Jun 5, 2008
Executives
Jim Burrows - President and Chief Executive Officer Wayne Mackey - Executive Vice President and Chief Financial Officer
Analysts
Randy Hugen - Piper Jaffray Timothy McHugh - William Blair & Company Andrew Fones - UBS James Janesky - Stifel, Nicolaus & Co.
Operator
Good day, and welcome everyone to CRA International's second quarter fiscal 2008 conference call. (Operator Instructions) With us today are CRA's President and Chief Executive Officer, Jim Burrows, and Executive Vice President and Chief Financial Officer, Wayne Mackey.
At this time, for opening remarks and introductions, I would like to turn the call over to Mr. Mackey.
Please go ahead, sir.
Wayne Mackey
Thank you, [Doug]. Statements made during this conference call concerning the future business, operating results, estimated cost savings and financial condition of the company and statements using the terms anticipates, believes, expects, should or similar expressions are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements are based upon management's current expectations and are subject to a number of factors and uncertainties. Information contained in these forward-looking statements is inherently uncertain, and actual performance and results may differ materially due to many important factors.
Such factors that could cause actual results to differ materially from any forward-looking statements made by the company include, among others, the company's restructuring costs and attributable annual cost savings, changes in the company's effective tax rate, share dilution from the company's convertible debt offering and stock options, dependence on key personnel, attracting and retaining qualified consultants, dependence on outside experts, utilization rates, factors related to its recent acquisitions, including integration of personnel, clients, offices and unanticipated expenses and liabilities, risks associated with acquisitions it makes in the future, risks inherent in international operations, performance of NeuCo, changes in accounting standards, rules and regulations, changes in the law that affect the practice areas, management of new offices, potential loss of clients, dependence on the growth of the company's Business Consulting practice, the unpredictable nature of litigation-related projects, the ability of the company to integrate successfully new consultants into its practices, intense competition, risks inherent in litigation and professional liability. Further information on these and other potential factors that could affect the company's financial results is included in the company's filings with the Securities and Exchange Commission.
The company cannot guarantee any future results, levels of activity, performance or achievement. The company undertakes no obligation to update any of its forward-looking statements after the date of this call.
Jim?
Jim Burrows
Thanks, Wayne, and thank you, everyone, for joining us today. I apologize if I don't come across clearly.
I have laryngitis, and I will try to get through the call as best I can and [because I think] I can. But first I would encourage everyone to refer to today's news release for a full reconciliation of GAAP net income and earnings per share to non-GAAP net income and earnings per share.
As outlined in today's news release, [inaudible] revenue for the second quarter of 2008 was $93.8 million, an increase of 6% over the second quarter of 2007. As previously announced, we exited or divested a number of lines of business during the first half of fiscal 2008, including the majority of our Asia Pacific operation and certain specialized Forensic-related practices in London.
The 2008 second quarter results include less than a full quarter of revenues from these lines of business as compared to the second quarter of 2007. That did have a full quarter of revenue.
Our overall revenue growth during the quarter was fueled by our Litigation and Applied Economics platform, which offset declines in our Finance and Business Facility platforms. In particular, within Litigation and Applied Economics we saw notable increases in our Competition and Intellectual Property practices as part of the divestiture of our competition business in Australia and New Zealand as well as continued growth in our Labor and Employment practice.
Within our Finance platform we saw increased activity in Subprime and Credit Crisis Investigation and Litigation work, however this positive trend was offset by a slowdown in work coming from our Forensics practice, which was affected by the timing of projects and the divesture of certain non-core pieces of the business in the U.K. and Australia.
Within Business Consulting, our Chemicals and Petroleum practice went below second quarter 2007 levels while we continue to work on replacing projects in the Middle East. Revenues in the C&P practice did recover significantly from the sequential first quarter.
The North America practice continues to be strong, with most of the increase in revenues coming from Europe and the Middle East. Performance for the other Business Consulting practices was mixed, with some up and some down.
With respect to the bottom line results, I am very encouraged by the early returns on our strategic cost-cutting initiatives which we talked about in last quarter's conference call. These initiatives were focused on better balancing the size of our work force and resources and the demands of the markets in which we operate, with the ultimate goal of reducing overhead costs, increasing our utilization rate, and improving margins of profitability.
Steps in the plan include reducing our work force, consolidating or closing some of our offices, divesting some of our underperforming practices, and eliminating other expenses based on an evaluation of our current administrative practices and infrastructure. Based on a thorough review of our entire client base, we implemented a work force reduction [inaudible] to address underperforming areas.
We have better aligned our resources with current market demand, and this improvement is becoming evident in our results. Utilization in Q2 was 74%, an increase over the 70% utilization in the first quarter of 2008.
We continue to target utilization in the high 70s. The second quarter reduction in SG&A expenses as a percentage of revenue after adjusting for the non-GAAP restructuring items is an indication of the impact our cost cutting is having.
This was the case where the compare was to the comparable quarter of fiscal 2007, a non-GAAP reduction of 2.5 percentage points, or sequential first quarter of fiscal 2008, a non-GAAP reduction of 4 percentage points. And I'll remind you that many of the measures we're taken only have partial results in the quarter.
During the quarter we completed the divestiture of the majority of our operations in Australia and New Zealand, which allowed us to exit less strategic and unprofitable areas of our Accounting and Computing and Transfer Pricing businesses. We also completed the consolidation of our Palo Alto and London offices.
In total, for the first half of 2008 we incurred costs of approximately $9.4 million in association with the cost-cutting efforts I just mentioned. We expect that these efforts will generate an annual cost savings of approximately $10.7 million going forward.
We reported a GAAP net loss for the second quarter fiscal 2008 of $512,000 or negative $0.05 per diluted share. This includes pre-tax expenses of $8.7 million related to employee separation and office closures and the divestiture of the majority of the company's Australia and New Zealand practices.
Excluding the items mentioned above and taking into account the related tax effect of $3.1 million, non-GAAP net income for the second quarter of 2008 was $5.2 million or $0.48 per diluted share. This compares with non-GAAP net income in the second quarter of 2007 of $4.8 million or $0.39 per diluted share, which excludes a net reduction in the tax provision of $1.8 million related to the conclusion of advance pricing by an agreement the company entered into with the IRS in the preceding year.
Turning back to our revenue performance, CRA's International business during the quarter represented 23% of total revenue. While this was down from 28% of total revenue in Q2 of '07, it is slightly higher than the 22% for Q1 of this year and reflects the impact of the divestitures in Australia and New Zealand during the second quarter and the exit of certain Forensic practices during the first quarter.
Our strategic decisions to exit certain lines of business and reduce overhead costs are beginning to improve our International margins as compared to our first quarter results. Looking at consultant headcount, we ended the quarter with 682 consultants compared with 772 in Q1 2008.
The current breakdown is 208 junior employee consultants and 474 senior employee consultants. Reduction in headcount reflects the divestiture of the majority of the Australia and New Zealand practices and the general work force reduction implemented during the quarter.
Turing to the business platforms, Litigation and Applied Economics revenue increased more than 20% over Q2 of '07. As I mentioned earlier, this increase was fueled primarily by our Competition and Intellectual Property practices.
There are notable Q2 projects in Competition. CRA was retained by International Paper to assist in securing antitrust clearance for its proposed acquisition of Weyerhaeuser's container board and package and recycling business.
[break in audio] In the first contested class certification case in Canada, the Supreme Court of British Columbia dismissed a motion for class cert of all direct and indirect purchasers of silicone memory chips. CRA provided economic evidence for a group of five defendants with respect to harm and damage issues relating to class members.
A joint U.S. and U.K.
team assisted Tele Atlas NV, a provider of navigable digital maps in connection with the European Commission's review of the proposed acquisition of Tele Atlas by TomTom International NV, one of the largest suppliers of portable navigation devices in the world. In Europe, CRA [assisted] Seawell, a provider of contract performing, platform drilling, engineering and welder intervention services to the offshore oil and gas industry in its acquisition of Nobel/NK.
Also in Europe, CRA assisted Oracle Corporation throughout European Commission proceedings on the acquisition of BEA Systems, a provider of middleware software. CRA also assisted Home Retail Group in receiving clearance for an acquisition of a 27store chain.
With respect to IP Litigation activity in Q2, CRA has been retained by several defendants in a large patent infringement matter involving telecommunications technology to provide damage related expert services. CRA is working with several clients in multiple industries represented by five different law firms.
These cases are ongoing, with trial scheduled at the end of this year. With respect to Transfer Pricing projects, we saw one of our [inaudible] projects for a construction-related client that had been on hold during Q1 move forward during the current quarter.
We expect work will continue into Q3. Our Transfer Pricing practice also received positive press coverage for its role in negotiating an advance pricing agreement on behalf of Warner Chilcott, an international pharmaceutical company focused on women's health.
Turning to Business Consulting, overall revenue in the platform was down a little over 10% for the second quarter, largely reflecting a year-over-year decline in Chemicals and Petroleum and a modest drop in revenues in Energy and Environment. There were mixed results in the smaller practices - Metals, Life Sciences and Aerospace & Defense up, Capital Projects and Transportation down.
Chemicals and Petroleum revenues rebounded sequentially in the second quarter from the first quarter, with more than a 40% sequential growth in Europe and the Middle East accounting for most of the increase. During the quarter we were hired by several significant private sector chemicals and petroleum clients in Saudi Arabia and Kuwait.
Other new C&P assignments in Q2 involved electricity restructuring in Africa and a wide range of projects for both European and Middle Eastern private equity clients. In addition, CRA worked for a global industrial products company on a business strategy in a supporting program to improve business processes.
In Q2, Energy and Environment work consisted of a broad range of products, continuing to assist in the [areazation] of a federal electricity and water authority in the United Arab Emirates. This project and related projects are expected to generate substantial revenues through the rest of 2008 and into 2009.
CRA's E&E practice also continued to advise energy companies in connection with the financial implications of climate change policies on their operations and commenced more than a dozen projects related to electricity capacity markets. At the end of Q2, E&E commenced work under its contract with the New York City Economic Development Corporation to develop a master energy infrastructure plan to meet the future needs of the city.
This work is expected to continue through the end of FY '08. Finally, in Q2 E&E received a large project to advise an Asia Pacific-based utility with respect to major generation acquisition.
During Q2, the Life Sciences practice was hired by a new client to run a pharmaceutical launch and begin exploring performance improvement opportunities at two multinational pharmaceutical companies. These companies are challenged with the efficient and effective management of multiple channels of distribution, multiple contracts for supply, and utilization with hospitals, clinics and managed care organizations.
Turning to our Finance platform, overall revenue declined about 5% in comparison to Q2 of last year. Within our Finance platform we saw increased activity in Subprime and Credit Crisis Investigation and Litigation work that was offset by the decline of our Forensic practice.
This decline in Forensics was attributable to our decisions to divest certain noncore components of this business and the effect of reducing headcount in the underperforming locations. The International Arbitration market remains active for Forensics, with several projects running through to final hearings in calendar year 2009.
The practice continues to offer its core financial, accounting and forensic computing services in the context of fraud, regulatory and internal investigations. With respect to Finance projects during this quarter, CRA assisted Clear Channel regarding economic issues arising from its litigation with several large financial institutions.
The dispute the parties was related to the financing terms for approximately $19 billion in loans with a purpose of financing Clear Channel's acquisition by private equity purchases. Other Finance work during the quarter included work for a major accounting firm in a class action matter relating to a client's accounting practices, valuation analyses of several bankruptcy matters, and assisting brokerdealerunderwriter defendants in IPO securities litigation.
With that, I will now turn the call over to Wayne for his financial review. Wayne?
Wayne Mackey
Thanks, Jim. Let me remind everyone that CRA's fiscal year typically operates on 13 four-week cycles producing unequal quarters in terms of length.
Q1, Q2 and Q4 are typically 12 weeks in length, while Q3 is a 16week quarter. Briefly recapping the Q2 results, revenue grew 6% to $93.8 million compared to $88.3 million for the second quarter of fiscal 2007.
As described in the press release, our GAAP results for the second quarter of fiscal 2008 reflected $8.7 million related to employee separation, office closure costs, and the divestiture of the majority of the company's Australia and New Zealand practices. Second quarter gross margin on a GAAP basis was 31.6%, and on a non-GAAP basis, excluding the items mentioned above, gross margin was 34.1%.
This compares with a gross margin of 36.4% in the second quarter of 2007. The decrease in gross margin percentage between Q2 2008 GAAP and non-GAAP measures is the result of the restructuring costs related to employee separation and other compensation recorded in conjunction with the employee work force reduction as well as certain costs associated with the Australia and New Zealand practice divestitures completed during the year.
The decrease of 2.3 percentage points in our non-GAAP measure of Q2 2008 gross margin compared to our Q2 2007 gross margin is due primarily to two items. The first item is an increase in reimbursable expenses of approximately $1.3 million or 0.6 percentage points.
Reimbursable expenses generally include no margin. In addition, calculating the bonus in the second quarter, the restructuring charges were not included.
Also an additional $1.3 million of incentive bonus was accrued as a retention incentive for key officers. SG&A expenses were 30.7% of revenue in Q2 on a GAAP basis.
On a non-GAAP basis, excluding the restructuring items mentioned above, SG&A expenses were 23.8% of revenue compared to 26.3% of revenue in the second quarter of 2007. As Jim mentioned, we are pleased to see the initial effects of our cost-cutting initiatives taking hold.
We instituted a number of additional programs to further reduce SG&A this quarter, including a plan to take more recruiting efforts in house. The 2.5% non-GAAP decrease in SG&A as a percentage of revenue is mainly related to a decrease in recruiting fees of $0.9 million compared to the same period a year ago.
We are anticipating an annualized rent savings going forward from the London and Palo Alto office consolidations of approximately $2.4 million. On a GAAP basis, operating income was $900,000 or 1% of revenue and was $9.6 million on a non-GAAP basis.
This compared with $8.9 million in Q2 of fiscal '07 on a GAAP basis. Non-GAAP operating margin was 10.3% compared to 10.1% in Q2 of last year, reflecting our increase in revenue and cost-reduction efforts.
Interest income was $660,000 for Q2 of 2008 compared to $1.4 million in Q2 a year ago as a result of a decrease in our cash balance due to share repurchases as well as a lower interest rate environment. CRA repurchased 369,000 shares under the share repurchase program during the second quarter of 2008.
The shares were repurchased at an average price of $31.93 for a total of approximately $11.8 million. CRA has approximately 216,000 shares of remaining capacity under its existing share repurchase program approved by the Board.
Our GAAP tax provision for the quarter was $1.4 million on a pre-tax income of $1 million, resulting in an effective tax rate of more than 140%. This compares with a GAAP tax provision of $2.6 million on pre-tax income of $9.5 million, resulting in an effective tax rate of 27.5% in Q2 of 2007.
The higher Q2 2008 GAAP tax rate was primarily due to losses outside of North America that either benefited a lower rate than the statutory U.S. rate or provided no tax benefit at all and additional tax associated with the divestiture of our New Zealand operations.
Our Q2 2007 tax rate of 27.5% reflected a reduction in the tax provision of $1.8 million related to the conclusion of an advance pricing agreement the company entered into with the IRS. On a non-GAAP basis, the tax rate for Q2 2008 was 46.1% as compared to 46.6% in Q2 of 2007, excluding restructuring items in the second quarter of 2008 and the advance pricing agreement in the second quarter of 2007, respectively.
The higher non-GAAP tax rates for the second quarter of this year and last year reflect foreign losses that we are unable to benefit from. Second quarter fiscal 2008 net loss was $512,000 or negative $0.05 per diluted share and non-GAAP net income was $5.2 million or $0.48 per diluted share compared with net income of $6.7 million or $0.53 per diluted share for the same period of 2007 and non-GAAP net income of $4.8 million or $0.39 per diluted share in Q2 of 2007.
On a GAAP basis, we calculated Q2 2008 loss per share using 10.6 million weighted average diluted shares outstanding. On a non-GAAP basis, diluted shares outstanding were 10.8 million shares compared to 12.5 million diluted shares outstanding in Q2 last year on both a GAAP and non-GAAP basis.
The reduction in diluted shares outstanding is the direct result of the company's share repurchase program and our reduced share price, which decreased the number of common stock equivalents. Turning to the balance sheet, billed and nonbilled receivables in Q2 were $111.1 million compared to $114.3 million at the end of Q1.
Current liabilities were $84.1 million at the end of Q2 compared to $76.3 million at the end of Q1. Due to some excellent work on the collections front, total DSO - days sales outstanding - decreased to 96 days.
This consists of 37 days of unbilled and 59 days of billed versus 107 days in Q1, which consisted of 41 days of unbilled and 66 days of billed. Cash and equivalents stood at $93.9 million at the end of Q2, down from $101.4 million at the end of Q1, reflecting the share repurchase program.
Our capital expenditures totaled approximately $2.2 million for the quarter compared to $2 million in Q2 of fiscal '07. Depreciation and amortization expense was approximately $4.8 million for Q2 compared to approximately $2.3 million in Q2 of last year.
The majority of the increase is related to the write down of intangibles totaling approximately $942,000 related to the divestiture of the majority of the company's Australian practice and $1.8 million related to the office closures that have been previously discussed. Before I turn the call back to Jim, I wanted to mention a recent change in accounting for our convertible bonds.
On May 9, 2008 the FASB issued Staff Position No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion, Including Partial Cash Settlement.
We will be required to implement the new accounting rule beginning in the first quarter of our fiscal 2010 for our $90 million in convertible bonds. We anticipate the implementation of this new accounting pronouncement will have no impact on past or future cash flows.
We are currently evaluating the impact this pronouncement will have on our consolidated financial statements. Now back to Jim.
Jim Burrows
Thanks, Wayne. In terms of our outlook, we believe the strategic initiatives we included in the first half of the year have created a solid foundation for profitable growth.
The CRA International brand remains one of the most prominent and recognizable in our practice areas. Overall demand for our specialized services across North America and throughout Europe has been steady.
Our entire management team is focused on recovering from the revenue shortfall we had in Q1, which was mostly the European, Middle Eastern portion of the Chemicals and Petroleum practice. We have already seen a significant recovery in this sector.
We are encouraged by the size of the contingent improvement in that business. With that I will ask the operator to open the call for questions.
Operations?
Operator
Thank you. (Operator Instructions) Your first question comes from Randy Hugen - Piper Jaffray.
Randy Hugen - Piper Jaffray
What needs to happen to get utilization back in the high 70s, and how soon do you think it can happen?
Jim Burrows
Well, it's a case of just managing the business and keeping on [inaudible] the headcount to match the business. We continue to have a, what I'll call a soft hiring freeze.
That is, we're looking at each potential hire as it comes in to make sure that they're needed for current business and will generate immediate revenues. And utilization can change pretty quickly in this business, so we're certainly hoping to get further recovery.
I'll remind you that the measures we took in Q2 were basically in mid-quarter, so what you're seeing in the utilization for that quarter still has a mixture of old and new in it.
Randy Hugen - Piper Jaffray
How are you thinking about guidance for the rest of the year? Could you just walk us through while you still don't feel comfortable providing guidance and what would have to happen to, I guess, allow you to provide guidance for '08?
Jim Burrows
Well, we have had practice at that, providing quarterly guidance, and now we're in the middle of the year and if we gave guidance now for the year, effectively that becomes quarterly guidance. I think we'll just simply reevaluate where we are at the end of the year.
Randy Hugen - Piper Jaffray
And then the Chemicals and Petroleum practice, how were things there at the end of the quarter? What's your visibility?
Is it back up to speed or are you going to continue to experience, I guess, a bit of a dragging into Q3 and Q4?
Jim Burrows
That practice has some visibility because a lot of their work is contract and that is, you know, the kind of work we do in Litigation. They are projecting some continued improvement going into the third quarter.
And there's a good pipeline of work, so we are optimistic.
Randy Hugen - Piper Jaffray
SG&A dropped nicely in the quarter. On a weekly run rate, is this a new baseline or could we expect continued cost saving going forward?
Jim Burrows
Well, we are continuing to implement cost reduction measures, so we are trying to continue the work to reduce that number over time. And what we saw - actually much of what we did in Q2 hasn't really shown up in the numbers.
There was a big drop in recruiting costs. But we do anticipate we'll have further savings.
Operator
Your next question comes from Timothy McHugh - William Blair & Company.
Timothy McHugh - William Blair & Company
As you look at, you know, the second half of the quarter and the impact of the restructuring initiatives, are you pleased that those are sufficient to get your International operations to the profitability you hope for or are you still evaluating other options?
Jim Burrows
No, we're happy with what we have internationally. I think we're good.
Solid practices. We actually, in spite of the first quarter problems, I think we're very happy to be in the Middle East.
There's a lot of work there. We're on the ground.
We have a good reputation. There's a lot of marketing going on and a good pipeline of possible work out there, so we think we basically have the right combination of resources and practices going forward [inaudible] right now.
Timothy McHugh - William Blair & Company
Along those lines, then - I know it's tough to draw conclusions from a relatively short period - but, as you look kind of post the implementation of these restructuring charges, are the International operations profitable again or is it going to take time for some of this to come back and for the C&P practice to improve?
Jim Burrows
Well, on a non-GAAP basis, I think the second quarter still showed a loss but it was down about half from what it was in the first quarter. But also the Q2 only had partial effects of any measures, so we're optimistic that we'll be able to move back [on regular block].
Obviously, there are a lot of moving parts there, but that's what we're driving towards.
Timothy McHugh - William Blair & Company
And as we think about the impact of the restructuring charges, you said most of them were pretty much midquarter. Can we assume about that amount of the cost savings or kind of half of it was maybe recognized in the quarter, or how shall we think of ongoing cost savings relative to your Q2 run rate?
Wayne Mackey
We took a look at what the impact on the quarter of these were, and if you think of the $8.7 million, actually, because of the nature of what occurred, some of the people rolled out that were [inaudible] left the company during the quarter or later in the quarter. We didn't really announce it until about halfway through the quarter, so it was muted to some degree.
The lease issues, those also didn't happen until the last part of March, and so the impact of this was much smaller, if you will, than you might have anticipated. It wasn't a full 25%, if you will, of the annualized effect.
So it's down well under 25% of what the annualized effect would be.
Timothy McHugh - William Blair & Company
And then, lastly, share repurchases that you were - continue to be aggressive there. What's you appetite going forward as well as the share repurchases in the quarter, Wayne, can you tell us relative to the quarter end share count, are most of those reflected in the diluted average that you show for the second quarter?
Wayne Mackey
They would be. With our quiet period, we did not buy shares after some time in the early to mid part of April, so those would be all reflected in the quarter-end balances.
In terms of the appetite, I think that's something we'll continue to evaluate depending on the price and what our Board's wisdom is on that.
Operator
Your next question comes from Andrew Fones - UBS.
Andrew Fones - UBS
You mentioned that the cost cutting occurred roughly mid-quarter. Did the divestiture also occur mid-quarter?
Jim Burrows
Yes.
Andrew Fones - UBS
And then, as I look at the utilization and how that kind of trended through the quarter, obviously it would have picked up post the cost cutting. Where did utilization - where was that running at the end of the quarter?
Can you give us that?
Jim Burrows
It was running fairly close to what the average for the quarter was, but I would caution that there's leading up in delivery of week to week variations in that number. So it definitely obviously trended up during the quarter.
It started out around 70%.
Andrew Fones - UBS
And then in terms of headcount, can you tell me where headcount was at the end of the quarter and how many college hires you expect to bring on during Q3 and Q4?
Jim Burrows
Headcount was at 682 at the end of Q2. There is a fairly large volume of new analysts coming in.
I don't know the exact number, but there's also expected - a large volume of analysts expected to go back to school. On expected value, we do see some growth in headcount in Q3 and Q4, but there are a lot of uncertainties in that number, so I think the actual will be anywhere from a small increase to some number in the 2%, 3% range.
Andrew Fones - UBS
And then how many weeks are in the third quarter this year?
Wayne Mackey
There'll be 16 weeks in the third quarter.
Andrew Fones - UBS
And what was reimbursable expense in the quarter?
Wayne Mackey
Reimbursable - let's see - $12.3 million.
Andrew Fones - UBS
And do you have cash from operations and Capex as well?
Wayne Mackey
I thought I gave it, but hold on for a second, Andrew.
Andrew Fones - UBS
Wayne, perhaps while you're looking for that, I had one more for Jim. In terms of the large Middle East project that fell off in the first quarter and, you know, may pick back up again later this year, what's your current thought in terms of the timing there?
Jim Burrows
Well, that particular line of business we're doing some work on, but the new contracts are still out there. But [inaudible] 74, realistically, we wouldn't expect to see - we'd be surprised to see any revenue before Q4 around those contracts or maybe even next year, even end of the year, because this is contracting process and Saudi Arabia is very protracted and [inaudible] to summer.
Ramadan this year is in September, so we're not counting on much revenue from those contracts. The revenue we're seeing is really from new clients and other business.
We do have - we are very, very optimistic that that line of business will resume, it's just a question of when.
Operator
Your next question comes from James Janesky - Stifel, Nicolaus & Co.
James Janesky - Stifel, Nicolaus & Co.
Jim, what did you say that the International operations account for now as a percentage of revenues?
Jim Burrows
[22]
Wayne Mackey
22 for the quarter, Jim.
James Janesky - Stifel, Nicolaus & Co.
22%? Okay.
And with the - now that's down, obviously, because of the divestitures, but historically, with European summer vacations, utilization was down sequentially in the August fiscal quarter. Is that an expectation that we should have going into this August?
Jim Burrows
That's always something we're going to watch. It's a little bit difficult to forecast.
Obviously, people do take their vacations. They do here.
Whether this just, you know, what the ripple effects are is different every year. So we just have to watch that carefully.
James Janesky - Stifel, Nicolaus & Co.
Gross margin, do you expect that, you know, the incentive bonuses that you gave to hold on to people, I would imagine, that's going to continue throughout fiscal 2008 or, you know, just give us an idea, if you can, what type of gross margins we can expect for the remainder of the year. Do you think that they'll be up versus this quarter or will there be more, you know, compensation that's going to flow through the number?
Jim Burrows
Well, the number referenced by Wayne was basically added to the bonus pool for the year, so they weren't - was not actually paid out during the quarter, simply reserved. And we do not expect that to be [inaudible].
James Janesky - Stifel, Nicolaus & Co.
Don’t expect it what, Jim? I'm sorry.
Jim Burrows
We're not expecting that to be continuing. It was a one - it was more in the way of a one-time adjustment.
James Janesky - Stifel, Nicolaus & Co.
Okay, but there will be, you know, accruals in the third and fourth quarter, right?
Jim Burrows
Well, they'll be the normal accruals.
James Janesky - Stifel, Nicolaus & Co.
Oh, I see. Okay.
So we could expect that gross margins could improve?
Jim Burrows
We certainly hope so.
James Janesky - Stifel, Nicolaus & Co.
And actually, Wayne, you gave three reasons why gross margins were down year-over-year, increase in reimbursable expenses and the incentive bonus. What was the third reason?
Wayne Mackey
The third had to do, Jim, with excluding the restructuring costs from the determination of the bonus accrual.
James Janesky - Stifel, Nicolaus & Co.
Jim, can you give us an idea of, you know, what type of work you're seeing in the Subprime, you know, broadly defined area - let's even more broadly define the Financial Services area, maybe - and how do you expect that to trend as we move through 2008 and into 2009?
Jim Burrows
I don't have a list of projects here, actually. I was trying to get a list before the call, and I just didn't get to it.
But we have received work in connection with some of the biggest names that you see out in the press. We tend to work for the large defendants, so it's work for accounting firms and some of the major players that are already subjects of lawsuits.
I actually don't have information on the billings for those projects yet. I know we're working on this.
I just don't have that information at this call, but we'll have more to say about that next quarter.
James Janesky - Stifel, Nicolaus & Co.
Do you expect that accelerate throughout '08 and into '09?
Jim Burrows
We do. We certainly think we'll see increasing [billages] from the cases we have as this is an area where there's regular activity.
We get opportunities on a fairly regular basis now in this area, so I would expect that to be growing.
James Janesky - Stifel, Nicolaus & Co.
Wayne, what was depreciation, amortization and stock-based comp in the quarter.
Wayne Mackey
Let me get that for you, Jim.
James Janesky - Stifel, Nicolaus & Co.
While Wayne is looking that - Jim, the growth of a little over 6% in the quarter, you know, if you exclude the divestiture of some of the overseas operations, what do you think organic growth is and what do you think that can be going forward?
Jim Burrows
I don't have a measure of what we had done on an apples to apples, but I think that would have raised it by several percentage points. I think the organic growth during the quarter was probably still less than 10%, however there were some significant activities during the quarter in connection with projects that the revenues aren't really going to show up until Q3.
So basically I think we're still operating in an organic growth area and the - you know, [OTEs] are close to that.
James Janesky - Stifel, Nicolaus & Co.
Wayne, do you have those numbers?
Wayne Mackey
Yes. The stock comp for the quarter was $1.6 million, Jim.
The depreciation and amortization, $4.8 million.
Operator
(Operator Instructions) You have a follow-up question from the line of Timothy McHugh - William Blair & Company.
Timothy McHugh - William Blair & Company
Yes, most of my questions have been asked since then other than I would be interested in cash flow as well. I didn't hear you respond to Andrew's question on that one.
Wayne Mackey
Yes. In fact, I was going to get back to that.
For the quarter, the cash flow from operations was $5.6 million and the Capex for the quarter was $2.2 million.
Operator
You do have a follow-up question from Andrew Fones - UBS.
Andrew Fones - UBS
Thanks. Tim asked my follow up.
Operator
Gentlemen, there are no other questions in the queue at this time.
Jim Burrows
Well, if there are no other questions, I wish to give my thanks to everyone and we look forward to speaking with you on our third quarter conference call later this year. This concludes today's call.
Operator
Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation.
You may disconnect your lines at this time.