Jan 10, 2008
Executives
James C. Burrows - President, Chief Executive Officer andDirector Wayne D.
Mackie - Chief Financial Officer, Executive VicePresident, Treasurer
Analysts
Timothy McHugh - William Blair & Company Randy Hugen - Piper Jaffray Andrew Fones - UBS Adam Kozer - Stifel Nicolaus
Operator
Good day, everyone, and welcome to the CRA Internationalfourth quarter and full year fiscal 2007 conference call. Today’s call is beingrecorded.
You may listen to the webcast on CRA's website located atwww.crai.com. In addition, today’s news release is posted on the site for thoseof you who did not receive it by e-mail.
With us today are CRA's President and Chief ExecutiveOfficer, Mr. Jim Burrows; and Executive Vice President and Chief FinancialOfficer, Mr.
Wayne Mackie. At this time, for opening remarks and introductions,I’d like to turn the call over to Mr.
Mackie. Please go ahead, sir.
Wayne D. Mackie
Thank you, Felicia. Statements made during this conferencecall concerning the future business, operating results, and financial conditionof the company and statements using the terms anticipates, believes, expects,should, or similar expressions are forward-looking statements as defined in thePrivate Securities Litigation Reform Act of 1995.
These statements are basedupon management’s current expectations and are subject to a number of factorsand uncertainties. Information contained in these forward-looking statements isinherently uncertain and actual performance and results may differ materiallydue to many important factors.
Such factors that could cause actual results to differmaterially from any forward-looking statements made by the company include,among others: changes in the company’s effective tax rate, share dilution fromthe company’s convertible debt offering and stock options, dependence on keypersonnel, attracting and retaining qualified consultants, dependence onoutside experts, utilization rates, factors related to its recent acquisitions,including integration of personnel, clients, offices, and unanticipatedexpenses and liabilities, risks associated with acquisitions it may make in thefuture, risks inherent in its international operations, the performance ofNeuCo, changes in accounting standards, rules and regulations, changes in thelaw that affect its practice areas, management of new offices, the potentialloss of clients, dependence on growth of the company’s business consultingpractice, the unpredictable nature of litigation-related projects, the abilityof the company to integrate successfully new consultants into its practice,intense competition, risks inherent in litigation, and professional liability. Further information on these and other potential factorsthat could affect the company’s financial results is included in the company’sfilings with the Securities and Exchange Commission.
Jim.
James C. Burrows
Thanks, Wayne and thanks, everyone for joining us today.Revenue in the fourth quarter of fiscal 2007 increased 14% over the prior yearto $98.7 million, continuing the steady growth we’ve achieved over the pastseveral quarters. As a reminder, we have not completed any major acquisitionssince our acquisition of the Ballentine Barbera Group in May 2006, so therevenue generated in the fourth quarter was entirely through internal growthled by a number of our service offerings.
In particular, we experienced strongcontributions from our competition, energy and environment, chemicals andpetroleum, and transfer pricing practices. Net income in the fourth quarter of 2007 was $10.3 millionor $0.89 per diluted share.
This compares with net income of $6.3 million or$0.51 per diluted share in the comparable period of 2006. Net income in thefourth quarter of 2007 includes a one-time benefit of approximately $2.1million or $0.18 per diluted share related to the licensing of intellectualproperty rights by NeuCo.
As you may recall, CRA has a 36.4% interest in NeuCoand accounts for its interest under the equity method of accounting. Looking at how the core business performed by excluding theone-time benefit from NeuCo, net income for the quarter would have beenapproximately $8.2 million or $0.71 per diluted share, which was below ourexpectations.
Our Q4 operating income performance was primarily the resultof higher-than-anticipated SG&A costs which Wayne will discuss in more detaillater in the call, and lower-than-expected employee consultant utilization. Utilization in the fourth quarter 2007 was 74%.
On ayear-over-year comparison, utilization was down from the 78% we achieved inQ406 and below our target range of 76% to 78% for the full year. To bring our utilization rate back into the 76% to 78% rangein fiscal 2008, we are reallocating consultants to the most active practicesand only hiring new consultants who can quickly bring in business who areimmediately needed on projects, and we are not generally replacing employeeswho leave.
We are also examining a range of other options to increaseutilization. Looking at consultant headcount, we ended the year with 771consultants.
This is a 5% increase from 733 consultants at year-end 2006. Ourcurrent breakdown is 231 junior employee consultants and 540 senior employeeconsultants.
Our recruiting efforts continue to focus on senior individualsthat can act as rainmakers and drive business. Before I discuss the performance of our specific businessareas during the quarter, let me provide you with our annual update on billingrates.
Our average net revenue realization per billed labor hour for fiscal2007 increased 11% to $344 as compared to $310 for fiscal 2006. This reflectsthe effect of our across-the-board rate increase in Q1 of this year of 2006,implementation of our FY08 rate increase to 6% in mid-October of this year,exchange rate effects and changes in the mix of our work.
Revenue per internalconsultant for fiscal 2007 was $545,000 as compared to $512,000 for fiscal2006. Turning to the performance of our business platforms, wecontinued to experience growth during the quarter from our broad range ofpractice areas.
Our strongest performer was our business consulting platform,where revenue grew nearly 20% during the fourth quarter and approximately 25%for the full year 2006. This growth was attributable to continued solidperformances in the majority of our business consulting practices.
The top business consulting practices during the fourthquarter were chemicals and petroleum and energy and environment. We alsoexperienced approximately a 10% growth in our pharma practice, which reboundedfrom several down quarters as new consultants hired began to experience greatersuccess with their business development activities.
Effective with the start of fiscal 2008, our pharmaceuticalspractice has been renamed the life sciences practice. We believe that the termlife sciences more closely reflects the thrust of the practice, reaching beyondpharmaceuticals to encompass work in biotechnology, diagnostics, and medicaldevices.
In chemicals and petroleum, revenue grew nearly 15% from Q4in fiscal ’06. That includes a year of outstanding growth in that practice, whichsaw chemicals and petroleum revenues increase nearly 55% over fiscal 2006.
Thegrowth in our C&P practice continues to be assisted by demand in the MiddleEast, which accounted for about a third of C&P revenue in Q4 and the fullyear. Notable assignments in our C&P practice in Q4 included:helping a major Canadian energy company establish an integrated venturestructure in order to best monetize its oil sands resources; assisting aleading North American retailer with an assessment of its store portfolio andthe performance of its capital spending program; and assessing the transferpricing and value chain management practices of a major European agri businessand food company.
Our energy and environment practice also posted strong Q4results with revenues increasing more than 25% year over year. Our E&Epractice, which grew more than 15% for the year, continued to benefit fromvarious projects.
For example, CRA was selected by the New York City EconomicDevelopment Council to assist the city implement its energy strategy to providecleaner, more reliable power by upgrading the city’s energy infrastructure. A CRA study for the American Petroleum Institute testimonybefore the U.S.
Senate Committee on environment and public works and anotherCRA study for the Florida Chamber of Commerce described the economic shocksthat will result in various proposed energy bills [being passed]. CRA is leading an effort to reorganize the federalelectricity and water authorities in the United Arab Emirates.
Turning to our finance platform, revenue had increasednearly 5% in Q4 of last year as a result of demand for our services insecurities and litigation matters. Utilization of the finance staff was high asstaff in this platform participated heavily in finance-related aspects ofprojects [flipped] in other practices during the quarter.
During the fourth quarter, the finance practice continued towork on a number of ongoing securities, other financial litigation matters,including sub-prime lending, and risk management advisory projects. For example, two of our clients of securities litigation wonmajor decisions currently in appeal denying class certification this year.
Inthe IPO securities litigation, CRA is assisting the broker dealer, under-writerdefendants in a second attempt by the plaintiffs to certify the class after thesecond circuit denied a class certification. In the Merck-Vioxx securitieslitigation, CRA is working with legal counsel on the plaintiff’s appeal.
CRA continues to work for major specialist firms in variouslitigations, including a new case involving an alleged improper handling oforders and executions by option specialists related to automatic executionsystems. CRA also assisted MF Global, one of the world’s largestfutures and options brokerage firms, in its recently settled litigationrelating to the bankruptcy of a large hedge fund.
CRA as engaged by Equity Group Investments counsel, [GenuBlack], to serve in analyzing certain valuation issues relating to the recentlyclosed Tribune company transaction. Finally, we are assisting in a number of sub-prime lendingmatters, including, for example, providing expert testimony on behalf of anauditor of a bank-run mortgage company regarding valuation and residualinterest [inaudible] mortgage obligations.
Demand for the finance practice continued to be strong andwe are optimistic that the growing sub-prime related work will contribute tosolid growth of the finance practice in fiscal ’08. Our forensic accounting practice grew approximately 15% forthe quarter as compared to Q4 of ’06 and grew approximately 30% for the fullyear.
The practice successfully concluded one major international arbitrationmatter which went through a final hearing in the quarter. Intensive preparationscontinue for further arbitration matters that are scheduled to go to hearingsin 2008.
Within our litigation and applied economics platform,revenue grew more than 15% to Q4 of ’06, fueled by our competition and transferpricing practice areas. For the year, our litigation and applied economicsplatform grew approximately 10%.
In Q4, our competition practice posted approximately a 25%increase over the year-ago period. In terms of Q4 projects in competition, CRAwas jointly retained by Abitibi Consolidated Inc.
and Bowater to prepareeconomic analyses related to the merger of the two leading North Americannewsprint suppliers. U.S.
and Canadian competition agencies approved U.S. Steel’s$1.2 billion acquisition of Canadian steel maker Stelco, making the combinedentity the world’s fifth-largest producer.
CRA assisted counsel for U.S. Steelduring both the U.S.
and Canadian merger review processes. CRA is working for Intel in competition matters before theKorean Foreign Trade Commission and the European Commission.
CRA continuessubstantial ongoing work on anti-trust projects for the [inaudible] industry inEurope. CRA work on the acquisition of Danone Biscuits by Kraft Foods and alsoin Europe, CRA assisted the software and information industry association witheconomic advice relating to Microsoft’s dismissed appeal of the EuropeanCommission’s decision that ordered Microsoft to supply information on theircommunication protocols.
Intellectual property net revenue was down approximately 10%for the quarter as compared to Q4 2006 and more than 5% for the full year ascompared to the prior year. We are taking a number of actions to grow ourbusiness in intellectual property consulting.
For example, we plan to add moresenior consultants with specialized expertise, build a greater presence inEurope, and increase our cross-selling efforts with other CRA practice areas,which IP issues often intersect with our client needs, such as transfer pricingand business consulting. With respect to IP litigation activity in Q4, we previouslyreported that CRA assisted Sprint in obtaining a favorable outcome at trialrelating to patent infringement by Vonage over a voice-over-Internet protocoltechnology.
Subsequent to that trial, CRA assisted Sprint in connection withnegotiations that resulted in the recently announced $80 million settlement ofthe case. CRA testified on behalf of Trading Technologies in a patentinfringement case against ESB involving trading software.
The result was a $3.5million jury award in favor of our client. A CRA Vice President offered expert opinion on lost profitsin the patent infringement case between [Q-spine] and [Ventronic Inc.]
dealingwith spinal implant systems. CRA assisted [Z4] Technologies in a patent damage claim thatwas successfully affirmed by a federal circuit court in a $160 million patentverdict.
The patents related to the prevention of software piracy. The transfer price practice had a very strong quarter withnet revenue up approximately 35% as compared with Q4 2006.
With respect toprojects this quarter, revenue growth was driven by key projects, includingdocumentation analyses for an international pharmaceutical firm consulting theglobal company building supplies industry, documentation analysis for a leadingprivate investment company, testimony in a private shareholder lawsuit. CRA's labor and employment practice continues to expand itsclient base and was engaged during the quarter in multiple reviews of corporatecompensation practices, Fortune 100 companies, computation of economic exposurein [inaudible] matters, and reviews of reductions in force for adverse impact.
Looking at our business from a geographic perspective,international revenue continues to represent a significant portion of our totalrevenue. Revenue from CRA's non-U.S.
subsidiaries during Q4 representedapproximately 26% of revenue that was comparable to the third quarter of 2007and 27% for the full year 2007, compared to 24% for the full year 2006. Thegrowth outside the United States continues to reflect the strength of theglobal economy and a sustained flow of large engagements from the Middle East,as well as the expansion of our London-based practices.
As a result of our continued growth and expansion,particularly overseas, we encountered some margin pressure during the year. Ourinternational work tends to generate lower margins than our U.S.
led serviceofferings, where we have an established presence and benefit from economies ofscale. However, overseas markets continue to represent a significantopportunity to expand long-term.
Therefore, we are currently analyzing ouroverseas cost structure to identify areas for improvement, includingreallocating resources to our most promising areas of growth. I will now turn the call over to Wayne for the financialreview.
Wayne.
Wayne D. Mackie
Thanks, Jim. As always, let’s remind everyone that CRA'sfiscal year operates on 13 four-week cycles producing unequal quarters in termsof length.
Q1, Q2, and Q4 are typically 12-weeks in length, while Q3 is a16-week quarter. Briefly recapping our Q4 results, revenue grew 14% to $98.7million compared to $86.3 million for the fourth quarter of fiscal 2006, and asJim mentioned, all of this growth was internally generated.
As I pointed out on our past three quarterly calls, prior toQ1 2007, we classified our internal information technology group’s labor costas an element of cost of services. In recent years, the IT group graduallybecame less involved in direct client projects and more focused on internalsystems.
As a result, and similar to the first three quarters of the year, wereported approximately $900,000 in SG&A for Q4 2007 and reclassified$900,000 for Q4 2006 for comparability purposes. These reclassifications increased the Q4 2007 and Q4 2006gross margin percentages by approximately 0.9 and 1.0 percentage pointsrespectively and increased the respective SG&A expenses as a percentage ofrevenue by identical amounts.
This reclassification continues to have no effecton operating income. All of my comments today on our financial results reflectthis reclassification.
Fourth quarter gross margin was 38.3% compared to 37.6% inthe fourth quarter of 2006. The 0.6% increase in gross margin was a year ago isa result of a 1.5 percentage point decrease in employee compensation expense,offset by the effect of a 0.9% increase in revenues from reimbursable expensesthat contain little or no margin.
In Q4 of 2007, reimbursable expenses were approximately$13.2 million, or 13.4% of our net revenue, compared to $10.8 million, or 12.5%of net revenue in Q4 of 2006. The increase in reimbursable expenses was due toan increase in the uses of subcontractors and external consultants, as well asan increase in travel costs billed directly to clients.
SG&A expenses for the fourth quarter 2007 were 24.8% ofrevenue, compared to 22.7% of revenue in the fourth quarter of 2006. Fourthquarter SG&A expenses increased on a percentage of revenue basisprincipally as a result of higher performance payments earned by externalconsultants of 0.9 percentage points and 0.5 percentage points of rent,depreciation/amortization expenses due to an increase in the number of officelocations, the relocation of our London facilities, and our expanded office inNew York.
Q4 SG&A also increased by 0.3 percentage points due torecruiting, training, and employee relocation expenses. For the full year 2007,SG&A expenses increased to 25.3% of revenue from 24.2%.
We are notsatisfied with our current SG&A cost levels and began a review of thesecosts in December, assisted by outside consultants. This review should identifyareas where management can streamline SG&A costs.
Fourth quarter 2007 operating income was $13.3 million,compared to $12.9 million for Q4 of fiscal 2006. Operating margin for Q4 2007was 13.4% compared to 14.9% for Q4 of last year, reflecting thehigher-than-anticipated expenses, in addition to other factors previouslymentioned.
Interest income was $1.0 million for Q4 2007 compared to$1.3 million for Q4 a year ago, reflecting lower cash balances resulting fromour share repurchase program. CRA did not repurchase any shares under the sharerepurchase program during the fourth quarter of 2007.
During the first three quarters of fiscal 2007, CRApurchased approximately 1,172,000 shares at an average price of $48.42 pershare. CRA has approximately 585,000 shares of remaining capacity under itsexisting share repurchase program approved by its board.
Our effective tax rate for the fourth quarter was 40.9%compared to 49.4% in Q4 of 2006, which includes the loss of tax deductionsrelated to executive compensation. Our full-year tax rate was 39.0% as comparedto 42.9% for fiscal 2006.
The lower tax rate in 2007 was largely due to the$1.4 million net tax benefit associated with the advanced pricing agreementthat CRA entered into with the IRS [in inland] revenue in the second quarter for $1.8 million, offset by the effect oflosses in several locations of $0.4 million. The 2006 tax rate was adversely impacted by the loss ofcorporate tax deduction associated with executive compensation of 2.0%.
Lookingahead, we expect our effective tax rate for fiscal 2008 to be in the 42% to 43%range. Fourth quarter fiscal ’07 net income was $10.3 million, or$0.89 per diluted share.
As Jim mentioned earlier, fourth quarter 2007 netincome includes a one-time benefit from NeuCo related to a license ofintellectual property rights by NeuCo. CRA's share of the net after tax effectof the NeuCo benefit was $2.1 million, or approximately $0.18 per share.
Excluding the one-time benefit from NeuCo, net income forthe quarter was approximately $8.2 million, or $0.71 per share. This compareswith the fourth quarter 2006 net income of $6.3 million, or $0.51 per dilutedshare.
I want to point out that net income for the fourth quarter of 2006 waslowered by two items -- approximately $1 million, or $0.80 per share, relatingto the loss of corporate tax deductions related to executive compensation, andapproximately $400,000, or $0.03 per share, related to the required adoption ofFAS reinterpretation number 47 accounting for conditional asset retirementobligations. We calculated Q407 earnings per share using 11.6 millionweighted average diluted shares outstanding compared with 12.5 million sharesoutstanding in Q4 last year.
The reduction in shares outstanding is the directresult of the company’s share repurchase program during fiscal 2007 that wasdiscussed previously. Incidentally, in fiscal 2007, the sum of our four quarterlydiluted EPS amounts do not equal the full year EPS amount by $0.02.
Thisresults from the impact of the share we repurchased during fiscal 2007. To briefly recap our full year fiscal 2007 results, revenuefor the year increased 13% to a record $394.6 million from $349.9 million infiscal 2006.
Net income for fiscal 2007 was $32.6 million compared with $27.4million in fiscal 2006. Earnings per share grew to $2.68 in fiscal 2007 from$2.24 in fiscal 2006.
Net income for fiscal 2007 included the one-time NeuCobenefit of $2.1 million, or $0.18 per diluted share and the net of tax benefitof the advance by [Sangrene], in effect of trap losses of $1.4 million, or$0.11 per diluted share. Net income for the full year of 2006 included the expenseeffects of the loss of corporate tax deductions on executive compensation inadoption of FAS reinterpretation 47, totaling approximately $1.4 million, or$0.11 per diluted share.
Weighted average shares outstanding used to calculateearnings per share in fiscal 2007 were 12 million versus 12.3 million in fiscal2006. Turning to the balance sheet, billed and un-billedreceivables in Q4 were $131 million, compared to $120.7 million at the end ofQ3.
Current liabilities were $98.8 million at the end of Q4, compared to $80.9million at the end of Q3. Total DSOs, days outstanding, were 109 days.
This consistsof 37 days of un-billed and 72 days of billed versus 108 days in Q3, whichconsisted of 41 days of un-billed and 67 days of billed. We continue to targettotal DSO below 100 days.
As mentioned in our Q3 call, we have implemented a programthat provides our consultants with specific DSO information relating to theirclient receivables and un-billed balances. This program creates a direct linkof our consultants individual DSO with their compensation.
Q4 was the firstfull quarter that program was in place and we’ve already started to seeevidence of improvement during the first four weeks of fiscal 2008, with DSOfalling under 100 days for the first time in over three years. Cash and equivalents stood at $100.5 million at the end ofQ4, down from $131.6 million at the end of Q4 2006.
The decline in cashreflects approximately $56.7 million for the share repurchase program. Duringthe fourth quarter, the company did not buy back any shares of common stockunder the share repurchase program.
Our capital expenditures totaled approximately $2.4 millionfor the quarter and $11.1 million for fiscal 2007, compared to $1.3 million inQ4 of fiscal 2006 and $6.1 million in fiscal 2006. The increase in capitalexpenditures reflects our investment in new, relocated, and expanded officesmentioned previously.
Depreciation and amortization was approximately $2.4 millionin Q4 compared to approximately $2.7 million in Q4 of last year. Our closing stock price did not exceed $50 for at least 20of the last 30 consecutive trading days during the fourth quarter 2007.
Pursuant to the terms of the indenture governing ourconvertible debentures, the CoCo trigger was not satisfied and these debenturescannot be converted during the first quarter of fiscal 2008. This will berepeated each quarter.
To date, as expected, no bonds have been converted. Now back to Jim.
James C. Burrows
Thanks, Wayne. Fiscal 2007 was a year of steady growth forthe company as we continued to expand the CRA brand.
CRA's reputation is amongthe best in the industry and we continue to be involved in more significanttransactions, litigation, and other events affecting the economic landscape. Weapproached $400 million in revenue by strengthening several of our practiceareas, establishing new areas of expertise, and making strategic investments inour international operations.
The continued success of our growth strategy depends on ourability to further diversify our suite of service offerings and areas ofexpertise. Turning to our guidance for fiscal 2008, as announced intoday’s press release, we anticipate revenue growth in the 10% to 14% range forthe year.
We expect to achieve annual net income growth in the 6% to 10% rangeand EPS growth rate in the range of 10% to 14% over fiscal 2007. Our 2008 net income and EPS guidance range percentages arebased on our 2007 GAAP reported net income and EPS of $32.6 million and $2.68per diluted share respectively.
Our 2008 guidance does not include the impactof any acquisitions or share repurchases. While we do not give quarterly guidance, I would like toremind everyone that Q1 generally is a slower quarter because of seasonality,including the effects of the mid-week Christmas and New Year’s holidays.
For your information, for the last three fiscal years, 2005to 2007, revenues for the first quarter for each year have averaged 20.9% ofthe full year revenue. As indicated in our news release this morning and consistentwith past practice, in order to estimate potential share dilution for ourfiscal 2008 EPS guidance, we base it on approximately 11.5 million averagediluted shares for the year and a stock price of $47.80, which was the averageclosing price for the past 10 trading days.
Deviations from this stock pricewill cause our earnings per share to vary based on share dilution from ourstock options and convertible bonds. With that, I will ask the operator to open the call forquestions.
Operator.
Operator
(Operator Instructions) We’ll go to Tim McHugh ofWilliam Blair & Company.
Timothy McHugh -William Blair & Company
Yes, I want to start off by digging into the utilizationquickly; can you talk about whether there is anything specific, a region orpractice level that cause the fall-off in utilization?
James C. Burrows
Obviously some were higher than others. Intellectualproperty probably had a bigger [crop] on average.
Other than that, it wasprobably a little bit across the board.
Timothy McHugh -William Blair & Company
Given that this surprised you, was this late in the quarterand did this -- is this a trend that continued in the first few weeks of fiscal2008?
James C. Burrows
Actually, I think it was -- it probably didn’t change a lotduring the course of the quarter and it’s a little bit early for us to know howthe first quarter will come out but bear in mind, the first quarter is heavilydominated by the seasonal effects. The utilization tends to be low in the weeksclose to the holidays.
Timothy McHugh -William Blair & Company
Okay, and my other question would be on the -- you mentionedthe international margins or international operations being lower margin.What’s the differential right now between international and domestic margins?
James C. Burrows
We haven’t given out that detail but there is a -- there’scertainly a difference between the international and domestic margins. It’s nottrivial.
Timothy McHugh -William Blair & Company
Okay. And the last question would be you mentioned that youare going to probably not hire as aggressively going into the new year.
Can youtalk about what other factors give you confidence that you will continue togenerate the revenue growth that you are forecasting without the headcountadditions?
James C. Burrows
Well, we are projecting headcount additions for the year andone thing to bear in mind is that the way our headcount growth tends to happen,it tends to be back-end loaded because all of the hiring at the entry levelsgoes up late in the third quarter and early in the fourth quarter. And in someways, there tends to be a tendency for more senior hires to be later than thefirst quarter or second quarter, so our pattern historically is for most of theheadcount growth to be Q3 and Q4 effects.
We certainly have the capacity to do more work, though itreally boils down to demand. We do assess that on a fairly continuing basis,practice by practice, and the practices -- each practice has a business planthat they have been, given their knowledge of the market.
It’s basically thedistillation of that that leads to our [inaudible] what’s likely to happenduring the year.
Timothy McHugh -William Blair & Company
Okay. Thank you very much.
Operator
We’ll go to Randy Hugen of Piper Jaffray.
Randy Hugen - PiperJaffray
Thanks. How should we think about operating margins as wemove through 2008?
Adjusting for seasonality, should we see a pick-up towardsthe end of the year?
Wayne D. Mackie
Well, I would think -- again, we don’t give guidance onoperating income specifically but clearly the seasonality factor that Jimreferred to almost definitely means that later in the year, we should bestronger in that area. We are also, as we mentioned, looking closely at SG&Alevels and hopefully we will make some progress on that during the year, sothat may well come later in the year as well, to add to that.
Randy Hugen - PiperJaffray
Thanks. And is it reasonable to think the competitionpractice may slow down through the year because of the high level of M&A inearly 2007, or would the long-term nature of the engagements offset that?
James C. Burrows
Well, the M&A work continues to be quite strong andcompetition actually had a strong quarter based on year over year, so we --competition actually has been a pretty strong performer for us throughout theyear. That continues to be the case.
Randy Hugen - PiperJaffray
Okay. And then just quickly, comments on the acquisitionpipeline.
James C. Burrows
We are, as is generally the case, we are always active inexamining alternatives. We have several that are at least in the stage offairly active discussions but they are all a fair ways off from being somethingthat’s likely to happen, so there is a fairly full pipeline but I really can’t predict[finding a way we might do something].
Randy Hugen - PiperJaffray
All right. Thanks.
Operator
We’ll go to Andrew Fones of UBS.
Andrew Fones -UBS
First of all, could I ask where the share count is rightnow, please?
Wayne D. Mackie
What is the share count now?
Andrew Fones -UBS
Yes.
Wayne D. Mackie
Hold on for a second, Andrew. We’ll come up with that foryou.
I think you heard what we said with respect to what we were using for thefiscal ’08 and the denominator for our guidance.
Andrew Fones -UBS
Yes, I did, and if you like, while you are looking for that,I can move on; as you look at the international business, what differences arethere in terms of the cost structure to cause the margins to be lower? So maybeyour offices, you know, have they not yet reached critical mass or are youseeing lower utilization or is it just generally higher business costs?
James C. Burrows
Well, I think there a number of factors. One is that theLondon, our London operating costs are very high.
This is basically just afunction of being in London. The operating costs of the office, these are notcorporate overhead costs, as a percent of revenue are 8% to 10% higher than therest of the company.
So that’s a significant factor requiring debt toutilization in high rates to offset to generate the same amount of income. Secondly, utilization has tended to be lower for the foreignoperations than the U.S.
average. That gap has been closing over time but theyare not equal yet, so we have higher operating costs and somewhat lowerutilization and the combination of those two obviously leads to lower operatingmargins.
The third factor of which I guess I should mention -- in theforeign operations, we have one very large office, namely London. That officerecently had a real estate consolidation.
I think as a result of theconsolidation, we’ll have a more efficient use of our real estate butthroughout fiscal ’07 and into fiscal ’08, we are continuing to have --essentially to pay the cost of carrying redundant space. We are still carryingthe cost of two locations.
We’ll be getting out of one of the leases duringfiscal ’08. There’s been a substantial cost overhang though than the consolidatedspace.
The second issue is that outside of London, the offices arevery small, so they are basically start-up offices. So there is a range offactors.
Some of those are just related to the fact that we are still in astart-up mode. As you may recall, we opened the London office essentiallyvery late in 2000, really early 2001 when we started.
And the growth in thelast three years has been very substantial but it is still basically reachingequilibrium. And then outside of London, we have very small offices.
So there’sa whole range of factors that will add to the operating margins being lower, [profitwill be] lower than the United States.
Andrew Fones -UBS
Okay, thanks. And as you look at SG&A and target costreductions, is it primarily real estate that you are looking at or are theresome other initiatives or areas that you think you may see savings?
Wayne D. Mackie
It’s really a number of different areas, Andrew. That’scertainly one of them but it would include travel and other related costs andfrankly, infrastructure costs throughout the company as well.
Andrew Fones -UBS
Okay, and then obviously costs are up significantly on theSG&A line year over year. Do you think you can get back to the levels yousaw in 2006, just over 20% of revenue?
Wayne D. Mackie
I think that’s a reasonable target. We have not -- we areearly on in looking at this and so we have intentionally not tried to setexpectations, either overly high or frankly overly low, in this area so wehaven’t even internally logged in on a specific target.
But it is clearly anarea we have our sights on to look at hard.
Andrew Fones -UBS
Okay, thanks, and then if I could perhaps ask for yourinsights into two of the practices in the demand environment that we might seein 2008 -- it seems as though for the litigation practice, we are currentlyseeing a pick-up in securities litigation and are you seeing that? Do you thinkthat could have an impact this year on demand and utilization in that group?
And then secondly, competition -- I think somebody had askedabout what the outlook could be. Obviously there’s some concern about afall-off in M&A but also obviously it’s an election year and there could besome impacts there, so if you could talk about that, that’d be great.
Thanks.
James C. Burrows
I missed the second part of your statement on competition. Iheard the M&A part.
What was the second part?
Andrew Fones -UBS
On competition, the M&A, the impact there, do you thinkthere could be a fall-off in M&A? And then also, it being an election yearand the potential change in administration and what impact you think that couldhave on the competition practice.
Thanks.
James C. Burrows
First on finance, we are continuing to experience a steadyflow of new engagements. There are some areas that area active, for example, inthe sub-prime mortgage area where we’ve been retained on a number ofpotentially major litigations and we think the momentum there is pretty good.
And there is a continuing amount of other large engagementsthat are starting to appear, so how rapidly they will show up in growth is hardto tell but the mood is quite bullish in that practice in terms of theirassessment of the full year going forward. In the competition area, work and demand has been quitesteady.
Obviously if the economy really goes south, M&A work or M&Atransactions could decline significantly. That will affect us.
That hasn’treally affected us to date. I’m not sure I’m in a better position to project that thananybody else because that’s really a function of what the macroeconomic impactsare.
But that work has been strong, it is quite strong in Europe where much ofthe work is emanating from, so we are geographically diversified, at least. Andas I said, [inaudible] has continued to be nearly a steady producer for us.
Now, in terms of the effects of the election, I think ourassessment is that almost regardless of the outcome of the election, whateverthe outcome is it should be good because the current administration is prettymuch of a hands-off on business. There is a tendency to let a lot of mergers gothrough without a lot of resistance and even if it’s just another Republicanadministration, I think the belief is that either there will be no change orchange for the better in terms demand for our kinds of services.
Andrew Fones -UBS
Okay. Thank you.
Wayne D. Mackie
There’s the question you asked on shares at the front-end ofyour questions. If this helps you, the number of shares that were reflected onthe balance sheet as outstanding, which I think is what you asked, I’m not sureif this is what you wanted, is just about 11 million at the end of the fiscalyear.
Of course, the $11.5 million that we are using as the estimate of theshares to be used for guidance and EPS calculation reflects the dilutive effectof the CoCo bond shares that would be convertible and options and so forth.
Andrew Fones -UBS
Okay, thanks. Yes, that’s great.
And then just as afollow-up to your comments that, if you don’t mind, on competition; I know thatin the past you’ve tried to give some quantification of the impact of M&Aon the competition business, or the proportion of business that was related toM&A. Do you have any thoughts you could provide there?
Thanks.
James C. Burrows
We haven’t quantified it, partly because it’s not a numberthat we can trim down very easily because there’s a lot of work that’s presentin terms of how it would be classified, but it is a substantial share of ourcompetition work.
Andrew Fones -UBS
By substantial, you would say possibly half or more thanhalf, or -- ?
James C. Burrows
I’m not sure it’s more than half but it’s certainly not 10%either.
Andrew Fones -UBS
Okay. Thank you very much.
Operator
(Operator Instructions) We’ll go to Jim Janesky of StifelNicolaus.
Adam Kozer - StifelNicolaus
Good morning, guys. This is actually Adam [Kozer] for Jim.My first question is going into ’08, what’s the sustainability for growth in Iguess the chemicals, petroleum and energy practices?
What does the demandpipeline look like?
James C. Burrows
The demand pipeline looks fairly good. There’s been, in thelast several months, a turnover of projects with projects turning, othersopening up.
I think there has probably been a slowdown of actual growth inrevenue but the -- there seems to be plenty of opportunities. In the MiddleEast, we have one very large project that we are still working on but it’ssubstantially reduced because we are in the late stages of that.
That’s beingreplaced by a number of new projects and leads, but they require conversions sowe are in one of those periods where we are turning over projects but the[parade] of new opportunities seems to be pretty good.
Adam Kozer - StifelNicolaus
Okay, great and then just briefly touching in on thesub-prime mortgage area, what types of clients are you starting to see orexpecting to see the most demand from?
James C. Burrows
Generally, it would be either the lenders themselves oraccounting firms or other financial institutions that have become involved. Ourwork tends to happen when there’s litigation.
We don’t tend to get involved onjust doing the forensic investigation or purely on stage work. It’s whensomething becomes a litigation and a major player is involved, large damage[inaudible].
Adam Kozer - StifelNicolaus
Okay. All right.
Thanks a lot.
Operator
(Operator Instructions) Gentlemen, having no furtherquestions, I’ll turn the conference back to management for any additionalremarks.
James C. Burrows
Thanks, everybody. We look forward to speaking with you onour first quarter fiscal 2008 conference call.
This concludes today’s call.
Operator
Thank you for your participation.