LECG Corporation Q2 2009 Earnings Call Transcript

LECG Corporation (XPRT)

Q2 2009 Earnings Call Transcript

July 28, 2009 5:00 pm ET

Executives

Brooke Deterline – IR

Michael Jeffery – CEO

Steve Fife – CFO

Analysts

Tim McHugh – William Blair & Co.

Rob Young – Wm Smith & Co.

Andrew Fones – UBS

Sean Jackson – Avondale Securities

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the Second Quarter 2009 LECG Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of this conference. As a reminder, this conference is being recorded for replay purposes. I would now like to turn the call over to Brooke Deterline of Investor Relations. Please go ahead.

Brooke Deterline

Thank you, operator. Good afternoon, everyone, and thank you for joining our second quarter 2009 conference call. Michael Jeffery, LECG’s Chief Executive Officer, and Steve Fife, our Chief Financial Officer, will present prepared remarks.

I would like to remind you that in our financial news announcement released today and also on this call, LECG Corporation is providing specific forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, concerning LECG’s future businesses and operating and financial conditions. These forward-looking statements are based upon management’s current expectations as of today, July 28, 2009, after which there may be events that occur that cause actual results to differ materially from expectations.

Information on these risk factors is included in the company’s filings with the Securities and Exchange Commission, which we urge you to consider. The company cannot guarantee any future results, levels of activity, performance or achievement, and undertakes no obligation to update any of its forward-looking statements after the date of this press release. Finally, you can find a reconciliation of the non-GAAP financial measures that we use in our news release and on this call to GAAP financials in today’s earnings release.

With that, I’ll turn the call over to Michael Jeffery for opening remarks and then we will follow with Q&A. Michael?

Michael Jeffery

Good afternoon, everybody, and welcome. In the second quarter of 2009, we saw a slight sequential increase in revenues of 2% to $68 million. We were encouraged that a majority of the revenue strength came from our core investment areas where we continue to see very attractive growth opportunities such as financial services, energy and environmental, and forensic accounting.

However, the revenue in our single largest sector, antitrust and competition policy, continues to be lackluster. We finished the quarter with a non-GAAP loss of $0.11 down from $0.15 loss per share in the first quarter, excluding one-time charges. As noted in our press release, a change in tax rate added $0.03 to our non-GAAP loss.

Professional staff utilization improved to 68.5% due largely to headcount reductions executed at quarter end with billable hours roughly flat. As we mentioned last quarter, in the near term, we are focused on managing through the current recession while maintaining the capacity to grow as pent up demand resumes. Without concrete forecast for an immediate market recovery, we have gained through prudent measures and decisively implemented additional restructuring activities in the second quarter, including the divestiture of our Canadian operations, which in total removed more than $11 million annualized from our cost of services.

Many of these actions took effect in the last month of the quarter and as a result most of the cost savings will materialize beginning in the third quarter. Overall market demand remained sluggish most significantly in Europe. However, we saw resurgence in some key markets. As a result, we built matter backlog during the quarter. In Europe we experienced demand declines across both our economics and finance and accounting services segments, as we are only now seeing the full impact of softer demand in Europe that hit our US business several months ago.

The more conservative approach to economic stimulus taken by the EU countries may further compound market challenges in Europe and could result in a longer revenue recovery period. In the near term, we do not expect a material pick up in the European market as the current slowdown will be translated by normal seasonality. As we await a recovery in the US, we continue to operate at low levels of revenue. However, the modest up tick we have seen since the end of the first quarter is cause for some encouragement.

On a standalone basis, improvements in US revenues, particularly in petrochemicals, which is part of our energy and environmental practice, along with the securities litigation of financial services sectors absorbed the declines in both Europe and global competition sectors. This combined with some recent recruiting successes should serve to bolster the performance going forward.

Overall, total matter backlog data continued strong with a pipeline of 513 matters compared to 498 matters at the end of the first quarter. These numbers are a positive indication that we are winning new engagements while also moving modest numbers into active re-engagements. Across the firm, we expect our revenue growth to remain very uneven in the near term. Until we see a greater recovery in the overall economy, we anticipate weakness in global competition and damages and intellectual property, which will be somewhat offset by strength in energy and environment, forensic accounting and financial services.

As we highlighted last quarter, our strategy is centered on expanding key growth areas by capitalizing on fundamental industry trends with a focus on the evolving of regulatory environment as we see more stringent enforcement, greater complexity and geographical diversity. We're also working to complement our traditional litigation business with recurring multi-practice consulting engagements. At the same time, we have instituted a disciplined approach to cost management in order to drive profitability. We're beginning to see a return on our investment in key markets such as financial services, forensic accounting and energy environmental sectors as we continue to win significant cases. We believe we have a strong competitive advantage in these sectors and are working quickly and decisively to capture the demand.

Now let me spend a little time on each of these areas, firstly financial services. The financial services sector represents a growing opportunity for the firm for substantial organic revenue growth. Revenues this quarter were the highest in a year with improved profitability and further growth anticipated in the second half as we leverage new and existing highly qualified industry experts. In contrast to our expert litigation consulting business, the financial services sector is not a transactional operation. Rather, it is based on long-term business relationships with financial institutions resulting in more dependable revenue streams.

Overall, this area has benefited from an increase in sector demand as a result of the rapid growth in banking regulations and a slight recovery in retail securities litigation. In order to increase our long-term opportunity in this sector, we are leveraging existing demand by establishing a significant presence in the financial services consulting arena. To that end, our focus on collaboration and scalability remains paramount. At present, the strong regulatory repetitions and thought leadership of our top experts, such as Bill Isaac, ex-chairman of the FDIC, and Mike Mancusi, ex-deputy controller of the currency, are attracting advisory businesses to the firm.

As projects come in, the group is leveraging each successful engagement in order to win additional consulting work to develop long term annuity relationships. During the quarter, we continued to ramp our bank assessment and enterprise risk management projects, mandated by regulatory authorities. These engagements have already led to follow on business and we expect more to come. We continued our acquisition support with private equity funds along with our balance sheet liquidity management and risk advisory work for banks. This sector, more than any other, is driving multi-practice engagements, primarily with forensic accounting and securities litigation.

The second largest growth opportunity for the firm is the energy and environmental sector. Our strategy in this practice area has been to capitalize on our core business, up slightly over last year, while further developing the capabilities to capture a larger share of the coming wave of business associated with new climate and renewable energy regulations. Systematic changes in the form of the largest energy bill in US history will force companies to fundamentally adjust the way they navigate this newly defined industry. Initially, this will result in a watershed of new consulting opportunities, followed by litigation work next year as regulations begin to affect the markets.

Given the conclusion of one large project, we expect only a modest increase in the near term followed by much stronger growth as regulations hit the market. We have hired experts in renewable energy, carbon emissions, and the smart grid in order to address these huge opportunities. For instance, over 1 trillion has been invested into wind power alone. We have recently hired the top expert in alternative energy wind power who is currently working with the largest wind developer in North America.

Lastly, let me talk a little bit about forensic accounting. This is comprised of investigation and bankruptcy restructured. Forensic accounting remains one of our largest revenue opportunities for the firm as a whole and feeds off many of the other sectors. Revenues rebounded from the first quarter's low levels. Recently we have seen some successes and initiated work on a number of client engagements due to the arrival of Lynn Turner, former chief accountant of the SEC, and achieving greater market traction from other group experts across the firm.

One significant new engagement was the direct result of the Foreign Corrupt Practices Act. This is a cross practice engagement utilizing over 30 different LECG experts and associates from three continents. In our bankruptcy and restructuring businesses, we're also seeing increased activity. Over the last few months, the number of larger, more complex bankruptcy filings nationally and particularly in Southern California has increased. We were recently retained on a substantial public bankruptcy case involving a high profile luxury real estate development. This client is likely to lead to follow on b business in forensic accounting, litigation support and discovery. We also experienced significant traction in our Asian operations in forensic accounting including Australia, Hong Kong and further opportunities that we are seeking in Shanghai.

As announced on July 6, I will be stepping down from my role as CEO at the next shareholder meeting. I would like to take a moment to thank all of the experts, staff and the board of directors for their support over the last few years and the opportunity to work with such a talented group of people. I would particularly like to thank and acknowledge the dedication, loyalty and hard work of our corporate staff led by Steve Fife, our CFO, Tina Bussone, as head of operations, and Deanne Tully, our general counsel.

It is during difficult times such as these that the demands on our staff are considerable and have showed unfaltering commitment to serve our shareholders and customers. At this point, I believe the heavy lifting is behind this. But it is never easy to lead a company through an extended period of restructuring and cultural change. We have accomplished much over the last few years. We made difficult decisions to restructure the company in order to address the vagaries of market conditions. Inevitably, such significant changes take time to be fully implemented and benefits realized.

The macro conditions continue to favor LECG. Litigation is picking up and the aftermath of the recession will require considerable expertise to help our clients navigate the new environment. Once the economy rebounds, I believe the true potential of the firm will be realized as the cost structure under which we are currently operating has great potential for profitable leverage. Although the company may continue to make small cost adjustments should conditions warrant, overall the firm is fit to weather the current economic situation.

Our recovery and return to growth will be uneven across segments and the exact timing cannot be foretold. However, I believe the firm will emerge from this storm as a strong player in its core businesses and an impressive new comer to certain other markets. We are poised to benefit from seismic shifts in major industries. In the meantime, a very active CEO search is underway to take LECG to the next level. I anticipate great things to come for LECG.

Now over to Steve Fife, our CFO.

Steve Fife

Thank you, Michael, and good afternoon, everyone. Total revenues for the second quarter increased 2.4% sequentially or $1.6 million to 67.9 million. Adjusted EBITDA from continuing operations was a loss of $1.8 million in the second quarter compared to a loss of $4.7 million in the first quarter. On a non-GAAP basis, we had a net loss of $0.11 per share, excluding pretax charges of $4.8 million in restructuring, impairment, divestiture, and mark to market losses.

On a GAAP basis, net loss was $0.25 per share. This compares to the GAAP and non-GAAP net loss in the first quarter of $0.15 per share. As noted in the press release, our adjusted loss per share was negatively impacted by approximately 3 cents due to the change in our 2009 estimated effective tax rate from 41% to 30% during the second quarter.

On a segmented basis, economics revenue for the quarter was slightly roughly flat sequentially at $29 million. We maintained revenues despite the reduction in headcount of seven experts and 13 professional staff. Billable hours in the economics group decreased 1.5% but was slightly offset by an increase in the segment average bill rate during the quarter. Similar to the first quarter, we saw strength in the securities and energy and environment sector offset by the continued weakness in global competition.

In the FAS segment, revenues were $38.9 million, up 1.5 million or 3.9% from the first quarter due to increased billable hours and higher average bill rates. As part of our ongoing restructuring efforts, we divested our Canadian operations at the start of the quarter. Excluding the Canadian revenue of $1.4 million in the first quarter, our sequential increase in FAS revenue would have been 5%.

Paid utilization also showed a modest increase due to the reduction of 14 professional staff. Strength in the FAS group was led by primarily by forensic accounting, financial services, as well as increases from higher education and damages and intellectual property. These increases offset the decline in the international sector during the quarter. The consolidated realization allowance was 2.8 million or 4.2% of gross fee-based revenues, flat with the first quarter's allowance.

The consolidated billable headcount at the end of the quarter was 718 compared to 773 in the first quarter. Our average billable full-time equivalent this quarter decreased by 22 to 595. We saw a 2.4% increase in net fee-based revenue in the second quarter driven by an overall increase in expert, subcontractor and affiliate revenues and billable administration, partially offset by a decline in professional staff revenue.

Our professional staff paid utilization increased to 68.5% from 67.1% in the first quarter due to the elimination of 27 professional staff in the quarter. Gross margin for the quarter was 25.2% compared with 21.3% in the first quarter. We experienced improved margins in all billable personal categories except our affiliates. Experts showed the largest improvement due to our reduction of discretionary bonuses in the second quarter and a favorable mix shift of revenue between salaried and at-risk experts.

Margin improvement was also driven by a partial benefit from the recent restructuring and reductions in stock-based compensation expense. Non-cash compensation expense for the quarter was $5.1 million, including stock-based compensation of 872,000 and bonus amortization expense of 4.2 million. This compares to non-cash compensation expense of $5.3 million in the first quarter of 2009. Excluding one-time charges, total operating expenses decreased by $92,000 to $20.1 million from the first quarter. Operating expenses as a percent of revenue were 29.6%, down from 30.4% in the first quarter. The primary drivers of the decrease in operating expenses were the reductions in headcount and other cost saving initiatives.

The effect of these cost savings are not fully reflected in the operating expenses this quarter as most staff were included in table of expenses through the middle of June. During the quarter, we revised our 2009 estimated annual effective tax rate from 41% to approximately 30%. The primary driver of this late revision was the projected tax impact of the $1.7 million divestiture charge arising from the sale of our Canadian practice. Due to the tax structure of the Canadian legal entity, we cannot carry forward this loss to offset future taxable income and have only limited carry back ability.

Also contributing to the change in our estimated rate was the anticipated impact of permanent items on our revised 2009 operating forecast. As a result of the revision to our estimated annual effective tax rate, our adjusted loss per share was negatively impacted by $0.03 increasing our non-GAAP loss per share from $0.08 to $0.11.

Turning to the balance sheet and cash flow, we ended the quarter with $3.4 million in cash and $13 million in borrowings against our line of credit resulting in a net cash decrease of $1.4 million over the first quarter. This decrease was a result of working capital investments, primarily driven by increases in accounts receivables and finder fee payment during the quarter, which accounted for a decrease in our expert accrued compensation.

Receivables grew by $4.8 million to 92.5 million as of June 30, while DSOs were flat with the first quarter at 123 days. Capital expenditures were $465,000 and there were no acquisition or earn out payments during the quarter. At the end of the first quarter, we discussed the likelihood that additional restructuring would be necessary to weather a near-term business conditions while maintaining our ability to capture the growing market opportunities. To that end, we executed additional cost saving initiatives in the second quarter amounting to $11 million. The capacity reduction in performance based employee action now (inaudible) with the soft market conditions that have prevailed since the end of 2008. As many of these actions were are not finalized until June, we do not expect to see the full benefit until the third quarter.

At this point, we are on track to break even at $70 million in quarterly revenue with a 30% gross margin and approximately $20.5 million in operating expenses. We continue to examine our business and will make further refinements as needed.

Turning to our outlook, given the current business conditions and economic climate, we continue to have limited visibility. While we are pleased with some of the operating trends we saw in the quarter as it is evident that our cost initiatives are having an impact, it is too early to draw conclusions given the challenging environment. We remain encouraged by the increased activity in key investment areas, the building backlog, and the transition of some of these matters into active engagements.

Now I would like to turn the call over to the operator for question and answers. Operator?

Question-and-Answer Session

Operator

(Operator instructions) We will take our first question from Tim McHugh with William Blair & Co.

Tim McHugh – William Blair & Co.

Yes. You had mentioned last call that your utilization rate in March and picked up to 73% as you saw improvement kind of from January, February. I was wondering if you could update us on how that flowed through as the second quarter progressed.

Steve Fife

Yes. Tim, this is Steve. So we saw that continue into April and then frankly we saw a slight drop off in both May and June with those two months being flat. So we ended up the quarter up modestly at about 68% but again down slightly in May and June.

Tim McHugh – William Blair & Co.

Right, down. So I'm assuming April was similar to March then, mid-sixties type of run rate?

Steve Fife

Yes, that is right.

Tim McHugh – William Blair & Co.

Okay. And then you mentioned areas that fell off were Europe and the antitrust, can you just kind of help quantify that and how significant of a follow up you saw there and then what you might expect, you had kind of suggested August would be seasonally weak period as it has been in the past?

Steve Fife

Yes. So a lot of – you know a lot of our internationals specifically was that we dropped was the result of our divestiture in Canada where we had about $1.4 million of revenue in Q1 that did not repeat at all in Q2. That transaction occurred right at the beginning of the quarter. So that was a significant portion of our drop off in the international fees. And then global competition, as Michael said, just kind of continued to go along at a rate that it has been the last couple of quarters. So it dipped down a little bit in Q2 but not materially. And I think we are just seeing the kind of the continued doldrums around activities in that sector. Clearly we are a little impacted in Europe on that side of the business from the standpoint that it is lagging the US in terms of any level of recovery at all.

Michael Jeffery

The big picture, Tim – it is Michael, since really November last year, there has been a significant drop-off in antitrust competition and forensic accounting. Forensic accounting is beginning to come back and we're very encouraged by what we see there. Some of it is due to some real good highs (inaudible) because that businesses' demand is beginning to pick up. We're beginning to see an encouraging pickup back in Europe in FAS, but we still struggle somewhat in global competition because of the lack of M&A deals.

Tim McHugh – William Blair & Co.

And just two follow ups to that, one, can you quantify what the impact of the Toronto sale was on the two different segments in the quarter? And then along those lines, you had mentioned FAS was up 5% excluding Canada, and yet you mentioned Europe was weak. I was wondering if you could give us a FAS domestic, how that performed, just to kind of strip out that European impact.

Steve Fife

Yes. So the Canadian number of $1.4 million, that is all in the international sector which is in FAS.

Tim McHugh – William Blair & Co.

Okay. So that is all FAS not economics?

Steve Fife

Correct, that was all captured in FAS.

Tim McHugh – William Blair & Co.

Okay. And then do you have the domestic FAS revenue, how that performed?

Steve Fife

We don't. That is something that we track internally.

Tim McHugh – William Blair & Co.

And one more if I might quickly the FAS improvement, that was both forensic accounting investigations and restructuring or was it predominantly the restructuring which I mentioned is a good environment right now?

Michael Jeffery

Both investigations and restructuring. In fact, a lot of the come back has been in the investigation area.

Tim McHugh – William Blair & Co.

Okay, thank you.

Steve Fife

And financial services.

Michael Jeffery

Yes, financial services part of FAS. So we saw good encouraging growth from both forensic accounting and in financial services. As you know, we don't have a huge restructuring practice. It was a separate practice but throughout the firm, many of our large and important experts are involved particularly these days in debt restructuring issues.

Tim McHugh – William Blair & Co.

Okay, thank you.

Operator

Moving on from UBS, let us go to Andrew Fones, please go ahead.

Michael Jeffery

Hello?

Operator

And let us move on to our next question. We will go to Rob Young with Wm Smith & Co.

Rob Young – Wm Smith & Co.

Hi, yes. Good afternoon.

Michael Jeffery

Good afternoon, Rob.

Rob Young – Wm Smith & Co.

Just quickly, can you talk a little bit about the long-term impact with some of their lawyers basically shuffling around to other law firms, does that have any effect on your broader relationships?

Michael Jeffery

No, we – I think I said in my prepared remarks (inaudible) business is a very event driven business and we respond and it is almost like a transaction business. So while we have close relationships with a number of lawyers, I wouldn't figure us to have deep relationships with any particular law firm and our experts get called in based on the issue at hand and the expertise that we have. So that doesn't affect us at all really. I mean it is a bit if you believe they will come, so we have this highly credentialed top talented people that are known in the field to have expertise in certain areas and that is what creates our relationship.

Rob Young – Wm Smith & Co.

Okay. And then quickly on the Canadian business that was divested, do you have a last 12 months revenue by chance?

Steve Fife

About $5 million.

Rob Young – Wm Smith & Co.

Okay. I'm sorry. Steve, you said that the cost savings attributable to that business was about 11 million?

Steve Fife

No, we didn't break it out separately. In total of the actions that we took including the divestiture of Canada was about $11 million on an annualized basis. So we had a fairly significant headcount reduction during the quarter as well. So those actions coupled with the Canadian divestitures was about $11 million annually.

Michael Jeffery

Canada was quite a small part of that $11 million.

Rob Young – Wm Smith & Co.

Okay, I got you. All right, well, I appreciate it. Thank you.

Michael Jeffery

Okay. Thanks Rob.

Operator

And now let us go back to Andrew Fones, UBS, go ahead sir.

Andrew Fones – UBS

Yes, thank you. I apologize I dropped off the call. I would like to – can you hear me okay?

Michael Jeffery

Yes.

Andrew Fones – UBS

Thank you. So I would like to just ask you know in terms of where utilization rates are running now in a follow up to Tim's question, where you would like to see those utilization rates and are you considering looking at further headcount reductions here? Thanks.

Steve Fife

Well, you know I think our long-term target on utilization remains in the high 70s to 80% range. As we discussed on previous calls, the balance we are trying to navigate right now is still maintaining capabilities within the company to address opportunities as they come in and obviously not all of our professional staff members are hundred percent fungible. And so we continue to react to the market demand as we see them and are committed to maintaining the right level of capabilities within the company while preserving that so that we can address opportunities as they come in the door in the future. But long-term our targeted utilization of high 70s to 80% hasn't changed.

Andrew Fones – UBS

It sounds to me from your answers though you are not looking to take actions really in the near term to bring yourself back into that range?

Steve Fife

I think as I said you know we will make small cost adjustments if warranted, but we put a lot of work behind deciding what we wanted in terms of capacity and what utilization rate we were comfortable with in this period. And again I think the key near term metric is (inaudible) well, that is what one needs to focus on. But it is very important for us to maintain the level of capacity in order to respond to any upsurge in business throughout the group. And as you know, it is the type of business where you can suddenly see a quick turnaround and a lot of matters come in and the same as those we have seen businesses suffer from settlement of cases that you thought could run for another two or three months. It is a fine balance. But I think we are in a very good place right now in terms of how we sit with our costs and our expectations.

Andrew Fones – UBS

Okay, thanks. And then just in terms of your thoughts about bringing in college hires here as we approach the summer months, do you have offers outstanding and should we think about the potential to bring anybody in relative to people that might be looking to move on and go back to school here?

Michael Jeffery

Well, in a way it has. As you know, Andrew, the industry – we always have quite a reasonable turnover of junior staff around this time. A lot of our junior staff come in for one or two years to get work experience and then they rotate back out to go and get advanced degrees. So we're very cognizant of that and we gear our college intake if you like in order to respond to that. And I don't see that being really any different this year. We certainly are mindful of the fact that we have cut back quite a bit on staff and so our intake would necessarily be a lot lower this year than it has been in the past.

Andrew Fones – UBS

Okay. Thanks. And then just kind of finally in terms of kind of the backlog and the kind of the length of the sales cycle, I was just wondering if you could talk to any kind of changes you have seen or not there, are you still, are you continuing to see a lengthening of the sales cycle, you're winning assignments, but they continue to be delayed or do you start to see any improvement in the rate of new assignments turning to revenue. I know that you mentioned that some have done that but I was just wondering if you have seen any kind of recent trends there. Thanks.

Michael Jeffery

I think it is mostly the same as we experienced really since the fourth quarter. If you look along whenever you go to the office of (inaudible) who heads our securities litigation practice and he is right now sold out and exceedingly busy. However, if you look on the whiteboard where is listed all the engagements that are under – that he has, you will see that the whiteboard is full of new matches which he has been engaged, which he hasn't yet started the build. It is the largest list in his entire career. He's just dumbfounded.

But I think it is all around the fact that what law firms want to do when specific matters come up is to ensure that they have nailed down the topics out in the field for when the matter starts to operate. And we have seen that still in our normal course of business and we see it in the extreme in both the labor practice and the securities litigation practice for example. We have been quite active on the hiring front which and right now we have been very fortunate to bring in new experts for the full business, within the books of business within and I mentioned we have made some pretty good hires on the energy and environment front, all rainmakers, and particularly in Europe, Byas Mazelle [ph] joined us and that is a great addition to what we're doing here. And we've got Andrew Madison and Bill Babcock [ph] here in the states and particularly in alternative energy area.

We have also been fortunate that we have seen the return of at least four and going on five or six experts that left us about a year ago. It has proved the grass isn't always greener on the other side of the fence and they have come back and again in the regulated industry space, in the business development space, and particularly in the healthcare space, and these people are coming back into LECG with QuickBooks of business. So eventually things have picked up and we have got a pretty good spirit. That means a lot of people here when I say – when they see returning rain makers to the firm, so that has been good for us.

Andrew Fones – UBS

Okay, thank you.

Operator

Let us move on to Sean Jackson with Avondale Securities.

Sean Jackson – Avondale Securities

Hi. Good afternoon. Just wanted to dig a little deeper on the monthly utilization trend in the second quarter. I know month-to-month trends can be noisy but can you just give an idea on why it was a little lower in May and June versus March and April, just the timing of certain projects cost, or there is a pause from a burst of ketchup in March or April, what is your opinion on that?

Steve Fife

Well, I think it is actually both of those too. When we look back – when I went back and looked at the kind of matter level detail in March and April, there were significant number of cases that you had deadlines during that time period that drove the utilization at that level. And then as we kind of continually discussed given the demand nature of our business when those cases settle, there is typically a little bit of a low between settlement and when the staff are redeployed. And so given the level that we are at in March and April, we saw that – we saw that top off in May and June and I think it is just a normal unevenness that we have been experiencing and frankly expect to continue to experience here in the short-term.

Sean Jackson – Avondale Securities

Okay. And also I think you mentioned about some cost savings that you are – cost cutting that you have done, and in the second quarter, you did not get the full effect from, can you just repeat what you said of that and approximately how much, what kind of magnitude are we talking about here?

Steve Fife

Yes. So on an annualized basis, we took out approximately $11 million in cost and …

Michael Jeffery

In cost of services.

Steve Fife

In cost of service and that was largely done in the June timeframe. So I would say you know maybe 20% of that annualized number was – we clearly got some benefit in the quarter but we would expect to get the full benefit actually starting in Q3.

Sean Jackson – Avondale Securities

Okay, all right. Thank you.

Steve Fife

You are welcome.

Operator

(Operator instructions) And we have no further questions; I'll turn the conference back over to Michael Jeffery for any closing remarks.

Michael Jeffery

Thank you very much. I would like to thank everybody for taking their time out to listen to us.

And just to reiterate, I think in summary, we still feel that the macros for LECG look very positive. Litigation is picking up. We are encouraged that we feel we're coming out of the bottom of our downturn in revenues and we're seeing encouraging signs across the board apart from global competition and antitrust. And I think the other thing to take away is that while we were soft in the year particularly, that the improvement that we did see although slight in the United States actually made for that setback that we had in Europe. So, all those are quite encouraging signs. And more importantly the fact that we continue to be able to hire top end experts in the field and continue to add to the highly credentialed talent pool that we have in LECG. Again, thank you very much.

Operator

And that ends today's presentation. We do thank you for joining us today.

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