Hackett Group Inc (HCKT) 2003 Q4 法說會逐字稿

Good evening and welcome to the AnswerThink fourth quarter conference call. Your lines have been placed on a listen-only mode until the question and answer session.

Please be advised that the conference is being recorded.

Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Mr. Jack Brennan, Chief Financial Officer. Mr. Brennan, you may begin.

Thank you.

Good afternoon everyone and thank you for joining us today to discuss AnswerThink's fourth quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of AnswerThink, and myself, Jack Brennan, the CFO.

A press announcement was released over the wires at 4:28 P.M. Eastern time. For a copy of the release, please visit our web site at www.AnswerThink.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our web site.

Before we begin, I would like to remind you that on the following comments and in the question-and-answer session we will be making statements about expected future results which may be forward-looking statements for the purposes of Federal Securities Laws. These statements relate to our current expectations, estimates, and projections and are not a guarantee of future performance. They involve risks, uncertainties and assumptions that are difficult to predict and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly risk factors contained in our SEC filings.

At this point I would like to turn it over to Ted.

Thank you, Jack.

As we customarily do, l'll make some initial comments just to give you an overview of the quarter. I will then turn it back over to Jack to make some comments relative to our detailed operating results, comment on our cash flow highlights and also provide some commentary on outlook. Jack will then turn it back over to me, I will make some comments, market and strategic comments and then we will open it up for q-and-a. Having said that, let me then start off with our overview.

We were again pleased to report revenues and pro forma EPS results within our previously provided guidance. During the quarter, we continued to make meaningful progress on all aspects of our strategy which is to position the organization as a high-value, high-impact consultancy with unparalleled business process knowledge. In a quarter that was unfavorably impacted by the number of holidays and vacation days during this period, our pro forma operating profit on gross revenue was 7%, and we generated cash flow from operations of $2.2 million. These results increased our cash balances to over $67 million, the highest balance in our brief history.

Our Hackett Group continued to expand as we formally launched or new Hackett Business Advisory Service offering. More importantly we experienced a significant increase in sales as we closed out the year. I cannot speak highly enough about the impact that Bruce's Barlight's(ph) leadership has had on the performance of our Hackett Group during 2003. Not only were we able to aggressively grow sales and revenues, but we fully transitioned and repositioned our entire service offering for the group. We also continue to see a meaningful component of the Hackett activity was in the multi-year or subscription based area.

During the quarter, we continued to see increasing lead flow, as a result of the increasing Hackett activity. And also due to the best practice implementation approach, drive the results in our Business Transformation Consulting Group. Leveraging our best practice insight is a key component of our Implementation Services strategy. We believe these activities are resulting in enhanced market permission in this area, and could result in stronger billing rates in 2004 as overall market demand improves.

On the Business Applications front, and as expected, our traditionally strong PeopleSoft Group results stabilized, as it achieved sequential results in line with our Oracle and SAP Groups. Our Business Intelligence Group also continued to perform strongly as expected.

Lastly, we are pleased to say that as we look at the first 90 days of our strategic alliance with Accenture, we are very pleased with the progress we have made, establishing a collaborative working relationship that leverages our unique best practice and business processcentric(sic) knowledge. We are also very pleased that we were able to close several phase one deals and start to develop a meaningful list of targets that we have formally agreed to pursue together. Last quarter we mentioned that the strategic alliance with Accenture could open the door to new Hackett users and give our Implementation Groups the ability to team with Accenture on large consulting in business processing outsourcing contracts that we simply could not - were not able to pursue on our own. We are very pleased with the progress we've made to date.

As I have continuously mentioned over the last three years, we have been strongly tested during this extended economic cycle. In our current market position and opportunity speaks volumes about our people. They have remained focused on client service as well as making noticeable contributions to our strategic and cost management initiatives. I want to thank them and recognize their outstanding commitment throughout the entire year. We are also pleased to say our incentive compensation programs gave us on opportunity to reward many of our associates for the second consecutive quarter. This was a very important year for us, and we are very pleased with the measurable progress we've made on our strategic priorities, while maintaining our strong focus on operational discipline and most importantly, how they both position us for the future.

Let me turn it over to Jack to provide some details on operating results, cash flow and also comment on outlook. Jack?

Thank you, Ted.

I plan to review our financial results and cash flow for the fourth quarter, then conclude with a discussion of our financial outlook for the first quarter. All references to revenue in my discussion will pertain to revenue, including reimbursable expenses. For the fourth quarter our revenues were $31.2 million and our pro forma net income was $1.3 million or 3 cents per diluted share. These results were within the range of guidance that we previously provided. Pro forma earnings for the fourth quarter exclude noncash compensation and intangible asset amortization and include a normalized tax rate.

On a GAAP basis, our net income was 2 cents per diluted share and included noncash stock compensation expense of $671,000 and amortization of intangible assets of $408,000. In addition, the GAAP effective tax rate was 0 for Federal taxes, with a small accrual for certain state and foreign taxes.

For the company, revenue was down 5% sequentially reflecting the seasonal impact of the fourth quarter when we have less billing days because of vacations and holidays. In the fourth quarter, the Hackett Group reported $3.5 million of revenue, which represented 11% of our total revenue. Business Transformation reported $5.5 million of revenue, which represented 17% of our total revenue. Business Applications reported $13.6 million to revenue, which represented 44% of our total revenue. Business Intelligence reported $8.6 million, which represented 28% of our total revenue.

For the full year 2003, the Hackett Group revenue was 93% above 2002. Hackett benefited from very strong sales of our rearchitected benchmark offerings. As we expected, Hackett Group revenue in the fourth quarter was down sequentially.

The third quarter benefited from strong benchmark sales at the tail end of the second quarter, which were delivered in the third quarter. Revenue is recognized as work is performed to deliver the benchmarks, which is normally within 90 days.

Sequential comparisons of Hackett revenue will fluctuate based on the timing of sales. Similar to what happened in the second quarter, a large number of deals were sold toward the end of the fourth quarter. Accordingly, we expect first quarter Hackett revenue to benefit from this activity.

If you break down our business across industry verticals, our largest vertical this quarter was manufacturing, which includes consumer and industrial goods. This vertical represented 40% of our revenue. Other key verticals were utilities, which was 10% of our revenue; financial services at 8%; life sciences at 8%; telecommunications at 7%; and media and communications at 4%.

In the fourth quarter, our revenue concentration from our top five and top ten customers was 25% and 37% respectively. This compares to a revenue concentration one year ago of 43% for our top five customers and 56% for the top ten. Our concentration during the year has been principally impacted by the winding down of two large PeopleSoft improvements (ph). This wind down is essentially complete and the PeopleSoft business is stable as we move into 2004.

The revenue concentration of our single largest client in the fourth quarter was 7%, which was down 12% from one year ago. Consultant head count at quarter end was 483, which is flat compared to the prior quarter in head count of 486. Included in consultant head count are 50 subcontractors which compares to 52 last quarter. Consultant utilization was 69% in the seasonally impacted fourth quarter, down from 73% last quarter. A per hour realized billing rate was $175 this quarter, down slightly from $178 last quarter. The rate environment appears to be holding steady, and we do not expect any meaningful rate changes one way or the other in the foreseeable future.

Our gross margins as a percentage of revenues were 38% in the fourth quarter compared with 36% last quarter. Gross margins benefited from an increase in software sales of our SAP reseller in a lower average cost per billable employee.

Our fourth quarter traditionally has the lowest cost per billable employee, as a result of lower FICA and unemployment taxes, which are front loaded towards the beginning of the year and increase (sic) throughout the year as employee maximums are met. Our pro forma SG&A as a percentage of revenues was 31% in the fourth quarter, up from 30% in the third quarter. Actual SG&A spending was flat sequentially, reflecting increased spending for Hackett sales personnel, offset by lower back office expenses. Pro forma operating income was 7% in the fourth quarter, compared to 6% in the third quarter.

Our cash balances including restricted cash and marketable investments were $67.4 million at the end of the fourth quarter, up $2.7 million from the end of last quarter. Our cash provided by operations was $2.2 million in the quarter, reflecting our operating earnings.

Our quarter end DSO's were 73 days, up from last quarter's 63 days. Cash collections during the last few weeks of the year were below forecast as vacations and holidays impacted project director follow-up and client access. Cash collections in early January were higher than normal. As we have mentioned on past calls, we believe that any DSO level below 70 days is a normal operating target for our business and we expect to achieve that goal next quarter.

We did not buy back any of our stock during the quarter. Of our $10 million authorization from our Board of Directors, $2.3 million is available for future purchases as of the end of the fourth quarter.

I would now like to address our future outlook. We would characterize the overall commercial consulting and IT implementation demand as gradually improving. Clients are more willing to move forward with IT projects as they gain more confidence in their business outlook. Our pipeline of activity has improved in virtually all of our businesses.

In the first quarter, Business Intelligence, Business Transformation and especially Hackett are expected to grow sequentially. Hackett is well positioned to grow aggressively as a result of strong sales activity experienced in the fourth quarter. Our ERP businesses including PeopleSoft should remain stable with fourth quarter results.

As Ted mentioned, our alliance with Accenture is progressing nicely with several wins that we hope will move from Phase 1 projects to larger engagements. Although we are not planning that our first quarter results will be meaningfully impacted as a result of the alliance, based on the number of joint pursuits in our collaboration to date, we're off to a good start.

For the first quarter, we expect our gross revenues to be in the range of $33 million to $35 million. That expected range would represent a sequential increase of 6% to 12%. Diluted pro formula earnings per share in the first quarter should be in the range of 2 cents to 4 cents. This pro forma estimate includes a normalized tax rate of 40%. On a GAAP basis, our diluted earnings per share should be in the range of 1 cent to 4 cents. Our GAAP estimates include a 3% effective income tax rate to accrue for a small amount of state and foreign taxes. The GAAP estimate also includes noncash stock compensation and intangible amortization expense estimated to be approximately $1 million. Our gross margin percent in the first quarter should be slightly lower than the fourth quarter due to the front loading of FICA and unemployment taxes early in the year.

We expect head count levels to increase by about 40 positions during the quarter. SG&A spending in the first quarter should be higher in the fourth quarter, due to the addition of Hackett sales and the AnswerThink Business Development personnel and costs to relocate our human resources function from Atlanta to Miami. Excluding any impact of our stock buy back program or acquisitions, our cash position should continue to increase during the first quarter, reflecting positive cash flow from operations.

Beyond the first quarter, our focus will be to continually improve our operating income. First we plan to better leverage our SG&A base, as revenue grows, thereby lowering our SG&A as a percentage of revenue.

Second, we intend to introduce the Blended Shore ERP delivery model by adding a dedicated offshore facility which should reduce our average cost per billable associate. We are currently in the process of evaluating dedicated offshore alternatives as we speak. Third, we will continue to focus on aggressively growing the Hackett business. As Hackett becomes a larger percentage of our total revenue, our margins should improve as Hackett products carry a higher gross margin, compared to our implementation businesses.

Lastly, we continue to sell the strategic nature of our implementation methodology, utilizing Hackett best practices and will continue to enhance this approach during the year. We expect at some point, that this value-added approach will translate to higher consulting rates.

One final point, the pending securities class action suit against the company was recently dismissed by the courts. And we've been informed by the plaintiffs that they will not pursue the matter further.

At this point, I would like to turn it back to Ted to cover our market outlook and strategic priorities.

Thanks, Jack.

As both Jack and I have mentioned, we have seen an improved client activity over the last six months. Perhaps most promising for us is our belief that the growth of our Hackett Group offering, and the impact it has on our ability to strategically engage clients and to help them with their implementation needs, using our priority tools, is improving. It is worth repeating. Our ability to use proprietary empirical data to help clients understand how proven best practices helps them optimize their performance is unique to us. No one else has an accepted business process (INAUDIBLE), a software tool that defines what data we capture and how to scrub the data. And most importantly, no one else has over 2200 participants that include over -- which includes 90% of the Dow Jones.

As a result of this process, tool and database, we are able to provide actionable insight, sometimes in a matter of weeks, and we are able to do that at a price point which is impossible to match without these assets. This gives us a great opportunity to work with the largest companies in the world. Many of our competitors can only engage clients by talking about their incredibly low billing rates. We can help clients achieve results and get greater ROI from their organizational or technology investments by using our proprietary performance data and related Implementation knowledge.

Given the significant transition that we have effected during the last year, let me specifically comment on our strategic priorities and our progress in each of these areas during the past quarter.

Our first initiative is to continue to rapidly grow our Hackett group with new and renewable or multi-year offerings. Our Hackett revenue growth not only provides a growing and higher margin source of revenue to the organization, we also know that customers that value our best practice offerings are also more likely to use our implementation services. So increased Hackett activity, should mean increased revenue growth throughout all of AnswerThink, and now, also, with our new alliance partner.

During the quarter we experienced increasing sales activity across both our benchmarking and business advisory services within Hackett. For the second straight quarter we also continued to experience our ability to sell multi-year benchmarks and multi-year subscription base services. We now have over 200 participating subscribers across 100 clients in our 7 new business advisory programs. We are really creating scale and the depth and breadth of the offering is clearly gaining momentum.

Our ability to bundle our services or to provide a menu of options to our clients that suits their specific performance improvement programs continues to gain momentum. Keep in mind that we did not settle on our final benchmarking and business advisory offering strategy until this past August. We are continuing to listen to our clients on how best to use our proprietary imperical data and to help them with their performance improvement goals. Therefore you should expect us to continue to leverage our existing product architecture to expand our offerings throughout 2004.

Our second priority is to expand and integrate our Hackett best practice knowledge into our implementation solutions. As I mentioned in my opening comments, we are clearly seeing an increasing number of clients directly attribute their decision to use us as a result of the diagnostic and implementation tools that we rolled out at the end of last year. The objective is to help clients in a smarter way and to optimize our Hackett knowledge and it's potential lead flow in our implementation businesses. Our tools help clients evaluate and specifically decide how best to redesign their business processes and how to configure their ERP software to optimize the efficiency and effectiveness of their organizations.

Most importantly, our clients know this advice comes from proven practices and if properly implemented can yield the targeted operating improvements. We plan to continue to expand our intellectual property to be able to leverage across all modules of the software packages we are currently implementing. We also expand this extend this knowledge into specific industry vertical areas.

Our third initiative is to create a new revenue channel by teaming with an alliance partner. As we said, by leveraging our Hackett benchmarking offering and our best practice implementation tools on larger enterprise transformation and related technology implementation products, that we simply would not be able to compete for or serve on our own.

As I mentioned in my overview comments, we have had early success in our joint pursuits with Accenture. It will be important to see how many of these Phase 1 wins transition into large follow-on Implementation projects. We knew that our Hackett intellectual capital brought greater leverage than we were able to capture on our own, given our skill and scale. And although it is too early to know what the ultimate potential of our new alliance is, we are optimistic about its prospects. We also continue to believe this alliance agreement will expand to additional service areas as well as geographically as we originally anticipated.

Our fourth initiative is to expand our duel shore or blended offshore capabilities. We continue to work with many clients to integrate our offshore leverage into our solutions, allowing us to be more responsive to their pricing demands. Over the last year, we have learned how to leverage this model in the appropriate client situations by teaming with other providers. Our goal now is to continue to look for the most effective way to leverage a dedicated global sourcing model. This focus to a dedicated model shows how our requirements have evolved along with market demands.

Our fifth and last initiative is to continue to pursue strategic acquisitions. We continue to believe that given our distinct value proposition, leveraging our business process intellectual capital and our very strong balance sheet and infrastructure, that we can support a larger service delivery footprint. We continue to believe that acquisitions must be accretive and/or have high growth prospects that strongly leverage our Hackett intellectual capital and sales channels.

In summary, we are confident that the strategic foundation that we developed in 2003 has strongly positioned our organization as we head into 2004. Those are my overview comments.

Let me turn it over to the operator to open up our q-and-a.

Thank you.

At this time we are ready to begin the question-and-answer session. If you would like to ask a question, please press star one on your touch tone phone. You will be prompted to record your name. You may withdraw a question by pressing star two. And you will be announced prior to asking your question. Once again, please press star one to ask a question.

Mr. Clint Fendley with Wachovia Securities, you may ask your question.

Good evening. Thanks for taking my question here.

I guess, first off, if you could take a bit about the margins. We saw some improvement in the gross margin sequentially here. Hackett, which you characterize as having higher margins, actually fell as a percentage of revenues. So could you reconcile maybe what's happening from your core offering here?

From the Hackett offering?

No, actually in the core.

Oh, in the core offering. Yeah, I would say, Clint, a very big impact in our margins is really the impact of FICA and unemployment taxes.

That could be as high as 7% at the beginning of the year and decreasing to a very, very low percent towards the end of the year as we hit employee maximums. So that clearly has an impact. Obviously we have higher vacation usage and a lower vacation accrual in the fourth quarter. So that clearly had an impact. We did have a little bit more activity, Clint, from our SAP reseller.

As you know, with any software company, end of the year sales tend to be the strongest part of the year. And their sales were up, and obviously those software sales will flow directly to the margin line. That really has somewhat of a benefit.

So I guess, Jack, moving on to the Hackett. Could you characterize maybe how much higher the margins are in that business?

I would say on a gross margin basis, you're really looking at margins probably around the 60% neighborhood. Obviously currently carrying the kind of heavy SG&A basis, we continue to feel the growth and hire the salespeople.

As we continue to grow, their subscription business, the business advisory services obviously as we continue to add clients, the incremental margin associated with that is very, very high. So as we look longer term, the more we position and aggressively grow Hackett, the better the long term margin prospects are for AnswerThink.

Clint, I would characterize Q3 as kind of more normalized, where you saw the Hackett revenue growth favorably impact margins. That's what we expect to happen in Q1 on a relative basis. The overall margins then being unfavorably impacted, like Jack said, by the front loading of the payroll taxes.

But if you were looking for that activity over an entire year, there is no doubt as Hackett grows, we end up getting overall market expansion. And our hope is that the margin in our core business is reasonably stable without changing our business model. As Jack mentioned, we have made a strong commitment to develop a dedicated dual shore model. And we will do that by buying or contracting for that support. And we do expect that that can have also a favorable margin impact on our business. But that will depend on whether or not the ERP rates will remain stable the way we have seen them over the last several quarters.

Ted, for the new clients that were signed at the end of Q4, how many of those were the result of the Accenture alliance?

How many of the new clients that we signed?

For Hackett.

Oh, for Hackett. Oh, Hackett, first let me make sure.

The Hackett sales activity for the quarter was very strong on an absolute basis and increased on a sequential basis. Accenture, I believe that the wins that we have characterized as Accenture wins, most of those wins included the inclusion of a Hackett benchmarking offer integrated into that total solution. I don't believe all. But I believe most. Did.

Okay. Thank you, guys.

Mr. John Mahoney with Raymond James. You may ask your question.

Hi, guys, congratulations on your patience. Things are finally starting to turn for you.

Man, we're hard to beat down.

You indicated some information about, - I know you don't want to be too specific, but you indicated business apps is going to be basically flat sequentially. Is that correct?

Yeah. Our best estimate at this point, it will be flattish as we go into Q1.

So, you know, the $3 million sequential increase basically in 1Q, if that's the midpoint, is it going to come mostly at Hackett and consulting combination?

On a percentage basis, we believe it is going to be Hackett and then also very strong performance from both Business Transformation as well as Business Intelligence.

Okay. Could you talk about how Hackett is effecting those others? How it is driving some other business?

I'll take that one, John.

I mean, when we started the year and we first rolled out the -- you know, best practice implementation tools that we spoke about at the beginning of last year, there is no doubt we were simply learning how to walk, not only in how strongly we used them to differentiate our offerings, but also to execute engagements. As we exit this year, I think there is very little work that we are winning, where the client is not directly attributing why they engaged us and the rates they are paying, directly to our best practice knowledge base or the way we've utilized these implementation tools to make sure they receive the benefit of that leverage.

So I'm going to say more than 75% of the work we're winning is directly attributed to this unique value that we're bringing to them. And then all of the Accenture joint wins that we've referred to, also use both or a combination of the benchmark or the BPI method as our way of participating with them.

Do you expect that you'll be able to contribute some bodies to the projects on those joint wins?

The answer is yes, but we wanted to make sure we said these are phase one wins. Normally projects that are a couple of months in duration, - would vary, but be typically at , or under $1 million. But they are with very substantial clients. And the follow-on projects, if they were to materialize, obviously would be significant and we clearly would then employ more people against those opportunities.

Okay.

But we have deployed some. But a limited number. And that's what we characterize them, phase one.

Again, on the first quarter, very strong revenue, sequential revenue forecast in the midpoint, up 9%. I know it is early, but can you speak to maybe how the rest -- I know we've got this big surge. Maybe it will be difficult to carry through in the second quarter, the sequential growth at Hackett because of the timing?

As you know, John, after the experience over the last three years, we've been very cautious to provide any guidance beyond the next quarter. I think we'll keep it at that. But obviously, we're hopeful. And I'll leave it at that.

How many salespeople do you currently have at Hackett?

I think we closed out the year with over 20. And I think that we're probably going to close out the first quarter with over 30.

Wow!

And so we did make a significant improvement toward the tail end of the quarter and as we entered the year. And this is part of -- you know, our overall sales strategy. Bruce Barlight(ph), who leads that effort has very strong background and understands how important it is to ramp up that group so that you're able to respond to the opportunity throughout the year and have a strong year-end close similar to the one we had this year.

Okay. Thanks a lot.

Okay.

Mr. George Sutton with Craig-Hallum. You may ask your question.

Hello, Ted. Hello, Jack.

Hey George.

Four questions, if I could begrudge you. First, I'm very intrigued by the definition of the number of Hackett folks you're talking about now going to 30. Can you just be clear in terms of what additional opportunities those additional 10 people might be focusing on. And also you're expecting to raise the amount of business development dollars. I want to understand what that will be going towards.

Jack actually referred to two SG&A investments. Let me first speak to Hackett.

Hackett specifically, you know we've decided given the momentum exiting the year and the number of new offerings that we launched during the second half of the year, that it was just smart and the timing was right for us to continue to strongly grow the dedicated sales force so that we're being responsive to the number of new offerings we launched in the second half of the year.

If is not necessarily a vertical or geographic focus change?

We have not only our benchmark offerings but, as you know, we launched seven new business advisory services during the quarter. And we expect the level of new offerings, along with the support for those that are already there, will require and deserve this level of sales support. We're happy with the sales effectiveness that we were able to achieve from the investment we made last year. We're very happy with the momentum we exited the year with. And we're hopeful we're able to carry that on in 2004.

The second part of your question was specifically to business development resources. We've decided that since we've had success with this sales strategy at Hackett where we have a component of account executives that are out calling directly on clients and some level of in-house or people who play a different role that are Atlanta based, that we should try to emulate some aspect of that for our core group. We started having some success with a small group that was being led out of New York. And we transferred that leader into Atlanta so that he could -- I'll call it benefit from this Hackett momentum and excitement. And also make sure that our message from Hackett to the core offerings was really tight.

So we decided to make an investment and actually then create a new internal lead generation group in Atlanta, supporting the sales of our core offerings, as Clint referred to them. So it is just simply positioning for what we hope is an improving market, improving strategic opportunity across all dimensions of our business.

Okay.

A question, too, it relates to the -- in your press release, you mentioned you expected to expand across additional service areas as well as geographically with Accenture. I know there was a specific term when you originally signed your deal. What is that term? Does that give us any sense of the timing of this?

The term had a 90-day moratorium for them to tell us what areas they were interested in moving toward the definitive agreement. We are actively working with them across several areas and many geographies for that expansion. Given, you know, even though those things are not final. And I think that's why we were being cautious with our comments.

Given how -- I'll call it successful, the first 90 days have been, we're simply working with them as diligently as possible to move those other areas and those other geographies into our amended definitive agreement. As we commented in my final comments, I would say we would be disappointed if we don't see expansion both into additional service areas and geographies.

Question three, Steve McMinus(ph) coming in to lead the effort. What exactly will his role be?

Steve has got his hands full making sure the opportunities we're seeing within the Hackett channel, that we believe need to be discussed and pursued jointly with Accenture are done in a manner that is understandable to their organization. As you know, they have -- first, it is a very large organization. It has different service lines and operating groups that are organized in industry verticals. So we've worked in our first 90 days to understand how we work through a service line and then expand into these operating groups. And Steve spends full-time driving those discussions and engaging the various Accenture partners in the various prospects that we've either; A: already decided to jointly pursue; or B: that we think deserve some discussion or close tracking.

Okay. Great.

And the last question for Jack, can you quantify the hours that you lost in Q4 from a vacation / holiday schedule that we can look on it as an apples to apples basis with Q3?

If you look at it, there are five vacation days in the fourth quarter, compared to two vacation days -- Holidays. Holidays in the third quarter.

So you have that loss there. And the vacation basis, I would translate, you know, obviously the reserve has gone down. So it is probably about -- I would say three day's vacation used in excess of what was accrued in the quarter.

Okay. Thank you. Vacation in the third quarter was pretty relatively flat on an accrual basis going from the second quarter to the third quarter.

Okay. Great. Thanks, guys.

Mr. Michael Sherick with SAC Capital. You may ask your question.

Okay thanks, and good evening guys. I guess a couple of questions, one -

A voice from the past, Michael.

Exactly, a blast from the past.

Glad to have you back.

You talked about the sales quarter over quarter for the Hackett Group being up in December versus September. Can you put a little more color around that, just in terms of how the sales continued to track in September? And if you can tie into that, as the sales force is now targeted to be, I think you said, over 30 by the end of this quarter, could we assume similar productivity per salesperson in the type of people you are hiring now?

I'll answer the second question.

No. We don't expect to deploy them and get similar productivity or we should have given you much stronger sequential growth rates. So the answer is no. But I think -- as you know, we've been very cautious in trying to stay away from specific Hackett sales information just to allow that group to continue to grow and develop, given the progress that's already made.

But I think that we -- I think that I can safely say that we were expecting a meaningful sequential growth increase in the fourth quarter. For two reasons. One, because we knew we were exiting the quarter with a stable product architecture and we had just launched our new business advisory service offering. And we also believe that the fourth quarter should be a stronger sales quarter for this type of business. And I guess I'll simply say the aggressive expectations that we had as we were looking at our fourth quarter sales activity as compared to the third quarter were achieved.

Let me just rephrase the one you answered first, my second one. I don't expect them to reach the productivity this quarter. But in terms of the type of people you're adding to the sales force, are we talking about people that are targeted eventually, obviously, as they get up and mature, to be at the same productivity as the 20 that were already there? Is it a normal extension, the sales force, or is it a different group of individuals or types that you're bringing on board?

A normal extension. I think we exited -- I mean, we're continuing to redefine how best to pursue the total opportunity within a client. So given that as a-- let's say that's a given that we'll continue to look at how best to kind of position the sales structure, but the -- I'll call it from an overall quota, from the overall productivity which is, I think, the essence of your question, you know, we expect this group to be able to achieve the sales effectiveness levels that we had from the group as we exited the year.

And so that the only question is, how long does it take us to achieve that productivity level. And I believe if we ask the Hackett leadership, they would say, given the fact we've got one year under our belt we hope we're able to achieve those targets quicker than we did in '03.

Which would have been a year that most of those guys were on board as salespeople in terms of them reaching their levels of productivity.

Yes. We did an aggressive ramp up if you recall at the beginning of last year as well. We added people through the middle of the year. We looked at what was working, not working, what we needed to adjust. Those adjustments were made, including, you know, moving some people we thought were not best suited for the activity. I think we have a better understanding of what it takes. And obviously on an overall basis, the results we achieved, you know, we're very happy with Hackett, both sales and revenue growth and the way it exited the year.

The last question for Jack.

Just to confirm, in the guidance that you gave on the pro forma, the 2 to 4 cents, you're assuming a 40% tax rate on that number?

Is that correct, Michael. Obviously you guys aren't going to be paying taxes for a while. How big is your deferred tax asset?

Michael, I would say at this stage, it is probably around $30 million. And as you know, we have taken a worthless stock deduction for ThinkNewIdeas, which is currently still under review with the IRS. I would say that's most of it. And we will obviously not record, from a GAAP perspective, any federal taxes until such point that we have a good track record of earnings. And then as you probably know at that point, you release the valuation allowance on the deferred tax asset. But then on a GAAP basis they record a normalized rate from that point going forward. So -- We could be actually recording in our books a normalized tax rate, potentially towards the end of the year.

Okay.

Just to confirm, the pro forma included-- so for purposes of looking at valuation and EPS you guys have already taxed that number in your pro forma?

That's correct.

Terrific, thank you, guys.

Thank you, Michael.

Once again if you would like to ask a question, please press star one.

I think that completes this section of our call. Let me again thank everyone for participating on our fourth quarter earnings call. Look forward to bringing everyone up to date again when we report our first quarter sometime in April. Thank you again for participating.