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FTI Consulting Inc. (NYSE:FCN)

Q4 2007 Earnings Call

February 28, 2008 5:30 pm ET

Executives

Eric Boyriven - IR

Jack Dunn - President and CEO

Dennis Shaughnessy - Chairman

Dom DiNapoli - EVP and COO

Jorge Celaya - EVP and CFO

Dave Bannister - EVP and CDO

Analyst

Tobey Sommer - SunTrust Robinson Humphrey

Arnie Ursaner- CJS Securities

Brandt Sakakeeny - Deutsche Bank

Andrew Fones - UBS

Chris Agnew - Goldman Sachs

David Gold - Sidoti

Alan Kurtz - Lord Abbett

Jim Janesky - Stifel Nicolaus

Scott Schneeberger - Oppenheimer

Timothy Mchugh - William Blair & Company

Dan Suzuki - Merrill Lynch

Operator

Good day. And welcome to the FTI Consulting fourth quarter 2007 earnings call. As a reminder, today's call is being recorded. For opening remarks and introductions, I would like to turn the call over to Eric Boyriven of FD. Please go ahead, sir.

Eric Boyriven

Good afternoon. By now you should have received a copy of the company's fourth quarter 2007 press release. If not copies of the press release can be found on the FTI website at www.fticonsulting.com. This conference call is being simultaneously webcast on the company's website and a replay will be available on the site for 90 days.

Your hosts for today's call are Jack Dunn, President and Chief Executive Officer; Dennis Shaughnessy, Chairman; Dom DiNapoli, Executive Vice President and Chief Operating Officer; Jorge Celaya, Executive Vice President and Chief Financial Officer; and Dave Bannister, Executive Vice President and Chief Development Officer.

Management will begin with formal remarks, after which they'll take your questions. Before we begin, I would like to remind everyone that this conference call may include forward-looking statements that involve uncertainties and risks. There can be no assurance that actual results will not differ from the company's expectations.

The company has experienced fluctuating revenue, operating income and cash flow in prior periods and expects that this may occur from time-to-time in the future. As a result of these possible fluctuations, the company's actual results may differ from our projections.

Further, preliminary results are subjected to normal year end adjustments. Other factors that could cause such differences include pace and timing of additional acquisitions, the company's ability to realize cost savings and efficiencies, competitive and general economic conditions, retention of staff and clients and other risks described in the company's filings with the Securities and Exchange Commission.

I would now like to turn the call over to Jack Dunn, President and CEO of FTI. Jack.

Jack Dunn

Thank you, Eric. And good afternoon and thanks to all of you for joining us on our 2007 fourth quarter and year end conference call. The fourth quarter was just an outstanding finish to an extremely good and important 2007 for FTI. For the full year, we saw the tangible results of the investments we have made in our people, our brand and our infrastructure in prior periods.

For the quarter, we maintained the extremely strong momentum that we have built over the course of the year enabling us to produce not only a record year for our company, but an important milestone for FTI. And by that I mean, the virtual completion of our 2009 five year plan, two years early.

As you remember the essentials of that plan were to double our revenue to $1billion have 15% of those revenues originate from outside the US, maintain our industry leading profitability and maintain our leverage at below three times EBITDA. I'm pleased to report that for 2007, our revenue topped a billion dollars, 16% of those revenues originated from outside the US. We maintained our industry leading profit margins and our net leverage was below one times EBITDA at year end.

Achieving these goals fully two years ahead of plan is attributed to our people, to our strategy, to the platform we have built and to our focus on execution. Our products are proving to be the right ones and our plan for geographical expansion is enjoying not only a strong demand for our services from the local market, but also demand from the multinational organizations coming to us, as one of the select few providers of both the critical mass and the ability to perform in multiple venues, as they increasingly globalize their operations. We think that achieving this plan this year, in three year is another validation of that strategy and a confirmation of how rapidly our business is truly come in together.

To begin our review, let me give you some key stats for the year and then provide some color behind the numbers. As mentioned for 2007, we reported revenue of $1billion up more than 41% compared to 2006, that performance included outstanding organic growth of 19% for the full year and was augmented by our acquisitions each of which is performing well and were above plan.

EBITDA for the year also increased 41% to $216 million or 21.6% of revenue confirming the margins we had achieved in 2006. We are in $2 per share compared to a $1.4 on the GAAP basis in 2006, which as you remember, included a $0.32 special termination charge.

So, in addition to the sheer growth of FTI, we are delighted at the pace in which we are realizing our strategic objectives. Before I discuss the fourth quarter highlights, I would be remiss, if I did not address the major business driving our industry and indeed the world. The topic that's on everyone's mind and that is the global credit crisis.

What began the virus in the US sub-prime mortgage sector has erupted into a full blowing financial and economic pandemic attacking transparency, liquidity and most importantly confidence throughout the world's financial markets and the institutions and enterprises that rely on them. These driven transparency, liquidity and confidence are vital to enterprise value. These are the very issues and skill sets that we are designed to illuminate and the very value our mission statement call us for us to protect. We have seen broad based international demand at every one of our segments from credit related engagement and that demand appears to be accelerating.

In corporate finance restructuring, we saw the first signs of the credit crisis appear in the real estate market and I previously reported to you, that we were seeing large disruption in the home building and mortgage related markets.

Since that first call, we received over a year ago to assist the struggling sub-prime originator New Century. We have been at the forefront of assisting financial institutions, [cope] with a growing peg. More recent engagements includes monoline insurers, hedge funds and continued work with homebuilders and their related suppliers. We have been active in assisting major private equity firms and their analysis on potential rescue plans for struggling institutions such as Northern Rock in the UK, and as we have predicted, the effect is now beginning to show up in areas dependent on consumer discretionary spending.

For example, we have active engagements for six of the eight large retailers, who have recently filed bankruptcy in the last several weeks. Stakeholders and household names such as Fortunoff, Levitz Furniture, Bombay and Sharper Image have sought our expertise and advice.

In technology, we are seeing significant new work from major financial institutions in the US and Europe, as they seek to understand and value their portfolios. Investigations are at early stages, beginning with electronic information discovery and analyses. These investigations may lead to evaluation and reserve adjustments, financial restatements and of course eventually securities litigation.

In strategic communications, we have been called on to assist clients challenged by the impacts of the credit crisis. These clients are as diverse as Centro, the major Australian retail property developer highlighted on the front page of the Wall Street Journal today, to Société Générale in France. We are assisting literally dozens of clients in the UK and the US as they seek to understand and communicate the effect the credit crisis they have on their institutions and their stakeholders.

In FLC, our role in the Bear Stearns Hedge Fund insolvency was probably our highest profile engagement but underlying that we have seen a number of new cases beginning at the end of last year that will begin to ramp up plus what is anticipated to include restatement work for homebuilders and mortgage lenders, investigation into investment vehicles related to subprime CDOs, CDO squared, [quad] lapse to relapse [FIVs] auction rate securities, mark-to-market and asset impairment accounting and shareholder litigation.

Because of the strength of our corporate financial restructuring practice, we often get an early look at the issues that grow into significant financial statement investigation engagements. FLC works closely with the restructuring team; they will begin their heavy lifting somewhat later into the crisis. They focus on the analysis, investigation, liability causation and damages assessment issues that are so critical in the trial phase.

Finally in Economic Consulting, we have seen a tremendous increase in the higher stake commercial litigation related to the liquidity crisis. In fact we had to go 19 new engagements since just the beginning of this year, addressing everything from securities class actions regarding fraud and exploitation of adverse conditions in the credit markets, to refusals to find mega deals and reliance on the so called MAC Clauses.

Factors used that have driven our business include, governance run amuck relating to Sarbanes-Oxley in 2001 to 2003, the reinsurance crisis of 2004, the hedge fund issues of 2005 and most recently the options backdating scandals of last year. While the magnitude and longevity of these global credit crises are unknown, the breadth, scope and dollars at risk endorse the aforementioned issues.

Now to the quarter, as you can see from our fourth quarter numbers, the momentum we enjoyed throughout the year continued to accelerate. Our revenue in Q4 was $280.5 million, 29% higher than the $216.8 million that we reported in the same period last year. Organic growth in the quarter measured by exceeding the contributions from businesses, we acquired in the past 12 months was 24%, which maintained the pace of the third quarter. Top line drivers of this outstanding performance were an increasing amount of work from enterprises being impacted by the global credit crisis, the continuing pace of legal regulatory and corporate integrity activity and increased strategic M&A activity.

We reported EBITDA on the quarter of $64.3 million, 26.4% higher than last year and 22.9% of revenue. In the fourth quarter of 2006, we reported EBITDA of $50.9 million and EBITDA margins of 23.5%. This very small decrease in our EBITDA margin was primarily caused by the substantial completion of the rollout of our long-term incentive and retention plans. In addition, we continued opportunistic spending at the corporate level on branding and infrastructure, where we believe we can make a real and permanent impact on our future. The results and revenue growth for the quarter and the year would indicate that we can.

Our earnings per share in the fourth quarter increased 43% to $0.60 from $0.42 last year. This was accomplished despite the headwind of a share count that increased 24% from the prior year due to our equity offering in October, share [issued] for stock based compensation and acquisitions, and the impact of our share and price increase on the calculation of stock options and convertible notes. Needless to say EBITDA, revenue and EPS were record for the company, and virtually every one of our segments had an outstanding performance.

As mentioned above an important strategic initiative in the fourth quarter was our successful stock offering in October of $4.8 million shares, which raised about $232 million for us. These proceeds combined with the cash we generated from operations enabled us to exit the year with cash and equivalents of $360 million, which provides us with the financial strength to continue and hiring the best people and acquiring businesses that enhance our capabilities and geographical reach.

We have already said that critical aspect of our business is obviously the hiring and retention of our people. We added over a 150 revenue generating employees in the fourth quarter, exiting the year with over 1,950 people up from just under 1,600 a year ago. Our attrition was 15.8% for the year, which continues to be one of the lowest in the industry. With our aggressive hiring so far this year, today our head count stands at 2800 strong with 2200 billable.

Now for the segments, it's ironic that having said the last several years adjusting (inaudible) restructuring market and declining to predict the “turn”. In the last few months we have seen not only a change, but the financial landscape eluded with over $1 trillion of write-offs from corporate and financial institutions, the firing of seven CEOs in major financial institutions and precipitous drop in home sales and for the first time in recent memory home values and 90% jump in home foreclosures in January, oil toping a $100 a barrel for the first time, gasoline reaching $4 a gallon, the Euro to $51, and a dramatic increase in corporate bankruptcy fillings predicted by many sources to grow by at least fourfold this year.

We may have to acknowledge that the restructuring bankruptcy market is back. Now, surprisingly given these dynamics corporate finance restructuring reported a strongest performance of the year, which revenues increasing 27.2% to $73.6 million compared to $57.9 million in the prior year period.

Segment EBITDA increased 48.1% to $22.4 million from segment EBITDA of $15.1 in the prior period, with margins expanding more than 4 points from 26% to 30.4%. As we said we can no longer explain these performances as an anomaly, we believe it is a beginning of a robust market. The bottom restructuring and one of my must reads with Deal Magazine, you heard me quoted and recommended to you many times for its unique table, industry insight articles and so forth.

In fact in our third quarter week after it named FTI as the top crisis managing firm in its first ever league tables measuring just that skill set, with almost double the cases of our nearest competitor. And to our last conference call Matt Miller the excellent writer with a good sense of humor from that prime publication took me to task and print -- mentioning bankruptcy only one time and restructuring only eight times during the call.

For the record, let me say bankruptcy and restructuring are critical to our company and its performance over the next several years. I cannot emphasize that enough. We now have over a 108 active cases, in the sub-prime mortgage space we have 20, in the real estate construction space we have 5, in retail we have 13, including the six of the -- last eight most notable cases that I mentioned.

In technology and telecomm, we have 17 and in healthcare we have 10. Again for the record, no one should be able to look at us and say that restructuring and bankruptcy are not an important in core competency for our company. As I said, we believe this is the beginning of a robust market and restructuring and bankruptcy will be a key too.

With regard to strategic communications, we did report another outstanding quarter with revenue rising 47.4% to $60 million from $40.7 million a year ago. FDs EBITDA increased to $16.2 million or 26.9% of revenue from $14.2 million or 34.8% of revenue last year, which reflects the introduction of a new bonus plan in 2007; whereas there was none in the fourth quarter of 2006 it's first looked as a part of FTI.

The UK, France, Germany and the US put in strong performances due to growth and retain clients particularly in the UK and strong contributions from businesses they have acquired during the year. Russia, Asia and in the Middle East the markets in which they are investing continue to generate strong momentum with growing profitability.

FD acquired two financial communications firms; one in Dublin and one in Chicago in the fourth quarter, which when combined with those made earlier in the year in London, Latin America, Australia and China extended its global footprint and provided further geographical and service diversification as it also opened its first office in Singapore. The integration of FD with the rest of FTI is progressing very well and there continues to be growing appreciation around the FTI network of the value FD brings to company wishing to protect their reputations and valuations in the financial markets.

With respect to Forensic and Litigation Consulting, revenue in FLC increased 6.9% to $54.8 million from $51.2 million a year ago. EBITDA at FLC was $15.4 million compared to EBITDA of $15.6 million last year. As a percentage of revenue the segments fourth quarter EBITDA was 28.1%, the highest of the year was down from 30.5% in Q4 of '06.

It was a particularly difficult quarter to lap, as it compares to a period that was exceptionally strong due to other stock options backdating cases that were being booked on last year within a special emphasis to get them finished by year end planning a lot of work into the fourth quarter.

The global business intelligence and investigations practice, which was formed last year was a standout driven by accelerated foreign corrupt practices activity and a growing number of cross border assignments from domestic clients expanding into Asia and Latin America.

We are very optimistic about the prospects in 2008, as the global credit crisis and turmoil in the financial markets have started to provide multiple engagement openings as yet only in their initial stages. Issues involved include valuation of complex financial instruments, financial statement reporting and investigations into business practices, all key areas of expertise for FTI. What's more our global footprint uniquely positions us to support clients on these matters regardless of where they occur.

In Technology, the segment contributed another superb quarter with revenue of $47.5 up 52.4% from $31.2 million a year ago. EBITDA technology increased the pace with 54% to $19.6 million from $12.7 last year and margins expanded to 41.1% from 40.1%. Growth of the segment continued to be driven by global product liability matters, board initiated investigations including FCPA matters, large class actions and antitrust second request issues.

Technology domain expertise in the global pharmaceutical financial services, banking hedge fund, and private equity industries is continuing to be a competitive advantage. Demand is increasing from Europe and Asia due to greater market awareness of FTI's global presence, the opening of a European network operating center in quarter two and as reputation for managing large and complex multinational cases.

Margins in the segment again benefited from a continuing shift in the revenue mix from services to software licensing and processing fees. The company's Ringtail suite of products is benefiting from new capability enhancements and heightened demand for tailored solutions that can scale for high volume/high profile matters and support a global base of opportunities based on Ringtail's strong multi-lingual capabilities.

In the fourth quarter, technology began to sell its Ringtail technology through value added resellers in domestic and international markets to speed its market penetration, and get more geographical coverage. As a result of these new partnerships and by offering reseller both engineering and sales support to a broader prospect base, the segment is seeing accelerated demand from its partners.

Economic Consulting also continues to excel, seeing its revenue increased 24.4% to 44.6 million from $35.8 million a year ago. EBITDA in ECON increased 7.1% to $11.8 million from $11 million last year. Margins were 26.4% compared to 30.7%. EBITDA margin while still very strong, was affected by the need to use outside consultants to add capacity to meet demand and was also affected by higher equity based compensation expense.

Like the other segments, ECON benefited from an increased frequency of disputes and associated financial consolidated engagements, created by the turmoil of the global credit market. Since December 2007, the segment has received 19 new engagements in the financial arena, including sub-prime. Demand for the segment's M&A services also continued very strong with 14 new cases since December.

As decreased liquidity in the credit markets is causing a shift in M&A activity from private equity towards strategic buyers, who historically are more likely to contend with anti-trust and anti competitive issues and require registration. The increased corporate M&A activity extends across a number of business sectors notably financial services, hospitals, airlines and industrial corporations.

Finally, the segment is seeing an increasing volume of rail commercial and regulatory work as a result of revised regulatory standards and continued seeing strong demand resulting from antitrust enforcement with eight new engagements, since December involving anti-trust, price fixing and rate setting, as global competition becomes ever more jugular.

Now a snapshot of 2008, as you can see from our announcement so far this year, we have begun the year at a rapid pace. Through the first two months, we have announced four acquisitions and have strategically advanced our business. Strategic discovery is an E-Discovery company based in San Francisco that will be integrated into our technology segment. FTI gives us a very strong technology offering on the West Coast. They have developed a rapidly growing business with Asia and we see FTI serving as a bridge for us with Asia that extends our offering into that region.

In addition their market strategy of engaging clients our corporate in-house councils has been complimentary to ours, which has been to come into our client outside law firms. We think the combination of these two markets' strategies is compelling. Rubino & McGeehin Consulting Group based in Washington DC is a nationally recognized consulting firm that provides practical and cost effective financial solutions to complex issues facing both owners and contractors on the construction and government contract areas.

RMCG will be integrated into our construction solutions and government contracts practice. We think it is a very timely acquisition, as the construction cycle is clearly maturing and government contract complex issues are becoming more critical. And we will be positioned with the strongest and broadest capabilities to protect our clients and what could be a much more contagious and unfriendly business client going forward.

Lastly, we purchased Thompson Market Services, which offers the full range of intellectual property and brand protection solutions in approximately 20 cities in China. TMS compliments our existing computer Forensic and Financial Investigations capabilities in Asia to give us greater coverage of China to better protect the patents, copyrights, trademarks and other intellectual property of our clients in that market.

Just minutes ago, we announced the acquisition of TSC Brazil, the leading computer forensic and IT security consultant in the Brazilian and greater South American marketplace. TSC will extend the E-discovery capabilities of our Forensic Litigation Consultant into this large and dynamic market, where we are experiencing accelerating anti-money laundering and Foreign Corrupt Practices Act activity.

Even having closed these four acquisitions our pipeline of potential opportunities has never been more robust and we anticipate several more announcements over the balance of the first quarter. We have also been extremely active in increasing our outstanding pool of talent. FD as I mentioned opened an office in Singapore, Denis Callaghan, who joined our Economic Consulting Practice after serving as Deputy Assistant Attorney General for Economic Analysis in the anti-trust division of the United States Department of Justice, where he focused on rationalizing and looking at international aspects of anti-trust law.

Professor Callaghan will be a member of the Compass Lexecon Economic Consulting team already the best group of competition economists in the market. His experience with the anti-trust regulators around the world will enhance our credibility in the overseas market and increase the likelihood of our being chosen for the most complex assignments in the field. We have recruited, hired and promoted 22 new senior managing directors so far this year. As you know, we are dedicated to finding and retaining the best intellectual capital in the world that is the way to build a professional services business.

And now I would like to talk about guidance. As you saw from our press release this afternoon, we are providing our initial guidance for 2008 which I would like to go over with you. And as you can see in the release, we have consolidated our guidance into what we seem to be the key indicators of our corporate performance. This is how we think you should evaluate us; it's how we think of the business. This format is also more consistent with best practices over a broad range of companies and industries. We'll however continue to report our segments, as we have in the past.

For the year, we look for revenue of between $1.28 billion and $1.32 billion, an increase of 27% to 31% over what we reported in 2007. The bottom end of this range anticipates organic growth of 17.5%, while the higher end uses 19.5% reflecting stronger growth from the current global credit crisis. In addition to organic growth, we have factored in revenue of between a $100 million and $120 million from acquisitions that we have announced so far this year or that are expected to be announced during the first quarter and thus will contribute to the remaining three quarters of the year.

First quarter acquisitions in aggregate are expected to have annual revenue of approximately $120 million, EBITDA of $35 million and a purchase price of $220 million approximately $170 million of which was or will be funded in cash and the balance in restricted stock. This implies acquisition multiples of 6.2 times consistent with our objectives. For 2008 due to accelerated amortization of backlog and other intangibles some integration costs and the fact that we'll not have a full year of contribution, revenue contribution is expected to be between $100 million and $120 million and the affect on EPS is expected to be between $0.12 and $0.16.

For normalized full year from these companies, we expect a contribution excluding acquisition related [rapid one] that's amortization to be closer to $0.40. We expect EBITDA to be between $300 and $310 million, which represents an EBITDA margin of 23% to 24% compared to 21.6% in 2006. This margin improvement is primarily driven by the incremental contribution of acquisition, which does not require proportional incremental overhead.

The lower end of our margin expectations reflects a small improvement over last year due to some operating leverage from the higher revenue and management of expenses. The higher end would be a function of the stronger demand driving higher utilization and billing rates and more operating leverage from the higher revenue.

All this translates into earnings per share of $2.40 to $2.50 per share compared to $2 in 2007. Our EPS guidance is predicated on a tax rate of 40% and weighted average shares outstanding of about 54 million shares for 2008, which is an increase of almost 20% over the 46 million shares for 2007. While we provide guidance on an annual basis, for those of you who have come to know FTI in the past year, I would like to remind you about the seasonality of our business, as it affects our quarterly results.

In brief, we experience seasonality in our business that affects primarily the first and fourth quarters. Additionally, we expect an overall improving trend in margins through the year reflecting the contribution from acquisition that are more profitable at the margin.

The first quarter is lying typically the lowest in the year primarily due to front front-end loaded expenses for such things as Social Security, 401(k) matches, discount on the employee stock purchase plan and the timing difference between annual salary increases and associated billing rate in adjustments.

Revenue is often somewhat below the robust fourth quarter. To help you in your modeling we estimate that the first quarter EBITDA margin will be about 300 to 350 basis points below what we experienced for all of last year. The second quarter does not have any appreciable seasonality. So, it is an average quarter relative to the year.

Q3 is also relatively average except that it is subject in some cases to summer vacations in July and August, as well as lower utilization from the influx of recent college graduates, who joined us during the summer and have yet to become fully billable and fully utilized.

And finally, as you have seen our most recent results, the fourth quarter in seasonally the strongest of the year. Those new hires who joined us in Q3 have become fully billable. We received the benefits from an active M&A calendar on success fees and there is a natural tendency on the part of our clients to try and resolve projects by year end. With this year end activity, fourth quarter and the EBITDA margin is about 300 basis points higher than the full year.

To conclude, last Monday we were fortunate to be named to the Wall Street Journal's list of top 50 performing companies in terms of shareholder value for both the one year and tenure categories. We believe excellence is a matter of not producing once or twice, but producing consistently. It is no accident that we continually admire great organizations like Goldman Sachs and McKenzie, where that we market with great organizations like the New York Yankees, Forbes Magazine and The Economist. They consistently not only perform, but outperform and that is our goal.

Over the past several years, we have been consciously building FTI into a company that we expect we will perform well regardless of where we are in the economic cycle. In 2006 and the first half of 2007, we reported strong results in a healthy business climate. We continue to do well through the second half of 2007, even as the equity and debt markets stumbled and cracks in the economy appeared.

And we believe we will have another record year in 2008, when there are even more wide spreads signs of global dislocations. The fact is that there all will be risks and we think we are uniquely structured to help our clients face and manage their risks on a continuing basis.

With that we would like to turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we'll take our first question from Tobey Sommer of SunTrust Robinson Humphrey.

Tobey Sommer - SunTrust Robinson Humphrey

Tobey Sommer, regarding acquisition in 2008, can you give us what's your additional debt assumption is maybe and then free cash flow and CapEx?

Jack Dunn

Yeah, our assumption is that we'll be using the cash on our balance sheet and not all of it for the ones that we've outlined in the guidance, which should leave us with sufficient cash balances over the year. So, we would not look for any more debt.

Tobey Sommer - SunTrust Robinson Humphrey

Okay. And also, do you expect strategic foreign buyers to keep the economic consulting busy all year?

Jack Dunn

They are actually not so much strategic foreign buyers as they are strategic buyers within the US acquiring other companies or certainly as a component of that business. I think, about 16% or 17% of it of course from offshore last year. But we're seeing it broad based among -- it's more driven by sectors that are seeing a financial need to do acquisitions and to [merge] for out of distress and other issues.

Tobey Sommer - SunTrust Robinson Humphrey

Okay, thank you very much.

Jack Dunn

Thank you, Tobey.

Operator

And we'll take our next question from Arnie Ursaner from CJS Securities.

Arnie Ursaner- CJS Securities

Jack, can you hear me?

Jack Dunn

Hi Arnie, yes.

Arnie Ursaner- CJS Securities

It's rarely heard an executive so excited about a very challenging economic world, but it really is playing to your strength. Little quick question I ask you, I think, I may have misheard something you've said in your prepared remarks about the '08 guidance. I think, I heard you say that the acquisitions, you believe would add $0.12 to $0.16, but then I thought after that, you mentioned the $0.40 number?

Jack Dunn

Yeah, $0.40 would be the -- after we get, typically in an acquisition, you've some accelerated amortization and depreciation for things under the accounting rules where for example you've to attribute a part of the purchase price to backlog and then you've to burn that off as the contracts burn off. So, what we're talking about on a normalized basis, we'd think going forward after about 15 months that these acquisitions could provide us on an annualized basis about $0.40.

Arnie Ursaner- CJS Securities

Okay.

Dennis Shaughnessy

And Arnie, it's Dennis. We only model these acquisitions for the last three quarter. So, we wouldn't have the benefit of the four years ownership anyway.

Arnie Ursaner- CJS Securities

But what I thought intriguing is again it's pretty matured to think about '09 but you kind of already laying out of $0.25, $0.30 cushion as you think about '09 you're almost to $3 without any growth, which is a pretty interesting way to think about your business. I hope I'm not thinking about it the wrong way.

Dennis Shaughnessy

No.

Arnie Ursaner- CJS Securities

The other question I had about your guidance is the 17.5% to 19% organic growth again that's obviously quite a strong absolute number. But trying to understand that relative to the growth you had in '07 the accelerated growth you had in the back half of year and most importantly the comment you made about each of your segment looking into '08 what is causing you to believe your revenue growth will slow from what you're seeing right now?

Dennis Shaughnessy

Arnie, it's Dennis again. Look I think, we're not going to do this model and you sit back and you try to project not only where the demand is taking you but your ability to match the capacity, the service demand with the demand I think that 19% is replicable of what we did last year across the entire year.

And I'd say for most companies probably going into recession, if they did 19% top line growth that would be harping the champagne bottles. I think the 17% is a more conservative number and it clearly I agree. It looks conservative compared to the 25%. But I think honestly if we want to model 25% you would probably laugh at us and to realistically sustain 25% over a long period of time, you do get in to capacity issues and we felt it was more appropriate to model something closer to the annual result rather than the last six months.

Arnie Ursaner - CJS Securities

In the same sprit two more questions if I can. In economic consulting the thing that really quashed your margin was the tremendous excess demand you had, you had to use outside consultants, and yet in the body of your reports, you highlighted since December, is that incredible number of new engagements. Why would you be taking on that many new engagements if you already capacity constrained and if you are taking the model, why aren't you pricing it to either maintain or even expand your margin?

Jack Dunn

But we are using outside contractors, we are in a business where you don't turn down business, we are also , more importantly in a business where we have a tremendous amount of momentum and a tremendous amount of credibility in economic consulting. We have as we joked before we have three of the top two competition policy (inaudible) in the world they all want to work with us.

We had meetings yesterday and the day before strategizing with them how to get more people to do that work. Our goal is to make our great experts available. Its work you can't turn down, because everybody wants us there literally aren't other people to do some of that work. So, we will find a way to do it through outside contractors when we have to, but we are aggressively hiring and looking to acquire as fast as we can.

Dennis Shaughnessy

And I think Arnie the impact of margin was obvious, on the other hand its still a very impressive margin with extremely good top line growth. So, I think you want to keep doing it, we want to recruit people so that we can be less dependent on the outside or co-op the outside consultants to come join us fulltime. But I think it's a high class problem when you have this kind of demand and we are working aggressively to try to build the classic.

Arnie Ursaner - CJS Securities

If I can have one final question if I may, I know you've at least considered the possibility of (inaudible) spin off for your Tech. Group and it's just booming. What's the update or the status of that please?

Jack Dunn

I think I'll go back and repeat what we've said and answer that question pretty consistently. Our job as the management of this company is to maximize value for the shareholders. It is quite obvious that the Technology Group is enjoying a tremendous amount of growth not only in the US, but very gratifying to us in Europe and in Asia and now beginning in Latin America. I think Arnie we would continue to look at the relative evaluations of companies that are primarily software or service companies.

The revenues in this upcoming year will be about 65% classic technology, licensing fees and hosting fees versus consulting so each year that number approaches more and more of a pure technology offering and I think we just have to very keenly aware of our job to maximize value and we keep trying to get the story out that this is a unique part of the company and a very valuable part of the company. So, I think we'll be watching to see if we receive value from the investment community for this division's performance or else.

Arnie Ursaner - CJS Securities

A great execution, terrific job, thank you very much.

Jack Dunn

Thank you Arnie

Dennis Shaughnessy

Thank you

Operator

And we will take our next question from Brandt Sakakeeny from Deutsche Bank.

Brandt Sakakeeny - Deutsche Bank

That's Brandt. So just a couple questions again on the technology segment, that did reaccelerate, looks like sequentially 3Q to 4Q, did you get any additional projects there, was there anything that really drove that business in the fourth quarter.

Jack Dunn

They received some very large projects offshore Brandt, predominantly for out of the Magic Circle law firms in UK for a lot of European clients and received several large assignments in the pharma area on a global basis which have really kicked in the fourth quarter and are continuing to kick in the first quarter.

Brandt Sakakeeny - Deutsche Bank

Okay, great. And just a question on the restructuring business. I mean that traditionally has been a great margin business. As you start to see it cycle up again and some initial engagements, what is your sense for what the margin's could be this cycle, probably not as high as they were in previous cycle but are you seeing anything that would make you think that you couldn't get some margin expansions out of the [Corp Fin] and the restructuring business as that segment ramps up?

Dom DiNapoli

Well, this is Dom DiNapoli. With higher utilization margins can ramp up a bit, we have put in place as Jack mentioned incentive plans and retention plans just to secure our top people, that's cost us a little bit, but as we can keep our people busier as the assignments get larger, we can leverage that better and with higher leverage we will generate higher margins, because it's the younger professionals where we make the higher margins. So, a more robust restructuring market should definitely lead to slightly higher margins than we have experienced in the recent past.

Additionally, we are moving from more of the [tax] business which is the transaction advisory [due diligence] business which is the transaction advisory, the diligent business which historically has been slightly lower margin that the restructuring business so, just that the movement from that practice into the core restructuring should help these margins a bit also.

Jack Dunn

Yeah, Brain I think the record margins that we showed in the last restructuring cycle sort of in the low 40s, I think none of us here, feel that we will replicate those margins, structurally, the business is different as Dom said, we have changed the way we compensate with people differently.

On the other hand, I think we have also said that this is the one area where we do believe if the utilization and as Dom said the jobs come in, you will continue to see margin expansion, but not at the record levels that you my have seen if you looked at us in the last big recycling cycle.

Brandt Sakakeeny - Deutsche Bank

Great thanks that's helpful. And I guess just for Jorge couple quick mining questions Jorge the tax rate for '08 what should we assume?

Jorge Celaya

Yeah approximately 40%.

Brandt Sakakeeny - Deutsche Bank

Okay. And stock comp expense in the quarter?

Jorge Celaya

For the fourth quarter?

Brandt Sakakeeny - Deutsche Bank

Yeah.

Jorge Celaya

I'll get back to you on this Brandt.

Brandt Sakakeeny - Deutsche Bank

Okay. Perfect thanks.

Operator

And we'll take our next question from Andrew Fones of UBS

Andrew Fones - UBS

Hi, can you hear me.

Jack Dunn

Yes.

Andrew Fones - UBS

Okay. I had a question on the acquisitions; first I think you mentioned that as of today you've added about 246 in billable headcounts since the end of the year, can you tell us, does that include TSC and what proportion of that headcount is [IS] related acquisitions? Thanks.

Jack Dunn

It's about 50-50. The 50 would be just new hire, net new hire's and 50% would be from the first four acquisitions.

Andrew Fones - UBS

Okay

Jack Dunn

That's approximate.

Andrew Fones - UBS

Okay so it does include the TSC.

Jack Dunn

It would include TSC yeah.

Andrew Fones - UBS

Okay. And then I think on the balance sheet you had $360 million in the cash at the end of the year. You're saying that you'll have spent 170 on acquisitions during the first quarter.

Jack Dunn

Yeah.

Andrew Fones - UBS

Can you tell me what the bonus payout we should expect and so I guess what I'm trying to understand is how much cash you'll have left to peruse acquisitions beyond the first quarter? Thanks.

Jorge Celaya

It could be probably approximately $90 million.

Andrew Fones - UBS

Okay. So you'll have about $100 million or so plus any cash from ops.

Jack Dunn

Right, right, cash from ops in the first quarter would add to that

Andrew Fones - UBS

Okay. And then you gave some interesting statistics on bankruptcies cases that you are currently active on at the end of the year by different verticals. Can you perhaps compare that to what you had seen a year ago? And beyond the obvious increases in sub-prime and real estate, have you seen increases in some of those other areas, is there are any evidence that the bankruptcies are spreading into two of other verticals? Thanks.

Dom DiNapoli

Well, in 2007 early on, we saw that in the automotive sector. And we had some of the largest cases that we have ever had, including Delphi with tremendous bankruptcy and restructuring case. So, as consumer confidence started to wane away, we spread into the other areas, as Jack mentioned. So, just recently that we were really seeing to pick up in retail bankruptcies, as Jack mentioned, we've been fortunate to get in our 15 to 16, probably since September, October, several with regards (inaudible) weeks.

So, there is a lot of pick-up there is. The consumer is feeling the pinch of the higher energy cost and the housing prices plummeting. We are going to see a lot more on the; certainly on the real estate side, the automotive side is going to continue and the retail is, particularly the specialty retailers are really starting to feel the pain.

On the sub-prime and the financial institution type [warrant] debts. I mean that's really starting to pick up. We have been involved with some of the builders in the part of the last six months, but that looks like that maybe accelerating also. So, generally the restructuring market is looking pretty strong going forward. We haven't seen the mega cases that we have seen in the prior years yet and that really drives profitability to higher utilization. But we assume that the market continues to deteriorate we'd be seeing a lot more of the larger cases over the next six to nine months.

Jack Dunn

Andrew, we're saying it creep into hospitality as well. We recently received some engagements in the hospitality industry, restaurant chain things like that. But again right to what Dom said I think it's linked to the consumer disposable income and the way he chooses to allocate it.

Andrew Fones - UBS

Okay that's really helpful. And then just a final one on hiring if you could perhaps help us understand what your plans might be, which division should be hiring most aggressively. And then pass spectra earlier question on Economic Consulting, what your thoughts are there and perhaps of that 50% that came from organic hiring in the first quarter how that breaks approximately?

Jack Dunn

We'd look over the course of the year to increase our headcount by about 25%., but for an average that will creep in over the year. In fact we've always say it will be about 10% to 12% and that's how we get part of our estimates for our growth because we do need in many of our businesses that type of headcount growth to produce the billable hours.

As you can imagine two areas that standout are Technology, where we've very aggressive hiring plans and then Restructuring and FLC right now we will try and tamper that with what we see that's the growth in that marketplace that's a little bit behind the others in terms of responding to the credit crisis belt.

And in terms of Economic Consulting, we'll take as many people, we can but as you consider that business because it tends to be very much in terms of very credential business it's not as easy to find the number of bodies, when you're looking for the PhDs and economists out of the great university. So, that will be a little slower. But it will as fast as we can at this point as we talk earlier we really do need the people there.

Andrew Fones - UBS

Okay, thanks. And just to be clear that guidance -- does that -- does the headcount guidance, does that include the acquisition?

Jack Dunn

We'd look to probably add -- that would include the acquisitions we've so for. But not any additional ones we'd do towards the second half of the year.

Andrew Fones - UBS

Okay, thank you.

Operator

And we'll take our next question from Chris Agnew of Goldman Sachs.

Chris Agnew - Goldman Sachs

Thank you good afternoon. Couple of questions on Technology and I guess as you said the mix shift moving more towards pure technology is benefiting margins. Where can you see margins going to for the Technology business?

Jack Dunn

Well it is no hybrid offering and we actually think this is the strength of the offering and it is the fact that it's a mixture of technology offered services and domain expertise. Clearly the repetitive nature of the business and that we're now hosing a little bit more than a billion electronic pages in our network operating center in the US and in the UK. I mean it's strictly we don't have to replace it the fee licenses does keep recurring the client server installed base licenses are recurring.

So, by definition it just keeps building and you should have some margin expansion. But the consulting will always be meaningful here. So, you'll never morph into a classic gross profit margin for the technology business where your main cost are media and then your other cost are marketing, packaging and R&D. So, I think you're right. I think we'd expect -- you can see this division continue to show some margin improvement. But it wouldn't be by leaps and bounds to get you up into the gross profit margin basis of a pure technology play.

Chris Agnew - Goldman Sachs

Okay. And then the new sales channels for the Ringtail technology did they have a meaningful impact in Q4. Is that something that's going to accelerate the shift to software licensing and who were the value added resellers. And would they include some of your maybe competitors that just don't have the scale for technology business.

Jack Dunn

The answer to the question would be yes to all of the above. And would be some of our competitors have already branded it, that's a unique channel. There are other value added retailers in certain parts of the world, where we don't have a direct channel distribution that we are utilizing that clearly facilitate our ability to access certain users and if we began to feel an impact of it in the fourth quarter primarily and the effort was really started this summer. So, we would hope that impact would continue as we go forward.

Jorge Celaya

It's not a question of the scale of the value added retailer some of them are very, very large organizations rather it's the proprietary intellectual capital that we had and they're need for that proprietary capital, right?

Chris Agnew - Goldman Sachs

Okay. That makes sense. And then I think given the sense you are having I think I heard on another conference call some one talked about E-Discovery market being flooded by new entrants. And what are you seeing there and does that impact in anyway maybe your pricing power.

Jack Dunn

Obviously, it didn't in the fourth quarter. I think what we have heard for numerous years more and more company saying that they are manning up, they are coming in, it's a major growth opportunity for with a major initiative. And I have no clue of what their growth looks like. We can only monitor our own and we've done very well over the last three or four years.

Without a doubt when you have a dynamic market like this, Gartner and Forrester and Yankee all projected its growing, marketwise worldwide 30 to 40% growth rate top line, you're going to have new entrants coming in and you are going to have new competition and I think that you have to be prepared to be flexible and to be aggressive in the way, you are investing in your product and scale.

I can assure you that we are investing aggressively in this division given the margins that we have to keep our leadership position. We are adding new feature sets to our proprietary technology. We are partnering with other companies to link their technology into our feature sets and we will be looking at these companies and other companies as a potential acquisition target to fall their technology under our tent and offer a broader continue on to the client to keep our lead.

And again all of this rest upon the fact that we have five or six years of reputation of delivering. Tremendous results now across the world for wide variety of either key intermediaries, the large court of law firms in the world are Fortune 100 type of clients, who were hosting all these pages for. And again I have to emphasize that the hosting part of this business, when you are holding a billion pages of sensitive documents in Europe, Asia and the US for very, very large clients. It is a very sticky relationship and is not a relationship that they are inclined to move very quickly.

So, I'm sure we'll see new competition coming in. We are hopeful that the investments that we are making, the developments that our own people are making internally, potential acquisition so we could possibly add here to bolster it and again our reputation and client relationships here will hold us in good stead against the competition.

Dennis Shaughnessy

Yeah. I think you've to think of it in terms of the market it serves as well. When you think about the legal market there are literally thousands of law firms, but there are 200 that really control the commerce of the major -- literally the major companies and enterprises of the world. There will be E-Discovery companies out there that will serve the smaller firms that will be boutique and that individual practitioners will like.

But when you're talking about the type of international matters that we use where you literally have to have an international capability that really narrows the playing field, as Dennis said, I think they are more likely to be acquisition targets than they are to be a threat to us going forward.

Chris Agnew - Goldman Sachs

Okay, thank you. And may be just one last question, now you've achieved your long-term goals; is it time where you think about setting some new targets?

Dennis Shaughnessy

Yeah. I think clearly we told people that we've aspirations to be a $2 billion revenue business by 2012. We think we can accomplish that and maintain the same margins that we've and also maintain the integrity of our balance sheet. We'd expect that you would see a business plan, which we're finishing up as we speak and we'll actually announce into the market place probably sometime at the end of the second quarter. That will show that at that new five year milestone you'd see probably instead of the 16% to 19% offshore business that we did last year that number will most likely increased into the 30s.

So, that will be one of the major differences. But I would say $2 billion at 2012 that's accomplished really through 11.5% compound organic growth rate and the acquisition of about $250 million in revenues in the first two years of the plan. As I said, we've already acquired about $220 million at the end of this quarter. So, we're well on our way to that.

Chris Agnew - Goldman Sachs

Great, thanks very much.

Operator

And we'll take our next question from David Gold of Sidoti.

David Gold - Sidoti

Hey, good afternoon. Couple of questions, one, can you just go -- let me check the acquisition, how much revenue is already in-house?

Jack Dunn

From these acquisitions?

David Gold - Sidoti

Right then at the first quarter and I know you said I think a $120 million was the goal, but just how much of that we've done?

Jack Dunn

Yeah, David -- Dave is going to dwell into that David.

David Gold - Sidoti

Perfect, thanks.

Dave Bannister

We were expected at -- we had about $27 million -- $27 million and $28 million expecting in-house.

David Gold - Sidoti

$27 million is --

Dave Bannister

Is done, it's been announced.

David Gold - Sidoti

It's announced, okay and that's including today?

Dave Bannister

Right, correct.

David Gold - Sidoti

Got you, so, there is….

Dave Bannister

Competition to this year.

David Gold - Sidoti

Sorry?

Jack Dunn

Competition to this year.

David Gold - Sidoti

Right. And presumably and the $120 number that you gave us for this year as well. So, there is something --

Jack Dunn

David the $120 is an annualized number, the $90 million to $100 million is for this year.

David Gold - Sidoti

Okay, got you. But I guess, the point there is, there is still something -- there is still something decent size to be done over the span of the next month.

Jack Dunn

Correct.

David Gold - Sidoti

Okay. And then can you talk a little bit about the plan with say the rest of the cash, when [touched] on. I guess, at the time, that you did the offering might got the assumption maybe incorrectly that you're targeting maybe some bigger acquisitions rather than those tuck and incisive just curious if that still would be the thinking or if you are more inclined to say a decent, nicely accretive tuck-ins and then say a little bit slowly as we're doing?

Dennis Shaughnessy

Well number one; if we add a $130 million of revenues, $120 million of revenues on an annualized basis in the first quarter that's 12% of our revenue base during the year. So, that obviously makes an impact, I think, as Jack said, when you normalize the amortization of the intangibles that as you know, you've to eat normally in the first of sort of first four to first six quarters of your ownership and we've been looking at those to contribute $0.40 a share. So, that's pretty accretive.

I think that we would continue doing those deals because if we can buy companies that tuck-in very nicely to us and pay 6.2 to 7 times doing EBITDA, that's a very accretive arbitrage for the shareholders as well as building out our platform internationally and brining into new domain expertise domestically.

We are always looking David, as you know I've talked about at larger deals we've talked to people about larger deals. We are not afraid to do a larger deal. I think that it's just a [deice], where the ones that in the last four months are coming to provision and it's coincidental on all [honesties] they happened to be closing sort of right on top, which have been in the first quarter, but it does make an easier of course to model them and give you some guidance, but we are looking at other large deals and we are not be afraid to do one.

David Gold - Sidoti

Okay. And I think one other actually couple I just I know you didn't break out by division, but curious if you can give us sense for how you are thinking about growth in the restructuring busyness for this year?

Dennis Shaughnessy

We didn't give segment guidance for specifically for reason -- especially because of the credit crisis is really a perfect example. It's affecting all of our divisions, we have people, who are crossing over and doing work and just makes a very hard to do that. So, we think it's much better to look at our company on a overall growth rate.

So, if we start just on your corporate finance and just on your technology and I guess will kind of undue, what I think about, but I think that, I mean if you look at the fourth quarter that was, that give a pretty healthy indication of where the momentum is in our different business.

Jack Dunn

David, I mean the nice thing about the group of our practices, its creates very good interdisciplinary teams and the confusing part of giving segment guidance would be how we allocate the time, when you have these joint efforts I mean we have some instances where we started out in restructuring, the restructuring lead to having to bring in, forensic investigation, the forensic investigation going to lead to potential defense activity and same time the client has hired our communication armed help to manage communication.

We're somewhat Salmon is sitting here and saying okay you can get credit for this much, you can get credit that much, it mean something internally. That really can distort the numbers, when people trying to analyze the segments, when we thought given where we saw the business going certainly in a foreseeable future that would be we better off, not to do that.

David Gold - Sidoti

Got it, fair. One more if I may, any success fees sizable one of that we should know about in the fourth quarter?

Jack Dunn

We did have success fees in the fourth quarter, they would not be material enough I want to comment on.

David Gold - Sidoti

Okay, that's helpful thank you all.

Eric Boyriven

Okay.

Operator

And we will take our next question from Alan Kurtz with Lord Abbett.

Alan Kurtz - Lord Abbett

Hi guys. Another great quarter, thanks again. Most of my question answered at this point, but the one I didn't seen your prepared remarks, pre DSO at the end of the year.

Jack Dunn

78

Jorge Celaya

78

Alan Kurtz - Lord Abbett

78, right, every year. And the other thing I know in strategic communications for example a lot of the work is a tenant based but given this level of demand within that area and a couple of the others. What kind of pricing are you able to take on a year-over-year basis?

Jack Dunn

Very typically on our fixed price and they are able to raise like the rest of our companies their prices again that 7% to 10% that we look at each year. They are consistent with the rest of our practices.

Alan Kurtz - Lord Abbett

Okay. And (inaudible) said to hit on this earlier actually. You had a big spike in the headcount in a couple of different areas end of the year. You said you see a lot of the headcount in the year coming on through restructuring. How do you see a plan out through the year like on a quarterly basis?

Jack Dunn

We have hiring targets and we also obviously have to meet our demand so you would see that the hiring budgets are for a fairly even growth through the year, but remembering that's all the kids that we get all the people out of college would come in the September time frame. So that's where you would see a little bit of a spike.

Dennis Shaughnessy

That's predominantly the corporate finance and the SLC practice that they'll hide (inaudible) start probably September.

Alan Kurtz - Lord Abbett

Okay got it. Thanks a lot.

Jack Dunn

Thank you.

Operator

And we'll take our next question from Jim Janesky of Stifel Nicolaus.

Jim Janesky - Stifel Nicolaus

Jack when you were commenting on the seasonality of the first quarter, did you say that we could expect that revenues could be down sequentially or just EBITDA. I didn't catch that part.

Jack Dunn

It's not unusual to have just a tiny bit smaller revenues in the first quarter than in the fourth quarter. It's a seasonal pattern we have seen year-after-year. The business kind of plateaus and you do a lot of ramping up in the fourth quarter to look at your year and that's what happens you start of coming back from holidays and then it begins to build and then in your second quarter you really start knocking the cover of the ball.

Jim Janesky - Stifel Nicolaus

Now, last year that didn't happen except for in FD, we are already into February here. Is that something that you could expect for this quarter based upon the demand, the strong demand that you are seeing across the board?

Jack Dunn

Yeah, we are just trying to give people a heads-up on their models for what we have seen for the past couple of years. Again we are talking about amounts that are almost too close to call. So I would say that be aware of that for your model, but that it wouldn't be anything to worry about.

Jim Janesky - Stifel Nicolaus

Okay, now looking at the organic growth rate for 2008, obviously on a billion dollars, lot of companies would love to have organic growth rates at the amounts that you are projecting. How much of that, really has to, is really on the comp versus, I know you don't really have backlog per se, but when you are looking at that, you think that the momentum of the business is pretty, you are confident that it can sustain that level of organic growth or is there still an amount of selling that's involved, their marketing in order to hit those targets as we move throughout the year?

Dennis Shaughnessy

Jim it is Dennis. Number one, I think you have to look at fourth quarter over third quarter, there is good sequentially growth, fourth quarter to third quarter as well as obviously tremendous year-over-year growth fourth quarter to fourth quarter. I think to go back to your earlier question. Jack so we are trying to enlighten you to the seasonal patterns, we are not trying to predict that we would necessarily be down. Obviously we are aware of the momentum that's there we are just trying to be honest and what the history has looked like.

I think on the organic growth, we're very busy. We've a lot of engagements, the engagements are picking up not declining as Dom talked about on the restructuring side and we talked about how sticky technology is per se. So that business doesn't tend or reverse itself easily it's more sort of incremental.

FD is another good example, where first quarter again tends to be a more stable quarter for them because its more of the work product type of quarter rather than new company business, but they again are tenure based business, so most of their work is, they have good visibility on.

So, I'd say we've pretty good visibility going forward. We're still on a [vent] driven consultancy. So, we live and die with new engagements as they come forward, but given the technology portion of the tech business the retainer portion of the FD business and then of course simply the momentum that we're seeing in some of our other businesses, we feel pretty good about the trajectory.

Jack Dunn

And typically in the past the restructuring cases and bankruptcy are longer-term engagements.

Jim Janesky - Stifel Nicolaus

Sure.

Jack Dunn

New builder we had 90 at the end of the third quarter, we now have a 108 those don't go away in three months like some of the litigation cases do.

Dom DiNapoli

And if you look at -- [corrupt for] practices you would like I think elephant hunter. So, the larger cases that often last longer south. I think litigation certainly can settle at any time, but our experience is that these litigation cases and ECON cases and the restructuring cases isn't lasting anywhere from 3 months to 24 months plus. So, they given a momentum that we've got in the cases that we got in household over the last quarter. We're relatively comfortable that 2008 will be a pretty good year and the cases aren't going to be settle overnight and given that the cases that have come in have been corrupt practices, the risk of tremendous drop off all last although anything can happen.

Jim Janesky - Stifel Nicolaus

Okay, Sure. Question for Jorge, when since you folks have modeled in the incremental acquisitions about another $60 million to $70 million for the balance of 2008, we obviously want to take into account that up-front amortization. Can you give us an idea of what the incremental amortization versus -- will be you reported about $2.8 million in the December quarter. Is that going to be a $1 million as a quarter in incremental, amortization are more?

Jorge Celaya

I think without the acquisition, the amortization will be pretty similar to what it was last year and with the acquisition you could see it's a little more than doubling.

Jim Janesky - Stifel Nicolaus

More than doubling? Okay. So, and that is acquisitions in hand and that you have modeled, right?

Jorge Celaya

About a $1 million a month for acquisition that we'd expect to be announced in the first quarter of incremental life of -- incremental amortization, but that based on $90 million to $100 million of revenue. I'm not sure that number 60 you taken incorrect.

Jack Dunn

I think you were taken the number that we have said were those original four that we have announced at the end.

Jim Janesky - Stifel Nicolaus

Yes, right. Yeah that's right. You said that was about $30 million, $35 million. So, you are obviously very confident that you will be announcing between another $60 million to $70 million and then that will affect calendar 2008 that's what I -- that was the number I was talking about?

Jack Dunn

Got it, okay. Thank you.

Operator

And will take our next question from Scott Schneeberger of Oppenheimer.

Scott Schneeberger - Oppenheimer

Thanks. Good afternoon and congratulations.

Jack Dunn

Hi, Scott.

Jorge Celaya

Hi, Scott.

Scott Schneeberger - Oppenheimer

First question in the Economic Consulting group, the outsource consultants who are these folks are you getting them from competitive firms, are you getting independent, are these people that you might be hiring on. Since obviously the demand is robust and in-house you currently don't have enough. When do you think that will balance off?

Jack Dunn

They are high level testifying experts. They would be more normally fairly well known academics, who are actively teaching. They would be working with our researchers, staffers, model builders, who are doing the analysis building the models, building the case and they would be ones they will be assisting sort of some of the rock stars in their testimony work or they're actually doing the testimony themselves. Predominantly right now the demand for these individuals has been in our West Coast operations, so they have actually been somewhat West Coast centric. And yes, we're talking to them constantly about recruiting them coming and things like that.

Dennis Shaughnessy

It's not unusual that's the way we get our people. They want to associate with people like Bobby Willig, then Janusz Ordover, and Dan Fischel and Denis Callaghan and Meg Guerin-Calvert and Jon Orszag and when they come in they find, they like it here and it becomes a very easy model for them to hookup with.

Jack Dunn

I think it was confluence of demand that surprised us and that we were literally being named on all the sides a very conceivable permutation and in order to create teams that could be Chinese Waldorf, we're having to bring another people in and the margin that you get on the people that you bring is clearly not as great as those who work for you. But I think we're actively trying to recruit some of them and some of their colleagues to join us.

Scott Schneeberger - Oppenheimer

Sure. And it sounds like a high class problem. But do you think we'll be seeing this in forward quarters or we get closer to having a remedy?

Jack Dunn

I think, you could see it continue in the first quarter although without a doubt we're working hard to take steps to increase the capacity I think you'll see debate going forward because who have been successful over our efforts in the next quarter -- in the next two quarters to bring in more capacity.

Scott Schneeberger - Oppenheimer

Okay, thanks. Moving over to the Technology Consulting space anyhow it's fairly fragmented we talked earlier about a lot of new entrance there. Could you give us an idea of -- I think, Jack you referred doing the top 200 law firms, how many of competitors are serving them is that very fragmented or it's just a few? And then just kind of high level thoughts on where you see this industry two to three years from now would there be a lot of consolidations and if the few large players are still widely scattered? Thanks.

Jack Dunn

My view is that they are probably 10 people that we watch in the different categories. We very closely watch the top ten list to come out of the surveys that are done continually to suitable litigators like who are they using, who is the installed base in the law firms and I think absolutely you'll see consolidation, you'll see the big enterprise software players want to acquire these firms because they want to get back to the source. But I getting the attorneys and the legal departments they get the entire company for their software suites and that's, what they are after at the end of the day, I believe.

Dennis Shaughnessy

So, it's a gap and which is a -- an industry analyst that track these things and sort of runs the list does have some pretty good research if you want to access to that, if you want to cross offline we can do that and clearly they were the firm that picked us as the top one in all capabilities last year. So, I don't mind giving in our research.

Scott Schneeberger - Oppenheimer

Okay, thanks. I appreciate that. One final one if I can, obviously it was in the third quarter and I imagine you do it again, but and I think I read that infrastructure and branding spending something that you've been pushing on obviously a great global operation you've. How aggressive it going to be in '08. Can you talk about what percentage of?

Dennis Shaughnessy

It's Dennis again. I think that we will continue to do that and I think that what you'll see is that the overall percentage of SG&A as a percentage of revenues will decline slightly. The actual spend on marketing brand building as a percentage of revenues will be pretty constant. So, we will increase in absolute dollar stay about constant level for this year.

We just think it's very important especially building this platform overseas that we continue to drive home the capabilities of the brand, the depth of the brand, and the reach of the brand. And so we can't back offer, although we know we've got to keep the expense basically within the same proportions that have we experienced last year.

Scott Schneeberger - Oppenheimer

Great, thanks very much.

Jack Dunn

Thank you.

Operator

And we'll take our next question from Timothy Mchugh of William Blair and Company.

Timothy Mchugh - William Blair & Company

Yes, Dunn, just want to ask about the unannounced, uncompleted acquisition at this point. Can you give us an idea what segments you'd hope to complete those and as we complete our models as well as annual EPS accretion you mentioned from acquisitions. How much of that would be from stuff not completed.

Jack Dunn

Well, I think what we -- we really can't disclose those for obvious reasons and we only really have about four weeks left in the quarter. So, we expect to get these things done in a pretty timely manner. I think the numbers (inaudible) and talk about right now is the per share numbers that we disclose that would be what this year after the amortization would contribute and that's in that $0.14 type of range we talked about.

After that amortization burns off, then we will be looking for more of $0.40 annualized, I think, I'm not trying to be sort of cute, but I think really we'll put out a lot more information on them in the next four weeks, as you see us making these announcements and I think we just be unfair to the company to be maybe shed some light one them, when the deals aren't 100% finished yet.

Timothy Mchugh - William Blair & Company

Okay. And then looking at the margin expansion embedded in your guidance you mentioned SG&A likely so that implies some nice improvement in the gross margins next year. What's driving that, it's a utilization improvement, a revenue mix shift, any comments there will be helpful?

Jorge Celaya

Could you repeat the question?

Jack Dunn

Give a break enough a little bit, I'm sorry.

Timothy Mchugh - William Blair & Company

Oh I'm sorry. EBITDA margin expansion that is embedded in your guidance is pretty nice, you mentioned SG&A would be done slightly, which implies pretty solid gross margin expansion, I was just wondering if you could comment on what you feel the drivers of that?

Jorge Celaya

There is couple of drivers. I think as Dom said, clearly as we anticipate utilization going up in some of the areas, that drives better margin, more profitability. I think the acquisitions that we are acquiring number one in their own right have a higher EBITDA margin right now than we do. And then number two, they are in areas that do not require significant incremental expense to support them.

So, on an operating leverage basis we again, once we get through sort of this artificial write-off of the intangibles we see significant leverage. So, we really come from a combination of controlling the cost on an absolute basis, so that the percentage goes down as the revenues go up and that's a just general SG&A. Number two would be higher utilization in some areas its simply give us higher margins.

And then number three of the $128 odd million of revenue that we're acquiring on an annualized basis, the margins are one higher than ours in the aggregate. And number two the support that we give them given the type of acquisitions they are and how they'll fit into the organization is not significantly incremental.

Dennis Shaughnessy

And it's also we're always looking at ways to reduce cost in the duplications that we've got within the practices, between the practices and corporate etcetera. We got a project going on now that. We hope to eliminate some of the redundancies that there might be in some of the support areas.

Timothy Mchugh - William Blair & and Company

Okay, thank you.

Operator

And we'll take our final question from Dan Suzuki of Merrill Lynch.

Dan Suzuki - Merrill Lynch

Yes. Good afternoon. Just a couple of questions here. I want to better understand the Forensic and Litigation, the slowdown you saw on revenue growth there. I understand in the press release in the prepared remarks you talked about the large amount of options backdated, which you did last year is that -- is there anything else or there any particular segments that you're seeing slowness in?

Jack Dunn

Well, number one the $50, we did about $52 million I think in the fourth quarter of 2006 and that was the record quarter in this company for Forensic and Lit that we had ever had. So, we were lapping the highest quarter we ever had. So, just on a pure comparative basis down it was just a tough quarter to lap. And that was -- it's largely driven by artificial demand from our clients to get the stock option backdating over so they could quantify the hit if any put it in their P&Ls and get their audited reports done.

I think without a doubt, as we've been saying all along, we did not see any huge assignments coming in the first half of the year. We thought it was somewhat of a sluggish year. We're doing all right, low double digit growth. And I think that continued into the third quarter. I think, but for the fourth quarter tough comp it would have been again low double digit growth.

And I think that we're now beginning to see the larger assignments come in although they did have a significant impact on the fourth quarter. These will be foreign corrupt practice cases of which we've gotten quite a few. A lot of those are teamed between the Technology group and the Forensic group. Technology goes first and brings in an awful lot of the information host it, harvesters it, [silos] it, organizes it and then the investigators from FLC get involved and do a lot of the forensic type of investigation.

So, we're seeing a lot of foreign corrupt practices activity and we're beginning to see the beginnings of credit crisis oriented type of work either high stake securities potential litigation, obviously we talked about hedge fund investigations and I think we're starting to feel the pick-up but it wasn't there enough -- the momentum from this it's just beginning and it didn't mature enough in the fourth quarter to overcome a very difficult comp.

Dan Suzuki - Merrill Lynch

Okay, that's very helpful. And then on the Economic Consulting side, just trying to reconcile the lack of capacity you had to fulfill the strong demand you had there with the utilization rate flat year-over-year and down sequentially by 6 percentage points just trying to reconcile?

Jack Dunn

It's a function where our utilization is. So, if you can think of a theoretical case where you bringing an expert, we've our own experts, where we've a whole team of people doing a lot of the work if it's going to mature, so you've to start doing a lot of testifying work, the actual team, so your younger people may have been finishing their work and your utilization might slack off enough. Your experts might have utilization up around 100%, 110%, 120% because that's the time where they really have to get involved in sort of the personnel activity or the interaction between the regulators, the commission over in Brussels, DoJ here or in cases of litigation it could be a corporate.

So, a lot of this is simply how the work flows in the mix, so if we would segment that and break it down you might see some quarters where the experts would have utilization that might be down in the 70%, 60% range and your staff would have utilization up in a 100 and then it could slip the next quarter depending on the maturity of the actual case to where the experts are up in the 100's and the staff back off and I think it was just more of the quarter anomaly where we just literally had to have a lot of people who were 'experts status' where most of the modeling research work had already been done and just I can tell you already it's equilibrated.

Jack Dunn

We also brought in about 10 additional hires in the quarter anytime, it takes a while to...

Dennis Shaughnessy

In the research side yes.

Jack Dunn

Right and that turns right around in the third quarter.

Dennis Shaughnessy

Yeah.

Dan Suzuki - Merrill Lynch

Okay. That makes a lot of sense and then on the communication side of the business, the bonus plans and pardon me if I missed this is that a one time catch up?

Jack Dunn

No it's an annual plan, so the margins that you saw on the fourth quarter were pretty much led on the same margin song third, second and first and that's what we would expect going forward. There was no bonus plan in the stub period that we owned the company in 2006. We put it in for the first full year in 2007 and that plan will stay in as it is, so you would expect to see margins next year the same that you say in the trailing four quarters.

Dan Suzuki - Merrill Lynch

Okay. And then so it's going to be a fourth quarter event if I'm understand …?

Jack Dunn

No.

Dennis Shaughnessy

No, no. Dan that was reflected this year for the full year.

Dan Suzuki - Merrill Lynch

Okay.

Dennis Shaughnessy

Each quarter.

Dan Suzuki - Merrill Lynch

Right that makes a lot of sense. And then one quick question for you guys. The growth rate do you have any idea how FX impacted the growth rate?

Dennis Shaughnessy

Very small, it's going to be very significant.

Dan Suzuki - Merrill Lynch

Okay alright thanks guys.

Operator

And that does conclude the Q&A session. I'd like to turn the call back to over to management for additional or closing remarks.

Jack Dunn

Thank you. Again I'd like to thank everyone for being with us. We want to use this time period to be able to give you some time to adjust for what was fairly full and frank disclosure. All the things we've going on were very optimistic for 2008 and we look forward to speaking with you after our first quarter results if not the fourth. So with that thank you very much we look forward to talking with you.

Operator

And that does conclude today's conference. We do appreciate your participation you may disconnect at this time.

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Source: FTI Consulting, Inc. Q4 2007 Earnings Call Transcript
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