December 11, 2006

Research Associate: Sweta Killa, M. Fin.

Editor: Christopher R. Jones, CFA

Sr. Ed. : Ian Madsen, CFA; ;1-800-767-3771,x417

155 North Wacker Drive  Chicago, IL 60606

BearingPoint, Inc. (BE - N)

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$7.96

NOTE: This report contains new material. Subsequent reports will have changeshighlighted.

Reason for Report:Files 2005 Form 10-K and Provides Key Metrics for 3Q06

(Previous Edition: 10K FY05 filings held back by court ruling, Oct. 19)

Overview

Based in McLean, Virginia, BearingPoint (BE), formerly known as KPMG Consulting, is aleading provider of management and information technology consulting services. BearingPoint'sover 15,000 consultants serve over 2,500 clients around the world, including large corporations,government agencies and other organizations. The company provides business and technology strategy, systems design, architectures, applications implementation, network infrastructure, systems integration, and managed services including small- and medium-sized government agencies and other organizations. It works to develop comprehensive solutions for common business issues, offer the expertise required to deliver those solutions, lead in the development of new products, and capitalize on joint marketing opportunities. The company provides services to clients throughfive industry groups: Public Services (approximately 40% of gross revenue), Financial Services,Communications and Content, High Tech, and Consumer and Industrial markets. More information can be found at

On November 22, 2006, BE filed its audited 2005 financial statements and 2005 Form 10-K with the Securities and Exchange Commission. It also reported key business metrics for 3Q06, which were driven by solid performance in the company's core business and indicated continued traction in itskey market segments.

Key Positive Arguments / Key Negative Arguments
  • Differentiated Hiring Model: BE consultants are generally hired from the industry rather than through a campus-recruiting model. As a result, BE consultants tend to have more experience.
  • Strong Vendor Relationships:It has developed strong alliances with 45 leading technology vendors, resulting in strong technical competency.
  • Client Diversity: BE has a higher percentage of public services clients relative to peers generating a more diversified revenue stream given the more consistent spending patterns of the space.
  • Strong Public Services Practice: BE possesses a strong and unique public services practice and is well positioned to capitalize on several macro trends in the attractive Federal Government space, such as an aging, reduced workforce, obsolete technology, etc.
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  • Late filing: The failure to timely file reports with the SEC will impact the company’s operation.
  • Competitive Environment: The highly competitive environment, poses a threat for systems integrators and consultants.
  • Spending Environment: The current IT spending environment is still at a risk. BE is also exposed to state/local government spending.
  • Outsourcing: Due to a decline in revenue, BE has resorted to outsourcing, which can have a negative impact on earnings and margins.
  • Technological Change: BE competes in a dynamic market where the pace of technological change is very high, and the company faces the risk of having its skills become obsolete if it does not keep pace with technological changes.

BE’s Fiscal Year ends on December 31.

Recent Events

On November 10, 2006, BE completed the implementation and deployment of the Department of Health and Human Services Unified Financial Management System (UFMS) at the Program Support Center (PSC) and is providing service to seven additional HHS agencies.

On November 9, 2006, BE announced it has been awarded two contracts by the United States Agency for International Development (USAID) to support efforts to implement the agency's Enabling Labor Mobility (ELMO) activities in Bosnia-Herzegovina and to assist in the implementation of the agency's Bosnia-Herzegovina Tax Reform Activity (TARA). Together, the two new contracts span four years and have a value of $19.6 million.

On October 19, 2006, BE announced it has been awarded a contract by the United States Agency for international development to implement the Sustainable Achievement of Business Expansion and Quality program (SABEQ) for Jordan. The purpose of SABEQ is to spur economic growth and reduce poverty in the country by increasing the number of jobs available to Jordanians and enhance the competitiveness of Jordanian firms, important steps the Government of Jordan is taking to meet its goal of increasing economic growth to reduce poverty. This is a five-year contract and is estimated at approximately $69.0 million.

On October 2, 2006, BE announced tht it has been awarded a contract by the United States Agency for international development to support efforts to implement economic growth reforms in Serbia. The four-and-a-half-year contract is valued at $19.8 million.

On September 14, 2006, BE announced a $28.0 million, two-year contract with the state of North Carolina to implement the state's new human resources and payroll modernization project.

Revenue

The company reported total revenue of $3,388.9 million for FY05, up0.4% y-o-y, from $3,375.8 million in FY04. It also reported revenue of $790.9 million for 4Q05, up slightly from revenue of $788.1 million for 4Q04. The revenue from each segment and regions are as follows:

New contract bookings in FY05 were worth $3,130.7 million. New contract bookings increased in all three industry groups in North America, driven primarily by strong bookings in Financial Services industry group, which offset decreased bookings in the EMEA, Asia-Pacific, and Latin America.

The company’s recently filed 10K indicated that it may be unable to keep pace with its clients' demands for global development resources. One firm (R W. Baird) believes that underdevelopment of its offshore capabilities has created a significant long-term competitive disadvantage to other global integrators such as IBM and Accenture, and pure-play offshore IT services providers such as Cognizant Technology Solutions and Infosys Technologies.

The company intends to shift to a more integrated service delivery model beginning in 2007. One firm (Needham) feels the shift will better align senior consultants across the company, which have deep industry vertical expertise with existing Public Services, Commercial Services, and Financial

Services industry groups.

One firm (UnionBankSwitz.) believes the company’s bookings trends bode well for sustained topline stability in the future and expects mid-single digit growth in FY07.

Please refer to the Zacks Research Digest spreadsheet on BE for detailed sales breakdown and future estimates.

Margins

The gross profit inFY05 was $358.0 million as compared to $547.5 million in FY04. Gross margin decreased to 10.6% inFY05 from 16.2% in FY04. This decrease is primarily attributable tocompensation expense of $76.2 million related to the vesting of certain restricted stock units and a $113.3 million loss recognized on the Hawaiian Telecom (HT) contract.

Management has forecast operating margin of double digits for 2006 excluding one-time costs.

The company expects FY06 and FY07 investments in its financial systems to reduce the cash required to support reporting requirements. To reduce future SG&A costs, BE is integrating its IT platforms and plans to spend $10.0-$12.0 million in FY06 and $25.0-$30.0 million in FY07. It will spent $95.0 million in FY05 to complete its financial statements and expects to incur costs of about $127.0 million in FY06.

Given the problem in 10-K filing delay caused by the bondholders, BE will need to wait until mid 2007 to complete all of its required SEC filings. One firm (Merrill) believes cost overruns could dampen overall margins in 2007 and expects significant margin improvement at the end of 2007 or 2008.

BE is pursuing larger deals, arguing that larger deals are more profitable since these enables the of leveraging more revenue on certain fixed overhead costs. But one firm (Stifel Nicolaus) believes larger deals tend to require more business development costs and time affecting the overall margin of the company.

In January 2007, BE intends to make a special contribution under the Employee Stock Purchase Plan (ESPP) to each eligible employee in an amount equal to 1.5% of that employee’s annual salary as of October 3, 2005 into his or her ESPP account. This ESPP contribution could cost BE about $14.0 million in 2007.

Please refer to the Zacks Research Digest spreadsheet on BE for more details on margin estimate.

Earnings per Share

BE reported net loss of $3.59 per share for FY05 as compared to net loss of $2.77 per share in FY04. The factors impacting FY05 EPS include:

  • $113.3 million in accrued losses related to the Hawaiian Telecom (HT) contract
  • $166.4 million goodwill impairment charge
  • $95.0 million in additional accounting costs
  • $81.8 million non-cash compensation expense related to the vesting of restricted stock units (RSUs)
  • $55.3 million increase in the valuation allowance against U.S. deferred tax assets
  • $29.6 million for lease and facilities restructuring charges
  • $33.4 million in charges for severance and termination benefits

The company also reported net loss of $2.06for 4Q05.

The Zacks Research Digest recorded EPS of net loss of $1.76 in FY05 and net loss of $0.78 in 4Q05.

Highlights from the chart are as follows:

  • 2006 EPS (10 total) range from ($0.20) to $0.49; the average is $0.20.
  • 2007 EPS (9 total) range from $0.20 to $0.60; the average is $0.45.

One firm (Stifel Nicolaus) is concerned about the company’s performance based on the following factors:

  • High employee attrition
  • Decreasing cash, which is affecting liquidity
  • Recent disclosures of problems in contracts
  • It is taking longer and costing more for BE to address financial filings, systems, and processes
  • Lack of a competitive offshore capability
  • BE's federal business may not be as healthy as previously thought
  • BE may be a less attractive acquisition candidate, given high attrition, weak cash flow, potential contract issues, and other factors.

Please refer to the Zacks Research Digest spreadsheet on BE for more extensive EPS figures.

Target Price/Valuation

The Zacks Digest average target price is $9.53 (↓ from the previous report).

Target prices for BE range between $6.50 and $12.00. One firm (Citigroup) with the Digest high price target used an average of EV/EBITDA analysis, discounted cash flow (DCF) analysis, and P/E analysis to arrive at the price target. Another firm (UnionBankSwitz.) with the Digest high price target used 20x CY07 EPS and DCF analysis to value the share.

The firm (Wachovia) with the Digest low price target based the valuation on 6-30x CY07 EPS estimate of $0.23. It reflects a lack of financial reports, limited financial flexibility, and less attractive market positioning, in the firm’s opinion.

Of the 13 ratings available, 4are positive ratings, 8are neutral ratings, and 1is a negative rating.

Risks to the target price include greater-than-expected weakness in international businesses, pricingpressure driven by lower unit-cost offshore business models, persistent financial control issues, and potential long-term decreases in U.S. discretionary IT spending. Employee turnover and potential for a cyclical downturn in the consulting market are also significant risks to the target price.

Please refer to the Zacks Research Digest spreadsheet on BE for further details on valuation.

Capital Structure/Solvency/Cash Flow/Governance/Other

At the end of December 31, 2005, cash (including restricted cash) was $376.6 million, including $290.0 million in convertible debt issued during 2005. Convertible debt at the end of 2005 was $668.0 million. In 2005, free cash flow was a negative $154.0 million and net cash used for operations in fiscal 2005 was a negative $113.1 million.

Due to higher-than-expected expenses, retention bonuses, restructuring related payments, and cash outflow related to the Hawaiian Telecom contract losses, one firm (Goldman) expects the cash flow to be negative until 1Q07.

One firm (Needham) expects the company to file its 2005 10Qs over the next couple of months and to subsequently begin filing its 2006 10Qs.

The company has a significant contract with Hawaiian Telcom Communications, Inc., a telecommunications industry client, under which it is engaged to design, build and operate various information technology systems for the client. The company incurred losses of $113.3 million under this contract in FY05 and is currently in the process of determining financial responsibility for delays and cost over-runs. The company is outsourcing the remaining work under the contract to other contractors at the request of Hawaiian Telecom.

BE disclosed in its 10K filing that it has received a subpoena from the SEC in March 2006 tied to possible violations of the Foreign Corrupt Practices Act. Management said that during a 2005 internal survey, it learned of incidents of possible non-compliance with the Foreign Corrupt Practices Act at certain operations in China. The company said it voluntarily reported these matters to the SEC and U.S. Justice Department a year ago and both agencies indicated they would investigate the matter. In March 2006, BE received the SEC subpoena. The SEC is in the process of taking testimony from current and former employees. Management said it may incur a loss because of the issue but stated it can not estimate how much that loss might be.

3Q06 update: At the end of 3Q06, the company’s cash balance stood at $274.0 million. Bookings were $811.0 million in 3Q06. Utilization was 77.2%, up 250 bps from 74.7% in 3Q05. Total global voluntary turnover was high at 27.5% in 3Q06. One firm (Needham) speculates that as the company continues to work to become current with its financial filings and meets some of the SEC filing milestones, turnover will begin to subside.

Potentially Severe Problems

There are none other than those discussed in other sections of this report.

Long-Term Growth

The highest projected long-term growth is 18.0% (Wachovia) while the lowest projected long-term growth is 10.0% (Bear Stearns, Merrill, Citigroup), and the average is 12.0%.

BE operates in a highly competitive, global market. It is focused on differentiating its service offerings from other consulting and systems integrated companies firmsby improving execution and expansion in international markets. The company is undertaking several strategic initiatives to improve its performance in the future as follows:

  • Service Offerings: To achieve better returns on investments, management streamlined its solutions offerings to ten key areas, including customer relationship management, enterprise solutions, supply chain management, managed services, and technology integration.
  • Focus on Larger Clients and Projects: Management has begun to concentrate its selling efforts on more profitable large and growing client accounts and projects.
  • Focus on Strengths and Specialization: Management has begun to persue advisory-led activities as opposed to commoditized services, aligning the market spending to existing strengths and distinct competencies, and striving to build a higher value for customized offerings.
  • Common Operating Model: Management has begun to implement a common operating model across its operating regions to provide the clients with integrated global solutions and intends to continue with this process through 2007.

The company has invested to create Global Development Centers (GDCs) with highly skilled resources to enhance its IT sourcing flexibility and provide clients with more comprehensive services andsolutions. The GDCs, located internationally in China and India and domestically in Hattiesburg, Mississippi, are extensions of global off-shore software capabilities, providing facilities and world-class resources at a lower cost for application development. The company currently has several hundred employees staffed in India and China GDCs, and plans to expand the Hattiesburg center toapproximately 200 by 2007.

The future growth and success of the company largely depends upon its ability to attract, retain and motivate qualified employees, particularly professionals with the advanced information technology skills necessary to perform the services that the company offers. Management is committed to the long-term development of employees and will continue to dedicate significant resources to improve hiring, training and career advancement programs.

Upcoming Events

On December 14, 2006, BE will hold for its annual meeting in Greenwich, Connecticut.

Individual Analyst Opinions

POSITIVE RATINGS

Bernstein – Outperform ($11.00 target price): 11/24/06 – The firm has maintained an Outperform rating based on a combination of turnaround and takeover prospects. INVESTMENT SUMMARY: The firm has a positive stance on the company and believes that the consulting and the systems integration market remains healthy overall, despite concerns about a slowing U.S. economy.

Citigroup – Buy ($12.00-target price): 11/27/06 – The firm has maintained aBuy rating. INVESTMENT SUMMARY: With the process of filing overdue financials begun, the firm believes the associated overhang on the stock would gradually lift, and help the stock going forward.

UnionBankSwitz. – Buy ($12-target price): 11/24/06 – The firmhas maintaineda Buy rating with a price target of $12.00. INVESTMENT SUMMARY: It thinks the company will now refocus on growth and margin expansion in FY07, which would be a positive development for shares as FY06 bookings/headcount/utilization are encouraging amidst a strong industry demand backdrop and costcutting initiatives are in BE's control (unlike the timing of an audit completion).

SIG – Positive (no target price): 11/24/06 -As the new leadership stabilizes the company, the firm continues to believe that BE has the best likelihood to expand operating margin moving into 2007.

NEUTRAL RATINGS

Needham – Hold (no target price): 11/24/06. INVESTMENT SUMMARY: The firm recommends investors to remain on the sideline until it can gain a greater level of confidence with regard to the company’s prospects to meet or exceed the revenue and profitability estimates in the near to intermediate term.

Bear Stearns – Peer perform (no target price): 11/24/06 – The firm has maintained a Peer perform rating. INVESTMENT SUMMARY: Some investors think the filing of 2005 10K may spur greater acquisition interest in the company.

Cowen – Neutral (No target price): 11/24/06 – The firm has maintained a Neutral rating considering the company’s lack of offshore presence, its ongoing employee retention challenges as well as a host of investment requirements (global delivery centers, financial auditing effort, etc.). While some of BE’s ongoing expenses are non-recurring in nature, it is difficult to assess BE’s sustainable profitability margins or returns considering the continued increases in its personnel expense.

Goldman- Neutral ($7.70 target price): 12/04/06 – The firm has reduced the price target to $7.70 from $8.10. INVESTMENT SUMMARY: It expects BE shares to remain range bound in the near term, given flat trailing 12-month bookings, higher expenses (on a reported basis) expected to continue to weigh on reported results in 2006, 2007, and possibly in 2008, and sustained high employee attrition. From a long-term perspective, the firm remains cautious on the company’s limited offshore exposure, with a higher percentage of revenue from Public Services, and its lower commercial rates.