BearingPoint Q3 2007 Earnings Call Transcript

BearingPoint, Inc. (BE)

Q3 2007 Earnings Call

December 3, 2007 8:00 am ET

Executives

Connie Weaver - Chief Marketing Officer

Roderick C. McGeary - Chairman of the Board

F. Edwin Harbach - President, Chief Executive Officer

Judy A. Ethell - Chief Financial Officer, Chief Accounting Officer

Analysts

Rod Bourgeois - Sanford C. Bernstein

Tien-tsin Huang - J.P. Morgan

Adam Frisch - UBS

Moshe Katri - Cowen & Company

Edward Caso - Wachovia

James Friedman - Susquehanna Financial Group

George Price - Stifel Nicolaus

Susan Chen - Merrill Lynch

Patrick Burton - Citigroup

Presentation

Operator

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the BearingPoint third quarter conference call. (Operator Instructions) I would now like to turn the call over to Ms. Connie Weaver. You may begin your conference.

Connie Weaver

Thank you, Operator and good morning, everyone. I am Connie Weaver, BearingPoint's Chief Marketing Officer and head of investor relations and we’re pleased to have you join us this morning. With me on our call is Rod McGeary, our Chairman; Ed Harbach, our newly appointed President and Chief Executive Officer; and Judy Ethell, our Chief Financial Officer.

We hope by now you’ve had a chance to review our press release and had an opportunity to obtain our third quarter Form 10-Q filing that we made earlier this morning. Before I get started, I would like to quickly outline the agenda for this morning’s call. Rod McGeary will start by making some opening remarks, followed by Ed Harbach, who will provide us with his priorities and review, along with Judy, our financials for third quarter of 2007 and highlight our 10-Q filing. Ed will come back and close our call and after that, we’ll open the line up to take your questions. At that time, we’ll go through the instructions for questions but I would like to remind you that we will be limiting questions to two per person so we can accommodate as many of you as possible.

Now for safe harbor; this information covered on today’s call, which is not historical in nature, consists of forward-looking statements within the meaning of the federal securities laws. Words such as may, will, could, would, should, anticipate, continue to expect, intends, plans, believes, in the company’s views, or similar expressions and are used to identify these forward-looking statements. These statements are only predictions and as such, are not a guarantee of future performance and involve risks, uncertainties, and assumptions that are difficult to predict and which could materially adversely affect the company’s financial conditions and results of operations.

Forward-looking statements are based upon assumptions as to the future events that may not prove to be accurate. Actual outcomes and results may differ materially from what is expressed or forecast in forward-looking statements. As a result, these statements speak only to the date they were made.

The company undertakes no obligation publicly to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Please refer to item 1-A, Risk Factors, contained in the company’s annual report on Form 10-K for the year ending December 31, 2006 and the company’s quarterly report on Form 10-Q and subsequent filings with the SEC for additional information regarding risk factors.

Now with that, let me turn things over to our Chairman, Rod McGeary. Rod.

Roderick C. McGeary

Thank you, Connie and good morning, everyone. I am sure everyone has already had a chance to see today’s announcement. I am very excited to announce that Ed Harbach has been named President and Chief Executive Officer and has been elected to our Board of Directors. Please join me in congratulating Ed on his new role.

Ed succeeds Harry You, whose accomplishments included helping us get current with our financial reporting, strengthening our balance sheet and resolving a significant number of financial, compliance and other issues which existed when he arrived. With these important achievements in place and as we enter the next phase of our turnaround, we believe that this is the right time for change in our leadership. On behalf of the board, the management team, and the entire global employee base of BearingPoint, we wish Harry well in his future endeavors.

We are thrilled that Ed will lead BearingPoint into its next critical phase of achieving strategic and operational excellence. As you know, Ed has been President and Chief Operating Officer of the company since January of this year and has already made tremendously positive impact on our organization as the leader of our day-to-day operations. With his proven ability to enhance operations, drive business results and increase client satisfaction, Ed will be instrumental in helping us make the final push on our business turnaround and execute our strategy for long-term profitable growth.

Ed meets all the criteria we defined for the Chief Executive role as we move forward. He is an industry veteran, having spent almost three decades at Accenture, where he served as managing partner and a member of the leadership team.

In addition to leading global client relationships with many Fortune 100 companies, Ed served as Chief Information Officer and managing partner client satisfaction and quality. And also served as turnaround leader on a number of critical client and organizational assignments in multiple geographic regions.

Importantly, Ed already has a deep understanding and knowledge of the BearingPoint organization. He is very well-respected across our global employee base and with many clients he has already interacted. Ed’s appointment reflects a determination by the board that moving forward the best way to create value for our shareholders, clients and employees is by intensifying our focus on operations and leveraging the full scale and scope of our global business. Ed will pursue this strategy with a focus and disciplined approach to driving profitable growth, building the company’s cash flow and strengthening the balance sheet.

With today’s third quarter filing, we are current in our SEC reporting requirements, putting us in very good position to continue to strengthen the organization, improve our performance, and create value for our shareholders. With that, I would like to turn the call over to Ed.

F. Edwin Harbach

Thank you for joining us this morning. I am very enthusiastic about our future and confident that our company can create long-term value for our shareholders, clients, and employees.

I would like to take a few minutes about the opportunities ahead and then review some operational and financial highlights. As Rod mentioned, I’ve worked in the consulting industry for almost three decades. Based on this experience and my time at BearingPoint, I know that we are well-positioned to improve our operations and grow both our top and bottom line in the long-term.

BearingPoint has talented, committed employees, blue chip clients, and a truly global footprint that can be leveraged in many value-enhancing ways. The strategic question we face is how best to leverage these assets for the benefit of all constituencies. The best way to generate value is through an aggressive, strategic and disciplined approach to manage our business fundamentals and delivering consistent, sustainable solutions to our clients worldwide. That means operating on a fully consolidated global business.

To that end, we intend to focus on the following strategic priorities as we move forward: first, to leverage opportunities across our global footprint; second, to focus on further developing our world-class employee base; third, to achieve operational excellence and deliver improved profitability. I’ll take a few moments to discuss each of these in a little bit more detail.

Since joining BearingPoint almost a year ago, I have met with thousands of our employees in a variety of forms around the world. I have been impressed by their passion for doing great work for our clients and by their steadfast commitment to building a great company. I have also spent time listening to many of our clients who reinforced my observations about the strengths of our business and why we continue to win business in the marketplace.

So having evaluated both our go-to-market capabilities as well as our infrastructure operations, I have a clear view of what we need to do in the months ahead and where I need to lead our company.

As I mentioned earlier, I firmly believe that having a global footprint is critical in today’s increasingly global economy, where the ability to leverage capabilities and best practices from different parts of our organization is an important differentiator. That does not mean being in every geography just to put dots on the map, but rather ensuring that we have the scale and presence in strategic markets so we can seamlessly serve and profitably grow our diverse portfolio of multi-national global clients.

Our European practice will continue to be a key part of this strategy. After extensive analysis and discussion, we have concluded that over the long term we can create more value by further integrating our businesses and operating model, not putting more distance between them. Now representing about 22% of our total revenues, EMEA is a solid business with very promising operations. Let me explain further why I’m confident that pursuing a global strategy will maximize our potential.

Our public services segment has been and remains the core of our business. Over the last few decades, we’ve built an enviable position with solid anchor clients, strong relationships, and a well-defined and differentiated set of solutions within North America.

But less known is we have begun to transfer this expertise overseas and started to build on relationships with federal and local governments worldwide. Looking ahead, I believe that globalizing PS will be an important growth driver for our company. While we have already built on this foundation as global strategy with key engagements in Germany, France, and China, we are looking at a tangible opportunity to further invest and grow this revenue base. You can also look at the success of our emerging markets in which we do extensive and highly differentiated work and in the process of redeploying that expertise to additional markets such as China and Saudi Arabia.

Within our commercial services segment, we are growing well in industry sectors such as energy, life sciences and banking. These are industries in which our clients require consulting partners that can provide services, both locally and globally. We already work with the top 10 banks and the top 10 drug manufacturers on the global Forbes 2000 list, as well as several market leaders in energy, so we have built a strong client platform on which to continue to build.

Properly managed, our global business can also provide us with some protection from the recessionary environments. As we have seen this year, growth in our units in Asia-Pacific and Europe have offset the declines in our U.S. commercial business and the weakening dollar.

Our next strategic priorities are our people. We have a world-class employee base throughout our organization. Because we are in the services business, our people are truly our primary asset and the lifeblood of our company. We are committed to recruiting and developing the best talent possible so that we can continue to provide clients with the service and results that they have come to expect from us.

To that end, we plan to increase our training efforts, including our Yale partnership, under our newly appointed global HR leader, Rick Martino. We have put about 1,500 employees through this training program in 2007 and the attrition rate among this group is well below our corporate average, so it’s crystal clear to me that this investment in our people pays off.

Also, I’ve initiated an ongoing employee satisfaction survey earlier this year. The output of this was incredibly useful in shaping our organization that will attract the best people.

Interestingly, many of our employees cited in their research their desire to work on a multi-national engagement and be part of a truly global company, which further supports and validates our decision to continue to operate as one consolidated business. I know firsthand that the quality of our people is a critical factor of success. With increased training, enhanced hiring programs and initiatives to increase retention, I believe that we will continue to bolster the drivers that create a world-class workforce.

Our third key priority is to continue to drive operational excellence and create a more competitive cost structure. I have established a culture of accountability with a performance scorecard that utilizes the metrics that represent the most important drives of our underlying revenue growth and profitability.

Good performance measurement is an important part of our successful management strategy for this company. Recent results show that we have driven utilization to all-time highs, nearing our target of 80% and that we will strive to improve this.

In addition, in the time since I joined BearingPoint, I’ve dug into our back office operations and spent a great deal of time analyzing our current cost structure. While we will still bear some costs associated with our new systems implementation and additional restructuring efforts, we will continue to drive through SG&A reductions in 2008.

We have identified significant savings opportunities in various infrastructure groups and practice areas, with the ultimate objective of reaching SG&A in the mid-teens as a percentage of net revenue by the end of 2009.

We’ve also made good progress in managing factors that improve cash flow. For example, we reduced DSOs in each and every quarter on a year-over-year basis and in the fourth quarter we are on track to reduce DSOs from last year’s levels, thereby generating positive free cash flow.

In 2008, we expect to continue to improve our quarterly DSO balances and increase our focus on improving operating margins. To that end, we will begin to consider exiting particular sectors and markets where we do not think we can achieve and sustain satisfactory operating margins.

While I know we have many challenges to overcome, I also know that we have great assets and achievable opportunities that will drive this company forward and create value.

With that, let me turn to our third quarter 2007 results. Gross revenue for the third quarter of 2007 was $861.9 million, an increase of 2.2% over Q3 2006. This performance is generally consistent with trends observed earlier this year, with growth in our public services and international units offsetting contractions in financial services and commercial services.

We were especially pleased by the continued strong performance of our public services unit, which grew year over year by 8.7%, reflecting the benefit of having a diversified and improved portfolio and increased momentum across several sectors of our government business. We recorded our highest public services booking ever in the third quarter of 2007.

In financial services, representing approximately 8% of total revenue and our smallest North American segment, the top line was impacted by several factors, including the previously disclosed wind-down of the business units [inaudible] client engagement, the continued effects of senior staff losses and certain higher rate business practices, and the early termination of some engagement by [inaudible] practice clients in response to recently reported losses related to asset write-downs.

During the past six months, FS leadership took decisive action to refocus this business and right-size the cost base, including reducing senior level consultants, executing general cost containment practices, and rebalancing the composition of our portfolio to focus more on lines of businesses with greater rates per hour. So while profitability and financial services is still down considerably from historical levels, these actions have enabled us to increase our gross profit margin in the third quarter by 3.1 percentage points to 19.4% from 16.3% in the second quarter.

Given the increasing uncertainty in the financial markets, however, we cannot discount future deterioration in our book of business and therefore we will continue to take actions to mitigate further declines.

In the third quarter, we also [inaudible] client and commercial services but at a slower rate than the second quarter. This improvement is largely due to improved performance in our life sciences and energy practices where expanding industry expertise and robust market trends have generated positive results. Specifically in the energy sector, high oil prices have created unprecedented liquidity for energy producers to concentrate on capital expenditures. In fact, many of our clients are deploying funds now in order to be more operationally efficient in the future and improve their underlying infrastructures and technology capabilities.

In life sciences, we continue to solidify our position as a leading player. As an example, we were recently awarded a large project with Cedars Sinai. Like in our financial services unit, however, we remain cautious on the outlook for commercial services as a whole, given the increasing negative macroeconomic conditions.

Now turning to our international segments, our performance in the regions reflected significant foreign currency benefits as well as flat to modest growth. I am pleased that throughout this period our colleagues in EMEA have been able to drive consistent results. In the third quarter, revenue grew by 10.3% in U.S. dollars and 2.4% in local currency. While the growth was largely driven by foreign exchange benefits, we did see noticeable improvements in Germany, which is our largest country in EMEA and is critical to our success in the region. Our German practice has always been a differentiator for BearingPoint. We are one of the largest technology management consulting firms and boost a roster of blue-chip clients.

France also posted double-digit growth. This was largely due to success in the financial services arena, which also serves to expand our business mix there. We will continue to achieve success in Russia. We view this country as a high priority growth opportunity. In just a few years, we have firmly implanted ourselves as a key player in the market, especially within energy but we are also diversifying into other sectors, including financial services.

As you may have seen, we have continued to rationalize our geographic footprint with the sale of a portion of our Spanish practice this past October. This is consistent with our stated overall objective to prune money-losing practices and we will continue to evaluate our portfolio on an ongoing basis.

Turning to Asia-Pacific, we grew nearly 3% in U.S. dollars and approximately 1% in local currency. Consistent with prior quarters, we continued to see strong growth in our Japanese practice, which accounts for more than 55% of our business in the region and remains BearingPoint's most profitable country practice.

Specifically in Japan, we continue to benefit from regulatory drivers, such as J-SOX, as well as several new large systems implementation projects. Moving forward, we will invest more time in growing and improving profitability in other Asia-Pacific markets and we continue to be bullish in our outlook for the region as a whole and our prospects there, largely due to our positioning in Japan and continued traction in China.

Coming back to the consolidated P&L, our net revenue for the third quarter grew to $657.2 million, representing an increase of 4.5% over the third quarter of 2006, reflecting better management of our own internal resources and reductions in sub-contractor usage.

Moving down the P&L, our gross profit for the third quarter was $132.6 million, or 15.4% of gross revenue, compared to $159.0 million, or 18.9% for the same period last year. This decline was largely due to a $28 million increase in professional compensation on account of greater stock compensation expense related to the performance share unit plan, which was authorized last February, as well as higher fringe costs, especially in EMEA.

Another factor impacting our gross profit in the third quarter was the increase in other cost of service. This increase was primarily due to increases in the number of non-billable employees, higher recruiting costs, and a software impairment charge reported within EMEA. This increase in the number of non-billable employees was due in part to the redeployment of existing employees from client-facing roles to practice support roles, which results in related salaries and expenses now being reflected in other cost of service rather than professional expense.

And finally, our gross profit in the third quarter also reflects our efforts to further streamline our real estate portfolio. In the third quarter of 2007, we took a $3.9 million charge associated with space we no longer will be using, primarily within EMEA and North America. We also expect to incur an additional charge in the fourth quarter of 2007 in our effort to optimize our office footprint and shed excess space.

Now turning to SG&A, our expenses totaled $160.3 million in the third quarter, representing a 7.5% decrease over the third quarter 2006. That improvement was primarily due to the planned reduction of temporary accountants and other costs related to the closing of our financial statements. In fact, external finance and accounting costs decreased to $14 million in the third quarter of 2007 from $32.1 million in the same period as last year.

As we previously stated, it is our objective to reduce SG&A by $60 million by the end of 2007. We are on track to achieve these cost reductions by year-end and also to continue to target reducing SG&A to achieve industry levels in the mid-teens as a percentage of net revenue by the end of 2009.

So in the third quarter, we posted an operating loss of $27.7 million compared to an operating loss of $14.9 million in the third quarter of 2006, as increases in professional compensation and other cost of services fully offset SG&A savings.

For the third quarter, our net loss was $68 million, or $0.32 per share, compared to $29.6 million, or $0.14 per share in the third quarter of 2006. The third quarter loss was driven by items I mentioned earlier plus an increase in interest expense of $8.9 million, primarily related to additional costs associated with our new 2007 credit facility, an increase in our income tax expense of $11.6 million, and more cash taxes and profitable jurisdiction in our FIN-48 accrual.

Now I would like to turn the call over to Judy Ethell, who will discuss our cash position, share management, and filing status. Judy.

Judy A. Ethell

Thank you, Ed. Now turning to our cash flow and balance sheet highlights, operating cash flow for the three months ended September 30, 2007 increased $76.5 million from a negative $161.6 million in the second quarter of 2007 and a positive $27.8 million in the same period of 2006. By the same token, free cash flow for the third quarter improved to $67.2 million from a negative $171.9 million in the second quarter of 2007 and positive $19.8 million in 2006. This improvement was driven by strong collections and an increase in our accounts payable, which drove both our operating and free cash flow up significantly in the third quarter on a sequential and year-over-year basis.

In fact, our DSO decreased from 95 days at the end of June to 90 days at the end of the third quarter, resulting in an increase of approximately $44 million in cash. So in line with our previous disclosures, our cash balance at the end of the quarter of 2007 was $431 million, a significant sequential and year-over-year increase.

We continue to expect the business to be a source of cash in the fourth quarter and expect our cash balances to be approximately $450 million by year-end. Where we land cash will be dependent on our ability to collect cash on a better rate in the fourth quarter of 2007 when compared to the fourth quarter of 2006.

In order to achieve these objectives, we have tied the payment of bonuses to DSO targets, just as we did at the end of 2006 and to overall business performance. We believe that this incentive will continue to drive the results we are targeting.

In terms of our SEC filings, with our Q3 filing we have delivered on our commitment to be a current filer before year-end and we are now well on track to timely file our 2007 10-K in February of 2008. After our second quarter filing, we issued approximately 5.6 million shares under an employee stock purchase plan. Of those delivered, only 15% have been sold in the market as of November 30, 2007.

Because we are once again a current filer, we will continue to provide our people with the opportunity to acquire shares under our various employee share plans. We will now be settling RSUs that have vested since 2005 but still expect the number of shares to be put up for sale by employees to be just over our average daily trading volume.

Our employees will be selling their shares in an off-market transaction, which we hope will limit any affects on our share price while providing our employees with enough flexibility to sell shares to cover their withholding tax liabilities and provide some liquidity. Once this overhang is behind us, we expect to return to ordinary settlement and trading practices under our employee share plans.

Let me turn it back to Ed.

F. Edwin Harbach

So with just a few weeks left to our calendar year-end, we have good visibility into our business performance for this fiscal year. We have already provided metrics for the third quarter of 2007 on our last conference call but I will say the monthly utilization employee retention metrics for October continue to be encouraging. We are more conservative, however, relative to bookings, given our recent negative news in the market and what is typically a seasonally softer bookings quarter given the holiday season.

As you have seen in our results for the first nine months of the year, 2007 has not been without its challenges. Our performance largely reflects the operational hurdle we face this year, including significant headwind related to not having current financials, challenges in our FS and CS business units, and higher compensation costs, which have reduced our underlying profitability. And these hurdles will continue to impact our results in the fourth quarter. We are not satisfied with these results and understand that 2008 will be a critical year for BearingPoint as we stand at the crossroads of becoming a timely filer and pivoting to a new phase of our transformation.

Understanding the work that lies ahead, I am committed to improving the underlying performances in our business and continue to achieve improved profitability and free cash flow. What you can expect from me is a clear strategy with decisive actions that are realistic in the context of expected economic environment in the next 12 to 18 months. You will hear more on this in the weeks and months ahead.

We intend to hold an investor day early in the new year to share with you much greater detail about our strategic plans and to provide a progress report on steps taken between now and then, and to update you on our operational financial performance. The investor relations team and I intend to maintain a proactive and clearer communication with you and we look forward to interacting with you in the coming weeks and months.

In conclusion, while I remain realistic about the evolving economy, I am optimistic about the potential for this business and our ability to grow value for our employees, our clients and our shareholders.

Now I’d like to turn the call back over to Connie.

Connie Weaver

Thank you, Ed. And now I’d like to open our lines up to take your Q&A. As I mentioned earlier on the call, we would like to ask you to keep your questions to two per person so we can accommodate as many of you as possible. And now I’ll turn it back over to Amy our operator to one more time review the Q&A procedures. Amy.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Rod Bourgeois from Bernstein.

Rod Bourgeois - Sanford C. Bernstein

Let me start the question with this; in reading the press release, it sounds like a very bullish press release. You’re citing experience in turning company’s around and making operational improvements and pride in getting financials current and so on and so on. I do see a big disconnect in the way investors look at this story, though. I mean, the stock is literally cut in half since 2005 and so I’m seeing a disconnect between the bullishness of the press release and what shareholders have been going through here.

I guess the question I want to ask in that context is in the last three years relative to the turnaround, particularly during the period that Ed has been on board, have you guys missed anything from a turnaround perspective that you could have done a better job of addressing and based on the lessons learned in that experience, what do you see doing different than the turnaround that we’ve heard about for the last three years? If you can cite anything that you’ve missed and anything you plan to do going forward that’s different than what you’ve done in the past, I think that would be very helpful for the shareholders that have been through a lot of pain here in the last three years.

F. Edwin Harbach

Good morning, Rod. I apologize for my cold. If you guys hear my voice a little bit this morning, I’ve got a cold but hopefully it will be clear for you.

The pain I understand and hopefully we won’t create quite so much pain going forward but I think we have accomplished some things. During the at least 10 or 11 months I’ve been here, we’ve gotten current. We are cash flow positive as we described before. The factory supply/demand is in balance. We talked about that in utilization. We’re cutting SG&A with more to come. Attrition is down, basically. DSO is down, so we’ve accomplished a lot and I think the key for us is focus and execution.

I think what you have to hold us accountable for is if we focus and we get this thing right and we execute, we’re going to create value for you, that’s going to follow, right? If we don’t then obviously it won’t but I think we will.

Rod Bourgeois - Sanford C. Bernstein

Let me ask you specifically on EMEA. There’s a big change in message on EMEA and I’m not sure I heard in the prepared commentary why the change of heart on divesting that unit and keeping it under the BearingPoint umbrella.

F. Edwin Harbach

I’ll give you a couple of perspectives on that. I’ve spent a lot of time talking to our clients and talking to our people and obviously I’ve been in the industry a long time. Our clients want a global firm. Not on every project, not on every engagement, but they expect us to serve them globally and I believe we can do that best without a transaction. Our people want to be part of a global firm. I talked to the Japanese staff, for example. They’re proud of being part of a global BearingPoint and they view it that way and frankly, when you guys do -- when I do the calculations, I think we can return more value to our shareholders being part of a global firm and we can do it that way and so that’s my recommendation. That’s the direction we’re heading.

Rod Bourgeois - Sanford C. Bernstein

And just a clarification there; I guess what I’m asking is did you have a difference of opinion versus Harry on that topic? Because at the analyst day earlier this year, we heard multiple arguments from Harry that being a global firm wasn’t important and therefore EMEA needed to be divested. And I’m wondering why the change in that view. Do you disagrees with the prior regime’s point of view on that topic?

F. Edwin Harbach

Rod, it’s an excellent question. I’m not going to look backward. I know you want me to but I’m going to look forward and I believe it’s all about execution. I’ve got a track record in terms of doing that. I strongly believe we’re better off having a global firm with EMEA as part of our global firm and that’s my recommendation going forward and that’s obviously a direction we’re heading.

Rod Bourgeois - Sanford C. Bernstein

All right, Ed. Thanks very much.

Connie Weaver

Thanks a lot. Next question, please.

Operator

Your next question comes from the line of Tien-tsin Huang of J.P. Morgan.

Tien-tsin Huang - J.P. Morgan

Thanks for taking my question. I guess I’ll ask about the financial services sector. Can you just give us a little bit more detail on what’s taking place there? What are you expecting in ’08, given the commentary about some of the challenges you are seeing now? And I think it would be helpful if you could give us a little bit more detail on your exposure, I guess by type -- exposure to banks, capital markets, mortgage, et cetera. Thanks.

F. Edwin Harbach

Thanks for your question. Financial services is probably one of the more kind of up and down segments we have. It’s about 8% of our business. If you look back about two years ago, it was the star. We have a ranking system we do internally for our business units. It was number one by far. Right now, obviously they are in a down cycle.

What we do with those guys is stabilize them and get them focused on the right clients and we end up picking which segments we’re going to operate in so we can be profitable going up and going down, so you’ll probably see some volatility in them in terms of revenue but hopefully there won’t be volatility in terms of profit.

As far as next year, we’re going to have an analyst day and we’re talking about ’08 plans. I’m not really prepared today to talk about the financial services or any other segment for ’08.

Connie Weaver

Thanks very much. Next question, please.

Operator

Your next question comes from the line of Adam Frisch of UBS.

Adam Frisch - UBS

Ed, congratulations on your new role. I have two questions for you. You have the unfortunate timing, I guess, of coming in when most believe some of your end markets are going to get weaker in the next 12 months, making your personal operating experience even more important in ’08. So my quick question to you is first on the operations, what kind of results should we be expecting in terms of growth margins or cash balances in the next 12 months? I think that’s important to know or at least get on this call before getting off given where the stock is.

F. Edwin Harbach

First of all, thank you for the congratulations. I hope you are congratulating me a year from now but the results for the next 12 months -- I figure my honeymoon is probably over today but the results for the next 12 months, if you let me wait until we had the analyst day at the beginning of the year to address ’08, I’d really like to do that. I don’t really want to talk about ’08 today.

I will talk about --

Adam Frisch - UBS

Okay, the analyst day will be when?

F. Edwin Harbach

Okay, go ahead.

Adam Frisch - UBS

The analyst day will --

Connie Weaver

I will certainly get back to you guys as soon as possible with dates but it will be early in the new year.

Adam Frisch - UBS

Okay, but maybe a different way to address that, at $3.60 or whatever the stock happens to fall out in the near term, should we be concerned or are you concerned Ed at all about a liquidity crisis or anything like that on the balance sheet?

F. Edwin Harbach

In terms of the balance sheet, obviously the balance sheet is what the balance sheet is, right? You guys could read that. From a cash standpoint, it was one of the concerns when I arrived but we had $350 million of cash at the end of Q2. Judy mentioned we’re at $430 million or so at the end of Q3. I don’t to go out -- I told you I’m not going to go out too far in the future but we are going to be cash flow positive for Q4 also somewhere around the 450 range in terms of doing that.

I told you I wasn’t going to speak to you about ’08 but I will violate that a little bit. We’re walking through our various scenarios and plans for ’08 now. They are not finalized. In every one of those scenarios, we plan to be cash flow positive next year and I don’t expect to have any need for additional financing over the next 12 months.

Adam Frisch - UBS

Okay, great. And then one last thing -- obviously one of the major attributes of some investors’ investment [pieces] was the potential for a strategic initiatives and M&A. Harry’s background was banking and operations. You are obviously a more seasoned operator with your 30 years of experience in the industry and so forth. So can you talk about some color on what you are thinking about for M&A and strategic initiatives at this point? And should we still expect those kinds of things or are you just coming in and saying look, I’m going to run this company better and more profitably with better cash?

F. Edwin Harbach

I guess the best thing I can tell you is I’m going to create value for the company in terms of running the company. We are obviously a public company and we’re for sale every day in the marketplace but my goal is to run the company and deliver value through improving the performance of BearingPoint.

Adam Frisch - UBS

Okay, thanks.

Connie Weaver

Thanks a lot. Next question, please.

Operator

Your next question comes from the line of Moshe Katri from Cowen & Company.

Moshe Katri - Cowen & Company

Thanks. Good morning. Looking at the quarterly results, have you experienced any project terminations or project deferrals? That’s number one. And number two, your 10-Q is indicating that you are planning to move or transition to a new financial system in North America some time in ’08. Can you give us some more details on that and will that impact any progress in terms of BearingPoint becoming current in their filings? Thanks.

F. Edwin Harbach

A couple of responses to that; we have a broad portfolio of thousands of projects. We get projects starting up. We have some termination all the time. I think the gut of the question is unusual. I’ve not seen anything outside of financial services. There are a few clients in financial services caught up in the mess you guys are well aware of that have gone through capital cuts and actually have terminated projects in the middle of those. But outside of financial services North America, I’ve not see that.

You are right. We have a new financial system we are implementing internally. We’re planning on doing that and converting our public services business sometime at the end of this year -- the end of, I’m sorry, 2008 in terms of going forward and that will just improve our ability to continue to stay current.

Moshe Katri - Cowen & Company

Thanks.

Connie Weaver

Thanks. Next question, please.

Operator

Your next question comes from the line of Ed Caso from Wachovia.

Edward Caso - Wachovia

Two questions; the first is you talked about near-record utilization and positive trends and I see turnover remains absolutely high and the gross margin is only 15%, so if you could talk about what are you going to do to get the gross margin higher. And the other question is on can you update us on the NOLs coming out of EMEA?

F. Edwin Harbach

I’ll take the turnover and the gross margin, Judy can take the NOLs. On turnover, it’s higher than we’d like but actually it’s trending down. We had 26% or so turnover last year. We’re year-to-date around 25% this year. October, which is really my most recent full month, we’re about 23.5% so attrition is trending down but it’s something we’re watching very carefully in terms of doing that.

In terms of the profitability, you’ll notice on the list of accomplishments I didn’t list improving profitability yet, so that’s the one you guys are going to have to hold me accountable for but there’s a lot of leverage on that. And we have pricing to start off with and we need by focusing the marketplace to create pricing power for us. We’re working on some reshaping of the pyramid. That’s consultant speak to talk about how many MDs we have versus senior managers versus more junior staff, make sure we have that right. We’re working on our onshore/offshore mix. We think we have some room to increase utilization further. We think we have some room to increase some focus in terms of what work we go after and what work we don’t.

So obviously the trick for us next year is increase the profitability and drive that and that’s what you guys have to hold us accountable for.

Connie Weaver

Judy.

Judy A. Ethell

Good morning, Ed. For the NOLs, as you know we have approximately $700 million of NOLs at the end of 2006 and we are still focused on unlocking that value for the organization so I think if you reflect on Ed’s comments about GAAP profitability in the future, a more efficient business, that really puts us in a good situation to start realizing the benefit of those NOLs and also, they’re available to us for some extended period of time due to the law changes and so I think that places us in a nice position.

Edward Caso - Wachovia

Thank you.

Connie Weaver

Great, thanks. Next question, please.

Operator

Your next question comes from the line of James Friedman from SIG.

James Friedman - Susquehanna Financial Group

Good morning and congratulations, Ed, on your new assignment. Not to beat a dead horse here, Ed, but does your vision anticipate any asset dispositions or acquisitions? I guess in particular in light of the fact that you perceive that the company has strength in a global footprint, do you feel that you need a better global delivery in low-cost developing markets?

F. Edwin Harbach

I guess I heard two parts to that and if I don’t get it right, probe again but I don’t believe we need a transaction to create value. Obviously I do believe we need to continue to strengthen and grow our global delivery centers to basically create value for our clients.

James Friedman - Susquehanna Financial Group

Okay, and if I could follow-up with one additional question, maybe for Rod if he’s still on the line, Rod McGeary; being that these developments occurred so shortly subsequent to the shareholders meeting, could you maybe brief us as to what was discussed at the shareholders meeting and what you perceive as the emphasis of this management versus the prior management?

Roderick C. McGeary

There was nothing unusual discussed at our shareholders meeting. The focus of this management is on execution. The only decision that was made at the recent board of directors meeting was to accept Harry You’s resignation and the board elected Ed to the board and to his current position and adopted Ed’s plan, which is to focus on the global footprint and on execution going forward.

Connie Weaver

Great. Thank you. Next question, please.

Operator

Your next question comes from the line of George Price from Stifel Nicolaus.

George Price - Stifel Nicolaus

Thanks. Two questions; first, notwithstanding some of the commentary around the bullishness of what’s being said, I guess I want to ask for a more specific answer around what is going to be different now? What is going to change? I mean, intensifying the focus on operations, establishing a culture of accountability, focus on profitability -- it sounds a lot like what we heard nearly three years ago. What specifically are you going to do different this time around? That’s my first question.

F. Edwin Harbach

History is history and I told you guys I’m not going to go back there but I have a track record of doing that and I think we’re going to execute, execute, and execute to drive that so I don’t think the story is going to be much different than what you’ve heard before except that we are going to focus on the business and we’re going to drive the improved profitability of the business and the value through that.

I think what you have to hold me and the others accountable for is do we execute to drive that?

George Price - Stifel Nicolaus

Fair enough. Second question is what are you going -- I mean, it sounds like your -- obviously the cash balance and the cash flow, we’re seeing some improvement, at least near-term. It doesn’t sound like you’re concerned about liquidity at this point so what are you going to do with the cash? Assuming that you hit your fourth quarter numbers and you are cash flow positive, confident of that next year, can you give us a little bit more around that topic?

F. Edwin Harbach

I think overall we just want to strengthen the balance sheet in terms of cash. I’m not planning on creating a long laundry list of things to do. I’d like to take the cash and strengthen the balance sheet. At some point we can do some refinancing if we get to that point but mainly it’s just strength in the balance sheet.

George Price - Stifel Nicolaus

So when you say strength in the balance sheet, you mean cash is going to sit on the balance sheet?

F. Edwin Harbach

For a point in time. We’re going to generate free cash flow and at some point we have to look at refinancing the facility we have today.

George Price - Stifel Nicolaus

Thank you.

Connie Weaver

Operator, I think we have time for about two more questions, if we have them.

Operator

Your next question comes from the line of Susan Chen of Merrill Lynch.

Susan Chen - Merrill Lynch

Good morning. Ed, a question; can you comment on the growth prospect of your public sector, like federal versus local and state? Do you see any budgetary issues given the state of the economy?

F. Edwin Harbach

Susan, I’ll be glad to do that. Public sector is growing well for us. Year-to-date this year, we’re up in the mid single digit percent and I’ve mentioned we’ve not finalized the plans for next year. The great thing -- and people worry about public sector but the great thing for us is it’s very diversified. We have the federal government business. We have the civilian business. We have emerging markets. We have healthcare. We have state and local government and if you -- we’ll talk about it when we got to investor day. There are certainly different prospects in all five of those business segments but overall we’re going to have solid growth this year. We’re going to have solid growth next year and it’s the crown jewel of our business.

Connie Weaver

Thanks. Anymore questions, please, Operator?

Operator

Yes, Madam. Your final question will come from the line of Pat Burton of Citigroup.

Patrick Burton - Citigroup

Good morning. Congratulations, Ed. My question is just -- I guess I’ll ask the last one about the RSU program. You mentioned off-market transactions. How will the company fund that? Will you actually repurchase those shares or will they be traded amongst employees given your balance sheet? Thanks.

Judy A. Ethell

Pat, for purposes of our RSUs, as we mentioned, some of those will be available to our employees once we file this Q, obviously which happened today. And we expect for that trading to be less than one day’s average of trading. So that will -- those will actually go into the market over a period of time and our employees will be able to sell those and have enough liquidity to pay their taxes, so they will be traded in the market. The company will actually not be buying those back.

Patrick Burton - Citigroup

But it’s about one day average volume?

Judy A. Ethell

Yes.

Patrick Burton - Citigroup

Okay, thank you.

Connie Weaver

Great. Well, with that, I would like to thank everyone for joining us here this morning. As always, please feel free to contact myself or Denise Stone or Francesca Lucie. Our IR phone number is 908-607-2100 and we’ll look forward to taking your calls and talking with your further. Thank you and have a great day.

Operator

This concludes today’s BearingPoint third quarter conference call. You may now disconnect.

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