Hackett Group Inc (HCKT) 2004 Q2 法說會逐字稿

Welcome to the Answerthink second-quarter conference call. Your lines have been placed in a listen-only mode into the question and answer session. Please be advised that the conference is being record. Hosting tonight's call are Mr. Ted Fernandez, Chairman and Chief Executive Officer, and Mr. Jack Brennan, Chief Financial Officer. Now I'll turn the meeting over to Mr. Jack Brennan. Sir, you may begin.

Thank you. Good afternoon, everyone, and thank you for joining us today to discuss Answerthink's second-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 released over the wires at 4:06 PM Eastern Time. For a copy of the release please visit our website 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 website.

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 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.

First let me start by welcoming everyone to our call. As we normally do, I will start by providing some overview or highlight comments relative to our quarter. I will then turn it over to Jack; ask him to please comment on operating results; also provide some information relative to cash flow; and also provide our comments relative to outlook. I will then ask Jack to turn it back over to me where I will make some comments relative to market and both our strategic drivers, and we will then open it up for Q&A.

Having said that, let me jump right into the overview of the quarter. We were very pleased to announce results that continue to reflect the strength of our business model, as we reported sequential and year-over-year growth as well as higher operating margins.

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.

Our Q2 year-over-year growth of 20 percent was the first year-over-year growth in over three years, and it came with a solid pro forma operating profit of 7.5 percent. We made great progress across all of our strategic initiatives and continue to build on a very strong Q1 result. We also added a key component to our strategy by closing on our dual-shore acquisition, which gives us our first presence in India. I am pleased to say that we have already started to leverage this new capability on two projects.

Our Hackett Group continued its rapid growth rate on both revenues and sales, with Hackett's year-over-year growth rate coming in at 117 percent and with strong sales that give us a chance to maintain our momentum into Q3. We also continue to see the strong sales growth of our business advisory and subscription-based offering, a key component of our long-term growth strategy in Hackett.

Our newly launched executive advisory program was very well received, as we integrated measurement and business advisory offerings into a subscription-based product for the first time. It also meaningfully contributed to our Q2 Hackett sales.

Leveraging our best practice knowledge in our consulting services continues to be a very key component of our strategy. Our Hackett Group access and our Best Practice Implementation approach continued to benefit our business transformation group, which continued to grow sequentially and was up 43 percent year-over-year. This was in spite of a meaningful contract cancellation from United Airlines in June, as they stopped most of their transformation initiatives and focused on securing additional financing. We saw strong demand in our newly launched Sarb-Ox Compliance Offering, along with increasing demand in the enterprise performance management area.

The enterprise performance management demand was also visible in our business intelligence group, as this group continued its strong performance, especially in our Hyperion-centric solutions. It is clear for us to see how our strong CFO access that comes from Hackett and our related best practice implementation solutions are impacting business transformation and business intelligence.

On the business application revenues, excluding the dual-shore acquisitions, we're down slightly on a sequential basis, as we exited our remaining Siebel implementation business to focus on our larger ERP offerings where our best practice knowledge can be most strongly leveraged. Longer-term, we believe our business application group should benefit from our dual-shore acquisition which we closed during the quarter, and from our Accenture alliance, as our relationship continues to grow.

Relative to Accenture, we continue to win new work with marquee clients and to significantly expand the number of partner entry points within Accenture. The new wins continue to improve our chances of landing a large implementation client, which we are clearly jointly focused on.

We also launched our first joint marketing campaign using a Hackett benchmarking offering in one of their industry verticals late in the quarter. We are still very early in our alliance relationship, but we are now expanding into their operating group structure and their ERP solutions organization, which we believe will further expand our ability to pursue clients together.

Although we are still learning how to navigate the organization, when we consider the number of wins, registered pursuits, our new joint marketing efforts in their operating groups, and also the Hackett certification training for Accenture partners and managers which was initiated late this quarter, our teaming alliance continues to expand.

As I have continuously mentioned, our strategic market position and our opportunities for growth speaks directly about the quality of our people. They have remained focused on great client service as well as making noticeable contributions to all of our strategic and cost management initiatives. I want to thank them and recognize their outstanding effort.

In summary, we are very pleased with the measurable progress we made on all of our strategic priorities while maintaining our strong focus on operational discipline, and most importantly, how they position us for the future.

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

Thanks, Ted. I plan to review our financial results and cash flow for the second quarter, then conclude with a discussion of our financial outlook for the third quarter. All references to revenue in my discussion will pertain to revenue including reimbursement expenses.

In the second quarter, our revenues were 37.6 million, up 20 percent from last year and up 7 percent sequentially. Our May 2004 acquisition of EzCommerce, a dual-shore ERP implementation company, contributed approximately 1.87 million of revenue in the quarter. Excluding the impact of EzCommerce, our organic sequential growth rate was 2 percent.

Our pro forma net income was 1.8 million, or 4 cents per diluted share, which was at the midpoint of our guidance. Pro forma earnings exclude restructuring costs, noncash compensation, intangible asset amortization, and discontinued operations, and include a normalized 40 percent tax rate. Our pro forma operating income improved to 7.5 percent in the quarter, up from 6 percent last year.

On a GAAP basis, our net loss was 3 cents per diluted share and included restructuring costs of 3.7 million, noncash stock compensation expense of 492,000, amortization of intangible assets of 459,000, and income from discontinued operations of 370,000. Restructuring costs related to an increase in previously established reserves for two real estate leases. The increases were to provide for less sublease income than expected based on our assessment of current market conditions. Income from discontinued operations pertains to a final settlement of a lease obligation.

Our GAAP effective tax rate is 6 percent, which is our estimated tax rate for all of 2004 to provide for certain state and foreign taxes. We accrued no federal taxes due to our NOL carryforward position.

If you recall, we claimed a work (indiscernible) deduction on our 2002 tax return for the discontinuance of (indiscernible), and voluntarily requested that the IRS review this position. Although the IRS review is still underway, based on our work to date with the IRS, we believe that we are entitled to a deduction of 77 million. We expect the IRS review to be formally completed within the next few weeks, and when the matter is officially concluded, we plan to file a Form 8-K to update everyone as to the final outcome.

Our performance in the quarter was led by continued strong results from The Hackett Group, which reported 5.6 million of revenue, up 15 percent sequentially and 117 percent year-over-year. Business transformation reported 7.2 million of revenue and grew 2 percent sequentially and 43 percent year-over-year. These results would have been better if not for the cancellation of a large ERP assessment project at United Airlines. During the quarter they determined their need to seek additional funding.

Business intelligence grew 5 percent sequentially to 8.7 million, driven by very strong demand for enterprise performance management solutions. Business applications grew 9 percent sequentially to 16.1 million. On an organic basis, they were slightly down sequentially, as EzCommerce contributed 1.8 million of revenue in the quarter. Most of the organic sequential decrease was attributed to exiting our Siebel business in the second quarter.

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 33 percent of our revenue. Our services vertical -- which includes primarily service organizations in the technology, advertising and travel industries -- represented 14 percent of our revenue. Other key verticals were life sciences at 10 percent of revenue, utilities at 8 percent, financial services at 8 percent, transportation at 6 percent, media and content at 6 percent, and retail at 6 percent.

Revenue from our top-five and top-10 customers was 23 percent and 33 percent, respectively, down slightly from the previous quarter. The revenue concentration of our single-largest client in the quarter was 9 percent, which was up from 7 percent last quarter.

Consultant headcount at quarter-end was 597, which is up 104 from the prior quarter-end headcount of 493. The acquisition of EzCommerce provided 86 consultants, 36 of which are in India. Consultant utilization was 72 percent in the second quarter, down from 75 percent in the first quarter. Our per hour realized billing rate was $176 this quarter, down from $181 last quarter. This decrease is attributed to the acquisition of EzCommerce, whose consultants carry bill rates lower than the Answerthink average.

Our gross margins as a percentage of revenues were 38 percent in the second quarter compared with 39 percent last quarter. Excluding EzCommerce, gross margins improved to 40 percent. As expected, EzCommerce's earnings were breakeven in the quarter. We anticipate future margin improvement to come from deployment of EzCommerce resources and higher rate Answerthink projects.

Our pro forma SG&A as a percentage of revenues was 31 percent in the second quarter, down from 33 percent last quarter. Actual SG&A spending was flat with the first quarter on a higher revenue base. Prior expenses for sales and marketing and recruiting were offset by lower bad debt and legal expenses.

Our cash balances, including restricted cash and marketable investments, were 56.2 million at the end of the second quarter, a decrease of 11.7 million from first quarter. This decrease principally reflects the initial upfront payment of 6 million to acquire EzCommerce and payment of 5.3 million to repurchase our common stock.

At the end of the second quarter, $2 million was available for future purchases of our common stock. The Board of Directors has authorized, effective today, an additional 5 million under our repurchase program. Since the inception of the program in July 2002, through the end of the quarter, the Company has repurchased 4.4 million shares of common stock for $13 million.

Cash flow from operations was 145,000 in the quarter and was impacted by an increase in DSOs from 67 days last quarter to 70 days this quarter. Excluding the impact of EzCommerce, DSOs this quarter would have been 68 days. EzCommerce's cash flow was disrupted a bit as we converted their accounting and billing systems to Answerthink systems during the quarter. Also, the DSO calculation included EzCommerce's revenue for only the two months that they were part of Answerthink in the quarter.

Capital spending in the quarter increased from 577,000 last quarter to 1.5 million this quarter. Higher requirements were primarily driven by PC purchases of approximately 1 million to replace older laptops.

I would now like to address our future outlook.

Our strongest pipelines today are in our Hackett business transformation and business intelligence group, where we expect continued sequential growth. We see very strong demand for Hackett's benchmarking and business advisory services.

In our business transformation and business intelligence groups, we also see strong demand. We also see strong demand for enterprise performance and management initiatives. We believe Sarb-Ox adoption requirements are driving demand in these areas, as clients want more timely and clearer visibility into financial and operating information. We also believe that this same Sarb-Ox adoption requirement is creating some volatility in our business applications group, as companies freeze their ERP environments until they get through Sarb-Ox testing and sign-off. We do see relative softness in our pipeline for ERP implementation business, and we expect this group to be down on a sequential basis.

At this point, we are not forecasting a significant third quarter revenue impact from Accenture. However, as Ted mentioned, the number of wins in jointly registered opportunities continue to build. For the third quarter, we expect our gross revenues to be in the range of 37 million to 40 million. Our third quarter does have a modest seasonal impact for summer vacation usage, impacting billable hours and client accessibility.

As I indicated earlier, we also discontinued our Siebel practice in the second quarter, which will contribute to the expected decrease in business applications revenue. Diluted pro forma earnings per share in the third quarter should be in the range of 3 cents to 5 cents. This pro forma estimate includes a normalized tax rate of 40 percent.

On a GAAP basis, our diluted earnings per share should be in the range of 2 cents to 5 cents. Our GAAP estimate includes a 6 percent effective income tax rate and noncash stock compensation and intangible asset amortization expense estimated to be approximately 1.2 million.

Our gross margin percent in the third quarter should be similar to what we experienced in the second quarter, and SG&A spending levels should also be consistent. Our consultant headcount should be flat at the midpoint of the revenue range, as we plan to increase our headcount in Hackett, business transformation and business intelligence, and reduce headcount in business applications. Excluding any impact of our stock buyback program, our cash position should increase, with anticipated positive cash flow from operations.

As we indicated last quarter, we continue to be very focused on improving our operating income. 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 higher gross margins compared to our implementation business.

Additionally, the client access -- the Hackett access, coupled with our ability to use our business process knowledge and our business transformation and business intelligence groups, continue to help drive our growth in those two businesses.

With the acquisition of EzCommerce we now have a dedicated offshore facility to use in our delivery of ERP implementations in the U.S. This blended shore model should reduce our average cost per consultant and allow us to be more competitive on new proposals generated by us or jointly with our strategic partners.

Finally, we believe we can leverage our relatively fixed SG&A base as revenue grows, which we demonstrated in our second-quarter results.

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

Thanks, Jack.

As we look forward and as Jack just mentioned, we continue to see strong demand in our Hackett Group, business transformation and business intelligence areas. And although we recognize that the ERP environment is the most volatile part of our business, we continue to see reasonable market activity there as well.

One thing we are keeping an eye on is what Jack referred to as the Sarb-Ox adoption impact. Sarb-Ox compliance efforts not only consume key resources, but as Jack mentioned, could also force organizations to defer implementation efforts until auditor sign-off is completed. We have launched a Sarb-Ox compliance offer to leverage our strong business profit expertise, and to also use for clients that want to optimize their Sarb-Ox investment to actually make performance improvement efforts.

We also believe meaningful business and technology implementation opportunities should emerge in the latter part of '04 and in early '05 from the remediation recommendations that emanate from the Sarb-Ox compliance reviews.

We continue to see business opportunities emerge from our unique benchmarking capability and the business process knowledge. Our Hackett Group tools and enterprise performance and best practice database are able to provide empirically-based actionable advice, in a timeframe and at a price point which is impossible to match without these assets. That is what makes our Hackett offering so strong.

Using our knowledge base and our implementation tools, we can then help clients validate targeted results and get greater return on investment from their organizational and technology investments. You should expect us to expand our strategic relationships to further leverage this unique capability.

We are evaluating new channel relationships that will be complementary to our Accenture efforts with software providers and other profit-centric service providers. What is absolutely clear to us is that our ability to capture best practice knowledge from our benchmarking efforts is of great strategic value to many large providers that must demonstrate the value of their solutions to clients. We really believe that there is no better way, and any more efficient way to do that, than with our current tool base. We will actively pursue those opportunities that give us the best opportunity to enhance our knowledge base and to drive implementation revenue to our consulting business.

Let me now comment specifically on our strategic priorities and progress in each area during the past quarter.

Our first initiative is to continue to rapidly grow our Hackett Group with new and renewable offerings. During the quarter, we continued to experience our Hackett -- rapid Hackett sales growth. We also continued to see an increase in both multiyear benchmarks and multiyear subscription-based services -- both very strong indicators of the long-term growth prospects for this business.

As I have previously mentioned, during the quarter we saw strong sales from our new executive advisory program that brings a strategic sea-level subscription offering to several of our functional benchmarking areas. It is this kind of empirical data-based business advisory offering that we will try to further expand through the balance of this year.

Our Hackett revenue growth not only provides a growing and higher-margin source of new revenue to the organization, we also know that customers that value our best practice offering are also more likely to use our implementation services. So increased Hackett activity should mean increased leadflow and a stronger knowledge base to all of Answerthink or to our joint partner pursuits. We are clearly seeing this in most of our areas; we think we should see this in all of our areas.

Our second priority is to expand and to integrate our Hackett best practice knowledge into our implementation solutions. As we have said, if you value our measurement tools and our benchmarking tools and best practice knowledge, you should also value the way we go to market and solve those problems.

Our best practice implementation tools help clients evaluate and specifically decide how best to redesign their business processes and how to configure their ERP software to optimize organizational impact. Most importantly, our clients know that this advice comes from proven practices, and if properly implemented can yield their targeted operating improvements. Our strategic investments in this area continue as we now plan to launch Version 2 of our implementation tool by the end of the year.

Our third initiative is to create an incremental revenue channel by teaming with an alliance partner. We're clearly leveraging our Hackett access and best practice implementation tools on larger consulting and to BPO project opportunities that we're not able to compete for and serve on our own.

As I mentioned in my overview comments, our Accenture relationship continues to grow across many dimensions. During the quarter we launched our first joint marketing campaign with Accenture in one of their industry operating groups. We expect this effort alone to expand the number of joint wins over the next several months. So now in addition to our so-called elephant, or large client, pursuits, we are now initiating programs that can bring volume to our joint efforts.

During the quarter, we participated in our first Accenture client conference. This was their global shared services conference, where our alliance was highly promoted and highlighted to their client base. All of these joint efforts and the increasing touch points within the organization are creating a very strong foundation for this relationship.

Our fourth initiative was to expand our dual-shore capabilities. As we mentioned throughout this call, during the quarter we closed the EzCommerce acquisition, which we believe provides us with the leadership and know-how necessary to fully develop our own dual-shore capabilities, primarily focused on our business applications implementation services.

Although we believe our goals are modest relative to other providers, if we are able to utilize our offshore center to support 25 percent of our total ERP hours before the end of 2005, we will be able to pursue a significant amount of work that we do not pursue today, and we will have an opportunity to meaningfully improve our operating margins in the service area.

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

In summary, we are excited about our strategic positioning, the progress we are making across all of our businesses, and with the momentum it provides us as we look forward.

Those are my comments relative to the market and strategy. Let me open it up now to Q&A.

(OPERATOR INSTRUCTIONS). John Mahoney, Raymond James.

First of all, I missed a number; what was the (indiscernible) amortization going to be in the upcoming quarter?

I would say for both the noncash compensation and the intangible asset amortization combined, it should be about 1.2 million.

How much will EzCommerce contribute -- how much in this quarter to revenue?

1.8 million.

1. 8 this quarter?

Yes.

And you'll get double that next quarter?

No. We had them, John, for two out of the three months in the quarter. So it will be less than a double.

So 2.3 or something like that.

2.5.

So you are going to be growing sequentially -- I mean organically, excluding EzCommerce?

Part of the difficulty you'll have going into Q3 is how much of the EzCommerce work now ends up being our projects. Since we've already launched two and are also working to shift some support work that we're currently providing onshore, obviously, we're going to leverage that capability as quickly as we can.

I have a question. I think I was bugging you guys when all the software companies were preannouncing and hitting the skids, but did you notice -- and you mentioned on the call, obviously, about your business applications business showing softness after seeing some revenue increase in the second quarter. Did that business -- is that reflecting -- I (indiscernible) you mentioned Sarb-Ox, but do you think it's Sarb-Ox related, or it's just software is just not coming back?

Our only perspective, it's Sarb-Ox related. We get asked a lot of questions whether it's economic or whether it has anything to do with the geopolitical situation. So I mean the only thing that we can tangibly point to are the fact that we know the clients are really significantly underwater, trying to respond to I guess what is now the finally-mandated Sarb-Ox documentation (indiscernible) requirement, and that we clearly have seen that mentioned in several scenarios, and that's why we mentioned it. Our decision to exit what was a small, but still on a sequential basis a pretty decent impact -- not only from Q1 to Q2 but Q2 to Q3 -- in the Siebel people, was simply the fact that we think we need to focus on with -- on some of the larger providers, and where our intellectual capital, which we believe is strongest in the SG&A area, and to a less extent in some of the CRM-focused areas that they had, on the rest of the ERP implementers that we focused on. And so when I comment on the fact that the activity was reasonable, we are seeing pretty decent activity. It does vary somewhat by provider. It also varies somewhat by a global 2000 or 4000 versus a small and medium market. But we believe our perspective is so narrow given our size, that to provide broad comments, other than the indicated reply -- that may be misleading. So we're saying hey, the activity is there. We are seeing -- we are continuing to see some disruption from the whole Oracle PeopleSoft -- whether you want call it decision or indecision. And if there is more meaningful impacts on clients decision to go forward, the only direct point that we can turn to as to why a client would defer a decision is the fact that they are absolutely swamped with the increasing requirements from the Sarb-Ox sign-off.

One of the difficulties last year we had with Hackett -- not difficulties, but Hackett had a huge third-quarter a year ago and completed a large project, and was down sequentially in the fourth quarter. And this year I'm wondering if you -- I know you're not giving fourth quarter guidance at this point, but would we expect that you would have a -- you'd grow sequentially in the fourth quarter, just at that business. Because it was such a small part of the company in the past; we really never gotten any feel for seasonality.

I think there's -- we don't want to comment on the quarter, but I would say to compare Hackett to last year would be inappropriate. The business has changed so significantly, both offering and growth and dimensions, that we don't think that looking at last year's pattern is significant. You are right; last year at the end of Q2 we had a very large benchmarking deal which favorably impacted Q3. I believe you're incorrect and I believe we were flat Q3 Q4, but I don't have the numbers. So if I'm wrong I'm sure Jack here will pull it out and tell me quickly.

What we know, John, is that Hackett had a very strong sales and revenue quarter. We expect it to grow sequentially. And for us to comment on the fourth quarter at this point would be premature. However, we do know from last quarter that we were unfavorably impacted in the fourth quarter -- at the tail end of the fourth quarter, from sales that were made late in the fourth quarter that we couldn't initiate some of those projects, that clients kind of shut off their lights relative to kicking off, benchmarking another program after the latter part of the year. But other than to say that kind of seasonally we would expect that to happen, all we can share at this point is that it had a great second quarter, it has great momentum going into Q3, and it has -- I guess we have our first subscription-based renewal season coming in this fall since we formally launched the subscription offering, if you'll recall, tail end of third quarter. So it should be an interesting fourth quarter, but to guide at this point would be inappropriate.

George Sutton, Craig-Hallum.

My apologies in advance. I hopped on late; so if I ask moronic questions that's probably why. The first thing I was curious about with respect to the Accenture relationship, can you quantify in some way, shape or form your ability to bring leads to them versus their ability to bring leads to you as part of this relationship?

We are bringing leads to them, I would say at this point, at a slightly lower rate than they are bringing to us. What is easier for them to do though, George, is since they know the client scenario, it's much easier for them to accept one of their leads or for us to accept their proposals to join them on a client situation that they know than for us to fully educate them and get them to equally register an opportunity we bring to them. So even though I would say that the proposed opportunities are running -- I don't know; let's just -- it's not 50-50, but let's just say slightly less than 50 percent up to them -- they clearly are more interested in us quickly accepting the ideas they bring to us than them doing a little bit extra work to decide whether they want to explore one of ours. Unless it is something that is very, very large and that they may have some visibility to the client or the opportunity, but just don't happen to be at the table or don't believe they can pursue it on their own.

Okay. Obviously, they have a lot more effective salespeople. So that's where I assume you will see the leftover time, is their addressing it with more and more of their potential addressable market?

Well, if you consider the number of people that are in their operating groups versus their service lines when we started. I mean, it dwarfs. The number of people in the operating groups are much larger than the people in the service line groups where we launch our functional initiatives through. So we think we're just scratching the surface with our first benchmarking program that was fully led and handled by one of the industry operating groups. And look, the fact is that we -- we are just meeting their ERP solutions leaders as we speak right now. So this is a very large organization. I think that we're working very closely together and strategically to continue to expand our relationship. And if we keep doing the things we are doing, our relationship will grow and they will impact our revenue.

You were aggressively hiring Hackett salespeople during the quarter. I just wanted to see, did you add as many salespeople as you expected? Can you give us a general sense of how they're performing? And then I was curious about how is benchmarking as a subscription service working? Is it something that clients seem to be very interested in versus that onetime benchmark? Just a general curiosity.

A lot of good observations I can make there. I think first of all, if you recall, we made our -- as we did in the prior year, we made our most significant increase, a very significant increase in the sales and telesales area in the first quarter, and some of that then kind of moved into the second quarter. So everything that we planned on doing is tracking pretty close to what we had originally kind of targeted at the beginning of the year, in terms of adding people to those areas. In terms of the performance of the group overall, they had a very, very strong sales quarter. So both the broadness of the participation within the sales group -- even though you always have your stars and the broadness of the programs that were sold throughout the quarter in the second quarter, where probably it was the broadest participation in terms of the number of sales personnel making a meaningful contribution, and the broadest in terms of the number of programs that were being sold throughout the quarter. So those two things were pretty favorable. Your last question, George?

I was just curious how the benchmarking capability as a concept for a subscription versus just a onetime event, how that specifically is being received?

We've really got several things happening. One, just the benchmarking sales -- when we call -- the units, the number of functional areas that we're selling and benchmarking on a quarterly basis, have continued to increase. And more importantly, they're growing because more clients are buying an SG&A benchmarking product that includes what is in essence five functional benchmarks bundled in one. So you're seeing one client utilizing our benchmark across a broader number of enterprise areas. Two, you're seeing more clients buy benchmarks and making commitments to benchmarks, and doing it for more than one year. And lastly and very important, the executive advisory program which you saw at the launch last quarter, that was the first combination of taking a scorecard or a measurement or benchmarking concept, bundled with the research advice on demand, the education aspects of our product and launching that, and we were very excited that not only was that just launched at the latter part of Q1, that we had meaningful sales in Q2 from that effort. So we're really seeing the impact of measurement and benchmarking being felt not only in broadening within the clients, therefore the number of units, multi-year, and in terms of now actually fully bundling it into a product. So the progress has been really strong, and that group and that leadership has really done a great job.

Last question, probably for Jack. You had a realization pricing program in place now, I believe, for two or three months. Just curious what the customer feedback has been on that, given that sounded like a fairly novel idea?

George, obviously, I think the pricing that we've moved to is more consistent with the pricing in the industry, which is to effectively have a standard rate and a discount office standard rate. So that has gone very nicely, and the rates that we're seeing out there in the marketplace right now for consulting and business intelligence continue to look very strong, with perhaps as time goes on even some upward bias. But I'll also put in perspective that the ERP rates that we're seeing today continue to be very low because of the offshore impact. But the organization has embraced the change; it's fully rolled out, and we believe it's working effectively.

When you say very low, Jack, do you mean consistent or lower, or (indiscernible) you said that ERP rates are very low. Are they lower than they were last quarter?

No, they were consistent but (indiscernible) they're low rates, and given the cost structure it's hard to get back to the normalized type of margins that we're accustomed to. Again, showing the importance of really blending in the offshore to get back to those margins that we've seen in the past. So it's not getting tougher, I would say it continues to be tough.

Ed Caso, Wachovia.

Jack, is there any receivable exposure from -- on the United situation?

No. They continue to make payments. We have collected virtually all of it, and full intention on their part to pay the balance as it becomes due. So no; we believe absolutely no exposure on it.

It actually is a great client, great people. But we are pleased that they kept their word about their commitment to us. But that is a good question (indiscernible) we worked -- obviously, worked hard (indiscernible) we saw them looking for financial assistance during the tail-end of the quarter.

On the EzCom, I guess the guidance you gave at the end of the last quarter excluded EzCommerce, if my memory serves me right. And you indicated 1.8 million in revenue. What was the EPS impact in the quarter from EzCommerce?

They were breakeven, so there was no EPS impact.

And on the Accenture, can you just update me? In Q2, how many integration deals were related to the Accenture/Hackett relationship, how many were in trial? Can you give us some metrics, and maybe percent of revenue as best you can?

We don't want to comment on percentage of revenues, but I would say that the number of wins in Q2 were consistent with our Q1 wins. And in terms of integration wins, what we have seen is a couple of the, actually, first quarter sales efforts are now moving into kind of a consulting/integration effort, which would be a prelude to a final decision on whether or not they're going to do something meaningful or not. So we have had a couple of those that actually moved into that stage too, where we have placed a few people on those projects as they devolved from kind of the benchmarking and scoping into that kind of pre or final RFP (ph) phase. And we'll see whether or not the client decides that they want to go forward with some of those initiatives and whether or not we're jointly successful.

I know this will be difficult, but I'm hoping you can give me some guidance. Trial or Phase I, size of Phase II, and then size of Phase III of those three phases. What's the order of magnitude? Are we talking 10,000, 50,000, 5 million? Is it that kind of order (multiple speakers)

A benchmark can be anywhere between 50 and 300, maybe a little bit more. A Phase I diagnostic is probably something that would range somewhere in the $500,000 million range, maybe could be as low as 100, depending on how much Accenture wants to invest; it could be up to 1 million. Then, if you move it into kind of a statement of work, that would be a prelude to an assessment that would be much larger. It could be just something that would stay in that (indiscernible) you would chunk out another half-a-million to a million, maybe a little bit more. And then the client then at that point has to decide whether or not it will actively pursue a large enterprise transformation effort that normally comes with an upgrade, change or consolidation of ERP platform, or actually considers something more significant, which is a transformation effort with some aspect of outsourcing.

Just help my ignorance here -- how many are in the, sort of the prelude stage now?

I think in general, we haven't provided numbers, but we're probably now approaching 15 joint wins.

At the statement of worker prelude stage?

They are in all three of those stages. We clearly are building the number of clients that we're serving, and we probably have activity that would be equal to -- equal or at that level.

And the numbers you provided, is that your share or is that the share --

That would be total, and then we would get anywhere between 15 and 25 percent. I'm sorry; accept for the benchmarks, anything that is Hackett related is at market price, and I would say virtually all the time is directly paid for by the client. The rest we would share at either 15 or 25 percent increments, depending on who sourced. And if we can't figure out who is the lead source, we split it, and we have done 20 percent deals.

I apologize. One last question. At this point in time, nothing is converted into a big large transformation yet?

We would consider something very large that would have a -- for that individual effort to have a $500,000 impact per month on Answerthink -- no; the answer is no. We had a very substantial opportunity in the second quarter, and that did not go -- that went to another provider; not them.

But you're feeling really good that the potential for some big transformation hits in the lower six quarters is good?

If we keep doing what we're doing, our chances continue to improve. So to me it's a matter -- and if we then are able to -- for example if -- you know, the number of benchmarking opportunities from one of these industry programs, if it's successful, could easily double the number of clients we're pursuing today. But do we know that now? We're just recently launched. It had meaningful sponsors, and we're now pursuing it across our joint client base. So what we like about it is that they are undergoing training to understand how to evaluate benchmarks, so they're giving us senior people that are going through training. We are being highlighted and promoted in front of their client space at their conferences. We continue to register (indiscernible) client wins where they believe we can be strategic, and we have just started to have programs or discussions in -- where their biggest partner base is, which is in their operating groups and their ERP solutions group. So we believe the opportunity is every bit as substantial as we have always thought, and hopefully it will materialize sooner rather than later.

Final question. Q3 guidance, EzCommerce -- is there any benefit of drag assumed at the earnings line?

No; I would say breakeven to slightly positive income in the third quarter.

(OPERATOR INSTRUCTIONS). George Sutton, Craig-Hallum.

Two things. Can you just give us a sense of the win rates you've been seeing with respect to the Accenture relationship? Has it been what you would have hoped or what they would have hoped?

I think it's pretty close to 50 percent on the stuff we are teeing up. I think the things we are teeing up, I think we're seeing wins at about half of them. We don't know how that compares to their overall win rate, but we would be delighted to go to bat on a 50 percent (indiscernible) rate with them as often as they like.

It would be a great batting average if you were a catcher.

It would be a great batting average for us. But it is tracking pretty close to that.

With respect to your new dual-shore capability, can you just give us a sense of how you did differently for opportunities than you might have before when it was a third-party relationship?

The biggest thing is that we actually proposed on a couple of pieces of business and deployed people onto the EzCommerce platform in the second half of the quarter. But I think what it gives us, and I would say if there's a big surprise here, what my business application leaders told me is how well it's been embraced and how well the need to drive a blended or dual-shore teaming has been embraced by our various ERP groups. So what it does is it allows you to respond more quickly with more confidence. (technical difficulty) upgrading the facility. They know that we now have people that are actively involved in the way we are recruiting and redeploying people there, since we're actually evaluating each person that was at their offshore facility. All of those things just allow you to plan, respond with a lot more confidence, and therefore we expect adoption and leverage to happen within a reasonable time frame. And as I said in my comments, it's not like we believe that we need to leverage the facility -- the 50 percent; we think just giving -- the way we go to market in ERP, the strategic value that we provide leveraging our best practice implementation tools; if we can leverage 25 -- if we can get 25 percent of our hours leveraged offshore sometime before the end of '05, it will have a very favorable impact on our results. So that's what our focus is on.

John Mahoney, Raymond James.

I was just considering with your Accenture relationship and the potential for deals to really flow from that. Given in your own business (indiscernible) people aren't really pulling the trigger because of Sarb-Ox compliance and 404, isn't that more likely that those things will be delayed until any (indiscernible) opportunities until '05?

We really don't know or have any indication of any of the ones that we're currently jointly pursuing, but the answer is if the Sarb-Ox impact is real, the answer is it could. What we're noticing, though, is that the largest companies -- which seems to be the ones that we would jointly go after -- are much further ahead and have a more fully developed program than some of the others. But if you're not someone who got way ahead of it and have been working very, very closely with your accountant for a long period of time, you are finding out that you have (indiscernible) resource requirements to get it done and you have changing requirements to get it done. We believe that that will have a disruptive impact. Whether it has across all client bases, we think it will impact some segments of the client base.

You were indicating it's already affecting your own business (indiscernible). I was just thinking on your Accenture opportunities, that that might delay those?

We have not seen any indication of anything impacting any Accenture pursuit in that manner whatsoever.

At this time I'll turn the call back to Mr. Fernandez.

As always, let me thank everyone for participating. We look forward to updating you when we release our third-quarter results. Again, thank you for participating, and we will look forward to talking to you at the end of the third quarter.

Thank you for your participation. Your conference call has ended and you may disconnect at this time.