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Duff & Phelps Corporation (NYSE:DUF)

Q3 2008 Earnings Call Transcript

November 6, 2008, 8:30 am ET

Executives

Jacob Silverman – EVP and CFO

Noah Gottdiener – Chairman and CEO

Gerry Creagh – President

Analysts

Eric Berg [ph] – Barclays Capital

Ken McGill – William Blair & Company

Bill Tanona – Goldman Sachs

Jim Woods [ph] – UBS Securities

Operator

Good day and welcome to the Duff & Phelps Corporation third quarter 2008 conference call. Today’s call is being recorded. At this time, I’d like to turn the conference over to Duff & Phelps Chief Financial Officer, Mr. Jacob Silverman. Please go ahead sir.

Jacob Silverman

Good morning and welcome to the conference call to discuss Duff & Phelps' financial results for the third quarter of 2008. I’m Jake Silverman, CFO of Duff & Phelps. With me on the call today are Noah Gottdiener, Chief Executive Officer and Chairman of the Board; and Gerry Creagh, our President.

Before we begin, I’d like to point out to all of you that statements in this call may include forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934, and the Private Securities Litigation Reform Act of 1995. Additionally, these statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on these forward-looking statements. Please see Risk Factors in our Form 10-K, Form 10-Q, and in other documents we filed with the SEC for a complete description of the material risks we face. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, or otherwise.

And now, I’d like to turn the call over to Noah.

Noah Gottdiener

Thanks, Jake. It’s a pleasure for me to speak with you this morning in our third quarterly earnings call of 2008.

Today, I’d like to start by quickly recapping key highlights of our results. Then, I’d like to discuss the current state of our business, the current market environment, and key growth drivers before turning the call back over to Jake for a more detailed financial discussion.

First, to briefly summarize our top line results, during the third quarter of 2008, revenues before reimbursable expenses increased approximately 15% to $96.3 million compared to $83.9 million for the corresponding prior year quarter. During the first nine months of the year, revenues increased approximately 16% to $287.3 million compared to $248.5 million for the first nine months of 2007.

For Q3, our Financial Advisory segment revenues increased 27% compared to last year. This was offset by a 22% Investment Banking segment revenue decrease in the quarter. For the nine-month period, our Financial Advisory segment revenues increased 25% versus last year, offset by a 13% Investment Banking segment revenue decrease for the period.

As of September 30, our client service professional headcount had increased 30% to 993 from 763 at September 30, 2007. This increase includes 26 managing directors that we brought on through hiring and acquisitions, as well as 16 managing directors that we promoted from within our organization to strengthen the reach and depth of our business. We are pleased with these overall results which speak to our balanced portfolio of business.

As we all know, we are in the midst of unique economic times. The continued stress and volatility arising from the dislocation of the credit markets and the financial services industry underscore the need for greater transparency, the proper application of fair value accounting, demands from independents and a greater level of corporate restructuring. These are the very trends that drive our business. The emerging global regulatory and accounting landscape presents significant opportunities for us to help our clients navigate through complex issues relating to valuation and objective presentation of value on their financial statements. As a result, I believe that Duff & Phelps is well-positioned to continue its track record of growth through this environment.

As we’ve described in the past, our technical expertise is helping to solve client’s complex, valuation and transactional challenges in meaningful ways. Let me give you some further color on trends by business unit for the first nine months of the year. Let us start with our Financial Advisory segment, which continues to experience meaningful growth year-over-year.

Our Valuation Advisory business, which represents 47% of total revenues, has grown 8% over the last year. Valuation advisory includes our core SFAS 141 financial reporting and SFAS 142 impairment valuation practices, our fixed asset real estate practice and general valuation expertise. We are seeing an increase in impairment testing [ph], particularly given the sharp declines of market valuations in many publicly-traded companies. Although our broader valuation advisory business remains solid in today’s environment, our growth has been tempered by the overall M&A environment, and therefore demand for SFAS 141 valuations.

Our acquisition in July of Kane Reece Associates adds to our core valuation expertise. The Kane Reece team has a nationally recognized presence in providing valuation services for the communications, entertainment, and media industries. We are excited about the capabilities and client base they bring to the Duff & Phelps platform.

Our corporate finance consulting business which represents 15% of total revenues has grown 44% over the last year. This practice includes our core portfolio valuation practice, financial engineering, and M&A due diligence services. We continue to benefit from new and ongoing portfolio valuation assignments for private equity funds, hedge funds, and other investment vehicles. Over the past several months, we’ve seen a strong level of interest from corporate clients with respect to their investment portfolios and pension funds, and we continue to penetrate the financial institutions market.

It’s important to note that our portfolio evaluation business is not tied to existing M&A transactions per se but rather to existing portfolio that our clients hold. We remain the clear market leader here and are proactively pursuing immediate opportunities for clients in need of independent portfolio valuation services. Our financial engineering professionals are currently working with clients to value complex securities, particularly in light of recent volatility. We continue to build our capability in this area to keep up with demand here including the recent hiring of three managing directors in New York to supplement our global financial engineering team.

Given the intense level of scrutiny and attention that the credit crisis has created on Wall Street, Main Street, and Washington, we have also focused our attention on the evolving regulatory landscape. We have committed substantial resources to ensure we fully understand the impact and opportunities of new regulation and accounting pronouncements. In fact, we believe we have an important seat at the table in terms of helping to shape this landscape as we have been called upon by regulators and other market experts to help define the road ahead.

Our Specialty Tax business is a key growth driver for Duff & Phelps. It currently represents 12% of total revenues, and it has almost doubled in size from last year. About 40% of the increase resulted from the Rash acquisition which has provided us with a suite of services required to penetrate larger and more complex accounts with regard to property tax services.

Our property tax advisory service has generated a number of contingency fees during the quarter contributing to our overall increase in rate per hour. We see the trend of value and contingency pricing in this business continuing.

Specialty tax will also benefit from our addition in July of World Tax Service U.S. This strengthens our platform of services to include global tax advice for structuring transactions and internal tax restructurings. As a result, we are not part of the World Tax Service global alliance of tax advisory services firms with 15 worldwide members. We are very excited about the global breadth of capabilities that this transaction provides us. In addition to WTSUS, we have three new specialty tax managing directors in our Chicago, Cincinnati, and Atlanta offices respectively.

Another notable area that we’ve been investing in is dispute and legal management consulting. This business represents 8% of revenues and has increased by 50% since last year. We’ve strengthened this business by bringing on Tom Britven and his team from the Lumin Expert Group. Tom brings the high quality, nationally recognized intellectual property and commercial litigation practice to our platform.

In today’s environment, litigation appears to be increasing particularly with respect to financial services, valuation and liquidity issues. Our dispute consulting business is well positioned to participate in this trend. Along these lines, we’ve also brought on six other managing directors to supplement the depth of our expertise especially with respect to testimony, fraud and forensics, and electronic discovery. We expect to continue to invest here.

Let’s turn to investment banking. We are pleased that the diversity and quality of our services within this segment mitigated the potential revenue decline compared to the general M&A market. In addition, given the dislocation in the broader investment banking marketplace, our investment banking segment is well-positioned for the future in terms of commercial and recruiting opportunities. That said, currently and in the near term, like the broader markets, we are experiencing headwinds with regard to our M&A advisory business.

Our middle market M&A advisory practice which represents about 5% of our total revenue is being impacted by the global disruption in the M&A and credit markets. While our sell-side auctions have generated significant interest from strategic and private equity buyers, we’ve seen a delay and in some cases cancellation of certain transactions as buyers are unable to secure financing and sellers work to shore up their business in a challenging economy.

The impact of the economic crisis on the middle-market M&A environment became most evident to us in September following the Lehman Brothers failure, at which point the credit freeze spread globally and middle-market lenders retrenched. While we are starting to see potential signs of credit loosening again in the middle market, it is apparent that the market will take some time to return to stability.

In our restructuring business which represents about 4% of total revenue, while we haven’t yet experienced an uptick compared to last year, we believe that the overall restructuring and distress arena is going to be extremely fertile ground for the next two to three years. The pace of numerous restructuring business is picking up for us domestically. Since July 1, we have won 10 new restructuring engagements in and out of court, and in terms of restructuring overseas, our Paris restructuring team continues to be a solid revenue contributor. This franchise is already capitalizing on the emerging distress market in Europe.

Finally, the challenging market is presenting real opportunities for us in our transaction opinion business which represents about 10% of total revenue. This practice has evolved into a leading national franchise, which is sought out by Boards and their key advisors to provide independent opinions regarding fairness and solvency. Most recently, our transaction opinion colleagues have been advising clients on some of the high profile and urgent transactions currently taking place. For example, our teams have been called in to provide such services in connection with the major financial institution transactions that have been completed in the recent weeks, generating a meaningful amount of fees in a short period of time; and we expect more of this type of activity as the government and remaining players focus on stabilization and consolidation of the market.

As a result, while not reflected in our third quarter performance compared to last year, the pace of activity increased towards the end of the third quarter and appears to be performing well in a very challenging market, demonstrating the strength of the Duff & Phelps franchise in this area.

Let’s now turn to our international business, which we see as a major growth driver for years to come. For the first nine months of the year, revenues from our international business more than doubled to over $28 million. In other words, almost 40% of our overall growth is being driven from our international operations. Headcount of international client service professionals increased to 139 at September 30, 2008, more than doubling since last year. In addition, we’re taking advantage of recruiting opportunities to attract great talent in multiple service areas. Notably, during the quarter, we strengthened our global M&A practice by adding senior professionals in our London office. Given the cross-border dimensions of many of our assignments, having this experience on a global scale will allow us to better respond to our clients’ needs regardless of location.

As we previously mentioned, we’ve also built a European restructuring business based in our Paris office with the recruitment of 29 client service professionals including three managing directors. As a result, we believe we are well-positioned to take advantage of increased financial restructuring opportunities in Europe.

It is important that as a firm, we make the best decisions in terms of capitalizing on the market opportunities while maintaining the right measure of prudence as we manage our business through these times. As necessary, we will reduce capacity in softer businesses as required. We have selectively done this over the course of the year, but we have also invested and grown the business in key areas. Going forward, we will continue to build on our broad and well-balanced mix of businesses through organic growth as well as opportunistic acquisitions like the ones we’ve completed year-to-date that either build directly on or are highly complementary to existing businesses.

All in all, our third quarter and year-to-date activities demonstrate our focus on prudent and balanced growth, domestically and abroad. While the markets are turbulent and not without their challenges for virtually everyone, we are seeing numerous opportunities to build our business and enhance the platform.

As we have reiterated in the past, we do not update guidance for the current year; but we also recognize the benefit in an uncertain market of providing a qualitative assessment of the factors that could impact our performance. To that end, let me say the following: As I stated a moment ago, we are clearly experiencing the most headwinds in our M&A Advisory business, which represents approximately 25% of our investment banking segment and about 5% of total revenue. As I previously mentioned, the impact of the economic crisis on the middle-market M&A environment became most evident to us in September following the Lehman Brothers failure.

The ongoing dislocation in the credit markets and the dampening M&A environment is, therefore, impacting this business more directly and we see scenarios in which some of the M&A success fees we otherwise would have earned in the late 2008 may not close this year. This would obviously have a corresponding impact on our top line revenue for the year and under certain of these scenarios, could result in our revenue for the year not being back-half weighted as we had previously expected.

Going forward, we are committed to our long-term financial objectives, which are 15% to 20% total revenue growth which is a mix of organic and acquired revenue; 19% to 20% adjusted EBITDA margins, and 20% adjusted pro forma EPS growth.

With that, I’d like Jake to discuss our financial results in greater detail. Jake?

Jacob Silverman

Thanks, Noah. Today, I’d like to discuss both company-wide financial results and then provide additional details on segment specific performance.

In addition to GAAP metrics, I will be discussing non-GAAP measures of our financial results, including adjusted EBITDA and adjusted pro forma net income. We believe these non-GAAP measures, when viewed alongside the GAAP measures we have already provided in our earnings release and we’ll disclose in our 10-Q, provide a meaningful means of evaluating our company’s performance.

As Noah described for our third quarter of 2008, revenues increased 14.8% to $96.3 million, compared to $83.9 million for the prior year quarter. For the first nine months of the year, revenues increased 15.6% to $287.3 million, compared to $248.5 million for the first nine months of 2007.

Organic growth, which excludes the impact of recent acquisitions to date, was 8.4% for the quarter and 11.6% for the first nine months of the year. This rate reflects the impact of the decrease in investment banking revenues that Noah described earlier. Organic growth of the Financial Advisory segment was 18.1% for the quarter and 19.7% for the first nine months of the year.

For the quarter ended September 30, 2008, adjusted EBITDA was $15.8 million or 16.4% of revenues, compared to $17.1 million or 20.3% of revenues for the prior year quarter. For the first nine months of the year, adjusted EBITDA was $52.9 million or 18.4% of revenues, compared to $51.4 million or 20.7% of revenues for the first nine months of the prior year. Adjusted pro forma net income per share was $0.22 for our third quarter and $0.76 for the first nine months of the year.

Let me describe what adjusted EBITDA and adjusted pro forma net income are. Adjusted EBITDA represents earnings before interest, taxes, depreciation and amortization, and non-controlling interest, as well as the following items – other income, acquisition retention expenses, equity-based compensation associated with legacy units of Duff & Phelps acquisition LLC, and the grant of options made at the time of our IPO. Adjusted pro forma net income represents adjusted EBITDA less depreciation and amortization, interest income and expense, other income and pro forma assumed corporate income tax. Adjusted pro forma net income per share consists of adjusted pro forma net income divided by the weighted average number of the company’s Class A and Class B shares outstanding for the applicable period, giving effect to the dilutive impact, if any, of stock options and restricted stock awards.

I’ll now talk briefly about segment performance and our balance sheet. In terms of segment performance, let’s start with Financial Advisory which represents 82% of total revenues for the first nine months of the year. For the quarter, our Financial Advisory segment reported a 26.7% increase in revenues to $80.2 million compared to $63.4 million in the prior year quarter.

During the first nine months of the year, revenues increased 25% to $234.7 million, compared to $187.8 million for the first nine months of 2007. The growth in revenue for the quarter was driven principally by demands from our corporate finance consulting, specialty tasks and dispute in legal business units. Of the overall increase in quarterly revenues, approximately 37% is attributable to a higher number of chargeable hours as a result of the increase in the number of client service professionals, 31% to a higher rate per hour, and 32% from our recent acquisitions. The growth in revenue for the nine-month period was driven principally by demand across our Financial Advisory business units.

Of the overall increase in revenues for the nine-month period, approximately 46% is attributable to a higher number of chargeable hours as a result of the increase in the number of client service professionals, 33% to a higher rate per hour, and 21% from our recent acquisitions. For the quarter, the Financial Advisory segment’s rate per hour increased 11% to $350 from $315. Utilization was 61.2% compared to 66.7% in the prior year quarter. For the first nine months of the year, the Financial Advisory segment’s rate per hour increased 9% to $350 from $321. Utilization was 62.5% compared to 68.4% for the nine-month period last year.

Improvements in rate per hour benefited from a change in our mix of services provided. We continue to see the benefit from premium price or contingent engagements, which are becoming an important element of our overall mix. As a result, to a certain extent, the utilization metric looked at in a vacuum becomes less relevant given the evolving mix of our business to include more value-added contingent fees. That said, our third quarter utilization rates are modest improvement over the second quarter and reflect the absorption of approximately 135 new recruits, who came onboard throughout the year and all of whom attended two weeks of intensive training in August.

We would note that there can be quarterly volatility in both of these metrics, and we tend to look at both on a blended annual basis to assess performance. Rate per hour for the annual period ended September 30, 2008, was $345. Utilization for the annual period ended September 30, 2998, was 64.2%. While we are pleased with the growth in realized rate per hour and overall revenue dollars, we continue to focus on improving our efficiency as measured by utilization.

Financial advisory headcount increased 30% to 864 client service professionals from 663. Of the increase, 49% resulted from domestic hiring, 12% from hiring in our international offices, and 39% resulted from our recent acquisitions including Rash.

Now, I’d like to turn to our Investment Banking segment, which represents 18% of total year-to-date revenues. For the quarter, we reported a 21.7% decrease in revenues to $16.1 million compared to $20.5 million in the prior year quarter. For the first nine months of the year, revenues decreased 13.4% to $52.5 million from $60.6 million. One essential point that needs to be underscored here, particularly with regard to our Investment Banking segment, Duff & Phelps has an inherently episodic business model as a result of the impact of M&A and restructuring success fees and the timing of transaction opinion fees. That is why we tend to look at overall annual performance as opposed to quarters to assess key trends in this business.

Noah provided context regarding the overall M&A and restructuring environment previously. We feel that we have a diverse portfolio of services in this segment that has helped us to shelter on a relative basis from the broader volatility in the market. Our M&A advisory revenue decreased 6.5% for the third quarter compared to last year and 16.3% for the first nine months compared to last year. Our global restructuring business decreased 5.4% for the third quarter compared to last year and 18.6% for the first nine months compared to last year. I’d note, however, that our global restructuring business is showing growth on a sequential basis this year and the pace of new engagements in our domestic practice is picking up meaningfully compared to the first half of the year.

Finally, our transaction opinions practice decreased 37.5% for the third quarter compared to last year and 9.3% for the first nine months compared to last year. As Noah mentioned, this business has shown a meaningful uptick towards the end of the third quarter, however, and this pace appears to be ongoing.

Let’s turn briefly to operating expenses. In the quarter, operating expenses were higher than previous quarters. This increase was a direct result of planned investments made now to ensure we have the resources and expertise in place to serve what we believe will be a growing market. In particular, in early July, we held a firm-wide training and strategic planning conference in Florida for approximately 500 managing directors, directors and vice presidents. The expense associated with this conference was approximately $0.03 of adjusted pro forma EPS during Q3. The program represented a full schedule of collaborative training, planning and compliance-related seminars and activities, which further support our unique culture as we grow. We have a strong belief that this type of event has direct near- and long-term benefits for our employees and our shareholders. Importantly, however, it does not represent a quarterly recurring expense.

In addition, I’d also like to mention that we sent 135 new recruits hired during the year to two weeks of intensive training during Q3. We believe that the education is vital to help us maintain our competitive edge. Although we closely monitor all expenses, we believe these investments will help us maintain our lead in the marketplace and also capitalize on the unique opportunities ahead.

Let’s turn to our balance sheet. Our balance sheet is strong with ample liquidity. We have $42 million of total debt on our balance sheet or just over half a turn of debt to trailing 12 months adjusted EBITDA. Our cash balance total is over $57 million at September 30. It’s important to note that we believe our cash balances are safe. We are not invested in any of the instruments that have come under pressure over the past year. We believe that our balance sheet provides us with flexibility to pursue growth opportunities, including potential acquisitions and lift-outs. It’s also important to note that we are not dependent on further access to the credit markets to provide us with near-term liquidity to run our business. Our cash balances and revolver availability should provide us with appropriate liquidity to fund our operations.

As we previously mentioned, we amended our credit agreement this past July. An important element of the amendment is that it increases our flexibility and capacity to complete strategic acquisitions. When the credit markets return to a more stable level, to the extent that we see opportunities in making acquisitions, you may see our debt levels increase somewhat. But let me be clear, we intend to maintain a strong balance sheet.

With regards to share count, we have a two-class share structure; with Class A shares, primarily owned by public investors and Shinsei; and Class B shares owned by the original members of Duff & Phelps acquisitions, our operating business, which are exchangeable into Class A shares. As of today, the total number of Class A shares outstanding is approximately 14.6 million. The total number of basic Class B shares outstanding is approximately 21 million. Thus, on a fully exchanged business, we have a total of approximately 35.6 million shares outstanding. Note that approximately 1.2 million of the Class A shares are in the form of restricted stock awards, which are subject to vesting and will not appear in our share count until vested for purposes of calculating basic earnings per share.

One final note before I turn it back over to Noah. This afternoon at 2:15 pm Eastern, Duff & Phelps will be presenting at the Keefe, Bruyette & Woods 2008 Securities Brokerage and Market Structure Conference. Investors and other interested parties are invited to listen to a live webcast of the presentation, which can be located on the IR section of our web site.

With that, I’ll turn the floor back over to Noah.

Noah Gottdiener

Thanks, Jake. In summary, we’re pleased with the overall growth of our business across services and geographies in the first nine months of the year. Last quarter, we mentioned that we had initiated a search for a new Chief Financial Officer, as Jake was moving into a new role overseeing strategy and corporate development for Duff & Phelps. However, given the current economic environment, we have suspended our search and I’m very pleased to say that Jake has agreed to continue in his current role while still overseeing strategy and corporate development.

This concludes our prepared remarks. In addition to Jake and myself, our President, Gerry Creagh, will now be available to answer your questions. With that, I’ll open the floor up to questions now.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question from Roger Clemens with Barclays Capital.

Eric Berg – Barclays Capital

Good morning guys. This is Eric Berg [ph] calling for Roger. In the Financial Advisory business, given the elevated concerns around the economic environment, could you give us a look into the backlog of your client engagement? Are you seeing any signs of pull back from these corporate clients to raising their level of external advisory firms and expenses, that sort of thing?

Noah Gottdiener

We have not seen any pull back of that nature. As I’ve said on the call because of the reduce M&A activity, we’ve seen a lesser level of activity related to our SFAS 141 valuation services, although our impairment business is up considerably, but we haven’t seen any general pullback by corporates related to the services that we provide generally.

Gerry Creagh

This is Gerry. It’s just that the mix is changing a little bit and so we’re seeing different needs by the markets, different needs by our clients. And given the diversification of our portfolio, we’re able to respond to all those different needs. It’s just a different mix.

Noah Gottdiener

Yes. And when clients need our services, they need them. And so, we’ve not seen the kind of pull back that you’re describing.

Eric Berg – Barclays Capital

Okay. The same point on pricing, are people pushing back on that at all yet? You still think you could probably see a low single-digit percentage increase on an annual basis at this point?

Noah Gottdiener

We have not seen a pullback in pricing and that’s reflected in our rate per hour. At this point, there’s no indication that we will see that pull back.

Eric Berg – Barclays Capital

Okay. And on headcount, given the heavy seasonality of your hiring cycle, is it fair to assume that you’re probably done for 2008?

Gerry Creagh

Generally speaking, we will – most of the recruiting has been done. As you know in Q3, we do bring on our campus recruits. At the same time, we’ve had very low attrition, much lower than we’ve seen in prior periods, so we clearly – except for some senior talent, we won’t be doing a lot of recruiting for the last couple of months.

Noah Gottdiener

Hey Eric, I just want to go back for one other point on your question related to pricing. I think one thing that we are seeing in this environment is a number of situations that are characterized by urgency, urgent transactions that have to get done under pressure where we’re called in, where if anything, we’re seeing our pricing go up in those situations.

Eric Berg – Barclays Capital

What sort of transactions are you referring to? That would be like urgent that are in need – which citizens [ph] client are you saying that in?

Noah Gottdiener

In particular, we’ve seen that in cases where we’ve been called on to provide opinions to Boards in situations that are taking place very, very rapidly under high levels of pressure, where they need expert advice and it has to been done right and it has to be done quickly. And we price accordingly and the clients accept our pricing.

Eric Berg – Barclays Capital

Excellent. Last question before hop into queue. On the expense line, you spoke to the large meeting in Florida this quarter, suggested it is not a quarterly meeting but you anticipate being an annual meeting at this point.

Noah Gottdiener

Listen, that’s something for us to assess. But let me just clarify the first point, it isn’t the quarterly recurring expense. And as a result, the margins that you’re seeing in our third quarter aren’t reflective of our annual margins or our margins for the fourth quarter, so that’s the first point and whether we have that type of expense next year or not is something for us yet to be determined.

Eric Berg – Barclays Capital

Okay, thanks guys.

Gerry Creagh

It is certainly within our – completely within our control.

Eric Berg – Barclays Capital

Sure. Thanks.

Operator

We’ll take our next question from Ken McGill with William Blair & Company.

Ken McGill – William Blair & Company

Yes. I want to ask first about the transaction opinion business where you said it was a little weaker than I think you would have thought in the third quarter but you’re seeing signs of improvements because of some of these urgent situations which you said is ongoing. Just a little more color I guess, what are you seeing out there that maybe makes you more optimistic that will be ongoing versus what you’re seeing in the third quarter?

Noah Gottdiener

Right. Well first, let me just clarify some thing. I don’t think we said that it was weaker in the third quarter. The mechanical calculations which show a significant decline, but the first thing I want to point out to you about that business is it is a lumpy business. It is very hard to evaluate it by quarter-to-quarter growth rates because if you had just a bunch of opinions that just happened to lump up in the third quarter of last year and they didn't lump up in the third quarter this year, it would result in that kind of skewing of the numbers. We don’t think that business is weak at all. And what we’re seeing, particularly in this environment, is two things: First of all, an incredible strengthening of our franchise in this area. We are the really the leading provider of these services. There are very few people who do them with the level of credibility and expertise that we have and that is now being very recognized in the marketplace.

Number two, the types of transactions that we’re seeing in this environment are bail-outs, financial services consolidations that are taking place sometimes over weekends, separation of good bank, bad bank, and that applies not only to financial services industry but other industries, just separation of good assets from bad assets, recapitalizations, spin-outs, all those things are taking place as people are grappling with the economic impact on their businesses, and are restructuring their businesses and that is leading to demand for this particular type of service where we are very strong. Does that respond –?

Ken McGill – William Blair & Company

Yes, that’s helpful. I guess – so what I hear given the market share gains that you’re getting as well as some of the events that may not be tied to traditional M&A, but are occurring in this environment, this business you think could continue to perform well even in a relatively constrained M&A environment? Is that fair?

Noah Gottdiener

Yes. That is fair.

Ken McGill – William Blair & Company

Okay. And then on the restructuring piece, you mentioned a number of cases in the quarter but the business improved somewhat sequentially there but not, I guess, drastically given the number of cases you said you won. Is it just the timing in terms of those ramping up or were these relatively smaller cases and we still haven’t seen yet the big cases start to flow through that will move the needle.

Noah Gottdiener

Yes, I think it’s a little bit of both. I mean, we’re still seeing – we’re sort of in a strange period here on restructuring in the sense that we’re seeing some of the revenues from an earlier period tapering off while we’re picking up new – we’re beginning to pick up revenues that are associated with this current cycle. So I would expect that we are on the right part of the curve here and will continue to pick up business and that business will continue to improve as the cycle deepens, where we feel we’re well-positioned with regard to what’s going to happen in the economy with regard to that business. Is that okay?

Ken McGill – William Blair & Company

Yes, that’s great. And then on the valuation consulting side, you talked a little bit about some of the opportunities you’re seeing. I was just wondering if – directly, if you can talk about anything related perhaps to the TARP program, or some of the other recent government initiatives and how that might impact the demand for your valuation services here going forward?

Noah Gottdiener

Yes. Let's see how specific we could get. We’ve obviously looked and followed very closely what’s been happening with TARP. We’re not directly providing services to the government with regards to TARP because most of those services relate to asset management and custodial trustee services. We’ve seen some RFPs related to TARP where we’ve actually passed on them because of the pricing constraints that the government is imposing. It just didn’t look like typically profitable business for us, but I think the important part here is that all of this has created just a greater focus on complex instruments and the need for valuation services from our corporate clients, and private equity clients that are increasing demands for those services, and you see that reflected in the growth rates for those segments.

Gerry Creagh

And I want – what I want to add is that the – as you know, relating to TARP, the SEC will be reporting back to Congress in early January on the impact of fair value accounting rules. And fair value accounting permeates the entire accounting literature and while there’s a lot of bad press about it, it is very much here to stay. We’ve think the dialog around fair value accounting has been both important to the capital markets and beneficial to our business. We are working with the FASB, the SEC in terms with dealing with the complex valuation issues. At the same time, our clients need our valuation expertise as much as ever. We believe that when the SEC comes back to Congress that they will provide clarification which will be very beneficial to the markets, beneficial to our clients, and beneficial to our business.

Ken McGill – William Blair & Company

On that note, as people move perhaps away from I guess mark-to-market accounting and maybe closer to a mark-to-model type of solution, could you see them turning more to you to do the valuation work, I guess on a recurring basis or even validate some of the work that they are doing?

Noah Gottdiener

Absolutely. As they move more to mark-to-model, that’s what we do, given the greater scrutiny and demands for independent providers in this type of environment where people have gotten these marks really long [ph]. We believe this will have a positive impact on the demand for our services.

Ken McGill – William Blair & Company

Okay, great. Thank you.

Operator

(Operator instructions) We’ll go to Bill Tanona with Goldman Sachs.

Bill Tanona – Goldman Sachs

Hi. Good morning guys. My first question just in terms of, as I’m looking at the compensation expense as it relates to SG&A, we’ve been seeing that growing pretty significantly relative to a lot of other areas of the expense line, so just trying to get a sense as to how we should be thinking about that going forward?

Jacob Silverman

Hi, Bill. This is Jake. With regards to SG&A, our expense dollars have grown and this growth has been expected at least by us as we’ve invested in our infrastructure. Obviously, as a public company, we’ve had to invest in Sarbanes-Oxley [ph] compliance and so forth. And then, of course, just last quarter as I mentioned earlier and as Noah described, we did have that firm-wide conference. So our SG&A dollars have grown but, frankly, I think we’re nearing a point where we’ll be able to start realizing real economies as our top line continues to grow. We really think that we have established a solid firm-wide infrastructure to support the business for some period to come. Now, this is one other point there, we will continues to invest in SG&A infrastructure overseas as our international business continues to grow.

With regards – I think you also mentioned compensation. If you read through our disclosure (inaudible) you will see that we have backed out some of the legacy equity cost expenses as we described in the past, but we’ve been focused on remaining pretty disciplined about accruing compensation to our target overall gross margin levels that we have described for our two segments.

Gerry Creagh

And I want to underscore that. We intend to remain disciplined around our compensation expense, so we don’t see that growing at any material way relative to the way we’ve accrued for those expenses in the past.

Bill Tanona – Goldman Sachs

Okay, that’s helpful. And then in terms of, obviously, the environment has changed pretty dramatically across the globe over the course of the last two months. Certainly I would say that maybe here in the US, we had a little bit of a jump start as it related to the financial services industry, but are you guys noticing any type of discernible trends between the international markets versus the US markets? I know it’s a significant growth opportunity for you, but are you noticing any behavioral changes outside of the US, now that they seem to be as impacted over the last two months?

Jacob Silverman

So, Bill, just so I understand, the question is around trends in international that relate to our overall business or of any particular area?

Bill Tanona – Goldman Sachs

I would say more of the valuation advisory work and things of that in that nature. Obviously, I would expect that the investment banking business would be more of a global impact but I guess more in terms of the financial advisory side of the business.

Gerry Creagh

Bill, this is Gerry. Clearly, internationally, they are being impacted in the same way that we are here in the States, but when you think of the way we’re growing our business and you think of the size that we are relative to the entire market opportunity, we see plenty of that opportunity still there for us to grow, to expand, to attract good people against a very, very desirable platform. So while they’re seeing the same stresses as we are in the States, we don’t think it impacts our long-term ability to grow in the business whatsoever.

Noah Gottdiener

Yes, and I would just add to that, again, Europe is seeing the same economic stress as United States. They are also – we are seeing the same secular trends that are driving our business in the United States are evident in Europe and Asia, and that’s what’s going to allow us to grow our businesses over the long-term in Europe and Asia, as well as in the United States. We’re feeling very good about our opportunities there.

Bill Tanona – Goldman Sachs

Okay. Thank you.

Operator

(Operator instructions) Let’s go to Andrew Fones with UBS Securities.

Jim Woods – UBS Securities

Yes. Good morning. This is Jim Woods [ph] filling in for Andrew. I know the firm-wide [ph] trading obviously was sort of a non-recurring event, but did you do the two-week training program for the new recruits last August?

Noah Gottdiener

Yes.

Jim Woods – UBS Securities

You did. Okay, it was would you say –?

Noah Gottdiener

For the primary non-recurring expense that we talked about was with the management conference which wasn't for new recruits. That was for MDs, Vice Presidents and Directors.

Jim Woods – UBS Securities

Okay.

Noah Gottdiener

I just want to make sure that that was clear so there wasn’t any confusion there.

Jim Woods – UBS Securities

Yes. No, I got it. And so again, would you say that in terms of how it impacted the business, the training program for the new recruits last year was similar to this year? Or were there any differences?

Noah Gottdiener

I don’t think that there were any particular differences with regard to training of new recruits. That’s just an ongoing investment that we always make in training as we bring people onboard.

Jim Woods – UBS Securities

Okay, okay. Thank you.

Jacob Silverman

Nothing materially or unusual related to that.

Gerry Creagh

Yes, but one thing I would note is that relative to last year, the campus recruiting will be less. We will be on campus. We need to be on campus. It is part of our growth strategy, but campus recruiting will be down. And therefore, the cost associated with training them will be down.

Andrew Fones – UBS Securities

Okay, that’s helpful. Can you explain, I guess, the usual Q4 seasonality that you would see for both businesses, recognizing of course that it’s not a usual year; but if you could just talk a bit about that? And remind us again why we saw a pickup in financial advisory utilization in Q4 the last couple of years?

Gerry Creagh

Let’s take this two separately. In terms of seasonality, generally, we’ve experienced some seasonality in terms of people just getting things, deals done and completed by year-end. I don’t know that that’s ever been a particularly material impact at our business and we’ll see how that plays out this year. And with regard to your second question, why has utilization – I’m sorry, would you repeat the second question?

Jim Woods – UBS Securities

Sure. The drivers of why there might have been – why there was a pickup in the financial advisory utilization in Q4 in the last couple of years?

Gerry Creagh

Yes, this is Gerry again. As you know, generally, the third quarter tends to be lower in terms of utilization because we’re bringing in people at that point in the year. Q4, we have – in the past, we have seen a pickup with respect to deadlines and therefore, the need for our clients to get things done; so we have in the past seen a pickup in utilization in Q4. We don’t know whether or not there will be a pickup this year but in prior years there has been.

Jim Woods – UBS Securities

Okay. Thanks very much.

Operator

(Operator instructions) And at this time, it appears there are no further questions in queue.

Noah Gottdiener

Okay. In conclusion, as all of us realize, the external environment is having a profound impact on our businesses around the world, with compelling opportunities and challenges at the same time. We believe that our year-to-date results have demonstrated the resiliency of our balanced portfolio of services and diversified client base. We remain committed to delivering sustainable long-term growth and value for our shareholders.

I thank you for joining the call today and look forward to updating you on our full-year results early next year. Thank you.

Operator

Again, ladies and gentlemen, we’d like to thank everyone for your participation on today’s call. You may disconnect at any time.

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Source: Duff & Phelps Corporation Q3 2008 Earnings Call Transcript
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