Resources Connection, Inc. F1Q09 (Qtr End 08/31/08) Earnings Call Transcript

Oct. 2.08 | About: Resources Connection, (RECN)

Resources Connection, Inc. (NASDAQ:RECN)

F1Q09 Earnings Call

October 2, 2008 5:00 pm ET

Executives

Kate Duchene - CLO

Thomas Christopoul – Chief Executive Officer

Nate Franke – Chief Financial Officer

Anthony Cherbak – Executive Vice President, Operations

Analysts

Mark Marcon – Robert W. Baird & Co.

Andrew Steinerman – JP Morgan

Gary Bisbee – Barkley’s Capital

Michel Morin – Merrill Lynch

T.C. Robillard – Banc of America Securities

Analyst for Paul Ginocchio – Deutsche Bank

Kevin McVeigh – Credit Suisse

James Janesky - Stifel Nicolaus

Scott Schneeberger - Oppenheimer & Co.

Operator

Welcome to the Resources Global Professional first quarter fiscal year 2009 earnings results conference call. (Operator Instructions) At this time, for opening remarks and introductions I’ll turn the call over to Kate Duchene.

Kate Duchene

Joining me are Thomas Christopoul, our Chief Executive Officer; Tony Cherbak, our Executive Vice President of Operations and Nate Franke, our Chief Financial Officer. Tom will speak first about the quarter's results, followed by Nate who will discuss the financial details and then Tony will conclude the call.

During this call we will be providing you with comments on our results for the first quarter of fiscal year 2009. By now you should have a copy of today's press release. If you need a copy and are unable to access it via our website, please call Patricia Marquez at 714-430-6314 and she will be happy to fax a copy to you.

Before introducing Tom, I would like to read an important announcement about certain statements that we may make during this call; specifically, we may make forward-looking statements. In other words, statements regarding future events or future financial performance of the company.

We wish to caution you that such statements are just predictions and actual events or results may differ materially. We refer you to our 10-K report for the year ended May 31, 2008 for a discussion of some of the risks, uncertainties and other factors, such as seasonal and economic conditions that may cause our business, results of operations and financial condition to differ materially from results of operations and financial conditions, expressed or implied, by forward-looking statements made during this call.

I'll now turn the call over to Tom Christopoul, our Chief Executive Officer, to give an overview of the first quarter.

Thomas Christopoul

Before we begin let me just address the fact that Don Murray is not joining us on this call today. Don is recovering from a medical procedure he had last week. He is quite fine and recovering well and will actually be home here in Southern California with us tomorrow.

Now on to the quarter. Total revenues for the first quarter of fiscal 2009 were $207 million, up 7% over the first quarter a year ago. Net earnings were $12.5 million or $0.27 per share, a 17% improvement over the $0.23 per share we reported a year ago.

Fiscal 2009 began like a continuation of our strong fourth quarter in 2008 with revenue averaging $16.5 million per week for the first six weeks of this quarter. However, over the last half of the quarter revenues decelerated to an average of $15.3 million per week as the summer vacation season for our clients and consultants kicked in for the year.

Over the course of the quarter 15 new offices hit new weekly revenue highs; 9 internationally and six domestically. As you know, historically our first quarter is our seasonally weakest due primarily to summer vacations in both the U.S. and Europe and to a lesser extent in Asia. Vacation hours in our first quarter increased approximately 10% over the comparable period last year.

First quarter gross margin increased 110 basis points to 39% compared to 37.9% a year ago. This margin improvement offset the impact of the revenue shortfall in our earnings for the quarter. Last year we told investors that improving gross margin was one of our most important operational initiatives and that all our managing directors and client service personnel were focused on it.

Throughout fiscal 2008 we worked hard to secure reasonable bill rate increases from our clients on existing projects and negotiate fees commensurate with the value we were delivering on new projects. These efforts have obviously paid off and we are very pleased to see gross margins in our first quarter much more closely resembling those we have enjoyed historically.

We have also worked very hard over the last several quarters to reduce nonessential SG&A. We are happy to report that SG&A in the first quarter of fiscal 2009 was well within our third and fourth quarters of fiscal 2008 and also consistent with our plan to tightly control SG&A spend especially in this current environment.

Nate will give you more details on gross margin and SG&A in his finance report in a few moments.

As we head into our second quarter and obviously the balance of fiscal 2009 it appears we, like everyone else, will continue to encounter a very challenging economic environment with exceptional volatility in the world financial markets. Obviously 18 months ago it would be impossible to predict the failure of Bear Stearns and Lehman Brothers, the failure of Merrill Lynch or the federal bail out of Freddie or Fannie, the toll of the credit crisis in the U.S. along with the recent economic contraction in Europe and Asia has caused many global companies to rethink their capital budgets and obviously plan more conservatively.

We are not immune to the effects of this cautionary approach in current operations as post Labor Day revenues have not rebounded as much as I would have liked. Revenues for the first four weeks of our second quarter, this current quarter which included the Labor Day holiday, totaled about $60 million, down about 2.5% from the first four weeks of the comparable period a year ago.

We have got $60 million for this fiscal year and beyond [audio breaks up]. Many of our clients will need help in navigating the new regulations and multiple industry consolidations that are likely to come in response to the credit crisis and we will be able to help many of those clients restructure and reorganize their businesses. While we believe the enormous change taking place in the global capital market will present many new opportunities for us going forward the timing of those opportunities is much less certain as these companies and our clients try to determine their way forward in this tumultuous business environment.

In any event, as you know our business model which is designed such that approximately 70% of our cash costs are variable will allow us to navigate profitably even in this incredibly tough business climate.

In addition to our continued focus on gross margin and SG&A spend, we are fine-tuning other aspects of our business like how we position our services within our clients, improving operations in markets that have greater potential than what is currently being recognized and importantly developing our readiness for emerging business opportunities like regulatory compliance and the establishment and promulgation of IFRS.

In short, we will continue to focus on our clients and consultants, those things we can control, and not be distracted by events that are occurring in the global economy. After my first four months as CEO I have had the opportunity to spend time with many of our offices domestically and internationally, our employees and executives and most importantly our consultants. I’m actually more encouraged today even given the global environment than I was here on day one. We clearly have the right business model and the right talent for continued growth in this market.

I’ll now turn the call over to Nate for a detailed review of our financial information.

Nate Franke

Revenues for the quarter grew 7% to $207.3 million versus $194.1 million in the comparable quarter a year ago. Generally we will not provide sequential comparisons today as the fourth quarter of fiscal 2008 included 14 weeks versus the 13 weeks that will comprise each quarter of fiscal 2009. Thus, making sequential comparisons to Q4 of limited use.

Now let me discuss revenue geographically. For the first quarter revenues in the U.S. were essentially flat quarter-over-quarter. For the first quarter total revenues internationally were $61.1 million versus $48.3 million a year ago, up 26.5% year-over-year. International revenue accounted for almost 30% of total revenues for the quarter versus 29% last quarter.

Europe’s first quarter revenues were up 27% quarter-over-quarter while the Asia Pacific region saw first quarter revenues up 31% quarter-over-quarter. Total revenues for the Netherlands practice in Q1 excluding Domenica were $17.9 million, up 9% quarter-over-quarter. U.K. revenues including Resources Solutions were flat quarter-over-quarter. Domenica’s revenues during the first quarter were $5.3 million.

As you are aware, during our first quarter of 2009 the U.S. dollar strengthened against several foreign currencies. However, on a quarter-over-quarter basis the U.S. dollar weakened and as a result on a constant currency basis international revenues would have been lower by about $4.4 million in the first quarter using the comparable fiscal 2008 conversion rates.

On a constant currency basis and excluding acquired businesses revenue in the quarter, international revenue grew 6.4% quarter-over-quarter.

Let me now give you some information about revenue trends for the first quarter fiscal 2009. The first week of fiscal 2009 included the Labor Holiday and revenue totaled $13.4 million. Weekly revenues for the next three weeks of the quarter were $15.5 million, $15.1 million and $15.8 million. Using the most recent weekly run rate over the remaining weeks of the first quarter and adjusting for the Thanksgiving holidays and certain other international holidays we would achieve second quarter revenues of approximately $197 million. Consistent with our historical practice, this computation is purely mathematical and does not consider increases or decreases in weekly run rates over the balance of the quarter.

Historically, our weekly run rates in the second quarter have increased over the latter part of the quarter due to increased demand from many of our clients as they approach their fiscal year end in December.

Now let me discuss gross margins. Gross margin for the first quarter was 39% compared to 37.9% a year ago, 110 basis point improvement. Excluding reimbursable expenses, our first quarter gross margin was 40% which compares to 38.7% in the first quarter a year ago. The quarter-over-quarter improvement stems primarily from the continued improvement in bill versus pay ratios. The average billing rate for the first quarter was approximately $138 and represents a 10.4% increase from approximately $125 a year ago. The average pay rate for the first quarter was approximately $70 per hour which represents a 9.4% increase from approximately $64 a year ago. On a sequential basis our first quarter gross margin was slightly less than the 39.4% experienced in the fourth quarter of fiscal 2008 due to the diminished leverage of certain benefits earned by the consultants over the lower revenue base experienced in Q1 which was offset in part by the improved bill pay rate spread.

Gross margin in the U.S. was 40.6% and our international gross margin was 36.7%.

Now to headcount. For the first quarter average consultant FTE count was 3,087. This compares to 3,220 in the previous quarter and 3,110 in the year-ago quarter. Quarter end consultant headcount was 3,166 versus 3,206 a year ago. The total headcount of the company was 4,042 at quarter end.

Now to the other components of our first quarter results. Total selling and general administration expenses including stock compensation for the first quarter were $56.5 million or 27.3% of revenue; the same percentage as the first quarter of fiscal 2008. In last year’s first quarter total SG&A expenses were $53 million. Total SG&A expenses were $61.8 million in the fourth quarter of fiscal 2008 or 26.1% of revenue. As a percentage of revenue our SG&A expense leverage was less than that achieved during the fourth quarter of fiscal 2008 primarily due to the loss of leverage provided by the extra week in Q4.

In comparison to our third quarter of fiscal 2008, which provides a better comparison our SG&A leverage improved 100 basis points. This improvement comes primarily from spreading our SG&A expenses over an increased revenue base as well as a decrease in stock compensation expense and a reduction in certain non-essential business expenses during the quarter.

Stock compensation expense was $5 million or 2.4% of revenue versus $6 million or 3.1% of revenue in the first quarter of fiscal 2008. At the end of the first quarter our office count remains at 89; 56 domestic and 33 international.

Depreciation and amortization was $2.7 million for the quarter, up about $2.1 million over last year’s first quarter as the result of our increased asset base. Based upon our current asset base we would expect similar levels of depreciation and amortization in the upcoming quarters. Interest income decreased by about $2 million to $516,000 in the first quarter versus $2.5 million a year ago. Interest income decreased primarily due to lower cash available for investment after the dividend payment, stock repurchases and our two acquisitions in fiscal 2008 as well as lower average interest rates earned on our invested cash in the first quarter of fiscal 2009. We would expect interest income to decline in the current quarter in light of the current interest rates associated with short-term U.S. Treasury instruments.

Our adjusted EBITDA or cash flow margin we defined as EBITDA before stock compensation expense was 14.1% in the first quarter compared to 13.6% a year ago and to 15.4% in the fourth quarter of fiscal 2008. Earnings for the quarter including stock compensation expense were $12.5 million or $0.27 on a diluted per share basis versus $11.6 million or $0.23 per share a year ago.

In the first quarter the non-cash pretax charge for stock compensation was $5 million or about $0.08 per share versus about $6 million or $0.08 [sic] in the comparable quarter a year ago. As we have discussed the past treatment of our incentive stock options under FASB statement 123R will likely cause continued volatility in our GAAP tax expense. The tax benefit for incentive stock options gets allocated to the balance sheet as paid in capital or to the income statement as ISO’s are exercised and sold on the date the ISO vested. Therefore, we receive no income statement benefit for a portion of the ISO’s exercised in any given period.

During our first quarter we experienced a slight increase in the number backed ISO’s exercised thereby increasing the tax benefit related to ISO’s for which we reported compensation expense of $1.3 million. As a result, our GAAP tax rate was 43.5% for the quarter versus 44.5% in the comparable quarter a year ago. On a cash basis we will get a real tax deduction for all ISO’s when they are exercised and ultimately sold. Our tax rate before the impact of stock compensation expense was approximately 40.5% for the first quarter.

Now let me turn to our balance sheet. Cash and investments at the end of the first quarter were about $121.7 million, a $14.9 million increase from fiscal 2008 year-end. As Tony will discuss further we did not repurchase shares during the quarter. During the first quarter we generated $10.1 million in cash flow from operations. Our shares outstanding at the end of the first quarter were approximately 45.2 million.

Receivables at quarter end were $117 million, down by about $9.7 million from the previous quarter. Days of revenue outstanding were approximately 49 days, up one day from the prior year’s comparable quarter but one day lower than the fourth quarter of fiscal 2008.

Now let me turn the call over to Tony for some additional comments.

Anthony Cherbak

I’d like to start out with a quick update on international financial reporting standards for IFRS. As you have all read by now on August 27, 2008 the Securities and Exchange Commission published a road map that could lead to the use of international reporting standards by U.S. public companies beginning in 2014. Under the proposal, certain of the largest publicly traded companies will be eligible to adopt IFRS in their 2010 filings. The SEC has proposed a multi-year plan with several milestones that it will ultimately allow them to decide in 2011 whether adoption of IFRS is in the public interest and would benefit investors.

Proponents of IFRS adoption believe that it will better position U.S. based companies to access capital in the global marketplace and provide for consistency in financial reporting for the benefit of investors, credit rating agencies and others around the globe.

We believe the adoption of IFRS in the U.S. will impact many aspects of our clients’ business. Clearly accounting, tax and financial reporting will be the most significant areas of emphasis but IT systems and stocks documentation and compliance will demand incremental bandwidth during the implementation phase of IFRS and will provide us with the opportunity to assist our clients through this process.

Currently we are working on a handful of projects for our clients that generally involve an assessment of what the adoption of IFRS means to their financial results. Although we believe that there will ultimately be significant client demand for systems of implementing IFRS it is likely that the bulk of the work is at least a year or more away.

In the meantime we will continue to provide IFRS training to our people and consult with our clients about what to expect and how to prepare for the implementation process.

I’d like to spend a couple of moments on capital allocation. During our first quarter we did not buy back any of our shares so our current board authorization for stock buyback program remains at $48 million. With the turmoil in the financial markets over the past few months we felt it prudent to take a break from buying back our shares and build our cash position. Throughout the balance of fiscal 2009 we will consider share repurchases in connection with other capital requirements of growing our business.

In our last call we talked about the importance that equity compensation plays in allowing us to attract and retain the talent needed to consistently execute our business model. We have recently filed our proxy statement which among other things asks our shareholders to approve an amendment to increase the number of shares of the company’s common stock for issuance under the 2004 performance incentive plan by two million shares.

ISS Governing Services, a business unit of Risk Metrics has reviewed our proxy and recommended a vote in favor of the amendment. We hope that our investors appreciate the importance of equity based compensation to our employees and vote in favor of this proposal.

Now a word about the service lines. RAS revenue was flat quarter-over-quarter and accounted for approximately 15% of total revenue in the first quarter of fiscal 2009 compared to 16% a year ago. Non-RAS service lines in aggregate grew 8% quarter-over-quarter.

Now let me focus on some information regarding our clients. In fiscal 2008 we had 340 clients for each of whom we provided services exceeding $500,000 in fees. Through the end of the first quarter on a run rate basis we served 2% more clients at this level than at the end of the first quarter a year ago.

Revenues from our top 50 clients represented 37% of total revenues while 50% of our revenues came from 109 clients. This is consistent with our past experience and validates our strategy to target large companies with whom we can develop sustainable, repeatable business relationships.

Our business with financial services companies grew 6% year-over-year. Although our growth rate for the first quarter has slowed when compared to fiscal 2008 we continue to enjoy significant client relationships in the financial services sector, 13 of which exceeded $1 million in revenue for the quarter. Our largest client for the quarter was just under 4% of revenues.

Client continuity continues to be solid. For our first quarter we served all of our top 50 clients from fiscal years 2008 and 2007. Our loyal client following is reflective of our client service approach and our basic principle of always doing the right thing for our clients.

Through the first quarter 47 of our top 50 clients have used more than one of our service lines and 74% of those top 50 clients have used three or more service lines. This service line penetration reflects the diversity of relationships we have within our clients’ organizations.

That concludes our prepared remarks. We would now be happy to answer any questions you may have.

Question-And-Answer Session

Operator

(Operator Instructions) The first question comes from Mark Marcon – Robert W. Baird & Co.

Mark Marcon – Robert W. Baird & Co.

I’m curious about what are you hearing from your clients over the last several weeks? Clearly the economic environment has gotten a lot choppier just in the last few weeks. Are you hearing any signs from any of your clients about potentially cutting back and have you been impacted at all the last few weeks by all of the various transactions we have seen in the financial services area?

Thomas Christopoul

It is always gratifying to see that management focus yields the results you expect it to. We will obviously have to give you some qualitative commentary here with respect to what we are seeing and hearing from our clients but it is a great question and it is obviously something we spend a lot of time working with them on and listening to them about. I don’t need to emphasize in any way for anyone on this call the amount of uncertainty that the global market is feeling and certainly the financial services sector is feeling. I’ll make my comments, I think in a few buckets.

First, in financial services what we are hearing from clients is they are not sure what is going to happen in the short-term. On the positive side we haven’t had any cancellations of projects from any clients. We haven’t had any need to lay off or reducing our staffing of our consultants on projects we have been working on with these clients. On the other hand it would be impossible not to describe their circumstances as in the best case uncertain and in the worst case dire.

Here is what we heard from them. They obviously have very little visibility into what kind of work they are going to be doing and whether that work is going to be focused on being integrated into another institution, being consolidated into another platform or being spun off as another separate perhaps entity where they may be a division today. Here is what they have said to us though and this is actually relatively real-time. We have heard this over the last 14 days from more than a handful of clients that we serve in insurance and banking and financial services. They have said they absolutely expect for there to be work for us to do and to please stand by. So we have actually gotten those in-bound calls on the expectation there is going to be presumably a lot of job and position displacement at these companies and presumably there will be lots of consolidation work and integration work to do in the financial area and in the systems area specifically.

But for the moment that has not translated into any significant demand for us and we wouldn’t expect it to translate into significant demand until there was a little bit more certainty and visibility by those clients into what sort of economic parameters they are going to be operating under and what sort of structural initiatives they are going to be required to carry out. So, guarded is how I would describe our view there and obviously we are keeping our ear to the ground and keeping close to our clients so that when they need us we are there for them.

As you know, we are not overly concentrated in that sector. We operate in many other industry categories around the world; manufacturing, pharma and many, many others. In those sectors we are seeing let’s call it less intense uncertainty but we would describe the overall environment with our clients as cautious and conservative. How that translates for us is many of our clients again, while not telling us they need to stop working on existing projects, they are telling us that their capital budgets and the extent to which they are going to move forward with certain projects is unclear at the moment and that is driven in many cases obviously by the overall uncertainty.

That doesn’t apply uniformly across our company and it doesn’t apply uniformly across our geography or our practice areas. We have seen and we expect to continue to see growth in regions around the world and in our practice areas with clients who need to get work done. So while obviously the note I’m striking here is cautious I would say that it is cautiously optimistic and we certainly haven’t seen a wholesale stoppage or wholesale fear across our clients. It is more; I’m sure what all of you and all the companies you follow are experiencing.

Mark Marcon – Robert W. Baird & Co.

I was wondering if I can ask one follow-up. Is it possible to quantify what your exposure is to all of the large financial services companies we have all seen in the headlines that are undergoing some form of transition? I’m speaking of an impact of WaMu, Wachovia, Merrill, Lehman to Bear, etc.?

Nate Franke

I would say I would couch it that we have certainly done work with many of those companies. Relative to a go-forward basis there will be transactions we will be able to work on in terms of merger integration for some of those clients. Other clients that have gone completely away obviously we won’t repeat the amount of revenues we have had in the past unless we get a special project helping them try to unwind their business. Right now I would tell you generally if we looked at first quarter revenues from those institutions that you have read a lot about they generally reflected kind of on a pro rata basis flat revenues when you compare it to the prior year in aggregate. So if I took aggregate revenues from those companies divided by four I’d get pretty close to what our first quarter revenues were with those companies.

Mark Marcon – Robert W. Baird & Co.

Since you went through that calculation do you have an idea of what percentage of your total revenue comes from those companies?

Nate Franke

Not as a percentage. I would just tell you from financial institutions in aggregate as we have disclosed in the past they represent approximately 20% of our revenues.

Operator

The next question comes from Andrew Steinerman – JP Morgan.

Andrew Steinerman – JP Morgan

Could you go over the prospects in the current quarter in terms of gross margins and if there is an ability to keep the bill rate/pay rate gap open?

Nate Franke

I think we are very pleased with the headway we have continued to make. My sense would be obviously a lot depends on the revenue outlook and the corresponding leverage that we get from the associate benefits that they get paid. We would be optimistic that the Q1 margin is a reasonable reflection probably at the lower revenue base. We might see a 40-50 basis point reduction but again I think that is really going to be dependent upon what the next 9 weeks hold from a revenue standpoint.

Andrew Steinerman – JP Morgan

Right, but if you geared towards the $197 meaning no change do you think it would be 40-50 basis point difference year-over-year or sequentially?

Nate Franke

Sequentially.

Andrew Steinerman – JP Morgan

And could you just give some qualitative comment on the second point, bill rate and pay rate environment?

Nate Franke

I think as we have shown during the past 12 months that we continue to be very focused on pricing our engagements to achieve that margin. Clearly the economic environment makes for certain tougher discussions but again it becomes something that we continue to be focused on and our goal is to really work to maintain our gross margin levels.

Thomas Christopoul

You obviously have two factors going on here at a very, very high macro level. Certainly clients in this environment want to continue to see value, right? So putting aside our value proposition you would assume that would exert downward pressure on bill rate but the opposite is true on the labor side where you’d expect let’s call it uncertainty to create some opportunity to sort of make that differential work in an appropriate leverage fashion. You should not conclude from my comments that we are struggling right now with maintaining our bill rate or we are struggling with the appropriate ratio. It is just really hard to say where that might go given what we are dealing with. At the moment it is not something we are seeing erode.

Andrew Steinerman – JP Morgan

So you are hopeful you can keep the positive gap in place?

Anthony Christopoul

I am hopeful and that is our management strategy and obviously the way we manage. I will tell you I have not heard anything qualitatively from any of our managers that would suggest that is a problem as we sit here today.

Operator

The next question comes from Gary Bisbee – Barkley’s Capital.

Gary Bisbee – Barkley’s Capital

I guess my first question is it seems like things have slowed pretty dramatically over the last few months. Can you give us some sense of that more challenging revenue run rate quarter to date? How that looked in the U.S. versus Europe? Does the U.S. turn negative? Has Europe slowed dramatically?

Anthony Cherbak

I would tell you and this just echoes the comments that Nate has already made. If you looked at our U.S. business we were relatively flat in terms of our revenue growth. If you looked at Europe we were up about 27% and that was on some strength we found across various different offices including France, Sweden, our Germany startup has done very well for us as well as Ireland. I would tell you the U.K., which is one of our bigger businesses over there is relatively flat. They are facing an awful lot of difficult economic headwinds at this point like everyone knows.

In terms of Asia we are up about 31% for the quarter on the strength of Japan and Hong Kong. Going forward we don’t see anything at this point that would cause us to look at those businesses too much differently than what has occurred during the first quarter.

Gary Bisbee – Barkley’s Capital

I guess I was referring more to the first month of this next quarter where if I heard you right your revenue run rate was down about 2.5% year-over-year. So clearly the U.S. has turned negative. Has Europe as well? I know the currency compares gets tougher by the day here. I’m trying to understand is the U.S. down double-digits to make that 2.5 and international is still growing? Are they both down?

Thomas Christopoul

Building on what Tony said I think and it varies in the various international geographies. We have certain geographies that are continuing to grow on an overall basis. I would say that decline is probably spread relatively evenly between the U.S. and Europe and then Tony kind of commented about Asia and I think what we saw in Q1 is consistent with what we are seeing here in the first part of Q2.

Nate Franke

Obviously the math makes it somewhat clear. 70% of our revenues are coming from the North American business unit so obviously 70% of the variability in that is mathematical. I guess to try to give you some color we don’t see anything disproportional about the current quarter’s performance geographically that would differ from what we saw directionally in Q1 but I don’t know how to characterize what might happen in terms of where does the Asian market go or how does the Japanese market respond and what will that do to our Japanese practice disproportionately. It is just too early to tell.

Gary Bisbee – Barkley’s Capital

It is safe to say that Europe is clearly seeing some slow down in addition to the U.S. right now?

Nate Franke

I think that is fair. I think, again, just to review what Tony said it is probably disproportionately true in the U.K. but given the way we developed our business footprint in Europe we have offices that wouldn’t necessarily you would conclude that was the case.

Gary Bisbee – Barkley’s Capital

Obviously with all the turmoil in the financial industry and I suspect growing in a lot of other industries given the lack of credit in the market, how much are your associates…do they have the skill set to really go in and handle restructuring type stuff? Obviously we hear a lot about the handful of restructuring consulting companies that have done terrifically well. Is that really a different or special skill set? Or are a lot of your people positioned to compete for some of these more turnaround or financing type engagements?

Anthony Cherbak

First of all I’d kind of break it down into several pieces. We do not specialize necessarily in being the firm that is going to bring in the chief restructuring officer or the chief executive officer of a turnaround situation. What we do though is we get involved in a lot of the blocking and tackling that goes on behind the scenes given the stringent reporting requirements of entities that are in turnaround situations. I would give you as an example in the past we have worked on some of the biggest restructurings in U.S. history including Enron and MCI, Adelphia, Delta…those are just an example of some we have done over the years. Relative to the skill set again we have one of the great advantages of our company is we have an incredible consultant base with varied skill sets that can help a company value complex derivative instruments as easily as they can and working in other parts of the finance organization. So, we have every confidence in the world that we have the talent and it is just a matter of getting the at-bat for the opportunity to deploy our associates to help those companies in that situation.

Thomas Christopoul

We do have those skill sets in our company but as Tony points out we are not competing for the chief restructuring officer opportunity. We are not a bankruptcy, turnaround or restructuring firm. But you assume and it would be a correct assumption that based on both the tenure and experience level as well as the technical capability especially in finance and accounting of our professionals around the world that we can and will play a role in these restructurings as they come out not only here in and work through the process they will have to go through here in the United States but also globally.

I think what I would add to that is as good stewards of the business you would expect us to be working hard at creating the type of partnerships that would allow us to play a role in that space and we are doing that.

Gary Bisbee – Barkley’s Capital

One last question. You have done a nice job slowing the growth of SG&A spend and relative to the initiatives you told us about a quarter ago for work towards that, did that largely happen in Q1 or is there some more to go in terms of executing some of those strategies to reduce the amount of spend? I’m trying to get a sense for what the run rate might be going forward.

Nate Franke

I think where we were in Q1 is probably a reasonable indicator of the future. We do have quarter-to-quarter changes that can occur due to timing of some of our international advertising and that type of thing we believe is still very important to continue on but I think we are feeling pretty good about where we are but it is something we will always be looking at based on changes in the business climate.

Anthony Cherbak

I agree. Nate is correct. It is a good indication. You know this. This is one of the luxuries we enjoy in this company because of our business model. We can adapt and respond much more quickly to the types of events we are seeing without having to take aggressive, let’s call it regressive action in the infrastructure of our company. So I would say the approach is to absolutely continue a sharp focus on this but I think again my comment here is at this point we are not required to take nor would we seek to take aggressive action in cost cutting in our company. We are going to grow. We will grow through this. We’re not exactly sure how long “this” will last but we’ll grow through the cycle and we need to invest in the long-term health of this business. Because of how the model works we have that luxury. While you shouldn’t expect to see us adding SG&A disproportionately we are not going to be burning furniture and again we don’t have to. So we will continue to invest in our business appropriately although obviously very conservatively in the market.

Thomas Christopoul

That is very consistent with the message that everybody in the field has which is let’s concentrate on the things you can control. Let’s watch the gross margins, minimize SG&A as much as we can and look to grow revenue in whatever account we can.

Operator

The next question comes from Michel Morin – Merrill Lynch.

Michel Morin – Merrill Lynch

I think you mentioned in your prepared remarks that the non-RAS segments were up about 8%. Was there anything in particular that stood out for us?

Thomas Christopoul

I would say finance and accounting obviously continue to be very strong as well as IM, maybe a little bit less so in terms of human capital. But when you look at our biggest businesses which again are accounting and finance, RAS and IM, RAS is obviously flat. The other two real large ones still good growth.

Michel Morin – Merrill Lynch

The flat RAS number I think in terms of dollar spend it looks like it has been fairly steady now for about a year. Have we reached kind of a steady state environment for that segment? Is that a way to think about it?

Thomas Christopoul

I don’t know. We think about it as we would like to see growth in it. Obviously we understand why the comparisons have gone the other direction as the rest of our service lines have grown. We will continue to be opportunistic with clients in this area. I think the real growth obviously is going to come in connection with regulatory change and IFRS is a good proxy for that. Still some lack of visibility on when exactly and how of IFRS but we don’t see this sort of declining disproportionately from this point. Again you have heard this from us quarter after quarter. We don’t manage these lines of business as practices. We manage them in connection with client needs. So client need could tick this up or the displacement into another area or service line could tick it down and that wouldn’t necessarily mean we are doing better or worse.

Nate Franke

As we have seen in the past, Michel, related to any time there is significant regulatory change and we anticipate that will occur given the catastrophic events within the marketplace, we tend to benefit from that because we try to help our clients navigate those new regulations. So to the extent this occurs, which we believe it will, I believe we will continue to sell work within the RAS service line.

Michel Morin – Merrill Lynch

Finally you mentioned you could be involved in merger/integration types of projects. You mentioned specifically financial services. Are you at the stage where there is already some RSP’s you have been bidding on? Or how early in the game is this?

Thomas Christopoul

Certainly with regard to the last 30 days worth of activity I think people are still sorting out who is doing what and who is reporting to who and what assets they have actually in some cases purchased or otherwise inherited. So I would say, in answer to a formal response on some of this work is not what we’ve seen. Rather what we have seen is from the people we have talked to in some of these clients that are impacted the indication I gave you earlier which is probably there is going to be a lot of work here. So, stand by and we’ll let you know exactly what has gone on.

I do think by the way there probably will be some more formalized approach to that work. We play in that space and compete with all of the usual sort of folks in that category and we feel our value proposition will take the appropriate share of that when it presents itself in a more formal opportunity.

Operator

The next question comes from T.C. Robillard – Banc of America Securities.

T.C. Robillard – Banc of America Securities

I just wanted to follow-up on the margin side to Gary’s question about the SG&A level. You guys said that first quarter level is a reasonable indicator of future levels. Were you talking on an absolute dollar basis or were you talking on a percentage of revenue basis?

Nate Franke

I think we were talking about how many on an aggregate dollar basis. If you looked at the dollar spend in Q1 as an indicator for Q2.

T.C. Robillard – Banc of America Securities

So should we think if you are expecting gross margin, if you guys hit your revenue expectation and you are expecting gross margins down 50-60 bits is that a reasonable assumption to also look for towards the operating line as well?

Nate Franke

Well again there would be depending on what your assumptions are you have to work through the leverage of where the SG&A estimate is depending on the overall revenue. Obviously there would be a downward trend in terms of the operating margin percentage.

T.C. Robillard – Banc of America Securities

Given your expectations for kind of a stable SG&A dollar spend throughout the rest of the year is it fair to assume you are not planning to open any new offices throughout the rest of fiscal 2009?

Thomas Christopoul

I don’t think that is a fair assumption because again we are going to be opportunistic relative to what might come about relative to client needs. We have often talked a little bit about wanting to establish a presence in Switzerland as one option and possibly another presence in Germany. I will tell you right now we don’t have anything on tap but it just depends what we see as we go through the next 10-12 weeks and how the revenues start shaping up. I don’t want to completely discount it but I will tell you there are no current plans.

T.C. Robillard – Banc of America Securities

Lastly, I just want to approach the question in terms of your revenue guidance. I’m just trying to get a sense…the last week you guys saw so far in the quarter was the highest weekly revenue and that is what you’ve used to trend out your guidance obviously adjusting for some holidays. I’m trying to get a sense as to what your comfort is considering the revenues per your comments haven’t bounced as you would have expected. What gives you the confidence to use the highest weekly run rate you have seen in the first month of the quarter to trend it out for the rest of your second quarter?

Nate Franke

Again, I think as we commented it is really just a mathematical computation based on that most recent week. It is not really meant to give, as we said it is not really trying to give a view of any increases or decreases that may occur.

Thomas Christopoul

It is not a forecast. Right? So it is merely a mathematical tool to help give a data point of what is a reasonable, it seems to me something you would be reasonably interested in, we are reasonably interested in which is where we might be but because of the way our business model works you could pick the middle week and do it or you could pick the first week and do it. I’m not sure that data point would be irrelevant. I’m certainly not sure it would be any more relevant than choosing the one we did. My view is you shouldn’t try to read into that and conclude anything. I suspect as this current quarter continues we will probably see weekly revenue in excess of that figure and below that figure and the question is how and when and that is going to be driven by the fundamentals of what we execute on and our clients, right? That is what you would expect us to be focused on and not on forecasting.

Anthony Cherbak

Just one more piece of color on those revenue run rates we gave you, I believe the third week that Nate quoted was $15.1 million. There was approximately $400,000 to $500,000 revenue lost that week as a result of the hurricane down in Texas. So just something you might find interesting. I think we are at this point in time based on this week’s run rate in revenue we seem to be back to full operations in Houston.

Operator

The next question comes from Paul Ginocchio – Deutsche Bank.

Analyst for Paul Ginocchio – Deutsche Bank

I was wondering if you could comment if the current environment has changed from a talent or recruiting perspective? Either positive there is more talent available or maybe negative that candidates are seeking more permanent type positions and they want a little bit more security?

Anthony Cherbak

On the latter, the answer is no. Again, the reason for that has a lot more to do with the nature and the tenure and the character of our consultant who has made a choice to partner with us because of who they are and what kind of work experience they want. So no, the answer on the latter is no. The answer on the former is again on balance we were asked this question last quarter does the type of economic environment play more to our model? The answer is probably yes but it is very much on the margin. Remember when we recruit we are recruiting to specific project work and so if the pool of talent for that particular project is marginally better sure that makes it marginally easier, but it is not as if this environment is going to create the opportunity for us to start replacing consultants with much more highly talented and much more experienced ones. I think on the margin it is helpful and on the last part of your question it is not meaningful.

Analyst for Paul Ginocchio – Deutsche Bank

I was wondering too it sounds like in Europe you are still seeing some strong growth and I guess in some of the European offices where you actually have a bench model and I am just wondering what it would take for you to consider headcount reductions there? Would you really need to see some serious negative trends or if that is something you are considering ahead of a downturn?

Anthony Cherbak

Bear in mind our operating model in Europe tends to be a little bit of a hybrid, a combination of a little bit of a bench but a significant amount of people that are contractors. So the majority of those practices are variable. So, if you had to take people out of the practice because there wasn’t work it would be done at the variable level.

Thomas Christopoul

I guess the answer to your question is in order for us to begin to impact the more dedicated, full time bench so to speak of some of those business units we would have to see significant reductions in client activity. I mean by like half. We don’t expect that and nothing in the market suggests anything like that is likely although I’m not necessarily a betting person in this marketplace. At least for us we seem to be insulated in that regard to some extent.

Analyst for Paul Ginocchio – Deutsche Bank

Could you give some examples with a little bit more detail of what types of consolidation or integration type work you might be asked to do by either insurance or financial services companies? Just to provide us a little bit more illustration.

Thomas Christopoul

Well, our understanding from reading the popular press is that they are having some issues determining valuation of certain derivative instruments on their balance sheet. There is a lack of both marketability of those instruments and because there has been a decline in value of some of the underlying derivative assets, presumably they could use some help in that regard. In a situation where they might be consolidating one might expect they might need perhaps even further help with respect to consolidating both those sets of asset values on the consolidated balance sheets. That is one theoretical example.

A more traditional example would be the typical integration work that occurs when a Barkley’s for example buys the asset management business of Lehman and needs to do all of the financial and accounting consolidations and re-forecasting of revenue as well as all the infrastructure aspects of a traditional integration activity like systems and other types of business processes. There are lots of other things people need to do in those circumstances. There is lots of activities in the legal area with respect to parent subsidiary cleanup and filing of lots of different documentation around the world. Then there is obviously the human capital aspect of change management which we address with our human capital practice.

Operator

The next question comes from Kevin McVeigh – Credit Suisse.

Kevin McVeigh – Credit Suisse

If you think about the current environment relative to the times with Enron where you were able to pretty quickly reallocate resources into special projects and things like that, in terms of timing do you think it would be similar or do you think there would be more of a lag?

Thomas Christopoul

Well, our ability to redeploy would be very similar to the event. I think there is a different question embedded in there maybe which is do I have a view or do we have a view of how that event and the timing of that event would result in the project work or order, let’s call it, to do project work with that client and that is what we have no visibility into. Our ability to deploy or not redeploy but deploy other consultants with whom we have worked in those types of areas that capability remains as let’s call it liquid as it has always been with us.

Kevin McVeigh – Credit Suisse

If you were to think about 20% of financial services, what percentage of that 20% do you think is still in disarray and in transition where you wouldn’t have an opportunity to transition anyone over in the next quarter or two? What percentage would you have an ability to do some special project work?

Anthony Cherbak

I don’t think you can break it down into percentages, Kevin. I think what you are seeing in the market right now is one of shock with the financial services companies. When this happens, as Tom mentioned in his remarks, you are going to see a much more cautionary approach being taken. Another month down the road hopefully the bill before the House gets passed to bring a bit of stability to the markets. People are going to have to get back to work and reconcile their bank accounts. They’re going to have to look at their internal controls. They’re going to have to look at the risk management policies. It is going to be a lot of business and we think that we are well prepared at this point to take advantage of that. Right now the biggest question is really timing. How quickly does that process occur?

Thomas Christopoul

Let me help you here Kevin with an example from our backyard. In New York City if we were to get a call today to deploy 20 consultants in a specific S&A area we would have no problem deploying against that opportunity utilizing our network of existing consultants in my view very easily. If it was a call for 200 people around the world because of the way our business model works I’d say we wouldn’t just wave a magic wand to do that but we would be very comfortable in being able to do that. If it were a significant amount, 70-80 people within a specific geographic area like Manhattan I think we would have a bit of a tougher time but candidly because of the displacement that has occurred and will occur in this sector we probably feel more confident about doing something even like that than we would have in a environment where there wasn’t that type of displacement and uncertainty. So to some extent we can make an opportunity out of what is a real challenge for our clients by redeploying those people and you know this already and we have talked about this. In these types of circumstances our clients do and often will rely on us as a mechanism for putting some of the people that may have been in their companies if they are laying off a significant amount of staff back to work.

Kevin McVeigh – Credit Suisse

What is the total number of clients you had in the quarter versus the prior quarter in absolute number?

Anthony Cherbak

We didn’t say but it varies when you look at it only on the end of a quarter. I would couch it like this. On an annualized basis we generally do work for about 2,400 clients. In the first quarter it is obviously going to be less than that because you still have the balance of the year in which a client you had a relationship with last year might not have projects right now but they will in Q2, Q3 or Q4. So about 2,400 on an annual basis.

Kevin McVeigh – Credit Suisse

Just one last question. What would be a good tax rate to use for the rest of the year?

Nate Franke

As I had mentioned, the tax rate tends to fluctuate depending on the volume of ISO stock options that are exercised in any given period. In the first quarter I think because of the stock price trending upward we had obviously some people exercising options. We were then able to take that benefit through a provision lowering it. So it is really something we can’t forecast because it is really dependent on the level of those ISO exercises. So I think you can look back at the quarterly rates over the past few quarters and probably come up with an estimate with where we were currently in the current quarter. If you go back to Q4 and Q3 of last year I think we were in the 44-45% range.

Operator

The next question comes from James Janesky - Stifel Nicolaus.

James Janesky - Stifel Nicolaus

I’m trying to get a better understanding of why we wouldn’t expect revenues per week to decelerate and in some cases maybe dramatically decelerate as we move throughout the rest of this quarter and even into early next year. My understanding is that spending on professional services including finance and accounting and other areas over the last several years has been driven both by secular trends of professionals and cyclical trends of a good economy. One of those, with the cyclical trends could be getting much worse and on a secular basis even in this merger and acquisition activity or restructuring area there is a lot of people available within companies even if they have to use them before they lay them off to do the work. Do you folks expect that there is going to have to be use of outside providers at some point in time just to maintain some level of objectivity? Could that help out support revenues over the next couple of quarters?

Thomas Christopoul

I’m not sure it is objectivity that is the core focum of the value proposition, Jim. There is no question that the work we do for most of our clients occurs over a project period that can be as short a 4-6 weeks and as long as 12-18 months. Part of why they come to us is we give them a skill set that they can use on a variable basis, presumably. Although I’m not going to disagree with your commentary on professional services. Clearly that is always an area where clients especially in contracting economic environments look to try to develop what is called a better value proposition or reduce costs. Again, we’re not immune to that but because of the way we work, right, because of the way our model works and because of the relative price value differential that already exists for us with respect to our professional services competitors, we are just a little bit better positioned. But I’m not going to…none of us is going to sit here today and tell you we have the most optimistic view about where we are going to be over the course of our fiscal year and the remainder of the calendar year because I, like every other company CEO don’t have a lot of visibility into what is going to happen in the marketplace.

Again, our main point of value is created at a client level. That is where we do our work and that is where we take advantage of our opportunities. I wouldn’t say that anything about that has changed. Although for us to suggest or for me to suggest that the overall economic environment hasn’t changed, the tonality of what is going on with our clients would be wrong.

James Janesky - Stifel Nicolaus

While 20% of your business which is in significant turmoil if we could call it that with the financial services industry, you still have 80% of your business that is outside of that, right? Are either one of those two buckets more cautious than others in terms of freezing spending or holding off on projects? Or is it too early to tell?

Anthony Cherbak

I would just respond to that by saying obviously the majority of the turmoil is within financial services. That being said I think the entire economy of the world is watching how we respond to this and how we work our way out of it. That is what I tried to mention when I said people are in a little bit of shock right now. The shock is going to wear off and the work is still going to have to get done and that is when our opportunity is going to be in helping our clients get through this whole process.

Thomas Christopoul

We can sit here for hours and talk about all the elements of uncertainty. You’ve got other secular macroeconomic aspects of the U.S. economy which aren’t in particularly good shape or going in the direction we would like them to go either; housing and employment being two just off the top of my head. Add to that you have a ton of uncertainty in an election year. There is tax rate uncertainty. Pick your area. I’m happy to respond.

But my two cents is worth as much as yours. You started your question by asking what would lead you to believe that our revenues aren’t going to drop off more significantly. The answer is I don’t know except perhaps 12 years of demonstrated capability to work through good economic times and bad and maybe not grow sequentially every single quarter but grow over a longer period of time quite nicely.

James Janesky - Stifel Nicolaus

A follow-up on the bill to pay spread. 10% bill rate increases I think might be an aggressive assumption over the next quarter or so and I can certainly appreciate there could be pay rate compression that generally lags bill rate compression. Do you think that you would just allow that to work through the system? Would you walk away from some business in the near-term or would you take some margin compression in the near-term to maintain longer-term client relationships?

Anthony Cherbak

We really look at that on a case-by-case basis. As you suggest it is any given client at any given point in time. I certainly wouldn’t state that over the upcoming 12 months we would expect to see another 10% increase. That said what we do hear from our clients and we hear in competitive situations is that we are still a very good value when we go up against some of the other very large professional services firms that we tend to compete with in the marketplace. So again we are focused on maintaining that margin but again that doesn’t mean we might look at a particular client or a particular opportunity and perhaps invest in it but on an overall basis I think we feel very strongly we continue to offer a very good value proposition and we are looking at maintaining our margins.

Thomas Christopoul

Jim we are quite disciplined but we are not rigid. Qualitatively that is where the judgment enters into. We do walk away from business routinely and we will continue to if it pushes us in a direction that is not consistent with our value proposition whether that is rate, type of work or what have you. But we are also not rigid and again in this economic environment if we have a high quality consultant who has worked with us for years and who has done great work at a dozen clients and in a particular example that individual consulted with maybe a team of four others and needed to be deployed at less than what we would like but consistent with our overall kind of gross margin orientation we would do it for all the reasons you would expect us to.

Somehow to just kind of maybe make this a little bit more real for you, some of the techniques that we sometimes employ in those circumstances might be the following: We might, for example, agree for a limited period of time in connection with a project say 90 days or 60 days to charge a rate that might be 10% below what we would otherwise charge with the option then of converting that consultant bill rate to the appropriate level and that demonstrates both good business and good partnership. Again, if we are reasonably confident and we generally are because we know the consultants well that the work is going to get done in an appropriate fashion. We are willing to take that risk and we are willing to bet our consultant’s ability to demonstrate that value many fold when they get to the client to do the work.

Operator

The next question comes from Scott Schneeberger - Oppenheimer & Co.

Scott Schneeberger - Oppenheimer & Co.

Could you give us a progress report on the more recently opened offices? Two, no share repurchases in the quarter due to uncertainty. I assume that is kind of the MO going forward and you mentioned you are probably not going to open any new offices and you mentioned a few European geographies but are you thinking anything on the acquisition front? Any types of business you’d like to enter looking at this new environment we are entering?

Thomas Christopoul

Let me take the share repurchases. We’ll kind of hand Nate the rest of your question as to the three parts there. We exercised good judgment in the most recent quarter with respect to share buybacks but everyone on this call knows and has heard us say before we are committed to appropriate balance return of capital to shareholders. The market will do what the market will do but even though I think we take an obviously conservative view we would be opportunistic purchasers of our stock on an appropriate accretive basis and if this market was caught sort of time or time in the market creates an opportunity for us to pursue that more aggressively because it is more accretive we would do it. I think that we would.

I might add by the way you should expect me personally to be a buyer of our stock if that same point holds and makes sense. Then I’ll do that and you should expect to see that.

But with respect to our newer offices I’ll let Tony or Nate address your question specifically and we’ll come back to your third part later.

Anthony Cherbak

Just to give you a view on some of the offices we have opened recently, our Raleigh office in the United States is already profitable in less than a year of operation. Richmond and Tulsa are progressing well along our normal pattern of profitability in 18-24 months. We are exceptionally pleased with our progress in Germany. I would say the progress we’ve had in Germany is beyond our expectations and that is why we like that market so much. Shanghai we are very, very pleased with that office as well with the progress they are making and we certainly look to China as being a market for growth for us in the future.

Scott Schneeberger - Oppenheimer & Co.

Any fields of business you would like to be in that you are not in already?

Anthony Cherbak

Fields of business we’d like to be in? We have looked at the turnaround business, the restructuring business to kind of compliment more of the capabilities of our associates so maybe getting in a little bit deeper into that business as we discussed in the past with you. We’d like to be in a little bit deeper in the government business, probably expand our capabilities in regulatory consulting. Those are some just right off the top of my head and those are things I think we can either do organically or if we find a nice little boutique acquisition platform that comes along that makes economic sense to us and the cultural fit is appropriate those will also be a couple of mechanisms to get deeper into those businesses.

Thomas Christopoul

Scott we are again not signally any aggressive orientation towards acquisitions. There are opportunities in this marketplace and there are any number of quality companies who would look to and do seek to talk to us about potentially partnering with a company like Resources which has the global footprint we have, the business model we have and the strong balance sheet we have. So we do continue to have those conversations and my own personal view is that the market and its uncertainty will create opportunities and [inaudible] to that for us but you should not interpret that as some signal we are going to be announcing any significant activity in the area. We’ll do what we always do which is we will be opportunistic but I will tell you that we still are having discussions.

Operator

The last question comes from Mark Marcon – Robert W. Baird & Co.

Mark Marcon – Robert W. Baird & Co.

First, do you happen to have the constant currency organic revenue growth rate for Europe?

Nate Franke

I think what we gave you was on an overall international basis. For Europe on a stand alone basis for that region it is 3.4%.

Mark Marcon – Robert W. Baird & Co.

The fourth week of the current quarter how close is that historically to the median for the quarter? Do you have any sense?

Nate Franke

We don’t really measure the rates relative to the median, Mark. I supposed we could figure that out. But I would say if you compared it to last year the run rate for the fourth week of the second quarter last year was something like $16.3 million or so. Something in that range. But I don’t know relative to the median.

Mark Marcon – Robert W. Baird & Co.

With regard to the variability with regard to SG&A on the one hand, 70% of having to do with compensation expense if I’m correct, would be variable but you also mentioned that it is likely the absolute amount is probably looking at sequentially a flat sequential trend. Can you give a little bit of color on that? Obviously there is uncertainty for everybody so nobody really knows how revenue is going to trend over the next couple of quarters but we’re just trying to figure out what would naturally flex if you weren’t going to…

Nate Franke

The way to look at it is and I think you are right when you think about the variability being compensation and where the compensation comes through our income statement is in two places; one is in the cost of revenue which is the salaries, hourly rates that are paid to our associates when they are working. Then the salaries and all the other costs of running the businesses in our field offices are in SG&A. So the variability comes from the cost of revenue line item and in primarily a majority of the SG&A is fixed because it is the fixed salaries of our office personnel, the field office, corporate office as well as occupancy costs and the like. So absent of making a change in headcount at the office level which I think Tom mentioned we have no plans to do the SG&A will probably tend to stay more constant at the current dollar spend rate.

Mark Marcon – Robert W. Baird & Co.

To the extent we were talking about and I know it is truly a mathematical…this wasn’t a forecast but if we go from $207 million in revenue to $197 million in revenue and we have a $10 million revenue decline would there not be some SG&A expense that would naturally come up or are there some other offsetting investments you are making that would make up for that?

Nate Franke

If I heard you right you are saying if revenues trended higher than that mathematical computation what would happen with SG&A? It would come up moderately just because of certain of the variable comp programs but not necessarily by a significant amount.

Mark Marcon – Robert W. Baird & Co.

Actually what I was asking was since, and again it is not a forecast, but if you revenue were to…it sounded like you were saying well mathematically our revenue might end up at $197 million, nobody really knows…but if that were the case it also sounded like it is likely the SG&A level would stay constant and I guess what I was wondering is we are looking at potentially roughly a $10 million decline sequentially in revenue. Would there not be some SG&A that declines naturally or is there some offset?

Nate Franke

I think as I mentioned to one of the earlier questions there would be a certain amount of decline that would occur but then I think I commented that we are doing some national advertising that has kind of been part of a continuous program that is going to occur in the second quarter.

Thomas Christopoul

I think the other thing, Mark, you have to weigh into this whole process is that the majority of our SG&A costs, about 2/3 of our SG&A costs is made up of salaries. We have never been a firm that in tougher times looks at our people in our field offices and say we are going to take out 10% of those people. If you look across the big four today they are doing just that with their people. That takes 5-6 years to cycle through your office. It impacts productivity. It impacts morale. We have spent 12 years building up this company. We have great talent and in the short-term if we have to take a little bit of extra pain to keep those people we’re going to do it because when IFRS hits everybody is going to be swamped. When regulatory consulting as a result to the response of the credit crisis hits we are going to need all of the people we can get to take advantage of those revenue opportunities. So while it might be a traditional practice for some companies to whack a bunch of their staff during tough times like this that has just never been the model of the company.

I think that even given our practice we have still been able to operate very profitably and we expect to continue to do so.

Mark Marcon – Robert W. Baird & Co.

It sounds like obviously from a GAAP perspective it is difficult to say what the tax rate would be because of ISO’s but in terms of if we were just running flat line for the rest of the year on a year-over-year basis it sounds like everything else should probably run, if that were the case, then there is no reason why the rest of the margins overall shouldn’t flat line here as well.

Nate Franke

Again, when you talk about the various margins a lot of that will be dependent on the revenue level. We have talked a lot about the cost structure but all else being equal we have said and currently obviously these are different economic times but we have clearly tried to manage to that 40% gross margin and our goal is a 15% EBITDA margin. Clearly in the current environment that will be difficult but that is long-term what we hope to manage to.

Operator

We have no further questions in the queue at this time.

Thomas Christopoul

Everyone thanks for tuning in. Obviously we look forward to talking to you at the conclusion of our next quarter and we’ll hopefully all have better economic news to be responding to at that point.

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