SOURCE: LECG Corporation

February 27, 2007 16:02 ET

LECG Corporation Reports Fourth Quarter and Full Year 2006 Results

Announces Organizational and Management Changes

EMERYVILLE, CA -- (MARKET WIRE) -- February 27, 2007 -- LECG Corporation (NASDAQ: XPRT), a global expert services firm, today reported financial results for the fourth quarter and full year ended December 31, 2006.

Fourth Quarter 2006 Financial Results

Revenues for the fourth quarter increased 22 percent to $88,946,000 from $73,028,000 for the fourth quarter of 2005. Expert and professional staff revenues increased 21 percent. Organic growth of expert and professional staff revenues was 14 percent.

Net income was $3,519,000 in the fourth quarter of 2006, 39 percent lower than net income of $5,807,000 reported in the fourth quarter of last year. Net income per diluted share was $0.14 this quarter compared with net income per diluted share of $0.23 in the same period a year ago. Diluted shares outstanding increased 2 percent to 25,459,000 in the fourth quarter of 2006 from 24,952,000 for the same period in 2005.

EBITDA(1) for the fourth quarter of 2006 was $7,930,000, a 29 percent decrease from EBITDA of $11,200,000 in the fourth quarter of 2005. Adjusted EBITDA(2) was $9,481,000 for the fourth quarter of 2006, a decrease of 20 percent over the prior year period.

The decline in net income and adjusted EBITDA was due primarily to a shortfall in gross profit and additional general and administrative expenses as presented in a release issued by the company on January 26, 2007.

Full Year 2006 Financial Results

Revenues for the year ended December 31, 2006 increased 23 percent to $353,850,000 from $286,656,000 for the same period in 2005. Expert and professional staff revenues increased 23 percent. Organic growth of expert and professional staff revenues was 12 percent.

Net income for the year ended December 31, 2006 was $21,467,000, 4 percent below net income of $22,376,000 for the full year 2005. Net income per diluted share was $0.85 for 2006 compared with net income per diluted share of $0.91 for 2005. Diluted shares outstanding increased 3 percent to 25,250,000 in 2006 from 24,557,000 in 2005.

EBITDA(1) for the full year ended December 31, 2006 was $42,816,000, a 2 percent increase over EBITDA of $41,846,000 in 2005. Adjusted EBITDA(2) was $49,614,000 in 2006, a 14 percent increase over the prior year period.

"Demand for our services is strong, and we have confidence in our revenue pipeline. Nevertheless, our fourth quarter financial results were disappointing," said LECG chairman, Dr. David Teece. "We have begun 2007 with renewed focus on improving gross and operating margins as well as free cash flow generation, and we are beginning to implement initiatives and procedures to achieve these objectives."

Operating Metrics

As of December 31, 2006, LECG had 1,291 employees and exclusive independent contractors compared with 1,151 as of December 31, 2005. Expert headcount was 376, an increase of 8 percent compared with 348 as of December 31, 2005. Professional staff headcount increased 13 percent to 634 from 563 as of December 31, 2005.

Organizational and Management Changes

The LECG board of directors recognizes the need for a full time chief executive officer and, as such, intends to conduct a search for a CEO in due course. In the interim, the board of directors has appointed Michael Jeffery CEO, effective immediately. Mr. Jeffery's mandate is to improve financial performance and shareholder value. As chairman, Dr. Teece will refocus his energies on communicating the firm's strategy and vision both internally and externally, in addition to continuing his significant professional contributions as a leading expert.

In his new role, Mr. Jeffery has launched a search for a new chief financial officer. John C. Burke will continue as a member of senior management in an operational role.

The executive management committee has been restructured and given expanded responsibilities to provide a sharper focus on profitability. The CEO will look to each executive management committee member to assume responsibility for practice areas within LECG's business. While the practice areas will remain integrated, each committee member will be accountable for growth, profitability, and professional development. Professionals within the firm will be affiliated with a specific area in order to enhance business generation, cross-selling, and staff utilization.

Dr. Teece, LECG chairman, commented, "LECG's objectives are to improve profitability, build competitive advantage, and deliver returns to our shareholders. These organizational and management changes bring a new vitality to our business by aligning leaders with practice areas they know well and creating the accountability to drive results."

Michael Jeffery, LECG chief executive officer, added, "This new management platform is designed to deliver the profitability and capital efficiency mandated by the board. I will work closely with the executive management committee to improve business performance through better operational and financial leadership."

Mr. Jeffery continued, "Jack Burke is a tremendous asset to LECG. He will remain actively engaged at LECG as chief financial officer while we conduct our search before assuming his new executive operational role."

Revised 2007 Fiscal Year Outlook

LECG expects that revenues for the full year 2007 will be in the range of $375 million to $400 million, and that net income per diluted share will be in the range of $0.90 to $1.00. For the first quarter ending March 31, 2007, LECG anticipates revenues will be in the range of $92 million to $96 million, and that net income per diluted share will be in the range of $0.17 to $0.19.

For the full year, professional staff utilization is expected to be between 80 and 82 percent on an available hours basis. Days sales outstanding are expected to range between 105 and 112 days.

Mr. Jeffery, LECG chief executive officer, commented, "Our revised guidance reflects management's commitment to make the tough business decisions in 2007 to improve margins, deliver shareholder value, and ensure the quality of our revenues without being distracted by aggressive growth targets."

Conference Call Webcast Information

LECG Corporation will host a conference call and live webcast to discuss these results at 5:00 p.m. Eastern time today. The webcast will be accessible through the investor relations section of the company's website, www.lecg.com. A replay of the call will be available on the company's website two hours after completion of the live broadcast.

About LECG

LECG, a global expert services firm with more than 1,000 experts and professionals in 36 offices around the world, provides independent expert testimony, original authoritative studies, and strategic advisory services to clients including Fortune Global 500 corporations, major law firms, and local, state, and federal governments and agencies worldwide. LECG's highly credentialed experts and professional staff conduct economic and financial analyses to provide objective opinions and advice that help resolve complex disputes and inform legislative, judicial, regulatory, and business decision makers. LECG's experts are renowned academics, former senior government officials, experienced industry leaders, and seasoned consultants. NASDAQ: XPRT

Statements in this press release concerning the future business, operating and financial condition of the company and statements using the terms "believes," "expects," "will," "could," "plans," "anticipates," "estimates," "predicts," "intends," "potential," "continue," "should," "may," or the negative of these terms 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 as of today, February 27, 2007. There may be events in the future that the company is not able to accurately predict or control, which may cause actual results to differ materially from expectations. Information contained in these forward looking statements is inherently uncertain, and actual performance is subject to a number of risks, including but not limited to, among others, dependence on key personnel, acquisitions, risks inherent in international operations, management of professional staff, dependence on growth of the company's service offerings, the ability of the company to integrate successfully new experts into its practice, intense competition and potential professional liability. Further information on these and other potential risk 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 press release.


                              LECG CORPORATION
                   CONDENSED CONSOLIDATED STATEMENTS OF INCOME
            For the Quarter and Year ended December 31, 2006 and 2005
                    (in thousands, except per share data)
                                 (Unaudited)


                                   Quarter ended           Year ended
                                    December 31,          December 31,
                               ---------  ---------  ---------  ---------
                                  2006       2005       2006       2005
                               ---------  ---------  ---------  ---------

Revenues                       $  88,946  $  73,028  $ 353,850  $ 286,656
Cost of services                 (60,261)   (46,197)  (235,723)  (188,242)
                               ---------  ---------  ---------  ---------
Gross profit                      28,685     26,831    118,127     98,414
Operating expenses:
 General and administrative
  expenses                       (20,601)   (15,666)   (74,909)   (55,490)
 Depreciation and amortization    (1,810)    (1,415)    (6,823)    (4,383)
 Goodwill write off                    -          -          -     (1,063)
                               ---------  ---------  ---------  ---------
Operating income                   6,274      9,750     36,395     37,478
 Interest income                     178        186        861        809
 Interest expense                   (262)      (128)      (653)      (346)
 Other income (expense), net        (154)        35       (402)       (15)
                               ---------  ---------  ---------  ---------
Income before income tax           6,036      9,843     36,201     37,926
Income tax provision              (2,517)    (4,036)   (14,734)   (15,550)
                               ---------  ---------  ---------  ---------
Net income                     $   3,519  $   5,807  $  21,467  $  22,376
                               =========  =========  =========  =========

Net income per share:
 Basic                         $    0.14  $    0.24  $    0.88  $    0.96
 Diluted                       $    0.14  $    0.23  $    0.85  $    0.91
Share amounts:
 Basic                            24,601     24,045     24,345     23,409
 Diluted                          25,459     24,952     25,250     24,557



                                LECG CORPORATION
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                        (in thousands, except share data)
                                   (Unaudited)


                                                          December 31,
                                                     ---------------------
                                                        2006       2005
Assets                                               ---------- ----------
Current assets:
 Cash and cash equivalents                           $   26,489 $   35,722
 Accounts receivable, net of allowance of $906 and
  $666                                                  107,585     94,299
 Prepaid expenses                                         5,092      4,317
 Deferred tax assets, net                                 3,877      1,745
 Signing and performance bonuses - current portion        9,545      6,122
 Income taxes receivable                                  5,481          -
 Other current assets                                     2,494      4,775
                                                     ---------- ----------
  Total current assets                                  160,563    146,980
Property and equipment, net                              13,701     10,791
Goodwill                                                101,464     77,133
Other intangible assets, net                              9,855     10,865
Signing and performance bonuses - long-term              28,265     19,035
Deferred compensation plan assets                        10,925      6,403
Other long-term assets                                    1,884      1,678
                                                     ---------- ----------
Total assets                                         $  326,657 $  272,885
                                                     ========== ==========

Liabilities and stockholders' equity
Current liabilities:
 Accrued compensation                                $   50,852 $   43,924
 Accounts payable and other accrued liabilities           8,011      5,412
 Payable for business acquisitions - current portion     10,876      6,510
 Deferred revenue                                         2,487      2,427
 Income taxes payable                                         -      3,961
                                                     ---------- ----------
  Total current liabilities                              72,226     62,234
Payable for business acquisitions - long-term             2,178      2,400
Deferred compensation plan obligations                   11,550      6,615
Deferred tax liabilities                                  1,851        989
Other long-term liabilities                               7,738      5,581

Commitments and contingencies

Stockholders' equity
Common stock, $.001 par value, 200,000,000 shares
 authorized, 24,907,072 and 24,243,482 shares
 outstanding at December 31, 2006 and 2005,
 respectively                                                25         24
Additional paid-in capital                              156,900    144,171
Deferred equity compensation                                  -     (1,056)
Accumulated other comprehensive income (loss)               880       (165)
Retained earnings                                        73,309     52,092
                                                     ---------- ----------
  Total stockholders' equity                            231,114    195,066
                                                     ---------- ----------
Total liabilities and stockholders' equity           $  326,657 $  272,885
                                                     ========== ==========



                           LECG CORPORATION
             CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
              For the Year ended December 31, 2006 and 2005
                            (in thousands)
                             (Unaudited)


                                                         Year ended
                                                         December 31,
                                                  ------------------------
                                                      2006         2005
                                                  -----------  -----------
Cash flows from operating activities
Net income                                        $    21,467  $    22,376
   Adjustments to reconcile net income to net
    cash provided by (used in) operating
    activities:
   Bad debt expense                                       266          201
   Depreciation and amortization of equipment and
    leaseholds                                          3,723        3,064
   Amortization of intangible assets                    3,100        1,319
   Goodwill write-off                                       -        1,063
   Signing and performance bonuses paid               (23,567)      (7,652)
   Amortization of signing and performance
    bonuses                                             8,827        6,729
   Tax benefit from option exercises and equity
    compensation plans                                    378        6,027
   Equity-based compensation                            6,481          541
   Deferred rent                                          158        1,441
   Deferred taxes                                      (1,648)        (731)
   Other                                                    7          (88)

Changes in assets and liabilities:
     Accounts receivable                              (13,552)     (21,373)
     Prepaid and other current assets                   2,779         (474)
     Accounts payable and other accrued
      liabilities                                       2,216         (635)
     Income taxes                                      (9,287)       3,279
     Accrued compensation                               7,646        1,978
     Deferred revenue                                      29          972
     Deferred compensation plan assets net of
      liabilities                                         412          166
     Other assets                                         200          180
     Other liabilities                                  1,813        1,866
                                                  -----------  -----------
       Net cash provided by operating activities       11,448       20,249

Cash flows from investing activities
   Business acquisitions and earnout payments,
    net of acquired cash                              (21,929)     (30,551)
   Purchase of property and equipment                  (6,291)      (6,897)
   Other                                                  (58)           6
                                                  -----------  -----------
       Net cash used in investing activities          (28,278)     (37,442)

Cash flows from financing activities
   Borrowings under revolving credit facility          25,000            -
   Repayments under revolving credit facility         (25,000)           -
   Exercise of stock options                            4,182        9,181
   Proceeds from secondary offering, net of
    offering costs                                          -        1,311
   Proceeds from issuance of stock-employee
    stock plan                                            265        2,071
   Tax benefit from option exercises and equity
    compensation plans                                  2,574            -
   Forfeiture of gain on stock option exercises            33            -
   Loan fees                                             (502)        (407)
                                                  -----------  -----------
     Net cash provided by financing activities          6,552       12,156
Effect of exchange rates on changes in cash             1,045       (1,323)
                                                  -----------  -----------
Decrease in cash and cash equivalents                  (9,233)      (6,360)
Cash and cash equivalents, beginning of year           35,722       42,082
                                                  -----------  -----------
   Cash and cash equivalents, end of period       $    26,489  $    35,722
                                                  ===========  ===========
Supplemental disclosure
   Cash paid for interest                         $       461  $       108
                                                  ===========  ===========
   Cash paid for income taxes                     $    22,566  $     5,888
                                                  ===========  ===========
Non cash investing and financing activities
   Fair value of common stock issued for
    acquisitions                                  $       250  $     1,500
                                                  ===========  ===========



                              LECG CORPORATION
                         EBITDA and Adjusted EBITDA
           For the Quarter and Year ended December 31, 2006 and 2005
                              (in thousands)


                                      Quarter ended         Year Ended
                                       December 31,        December 31,
                                      2006      2005      2006      2005
                                    --------- --------  --------  --------

Net income                          $   3,519 $  5,807  $ 21,467  $ 22,376
Add back (subtract):
 Provision for income tax               2,517    4,036    14,734    15,550
 Interest (income) expense, net            84      (58)     (208)     (463)
 Depreciation and amortization          1,810    1,415     6,823     4,383

                                    --------- --------  --------  --------
   EBITDA (1)                       $   7,930 $ 11,200  $ 42,816  $ 41,846
                                    --------- --------  --------  --------


Adjustments to EBITDA
 Previously unrecognized
  compensation expense                      -        -         -      (424)
 Equity-based compensation              1,551      124     6,481       541
 Expensed acquisition costs                 -      559       317       559
 Goodwill write-off                         -        -         -     1,063

                                    --------- --------  --------  --------
   Adjusted EBITDA (2)              $   9,481 $ 11,883  $ 49,614  $ 43,585
                                    ========= ========  ========  ========


(1) EBITDA is a non-GAAP financial measure defined as net income
    before provision for income tax, interest, and depreciation and
    amortization. The company regards EBITDA as a useful measure of
    financial performance of the business. Generally, a non-GAAP
    financial measure is a numerical measure of a company's performance,
    financial position or cash flow that either excludes or includes
    amounts that are not normally excluded or included in the most
    directly comparable measure calculated and presented in accordance
    with GAAP. This measure, however, should be considered in addition
    to, and not as a substitute or superior to, operating income, cash
    flows, or other measures of financial performance prepared in
    accordance with GAAP.

(2) Adjusted EBITDA is a non-GAAP financial measure defined by the
    company as EBITDA as defined in (1) above adjusted for unrecognized
    expenses in its previously issued 2005 annual financial statements
    in connection with certain specific expert compensation model
    calculations as discussed in LECG's January 26, 2007 press release,
    equity-based compensation, expensed acquisition costs recognized
    in the first quarter of 2006 and the fourth quarter of 2005, and
    goodwill written-off in the third quarter of 2005. As is the case
    with EBITDA, this measure should be considered in addition to, and
    not as a substitute or superior to, operating income, cash flows,
    or other measures of financial performance prepared in accordance
    with GAAP.

Contact Information

  • Contacts:

    Jack Burke
    Chief Financial Officer
    510-985-6700

    Erin Glenn
    Investor Relations
    510-985-6990
    Email Contact