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Executives

Noah Gottdiener – Chairman and Chief Executive Officer

Gerard Creagh – President

Jacob Silverman – Chief Financial Officer

Analysts

William Tanona – Goldman Sachs

Timothy McHugh – William Blair & Company

Roger Freeman – Lehman Brothers

Andrew Fones – UBS

Michael Weisberg - ING Group

Duff & Phelps Corporation (DUF) Q1 2008 Earnings Call May 8, 2008 8:30 AM ET

Operator

Good day ladies and gentlemen. Welcome to the Duff & Phelps Corporation First Quarter 2008 Conference Call. Today’s conference is being recorded. At this time I would like to turn the call over to the Executive Vice President and Chief Financial Officer, Mr. Jacob Silverman.

Jacob Silverman

Thank you. Good morning, and welcome to the conference call to discuss Duff & Phelp’s financial results for the first quarter of 2008.

I am Jake Silverman, Chief Financial Officer of Duff & Phelps. With me on the call today are Noah Gottdiener, CEO and Chairman of the Board, and Gerry Creagh, our President.

Before we begin I would like to point out to all of you that statements in this call may include forward-looking statements as defined in Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Additionally, these statements involve known and unknown risks, uncertainties, and other factors that may cause actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. Therefore, you should not place undue reliance on these forward-looking statements. Please see Risk Factors in our Form 10-K and in other documents we file with the SEC for a complete description of the material risks we face. We do not undertake any obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments, or otherwise.

And now I would like to turn the floor over to Noah.

Noah Gottdiener

Thanks, Jake. It’s a pleasure for me to speak with all of you this morning in our first quarterly earnings call of 2008.

I would like to start today by quickly recapping key highlights of our results. Then I would like to discuss the current state of our business, the current market environment, and discuss key drivers of our growth before turning the floor back over to Jake for more detailed financial analysis.

First, to briefly summarize our top line results, during our first quarter of 2008 revenues increased 20.2% to $93.2 million compared to $77.5 million for the corresponding prior year quarter.

At March 31, 2008, our client service professional head count had increased 33%, to 916 from 691 at March 31 of last year.

As we have said on earlier conference calls, our revenue and head count growth are being driven by broad market trends that continue to increase in importance, especially in light of the current economic environment. In particular, the current volatility in the financial markets underscores the need for greater transparency, the move towards fair value accounting, and demands for independence.

Our financial advisory and investment banking segments offer services that are notable in their breadth and in their independent vantage point. They involve or are related to providing highly complex, highly technical assessments of value to a global and blue chip client base. They all ultimately relate to our mission of protecting, recovering, and maximizing value for our clients.

This mission is critical at all times, but its importance is heightened in today’s markets. And as I have said in the past, we deliver these services as an unconflicted and independent advisor, free of the potential conflicts of having an audit practice or capital markets function. Given the economic times we are facing, this independence is absolutely vital to our clients.

The secular trends we have noted in the past continue to drive our opportunities for growth in the future. These include: first, the global trend of moving towards fair value accounting and financial statements as investors and regulators increasingly see fair value as superior to historical cost figures; second, the increasing importance that companies worldwide are placing on independence of the financial advise that they are receiving; third, the rising demand for greater levels of transparency and how companies across industry sectors and investment firms are valuing their assets and investments; and finally, we believe we are at the start of a sustained up tick in corporate restructurings, distress situations and bale outs as economic and market cycles continue to transitions.

All of these trends have been driving our business and recent volatility has created new opportunities for us. So as we did on our last call, let me address the question that I’m sure remains on your mind: How is the credit and broader market dislocation specifically affecting our business?

Once again, the answer is that key parts of our business are benefiting from this market. Let me give you a few examples. We continue to be hired by multiple global financial institutions to provide individual valuation assessments of certain of their investment portfolios and complex instruments. We are building up our capability in this area to keep up with demand here.

Our transaction opinion business remains strong. We have been hired to provide multiple transaction opinions and related advice with respect to distressed bale out situations in the financial services sector.

Major corporate clients are hiring us to value their investment portfolios, particularly with respect to instruments such as auction-rate securities. Our FAS 142 impairment valuation practice, a key component of our valuation advisory services business, continues to see lift in today’s environment.

And not surprisingly, litigation appears to be increasing, particularly with respect to valuation and liquidity issues. Our disputes consulting business is well positioned to participate in this trend.

Just as importantly, certain of our businesses that some might consider to be correlated to the M&A markets, are performing well in light of the current market environment. Our independent transaction opinions practice has experienced a number of significant wins to date and not just with regards to distressed bale outs. Based on what we’re seeing today, the pace of this business is not subsiding and we believe we continue to gain share here.

Our middle-market sell side M&A practice appears to remain sheltered from the broader dislocation in the M&A and credit markets. Our sell side auctions are generating significant interest from strategic and private equity buyers with financing sources in line to back them.

That said, we are observing that transaction cycles might be lengthening and we would expect to see deferral of some deal closings into the second half of the year. This is one of the reasons, as we have previously indicated, that we expect revenues will be weighted towards the second half of 2008.

Let’s be clear. The decline in broader M&A activity has tempered demand for valuation services related to domestic purchase price allocations. However, demand for valuation of complex securities, portfolio investments, impairment analysis, and general valuation services overseas has offset this tempered demand. We believe this demonstrates the resiliency of our balanced portfolio services.

Our high-growth businesses that are independent of M&A cycles, in particular out portfolio valuation and specialty tax businesses remain on track. In portfolio valuation, our business that performs valuation assignments for private equity funds, hedge funds, and other investment vehicles, our client acquisition and penetration continues at a strong pace. We remain the clear market leader here and the recent market environment has drawn more attention to the need for independent portfolio valuation services.

In specialty tax, the Rash acquisition has provided us the suite of services required to penetrate larger and more complex accounts with regards to property tax services. Newer services such as unclaimed property and sales and use tax are in their early stages but we are excited about their prospects.

And as we have mentioned before, all of these services draw on our core competency in financial analysis and valuation and none of these services are transaction or M&A dependent.

One other notable area that we have been investing in is dispute and legal management consulting. We have strengthened this business by bringing on Bruce Dubinsky as the managing director, along with his team, to lead our practice in the Washington, D.C. metro area. This gives us a presence in an important geographic market and also augments our skill set in the financial services space.

We have also hired two additional managing directors to support the dispute and legal management consulting practice in our Chicago and Boston offices.

Going forward we will build on our broad and well-balanced mix of businesses through organic growth, as well as opportunistic acquisitions that either directly build on, or are highly complimentary to, existing businesses.

Let’s now turn to our international business, which we see as a major growth driver for years to come. The key secular trends of fair value, independence, and transparency are all very relative in non-U.S. markets where we have considerable room to grow.

For the quarter ended March 31, 2008, our international business almost doubled in revenues to $7.9 million, compared to $4.1 million in the year ago quarter. In other words, approximately 25% of our overall growth is being driven from our international operations.

Head count of international client service professionals increased to 101 at March 31, 2008, more than doubling since last year. We are taking advantage of recruiting opportunities to attract great talent in multiple service areas. Notable, during the quarter we recruited nine client service professionals in our Paris office to build the restructuring business there. And since the end of the quarter we have built this restructuring practice to over 20 client service professionals, including three managing directors. As a result, we believe we are well positioned to take advantage of increased financial restructuring opportunities in Europe.

Our team in Tokyo is seeing a strong pipeline of engagements and we are looking to grow that office to support our growth expectations in Japan and Asia more broadly. Along these lines, we have continued our expansion in Asia through the opening of an office in Shanghai. Over time we expect valuation needs with regard to investment in and by Chinese companies to become a meaningful opportunity for us.

No matter where we are on the globe, our fundamental asset is our people. We have great talent across our businesses and we have been effective in adding to this talent on a worldwide basis. We think this speaks to the quality of the Duff & Phelps platform. It’s also worth pointing out that we are retaining talent at the most senior and experienced levels of our organization. Our managing director attrition rate is in the low single digits. Additionally, voluntary turnover across our organization has been slightly below our expectations.

All in all our first quarter and year-to-date activities demonstrate our focus on prudent and balanced growth, domestically and abroad. While the markets are turbulent and not without their challenges, for virtually everyone, we see numerous opportunities to build our business and enhance the platform.

Let me take this opportunity to repeat the long-term financial objectives that we have described in the past, which are: 15%-20% total revenue growth, which is a mix of organic and acquired revenue; 19%-20% adjusted EBITDA margins; and 20% adjusted pro forma EPS growth.

With that, I would like Jake to discuss our financial results in greater detail.

Jacob Silverman

Thanks, Noah.

Today I would like to discuss both company-wide financial results, and then provide additional details on segment-specific performance.

In addition to GAAP metrics I will be discussing non-GAAP measures of our financial results, including adjusted EBITDA and adjusted pro forma net income. We believe these non-GAAP measures, when viewed alongside the GAAP figures we have already provided in our earnings release and disclosed in our 10-K, provide a meaningful means of evaluating our company’s performance.

As Noah mentioned, for our first quarter of 2008, revenues increased 20.2%, to $93.2 million, compared to $77.5 million for the prior year quarter. For the quarter ended March 31, 2008, adjusted EBITDA increased 7.7% to $18.8 million, compared to $17.4 million for the prior year quarter.

Adjusted pro forma net income per share was $0.27 for our first quarter. I would also point out that this includes a non-cash charge associated with revaluation of our interest rate swap. Backing out this charge would result in $0.28 per share.

Let me describe what adjusted EBITDA and adjusted pro forma net income are. Adjusted EBITDA represents earnings before interest, taxes, depreciation, and amortization, and noncontrolling interest as well as the following items: other income; acquisition retention expenses; equity-based compensation associated with the legacy units of Duff & Phelps acquisition LOC; and the grants of options made at the time of our IPO.

Adjusted pro forma net income represents adjusted EBITDA less depreciation and amortization, interest income and expense, other income, and pro forma assumed corporate income tax.

Adjusted pro forma net income per share consists of adjusted pro forma net income divided by the weighted average number of the company’s Class A and Class B shares outstanding as of March 31, 2008, on a fully diluted basis.

I will now talk about segment performance in our balance sheet. In terms of segment performance let’s start with Financial Advisory. For the quarter our Financial Advisory segment reported a 26% increase in revenues to $73.9 million, compared to $58.7 million in the prior year quarter.

Of the overall increase in revenues, approximately ¾ is attributable to a higher number of chargeable hours from the increase in the number of client service professionals and the remainder is attributable to the acquisition of Rash & Associates and improvements in rate per hour.

Because the revenue model for our Financial Advisory segment is largely based on billable time by our client service professionals, two metrics that we believe are helpful in assessing the segment’s performance are rate per hour and utilization. For the quarter the Financial Advisory segment’s rate per hour increased 3.8% to $326, from $314. Utilization was 56.1%, compared to 67.5% in the prior year quarter.

Improvements in rate per hour benefited from a continued change in mix of the services we provide. Our first quarter utilization reflects the absorption of a substantial number of new recruits who came into our organization since last year and during the quarter, particularly overseas. We would not that there can be quarter volatility in both of these metrics and we tend to look at both on a blended annual basis to assess performance.

In our Investment Banking segment, for the quarter we reported a 2.4% increase in revenues to $19.2 million, compared to $18.8 million the prior year quarter.

One essential point that needs to be underscored here, particularly with regard to our Investment Banking segment, Duff & Phelps has an inherently lumpy business model as a result of the impact of success fees. That is why we tend to look at overall annual performance as opposed to quarters to asses key trends in this business.

In addition, we continue to see some softness in our restructuring business, which we believe should start to see lift as the distress cycle continues to mature, which we expect it will. That said, we are optimistic for our longer-term prospects in restructuring globally. As Noah mentioned, we are investing in this business and have built our restructuring practice in Paris by recruiting over 20 client service professionals, including three managing directors.

Our balance sheet is strong, with ample liquidity. Following our IPO we repaid $35 million of our credit facility, with $44 million in total debt now remaining on our balance sheet, or just over half a turn of debt to trailing 12 months adjusted EBITDA. We believe this is an appropriate balance sheet that provides us with flexibility to pursue growth opportunities, including potential acquisitions and lift outs. To the extent that we see opportunities in making acquisitions, you may see our debt levels increase somewhat but we intend to maintain a strong balance sheet.

With regards to share count, we have a two class share structure with Class A shares primarily owned by public investors and Class B shares owned by the original members of Duff & Phelps acquisitions, our operating business, which are exchangeable into Class A shares.

As of today, the total number of Class A shares outstanding is approximately $14.3 million. The total number of basic Class B shares outstanding is approximately $21.1 million. Thus, on a fully-exchanged basis, we have a total or approximately $35.4 million shares outstanding. Note that approximately $1.1 million of the Class A shares are in the form of restricted stock awards, which are subject to vesting and will not appear in our share count until vested for purposes of calculating basic earnings per share.

In conclusion, I would like to remind you that Duff & Phelps provides annual guidance only at the beginning of each year, as we did this past March. We believe that we are well positioned to continue our record of balanced revenue and earnings growth over the long term.

And with that, I will turn the floor back over to Noah.

Noah Gottdiener

Thanks, Jay.

In summary, we are pleased with the overall growth of our business across services and geographies in the first quarter.

This concludes our prepared remarks. In addition to myself and Jake, our President, Gerry Creagh, will now be available to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Tanona with Goldman Sachs.

William Tanona – Goldman Sachs

I have a couple of questions. I guess, just given some of your commentary in terms of somewhat optimistic about the future prospects of your business, I wanted to just kind of understand that within the context of the investment banking revenue line item. Because obviously, as you guys have mentioned, it is somewhat lumpy and to correlate it with some of the comments you have made in terms of expecting the back half of the year to be stronger than the first half of the year, wanted to know, I guess, whether or not that would still be the case within the investment banking business, just given what we’re seeing in the marketplace in terms of the lack of kind of announced activity. I know you guys kind of operate in a different segment, but just wanted to make sure I understood that from an investment banking perspective.

Noah Gottdiener

Sure. I would say we continue to see good activity in our M&A business, which is focused on the lower middle-market, as you know, Bill. We’re very pleased with the quality and the quantity of business that we have there. As we look at the business, we can see where things are going to close and it’s clear to us that we’re going to have more closings in the second half than the first half. So that’s part of what is going on there.

Our transaction opinion business remains very strong. And our restructuring business, which is also part of that segment, we’re very pleased with the capabilities. The inquiries continue to increase, the activity hasn’t picked up for us yet, but we expect it to pick up as the credit cycle and restructuring cycle matures.

Is that responsive to your question?

William Tanona – Goldman Sachs

Yes, it’s very helpful. And then moving on to the financial advisory business, obviously we saw significant growth in head count there. Could you kind of break that down? I know you did a little bit, but in terms of where that head count growth was specifically coming from in terms of the acquisitions and some of the product and regions.

And then I guess the second part of the question would be can you help us understand how we should be thinking about the utilization rate and the hourly rate as it pertains to that type of growth, because it’s difficult for us to understand exactly who those advisors may be and what change it may have in terms of utilization and hourly rates.

Gerard Creagh

In terms of head count additions, we are seeing it across a number of areas. Obviously, international where we’re bringing in people as well as in tax, and in the restructuring practice that we just formed in Paris. So they were the three major areas generally that we’re seeing additions of people.

But we brought in 80 something people in the first quarter and so they are obviously investments in the business and we will expect to see the benefits of those investments in future periods.

Does that answer your question on head count?

William Tanona – Goldman Sachs

Yes, it does. And just in terms of understanding how that may impact the hourly rate and utilization rate?

Gerard Creagh

Well, let’s talk about the utilization rate first. We have talked about a target in the low 70s for utilization. Obviously, the model is to push people across the services. They have similar backgrounds, we can utilize them in multiple areas, we are always managing the number of people that we have. Again, long-term objective of low 70s. So we still have that target of low 70s, we’re making investments in certain areas of our practice that we believe have growth opportunities.

But the other side of it is we are still seeing a growth in rate per hour. We’ve talked about it being in the mid-to-low single digits and we continue to see an expansion of that rate based upon mixes of services. The service mix has changed in the last two years and so we’re benefiting through that rate and these mix of services. So that will continue to evolve, as the mix of services change.

William Tanona – Goldman Sachs

I guess just in terms of understanding where you want to be in terms of head count, obviously you guys are growing very fast in a lot of areas. When you look at your head count just in the last three quarters it’s up over 200 people in that business. At what point do you feel that you’ve kind of reached your capacity or is it something where you could still continue to see this level of head count growth for the foreseeable future?

Gerard Creagh

The way we look at it, we would like to long term be thinking about head count expansion of maybe 80% or thereabouts of growth rate. So as we see a lot of growth opportunity throughout the world we will continue to expand our head count in accordance with those growth opportunities. So we don’t see any significant changes.

Noah Gottdiener

I would add if you think about our long-term growth goals, approximately 15% organic growth, which could be enhanced through acquisitions, part of that is going to obviously come from head count. I would say roughly about 2/3 of that would come from head count and 1/3 of that growth would come from productivity and pricing increases. So you’re going to continue to see that kind of head count grow, in line with our growth goals.

Operator

Your next question comes from Tim McHugh with William Blair & Company.

Timothy McHugh – William Blair & Company

I wanted to ask about restructuring. You mentioned you haven’t seen a pick up there yet, but you’re seeing some inquiries. I want to get your feel on why it’s just inquiries at this point? We’ve seen that business pick up at some other companies. Wondering if you guys feel good about your competitive wins there or if there’s anything else going on.

Noah Gottdiener

Let me give you a little more flavor there. The restructuring business that we currently have is focused on credit or representation. And that business will generally see benefit a little bit later on in the cycle as you have more traditional filings take place and in-court restructurings take place. So we expect to see the lift in that business as the cycle matures a bit.

Having said that, we’ve just made an investment in restructuring business in Paris, which we described, which is focused more on working with companies and debtors as they begin to get into trouble. It’s more focused on working capital management and cash assessment needs and so the mix of our restructuring business as a result of that is being pushed into the earlier part of the cycle, which is an important focus of ours.

So that gives you a little more sense of the complexion of our overall restructuring business, which is morphic.

Timothy McHugh – William Blair & Company

The next thing I wanted to ask you, there’s been some talk that the credit crisis may be calming down a little bit, or at least relative to where we were earlier this year. As that happens, if that is the case, what’s your view of the sustainability of some of the work that you’ve gotten, for instance being pulled into corporations to value auction-rate securities. Do you see that as ongoing at this point and a new level of service that they’re going to look for, or do you see that winding down at some point?

Noah Gottdiener

I would say that everything that we’ve experienced in this credit cycle has heightened the sensitivity of investors, corporations, and boards around a lot of the valuation issues, relating to what they have on their books, investments, assets, etc. I don’t see that sensitivity being reduced significantly.

But again, I will tell you that our business is at this point a very balanced business. It did very well during a very robust period predating the credit cycle, it’s doing very well during this credit crunch, so we’ve got great balance in our business that will see us through different types of economic cycles, which is what we’ve been very focused on, the management team, in terms of creating strategically on the balance of this business.

Timothy McHugh – William Blair & Company

And then a few quick number ones for Jake. First, just to be clear, are you then reiterating the revenue and EPS guidance that you provided before, as well as then do you have the ending cash balance and the cash flow for the quarter?

Jacob Silverman

With regard to guidance, Tim, as we said, we provided guidance earlier in the year during our March conference call and our policy is not to reiterate guidance. We gave it to you at the beginning of the year and we’re focused on asking investors to focus on our delivered results throughout the year.

Noah Gottdiener

And I would just underscore here, I would ask you to measure us on what we deliver to you in our performance. And that’s going to be our focus.

Jacob Silverman

With regard to cash, Tim, again you’ll see this all in the Q, but March 31 cash was just over $28 million and that reflects the payment of 2007 bonuses, which actually happens in Q1 of the subsequent year.

Operator

Your next question comes from Roger Freeman with Lehman Brothers.

Roger Freeman – Lehman Brothers

I guess first, on the restructuring opportunity, I thought your comments were interesting about where you play in the cycle, but you’re moving up closer to the early sort of stage with your investment in Paris. What was it about the Paris opportunity, and presumably that business, there’s real opportunities in the U.S. as well, I’m curious why you picked Europe?

Noah Gottdiener

A couple of things. We are generally, with regard to our European strategy, looking for an opportunity to introduce all of our U.S. services where appropriate into our European locations. So I would start off with that.

Second of all, there are clearly restructuring opportunities in Europe that we’re seeing and we’re going to be opportunistic about this. This was a great opportunity to recruit a group of 20 people who are very well known in this area. It’s just a fantastic opportunity for us and we took it. And we’ll do that all day long.

Roger Freeman – Lehman Brothers

This is a team lift out of another company that you were able to . . .

Noah Gottdiener

I would describe it as recruiting opportunity.

Roger Freeman – Lehman Brothers

In terms of your comments on the difficult of valuing securities, could you provide a little more color on that? And I guess the types I’m looking for are which securities do you think you have real expertise on at this point? You mentioned auction rate, what about some of the REIS securities, CDOs, ADS, commercial? Who are you doing this for, is it more for companies, corporations, or is it hedge funds, other financial services firms?

Noah Gottdiener

It’s first of all, in terms of securities, we have deep expertise, at this point, around pretty much most of the complex securities that you’ll read about. So whether it be all the sort of disruptured housing product, CDOs, CDO squared, auction-rate securities, just about everything, we can value. We believe we are the largest valuation firm in the world and so we are going to have capability around all these types of securities.

We’re beginning to do this work for all sorts of companies, financial services companies, banks out of Europe, out of Asia. We’re doing it for corporate accounts. Corporations are coming to us saying they thought they had cash on their balance sheet but apparently they have something else on their balance sheet. Can we tell them what it is and what it’s worth. So the demand and the need for this are very broad, wide-spread geographically across different types of securities, across different types of industry sectors.

Roger Freeman – Lehman Brothers

How many people are involved at this point in that part of the business?

Noah Gottdiener

We draw on a lot of capabilities here so I would hate to put a number and say there are exactly this many people doing it because we are bringing our portfolio valuation people up to speed. We have a core group of financial engineering people who are what we consider quants in this area. I can’t put an exact number on that.

Roger Freeman – Lehman Brothers

Maybe I should have phrased it more specifically. How active have you been in hiring for these capabilities, because they are very specialized. I’m assuming you’ve had to go to some of the large broker/dealers to get some of that expertise.

Gerard Creagh

We’ve been recruiting very actively in this area, as you know. These people can sometimes be difficult to find but we believe that we have a great platform for them and so we’ve had a number of people join us in the last six months. So we continue to build out that area. We want to build it out locally.

Roger Freeman – Lehman Brothers

Do you consider this to be any kind of meaningful contribution yet, or is it still pretty small?

Gerard Creagh

It’s a meaningful contribution.

Roger Freeman – Lehman Brothers

The hours, is there any impact there from all the hiring? I think normally it should go up sequentially, right? Because of fewer vacation days in the first quarter? It’s down quite a bit over the year-ago quarter. Is there any noise in that?

Jacob Silverman

Chartable hours increased year-over-year, as we described, meaningfully because of new capacity that we’ve added. And with regard to Q1 versus Q4, I think maybe just review your question there.

Roger Freeman – Lehman Brothers

Maybe I’m looking at the wrong numbers. I thought your hours were down from Q1 2007, 439 versus 477. On a per person basis.

Jacob Silverman

I’m not sure. I’ll circle back with you on that.

Roger Freeman – Lehman Brothers

And on utilization lastly. I guess if you adjusted for the impact of the heavy hiring, what do you think that is really running at? I guess, say, in the core business?

Jacob Silverman

We can’t comment on that, but what I can say is that the impact of, particularly our international business, is contributing to that slightly lower utilization.

Operator

Your next question comes from Andrew Fones with UBS.

Andrew Fones – UBS

Could I get organic growth for the quarter, please?

Noah Gottdiener

Sure, organic growth for the quarter, Andrew, was about 18%.

Andrew Fones – UBS

And I think it was just the Rash acquisition that you’re exerting there, is that correct?

Noah Gottdiener

That’s correct.

Andrew Fones – UBS

And then to follow on from Tim’s question on the restructuring business. Can you kind of talk about which verticals you feel you have the greatest strength in and then if there’s any verticals you’re perhaps looking to acquire within to kind of build out your capabilities?

Noah Gottdiener

I would say that in terms of industry verticals, we’re pretty broad-based. And have good capabilities across different industry sectors in the economy. What we’re really trying to do is broaden out where we play in the cycle, what constituents we play with in restructuring. So, we have a very powerful group work that has traditionally worked on the creditors’ side, now we’re introducing some capability around working capital management on the debtor side and there are other areas within restructuring that could make sense for us that we will look at.

Andrew Fones – UBS

And obviously you’ve got quite a nice portfolio, in terms of different businesses you have. To help understand that could you perhaps give us your top three businesses in terms of growth year-over-year in this period, and perhaps the three that are kind of seeing the slowest growth at this point?

Noah Gottdiener

I guess what I’ll say here is some of the areas we’re really seeing some very exciting growth in would be our portfolio valuation business, our financial engineering business, which is the complex securities business, our specialty tax business, our dispute consulting business, our transaction opinion business, which has been extremely strong, and then international, generally. Those are the businesses that are giving us probably the extra lift.

Andrew Fones – UBS

And then just kind of to finish off, in terms of the investments you’ve been making in the tax business, just if you could kind of update us on how things are going there. And how you view that business in terms of any kind of economic impacts.

Noah Gottdiener

We obviously made an acquisition of Rash. We have been very pleased with what Rash has been able to do for us in terms of the property tax marketplace. We have expanded and recruited a number of entities in other specialty tax areas. We think we have an opportunity to substantially grow out that business and so we see a lot of near- and long-term opportunity there.

So, we’ve made a number of investments there and we’re still in the early stages of seeing the benefit of those investments. But clearly, where we have made investments over the last year we have seen a lot of growth coming from that practice.

Andrew Fones – UBS

And I think you’ve recently kind of introduced a new strategic tax group. Could you give us some details on that?

Noah Gottdiener

Yes, in terms of helping clients that are in the process of making large capital expenditures, helping them in the area of property tax, sales tax, helping them manage the tax within the supply chains. And so this is a practice we’ve just brought in a couple of MDs, we are growing out that practice. These are services that our clients need, these are services that we don’t believe are appropriately being addressed in the marketplace and we think that there is a lot of opportunity and we’re seeing a lot of activity in terms of fixes right now.

Operator

Your last question comes from Michael Weisberg with ING.

Michael Weisberg - ING Group

Would you just help us a little bit on guidance. Everyone’s new to this process with you. Is it your intent not to change guidance for the year, or if it was running above or below expectation would you make changes in the annual guidance?

Noah Gottdiener

That’s a good way of phrasing it. We’ll make a difference whether business is running above or below expectations. So we’re giving guidance once at the beginning of the year. That’s our policy.

Michael Weisberg - ING Group

I would say that again. So that guidance won’t change irrespective of how business is going?

Noah Gottdiener

Well, it won’t change because we’re only giving it once. At the beginning of the year, for the year.

Michael Weisberg - ING Group

So, irrespective of the near-term business, you’re not going to change your guidance?

Noah Gottdiener

That’s right. Irrespective of whatever direction, we’re not changing our guidance. That’s the guidance we gave you at the beginning of the year. That’s our policy and we really want to focus you all on measuring us by what we deliver as opposed to what we jaw about here.

Michael Weisberg - ING Group

Is the [Dubinsky] company a company you bought in the quarter?

Jacob Silverman

We brought on Bruce and team subsequent to the quarter end.

Michael Weisberg - ING Group

And what business was that?

Noah Gottdiener

That business is in our dispute consulting practice. So the team brings real commercial litigation, that’s important skills. Expert witness testimony forensics. Evaluation support, etc. And we’re very excited about that practice becoming part of ours.

Michael Weisberg - ING Group

Where are they based?

Noah Gottdiener

They are based in Bethesda, right outside of Washington, and it [inaudible] for us in that marketplace, which is the market that we wanted to enter.

Michael Weisberg - ING Group

Maybe you could tell us how many people are involved?

Noah Gottdiener

It’s a small, again, terms were not disclosed. It’s less than 10 people.

Michael Weisberg - ING Group

The operating margin declined year-to-year in the financial advisory business. Was that totally a function of the lower utilization because of the people you brought on?

Noah Gottdiener

It’s really a function of, our operating income is a function of allocation of our overall corporate SG&A, and I think what you will see is on a year-over-year basis, Q1 versus Q1 last year, our EBITDA margin declined from just over 22% to just over 20%. I would say that that 2% decline, that 22% last year was not indicative, as we said, of sort of future operating margins. At least in the near-to-medium term. Our focus is on maintaining a 19%-20% adjusted EBITDA margin going forward.

Again, that reflects our investments, to build up our infrastructure globally, as well as our investments to support our infrastructure to be a public company.

Gerard Creagh

And that’s nothing new there, either.

Noah Gottdiener

That’s right. I think that this 20% or thereabouts margin that we posted in Q1 is consistent with last year’s margin, last year’s full-year margin.

Michael Weisberg - ING Group

And that’s the way we should look at that.

Noah Gottdiener

That’s right.

Michael Weisberg - ING Group

Your comments, I took to mean that the investment banking business, the rate of growth on the year-to-year basis should accelerate in the second half from the level of the first quarter. Is that fair?

Noah Gottdiener

That would be fair. But again, we think of that business in terms of annual trends.

Michael Weisberg - ING Group

The reason I ask is that from our perspective we were looking at more of a high single digit year-to-year growth and the first quarter was a bit below that and I think you have some explanation, so that’s why I was wondering. I thought about a high single digit year-to-year growth in that business would be legitimate.

Noah Gottdiener

I appreciate how you’re parsing the question, Michael, but we’re not providing that kind of disclosure. You know, again, we don’t provide quarterly guidance. There is going to be some back half waiting but part of the reason is that we have visibility where we see M&A closings and there will be more closings in the second half than in the first half.

And while I’m on the subject, the other reason there’s some back half waiting is we’re in a growth mode generally as a company, we’ve added a number of managing directors that will, as they come on steam, they will add to our revenues. And we generally see a fourth quarter effect in our business.

Michael Weisberg - ING Group

One should expect revenues per professional to improve on a year-to-year basis as you assimilate some of the new hires in the first quarter?

Noah Gottdiener

Yes.

Operator

We will take a follow up question from William Tanona.

William Tanona – Goldman Sachs

I guess as I think about you doing a lot more of the portfolio valuation work, particularly with some of these securities that have been in the news, what has been the reaction of the valuation assessment that you’re providing to these companies and how do those valuations compare to what they may be having it on the books for versus what your valuation versus what might be the market valuation of those securities?

Gerard Creagh

There’s obviously a lot of situations where we’re valuing securities and in certain cases we re below what is on the books and they are working with their auditors to make a decision as to what they need to do relative to impairment charges. But it runs the full gamut of different situations, different clients, and so it’s hard for us to comment on exactly an individual situation.

But we are doing a lot of this. We saw in the first quarter a number of companies come to us that needed help with auction-rate securities. So we’re starting to see more and more companies recognize that this is something they don’t want to do in-house. This is something they want an independent advisor, they need assistance. They ultimately have to work with their auditors to reach a conclusion as to what is the value on their books. But they are getting much more comfortable, especially with increased board sensitivity, around using outside advisors. So we expect that trend to continue in the future.

Noah Gottdiener

And their auditors are also getting more comfortable with when their clients use a credible player like ourselves to help them assess this stuff.

Operator

We will take a follow up question from Roger Freeman.

Roger Freeman – Lehman Brothers

Just one question. Fair value accounting, there’s been some discussion over the past several weeks around the SEC’s intention with respect to FAS 157 and rolling back any of the provisions there. Do you have any thoughts on that? Any discussions you’ve had with them, do you expect any change in tone?

Noah Gottdiener

No, we haven’t detected any change in tone. Obviously there is a lot of scrutiny in the marketplace, to increase the level of transparencies. And we all know that there’s been a lot of debate around fair value accounting. But that said, the capital markets are demanding disclosure. They are demanding transparency. These are, in many respects, very complex securities people do not understand so we think that the push towards enactment of 157, fair value accounting adoption, early adoption, is there. So we don’t see any slow down in that movement towards companies adopting fair value accounting.

Operator

And we have a follow up question from Tim McHugh.

Timothy McHugh – William Blair & Company

Just one other question. Your comments about potential pushing back some transactions into your M&A pipeline to the second half of the year. Is that observation any different from the trends you were seeing when we talked about a month ago on your fourth quarter conference call? I guess have things slowed down more since then, or is that consistent with the view as you kind of walked into the year here?

Noah Gottdiener

I would say that it does not really reflect a slow down. It’s consistent with our views when we spoke last time. It’s really the timing of when deals have gone to market and when we would expect them to close. It’s purely looking at our deals, when they’ve gone to market, when we would expect closings to take place, and mapping that out.

Jacob Silverman

And Tim, just to sort of reiterate, the sort of second half waiting that we described on this call is consistent with what we described in mid-March with that investor presentation we filed via 8-K. So that perspective has not changed.

Operator

There are no further questions. I would like to turn the call back over to Noah Gottdiener for any closing or additional remarks.

Noah Gottdiener

Thanks everyone. I’m sure we’ll be speaking to you.

Operator

That does conclude our conference for today.

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Source: Duff & Phelps Corporation Q1 2008 Earnings Call Transcript
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