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BearingPoint, Inc. (BE)
Q2 2007 Earnings Call
October 22, 2007 5:00 pm ET
Executives
Connie Weaver - IR
Harry You - CEO
Judy Ethell - CAO, EVP Finance
Analysts
Pat Burton - Citigroup
Julio Quinteros - Goldman Sachs
Adam Frisch - UBS
Andrew Steinerman - Bear Stearns
George Price - Stifel Nicolaus
David Cohen – JP Morgan
Susan Chen - Merrill Lynch
Rod Bourgeois - Sanford Bernstein
Operator
I would like to welcome everyone to the BearingPointinvestor conference call. (Operator Instructions) Ms. Weaver, you may beginyour conference.
Connie Weaver
Thank you, Teresa and good afternoon to everyone. As Teresamentioned, I'm Connie Weaver, BearingPoint's Chief Marketing Officer and alsoHead of Investor Relations. With me here this afternoon are Harry You, ourChief Executive Officer; and Judy Ethell, our Chief Financial Officer.
We hope that you've had a chance to review our Form 10-Qfiled earlier this afternoon; since it just made the wire at 5:00, I'm sure you really haven't. We are goingto take the time in this next hour or so to review the high points of ourfiling for the second quarter, the 10-Q, and also included in that you willfind metrics for the third quarter which we will be discussing.
At the end of our call, we will be opening the lines up, wewill take a Q&A period and we will try to answer as many of your questionsas possible. The operator will be providing us with instructions on how to dothat at the end of our formal remarks. I would ask you at that time to try tokeep your questions to about two per person, so that we can get through as manyof you as possible.
Before we get started, the information covered on today'scall which is not historical in nature consists of forward-looking statementswithin the meaning of the Federal Securities law. Words such as may, will,could, would, should, anticipate, continue, expects, intends, plans, believes,in the company’s view, and similar expressions are used to identifyforward-looking statements.
These statements are only predictions; as such, they are nota guarantee of future performance and involve risks, uncertainties andassumptions that are difficult to predict and which could materially, adverselyaffect the company's financial condition and results of operations.
Forward-looking statements are based on assumptions forfuture events that may not prove to be accurate. Actual outcomes and resultsmay differ materially from what is expressed or forecast in forward-lookingstatements. As a result, these statements speak only as of the date they weremade. The company undertakes no obligation to publicly update or revise any ofthe forward-looking statements, whether as a result of new information, futureevents or otherwise.
Please refer to 1(a) Risk Factors, contained in thecompany's annual report on Form 10-K for the fiscal year ending December 31,2006; and the company's quarterly report on Form 10-Q for the second quarter of2007; and subsequent filings with the SEC for additional information regardingthe risk factors.
With that, let me turn things over to Harry You for theformal part of the session.
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We filed our secondquarter 10-Q within a few weeks of publishing our first quarter financials; andmore importantly, prior to the due date for our third quarter 10-Q.While we arenot ready to declare victory just yet, I am pleased about our progress, and I'mexcited about our future. Over the past two years, our people have not lost theirfocus on satisfying their clients, executing elements of our strategy andbuilding a more solid future for our company. In fact, there are countlessexamples of progress being made across the firm, whether it is our growth inChina, success in our emerging markets practice, the launch of our new brand,or a smarter go-to-market approach with our solutions, we are working hard toposition ourselves for continued success in the marketplace. We have made this progress even in the face of greatermarket uncertainty, and the overhang of not having current financials. While2007 has not been without its challenges, as you will see in some of our secondquarter numbers, I believe we are at a turning point and I'm excited about whatlies ahead. Our mission remains to be one of the preeminentconsultancies in the world, and I believe we have the right people and theright solutions to achieve the results we aspire to. Our customers believe thatthis is true, and we need to persuade recruits and new shareholders that thisis the case. Becoming a timely filer, I believe, will be a critical inflectionpoint for the firm. While we are not there yet and there may be challenges ahead,we expect to file our third quarter financials later this year, setting thestage to timely file our 2007 10-K in February, and hopefully put this incrediblyhard and costly part of BearingPoint's history behind us. In so doing, we will intensify our efforts to driveprofitable growth, including making important decisions about where we willplay and where we won't; taking more decisive actions to cut our SG&A, butalso investing in our core business, our brand and our people; something whichwe haven't been able to do on account of the distractions we have faced overthe past two years. Many of you ask why it's taken so long and cost so much, andI think when you look at what we've had to do in terms of GAAP eventsaccounting and catching up with all of the historical errors in the past aswell as remediating our system, it has been a task that has taken longer than Iwould have thought and been more costly. But at the same time, I hope people donot underestimate how with this burden relieved, I hope we can perform betterin the future. We also hope to be able to more proactively position ourselveswith clients and also resume regular communications with The Street, startingwith this conference call. So with that, let me turn to our second quarterresults. For Q2 results, our gross revenues for 2007 for the secondquarter were $875.3 million, a decrease of 1.9% from the second quarter of2006. As we look at our North American units, our results were mixed as strongperformance in our public services unit was offset by declines in financialservices and commercial services. In the second quarter, public services -- the cornerstone ofour business, representing 41% of revenue -- grew year over year by 5.4% as wecontinued to win work with existing clients and expanded our footprint in highgrowth markets within the PS sector, even in the face of Federal appropriationsdelays in the first half of the year. For instance, the U.S. Navy recently awarded us a five-yearengagement worth $57.9 million to provide IT management support. In the Stateand local markets, clients are now turning to BearingPoint as one of theleading providers of retirement, motor vehicles, and unemployment insurance ITsolutions, as evidenced by the recent e-gov win with the California Departmentof Motor Vehicles. Similarly, we have built a strong emerging markets practicesupporting agencies such as The U.S. Agency for International Development,USAID, across the globe. In the quarter, our financial services unit continued to beimpacted by the same challenges which affected our first quarter results. Aspreviously disclosed in the latter part of 2006, one of our largest FScontracts rolled off after successful completion. Even though this contractrepresented a significant piece of our FS portfolio at the time, we hope tooffset the impact by booking enough work to refill our backlog. But we wereunsuccessful, largely on account of client perceptions regarding our filingsituation and financial position, which resulted in a significant decline in FSbookings. At the same time, we lost some key professionals in our highgrowth technology practices within FS, which weakened our competitive position.Unfortunately in the first quarter, we did not respond quickly enough to reduceour capacity in response to these issues, so this materially impacted both ourrevenue and profitability. During the course of the second quarter, however, wereacted more aggressively to these challenges by right-sizing our cost base inFS. We have reduced billable headcount and will continue to trim costs tomanage profitability. So even though client perceptions regarding our filingsituation and financial position continue to disproportionately impact our FSbusiness, we are hopeful that the information we provide today and the timingof our announcement can start to put an end to these misperceptions once andfor all. Also, while we cannot completely discount the risk that thebusiness deteriorates even further given uncertain market conditions, FS nowrepresents only a small portion of our overall revenue and gross profit. Commercial services also contracted in the second quarter.As you know, over the past 18 months, we have taken significant steps torefocus our commercial services practice, including establishing new leadershipunder Ed Harbach and implementing a broad set of initiatives to rationalizeaccount strategies in an effort to better target offerings across ourprioritized industry. We continue to exit small and unprofitable accounts andcontinue to refine our focus based on evolving market trends and our skillsetto ensure we deploy our energies and investments in the most effective way. We are starting to see that strategy yield results asevidenced by our improving rate per hour in CS, which is at its highest levelsince September 2004. For example, in our telecom practice, we undertook asignificant restructuring effort early this year under the leadership of TomMcKelvey. We rationalized our client portfolio, cleaned up our contracts,established new leadership beneath Tom, recruited industry experts, and rebuiltthe competitive pipeline and salesforce to push the segment forward. While we are at the beginning of this turnaround in telecom,we are optimistic that we are following the right course of action to reigniteprofitable growth. We clearly have more work to do across CS, but we areexecuting against our strategy and hope to report on our progress in the latterpart of 2007 and in 2008. Now turning to our global segments, we are pleased by theresults of our international units, EMEA in particular, which turned the cornerin 2006 after several years of contracting revenue and significant losses. Infact, from 2003 to 2005, EMEA accumulated net losses totaling $750 millionincluding goodwill impairment charges. So 2006 represented the first year thatthe unit was profitable and cash flow positive, and this reflects the significantprogress made by Peter Mockler and his team, who undertook an aggressiverestructuring program to improve EMEA's underlying operations. I'm pleased that the results continue to be strong into thesecond quarter of 2007, with the team delivering double-digit growth aided by afavorable foreign exchange benefit of 7.9% to gross revenues. Performance wasdriven by significant growth in Russia,Ireland and theUnited Kingdom. Another key driver, while not as impressive as the recordexpansion in some of the smaller countries, was the continued growth of ourFrench practice, which grew 12.1% in the second quarter and accounts for 23% ofour revenue in the region. Asia Pacific’s revenue grew 0.3% in the quarter, reversingthe declines in the first quarter. As we previously stated, we are very bullishon prospects for the region. Our performance in Chinahas been especially encouraging. BearingPoint was one of first managementconsultancies in China.We are now growing profitably in this important market and we continue to be atthe forefront of change as a key partner to the government in developing thisimportant sector. In fact, in early September I had the honor of outlining astrategy for developing China'soutsourcing industry in a keynote address at the 2007 International InvestmentForum in Xiamen. The forum is partof the world's largest international investment event aimed at bilateralinvestment cooperation. Our participation was a great honor. Of the ninespeakers, seven were Deputy Prime Ministers or Prime Ministers from othercountries. BearingPoint and Emerson Electric were the only two companiesinvited to present. In attendance were more than 800 government officials fromaround the world, including Vice Premier of China Wu Yi, considered by Forbesas the world's second-most powerful woman. We continue to be excited about ourunique position in the Chinese market, which should bode well for future growthin the region. Despite the decline in overall gross revenue, net revenueincreased slightly to $682 million as we continued to reduce our dependency onsubcontractors. We are also encouraged by improving net rate per hour trends,which have increased on sequential basis over the past four quarters for allour business. Moving down the P&L for our business, our gross profitfor the second quarter was $142.5 million, or 16.3% as a percentage of grossrevenue compared with $191.6 million or 21.5% for same period last year. Thischange was the result of the revenue decreases discussed earlier, as well as anincrease in professional compensation, largely driven by higher bonus accrualsand stock compensation expense, each of which we thought were critical tomaintaining our best and brightest people as we make it through these last hardstages of writing our financial systems and SEC reporting results. Our total stock compensation charge in the second quarteramounted to $30.9 million compared to $11.5 million in the same quarter of2006. The Q2 expense was comprised of $21.6 million associated with ourperformance share unit, or PSU plan; $5.6 million related to vested RSUs; $2.2million in options expense; and finally, $1.5 million associated with our ESPP,and owner plans and restricted stock awards. While the PSUs quick vest in 2009,pending our ability to achieve certain shareholder performance criteria, GAAPgenerally requires us to expense the cost ratably over three years. Thisresulted in a $21.6 million increase to stock compensation in Q2 2007 comparedto Q2 2006, most of which falls in the professional compensation line, as it isassociated with billable staff. So while these costs have impacted our near-termprofitability, we believe that increased focus on stock and variablecompensation have been effective in retaining our best performers during thesechallenging times, and in aligning the interest of our shareholders with ouremployees. While overshadowed by the non-cash stock compensationexpense, I do want to note the improved profitability of our EMEA and PSbusiness units. Over the course of 2006 and into 2007, PS has shown improvedprofitability. We continue to enjoy a leadership position in many of our keysegments, which has led to improved net rates per hour and increasedutilization. Similarly, EMEA also posted record results after two yearsof restructuring efforts as I described earlier. EMEA's leadership has alsobegun to operate as a region as opposed to a loose cluster of countrypractices. This has resulted in better resource coordination, a rationalizationof its solutions portfolio, and better utilization. Now turning to SG&A, our expenses totaled $174.7 millionin the second quarter, representing an improvement in absolute terms from thesecond quarter of 2006. That improvement was primarily due to the plannedreduction of temporary accountants and other costs relating to the closing ofour financial statements. While we are still running well above where we wantto be, our finance and accounting costs are declining. In fact, we currentlyexpect external finance and accounting costs to amount to $81 million for 2007, a significant reduction from2006 levels of $128 million. Overall, we are well on track to deliver on our commitmentto reduce corporate infrastructure expenses in 2007 by approximately $60 millionyear over year. Our plan is to take even more decisive actions in the latterpart of 2007 and into 2008 to further right size our SG&A, an issue onwhich we will update you in the months ahead. It is our hope to reduce ourSG&A to industry levels in the mid-teens as a percent of net revenue by theend of 2009. In the second quarter, we posted an operating loss of $32.2million compared to an operating profit of $14.7 million in the second quarterof 2006, and a net loss of $64 million, or $0.30 per share, compared to a netloss of $2.9 million, or $0.01 per share in Q2 of 2006. The factors contributing to the net loss for the secondquarter of 2007 were as follows: First, a decrease in gross profit of $49 million, primarilydue to revenue reductions and the increased stock compensation expense Idescribed earlier. Second, an increase in interest expense of $6.8 million,primarily related to additional costs associated with our new 2007 creditfacility and acceleration of debt issuance costs from the termination of our2005 facility. Finally, an increase in our income tax expense of $6.1million. Turning to our balance sheet and cash flow, I would like tospend a few minutes walking through a detailed cash reconciliation for the pastsix months, as I believe it will shed light on not only what drove our cashoutflows in the first half of the year, but also provide a better perspectiveon our outlook for the remainder of the year. As you well know, we ended 2006 with $393 million of cash onour books, largely driven by strong collections and improved businessperformance at the end of the year. At the end of June, however, our cashbalance declined to $353 million, inclusive of net proceeds of $282 millionfrom our 2007 credit facility. This represented a $322 million decline over theperiod. While significant, it can be largely explained by the following sixfactors: (1) $37million of cash use related to our net loss for the six months ended June 2007,adjusted for non-cash items. (2) $108million associated with the 13-day increase to DSOs over the same period, whichI will review in more detail a bit later. (3) $108million related to payments of certain 2006 payables or liabilities. In otherwords, items for which the GAAP expense was reported in 2006, but the cash flowimpact is reflect in our 2007 balance. This included $86 million associatedwith the payment of 2006 bonuses and other payroll-related items, as well as$22 million of costs for the fiscal 2006 audit. While we will always have someitems track over from year to year for payment, the $107 million paid in thefirst half of 2007 was unusually high. (4) Paymentof unusual items totaling $44 million. This reflects settlement costs of $35million primarily related to two telecom clients and KPMG; and a $9 millioncash outflow related to our real state restructuring efforts in the first halfof 2007. (5) Accountspayable in the normal course of business, including cash taxes and othermiscellaneous items totaling $2 million. (6) $23million of capital expenditures. So if you analyze the numbers, you will see that nearly halfof the $322 million decline was actually related to 2006 items or unusualissues that materially impacted our cash balance in what is also the weakercollections half of the year. The other significant component, as referenced earlier, was achange in our DSOs which rose sequentially from 82 days at the end of Decemberto 95 days at the end of June, resulting in a $108 million reduction in cash.This increase was in large part due to a sequential increase in unbilledrevenue which largely reflects historical business patterns. In fact, on ayear-over-year basis, unbilled revenue at the end of June 2007 actuallydecreased by $7 million from the same period in 2006. So we continue to focuson managing unbilled more efficiently and continue to believe that these arelargely collectible. So while DSOs did increase sequentially in both the firstand second quarters, if you look at year-over-year trends which remove thedistortion of seasonal business patterns, we have successfully reduced DSOs ona year-over-year basis every single quarter since March 2005. The 91 daysreported in the first quarter of 2007 compares to 102 days at the end of Q1 in2006, and 112 days at the end of Q1 of 2005. The 95 days reported for thesecond quarter of 2007 also represented a significant improvement from 104 daysat the end of June 2006 and 111 days at the end of June 2005. So DSOs continueto be a significant lever, and while we have further room for improvement,trends show that we are consistently moving in the right direction. As a result of these movements, operating cash flow and freecash flow for the six months ended June 30, 2007 decreased to negative $298.4 million and $321 millionrespectively; again, primarily attributable to the timing of 2006 payments, thehistorical issues I mentioned earlier, and cash usage from operations. We were able to turn the corner in the third quarter andgenerate positive cash flow from operations on the back of strong collections,a pattern which we signaled to you earlier this year. This drove our cashbalances up to approximately $430 million, a $77 million sequential improvementover the second quarter. Our DSO improvement in the third quarter will represent thetenth consecutive quarter of year-over-year reduction in DSOs from 96 days inQ3 of 2006 and 108 days in Q3 of 2005. As we look out to the end of the year,we hope that our cash balances will be above Q3 levels in the range of $450million to $500 million, dependent on our operating performance and on ourability to collect cash at a better rate than in the fourth quarter of 2006. In order to achieve this objective, we are tying the paymentof bonuses to DSO targets as we did at the end of 2006 and to overall businessperformance, and we believe that this incentive will again drive positivebehavior. As you will recall, our Q4 DSOs last year stood at 82 daysand that was a 12 and 21-day improvement from 2005 and 2004 levelsrespectively. To the extent we are able to reduce our DSOs below 2006 year endlevels there are opportunities for upside in our cash balances. So as previously stated, we are comfortable with our capitalstructure and with the ability of our business to generate sufficient cash torun itself over the next 12 months. We are focused now more than ever ondriving profitable growth in the future, which should allow us to continue theincrease in cash generated by our business. Let me talk now about Q2 and Q3 business metrics. Inaddition to providing this outlook on cash, I would like to provide aperspective on our current operational performance by reviewing our second andthird quarter metrics. Bookings for the second and third quarters of 2007 totaled$746.8 million and $764.1 million respectively, bringing total bookings for thefirst nine months of 2007 to $2.2 billion. Year-to-date totals represent a year-over-yeardecrease of 8.7% as growth in our international business units was more thanoffset by declines in our commercial services and financial services businessunits, and the lingering effects on our public services unit associated withFederal appropriations delays. While we have recognized that the year-to-date numbers havebeen softer than we would have hoped, we are encouraged by the steadyquarter-on-quarter improvement over the course of the year. This is especiallytrue for PS, our largest business unit, which recorded its highest bookingsquarter ever in the third quarter of 2007 as a result of both new wins and anincrease in the amount of appropriations approved by Congress, coinciding withCongress' fiscal year end. This allowed us to book significant amounts ofpreviously won but unfunded business, which resulted in an increase of ourreported bookings and a corresponding decrease in our unfunded contractsignings in the third quarter of 2007. I would like to note, however, that despite this surge inappropriations in the third quarter, our unfunded contract signings stillremain well above our historical average -- about 40%, in fact -- which meansthat we still have a significant amount of work that has been awarded but isstill awaiting funding. So the good news is that we will continue to win in themarket, and the opportunity to convert these unfunded contract signings intobookings is still there. Our record performance in PS more than offsets soft bookingsin our commercial services and financial services business units, but we arestarting to see momentum across some commercial services segments, which isencouraging. In fact, Q3 bookings in our telecom practice were up double-digiton both a year-over-year basis -- up 10.1% -- and more than double from thesecond quarter, up 108%, demonstrating that we are turning the corner and thatour strategy is yielding results. Similarly, life sciences bookings also increased on ayear-over-year basis, up more than 100%. I feel that we are well positioned tocapture demand in this sector based on our innovative work to-date. Forinstance, BearingPoint is working collaboratively with the three leadingcommunity pharmacy organizations on Project Destiny, a transformationalstrategy to enhance the role of community pharmacists in the healthcare systemby bringing more value to patients with chronic conditions through medicationand disease management. As far as financial services is concerned, we are cautiousas we continue to correct our own issues and wait to see what, if any, impactthe recent turmoil in the credit markets will have on future IT spending budgets. After a strong performance in the first half of 2007,bookings in our international units decelerated in Q3 of 2007, but our pipelineremains solid and we continue to be optimistic, especially in Asia Pacific. So in summary, we are encouraged by the sequentialimprovement in bookings in the second and third quarters, which underscoresthat we are winning in the marketplace, and this is a testament to our focus onclient satisfaction. Based on internal and third-party measurement, our overall clientsatisfaction scores continue to improve and are solidly above the industryaverage, with clients citing our account management skills and ease of doingbusiness as key strengths for BearingPoint. I would like to thank all our people who continue to deliversuperior results for our clients. They truly understand that customer focuswill be critical to our future success. Turning to utilization, I am pleased to report that themetric continues to increase and improve. For the second and third quarters of2007, utilization was 76.3% and 78.5% respectively. Thanks to all of ourefforts around resource management, we hit a record high of 80% in the month ofSeptember. We believe that our target of 80% utilization for the businessconsistently is now well within sight. We've also made progress on attrition. For the secondquarter of 2007, total voluntary annualized attrition was 26.4%, down from28.6% in Q2 of 2006. Data for the third quarter is equally encouraging, withtotal voluntary attrition at 25.8%, a 60 basis point improvement from the firstquarter of 2007, and a 250 basis point improvement from the second quarter of2006, further demonstrating that our people are committed to the long-termsuccess of the firm. Management and Director attrition continues to be within ourtarget range. In fact, we estimate that the normalized MD attrition remainsstable at approximately 9%. While retention remains a critical priority, thisyear-over-year improvement shows that we're making progress in attracting,developing and retaining top talent through such initiatives as our new brandprogram and our innovative training program with the Yale School of Management.In fact, of the 1,200 employees who have already attended our Yale program,turnover was less than 3%, significantly below the firm average. We expect thata total of 1,500 of our high performing employees will attend the Yale programthis year, and we are planning to double attendance in 2008, as this is provingto be not just a great development program, but also an effective retentiontool. We are also pleased to announce that we have hired a newHuman Resources leader, Rick Martino, who joins us after 18 years at IBM wherehe was Head of Talents under Lou Gerstner and several years as Chief AdministrativeOfficer and Chief Operating Officer of the March of Dimes. Rick has a greattrack record of enhancing employee development and transforming people programson a global basis. With that, I would now like to turn the call to Judy to givean update on our filing targets and other key initiatives. Judy Ethell Thank you, Harry. With our Q2 filing, we have achievedanother important milestone toward becoming a timely filer, and this representsanother example of meeting the commitments we set at the beginning of the year.In fact, while we have said all year that our goal was to get current with ourthird quarter filing, we have exceeded that target by filing our second quarterahead of schedule. As we previously stated, however, we do not expect to fileour third quarter 10-Q on time by November 9th. With that said, we are on trackto file before the year's end, when we will return again to current filerstatus. We will then focus on the ultimate goal of timely filing our 2007 10-Kin February of 2008 and hopefully put this incredibly hard and costly part ofour history behind us. Because we are technically current with this second quarterfiling, we will again begin to gradually provide our people with theopportunity to acquire shares under our various employee share plans. As wediscussed on our last call, our goal is to provide liquidity opportunities forour people, but at the same time to ensure a phased entrance of new shares intothe market. With regard to this quarter, we will be settling shares dueunder our employee stock purchase plan only. We estimate that this will beapproximately 6.5 million shares in total. Historically, we have experiencedrates of rapid resale among our employees of around 30% of delivered shares; butsince we have been unable to settle shares under this program for the last twoyears, we really cannot estimate what is likely to occur. With respect to restricted stock unit awards that are vestedbut unsettled, we intend to exercise our rights and discretion under thevarious awards to settle approximately 6.5 million shares after each of our SECfilings. We are hopeful that this phased delivery schedule will facilitate theorderly sale of shares by our employees into the market. Let me talk a little bit about our SOX update and systems.We also continue to make substantial progress on our SOX remediation efforts.Significant improvements have been made in our controls over identifying,tracking and accounting for our cross-border travelers; our ability to control andproperly account for our facilities management functions; and identifying,tracking and properly accounting for our property and equipment and thepreparation of reporting our income tax accounts. Based on this progress, we expect to remediate at leastthree of the nine -- and possibly more -- of our material weaknesses in fiscal2007. This makes us confident that we will achieve our goal for a cleanSarbanes-Oxley opinion for 2008. At the same time, we are moving ahead with the transition toour new financial system. We are confident that this is the right thing to doto take our business to the next level and reduce costs in the long run. Withthe benefit of our history, we want to take a very measured and thoughtfulapproach. We are still planning to begin this process in the second half of2008. To that end, the strategy, design and build phases for theproject are proceeding as planned. In the interim, we continue to makeincremental improvements on our existing North Americafinancial reporting systems to be able to support and achieve our goal ofremaining timely in our SEC periodic reporting in 2008. With that, let me turn it back to Harry. Harry You Thanks, Judy. In addition to these efforts, we also continueto explore potential strategic initiatives. I am pleased to report that we aremaking progress as scheduled in our exploration of the potential sale of ourEMEA units to our managing directors in EMEA. We have undertaken some plans toprovide debt financing for this transaction, and are now beginning to reach outto potential third-party mezzanine equity sources to test their interest inparticipating. As we discussed with you in February, we continue to believethat taking this path with our EMEA business will help drive shareholder value,reduce cyclicality of our business, further strengthen our balance sheet andlower costs, while retaining the benefits of a federated global business model.We are on schedule and still expect to reach final decision by year end as towhether to proceed with the EMEA transaction. I'm pleased that we continue tomove in the right direction on this front. As we look ahead, 2008 will be a critical year forBearingPoint, as we stand at the crossroads of becoming a timely filer andpivoting to a new phase of our transformation. As you well know, the last threeyears have been extremely challenging, as we had to focus all of our energieson addressing a wide range of historical issues, whether it be reducing ourlitigation docket, which is now largely fixed; fixing our financial systems;investing significant amounts to get current financials and position ourselvesfor SOX compliance as Judy just detailed; restructuring our real estateportfolio; resolving contract disputes and cleaning up our engagement portfolio,as well as implementing stock and bonus retention programs. These charges and cash outflows amounted to a staggering $1billion, resulting in cumulative net losses of $1.5 billion from 2004 to 2006.These efforts have been far more costly and have taken longer than any of usever imagined -- including myself -- but essential to better position ourselvesfor the future. To give you an example, our real estate costs have gone from5.7% of net revenues to 3.9% in the first half of 2007. But as we look ahead,we still have some work to do, as evident in our results for the first sixmonths of this year, but the cash flows attributable to the mistakes of thepast are largely behind us. I expect that the full year results will be largelyconsistent with trends observed in the first half of 2007. So while we arelikely to grow over fiscal 2006 levels, we expect our underlying profitabilityto be lower than last year. Hurdles have included significant headwinds related to nothaving current financials, challenges in our FS and CS business units, andhigher compensation costs which have reduced our underlying profitability. Inaddition, we continue to streamline our cost base and expect an additional realestate restructuring charge in the fourth quarter. While we are bullish on our cash outlook for the year,targeting a range once again of $450 million to $500 million at year end, wehave not lost sight of our need to grow profitably and generate significant freecash flow. We are resolute to take our business to the next level. Gettingcurrent should remove a significant amount of headwind we have faced over thepast two years with clients and our people; headwinds that our competitors havetried to use to their advantage. We understand that getting current alone is not the panacea,and we need to undertake additional steps in the remainder of 2007 and 2008 tobetter position ourselves to achieve our goals. In 2008, we will strive toachieve GAAP profitability, which will be a significant achievement after yearsof GAAP losses and to generate free cash flow consistently. While we will still bear some costs associated with our newsystems implementation and additional restructuring efforts, we will continueto tackle our SG&A with the objective to reach industry levels by the endof 2009, in themid-teens as I described before. To the extent we are able to move forward onour strategic initiatives, we may be able to accelerate this, but recognize wealso need to invest in our future. To that end, we will turn our energiestowards what is most important, our business and our people. This will entaildriving increase investments in our focus areas, where we know we can winprofitably. We plan to increase our training efforts under RickMartino's leadership to ensure that we retain and recruit the best andbrightest at BearingPoint. We plan to invest in our new brand to increaseclient awareness and differentiation, which in the long run should lower ourcost of sales. While we plan to accelerate our investments in our coreareas, we will also continue to prune our portfolio and exit unprofitablesegments. This strategy is focused on driving much higher return on investmentand return on invested capital. We plan to invest in our global development centerswhere we have lagged the competition. This does not mean that we will take offshorefor offshore’s sake, but rather to optimize the cost of our delivery. These are examples of how we can position ourselves forlong-term success, not only for the benefit of our people, but also for ourclients and shareholders. We cannot defer investing in our business, as thiswill help reignite growth and drive profitability for our long-term success. In the months to come, we will keep you posted on ourprogress and upcoming plans as we close this long chapter on our past. As partof that commitment, we intend to host an investor day as soon as practicallypossible to reintroduce you to the new BearingPoint and share with you the manyaccomplishments we have achieved to date, but more important, to address ourlong-term strategy. I'm optimistic about the future, and what it will bring toour employees, shareholders and customers. We truly appreciate your continuedsupport and patience and we look forward to updating you in the near future. Now I would be happy to take your questions. Teresa, pleaseprovide the instructions for the question-and-answer period. Question-and-AnswerSession Operator (Operator Instructions) Our first question comes from PatBurton - Citigroup. Pat Burton - Citigroup In the financial services segment, Harry, what do you thinkit will take to get the bookings back up in that specific business? I realizeyou've downsized it, but what will it take to improve profitability? Thanks. Harry You Pat, I think we need to turn the corner on bookings. I thinkwith all candor and a sober assessment of the situation, I think we are goingto have to look past the end of this year. I think we have to see how bankslike yourselves and other brethren you have in the capital markets business,how they fare at year end and what is the fate for IT spending plans in the NewYear? So I think we're getting a grip on costs and putting ourbusiness in the right size context, but obviously the best tonic will be tohave bookings bottom out and turn upward. I think realistically that's an '08phenomenon, not something that we'll see anytime in the near future. The good thing is that we have a very high quality practice.It's had before, when you look on a stand alone basis, EBIT margins in themid-teens; those obviously have dramatically come down with the large revenuedeclines. But the quality of the people and the esprit de corps of the teams,as well as their reputation with clients is still there. I think we just needclarity on the overall stock market and capital markets environment beforecalling that turn. Pat Burton - Citigroup In terms of the stock comp level for the whole company,would you look for that number to keep increasing as we move forward, or shouldthat begin to plateau? Thanks. Harry You I think it'splateaued, Pat, and I think relative to the performance share units, we need todeliver on shareholder value. The shareholders will not be diluted. Clearly, ifwe have a prolonged period of depressed stock prices, I think there are veryinteresting opportunities for us to decrease the share count in terms of eitherrestructuring or repositioning these plans, as well as what I would hope, Ithink, one needs to look conservatively into '08 after we file the '07 10-K. Obviouslywith the publicly disclosed constraints on the bank term loan, which has givenus some nice balance sheet cushion, looking at those constraints, and lookingat the '07 K getting filed on a timely basis as Judy described, I think then wealso bring into play repurchase of shares as well as repurchase ofconvertibles. I think we're at a very interesting point. I'm digressing alittle bit just in terms of where the share count may be, and there I think youneed to factor in the stock comp expense. But what I say as a final close, Pat,is as I arrived at BearingPoint, we got down to less than one-half of 1% ofemployee ownership. We are now in the mid to high teens, and so we have to do alot of catch up. I would expect not only would you see plateauing in the nearterm, but you'll see decreases. We just had to catch up from levels that werefor lack of a better expression, abysmally low. Operator Your next question comes from Julio Quinteros - GoldmanSachs Julio Quinteros - Goldman Sachs On the headcount and the attrition metrics, looking at wherewe are from a headcount perspective today versus where we were at the beginningof the year, what is the headcount ramp plan as we go forward from here? Harry You I think we're goingto be conservative on the headcount. I couldn't be more pleased or delighted,Julio, that we are at 80% utilization. It's higher than the company's everbeen. I feel like we still have room to go, as I mentioned, in terms of wherewe go in getting out of unprofitable businesses or segments that we shouldn'tfocus on where the account size is small, where the corresponding G&A costto support it is disproportionately high. So I think when you look at our headcount, you have to takethose perspectives in mind. Our MD to staff pyramid has improved from 18:1 to20:1. Generally, we are getting significantly higher billing rates across allof our segments. So I think it just shows we are getting better profitability. It is a long-winded way of saying our headcount hasgenerally been flattish, but we are driving significant productivity, whetherit's in the pyramid, whether it's in utilization, or whether it's in bill rate. I'm also excited because I think one of the other hiddenbenefits as well as hidden struggles of not being current was all the fightrelative to keeping our best talent. That's just going to get disproportionatelyeasier, post-November. I think sometimein '08, we will probably have a better, more formulaic discussion with you ofhow headcount translates into better profits and profit margin. But right now,we've just been squeezing out big efficiencies that are laying for the taking. Julio Quinteros - Goldman Sachs I just want to double-check this, but for March, I have attritionat 23.9% and I believe the current quarter number you gave is 25.8%. Is thatcorrect for the employee attrition? Harry You Yes, it is correct. Our attrition, just like attrition atGoldman Sachs, is largely seasonal, so you need to really look year over yearin terms of when we are hiring people, when people receive bonuses, how somepeople may respond to that. We also, I think, unlike perhaps some others in ourindustry, Julio, are very conservative. We don't tend to separate out peoplewho have been gently cajoled out of the firm. We don't squeeze those out of theattrition numbers, but I'm comfortable here that once we get current and timelyas Judy detailed, I think we'll be at normalized levels. I think now that we're reinvesting in training with ourpeople, I think our people are generally feeling better about the future andnot having to spend their extra time doing mundane but previously essentialstuff like audit binders. Operator Your next question comes from Adam Frisch - UBS. Adam Frisch - UBS Two things on liquidity, Harry. I think that's the key withwhere the stock is. First, I'm assuming that the cash balance forecast for yearend do not include any proceeds from EMEA, is that correct? Harry You That's correct. Adam Frisch - UBS Why should we be confident that the cash balance is going tocontinue to improve? Do you anticipatethe company needing to raise any more capital in the near term? Harry You We don't anticipateany need for capital. I think when we raised capital this summer, we wanted tomake sure we had some extra cushion because ultimately, my first priority aswell as Judy's and the management team's and the board’s was to make sure, andI think everyone needs to remember this, we wanted to make sure we got thenumbers fixed and fixed correctly. Judy and I always look at each other and sayour number one goal, although it's something we obviously can't control allwithin our power or our group's powers is to try not to have any restatement. Ithink we feel very good that we've cleaned up so many mistakes from the past. I think as you've heard me describe before, Adam, it waslike 35,000 mistakes in the ledger, and we've gotten the numbers cleaned up andstabilized, we've remediated the financial system, so now it operates. I thinkeverybody has to realize in the end our biggest priority was to get that done,to get current; that's now within sight, within literally a handful of weeks. And I think to give everyone confidence on the cashprojections, we've had a robust syndicated lender group. We have been abovetheir projections for the year in general. I think the banks have goodconfidence in terms of how we are managing cash, we've very consciously spentmoney on certain critical issues, but people have also seen the uptick in cashand what we signalled to you at the beginning of the year, very close to what wehad planned. We have had a little bit of upside as well here. once again as I mentioned, I am looking forward to '08 beingfree cash flow positive. We're obviously not going to be all the way there interms of driving down SG&A. We have one more year of that, and we have toget the public sector system fixed. The level of these one-time costs is justat a much more manageable level than what it's been in '05 and '06. As Imentioned, I think we proved in '07 we could start the cuts on SG&A. But when you think of it, the end of November/early Decembertimeframe, that's really the key inflection point on all these costs andhopefully what the free cash flow for the business is. I think we do haveuncertainty in terms of the overall business environment, but the general cashtrajectory is in our hands and in our control. Adam Frisch - UBS On EMEA, I think the progress that you cited in yourcomments getting done maybe in the next month or two will likely increasespeculation about the sum of the parts. Our own suggests public services as astandalone is probably worth $6 exclusive of net cash. Is this way of thinkingtotally off base in your view, the values that are out there on The Street? Harry You I know, Adam, you andothers have written reports on the sum of the parts. I think we have a complextax situation. Obviously we need to do what makes sense strategically tooptimize the business, but also 100% prosecute our fiduciary duty toshareholders in the best manner possible. So as for those of you who know me,you can appreciate my statement here that we have looked at all options, wecontinue to look at all options. Clearly we need to decide whether we do EMEA in the firstplace. As we described before, potentially doing EMEA also has some interestingtax benefits and ramifications, which I think generally people haven't factoredinto their model. But I think as you are indicating, the bulwark of any sum ofthe parts analysis, which I think is apropos when you look at strategicalternatives, is as you mentioned, our public sector business. I think here youhave a business that was a $10 million revenue business in '89 and is now over$1 billion less than 20 years later. Standalone it's almost a mid-teens 14% to15% EBITDA margin business that if you do the math, would on its own produceover $100 million in net income. You guys know the values better than me, but that'sobviously a very valuable business as are our other businesses. We arecertainly cognizant as we weigh all the different alternatives of how the mathworks. But at the same time, I think what people have to appreciate is thereare some business realities we need to balance, and we need to balance all thedifferent alternatives on whether they make sense from a fiduciary sense forour shareholders or not. Does that help? Adam Frisch - UBS Harry, at the end after you talked about strategicinitiatives, you said the margins would be down in '07 versus '06, correct? Youdid not give any view on '08 yet? Harry You That's correct. Adam,hopefully one of the things that will attract a good healthy crowd or maybe a biggercrowd for the analyst meeting I described is Judy and I will walk through whatwe are looking for in terms of '08 here. I think I'd have to say though it will be very important tosee how the next couple of months in the stock market and the global businessenvironment unfold. I think our business tends to have a lag factor relative tothe S&P, so the business environment looks good. I think there's a lot of potential volatilityin certain sectors, especially the financial services sector. We are mindful onmaking sure that we are conservatively budgeting as we look to next year. In the PS business, obviously we feel great about having arecord quarter in the third quarter, but there potentially may be a change ofadministration in the White House, there may be a change in spendingpriorities, if there's a further party shift on Capitol Hill, so we will wait alittle bit longer before we make an '08 call here. Operator Our next question comes from Andrew Steinerman - BearStearns. AndrewSteinerman - Bear Stearns Harry, you were kind enough to give us an SG&Aefficiency goal. Do you think maybe you could also lay out a gross margin goal,even if it's end of '09 or further out? Harry You I think for us to be worth our salt, we need to consistentlybe a double-digit EBIT margin company. We're clearly dealing with the businesscycle now, and I think when you look at '06, I think you'd say but for someone-time costs, we were more than there. I think how we track out in '08 andbeyond we'll have to see how the next handful of months go. So that is clearly my target, because it puts you in the topquintile of our industry, it just means you're doing value-added work, it meansyou can pay your people better, and so that's how I net it all out. AndrewSteinerman - Bear Stearns That includes stock comp, right? Harry You Yes. AndrewSteinerman - Bear Stearns Your goal for SG&A by the end of '09, is that assumingthat 2009 is not a recession, or do you think you could do that in anyscenario? Harry You I think we aredetermined. I say this not only at the senior management level, but also at theboard level, Andrew. We have to get SG&A to normalized levels. While I cantalk about the issues that were laid upon us from the past, Judy and I andothers in the management team increased the SG&A to fix these problems, andnow we have to reduce the SG&A now that the problems are going to belargely behind us. I think when you look at the scope of what SG&A needs tobe reduced, Andrew, I've put it in a handful of different buckets. I think it'spast inefficiencies like real estate and IT which we're still chipping away at;and then it's big chunks of one-time costs that should more rapidly roll off inareas like finance and accounting; then there are longer-term areas ofproductivity in finance or accounting or legal where I think by doing ourbusiness more effectively and with better systems we can run at lower SG&Alevels. Clearly, I think one of the interesting issues to see,depending how the board looks at EMEA, is that we have what I would callinefficiencies in scale and scope on some SG&A because of our globalfootprint. I think we're doing a lot ofwork to see how we might more rapidly accelerate SG&A decline if we decidethat it is appropriate to reduce the consolidated country footprint ofBearingPoint. Operator Our next questioncomes from George Price - Stifel Nicolaus. George Price - Stifel Nicolaus Harry, going back toEMEA, we have improving fundamentals, what would now seem to be the benefits ofgeographic diversity, given the macro environment and what is happening incommercial, particularly financial services in the U.S.; BearingPoint's lack ofan offshore capability, which I think is at least for the time being less of anissue in Europe; so why sell it? Part of that you hinted at was the tax benefit. I wonder ifyou can give us any more color as to the magnitude you may preliminarily bethinking about there. Harry You I think this is for our board to decide, and I say, George,all your comments are valid comments and ultimately, each person on the board --and certainly there will be a recommendation from management – will have aprice that encapsulates what makes sense or not. I think we'll look at all these factors, and Ithink there's nothing deterministic. If the price were too low, it would bebetter to keep the EBITDA and the tailwind from the dollar continuing todecline over the near term. But if the price is a sufficient or fair one, wewill look at the other financial benefits and other business benefits andpotentially go ahead. George Price - Stifel Nicolaus Do you have any way to quantify what kind of tax benefit wecould be talking about from that? Harry You I think we mentionedon an earlier call, George, I think the accumulated NOLs and tax losscarryforwards are $863 million. Obviously this changes as we go quarter toquarter; it's not to say that all of those benefits might be usable in thecontext of certain future transactions or a certain operating profile, but it'sa big chunk of tax benefits. George Price - Stifel Nicolaus If I could then on offshore, we didn't really hear muchabout that but for a comment at the end. Can you maybe just step back andreview what your current thoughts are and what BearingPoint's current strategyis with respect to global deliver? Maybe give us an update in terms of globaldelivery headcount footprint in Chinaand India? Harry You George, when I arrived on the scene I think we had 38 peoplein India, and Ithink they were in Chennai. Now we're well over 300. We have several hundredpeople in China.We are just establishing a footprint for our EMEA business in Romania,and we have about 150 people in Hattiesburg, Mississippi. I continue to believe that we have an interesting businesspositioning in the sense that yes we do need offshore, these global deliverycenters, but it's not as important for us as our large competitors to make thenumbers and to make growth. Our public sector business is 41% of our business,traditional offshore is not going to affect it, I think the state and localgovernment and municipalities and the federal government are pleased that weare establishing presences and places like Hattiesburg, Mississippi. So I feel like we areaddressing that need. George, I feel it's just more important for us ultimately tomake sure we're reinvesting in high value added solutions. We don't have toslug it out with people punching at the belt line. Obviously there are someofferings that we need to have to be competitive, but our scale of businessesis very different from some of our competitors. We can grow revenue by notnecessarily having to have thousands of people offshore. But at the same time, I would be the first to admit I wouldlike to keep improving that capability. We are not at critical mass yet, but it'snot something that I fret about late at night. George Price - Stifel Nicolaus Real quick, MD attrition, do you have a number for that inthe second and third quarter? Harry You Yes, I gave thenumber, it's at 9%. Once again, before I arrived on the scene it was 23%. It'sbeen pretty consistently in the mid to high single-digits. I couldn't be moreproud of our team, George, to go through what people have gone through, tothink of all the errors people have had to clean up, the losses, the cash lossesI described well over $1 billion. I was telling one of our shareholders theother day it would be as if the General Electric team had to dig out of $150billion of mistakes and sins of the past. We're now largely through that. The team has held together,they have been able to grow the business despite some of our competitors beingaggressive in detailing some of our issues, or just grossly inaccurate, andwe're actually coming after some of them, which Ed and I are delighted to do. SoI couldn't feel better about the team we have. I think really the big challenge is we have an uncertaineconomic environment and all of us will have to dig in hard and work throughthat, but I'm confident that a team like we have that's gone through the lastthree years, that team can surmount just about anything. Operator The next questioncome from David Cohen – JP Morgan. David Cohen - JP Morgan I was hoping that you would share your view of the one-timecharges in both the quarter and year-to-date, if you can quantify them? Harry You We'll have Francesca and Denise follow up with you and gothrough the issues. I think how I look at them, David, is they have decreasedsignificantly from 2006. I think whatI've signaled and I hope everybody understands is it will decrease again in2008, but we won't be entirely rid of them either. Ultimately, I think as we get together at an analystmeeting, as soon as we practically can pull one together as a current andtimely company, we'll walk people through the business model and what theresidual, one-time charges are. But they are obviously a lot less than whatthey were in '05 and '06. David Cohen - JP Morgan I haven't had a chance to get through the 10-Q just yet. Iwas wondering if you have given the headcount by segment there or if you couldshare it with us now? Harry You We will follow up with you. David, you would be the mostincredible speed reader if you got through the 10-Q, because I think we got itout like two minutes before the call started. So if you did get through it, youshould be one of the most hirable people in equity research in our sector. Anyway, I'm sorry to be so glib there, but we will follow upand walk you through the numbers. David Cohen - JP Morgan That's fine. I'mhappy with the job I've got right now. How much cash do you need to run thebusiness intra-quarter? Harry You Judy can give her view. We generally have fluctuations whereit's nice to have a couple hundred million of cash on the balance sheet and Ithink you guys have seen some of the seasonal fluctuation. But in the end, whatI've always felt is attractive about running a business in our particular area asa sector is that it should be a strong free cash flow business and a highreturn on invested capital business. We are shrinking our CapEx, it's not likewe have a huge portfolio of outsourcing or managed services contracts. Itshould be a pretty cash lean business. We just have to write some big checks totemporary accounting firms and other people that will very soon be a thing ofthe past. Operator Your next question comes from Susan Chen - Merrill Lynch. Susan Chen - Merrill Lynch Thank you. Harry, youmentioned the international bookings decelerated year over year. What areas orindustry verticals are you seeing some weakness in? What's your outlook for2008? Harry You Susan, I don't want to make any broad inferences, because Ithink year over year for our quarters it can be lumpy in terms of someindividual countries. I think obviously we've seen some general weakness infinancial services; manufacturing has been a little weak, but as I mentionedsome of the other sectors, life sciences, and telecom and the technologybusiness have been strong. I generally say, because I was talking with a shareholder lastweek, I mean who would have thought that you would say that tech companieswould be a more defensive sector? But as I've said many times in the past, whatyou tend to see in the stock market you also see in our bookings, and thetechnology companies have done very well and they have lots of pent-up ITsystems spending. I wouldn't draw a huge conclusion when you look overseas.Our businesses are relatively small, so one big booking here or there in acountry tends to swing the growth numbers pretty significantly. Operator Your final question comes from Rod Bourgeois – Sanford Bernstein. Rod Bourgeois - Sanford Bernstein Harry, you started your presentation out talking about thebusiness being at a turning point. Iwanted to inquire about that, because it seems like a lot is hinging on gettingthese financials current, and that is helping with the turning point in thebusiness. My specific question on that is, it seems that some of yourmargin issues are related to not being current with financials. That is, theexternal F&A costs. But there's also a number of margin issues like realestate and other things that don't seem to be directly a function of beingcurrent with financials, or being not current with financials. Can you help investors understand how the margin pressureswill be alleviated when you get current with financials? Or how the turningpoint is coming across the broad range of margin challenges that you arecurrently facing? Harry You I think the first thing, Rod -- and thanks for your question,and congratulations, by the way -- I think the real issue is you have to just understandthe pressure in terms of all the catch up. I mean we have some MDs that havehad a particular project or contract audited and re-audited seven or eighttimes. Just the opportunity cost of people collecting historical informationhas taken away from utilization, it's taken away from spending time out withyour customers and getting new bookings. There's also been the issue withjunior folks on retention. And in general, just generally reinvesting in thebusiness. So I don't know and I am certainly not smart enough toquantify the negative impact, but in my gut, I know that having that relievedfrom people will be just a wonderful feeling for all of us, including myself. SoI don't want to overstate how good it will be, but my gut feeling is boy, youcan't imagine how painful it's been. So I think it's going to be pretty darngood once we get back to being a normal company in terms of how people havebeen able to focus. There are a number of issues that I would call sort of marginallyrelated. Clearly, when you have more retention challenge, you have to probablypay a little bit extra on the margin on comp. We obviously had catch up onstuff like stock comp expense which depressed margins more than normal. Certainlywhen the banks looked at BearingPoint's credit capacity, I think veryinterestingly, the vast majority of potential lenders in the syndicate haveviewed 80% to 100% of this stock comp expense as one-time expense, just becausehow many companies in our industry would ever get to a point where they hadonly about one-half of 1% ownership? I think you have to look at that impact. It plays into the retentionpiece. Then other areas are independent, as I mentioned and you mentioned, likereal estate or getting our IT to a better level. But once again, not havingthis overhang of worrying about getting current and we should be able to focuson those issues and become more efficient, more quickly, and sustain it there. I think once again -- and I'm sorry to sounds like acorporate advertisement -- but I couldn't be more proud of our people, becausethey got thrust into a terrible hole by some of the mistakes of the past. Theyhave dug themselves out. We can now see out of the hole, we're going to get onground level or sea level with all our competitors, but even fighting with onehand behind our back, and fighting two to four feet underground, we're stillable to win a lot of business and grow the business. I think just what Ed has been driving in terms ofutilization or what the business units have been driving in terms of newsolutions, I think those bode well. At the same time, I think I'm sober,because certainly some of our biggest critics, Rod, are internal. We're like asports team that has never strung it all together, all at once, right? So weneed to make sure that we get into the play-offs and we don't have excuses, onegame to the next on why we didn't win by a good margin. I think we are now in a position where we can potentiallysay that in the future. So that's I think what we are all excited about. Rod Bourgeois - Sanford Bernstein So it sounds likethere are a number of indirect benefits to getting current with financials andthat's helpful to get perspective on. One other quick question, and thanks for the congratulatorycomment there, but on the cash flow you had really strange cash flow in thefirst half, but it looks like the cash balance went from $349 million in Q2 to$430 million in Q3, so it's up $81 million sequentially. Can you give some morespecifics on the puts and takes on the Q3 cash flow? Clearly DSOs was positive,but can you give us more specifics on how the cash flow improved in Q3? Harry You I'll simplify, Rod.It was very largely DSOs and I think if you look at what the business produced,instead of the business producing losses which it did in the first half, in Q3call it breakeven or making a buck or two, right? Now we just have to keepdriving forward from that. But once again, think of the challenge where you haveeveryone worried about getting current, and how we remediate our SOX issueswhich we made huge progress on, remediating systems, trying to hold on to theten people who work with you who are worried about things. I mean, those sortsof issues are going to recede and I think that my prediction is the benefitwill be better than one might think because the hurt has been worse and takenlonger than one would have thought. Operator There are no further questions at this time. Connie Weaver Thank you all very much for joining us here this evening. Weappreciate your time and your attention. As always, please feel free to callFrancesca Luthi or Denise Stone or myself for follow-up questions. That numberis 908.607.2100. With that, have a wonderful evening. Thank you.
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