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Navigant ConsultingInc. (NYSE:NCI)

Q4 2007 Earnings Call

February 21, 2008 05:00 pm ET

Executives

Bill Goodyear – Chairman, CEO

Scott Krenze - COO

Julie Howard - SVP

Bill Dickenson – Managing Director

Rich Fisher – VP, Secretary and General Counsel

Analysts

Jim Janesky – Stifel Nicolaus & Company, Inc.

Andrew Fones – UBS

Mike Hewitt - Craig-Hallum

Tim Mchugh - William Blair Company

Tobey Sommer - SunTrust Robinson Humphrey

Bill Sutherland - Boenning & Scattergood Inc

Margo Merchaz - Snyder Capital

Dan Suzuki - Merrill Lynch

Rob Yung - Analyst

Operator

Good afternoon and welcome to Navigant Consulting FourthQuarter and Full Year 2007 Results of Operations Conference call.

(Operator Instructions)

I would like to introduce today’s speaker, Mr. WilliamGoodyear, Chairman and CEO of Navigant Consulting, Mr. Goodyear, you may begin.

Bill Goodyear

Before we begintoday’s session, I would like to point all of you to the disclosure which is atthe end of our earnings release for information about any forward-lookingstatements that may be made or discussed on this call. We have posted the release on our website,please review that information along with our filing with the SEC disclosure offactors that may impact subjects discussed in this afternoon’s webcast. Also on this call we will be discussing oneor more non-GAAP financial measures. Pleasereview our earnings release on our website for all the disclosures required bythe SEC including the reconciliation to the most comparable GAAP numbers.

So with thosestarters, let me start by referencing our discussions last October at whichtime we were in the middle of some organizational changes, some managerialchanges and an intensified review of our business model and our restructuringinitiative. All of those efforts as wehad discussed at that time were an effort basically to better leverage ourleadership talent, drive accountability deeper into the organization and haveimmediate significant hopefully lasting impact on our financialperformance. Tighter, better, faster inthree words, happily, we have made some excellent progress in the last threemonths of 2007. I am going to share someof that with you today.

We had a very solidfinish to the year. we had recordrevenues, surprisingly strong in the fourth quarter with its seasonality,reflecting very strong market demands across most of our business model and Ihope George Sutton is on the call because we clearly have building regulatorypressures out in the marketplace and we, as always are the beneficiary of thosepressures and I would include the subprime issues as it relates to both theFederal and State regulatory levels, continuing asset and money laundering AMLissues, foreign corrupt practices act issues and continuing regulatory andintervention issues in both health care and the energy market, so fourthquarter efforts, we hope, set the stage for, and we think they have continuedimproved performance in 2008. We gave apreviews of our aspirations for 2008 in our October call and Scott is going toprovide more detail on those in a minute.

I would sum up thefourth quarter as good revenues, good on cost, and broad based. Recall that our guidance was $184 million to$192 million of revenue and $26 million to $29 million of EBITDA excludingrestructuring charges of $0.12 to $0.16.

If you look at ourfourth quarter results, we exceeded all of those levels and we will get intosome of the details as to why we were fortunate to have that success. We did talk in October that our effort was toreally focus on improving our profitability, worked hard on that in the fourthquarter and set the stage for improved margins in 2008. Recall that we had a 16% operating marginfrom EBITDA operating margin in the third quarter, we obviously felt that wasnot satisfactory relative to what we had been able to do historically and wewanted to move the needle on that in the fourth quarter en route to an 18% to19% EBITDA margin target for 2008. Wemade progress on that and if you work through the numbers in terms of our $32.9million EBITDA that was an 18% margin in the fourth quarter and reflects a lotof the hard work that we did. We hadestimate a restructuring charge of $78 million of both severance and realestate, we came in at 7.3% and Scott will give some of the details on that.

When we look insidethe fourth quarter record revenue numbers and much improved profitability,fortunately we see that both our dispute and our advisory segments grewquarter-over-quarter and year-over-year, that 13% number was verygratifying. Both segments improvedutilization quarter-over-quarter and year-over-year and that also was verygratifying. Recall that we have beenrunning for a period of time 1% or 2% below where we wanted to run and belowour historical levels. We obviouslycrossed over on that. You will see thatwe are reporting on an $18.50 base, we came in as a company at 78% in thefourth quarter which was very good for us up from 77% in the third quarter andup from last year’s 77%.

Also, from a metricsstandpoint, our DSO came in at 77 days down from 90 that was a very nicejob. A lot of people worked hard onthat. I want to thank them for that andthat allowed us to generate a significant amount of cash in the fourth quarterto the extent that we took our bank credit facility down from $310 million to$257 million which was better than we had anticipated and really reflected alot of hard work on people all over the company.

When we looked atthe fourth quarter and I have highlighted in the press release some areas wherewe had particularly strong results. Ourfinancial services practice, our energy practice and our healthcare practice,all had a very strong finish to the year. The dispute segment also had a very solid finish to the year andrebounded from some softness in the mid part of the year that we discussed backin October. If we step back for a minutenow and look at the whole year and just do a real brief retrospect, I made acomment in the release that it was a year of challenge and I am referring tothe second and third quarter’s change which was the effort that we initiated inthe third and fourth quarters in an opportunity and that is how we finished theyear really with a nice flush, a nice momentum and are looking forward to 2008.

I do feel that wehave executed well on streamlining the business, refining our operationalfocus, I think that is reflected in our results and I also think that if youlook back at the whole year, you can see that the international investments wehad made are earning a nice return for us and if you just step aside and say wehad $86 million of revenue last year, $33 million of that was international andyou can see it from a growth standpoint in our year-over-year, internationalwent from $29 million to $63 million reflecting those investments and also somenice organic growth.

When we looked atthe dispute channel, we started the year finishing up a very significant backdated options series of engagements that wrapped up in the first quarter andthen we slowed down a bit and as the year progressed, I think the regulatorypressures and the very significant credit capital markets disruptions clearlystarting to have some significant impact all over the business model so that weend the year with some nice momentum there and on the advisory side, when welook back at the year, financial services and energy practice had excellentyears, insurance and healthcare practices were flat year-over-year, but havingsaid that, they did a lot of work in the fourth quarter and I think we aregoing to be the beneficiary of that as we get into 2008.

I have got some morecomments that relate to the subprime market if you will, an opportunity, I amgoing to defer those for a minute and ask Scott to dig in to the detail alittle bit.

Scott Krenz

As Bill just said, the fourth quarter results weresolid. We exceeded our guidance forrevenue EBITDA and EPS and for the first time produced $200 million-plusrevenue quarter. On the third quartercall, as Bill mentioned we talked about some additional charges related toseverance and real estate of between $7 million and $8 million and as Bill saidin the event, we recorded $7.3 million in the fourth quarter. On that $7.3, $2.7 million relates toseverance and $4.6 million relates to real estate. I will pride a little color on that in just amoment, but first I wanted to point out that as we talk about EBITDA net incomeand EPS, we will be discussing non-GAAP numbers that exclude the severance andreal estate charges I just mentioned.

We do this because we believe that these adjusted figuresgive the investors a better understanding of our core ongoing businessmodel. Having said that, you will findreconciliation between these adjusted numbers and GAAP results included in ourpress release.

So now, as I promised, let me explain the fourth quarterseverance in real estate charges. Severance is a continuation of the efforts we began in the third quarterto reduce over capacity in certain practices. The $2.7 million charge recorded in the fourth quarter relates to 83people with a combined compensation of over $11 million. The fourth quarter charge completes thiseffort. On the real estate front, we arecontinuing our consolidation program. Inthe fourth quarter, we took 98,000 square feet out of service. I mentioned on third quarter call that ourgoal was to become 30% more efficient in our use of real estate.

Since rental rates very widely from city to city and in anycase tend to increase over time. Themetric we used to measure our progress is rentable square feet per person. On that front, we have moved the needle, from324 rentable square feet per person, at June 30th to 304 rentablesquare feet per person at December 31st. So during that period, we made a 6%improvement in our use of real estate. For 2008, we are projecting our rent expense for the company to be flatand this is despite higher headcount and rent increases throughout the country.

We saw ways to go to hit our goals, but we are certainlymaking progress. As you can see from ourfourth quarter press release, total revenue was $203 million and this was up13% over fourth quarter of 2006 and $11 million over the high end of ourguidance. The $11 million is explainedby utilization of 78% which is 2 percentage points above what we hadanticipated for the fourth quarter. Higher than expected utilization was led, as Bill said, by strongperformances in the dispute and investigative energy in financial servicespractices.

The higher utilization accounts for $4 million to $5 millionof the $11 million we over achieved guidance by. In providing guidance, we were cautious whenincluding performance fees predicting the timing of performance fees is alwaysdifficult. In the event, we collected $6million of performance fees in the fourth quarter. That is $4.5 million more than we werecomfortable projecting when we provided guidance for the fourth quarter.

As in the side, in the fourth quarter of 2006, we collected$8 million in performance fees. Historically the majority of performance fees have been seen to come inthe fourth quarter. The remainder of thedifference is mainly accounted for by an average bill rate of $240.00. That is $5.00 more than what we hadanticipated when we provided fourth quarter guidance.

EBITDA of $33 million was $4 million over the high end ofour guidance, an EPS of $0.22 was $0.06 over the high end of our guidance forthe quarter. Both these are the resultof the extra revenue dropping through the profit in our leverage model. As it is probably obvious at this point, fullyear revenue of $676 million and full year EBITDA of $119 million and full yearEPS of $0.80 all exceeded the high end of our guidance for the same amount andfor the same reasons the fourth quarter did.

One final point, voluntary turn over came in at 22% for bothfourth quarter and full year of 2007. This compares to 21% for both the fourth quarter and full year of2006. Before moving on to the balancesheet, let me take a just a second to talk about our new segment line up. In October, we announced a reorganization,which among other things gave more prominence to our businesses outside of North America. Inkeeping with the new reorganization, as well as the size and growth of ourbusinesses, outside of North America, we havebroken this into a separate reportable segment. So now, we will report three segments instead of two. North American Dispute and InvestigativeServices, North American Business Consulting Services and InternationalConsulting Services. If you go to ourwebsite, www.navigantconsulting.com,you will find a metrics page posted under the Investor Relations link. This page will provide key metrics for bothcurrent and historical periods including revenue, segment operating profit,utilization and average bill rates for the three reportable segments.

Just a couple of highlights in the balance sheet, first, asBill mentioned, debt is down $257 million from $310 million at the end of thethird quarter. This is the result of astrong fourth quarter operating cash flow of $50 million. This brings our full year operating cash flowto $92 million which is $4 million more than full year 2006. A large contributor to that is again theperformances Bill mentioned in DSO with a 13 day reduction from 90 days at theend of the third quarter to 70 days at yearend.

We shared with you for the fourth quarter was DSO of 82days, so we did better than that, however, we are not declaring victory. We have not finished putting all of theprocesses we are working on into place. This result for the fourth quarter was built on really the result ofjust good hard work by the whole Navigant team, so I just want to cautioneveryone that there could be some back tracking quarter-over-quarter until weget all the new processes in place, but I do not want to sound loony about thisbecause this is a really good result.

On the third quarter call, I mentioned our informationtechnology initiatives, so I would be remiss if I am not going to give a briefupdate about this. As I would like toremind everybody, this initiative is more about improving efficiency of theentire company than just cutting IT cost. We have completed our initial assessment and launched three follow oninitiatives. The first is to integrateand make more accessible all of our data, the second is to look at an ERPsolution for the longer term and the third is to explore efficiencyimprovements through both outsourcing and partnering.

We are making a lot of progress and I really need torecognize the hard work of the IT team who had made this happen.

Finally, let me confirm our expectations for 2008. We first discussed this on our Octobercall. We are not changing our 2008guidance. To restate that guidance, wehave had total revenue growth of 6% to 9% or doing the math $810 million to$840 million. EBITDA margin of 18% to19% or in dollar terms, $130 million to $137 million, an EPS of $0.82 to$0.96. We ended 2007 strongly and areoff to a good start in 2008, but there are still some uncertainties. Temporary distractions caused by our recentleadership changes like competitive marketplace for both business and talentand any impact from the worsening of economic conditions and those just tomention a couple.

We are optimistic about 2008 and we still feel that cautionis warranted and with that, I will turn it back to you, Bill.

Bill Goodyear

You did the caution part and now I am going to do themarketing part. Let us talk a little bitabout the subprime litigation trend. Wereferenced this in our October call. Iam sure some of you have seen the report that we authored and issued lastFriday referencing the subprime analysis that we had done, it was entitled“Looking Back at What’s Ahead.”

The genesis of the report started over a year ago when weset up a subprime task force and began to intensely follow primarily thelitigation matters that were evolving coming out the chaos in the creditmarkets. We began to track in detail allmajor litigation matters particularly at the Federal level, and as the reportoutlined last week and subsequent to Friday’s release, we have had 250 majornews articles on a global basis that have picked up the Navigant report, so weare very excited about that and we think that we clearly have staked out agrowing opportunity and we are extremely well positioned as a result of thehand work in the past year.

In the first half of 2007, there were 97 major pieces oflitigation that were filed at the Federal level. In the second half, there were 181incremental matters for 278 for the year. we ran this analysis and cut it off each Tuesday. Through Tuesday of this past week, in otherwords, the first seven weeks of 2008, there were 74 additional matters, so weare now looking at 352 major pieces of Federal litigation. We track in a separate database the statelevel issues which is a whole separate matter, but the big cases are going tobe brought at the Federal level and that is why we have reported on those.

So we have gone from four cases a week in the first half oflast year to seven in the second half to ten a week and you can visualize theacceleration in the litigation. We didgo back and compared and contrast what is happening in what we refer to as thesubprime litigation field to the previous all time high in terms of financiallitigation which was the S&L crisis. Where over a period of seven years, there were 559 major pieces oflitigation so you can think about the size of that, how long it took the factthat we are still working on those issues at Navigant and to get a feeling forhow large and how complex and how much opportunity we think there is over timefor a company like ourselves and as I have said we have invested a lot of time,effort and money to position ourselves and I think we will get a return onthat.

Ultimately, we think the issues in the subprime field areright in our wheel house. If you thinkabout a subprime litigation matter, discovery skills are very important. Our discovery team is much busier now than ithas been for the last year or a year and a half. The valuation issues are obviously front andcenter. Our valuation team is busy. Frantic investigation is called for when oneof these things hit. We are gettingbenefit from that and then ultimately, there are very complex accountingmatters that have significant amounts of data, significant amounts of reconciliationand require deep accounting skills and insight to sort out. All of these things are our core competenciesthat we have, and that is why we are excited about this, we have focused hardon it and we hope to benefit from this increasingly as 2008 progresses.

In October, we talked about sizing the back dated optionmatters. They were in aggregate we thinkaround $40 million. They came quick,they came hard, they really impacted 2006’s fourth quarter and the firstquarter of this past year and then they were gone. This has a lot of different feel to it. This is going to have a much longertail. It is much broader. It is seeping and its tentacles are into allareas of the economy frankly and we were just talking with Jeff Green who headsour dispute segment was just in Londonand clearly the tentacles are reaching overseas on this.

So that is a quick update on subprime, I will make a coupleof other comments, one of the things that we talked about when we did thereorganization was to allow me to get more active in the market, if you will,market facing activities and I had been fortunate and had been able to hostevery two weeks on Tuesday evenings collective calls with all of our practiceleaders, informal, but what is going on in the market, how do we call them toconnect the dots, how do we bring Navigant skills on a collective basis tobear. We are going after larger, morecomplex and hopefully more profitable engagements and I can report back herethree or four months into that process that those calls are becoming increasinglyproductive. They are probably the mostrewarding part of each week and we are definitely moving our intellectualcapital around better, faster, and I think more effectively in terms ofcapturing significant engagements.

I did go back and look anticipating a question or two, in2007; we did have 131 engagements that were over a million dollars. We have been tracking that as you know for anumber of years that compared to approximately 120 in the previous years, so wecontinue to move the million in a needle. We also have begun tracking for the first time because we have a numberof them, $5 million and over. We did notuse to do that because we did not have any, this year we had 22 engagementsthat were over $5 million and that compares to 14 in the previous year andbefore that, it was even more less.

So the concept of bringing the skills that we have and allof the segments and practices together and compete for larger engagements, Ithink is getting some good traction and I wanted to mention that.

A comment about our business development team while we aretalking about market facing, recall that Julie Howard set up the team fouryears ago, so we are just into our fourth year and Randy Burrows who many ofyou have met leads that team. We werevisiting and reviewing the results of that team over the past few weeks as weclosed the books and the team was actively involved in incremental revenuegeneration this past year of $55 million and that is up from $30 million in theprevious year, up from $18 million in the year before that. And recall the original concept was a bitcontroversial because it was creating a sales business development team thatwould serve the whole firm. And was ontop of the managing directors and the practice leaders who are primarily taskedwith generating that business, so as we have learned how to use that team moreeffectively the team is learning how to work more cunningly and creatively withthe practice leaders, it is really a nice job and I wanted to mention that Randyand his team just had an excellent year and they are off to a good start in2008.

I will tell you one anecdotal story and then we will open itup for Q&A.

The gentleman that really drove the subprime study was oneof our managing directors in Washington D.C, his name is Jeff Nielsen andtogether with Scott Pecsoza who is one of our business developers here inChicago and the head of our research, Bill Scheffler, they did an outstandingjob at looking back on what is ahead, I sent him a BlackBerry, an email. I said, “Jeff, could you call me. I have a subprime question and if could gettwo minutes of your time.” He emailed meback and he said, “In a cab, finishing an engagement letter for major financialinstitution en route to a TV interview…” with I think the business newsnetwork. I emailed him back and said,“Do not bother calling me back, I do not want to interfere with progress here.”

So it is just a nice anecdotal piece of business. Now, we have talked a lot about subprime andthere are some good things in energy. The healthcare practice is off to a nice start so I do not want todiminish those and as I said, international obviously is continuing to do well,so we have got good breadth and we can cover that in the Q&A.

Julie Howard is sitting right beside me. You have heard Scott, Bill Dickenson is in Washington DCand is tied in by phone so we will open it up for Q&A now and we will havesome fun.

Question and AnswerSession

Operator

(Operator Instructions)

Jim Janesky would like to ask a question with StifleNicolaus, go ahead.

Jim Janesky – StifelNicolaus & Company, Inc.

Bill, I have a question about the subprime area. It seems as if there are inconsistent, Iguess results coming out of your competitors in the space. Some are saying, no we are not seeing anyreal push in the subprime area yet’, you have indicated that you are, do youthink that you are taking marketshare or what could be going on there becausethere are inconsistencies with respect to the amount and how early the businessis coming out of the subprime markets?

Scott Krenz

Well, Jim that is a good question. I cannot speak to the competitors, obviouslyI can only speak with what we are seeing and I can confirm because you and Ihave talked about this before, but setting this task that we did a year ago andwe put some of our best and brightest talent on it and I can tell youoriginally, when I was trying to get the task force together and called upmeetings and what not, it was like, why are we doing this? Now we are trying to keep people out of thetask force, so I mean, we got it right and we anticipated this, but we put alot of time and effort into it and we put a lot of time and effort into it withthe key law firms and key partners in the law firms that are going to be frontand center on these major pieces of litigation and we have began building thisproprietary matrix and database of all major litigations and inside of thisdatabase that now has 352 items that I referenced earlier, we have the detailon all the parties involved. The typesof cases, the issues in those cases, the status of the case, where the suitswere brought? The specific claims and wefind ourselves happily and fortunately in a position now where the majorpartners in these law firms all over the United States and now, starting inLondon are calling and saying, it is the Navigant metrics out yet this weekbecause when we get it out, it is confidential, but we shoot it to selectiveprincipals in this law firms.

So I do think that a lot of hard work is paying off and Ithink we are very well positioned. I amnot suggesting that of our $676 million this past year that a huge part of thatwas subprime, but it was significant and it was more significant in the fourthquarter.

Jim Janesky – StifelNicolaus & Company, Inc.

Turning now to headcount, you did mention in the call and inthe press release a challenging environment and I have really a twofoldquestion around that, is that challenging you think industry wide is thisunique to Navigant and then if you can give us an idea of your expectations forturnover especially early in 2008?

Scott Krenz

I am going to ask Julie to comment on this, but I am goingto start by saying that I think that our attrition and the issues that we arefacing right now in the industry, and I do not think they are unique toNavigant to answer that part of your question, but I hav the suspicion thatthey are peeking for a variety of reasons that I do not think we need todiscuss today, but I think that we are at that point in the cycle where thereis going to be less pressure going forward and one of the things that is goinghelp us in that regard in terms of talent and I refer to our friends on thestreet or I would suggest that over the next three to four months, there isgoing to be a lot of talent that will be looking for jobs that will be verytalented people that would fit pretty well not only in our business model, butin the business models of our competitors, and so I think that that will bequite a significant thing because Wall Street has softened up in the last twoor three years a lot of very good young talent and that talent is going back onthe street and that will take some heat off of us. Julie, you might want to comment on theheadcount.

Julie Howard

I think the only thing I would answer that is that is asScott mentioned, we had a rolling 12 months attrition rate of 22%, soessentially unchanged from Q3 to Q4 on a rolling basis, but if we look at ourabsolute in those quarters, we saw a downward trend. Now is that related to the fact that it isthe fourth quarter of the year and people do not typically return jobs or isthat that we are making headway on our retention effort. It is hard to tell. We will have to keep looking at that in thefirst quarter. We also know that we dida number of restructuring in various practices and we took a lot of 29:21, someof those individuals, while they were notified in the fourth quarter will rollover and left early in the first quarter, so we will see. I think we will continue to see streamliningof our headcount. On the other hand, wecontinue to selectively recruit and particularly in our high performingpractices in the disputes arena and financial services. We are in a marketplace looking for thosereally qualified individuals, so I think that it is a competitive marketplace,it is probably industry-wide in the consulting arena and we try to hold ourown.

Scott Krenz

We will do fine. Bill, do you want to comment on that from DC?

Bill Dickenson

Well, I think the only thing I would say to maybe put morecolor on what Jim is talking about is in our headcount our efforts are, asJulie just mentioned, more of a continuous nature. I am not trying to manage to a certainheadcount level, we are trying to manage to what makes sense given our marketthat we face and that seems to me that is the key, so we are indicating to youthat things are very competitive in the marketplace which is certainly true forthe areas that Julie mentioned plus a couple of others where we have had veryhigh demand for our services from our clients, also that means high demand forthe people and that is not just Navigant necessarily so we are facing thatmarket and dealing with it. That is allI would add.

Operator

Our next question comes from Andrew Fones, UBS. Sir, your line is open.

Andrew Fones - UBS

I just wanted to congratulate you on the excellent results.

Bill Goodyear

We only made some progress, Andrew, thank you.

Andrew Fones - UBS

Can I ask, based on these results why you decided to leaveyour guidance on change for 2008, perhaps walk us through some of thinkingthere. Thanks.

Bill Goodyear

Well, Andrew if you are sitting in our chair relative towhat happened to us last year, I think you would come to the same conclusionthat you do not want to declare victory and you want to be cautious andconservative. Scott, do you want tore-quote yourself?

Scott Krenze

Well, I understand what you are saying and we certainly hada strong fourth quarter and are getting off to a strong start here, Andrew, butI still think there are some significant uncertainties and we want to payattention to those.

Andrew Fones - UBS

That is helpful and then just in terms of withstanding theimpact of the subprime business that you have outlined in the quarter. Looking at your disputes lying in North America, I see that accelerated prettysignificantly from Q3 to Q4, is that where we saw most of the impact fromsubprime or would say it filtered in through some of the consulting leg aswell?

Bill Goodyear

Andrew, that is a good question and it filtered intoboth. As I said when we were talkingabout what skills you do you need to bring in the discovery that is our disputeside, evaluation. Some of those skillsare in the advisory side and some are in dispute. Forensic investigation would be dispute,complex accounting matters data, accounting recognition or financial servicespractice, which had a great quarter, obviously was benefiting from that, so itwas both places, but clearly some of that quarter-over-quarter stuff showed upas you had identified.

Andrew Fones - UBS

I know that you broke it and I apologize, I did not catchthis fully, but you broke, you said, I think $4.5 million was from oneparticular area. What was that?

Scott Krenze

The reasons why we exceeded our guidance was that related toperformance fees which are fees your receive for achieving certain milestonesand we had anticipated a level in our fourth quarter guidance and we actuallyover achieved that by $4.5 million, but those are always terribly difficult toestimate and so we took a very conservative approach to that when we puttogether the fourth quarter guidance.

Andrew Fones - UBS

Okay, that is helpful as well. And then perhaps if you could walk us throughwhat your thoughts are regarding college hiring this year?

Julie Howard

As I have mentioned in previous calls, we are targetingsomewhere between 100 and 110 recruits from campus and I think we are about 75%to 80% of the acceptance rate on that 100 or 110, so you can expect about asimilar level of recruits coming in this summer as we have done in previoussummers.

Operator

Our next question comes from Mr. George Sutton,Craig-Hallum.

Mike Hewitt - Craig-Hallum

This is Mike Hewitt filling in for George who is on the callon Spirit, a couple of questions, first you have mentioned and people haveasked about the subprime. I am wonderingas you look at Andy Cuomo and his medical insure focus and also are there anyother task groups that you have not mentioned that present meaningfulopportunities as we look over into the next year?

Bill Goodyear

I will address the Cuomo question, we have in our healthcarepractice, in combination with our dispute channel, we have a unique team thatis studying that whole issue and has been for some time, so that is a very goodquestion and it is a significant matter and we are on it.

Mike Hewitt - Craig-Hallum

Given the amount of cash flow that you guys generated in Q4and it sounds like you did a good job of paying down the debt, is there anythought of a buyback maybe if you continue to pick up that kind of cash.

Bill Goodyear

Well, in having just bought $220 million, I am obviouslycautious on responding to that, but that is a very fair question and at thelevels that the stock is trading at now, we look at the stock and we look atthree things. Should we buy our ownstock, should we invest internally and then obviously is there something thatis really strategic that we would do externally and we had talked about allthree of those in October, we have authority as you know, but I do not think wehave current plans, we just talked about this at a Board meeting yesterday andwe said, yes, the question is going to come up and we will probably duck it fora while.

Mike Hewitt - Craig-Hallum

Operator

Our next question comes from Mr. Tim Mchugh, William BlairCompany, your line is open, sir.

Tim Mchugh - WilliamBlair Company

Yes, not to kill the subprime issue here, but last quarter,I think you kind of gave a run rate of where you thought revenue from thatwas. I am just wondering where you camein at the fourth quarter compared to, I think you said around $10 million runrate per quarter.

Bill Goodyear

We exceeded that.

Tim Mchugh - WilliamBlair Company

Can you quantify that at all?

Scott Krenze

No, I do not want to. It is kind of proprietary competitive and I was abused greatly at thecompany for throwing the $10 million out after we got off the call, other thanto say that we certainly achieved that run rate and remember, I compared thatto, I said I thought we were approaching the run rate on a quarterly basis, itwas the equivalent of the backdated stock option $40 million matter and that ishow we backed into that number.

Bill Goodyear

And so we did, I think it is fair to say we improved on thatrun rate and I hope we can continue to do that.

Tim Mchugh - WilliamBlair Company

Lastly on that issue, where do you, I guess justqualitatively, given what you are hearing out there, do you feel like theacceleration in work from that area is something that is happening in the nexttwo months or potentially still could be six months out.

Scott Krenze

That is a very good question and if you have a piece ofpaper and you draw a line down the middle, there are two columns and one of thelines is the litigation column and the other line would be fire saleinvestigation column.

Let us take the litigation column because I think that oneprobably has the longest tail. Litigation is filed, counsel is retained. The value of the process starts. There are probably extremely broad subpoenasbefore counsel and the first phase then is to go through and grind around for30, 60, 90 days and try to get the whole thing dismissed. The dismissals are quite rare here and in ourreport, there is a statistic about what percentage of these things are beingdismissed. Now, it is very, very small.

Then if you are not dismissed, you work hard at narrowingthe subpoenas to get down to what are the real issues here that you are goingto litigate on that takes few months and then the game is on. And when the game is on, then you have to setyour strategy, how are we going to defend this litigation. What teams do we want to put in place andthat is where a company like ourselves typically would get involved. What experts are you going to retain, what isyour strategy going to be? How are yougoing to do the analytics? What are thedifferent alternatives that you could do and that gets to be very dataintensive, very support intensive and that is where we would come in.

You may try to do that if you are the client, you may try todo that internally for a while. I thinkthe major banks have done that, but the absolute volume of this stuff and Ithink the need for independence is going to clearly tip that scale and as 2008progresses, we are starting to feel the latter stage of this. We navigate now, after having observed thefirst phases.

Now let us move over to the other next column where there isan investigation and that is where a major piece of litigation or regulatoryinquiry starts and an independent committee of the board is formed or somethinglike that, you can get a call as we did last Friday. We got a call at two o’clock and we wereengaged at three o’clock and worked over the weekend, so somewhere in there isthe reality of the mix. You like to geta lot of the investigation calls, but there are not that many, but thelitigation is going to flow from all 352 of these things.

Tim Mchugh - WilliamBlair Company

And then lastly, I was wondering if you can touch on giventhat market opportunity and the fact that had been calling out some of yourstaff in the fourth quarter, what would be your hiring plans as you look out to2008?

Bill Goodyear

I am going to call Bill Dickenson. Say again about managing the business asopposed to managing the number.

Bill Dickenson

That is right. As Isaid before, I am not managing to an arbitrary headcount. I am trying to match my people with theirskills and what we are seeing in the market so, if a man continues strong, wewill adjust our hiring plan accordingly. But we are also making adjustments internally as well. We are moving people within our organization,not necessarily without. We are doingoptimization inside and outside.

Bill Goodyear

We want to run the company obviously aggressively. Julie, do you want to comment.

Julie Howard

I can concur with all of those comments and just to Bill’spoint about working within the firm’s approach, we moved in 2007. We moved 50 to 70 professionals around andamongst permanent practices from an internal mobility perspective.

Bill Goodyear

And the other thing that we have done and we actually did inthe fourth quarter is we refined for this very reason, we refined our internaltransfer mechanism between teams and practices, so that wherever you are in thecompany, hopefully you are economically ambivalent as to whether the businessis in your team or somebody else’s team. We want to get the business and thenmake sure that people are recognized internally from a bookkeeping standpointand you never get that perfect, but I think we are much improved from where wewere.

Operator

Our next question comes from Mr. Tobey Sommer, SunTrustRobinson Humphrey, sir your line is open.

Tobey Sommer -SunTrust Robinson Humphrey

I want to follow up on the same question from a differentangle. What proportion of your headcountdo you think can effectively be moved within the units and among them to allowyou to kind of address demand that surges in one unit with your existingheadcount as opposed to hiring additional folks?

Julie Howard

Well, if you think about that we have 1950 consultants inthe firm, probably somewhere less than half, maybe 40% are in a consultingrole, either a senior consultant, managing consultant where they haveextendable skills, but still at that point where that could be applicable to anumber of different types of assignment. If you think about it, we focus on some real core disciplines,accounting, finance, economics, engineering, technology, we have got some realfundamental disciplines that underpin the company, so we are able to, as peopleare starting out be able to move them around.

Now, having said that, we also focus on particularindustries and that create specialties, so 40% of our consulting base isprobably in the range, we would say we have those kind of skills, but then fromthere, we have got to pare that down. Ido not if that helps, it is a good number, but it is not a huge number.

Bill Goodyear

And frankly, we are a lot better at this than we were a yearago where standard deviations are better than what we were two years ago.

And then to get good at that is that you are grabbing thatlast point or two of utilization and each point of utilizations we have talkedabout before is worth $9 million or $10 million of revenue and $0.08 or $0.09 ashare given our current business model, so we really want to take advantage ofthe resources we have. One of themistakes we made in the last cycle was to some extent staffed for the peak andwe want to staff behind the peak now and really leverage our people to theextent we can.

Now, there are certain points where you are going to burnpeople out and we certainly do not want to go there either.

Tobey Sommer -SunTrust Robinson Humphrey

And just to address something that was in the press release,I think came up already in the Q&A, you did mention that that dispute areathe competition for folks is intense and expected to remain challenging yet Ithink I heard you say that you thought it was cresting now. How do you kind of reconcile those two?

Bill Goodyear

The cresting part is a function of frankly what is happeningeveryday on Wall Street and that is real time and that is speculation on my partthat is the offset. What we do know isthat the skills that we have are very attractive right now given a lot of thelitigation pressure that is going to be out there in the market. So we thinkthat there is going to be more talent available, but at the same time, we knowthat the talent we have is very attractive so that was really where that P&Lwas coming from.

Tobey Sommer -SunTrust Robinson Humphrey

And then specifically regarding the numbers in the past, youhad given some kind of rolling 12 months turn over rates, can you refresh us onwhat those were in the quarter.

Bill Goodyear

We did earlier.

Tobey Sommer -SunTrust Robinson Humphrey

I am sorry, could you repeat that?

Bill Goodyear

As I mentioned, it was 22% for both the fourth quarter and2007 full year and compared to 21% for the fourth quarter in full year of 2006.

Operator

Our next question comes from Mr. Bill Sutherland, Boenning& Scattergood, sir your line is open.

Bill Sutherland -Boenning & Scattergood Inc

Scott, is there any real estate savings in the quarter?

Scott Krenze

There were some, yes. Fairly significant, we have reduced, I do not know, on an annual basiswe have taken $5 or $5.5 million of expense out. It happened throughout the quarter, so thereare certainly savings, but I have not gone back and actually parsed that out.

Bill Sutherland -Boenning & Scattergood Inc

So over the whole quarter, it was $5 million.

Scott Krenze

No, I said that was the annualized ramp, the savings wasabout $5.5 million to date.

Bill Goodyear

Which we are going to lose because our escalators go up thisyear, but otherwise, we would be $5 million higher I guess that is the point,right?

Scott Krenze

That is the point. Rentsgo up every year.

Bill Sutherland -Boenning & Scattergood Inc

Can I get some color on the international utilization numberfor the quarter, it was 66% and we have not seen obviously that broken outbefore, so I just want to get a sense for that number and perspective.

Julie Howard

Yes, Bill, I can talk about that. It is a composition of a number of differentpractices that we have within our international consulting business. Our construction dispute continues to be verybusy and in fact we are now doing a lot of the endpoint to keep up with the businessthere, but it is also comprised of our public sector program services group aswell as our new financial services team and as you recall, we acquired Troikain the end of the third quarter and probably see some reflection of ramp upthere as we integrated that group and they tend to run a little bit lowerutilization and I guess the only way I thing I would point out is that we havea significantly higher bill rate in our international side which is somewhatoffsetting to our utilization.

Bill Sutherland -Boenning & Scattergood Inc

So is that a range Julie that you would expect it to begenerally?

Julie Howard

I want to see it higher, but for the time being, as we getourselves integrated, remember our international team has been a kind of a facet. The north American group was then severalyears ago where we have a lot of new businesses, new people with high growthand so every time you have that, I think we have a little bit a customermediation as people get used to the firm and to each other as colleagues and Iwould hope to see that ramp up over the course of the year.

Bill Sutherland -Boenning & Scattergood Inc

How does the acquisition pipeline look at the moment?

Bill Goodyear

Frankly, I think the company performed very and I guess havingsaid that, let me just address the acquisitions and I am going to say the samething Bill that I said before and that is we will do external investment forthe time being with the exception of something very attractive, very strategicand fits a hole that we really, really want to fill, and so with that caveatand I will tell you that when you look at where we are really strong right nowwhere we are at capacity, the energy practice comes to mind, financial servicescomes to mind and frankly our dispute practice, from the standpoint is you knowwe have been working, not terribly successfully over the last three or fouryears, at the really high end economic sorts of things, so those are areas thatwe obviously would always look at.

Bill Sutherland - Boenning& Scattergood Inc

So Bill are you saying that you would do an acquisitionwhere your capacity constraint is to have more bench?

Bill Goodyear

Probably not purely bench, Bill, but if it was an extensionand brought in real key skills that we did not have, those two things incombination would be, I think the bench thing we would probably groworganically. Bill, from an energystandpoint, you would not just do an acquisition that added more bench, youwant some real skills there.

Bill Sutherland -Boenning & Scattergood Inc

Sure, last question, I think you mentioned option backdating or may be Scott did had a nice impact on the quarter with a couple oflitigation.

Bill Goodyear

Back dating had a nice impact on a year ago’s fourthquarter.

Bill Sutherland -Boenning & Scattergood Inc

Okay, I am glad I clarified that.

Bill Goodyear

That ramped up in this year’s first quarter.

Bill Sutherland -Boenning & Scattergood Inc

I thought I heard you have conversation about litigationsthat had sort of surprisingly emerged to help recent business.

Scott Krenze

I think the comment that I recall and I am just recallingwhat you said, Bill, I think in the last call is that it has been surprisingthat some of that stuff, how long it lingers and just continues on. And it is clearly not, but it still goes onfor a long time.

Bill Goodyear

But just as a plug, our Canadian team in Torontolanded the first major back dated stock option case that has evolved in Canada and unlike what happened in the United Statesthere was an active mission that did a study that identified 20 companies orwhatever. This is one that came to us,so we are working on the matter, but it is a North American better but it is aCanadian matter.

Bill Sutherland -Boenning & Scattergood Inc

Yes, I have heard that there has been a couple of filingsfor this year as well.

Operator

Your next question comes from Margo Merchaz, Snyder Capital,ma’am your line is open.

Margo Merchaz -Snyder Capital

Thank you very, I was wondering on your cost of your serviceline and you have talked about your reasons for that in the last year. Are we just a permanently higher withcompensation annually to get that line looking better with utilization, are yousatisfied with the changes you have made. You think you have to make more changes?

Bill Goodyear

Well you are never satisfied, but I think we have made someprogress and embedded it for next year is further progress and some of thatmargin progress is if you look at the higher end of our guidance, the higherend of the guidance has the more attractive margin so we have that sort of flexkind of built in to the guidance and into the business model.

Margo Merchaz -Snyder Capital

On your SG&A line, what are the factors that couldimprove that ratio? Scott had said thatthere would be significant real estate savings but you are now saying thatmaybe some of that is offset by rent increases, so I was wondering if you couldtalk a little bit about the things you might get in G&A.

Bill Goodyear

It is in the short term, but then we have not completed thework we are doing in real estate. Obviously that is governed by leases and being able to move people andthe like and we still are intent to make significant progress in that. We want to de-couple and we are working veryhard to decouple a large number of the SG&A cost from having to increaseand lock step with revenue. We are justtrying to automate things, did I mention ERP system that is part of theautomation process. Real estate going toa more flexible model which encourages more people to be virtual or flexemployees as part of that model, so we are looking at a number of those areaswith the intent that we can decouple that, permanently change the SG&Atrajectory to something lower than revenue and then over time watch thatpercentage of revenue decrease.

Margo Merchaz -Snyder Capital

If you look at 208, is there an EPS number for savings thatyou achieved through real estate versus 2007?

Bill Goodyear

We certainly have internal targets here, but it is not alevel of granularity that we have shared nor I think is wise to share sincethose plans tend to change quite a bit. That is the nature of the company, it changes. It is a very dynamic organization.

Margo Merchaz -Snyder Capital

That 6% to 9% is basically organics growth?

Bill Goodyear

Yes, that is what we said specifically. It is organic.

Margo Merchaz -Snyder Capital

Just a few little questions, what is capex going to be forthis year? I know you are not capitalintensive.

Bill Goodyear

In broad terms, I would not expect it to be different fromhistorical trends, we have not seen it, I do not know as we sit here ofanything which would cause me to think that it is going to change from what wehave historically done?

Margo Merchaz -Snyder Capital

And in terms of the ERP, have you selected a system? Can you give us any idea of the timeframe?

Bill Goodyear

That is a longer term thing. No, we have not. We are goingthrough the evaluation process right now. One thing we are not going to do is bite off more than we can chew hereand try for a big bang. In fact, I havewatched too many implementations fail, so it is something that is going to takea period of time and quite an extended period of time. I will tell you that our focus is going to beinitially on our human capital support systems because we are a people basedcompany and in some of core accounting systems.

We are kind of running through our five o’clock, we have gota couple of more questions here, Dan are you on the line?

Operator

Dan Suzuki, your line is open.

Dan Suzuki - Merrill Lynch

On the discovery practice I think you had mentioned someslowness last quarter, have you made any decisions on whether you would like toexit that service or downsize it or have you looked at that?

Bill Goodyear

Thank you for that question. We made a lot of progress organizationally on the discoverypractice. We did eliminate some of thecapacity there, made the structural changes and organizational changes werecompleted in the fourth quarter. We havegot a good focus on our core offerings and have added a number of new projectsin the last couple of months and the discovery team if you will is operating ata performance level that we have not seen for quite a while so we are very,very pleased with that. Thank you forthe question. And a lot of the thingsthat are out there in the market right now, discovery is your on the ground firstpiece of contact, so it is an important skill to have. We have got a good team and we are verypleased with the direction we are going.

Dan Suzuki - Merrill Lynch

And when you say that you restructured it and streamlinedit, did you just take out capacity or where there services that you took out ofyour offering”?

Bill Goodyear

I am talking primarily capacity. Now we have added actually some capabilitiesthat I am not going to get into here in terms of some of the skills and some ofthe routines that we have but having said that it was capacity and I think wehave gotten better focused in terms of our sales and marketing and it is moreembedded in the marketing mechanism of the company.

Dan Suzuki - Merrill Lynch

I do not know if you mentioned this, but you mentioned the83 people that you let go in the quarter. Any idea how that shakes out in terms of buyer practice?

Bill Goodyear

We did not mention it, but that is a fair question. It was broad based both in term of across thecompany and it was also vertically broad. In other words, it was not just at lower levels, it was all up an downfrom a level standpoint

Dan Suzuki - Merrill Lynch

So there is no segment where you let go more than ten peopleor so?

Bill Goodyear

Well I do not know. Ido not think I said that. I just said itwas pretty broad based.

Dan Suzuki - Merrill Lynch

And then any idea on just general organic growth rate forthe quarter?

Bill Goodyear

We did look back at the year and we have for a long timebeen about half and half and so if you look at what was, year-over-year was12.5% to 13%, that probably was a half and half sort of number. I do not think it is off of that mark, you donot have to worry about it.

Dan Suzuki - Merrill Lynch

On the attrition rate, was that concentrated on any segmentor is that broad based as well in international or the other two north Americansegments?

Julie Howard

Generally, broad based and probably more predominantlyhoused in our larger practices and you also see a little bit higher number inour more leveraged practices because they just have higher concentration ofyounger professionals and that is where you see your higher levels ofattrition.

Operator

Our last question comes from Mr.Rob Yung, sir your line is open.

Rob Yung - Analyst

I have two quick questions, youspoke a little bit about the increasing market for subprime related engagementsand I just wondered how you anticipate dealing with any potential conflict ofinterest. I assume that that would begrowing as well, just to kind of how you feel about that.

Bill Goodyear

You were breaking up a littlebit, I am not sure I got the question, did you get the question, Scott?

Rob Yung - Analyst

What I was referring to was withthe increasing market of subprime related engagements, I am curious regardinghow you guys anticipate dealing with the increased cost net of interest that Iwould assume would come along with that. Is that something you guys are seeing as well?

Bill Goodyear

I think your question is a goodone and our general counsel is here, but in terms of the conflict process inthis arena, just to state the obvious, everybody is involved in everythingbecause you have got so many parties, you have got the originators, thepackagers, the sellers, the valuers, the auditors, whatever, so it is very,very difficult. Your conflict languageand your conflict process has to be very thorough and the ultimate resolutionof a conflict is to disclose the potential issue and clear it, and so thatprocess is going to be very, very important here. That does not mean that you can be all thingsto all people, but disclosure is going to be the predominant way because thereis going to be multiple parties on multiple sides, I do not know if you want tomake a comment on that.

Rich Fisher

I would reiterate that sunshinedoes cure a lot and providing the transparency so that all parties have anunderstanding of what we are doing helps a lot. I also would say that we have a fair amount of experience dealing withthis sort of issue historically in the firm mostly through our insurancepractice where historically you have a lot of insurance companies withcomplicated financial relationships with each other and so you see after awhile that a protocol develops for allowing these companies to sort of get theexpertise they need and not be foreclosed from getting it by virtue of thecomplex process and that is what I think the heart of it here is that I thinkthe folks who come and look for our assistance, it is in their interest to nothave conflicts necessarily stop us to stop them from being able to engage ourservices because they need them and so whenever that happens, you can use yourtraditional tools like disclosure and ethical screens where necessary toachieve the result to allow us to kind of go forward.

Bill Goodyear

It is a good question and it is just one that the industryis going to have to work through, but we certainly have been doing that as anorganization for a long time. We arepast our witching hour. I want to thankyou all for your questions. I lookforward to hopefully, touch wood here, another good quarter and look forward tovisiting in April.

And we may see some of you next week because we will be outat the Credit Suisse conference and look forward to those discussions. Thanksvery much.

Operator

Thank you for participating in today’s conference call. You may disconnect at this time.

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Source: NCI Navigant Consulting Inc. Q4 2007 Earnings Call Transcript

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