology was hard hit by the rapid unwinding of the Financial Services Industry. They had sizable, ongoing and prospective engagements with a number of financial clients such as Bear Stearns, Lehman Brothers and Merrill Lynch that went away when these clients were either acquired or went bankrupt and this had a disruptive impact on revenue for them in the period.

Finally, during the quarter, we saw the beginning of some competitive pressure on prices. The smaller participants attempted to find a tool to compete with our practice. We do not intend to stand still in the introduction of the combined Ringtail-Attenex platform in early 2009. It is intended once again to change the game. Despite these several challenges, our revenue grew 24% to 55.4 million in the quarter. Growth came from work on several large farm and financial services clients but was lower than it had been trending in the past several quarters for the reasons I mentioned. EBITDA declined to 15.4 million equal to 27.8% of revenue from 18.6 million or 41% of revenue last year. Going forward, we expect the margin structure of this business to resemble comparable software service and content management companies.

With regard to the outlook for our businesses, as we said Corporate Finance is very strong. We hired 60 people during the quarter, successfully training and migrating them into jobs and are looking for more each day. Again each day, new sectors are feeling the bite of the credit markets and a number of high-yield financings coming due in the next months and years as featured in the financial press. In terms of challenges, we are particularly seeking new hires at the senior level to prevent a bandwidth of talent from becoming a constraint on growth.

In fact, earlier today we were pleased to announce the addition of five senior practitioners who will focus on Canada and Latin America. These senior professionals and the team that join them have extensive experience in dealing with the myriad of complexities and markets that will be caught up in the vortex of the global recession. The opportunity to serve Latin America is especially attractive and complimentary given our focus on that area and its economic problems.

As the segment that gives rise most often to exuberance during these market times, it is important to remember that it has been growing in plus or minus the 30% compound annual growth rate for sometime, in many cases, lapping some very quarters to boot. Therefore, each new case does not bring the prospect of dramatically moving the dial but over the older prospects, as we said appear exceptional.

With respect to economic consulting, following another great quarter it has momentum. While it is still seeing strategic M&A work, it also has had a large run-up in litigation and enforcement matters relating to the subprime debacle and related messes. We represented both Delta and Northwest before the Antirust Authorities in the Justice Department in their recent merger. We represent all the big banks in the Antitrust Plaintiff Litigation over municipal bond fees and Yahoo has been and will be an important client. We represent the CNE where we provide strategic counsel in connection with the role and impact of nontraditional speculators in the future markets. We also represent many clients in the private equity and the hedge fund industries with (inaudible 00:24:27) issues of the day.

Perhaps, however, the best indication of the strength of this sector is the number of senior hires we have made and are about to make to strengthen even further what is already a bastion of intellectual capital. A single big-named economist can be responsible for 5, 10, 15 or even 25 million dollars of revenues per year and we believe we are increasingly the place of choice for such professionals, especially in some of the turmoil that has taken place in the economic consulting world recently.

The segments that are subject to large or strong level of capital market activity as we talked about, such as strategic communication and our real estate offering. We are dependent on litigation and regulatory activity like FLC had a especially challenging quarter and have challenging outlooks. They are looking to negotiate these difficult times by being as nimble and proactive as possible. Strategic communications’ success and outlook will depend on its continuing ability to successfully shift its focus from M&A and IPOs to financial crisis communications. To date, they have replaced a good deal of their revenue with some major assignments, these included global assignments working with one of the largest international insurance company and other mandates for All State Citadel and TPG. In addition, Gulf State Sovereign Fund and also the largest NAPA resources in China each became strategic clients.

The other thing that will determine them of course is the return of the capital markets. In addition, however, emerging markets such as Asia and Middle East have continued to do well and appear to be strong. Most of their acquisitions also in particular Ashton Parkson in the US and First Person in Australia are also performing strong.

As we discussed, they are also facing over $7 million hurdle in foreign exchange policies as the pound plummeted from a $1.99 earlier in the year in July to a $1.56. All things considered, the creativity, effort and focus which has successfully replaced the more traditional capital markets engagements has been remarkable.

As described above, we fully expect FLC to have a good year next year. The early sign of big litigation resulting from the financial crisis is already being sensed in our economic practice and if it runs true to form, the new administration will increase regulatory activity and that litigation will go from the strategic area where our economists are so often involved into the stages that involve Damages, Assessment, Accounting and Investigation.

Regarding guidance, while the third quarter presented unusual challenges, September and most recently October were both strong months and we believe the underlying demand for our services will continue throughout the balance of the year and beyond. Given the volatility, the truly unique business climate in which we are operating, we are mindful that predicting earnings in any discreet 90-day period can be challenging. Based on current market conditions, we believe our revenue for the year will be in the range of $1.275 billion to $1.3 billion, approximately 30% greater than last year. Earnings per share, we believe, will be between $2.30 and $2.35 more than 15% greater than last year.

Importantly, current market conditions that include financial markets in disarray and new enforcement oriented administration, ongoing credit and capital constraints and the compelling needs of businesses around the world to anticipate and react to these issues, all laid a foundation for a solid 2009 and beyond. We are enthused with the prospects in front of us, we have the capital required to pursue unprecedented acquisition opportunities at what are becoming compelling valuations. We also firmly believe that good companies invest in their brand, especially at times like these when others can’t or don’t. Over the coming weeks and months, please look for the impact of our brand-building investments domestically and around the globe.

We are increasingly seen as the employer of choice for the true rainmakers in our industry and expect to continue to welcome the bets and the brightest to our FTI family. We are helping clients solve problems on a global basis and our advice and counsel have never more highly valued. We are the leader in the Technology Sector and we are looking to further change the game through the soon to be released and-to-end solution where we integrate the two market platforms Ringtail and Attenex. We remain confident in our ability to double our revenue and earnings over the next four years and are committed more than ever to achieving the objectives we laid out in our Vision 2012 Plan. With that, we’d like to now address your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Arnie Ursaner from CJS Securities.

Arnold Ursaner – CJS Securities

Hi. Good afternoon, Jack.

Jack Dunn, IV

Hi, Arnie.

Arnold Ursaner – CJS Securities

You covered a lot of ground in your prepared remarks so the question I have is, can you give us feel for the accounting treatment or the Deal Expenses. I mean, how they may have impacted Q3?

Dennis Shaughnessy

Could you repeat that, Arnie, it’s Dennis.

Arnold Ursaner – CJS Securities

Sure. A feel for the accounting treatment for the Deal Expenses that you may incurred in Q3.

Dennis Shaughnessy

Yes, we have expensed – the expenses were in two levels. One, they were in the SG&A expenses of the Technology Group. They would be broken down into Brand Expenses, Naming, Research, there’s also Accounting Expenses that were in there that pertained to some of the Revenue Recognition work that we’re doing and just some general Admin Expenses trying to prepare it to become a separate company. We also had the Audit Expenses that we ate in Corporate. Those have all been expensed. They were expensed in the quarter. The bulk of those would be behind us. There were some small amounts of expense that would be legal, that would be really immaterial that we had to capitalize and would be offset against an IPO transaction as a cost-erasing capital.

Arnold Ursaner – CJS Securities

Okay. Would it be fair to say the reclassification of $4.9 million of expenses into SG&A, I assume that’s a different issue and –

Dennis Shaughnessy

That is really a function of reclassifying Research and Development Costs. What happened, Arnie, is we charged the Research and Development Costs and expensed them directly as a direct expense of the Technology Group because of the magnitude of R&D in Attenex which is a pure technology company. Our accountants felt that would be better to drop all of the R&D expense down into SG&A to conform it more with industry standards.

Arnold Ursaner – CJS Securities

Well then, I guess, the logical question to follow it up is, can you attempt to quantify the total expenses and the margin impact it had on your Technology Segment.

Dennis Shaughnessy

Well, there was no effort to integrate the R&D Expense in the quarter.

Arnold Ursaner – CJS Securities

No, what I’m – I’m sorry. What I was talking about is the accounting treatment for the Deal Expenses. Can you quantify the total of those and how it would’ve impacted your margin?

Dennis Shaughnessy

Yes, I think you’re looking at $0.02 to $0.04. Part deal, part extra R&D expense.

Arnold Ursaner – CJS Securities

Right, I’m sure you have many people on the call. So the other question I have again related to the Technology Segment is, when you have contracts that evaporate if you will because the company may change, go to the bankruptcy or merge or some other factors. I guess, my question is what incremental cost would you have necessarily incurred since isn’t a lot of this business scalable and again, I’m looking at your –

Dennis Shaughnessy

Now, the cost would be the – one of the things that the Tech Group was doing is building an independent direct sales network outside of what we already had in FTI anticipating obviously, operating eventually on its own. So you do have selling expense but in all honesty, it’s not that much. The main contracts that we lost were therefore, large enterprise licensing contracts. One of which could come back because it was about ready to be signed and the company was one of the ones that went into a forced merger. Obviously, the Lehman Brothers won’t come back because of the bankruptcy filing although the good news is we’ll probably as an institution, make more money on it long-term because of our selection to represent the creditors of Lehman Brothers. But there’s not a lot. It’s mostly the upfront cost, Arnie, would just be the selling expenses to close the deal. It was just unfortunate that it all hit in one quarter as the three of these brand-name institutions pretty much ceased to make their own decisions.

Arnold Ursaner – CJS Securities

Okay, I’ll jump back to the queue. Thank you.

Operator

Next, we’ll go to Tobey Summer with SunTrust Robinson Humphrey.

Frank Brown – SunTrust Robinson Humphrey

Hi, this is Frank in for Tobey. Can you hear me?

Dennis Shaughnessy

Yes.

Jack Dunn, IV

Yes.

Frank Brown – SunTrust Robinson Humphrey

Quick question about Forensic and Litigation, how much visibility do you have there looking forward and what are you seeing in terms of the trends there?

Jack Dunn, IV

I think the visibility there for – it’s a large business, we have good visibility in our Investigations business throughout the world. We have ongoing cases in terms of our – as we mentioned, the places where we have domain expertise in intellectual property, we have longer-term projects and assignments. The visibility that’s lacking right now is for the big enforcement areas which will probably, as I say, not begin in full force until there’s a new administration but trust me, based on a number of cycles like this, you will have, especially given the enthusiasm that we all saw evidenced last night. There will be a very proactive and enforcement-oriented administration coming in.

I think you’ll see targeted and we’ve already seen, as I mentioned, our Economic Consulting, the focus on individuals that were ostensibly the beneficiary of the bailouts become the subject of litigation. So we would be looking at the beginning of next year to see the larger cases start to kick in again. The other thing that I’ll mention is with the acquisition that we did in the UK. We have a very good – we probably have a recognized brand there in FA and we were just recently able to hire a new individual who is a noted individual in the Investigations business which fills out a hole in our platform. We had great investigation capability in the Far East, we had exceptional capability beginning in Western Europe and in South America and now, with the addition of this individual and our commitment behind him to build a team, that should fill out the dance card for us. So I think, on that kind of stuff, you have good visibility. What you don’t have the visibility on is what’s going to be the next options backdating case or the next foreign corrupt practices act type of enforcement. I would suspect that it would focus on hedge fund activity, how it’s suspected and would focus on the activity in the subprime area and that would be a major, major push in the Justice Department, especially in light of the Bailout Plan.

Dennis Shaughnessy

Frank, we’ve been retained – we have some degree of visibility on what the large cases may look like and that the potential defendants are obviously lining up their teams and have been retaining our economists to do damage surveys, studies, build models as to potential securities litigation problems. So we’re seeing it in the very beginning, there’s been a lot of cases filed as they consolidate and mature that would give us more visibility into which ones are going to need Intensive Investigation, Evidence Management Technology would obviously be involved in that, as well as FLC.

Frank Brown – SunTrust Robinson Humphrey

Okay, great and two quick ones. First, I guess, on the restructuring side. You saw a little bit of margin growth there, where do you see those margins going as you kind of look out towards some of the new business that you talked about in your prepared remarks. And also, could you quantify the size of the auction strategies business?

Dominic DiNapoli

This is Dom DiNapoli. I’ll take the first part of your question. We could see the margins continuing to grow a little bit into corporate finance as we integrate the transaction advisory step into the restructured projects that we’ve been able to land, in particular, over the last couple of months. Also as cases mature, we’ve got opportunities to receive transaction fees or success fees at the end of the cases and they tend to help our margins also. So right now, that is a relatively high margin business but it will move a little higher as we move people from the lower past (ph 00:38:02) practice into the bankruptcy and restructuring assignment.

Dennis Shaughnessy

As to the auction, I think our feeling as coming out of the gate, it’ll mature pretty quickly to about a base $10 million business and then you would have the use of the expertise of Dr. Meldrum is at Stanford and has pretty much written every book and conducted every major auction around the world, he was consulted immediately by Treasury to try to get some background on their potential auction process. For example, he did the auction for the Google IPO, designed the entire process for them. So as the transactions mature, we would expect to see that revenue base go up above simple consulting but we’re very excited to have Dr. Meldrum and Stanton joining us. We think it’s an intellectual capital that’s going to be used around the globe and one that with our reach and balance sheet, we’ll be able to grow rapidly.

Frank Brown – SunTrust Robinson Humphrey

Okay great, I’ll let someone jump in now.

Operator

Thank you. Our next question will come from Tim McHugh with William Blair.

Tim McHugh – William Blair & Company

Yes, I'm wondering if you could quantify whether it’s the revenue or EPS, the unexpected impacts, may be relative to your past guidance from the unprecedented events that you talked about in terms of the clients that you lost.

Dennis Shaughnessy

Well, I think in the case of the three large financial institutions would have had an impact of probably between $5 million and $7 million some time starting late August through the balance of the year on a revenue basis. I think as far as the freezing up of work, I think we literally saw the market come almost to a complete stop in some areas in August. It stayed very frozen almost as if it was in shock.

End of September, we started picking up significant business and we were – I think we were watching the same screens everybody else was and I think it’s just simply delayed. We literally had law firms self-imploding to where our clients had to switch law firms they are working on and because the law firms were having their own internal problems we had. Investment advisors that literally just stopped talking because they were fighting redemptions and things like that.

Our clients in the hedge fund industry and all around had a – we had $3 million worth of delayed SMG transactions that were on the books ready to pull the trigger and probably will mature but were delayed. In Strategic Communications, we literally had clients. For example, we represented all three Icelandic banks that you’ve been reading about and we represented several of the British banks that were nationalized by the government. All of that business came to a screeching halt.

On the other hand, some of it is reemerging with a different character and will reemerge with different institutions as the government sort things out. The good news is we’re being retained by governments, for example, in Eastern Europe where they have challenges in things to try to get a broad sort of grip around where they have to go the next couple of years to address these challenges and we expect those mandates will include everything from securities to investigation to high-end advice on their markets and on their exchanges. So, it was a very interesting four to five weeks. The good news is we saw the momentum start turning back to where September ended up, being one of the largest new business months we’ve ever had, but none of that revenue matured until this quarter so it wouldn’t have had any effect on the business in the third quarter.

Tim McHugh – William Blair & Company

Okay, just following up on that comment. If September was so strong and you mentioned October was particularly strong as well, your guidance at least for the fourth quarter doesn’t seem to reflect much of an improvement, and actually a slowdown on the year-over-year growth rate or organic growth rate. Can you talk a little or just give a little more color on them –?

Dennis Shaughnessy

I think in all honesty, we expect that the system, the financial system of the economy is going to receive several large jolts and I think while we would like to be significantly optimistic and say the third quarter is just an aberration, that we won’t see people freezing up again, that we won’t see some dis-intermediation of decisions in business because of what could be very significant negative transactions, we’re trying to be realistic. I think we’re sitting here saying that on our new business development we’ve had two back-to-back great months. On a momentum basis in revenue, we’ve had very, very good months. There is a lot of pressure for people to control costs. So in some of the areas, specifically communications, there are literally clients coming and saying could you cut your retainer for the fourth quarter because I need to pull my costs down, in my own right. So I think the –

Jack Dunn, IV

And we have the currency hurdle as well –

Dennis Shaughnessy

Right and the $7 million of currency impact to us. Again, normally to watch our currency fall like that, you’d be looking at over four or five quarters to where it’s more of a gradual impact. We've watched it all hit us in one quarter and I think we believe it’ll stay there at least for the next quarter. So our new business and revenue growth that we're seeing is being tampered by the pressure of currency, the pressure of some clients that we think could hit margins in some of the business and just having the biggest restructuring company in the country. We have a perspective that you have to be very careful when you see a lot of bad news out there. It can come quickly and it can come very hard to increase these markets again.

Tim McHugh – William Blair & Company

Okay. And lastly, I guess following on that – incorporating that viewpoint in the mix of businesses and the trends you've seen. I know it’s a little early, but as you looked out to 2009, would you – can the mix of businesses here still perform in line or better than kind of the long-term growth rate that you've talked about historically?

Dennis Shaughnessy

Yes, I think Jack summed it up very well. I think we think 2009 is just the year to represent exceptionally opportunities for us. I think without a doubt our corporate finance group will prosper and grow. We are adding talent. The group that we just brought in Canada, which is one of the best groups in Canada as well as Latin America. We think we’ll expand rapidly. We are very fortunate to be in the position where in spite of what we see as a pretty lousy set of macroeconomic data, we have three groups that will prosper. We think the Econ Group will continue to prosper. They are being retained by almost every major player either on the investor side, on the advisor side, or on the financial institution side in anticipation of a wave of new investigation, regulation, and litigation. I think as Jack said very clearly, we anticipate a spill over effect that will come into FLC which is doing a good job on treading water. They’re growing. They’re not growing rapidly, but they’re still continuing to grow and we think that investigative business will start to mature and legal support business start to mature next year so we think 2009 FLC is going to see a lot of this increased regulatory investigation by the government start to pay off in new assignments as well as the maturing of a lot of the threat and litigation or the pre-filed litigation which simply hasn’t moved into. And then, I think technology will continue to grow.

We will roll out the combined platform of the Attenex Ringtail with some new bells and whistles which we think as Jackson will change the game again as we've done it before in the way people are managing their data for sensitive production. So we expect to have a very good year next year. We expect their margins will return once the integration is finalized between the acquisitions which we expect will run into the fourth quarter but start to abate significantly early in ’09 that those margins will return up into the margins in the 30 areas that are similar to software as the service company margins.

I think as we said the communications group has done a fantastic job of replacing capital markets work with crisis communication work and every month that goes by, they’re brought in to more and more of that work. It is good work. It has a traditional margin in the 20% level that they have experienced. It does not have sort of the cream of the crop success-type of margins that allow you to get a margin spike from the capital markets work. We don’t see that next year. We see them continuing to add more and more crisis communication work. We see some pressure on their retained business as companies are trying to manage their own marketing IR-PR spend and so I think we have to be realistic about where they would go. And then, finally, I think SMG is the premier brand in complex real estate structuring. This valuation free fall that we’re watching and the lack of transactions are eventually you going to find the floor. When it does, there’s tremendous liquidity that will move into the marketplace either at a fund sitting onshore here or out of a lot of client offshore. When that happens, they’re going to be extremely busy and we would expect their work to jump significantly and their margins to improve. Trying to call that right now is very, very difficult without a better crystal ball than we do.

Jack Dunn, IV

Yes, I think there’s just one thing I’d add is that the – I think the new hire environment for us will be spectacular next year. I think in terms of what we have built and the platform we have is very much recognized throughout the professionals that serve in the same industries that we do and I think that we will have a tremendous opportunity as we preach for years the good and the bad news in our businesses as the inertia. When clients have somebody who is a professional like their investment advisor or their dentist, they don’t change because of price. They typically stay with you because of the results and I think more and more of those types of people will be joining us.

Dennis Shaughnessy

When we did our five-year plan we modeled organic growth in the mid-teen area to be complemented by that like amount of acquisition. I think we feel very comfortable next year that we’ll be on target on our plan and the opportunities that are being presented to us right now for acquisitions at valuation levels that literally were unheard of twelve months ago are very exciting and we will try to make the right strategic decisions. We’ll pick our spots. We won’t hesitate to make a move that we think will broaden the company and strengthen it especially in the global platform and we feel what we do in our valuation levels to where we can significantly make money on the buy side.

Tim McHugh – William Blair & Company

Okay, thank you.

Operator

We’ll move on to Michel Morin with Merrill Lynch.

Michel Morin – Merrill Lynch

Yes, thank you. I was wondering, given the cash flow generation during the quarter and I realized what you've said about acquisition opportunities, what can you tell us about your plans in terms of the balance sheet and managing the debt level in the current environment?

Dennis Shaughnessy

I think, number one, our debt is long-term debt. We have about $400 million in debentures which I think will start maturing around the 2012 to 2013 level so that’s pretty fixed debt. We have a $150 million in a convert which because it exceeded the conversion price we focus as a short-term debt but there’s been very little demand to convert it given that you’re getting paid, the best we hold an optional stock that significantly in the money.

We have no short-term debt. We’re not into our lines. We have $165 million line of credit that’s available for us to use. So, I think between the cash that we have, the fact that we generate a lot of cash each quarter, and then our ability going in and access lines, I think we’re in a very strong position to make acquisitions. So, I think that would be our first choice.

The other thing is we have a line of people coming to us who are luminaries in their practices, wanting to bring teams in which requires signing up and financing of those teams to transition over and while it’s not a classic acquisition, it does require working capital and does require upfront signing bonuses as considerations. So, we are happy to be in that position. We would – you would see us aggressively moving to take advantage of the positions there and to take advantage of acquisitions and keep our powder dry. I think right now is – companies that can build strong balance sheets are going to have significant advantage.

Jack Dunn, IV

Yes, traditionally, the fourth quarter is another good cash flow quarter for us so we would expect to improve our position.

Michel Morin – Merrill Lynch

Okay. Great. And then you mentioned the contract that you signed represents the Lehman creditors. Can you help us understand how significant this can be for you and I don’t know – I realized that there’s some confidentiality limitations there perhaps but maybe by giving us a historical perspective on the kind of work that you’ve done in the past that places like WorldCom or Enron, how should we think about the revenue generating potential from these kinds of deals when we hear about them in the press? Thank you.

Dennis Shaughnessy

All right. I mean, the credits committee is a very large role and I’d compare it to cases years ago with (inaudible 00:53:22) or more recently Enron where you’re probably running in the area of $1 million easily a month and those cases will go on. There'd still be peaks and valleys to that but the typical case will go on 18 to 20 months.

Michel Morin – Merrill Lynch

Great. Thank you.

Operator

We’ll move now to Jim Janesky with Stifel Nicolaus.

James Janesky – Stifel Nicolaus

Hi. Yes, thank you. Couple of questions. When you look at the outlook that you provided prior to going into a quiet period and then you look at your revised outlook put out today, other than the issues with customers being frozen and we’ve seen that, we’ve seen those results also reflected in your competitors, other than that, what incrementally changed that would have either allowed you to raise of lower your outlook based upon moving into the third quarter and now into the fourth quarter?

Dennis Shaughnessy

I think $7 million of a currency is certainly something that we could not predict and we’re trying to be realistic about where it’ll all settle. Right now the outlook is based on a currency exchange rate between the dollar, the Asian currencies, and the Euro, that’s about where it is right now. We don’t have a lot of confidence that it will stay where it is. It might go up, it might go down but we don’t really believe it simply going to stay where it is. It’s very, very volatile. So, I think we’re trying to be careful that we don’t call something optimistically and then only to have it wiped out by a significant downward movement for two or three months of currency. So, I think that is clearly one of the things we're looking at. We’re trying to get our hands around what’s a good sustained exchange rate to try to model off but that is one of the things we have a concern. That’s one of the reasons we adjusted the outlook for what it is.

I think the other thing that has surprised us is there simply are no transactions of any deal whatsoever in the real estate area. I think there was an article on the paper that says commercial transactions in New York area, a lot are down 61% and nationwide they're really down. Now we know that’s going to turn but I think given the magnitude of those numbers we don’t necessarily feel that'll turn in the fourth quarter. We think it'll take some more time.

And then finally, we are deliberately spending money intact on the integration of these two companies. We are trying to get it over with this year, so we have not adjusted the spend rate, we have not looked at any opportunities for consolidation and our main goal is to get the platforms integrated, to put some new features sets on and get them out and have that together. So I think when we gave you our projections the last time I think the Dow was at 11,600 to 11,700 and while I think people were concerned and you had some threatened failures, the Dow’s now at 9,100. We’ve had name brand companies literally disappear in the period of weekends and I think we’re trying to be conservative but it is easier for us in all honesty to look at four or five quarters and say, we think a lot of this will smooth out and we feel better about it. It’s a lot tougher to look out in the next 90 days even though we’ve got a month under our belt with a high degree of certainty and say we understand where the Euro’s going, we understand where the pound is going, we understand where the Australian dollar is going and how it’ll impact us or what are two major transactions that could be a huge negative on the economy drop in and just monopolize everybody’s mind-share to where there’s not a lot of other things getting done even if we maybe a long-term beneficiary of one of those dropping in, as far as working on a restructure.

James Janesky – Stifel Nicolaus

Okay, thanks and then, another question is in some cases, you’re benefiting from the turmoil. For example, in portions of Strategic and the Financial Communications, you talked about your Economic Consulting division continues to buck any the trends at any competitor’s who have reported very weak results who are somewhat pure plays in that area. So on the one hand, it’s benefiting you, on the other hand, it’s hurting you, this global turmoil. Does it just happen to be where your customers are in that space that determines whether or not spending either goes down or is frozen? Is that a way to look at it?

Jack Dunn, IV

We’ve built a – consciously as I said, starting in 2002, we have invested a lot of money in building what we think is a balanced portfolio of services. It worked great as the market turns and you saw that all this year, a sudden dramatic drop like this is something that I don’t know that we’d be alone in saying that we didn’t know that the entire financial system in the globe was going to melt down. I think as you asked earlier about the number of jobs that we now, I mean, Dennis enumerated probably close to $15 to $20 million worth of business in discreet projects that disappeared and that doesn’t include the smaller retained cases and stuff like that that would be in the Strategic Communications so I think, that’s what changed. In the normal situation the segue or the handoff between IPO and M&A work would be a little smoother so you’d have a chance to build it off.

Now the good news again, one of the reasons we’re so bullish for next year is that if again, if it runs true to form, the Crisis Communications clients and the Strategic Communications clients we picked up become the retained clients next year because we do a good job for them and that we may end up being much more of annuity-based in the next year. So I think that’s the reason why we’re looking at it and this will normalize. There’s no question that the Sovereign Funds and other investors looks to invest assets, we will find a clearing price and when that happens, real estate assets, things that they can sense and touch, and most importantly describe to the investors in the fund are the things that will get taken up. And I think, that also may be not in the first quarter, may be towards the end of the first quarter or the second quarter, I see we’ll think – see that pickup. And the clients that we’re adding on the restructuring side as Dom mentioned, those tend to be 12-month minimum assignment so you build up a cadre or an annuity-base of those as well. So I think, we’re going to see that happen.

James Janesky – Stifel Nicolaus

Okay and then final question. Yes, you talked about using capital towards acquisitions or may be even some group hires. Your stock is down about 30% in the after market, any thoughts on the potential for stock buy backs if the stock were to trade to those levels?

Dennis Shaughnessy

Well, I mean, I would hope the stocks are not going to stay where it is. I think clearly, we feel we will be a company that has a significant increase in earnings next year. I’m not sure how many companies will be able to be in that kind of position. I think that – I don’t know of many companies that have bought their stock in the last reeling 12 months, they are happy they bought their stock and I think when you’re concerned about quarterly volatility, we aren’t the masters of what’s controlling our stock and to reduce our share count by a couple of million dollars and try to increase earnings by a nickel or something, when in fact, you could have another downward reevaluation of the whole market, I’m not at least in the short run, it’s a good use of capital. I think it’s a better use of the capital just to take advantage of somebody’s lower evaluation that fits strategically into where we are.

So I would say right now, we wouldn’t be looking to buy stock. I would hope – look, we don’t like to disappoint expectations the company had a 30% top-line revenue growth and significant net income growth, we simply got – we’re in a situation where we could meet expectations and we’re not happy about that and we’re determined to make sure that doesn’t happen again. But I think, it’s not as if we’re sitting here looking at a company that’s not growing, that’s not very, very profitable, that’s not very high cash flow, I think we can deploy the cash to enhance that growth in strategic fashion at again, what we feel are just at least a start. We have very, very low valuation levels and even if we trade down, we take the valuations levels of potential targets pretty much lower than us.

James Janesky – Stifel Nicolaus

Okay, all right. Thanks for the update. Appreciate it.

Operator

We’ll now go to Paul Ginocchio of Deutsche Bank.

Paul Ginocchio – Deutsche Bank

Yes, thanks. Would you talk about may be your organic growth rate as you exited the quarter, may be where you were in October just to see you were talking about the rebound, maybe to quantify it. You talked about September and October being some of the best months of your business ever. Can you somehow give us some context to that, it –

Dennis Shaughnessy

I think the September new business is only now beginning to mature and October obviously is what it is, it’s just new assignments. We haven’t manned a lot of them yet. I think that the organic growth rate will approximate hopefully what we’ve experienced in the past quarter. It’ll be mid-teen-type of growth rate for the fourth quarter and we expect it to hopefully accelerate back into a higher teen level next year.

Paul Ginocchio – Deutsche Bank

Very helpful. And then on the real estate, can you sort of quantify, again I think, your organic growth rate there was in the Corporate Restructuring area and Bankruptcy was (inaudible 01:04:22) that the acquisition revenues, I think this is my expectation and I guess that’s obviously after SMG. Can you just talk about sort of the current run-rate of that business?

Jack Dunn, IV

We did about $11 million in the quarter.

Dennis Shaughnessy

Right. SMG’s running – run-rate to 2008 is probably in the range of $48 to $50 million.

Paul Ginocchio – Deutsche Bank

With $11 million in the third quarter.

Dennis Shaughnessy

Yes, yes.

Paul Ginocchio – Deutsche Bank

And was that the fourth quarter impact or was it just the last few months?

Dennis Shaughnessy

No, we had a full quarter of it.

Paul Ginocchio – Deutsche Bank

I’m sorry. I’m talking about the impact of the shutdown of –

Dennis Shaughnessy

No, I didn’t do it. They were facing, in all honesty, there’s even more macro in the last two quarters. We bought SMG at a purchase price that was significantly below what they were looking for, we bought it at that price because we anticipated this would be a difficult year so we had somewhat priced in the performance. They’re on target to do about what they did last year. I’ll tell you that last – so not much growth. They’re generating about a 20% EBITDA margin off of their revenues so they’re profitable and yes, the third quarter I would say if you talk to them, was probably what they would consider their worst quarter. But in all honesty, the second quarter wasn’t great either because I think the commercial marketplace has slowed down significantly in the second quarter.

Paul Ginocchio – Deutsche Bank

Good, thanks a lot. If I could sneak one in, I think, you talked about some reserves that you took in the Technology Division, was that – or you already discussed the deal fees or is this something different?

Dennis Shaughnessy

They weren’t really significant. I think they were –

Jack Dunn, IV

The reserve we talked about in connection with Strategic Communications where we had. It was basically a litigation settlement reserve dated back several years to a case they had way before they were acquired by us and it’s something that we need to deal with and there’s always a potential for a recovery there but it was just –

Paul Ginocchio – Deutsche Bank

You mean besides that?

Jack Dunn, IV

– affected their margin.

Dennis Shaughnessy

Yes, we didn’t have any significant reserves that we took intact.

Paul Ginocchio – Deutsche Bank

Okay, so besides the one in Strategic Communications.

Jack Dunn, IV

Yes, I would say that you could think of it plus or minus a penny.

Paul Ginocchio – Deutsche Bank

Okay, thanks.

Operator

Well now, let’s do (ph 01:06:49) Andrew Fones with UBS.

Andrew Fones – UBS

Yes, thank you. I wanted to ask about what we should expect Tech margins to look like over the next few quarters. You mentioned, there’s some ongoing R&D spending that could through Q1, there was some deal expense both (inaudible 01:07:08) the revenue disruption obviously and Attenex integration, so how shall we think about all those bases?

Dennis Shaughnessy

I think that most of the expense to sort of position the company an independent company has been expended so I think that pressure on the margin will abate. I think we are deliberately running almost a dual research function in an effort to integrate these platforms and to deliver a sort of combined offering with some new bells and whistles. Andrew, we’re focused on the first quarter to get that out. I think after that, you’re going to see the logical sort of integration of the operations we picked an overall R&D, which is an executive of Attenex and he’ll be – once the platform integrations and the feature sets have been developed, I think you’ll see that spend slow down. So I think, I would say the – you’ll see the integration expenses just simply the normal integration expenses abate at the end of this quarter. And you would see the transactional expenses that were unique to the IPO spend pretty much over and then, you would see a different R&D spend once we release the combined platform in the first quarter.

Andrew Fones – UBS

So would we – are we looking back to kind of a high steady (inaudible 01:08:47) margin past by the middle of –

Dennis Shaughnessy

Yes. I mean, I think you’re looking probably Q4 at a margin similar to Q3 and then I think you would see the margin start to expand again into the 30s and so, I mean, I think a lot of it would depend on some – how high it gets in the 30s Andrew, will depend on just the overall economy and whether we can get it back up that quickly to the high 30s, that I am not sure.

Andrew Fones – UBS Securities

Okay thanks, and then just a small one, could you quantify the integration expense in FLC in the quarter? Thanks.

Dennis Shaughnessey

It was – there were stay bonuses in the Brewer Company and I think they would probably represent about a half percent to a cent per share.

Jack Dunn, IV

Yes between that and the double rent as we consolidated our people over there, that’s about right.

Dennis Shaughnessey

So about a penny.

Andrew Fones – UBS Securities

Thank you.

Operator

And we will move now to David Gold with Sidoti.

David Gold – Sidoti & Company

Hey, good afternoon. A couple of questions, first, restructuring. Utilization here, given the work that we saw you signed up in the quarter a little softer (inaudible 01:09:59) and just curious there a couple of things. One, you can speak to when the hiring was done in the quarter if that wait end, and two, I guess industry sources tell us but in Lehman on the other side at the end of the quarter they went from a 125 professionals to 400, curious if we could safely expect you to sort of ramp up resources on that as well?

[Unidentified Executive]

Well, let me give it to the Lehman, 400 that’s a number that surprises me, I do keep an eye on that case in particular. I don’t think that 400 is a good number, we certainly are ramping up as more issues arise in the case. It’s relatively new. We’ve only been in it for a couple of months and it takes a while for these cases to really get started and we’ve got a significant number of people on that case but it will continue to ramp, I think to 400 on the other side if you’re referring to the advices to the debtor. I think that’s a little high. I don’t think there’s that many people. I do not think there were many people in the firm.

Jack Dunn, IV

With regard to some of the other things that happened during the quarter, we added the people probably towards the August time frame that is typically when we do – people have a summer and these are younger folks typically. A couple of other things happened during the period, we probably redeployed about 50 of our transactions support people from doing transactions support to working on other jobs so that happened. In addition, typically the summer is always a little bit slower time so I think that you would expect to see utilization improve and then the other thing that’s in there as SMG which has traditionally had not quite the same utilization rate that we’ve had. So I think there are number of things that are kind of coalescing to improve the utilization in our restructuring business.

Dennis Shaughnessy

Yes, Dave. I think it would be –if you peel the onion, our utilization is up if you don’t count the addition of the 60 new people in SMG. If you count the addition of 60 new people, they’re now being fully deployed as normally happens once they’ll come out of the third quarter with deployment of the fourth quarter. And I think we’ve said it several times, that SMG is having a year that’s challenging and their utilization numbers when put in with (inaudible 01:12:22) are lower.

Jack Dunn, IV

The 60 people were actually in core restructuring. SMG was about, I guess, was a total about 150 people.

[Unidentified Executive]

And the other thing you see, the new people that came in, there was relatively extensive training for them so we took awhile in the third quarter to get them up and running on jobs. One of the point I want to make is the run rate of SMG is the 48ish range, that’s an annual run range, we wouldn’t have this for the full year.

David Gold – Sidoti & Company

Right, right. Okay, a couple of other small ones. Now as your business or the ramp up and spend there as you’re launching the new product, can you give us sense for how significant that might be?

Dennis Shaughnessey

I think we paid the $80 million dollars to get control of the Attenex Technology. We view it as the deepest technology, as far as the installed base and the most robust, as far as the ability to expand the engine, so our feeling is the successful integration of Ringtail and Attenex together with the appropriate new bells and whistles is going to be a major offering to the market next year.

David Gold – Sidoti & Company

Right, but – one of the sort of catalyst for presumably the change in guidance is the step up in expanse there commensurate with the launch and so was just sort of curious, obviously something there has changed in the last quarter or so –

Dennis Shaughnessy

We bought it taxed so there will – a part of its just aggregate increase. And as I said we decided to – to decide the EBITDA Integration expenses as rapid as we could, we decided to pour effort into an integration program that we thought was going to take longer but we think we can get done a lot faster so it penalizes Q3, it penalizes Q4. So we think if we get it out on the market place, David, then the revenues start kicking in at a higher level. We think together with more of a joint offering, it will go a long way to expanding our position in the market.

David Bannister

David, it’s David Bannister. On an apples-to-apples basis, if we could have this restatement in there for the R&D, there’s about $6 million of additional SG&A expense. The bulk of that is related to R&D.

David Gold – Sidoti & Company

Got you. Okay and then just one last one. Jorge, does the guidance include the change in accounting for convertibles, I think my calculation by your last Q, it looked like that was about a nickel of the cost.

Jorge Celaya

That only takes effect next year in 2009.

David Gold – Sidoti & Company

Okay. But is the nickel about the right number?

Jorge Celaya

Yes, it’s about right.

David Gold – Sidoti & Company

Perfect, thank you!

Operator

Well move on to Scott Schneeberger with Oppenheimer.

Scott Schneeberger – Oppenheimer & Company

Thanks. Could you guys speak a bit on within the FT business through your communication, the mix there of M&A versus crisis communication, what – you talked a little bit about the levels of margins in each and the potential for SEC to discuss these more in M&A. Can you just talk about the mix there and kind of moving into next year what you see is happening?

Declan Kelly

This is Declan Kelly. I think what you’ve seen is the phase of M&A and ideal markets have shut down and this is something that’s happened before in our business, it’s not the first time this is happened. It has happened in previous cycles. What happens in that situation is that all of the individuals who’ve got specific skills in that area are deployed in a different way. They’re deployed to do crisis communications assignments and many of the clients that were previously contemplating M&A assignments find themselves in high-end litigation matters, sometimes getting out of transactions that were previously in and sometimes just reorganizing themselves on the basis of what happens inside the market.

And the margins in that business are not that different to the margins of the M&A side. What is the different is the success of the element because the success we don’t apply very often on large-scale litigation matters or on crisis management assignments. In the United States, we price those assignments by the hour so it tends to be a pretty high margin business because there’s a lot of man hours involved, especially in a volatile economy like this one and in mainland Europe it tends to be a lot more retainer plus the overage billing that we get on top of an agreed amount of time that we sell to the client for that particular service.

Jack Dunn, IV

In a given year, this is not exactly a given year but the mix would be about a 70-30 between retained business and then other business, which would include transactions IPO, M&A and strategic communications on a – and it’s in a driven basis. In the past whereas that mix would have been 80% – of the 30%, 80% might’ve been capital market oriented and the other 20% would be the strategic. Probably in this market place, okay Declan, I think it’s probably safe to say that’s flipped on its head, it’s probably 80-20 the other way.

Declan Kelly

And we expect that to continue into the perceivable future.

Scott Schneeberger – Oppenheimer & Company

Okay, thanks. So, I mean, if we did the stamina M&A remain dried up for a multiple quarter period, would we see, maybe I’m just not running these numbers that quick in my head, but would it be going down to around a 20% margin or not that severe. I guess, what I am getting out is how big are those success fees?

Declan Kelly

The success fees last year were not a material amount of money in terms of the overall performance of the business, so the margin impact should not be severe even if that were to continue for a significant period of time. All of the people that we’ve had working on M&A and IPO matters, which are all very senior, high-end executives have already been deployed into other assignments so we expect that this kind of work will continue over the next several quarters. Litigation is getting more pervasive, not less pervasive on the basis of what happened over the last 2 to 3 weeks.

Scott Schneeberger – Oppenheimer & Company

Okay, thanks and then shifting gears, in Tech Consulting, you did mention in the press release and then again on the call, seeing increased competitive pricing in the recent period, you are a premier player in the States and probably get premier prices but could you talk to what type of threat you’d view that as?

Dennis Shaughnessy

Yes, I think it’s real and it’s sort of running the course – it’s not unexpected. It’s running a course if you see it in a lot of sort of new technology developed market. What we’re seeing is competitive pressure on sort of the front end, the data collection and from a lot of smaller pure tech companies who are venture-backed companies or start-up companies, in some cases, their licensees of other companies. And they’re using price to get trial and I think that some of them have been successful in getting trial, some of them are simply this-successful in lowering the price. And I think you’ve seen this in other tech industries. I’ve seen it a lot in my prior private equity history. I think you’ve got one-trick ponies that have to get revenues or they can’t justify their next round of funding or they can’t justify staying in existence and so they cut price.

Across the whole continuum, we aren’t seeing that but certainly on the front end, we’re seeing it fairly aggressively. What happens in these things is the market tends to sort itself out, there’s no doubt part of the market will always become commoditized where the value-added is not as great, one of the technology and it’s more of just a process function as you move up to continuum, clearly that’s where the consulting comes in, as well the strength of technology. The value added is higher, the enterprise risk is higher and that’s where you get higher fees for what you’re doing.

I would anticipate we would continue to see price pressure on the front end as these companies are coming trying to buy share. It’s a dynamic market. It’s growing very rapidly. It has high margins and it’s very attractive for people to enter and they would normally enter it on the easiest path to provide a technological solution, not trying to move in to the higher end of the market but the lower end. But it’s real, it’s there and we are seeing it.

Jack Dunn, IV

It’s kind of a tough incubator to tell because I think all the empirical evidence would point to the fact that there haven’t been the types of major transactions or major litigations or even major second document request that we experienced even in the first half of the year, so I think until you see that, you have to judge this about whether those types of competitors are appropriate for a certain type of transaction or whether they can really handle the type of massive document cases that are both size, quality intensive but also time-sensitive that we have really made our reputation as those come back into the market place. I think you need a little bit of that to really judge what’s happening with the pricing there as well.

Scott Schneeberger – Oppenheimer & Company

Okay thanks. And just a quick one if I could, you mentioned you’re going to – that we will be seeing some brand spending and it sounds that you will continue to be relatively aggressive with hiring. With some of your FTI discretionary spending, what do you need to see that may be pull back on that if things stay tough for a long period of time, just the way you think about that, thanks.

Dennis Shaughnessy

I think to the last part of question, I think our feeling is if things stay tough, we’re going to do very well. It may not do relatively as well if things are booming but we’re going to do very, very well. I think our feeling is that you may not be spending in certain divisions that don’t have the growth but you’ll be spending overall support the FTI brand, which we think will pay off geometrically or exponentially to us, as the economy starts to turn, Declan you might elaborate.

Declan Kelly

Sure. Well, as it relates to the FTI brands, for the last several months obviously since coming on board, we spent a lot of time looking at the way we’re spending our money and where we want to spend this next year and beyond, and the good news is that there are lot of things that we can do in this market because of pricing and evaluation as to different sponsorship and marketing opportunities that we can avail of that are very good for our business especially if we look at the geographic platform that we have now.

So you can look to us next year to invest heavily behind the brand. You will see the brand activated in places where it has not been activated before, following off from where we’ve done acquisitions and where we’re growing our business. The good news is that we don’t intend to spend any more money than we spent this year. We’re just going to activate our money in a different way and so, in terms of the overall impact on expenditure levels, we don’t see a need to increase it but we do think, we will get significant impact from deploying it differently and more, I suppose, strategically in markets where we see growth opportunities.

Dennis Shaughnessy

Yes and as tough as the quarter was, again we can’t forget, we had 29% increase in revenues, we have an EBITDA margin of plus 20%, I think as a lot of you know, we run an equity compensation expense that tends to be about 2 to 2.5 points of margin, so if you look at the cash EBITDA margin, you’re up to 22.5% and our target in our 5-year plan is to run the business at the cash EBITDA margin of 25%. So we’re really not off that mark by that much. I think that clearly if we can just – if you just did 29% revenue growth quarter, in the quarter and you did 20% margins, you’d have a lot of companies going to invest in that model.

Scott Schneeberger – Oppenheimer & Company

Great, thanks.

Operator

And our final question today will come from Kevane Wong with JMP Securities.

Kevane Wong – JMP Securities

Hey guys, a few things, first on the tech pricing, are you seeing any impact as far as pricing due to the general movements of a lot of that (inaudible 01:24:48) were moved in-house corporation versus sort of being sourced through the law firms which tends to be sort of higher priced element?

Dennis Shaughnessey

We haven’t felt that. I think that, we again deal – some of our biggest clients are huge, Fortune 100, 200 companies were we dealing directly with the General Counsels in that law firms so I think, I’m not saying that’s not the case, Kevane, I just think at least with our clients, we haven’t felt that.

Kevane Wong – JMP Securities

Got you. Just a quick one, on the free cash flow obviously you’ve pointed to fourth quarter tends to be as strong operating cash flow quarter. Usually that’s up sequentially from September quarter, is there any reason to think that wouldn’t be the case in this third quarter?

Dennis Shaughnessy

Well our fourth quarter is almost traditionally always our best cash collection quarter and so –

Jack Dunn, IV

There’s no reason not to think as we’ve been pushed the year because our clients understand it the best.

Dennis Shaughnessey

Yes, I would say we will look for cash flow to increase in the quarter.

Kevane Wong – JMP Securities

Got you. Two other, you’ve mentioned that you guys are thinking it might be several large jolts here still as far as macroeconomic environment. Are there specific things that you’re looking for and that we should be watching for or is that just the general sense of there’s more stuff coming but there’s not a specific thing that you’re looking for per se?

Dennis Shaughnessey

I would just say two things in general. Number one, there are several industries that have their tentacles all through the country that you hear just as well as where we are that if, there are only a few players and then if they go down, the networks that will go down around them will be staggering. And I think we have to be careful that if they do go down it’s going to be a quite a jolt for the system.

Secondly, I think there are much deeper problems in Europe even than we’re seeing in the papers, I think that clearly, that could have an influence on currency, it could impact us, as one of the reason we’re trying to be cautious in the overall impact to currency and if some of these things happen, it could be very country-centric over there to where you have a systemic problem but it races through the country not just in the industry. So I think we have to be watchful, that’s one of the reasons. Our feeling is, we get through the fourth quarter hopefully you have a new administration who really have their feet on the ground ready to make an input here. You’ll have a lot more transparency in visibility to some of these problem that we think, we should be worried about over there and hopefully some of the big industrial problems that we have here have either matured to where we can get our arms around the magnitude of it or there’s some degree of assistance that is given to either forestall them and postpone them or to at least allow the beginnings of a longer term solution but we certainly are concerned about those issues and how they could impact a short-term earnings period like a quarterly earnings forecast.

Jack Dunn, IV

I don’t think you should underestimate the value of the practice we just added that involves heavy emphasis in Latin America scenario we’d spent a lot of time. You have countries that have been beneficiaries of high oil prices, you have delicate, to say the least, political balances in between our strategic communications and our – both our due diligence and our now, restructuring capability. I think that could be a very big area for us.

We’re seeing a pickup in the number because of strategic communication emphasis and because of, frankly, systemic issues with governments, we’re seeing more and more being hired by agencies or by governments themselves to help what they’re thinking. So it’s just a very tentative marketplace right now. The last couple weeks I guess have given some comfort in the stock market which I guess is a poor indicator but I just think we shouldn’t declare a victory just yet in terms of the global economy or the US economy.

Kevane Wong – JMP Securities

That’s helpful. And then the last one I wanted to ask. Obviously there was still a lot bodies add on for the quarter, I actually was not looking for a big increase but you still added on a couple of hundred people at the end of the period. I guess it’s a sort of two parts. One is, would the situation where you already (inaudible 01:29:25) hiring these people when things got difficult so you couldn’t adjust the expenses that quickly and I guess also if I’m looking forward, is that part of the reason that the guidance for 4Q is tough, as you’ve got all these people and yet you got them up to speed and what are your plans as far as hiring both for 4Q and also going forward ’09?

Dennis Shaughnessy

Okay, again remember the margin’s about 20% and it’s about 2.5 points below where we wanted it and in all honesty we achieved the 2.5 points. We would be talking about, that’s the leverage that we have here plus or minus, we wouldn’t be having the conversation about the miss, we’re talking about hitting it, given the revenue growth and EBITDA growth that we had. So, I think there are no plans here to do any kind of draconian, I mean we’re always trying to fine tune the engine and some people work out, some people don’t work out and that’s just a part of our everyday system. I think the 60 people that came in were predominantly restructuring and we are running very high utilization restructuring especially if we take SMG out and the demand for those people has increased.

The main bulk of the people that came in the quarter were through the Attenex acquisition and that’s one of the largest acquisition we ever made and so we did not make any significant effort to try to basically get any kind of synergies out of that acquisition. I think our style in the acquisitions that we make tends to be –, to make sure we understand the company well. Let’s not wreck the enterprise value in an effort to reduce cost and in this instance, we made a conscious effort to keep all the R&D in place of anything expanded in order to deliver what we think will be a significant product to the marketplace faster. This is a great team that we bought out there, they’re very bright, they’re very talented, and it’s one of the main reasons for the acquisition. We wouldn’t want to go stumbling in there in an effort to realize some integration synergies. And again, the technology, we wouldn’t be having this conversation if they didn’t get the jolt of losing some major customers in the quarter; they would’ve been down a little bit but nothing to get too excited about.

Kevane Wong – JMP Securities

I see, I wasn’t looking at, are you going to cut people more, given sort of the people (inaudible 01:31:55) at the end of September. For example, are you – would you feel for the fourth quarter that given this sort of the environment that you wouldn’t be looking to really add much as far (inaudible 01:32:02)

Dennis Shaughnessy

Let’s be clear. We’re in a growth mode. We had the largest (inaudible 01:32:08) mediation in the global economy in history in the last quarter and probably the month of September or the middle of September till the middle of October. We, as we’ve mentioned, we just hired five people to give us a whole new capability in terms of restructuring internationally between South America and Canada. We have added the investigative person who will build the team in the UK. We are actively looking everywhere we can for big name economists and for economic support. In FD, we are adding people around the globe because while it’s tough in some places there’s always someplace else where the money flows. We added the auction rate of the auction professionals. We hired some of the highest intellectual capital in probably in the world. So across the board, we are looking to add people because we think despite one quarter or 60 days or 90 days, we are in right businesses at the right time and this thing is going to really catch fire next year.

We have the opportunity this quarter and we started doing it to bring in teams of senior people that want to migrate from other organizations. To group in Toronto, we’ll be building a staff around them to work on the Canadian restructuring and Latin American restructuring, which was what they’ve been doing. The key high-end individual we just brought in London is a big rainmaker and he will be augmenting the staff that he will walking into with FA with more hires over there. We are in conversations with several major economists here in the States and over in Europe to where, if they come in the fourth quarter, they will be bringing teams with them.

Now, one of the reasons, you have to be a little careful in the quarter, if we’re lucky and we can get these people which we would’ve love to get. You’re going to have more expense hit you in the quarter as you man up and as you bring them in and as they transition their books of business. A lot of times, not a 100% of the book of business fore competitive reasons or restriction reasons can come over. But these people tend to ramp fairly quickly and we will be very excited to get them because the impact it’ll have on 2009 will be significant. So we are aggressively in the marketplace and we are being aggressively wooed by people who feel that our platform longer term is a better place for them to be.

Kevane Wong – JMP Securities

Excellent. That’s probably the strongest statement you (inaudible 01:34:43)

Jack Dunn, IV

This call typically has a broad audience so we want to be very clear, we are hiring.

Kevane Wong – JMP Securities

Excellent. Thank you.

Operator

And we have no other questions at this time. I’ll turn the conference back to Management for any closing remarks.

Jack Dunn, IV

Okay, great. Again, we want to thank everybody for joining us and we look forward to our next call with you at the end of the year and also with respect to our 2009 guidance and thank you again.

Operator

Again, that does conclude our conference with you. Thank you for joining us.

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