Executives
AdamGutstein - Chief Executive Officer & President
Karl Bupp- Chief Financial Officer
BillMcClayton - Chief Administrative Officer
MargaretBoyce — Director of Investor Relations
Analysts
GeorgePrice - Stifel Nicolaus
ChristinePezino – JP Morgan
DevangKothari - JMP Securities
Eric -Wachovia Securities
Moshi Katri- SG Cohen
DiamondManagement & Technology Consultants, Inc (DTPI) F2Q08(Qtr End 09/30/07) Earnings Call November 1, 2007 5:00 PM ET
Operator
Welcome to the Diamond Management &Technology Consultants’ Second Quarterearnings conference call. This conference is being recorded ThursdayNovember 8 2007.
I would now like to turn the conference overto Miss Margaret Boyce, Director of InvestorRelations. Please go ahead, Ma’am.
Margaret Boyce
Thank you. Good morning, everyone. This is Margaret Boyce, Director of InvestorRelations for Diamond. This morning wewill discuss our financial results for the 2nd quarter of our fiscalyear 2008 ended September 30, 2007. Withme today are key members of our management team: Adam Gutstein, our Presidentand CEO, Karl Bupp, our CFO, and Bill McClayton, our Chief AdministrativeOfficer.
Adam will provide a fewhighlights on the quarter and the outlook. Karl will cover the financials in detail,after which Adam will give you an update on what we're seeing in the market andour current initiatives. We will thenopen up the call for
questions. There are supporting slides available on ourwebsite that accompany our remarks today. You can advance the slides at your own paceand download them for future reference. Iwould also like you to note that the financial results we will discuss today arerelated to the continuing operations of the company unless otherwise noted.
As a reminder duringtoday's call, we will make historical and forward-looking statements in orderto help you better understand our business. You should realize that our actual results maydiffer materially. Any forward-looking statements speak only as of today'sdate, November 8 2007, and we undertake no duty to update this information inthe future. The risks and uncertainties associated with our business arehighlighted in our filings with the SEC, including our quarterly report on Form10K for the quarter ended March 31, 2007.
Finally, I wanted toshare with you that we are presenting at the UBS Global Technology conferencein New Yorkon November 14.
With that I will turnthe call over to our President and CEO, Adam Gutstein. Adam?
Adam Gutstein
Thanks, Margaret, andthank you all for joining us this morning. We delivered a solid 2nd quarter with net revenue of $45.3million and an EPS of $0.09, both within our previous guidance. We generated a year-over-year net revenuegrowth of 10%, largely driven by growth in our practices in Healthcare and Enterprise.
Our Enterprise group consist primarily ofconsumer and industrial goods, travel and transportation, and lodging clients. Froma profitability standpoint, gross pre-tax margins also increased on ayear-over-year basis. Free cash flowfrom operations was $3.1 million in the 2nd quarter. Free cash flow was less than anticipated and wasimpacted by some in-transit collections we received during the first two daysafter the quarter closed.
Earlier this week, our Boardof Directors expressed their confidence in our business by declaring an annualcash dividend of $0.35 per share, a 17% increase over last year.
During the 2ndquarter, we welcomed 40 campus hires to the firm, brought in one experiencedhealthcare partner, and promoted two principals to partner effective October1. We are also pleased to be judged onceagain as one of “Chicago’sBest And Brightest Companies To Work For” by the National Association ofBusiness Resources.
From a clientperspective, we have had a number of significant wins with leading companieswithin our Healthcare, Enterpriseand Insurance practices that we believe have the potential to become core clients. The nature of the work is in our sweet spot,integrated business and technology planning and enterprise architecturestrategy. That generally leads to very good long-term relationships. We have also been increasingly successful inleveraging our data and analystics capability to help our clients betterunderstand their business and its operational performance. This has proven valuable to our clients as ithas proven an excellent source of insight and it has created follow onopportunities for Diamond.
When we last spoke duringour 1st quarter conference call, we provided annual guidance thatassumed a stronger second half performance. We continue to see a solid pipeline of opportunities. Yet over the last several weeks, we all haveobserved an increasing degree of uncertainty about the economy, principally in FinancialServices. For this reason, we think itmakes sense to moderate our growth expectations for the fiscal year. We expect 3rd quarter net revenueto be in the range of $45 to $47 million, an EPS of $0.07 to $0.09. For the full year, we expect annual netrevenue growth of at least 10%; full-year pretax margins of at least 13%; EPSof at least $0.37, and annual free cash flow of at least $23 million. If demand turns out out to be stronger, wewill be well prepared to respond. Whileit is our expectation we can grow faster in the long-term, we believe we are taking a balanced view and we will manage thebusiness with this in mind. We continue to firmly believe we are on the rightmarket, the right clients, doing the right things with the right people.
I will now turn it over to Karl to give youmore detail on the quarterly results and then I will discuss our currentinitiatives for further improving the consistency of our revenue, our prospectsfor future growth and pace in which we reach scale. Karl?
Karl Bupp
Thanks Adam and good morning everyone.
Net revenue for the 2nd quarterwas $45.3 million, up 10% on a year over year basis. Project personnel cost before reimbursableexpenses were $31.4 million, down 3.5% year over year. As a percentage of that revenue, projectpersonnel cost before reimbursable expenses decreased to 69%, down from 79%.inthe year ago period. Total otheroperating expenses were 20% of net revenue in the September quarter, animprovement over 24% last year. Professionaldevelopment and recruiting expenses increased to $2.2 million, up 8% percentyear over year but remained flat as a percent of net revenue. The increase was primarily due to increase intraining and recruiting initiatives.
Marketing and sales expense increased to$731 thousand, up 12% over last year but remained flat as percent of the netrevenue. Management and administrativesupport decreased to $6.4 million, down 13% from last year, and decreased as a percentageof that revenue to 14% from 18%. Stock-basedcompensation expense was $4.6 million in the 2nd quarter in linewith our previous guidance.
Income from operations before taxes was$5.6 million compared to negative $200 thousand reported last year. Excluding the $4.6 million special bonus accrualtaken last year, on a pro forma basis, income from operations before taxesincreased 28% from $4.4 million in the 2nd quarter of last year. The increase was attributed to higher grossmargins with only a modest increase in other operating expenses. Pre-tax marginwas 12.4% compared with the negative 1% on a reported basis and 10.6% on a proforma basis. Income after taxes in the 2nd quarter was $2.9 millioncompared with $18 thousand from a reported basis last year. On a pro formabasis, income after taxes was up 9% from $2.6 million in the 2ndquarter of last year.
Diluted earnings per share was $0.09 in the2nd quarter compared with breakeven EPS on a reported basis and $0.08on a pro forma basis in the 2nd quarter of last year.
Our effective tax rate was 49% in the 2ndquarter compared with 108% tax rate in the same period last year. As we said before, our effective tax rate ishighly dependent on our international profitability, which improved year overyear.
Diluted weighted average shares outstandingdecreased 5% to $32 million from $33.5 million as of September 30 last year,even as our average quarterly share price increased 17% year over year. This decrease was a direct result of ourstock-buyback program.
We ended the quarter with cash and cashequivalents of $67.47 million and no borrowings. Free cash flow was $3.1 million in the 2ndquarter. As Adam mentioned, the 2nd quarter free cash flow wasimpacted by some in-transit collections we received during the first 2 daysafter the quarter closed. If we havereceived those collections during the quarter, our free cash flow would havebeen over $7 million. Days billingsoutstanding as a result was over 40 days in the September quarter. Our target for DBOs remains at 30 days, andwe expect to return to this level in the December quarter.
Turning to our client metrics. We served 63 clients in the 2ndquarter, the same number as the prior year and the prior quarter. We added 22 new clients in the 2ndquarter representing 8% of revenue. Ourclient concentration improved over the prior year with our top 5 clientsrepresenting 39% of revenue compared with 41% in the September quarter last year.
We ended the 2nd quarter with518 consultants up from 502 in the year ago period. Pricing improved nearly 11% over the year agoquarter and over 1% sequentially, demonstrated by revenue per professionalincreasing to $357 thousand on 60% chargeability in the recently ended quarter,compared to $346 thousand last year on chargeability of 64%. Chargeability was down from the 1stquarter due to the addition of over 40 campus hires and lower sequentialrevenues in the 2nd quarter. Our annualized voluntary attrition was 21% in the 2nd quartercompared with 22% last year. We expectto end the 3rd quarter with 515 to 520 consultants.
Looking at revenue by industry, we continueto maintain a good diversified mix with only modest changes in a percentagebasis from the prior quarter. FinancialServices represented 28% of revenue in the 2nd quarter; Insurance24%; Healthcare 21%; Enterprise18%; Telecoms 7%; and Public Sector 2%.
Turning now to our buyback program, we wereactive in our stock buyback program in the September quarter. We repurchased over 870,000 shares in thequarter at an average price of $9.75 per share, totalling $8.5 million. Our remaining authorization for stockrepurchases was over $44 million as of September 30 2007.
We will continue to repurchase stock duringthe remainder of fiscal year 2008. Asyou may recall, we paid our first annual dividend last year. Earlier this week, our Board declared a cashdividend of $0.35 per share, up $0.05 or 17% over the annual dividend paid lastyear. This dividend will be paid to shareholders of record as of November 202007 and will be paid on December 6 2007.
As Adam mentioned, we are revising ourguidance. In the 3rd quarter,we expect to generate net revenue of $45 to $47 million. We expect pre-tax income of $5.6 to $6.2million; earnings per diluted share of $0.07 to $0.09 and free cash flow of $10to $12 million. In the 3rdquarter we expect our reported income tax rate to be between 55% and 57%.
We are also revising our annual guidance forfiscal year 2008. We expect full yearnet revenue to grow at least 10% which will result in net revenue of at least$186 million. We anticipate full yearpre-tax margins to be above 13% and EPS of at least $0.37 per share.
We expect full year free cash flow to be atleast $23 million. Our assumption is anannual reported effective tax rate of between 49% and 50%. We also expect to end the year with 525 to535 client-serving professionals.
Adam?
Adam Gutstein
ThanksKarl. The 2nd quarter bringsto a close a solid first half with 14% revenue growth and improvingprofitability year over year. We areseeing a solid pipeline of opportunities even as we sense a bit of uncertaintyin the market. Based on our pipeline, webelieve we will grow our net revenue 10% or better for the full fiscal year.
Ingeneral terms and over the long term, we have a great deal of confidence in ourbusiness based on our market position and our client needs and we would expectto grow faster than 10%. To that end, weare committed to a number of initiatives to improve the consistency of ourrevenue, our prospects for future growth and the pace at which we reach scale.
As youknow, raising the awareness of our brand has been a key initiative for Diamondthis year. Increasing the awareness ofour brand will result in more opportunities at the leading companies we targetand will also yield improvements in pricing. Taken together this should help us to improve both our profitability andour growth.
To thatend we recently rolled our new annual primary research report, the DiamondDigital IQ. Beyond its value in terms ofour marketing and branding efforts, this work will help our clients understandwhat their peers are thinking and doing. The study confirms the strategic relationship between business and ITand shows how its value and complexity will increase over time.
Perhapsmost interesting though, the report vividly highlights that even though we haveseeming alignment between business and IT leadership today, we still do nothave enough management in place to take advantage of it, which is where Diamondcan and regularly does help. So thisreport effectively confirms Diamond’s competitive positioning.
With anexcellent position to capitalize on this trend and the resulting needs. Our multi-disciplinary teams are uniquelyqualified to help our clients foster strategic alignment, improve the practiceof management and deliver results at the intersection of business and technology.
Our business continues to grow. Itis profitable and generates very good cash flow. We also know that scaled rise predictabilityand stability in our business. As wework to achieve scale, we look at three primary levers: pricing, chargeabilityand leverage. We have beenfocusing on pricing and chargeability over the past year. We feel good about our progress on pricing,increasing 7% since the beginning of our fiscal year and 11% year overyear. We have put together a number ofthings that we believe will improve chargeability as well. We expect we will see an improvement in thecoming quarters assuming a reasonable demand environment.
However,leverage with the ratio of partners to consultants is one area in which we havehistorically placed little emphasis. Today we are running the business with a leverage of about 1:6. We are looking at ways to modestly expand ourleverage within our current model.
Let mepause and say this is something we are doing within the existing die andmold. We are not considering becoming anintegrator, we are not considering becoming an outsourcer. we are notconsidering becoming an offshore provider. This is a modest refinement of our current model that should allow us togrow more consistently, provide more value to our clients, and allow our peoplewho are interested in leadership responsibility and greater careeropportunities. We look forward tosharing more with you on future calls as we refine our thinking to develop ourplans.
In summary,we are pleased with the first half of the year. We are looking forward to a solid second half. We believe we are managing the businessappropriately given the market environment. We continue to improve our pricing and chargeability and we arebeginning to focus on leverage as well. We are excited about our improving research in analytic abilities andour ability to build both our brand and better serve our clients. We firmly believe we are in the right marketwith the right clients, doing the right things with the right people.
With that,let us open the call for questions.
Questionand Answer
Operator
Your next question comes from the line of George Price. Pleasego ahead, Sir.
George Price - Stifel Nicolaus
Can you talk a little bit about when theuncertainty that you say appeared relative to the progression of the quarter,coming in from the end of the summer? Can you maybe talk about how much of is Financial Services? What are you seeing in other industries andwhat other industries?
Adam Gutstein
Sure. I think really, there has obviously been awhole lot of news. I think it is nosecret that we work in the capital markets arena. I think we also, you know the announcementsaround Merrill and around Citigroup. ButI would say, it has really been over the last several weeks that as we developour point of view about the second half, our sense was that there is a generalsense of caution if you will in the overall macroenvironment. In particular, there is a lot of uncertaintyin Financial Services. So we are reallynot seeing a big impact, as far as we can tell anyway, in otherindustries. But it is clear that thereis a bit of a cloud of uncertainty over the Financial Services industry. At the moment, things are proceeding verywell for us. As I have said, we see asolid pipeline of opportunities. Butgiven the time of year, and given theuncertainty, it just made sense as we look forward to moderate our growthoutlook.
George Price - Stifel Nicolaus
Okay. Any sense of what the Financial Servicescompanies are talking about in terms of their IT or their discretionary budgetsfor next year?
Adam Gutstein
Yes, is that not the magicalquestion? What would the budget be nextyear? From our standpoint, we are in apretty good position to see that. Wereally see our Financial Services clients kind of continuing in the samefashion they have. That is to say, theyare continuing I think in a very prudent fashion, a very judiciousfashion. They do have the budgets. I do not believe that they are planning toreduce their spending. But I do notbelieve as a general rule they are planning to dramatically increase theirspending either. At the same time, mysense is that there is still a bit of a wait and see to see just what theimpact of the various write-downs are and the various changes inmanagement. You know it is really hardto anticipate exactly what will take place both in those companies that havealready had large write-downs as well as those companies which we might expectto have some write-downs.
George Price - Stifel Nicolaus
Okay. Last question I want to ask and then I willturn it over. You guys have aninteresting perspective, having been through this on the last up cycle, thelast down cycle. What does this feellike to you vis a vis the last down cycle? Does this feel like the fall of 2000 in any respect? Is it different for some specificreasons? I want to get your, what thisfeels like vis a vis history.
Adam Gutstein
Well it certainly does not feellike the fall of 2000 other than the fact that we are sitting here in the monthof November. I think that was a veryvery different time when we had a very very steep, if you will, run up ininvestment. The fact is, as we came downout of that, there was a very steep decline in spending. You saw sales cycles lengthening in an extraordinary fashion. You saw lots of, plenty of clients cancelprojects. Today, as we enter thisquarter year, we have had a client cancel a project due to some of the issuesinside Financial Services. But we onlyhad one in that category. I think thatis dramatically different.
As far as sales cycles, which Ithink is another indicator of this, I will admit we perhaps anticipated a bitof a lengthening. But is that attributedto the holiday season, and some of this uncertainty? But it is not, in my mind, it is certainlynot anything near what we anticipated then nor what took place then. Nor is it attributed to the same reasons,that is, a steep run up in investment. It was a totally different time.
George Price - Stifel Nicolaus
Great.
Operator
Our next question comes from Christine Pezino of JP Morgan. Please go ahead.
Christine Pezino - JP Morgan
Adam, you havetouched on my question related to sales cycles. It sounds like you are anticipating an elongation, but you have notquite seen that yet? Is that the rightway to characterize it?
Adam Gutstein
Yes. I mean, Christine, when we look at the pastquarter, our 2nd quarter, we really did not see anythingelongating. It was much as we expectedand much as the quarters before. But aswe look forward, and our guidance does accommodate this, we simply facing up towhere we are in the calendar and the overall environment; and so it is not hardfor us to manage in that. There may besome initiative that slipped out of this quarter and wind up in the nextquarter, and that is going to translate into effectively a longer salescycle. But as I said to George, wereally do not see anything at all like those dark days. Nor do we see this in a broad sweeping kindof way.
Christine Pezino - JP Morgan
Okay. And then, can we just look into the pipelinea little bit. Have you seen in the mix,checking the mix there, in terms of the projects and the types of projects thatcustomers are pursuing? Is it stillpretty balanced between growths and costs, or is it getting skewed towards oneor the other?
Adam Gutstein
I would say at the moment and as welook into our 3rd fiscal quarter, it is still pretty balancedbetween growth and cost. I would saythat that is true in all the industries we serve. But I would say that for obvious reason, thereasons in Financial Services, there is no doubt more of an increased focus oncompliance and risk management.
[Voice overlap]
Christine Pezino - JP Morgan
Uh-huh. Thanks, Adam.
Adam Gutstein
I am sure that does not surpriseanyone.
Christine Pezino - JP Morgan
We haveheard a couple of suppliers this quarter mention that they saw a weakness inthe Insurance sector. I am not sure whatto attribute that to. But have you seenanything along those lines? Do you haveany sense of what might be going on in that port of call?
Adam Gutstein
In terms of Insurance, obviously, oneaspect of Insurance is the revenues and profits they earn on theirpremiums. Another aspect is howprofitable their investments are. Andso, all of our Insurance clients likely have securities that have somesub-prime mortgages included in them. Sothey all likely have some risk. I thinkone of the difference is in general insurance companies hold their investmentsfor longer periods of time. As aconsequence, we are not seeing that as a big impact in the conversations withour insurance clients. We are certainlynot seeing it in the work that we are doing.
Having said that, I would say that mostpeople, most professional services firms, when they think of Financial Services,do think of insurance, capital markets, brokerage, money center, banking, etcall together. So it would not surpriseme to see some of that. But we are notseeing that affect us directly today.
Christine Pezino – JP Morgan
Okay thanks, Adam.
Operator
We have a returning question from the lineof George Price of Stifel Nicolaus.
George Price - Stifel Nicolaus
I figured there might be a few ahead ofme. But anyway, a couple of things. First of all, the pricing I was jumpingaround, the pricing call of 11%, is that year over year?
Adam Gutstein
Yes, year over year.
George Price - Stifel Nicolaus
Okay. Do you see any, where do you see the most strength and pricing, and whatkind of impact to pricing do you think these uncertainty is going to happen?
Adam Gutstein
George, I think from a pricing standpoint,this is much more, it is less about the particular industry in which you areworking. It is more about making sureyou are working on the right things with your client. We have brought a great deal of focus, and Ihave covered some of these in the past, a great deal of focus about doing theright work at the right level within our client organizations, as well asmaking sure that the work is valuable, is impactful. But also we have invested a great deal oftime and effort in training our partners in how to do a better job relative toarranging and negotiating the work, and frankly having the confidence that whatwe do is in fact valuable. So I think ithas much less to do with our industry per se, and much more to do with our ownbehaviour.
George Price - Stifel Nicolaus
Okay. In terms of the cash that you intend to deploy for share repurchases,Karl, I think you have talked about this before. What is the level that you think you need todeploy in terms of share repurchases to offset dilutions to the share count?
Karl Bupp
Well, George, I think we have made somereal progress in managing the dilution. You see it in the weighted average share count where the stock pricewent up, but the weighted average share count went down 5%. We believe that if we follow the guideline orguidelines for repurchases, which is stock-based comp expense plus optionexercise proceeds plus ESPP proceeds less shares withheld for taxes, we shouldmaybe able to continue to reduce the share count over time. I think in the last call, we said we wouldspend over $30 million buying back stocks this year and we fully expect to doat least that amount going forward.
George Price - Stifel Nicolaus
Do you think in general that that is goingto push your share count down?
Adam Gutstein
Based on where we are looking, we expectthe share count to be flat to down for the second half of the year.
George Price - Stifel Nicolaus
Okay, last question on attrition. It seems to be a little bit higher. What do you attribute that to?
Adam Gutstein
Well in terms of attrition, voluntaryattrition was roughly flat in the last quarter, I am sorry with last year on ayear over year basis. We expect thesecond half attrition to continue to trend down.
Attrition for us typically runs a cycle,like most professional services firms. It is at its height just after the fiscal year, and then it trends downas we approach the end of the fiscal year, as people anticipate end of the yearperformance reviews and performance awards and that sort of thing. So that is the first one. Second one I think as a general rule, ourpeople have a great deal of confidence in where we are going as a firm and someof the changes we are making and some of the initiatives we have in place. So, our general sense is that we will seeattrition continue to improve on a voluntary basis.
George Price - Stifel Nicolaus
Great! Thank you.
Operator
Our next question comes from line of DevangKothari from JMP Securities. Please goahead, sir.
DevangKothari – JMP Securities
Hi, good morning, gentlemen. I have a question on the utilization or Iguess the chargeability as you call it. It had a sequential drop off here. Is that just seasonal or are you beginning tosee some of the effects of potentially a slow down in the Financial Servicessector?
Adam Gutstein
Good morning Devang. Good to hear from you. Chargeability went down a bit and you willalso note that pricing improved so it resulted in a reasonable number for thequarter. We also hired an excess of 40 campus hires. So essentially, the lower chargeabilityrepresents a combination of the decreased demand as well as the increase in hires. We would expect to absorb those hires in thesecond half as we continue to grow. Wedo not have an as aggressive second half view on growth. But it is still continuing to grow and sochargeability should improve even if only modestly.
DevangKothari – JMP Securities
Okay. And then the demand slowed down as well as the reduced guidance, and Iapologize if you covered this in the early part of the call, I missed some ofthe early part. But is that primarily FinancialServices or are there other sectors where you are also starting to see a slowdown?
Adam Gutstein
That should be a good question,Devang. Let me first sort of at ageneral level make it clear. There was aquestion asked, essentially the question was, is the world coming to anend? Are we falling off a cliff? And the answer is no. Absolutely not. It is not like it was in the fall of2000. That is not what we are talkingabout.
I think what we are talking about is thatthere is some uncertainty clearly in the Financial Services arena. I do not think any of us, we have to have hadour heads stuck in the sand to have missed all the news and some of the seniorlevel departures in some of the major firms on Wall Street. And so as we look forward, we are simplylooking at this from the standpoint that it is not going to be, we are notgoing to see growth in quite as an aggressive fashion at least in the nearterm.
Over the longer term, we fully expect toreturn to 15% or better. But as we lookat the second half, we expect growth to moderate a bit. On the other hand, if we are wrong and demandis in fact stronger, we are well prepared to respond to that. We have plenty of capacity. We believe we are doing the right work withthe right people and the right places. Butit just seems prudent as far as how we manage the business to take a lessaggressive view to growth in the short term. It is not something that we see spread throughout the industry. It is not a huge macroeconomic issue. That is not what we are saying.
DevangKothari – JMP Securities
Okay. I understand. And then given thetype of work you do, Adam, you had kind of good insights into how budgets look goinginto the next year. I heard your earliercomments about, you know, it sounds like budget may be flat, may be slightly up. But given that, what kind of growthwould you expect to see in your Financial Services practice?
AdamGutstein
You know, as we look toward our next fiscalyear, we will plan our Financial Services practice at at least 15% growth.
DevangKothari – JMP Securities
Okay, great! Well, thank you for taking my questions.
Karl Bupp
One last comment. When Adam mentioned our outlook, as we look atthe monthly revenue progression in the September quarter, August was betterthan July, September was better than August, October was better than September. But as we look through into the Decemberquarter, as Adam said, we still think the outlook is good, flat to up. We are just not, we are just being pragmatichere based upon everything that we believe is going on. I mean, business is going well, proposalactivity is good. Our win rate hasimproved, quarter over quarter. We are positiveabout the business. But again, justbeing pragmatic about looking at what is going in our our exposure to FS and Insurance. That is 50% of our revenue. So we still think we can grow thebusiness. It may be not just as fast aswe previously thought we could.
DevangKothari – JMP Securities
Karl, you have a pretty good visibilityinto your quarterly revenues at this point in time, and especially when youstart looking out at the end of Q3 for yourselves. I am assuming you are seeing clearly someindication in your pipelines or in the amount of revenue that you booked as tothe reason why you are kind of moderating your outlook here.
AdamGutstein
You know, I think, Devang the answer tothat is we are very confident in the numbers that we have quoted for thequarter. Very confident.
DevangKothari – JMP Securities
Okay. Great! Thank you very much.
Operator
Our next question comes from the line of EdCaso of Wachovia. Please go ahead.
Eric- Wachovia Securities
Hey guys. This is actually Eric forEd. We spent a lot of time talking aboutFinancial Services and Insurance being about 50% of your revenue. Can you talk about the budgets that you areseeing from your client in the other sectors? We talked about how sky is not falling. But any particular comments you can make about the other verticals?
AdamGutstein
Good morning, Eric, how are you? In terms of the other verticals from ourstandpoint, we are really not seeing any change. It is really business as usual, and so weexpect our clients to continue to spend where it makes sense, where the use oftechnology can improve their business in terms of its operatingcharacteristics, its ability to grow, its ability to operate profitably. We are not seeing any noticeable change.
Eric–Wachovia Securities
Alright. On your comments about increasing the leverage in the model, does thatinclude more offshore and how aggressive are your efforts in going on overthere? I know you have a couple ofpeople over there.
AdamGutstein
Yes, first, let me just make it clear, justso that, for those who have joined the call a bit late. We are clearly not talking about becoming asystems integrator or an outsourcer or an offshore firm. This is truly just a, it is a modestenhancement. I am thinking simply, wehave been at 1:6 partner-to-staff for a very long time. We know that it is one of the key levers toimprove this business. We believe we canincrease it from 1:6 to something greater, but substantially less than anoutsourcer or an integrator.
We are still an advisory firm. So, if we were in the 1:10, or 1:9, or 1:11, 1:12kind of range, that is a reasonable place to be. Those are still small multi-disciplinaryteams that help clients from a planning standpoint, but are better suited tohelp in execution with a broader team, I.e., the team that may be partneredwith an integrator or partnered with an offshore firm or many more clients tendto be much larger.
So we are not talking about a dramaticchange in the business. We are talkingabout a refinement within the current model. Having said that, it is really not related to our practice in India orour offshore analytics capability. Boththose practices are in many senses advisory practices. What we are really talking about is addingmore to help, in particular around execution with our clients. There are obviously lots of benefits there. Our clients are asking for us to help in abroader way in the context of execution. From our standpoint, it should give us more significant and more longerrunning projects in the context of what are already 26- or 27-month on the averagerelationships. So it should make it evenbetter.
Eric–Wachovia Securities
Okay. Thanks.
Operator
And our next question comes from the lineof Moshi Katri - SG Cohen. Please goahead.
MoshiKatri - SG Cohen
Thanks. Good morning. I wanted first tocongratulate you for being pre-emptive and proactive in your guidance. That is number one. Going through your comments about thebudgets. I want to focus a bit about thebudgeting cycle that is ongoing as we speak especially in the FinancialServices vertical. Can you give us afeel in what you think, what sort of a time frame we are going to have to gothrough in terms of when do we actually get decisions on the ’08 spending? Because we are hearing that the timing onthis has been pushed probably more to January, and under that scenario we mayactually get to a possibility of some sort of a pause during the March quarter,especially for funding for new projects?
AdamGutstein
Good to hear from you. I think that is probably a very reasonablepoint of view. I think, certainly in FinancialServices and in particular, in capital markets, there is a small number of verysignificant firms. Clearly, when you arein the midst of some of the changes that they are undergoing, some of their owninternal scrutiny, you are going to see a bit of a delay. I think that is right.
The second fact, I would say is again, thisis just me talking and giving you my point of view for where I sit. But I think we will probably see companies asthey come out of the holidays, they will probably take a pause as you said andevaluate what is going on with consumer spending. They will react to how they think theconsumer will or will not continue to spend, because that has obviously been abig part of this last economic expansion.
So I think you are going to see some delayin making decisions. Now having saidthat, one of the things that I have seen over the years, is that decisionsabout budgeting or— They are important, I do not want to downplay them. But what is most important are the nature ofthe planning projects and execution projects that firms consider and eventuallyundertake. In my experience, if thoseprojects make good economic sense, firms find a way to do those projects. As a general rule, I think most of ourclients operate just in that fashion.
The other thing that I would tell you isthat from a guidance standpoint, we basically have factored in all the aspectswe are talking about here, sort of if you will, the potential of our clients tothink about consumer spending at the start of the year. We factored in the holiday season, and wefactored in some of the risks and uncertainty around Financial Services. So that is included in our guidance. But I think those are things that peopleought to be thinking about at this time of the year.
MoshiKatri - SG Cohen
Are you hearing about any layoffs,especially in internal IT departments, happening? Or is this too early?
AdamGutstein
Yes, we are certainly aware of some of thelayoffs that have taken place relative to mortgage-backed securities. We have seen some cost-cutting in some firmson the operations side. But we have not,my general view is that we are probably not going to see much in the way oflayoffs around IT. IT is still-- ourDiamond Digital IQ survey really makes it crystal clear, IT is still, and I expect it will continue tobe, at the very top of the seniormanagement’s agenda from the CEO down. It is probably the only area where you can truly make step-wiseperformance changes relative to operating performance. So I do not expect to see layoffs in IT. I expect to see, frankly, continuedinvestment even if it is scrutinized more carefully.
MoshiKatri - SG Cohen
And then the final question. Sorry for asking all these questions. Again from a high level perspective, if youlook at IT budgets, are you hearing about more cutbacks? Maybe more on the products side versusservices, ie, software and hardware? Oragain, it is too early to talk about that?
AdamGutstein
First, what I would say is that it is tooearly to know just where that is going to go. But I do not think-- In a sense, what you are doing is that you aredrawing a parallel to another time in our history, where there was sort of anenormous investment in the capital side of the equation. And then there was a period of time, frankly,when the spending slowed, and essentially, technology organizations wereworking off that investment. We are notin that position today. So my own viewis that products that have value and will support, from the IT organization’smission, to help the business grow and grow profitably, will be bought. Just as services spending will continue whereit will make sense in the context of delivering value, planning for value, andproviding necessary expertise.
MoshiKatri - SG Cohen
Thanks for your help.
Operator
There are no further questions from thephone lines. I will now turn theconference back over to you.
Adam Gutstein
Thanks, Operator. We are pleased we continue to grow and improveour profitability. We are focused onimproving our prospects for sustained profitable growth and getting toscale. We have a very optimistic viewabout the future. Thank you for takingthe time to join us today.
Operator
Ladies and gentlemen, that does concludeour conference call for today. We thankyou for your participation and ask that you please disconnect your lines..
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