Hackett Group Inc (HCKT) 2005 Q1 法說會逐字稿

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

The press announcement was released over the wires at 4:31 p.m. Eastern Time. For a copy of the release please visit our web site at www.answerthink.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the investor relations page of our web site.

Before we begin, I would like to remind you that in the following comments and in the question and answer session we’ll 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 and uncertainties, and assumptions that are difficult to predict, and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly risk factors contained in our SEC filings.

At this point, I’d like to turn it over to Ted.

Thanks, Jack. And good afternoon, everyone. As we ordinarily do I will start the call by just providing some highlights for the quarter. I’ll then ask Jack to comment on detailed operating results, cash flow, and also provide some details relative to outlook. Jack will turn it back over to me. I will provide some market and strategic overview comments, and then we’ll open it up for q and a.

Having said that, let me start with the quarterly overview. We are pleased to announce results within the range of our previously provided guidance. Of special note was our ability to achieve sequential growth across all of our service lines. Our focus during the quarter continued to be centered around leveraging our proprietary best practices, intellectual capital, and tools to drive our growth.

This was most strongly evident in our renewable Membership Based Advisory Programs which continue to experience very strong sales growth and in the strong market acceptance to our newly launched Transformation Advisory offering.

A sequential growth in our best practice solution group which includes our business application and business intelligence teams was highlighted by the strong sequential and YOY growth in our Hyperion practice area.

On the Alliance front we continue to close new deals with Accenture, as well as expand projects that are underway. Overall, Alliance revenues continue to grow and are expected to continue to do so into Q2.

In late February we announced the alignment of our Business Transformation Group under The Hackett Group brand. This move will allow us to start offering the powerful content in our best practice implementation tools, and also avail Hackett Membership Based Advisory Program clients to the broad execution insight of our most experienced Transformation Associates. The addition of our BPI or best practice implementation tools content, along with the subject matter expertise of our most experienced Transformation Associates, we believe are powerful additions to the value we already offer through these services.

The move also allows us to directly introduce a series of fixed price, fixed go to Transformation Advisory Programs to Hackett clients that is responding to their increasing requests for strategic planning and execution support beyond the benchmarks that we deliver for the Executive Advisory Programs that we support.

Based on the sales activity since our launch in the beginning of March we believe we have an opportunity to significantly increase the number of new Transformation Advisory clients, as well as the rate per hour and revenue per professional for all of our Transformation Associates.

We are keenly aware that we have a very unique combination of both imperical data and research coupled with strategic consulting expertise which provides us with an opportunity to continue to aggressively grow our membership programs. We also believe that our Advisory Membership Programs allow us to develop a very close and continuous relationship with our clients that position us to strategically, independently, and objectively assist them as their needs emerge. With this new expanded capabilities under The Hackett brand, we believe we create a new category of empirically based advice that we refer to as ‘Strategic Advisory.’

Overall, we continue to experience strong growth in both Hackett Group Benchmarking and Advisory Program, as well as our Business Transformation or newly named Transformation Advisory Service Groups, which resulted in 30 percent growth on a YOY basis. Specifically, our Advisory Program sales continue to grow strongly with nearly 100 percent growth in the YOY sales for these renewable or membership based programs.

A key component of our long-term value creation strategy is to continue to emphasize the sale of our membership offerings, which allow us to strategically advise clients on a continuous basis. This is a unique and very important aspect of our strategy, especially at our scale. Overall, we enter the quarter with a very strong pipeline for all of our Hackett offerings.

In our Business Applications and Business Intelligence Groups we continue to see the importance of strongly selling our unique value proposition that is defined by our best practice implementation tools. We are optimistic that our proprietary tools and our expanded Alliance strategy will allow these service groups to not only stabilize but grow as the year progresses.

Lastly, as I normally do I want to recognize the effort of our associates. They remain focused on great client service and continue to make noticeable contributions across all of our strategic initiatives. I want to thank them and recognize them for their outstanding effort.

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

Thank you, Ted.

I plan to review our financial results and operating statistics for the first quarter, and then conclude with a discussion of our financial outlook for the second quarter. All references to revenue in my discussion will pertain to gross revenue which is revenue including reimbursable expenses.

For the first quarter our revenues were 36.9m, up 9 percent from the prior quarter, and at the midpoint of our guidance. Our pro forma net income was $355,000 or one-tenth per diluted share, and was at the lower end of our guidance. Earnings came in a bit lower than projected due to the lack of software sales from our SAP software reseller group and higher than anticipated [Sar BOX] and medical costs.

On a GAAP basis our net loss was 3 cents per diluted share and included a restructuring cost of 1.1m, non-cash stock compensation expense of 557,000 and amortization of intangible assets for 444,000.

The restructuring costs relate to an increase in previously established reserves to reflect the buyout of our New York lease obligation with our landlord. This opportunistic settlement eliminates our future lease obligations which total 20m through the year 2015. We will be required to pay $3m in April as part of this settlement. The earnings impact of this payment has been fully reflected in our first quarter restructuring reserves.

Our GAAP effective cash rate was 7 percent, which is our estimated tax rate for all of 2005 to provide for certain State of Florida taxes. We accrued no U.S. Federal taxes due to our NOL carry forward position. As of the end of 2004 the Company has approximately 74m of U.S. Federal loss carry forwards.

In the first quarter revenue from Benchmarking and Membership Advisory Programs of 6.3m, which represented a sequential increase of 8 percent. Revenue from Packaged Transformation Advisory Group, which was formerly named Business Transformation, reported 9.1m of revenue, which represented a sequential increase of 10 percent. Business Intelligence reported 8.3m of revenue, which represented a sequential increase of 14 percent. Business Applications reported 13.2m of revenue, which represented a sequential increase of 7 percent.

This quarter we had strong performance across all business groupings. The Hackett Group reported $6m of Benchmarking and Membership Advisory contract sales in the first quarter. This compares to sales of 10m in the seasonally strong fourth quarter, and 5.2m in last year’s first quarter. If you break down contract sales between Benchmarking and Membership Advisory Programs the mix of Membership Advisory continues to grow.

Membership Advisory sales represented 43 percent of total sales in the first quarter, compared to 25 percent in the same quarter last year. A YOY sales increase of 100 percent. This transition is a key component of our long-term strategies since these are annual subscriptions that allow us to create renewable relationships with our clients. However, because revenues for these contracts amortize over a one to two-year period compared to about 90 days for a typical benchmark, the shift in mix does slow the overall Hackett growth rate as revenue is pushed out over a longer time horizon.

Package Transformational Advisory Group performed well in the quarter and prospects for continued strong growth have been enhanced with the integration of this business into Hackett. As Ted mentioned, this group has developed a new series of programs and is leveraging The Hackett sales force to market these products. Early sales of the product have demonstrated that the use of The Hackett brand provides meaningful rate uplift from our current realized rates.

Our Best Practices Solution Groups, Business Intelligence and Business Applications, both showed promising results. After coming off two consecutive quarters of sequential declines, these two groups grew sequentially in the quarter. Revenue from our Accenture Alliance grew to 7 percent of total Answerthink revenue in the quarter, up from 6 percent last quarter.

Our Hyperion implementation practice was especially strong as Hyperion software product continues to gain wide acceptance in the marketplace. During the first quarter we acquired a team of six billable resources that specializes in the implementation of [Brio] data warehouse software that further extended our Hyperion capabilities.

Revenue from our top five and top 10 customers was 24 percent and 36 percent, respectively, compared to 23 percent and 36 percent, respectively, in the previous quarter. Revenue from our largest customer was 7 percent.

Consulting headcount at quarter end was 569 compared to 550 at the end of last quarter. Included in consultant headcount were 48 subcontractors which compares to 45 subcontractors last quarter. Consulting utilization was 7 percent in the first quarter, up from a seasonally impacted 61 percent in the fourth quarter. Our per hour realized billing rate was $182 this quarter, up slightly from $181 last quarter.

Gross margins as a percentage of revenues were 35 percent in the first quarter compared to 36 percent in the previous quarter. Higher consulting utilization in the quarter was offset by an average cost per consultant increase of 14 percent. As we mentioned last quarter, we expected this cost increase which results from the front loading of employment related taxes in a seasonal buildup of our vacation accrual in the first quarter. Our pro forma SG&A as a percentage of revenues improved to 34 percent in the first quarter, compared to 35 percent last quarter.

Our cash balances including restricted cash and marketable investments were at 50.3m at the end of the first quarter, a decrease of 1.5m from the fourth quarter. This decrease principally reflects our stock buyback program and the timing of our payroll cycle which resulted in an increase in accrued payroll costs of 1.3m.

During the quarter we repurchased 196,000 shares of our common stock at a cost of $809,000. At the end of the first quarter $6m was available for future purchases of our common stock.

DSOs decreased from 78 days last quarter to 71 days this quarter which was very close to our targeted 70 days.

I would now like to discuss our guidance for the second quarter. We are seeing a strong pipeline of opportunities in Hackett but we would expect to see an sequential increase in revenue in the second quarter. The integration of our Transformation Advisory Group into Hackett is creating more sales opportunities and should increase our Transformation consulting rates by using the Hackett brand. For business applications and Business Intelligence the demand environment appears to be stable and we expect those two groups to be flat to up slightly in the second quarter.

For all of Answerthink we expect second quarter revenue to be in a range of 38m to 40m. This would represent a sequential increase of 3 percent to 8.5 percent.

Diluted pro forma earnings per share in the first 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 EPS should be in the range of 2 cents to 5 cents. Our GAAP estimate includes an estimate of 1.1ms for non-cash stock compensation and intangible asset amortization expense. It also includes a 7 percent tax rate to accrue for certain State and foreign taxes. Both pro form and GAAP guidance includes approximately a 1 cent impact for executive severance resulting from the alignment of Business Transformation under The Hackett brand.

Our gross margin percent in the second quarter should be higher than the first quarter levels due to the higher rates and lower employment related taxes. Consultant headcounts should be up modestly. SG&A spending should be up slightly compared to the first quarter levels, but lower as a percentage of revenue. Excluding any impact from our stock buyback program our cash position should remain about the same as expected positive operating income should be offset by the 3m payment to settle our New York lease obligation.

In summary, we made good progress in the first quarter with solid growth across all of our businesses. Although pro forma operating income levels are not at our long-term target of 12 to 15 percent, we expect to show operating income improvement in the second quarter to an expected range of 5 percent to 9 percent, as we plan to increase the mix of higher margin businesses and better leverage our cost structure.

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

Thank you, Jack.

As we look forward, we continue to expect strong demand for the unique combination of offerings that we’re now delivering to our Hackett brand. Our ability to strategically advises clients through some combination of Benchmarking, Transformation Advisory, along with our ability to provide OnDemand access to our proven best practices and strategies in our Advisory Programs is uniquely ours and available nowhere else. Our ability to then link our best practice knowledge base to software configuration or workflow automation through our Business Applications and Business Intelligence Teams also allows us to define a very unique value proposition. We know our approach and tools are distinct due to the increasing number of joint marketing ideas presented to us from current and potential partners.

We continue to expect IT implementation opportunities to improve as the year progresses as clients strategically deal with Sarbanes-Oxley remediation by automating deficient processes. Sarbanes-Oxley has highlighted the fact that automating process is the most efficient way to deal with control compliance.

With that as a backdrop, let me comment on our strategic priorities and our progress in each area during the past quarter. We’ve focused over the last couple of years on continuing to rapidly grow our Hackett Group and, specifically, our renewable offerings. As I covered in my opening remarks we continue to experience strong growth in our Membership Based Advisory Program. In fact, our subscription or Executive Advisory Program sales during the quarter grew 100 percent when compared to Q1 of last year. Clearly, our focus in this area is paying off as we are moving our Hackett model to a more renewable base revenues to more renewable based revenues more aggressively than we originally anticipated.

We also believe our recent addition of our transformation offerings under The Hackett brand, as Jack mentioned, will allow us to better leverage those resources. It also allows us to leverage our best practice implementation tool content into our membership programs, something that we plan to rollout in May.

We also believe that by adding both this content along with aligning our most experienced associates to support our Advisory Programs will significantly increase the value that we already offer our membership based clients. The move also leverages the sales and marketing investments that we have made in Hackett more broadly. This is also a very important part of the strategy.

All in all, we think this will allow us to grow revenues and operating margins more rapidly. To top it all off, our largest marketing event of the year, The Hackett Annual Best Practice Conference, will take place this Thursday and Friday in Atlanta. We are now expecting nearly double the attendance that we did a year ago.

Our second initiative is to continue to expand our best practice implementation tools. As we have repeatedly said, we continue to see our clients and our Alliance partners’ decision to team with us directly attributed to our proprietary best practice implementation tools and its relationship to Hackett certified best practice.

The objective of our best practice implementation tools is to help clients define their performance improvement opportunity, and to help them make smarter business process and software configuration decisions. We mentioned last quarter in January we launched Version 2 of our BPI tools. We expect this expanded version to further differentiate our skills. We also expect to continue to build on these tools capabilities.

Our third initiative is to create incremental revenue channels through strategic relationships by leveraging our Hackett knowledge base and the uniqueness of our BPI tools. On large projects that we would not be able to compete [for]. As I mentioned in my overview comments our Accenture relationship continues to grow. We continue to see our relationship expand geographically as well as in their operating groups and in their E, or P, or global solution groups. We say this while at the same time we know that there are many of their service lines, operating groups, and some of their solution groups which we have yet to effectively penetrate.

I mentioned over the last several quarters that we are still learning how to navigate the organization, but when we consider the number of wins, the register pursuits, and the growing revenue, we are very optimistic about the impact that the Accenture alliance can have on our technology implementation teams.

Last quarter we mentioned our new initiative with Oracle. All of their recent acquisition activity deferred the launch of our program until late January. We are now pleased to say that we have started to see momentum in a number of organizations that have now signed up to participate in our joint application ROI offering.

Also, as you know, we have been seeking a research relationship with one of the big four accounting firms, so that we could significantly expand our Sarbanes-Oxley research base. We are pleased to announce that we have launched a joint study with KPMG that will allow us to survey public companies on their total cost of compliance. Based on the number of participants that have already enrolled for this study we expect to find these to be strongly received. We plan to release the findings to a number of planned national forums over the next several months along with KPMG. We also expect the insight from the study to result in a new Sarbanes-Oxley benchmark offering that we plan to launch in Q3.

Our fourth initiative was to expand our dual shore capabilities. In November we opened up our new facility in [Hydrobad], which has allowed us to more aggressively market this capability across all of our offerings. I’m happy to say that we now have over 40 billable resources in this facility, our utilization in the quarter was actually pretty strong. We are also very pleased to say that the offshore leverage that is being expanded to support our Hackett Group delivery efforts.

Our fifth and last initiative is to continue to pursue strategic acquisitions. We continue to believe that our unique Hackett access, our BPI approach, coupled with our strong balance sheet and infrastructure can be utilized to support a large service organization. We continue to be very active in pursuing prospects that not only improve our growth but are accretive to earnings. But most importantly, as we’ve repeatedly said, any acquisition must have strong synergy with our strategic focus. And that is the leverage of our intellectual capital and access.

In summary, we believe we have strong momentum to meaningfully improve our operating results, 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 for q and a.

[OPERATOR INSTRUCTIONS]

[Justin Martos] of [Graham Partners], you may ask your question.

Yeah, hi. Just wanted to ask you guys regarding The Hackett Group, how much was the Business Advisory versus the Benchmarking?

In terms of the revenue breakout?

Yes.

Okay. I mean it’s obviously not as much as the sales breakout, but it grew to 28 percent in the first quarter of ’05, 28 percent of the revenue was the Advisory Program.

For The Hackett Group?

Yes.

And then with the Executive Advisory, do you expect that to really be impactful on the revenue side by the back half of this year?

Is that the Transformation Advisory or the Membership Based Executive Advisory Programs that were launched last March?

The Membership Based Advisory?

The Membership Based Advisory. The Membership Based Advisory, those Membership Based Advisories, as I said the sales of those specific programs grew 100 percent on a YOY basis, so we continue to expect the percentage of reported revenue to increase. We also realize that it’s probably becoming increasingly important to our investors to perhaps instead of comment on sales to actually comment on annualized contract value, and that’s something that we’re going to look into, we’re going to see if we can provide in one of the future quarters, and do that on an ongoing basis.

And then, Accenture, how much – can you quantify a little bit more about how much they were helpful in The Hackett business versus the consulting, or do you have any metrics that you can talk about there?

The overwhelming amount of the 7 percent of our total revenue that we mentioned, that benefit accrues to the technology implementation businesses. I think the most surprising thing that we’ve seen in our relationship is although the benchmarks are something that they clearly offer the clients to validate an independent business case, what they have been increasingly using is our BPI tools to differentiate the value they plan to deliver. Therefore, the revenue is accruing in the implementation engagements in both business applications and as well as business intelligence.

And one other question on the cost side, on the Sar BOX and medical, can you tell me was there something different in the medical, or can you quantify the Sar BOX a little bit more?

Yeah, I mean for the medical costs, we did have to provide an additional approximately $150,000 more than we had budgeted. It wasn’t a substantial impact, but added to the two other elements it does kind of create the penny or so miss from our midpoint. The other impact with Sarbanes-Oxley and, obviously, there’s a great deal of effort here in the first quarter to get it wrapped up. And then, again, that impact was probably, again, somewhere in the $150,000 area.

And you guys are on track for your Sar BOX 404 extension?

Yes, our 45 day automatic extension is due on next Monday. And we do plan on filing at that point.

Thank you.

George Sutton of Craig-Hallum.

Hey, guys. I hopped on actually just as you were starting question and answer, so I apologize if I’m repeating things. But, Ted, I really wanted to understand the transformational consulting combination with Hackett. It looks to me that that creates a business that’s well over $50m in revenues and would seem to have some very attractive components. Can you just go through what those components might look like in terms of what sort of margin structure, growth rate, and et cetera that might have?

Yeah, I think one of the interesting phenomenon’s over the last year is that many of our investors have been so focused on Hackett’s growth and on the Alliance revenue impact that they perhaps have overlooked the fact that one of our fastest growing and clearly the most profitable group within our organization was our Business Transformation Group.

We believe that by taking that Group and aligning it as we did under The Hackett brand not only did we significantly increase the value that we’re going to be able to offer in what we call our walk-in or Executive Advisory Programs that we talk about, but just in the sales activity that we saw in Mach and April alone, George, we saw that the programs that we launched under Hackett for that team were being sold at significantly higher rates and that is clearly one of the drivers of improved guidance going into Q2.

It also, just to talk about that integration, the combination of benchmarking the Membership Based Program, and these new Transformation Advisory Programs are probably seeing one of the largest pipeline opportunities that we have ever experienced going into another quarter.

Okay, good. Did you give any clarification or sense on the Accenture attachment? In the past you’ve talked about registered pursuits, did you give any clarity around that?

Yeah, I mean the revenue impact in the quarter was 7 percent, up from 6 percent. And just based on the pipeline of opportunities that we see, the registered opportunities, the interaction between the teams, and we do continue to anticipate that that will continue to be a larger percentage of revenue next quarter, and so it just continues to gain momentum in the foreseeable future.

And I know you’ve focused on the elephant hunting strategy in the past, are there still elephants out there that you’re looking at? And of course I asked this with the backdrop of a macro that’s become a little more difficult, both Accenture and IBM Global Services talking about slower rates of new bookings than expected. It sounds like you’re seeing the opposite? I’m just trying to put those two together?

Well, I think by definition they focus on large opportunities. Whether or not they start large at the beginning, or not. So, I would say that clearly the list of opportunity includes either significant opportunities right off the bat or opportunities that they believe build to something that makes sense for them. And that’s the same kind of I’ll call it backlog that we have with them. So, we’re hoping that some of our previous wins also build the way they expect those relationships to build so that we can benefit from that, as well.

So, I think their focus is unchanged, it’s clearly going after large relationships, and if we’re able to help them close and jointly bid on some of those opportunities we’re going to benefit accordingly.

Okay. Super. Thanks, guys.

John Mahoney, Raymond James.

Hi, guys. Nice quarter.

Well, we wish it was better, but we’re, obviously, we like what we see as we look forward.

Turning up. The growth margin, could you give a little more detail? I mean 38.6 compared to, and I guess that’s on net revenues. On gross revenues, I’ll have to do the calculation over, but as compared with a year ago? I know that you had higher labor costs but that's going to be the case every year, you know, higher taxes. Can you discuss that? Why the decrease?

Yeah, and again, it’s really entirely due to our average cost per consultant, which is due to the front loading of FICA and State unemployment taxes. If you’re looking at a fourth quarter to first quarter impact of that alone, that’s probably 5 to 6 percent increase in average cost per consultant.

A year ago you were much higher, much more profitable.

A year ago we – but the big difference was we ran on 75 percent utilization versus 69 percent in this first quarter. That was the key difference.

Yeah, the Q4, John, we believe because of IT, Sar Box disruptions we had to build a pipeline in a couple of the implementation quarters this year as compared to last year.

Okay.

I think that was the primary difference.

The two numbers, 10 wasn’t right, and looking at the time. But your Advisory business, the recurring revenue was what percentage of Hackett?

It was 28 percent.

28 percent of old Hackett or new?

Yeah, of old Hackett, of the Advisory plus the Benchmark.

And that’s versus – it doubled, so it was versus what a year ago?

That percentage a year ago was about 15 percent.

And the other figure was 7 percent from Accenture, right? Revenues? And that’s all – those relations are being driven, or those revenues are going through business apps?

Yeah, I would say probably 90 percent of it is going through both business apps and business intelligence.

I don’t mean to bring up a sore subject, but that, I think that’s been a little bit of a disappointment from where you would have hoped it had been when you first started that relationship. And I know, I guess earlier, Ted you mentioned that you’re still trying to figure out how to navigate that, you know, that tanker?

Yeah, we have told them, we believe we’re very strategic partner, and we have told them that, yeah, that I think that we would expect that the impact on our results would be greater by this time. Having said that, we know it’s growing. We enjoy a great relationship, and we know we have a meaningful number of opportunities we are jointly bidding on that could significantly change those numbers.

I guess one last thing, I mean Hackett looks this year, I mean grew this quarter, what? 29 percent YOY? Total Hackett?

Yeah, that’s right, just under 30, correct.

And because it’s getting a little larger now, it’s not quite so choppy, and because it’s two pieces together, is that the kind of rate you think it will grow? Do you think it can grow at faster rates? Throughout last year, you know, it grew 50 percent last year, 30 percent this quarter. What’s a more normal rate we can expect in the intermediate term?

It’s impact on the growth rate, John, believe it or not, is driven by the percentage of sales that are done between the Membership Based Programs or the Benchmarking Programs. Because as Jack said, one comes in over 90 days, and the other one comes in over 12 to 24 months.

Okay.

So, we would expect it to stay at or about that rate, and as we said, we’re expecting a very strong sales quarter for, we’ll say old and new Hackett as we look at the pipeline going into the quarter.

Okay. So we think the 30 percent we should continue to see out of Hackett?

That would be our hope.

Okay. thanks a lot.

[Sanje Patel], Morgan Stanley.

Hello.

Yes, Sanje.

How are you?

Very well.

I’d like to ask about the success of Hackett. How has it grown, and in terms of it has a powerful brand right now, how is it absorbing the parent? And how will the new strategy be great?

Well, as we said, it’s growing 30 percent YOY but probably most important is the fact that the membership based programs which we think allow us to develop a continuous or lock-in relationship with our client, the sales of those specific programs grew 100 percent when we look at that on a YOY basis. And as Jack said, the percentage of revenue, which is a higher number, also grew from 15 to 28 percent of the revenue. So, that has obviously worked pretty well.

We think that we now are able to improve on that strategy by including the Transformation Advisory offerings, and given both the strong growth rate for that team last year when it did not leverage a Hackett brand and when we consider the fact that it can, it should now be able to improve the number of clients that it served, and to do so at higher rates, you know, that combination we believe has great promise. And we are seeing some of that, as we look at pipeline and the guidance we’re providing for next quarter.

Under the new Hackett, aren’t you not selling consumptive branding versus advisory?

We’re selling, all of our services we leverage the intellectual capital, so the skills, the services we believe we’re selling are strategic advisory, is what we coin as strategic advisory offerings. Independent, objective, leveraging the empirical data, very unique. So, that’s why I’m talking about the fact that we are referring to it in a new category, and we believe that it is a new category.

Okay. And another question I have is I understand that the CEO of Hackett has recently left the firm?

That is correct.

And aren’t you worried that he can join the competitor, and what will that do to the current Hackett Team?

We believe that we have great protection, relative contractually and otherwise, and we’re expecting to enter into an applicable separation agreement. So, no, we believe we have phenomenal protection, and have made a great transition that has improved the overall business.

And the current management team, are they experienced to manage the firm?

Correct, they have phenomenal experience.

Okay. Thank you very much.

All right.

[Jeff Meiers] of [Trepid Capital].

Thanks a lot. Just the first one, housekeeping. I think you mentioned the Hackett bookings for Q1 of last year, and then a percent of those that were subscription?

Yeah, the bookings last year were 5.2m, and of that we said that the 25 percent were Membership Advisory.

That’s it. So, just looking at, you know, I think we have data from, you know, I guess four of the five quarters, through the beginning of last year. You know, so this year was kind of, you know, book to bill was about 1 to 1. You know, last year it was about the same. The third quarter of last year was about the same. The fourth quarter was I guess 1.7 and, obviously, a big sales quarter. And we don’t really have data for the second quarter of last year. I mean maybe you could just talk about the seasonality of Hackett sales?

The biggest seasonality comes in the fourth quarter. It has historically been I’ll call it the strongest sales quarter when we look back over the last several years.

But overall I think the biggest difference has been the transition to the membership based programs, more aggressively. And I personally continue to believe that the public company, Sarbanes-Oxley efforts, did disrupt some of the benchmarking efforts, because I don’t believe companies could undertake a detailed benchmark at the same time that they were trying to complete with their compliance requirements under Regulation 404.

Having said that, when we look at both this current quarter activity and more importantly the opportunity we see before us going into Q2, we’re very encouraged that we can continue to grow both the benchmarking, more aggressively grow our membership based services, and then lastly, also use the Hackett channel to continue to aggressively grow the Transformation Advisory Programs that were launched at the beginning of March.

Got you. I mean, you know, let’s say next quarter you guys come in sort of, you know, book to bill, 1 to 1, I mean would that be a disappointment given what you’re seeing now? Or?

Yes, that would be a disappointment.

Got you. Okay, great. Thank you very much.

All right.

Justin Martos, Graham Partners.

I just have a couple of follow-up questions. Where does the gross margin go from here?

The gross margin improved as two things happened. One, your higher margin businesses continue to grow, and those are the, both the content based businesses under Hackett and the Transformation Advisory business that’s now been put under the Hackett brand, that provides margin expansion.

The other thing that provides margin expansion is higher utilization in the technology implementation teams and better leverage in the investment that we’ve made in the offshore facility. When you look at the combination of those things, and our ability to have managed our overall infrastructure over the last couple of years, it provides a path for us to hit our target’s operating profit.

Great. So, it sounds like for this, the balance of this calendar year the gross margin should trend up, you know, with the, as the revenues go up next quarter you should see an increase in gross margin?

Correct, and that’s what’s reflected in the increased operating guidance for Q2, that Jack mentioned the guidance ranges from 5 to 9 percent and that includes the once an impact for the executive severance relating from the alignment of the Business Transformation Group under the Hackett brand.

Great. And so do you expect that, you know, 40 percent gross margin on gross revenues is sort of be the number you’re shooting for, you think in the back half of the year?

Yeah, I would just say that we expect to show continued improvement. I really don’t want to lock in on any specific numbers.

Also, your headcount ex your non-consultative headcount went up sequentially. What was that primarily?

Primarily business development resources, some additional back office resources in Finance and a few other groups, and some administrative people, as well.

Okay. Because SG&A expenses continue to move-up slightly. I mean do you sort of think you can leverage that 12, 9 for the balance of the year?

We actually think we have great leverage, when you consider the change that we’re reflecting in SG&A and the fact that we have a very large marketing event which is the best practice conference which I just mentioned takes place this week, that alone probably accounts for most of that change.

Okay. And then the share buyback you mentioned you still have, what? Close to 6m left?

Yes.

Okay. And then following up on the demand from Morgan Stanley question, can you just go into a little bit more about those executive changes?

As we mentioned in our release, we had an opportunity to bring Transformation Advisory in under the Hackett brand. And that provided for us to drive some, what we’ll call some more ‘shared leadership, more integrated leadership.’ And as a result of that change in strategy we simply we had a departure of one of the executives and one of the – the Hackett CEO departed, the Hackett President continued in that leadership role, in the previous role that that Hackett CEO had. And consistent with the leverage that we want to create in Hackett by bringing in the BPI content in all, I’ll call them our most experienced Transformation executive, the individual that was running the Business Transformation Group, as you can imagine, came in to play that COO role responsible for service delivery. So it was a very natural transition given what we were trying to accomplish.

Okay. And Bruce, was he a cofounder of Hackett?

Oh, no, no. Bruce has been with us a little bit over two years. He joined us when I decided that I wanted to pursue the Hackett accelerated growth story. So, no, Hackett was founded by an individual back in 1991. We bought it in 1997, a phenomenal brand that we’ve continued to expand all the way through this year.

And on the Business Transformation, do you expect that, you know, for your branding to really have I guess a more positive affect in the back half of the year? I mean because it sounds like if you just started trying to do this in the latter half of the March quarter, you know, it’s got to slowly roll through sort of your engagements as you sort of bid for projects? Is that a fair interpretation?

I mean if what we see today going into Q1, and as we stand here today, continues into the second half of the year, obviously, our ability to continue to improve operating performance only grows. But as Jack says, you know, we’re providing guidance one quarter at a time, so we’re trying to do that as accurately as we can for you.

Okay. Thank you very much.

George Sutton, Craig Hallum.

Hey, just a follow-up on the last question, from my perspective anybody who has met [Wayne Mense] and understand what he’s going to bring to that CEO role would be quite excited about that change.

Two other questions. Quarter to date, can you give us a sense of utilization rates since we’re a month through the quarter? And then, secondly, I just want to understand what Sarbanes-Oxley did to you the last couple of quarters in terms of forcing you to lose some implementations, and what it might bring to you over the next couple of quarters? Have we crossed that transom yet?

Well, first, let me first thank you on behalf of Wayne. I don’t know how much Wayne paid you, but I agree, we have a great team of executives, and we’re very lucky to have Wayne assume that role, George.

Also, the Sarbanes-Oxley, I mean we believe that Sarbanes-Oxley disrupts the IT implementations in the second half of the year. That organizations have to freeze their environments in order to go through the testing and make sure they’ve got things signed off. We know many organizations, you know, were undergoing and reviewing their environments all the way through mid-March, some had to file extensions, as you know.

So, we think that on the other side of that comes an opportunity for companies now who have received a laundry list of I’ll call it the process assessment, including a very large number of process deficiencies to decide how they’re going to address that. And those that end up addressing those issues that have been identified by their accountants strategically, I believe will choose to automate workflow and extend the web based applications that are available both in ERP and analytic apps, and that should improve the prospect for software implementation as the year progresses.

To some extent we now believe that people probably took a little bit of a breather, but when we look at the activity in the general consulting market we think some of the uplift probably comes from people that have said, okay, I’m through it, now let me jump on it and address this strategically, and now they’re probably going through those assessments as we speak.

And then quarter to date utilization, if you can just give us a sense of where that stands?

The utilization in the first quarter ran about 70 percent, and we expect, given the guidance, we did say revenue, we do expect it to be up, we do expect to add some heads to support that revenue which would indicate that utilization for the quarter will probably be at a consistent level to what we’re seeing in the first quarter. Some of the revenue uplift, though, is also the result of some improved rates that we see going into the second quarter, as well.

Okay. That’s helpful. Thank you.

Thank you.

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At this time, we have no further questions.

All right. Well, let me thank everyone for participating, and we look forward to updating you on our next quarterly earnings call. Thank you, again, for participating.