Hackett Group Inc (HCKT) 2004 Q4 法說會逐字稿

Good evening and welcome to the Answerthink fourth quarter conference call. Your line has 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.

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

Thank you, Jack, and good afternoon, everyone. As we customarily do, I will open up the call by just providing some overview comments relative to the quarter. I will turn it back over to Jack so that he can comment on the detailed operating results, also comment on cash flow and also speak to guidance.He will then turn it back over to me, I will make some market in both strategic and overview comments and then we will then open it up for Q&A.So let me start first with the overview of the quarter. We were pleased to announce results within the range of our previously provided guidance. With year-over-yeargrowth totaling 8 percent and pro forma operating income of $600,000. During the quarter, we continued to make meaningful progress on the key drivers of our strategy, which are centered around leveraging our proprietary Hackett Best Practices, intellectual capital to drive our growth. This was strongly evident across both our Hackett programs and in our business transformation offerings, which grew 66 percent and 51 percent, respectively.We also continued our strong emphasis on expanding our strategic alliances, which specific attention on the increasing number of joint pursuits and further expanding our Accenture relationship in targeted areas. We continue to see increasing activity from this effort in the quarter and expect it to be further evident in 2005. First let me comment on the highlights of the quarter results and also comment on the strategic drivers later on in the call.Q4 is seasonally the most challenging quarter for us when you consider the reduced number of billable days during the quarter that result from the holidays and also from the increased level of vacation that is normally taken during the quarter. We also believe that there would be a certain level of disruption of client IT integration projects as a result of our clients' need to freeze their controlled environment through the end of their fiscal reporting periods in order to ensure Sarbanes-Oxley compliance for the year. With that backdrop as we enter the quarter, we continue to experience very strong growth in our business transformation service line, as our focus on productivity improvement and enterprise performance management initiatives resulted in a 51 percent growth on a year-over-year basis.It is clear that where we strongly link our intellectual capital and strongly link our Hackett brand, we are seeing an increasing number of opportunities to strategically advise clients. As I mentioned, our Hackett Group continued to grow strongly with 56 percent year-over-yeargrowth in the quarter. We also experienced strong year-over-year sales growth in the quarter which Jack will cover in more detail in his comments and provides us strong momentum going into 2005.Most importantly, we continue to see our Hackett Business Advisory programs -- which are our subscription programs -- grow at an increasing rate with over 3 percent of our Q4 sales coming from the subscription based programs. A key component of our long-term value creation strategy is to continue to emphasize the sale of our subscription offering. However, the short-term impact on sequential quarterly revenues is unfavorable as those offerings are amortized into income, typically over a 12 to 24 month period instead of the benchmarking products which are typically recognized over a 90 day period.Our Business Intelligence Group came in pretty much as expected as we exited the year. We are seeing an increasing number of opportunities, especially in the planning and enterprise performance area which will benefit this group in the first half of 2005. Business Intelligence is also an area that we expect to benefit from remediation recommendations that should result from completed Sarbanes-Oxley efforts.Business applications revenues came in slightly lower than expected. Business application is the area that we expect will benefit most meaningfully from the increasing pipeline with Accenture. Although the deployment of resources from our joint wins have taken longer than we originally estimated, we expect the revenue from Accenture joint wins to increase in Q1 and continue to increase into Q2 based on our Q4 wins.Correspondingly, we are expecting business applications to grow sequentially in Q1. Relative to Accenture, we continue to win new work, including several new benchmarking assignments, several extensions and/or expansions from existing clients that are going into implementation phases and we also had a couple of sizable application implementation wins. We also saw an increase in the number of registered pursuits. Registered pursuits are very important because it means we have formally agreed to pursue specific initiatives at agreed to clients. And sets the stage for joint proposals and, hopefully, then wins.Lastly, I want to recognize the efforts of our associates. They have remained focused on great client service as well as making noticable contributions to our strategic initiative. I think we have seen great progress made throughout the year, I think the second half of the year was clearly a little bit more challenging than we had expected at the beginning of the year and I want to thank them and recognize their outstanding effort throughout the entire year.Let me turn it over to Jack to provide details on our operating results, cash flows and also comment on guidance.

I plan to review our financial results and operating statistics for the fourth quarter then conclude with a discussion of our financial outlook for the first quarter of 2005.All references to revenue in my discussion will pertain to gross revenue, which is revenue including reimbursable expenses.In the fourth quarter, our revenues were 33.7 million, up 8 percent from last year. Our pro forma net income was 332,000 over 1 cent per diluted share. Both revenue and pro forma earnings were within our range of guidance. Pro forma earningsexclude non-cash compensation and intangible asset amortization and include a normalized 40 percent tax rate.On a GAAP basis, our net loss was 2 cents per diluted share. It included non-cash stock compensation expense of 430,000, and amortization of intangible assets of 604,000. We accrued 251,000 of tax expense in the quarter, representing a small accrual for certain state and foreign taxes. We accrued no U.S. federal taxes in 2004.At the end of 2004, the Company has approximately 74 million of U.S. federal loss carryforwards. We continue to record evaluation allowance against this benefit which we will continually assessed in future reporting periods.In the fourth quarter, revenue from The Hackett Groupwas 5.9 million, which represented 17 percent of our total revenue and a year-over-yearincrease of 66 percent. Business transformation reported 8.2 million of revenue, which represented 24 percent of our total revenue and a very strong year-over-year increase of 51 percent. For the intelligence (ph) report 7.3 million of revenue which represented 22 percent of our total revenue and a year-over-year decrease of 16 percent.Business Application Group reported 12.3 million of revenue which represented 37 percent of our total revenue in a year-over-yeardecrease of 9 percent. Year-over-year comparisons for business applications benefited from the acquisition of easy commerce in May of 2004. Our best performing groups continue to be Hackett and Business Transformation. These groups strongly benefit from our business process and best practices intellectual capital that give us a unique competitive edge in the marketplace.As Ted mentioned, the dollar value of Hackett contract sales in the quarter were very strong. In the quarter, we closed 10 million of new contract sales for Hackett. This compares to 5.7 million in the previous quarter and 7.5 million in last year's fourth quarter.If you break down contract sales between benchmarking and Business Advisory services, mix of Business Advisory continues to grow. Business Advisory sales represented 41 percent of total sales in the fourth quarter which compares to 19 percent in the same quarter last year. This increase is a key component of our long-term strategy since these are annual subscriptions that allow us to create renewable relationships with our clients. This shift to Advisory Services has an adverse short-term revenue impact offset by the long-term benefit of an increase in unearned contract value. This is because revenues for these contracts amortized over a one- to two-year period which contrasts to a benchmark sale where revenue is typically recognized over a 90 day period.Revenue for Business Applications declined a bit more than we expected. As we said last quarter, we believe that clients in the second half of '04 have deferred finance and other back office related implementation so they can focus on Sarbox compliance.We do expect this demand to stabilize as organizations get through year-end Sarbox testing and related sign offs and begin to launch 2005 projects that address Sarbox remediation and automation of internal controls.If you break down our business across the industry verticals, our largest vertical this quarter was consumer and industrial goods, which represented 39 percent of our revenue. Our services vertical which includes primarily service organizations in the technology, advertising, and travel industries represented 18 percent of our revenue. Other key verticals were Life Sciences at 9 percent of revenue, Financial Services at 8 percent, Telecommunications at 7 percent, Retail at 6 percent, and Utilities at 5 percent. Revenue from our top five and top 10 customers was 23 percent and 36 percent, respectively, up from 18 percent and 29 percent, respectively, in the previous quarter. Revenue from our largest customer was 5 percent. Revenue contribution from our Accenture lines continues to grow. This alliance channel represented 6 percent of our total revenue in the quarter. Based on our current pipeline, we expect reviews from the alliance to continue to grow in 2005. Our Business Application and Business Intelligence groups should benefit the most from this alliance.Consulting headcount at quarter end, it was 550, which is down 50 from the prior quarter end headcount of 600. This reduced headcount primarily occurred in the Business Application group in both the number of W2 employees and our use of subcontractors.Consulting utilization was 61 percent in the fourth quarter, down from 67 percent in the third quarter. Lower (ph) utilization in the fourth quarter reflects the seasonality of the fourth quarter where we do have less billing days due to vacation usage and holidays. Our per-hour realized billing rate was $181 this quarter, up from $174 last quarter, reflecting the continued shift in mix to higher rate Hackett and Business Transformation offerings. Our gross margins as a percentage of revenue were 36 percent in the fourth quarter, which was flat compared to the previous quarter. Our pro forma SG&A as a percentage of revenues was 35 percent in the fourth quarter, up from 31 percent last quarter. This increase was primarily the result of lower revenues as overall spending levels increased slightly from 11.5 million to 11.8 million. Our cash balances, including restricted cash from marketable investments, were 52.8 million at the end of the fourth quarter, an increase of 1.3 million from the third quarter. This increase principally reflects a decrease in accounts receivable and unbilled revenues of 4 million, offset by the payment of 2.3 million to repurchase 568,000 shares of our common stock during the quarter. At the end of the fourth quarter, $6.8 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 5.5 million shares of common stock for 18.2 million.DSOs decreased from 79 days last quarter to 76 days this quarter. We did show improvement in the quarter but we were still below our DSO target of 70 days. Earlier in the fourth quarter, we did experience some disruption in our normal billing cycle as a result of the implementation of Oracle 11 I that I mentioned on last quarter's earnings call. We have since resolved all billing issues and we expect to see continued improvement in DSO next quarter. I would now like to address our future outlook. The first quarter, we expect revenues to be in the range of 36 million to 38 million. This would represent a sequential increase of 7 percent to 13 percent. We expect Hackett and Business Transformation to show the most improvement as demand for those services continues to be strong. As I mentioned earlier, the shift in Hackett sales mix to more Business Advisory subscription programs should slow the Hackett growth rate compared to its historical performance as that revenue is recognized over the longer term than a benchmark sale.For example, as I previously mentioned, Business Advisory contract sales in the fourth quarter were 41 percent of total Hackett sales. If that mix was 19 percent, that we experienced in the fourth quarter of 2003 our estimate for Hackett revenues in the first quarter of 2005 would be approximately 10 percent higher than what we're currently estimating.For our other service lines, we expect Business Applications to be up sequentially, Business Intelligence to be flattish to sequentially. In Business Applications, we are benefiting from some new wins as well as deployment on Accenture alliance projects which we won in the fourth quarter.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 an estimate of 1.1 million for non-cash stock compensation and intangible asset amortization expense. It also includes a 5 percent tax rate to accrue for certain standard foreign taxes. We do not plan to accrue for any federal taxes due to our net operating loss carryforward position which deferred tax benefit has been fully reserved.Our gross margin percent in the first quarter should be comparable to fourth quarter levels. Expected higher utilization in the first quarter should be offset by a higher cost per consultant. This expected higher cost per consultant results from the beginning of year front loading of FICA and unemployment taxes, as well as an expected seasonal buildup in our vacation accrual. We estimate that the combined impact of these two factors is a sequential increase of about 15 percent to our average cost per consultant.Consultant headcount should be up modestly. SG&A spending should be up modestly, compared to third quarter levels. Excluding any impact of our stock buyback program, our cash position should increase with the anticipated positive cash flow from operations.We do plan to adopt FAS 123 revised, effective in our third quarter of 2005. This pronouncement would require that we expense the fair value of options in our income statement vs. disclosing the impact in the footnote which is what we do today. Since we already expensed the value of our restricted stock ramps this new pronouncement would not change how we account for restricted stock.As of the end of the quarter, we had approximately 3.3 million options outstanding. We estimate that the FAS 123 revised expense with these options could be only 200,000 in our third quarter of 2005 and then decrease each quarter after that as vesting occurs. So you see the impact of adopting FAS 123 revised on the Company is not expected to be that significant. 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 base.Both Hackett and Business Transformation carry higher margins than the remainder of our business. And as that mix of business increases, margin opportunity should improve. Our alliance with Accenture continues to gain traction and as Ted mentioned, the number of jointly pursued opportunities continues to increase. This provides us an opportunity to reverse the current trend and grow the ERP and Data Warehouse Implementation businesses.Finally, we expect that the completion of Sarbox testing by our clients should result in new IT investment initiatives to remediate and identify controlled deficiencies which should improve the IT implementation demand environment. At this point, I'd like to turn it back to Ted to cover our market outlook and strategic priorities.

We do continue to see improving demand across most of our service lines and more specifically and consistent with Jack's comments in our Hackett and business transformation areas. Although we recognize that the ERP environment has been the most volatile part of our business, we are seeing reasonable demand, especially when we consider our joint pursuits with Accenture. As we mentioned last quarter, there will be a demand disruption in the IT integration marketplace until Sarbox adoption efforts are completed. Since we expect final Sarbox testing and signoff to extend into January for many of our clients, we expect Sarbox's efforts to have a diminishing impact on Q1. However, we also expect IT implementation opportunities to improve as we execute one as the remediation recommendations that emanate from the same Sarbox compliance reviews are addressed permanently through additional implementation of information technology.As I mentioned in my opening remarks, we continue to see strong demand and expanded brand recognition for our benchmarking and Business Advisory programs. With our Hackett Group, Enterprise Performance, and Best Practice database, we are able to provide empirically (ph)based and, therefore, clearly independent and objective advice in a time frame and at a price point which is impossible to match by our competitors without our Hackett intellectual capital assets.Using our knowledge base and our Best Practice implementation tools, we can help clients validate targeted results and get greater ROI from their business and technology investments.Let me now comment on our strategic priorities and on the progress in each area during the last quarter. Our first initiative has been to rapidly grow our Hackett Group with new and renewable multiyear offerings. As we have covered in our opening remarks, we continue to experience strong growth in these areas and, specifically, with our subscription sales now totaling more than 40 percent during a strong year and sales quarter and many of those sales coming with multiyear commitments.Clearly, our focus in this area has paid off as we are moving our Hackett business model to a more subscription based revenue model where -- and this is happening much more aggressively than we envisioned at the beginning of 2004. It is worth repeating. Our Hackett revenue growth not only provides a growing and higher margin source of new revenue to the organization, but we also know that customers that value our best practice insight in their offerings are also more likely to use our other services. This has been most clearly evident in the higher than expected revenue growth rate that we have started to experience in our business transformation service lines. We also believe this strategic asset positions us more strongly to increase our business transformation rates during 2005.As we move into 2005, we plan to further leverage the sales and marketing investments that we have made in Hackett to sell and bundle our Business Transformation services. We think this will allow us to grow more rapidly and to also result in higher margins for transformation consulting business. Correspondingly, we are looking for ways to further leverage our Best Practice Implementation tool and related research to further expand the value and the offerings that Hackett currently provides to its Business Advisory clients. We think that the tighter integration of our Hackett content -- with our Business Transformation Services -- will result in higher growth and margins for both groups in 2005.The second initiative is to continue to expand our best practice implementation tools. We continue to see our clients directly attribute their decision to use this, as to our Best Practice Implementation, approach and tool. The objective is to help clients make smarter business process and software configuration decisions. As a result of our Best Practice Implementation methods and knowledge which are centered around Hackett certified best practices.In January, we launched version 2 of our BPI tools as we call them. This new version resulted in an expanded Best Practice repository, along with key revisions in business profit areas that have been impacting by emerging information technology.We expect this new and expanded version of our tools and methods to further differentiate our ability to serve clients.Our third initiative is to create incremental revenue channels through our strategic alliances. By leveraging the Hackett intellectual capital and our Best Practice implementation tools, as we have said on large transformational projects that we would not be able to compete and surf for (ph) on our own. As I mention in my overview comments our essential relationship continues to grow across many dimensions. We continue to see our relationship expand geographically as well as in their operating groups and in their ERP or global solutions group.I have mentioned over the last several quarters that we are still learning how to navigate the organization but when we consider the number of wins, registered pursuits and the growing impact that it's starting to have on our results we remain very optimistic about the impact this alliance can have on the growth of our technology implementation practices.Last quarter, we mentioned our new initiative with Oracle. As you can imagine, their acquisition activity deferred many things -- well, they deferred our formal kickoff until actually January of 2005. But we continue to believe that these kinds of joint marketing efforts can impact our strategic value to partners and eventually impact our growth.The fourth area of focus for us to spend to expand are duel shore and, therefore, offshore capabilities. In November we opened up our new facility at Hyderabad, India, which will allow us to more aggressively market our offshore capabilities in proposals in 2005. Additionally, with improved infrastructure in place we are expecting our utilization of our existing Indian resources to improve in Q1 and through the balance of the year.Our fifth and last initiative as we continue to pursue strategic acquisitions. We believe that our unique Hackett assets and that our BPI or Best Practice Implementation approach and tools -- coupled with our strong balance sheet and infrastructure -- can be utilized to support a larger services organization. Acquisitions must be accretive and/or have a strong growth prospect but, most importantly, must have strong synergy with our strategic focus and our intellectual capital.In summary, although the second half of 2004 proved to be more challenging than we originally anticipated, it is important not to lose sight of the great progress may be made across all of our key strategic areas. Accordingly, we continue to be excited about our strategic positioning, the progress we continue to make and with the opportunities they provide the organization as we look forward. Let me now open it up to -- for Q&A.

(OPERATOR INSTRUCTIONS) Justin Martose.

On the Business Transformation, the sequential decrease. Was that -- could you just talk about that?

Yes, it was as expected. We have substantially less billable days in the fourth quarter compared to the third quarter. When we estimate with holidays as well as vacation time that our associates take probably have about 12 percent less billable days. That would really explain why we saw that decrease.

And the increase is just at the low end of the range, the 36 million from the 33 7 you just did, where does the increase come from both Hackett and Business Transformation? Primarily?

Primarily, from those two groups but also we are seeing Business Applications -- they look to be growing as we go into the first quarter as well.With Business Intelligence being somewhat flat.

Right but the majority of the growth, the incremental growth, say, 2.3 million comes from Hackett and Business Transformation. Is that fair?

I would say that their percentage increase, their percentage sequential increase in growth would exceed the other two businesses.

Right. And can you just repeat what you said regarding the Hackett business that if, regarding how the change of mix is happening and what that means to your growth rate, just wanted to be a little bit more clear on what you are saying?

Yes no. I gave an example of the business that we closed in the fourth quarter, 40 percent of it was Business Advisory sales. If we had closed on, say, 20 percent Business Advisory which is what we did approximately a year earlier and had 80 percent benchmark sales, that additional 20 percent of benchmark sales, the majority of that would amortize into revenue the next quarter, just given the great short nature of those contracts. Whereas, if you sell Business Advisory that was going to amortize to revenue over a one- to two-year period. Some of our contracts go one year. Some of our contracts are multi-year. So the next quarter's impact of the benchmark sale is substantially higher on revenue than it is for Business Advisory.

You had a dramatic increase in the percentage of Business Advisory sales from last quarter to this quarter. Did you try something different or was there anything else that you want to talk about how you're marketing the services?

Well actually in Q3, they were actually a pretty high percentage as well. We spent quite a bit of time with our Hackett leadership, talking about it. But it has been clearly the focus. I mean, the mission statement is that we want not only a relationship with a client we want a continuous relationship with the client and when we sell a Business Advisory program instead of a benchmark, we are entering into a relationship where not only are we going to generate revenue and have a chance to serve and market to that client throughout that next 12- to 24-month period it allows us to renew that revenue, we think, much more readily. So I actually spent some time on this. There is no doubt that there is some cannibalization of benchmarking as a result of the fact that we want long-term renewable relationships with our clients. However we continue to strongly sell our benchmarking services because the depth of the data capture that we get from those benchmarking services -- not only are they in high demand they provide a tremendous amount of deep and rich empirical data that allows our research and advice to clients to be that much more valuable. So they are both important but there is no doubt that we've worked very hard at growing and expanding and launching our advisory program and we want that growth to continue.

Just to be clear, 40 percent of the business books in the last quarter was the Business Advisory for the percentage of actual revenues recognized in the last quarter for Business Advisory is still at what? 21, 22 percent?

Yes it was probably what, Jack? Low 20s?

Yes.

It was, yes, it was probably still not getting to 25 percent. So, yes, that is a perfect example of the impact of amortizing that over a longer period of time or recognizing it over a longer period of time than benefiting from a benchmark, which is normally delivered in the subsequent quarter and perhaps the -- some period thereafter.

John Mahoney.

John Mahoney from Raymond James. Jumping on a couple of calls here so if I apologize if I missed this during the regular call -- I mean during the comments -- but did Hackett in the quarter. It was flattish and I guess the last caller speaker was just commenting most of the growth is going to come from Hackett and Transformation, right?

I think Jack said that the growth would come the higher percentage growth of the growth would come from Hackett and Transformation, but that we are expecting business applications to be up as well.

I know on a sequential basis, the gross margins were down a little bit because of the fewer days, normal seasonality but on a year-over-year basis, why wind down almost three other basis points when your two highest margin businesses, Hackett and Transformation, are such a larger percentage of profits? Of revenue, rather?

Part of the problem, John, is that we continue to invest significantly in our Hackett business and we are not focusing on really driving profitability or have been really -- that is to say, we tried to drive profitability in Hackett more aggressively until we got into '05. So the significant investment that we made in SG&A in Hackett or when you see an SG&Aincrease are primarily investing in the delivery programs, tools, everything that will allow that business to continue to grow.

John, I would say the other big impact is that we ran a 61 percent utilization in this fourth quarter. That compares to 69 percent in the previous fourth quarter. So we were staffed up a little bit more heavily in this quarter which, obviously, had a direct impact on our margins.

Well, thank you and let's hope the (indiscernible) comes back strong.

Well if it doesn't, the others do continue I think then we are really looking for some pretty significant improvement.

Congratulations on a nice job.

George Sutton.

Wanted to push on the Sarbanes-Oxley impact a little bit more. If we look at all the other pieces, you would have had just a superb quarter if you had normal implementation work. And I can clearly understand how Sarbanes impacted you. Is there a way to try to quantify how many different projects maybe were involved that you felt you were pushed off because of the Sarbanes effect? And I am looking at that, obviously, primarily in the fourth quarter. But at what point -- you mentioned it's still somewhat of an issue in Q1 and we're obviously still seeing companies dealing with it but at what point do we flip a switch and then we move to part B which is then hopefully increased work from all of the pieces that have been found as a result of Sarbanes-Oxley? And can you point to any examples where you have already seen that occur?

I think in general in -- as we exited the year we were seeing improved activity and demand across most of our businesses, as we mentioned. I think it is important to remember my comments in Q3. We missed an opportunity to close a couple of meaningful engagements in, as we exited Q3, that significantly impacted our Oracle group. And we also have somewhat of a deployment deferral on one of the key wins that we had with Accenturein Q4 that we have since launched. But we have seen, obviously, we feel strongly about that group. The group has had some key wins here already in Q1 and we launched and deployed against that. I would say that has been the single business opportunity other than the fact that we lose the available base.But in general, we know of clients across the board that are -- that have deferred or waited for things that launch projects that would have any impact on their auditors' questions whether or not that they were changing the controlled environment that they had signed off on.

You mentioned that you're targeting some specific areas within Accenture for work. I want to make sure I understood which areas or how that might be different than how you would gone to market with Accenture for and then you also mentioned Q4 wins was Accenture. And I wondered if you could be a little more specific as to when some of that business was signed and when you start to see the revenue impact.

Let me first answer the first part of your question. The specific targeted areas. We are spending a significant amount of time with their government services group and if you had asked us at the beginning of our relationship, whether the government services group would be an area that we expected to have, let's say, a more special relationship than others, I think we would have categorically said no. But for whatever reason, the partners in that practice highly value are go to market the Best Practice Implementation approach believes that it's highly applicable in several areas in pursuits that they have underway; and we have spent probably more time recently with them working on some specific strategies than any. That would be an example of a targeted area.I'm sorry, George, the second part, the second part of your question?

You mentioned some Q4 wins. I was just curious, when those might have been signed and when you would start to see a revenue impact?

The Q4 wins, well, one of them is the one that I am referring specifically and Oracle as an example was a Q4 win that we actually thought we would get some deployment in the latter part of Q4 that we did not actually staff up until just -- I believe maybe a week or so ago. That would be an example. We had another very significant win in the whole planning and performance area, which deals with another application which we have just recently launched with them as well.We have sold, we have continued to sell several benchmarks as I think there was probably two or three in the quarter that were launched. And we know that the impact of a detailed benchmark then has a much longer tail on the eventual outcome of what you deploy against. And then we had a couple of engagements where the clients actually either performed some diagnostic work or benchmarking work with us in Q1 of -- Q1 and Q2 of '04 where we actually started to deploy a more meaningful number of resources as we exited Q4.

Last for me. On Oracle you had mentioned you have because of their M&A activity, obviously, had to put off some of the work that you are doing with them as you go to market with them. Can you give us an update? I guess you did the kickoff in January? When do we expect to start to see some impact there?

Our hope is that we have a 90 day program so that and we are targeting I think we have jointly targeted 20 participants so our hope is that over the next 90 to 100 days that we will actually be able to let those clients those participants leverage our publication ROI product and then you'd see subsequent opportunity intercept (ph) based on the outcome of those results.

Kelly Tam.

(indiscernible) Capital. I am a little confused. Is the Business Advisory that you talked about -- the 41 percent of total revenues and the benchmarking -- how does that correlate to the other revenue groups that you talked about? The I Group and Business Transformation and The Hackett Group?

Very good question and also very different. Our Hackett Group sells a benchmark product and a subscription product that we call a Business Advisory program that includes access to our research advice on demand.

But you said Business Advisory was 41 percent of total revenues and Hackett Group is relatively small. (technical difficulty) total revenue.

It was 41 percent of total sales in the quarter. Is what Jack said for Hackett. And it was -- .

Is 41 kind of total Company revenue or 41 percent of Hackett revenue?

41 percent of the $10 million in sales that Hackett had in the quarter. Hackett revenues are different from the Hackett sales. So Hackett sales were 10 million, Hackett reported revenue was 5.8 million? Jack?

Right.

5.8 million a reference to 41 percent was relative to the sales in the quarter which we will then recognize in to revenue. The 41 percent will be recognized in to revenue of the next 12 to 24 months and the --

Should I assume benchmarking then is 5.9?

5.9 would be the difference, correct, in the $10 million of sales and that revenue will typically amortize over 90 days so it will come in over the first and second quarter.

And if you contrast that business to the rest of our business, the rest of our business is more the traditional consulting where you do either fix the engagements (MULTIPLE SPEAKERS)

-- total revenues of company revenue. (inaudible). (MULTIPLE SPEAKERS)

Just the packet revenue. (MULTIPLE SPEAKERS) Hackett more of a product business which is getting to the rest of our businesses.

(OPERATOR INSTRUCTIONS) Justin Martose.

Two follow-up questions. The easy (ph) commerce revenues. Have they grown in the quarter?

Easy commerce, we disclosed if I recall back in the second quarter they did 1.8 million. In the third quarter they did 3; and at this point they really fully integrated in with the rest of the ERP Implementation businesses. So we are not disclosing that number; we are not disclosing, separately, going forward.

I would say, generally, they would be down with the same lower available days and the other key components which has been part of the strategy, a pretty significant amount of their new revenue is coming from Answerthink. The deployment of Answerthink leads and sales and that part is clearly their growing part of their revenue model today. Or of that business's model today.

Just regarding The Hackett Group revenues for as we should think about the seasonality and full year. Does it follow a trend like last year where you'll have better growth in the first half on actual revenues? And then it flows up in the back half? Or can you just have some comments or thoughts about how those revenues should trend?

I think the key part of the comments today is for everyone on the call -- our investors and everyone on the call -- to understand that as the subscription base product of (technical difficulty) becomes bigger, that the revenue will then amortize over a longer period of time. So, since the mix is different as we exit '04 and go into '05 and expect that trend to either continue or increase, we would not expect the same seasonality relative to revenue. Because we will be looking at a different revenue mix quarter over quarter throughout all of '05. So let's just say that it would require some modeling, just to kind of look at the relative sales mix and to be able then to look at how that impacts subsequent quarters but since we know the mix is different from the sales we had in Q3 and Q4 and the sales we expect in the first quarter of Q5. We do expect a comparison to be different as the -- that part of the Hackett revenue model continues to grow.

But I mean it's still like you'll have year-over-year growth throughout the entire year there. It's just that --?

Oh yes. We would expect it to continue to grow nicely. We just know, mathematically, it is impossible for us to continue to grow at the same historical rate both maybe because of scale but also more importantly we want people to understand because the (indiscernible)has a significant difference significant impact on how we recognize revenue. But yes, we expect Hackett to continue to be a strong grower both in sales and in revenue throughout all of '05.

Will the profit be with the Hackett, with the mix of business change how does Hackett look on a profitable segment basis when you are thinking about on a quarterlybasis like what do you need to have?

Another excellent question because, as the Business Advisory program, that revenue grows. As you can imagine to be able to launch a high-quality research advice on demand facilitated service like we have launched you are having to make a very significant investment in the delivery of that model. So actually as we go into '05, the marginal, the gross margin coming from the Advisory programs is lower than the benchmarking programs -- even though our overall packet margins continue to stay in the high 60s. So as the revenue base comes into the Business Advisory programs which is a service that is that many times has delivered on a one to many options. It will give us great leverage. And we would expect that profitability improvement to grow gradually throughout all of '05.

Jeff Myers.

Intrepid (ph) Capital. Thank you. Two questions. One what is your target mix within Hackett between Business Advisory and benchmark? And when do you think you're going to get there. And then No. 2, just if you could maybe explain the difference between what a customer gets for benchmarking and for Business Advisory and are there customers who take both?

Our target mix for '05 is expected to be 50/50 but given the growth of the Business Advisory program, we may exceed that in '05. In a benchmarking product, a client uses our software or our portal to submit data about the specific area of the businesses. They want benchmark. And let's just say a typical benchmark would require a client to populate 500 data elements, 75 percent would be quantitative, 25 percent would be qualitative. Qualitative items directly relate to Best Practices that they are deploying. We then take that data, scrub it, using what we call our power tools -- which determines the acceptability of the submitted data -- and then we compare that to a peer group that we have predetermined with that client at the inception of the project; and the client receives a deliverable that's at a process level, gives them a specific number with they then target as a performance improvement number. And they can compare themselves to a top desktop company or average (indiscernible) company. They would see a report that says, your ability to improve at a process level is X compared to the peer group you selected from our database.For research, our Business Advisory programs are programs where a client has several offerings. One, it has the ability to receive a quarterly scorecard which allows them to submit a smaller number number of data elements quarterly, which can be compared to a peer group. It is clearly a much higher level and much smaller data elements so that they can do that quickly on a periodic basis. They then have access to something you may not have heard of but in the Hackett world it's a highly recognized product, which is our book of numbers, which is a research product that we do annually which we're now extending on a more frequent basis. We provide the client access to our research library on their specific program that they've selected. We also facilitate webcasts and meetings of interested peer groups so that they can share some of those insights as well. And in addition to that, a client can call us with for what we call advice on demand. They can ask us specific research questions in the program area they signed up to. As we said we bill for that program depending on the scale of the company and the functional area and we sell that over a one- to two-year period.

How is the pricing of this prescription product vs. a particular benchmark?

The benchmark product, because of the detailed insight will typically sell for a higher amount but it also has a direct correlation with the scope of the product you want that across the entire enterprise to cover finance, a chart, IT procurement, and the like or do you just want it in the collected area of the business? Depending on the extent of the enterprise you want covered and on the scale of the company then our pricing is driven. It is also symmetric.

Okay. I believe we have no more questions. So in closing, I want to thank everybody for participating on the call. We are clearly looking toward '05 to continue to obviously leverage the hard work that we've put in '04 to continue to position the Company strongly. And I would like to close simply by thanking all of our people for just continuing to demonstrate tremendous loyalty to the organization and providing outstanding client service. It truly is appreciated by all of the leadership and I know it's truly appreciated by our clients. Again thank you for participating on the call.