Hackett Group Inc (HCKT) 2004 Q3 法說會逐字稿

Good evening and welcome to the Answerthink third 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 third quarter results. Taking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of Answerthink, and myself, Jack Brennan, CFO.

A press announcement was released over the wires at 4:22 PM 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 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.

Good afternoon everyone. As we customarily do, I will start by providing some overview comments on the quarter. I will then turn it back over to Jack and ask him to comment on our operating results, cash-flow highlights and also comment on outlook. I will then pick it back up, make some comments regarding perspectives on the market and key strategic initiatives and we will open it up for Q&A.

Having said that, let me go ahead and start with our overview. We were pleased to announce results within the range of our previously provided guidance, with year-over-year growth totaling 13 percent and pro forma operating income of $2 million.

During the quarter, we continue to make meaningful progress on the key drivers our strategy with a very strong emphasis on expanding our strategic alliances and with specific emphasis in expanding our essential relationships in targeted areas.

Let me first comment on the highlights of our Q3 results. And I will comment on the strategic drivers later in my comments. This was an especially challenging quarter when you consider the significant amount of revenue that we have to replace from Q2, coupled with the anticipated disruption of client projects that we thought we would encounter from clients' pursuit of their Sarbanes-Oxley compliance initiatives.

We went into the quarter knowing that our largest client in Q2 would clearly have low revenues, since our projected -- our project resulted in a very large BPO contract being awarded. Additionally, we knew we had to replace revenues from work we did in Q2 at United Airlines and the revenue from the exit of our Siebel business.

With that backdrop as we entered the quarter, we continue to experience very strong growth in our business transformation service line, as our focus on best practice business processes improvement consulting along with our recently launched Sarbanes-Oxley services grew 32 percent on a year-over-year basis.

It is clear that where we strongly link our intellectual property to our offering we're seeing more opportunity. Our Hackett Group continued to grow strongly with a 46 percent year-over-year growth rate, although it was lower than what we targeted. We saw a higher-than-expected percentage of our Hackett sales coming from our subscription-based business advisory service and lower-than-expected benchmarking sales.

A key component of our long-term strategy is to continue to emphasize the sale of our subscription offerings. However, the impact on sequential quarterly revenues is unfavorable, as those offerings are amortized into income over a 12-month period instead of the benchmarking offerings, which are typically recognized over a 90-day period.

Although I think that our benchmarking business was also impacted by the clients who are trying to deal with their Sarbanes-Oxley requirements, we believe our Q4 sales activity will benefit from the (technical difficulty) will experience very strong Hackett sales in Q4 in both benchmarking and business advisory services. And this will bode very well for our 2005 growth prospects in Hackett.

Our business intelligence group outside of our Hyperion practice experienced lower-than-expected demand, even though we continue to see clients consider strategic performance management and reporting initiatives that could leverage these skills. This is an area that we expect to benefit from the remediation recommendations that result from Sarbanes-Oxley efforts.

Our business applications revenue, including EzCommerce, came in as expected. As we look at the types of meaningful registered pursuits with Accenture, we believe our business applications group should benefit from growth in our joint pursuits.

Relative Accenture, we continue to win new work with market clients, expand the number of partner contacts and most importantly, significantly increased the number of registered pursuits. Registered pursuits are very important because it means that we have formally agreed to pursue specific initiatives at agreed-to clients, which sets the stage for joint proposals and wins.

During the quarter, we saw the power bar relationship as we closed one meaningful ERP project and one meaningful BPO transaction. Of most significance is that the 2 wins were part of the first benchmarking win that we have reported last February. If you recall, last February we mentioned we had our first wins with the alliance -- the ERP deal, which we closed as expected, to have some impact in Q4 and increase into Q1. On the BPO deal, it is expected to be what is referred to as a lift and drop transition, which limits the consulting participation. However, Accenture is currently looking for the best way to recognize our contribution on this deal. And we're expecting to benefit from it in Q1 of '05. It is clear to us that we're seeing the Accenture work and strategy payoff and build.

Since last February, we now have had approximately 20 wins, excluding the 20 participants that we signed to the financial services benchmarking study we launched in Q3. More importantly, our active registered pursuits since our first progress report, or since last February, have increased substantially quarter-over-quarter and with a pretty significant increase this quarter.

Although I know many of our followers would like to see our relationships -- revenues build quickly, what has become very evident to us is that our efforts require time. In the two wins, the examples that I noted above, it took 9 months to get to the targeted implementation for BPO opportunity. But if we're able to continue to plant these seeds for registered pursuits with large clients, a representative number of meaningful wins should follow.

I want to also recognize the efforts of our associates. They have remained focused on great client service as well as making noticeable contributions to our strategic initiatives. I want to thank them and recognize their outstanding effort. Let me turn it over to Jack to provide some details on our operating results, cash-flow and also comment on outlook.

Thank you Ted. I plan to review our financial results and operating statistics for the third quarter, then conclude with a discussion of our financial outlook for the fourth quarter. All references to revenue in my discussion will pertain to revenue including reimbursable expenses.

For the third quarter, our revenues were 37.1 million, up 13 percent from last year. Our pro forma net income was 1.3 million or 3 cents per diluted share. Both revenue and earnings were within our range of guidance. Pro forma earnings exclude non-cash compensation and intangible asset amortization and include a normalized 40 percent actuary (ph). Our pro forma operating income was 5.3 percent in the quarter.

On a GAAP basis, our net income was 2 cents per diluted share and included non-cash stock compensation expense of 597,000 and amortization of intangible assets of 581,000. Our GAAP effective tax rate for the 9 months ended October 1, 2004 was 26 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 net operating loss carryforward position.

If you recall, we claimed a worthless stock deduction on our 2002 cash return for the discontinuance of our interactive marketing business and voluntarily requested that the IRS review this position. During the third quarter we filed and 8-K to report that the Company finalized this matter what the IRS. Final determination resulted in a 77.3 million worthless stock deduction. Including this deduction, the Company has approximately 77 million of operating loss carryforwards.

In the third quarter, revenue from the Hackett Group was 5.8 million, which represented 16 percent of our total revenue and a sequential increase of 3 percent. Business Transformation reported 8.4 million of revenue, which represented 22 percent of our total revenue and a sequential increase of 16 percent.

Business Intelligence reported 7.6 million of revenue, which represented 21 percent of our total revenue and a sequential decrease of 13 percent. Business Application reported 15.4 million of revenue, which represented 41 percent of our total revenue and a sequential decrease of 5 percent.

Our strongest performing groups continue to be Hackett and Business Transformation, which on a year-over-year basis were up 46 percent and 32 percent respectively. These groups benefited from our business process and best practices intellectual capital that give us a unique competitive edge in the marketplace.

In the quarter, Hackett revenue was lower than what we expected as several benchmarking deals that we expected would close in the third quarter now appear to be delayed until the fourth quarter. There is also a higher mix of subscription-based business advisory contract sales in the quarter. Revenue for these contracts amortize over a 1 year period, which contrasts to a benchmark sale where revenue is typically recognized over a 90-day period.

We believe that the results for Business Applications and Business Intelligence were unfavorably impacted by our clients' efforts to complete their Sarbanes-Oxley compliance efforts. Clients appear to be deferring finance and other back office-related initiatives so they can focus on Sarb-Ox compliance, which must be finalized by year end.

On the other hand, our Business Transformation business has benefited from Sarb-Ox. They assist clients with more complex business process documentation and readiness efforts that in many cases also require a better understanding of automated internal controls.

We break down our business across industry verticals. Our largest vertical this quarter was manufacturing, which includes consumer and industrial goods. This vertical represented 32 percent of our revenues. Our services vertical, which includes primarily service organizations in the technology, advertising and travel industries, represented 16 percent of our revenues.

Other key verticals were retail at 12 percent of revenue; life sciences at 10 percent; financial services at 9 percent; telecommunications at 6 percent; utilities at 5 percent; and media and content, 4 percent.

Revenue from our top 5 and top 10 customers was 18 percent and 29 percent respectively, down from 23 percent and 33 percent respectively in the previous quarter. Revenue concentrations continue to improve, decreasing our reliance on any one or few key relationships.

Consultant headcount at quarter end was 600, which is up 3 from the prior quarter end headcount of 597. Consultant utilization was 67 percent in the third quarter, down from 72 percent in the second quarter. Lower utilization in the third quarter reflects lower than expected revenue levels.

Our per hour realized billing rate was $174 this quarter, down slightly from $176 last quarter. Our gross margins as a percentage of revenues were 36 percent in the third quarter, compared with 38 percent last quarter. Lower margins were delayed directly related to the decrease in utilization.

Our pro forma SG&A as a percentage of revenues was 31 percent in the third quarter, which is equal to 31 percent last quarter. Actual SG&A spending was flat with the second quarter. Higher professional fees related to Sarb-Ox compliance and our external audit were offset by continued cost management in our back office areas.

Our cash balances, including the restricted cash and marketable investments, were 51.5 million at the end of the third quarter -- a decrease of 4.5 million from the second quarter. This decrease principally reflects an increase in accounts receivable and unbilled revenue of 3.4 million and the payment of 2.8 million to repurchase 589,000 shares of our common stock during the quarter.

At the end of the third quarter, $4.1 million was available for future purchases of common stock. Since the inception of the program in July 2002, through the end of the quarter the Company has repurchased 5 million shares of common stock for $15.9 million.

DSO has increased from 70 days last quarter to 79 days this quarter. This increase was primarily the result of our implementation of Oracle 11i in the quarter and the transfer of our European accounting to the new platform, which delayed our traditional end of month billing cycle. We expect to be back to our traditional cycle in the fourth quarter and expect to see improvement in our DSOs when we close out the year.

I would now like to address our future outlook. In the fourth quarter, we expect revenue to be in the range of 33 million to 36 million. There is a seasonal impact in the fourth quarter, where we expect to have approximately 12 percent less billing days when compared to the third quarter due to additional holidays and vacation usage.

As we saw in the third quarter, we also expect Sarb-Ox compliance efforts to continue to disrupt our implementation businesses in the fourth quarter.

We expect Hackett revenue to be up sequentially in the fourth quarter. Their pipeline is very strong, which we believe will translate into a high level of contract sales in the fourth quarter, which will position us well going into 2005. We expect Business Transformation to be flat to slightly down sequentially in the fourth quarter. And we expect Business Applications and Business Intelligence to be down sequentially due primarily to the fewer billing days that I previously mentioned.

Diluted pro forma earnings per share in the fourth quarter should be in the range of 1 cent to 3 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 a loss of 1 cent to income of 2 cents. Our GAAP estimate includes accrual of approximately 300,000 in state and foreign taxes, and non-cash stock compensation and intangible asset amortization expense estimated to be approximately 1.2 million.

Our gross margin percent in the fourth quarter should be flat to up slightly compared to the third quarter. Our consulting costs should be lower in the third quarter, as we expect headcount levels to decrease by approximately 40 positions. We also expect to benefit from a reduction in our vacation accrual based on planned vacation usage.

SG&A spending should be comparable to third quarter levels.

Excluding any impact of our stock buyback program, our cash position should increase with anticipated positive cash flow from operations and expected DSO improvement. We continue to stay focused on improving our operating income and believe this improvement will occur as revenue levels increase. This will allow us to leverage our relatively fixed SG&A banks. Operating income improvement should occur from other initiatives we're currently pursuing.

We believe Hackett has a revenue growth opportunity that exceeds our other businesses. 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.

Our alliance with Accenture continues to gain traction, as Ted mentioned, and the number of jointly pursued opportunities continues to increase. This provides an important revenue channel for our implementation businesses.

With the acquisition of EzCommerce, we now have offshore resources and expect to move into a new facility by the end of this year. As we ramp up our offshore capability, this will allow us to be more competitive in our ERP implementation proposals and, over time, lower our average cost per consultant. 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 assuming a -- I guess our current 3 percent GDP environment, we continue to believe that there is strong demand opportunity in most of our service line areas. Although we recognize that the ERP environment is most volatile -- (technical difficulty) our business. We continue to see reasonable market activity there, especially when we consider our joint pursuits with Accenture.

As we mentioned last quarter, we think we will continue to experience some demand disruption due to Sarb-Ox through the end of the year. There is no doubt that it is taking away clients' attention and resources, as Jack said, clearly in some of the back office areas.

We continue to see new business opportunities emerge from our unique benchmarking capability and business process knowledge. Our Hackett Group tools and the focus on enterprise performance and best practice database are able to provide empirically-based, actionable advice in a time frame and at a price point which is impossible to match without these assets. This is absolutely critical for us, because we know it provides as a very distinct competitive advantage.

Using this knowledge base and our best practice implementation tools, we can help clients validate targeted results and get greater ROI from their organizational or technology investments.

Our ability to capture best practice knowledge from our benchmarking efforts is of great strategic value to many of our large providers that must demonstrate the value to the solutions to clients. We will continue to actively pursue those relationships that give us the greatest, best opportunity to enhance our knowledge base and grow our business.

A great example of this is an application ROI campaign that we plan to launch with Oracle this quarter. Our objective will be to use one of our Hackett measurement tools to quantify the performance improvement opportunity that a client can target from implementing specific Oracle modules.

This is the kind program that, if successful, could help drive both Hackett offerings as well as benefit our Oracle implementation practice revenues. In this case, Oracle has agreed to share the downstream implementation revenues that result from the participants in this program.

Let me comment more specifically on our strategic priorities and the progress in each area during the past quarter. As we track now for really about 18 months, our first initiative is to continue to rapidly grow our Hackett Group, and more importantly, to do that with new and renewable offerings.

During the quarter, we continued to experience strong Hackett growth. More importantly, our subscription-based sales grew as a percentage of our total Hackett sales. We also saw strong sales from our new executive advisory programs that were launched last March that bring 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 the year. And it's clearly key to our long-term growth.

It is worth repeating -- 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 best practice offerings are also more likely to use our implementation services. So increased Hackett activity should mean increased lead flow and stronger knowledge base to all of Answerthink and to our alliance partner pursuits. I think we're seeing that happen.

Our second initiative is to continue to expand our best practice implementation tools. We continue to see our clients directly attribute their decision to use us to our approach. The objective of our tools is to make -- help our clients make smarter business process and software configuration decisions as a result of our best practice knowledge base.

Our best practice implementation tools help clients evaluate and specifically decide how to best redesign their business processes and how to configure their ERP software to optimize organizational impact. Our clients value this advice because they know it comes from proven best practices and, if properly implemented, can yield their targeted operating improvements.

We currently plan to launch version 2 of our expanded BPI tool set this coming January; clearly critical and a building block from our whole approach.

Our third initiative is to create incremental revenue channels through strategic alliances by leveraging both the Hackett intellectual capital and the Best Practices Implementation insight on consulting or BPO projects that we would not be 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. In Q3, we launched our first joint benchmarking study with Accenture's Financial Services operating group. From this effort, we signed up 20 participants, all of which become registered opportunities in our alliance.

From this and other efforts, our registered opportunities continue to significantly increase during the quarter. It is also important to see more of our targeted implementation pursuits play out and our revenue from Accenture expand.

Although we still admit that we are learning how to navigate the organization, when we consider the number of wins and registered pursuits, our recent industry benchmarking study, and our continuing discussions to formerly expand efforts beyond our current geographic alliance agreement and with other large parts of the Accenture organization, we remain very optimistic about the impact this alliance can have on our organization.

It is also important to note that initiatives like the Oracle program, as I previously mentioned, I believe exist with other large alliance partners that would complement our existing relationships and further augment our growth.

Our fourth initiative was to expand our dual-shore capabilities. As you know, we closed on the EzCommerce acquisition last quarter, which provides us with the capability to serve our own dual-shore engagements. And our target is to do that across all of our business application implementation services.

We believe we will be in our new facility in Hyderabad hopefully by the end of November, but no later than the end of the year, and for this capability to be more aggressively marketed in our proposals as we head into 2005.

Our fifth and last initiative is to continue to pursue strategic acquisitions. We continue to 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. However, acquisitions must be accretive and/or have a strong growth prospect. But more importantly, it must be -- it must have very strong synergy with our strategic focus and the intellectual capital that we so strongly leverage.

In summary, we continue to be excited about our strategic positioning, the progress were making across all of our businesses and with the opportunities that they provide the organization as we look forward. Those are my strategic and market-related comments. Let me turn it over to Q&A and see if we have some questions.

(Operator Instructions). John Mahoney, Raymond James.

Doug Thompson for John Mahoney from Raymond James. Could you give us an idea of the contribution from EzCommerce in the quarter? I think we were looking -- it was what, 1.8 million in the second?

They actually did contribute positively to the bottom line. I would say that the amount of operating income is really not significant. But it was profitable.

Sure. And on the top line?

On the top line, they did approximately $3 million.

Okay, great. And Hackett was up this quarter, a little bit less than perhaps what we were looking for. Could you give us a little color on the -- I think you said a couple of projects were pushed out into the fourth quarter -- the impact there versus the subscription and benchmarking mix lead generation?

Well, as I said, there were really two components. Subscription, sales actually were every bit as strong as they were expected (ph), and actually totaled 35 percent of the total Hackett sales this quarter. But the principal impact in the current quarter of reported revenue was that the benchmarking volume was simply lower. (multiple speakers) Probably lower -- you could probably say that it was 1 or 2 kind of SG&A deals that the Hackett leadership believes will be closed in Q4.

I personally, as I commented in my comments, I personally believe that we are fighting for -- on a benchmarking related engagement, where the client has to mobilize back office personnel to input data, do kickoff meetings (technical difficulty) trying to go through a meaningful measurement exercise. I think we're competing for time with the Sarbanes related initiatives.

So although our team expected for those sales to close, I expected the transactions out of Hackett to be impacted before the end of the year, but I was hoping it would not be. So I'm not quite as surprised. But this is a team that absolutely nailed every single number that they've had in front of them over the last 2 years.

The Hackett performance has been terrific. The pipeline, as Jack mentioned, is extremely strong. If they are within the range of what they are currently estimated on sales, low or high, it will be an outstanding sales quarter. If that happens, then the growth prospects for Hackett going into the first half of '05 will be strong.

Great. And last question -- could you give us an update on your own internal Sarb-Ox initiatives?

(multiple speakers) Costly would be my comment, but I will let Jack comment.

Probably the same thing you hear from everyone. But we have actually made a lot of progress working very closely with TWC. We've actually used our own internal consultants to help us with compliance.

At this stage, we have done all the documentation. We've actually finalized our testing. And the auditors right now are in the middle of their testing; haven't seen any significant issues coming out of any of their work to date. And we plan to be able to obviously finish before year-end and do so without any significant issues. So far, so good. But we will see how the fourth quarter goes.

(multiple speakers) Also give Jack and the back office team some credit. I will bet that we were one of the few companies that was willing to take on Sarbanes-Oxley and also go forward with a go live date on an Oracle enterprise implementation. But they've pulled off.

Yes, it had some disruption in some of our typical billing cycles. But we think the benefits from that implementation are significant. We think it's behind us.

Clint Fendley, Wachovia Securities.

Clint Fendley for Ed Caso with Wachovia Securities. I have a few questions here surrounding the revenue outlook. I wondered if you could comment on if the Sarb-Ox legislation is really -- could benefit, I guess, in that you have an offering around that. But yet it's also been somewhat of a distraction for your clients. Could you just discuss some of the milestones with this legislation and the impact you expect it to have on your revenues going forward?

We saw the biggest impact actually surface in late May and June when the firms actually finalized their final testing positions on their Sarbanes-related offerings, sometime in that time-frame. In fact, as I reflect on this June/July idle period that everybody referring to during that time-frame, since I have no other -- any other item to point to, I actually believe that the accounting firms coming back to many of the firms who just didn't simply have -- were way ahead of their overall Sarbanes-Oxley efforts found out that they had more work to do.

In any implementation-related business where you are either trying to bring a new system into production, or in the business transformation side where you're actually going to undertake changes in your organizational model, unless you have complete sign off from auditors, which is hard to do unless it's not material to your business, you are to some extent frozen and committed to them to stay with what's been documented -- scoped, documented and tested.

So I believe that we have seen that effort in the final -- I will call it the final clarification of the rules impact clients' availability to focus on new initiatives, or willingness to actually undertake new initiatives that may or may not be subject to either testing or re-testing.

As it impacted our business, we saw a little bit of the impact in ERP and we guided to that as we went into Q3. The activity in ERP, the overall volume in ERP actually remains pretty reasonable. I would say that with the exception of 1 engagement lost that we had in our Oracle group where we expected -- we just thought we had a very high probability of closing, which we did not, I would say that the overall demand has been pretty much as we expected and actually leveled out somewhat from what we saw in the June/July time-frame. (multiple speakers) (technical difficulty) Probably what took us a little bit more by surprise was that the BI group had pretty decent momentum in the first half of the year and we have seen that it also is fighting in some of the analytics reporting performance management space for that same resource or management time focus.

So I think we're seeing some of that disruption in BI. And I also believe that it may have or has impacted the -- some of the benchmarking initiatives.

As we look at Q4, a client could easily buy -- have a sale transaction in both the benchmarking business advisory transaction and initiate the kickoff of the program late in the quarter, which in my view we can visualize actually happening post Sarbanes-Oxley signoff. Therefore, I am pretty optimistic that what our Hackett team believes they can do is achievable.

But overall, I think what we're seeing is a first-time and very comprehensive initiative that has gone through several re-definitions of kind of what actually needs to be done. I think their accountants have been doing the best job they can to kind of work their way through it. I believe it has a disruptive event in the second half of '05.

Having said that, when you look at the outcome, and I say this since we obviously aren't involved in helping clients with some of these complex initiatives -- actually pull this off, especially when the client is looking at how to leverage automated controls where the accounts don't have the strongest background as perhaps an organization like ours.

We think that the final reports will have a series of recommendations that require remediation. The ones that require remediation prior to signoff will happen quickly and will probably be done in whatever way that can be accomplished so that the auditor feels comfortably that the controls have been put in place and can be tested, whether they're manual or not.

But there will also be a very significant, in my view, series of other observations which the auditors will note to the audit committees of these public companies as areas where it wasn't deficient enough not to signoff, but this is remediation that we called yellow.

We have things are very, very strong. Things are in the red area that require remediation immediately and these other areas of deficiencies that we call yellow items that we believe will become recommendations that I doubt very few audit committees will sit idly and just tell the company hey, it's okay to have a longer list of yellow items or items that are okay but not great.

It's because of that I believe that there is a favorable impact on both consulting opportunities for companies then if they're going to have to make changes to do it the right way. And then the other impact of Sarbanes-Oxley is that a company is able to do that with an automated control instead a manual control.

The ability -- the testing of automated controls is dramatically more efficient. This is without talking about just the -- it's more efficient to execute on a continuous basis. And in my view, that will drive either reimplementation, upgrade to new modules (technical difficulty) and other applications and other application demand in '05.

Ted, can you hear me? I wondered also on the decline we've seen in revenue from your notable client, assume historically that was Waste Management, was that due to the Sarb-Ox? Or did it signal a longer term trend there? And also I guess you mentioned United as well earlier. If you could comment on the slowdown that we've seen (inaudible) (multiple speakers)

No, it was no slowdown. In Q2, United Airlines -- we commented when we signed off on Q2 that United Airline had terminated the consulting initiatives it had with us. We're still doing a small amount of work with them in one strategic area, I believe. But the large piece of the work we were doing was stopped as they focused on making sure they could secure financing. And we commented on that when we reported the second quarter.

The other large client -- if you will recall we worked as in a BPO advisory in a strategic role with a client who took our overall effort and finalized -- we finalized our project by the client awarding a very large BPO transaction to this client. So what happened is that after that client was awarded, a meaningful part of the work we were doing is now being done by the organization that was awarded that BPO contract. And even though we continue to serve that client in other areas, it had a meaningful impact in Q2.

Actually, Waste Management continues to be a client of ours. The level that Waste Management spent with us on an ongoing basis has been really reasonably constant now for the last -- I'm going to say 1 to 2 years. I'm looking at Jack just in case he wants to jump in.

But no, I think the one thing we have done extremely well the last couple of years is our -- we just don't have any single client that we’re significantly relying on the way we used to rely -- with the way were I'm going to say proud to rely on Waste Management a couple of years ago, when it became a pretty significant part of our business.

Okay. Fair enough (multiple speakers)

(multiple speakers) nothing specific; nothing of note in those changes.

Jack, how much of Hackett's revenue -- what percentage is on subscription basis?

If you look at the percentage, it's approximately -- this quarter, 20 percent. Today, if you look at it as a percentage of sales, in the quarter it was more in the 35 percent range.

George Sutton, Craig-Hallum Capital.

So I understand you don't like to give guidance more than one quarter out, but it sounds very clear to me that as we look out to Q1 of '05, pretty much every piece of your business you see improving. And I say that because I think there will be more Accenture attachment at that point. The Hackett subscription business will continue. The Oracle business will start to kick in. The dual-shore initiative will be built out. So as I look out to Q1 of '05, if you could just give us a sense of what that environment should look like and of course Sarbanes will be over at that time as well. If you can give a sense of what that might look like versus Q4, I am just curious.

I tried to provide some comments in my forward-looking statements. We believe that demand for most of our service lines in what I say -- a 3 percent GDP growth environment is actually pretty strong. And we have also acknowledged the fact that we are expecting the ERP demand to be -- continue to be volatile. That all depends on what someone believes the overall macro opportunity in ERP is.

So, if Sarbanes-Oxley disruption is behind us, and we see the kind of initiatives that the clients -- where aggressively looking at in the first half of the year, that we believe have been impacted by their efforts to focus on this area in the second half, we should see strong demand. We should see growth in all of those service lines.

Additionally, and I commented on this as well, we believe that the same kind of growth opportunity in ERP -- I think we are acknowledging that hey, it's going to be volatile. But if the Accenture relationship continues to expand, Accenture will become a meaningful channel for us as we head into Q1.

And based on the things that we're seeing with Accenture and the kind of expansion and implementation efforts we see in the ERP space, we think they should impact or help our ability to grow our ERP business.

So, you are right, it were extremely hopeful that we're making the right strategic decision, that we are in businesses that we want to be in, and that the disruption will become help and the investments were making in the Accenture relationship will also contribute.

If that happens, you are right, we will be back on a growth track. And I think we will be aggressively pursuing this target operating opportunity that we were pursuing when we started '04.

So, this Oracle news that you put out on the call I'm very intrigued by. And I want understand exactly how large you're looking at that potentially being. You're going to share downstream opportunities -- you're going to go to market with them. Can you give a little bit more clarity about how you go to market, how much emphasis they put on this program? Is it similar to what you're doing with Accenture in terms of the revenue share? I'm just curious if you can give a little more detail there.

I think what we wanted to do with Oracle and what Oracle wanted to do with us is to -- I think they strongly believe that our intellectual capital and our approach helps build a more credible business case for clients that are considering these initiatives. So, to find out just how powerful that joint effort could be, what we did -- we said why don't we just agree to a specific campaign.

Our hope is actually to do something similar to what we targeted with Accenture Financial Services. Can we -- let's see if we can try to get 20 participants to utilize our application ROI tool. Let's obviously use the opportunity to market the value of the tool to a broader audience where (ph) we think provides a marketing opportunity.

So there's the marketing feedback that you get. There's the actual as we call it kind of an independent tool that can validate a business case or help a client validate a business case on the implementation of new Oracle modules. And what we have agreed is for those people who participate – first, we will be paid for that effort by Oracle. And we've also agreed to make sure that we bring participants to that mix. And for those opportunities that we close, we expense (ph) -- we plan (ph) to share them actually 50-50.

So we tried not to overcomplicate it. We wanted to put a smart program in place that we could launch before the end of the year and to give us both a chance to see the kind of impact it can have in the marketplace. And I think that it's very fair and they are willing to share, then, the downstream 50-50. So we think it's a great initiative.

It will be something, obviously, we'll work hard to get (ph) through the balance of the year and probably in the beginning of the year. And it's the kind of thing, George, that we think -- if successful with very large partners -- with a very large alliance partner like Oracle, could really help us fuel our growth.

I mean (technical difficulty) they are (technical difficulty) all consultancy for us to get (technical difficulty) our fair share of the pie having strong strategic relationships is -- what I like is the fact (technical difficulty) with the likes of the Accentures and others (technical difficulty) in that (technical difficulty) willing to do this (technical difficulty) willing to fund those (technical difficulty) I see it just as a huge win-win.

Just to be clear, it is their application sales group that will be offering this alongside your folks?

The plan is for them to offer it to the application sales group. And they also have a strategic, I want to call it, services group that helps with pre-sales and strategic sales within their organization. And that's the group that we have been interacting with.

Last question, you mentioned the joint benchmarking work that you are doing with Accenture. And there are 20 registered opportunities with respect to that. Can you just characterize the size of the companies that you're working with on that project?

They are all very large (technical difficulty) banking and insurance companies. As you know, we did that jointly with Accenture. They helped us bring in some of the initial sponsors. I believe there were 5 or 6 initial sponsors. And 20 people have agreed to participate. And again, similar to our alliance agreement, opportunities that emanate from that initiative, entry point plus (ph) (technical difficulty) 24 months will be served jointly to the extent that we have resources available in country to serve those opportunities.

So the most important thing about that initiative is that we wanted -- we want to drive volume into both Hackett and the number of registered opportunities, as well as continue to pursue very large as what we kind of refer to them kind of elephant deals. So I think they believe that this kind of study can be applied in other industry operating groups. And we're hoping that we're able to launch more of those programs as we get into Q1.

I'm not showing anymore questions.

Okay. Well then let me conclude by thanking everyone for participating in the third quarter earnings call. I look forward to updating you again when we report our fourth quarter. Thanks again for participating.