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Navigant Consulting Inc. (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

Presentation

Operator

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

(Operator Instructions)

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

Bill Goodyear

Before we begin today’s session, I would like to point all of you to the disclosure which is at the end of our earnings release for information about any forward-looking statements 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 of factors that may impact subjects discussed in this afternoon’s webcast. Also on this call we will be discussing one or more non-GAAP financial measures. Please review our earnings release on our website for all the disclosures required by the SEC including the reconciliation to the most comparable GAAP numbers.

So with those starters, let me start by referencing our discussions last October at which time we were in the middle of some organizational changes, some managerial changes and an intensified review of our business model and our restructuring initiative. All of those efforts as we had discussed at that time were an effort basically to better leverage our leadership talent, drive accountability deeper into the organization and have immediate significant hopefully lasting impact on our financial performance. Tighter, better, faster in three words, happily, we have made some excellent progress in the last three months of 2007. I am going to share some of that with you today.

We had a very solid finish to the year. we had record revenues, surprisingly strong in the fourth quarter with its seasonality, reflecting very strong market demands across most of our business model and I hope George Sutton is on the call because we clearly have building regulatory pressures out in the marketplace and we, as always are the beneficiary of those pressures and I would include the subprime issues as it relates to both the Federal and State regulatory levels, continuing asset and money laundering AML issues, foreign corrupt practices act issues and continuing regulatory and intervention issues in both health care and the energy market, so fourth quarter efforts, we hope, set the stage for, and we think they have continued improved performance in 2008. We gave a previews of our aspirations for 2008 in our October call and Scott is going to provide more detail on those in a minute.

I would sum up the fourth 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 excluding restructuring charges of $0.12 to $0.16.

If you look at our fourth quarter results, we exceeded all of those levels and we will get into some of the details as to why we were fortunate to have that success. We did talk in October that our effort was to really focus on improving our profitability, worked hard on that in the fourth quarter and set the stage for improved margins in 2008. Recall that we had a 16% operating margin from EBITDA operating margin in the third quarter, we obviously felt that was not satisfactory relative to what we had been able to do historically and we wanted to move the needle on that in the fourth quarter en route to an 18% to 19% EBITDA margin target for 2008. We made progress on that and if you work through the numbers in terms of our $32.9 million EBITDA that was an 18% margin in the fourth quarter and reflects a lot of the hard work that we did. We had estimate a restructuring charge of $78 million of both severance and real estate, we came in at 7.3% and Scott will give some of the details on that.

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

Also, from a metrics standpoint, our DSO came in at 77 days down from 90 that was a very nice job. A lot of people worked hard on that. I want to thank them for that and that allowed us to generate a significant amount of cash in the fourth quarter to 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 a lot of hard work on people all over the company.

When we looked at the fourth quarter and I have highlighted in the press release some areas where we had particularly strong results. Our financial 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 and rebounded from some softness in the mid part of the year that we discussed back in October. If we step back for a minute now and look at the whole year and just do a real brief retrospect, I made a comment in the release that it was a year of challenge and I am referring to the second and third quarter’s change which was the effort that we initiated in the third and fourth quarters in an opportunity and that is how we finished the year really with a nice flush, a nice momentum and are looking forward to 2008.

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

When we looked at the dispute channel, we started the year finishing up a very significant back dated options series of engagements that wrapped up in the first quarter and then we slowed down a bit and as the year progressed, I think the regulatory pressures and the very significant credit capital markets disruptions clearly starting to have some significant impact all over the business model so that we end the year with some nice momentum there and on the advisory side, when we look back at the year, financial services and energy practice had excellent years, insurance and healthcare practices were flat year-over-year, but having said that, they did a lot of work in the fourth quarter and I think we are going to be the beneficiary of that as we get into 2008.

I have got some more comments that relate to the subprime market if you will, an opportunity, I am going to defer those for a minute and ask Scott to dig in to the detail a little bit.

Scott Krenz

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

We do this because we believe that these adjusted figures give the investors a better understanding of our core ongoing business model. Having said that, you will find reconciliation between these adjusted numbers and GAAP results included in our press release.

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

Since rental rates very widely from city to city and in any case tend to increase over time. The metric we used to measure our progress is rentable square feet per person. On that front, we have moved the needle, from 324 rentable square feet per person, at June 30th to 304 rentable square 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 flat and this is despite higher headcount and rent increases throughout the country.

We saw ways to go to hit our goals, but we are certainly making progress. As you can see from our fourth quarter press release, total revenue was $203 million and this was up 13% over fourth quarter of 2006 and $11 million over the high end of our guidance. The $11 million is explained by utilization of 78% which is 2 percentage points above what we had anticipated for the fourth quarter. Higher than expected utilization was led, as Bill said, by strong performances in the dispute and investigative energy in financial services practices.

The higher utilization accounts for $4 million to $5 million of the $11 million we over achieved guidance by. In providing guidance, we were cautious when including performance fees predicting the timing of performance fees is always difficult. In the event, we collected $6 million of performance fees in the fourth quarter. That is $4.5 million more than we were comfortable 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 in the fourth quarter. The remainder of the difference is mainly accounted for by an average bill rate of $240.00. That is $5.00 more than what we had anticipated when we provided fourth quarter guidance.

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

One final point, voluntary turn over came in at 22% for both fourth quarter and full year of 2007. This compares to 21% for both the fourth quarter and full year of 2006. Before moving on to the balance sheet, 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. In keeping with the new reorganization, as well as the size and growth of our businesses, outside of North America, we have broken this into a separate reportable segment. So now, we will report three segments instead of two. North American Dispute and Investigative Services, North American Business Consulting Services and International Consulting Services. If you go to our website, www.navigantconsulting.com, you will find a metrics page posted under the Investor Relations link. This page will provide key metrics for both current 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, as Bill mentioned, debt is down $257 million from $310 million at the end of the third quarter. This is the result of a strong fourth quarter operating cash flow of $50 million. This brings our full year operating cash flow to $92 million which is $4 million more than full year 2006. A large contributor to that is again the performances Bill mentioned in DSO with a 13 day reduction from 90 days at the end of the third quarter to 70 days at yearend.

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

On the third quarter call, I mentioned our information technology initiatives, so I would be remiss if I am not going to give a brief update about this. As I would like to remind everybody, this initiative is more about improving efficiency of the entire company than just cutting IT cost. We have completed our initial assessment and launched three follow on initiatives. The first is to integrate and make more accessible all of our data, the second is to look at an ERP solution for the longer term and the third is to explore efficiency improvements through both outsourcing and partnering.

We are making a lot of progress and I really need to recognize 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 October call. We are not changing our 2008 guidance. To restate that guidance, we have had total revenue growth of 6% to 9% or doing the math $810 million to $840 million. EBITDA margin of 18% to 19% or in dollar terms, $130 million to $137 million, an EPS of $0.82 to $0.96. We ended 2007 strongly and are off to a good start in 2008, but there are still some uncertainties. Temporary distractions caused by our recent leadership changes like competitive marketplace for both business and talent and any impact from the worsening of economic conditions and those just to mention a couple.

We are optimistic about 2008 and we still feel that caution is 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 the marketing part. Let us talk a little bit about the subprime litigation trend. We referenced this in our October call. I am sure some of you have seen the report that we authored and issued last Friday 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 we set up a subprime task force and began to intensely follow primarily the litigation matters that were evolving coming out the chaos in the credit markets. We began to track in detail all major litigation matters particularly at the Federal level, and as the report outlined last week and subsequent to Friday’s release, we have had 250 major news articles on a global basis that have picked up the Navigant report, so we are very excited about that and we think that we clearly have staked out a growing opportunity and we are extremely well positioned as a result of the hand work in the past year.

In the first half of 2007, there were 97 major pieces of litigation that were filed at the Federal level. In the second half, there were 181 incremental matters for 278 for the year. we ran this analysis and cut it off each Tuesday. Through Tuesday of this past week, in other words, the first seven weeks of 2008, there were 74 additional matters, so we are now looking at 352 major pieces of Federal litigation. We track in a separate database the state level issues which is a whole separate matter, but the big cases are going to be 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 of last year to seven in the second half to ten a week and you can visualize the acceleration in the litigation. We did go back and compared and contrast what is happening in what we refer to as the subprime litigation field to the previous all time high in terms of financial litigation which was the S&L crisis. Where over a period of seven years, there were 559 major pieces of litigation so you can think about the size of that, how long it took the fact that we are still working on those issues at Navigant and to get a feeling for how large and how complex and how much opportunity we think there is over time for 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 on that.

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

In October, we talked about sizing the back dated option matters. They were in aggregate we think around $40 million. They came quick, they came hard, they really impacted 2006’s fourth quarter and the first quarter 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 longer tail. It is much broader. It is seeping and its tentacles are into all areas of the economy frankly and we were just talking with Jeff Green who heads our dispute segment was just in London and clearly the tentacles are reaching overseas on this.

So that is a quick update on subprime, I will make a couple of other comments, one of the things that we talked about when we did the reorganization 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 host every two weeks on Tuesday evenings collective calls with all of our practice leaders, informal, but what is going on in the market, how do we call them to connect the dots, how do we bring Navigant skills on a collective basis to bear. We are going after larger, more complex and hopefully more profitable engagements and I can report back here three or four months into that process that those calls are becoming increasingly productive. They are probably the most rewarding part of each week and we are definitely moving our intellectual capital around better, faster, and I think more effectively in terms of capturing significant engagements.

I did go back and look anticipating a question or two, in 2007; we did have 131 engagements that were over a million dollars. We have been tracking that as you know for a number of years that compared to approximately 120 in the previous years, so we continue to move the million in a needle. We also have begun tracking for the first time because we have a number of them, $5 million and over. We did not use to do that because we did not have any, this year we had 22 engagements that were over $5 million and that compares to 14 in the previous year and before that, it was even more less.

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

A comment about our business development team while we are talking about market facing, recall that Julie Howard set up the team four years ago, so we are just into our fourth year and Randy Burrows who many of you have met leads that team. We were visiting and reviewing the results of that team over the past few weeks as we closed the books and the team was actively involved in incremental revenue generation this past year of $55 million and that is up from $30 million in the previous year, up from $18 million in the year before that. And recall the original concept was a bit controversial because it was creating a sales business development team that would serve the whole firm. And was on top of the managing directors and the practice leaders who are primarily tasked with generating that business, so as we have learned how to use that team more effectively the team is learning how to work more cunningly and creatively with the practice leaders, it is really a nice job and I wanted to mention that Randy and his team just had an excellent year and they are off to a good start in 2008.

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

The gentleman that really drove the subprime study was one of our managing directors in Washington D.C, his name is Jeff Nielsen and together with Scott Pecsoza who is one of our business developers here in Chicago and the head of our research, Bill Scheffler, they did an outstanding job 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 get two minutes of your time.” He emailed me back and he said, “In a cab, finishing an engagement letter for major financial institution en route to a TV interview…” with I think the business news network. 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 and there are some good things in energy. The healthcare practice is off to a nice start so I do not want to diminish 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 DC and is tied in by phone so we will open it up for Q&A now and we will have some fun.

Question and Answer Session

Operator

(Operator Instructions)

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

Jim Janesky – Stifel Nicolaus & Company, Inc.

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

Scott Krenz

Well, Jim that is a good question. I cannot speak to the competitors, obviously I can only speak with what we are seeing and I can confirm because you and I have talked about this before, but setting this task that we did a year ago and we put some of our best and brightest talent on it and I can tell you originally, when I was trying to get the task force together and called up meetings and what not, it was like, why are we doing this? Now we are trying to keep people out of the task force, so I mean, we got it right and we anticipated this, but we put a lot of time and effort into it and we put a lot of time and effort into it with the key law firms and key partners in the law firms that are going to be front and center on these major pieces of litigation and we have began building this proprietary matrix and database of all major litigations and inside of this database that now has 352 items that I referenced earlier, we have the detail on all the parties involved. The types of cases, the issues in those cases, the status of the case, where the suits were brought? The specific claims and we find ourselves happily and fortunately in a position now where the major partners in these law firms all over the United States and now, starting in London are calling and saying, it is the Navigant metrics out yet this week because when we get it out, it is confidential, but we shoot it to selective principals in this law firms.

So I do think that a lot of hard work is paying off and I think we are very well positioned. I am not suggesting that of our $676 million this past year that a huge part of that was subprime, but it was significant and it was more significant in the fourth quarter.

Jim Janesky – Stifel Nicolaus & Company, Inc.

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

Scott Krenz

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

Julie Howard

I think the only thing I would answer that is that is as Scott mentioned, we had a rolling 12 months attrition rate of 22%, so essentially unchanged from Q3 to Q4 on a rolling basis, but if we look at our absolute in those quarters, we saw a downward trend. Now is that related to the fact that it is the fourth quarter of the year and people do not typically return jobs or is that that we are making headway on our retention effort. It is hard to tell. We will have to keep looking at that in the first quarter. We also know that we did a number of restructuring in various practices and we took a lot of 29:21, some of those individuals, while they were notified in the fourth quarter will roll over and left early in the first quarter, so we will see. I think we will continue to see streamlining of our headcount. On the other hand, we continue to selectively recruit and particularly in our high performing practices in the disputes arena and financial services. We are in a marketplace looking for those really 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 our own.

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 more color on what Jim is talking about is in our headcount our efforts are, as Julie just mentioned, more of a continuous nature. I am not trying to manage to a certain headcount level, we are trying to manage to what makes sense given our market that we face and that seems to me that is the key, so we are indicating to you that things are very competitive in the marketplace which is certainly true for the areas that Julie mentioned plus a couple of others where we have had very high demand for our services from our clients, also that means high demand for the people and that is not just Navigant necessarily so we are facing that market and dealing with it. That is all I 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 leave your guidance on change for 2008, perhaps walk us through some of thinking there. Thanks.

Bill Goodyear

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

Scott Krenze

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

Andrew Fones - UBS

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

Bill Goodyear

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

Andrew Fones - UBS

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

Scott Krenze

The reasons why we exceeded our guidance was that related to performance fees which are fees your receive for achieving certain milestones and we had anticipated a level in our fourth quarter guidance and we actually over achieved that by $4.5 million, but those are always terribly difficult to estimate and so we took a very conservative approach to that when we put together the fourth quarter guidance.

Andrew Fones - UBS

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

Julie Howard

As I have mentioned in previous calls, we are targeting somewhere 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 a similar level of recruits coming in this summer as we have done in previous summers.

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 call on Spirit, a couple of questions, first you have mentioned and people have asked about the subprime. I am wondering as you look at Andy Cuomo and his medical insure focus and also are there any other task groups that you have not mentioned that present meaningful opportunities as we look over into the next year?

Bill Goodyear

I will address the Cuomo question, we have in our healthcare practice, in combination with our dispute channel, we have a unique team that is studying that whole issue and has been for some time, so that is a very good question 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 Q4 and it sounds like you did a good job of paying down the debt, is there any thought 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 obviously cautious on responding to that, but that is a very fair question and at the levels that the stock is trading at now, we look at the stock and we look at three things. Should we buy our own stock, should we invest internally and then obviously is there something that is really strategic that we would do externally and we had talked about all three of those in October, we have authority as you know, but I do not think we have current plans, we just talked about this at a Board meeting yesterday and we said, yes, the question is going to come up and we will probably duck it for a while.

Mike Hewitt - Craig-Hallum

Operator

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

Tim Mchugh - William Blair 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 that was. I am just wondering where you came in at the fourth quarter compared to, I think you said around $10 million run rate per quarter.

Bill Goodyear

We exceeded that.

Tim Mchugh - William Blair 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 the company for throwing the $10 million out after we got off the call, other than to say that we certainly achieved that run rate and remember, I compared that to, I said I thought we were approaching the run rate on a quarterly basis, it was the equivalent of the backdated stock option $40 million matter and that is how we backed into that number.

Bill Goodyear

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

Tim Mchugh - William Blair Company

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

Scott Krenze

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

Let us take the litigation column because I think that one probably has the longest tail. Litigation is filed, counsel is retained. The value of the process starts. There are probably extremely broad subpoenas before counsel and the first phase then is to go through and grind around for 30, 60, 90 days and try to get the whole thing dismissed. The dismissals are quite rare here and in our report, there is a statistic about what percentage of these things are being dismissed. Now, it is very, very small.

Then if you are not dismissed, you work hard at narrowing the subpoenas to get down to what are the real issues here that you are going to litigate on that takes few months and then the game is on. And when the game is on, then you have to set your strategy, how are we going to defend this litigation. What teams do we want to put in place and that is where a company like ourselves typically would get involved. What experts are you going to retain, what is your strategy going to be? How are you going to do the analytics? What are the different alternatives that you could do and that gets to be very data intensive, 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 to do that internally for a while. I think the major banks have done that, but the absolute volume of this stuff and I think the need for independence is going to clearly tip that scale and as 2008 progresses, we are starting to feel the latter stage of this. We navigate now, after having observed the first phases.

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

Tim Mchugh - William Blair Company

And then lastly, I was wondering if you can touch on given that market opportunity and the fact that had been calling out some of your staff in the fourth quarter, what would be your hiring plans as you look out to 2008?

Bill Goodyear

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

Bill Dickenson

That is right. As I said before, I am not managing to an arbitrary headcount. I am trying to match my people with their skills and what we are seeing in the market so, if a man continues strong, we will 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 doing optimization 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’s point about working within the firm’s approach, we moved in 2007. We moved 50 to 70 professionals around and amongst permanent practices from an internal mobility perspective.

Bill Goodyear

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

Operator

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

Tobey Sommer - SunTrust Robinson Humphrey

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

Julie Howard

Well, if you think about that we have 1950 consultants in the firm, probably somewhere less than half, maybe 40% are in a consulting role, either a senior consultant, managing consultant where they have extendable skills, but still at that point where that could be applicable to a number 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 real fundamental disciplines that underpin the company, so we are able to, as people are starting out be able to move them around.

Now, having said that, we also focus on particular industries and that create specialties, so 40% of our consulting base is probably in the range, we would say we have those kind of skills, but then from there, we have got to pare that down. I do 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 year ago where standard deviations are better than what we were two years ago.

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

Now, there are certain points where you are going to burn people 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 area the competition for folks is intense and expected to remain challenging yet I think 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 happening everyday on Wall Street and that is real time and that is speculation on my part that is the offset. What we do know is that the skills that we have are very attractive right now given a lot of the litigation pressure that is going to be out there in the market. So we think that there is going to be more talent available, but at the same time, we know that the talent we have is very attractive so that was really where that P&L was coming from.

Tobey Sommer - SunTrust Robinson Humphrey

And then specifically regarding the numbers in the past, you had given some kind of rolling 12 months turn over rates, can you refresh us on what 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 and 2007 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 basis we have taken $5 or $5.5 million of expense out. It happened throughout the quarter, so there are 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 was about $5.5 million to date.

Bill Goodyear

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

Scott Krenze

That is the point. Rents go up every year.

Bill Sutherland - Boenning & Scattergood Inc

Can I get some color on the international utilization number for the quarter, it was 66% and we have not seen obviously that broken out before, 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 different practices that we have within our international consulting business. Our construction dispute continues to be very busy and in fact we are now doing a lot of the endpoint to keep up with the business there, but it is also comprised of our public sector program services group as well as our new financial services team and as you recall, we acquired Troika in the end of the third quarter and probably see some reflection of ramp up there as we integrated that group and they tend to run a little bit lower utilization and I guess the only way I thing I would point out is that we have a significantly higher bill rate in our international side which is somewhat offsetting to our utilization.

Bill Sutherland - Boenning & Scattergood Inc

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

Julie Howard

I want to see it higher, but for the time being, as we get ourselves integrated, remember our international team has been a kind of a facet. The north American group was then several years ago where we have a lot of new businesses, new people with high growth and so every time you have that, I think we have a little bit a customer mediation as people get used to the firm and to each other as colleagues and I would 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 having said that, let me just address the acquisitions and I am going to say the same thing Bill that I said before and that is we will do external investment for the time being with the exception of something very attractive, very strategic and fits a hole that we really, really want to fill, and so with that caveat and I will tell you that when you look at where we are really strong right now where we are at capacity, the energy practice comes to mind, financial services comes to mind and frankly our dispute practice, from the standpoint is you know we have been working, not terribly successfully over the last three or four years, at the really high end economic sorts of things, so those are areas that we obviously would always look at.

Bill Sutherland - Boenning & Scattergood Inc

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

Bill Goodyear

Probably not purely bench, Bill, but if it was an extension and brought in real key skills that we did not have, those two things in combination would be, I think the bench thing we would probably grow organically. Bill, from an energy standpoint, you would not just do an acquisition that added more bench, you want some real skills there.

Bill Sutherland - Boenning & Scattergood Inc

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

Bill Goodyear

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

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 litigations that had sort of surprisingly emerged to help recent business.

Scott Krenze

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

Bill Goodyear

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

Bill Sutherland - Boenning & Scattergood Inc

Yes, I have heard that there has been a couple of filings for 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 service line and you have talked about your reasons for that in the last year. Are we just a permanently higher with compensation annually to get that line looking better with utilization, are you satisfied 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 some progress and embedded it for next year is further progress and some of that margin progress is if you look at the higher end of our guidance, the higher end of the guidance has the more attractive margin so we have that sort of flex kind 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 could improve that ratio? Scott had said that there would be significant real estate savings but you are now saying that maybe some of that is offset by rent increases, so I was wondering if you could talk 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 the work we are doing in real estate. Obviously that is governed by leases and being able to move people and the like and we still are intent to make significant progress in that. We want to de-couple and we are working very hard to decouple a large number of the SG&A cost from having to increase and lock step with revenue. We are just trying to automate things, did I mention ERP system that is part of the automation process. Real estate going to a more flexible model which encourages more people to be virtual or flex employees as part of that model, so we are looking at a number of those areas with the intent that we can decouple that, permanently change the SG&A trajectory to something lower than revenue and then over time watch that percentage of revenue decrease.

Margo Merchaz - Snyder Capital

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

Bill Goodyear

We certainly have internal targets here, but it is not a level of granularity that we have shared nor I think is wise to share since those 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 for this year? I know you are not capital intensive.

Bill Goodyear

In broad terms, I would not expect it to be different from historical trends, we have not seen it, I do not know as we sit here of anything which would cause me to think that it is going to change from what we have 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 going through the evaluation process right now. One thing we are not going to do is bite off more than we can chew here and try for a big bang. In fact, I have watched too many implementations fail, so it is something that is going to take a period of time and quite an extended period of time. I will tell you that our focus is going to be initially on our human capital support systems because we are a people based company and in some of core accounting systems.

We are kind of running through our five o’clock, we have got a 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 some slowness last quarter, have you made any decisions on whether you would like to exit 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 discovery practice. We did eliminate some of the capacity there, made the structural changes and organizational changes were completed in the fourth quarter. We have got a good focus on our core offerings and have added a number of new projects in the last couple of months and the discovery team if you will is operating at a performance level that we have not seen for quite a while so we are very, very pleased with that. Thank you for the question. And a lot of the things that are out there in the market right now, discovery is your on the ground first piece of contact, so it is an important skill to have. We have got a good team and we are very pleased with the direction we are going.

Dan Suzuki - Merrill Lynch

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

Bill Goodyear

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

Dan Suzuki - Merrill Lynch

I do not know if you mentioned this, but you mentioned the 83 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 the company and it was also vertically broad. In other words, it was not just at lower levels, it was all up an down from a level standpoint

Dan Suzuki - Merrill Lynch

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

Bill Goodyear

Well I do not know. I do not think I said that. I just said it was pretty broad based.

Dan Suzuki - Merrill Lynch

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

Bill Goodyear

We did look back at the year and we have for a long time been about half and half and so if you look at what was, year-over-year was 12.5% to 13%, that probably was a half and half sort of number. I do not think it is off of that mark, you do not have to worry about it.

Dan Suzuki - Merrill Lynch

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

Julie Howard

Generally, broad based and probably more predominantly housed in our larger practices and you also see a little bit higher number in our more leveraged practices because they just have higher concentration of younger professionals and that is where you see your higher levels of attrition.

Operator

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

Rob Yung - Analyst

I have two quick questions, you spoke a little bit about the increasing market for subprime related engagements and I just wondered how you anticipate dealing with any potential conflict of interest. I assume that that would be growing as well, just to kind of how you feel about that.

Bill Goodyear

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

Rob Yung - Analyst

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

Bill Goodyear

I think your question is a good one and our general counsel is here, but in terms of the conflict process in this arena, just to state the obvious, everybody is involved in everything because you have got so many parties, you have got the originators, the packagers, the sellers, the valuers, the auditors, whatever, so it is very, very difficult. Your conflict language and your conflict process has to be very thorough and the ultimate resolution of a conflict is to disclose the potential issue and clear it, and so that process is going to be very, very important here. That does not mean that you can be all things to all people, but disclosure is going to be the predominant way because there is going to be multiple parties on multiple sides, I do not know if you want to make a comment on that.

Rich Fisher

I would reiterate that sunshine does cure a lot and providing the transparency so that all parties have an understanding of what we are doing helps a lot. I also would say that we have a fair amount of experience dealing with this sort of issue historically in the firm mostly through our insurance practice where historically you have a lot of insurance companies with complicated financial relationships with each other and so you see after a while that a protocol develops for allowing these companies to sort of get the expertise they need and not be foreclosed from getting it by virtue of the complex process and that is what I think the heart of it here is that I think the folks who come and look for our assistance, it is in their interest to not have conflicts necessarily stop us to stop them from being able to engage our services because they need them and so whenever that happens, you can use your traditional tools like disclosure and ethical screens where necessary to achieve the result to allow us to kind of go forward.

Bill Goodyear

It is a good question and it is just one that the industry is going to have to work through, but we certainly have been doing that as an organization for a long time. We are past our witching hour. I want to thank you all for your questions. I look forward to hopefully, touch wood here, another good quarter and look forward to visiting in April.

And we may see some of you next week because we will be out at the Credit Suisse conference and look forward to those discussions. Thanks very 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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