Hackett Group Inc (HCKT) 2006 Q1 法說會逐字稿

Good evening and welcome to the Answerthink first quarter conference call. [OPERATOR INSTRUCTIONS] Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO; and Mr. Grant Fitzwilliam, Chief Financial Officer. Mr. Fitzwilliam, you may begin.

Thank you and good evening, everyone. And thank you for joining us today to discuss Answerthink first quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of Answerthink, and myself, Grant Fitzwilliam, CFO.

A press announcement was released over the wires at 4:40 p.m. Eastern time. For a copy of the release, please visit our website at www.answerthink.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the Investor Relations page of our website.

Before we begin, I would like to remind you that in the following comments and in the question-and-answer session we will be making statements about expected predict expected future results which may be forward-looking statements for the purposes of the federal securities laws. These statements relate to our current expectations, estimates and projections, and are not a guarantee of future performance. They involve risks, uncertainties and assumptions that are difficult to predict, and which may not be accurate. Actual results may vary. These forward-looking statements should be considered only in conjunction with the detailed information, particularly the risk factors, contained in our SEC filings. At this point, I would like to turn it over to Ted.

Thank you Grant. As we customarily do, I will provide some overview and highlights in the quarter. I will turn it back over to Grant and ask him to comment on our detailed operating results and also comment on cash flow and our outlook or guidance. Grant will then flip it back to me and I will make some comments about some of our strategic priorities and then we'll open it up for Q&A.

So let me start with the quarterly overview. We were pleased to announce 35% year-over-year quarterly revenue growth, and this includes the recent REL acquisition. We were also able to report pro forma EPS results in line with our previously provided guidance, even though our contribution from REL, including the Dan bankruptcy, was lower than expected.

We experienced year-over-year growth across all of our service lines but the strongest growth was reported by our business intelligence group, which was up 27% on strong Hyperion growth, and our Hackett Group, which organically grow 23% on a quarter -- year-over-year basis, driven by the strong growth of our membership advisory and business transformation offerings. Our membership advisory programs sales were up 42% on a year-over-year, driven by 49% growth in our C level or executive advisory program. We closed out the quarter with membership advisory client and membership counts, which now approximate 430 members and 210 clients, and this is even though we continued to move to our executive advisory or C level offerings as our primary program architecture.

Although the transition to the executive advisory platform sacrifices our overall membership count by bundling a group of process advisory program under one executive advisory program, the favorable impact of that not only is focused but the shift is also resulting in meaningful increase in the average contract value per member. Our 2006 incentive plan changes to further emphasize our membership advisory programs is starting to noticeable impact on our channel focused as we expect our membership advisory revenue to show meaningful growth from Q1 to Q2. And we anticipate -- as we anticipate the continued growth of the executive advisory programs, we also expect meaningful sequential growth from our benchmarking group.

Our transformation group also continues to show strong growth as the ability to sell strategic transformation programs that can lead to large implementation initiatives continues to expand as planned. Our best practice solutions groups continued to see improving performance as a result of our strong Hyperion implementation demand and also as a result of our ability to leverage our best practice implementation approach to differentiate our technology implementation solutions across the other practices.

On the REL consultancy front we made great progress on both product and sales integration. In fact, we recently launched our Total Working Capital Executive Advisory Program. In Q2, we expect to fully integrate all operations onto our systems and to realize both revenue and operating profit improvement from the acquisition in the subsequent quarter. With our integration efforts mostly complete by the end of Q2, we also expect to see the strategic synergies from the acquisition further impact our results in the second half of the year. We believe that the move to combine our empirical data and research coupled with our strategic execution expertise provides us with an opportunity to grow our advisory program revenues and also position our best practice implementation offerings.

At the heart of that strategy is our strong belief that our advisory membership-based programs allow us to develop a close continuous relationship with our clients that positions us to independently and objectively assist them as their other execution needs emerge. Our strategy, as I said previously, is simple -- clients who value our data and our insight in our advisory programs will turn to our other offerings as those needs arise and vice versa.

Let me turn it over to Grant to provide 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 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 at $49.8 million, including 6.2 million attributable to REL which was acquired on November 29, 2005. Total revenues are in line with guidance.

Excluding REL revenue was 43.6 million, which is up 18% from the first quarter of last year. Our pro forma net income was 1.7 million or $0.04 per diluted share which was within guidance. REL integration costs and a pretax charge for bad debt reserves established to cover receivables related to the bankruptcy of Dana Corporation impacted pro forma earnings by approximately $0.01. Pro forma earnings exclude non-cash compensation and intangible asset amortization and include a normalized 40% tax rate.

Our pro forma operating profit margin was 5.4% compared to 1% in the first quarter of 2005. As mentioned last quarter, our first quarter results always include a substantial impact of [inaudible] and unemployment taxes kicking back in and the sequential buildup in the vacation accrual. On a GAAP basis for the first quarter, we had a net loss of $6 million or $0.13 per diluted share, which includes non-cash stock based compensation expense of 1.1 million, amortization of intangible assets of 969,000, and 6.3 million of restructuring charges.

Restructuring charges, which we previously announced in the fourth quarter, relate primarily to excess office space and related severance costs in our technology centric Philadelphia office. Income tax expense of 365,000 is primarily attributable to REL profits in the U.S. that could not be offset against Answerthink's U.S. federal loss carry forwards. We are currently revising our tax structure to incorporate the various legal entities acquired with REL and further leverage our U.S. federal loss carry forwards on a go-forward basis. As of the end of the first quarter of 2006, the Company has approximately $78 million of U.S. federal loss carry forwards.

From a revenue perspective, total Hackett revenue, excluding REL, totaled 19 million, an organic increase of 23% on a year-over-year basis. Business applications reported 14.1 million of revenue, a 7% year-over-year increase. Business Intelligence reported net revenues of 10.5 million a 27% year-over-revenue increase. Business Intelligence continues to benefit from the strong growth in our Hyperion practice.

Breaking down Hackett revenues for the first quarter, membership advisory revenue was up 2.2 million, a 33% year- over-year increase. Transformation advisory revenues, excluding REL, was 12.1 million, a 33% year-over-year increase. And benchmarking revenue was 4.6 million, which is flat on year-over-year basis. REL revenue came in at 6.2 million, which is slightly below the expected 6.5 million. From a sales perspective membership advisory program sales totaled 3.7 million, compared to 2.6 million in last year's first quarter, a 42% year-over-year increase. Membership advisory sales were driven by continued strength in executive memberships, which were up 49% year-over-year.

Benchmarking contract sales in the first quarter totaled 6.1 million, compared to 3.4 million in last year's first quarter, a 79% increase. The Hackett sales channel also generated another 4.7 million in first quarter transformation advisory program sales. We continue to see strong advisory benchmarking and transformation pipeline and expect to see the impact on Q2 results. Revenue from the Accenture alliance represented 7% of Answtrthink's revenue in the quarter, which is flat compared to the previous quarter. Most of this revenue represents technology implementation services that are included in our technology implementation groups.

Revenue from our top 5 and 10 customers was 21% and 32%, respectively, compared to 20% and 30%, respectively in the previous quarter. and 24% and 36% in the first quarter of 2005. Revenue from our largest customer was 6%, compared to 7% in the previous quarter and the first quarter of last year. Consultant headcount at quarter end was 670, compared to 694 at the end of last quarter. Included in the consultant headcount was 62 subcontractors which compared to 66 last quarter. Revenue per professional in the Hackett Group and new and more arrogant metric we're not providing was $350,000 in the first quarter of 2006, compared to 352,000 in the first quarter of last year.

The Q1 2006 number is down sequentially as we continue to invest in the membership advisory business and we have not fully realize the integration synergies of the REL acquisition and we are far from our revenue per professional capacity for REL. Revenue per professional is calculated by dividing gross Hackett Group revenues by the average number of consultants and subcontractors including the cost of sales or project personnel and expenses line item, as it is named in our income statement.

For the business applications and business intelligence practices, consultant utilization was 76% in the first quarter, up from 73% in the first quarter of last year, driven by overall solid demand in these practices. But the business applications and Business Intelligence practice our per hour realized billing rate was $155 this quarter, up from $146 last quarter. This includes the offshore rates for work performed in India and reflects stable to improving pricing in the marketplace going into 2006.

Our pro forma gross margins, which excludes stock compensation expenses as a percentage of revenues, were 37% in the first quarter, up from 35% in the previous year's first quarter. This was driven by higher rates in our transformation, advisory and business intelligence practices. Our pro forma SG&A as a percentage of revenues, was 32% in the first quarter, down from 34% last year. In Q2, we expect REL SG&A integration benefits to be somewhat offset by conference and training costs in the quarter.

Our cash balances, including restricted cash and marketable investments, were 24.3 million at the end of the first quarter, a decrease of 8 million from the fourth quarter. This decrease resulted primarily from 3.7 million to pay off REL's employee benefit trust obligation and REL related restructuring costs that were paid out during the quarter. During the quarter we did not repurchase any shares of our common stock. At the end of the first quarter, $7.9 million was available for future purchases of common stock. DSO increase from 73 days last quarter to 76 days this quarter. The 76 days is within the range of historical levels, but is a continued focus for me personally as we complete the integration of REL.

I would now like to discuss our guidance for the second quarter. For all of Answerthink, we expect second quarter revenues to be in the range of 48.5 to $51.5 million. Diluted pro forma earnings per share in the second quarter should be in the range of $0.05 to $0.07. This pro forma estimates includes the normalized tax rate of 40%. Hackett revenues will be up sequentially, driven by growth in membership advisory and benchmarking revenues. Revenue for business applications and business intelligence should be down, impacted by two large client transitions, several software conferences and training programs.

REL integration related costs will be down and overall REL performance will be improved as the operating synergies continue to take effect from both a topline and bottomline perspective. In summary, we reported year-over-year revenue growth across all service lines. We expect continued progress towards our target operating margin of 12 to 15%, as our Hackett revenues continue to grow. And once REL is fully integrated into the Hackett portfolio of services in the first half of 2006, and we gain SG&A efficiencies from the fourth quarter 2005 and first quarter '06 restructuring charges. Cash balances are expected to be down with approximately $8 million due in deferred acquisition payments, partially offset by cash flow from operations. At this point I would like to turn it back Ted to cover our market outlook and strategic priorities.

Thank you Grant. As we look forward and consistent with our comments in the third week of February, we continue to expect strong demand for the unique combination of offerings and the value proposition that we define using our benchmarking and best practices intellectual capital. If a client is interested in establishing baseline performance, they can turn to our benchmarks. If they desire continuous access to our data, research and advisors in pursuit of an enterprise performance improvement initiative, they can use our membership advisory programs. Finally, if they seek on-site strategic planning or best practice implementation assistance, we can support them as well.

In every case we offer companies unique data-driven guidance that has proven its ability to reduce costs, improve working capital and enhance strategic alignment. Geographically we continue to see the solid GDP growth and related business spending reflected in our U.S. demand. In Europe, we continue to see the more volatile macroeconomic environment and therefore we will continue to be more tempered about our expectations relative to that marketplace.

With that as a backdrop let me now comment on the strategic priorities which we laid out at the beginning of the year and talk about the progress during the quarter. Number one, we're committed to building and membership advisory programs to 1,000 members and 500 clients as quickly as possible. As I said then, given our brief history we're excited about our progress. A larger client and membership count allows us to build on the rich intellectual capital and insight that our clients strongly value and rely on to make critical decisions. The client and membership targets also represent program scale that can drive strong profitability to our business model.

This overall level of membership participation also defines a large and growing client base that we clearly see - that clearly see us as strategic and trusted advisors. We believe that those users will also be frequent users of our complimentary benchmarking, business transformation and best practice solution offerings. So we believe over time we will be able to ascribe and hopefully predict an increasing percentage of our total annual revenues to our advisory program members. In 2006 we increased sales incentives and significantly increased the number of delivery and client service associates dedicated to our advisory programs.

We believe all of these actions and investments will accelerate our path to 1,000 members and 500 client. As Grant and I have now mentioned earlier in our comments, we also expect to see these actions start to have a more noticeable impact as the year progresses. Clearly we believe that the sales growth that we saw in Q1 is a great indication of the initial response. Our second initiative is to further drive the importance of our advisory program strategy, and to do that we refined our delivery strategy to something that we mentioned in February as Advisory Inside which allows us to include the appropriate of sight advisory program support on certain implementation engagements, by providing continuous access to our data, our research and our advisors beyond the traditional diagnostic or planning engagements.

This type of IP centric service support further differentiates the value of all of our offerings and is aligned with our growth objectives. We saw some of the initial benefits of this strategy reflected in our Q1 sales activity and we expect it to continue as well. Our third initiative is to continue to expand our best practice repository and implementation tools. We continue to see, as we have now for the last couple of years, our clients and our alliance partners' decision to team with us, directly attributed to these tools and content that drives of these tools and the content that drive these tools. The objective of our best practices implementation tools is to help clients define their performance improvement opportunity, and to help them make smarter business process and software configuration decisions that allow them to realize targeted results.

We are continuing to look for ways to utilize our I.P. to differentiate the way we sell and deliver all of our solutions. We believe that the leverage that we're looking for is a far from being what we target. Our fourth initiative is to create incremental revenue and IP channels through strategic relationships. That helped us leverage and expand our capital base, as well as grow our revenues. We continue to believe that there other organizations that can help us grow our revenues and our intellectual capital consistent with our strategy.

On the Accenture front, we continue to see proposal activity and close new deals, primarily with their government services and global business solutions group. As we mentioned in our year end call, we closed a meaningful public sector systems integration win during the quarter. We also see our joint national association state agency contract continue to result in state agency benchmarking wins as well as other Oracle and PeopleSoft-centric activity. Our fifth initiative was to continue to expand the leverage of our India based capabilities. As we've mentioned in years past, in November of '04, we opened up this facility. We've continued to expand the leverage of this facility not only to support our business applications group, but also to support our Hackett group delivery. We are seeing the benefits of this investment continuing to expand each and every day. And we continue to see the -- our ability to leverage this important talent pool expand as well.

Lastly, we continue to believe that our unique Hackett access and our best practices intellectual capital, coupled with our strong balance sheet gives us -- can be utilized to support a larger service organization. Our focus and goals remain unchanged - acquisitions must be accretive and have strong growth prospects, but more importantly, have synergy with our intellectual capital and strategic advisory offerings. As we mentioned in February, although the REL acquisition will temper our short-term expectations, we will continue to keep an eye on organizations that help us accelerate our strategy.

In summary, we believe our intellectual capital and strategic advisory services focus provides us with a unique set of value creation opportunities. Accordingly, we continue to be excited about our strategic positioning, the progress we continue to make and with the opportunities that it provides our associates as we look forward. I always like to recognize our associates. They are passionate about our business model and the value they deliver to our clients and continue to make noticeable contributions across our strategic initiatives. I want to thank them and recognize their outstanding effort and spirit. If any of our clients want to see just how passionate and how terrific the talent is, they'll have a chance to see it at our upcoming best practice conference, which we'll be holding in Atlanta this Thursday and Friday which we will be hosting to an absolute full house.

Having said that, let me open it up for Q&A.

[OPERATOR INSTRUCTIONS] Our panel's first question comes from George Sutton, Craig-Hallum. Your line is open.

Hi guys. Several questions. First, the Dana. In the quarter, you said the impact was $0.01, and I just wanted to be clear. So you report the $0.04 pro forma, that includes that $0.01 impact?

George, yes, what we said was that the $0.01 was a really a combination of REL integration costs and the charge for the Dana bankruptcy. So the combination of these two equaled the $0.01.

Okay. Ted, you mentioned in your prepared comments that membership advisory growth should be meaningful Q2 over Q1 and that benchmarking growth should be meaningful Q2 over Q1. Can you provide a little more specificity to that and sort of what's behind that statement?

Well, when you look at the sales activity in Q1 - well, let me break it up into two pieces. We continue to build our annualized contract value within our membership advisory business. As that revenue continues to grow, which we expect it to, it clearly has an impact on our overall results. Relative to the specific revenue growth itself, we're building on the sales activity we saw in Q4. We expect the actions that we took with the increasing sales commission and the advisory insight strategy, both of those to continue to expand. So the sales increase we saw in Q1, we expect it to continue to take place. And as we say, we expect that to happen around the focus we're creating around our executive advisory programs. So it's a combination of the changes we made and I think the focus on those programs.

On the benchmarking side, Grant mentioned that our year-over-year sales were extremely high, 79%. So not only did we have a pretty strong first quarter sales activity in benchmarking, we see that activity continuing in Q2 as well. So we're expecting that to then result in revenue growth in Q2 as well. So we're expecting both of those areas to contribute strongly and show the sequential revenue growth improvement that I mentioned in my comments.

Just so I'm on benchmarking, that business was flat year-over-year in Q1.

That is correct.

Is there something unusual in Q1, given that you're seeing the substantial growth Q2 over Q1?

No. We've always believed that our benchmarking business would not be the long-term growth grower that our membership advisory or transformation business is. Having said that, we still continue to see very strong demand for our benchmarking capabilities and it's just a function of how they're included in some of our transformation initiatives, whether they lead some of our initiatives or whether they not. We're seeing very strong activity in both benchmarking, included with transformation advisory initiatives and that's the impact that I believe we saw in Q1 and we'll see reflected in Q2.

Okay. And then lastly with respect to BA and BI, you mentioned that you had two large client completions in the quarter, as we look further out into the year, obviously business intelligence has been a big growth driver for you, do you expect that to reaccelerate and also can you comment on BA?

Well, it's interesting. One was in the Hyperion area and one was in one of the BA areas. On the Hyperion areas, the demand we're seeing there is just unabated. We believe we have one of the top practices in the country and we continue to see great demand. So the, I'll call it, the slowdown a little bit in Hyperion in this quarter has more to do with the amount of time we're setting up for competence and training and to a lesser extent from that meaningful client transition. But demand there is unabated.

On the, I'll call it, Oracle soft side, they're also experiencing a meaningful client transition there because the demand is not quite as strong as Hyperion. We expect that to probably have a little bit more of an impact. So one, it has a little more impact on the Oracle soft side. On the Hyperion side, I mean, you've got to look at what these groups have done now on a sequential basis now over the last several quarters. On a year-over-year basis they're still going to show pretty good progress. But to some extent the transition is probably giving them somewhat of a breather.

Okay. Thanks guys.

Our next question is from [inaudible]. Your line is open.

Thank you. I wondered if you had -- you mentioned average contract value per member - I can't remember if it was you, Ted, or Grant.

It was my comment.

Did you have a number for that?

No we don't provide that. What I was trying to say is that as we have intentionally bundled the group of process advisory programs, which reduces the specific count to one executive advisory program instead of, let's just say, the individual account of the specific programs that we bundle to create this new executive advisory offering, it has the affect of slowing the sequential membership count. Having said that, we said that the inverse of that is that it's also having a very significant impact in our average contract value. No, we have not provided that. We have stayed away from average contract value thus far - things that we will probably introduce in '07

Okay. And on the executive advisory sales, Grant, did you say they were up 49%?

Yes, 49%.

And you just referenced growth on that as opposed to an absolute number. Is that right?

Yes. What I did reference was total membership advisory sales of 3.7 million, which represented 42% year-over-year. And included in that is membership advisory, which is 49%. So the difference between the 49 and the 42 is a slight decline in the process advisory program.

But Bill, I would suffice to say that the executive advisory offerings, including the process bundle, which I'm referring is becoming a very large part of our total sales now.

Back to business intelligence just for a second, they were sequentially flat Q1 Q4. Is that seasonality or is that the beginning of those issues - a couple of those issues that you mentioned?

I believe it's primarily the transition of the large engagement, slightly lower contractor revenue in one of the engagements that drove some of that increase.

Okay. And then lastly, Ted, I guess we'll try and [spot] a little bit and see if you want to take a stab at where you think members and clients might be by year end?

Oh no. But I - but all of my guys know that -- how quickly can we expand it. And it's both. We look at both - we look at membership, we look at the client account and we look at, obviously, the average contract value that we're selling because we're looking at an overall revenue rate. So those are the three critical numbers we're continuing to manage to. We like the progress that we've made and that we continue to make across those three.

Okay, great. Thanks.

Our next question comes from [Lothan Yagely] of [inaudible]. Your line is open.

I'm curious about your goal here of 1,000 members and 500 clients. You added, what, 30 members in this quarter and 10 clients, is that correct?

That is correct.

And to reach your goal here, you're going to have to add not 30 members a quarter, but 100 members a quarter to hit this number by '07. And by the same token, on clients, which you added 10, you're going to have to add 50 a quarter.

That's why we look at all three. The fact is that we have a target - I personally have a target for the end of '07 which gives me a revenue run rate for that target. So if that target is achieved with a slightly lower members and clients but with a much higher contract value, I will still be okay. Having said that, I'm not changing the target [inaudible]. We want depth across those programs as quickly as we can get it and we think that the target that we've set - how quickly we get to 1,000 members and 500 clients is the right goals.

Well, I understand that is the right goal, but help me here. I mean, you've got a major acceleration required to reach that goal. I mean, how --

Again, it's a function if membership and client is the only goal. Remember that our primary objective, which is the expansion of our - besides the EPS expansion - is a revenue run rate. So you're leaving out the third element of that, which is the average contract per member.

No, I understand that, I understand the revenue but you have a stated goal here. But I'm just understanding - I'm just asking how you ramp to that kind of massive change and if you're at such a slow rate right now.

We continue to execute our current strategy - we just continue to executive our current strategy.

Okay.

And we do believe that it builds. We believe that as programs build and we have more focus and programs, that both that membership and client count will expand as well. To give you an example, if -- just to answer - to maybe make my example a little better - if -- to hit the right revenue - overall revenue target by the end of '07, you were able to do that with 100 less members or 150 less members and you were doing that with significantly higher average revenue per program. As a result of, for example, the bundling strategy that was just implied. I wouldn't be disappointed as long as we were achieving the rights revenue growth and profitability yields that I know that kind of revenue growth could give us.

Right. I mean, obviously we're after revenue here.

That is correct. That's why - I mean membership and client counts are important but you can't leave out that third dimension. And that's why I wanted to make sure you understood that we compromise our membership count growth by creating a process advisory bundle, but the inverse of that compromise was a significantly contract per program both achieved and sold. So again you've got to look at both numbers to target a revenue number whenever you want to do that - a year out or two years out.

Right. Okay.

Do you understand what I'm saying?

No, I understand the point you're making. I mean, the overall importance here is revenues, not specific.

That's correct. And those targets that we established for ourselves around that remain unchanged.

Is there any seasonality in the first quarter? I mean, you've had benchmarking sequentially down. Did you have any other area sequentially down in this first quarter from the fourth quarter?

No. Across those programs, the seasonality is just a function of what we're incentive and what we're selling and what our clients need. So we've seen that happen but we are happy to see that benchmarking is expected to accelerate based on the Q1 sales that we had. And we are glad to see that our advisory programs are expected to grow nicely into Q2 as well. And obviously we can't complain about the transformation advisory orgranic growth which was over 30%. So all three aspects - we like the combination that we saw. And then on the REL side we expect it to continue to improve and that we know it can be a very significant contributor to our results as well.

Sales activity for benchmarking, I believe, was 6.1 million in this quarter and advisory was 4.1 million. Is that correct?

Advisory was 3.7 in Q1 and benchmark was 6.1.

6.1. What were the same numbers in the fourth quarter please?

Hold on one second. We didn't break it out but the total sales for those two were 10.2 million.

10.2 million. And so this adds up to 9.8 million in this quarter. Again, a down sequential --

Oh, I'm sorry. That's year-over-year. No no. We will definitely see our highest activity in our year end quarter and we have reported that each and every year.

Okay. So we do --

No no. We do have seasonality in sales - I'm sorry.

All right.

Yes, from Q4 to Q1, absolutely.

Q1 is usually our weakest sales quarter, if you go back looking at '05 and '04.

Yes because you have a very significant year end Q4 activity of sales, Q1 goes - that's why we were very happy with our Q1 activity and thought the year-over-year numbers are very relevant.

Okay. Well, that's good. How about -- do you have the same kind of seasonality here for REL?

No. REL is simply us just doing everything we need to do for them to benefit from the way we go to market. And we expect them to show improvement in Q2. And as Grant mentioned, that's a phenomenal business, which when we're able to get it within our format, back to their annualize run rates can be a very significant contributor. And we expect to make improvements in that in Q2 and we expect to show that further improvement in the second half of the year.

Okay. Thank you Ted and Grant.

All right.

Our next question comes from Richard Dearnly with Longport Partners. Your line is open.

Good afternoon. The -- could you give the gross and the net adds and losses that got us to the plus 30 and plus 10?

I'm sorry, that got us to the -

Well, the net adds in the membership advisory of 30 and 10?

No. We don't provide that activity, especially with the significant transition that we've been going through by emphasizing the executive advisory program as our primary product offering. That's what we have stayed to overall sales activity and we started providing the membership count information in the second half of last year. As the product matures, you'll see as provide more of that and add annualized contract value, which is an important element as well. Our plan is to do that in the beginning of '07 - give the year -- give the business one more year to not only get the level of maturity, get the program focused where we want it and -- before we providing that information.

Okay. And then the Hyperion -- I read something about they had slowed license sales and yet your business was still strong.

Well, in fact, when I saw their release and went through it, I spent some time and asked our leaders about that. We continue to see very strong demand in that area. They have seen that no changes, including any rate discounting or the like. So any of those signals, we have not seen any of that.

And the lack of a repurchase is in the quarter, was that intentional for some reason or what is the repurchase policy?

We've continued to have quite a bit of strategic activity in the quarter. So we just simply have decided to stay out of the market until all of those strategic considerations are not in place.

Okay. Okay, thank you.

All right.

[OPERATOR INSTRUCTIONS] Our next question comes from George Sutton of Craig-Hallum. Your line is open.

Guys, could you walk through the math of switching the advisory to the executive programs? Like when you say you bundle, how many advisory programs might you have that would be equivalent to an executive program?

Let me give you an idea. Under the original launch of profit, if we now sell an executive advisory which may have a bundle of the three, four, or five processes programs. When we sell that as a bundle, we now count that as one executive advisory program because we're selling it as a bundle to a dedicated buyer. In our previous world, when we initially started the entire business when we originally launched these at the end of '03, if we would have - if we had sold, let's say, five programs to one client, we would have counted that as five members.

So that's a big shift.

It's a big shift. It's a big shift and we've been going through both the shift and the bundle and the emphasis of trying to get to a primary product architecture because we believe that both the standardization helps us with sales incentives and also helps us with focus on buying centers. So that's why the question that was previously asked is an important one when I say that if at the end of the day lower members still get me to the same revenue target at any period in time, we'll be comfortable from our goal from a shareholder value creation. But we still want to aggressively build scale into those programs and we will not change our target.

With respect to your Q2 guidance, I think it's this simple, your bottom guidance to me is a little more enthusiastic than your top line. And I think what you're saying, and correct me if I'm wrong, you're seeing a nice mix shift to more membership advisory and benchmarking vis-a-vis your traditional BA and BI. So the impact on the margins is fairly favorable there. Is that what I'm reading?

Grant - I mean, that's the primary impact. Clearly, one business - that's part of the impact. The other impact is, as Grant said, we were hurt by some of the strategic synergies from REL. We're getting those further under our belt. So that helps us as well. What else, Grant?

I think the third thing is that the employer tax has become less of a burden on the total cost in the second quarter. So I think it's a combination of those two things that helps us from a cost perspective.

Now you mention REL, if I could just follow up on that. One of the issues you've seen is the incentive programs that you have don't kick in on deals that you had when you took over the business. And that can be a fairly significant piece of that REL. So that starts to kick in, I believe, in Q3 and Q4. Is there anything else about REL that's sort of a new piece of information we should be taking?

No, I think that we're trying to -- we believe the best long-term growth comes from the integrations that we made both in product and in sales channels. And those simply take some time. Yes, we were -- for example, Grant mentioned the impact of the Dana bankruptcy in Q1. To some extent, the bigger impact would've been in Q2 where we did have an opportunity for some meaningful gain share in there which - those opportunities have now been lost. And by the way, those are opportunities beyond the accounting call back. So when we look at the fact that that client did not continue all of the integration efforts that we're making.

If they make the kind of - if they continue to just make the improvement that we're planning on right now, then we think it will be nicely positioned in the second half of the year. Right now, we just want to see them improve from the Q1 performance to Q2. It will give them a chance to contribute to our results as well. And then if some of the strategic synergies then start having a bigger impact so that we start getting closer to the annualized revenue targets that we believe they can drive, then they can have a very meaningful impact on our EPS results.

Okay, thanks guys.

And our next question comes from [inaudible].

Yes, Ted, last time we talked you were very optimistic about the commission incentive program. Could you explain what you did and what's your read on how that's working?

Well, as if you recall, on our first quarter call, I said that we had changed our commission structure at the beginning of '06 so that we would pay 3x the commission for the sale of our membership advisory program, and 2x the base commission that we would pay for our benchmarking server group and then 1x for the transformation element. So when we look at that change and we see the sales result in Q1 and pipeline into Q2, we feel pretty good about the balance that we struck because we clearly want to create greater emphasis on advisory and at the same time we wanted to make sure that by creating greater efforts that weren't overdoing it and hurting the transformation business. So when we look at transformation business and its results and its activity and we look at the activity that we're seeing in membership advisory one quarter in, we're pretty pleased and we'll continue to track it closely.

Do you - I mean, are you pleased enough to leave this commission structure in place for the balance of the year?

We have made a small tweak, which is not even worth mentioning. So the answer is yes. We could have made a change at the beginning of Q2 and we - it was very small and that was just to see if we could create some slightly more incentives on the REL side so that our people - our sales channel will have more of an incentive to get fully educated and up the speed on the REL-related services since we know the REL business can have such a significant impact on our results. So - but it was a tweak

Okay. So --

No, we're holding - we're holding with what we did. We feel pretty good about it.

Okay, good. Thanks.

Yes.

At this time there are no further questions. I now turn it back over to Ted Fernandez..

Well, let me thank everyone, again, for participating in our quarterly earnings call. And we look forward to updating everyone when we report our second quarter results. Thank you, again, for participating.