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Navigant Consulting, Inc (NYSE:NCI)

Q3 2008 Earnings Call Transcript

October 30, 2008, 5:00 pm ET

Executives

William Goodyear – Chairman and CEO

Julie Howard – President and COO

David Wartner – Interim CFO, Controller, and Chief Accounting Officer

William Dickenson – VP, Executive Managing Director, North American Consulting Operations

Sharon Siegel Voelzke – VP, Business Unit Leader, North American Business Consulting Services

Jeff Green – VP, Business Unit Leader, North American Dispute and Investigative Services

Jeffrey Stoecklein – VP, Corporate Development

Analysts

Tobey Sommer – SunTrust Robinson Humphrey

David Gold – Sidoti

Dan Leben – Robert W. Baird

Tim McHugh – William Blair & Co.

Andrew Fones – UBS

Joseph Foresi – Janney Montgomery Scott

Kevane Wong – JMP Securities

Rob Young – WM Smith & Co.

Michel Morin – Merrill Lynch

Operator

Good afternoon and welcome to Navigant Consulting’s third quarter 2008 earnings conference call. At this time I would like to inform all parties their lines will be in listen only until the question and answer portion of today’s call. Today’s call is being recorded. If you have any objections, please disconnect at this time.

I would like to introduce today’s speaker, Mr. William Goodyear, Chairman and CEO of Navigant Consulting. Mr. Goodyear, you may begin.

William Goodyear

Thank you, and good afternoon. Before we begin, I’d like to remind us all that the disclosure at the end of our earnings release relates to the forward-looking statements that we may make or may be discussed on the call and as we’ve done in the past, our release is on our website together with our metrics backup.

Dave Wartner and I signed the Q today. We’ll be filing that tomorrow morning, and we would suggest that, in combination with this earnings release, you look at the Q filing as well. As in the past, we’ll be discussing one or more non-GAAP financial measures and we’ve got reconciliations as we’ve had in the past in our press release where appropriate.

With me today, Julie Howard in Chicago; Dave Wartner, our Interim CFO, Controller, Chief Accounting Officer. As you saw in our release yesterday, Dave will be losing part of that title. We’re so pleased to have Tom Nardi joining us on the 10th of November, and Tom wanted me to let all of you know that he’ll be reaching out to you as soon as he’s in the saddle. The corporate team is here with me in Chicago as well; Bill Dickenson, Sharon Siegel Voelzke, and Jeff Green are joining us by phone.

We appreciate you being with us this afternoon. I would say before we get into the numbers that it was an incredibly interesting quarter. I think it’s fair to say it was a wild ride, and we basically got to witness the remaking of the entire financial service industry in about 30 days and given our domain expertise and Navigant’s role in the big issues that relate to the financial services industry, I can honestly say it was exciting every day to get up and come into the office and I think we’ll look back on this as a very unique time and all of this happened as we know concurrently with the presidential election and the economy going into a recession, certainly here and in all likelihood globally.

As we know, a certain amount of stress is very good for Navigant’s business model. Extreme chaos does have its costs, and I think we can look back on the third quarter and actually quantify some of that. We would estimate conservatively that we lost $8 million of revenue as the quarter began to come to a close because of all the dislocation and disintermediation in the financial services markets.

You’ll see in our press release that we added another $5 million beyond our normal run rate in terms of bad debt provisioning Andrew Fones, I don’t know if you are on the call, but I am reminded of the exchange you and I had 90 days ago where you asked if we would return to our normal run rate on bad debt provisioning and I said we expected to, which we did, and I’ll say again, we’ve looked at all of our exposures at the end of this quarter and we expect to return to our normal provisioning in the fourth quarter.

That said, honestly we did not know that Lehman was going to fail, that AIG, Freddie, Fannie would be taken over by the government, that Wachovia would be purchased by Wells, and Merrill Lynch would be purchased by Bank of America, that WaMu would be the largest failure, that money market funds would be guaranteed and we’d have TARP. We did have exposure and we’re active I think with every name I just mentioned. We did write off $2 million on Lehman Brothers. We’ll see if we get any of that back in the future.

So it was a very interesting quarter. Having said that, we feel very good about the way the company performed, the way we came through it. A little comment on numbers. You saw that our revenues in the third quarter were up 4%, 9% year over year. Revenues before reimbursements were up 7%, and then 10% year over year to date. Our EBITDA number was a good $27 million. That was after the $5 million of extra debt provisioning and EPS came in at $0.17 compared to $0.14 a year ago.

The extra bad debt reserve that we took we’d estimate was $0.04 or $0.05 of EPS, and we did have a penny of currency adjustment. We’ll comment more on that later, but the flight to the dollar, which was an interesting aftermath to all of this, was very severe. You know, flight to safety, if you will, and that impacted our revenues by we would estimate $1.5 million in the third quarter. We’ll talk a little bit more about that later.

We had an excellent quarter from a cash flow standpoint. I wanted to talk to that upfront, $39 million, up from $31 million a year ago. We reduced our bank borrowing substantially to $273 million from $309 million, and as we sit here today we have $150 million plus of capacity in our bank facility, and we’re comforted that the maturity is 2012. Even three months ago, we wouldn’t have thought to comment on the majority or the lack of maturities that we have, but given the dislocation out there we find that, I think mid-year 2012 maturity is a real asset for us.

So with that said, a comment about the fourth quarter, and then I’m going to ask Julie to provide some granularity. We’re off to a very nice start in the fourth quarter. Utilizations rebounded strongly as engagements that quieted down or were delayed or postponed have begun to restart, and in some cases expand. Company-wide through last week, we were running at 82%, which, as you all know, is a very nice number for us. So we’re pleased the way we came through this. We’re very satisfied with the quarter that we had, and we look forward to an exciting finish to the year and we can get into that a little more in the Q&A, and I’m going to come back to guidance for the full year.

So, Julie, with that, could you give us a little granularity, and then I’ll wrap up with some year-end guidance?

Julie Howard

Sure. Thanks Bill. I just wanted to remind everybody as in prior calls, I want to point out that the EBITDA net income and EPS numbers I’ll be discussing are non-GAAP and exclude certain charges related to the restructuring and consolidation of our real estate portfolio. We do this to highlight for you our fundamental ongoing business model. You’ll find the reconciliation between the adjusted numbers and the GAAP results are included in the press release.

I wanted to just start with an overview of our year-to-date results as compared to this time last year so that we can all remind ourselves of the strong performance and progress that we’ve had at Navigant in an otherwise very tumultuous business environment. Our diversified business model, both forensic and forward-looking services, and highly regulated sectors gives us a strong foundation to whether the current economic and sector cycles that we’re experiencing and continue to deliver growth and profitability over the longer term.

Notwithstanding this daily market volatility that we’ve seen, as a management team, we want you all to know that we’re working off of our plans for long-term potential and also blocking and tackling against the more immediate impacts.

Notably on a year-over-year basis, year-to-date revenues, 2008 revenues of $616 million reflected a 9% growth over year-to-date 2007 in the same period, well within our previously discussed growth plan of 7% to 10%.

Also during the same timeframe, EBITDA increased 11%, and EPS increased 14%, despite the significant increases to our allowance for doubtful accounts due to the economic climate we find ourselves in today. We’re very pleased with our year-over-year results, and would expect to continue to execute against plan go forward.

Focusing on the third quarter specifically, revenues of $198 million represent an increase of 4% year over year, but a decrease of 6% quarter over quarter, as we had expected and discussed in our Q2 earnings call. Given the extreme disruption in the financial markets, general economic climate and the seasonality of our third quarter, we’re very satisfied with these results and feel positive about the climate for our services in the fourth quarter and into 2009.

Let’s go just a little bit more depth into each our segments. We’ll start with the North American disputes and investigative segment, which achieved revenues of $79.8 million in the third quarter. That was down 2% year over year and 10% from the second quarter, primarily reflected in utilization, which came in at 73%, down from 77% in the second quarter. That downward trend in utilization reflected both the seasonality we experienced due to summer vacations, and that was about two percentage points quarter over quarter, as well as postponement and delay of certain engagements involving our financial sector clients, which was about another 2% during the quarter.

Average bill rate was $291 compared to $299 in the second quarter, and that decrease is reflective of a change in mix issues as we on-boarded our junior staff, the new hires that come off campus during the third quarter, and also a shifted work stream to the lower rate levels.

Operating profit, though, for this segment came in at $32.6 million, which is just a slight decline from the second quarter and up modestly year over year.

In the North American business consulting segment, we reported revenues of $82.9 million for the third quarter, which is down 9% year over year and 10% from the second quarter, reflecting, as we all talked about, shortening in the discretionary consulting spend in our financial services area.

Utilization was 78%, which is only down slightly from 80% in the second quarter, which is a strong reflection of the expertise and the demand for our services in both the health care and the energy sectors. Both of those sectors remain very strong and the practices performed extremely well in the third quarter, and we would expect to continue to see that in Q4.

Head count was down from the second quarter, and this is a direct result of the realignment of our resources within the financial services and insurance practices that we undertook in the third quarter.

Average bill rate remains steady at $227. Operating profit was $28 million, which was down $6 million or 17% from the second quarter. Again, that was primarily reflecting the drop in discretionary spend in consulting services in our financial services practice, as we had previously discussed.

Moving to international. The international segment reported revenues of $20.8 million in the third quarter, which is up 16% year over year, down 10% from the second quarter. The downward trend in revenues from the second quarter to the third quarter was about half of that came from the currency exchange and the flight to the dollar, and the other balance of that was kind of a significant holiday impact that we always experience throughout the month of August within Europe. Notwithstanding that, our international construction practice continued to perform extremely well and had a continued growth year over year.

Average bill rate for the international segment was $292, which is just down slightly from the second quarter, and again is a reflection of currency exchange decline.

And lastly, our operating profit came in at $6.1 million, which is up 25% year over year but down 2.1 from the second quarter, again reflecting the seasonality, as well as the currency exchange.

And finally, our economic consulting segment which is – this will be the first quarter that we are reporting out on the segment with full results since they were acquired, Chicago Partners was acquired in May of 2008, and we’re really pleased with their very strong performance in the third quarter. Third quarter revenues were $14.5 million, in excess of our plan and their operating profit was $6 million.

Utilization came in at a remarkable 99%, a phenomenal number. Don’t mark that down in your models because I can’t imagine that we will continue that and our average bill rate was $337. Again, very pleased with this segment’s performance, continue to make excellent progress on cross-collaborative opportunities between both our D&I segment, as well as our financial services practice, and we’re working very well on our internal integration.

During the third quarter, the vast majority, as we’ve talked earlier, of our campus hires joined the firm. We had approximately 82 young professionals who joined the company. All of these individuals are now being utilized in their assigned segments. We continue to hire as our practice needs require, and are taking advantage of a hiring market that falls in our favor despite its negative impact on the economy right now, and our annualized attrition decreased in the third quarter. It is a rolling 12 month, so we hope to continue to each quarter roll down modestly, but it came in at 20.9%.

Third quarter G&A expenses, exclusive of the increase in allowance for doubtful accounts of $7.7 million, remained consistent with the second quarter, and we would expect that trend to continue on a go forward basis. As I think we’ve talked about in many of our prior calls, we intend to continually scale our G&A at a much lower rate than our revenue growth and will continue our efforts to optimize our real estate footprints via kind of streamlined square foot per person metrics.

And then finally, before I turn it back over to Bill, I just wanted to refocus everyone on our cash position at the end of the third quarter as we reduced our borrowings under the company’s bank facilities to $273 million, down from $309 million at the end of the second quarter, which was phenomenal progress for us over the quarter. DSO came in at 84 days. That’s down from 90 days in the third quarter of last year and down slightly from 85 in the second quarter.

And I just wanted to say that notwithstanding the environment we find ourselves in, our practice leaders and our team leaders remain vigilant about their collections during this timeframe, and in certain circumstance are adopting retainer policies as appropriate.

So with that, I’ll turn it back over to Bill so he can talk a little bit about guidance.

William Goodyear

On page 3 of the release, we talk about 2008 year-end outlook. We say that we are expecting revenues and net income EPS, if you will, for the year ending December 31st to be at the lower end of our guidance range that we announced earlier this year. You’ll recall that that was $820 million to $845 million in terms of revenue and net income EPS per share of $0.89 to $0.96. So we’re now focused on the $820 million and the $0.89 and that’s where we expect results to come in and cluster around those numbers.

The full year 2008 guidance for adjusted EBITDA, we’ve taken the $5 million of incremental bad debt expense out of the EBITDA range. If you’ll recall it was $135 million to $142 million, so now at the bottom of the range that would be a $130 million say to $135 million.

Now, you all can do the math quickly, but what that reflects is that we expect to have a fourth quarter that will be north of $200 million in revenue and in the $0.23, $0.24 from an EPS standpoint range.

Now the reason that we’re comfortable with that kind of if you will rebound is that as we sit back and look at the company here as we’ve entered into the fourth quarter and the wrap-up, backlog is excellent. The financial services and insurance services practices which, as you know were if you will a drag because of the elimination. You know, first it was the decline, and then it was the complete elimination of any discretionary expense. We’ve worked our way through that process, and the backlog in both of those practices for the first time was stable, not up, but stable as opposed to declining.

And year over year, if you aggregate those two practices, we were down $20 million through the first nine months. We do not expect that to continue. The leadership of both teams and both practices has done a very nice job. Utilization is back up, and I would think that we have favorable expectations as we go forward from this point on those two.

The dispute practice clearly is going to benefit from this turmoil, as it already is. Healthcare and energy have performed exceedingly well all year. We expect that to continue.

The economic consulting segment, as Julie referenced, is off to a very nice start. So when we take a look at that, we’re comfortable, but notwithstanding that the fourth quarter has the holidays and you would expect that Thanksgiving, Christmas and New Year’s ordinarily to impact revenues where you might be expecting to be down a bit from the third quarter. We don’t expect that this year. We think we’re going to have a very solid finish to the year.

So that would be our view on the fourth quarter and the full year. I’ve got two subject twos on that, which I’ll throw out and we can maybe discuss more in Q&A or in follow-up sessions.

One is I want to go back to my comments about currency volatility, which we referenced in our press release, but this flight to the dollar has been very vicious, if you will, and the volatility day to day and week to week on the dollar versus Sterling and the U.S. dollar versus the Canadian dollar has been startling in its fluctuation.

We have our own projections and our own view, which is embedded obviously in our guidance, is that those relationships in the fourth quarter will average out to be at the same level they were at the end of the third quarter. Now, to the extent that that doesn’t happen and we could have some volatility, recall that we have $35 million of quarterly revenues that would be there up in Canada or in London, and so you all can speculate on currencies and decide how you want to view that.

The second subject two is that in the fourth quarter, we typically have most or a meaningful part of our, if you will, performance fees, success fees, whatever you want to call them. Last year, if I recall we had when we closed off the quarter, we had $6 million or $7 million of success fees, and these things tend to land heavier in the fourth quarter. This year, we have imbedded in our projections about $3 million, so a significantly lower number, and the reason that we have that lower number in there is because of the volatility in the capital markets and the impact that that could have on some of these engagements.

So with those subject twos, I will wrap up that part of the discussion, and why don’t we open it up for Q-&-A.

Questions-and-Answer Session

Operator

(Operator instructions) Our first question is from Tobey Sommer of SunTrust Robinson Humphrey. Your line is open.

Julie Howard

Hi, Tobey.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you, good afternoon.

William Goodyear

Hi, Tobey.

Tobey Sommer – SunTrust Robinson Humphrey

First I would like to ask you on the attrition side, nice to see some moderation there. Could you refresh my memory as to what the attrition had been running at the last couple quarters?

Julie Howard

Yes. It hasn’t been a significant change. We’ve run on a 21% to 22% range, 22% I think we’ve averaged for the last several quarters and so, you know, because we use an annualized attrition number rolling past 12 months, it takes a little while to continue to move that down, but we were pleased to see that down.

William Goodyear

Three quarters, Tobey, I think in a row, where it’s ticked down a bit.

Julie Howard

Yes, it has. In three quarters, we’ve ticked down each of those quarters, but we’ll start to see some progress there.

Tobey Sommer – SunTrust Robinson Humphrey

Great and, if you dissect that a little bit and look at the folks that are really bringing in the business for you, have you seen a comparable improvement among that smaller group?

Julie Howard

Of the folks that are bringing in the business for us? Yes, I mean I would say just overall, we’ve seen a nice downward trend in utilization. Remember, that group has a much, much lower attrition rate than, as you might recall from prior conversations, our attrition rate is driven by our junior professionals.

Tobey Sommer – SunTrust Robinson Humphrey

Right. Right.

Julie Howard

And that’s where you see most of the churn, and then some of that, as I’ve said before, I think is to be expected and consistent with kind of the generation, but in the senior levels, we don’t run nearly at high that level.

Tobey Sommer – SunTrust Robinson Humphrey

Okay and then I noticed that you were able to add some people, it looks like towards the end of the year, and kind of consistent with prior conversations we’ve had, I wanted to see if the hiring environment is getting even better for you to bring in seasoned people as well as junior consultants.

William Goodyear

Tobey, I’ll jump in and speak on behalf of all of us, that we have a number of conversations going. I’ve been part of some of them, and as had Julie and Bill and Sharon and Jeff, but I think collectively, we’ve got as many senior conversations going at various parts of the firm as I can remember, certainly in the last two, or couple of years, maybe three years.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much and then I just wanted to ask one last question and I’ll get back in the queue. Cash flow was very strong. DSO performance exceedingly so. As you look at opportunities out in front of you, are you being presented with opportunities and are they reflective of multiples that are attractive at this stage?

William Goodyear

That’s a good question, Tobey. We’re all getting ready to answer that one concurrently. Jeff Stoecklein is here, Julie is here, they’ll all open their mouth at the same time.

The answer is yes in terms of opportunities and I think the answer is yes in terms of multiples, although Jeff is not quite – do you give me a nod on that, Jeff, or not?

Jeffrey Stoecklein

The situations vary, but on the whole it’s a good time to reset expectations on multiples for sellers.

William Goodyear

Yes, and I think that there’s a sense that we’ve got a good platform here and that it might be in this chaos, you know, that it’s nice to have critical mass and size, and we can offer that to people.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you very much. I’ll get back in the queue.

Julie Howard

Thanks, Tobey.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you.

Operator

Our next question comes from David Gold of Sidoti. Your line is open.

David Gold – Sidoti

Hey, good afternoon.

Julie Howard

Hi, David.

William Goodyear

Hi, David.

David Gold – Sidoti

So I wanted to talk a little bit, if you can, on utilization pick-up in October, a couple of things there. If you can a sense of sort of what practices you see in that and then also what your sense if of why things, you know, sort of came back to normal so quickly.

William Goodyear

Well, you know, it’s interesting. I knew you were going to ask that question.

David Gold – Sidoti

How’s that?

William Goodyear

We have you down as the utilization man, so I would have been disappointed.

But I actually went back and looked at utilization across the company, and I don’t think there was a single practice that was not up and I’m fairly certain I can say that. I mean, now, look, three weeks does not a quarter make as we know, David, but...

Julie Howard

It’s a good trend.

William Goodyear

It’s a very good trend, and we were surprised ourselves at the trend in terms of, it hit quickly, and we thought all right, well, I think the first week was kind of a stub week and we said, "Oh, it’s not", and then the next week and then the next week. So, the answer to the question is, it’s been broad and I think consistent across the company and there we are. So that’s encouraging.

David Gold – Sidoti

Okay and then, Bill, also, you commented about $8 million of revenue that was dislocated at the end of the quarter. Do we think then sort of in there that that would be recaptured? When you say dislocated, I mean, is that deferred or delayed or cancelled?

William Goodyear

Well, in the first page of the press release, we said with events moving at hyper speed, client decision-making understandably slowed significantly with certain engagements delayed or postponed, and I would say or cancelled and you know, we don’t have cancelled in there, but we should say "or cancelled" relative to what we had expected.

So some of the cancellations have gone away. Some of the delays have actually auctioned and some of the engagements that we were working on but they hadn’t ramped like we thought they would ramp have ramped in the fourth quarter. So, and I think that’s about the way I would respond to that.

David Gold – Sidoti

Got you. Okay, that’s helpful. Thank you all.

Julie Howard

Thanks, David.

Operator

Thank you. Our next question comes from Dan Levine of Robert W. Baird. Your line is open.

Dan Levine – Robert W. Baird

Great, thank you. Just to follow up on the October utilization up tick. Give us a sense of historically in the fourth quarter how utilization has trended, and why, you know, some of the current trends make you feel better that you won’t see the kind of a typical weakness due to the holidays?

William Goodyear

Well, that’s a good question, and you’re not going to run 82 in December, because if you guys all pull your calendars out, as we have done, and both Christmas and New Year, I know Christmas is like on a Wednesday.

Julie Howard

Christmas and New Year’s are in the middle of two individual weeks this year.

William Goodyear

Yes, so December, you’re going to have to bale a lot of hay prior to that, you know, that holiday week. So the issue for us is, you know, the backlog looks very attractive. So the question is, can you convert the backlog, get it into revenue and get that done before you run into that last few days of December? Having said that, 82% in October is a good number.

Dan Levine – Robert W. Baird

Okay, great and then just a little bit on the energy business. I realize there’s a big utility portion there, but with oil pulling back to $65 and natural gas at, you know, $6.75, have your clients started talking about any changes they are thinking about making? Or are they kind of on the same path and if those prices persist for another quarter or two there may be some structural changes they may make?

William Goodyear

Well, I hope they’re not that short-sighted. I’ll let Mr. Dickenson comment on that.

William Dickenson

All right, thanks. Yes, we’ve had some discussions with investors, as well as owners of assets and the future assets are trying to install, especially energy efficiency or renewable-related equipment, and there’s been some change in some of the financing arrangements, I’ll put it that way, but for highly valued new assets, they appear to be pushing ahead even in the face of these lower benchmark oil prices.

Dan Levine – Robert W. Baird

Okay, great and then just on the bad debt side. You know, obviously, you had some specific customers where you needed to take write-offs. Was there also a dose of conservatism with financial services in general, just trying to get ahead of the curve, or are you still kind of exposed to specific clients and that’s how it is going to trend going forward if there’s specific events that trigger those?

William Goodyear

Well, I think that there’s a comment in here, I’m going to go back to the language, because my controller here is looking at me. On page 3, under balance sheet, the last sentence says, "It’s anticipated that allowance for doubtful accounts will return to historical levels in the fourth quarter, subject to further financial market disruptions or specific client circumstances."

Well, I mean, if you tell me that we’re going to yet again reshape the financial services industry, then we could have further disruption. Absent that, we like the way we’re provisioned and feel pretty good about it.

Julie was not making an idle comment when she said that we’ve put in a cash retainer policy. If somebody had told me that Friday when we went home that Lehman was going to be gone on Monday morning, I just simply wouldn’t have thought that possible, and in hindsight I wish we’d had a retainer on that, but we didn’t. So we’re being more conservative on retainers. We’re prepared in certain instances to lose business, because we just think we don’t want to take that risk.

Dan Levine – Robert W. Baird

And then just real quick, outside of financial services, have you seen any performances on payments from customers and other verticals that have either started extending or have started presenting any challenges?

William Goodyear

Well, not really. I mean, it’s been a fight, but if you look at our DSO, I think we’ve never been at the end of the third quarter, I don’t think we’ve ever been this low, you know. Usually you do make a big push at the end of the year. Dave, would you have a comment on that?

David Wartner

Seasonally we pop in the third quarter, if you look back the last few years in the middle of the year. At the end of the year, we’d expect to show some improvement in that area, but with the work that we’ve put into kind of driving a lot of the initiatives that we started on DSO improvement, we’re starting to see some results there. We’re kind of swimming upstream with the markets, too, given the environment.

William Dickenson

Yes, I know, but as you can see, we haven’t really been extended.

We are watching the healthcare space closely. One of the positives, I mean for Navigant is that our healthcare team is just having a great run, and there’s a lot of stress in that sector. So we have to obviously be careful in terms of payment, but we haven’t had any issues so far.

Dan Levine – Robert W. Baird

Great, thanks.

Operator

Thank you. Our next question is from Tim McHugh of William Blair & Company. Your line is open.

Tim McHugh – William Blair & Co.

Yes. I wanted to ask about you mentioned as part of the work that you’ve seen pick up in October and mentioned some of that is in the financial services industry. What type of assignments are really starting to ramp up at this point, and where’s the opportunity in the near term?

William Goodyear

Well, you know, Sharon, I don’t know if you want to comment on it. It’s a little hard from a confidentiality standpoint, but we can talk in generalities. Sharon, do you want to take a crack at that?

Sharon Siegel Voelzke

Yes. Yes. Sure, Bill. Can you hear me fine?

William Goodyear

Yes.

Sharon Siegel Voelzke

I would say that I’d like to bucket it as sort of financial risk management type work. So anything where we can kind of come in and help mitigate risk, whether that’s credit, pricing, valuations risk. We have seen recent assignments really giving us a nice opportunity to pull in experts from all over the company, whether it’s our economics practice, our dispute practice, to try and help our clients with a lot of these sorts of risk, credit and pricing type of work. So that’s pretty pervasive across the industry, and, Jeff, you can probably comment more on sort of the dispute side of the house.

William Goodyear

Yes, Jeff, why don’t you take a crack at this, too.

Jeff Green

Yes, well, I think you touched on it a little bit, Sharon, but we are feeling the built, the pent-up demand for the services of our dispute segment and our investigative practitioners. There’s been this bit of a pregnant pause as the industry reorganizes, as the regulators set their priorities, but as we enter into the fourth quarter, we’re seeing some of the pipeline that we’ve been building during the course of the year, and very significantly in the third quarter, start to make its way into our actual backlog and our billings.

And we’re seeing an even increased level of activity and interest on the part of our clients, primarily law firms and corporate legal departments. So as we enter the fourth quarter and focusing on the financial services industry, and more broadly the credit crunch, you know, we expect upticks in the demand for our discovery services practice, which are often the leading edge or the tip of the sword on regulatory investigations and complex litigation, as well as our white collar and accounting investigations practices and other mortgage-related litigation that draws on those skill sets that reside in our dispute segment, that reside in our economics segment, financial services, real estate and construction, our corporate finance and restructuring group. It’s an exciting time, and it’s an exciting time to be putting together all these pieces from across the firm.

Tim McHugh – William Blair & Co.

Okay, great and then the economics segment. You mentioned not to extrapolate the 99% utilization, but was there a large project there that made it I guess unusual, and if we shouldn’t extrapolate that utilization, should we assume revenue down, or are you adding people such that you can maintain that revenue level?

Julie Howard

That’s actually a very good question. The revenue for the third quarter was made up of several large assignments, many. So it wasn’t just one big assignment.

We did find that we weren’t able to hire and bring in all of the individuals that we thought we were going to do in the third quarter, so that’s part of the reason that you see such a high utilization rate, and I would expect that that utilization rate would trend down a bit in the fourth quarter, and that we will remain pretty solid from a revenue perspective in Q4. The practice continues to turn their pipeline into billable work as well.

It’s a variety of assignments, securities, litigation, and anti-trust. We had some labor assignments. We also had a number of collaborative work efforts with both of the dispute practice and with some of our financial services team members. We have also started to see some subprime opportunities as well.

William Goodyear

No, let’s just say, "Hey, it’s a home run." I’m good with 99%. I told the guys that that’s my new low mark, so we’ll see what happens.

Tim McHugh – William Blair & Co.

All right, well, that sounds good. Thank you.

Operator

Thank you. Our next question comes from Andrew Fones of UBS. Your line is open.

Andrew Fones – UBS

Yes, thank you. I had some follow up questions to Tim’s. Bill, you know, kind of given your background before you came to Navigant and perhaps, you know, that unique vantage that it gives you over what’s happening, how do you see things unfolding over the next six months, you know, from a kind of a timing standpoint?

We have the election here upon us, but kind of in one of your earlier comments, I think somebody said that we’re in a pregnant pause here. Kind of how do you see things playing out from here? Thanks.

William Goodyear

Well, Andrew, this observation is probably worth what I’m going to charge you for it, but first of all, we’re going to have reregulation in the financial services and probably the insurance industry that will make everything between now and the New Deal look small. So I think we’re going to have reregulation that we just haven’t seen since the ‘30s and I would extend big regulation impact actually into healthcare and energy too, with change of administrations, which I think it’s fair to say we all expect at this point. So I think reregulation would be the first comment I would make.

The second comment I would make, and Jeff Green just touched on it earlier, is there’s going to be a searing blowback here on management and directors of financial institutions, right or wrong and we’ve seen Attorney General Cuomo coming out yesterday and subpoenaing to get the list of everybody in the nine major institutions that took the government’s money on compensation – everybody over $250,000. My comment to Julie Howard when I saw her this morning, "That’s going to be a long list."

So I think the search for the, you know, the blame sort of thing, Congress is going to come back from this election break and we’re going to get new regulators, and it’s going to be a big deal and I think hopefully it doesn’t get too far off track. That would be my second comment.

Concurrent with that comment, though, is that Navigant’s white collar defense capabilities are the gold standard in the industry. So I think our team is going to be extremely valuable to many boards and many management teams that need rational defense on these investigations and we’ve told Mike Malone, who sits with Jeff Green, and Bill in D.C and then our team in New York, I mean, we already are getting traction, but it’s going to be a huge, a huge deal.

Then the next phase on this thing is going to be, and they’re already starting, and when we release our update on what we used to call the subprime report, now we’re calling it the credit chaos report, but the next phase on this will be all of the lawsuits and litigations on what we call the share price lawsuits and those started actually the second half of September. It just took off like a rocket ship and if you look at every major institution that hasn’t actually gone broke, stocks are down at least 50%.

So I would see that playing out. So that’s why we think that we’re more valuable as a company today than we were six months ago.

Andrew Fones – UBS

Thanks. That was a great overview. Just to kind of follow up on that question, in terms of what you’re seeing in terms of pipeline, things that you’re now kind of looking and being asked to bid on, you know, what differences do you see between kind of where you see things going and what you’re currently seeing in terms of pipeline? You know, what areas do you think are yet to come and what areas are you already starting to see some traction in terms of things in the pipeline?

William Goodyear

Well, we’re seeing, I think referencing what Jeff and Sharon said, we’re seeing some early traction on the white collar defense work, and we’re seeing early engagements in the discovery practice where you have to capture all of the data and prepare it for analysis and those are, if I recall, we had three of those that hit this week and so, we’re in the early, early stages of these things. So I find that to be very exciting.

The valuation work that we’re doing in the firm has really taken off, and our valuation team is very, very busy and the capabilities that the Chicago partners, now our economic practice bring is I think very, very exciting for us, because one of the things that’s going to have to happen here in these cases as they mature is people are going to have to unwind these arrangements and these entanglements from a counterparty standpoint and put values on things.

You know, I think we’re probably best in class in our capabilities of being able to do that. That’s to come.

Now I’m going to throw one more thing out there, because it’s coming, and that is the – you know, we’ve talked in the past about what’s the next big opportunity. The impact that this market turmoil has had on pension funds has been really significant, and it really hasn’t been focused upon and I’m talking about pension plans in publicly traded companies, but also in all of the governmental entities and there’s going to be hell to pay when these statements come out, and there will be investigations.

And I think that’s probably a second half ‘09, maybe early ‘10, but that is definitely out there, big time. John Gary in our New York office, he’s been saying, "Bill, just mark it down, the pension thing is going to come, I’m not sure when." I don’t know if John’s here today. I think he was off on an assignment, but I think he’s close to being right on that.

Andrew Fones – UBS

Thanks. That was great. Thank you very much.

Operator

Thank you. Our next question is from Joseph Foresi of Janney Montgomery Scott.

Joseph Foresi – Janney Montgomery Scott

I wanted to ask you, I know you talked about this pause, and it seemed like it was kind of widespread. What caused the pause? I mean, outside the companies that we going through obvious turmoils. Were people hesitant to start engagements because they were protecting their balance sheet? What particularly, what would you point to as being the cause of that pause?

William Goodyear

Well, it wouldn’t be protecting the balance sheet. Let’s just take a specific example. We had a couple of engagements with Wachovia that were under way, and just think back about September. Wachovia didn’t know whether CitiCorp was going to buy them, and then Wells came in after they orchestrated the first deal, and whatever Navigant wanted to do or was doing for Wachovia wasn’t particularly a high priority for about three or four weeks in September. So it’s those kinds of things.

Jeff, I don’t know if you’d want to provide any more color on that?

Jeff Green

Well, I think that’s fair. I would summarize it by saying, you know, probably no two instances are alike. If I can identify some categories, one would be just funding for a particular project getting put at risk. I think about that in the context of some of the work done out of our construction practice, where some of our buyers were under funding constraints.

We were involved in regulatory investigations of various sorts, and because of the shifting priorities of the regulators, the needs of the investigation changed or were slowed down and you know, the urgency for our clients was slowed down. So that would be a bucket.

Another bucket would be, as Bill pointed out earlier, you know, there’s a reorganization going on in the financial services industry, and I can think of a couple of our clients that were active early on in the quarter that essentially put our assignment on hold as they thought about what their future was going to hold, whether they would actually be a living, breathing entity, whether they were going to be acquired, you know, what form they were going to existing in going forward.

So it’s those sort of things, and then some of our other clients are big, complex entities that may be on a consolidating end of the industry, and again the people we interact with and our law firm clients interact with were just frankly distracted and again, the shifting priorities as they’re dealing with the rapidly shifting sands of the regulatory and the economic environment caused them to slow down our efforts.

Joseph Foresi – Janney Montgomery Scott

And just judging by utilization, is it safe to say that they’ve now refocused? Are you seeing a refocus in the last month and a half?

William Goodyear

Yes.

Joseph Foresi – Janney Montgomery Scott

And then it just sounds like the bad debt amount obviously was reverting back to where it was last quarter. Should we take that to mean that you guys are saying that maybe not all the bad news is gone, but that, you know, some of the rocky pieces of business that you were worried about have settled down in your opinion, going into this quarter.

William Goodyear

Well, yes, I think that’s fair. Let me read my statement one more time, "subject to further market disruptions or specific client circumstances."

But absent that, we think we’re going to get back to our historical run rates. I wish I had put my subject two on those 90 days ago, but I didn’t anticipate all this chaos. Oh, we did in the queue? Good. Okay, thank you.

Joseph Foresi – Janney Montgomery Scott

And then just one last question, looking into ‘09. I wonder if you could give us some rough quantification or even just some rough parameters or perhaps goal posts on maybe what part of the business you think could potentially be stressed from a discretionary standpoint, and maybe what you’re expecting to pick up in the dispute litigation side?

William Goodyear

Well, I would guess we’re in the mid-point of our ‘09 view, is that fair, Julie?

Julie Howard

That’s fair.

William Goodyear

So I’m not really going to comment about ‘09. I’m just worried about next week right now. So if we look at discretionary spent, I don’t think we have any – if there’s a discretionary spend assignment left at Navigant, I’m not sure I could put my finger on it.

And we’re focused on, Scott Pecks also leads our business development team, and I was on the call with the team this week and I can tell you that they’re totally focused on what issues do the clients have to deal with now as opposed to the nice to deal with later. So, you know, what we’re focused on right now are the real critical sorts of issues.

So, I’m not too worried about discretionary spend. Now, I wish I had been more worried about it a year ago, but we didn’t see this chaos coming.

Joseph Foresi – Janney Montgomery Scott

Thank you.

Operator

Thank you. Our next question is from Kevane Wong of JMP Securities. Your line is open.

Kevane Wong – JMP Securities

Hi, good afternoon, guys. Just sort of a follow-up to Tim’s earlier question, looking at Chicago Partners. Obviously utilization was great, you addressed that. The bill rate also was up sequentially. Is that something permanent, or was that up because of, you know, projects that had a little more time sensitivity and so you were able to bill more?

Julie Howard

That was up because we had more senior people billing, because we hadn’t done all of the recruiting that we had hoped to in the third quarter. So again, I wouldn’t take 99% and the bill rate continuing its tick-up as the normal, other than to say that the practice is performing very well. We hope to continue to see that happen in the fourth quarter, but those are not normal run rates.

Kevane Wong – JMP Securities

Got you. It’d be nice though, right? Also then, looking at the G&A, it was $41.4 million, really not much above 2Q levels, and within that you’re saying with the $5 million sort of extra on doubtful accounts. If we take that out, you know, it’d look like more like $36.5 million as far as the G&A level. Is that a proper level to use sort of as a base line going forward as you grow the business off of that, or would that be looking at that incorrectly?

Julie Howard

No, I think that is a very reasonable level to consider for the business going forward, you know, subject to, if just like whenever you make a significant acquisition, you’re going to have to add your real estate footprint, et cetera, et cetera, but outside of that, that would be our normal run rate.

Kevane Wong – JMP Securities

Fantastic and then lastly, and I’ll let someone else jump on. One of the things you talked about as far as giving you confidence in 4Q, you mentioned, you know, the backlogs looking excellent. What is sort of the risk of some of those things being pushed off?

Obviously, there have been a lot of contracts in general in this space, where even though it might be something vital or considered acquired, people and clients have been finding ways to try to push those things off and delay them. How much confidence do you have on that backlog, that there won’t be delays or other issues that could sort of push those out a little farther than you expect?

William Goodyear

Well, I think that’s a very good question, and I guess the way I’d answer it is first of all, it’s really great to have the backlog, you know, regardless of when you’re going to be able to convert it.

Secondly, I think a significant amount of that has some implicit, sort of we’d like to get it done sooner as opposed to later, part of it, but there’s, you know, in this world that we’re living in, let’s be honest, these are tumultuous times, so some of that could get shoved out into the first quarter next year and we’ve given it our best judgment when we put that north of $200 million revenue number on the table. That’s our judgment. There’s not a lot of discretionary stuff left in there, but there could be some, you know, let’s push it out a little bit. That’s a fair question.

Kevane Wong – JMP Securities

Got you, perfect. Thanks, guys. Appreciate it.

Operator

Thank you. Our next question is from Rob Young of WM Smith & Company.

Rob Young – WM Smith & Co.

Hi, good morning. Or good afternoon. I was just hoping if you could talk a little bit about the acquisition pipeline that you talked about a little bit earlier in the call as far as capital deployment. Is there a priority between internationally or domestic use of it?

William Goodyear

Well, the priority is that we want to build around our core competencies, and there are some things that we’re looking at in the health care arena as an example. We’ve looked in the last quarter at some energy things which I don’t think are going to come to fruition. I wouldn’t – and we did look at some things in London, but I don’t think those are probably going to come to fruition.

So I wouldn’t prioritize it other than to say the highest return on capital, assuming it gets within the business model, is going to get the call and I don’t see significant things in the fourth quarter, you know, subject to these are interesting times and we’ve got some capacity.

Rob Young – WM Smith & Co.

Okay and then on a couple of the other industry calls, there’s been some mention that a lot of the headlines that we’re seeing in the news have not really come through that litigious pipeline and I was just wondering if you’re seeing similar things, or if you’re seeing something differently.

William Goodyear

Well, you know, our backlog is up and we started the quarter strongly. I think that we may have a little different view and may be positioned a little differently than our competitors. You know, we kind of get lumped all together, but we have very different practices, as you know, and our domain expertise that we’ve staked out, I think appropriately, is our competencies in a variety or really unique skill sets that are brought to bear on these issues that are front and center in the economy right now. So I think we may benefit when others might not.

I really can’t speak to that. I can tell you that we in the third quarter, we brought in triple the number of financial kind of subprime credit sorts of engagements that we did in the first quarter of this year. So notwithstanding all of the turmoil and chaos now, we didn’t necessarily bill a lot on some of those engagements, but you know, we signed them up. So I think it’s happening and we’re definitely feeling it.

Rob Young – WM Smith & Co.

Okay and then on the sequential drop in utilization, it looks like you went from 79 to 76, how much of that do you think is attributable to new hires versus just a slowdown in the economy and clients pushing back consulting services?

William Goodyear

Well, I would say kind of 50/50.

Julie Howard

You know, the seasonality that we have from Q2 to Q3 as it relates to holidays, vacations, the fact that we on-board so many of our young professionals, and then clearly, you know, slowdown-related to this intermediation in the market. I’d say it’s about 50/50 between general, regular business model issues that we have every summer, seasonality and new young people, versus the impact of the market.

Rob Young – WM Smith & Co.

Okay, great. That’s all I have. Thank you.

Julie Howard

Thanks.

William Goodyear

Okay, it’s five o’clock, are we?

Julie Howard

Four more questions.

William Goodyear

Four more questions, okay.

Julie Howard

We can keep going.

Operator

Thank you. Our next question is from Michel Morin of Merrill Lynch. Your line is open.

Michel Morin – Merrill Lynch

Hi, good afternoon. I’ll keep it quick. I was just wondering when you look at your backlog, where’s the new activity coming from? Is it coming from current existing clients or are you reaching new clients? And then when you look at the backlog, is there someone there who has the potential of becoming a 5% of revenue type of engagement or client? Thanks.

William Goodyear

I really wish we had one of those, but I can’t honestly say that I can see that one right now, sorry, on the 5%.

The backlog, the nice move on backlog in the last three or four months has been in the not surprisingly has been in the energy, healthcare, and more recently in the dispute sort of economic consulting areas. So it’s been fairly broad based, but it’s not surprising as to where it shows up. I think the most encouraging thing is that financial services and insurance services did not decline, and that helps so that you’re not offsetting one with the other.

Now I’m trying to remember if there was another piece to that question.

Michel Morin – Merrill Lynch

Well, it was just in terms of the actual clients, is it still primarily via your law firms that the business is coming from? Where is the business-enrichment?

William Goodyear

Oh, yes. It was the new versus; historically, and I mean historically the last couple of years, 80% to 85% of our new business incremental engagements comes from our historical customer base and about 15% is what we call new-new. So you get new-old, and that’s 80% to 85%, and then new-new, and that’s about 15%. Depending upon which channel you’re in, I mean in the dispute practice the law firms are – Jeff, what percentage would law firms be in the dispute channel?

Jeff Green

It’s probably in the 80% percent range.

William Goodyear

Yes, and then Sharon, on the advisory side, it would be much smaller than that?

Sharon Siegel Voelzke

Correct. Much smaller, yes.

William Goodyear

So it kind of depends on what part of the company you’re in.

Michel Morin – Merrill Lynch

Right, and then the 85% that you alluded to, that’s been stable and there’s, as you look out to 2009 and to the pipeline that’s potentially out there, is that a number that should change or you expect that to stay pretty similar?

William Goodyear

I think it’s pretty stable. I mean, if it wasn’t, budgeting would be pretty scary, wouldn’t it, because our duration is not that long, but we know that our client base generates a certain amount of revenue year in and year out for us, so that’s comforting.

I would like to see it move down. I mean, I would like to see the new-new actually increase a bit, because you know, that means you’re expanding your customer base, but it’s moved up a bit, but not real materially over the last couple of years.

Michel Morin – Merrill Lynch

Right. Thanks very much.

Operator

Thank you. Our next question comes from (inaudible). Your line is open.

Unidentified Analyst

Good afternoon.

William Goodyear

Hi, George.

Unidentified Analyst

This is Vijay calling for George Sutton. Could you provide an update on the banking initiative you had mentioned on the last call?

William Goodyear

That’s a good question. The banking initiative is on pause and let me explain that comment.

Unidentified Analyst

Okay.

William Goodyear

With the TARP initiative and the $700 billion allocated, and then the sub-allocation within that originally was to buy the bad assets from the banks and then it turned out within five business days to be for investment in the banks. That clearly has had a very, very stabilizing impact, and hopefully it will continue to have a stabilizing impact certainly for the major institutions and we saw this week the next round of investments, the next level down from a size standpoint.

So, as we watch that evolve, we are assessing what that means in terms of the bank initiative. There still is going to be a significant opportunity to work with the FDIC, but it may be a different kind of opportunity and may be targeted to a different size of institution.

Jeff Green has been interacting with the FDIC. Jeff, I don’t know if you’d want to add any to that?

Jeff Green

I don’t know that I have much to add, other than to say that we have been interacting with them quite a bit. As you know, the statistics on bank, FDIC and short bank failures were widely publicized, and I think probably three months ago we all would have guessed that there would have been more notable bank failures that we would be including in that list by now.

But as Bill pointed out, you know, the TARP initiative has had a stabilizing effect, and we and others wait patiently to get a sense for how the rest of the industry is going to fall out and what the needs of the FDIC are going to be, but our history with the FDIC, with the OTS, RTC and other banking regulatory agencies is long, and we’ve provided a broad range of skills to them in the past, both in terms of investigative and resolution assistance related services. So we’re well poised to assist when the needs are called for.

Unidentified Analyst

Okay. I guess most of my other questions are already answered, so thanks a lot.

William Goodyear

Thank you.

Operator

Thank you. Our final question for the conference will come from Tobey Sommer of SunTrust Robinson Humphrey. Your line is open.

Tobey Sommer – SunTrust Robinson Humphrey

Thank you, my question was answered as well.

William Goodyear

Okay, thanks everyone. Let’s have a good fourth quarter and we’ll see you after the New Year.

Operator

Thank you for participating in today’s conference. At this time all parties may disconnect.

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Source: Navigant Consulting, Inc. Q3 2008 Earnings Call Transcript
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