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Resources Connection, Inc. (NASDAQ:RECN)

F4Q09 Earnings Call

July 15, 2009 5:00 pm ET

Executives

Kate W. Duchene – Chief Legal Officer, Executive Vice President Human Relations & Assistant Secretary

Thomas D. Christopoul – President, Chief Executive Officer & Director

Donald B. Murray – Executive Chairman of the Board

Nathan W. Franke – Chief Financial Officer & Executive Vice President

Anthony Cherbak – Executive Vice President Operations

Karen M. Ferguson – Executive Vice President, President North American Operations & Director

Analysts

Jim Janesky – Stifel Nicolaus & Company, Inc.

Sara Gubins – Bank of America

Scott Schneeberger – Oppenheimer

Andrew Steinerman – JP Morgan Securities

Kevin McVeigh – Credit Suisse

Paul Ginocchio – Deutsche Bank Securities

Gary Bisbee – Barclays Capital

Mark Marcon – Robert W. Baird & Co.

Timothy McHugh – William Blair & Company

Operator

Welcome everyone to the Resources Global Professional’s fourth quarter fiscal year 2009 earnings result conference call. Today’s call is being recorded. At this time for opening remarks and introductions I would like to turn the conference over to the Chief Legal Officer Ms. Kate Duchene.

Kate W. Duchene

During this call we will be providing you with comments on our results for the fourth quarter of fiscal year 2009. By now you should have a copy of today’s press release. If you need a copy and are unable to access one via our website please call Patricia Marquez at 714-430-6314 and she’ll be happy to fax a copy to you.

Before introducing Tom I would like to read an important announcement about statements that we may make during this call. Specifically, we may make forward-looking statements, in other words statements regarding future events or future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially.

We refer you to our 10K report for the year ended May 31, 2008 for a discussion of some of the risks, uncertainties and other factors such as seasonal and economic conditions which may cause our business result of operations and financial condition to differ materially from results of operations and financial conditions expressed or implied by forward-looking statements made during this call.

I’ll now turn the call over to Tom Christopoul, President and Chief Executive Officer.

Thomas D. Christopoul

Welcome to the Resources Global fourth quarter conference call. Joining me today on the call are Don Murray and members of our senior leadership team Nate Franke; Kate who you just heard from; Tony; and Karen Ferguson. Let me begin by giving you a brief overview of our fourth quarter operating results.

Total revenues for the fourth quarter of fiscal 2009 were $132 million, a sequential decline of $24 million from our third quarter revenues of $156 million or 15.4%. For the quarter we recorded a GAAP net loss of $6.3 million or $0.14 per share which includes a pretax charge of $3.6 million for office consolidation and severance costs which we discussed with you on our last call and a non-cash charge of $3.5 million related to deferred tax assets of certain of our foreign subsidiaries. In aggregate, these charges totaled $5.6 million on an after tax basis or $0.13 per share. Without these charges, we were essentially breakeven for the quarter with income from operations totaling $539,000.

Fourth quarter gross margin was 38.2% compared to 39.4% a year ago. The 120 basis point decrease in gross margins is primarily due to the deleveraging of certain consultant benefit costs over a lower revenue base. Excluding the $3.6 million charge for office consolidation and severance costs, our SG&A costs declined $3.5 million or 6.9% sequentially to $47.3 million for the quarter. Nate will provide more details on each of these areas later in the call.

I’d like to take a moment now to discuss recent revenues trends. The significant rate of weekly revenue deceleration experienced in our third quarter where we saw revenues go from $14.4 million at the beginning of the third quarter to $11.2 million at the end moderated during the fourth quarter. As we previously discussed, revenue during the first five weeks of the fourth quarter averaged around $11 million. For the remainder of the quarter non-holiday weekly revenue averaged approximately $10 million falling in a tighter band of $9.6 to $10.4 million per week.

Revenue trends for the first five weeks of the first fiscal quarter of this fiscal year 2010, continued to stabilize as weekly revenues have ranged from $9.6 to $9.8 million per week excluding the holiday week of July 4th. Based on recent discussions with our clients, we believe the continued thawing of the credits market and stabilization of global equity markets are beginning to allow corporate executives to focus on business initiatives other than maintaining liquidity or pursuing cost reduction efforts.

Additionally, while many analyst describe recent economic data such as unemployment as less bad, other forward-looking economic data such as certain manufacturing indices and purchasing managers index correlate to the improving tone of the discussions we are having with our clients. While these discussions are encouraging, they have not yet resulted in improved weekly revenue. However, we believe that over time our clients will begin to execute against these internal initiatives currently being deferred as the business climate becomes more certain. Until then, we will continue to focus virtually all of our efforts on business development.

We have found our clients and prospects very willing to meet with us regardless of whether they have immediate needs as they are anxious to hear what we are seeing in the market place and get our thoughts on their business issues. We continue to push the concept of shift share, that is shifting a greater share of our client’s overall consulting spend to resources. We believe our value proposition which combines superior consulting talent with a lower bill rate structure provides a compelling incentive to companies with critical initiatives to shift consulting spend from higher cost service providers to Resources. Against the back drop of lower overall consulting spend, we continue to see progress in this area.

Let me share a couple of recent examples with you; in June we were engaged by a global financial services company to assist them with their business transformation efforts. Initial projects including improving and streamlining their global financial reporting process and a development of standalone carve out financial statements for certain subsidiaries. Consultants from offices in the US, Europe and Asia are participating in these projects.

Also in June, we were engaged by a handful of companies to begin early stage IFRS implementation projects. While each of these projects are small, they reflect the fact that CFOs at this company are beginning to think about these new standards and the potential impact they will have on their business and their financial statements. We also recently won an engagement with a large US federal government entity to assist with their efforts to comply with Sarbanes-Oxley. This project is exciting for us as it represents our first large scale project with a US government organization.

In winning these new engagements, our clients told us that our global footprint and our ability to deploy various experienced high quality consultants at competitive hourly rates were critical decision making factors in winning the work. We continue to believe that these attributes will be key drivers to our future success as the global economy improves.

We talk frequently about the benefits of our business model in which approximately 70% of our cash costs are variable which in turn self regulate the cost of our revenue even when revenue levels become volatile. The resiliency of our business model has allowed us to build cash in each quarter of fiscal 2009 even though total revenues declined 16.9% from fiscal 2008. In fact, we have generated approximately $66.3 million in cash from operations for fiscal 2009 and ended the year with approximately $163.7 million of cash and short term investments with no debt on our balance sheet.

Our ability to build cash in what has been the most challenging year in our company’s history not only insulates us from the vagaries of the capital markets but allows us the flexibility to return cash to shareholders through our stock repurchase program as well as considering other strategic investments as they present themselves. As an example, in the fourth quarter we purchased the consulting business of Xperianz in Cincinnati. While this is a relatively small transaction, it afforded us the opportunity to expand our service presence in the Ohio Valley market place.

In addition, we continued our stock repurchase program with the purchase of 72,300 of our shares in the open market. We will continue to build and deploy capital in the best interest of our shareholders. With that, I will now turn the call over to Nate for a detailed review of the financial results.

Nathan W. Franke

As Tom mentioned, revenues for the quarter were $132 million versus $236.7 million in the fourth quarter a year ago. As you recall, our fiscal 2008 fourth quarter consisted of 14 weeks while our 2009 fourth quarter consisted of 13 weeks. Revenue during this extra week in fiscal ’08 was $15.1 million with 64% in the US and 36% internationally. After adjusting for the extra week, the quarter-over-quarter revenue decrease was 40.4%. On a sequential basis, fourth quarter revenue declined 15.4%. On a constant currency basis the quarter-over-quarter decrease was 37.4% and the sequential quarterly decrease was 15.3%. For the 2009 fiscal year, revenues were $685.6 million versus $840.3 million in fiscal ’08 representing a decrease of 16.9% after adjusting for the extra week in fiscal 2008.

While Tony will discuss our international operations in depth, let me discuss some highlights of our revenues geographically. For the fourth quarter revenues in the US were $96.2 million, a decrease of 39.5% quarter-over-quarter after adjusting for the extra week in the fourth quarter of fiscal ’08. On a sequential basis, US revenue decreased 13.9%. For the fourth quarter, total revenues internationally were $35.8 million versus $68.2 million a year ago, a decrease of 43% after adjusting for the extra week in the prior year fourth quarter. On a sequential basis, international revenues decreased 19.2%. International revenues accounted for approximately 27% of total revenues for the quarter versus 28% last quarter.

After adjusting for the extra week in the prior year’s fourth quarter, Europe’s fourth quarter revenue decreased 42% quarter-over-quarter and 18.6% sequentially while the Asia pacific regions saw fourth quarter revenues decrease 45% quarter-over-quarter and 16.5% sequentially. As you are aware, during the fourth quarter of 2009 the US dollar remained volatile against several foreign currencies but strengthened during the later portion of the fourth quarter. On a constant currency basis, the quarter-over-quarter percentage decrease in international revenues was 32.1%.

Let me now discuss early revenue trends for the first quarter of fiscal 2010. Weekly revenues for the first four weeks of the first quarter were $9.7 million, $9.8 million, $9.7 million and $9.6 million and for the fifth week which included the July 4th holiday in the US, revenue was $8.4 million. In light of the weekly revenue volatility we have experienced over the past two quarters, we will not extrapolate these weekly amounts to the quarter as a whole. Please remember, our first quarter is typically impacted by vacations taken by consultants in the US and Europe typically beginning in July.

Now, let me discuss gross margins. Gross margin for the fourth quarter was 38.2% compared to 39.4% a year ago and 37.2% in our third quarter. Excluding reimbursable expenses, our fourth quarter gross margin was 38.9% which compares to 40.4% in the fourth quarter a year ago. The primary driver of the gross margin decrease from a year ago is the deleveraging of certain consultant benefit costs primarily healthcare costs over the lower Q4 revenue.

The average billing rate for the fourth quarter was approximately $128 per hour and represents a 4.5% decrease from approximately $134 a year ago. The average pay rate for the fourth quarter was approximately $65 which represents a 4.4% decrease from approximately $68 a year ago. Please remember these hourly rates are derived based upon prevailing exchange rates during each given period.

We remain focused on working to maintain our gross margin at 40% excluding the impact of reimbursable expenses. However, our gross margins in the near term may continue to be impacted by reduced leverage of certain benefit costs in light of the current revenue base. For the fourth quarter gross margin in the US was 39.9% and our international gross margin was 33.9%. Our consolidated gross margin for fiscal 2009 was 38.4% versus 38.3% in fiscal ’08.

Now to headcount, for the fourth quarter the average consultant FTE count was 2,104. This compares to 2,513 in the previous quarter and 3,220 in the year ago quarter. Quarter end consultant headcount was 2,065 versus 3,490 a year ago. The total headcount of the company was 2,852 at quarter end. In comparison to the fourth quarter a year ago, non-consultant headcount has decreased by approximately 10%.

Now, to the other components of our fourth quarter financial results; excluding a charge of $3.6 million related to lease abandonment and severance costs, total selling, general and administrative expenses including stock compensation for the fourth quarter were $47.3 million or 35.8% of revenue, a sequential reduction of $3.5 million when compared to SG&A cost of $50.8 million or 32.6% of revenue in the third quarter of fiscal 2009. SG&A was $61.8 million or 26.1% of revenue in the fourth quarter of fiscal 2008. The sequential improvement in SG&A stems from reductions in all expense categories.

Stock compensation expense was $4 million or 3% of total revenues versus $5.1 million or 2.1% of total revenue in the fourth quarter of fiscal 2008. We would anticipate quarterly stock compensation expense to approximately $4 million in the upcoming quarters. As we previously discussed, during the fourth quarter we consolidated seven of our offices into nearby larger market practices. In conjunction with this activity and other personnel actions, we recorded a charge during the fourth quarter of approximately $3.6 million or $0.05 per share on an after tax basis.

We expect these actions combined with those undertaken in the third quarter will reduce SG&A costs on an annualized basis by approximately $12 million. Approximately $1.5 million of which was realized in our fourth quarter. At the end of the fourth quarter our office count was 82; 52 domestic and 30 international.

Related to other components of our financial statements; depreciation and amortization was $2.6 million for the quarter, down slightly from $2.9 million over last year’s fourth quarter. Based upon our current asset base, we would expect similar levels of depreciation and amortization expense in the upcoming quarters. Interest income decreased by about 50% to $239,000 in the fourth quarter versus $480,000 a year ago. Interest income decreased due to lower average interest rates earned on our invested cash in the fourth quarter of fiscal 2009.

As Tom discussed earlier, during the fourth quarter we recorded tax charges aggregating $3.5 million. Accounting standards related to income taxes generally require valuation allowances to be recorded against deferred tax assets in tax jurisdictions in which three years of cumulative losses have been experienced. Consequently, during the fourth quarter we recorded a valuation allowance totaling $2.4 million against deferred tax assets associated with our operations in Belgium, Ireland and Singapore.

For tax purposes, each of these tax jurisdictions allows these deferred tax assets to be carried forward indefinitely. Additionally, to meet corporate capitalization requirements in France in a cash efficient manner, intercompany debt to our French subsidiary was forgiven. This debt forgiveness reduced our tax loss carry forwards in France resulting in a tax charge of $1.1 million.

Despite our GAAP loss, we generated $18.7 million in operating cash flow during the quarter and our adjusted EBITDA or cash flow margin which we defined as EBITDA before stock compensation was 2.6% in the fourth quarter compared to 15.4% a year ago and 7.3% in the third quarter of fiscal ’09. For fiscal 2009 our cash flow margin was 9.8% versus 13.9% in fiscal 2008. The GAAP loss for the quarter was $6.3 million or $0.14 per share versus earnings of $15.9 million or $0.35 per diluted share a year ago.

In the fourth quarter the non-cash after tax charge for stock compensation was $0.06 per share versus $0.09 per share in the comparable quarter a year ago. Additionally, the after tax per share impact of the Q4 restructuring activities was $0.05 per share and the deferred tax asset charge was $0.08 per share. For fiscal 2009 earnings were $17.8 million or $0.39 per share versus $49.2 million or $1.03 per share in fiscal 2008.

As a result of recording the valuation allowance, the French intercompany debt forgiveness and to a lesser extent the impact of incentive stock options and other permanent differences, our GAAP tax rate was 120% for the quarter versus 45.1% in the comparable quarter a year ago. We estimate our tax rate before the impact of stock compensation will approximate 41.5% for fiscal 2010. This rate reflects foreign taxes and the relative impact of non-deductable expenses on lower pre-tax earnings.

Now, let me turn to our balance sheet. Cash and investments at the end of the fourth quarter were about $163.7 million, a $56.9 million increase from the end of fiscal 2008. During fiscal 2009 we generated approximately $66.3 million in cash flow from operations. During fiscal 2009 we purchased about 785,000 shares of our stock for approximately $12.3 million for an average price of $15.73 per share. Our current board authorization for our stock buyback program has approximately $35.6 million remaining. We will continue to assess additional share repurchase maintaining a balance between the capital requirements of growing our business and fiscal prudence.

We believe the strength of our balance sheet offers us a significant competitive advantage. Our shares outstanding at the end of the fourth quarter were approximately 45.1 million. Receivables at quarter end were approximately $68.2 million, down about $15.9 million from the previous quarter. Days of revenue outstanding were approximately 52 days, up five days from the prior year’s comparable and two days higher than the third quarter of fiscal ’09. We believe the increase from Q3 stems from the Memorial Day holiday falling during the last week of the fourth quarter.

Now, Tony will add some additional comments about our international operations and significant clients.

Anthony Cherbak

I’d like to take a moment and provide a bit of more detail on our international operations. Please remember that all comparable period amounts are adjusted for the 14th week of Q4 2008. Total revenues for the Netherlands practice in Q4 were $14.5 million, down 40% quarter-over-quarter and 18% sequentially. On a constant currency basis, the quarter-over-quarter decrease was 30%.

UK revenues were down 61% quarter-over-quarter and 16% sequentially. On a constant currency basis the quarter-over-quarter decrease was 48%. Revenue in our Asia Pacific region declined 45% over the comparable quarter last year and 17% sequentially. On a constant currency basis the quarter-over-quarter decline was 48%.

The last half of fiscal 2009 has been exceptionally tough for our international businesses. For the year, our international revenues declined by 11.4% in aggregate or 10.3% on a constant currency basis. Europe and Asia Pacific did not feel the effects of the worldwide recession as early as we did in the United States but have clearly felt the impact of severe cost containment activities of our US based multinational companies operating in their respective geographies over the last six months.

In addition, weakness in the Euro, Pound and Nordic currencies against the dollar throughout fiscal 2009 contributed to the overall revenue decline in our international operations. As Nate mentioned earlier, in our fourth quarter we recorded a $3.5 million non-cash charge related to the deferred tax assets of our businesses in Belgium, Ireland, Singapore and France. The non-cash tax charges required by generally accepted accounting principles in no way reflect any lack of confidence or commitment to those businesses over the long term.

Our international foot print is integral to our ability to offer a multinational client seamless professional services anywhere they do business and is a strategic advantage when competing for large and complex projects around the world. We believe we currently have the right managing directors in place to build our businesses in those geographies.

Let me shift the discussion for a moment to our clients. In fiscal 2009 we had 293 clients for whom we provided services exceeding $500,000 in fees, down 13.8% from 340 clients at that fee level in 2008. A total of 133 of those clients had fees in excess of $1 million for the year. Our top 50 clients represented 36% of our total revenues while 50% of our revenues came from 113 clients. Our business with financial services companies decreased 23% year-over-year. While demand from these clients have decreased from a year ago, we continue to enjoy significant client relationships in the financial services sector, 34 of which exceeded $1 million in revenue for the year.

Our largest client for the quarter was approximately 3% of revenues. Our client continuity continues to be outstanding. During fiscal 2009 we served all of our top 50 clients from fiscal years 2008 and 2007. Our loyal client following is reflective of our client service approach and the quality of the work performed by our consultants. Through the fourth quarter, all of our top 50 clients have used more than one service line and 80% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of the relationships that we have within our client’s organizations.

I’d like to now turn the call back to Tom.

Thomas D. Christopoul

That concludes our prepared remarks and we’re happy to answer any questions that you have at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Jim Janesky – Stifel Nicolaus & Company, Inc.

Jim Janesky – Stifel Nicolaus & Company, Inc.

A couple of questions, when you look at historic patterns of activity with respect to vacations, so for example between the fourth and the fifth week of the quarter which includes the 4th of July revenues dropped on an order of magnitude of about 12%. What percent continues throughout the rest of the quarter due to vacations by your experience?

Thomas D. Christopoul

Jim I would probably say on average and this goes back a period of years, that can range anywhere from 5% to 8%. Obviously, during the 4th of July week you actually have a holiday so that makes that number a little greater. But, that percentage can vary kind of week-to-week and also change kind of country-by-country but I think that’s a reasonable range.

Jim Janesky – Stifel Nicolaus & Company, Inc.

Tony, on the international arenas, as you pointed out the international declines or eventual increases somewhat lag the US, do you think that we should expect that the international markets will continue to be weaker than the US markets at least for the next three to six months?

Anthony Cherbak

For the next quarter I would say that you’re going to continue to see some weakness. I think that in talking to our folks in Europe they believe that they will start to see some pick up in the fall but clearly during their prime holiday season which Nate mentioned was July and August, we will continue to see some weakness. But again, we expect better results as we get in to the fall months.

Jim Janesky – Stifel Nicolaus & Company, Inc.

Last question is you and other companies have talked over the last three months or so about having more conversations with clients but that’s not really not translating in to revenues yet. In fact, revenues continue to decline on an almost accelerating basis in a lot of different places, especially companies with international exposure. Do you think that the engagements with the clients and the conversations are to keep you for when the business does pick back up or are these conversations that you would expect to turn in to revenues in the near term in any meaningful way?

Thomas D. Christopoul

That’s very hard to predict but I would say the answer to that is both. We were talking this morning about reminding ourselves that we’re still half way through or just a little bit more than halfway through a calendar year in which none of our clients really had a lot of visibility at all in to their budgeting or planning process. So, the conversations that we had today with our clients are about everything ranging from project backlog that has been put on hold that they expect to be able to do at potentially some point in the future to as summer turns to fall some more I think substantive discussion with those clients about what they expect to be pursuing in project work for their fiscal and calendar 2010 which is as we remarked kind of the first calendar year in a little while here that our clients have had some visibility in to what a reasonably stable market might be.

So, I think it’s both, existing opportunities to as we say shift share where there is consulting spend against a context where that spanned across almost all of our clients is down and longer term opportunities as those clients consider sort of gearing back up with respect to work that has been deferred over the course of the calendar year of 2009 even reaching back in to the end of 2008.

Operator

Your next question comes from Sara Gubins – Bank of America.

Sara Gubins – Bank of America

In terms of SG&A I’m wondering if we’re not at a reasonable run rate excluding the charges in the fourth quarter or if we should expect more cuts in SG&A?

Thomas D. Christopoul

I wouldn’t say that you should Sara. I think what we’ve seen and what we’ve reported is revenue deceleration through the back half of our fiscal 2009. But, we also reported that our let’s call it weekly revenue ranges have tightened and have flattened over the last several weeks. So, right now we think that’s again, not falling is better than falling so that stabilization we think is a good outcome. I’m not so sure I would call it at trend at the moment but it’s a good outcome.

Relative to our infrastructure, as Nate reported, our expense spending is down in all categories with regard to the consolidations and other cost containment actions we’ve taken. We feel that we have not given up any of what we would call our strategic infrastructure. But, we also remarked that we’re very happy right now with our global footprint for a lot of reasons including the fact that it is today and will remain a very important strategic asset for us. We absolutely have to be ready when our clients ask us to do work with them to deploy on a global basis because those are the types of projects that they need us for.

So again, we’re investing here at the company for the long term and we expect to be able to deliver against those opportunities when they come up irrespective of whether they come up this quarter, next quarter or in to the future.

Sara Gubins – Bank of America

Then last question, do you expect to continue pressure on bill rates and would you plan to continue to pass those on to consultants?

Thomas D. Christopoul

So you saw that we reported declining bill and pay rates and as we’ve discussed and remarked before, we actively manage those on an engagement by engagement basis. Whether we expect to continue to see rate pressure I think for us changes and is different geography to geography meaning there are certain market characteristics that are different in say some of our Asia Pac practices from our European practices and the US practice.

It’s not Sara a robust rate environment right, so we would not expect to see sequential increases in rate but I’m not so sure that I would say at the moment that we are contemplating or planning for a substantial or sequential decreases in rate although I obviously qualify that comment by telling you we’ve always actively managed that gap and we’ll continue to do so.

Operator

Your next question comes from Scott Schneeberger – Oppenheimer.

Scott Schneeberger – Oppenheimer

Could you speak a little more specifically to the financial services customers and you mentioned conversations that sounded like it was broadly across verticals, specifically to those might we see something sooner there versus other verticals? Just any further color?

Thomas D. Christopoul

Again, as we mentioned in our prepared remarks, our financial services business is down by a fairly significant percentage year-over-year and quarter-over-quarter and that results as you can imagine from a lot of the big name financial services clients that have either gone out of business or have had consolidation of their own. It continues to be a very important market for us, we service them across all of our practice areas and we will continue to do so. So, it’s still a rather significant piece of our business and we look to continue working with those clients in the future.

Scott Schneeberger – Oppenheimer

You mentioned practice areas, are you engaged in hiring currently? What are some of the areas that are doing less of that? I assume none are thriving at the moment. If you can just speak across the practice areas.

Thomas D. Christopoul

In terms of the practice areas I would say the two more resilient practice areas have been supply chain management and legal services. Legal services is a relatively small piece of our business but if I had to pick out two those would be the most resilient. We always do a pretty strong business in our accounting and finance, I would say to a lesser extent right now with some of the pricing pressure you would be looking at information management and human capital services.

Scott Schneeberger – Oppenheimer

On the closed offices you mentioned before probably a $12 million annual benefit, now that you’re further along any change to that and now we’re in four quarters correct, of impact from that?

Nathan W. Franke

I think what we had mentioned during the prepared remarks is that that amount on an annual basis of $12 million is correct. That breaks down obviously to about $3 million per quarter however, I would remind you that in the fourth quarter we realized, because of the timing of those cuts and certain actions that were taken in our third quarter that we realized probably $1.5 million of that $3 million in the fourth quarter. So sequentially, all else being equal from the fourth quarter to the first quarter I think we’d realize the other $1.5 million.

Scott Schneeberger – Oppenheimer

Then finally on those closed offices any loss revenue that’s material? I know you were talking consolidation on the last quarter’s call wouldn’t have much impact but have you found that to be the case?

Nathan W. Franke

No, in fact everything has been pretty successfully integrated so I would say no lost revenue.

Operator

Your next question comes from Andrew Steinerman – JP Morgan Securities.

Andrew Steinerman – JP Morgan Securities

I just wanted to jump in to the theme of stabilization that we talked about. Obviously the first four weeks of the quarter were in that range of $9.6 to $9.8, did that stabilization start earlier than that? Like if you look at the end of the fourth quarter were we at that level for a while? My question is why do you think that we started the quarter at $11 million, why do you think that the quarter ended at a lower weekly revenue than where it began? Do you feel like that’s all the economy got worse during the quarter?

Thomas D. Christopoul

Andrew, I don’t know if it has to do with the economy getting worse during the quarter, it’s just as we reported to you on the last call first five weeks or so of the fourth quarter were at $11 million. We were hearing an awful lot of what we would consider positive chatter in the market place relative to opportunities, client projects, having good discussions with our clients but unfortunately they did not turn in to immediate revenue.

As the quarter went on we saw a little bit of a slide in those first five weeks where we gave down to average right around $10 million. You asked when did we start to see the trend in that $9.6 to $9.8 range, I would say in the latter part of the fourth quarter we were right around that range, we were in the $9.6, $9.8, $9.9 weekly revenues. So, we’ve now had several weeks in a row within that band. We would hope at this point we are at revenue stabilization but we will see as we go through the balance of the first quarter. As Nate mentioned, there is going to be a little bit of an effect relative to the summer holidays both in the US, Europe and Asia.

Andrew Steinerman – JP Morgan Securities

Could you just clarify that point before that was asked earlier about vacation impacting 5%? I didn’t quite understand, it was the first question?

Nathan W. Franke

Andrew, I think the question was when you look back on a historical basis as the summer vacation season kind of begins in July and carries on in to August, what is the percentage kind of decrease that we see impacted by the vacation and as I said, if you go back up a period of years there’s a range and I would tell you that’s probably in that 5% to 8% range that would take you through really to the Labor Day type period. Again, as I mentioned, it varies by geography a little bit.

Andrew Steinerman – JP Morgan Securities

That’s versus June run rate, right?

Nathan W. Franke

Yes.

Operator

Your next question comes from Kevin McVeigh – Credit Suisse.

Kevin McVeigh – Credit Suisse

Just to follow up a little bit on kind of the revenue trends, is it a 13 week or 14 week fourth quarter?

Nathan W. Franke

13.

Kevin McVeigh – Credit Suisse

So if you assume kind of the midpoint of the $9.7 and obviously it seems like it will be a little lower than that, it would be $126 million in seasonally a weaker quarter. How should we think about gross margins relative to that because it sounds like there’s a deleveraging affect that you saw in the fourth quarter in terms of a range on gross margins, how should we think about that in the first quarter?

Nathan W. Franke

Well I think that Kevin what you say is probably correct, while I think we are doing a great job on the pay versus bill rate, I expect because of the revenue rate, because of the impact of the vacations that we will see a certain amount of compression because of the benefits and again, I think there’s within a range but my guesstimate could be that that could be 50 basis points give or take a handful. It really depends on ultimately the revenue base.

Kevin McVeigh – Credit Suisse

Nate, that’s 50 so it would be 50 off the fourth quarter run rate?

Nathan W. Franke

Correct.

Kevin McVeigh – Credit Suisse

Then just real quick on the buyback, I kind of looked at the trend in the stock price and it looks like it might have been somewhere around late April or early May, how should we think about the buyback relative to trenchers in the business at the time?

Thomas D. Christopoul

I would say completely unrelated Kevin meaning the stock buyback proceeds on what we consider to be a market opportunistic basis but, it’s in no way mapped or connected to weekly revenue in terms of either the way the board authorizes the buyback or the way we execute it.

Operator

Your next question comes from Paul Ginocchio – Deutsche Bank Securities.

Paul Ginocchio – Deutsche Bank Securities

Just with the DSOs have you made up those lost five days now that the Memorial Day holiday is over?

Nathan W. Franke

By the time you got to about the second week in June we saw basically back to where we were on more of a historical basis.

Paul Ginocchio – Deutsche Bank Securities

Then if you look back I guess to ’01 and ’02 and sort of look at the July/August period was it also that 5% or 8% below the June revenue trends or do companies typically or people take more holidays when there’s no work to do?

Nathan W. Franke

Well, I don’t know if I’d draw a complete comparison in terms of what ultimately will transpire. I think a number of our consultants are going to take their vacations, I think that will be very true in all geographies. There is a potential just because of the revenue base and a certain amount of down time that consultants experienced that they may forego certain vacation time in the summer and save that time for later on. But, I don’t know if I’d say back in that ’01 and ’02 time frame that I would really draw on that as a comparison. What I think I gave you is just kind of what were kind of broader trends over the last several years.

Paul Ginocchio – Deutsche Bank Securities

61 business days in the US in the August quarter, is that right?

Nathan W. Franke

That is correct.

Operator

Your next question comes from Gary Bisbee – Barclays Capital.

Gary Bisbee – Barclays Capital

Nate, can you repeat what you said about the tax rate? You made a comment about what we should expect in fiscal ’10?

Nathan W. Franke

Absent what I would call our kind of cash tax rate we would anticipate it at about 41.5%. As you know, we have a certain amount of volatility in that tax rate because of the ISO incentive stock options that we have to take a GAAP charge through the P&L but we aren’t able to take that deduction for taxes until the option is exercised. So, depending on the volume of ISO exercises there can and will be volatility in that rate. If you look back at the prior quarters prior to Q4, that rate has been 45%, 46%. But again, from a cash rate absent of the ISOs, about 41.5%.

Gary Bisbee – Barclays Capital

Are you hearing anywhere from clients that they may have cut back too far in their say finance departments and there might be a need as they get to whatever it is, their fiscal year ends, getting the books closed or whatever, with some sort of more basic stuff have the cut too much or is that not what you’re hearing?

Nathan W. Franke

I would tell you absolutely. I would refer to a discussion up in the Pacific Northwest with a client that talking with a functional director we were basically told that there was no way that he would be able to complete the work that needed to be done prior to yearend based on the cuts that were made. So, I think it goes without saying in our mind that given how quickly many of these global corporations reduced headcount that it probably wasn’t done as thoughtfully or planned as it would have been done if it was completed over an extended time period. I do think, and based on our discussions with clients, that that will create demand for services over the foreseeable future.

Gary Bisbee – Barclays Capital

Tony, I think in your comments you mentioned that the international subsidiaries of US companies have cut way back on costs. I guess I’ve never really asked the question in the past, how successful have you guys been overtime selling in to foreign companies as opposed to the international arms of the US companies? Then, is the experience any different and can you just enlighten me as to how much of the international revenue that is?

Anthony Cherbak

I think number one, as we have established our international subsidiaries or offices over time we generally have established them based on client’s needs. One of the basics of setting up the company was we wanted to be multinational, have a good geographic foot print so that we could serve our multinational clients wherever they did business. So, probably the first line of defense is clients from US multinationals doing business in Europe and Asia and it can be vice versa too. It can be multinational companies in Asia doing business in Europe or the United States.

There are specific operations that we have in Europe that probably focus a little bit more on homegrown companies than US multinationals and you’ll generally see that like in Sweden or Norway. But generally a lot of the base of our business is US multinationals doing business in Europe and Asia and to a lesser extend building out the local businesses. But, we obviously encourage our offices to focus significantly on both areas.

Operator

Your next question comes from Mark Marcon – Robert W. Baird & Co.

Mark Marcon – Robert W. Baird & Co.

I’m wondering if you can talk a little bit more about the areas that you’re clients are saying that they are expecting to do something in? And, can you talk about the specific types of projects that they are talking about? And, are you hearing this directly or is this basically coming up the chain to you and is it possible in some cases it’s hopefully they’re going to do something as opposed to they definitely will do something?

Thomas D. Christopoul

If your question is are we getting upward polished information from our field practice organization I would say that the answer that is no, it’s not a cultural reality here. But, the real answer to your question is both meaning all of us Don, myself, Tony, Nate, Kate, all of us are frequently engaged in discussions directly with clients. That’s where we try to spend a fair amount of our time.

We mentioned earlier that all of our activities are aimed right now at business development so we hear that directly. But obviously, we also hear it through and we expect to hear it through the people that are most close to our clients who are our field practice representatives. So, the answer to the first part of your question is that it’s a range. It’s as much of a range as opportunity as it’s always been meaning a deferred IT project, potential SAP or ORACLE implementation or one that’s gone wrong that they’d like our help with fixing.

In the example that we gave with respect to the US government organization, it’s a new opportunity with respect to Sarbanes-Oxley compliance work where we were able to win that work from some of our more traditional competitors. In other cases, some that we’ve given in other examples here on this call and in others, it’s just the opportunity to shift share to a more cost effective model for our clients.

I think it’s important to remember, and this is the tone of the conversations that we have had and all of our client service directors have with our clients, we want to let them know that our unique business model is very important for them solving their problems and we can solve them in a different and better way in many cases than anyone else in the market place. It’s continuing to remind them of that both in general and then with respect to specific opportunities that I would say characterize most of the client conversations that we have.

Anthony Cherbak

I would just add to that Tom and say that some of the specific examples as you can imagine are around cost containment with our clients. A lot of project examples around shared services, a lot of people looking at shared service centers, how do they take costs out of their own infrastructure, their back office infrastructure as well as how do they take costs out of their supply chain. So, those would be some of the additional popular themed discussion that we’re having with clients that have resulted in real projects for us.

Thomas D. Christopoul

Some other of it is the same work by a different name. We’ve been involved with opportunities to assist large global clients with what they refer to now as an example, finance organization transformation. That’s a pretty wide ranging title. The work that results from something like that could range from financial system consolidation to actual process transformation and improvement in things like the closing process.

Mark Marcon – Robert W. Baird & Co.

In terms of your individual offices, in past conference calls we’ve had a lot of discussion about what are you seeing on the coast relative to some of your offices that are newer in the middle of the country, what are you seeing in some of your more mature offices internationally versus the less mature ones? Part of the reason for my question is it sounds like you’re saying, “We’re pretty happy with the platform and the foot print as it current stands and we’re probably not going got make any adjustments in the near term to it.” Is that a correct interpretation?

Thomas D. Christopoul

I think it’s in the near term or in the long term. As we’ve commented on taking a tremendous amount of time and effort to successfully build out the global foot print. That doesn’t mean that we can’t and that we don’t actively manage our expense categories or where in the past where we’ve said we can consolidate a facility in to one that’s close by. But, you shouldn’t take from our comments that we’re prepared to sacrifice the global foot print at all. We’re not contemplating that sort of trade off is going to be required.

Mark Marcon – Robert W. Baird & Co.

Can you talk a little bit about the differences in the dynamics of some of our –

Anthony Cherbak

Yes, I would just tell you Mark, look at $132 million for the fourth quarter business is pretty tough all over. Again, I’ll speak to Europe and Asia Pac specifically, our biggest practices there being the Dutch practice, the UK practice, the Swedish practice; probably the Swedish practice up in the Nordic region is the most resilient of the three. Netherlands has struggled, the UK struggled, if you look at Ireland they are close to -15% GDP and their unemployment rate is 125 plus and climbing.

So the European continent is certainly suffering. We’re seeing a little bit of resiliency out of our practice in Japan which means again, as Tom alluded to it earlier is some of these trends are less bad than others. But again, relative to our global foot print it’s integral to being able to serve big clients. When we go to a big financial conglomerate in New York, if we didn’t have operations in Japan or in China or in some of the key cities in Europe it would be much harder to convince them to utilize us on a global project.

I can pick out one, or two, or three offices that have maybe been a little bit more resilient in the US but, clearly our most significant practice in tri-state. They continue to do a great job and they continue to sell new work each day, it’s just not quite as robust as it was last year at this time. I don’t know if that answers your question but that’s kind of the flavor.

Mark Marcon – Robert W. Baird & Co.

I guess as we look at your overall margin I guess I was just trying to think about how many of your offices are still making money versus how many are losing? What I was thinking about is what is happening with some of the smaller offices around the US, is there any commentary you can give there just in terms of moral? Are they all at critical mass, is there any other closings that might be contemplated? How are you thinking about that?

Thomas D. Christopoul

Mark, I would tell you at the present time we don’t have any plans from a consolidation standpoint. I would tell you in the US we have a handful and it literally is a very small number of some of our smaller practices who in the last couple of quarters with the revenue fall off their operating margins are probably close to breakeven or very slightly negative. Again, that’s on a contribution margin level.

Again, the variable model when you look at an office-by-office basis in these smaller markets their staffed by a much smaller number of people so you are able to adjust to a certain extent. That should give you a little bit of color but again, it does vary kind of city-by-city and when you look at the local economies, the degree of diversification in a particular city and then you overlay what’s kind of happening and again, I’m speaking to the US and the US economy, where you have certain areas that are more diversified, you have more places to go. If you’re a smaller city in the Midwest it obviously in this environment can be a little more difficult.

Operator

Your next question comes from Timothy McHugh – William Blair & Company.

Timothy McHugh – William Blair & Company

I just had one question, I think Andrew was kind of asking around this and you may have answered it and I just didn’t understand it but, the improve chatter that you’re describing from your customers right now, you had said also in this call you had heard kind of improving chatter around our last call and then the revenue run rate kind of ended the quarter at a lower run rate. Is there any flavor that you can add that is maybe different from what you’re hearing now versus a couple of months ago that might make you feel better other than just the general term about improving chatter?

Thomas D. Christopoul

Tim I guess I would tell you, and I was in a couple of our larger practices over the last few weeks, what I would tell you is probably one of the biggest changes and actually other CFOs that I talk with in the Southern California area is there is a lot less concern around what I would say liquidity and survival. If you turn the clocks back three or four months and some of the critical issues companies were facing around bank covenant violations and those types of things my sense is for a number of companies the view around buttoning down the hatches and going in to survival mode we’re in a transformation stage where I think people are starting to feel a little bit better.

That doesn’t mean that their own revenues are kicking up and the pocketbooks are opening to spending but I think people are now starting to plan a little bit more for the future and starting to recognize that if their business enterprise indeed is going to survive that they need to start thinking about the future a little bit more. And, given the headcount reductions that so many of these companies have made, I think the demand environment should improve as we get especially towards the end of the calendar year.

Operator

Your next question comes from Paul Ginocchio – Deutsche Bank Securities.

Paul Ginocchio – Deutsche Bank Securities

Just looking at the US over the last two quarters, Feb and May, it looks like it was down on a same day organic around 24% based on my calculations. For the degradation in the weekly run rate is that coming out of the US or is that more an international degradation versus the May quarter?

Anthony Cherbak

I’d say it’s coming a little bit more out of international. Again, as we mentioned, international lagged in but if you looked at their fourth quarter quarter-over-quarter run rates I think we’ve been hurt a little bit more on the international side over the last two quarters versus the first two quarters which were more US versus international.

Paul Ginocchio – Deutsche Bank Securities

So the US has been say a little bit more stable over the last couple of quarters and going forward looks a little bit more stable than the rest? Not much has changed?

Anthony Cherbak

That’s correct.

Operator

At this time there appear to be no further questions. I’d like to turn the conference back over to management for any additional or closing comments.

Thomas D. Christopoul

Thank you for your participation and your continued support of Resources. We look forward to talking with you at the conclusion of our next fiscal quarter.

Operator

That does conclude today’s conference call. Again, we do thank you for your participation.

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Source: Resources Connection, Inc. F4Q09 (QTR End 05/31/09) Earnings Call Transcript
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