Hackett Group Inc (HCKT) 2006 Q2 法說會逐字稿

Good evening and welcome to the Answerthink second 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. Grant Fitzwilliam Chief Financial Officer. Mr. Fitzwilliam, you may begin.

Thank you. And good evening everyone, thank you for joining us today to discuss the Answerthink second 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, FCO. Our press announcement was released over the wires at 4:33 pm eastern time today. For a copy of the release, please visit our website at www.answerthink.com. We have also placed any additional financial 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'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, 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 normally cover, I will start with an overview of the quarter and then turn it back over to Grant, actually, to provide some detailed comments on operating results, a comment also on cash flow and also on guidance. Grant will turn it back over to me and then I will make some comments relative to our market and strategic overview. And then we'll open it up for Q&A.

So now let me start first with overview comments relative to the quarter. We were pleased to announce our Q2 results with both reported revenue and EPS in line with our guidance. Overall results were close to expected with strong sequential increases in our membership advisory program, and benchmarking revenues, better than planned performance from our Business Intelligence group but lower than expected revenues and contribution in our Transformation and our REL or Total Working Capital group.

A key part of our 2006 plan involved the sales incentive plan changes meant to further emphasize our membership advisory programs. It is clear that the enhanced advisory focus is starting to have a noticeable impact on our channel. That is good news relative to our advisory program growth, but unfortunately, it also appears to mean that this enhance focus is coming at the expense of our other Hackett offerings. However, we believe the emphasis is the right one, but we know that we will have to make further changes to strike a better balance for the total business.

Having said that, let me comment further on membership advisory. In order to provide a broader perspective on our membership advisory program progress, for the first time since we launched our membership advisory programs, we will start providing the analyzed contract value from those programs, or ACV. This figure represents the analyzed value of active contracts at any period end. We believe this will provide the best indication of our progress, especially when you consider that our previously provided sales information included multi-year sales, which made meaningful analysis very hard for many. ACV is the most critical data point provided by others in the membership or subscription-based advisory sector. At the end of the quarter, our analyzed contract value was approximately $11.4 million, which represents a 41% year-over-year increase.

This quarter we will also expand our advisory disclosure by providing both the program and membership count consistent with our 2005 membership count disclosures, as well as the process advisory bundled count, which we've provided as our membership counts for the first time in Q1 of this year. Let me provide you both the gross and net since this was a matter that was -- that received quite a bit of attention on our last quarter -- quarterly earnings call. We closed out the quarter with membership advisory -- membership accounts now at approximately 550 program members and on a bundled basis, 470 members. And nearly 240 clients. Net or gross, all counts are very strong on a sequential or year-over-year basis. By providing both membership counts, we allow to investors to track our transition to emphasize our executive advisory program as our primary advisory program architecture, while still seeing the total number of program members that we serve, and which is also consistent with the count we provided both in the third and fourth quarter 2005. We hope the additional membership count data along with the ACV, or analyzed contract value data, will help you better understand our progress.

Our Transformation group, which has performed very strongly for the last two plus years, was a strong contributor in the quarter, but experienced lower than expected conversions of Phase I planning and design programs to Phase II programs, which impacted revenue. Many of these opportunities still remain active, however, the timing of those engagements in Q3 is still uncertain. Relative to REL in Q2 we showed both revenue and contribution improvement from Q1. Unfortunately, the improvements do not appear to be sustainable into Q3.

On the integration front, we completed the integration of all operations on to our systems in the U.S. and in Europe. On the product integration side, we launched our total working capital executive advisory program and added several new members in the quarter. On the sales side, we decided to take a step back on the sales integration front and to reestablish the dedicated total working capital focus for the REL group. Specifically, we have realigned the REL sales team to the REL U.S. and European leadership, while still maintaining the sales incentives for work sold by the legacy Hackett sales channel. We believe this will give us the quickest path to growth, while also allowing the total sales group more time to come up to speed on the total working capital sales drivers.

On the best practice solution front, we continue to see good demand and stable pricing across the practice groups. Our BI or business intelligence team performed better than expected, and excluding our continuing de-emphasis of our SAP staff augmentation work in our Business Applications group, that group finished the quarter strongly, as well.

Let me know turn it over to Grant to provide details on our operating results, cash flow and also comment on guidance.

Thank you, Ted. I plan to cover four main topics; overall results, secondly, a break down of revenue, followed by key operating statistics and then conclude with a discussion of our financial outlook for the third quarter. Note that all references to revenue in my discussion will pertain to gross revenue, which is revenue including reimbursable expenses. For the second quarter, our revenue was $49 million, a 17% increase from the second quarter of last year. Our pro forma net income was $2.7 million or $0.06 per diluted share. 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 8.7% compared to 5.4% in the first quarter of 2006 and 5.2% in the same quarter a year ago. Both revenues and EPS are in line with our quarterly guidance.

On a GAAP basis for the second quarter, we had net income of $2.1 million or $0.05 per diluted share, which includes non-cash stock compensation expense of $1.1 million and amortization of intangible assets of $834,000. Our effective GAAP tax rate for the quarter was 13%. We expect this rate to decrease in the second half of 2006 as we benefit from realigning REL's legal entity structure to further leverage our U.S. federal loss carry-forward. As of the end of the second quarter 2006, the Company has approximately $75 million of U.S. federal loss carry-forward. From a revenue perspective, internal Hackett revenue was $25.6 million compared to $25.2 million in the previous quarter and $17.8 million in the second quarter of last year.

This quarter includes $6.3 million of revenue for REL compared to $6.2 million in the first quarter and $0 in the second quarter of last year. Breaking down Hackett revenue further; benchmarking revenue was $5.1 million, a sequential increase of 11% and a year-over-year decrease of 5%. Membership advisory revenue was $3.2 million, which includes approximately $300,000 of revenue recognized from a vendor program that we had originally planned on amortizing over a one-year period beginning in the fourth quarter of 2005. The use it or lose it clause in this contract drove the revenue recognition even in the second quarter of 2006. Excluding this item from the second quarter of 2006, revenue was $2.9 million, a year-over-year increase of 49%.

Transformation advisory revenue was $17.2 million, which included the $6.3 million attributal to REL. Excluding REL, Transformation advisory revenue was $10.9 million, a year-over-year increase of 5%. Transformation revenues were negatively impacted in Q2 due to deferred client decisions. REL revenue of $6.3 million includes approximately $400,000 of recovered revenue related to the Dana Corp. bankruptcy. Revenues for Business Applications totalled $12.8 million, down sequentially as expected. The year-over-year decrease of 11% reflects our continued de-emphasis of SAP staff augmentation work. Revenue for Business Intelligence totalled $10.7 million, up slightly sequentially and up 12% on a year-over-year basis as we continue to benefit from the strong performance in our [inaudible] practice.

We will no longer be reporting Hackett sales information, as it excluded sales generated outside of our sales channel, for example, sales generated by our consultants. Instead, we will begin to report analyzed contract value for the Hackett membership advisory business and continue to provide overall revenue guidance on a quarterly basis. Analyzed contract value is a key metric use in the membership advisory service industry. This metric is defined as the aggregate, analyzed revenue attributed to all agreements in effect at the end of a quarter, without regard to the remaining duration of any such agreement. Analyzed contract value for Hackett's membership advisory business was $11.4 million at the end of the second quarter of 2006. This is a 41% increase compared to the second quarter of 2005.

I would now like to discuss our key operating statistics. Consultant head count at quarter end was 642, compared to 670 at the end of last quarter. Most of the decrease was due to subcontractors, which were 45 in Q2, which compares to 62 last quarter. Revenue per professional in the Hackett group was $387,000 compared to $350,000 in Q1 and $403,000 in the second quarter of last year. Revenue per professional was negatively impacted on a year-over-year basis by the significantly higher head count investment in membership advisory. Revenue per professional is calculated by dividing gross Hackett group revenues by the average number of consultants and subcontractors during the period.

For the Business Applications and Business Intelligence practices, consultant utilization was 76%, which is flat compared to the first quarter of 2006 and up from 73% in the second quarter of last year. With the Business Applications and Business Intelligence practices, our per hour realized billing rate was $156 this quarter up from $155 last quarter and Q2 of last year. These rates include the offshore rates for work performed in India and reflect stable pricing in the marketplace.

Our pro forma gross margins, which exclude stock compensation expense, were 40.1% in the second quarter, down from 41.5% in the previous year's second quarter. This was again impacted by lower than expected revenue in our Transformation Advisory and Total Working Capital practices.

Our pro forma SG&A as a percentage of revenue was 31% in the second quarter, down from 32% and 36% in last year's second quarter. SG&A continues to benefit from the restructuring efforts the Company has undertaken to reduce real estate expenditures and integrate REL's back office functions.

Our cash balances, including restricted cash and marketable investments, were $17.1 million at the end of the second quarter, and as expected, decreased from Q1 by approximately $7.2 million. This decrease resulted primarily from $8 million in deferred acquisition payments, an extra pay period in the quarter, a four day increase in DSO and partially offset by cash flows generated from operations.

During the quarter, we did not repurchase any shares of our common stock. At the end of the second quarter, $7.9 million was available for future purchases of common stock.

I would now like to discuss our guidance for the third quarter. For all of Answerthink, we expect third quarter revenues to be in the range of $43 to $45 million. Diluted pro forma earnings per share in the third quarter should be in the range of $0.03 to $0.05. This pro forma estimate includes a normalized tax rate of 40%.

We expect a sequential revenue decline to impact both the Hackett and Best Practice Solutions group with a primary decline drivers in Hackett being the benchmarking and REL Total Working Capital practices. In the Best Practice Solution group, the primary decline driver is the continued de-emphasis of SAP staff augmentation related work. Given the fact that we believe demand remains healthy, the sequential quarterly declines in revenue are transitional, with the exception of SAP staff augmentation related work.

In summary, we reported strong profitability in the second quarter. We believe demand is unchanged for our portfolio of services, however, we have to execute better on our strategy to grow all revenues, while we continue to invest and emphasize our membership advisory revenue growth.

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

Thank you, Grant. As we look forward, although going into Q3, we are seeing more volatility in our non-membership advisory Hackett offerings than we expected. As Grant said, we believe the demand for those services is unchanged. Geographically, our view is also unchanged. We are expecting to see the solid GDP growth and related business spending reflected in our U.S. demand. In Europe, we continue to see a more volatile macroeconomic environment, and therefore, we will continue to be more tempered about our expectations in the region, even though we believe they are improving.

With that as a backdrop, let me now comment on strategic priorities and progress during the quarter. Several quarters ago, I said number one priority was to build our membership advisory programs to 1 ,000 members and 500 clients as quickly as possible. For us this was a way of building scale across all of our programs, which we believe would have significant impact on profitability of our business.

I'd like to start by reminding everyone that we launched our executive advisory programs in 2004, given our brief history, we are pleased with our progress. We reported strong revenue growth in the quarter, along with strong membership and client counts, as well as growth in analyzed contract value. Given the large number of multi-year contracts, our total contract backlog gives us even greater visibility into 2007. So we are equally excited about our prospects. At the beginning of the year, we increased sales incentives and significantly increased the number of delivery and client service associates to our advisory programs. As we head into the second half of the year, we are making further improvements in channel focus, as well as in the number of ways we touch our client in the delivery of all of our programs.

As I previously mentioned, we believe that members defined a large and growing client base that see us as strategic and trusted advisors. We also believe that those users will also be frequent users of our complementary benchmarking Transformation and eventually, Total Working Capital offerings. Key aspect of our strategy is that 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 clients. And as Grant said, the key for us now is to be able to execute across all fronts while continuing to retain this focus on advisory growth.

Another initiative that we commented in previous quarters is our advisory inside program, which we developed to further emphasize the unique nature of our business model. Our advisory inside delivery strategy allows us to include the appropriate off-sight advisory program support on certain benchmarking, transformation, and eventually, TWC engagements by providing continuous access to our data, research, and advisors beyond the traditional on-site diagnostic or planning engagements. This type of IP-centric service support further differentiates the value proposition of all of our offerings. We know of no other consulting or business services model that uses strong empirical capital to support client initiatives, and it also has architected an offering that provides the clients with the requisite strategic advisory support when a project is completed.

Another key initiative for us is to continue to expand our Best Practice repository and the related implementation tools. As we mention quarter after quarter, we continue to see our clients and our alliance partners decision to team with us directly attributed to the proprietary Best Practice implementation tools and content. The objective of the tools is to help clients define their performance improvement opportunity and to help them make smarter business process and software configuration decisions that allows them to realize targeted benefits. We just kicked off our annual review and refresh of our BPI repository and tools, this ensures that we will have updated all of our IP for emerging Best Practices, as well as for improvements in enterprise application functionalities that come with new software releases.

Another key initiative was our desire to create incremental revenue and intellectual capital channels through strategic relationships. We continue to believe that there are other organizations that can help us grow both revenue and our IP, consistent with our strategy. Specifically, we normally comment about Accenture, we continue to see proposal activity and close new deals with Accenture's government services and global business solutions group. Revenue from the alliance remained at 7% of total revenues. We are actually currently evaluating a functional area benchmark initiative with Accenture that would help us further expand our IP base.

And lastly, I always like to comment on the fact that we continue to look for ways to expand and leverage our India-based facilities. We mentioned in the in November of '04, we opened up our new facility in Hyderabad, India. And as we've also mentioned throughout the year, we continue to expand the leverage of this facility to support not only our Business Application group, but also to support our Hackett group delivery and internal software development skills and continue to look for ways to further leverage this very important talent tool.

In summary, the prospects for our business models remain strong. Our ability to combine our empirical data and research, coupled with strategic execution expertise provides us with an opportunity to continue to grow our advisory program revenues and also position our other offerings. We know we will have to improve our execution to do so, but we believe the opportunity is there. However, at the heart of this 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 is simple; clients who value our data and our insight in our advisory programs will turn to our other offerings as those needs arise.

Let me close by recognizing our associates. They remain passionate about our business model and the value they deliver to our clients and continue to make noticeable contributions across all of our strategic initiatives. I want to thank them and recognize them for their outstanding effort and spirit.

Those are my comments. Let me now turn it back to the operator. And see if we have some Q&A.

[OPERATOR INSTRUCTIONS] And our first question comes from George Sutton from Craig-Hallum.

Hi guys. Could you walk through the sales incentive plan changes? Maybe what the impact has been, particularly with respect to the REL business? I'm a bit confused with some of the more recent changes.

Well, let me go back to the recent ones, George, at the beginning of the year, what we did, we said that we were resetting our sales incentives so we would pay 3X the commission for the sale of a membership advisory program, 2X for benchmarking and 1X for transformation. We then included REL along with -- at the same incentive level as transformation. That was kind of step one, which clearly has -- let's just say, focused our sales channel at making sure that we achieve the membership advisory growth that we desire and that we differentiate our business model so distinctly.

Having said that, we also then -- the second thing we did is to fully integrate the REL sales channel with our Hackett sales channel on January 1st of the year. So we closed the acquisition at the end of November and 30 days later, we went to full sales integration. In hindsight; given our other changes and given the complexity of the REL solution, it just simply may have been a little bit too much for our sales group to just, I'll say, take in all at one time. We may have expanded the bag a little bit too much, expanded complexity in light of the other changes too much.

So step one was, we took the REL sales channel that came with the acquisition and we have rededicated that group to focus solely on the sale of Total Working Capital solutions. We still -- and then -- we have then then further taken our sales channel to focus one part of the group on the sale of membership advisory and membership and then have created a group that will then sell all of our solutions, who are the individuals that have the broadest enterprise experience to do so. Those are the mid-year changes.

So the beginning of the year was differentiating the sales commission by offering and fully integrating REL, the mid-year change is to take a step back with REL, putting back the dedicated channels reporting directly to both the U.S. and European leadership, and then further focusing our Hackett sales channel to have the individuals who are having greatest success with advisory focus on advisory and having the broadest individuals, then, continuing to sell what we call the whole bag.

I think you can appreciate how confusing this would be for a salesperson, let alone an analyst. But can you walk through sort of retention rates with the sales force? Any major changes there that might account for some of the weak sales?

No. The sales are actually, overall, pretty strong. The sales weakness, if it was experienced, was really only on the REL side.

Okay.

We didn't experience sales weakness, but what we continue to do -- what is impacting us, though is two things. One, the level of multi-year sales that our sales group completed is having an impact on the sequential growth of the business.

The -- you mentioned the SAP staff augmentation business. And it almost sounds like you're winding that business down. Is that not a business that you had intended to sell at one point?

[inaudible] that differentiate our SAP implementation business with just one small -- an aspect of our SAP implementation business. No, I would say that our SAP implementation business is actually performing very nicely. The leadership changes we've made there -- they were strong contributors in the quarter. However, our focus in SAP around some industry solutions and around our VAR channel have just told us that we will retain some staff augmentation relations, but they will be very, very limited so that we can focus on the higher rate, higher margin project-based business.

Are you able to quantify the SAP staff augmentation piece?

I think that you mean -- in total?

Yes, as we're looking forward, particularly with guidance, how much of the guidance impact is from the SAP augmentation piece?

It's about $500,000 to $600,000 in the quarter and it was actually several hundred thousand -- it was probably the same amount in Q2. So let's just say that it's been a wind down for us, probably since the third quarter of last year.

Okay. So then the larger impact, therefore, would be the transformation piece, in terms of Q3?

What Grant said is we have both -- the sequential decline is contributed to both Hackett and our Business Intelligence and Business Applications group. The largest decline that we're expecting, sequentially, in Hackett would come from REL. And the second sequential decline -- and I guess the only other sequential decline would be in benchmarking. REL, we believe is sales focused. Benchmarking -- the principal impact in benchmarking is we have benchmarks -- benchmarks that have been contracted and sold in 2005, of which the clients are deferring the start from the scheduled Q3 kickoff date.

Okay.

Principal impact in benchmarking and then the other one, REL.

All right. Thanks guys.

It appears we have no further questions.

Okay. I think we -- wait. Hold on we have --

Our next question comes from Jeff Meyers of Intrepid Capital.

Thanks. Just a few things. The first one is the cash position. Where should that be, kind of at the end of the next quarter?

Assuming that we have no stock buy-back activity, the only planned capital outlay is about a $0.5 million to $1 million deferred acquisition payment, which will be our last one. So other than that, cash flow from operations should end up cash in bank.

Okay. And in terms of the contract value metric, is that something that you guys are going to publish, I guess, retrospectively? It would be nice to have a history of that going back a few years.

I think we can do that. Yes. I think that's a reasonable request. We can do that, Jeff.

Okay. I guess looking out beyond -- beyond sort of the current quarter --, do you guys see any sort of bounce back in Q4? What are kind of -- some of the indicators you're looking at today?

We spent quite a bit of time with most of our leaders here over the last several weeks and as recently as today with both -- a couple of our leaders as well as the sales channel leader. Just to reconfirm -- or just to ask them if they had seen any change in market demand. And they simply are continuing to see strong activity and believe that it's a function of closing and starting deals and making sure that the sales that have a multi-year aspect, do not slip in the kickoff side, as well. Those are the two principal impacts for us relative to the, I'll call it, the core Hackett business. On the REL side, same. Demand unchanged, in fact, as rates go up, the total working capital and cash flow generation of business value goes up, as well. We -- we do believe in retrospect that we asked our sales channels to do too much by integrating and may have distracted their sales channel somewhat. And we believe by fully dedicating them, we will be able to get them -- we want to get back to the preacquisition run rate as soon as we can. REL is a business with rich history and 30 years history of performance. And we believe the opportunity to get them back to there and further exist. The question is how quickly -- I think how quickly we come back will clearly be a function of how quickly we're able to close and kick-off work. Some is purely kick-off. In REL side, we really do have to build pipeline.

It goes without saying, we're extremely disappointed that we're having to take a step back, because as you can see, Jeff, if the revenues had only been flat, the EPS growth from Q2 to Q3 would continue to be very substantial. So we're very disappointed that we're taking a step back. Having said that, we know we took the risk for the right reasons. We know we can build a unique business model if we build a membership advisory business that really allows us to be absolute and distinct. We thought we could eat our cake and eat it too by changing the incentives and driving the integration. I guess with hindsight, we were wrong. We're taking a step back, making the changes and believe that the demand is there for us to build the revenues back up and build both revenue growth and EPS expansion as planned.

I guess, just taking a look at the forecast for this coming quarter, if you just forget about the REL acquisition, things are kind of down year-over-year. And obviously, we've been long and sort of very patient shareholders. Is there at this point, something more drastic that needs to be done? What would you say to me at this point saying, here's a shareholder who has been around for a long time, who have seen a lot of changes in the Company and at some point, we don't want to ride this back to zero. So, I guess, what would you say to us? How do you kind of address the issues that you see today?

I would say that the value -- the distinct value of the business is really built around building a large membership base, which allows us then to drive revenue around so that we go from being, I'll call it, a typical project-based business to a business that has a strategic and trusted continuous relationship that then defines a broad level of revenue around it. Having said that, and since we're investing so much money in advisory, our investment in that business is -- we're two years into that investment, we continue to invest very heavily in it. And in fact, on a fully allocated basis, as you know, we still lose money on that membership advisory side. So to create in my view -- to create real substantial shareholder value, you have to build a distinct business model. And I believe that it comes around the membership advisory business. And that we believe the execution around our more traditional services will follow. And the volatility is part of the business, but we still believe that the revenue growth and profitability from those services exist.

But answer your question, we can only be distinct by having a different business model. And we're doing that around a two-year-old product. I believe that even though this is a step back, if we can do it while showing progress in that business and strongly cash flowing, we build strong shareholder value.

Okay.

Our next question comes from Bill Sutherland of Boenning & Scattergood.

Thank you. The advisory inside product. How does that -- how do you extract value from that, as far as your numbers?

Well, it's a small -- at the current point -- at the current run rate and the current adoption rate, I would say small. If it's an indication of what does it mean to scale today. But on a long-term basis, our desire is to be able to deliver our benchmarking and transformation and eventually our Total Working Capital service, and in fact, our BPS service, along with an advisory program. However, we know that we can only do that when the client is making a certain commitment to it in terms of the total revenue opportunity. So that it truly is both additive to revenue as well as a value added. So it's implemented because we strongly believe that a decline is driving an enterprise performance improvement initiative. It needs ongoing support that it can only get efficiently from an off-site advisory-based program like the one we've built. And we believe that our clients understand and see that value. And we continue to increase the number of benchmarking and transformation sales that are now embedding advisory in as part of the total contract. But we are in the, I'll call it, the beginning stages of that, and our -- I'll say -- we're -- how many contracts I don't know -- we're at the beginning stages of that. And we believe that [inaudible - overlapping speakers]

Yes. I knew it wasn't material. I'm simply asking, is it going to be just a natural part of any transformation engagement? Or is it a special program?

It's a -- we will only -- our goal is to only deliver a benchmark or a transformation engagement of a certain size with the corresponding advisory program that is directly tied to the intellectual capital or expertise they need once the project is complete. And that's the way we started to sell it. The clients react really favorable to it, it allows us to maintain continuous contact with the client, which we want to do, but we want to do it in a strategic way.

Why do you think the -- some of these starts in benchmarking have occurred -- have been delayed?

Well, we're in the early stages of some of the multi-year cycle. They are primarily, I want to say, in Europe. No specific issue other than the client says, look, I want -- I just want to do it at a later time. So I'm getting several that are saying, I do not want to kick it off in Q3, even though they have a multi-year contract to do that. And unfortunately, I only have a couple that want to move in early, and they won't pick up until Q4.

Did you come across this seasonality last year? Is that what you're talking about?

No, we have not -- we have not -- we have not come across this kind of, I'll call it, multi-year contract deferral in the past -- no, we have not.

And then on REL, I guess all bets are off as far as the indications you were providing for the year, once you got to the integration.

Yes. For us to continue to stay at our target, we needed to take -- I mean, they made a nice contribution this quarter, but they needed to build on that contribution. By taking a step back, what was a $0.04 to $0.08 opportunity, now we would have to scale back to $0.00 to $0.04.

Inside of '06 or -- ?

Inside of '06, if Q4 manifests itself the way we hope.

Okay. Now, I guess -- you have the same confidence, after all these internal meetings, in the European demand picture? Because -- at one point in your comments, you said it's more volatile, I think was the word -- over there.

It's been -- I mean there's no doubt that when you're dealing -- in '05 you were dealing with sub 2% GDP in UK and both Germany. But we do see the behavior slightly better as we -- as we as we sit here today verses a year ago. So I'm -- I guess what I wanted to simply express was that we're more optimistic that we see opportunity in that marketplace verses some, I'll call it, prolonged impact on kind of discretionary or enterprise performance related engagements.

Remind us how much of REL is in Europe?

A half.

And that's still the case?

Yes, that's still the case.

Okay. And as far as color on Q3, it's -- we can't -- can you provide anything more as to the -- as to the sequential issues?

Well, it's principally REL, we expect it to be down most significantly, somewhere, let's say $1.5 million to $2 million. Benchmarking and advisory -- remember advisory -- we're thinking we're going to be down because we have the benefit from the way the accountants dealt with that use it or lose it contract. Maybe the wind in and out. That impacts us, we believe, several hundred thousand dollars on advisory. And the difference --a benchmarking could be another $600,000 to $700,000, to give you a little more color.

Okay.

On the BPS side, it will be primarily the staff augmentation. And even though we're being, hopefully, we're being conservative on the BI side since they've surprised us on the upside every quarter. But we're guiding the way we see it today and the way our practice leaders have given it to us.

And then, you're hopeful going into Q4, that these new sales -- the rejiggering of the the trips there will have an impact by Q4?

Yes, the only caveat we got -- the only caveat we got -- if the demand is unchanged and we're seeing decent activity, then the only caveat or concern we have in -- the timing for Q3 is the number of vacation days, primarily in Europe, but even here -- we're still impacted by how many truly available sales day we have in the U.S. And obviously, it's a bigger number in Europe. So we temp our expectations because of that. But clearly we -- if the demand is there, we expect it to be transition.

Did you -- and last question. Did you ever give us the sales head count? Where it's kind of moved in the course of the year? I know you got some with REL.

No, it stayed about the same. We added head count at the beginning of the year, so it's really tracking according to plan. I think that there are -- I think we have two open spots that we're trying to fill right now. And the number is, I don't have that number off the top of my head. But I can follow up with you, Bill.

Okay, thanks, guys.

Let me thank everyone for participating on our quarterly earnings call. And look forward to updating you again when we report the third quarter. Thanks again.

Thank you for participating in today's conference. You may disconnect.