Diamond Management & Technology Consultants, Inc. F2Q10 (Qtr End 09/30/09) Earnings Call Transcript

Diamond Management & Technology Consultants, Inc. (DTPI)

F2Q10 (Qtr End 09/30/09) Earnings Call Transcript

November 4, 2009 9:00 am ET

Executives

Margaret Boyce – Director, IR

Adam Gutstein – President and CEO

Karl Bupp – CFO

Analysts

George Price – Stifel Nicolaus

Ed Caso – Wells Fargo Securities

Kevin Liu – B. Riley & Company

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Diamond Management & Tech Consultants second quarter conference call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Wednesday, November 4, 2009.

I would now like to turn the conference over to Margaret Boyce, Director of Investor Relations. Please go ahead.

Margaret Boyce

Thank you. Good morning, everyone. This is Margaret Boyce, Director of Investor Relations for Diamond. Also with me today is Adam Gutstein, our President and CEO and Karl Bupp, our Chief Financial Officer. Adam will begin with a discussion of the September quarter. Karl will provide the financial details and then we’ll open up the call for questions.

We have supporting slides available on our website that accompany our remarks today. I would also like you to note that the financial results we will discuss today are related to the continuing operations of the company, unless otherwise noted.

As a reminder during today’s call, we will make both historical and forward-looking statements in order to help you better understand our business. You should realize that our actual results may differ materially. Any forward-looking statements speak only as of today’s date, November 4, 2009, and we undertake no duty to update this information in the future. The risks and uncertainties associated with our business are highlighted in our filings with the SEC, including our Annual Report on Form 10-K for the year ended March 31, 2009.

Before turning it over to Adam, I’d like you to know that we’re presenting at the following conferences during the December quarter. The Janney Montgomery Scott Software and Services Conference, the Goldman Sachs Data Center Techtonics Conference, both in New York, and the Barrington Research Conference in Chicago. For more details about these events please visit the IR section of our website.

I’ll now turn the call over to our President and CEO, Adam Gutstein. Adam?

Adam Gutstein

Thanks, Margaret, and thank you all for joining us this morning. We’re pleased to share with you the results of our second quarter. We executed well and delivered results above our previous guidance on nearly all dimensions.

First, net revenue of $43.6 million was up 8% year-over-year, and 15% sequentially. EPS of $0.07 was above our previous guidance of $0.03 to $0.05.

Second, we saw significant margin expansion this quarter with pretax margin increasing to 8.5%, driven by rate improvements, consistent chargeability, increased head count and strong expense management. Finally, free cash flow was over $10 million exceeding our previous guidance of $4 million to $6 million.

Looking ahead, we expect net revenue to be in the range of $43.5 million to $45.5 million in the December quarter.

Let’s start with the discussion of the second quarter and what we’re seeing from a demand standpoint. Our strong performance was the result of increased demand in both the US and the UK. From an industry perspective, growth was particularly strong in insurance and health care. Financial services and enterprise also grew nicely.

Our work in the second quarter continued to emphasize the changing environment in terms of increasing competitive intensity and regulation. Our clients recognized the change and are motivated to better differentiate themselves relative to how they interact with their customers and how they manage their offerings and operations. We’re helping our clients increase the value of their information and make better decisions, better align their business, operating and technology strategies and plan, execute and realize value from their most important projects.

Turning to our business metrics, revenue per professional was $376,000, the highest level in over three years driven by improved pricing and higher chargeability. Chargeability in the second quarter ran high at 76%, which is above our target. However, we expect it to trend lower next quarter as we assimilate recent hires and continue to add staff. During the September quarter, we welcomed over 60 new hires, a combination of both campus and non-campus hires.

Included in this group was a new partner in our Mumbai office, Alok Gupta, a well respected Financial Services Consultant, who brings additional leadership capabilities, skills and experience to help us capitalize on our financial services opportunities in India. Consistent with our long-term outlook, we promoted six individuals to partner. Growing and developing the leadership of the firm primarily within our own ranks remains a corner stone of the firm. Over 85% of all Diamond partners have been developed from within the firm.

Annualized voluntary attrition improved to 8% from 13% last quarter within our target range.

This has been a very difficult economic time for us and most companies and we believe the worst is behind us. Coming out of this period, Diamond is stronger with sharper service offerings, deeper industry skills and even better people. We’re fortunate that the actions we took at the start of the downturn, including improving our cost and capital structures have positioned us well for the future, delivering real economic value in challenging times, maintaining core client relationships and investing in our people, service lines and relevant intellectual capital have always been keys to our success.

In the beginning of our fiscal year, we laid out a growth strategy comprised of expanding revenue opportunities by both geography and industry, building and focusing our service lines and brand, growing our current client relationships and cultivating new, significant relationships. We feel good about what we’ve accomplished and as we look forward, we’re well positioned for growth. Today, demand is healthy. Our client relationships are excellent, our industry knowledge and offerings are strong and our people continue to be among the very best.

While it’s hard to know just how long it will take for the economy to establish a solid footing, it is in transition and we’re pointed to a return to double-digit annual revenue growth, pretax margins and free cash flow as a percentage of revenue. In the December quarter, we expect net revenue to be in the range of $43.5 million to $45.5 million.

I’ll now turn it over to Karl to review the second quarter results. Karl?

Karl Bupp

Thanks, Adam, and good morning, everyone. We’re pleased with our second quarter financial results and the progress we made improving our operating metrics.

Net revenue was $43.6 million, above our previous guidance of $38 million to $40 million, and up 15% or 14% in constant currency versus the prior quarter. Compared to the second quarter of last year, net revenue was up 8% and 9% on a constant currency basis.

Project personnel costs before reimbursable expenses was $31.6 million in the second quarter, up from $28.6 million last quarter and $29.5 million in the September quarter last year, primarily due to a 10% increase in head count.

Gross margin was 27.5% in the second quarter, compared with 24.5% in the first quarter and 27.2% in the September quarter of last year, driven by improved revenue per professional.

Total other operating expenses were $8.3 million, up from $7.4 million in the June quarter due to increased recruiting and training costs, and down 9% from the September quarter of last year.

Stock-based compensation expense was $1.3 million in the second quarter, the same as the prior quarter and down from $3.8 million in the September quarter last year.

Pretax income was $3.7 million, up from $1.9 million in the June quarter and $2.1 million in the September quarter of last year. Pretax margin was 8.5%, up from 5% in the prior quarter and 5.2% in the September quarter last year. The effective tax rate was 51% in the September quarter, versus 55% in the June quarter and 75% in the September quarter last year. The decrease in the second quarter tax rate was due to improved international profitability.

Income from continuing operations after taxes was $1.8 million or $0.07 per diluted share in the September quarter, up from $800,000 or $0.03 per diluted share in the June quarter.

Income from continuing operations after taxes was $500,000 or $0.02 per diluted share in the September quarter last year.

Diluted weighted average shares outstanding was 27.7 million in the second quarter compared with $27.4 million, 24 million last quarter and 26.4 million in the year-ago period.

EBITDA was $4 million in the second quarter, up from $2.4 million in both the prior quarter and the second quarter of last year.

Free cash flow was $10.8 million in the second quarter, exceeding our previous guidance of $4 million to $6 million. The exceptional free cash flow was due to revenue growth, continued diligent expense management, good collections and increased variable compensation accrual, which was paid out at the end of October.

Days billing outstanding was 30 days in the September quarter, compared with 31 days in the June quarter and 34 days in the second quarter of last year.

During the second quarter, we repurchased nearly 500,000 shares of stock at an average price of $6.08 per share. Our stock repurchase authorization was $23.7 million as of September 30, 2009, and we remain committed to managing dilution from future equity grants, as well as opportunistically purchasing shares based on the market environment, investment opportunities and our cash flow outlook.

In September we paid out our second quarterly dividend of $0.07 per share or $1.9 million. We ended the quarter with cash and cash equivalents balance of $54.4 million, up $6.3 million from $48.1 million at the end of June.

Turning to revenue by industry, the mix was similar to last quarter. The second quarter mix by industry was financial services 31%, insurance 27%, healthcare 21%, enterprise 17% and public sector 4%.

Turning to our client metrics, we served 61 clients in the second quarter, the same as the prior quarter and compared with 64 in the second quarter of the prior year. We added 8 new clients in the second quarter, which generated 1% of revenue compared with 10 new clients last quarter, which generated 6% of revenue and 10 new clients which generated 5% of revenue in the second quarter last year.

Although the number of new clients and the revenue generated in the quarter was low, the majority of these new clients have the potential to become significant relationships. Our top five clients represented 37% of revenue, compared with 34% in the first quarter and 35% in the second quarter of last year.

We ended the second quarter with 486 consultants compared with 441 in the prior quarter and 495 in the second quarter of last year.

Annualized revenue per professional was $376,000 compared with $335,000 in the prior quarter and $336,000 in the second quarter of last year. Second quarter chargeability was 76% compared to 74% in the prior quarter and 66% in the second quarter of last year.

Our annualized voluntary attrition was 8% in the second quarter compared with 13% in the prior quarter and 9% in the second quarter of last year. We expect to end third quarter with 495 to 505 billable consultants.

Looking ahead to the December quarter, we expect net revenue to be in the range of $43.5 million to $45.5 million, pretax income of $3.7 million to $4.3 million and GAAP EPS in the range of $0.07 to $0.08 per share.

We expect stock-based compensation expense to be $1.3 million, tax expense to be in the range of $1.9 million to $2.1 million and our weighted average share count to be approximately 27.5 million shares.

And finally, free cash flow is expected to be negative in the December quarter in the range of negative $8 million to negative $6 million as a result of the payout of variable compensation in October. I’ll now turn it back over to Adam.

Adam Gutstein

Thanks, Karl. In summary, our business is healthy and both the near-term and long-term future is bright. We’re operating in an improving demand environment with relevant services, exceptionally skilled people and durable client relationships.

With that, I’ll open up the call for questions.

Question-and-Answer Session

Operator

(Operator instructions). Our first question comes from George Price with Stifel Nicolaus. Please proceed with your question.

George Price – Stifel Nicolaus

Hi. Good morning, everyone and congratulations on a nice job in the quarter

Adam Gutstein

Good morning, George. Good to hear from you.

George Price – Stifel Nicolaus

Karl, real quickly, I missed one thing. What were the billable expectations in December?

Karl Bupp

For the head counts, we expect [ph] billable headcount to be between 495 and 505.

George Price – Stifel Nicolaus

Okay. And just I wondered, maybe, Adam if you could give us a little bit more color on how demand trended in the different verticals of the quarter, and I guess how you see them playing out in the December quarter?

Adam Gutstein

Yes, George, actually, really across all the verticals we serve, our business has been reasonably strong and reasonably consistent. And I don’t expect to see much of a change as we look forward, at least as far as the December and the March quarter.

Financial services has been strong throughout the downturn. I think we had one quarter where it dropped and the rest of the time it was flat to up. Insurance trended up nicely this past quarter. Even enterprise, which as you know is comprised of businesses like telecom, consumer, industrial, logistics, transportation, also trended up nicely this quarter.

I expect, you know, basically I expect financial services and insurance to continue to be strong. I think healthcare will continue to be strong and I think there’s still some softness in the enterprise segment because I think that’s lagging in the economy. But overall, it’s pretty broad based.

I still believe that things are stronger at least for the moment here in the U.S. than they are in Europe and our business is rather small in Asia, but for us it’s weaker in Asia.

George Price – Stifel Nicolaus

Okay. And, I’m assuming that the trends that you saw last quarter decrease in cancellations, deferrals, improving visibility, good pipeline, no negative changes there, if anything things moving the other way?

Adam Gutstein

Correct. If anything, things moving the other way.

George Price – Stifel Nicolaus

Okay. Any thoughts on IT budgets going into next year, what are going to be -- what are shaping up to be the areas of focus for clients given the kind of visibility that you guys tend to have?

Do you expect that the timing of the budgets being finalized and new spending in the new year starting to ramp, do you think those things will take longer than normal, or what are your thoughts on that?

Adam Gutstein

Well, I have probably seen the same surveys that you’ve seen that suggest that IT budgets will be up 2% to 4% this coming year. From our standpoint, and again you have to remember that our clients are primarily sea level executives, so in the IT side it tends to be the CIL.

From our standpoint, we don’t expect those budgets to be finalized until sometime in the middle of the first quarter, middle to the end. It’s just typically how as we see business run itself the last several years and certainly this year with continuing uncertainty, we just don’t expect to see that finalized.

Having said that, I do expect to see more what you folks in the analyst community call discretionary spending take place. I think that there is a bit of pent up demand to be able to compete more successfully because everybody is making a difference in how they interact with customers, how they bundle their offers, how they use information to create a competitive advantage and so my own sense is that we’ll see more in the discretion area than we have.

George Price – Stifel Nicolaus

Okay. Last question, Karl, if I could, the cash flow being negative next quarter, I guess maybe a little bit more than I would have thought, what’s the bonus payment number, are there any other factors that are influencing cash flow next quarter? Is there some, I guess, you had a good collections quarter. Do you think, is there a little bit of conservatism that hey, can we maybe not see that pace continue at quite the same level?

Karl Bupp

Well, George, what’s going to impact the December quarter is the shift in our payout of variable comp. We typically paid that out in April and this year we’re going to begin payout in October and the next time we pay out annual variable comp will be October of 2010. The payout is going to be a little less than $15 million. It was actually done in October.

But remember, George, we made a significant shift in our compensation structure. We went -- we did the tender offer in March. We shifted from primarily equity-based variable comp to cash-based variable compensation, so that’s -- this is part of the shift. We were expecting that.

In terms of collections, I mean, we’re expecting 30 days DBO at the end of December.

It’s typically our strongest collection quarter, so we might be able to do a little bit better, but our guidance anticipates 30 days DBO, and that’s really the difference. And I think when you look to the June quarter next year or June 2010, since you’re not going to have a cash payout then, that should be positive versus typically negative.

George Price – Stifel Nicolaus

Okay. Fair enough. I’ll let some others jump on. Thanks very much.

Adam Gutstein

Thank you.

Karl Bupp

Thank you.

Operator

Thank you. Our next question comes from Ed Caso with Wells Fargo Securities, please proceed with your question.

Ed Caso – Wells Fargo Securities

Hi. Thanks. Congratulations on a good quarter. I guess I want to drill down a little bit more on productivity and chargeability. I think, Adam, you mentioned that 76% was a little hot for you guys. Can you sort of remind us what the normal range is and your ability to keep it in that normal range?

Adam Gutstein

We’d like our chargeability to be about 71%, so it was about 5 points higher than we’d like and, it’s a constant battle to manage, to manage that. We have made some changes that, we believe will help us even out our chargeability and that has to do with our annual review cycle and our campus hiring cycle better matching up. So with the with the campus hires coming on June, July, August, September and our annual review cycle taking place now in September and it being in effect in October, that should give us a bit more control in terms of the ups and downs in our head count, but, we’re not, we’re not unhappy about running this hot for a quarter.

We don’t want it to run this hot for too long because if you let it run this hot for too long, you don’t have enough capability to invest in training, proposal development and, frankly, even a little down time for your people.

Ed Caso – Wells Fargo Securities

Can you, I apologize if I heard it, I missed it, but pricing, your sense on the direction of pricing?

Adam Gutstein

Pricing for us has basically increased modestly on a monthly basis for each of the last four, five months.

Ed Caso – Wells Fargo Securities

And you think that will continue or is there some seasonality to that?

Adam Gutstein

I don’t think there’s any seasonality to that. I think in our case, it’s really about picking the right clients, the right work, getting it staffed properly, being sure that we’re working on the most important, the highest impact projects and then I think our value is clear. I think when we find ourselves in a cycle where, everybody is scrambling and there’s not a lot of high value work using the terms that the analysts community likes to use, not a lot of discretionary work, our pricing is hurt.

Ed Caso – Wells Fargo Securities

My memory is in the best of times, revenue per consultant was in the sort of 425, 450 range, and may be off a little bit. Where do you think that will go here in the coming quarters?

Karl Bupp

I guess, Ed, this is Karl. I think in the, looking here in the December quarter, we’re guiding somewhere between 355 and 365. I think as Adam mentioned, chargeability was higher than we’d like in the September quarter and we realized we added 60 plus new hires in the September quarter. We’re still out recruiting and adding folks here in the December quarter as our net head count will increase, probably 10 to 20 on a net basis. So revenue per consultant is going to come down a little bit as we bring the chargeability and our goal is to get the chargeability down closer to 70% here in the December quarter.

But my guess is chargeability will be, continue to be above 70% for this quarter and probably the next quarter.

Ed Caso – Wells Fargo Securities

Okay. Just I’m really clear here, are you, have you declared victory here? Are you more positive, is it, are the win, is the win in the sales or are you still in choppy seas, whatever the expression is?

Adam Gutstein

Look, if you look back at our performance, we basically grown from, 35/9 to 37/9 to 43/6 and we’re guiding flat to up. So, it would be hard to say, Ed, that we don’t think things have gotten a lot better. So our point of view is we believe the worst is behind us and we think that, there are better times in front of us. We got a great deal of confidence in the business over the long term as we always have, but even here in the near term, and we look out to December, it feels pretty good and we even have some visibility into March, which feels pretty good.

Our guidance, frankly, imagine some softness in December and even in January as we look forward. And frankly, if we happen to be flat in the December and March quarter, we’ll have grown year-over-year roughly, I don’t know, somewhere between 11 and 13%. It’s pretty good by any measure. So I’d say we, we believe things are, looking up for us.

Ed Caso – Wells Fargo Securities

My interpretation, then is, as you’re feeling good, things are better, but, they’re not rolling business at you at the moment?

Adam Gutstein

I didn’t follow that. We’re not doing what?

Ed Caso – Wells Fargo Securities

I guess the business is good, but it’s not as robust as it could be in a better cycle?

Adam Gutstein

Well, I think there’s no doubt in a stronger economy with increasing business investment, we’re going to do better. The good news is that business investment was slightly up in the last reported quarter, but if you look in the prior quarters, it was particularly weak. So my view is that, we should only perform better. But by the same token, look, it’s obviously uncertain times, so we still proceed in a measured way and we’re careful about our spending. We’re running a good business. I think we have run a good business for several quarters and we’re going to continue to run that good business.

Ed Caso – Wells Fargo Securities

Great. Thanks. Congrats.

Karl Bupp

Ed, just to clarify, this is Karl. When Adam talked about seeing some potential softness in December and January, that’s typical seasonality, as our clients slow down around the holidays. I don’t think we’re, that’s what Adam was referencing.

Operator

Thank you. Our next question comes from Kevin Liu with B. Riley & Company. Please proceed with your question.

Kevin Liu – B. Riley & Company

Hi. Good morning. Looking at the net revenue number you generate in the quarter, obviously came in well above what you guys had originally thought you could do and without a big contribution from the new clients in the September quarter, I was wondering kind of what drove that upside relative to your internal expectations, if you could put a little color around maybe some of the ramp up in work that some of your existing clients did?

Adam Gutstein

Well, it was really just, hey Kevin, it’s Adam here. It was really just stronger performance amongst our top 20 clients. And these are obviously very strong companies, well positioned in their industries and or investing to frankly get ahead and further to lead on the competition. So it was really as simple as that.

Kevin Liu – B. Riley & Company

Got it. And then in terms of some of the visibility you pointed to going even into the March quarter, is it just the nature that some of these projects are now longer term or is there something else that you can point to whether, whether it’s that clients aren’t requesting, as quick of an ROI as they used to, anything you can point to on that front?

Adam Gutstein

I do think projects are a bit longer. I also think our relationships are stronger as evidenced by the continuing, durability of those relationships. I think it’s up to almost three years on average at this point. We also have typically more than one thread in each of our major clients, so we’re working in multiple functional areas with multiple relationships on multiple projects.

So, overall, I think we’re just very well positioned with our top clients. At the same time, even the new client starts we had this quarter all have the potential to grow into many have the potential to grow into significant relationships and even as we look to the December quarter already, the new client starts in December are well ahead of the new client starts we had in September. So it’s a nice mix of what’s going on out there.

Kevin Liu – B. Riley & Company

Great. And one last one, just with the pickup you’ve seen in the business so far, what are your plans in terms of scaling the sales and marketing as well as the recruiting cost backup?

Karl Bupp

Well, what you’re going to see here, Kevin, this is Karl, as here in the December quarter you’ll see an uptick in both recruiting and sales and marketing. We held a Diamond Exchange event in October and we’ve also been increasing our non campus recruiting here. We’re also, we’ve also went back on campus and we’re, in fact, on campus today at a number of schools with a target that would increase our campus yield by, over 50 at least over 50% from what we took last year off the campus. So, you’ll see those two numbers move up as we look ahead.

Kevin Liu – B. Riley & Company

Great. Thank you.

Operator

Thank you. (Operator instructions) Our next question comes from George Price with Stifel Nicolaus. Please proceed with your question.

George Price – Stifel Nicolaus

Thanks very much. Just had a couple of follow-ups. First of all, Adam, I just missed, want to make sure I heard correctly the comment that you made just now about the new client starts in December quarter. Is that new client, the revenue pace from new clients is, higher in thus far in this quarter than the September quarter, is that what you meant?

Adam Gutstein

Yes, it’s really interesting where we are. The truth is we probably have better visibility today, than we have had in any time since the bubble years, which is really extraordinary, if you think about it. And, so, here I am sitting talking about the September quarter, but I am also able to comment on what’s going on in the current environment and midway through the December quarter, it’s true. Our revenue from new client starts in December is ahead of what we did in September by quite a significant amount. So, yes, I think that’s pretty good.

George Price – Stifel Nicolaus

Okay. And just kind of curious, what do you think caused the low new client revenue percentage in the September quarter? Was it just kind of a, slow ramp, nature of the work?

Adam Gutstein

I think it’s the admiration that we Americans have for the Europeans, and I think what happened is that August is a really slow, slow month, that’s what I think happened.

George Price – Stifel Nicolaus

Yes.

Adam Gutstein

Okay.

Karl Bupp

This is Karl, George, a lot of those new clients started in September and, one of the things we are seeing is a very nice ramp up here from those clients that started in the September quarter, ramping up here in the December quarter.

So I think Adam is right, I think we had a little bit -- just a little bit of new client seasonality in the September quarter.

George Price – Stifel Nicolaus

Okay. Okay. With the new -- kind of getting back to cash flow, so with the new incentive comp focus on, on cash payments, do you have a target for, how you kind of think about the cash generation potential of the business or some way for us to, think about it, boil it down to a range or, numerically somehow?

Karl Bupp

You know, George, we think of it as about 12% of revenue.

Adam Gutstein

That’s kind of the target long term, the annual target.

Karl Bupp

And I think this year is a little unique because we have a bit of a stump period. We paid variable comp in April, we paid it again in October and then next year, I think it will become more normal as we just pay out all our variable comp in October.

George Price – Stifel Nicolaus

Right. Right. Sure. And the -- and in terms of the profitability, you used to, really think about the business from a pre-tax perspective and, talk about mid-to-upper teens on a pretax level. What -- given what we are coming out of and the changes you’ve made to the business and how you see the environment at least right now, what do you think is a reasonable target level in terms of where you could get the profitability of the business?

Adam Gutstein

In the near term, we ought to get ourselves to double digits on a pretax basis and over the long term, we ought to be able to get to 18%.

George Price – Stifel Nicolaus

Okay. So you still think, Adam, there is nothing structurally that’s changed about demand or pricing in the environment or your business or anything like that, that would constrain you from getting back up to that level, in a normal demand environment? I realize we are probably not anywhere near normal yet?

Adam Gutstein

No, I would agree with what you are saying. There are always changes in the environment, but the challenge for all of us is to manage in the context we are given and, I mean, you know, Karl, what do you think we can do from an EBITDA standpoint?

Karl Bupp

I think we do roughly the same thing, roughly 18% pretax long-term getting there. I think the thing we want to do here, George, is to grow into this nicely and make sure we make the investments today to ensure that we have predictable, sustainable growth.

And so we have talked a bit about kind of the sharing formula and our guidance assumes that 30% of incremental revenue dollars fall for the pretax line. So, we think that’s a nice way to kind of transition up to 18. Some may argue that, that time line is too long to get to 18%. But that’s the form -- the path we are on today, and if we can do it more quickly, we will. But we want to make sure we do it thoughtfully, making the appropriate investments in areas like recruiting, training, marketing, sales so we can have predictable, sustainable, profitable growth.

George Price – Stifel Nicolaus

Right. Okay. Last question, just was hoping to tap in a little bit more broadly to what you guys -- kind of a follow up to the 2010 budget questions that you’ve gotten, but tapping a little bit more broadly to the view, pretty unique view that you guys have, can you talk any more specifically about, you know, common themes or trends in terms of demand, things that clients are focusing on coming out of this downturn?

I mean, you know, I know it may still be a little bit early for next year, but where are they looking to spend their, where are they looking to spend their money? Different areas of technology, different areas of software, you know, types of services, offshore demand looks to be quite strong, for example, do you anticipate that that’s going to continue next year? Just love to hear what you are kind of seeing out there? Thanks.

Adam Gutstein

You know, from our standpoint, George, we have tried to design our service lines in such a way to reflect what we think are the real demands out there and, you know, offshore versus onshore, that sort of thing, that’s a trend, it’s a major force that’s going to continue for some period of time regardless of what companies choose to do. When they can get better skills and better economics, they are going to go offshore and, we saw a bit of a pause in that during the downturn because I think people froze a little bit. You know, it wasn’t because that major trend was changing or not changing, you just had some people freeze.

In terms of what we think clients are going to focus on, as we look forward, from our standpoint, we’ve organized the company to grow in a way that we can deliver repeatable services and it’s really our platform for growth.

So, basically we are organized in a way today very differently from the way we have been organized over the course of history. We have very strong industry organization, strong industry skills. We have strong geographies, and we also have service lines that really drive our business.

So, when you look at what companies are spending on, really across industries, first they want to get more value out of the information they have. So, stronger analytics, stronger decision making, making better decisions. It’s obviously very technology and very information intensive. Second, what they want to do is they all have to differentiate themselves. This is a world where clearly savings rates, at least in the developed world, are going to go up and there are going to be fewer dollars chasing, you know, the existing offerings. That means you got to have a customer experience at every part of the value chain that is stronger, more differentiated better. So we have a service line, what we call customer impact and we think that there will be quite a bit of spending in that area.

The third area is basically aligning a company’s business operating and technology strategies. There is too much leakage and there is too much inefficiency across those areas, so that even with the best of out market strategy or a product strategy or an operating strategy, the technology may not be aligned properly, and there is an enormous amount of value to get -- to synchronize, if you will, across the organization.

So, our focus is in that area as well. And finally, companies do not want to make the same mistakes that they did in the past where they have these huge projects, hundreds of millions of dollars and they don’t realize the value. So, having topnotch management talent that can help drive those benefits and make sure that they realize the intended benefits, that’s the fourth area of focus we have, and our research tells us that those four areas are where people are going to be spending money.

From the standpoint of, what else is going on out there, there is obviously a lot of regulatory change and a lot in the way of compliance issues. Now, my guess is that’s only going to increase. We are going to see that in healthcare, in the pair market, we are going to see that obviously in financial services and we are going to see that in insurance.

So we think we are well positioned there. We are also going to see technology changes driven largely by web 2.0 and what comes beyond, those social media and the like, and many of our clients today are already asking and doing things about that, trying to figure out how they can capture the mine share of their potential and existing clients.

So that’s a technology trend that we see out there that’s meaningful. So, from our standpoint, there is a lot of good things going on in the minds of our clients and our prospects. We think we are very well positioned. Our business is running as well as it’s ever run and our future, in our view, is very bright.

George Price – Stifel Nicolaus

Great. Lastly, what do you guys think about some of the recent M&A and, in the industry and I guess, maybe just give us some of your thoughts currently on whether you start to think about making any acquisitions yourself or, you know, frankly whether you think somebody is interested in you?

Adam Gutstein

George, I thought you were about to make an offer for us at like 30 or 40 times’ earnings? That’s where I thought you were going with that.

George Price – Stifel Nicolaus

I think that’s been done.

Adam Gutstein

Yes, I was really liking that. Our point of view is that we are always in the market looking for the right kinds of acquisitions, and if we find an acquisition that is of the right size, at the right price, in the right area of focus, frankly taking advantage of how we are organized, so if it gives us some more geographic coverage or gives us another leg in the industry area or if it gives us an additional service offering or service line, you know, then we will do it. But it will have to be the right fit at the right price at the right time.

And, as of yet while we have seen a lot because there are plenty of people hawking things out there, we haven’t seen things that quite make sense for us.

George Price – Stifel Nicolaus

Okay. Great. Thanks.

Adam Gutstein

Thank you.

Operator

Thank you. Miss Boyce, there are no further questions at this time. I will now turn the conference back to you. Please continue with your presentation or closing remarks.

Margaret Boyce

Thanks, operator. And thank you all. We appreciate you taking the time to join us today and we look forward to speaking with you again next quarter.

Take care, bye-bye.

Operator

Thank you, ladies and gentlemen. That concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.

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