Hackett Group Inc (HCKT) 2004 Q1 法說會逐字稿

Good afternoon, and good evening, and welcome to the Answerthink first quarter conference call. [Operator Instructions] Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Mr. Jack Brennan, Chief Financial Officer. Mr. Brennan, you may begin, sir.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Answerthink's first 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, CFO. The press announcement was release over the wires 4:22 PM Eastern Standard Time, for a copy of the release 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 in 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 the 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 the risk factors contained in our SEC filings. At this point I would like to turn it over to Ted.

Thank you, Jack and welcome, everyone to our first quarter earnings call. As we're accustomed to doing, I will open the call with some overview or highlight comments relative to the quarter. I will turn it back over to Jack to provide some detailed comments on our operating results, cash flow, and also to comment on outlook and guidance. Jack will turn it back over to me, I will provide some additional comments on what we're seeing in the market, and to also comment on our strategic progress, and then we will open it up for the Q & A.

Having said, that let me start with the overview comments on the quarter. We were pleased to report revenues above our previously provided guidance in pro forma EPS inline with 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.

We have strong sequential growth of 13%, with an operating profit of 6%. These are strong results even when you consider it was against a seasonally slower fourth quarter. Our operating results also continued to increase our cash balances to nearly $68 million, even though the strong sequential growth drives incremental working capital requirements.

Our Hackett Group continued its rapid growth rate on both revenues and sales, while we continued to make significant investments in expanding our Hackett subscription-based offerings. We also continue to see the growth of our subscription spaced offerings grow as a percentage of our total Hackett sales. Increased business advisory service offerings as we call them, were subscription-based offerings the way most of our investors refer to them along with the successful launch of our new offerings, are key to our long-term growth.

Leveraging our best practice in sight is a key component of our implementation services strategy. During the quarter we continued to see improving lead flow as a result of the increasing Hackett sales activity and also due to our best practices implementation approach -- drive 29% sequential growth for our business transformation group.

Our Business Intelligence Group also continued to perform strongly with solid sequential growth, and we are starting to see the benefits in this area from our expanded Hyperion capability. On the Business Applications front we saw revenues were basically flat on a sequential basis, we believe this group will benefit from our dual shore acquisition announced today and also from our central alliance implementation wins as the alliance continues to grow.

Lastly, we like the progress we are making on our Accenture alliance. We now have two implementation wins along with a significant expansion of our teaming footprint across additional service lines and geography to leverage. The implementation wins are important to the credibility and long-term success of this new relationship. Alliance partners like to see clients react favorably to alliance value propositions, but at the end of the day we are measured by the number of deals we are able to close. Additionally, the number of joint pursuits continues to grow along with the number of Accenture partners and operating groups who understand how and when we should strategically team. I want to remind everyone that we are still learning how to navigate and educate this very large organization, but the recent activity to our teaming model is very favorable.

As I have continuously mentioned, our current market position and opportunities for growth speaks volumes about our people. They have remained focused on great client service as well as making noticeable contributions to our strategic and cost management initiatives. I want to thanks them and recognize their outstanding effort. We are also pleased to say that our incentive compensation programs gave us an opportunity to reward many of our associates for the third consecutive quarter. We expect this trend to continue. All in all we are very pleased with the measurable progress we have made across all of our strategic priorities. I will comment further on each one later on in our call. While also maintaining the strong focus on operational discipline, and most importantly, how the combination positions us for the future. Let me turn it over to Jack to provide details on our operating results, cash flow and also comment on guidance.

Thank you, Ted. Review of our financial results and cash flow for the first quarter and then concludes discussion of our financial outlook for the second quarter. All references to revenue in my discussion will pertain to revenue including reimbursable expenses. In the first quarter our revenues were 35.1 million, and our pro forma net week 1.3 million or 3 cents per diluted share.

Revenues exceeded previously provided guidance and pro forma EPS were at the midpoint of our guidance. Pro form earnings exclude not cash compensation intangible asset amortization and include a normalized 40% tax rate. On a GAAP basis our net income was 2 cents per diluted share and included non-cash stock compensation expense of 802,000 and amortization of 331,000. In addition, our GAAP effective tax rate was 4%, which included a small accrual for certain state and foreign taxes. We accrued no federal taxes due to our NOL carry forward position.

For the company, revenue was up 13% sequentially, reflecting strong sequential growth from 3 of our 4 business groups. Comparisons also benefited from a seasonally slower fourth quarter, which is impacted by less billing days because of vacations and holidays. In the first quarter, the Hackett Group grew 38% sequentially to 4.9 million, which represented 14% of our total revenue.

Business transformation grew 29% sequentially to 7 million, which represented 20% of our total revenue. As expected, Hackett first quarter revenue benefited from strong sales activity late in the fourth quarter of 2003, along with continued strong sales in the fourth quarter, I'm sorry, in the first quarter. These sales along with our BPI message, resulted in increased opportunities in our transformation consulting business, which also showed strong results.

Business Intelligence reported 8.4 million of revenue, which represented 24% of our total revenue. Business Applications reported 14.8 million of revenue, which represented 42% of total revenue. Comparisons for Business Intelligence and Business Applications were impacted by the transfer of our retail technologies and project management office resources, from Business Intelligence to Business Applications. These resources contributed revenue of 1.3 million in the first quarter. If you add back this revenue to Business Intelligence, that group would have grown 13% sequentially. Likewise, by subtracting that revenue from Business Applications, that group was basically flat in the quarter.

We are pleased to report that for the first time since the third quarter of 2001, we experienced a sequential revenue increase in our PeopleSoft business. This impact was primarily offset by a decline in our Lawson business if you break down our business across industry verticals, our largest vertical this quarter was manufacturing. Which includes consumer and industrial products. This vertical represented 38% of our revenue.

Other key verticals were utilities, which were 10% of our revenue, financial services at 9%, and life sciences at 8%, and telecommunications at 8%. In the first quarter, our revenue concentration continued to decline. Revenue from our top five and top ten customers was 24% and 35% respectively. This compares to a revenue concentration one year ago of 38% for our top five customers, and 51% for our top ten. The revenue concentration of our single largest client in the first quarter was 7%, which was down from 10% one year ago.

Consultant head count at quarter end was 493, which is up 10 from the prior quarter in head count of 483. Included in consultant head count are 41 subcontractors, which compares to 50 last quarter. Consultant utilization was 75% in the first quarter, up from a seasonally impacted 69% in the fourth quarter. If you exclude the impact of subcontractors, which are 100%, our utilization rate on our W2 professionals in the quarter was 72%.

Our per hour realized billing rate was 181 this quarter, up from 175 last quarter. Our rate improvement from last quarter reflects higher rates for Hackett, as well as an increased percentage of Hackett revenue to total revenue. The Hackett business carries our highest rates per hour. Our gross margins as a percentage of revenues were 39% in the first quarter, compared with 38% last quarter. Higher rates and better utilization drove this improvement, which was somewhat offset by a higher average cost per consultant. As we explained last quarter the primary reason for higher average cost per consultant is caused by the front-loading of FICA and unemployment taxes at the beginning of the year. There is also much less vacation time taken in the first quarter, which also increases our average cost per consultant.

Our pro forma SG&A as a percentage of revenues was 33% in the first quarter, up from 31% last quarter. In the first quarter, we incurred higher spending to increase both Hackett and Answerthink sales personnel, to relocate our HR department from Atlanta to Miami and to record higher bad debt expense, we recorded 500,000 of bad debt expense in the quarter related to a client dispute. Pro forma operating income was 6% in the first quarter, compared to 7% last quarter. Our cash balances including restricted cash at marketable investments were 67.9 million at the end of the first quarter, up 500,000 from the ends of last quarter. Our cash provided by operations was 241,000 in the quarter. Positive income from operations after adding back non-cash expenses was mostly offset by an increase in working capital requirements.

Accounts receivable and unbilled revenues increased to support the growth in the business. DSOs in the quarter actually improved to 67 days and 73 days last quarter. The timing of our payroll cycle this quarter also unfavorably impacted working capital requirements. 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 was available for future purchases, as of the end of the first quarter.

As Ted mentioned, we signed a definitive agreement to acquire the operations of easy commerce a US and India-based company that specializes in the implementation of SAP, and Oracle software, utilizing the blended dual shore model. We expect that this transaction will close within the next few weeks. The purchase price will be 9 million of fixed payments, and 3 million of contingent consideration that will be paid over two years if certain earnings targets are met. Of the 9 million in fixed payments, 6 million will be due upon closing and 3 million will be paid over two years. As part of the transaction, we will also acquire 1.5 million of working capital. Easy commerce is expected to contribute approximately 8 million of annualized revenue.

Over the next quarter or two, we expect the

acquisitions to have no impact on pro forma EPS as we plan to make investments to integrate their dual shore delivery model and methodologies into our ERP requirements. After that, it should contribute positively to earnings, as we begin to use their offshore resources in the delivery of our US ERP projects. I would now like to address our future outlook.

We continue to see gradual improvement in demand for consulting and IT implementation services. Clients have slowed spending for a number of years, which we believe has resulted in pent-up demand. The nature of the spending appears to be moving from primarily cast takeout type projects to more strategic projects focused on emerging growth. Our pipeline continues to look strong, and we expect sequential improvement in our business groups as we head into the second quarter, with the exception of Business Applications, which we expect to be flat to up.

As Ted mentioned, our alliance with Accenture is expanding into new service lines and geographies. We had several wins in the quarter, including two that did not include any Phase I work, and went directly to the implementation phase. We also continue to collaborate on an increasing number of joint opportunities. The revenue impact from the Accenture alliance should increase in the second quarter, although it should not have a significant impact on our second quarter results. We do expect that the revenue impact from the Accenture alliance to continue to build throughout the balance of the year.

For the second quarter, we expect our gross revenues to be in the range of 36 to 38 million. This excludes any impact from the acquisition of easy commerce. That expected range would represent a sequential increase of 3% to 8%. Diluted pro forma earnings per share in the second quarter should be in the range of 3 cents to 5 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 3 cents to 6 cents. Our GAAP estimate includes a 4% effective income tax rate to accrue for small amount of state and foreign taxes. The GAAP estimate also includes non-GAAP stock compensation and intangible amortization expense, estimated to be approximately 1 million.

Our gross margin percent in the second quarter should be slightly higher compared to the first quarter, as lower employment-related taxes should result in lower cost per consultant. We expect head count levels to increase by about 30 positions during the quarter. SG&A spending in the second quarter should be comparable with the first quarter, which would lower our SG&A costs as a percentage of revenue. Excluding any impact of our stock buyback program, our cash position you should increase, reflecting the anticipated 6 million initial payment to acquire easy commerce, partially offset by positive cash flow from operations.

As we indicated last quarter, we continued to be very focused on improving our operating income. There are a few factors, which drive this improvement of the first, with the acquisition of easy commerce, we now have a dedicated offshore facility to use in our delivery of ERP implementations in the US. Our initial focus will be on SAP and Oracle implementations. This blended-shore model should reduce our average cost per consultant over time and coupled with our BPI approach, should allow us to improve our Business Applications gross margins.

Second, 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. Third, we plan to better leverage our SG&A base as revenue grows, thereby lowering our SG&A as a percentage of revenue. We believe our alliance with Accenture provides a very important channel for new revenue. Lastly, we expect that some point that our value-added BPI approach will translate to higher consulting rate. At this point I would like to turn it back to Ted to cover our market outlook and strategic priorities.

As we look forward, both Jack and I have mentioned that we continue to see improving market demand, and client decision-making. We also continue to believe that the growth of our Hackett Group brand, supported by our BPI approach improve our ability to strategically engage clients and to help them with their implementation needs. I know our associates are probably tired of hearing me say this, but our ability to use benchmarking and our best practice implementation or BPI tools to help clients understand how proven best practices helps them optimize their performance, is truly unique to us. No one else has a software tool that has an accepted and embedded business proper taxonomy that defines what and how data is captured, that statistically scrubs the data, and most importantly, no one else has a 2400 participant database that includes over 97% of the Dow Jones to compare companies-specific results to.

As a result of our Hackett Group process, tool and database, we are able to provide actionable insight in a matter of weeks or months and we're able to do that as at a price point, which is simply impossible to match without these assets. We continue to see that many of our competitors can only engage clients tactically, and talk to clients about their low rates. Using our research and implementation tools, we can help clients achieve targeted results and get greater ROI, from their organizational and technology investments. Having said, that let me now comment on our strategic priorities and our progress in each area during the past quarter.

Our first initiative is to continue to rapidly grow our Hackett Group with new and renewable multiyear offerings. During the quarter we continued to experience a rapid Hackett sales growth, we also continue to see that a higher percentage of our total sales was for multiyear benchmarks and multiyear base subscription services. Both are very strong indicators of the long-term growth prospects for this business.

We also continue our offering expansion in Hackett by launching three new executive advisory programs that now bring a strategic the level subscription offering to several of our functional benchmarking areas. You should expect this to continue to leverage our existing product architecture and dedicated sales channel to expand our offerings throughout all of 2004. Our Hackett revenue growth not only provides a growing and higher margin source of new revenue as Jack said, but it also -- we also know that customers that value our best practice offerings also are more likely to use our implementation services. So increased Hackett activity should mean increased lead flow, to all of Answerthink or to our joint alliance pursuits.

Our second priority is to expand and and integrate our Hackett best practice knowledge into our implementation solutions. You've heard us repeatedly refer to BPI, which is the approach that we use. As we mentioned throughout our opening comments, we are seeing an increasing number of clients, who attribute their decision to use us to this intellectual capital. Our objective is to make clients make smarter organizational and software configuration decisions as a result of this best practice knowledge. Our tools help clients evaluate how to specifically -- how to specifically best redesign a business process or how to configure ERP software. Most importantly, our clients know that our advice comes from proven best practices and if properly implemented, what they target, they can achieve. Our current BPI investments are focused on high impact delivery application, and on updates for new software releases.

Our third initiative is to create an incremental revenue channel by teaming with an alliance partner, we all know now that that alliance partner is Accenture, and we do this by leveraging our Hackett access and the BPI tool, it's important as Jack mentioned that the two implementation wins we have with Accenture did not have a Phase I element. This means that the intellectual capital that was leveraged in order to position those wins were these BPI tools.

We are also tracking several Phase I projects that have the potential to transition into large follow-on implementation projects with Accenture as well. During the quarter, we significantly expanded the alliance agreement across new Accenture service lines, which include information technology, their information technology service line, and their procurement service line.

Geographically, the alliance lines was expanded to include Germany, Austria, and the UK, and we are still evaluating HR, and sales and marketing service lines, and we expect the agreement to expand to at least one of these areas, hopefully, both. On the geographic front, we expect to further expand the agreement into Western Europe and to start discuss discussions about the possible expansion in to Asia in Q3. Although it is still too early to know what the ultimate potential of our alliance is, we are optimistic about our progress in its prospects.

Our fourth initiative was to expand our dual shore capabilities, we have been mentioning over the last several quarters that we continue to work with many clients that ask us to integrate offshore leverage into our solutions in order to be responsive to their pricing demands. Our goal is to look for the most effective way to leverage a dedicated global sourcing model and as Jack mentioned our announcement today of the acquisition of easy commerce we believe provides us with the leadership and know how necessary to fully develop and expand our own dual shore capabilities across our technology implementation services.

Our fifth and last initiative is to continue to pursue strategic acquisitions. We believe that our unique Hackett access and our BPI approach coupled with our strong balance sheet and infrastructure can be utilized to support a larger service organization. We believe acquisitions must be accretive, and have strong growth prospects, but most importantly, they must have strong synergy with our strategic focus.

In summary, we are excited about the measurable progress we are making across all of our businesses, and with the momentum it provides us for the balance of the year. Those are my comments. Let me turn it over and see if we can open it up for any questions that you may have.

Thank you. [Operator Instructions]. And our first question comes from Ed Caso of Wachovia Securities.

Hello, guys, great quarter. Can you talk a little bit about, I think previously you mentioned there were five or six Phase I, where they stand, what's the probability that they become Phase II, where you get involved and what the order of magnitude might be?

Well, of the -- as we mentioned last quarter, of the several Phase I projects that we were tracking, the reference that I made in my comments to two large ones that we are continuing to pursue, and we believe have the potential to move into a large or significant implementation deals, that would be -- we would line up the wins from the previous quarter to those two that we're continuing to track. But if I have to cut off kind of speak to all, kind of all of the ones we were tracking, I would say a third of them are, I'll say the client is either not going to do anything or is holding off the decision, a third of them we are strongly pursuing, and a third of them it's still too early to know.

OK. Can you give -- I've had several people ask me, sort of try to quantify the Accenture. I mean, if you get one of these two large deals. I mean, how many consultants does that work out to be? I mean, can you help us sort of walk us toward one decent size win with Accenture equates to and can you bracket a revenue number?

No, that's a very important question because Jack and I always wonder whether somebody thinks we should close a big deal and that all comes in the next quarter which in fact it doesn't. The nature of a large implementation opportunity has two characteristics. One is how long it takes to actually pursue and close this, which is, I think, I have commented if a Phase I would normally take 8 to 12 weeks, if a clients decides to go forward some RFP may or may not be prepared. If it is, which has pretty large scale, it normally would, that would mean you're probably taking that decision out another 8 to 10 weeks, maybe 4 weeks for an RFP preparation and maybe 4 to 6 weeks for a decision to be made. But once a large transaction is closed, and let me use one of the examples that we spoke to in implementation wins, approximately a $10m deal, which we -- which in Accenture's book would not be considered a large Accenture transaction. If you were to get, I thin the midpoint of both the 15 or the 25, you know, those are the two percentages that dictate what percentage of the revenue or sapping positions we get, depending on who sourced the opportunity, but if I use 20% on a 10, and you could apply that to 20, 30, 40, 50, $60m deal at a large transaction would normally be implemented over 8 to 24 months, and if you were to take that out under any scenario, it's more about building a pipe lining tail that its impact will build versus it's going to have a significant impact on our next quarter results. That's why Jack said, spoke about the pipeline building and about the fact that the Accenture related revenue is clearly increasing in the quarter but it's still not significant to our Q2 results, but we would expect that to build as we're able to give more of these implementation wins, and start those engagement.

So, normally you could take, if you wanted to use round numbers, you could take a dollar value, you could divide that dollar value, say, by maybe $225,000 per person, you divide that, that will give you the number of full-time equivalent, and if you took the number of full-time equivalents over an 18 to 24-month period, that would give you the number of actual heads that will be deployed and depending on whether we source the deal, if we had sourced it, it's 25% of the staffing opportunity, and if they sourced it, intellectual capital we would get 15% of the staffing opportunity. Is that help or does that raise more questions than -

No, that helps, I don't think we need Jack anymore, now that I know you know the numbers. Maybe just a clarification. You said two deals immediately went to Phase II. Does that mean they were deals that were identified by Accenture, or these deals that -- I mean, --

In this case, I believe -- I don't know if there was an compromise or on one or two. Meaning we both had access to the client. But in that scenario, we actually -- I think competed for four, and I know we competed for at least three, but I'm going to say four because I haven't heard on the fourth, and we were successful on two of those three or four where we agreed to team directly to pursue an implementation opportunity.

Last question. The year over year growth in Hackett was 80-some percent, that's down from the 140-ish percent it had been growing. Is that just a tougher comp a year ago, or is sort of 80% sort of what we should expect the next few years on a year over year basis?

Well, I'll take 80%, I'll take 80% for a while, but I think as you know, Ed, it's -- the product's architecture, the offering is changing so significantly that I would hate to comment. But we're very happy with that growth rate and we think it will vary, depending on our introduction of offerings, how many sales people we're bringing into the channel. I mean, it can be impacted by a lot of things but we're obviously very pleased with that kind of growth rate, especially if it's -- if it was sustainable

I have one other. Of the $5 million of Hackett revenue, how much of that was subscription-based revenue?

We didn't provide the actual percent. I don't know, Jack, if you want to or not, but it was increasing percentage of the total. Do you want to provide that percentage?

Yeah, I would say, Ed, the percentage in the quarter, the revenue from the business advisory was somewhere in the 15% neighborhood.

Great, thank you.

Thank you. Our next question comes from George Sutton of Craig-Hallum.

First, to come to Jack's defense, I do think we need you.

Thank you, George

You keep Ted grounded.

It's good to have an advocate.

George, he doesn't have many.

Well, I'll go on record. From Accenture, the pro spec of the Accenture deal, some areas were included, some were not, can you give us a sense what have the logic is. Is it just such a huge attempt to fry to broaden these with all the existing relationships they might have and those will come with time, or do you hold out for, you know, like in BPO, you could partner with somebody else, for example?

Oh, no, first let me, when we mention an area, a functional area, like financial procurement or IT that we currently have, that would mean that their consulting our systems integration as well as our BPO offerings are included in that offering. It's an interesting -- it's interesting. There's an organization that has service lines to define their functional expertise across an enterprise that goes to market across industry vertical operating groups.

So, I would say that I'm surprised that we moved into these areas that we announced today as quickly as we did, and I would say that I'm surprised that one of the other two areas that we're still in discussion with hasn't been finalized. But I can tell you that it has a lot to do with how they go to market, if this leader is US-based or not, and the time, the availability of this individual, to go through the details, to reach the agreement as required.

So, I look at the fact that we think that there were four or five areas that we could have a relationship with, the organization, and look at the fact that we've got three now and that we think we have a very good chance at either getting four or all five, so I consider the progress to be very, very good.

OK, great. With respect to the Hackett sales force, you expanded that group fairly measurably in the quarter. Can you give us a sense of how those folks are ramping up, should we start to see more contribution in Q2 or Q3? I just want to get a sense of timing.

Well, as I believe I mentioned last quarter, when we targeted the hiring for the early part of the year, I know that the Hackett leadership expects the newly hired individuals to be fully contributing within six months, but I know that, as you know, it really varies by individual. But we would expect them to start making an incremental contribution prior to the fall, but I know that the investment is really targeted to have a very strong end of year sales program, and to actually position growth into '05. So, I don't know if that answers your question but the expected ramp up quota, I think it's a six-month target.

OK. With respect to the acquisition you made, I'm curious how this changes your competitive position and a lot of the things that you bid on. Obviously, not having a direct offshore capability you've had it through a partner, I'm just curious how this changes your go to market string or improves your go to market strategy.

Well, it does actually two things for us. One, it expands our SAP capabilities which we needed to do. This is a group that has strong module capability in some of the areas that we wanted to have additional skills in, like a finance, and business warehouse. The group also brings with it an industry vertical template, which is very close to SAP approval in the pharmaceutical space, which is consistent with the same industry vertical investment that we had been making as well.

So first, it helps us with our SAP on-site delivery capability, as a starting point. But the reason for the transaction was obviously to have these individuals help us, then take the strong ERP knowledge and to help us build strong capabilities in India, and to do that, we've developed a six-month program where we are looking at every individual that they have in their offshore facility today, and trying to make sure that we can match those skills specifically to the capability we think each of our ERP practices need, and then we will be making the necessary changes to actually try to match those requirements as closely as we can.

And hopefully, sometime in the latter part of the year, you'll see that -- you'll see us then be more aggressive, to answer your question, in competing for -- in competing more aggressively with price, I mean, as you know, we go to market strategically using our intellectual capital and best practices implementation method, but we know there are instances where we could be one, more aggressor with price to capture more revenue growth, or two, simply utilize the model to deliver sales that we believe would provide us meaningful margin expansion.

So overall, we're looking for it to do several things, expand the SAP footprint in the US on-site, but more importantly to help us quickly build an offshore complement for our SAP Oracle, and then eventually PeopleSoft and Lawson groups.

And just to be clear with the HCL relationship, does that wind down over time? Is that how that should work?

Well, it's been pretty -I will say, the level of activity with HCL has remained pretty constant over the last 6 to 12 months. Our relationship has really evolved as we started really focusing on the ERP skills instead of the large custom development areas that we targeted at the beginning. Once we move to the ERP specific pursuits, it didn't take us long to understand and to decide that we needed dedicated resources. So, the HCL relationship, we hope will continue, but it will continue in the limited way it is today, which is they will complement and hopefully help fill our skill gaps when we don't have them internally. But we don't expect them long-term to fill the ERP-specific skills.

OK, perfect, thanks, guys.

Thank you. Our next question comes from John Mahoney of Raymond James.

Hi, guys, congratulations on the turn in the business.

Thank you, John.

A couple of questions. In the third quarter of last year, you had that big surge or Hackett had a couple of very solid - the big surge from the end of that one big project, and had to sequential down in the fourth. You indicated they were coming back in the first quarter, and as you indicated up 38% sequentially. Are we going to see - can you give us some idea about what the magnitude of the sequential growth is going to be like in the second quarter? I don't mean to ask such a direct question, but you know, closer to 10%, or is it going to be closer to the rate we just had this quarter? And what can we use on the outside, use to gauge how fast it's going to continue to grow?

John, as we look at the pipeline right now, the backlog as well as where they're kind of tracking on the sales basis into the second quarter, we do believe there will be a very strong sequential grower going into first quarter, and on a percentage basis, we believe at this time probably stronger than any other group.

OK. So I look at the total you have guided to of about ..

It will be less than the current quarter sequential growth, but it will be strong. It should be strong, let's say it that way.

You know, there was double the kind of sequential growth you've indicated which was 5%, it would be 10. Could it be 20% sequential in the second quarter?

John, at this point, I would just say it's going to be a good sequential growth, we believe better than the other groups. I really don't want to give any more guidance beyond that.

OK. Also, I know that you're investing a lot of money and there's sales commission that you paid and you've hired a lot of great guys in that business. Is it close to breaking even now, or on operating basis? I know the gross margin. Could you give us an update where the gross margins were this quarter for Hackett in addition?

John, we really don't disclose gross margins per quarter. We do say that generally this business is tracking in the 60% neighborhood. So we'll continue to say that. From a bottom line perspective, it is contributing positive operating earnings to the group, and I would say their profitability just continues to improve on a percentage of revenue basis. And probably leave the comments at that.

My last question. You know, last cycle, you guys were kind of early and you guys did a lot of package and kind of missed out on a lot of the web stuff, but your operating margins kind of peaked out, you know, in the 12%, 13% range. Obviously Hackett is going to, has the potential to do better than that. Where do you see the opportunity over the next couple of years?

First, John, let me remind you that we peaked at 15.1, I think if you go back and check. But we agree, we were not as strong as some of the others, but we think that the combination of the Hackett revenue component, which is obviously new to our operating model one, and the, our ability to go to market with the BPI tool, and hopefully the, let's call it, the effective integration or execution of this dual shore model, will give us the chance to get gross margins long-term back to some of our historical levels.

So, the real question, which as you know, it's a combination of several things. One, revenue growth to fully leverage the SG&A that we've got in place as Jack mentioned, so the real question is one of timing. I think our ability to realize reasonable operating margins, consistent with our historical operating margins, are realistic. The only question is, you know, can we get the revenue growth and how quickly can we get the revenue growth to allow to us get to that level? And let me ask you, Jack's sitting here I'm sure dying to comment and let me see if he would like to add something as well.

No, I think that's a fair assessment. You know, we obviously have some things that will drive margin improvement. I do think our biggest opportunity long-term is to really decrease our SG&A as a percentage of revenue. We're running at much higher levels than we have historically, and again, John, that's just a function of losing over half your revenue base over the last couple of years and being able to restore some of that revenue and better leverage our SG&A.

And what will be the kind of a longer-term target?

I would say, just from an operating income perspective, I think on gross revenues we believe that we have clear visibility to get to, let's say somewhere in the 12 to 14% neighborhood. I don't expect that in the near future, but I would say probably sometime in 2005. And you know, we'll just continue to drive incremental improvement every quarter.

And that's on gross revenue?

Yes.

OK thank you very much.

Thank you. [OPERATOR INSTRUCTIONS]. Our next question comes from Neil Garnier of Oppenheimer Securities.

Yes I would like to know what is the back log in some of your services as far as some of the business services for the clients that you have with the S&P? What is some of the backlogs on that in.

Yes, I would say that we don't disclose a specific backlog number. I will say that there continues to be a lot of activity out there, a lot of discussions, clients appear to be more willing to move forward with initiatives, our pipeline is strong, as we go into the second quarter, and looking as the overall environment continues to do well, companies are increasing purse strings, spending more on IT, we think that continues to Build well as the year goes on.

OK and the second question. How much of your business is manufacturing versus service, as far as like the recurring revenue stream?

Well, we mentioned that our manufacturing industry vertical accounted for 38% of our total revenues in the quarter, and that's been pretty consistent with what we've reported over the last couple of quarters. What you will see is that our, the nature of our Hackett product, the more complex the business environment is, and normally when you're manufacturing goods, that's about as complex as it gets when you're actually moving physical goods. So, that's where our Hackett Intellectual Capital and research is at its best and I believe that that's the reason that that continues to be our largest single vertical area.

Thank you so much.

Thank you. And at this time it appears we have no questions registered, sir.

All right, well, listen, I would like to thank you all again for participating in our quarterly earnings call. We look forward to updating everyone again at the ends of the second quarter. Thank you again for participating.