Hackett Group Inc (HCKT) 2006 Q4 法說會逐字稿

Good evening, and welcome to the Answerthink fourth 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, operator. Good evening, everyone, and thank you for joining us today to discuss Answerthink's fourth quarter results. Speaking on the call today and here to answer questions are Ted Fernandez, Chairman and CEO of Answerthink, and myself, Grant Fitzwilliam, CFO. Press announcement was released over the wires at 4:26 p.m. eastern time today. For a copy of the release, please visit our website at www.answerthink.com. We'll 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 future results, which may be forward-looking statements for the purposes of the federal securities laws. These statements relate to our current expectation, estimates, and projections and are not a guaranty 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 open up by providing some overview comments relative to the quarter. Then I will turn it back over to Grant so that he can comment on operating results, cash flow, and also comment on outlook. Grant will turn it back over to me, I will make market and strategic overview comments, and then we will open it up for Q&A.

Having said that, let me start with our overview comments. Today we reported Q4 results with revenue $800,000 below guidance and pro forma EPS in line with guidance. Overall results were as expected in our Membership Advisory, with strong year-over-year revenue and annualized contract value growth and with lower than expected revenues in our transformation group, as this relates to the Hackett Group. In our best practices solutions group, we completed the exit of our business applications low-margin staff augmentation contract in Lawson as well as in the SAP practice. And in business intelligence, we did experience lower than expected revenues from our Hyperion group. As I mentioned on our second and third quarter call, a key part of our 2006 strategic plan was a change we made to our sales incentive structure by increasing the sales commissions and commission accelerators specific to Membership Advisory sales relative to our benchmarking and transformation group sales. We have seen this emphasis on Membership Advisory result in this quarter alone in a 58% year-over-year increase in both Membership Advisory revenue, as well as in the analyzed contract value. Again this is for the fourth quarter.

Given the brief history of this offering, the annualized contract value growth represents a great progress in developing this emerging capability and membership base within our service portfolio. However, it's clear that this sales channel emphasis negatively impact the growth of our other Hackett offerings during 2006; given our strong desire to build a large Membership Advisory base and the impact it represents to our overall business model, we may look back to 2006 and see it is a very strategic investment. However, during Q1, we are making the necessary changes to ensure that our non-Membership Advisory services grow at normalized growth rates while continuing to grow our Advisory services as aggressively as possible. Specifically, we have made adjustments to our current sales incentive structure so that we reward a sale for all of our offering equally as we did in 2005. However, we will continue to make the sale of our Membership Advisory program a prerequisite for accelerator and club incentive recognition.

Additionally, we have changed the emphasis in our primary go-to-market strategy to ensure that we optimize client relationships and leads across all of our offerings. In order to do this, we have introduced a transformational benchmark that allows us to engage a client as strategically as possible at the onset of our relationship, while fully exposing them to our proprietary benchmark metrics, best practice implementation content, and our advisors, which are at the heart of our Membership Advisory offerings. We believe these adjustments will result in higher Hackett Group sales and revenues per client and favorably impact profitability throughout 2007. Although we do not expect the impact of these changes to be noticeable until Q2, the emphasis in a more balanced sales focus as we exited the year is already expected to be very evident in the strong sequential growth in our transformation group in Q1. This will allow the Hackett Group to grow strongly from Q4 to Q1.

Relative to REL, in Q4 we saw solid sequential increase from Q3. However, we do not expect that increase in momentum to result in sequential revenue growth into Q1. Having said that, we believe that the dedicated sales channel focus we affected at the beginning of Q3 of last year is allowing us to build a strong pipeline of opportunities in this business. Given the number and quality opportunities we are currently pursuing, we are -- we do expect revenue growth momentum to build throughout 2007. On the business applications front, we are entering 2007 with improved market focus and demand in both SAP and Oracle. Relative to business intelligence, we believe we can regain the momentum we had in our Hyperion practice in 2007 as we increase our emphasis in growing the demand that we're seeing in the Hyperion, analytics and reporting area.

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 cover five main topics -- First, a summarization of the UK loss from misappropriation; second, over-all Q4 2006 results; third, a break down of Q4 2006 revenue; fourth, key operating statistics; and finally a conclusion with the discussion of our financial outlook for the first quarter of 2007. Note that all references to revenue in my discussion will pertain to gross revenue, which is revenue including reimbursable expenses. First a summarization of the UK loss of misappropriation. As reported in our press release from last Thursday, we completed the restatement of our 10-K report for fiscal year 2005 and the 10-Qs for the first and second quarters of 2006. We also filed our 10-Q for the third quarter of 2006. This enables us to be in compliance with the listing requirements for NASDAQ. The impact of the loss from misappropriation resulted in a cumulative charge to earnings of $2.2 million. In January of 2007, we reached a financial settlement with our former UK disbursement agent, who misappropriated the funds. The settlement terms call for the full repayment of the amount misappropriated. All repayments received, including an initial payment of $350,000, which was received in January, 2007, will be accounted for on a cash basis in the period collected.

As a result of this issue, the Company has determined that a control deficiency related to the UK payroll and disbursement process constituted a material weakness in its internal controls over the financial reporting. Management has undertaken certain actions to address the control deficiencies including opening up a European financial shared service organization in London in December 2005 and ceasing the agency relationship with the UK disbursement agent in January of 2006. Secondly, vendor disbursements are now processed in-house by our European financial shared service center. And finally, our UK payroll and related tax disbursements have been migrated to ADP in the UK. These actions will be assessed in connection with management's year-end Sarbox 404 assessment for 2006. Associated legal and accounting professional fees incurred by the Company in the fourth quarter amounted to $700,000. We expect to incur further fees relating to this issue in the first quarter of 2007 of approximately $200,000.

Overall Q4 results. For the fourth quarter our revenues were $38.2 million, which were slightly below guidance -- a guidance range of $39 million to $41 million. Revenues declined 15% on a year-over-year basis and 12% sequentially. Hackett revenues were flat comparatively; however both business applications and business intelligence were down, primarily as a result of exiting low margin staff augmentation contracts in SAP and Lawson, and fewer available billing days when compared to Q3. Our pro forma net income was $300,000 or $0.01 per diluted share, which was in line with guidance. Pro forma earnings exclude non-cash compensation of $863,000, intangible asset amortization of $365,000, the effects of the loss from misappropriation in the quarter of $715,000, and include a normalized tax rate of 40%.

On a GAAP basis for the fourth quarter, we had a net loss of $1.4 million or $0.03 per diluted share. This included a small tax benefit in the quarter of $34,000. As of the end of the fourth quarter of 2006, the Company has approximately $71 million of U.S. federal operating loss carry forward. From a revenue perspective, total Hackett revenue was $20.8 million compared to $21.3 million in the previous quarter and $20.6 million in the fourth quarter of last year. This quarter includes $4.6 million for REL compared to $4.0 million in Q3, and $2.5 million in the fourth quarter of last year. Breaking Hackett revenue further, Membership Advisory revenue was $3.5 million, which is up 58% on a year-over-year basis and also up 17% sequentially. Annualized contract value for Hackett Membership Advisory business was $13.9 million at the end of the fourth quarter, which is up 14% sequentially and also up 58% on a year-over-year basis.

Benchmarking revenue was $4.1 million, up slightly on a sequential basis, but down 14% on a year-over-year basis. As Ted mentioned in his opening remarks, benchmark revenue has been negatively impacted throughout 2006 as a result of the 2006 sales commission plan, which strongly emphasized Membership Advisory sales. Business transformation revenue was $13.2 million, which includes $4.6 million attributable to REL. Excluding REL, transformation advisory revenue was $8.6 million, down 16% sequentially, and 23% year over year. Transformation revenue has also been negatively impacted throughout 2006 by the sales commission plan, which paid the lowest commission rate for transformation sales. As Ted mentioned, the 2007 commission plan will pay the same commission rate for any Hackett product sale with accelerators governed by achieving certain Membership Advisory sales targets. Even before the plan change has had a chance to fully take hold, we are expecting business transformation to be up strongly in Q1.

I would also like to point out that this is the last quarter we will be breaking out REL separately, as they have now been part of the Company for over a year and today have a meaningful number of joint engagements with the transformation groups. Revenues for business applications totaled $9.9 million, which is down 17% sequentially as expected. The decrease is due to the fewer available billing days in Q4, and our planned exit from low-margin Lawson and SAP staff augmentation contracts. Revenues for business intelligence totaled $7.4 million, down 29% year over year, and 28% sequentially. Although we believe overall demand for Hyperion remains strong, we have seen decreasing utilization, primarily due to the transition in demand for our Hyperion offerings around its analytics reporting offerings versus the traditional strong HFM offerings.

I would now like to discuss our key operating statistics. Consultant head count at quarter end was 584, a decrease of 37 compared to 621 at the end of the last quarter. The decrease is primarily attributable to a reduction in the number of sub-contractors used and the exit of Lawson and SAP staff augmentation work. Revenue for professional in the Hackett Group was $322,000, compared to $330,000 in Q3 and $375,000 in Q4 of last year. Revenue per professional was negatively impacted in the current quarter by lower than normal consultant utilization in the business transformation practice. We had expected and have already noted a rebound in the transformation practice in Q1 and therefore did not reduce head count to improve overall short-term profitability in Q4. The transformation group will be up very strongly in Q1, as we have seen improved momentum in this group since the beginning of the year. Revenue per professional is calculated by dividing gross Hackett Group revenues by the average number of consultants and sub-contractors used during the period.

For the business applications and business intelligence practices, consultant utilization was 60%, which is down compared to 72% in Q4 of last year. This was driven by a lower than expected utilization in the Hyperion practice and the fact that last year's Q4 utilization was unseasonably high due to a number of year-end go-lives requiring consultants to work through the holidays. From the business applications and business intelligence practices, our per hour realized billing rate was $161 this quarter, down from $173 last quarter and $173 in Q4 of last year. The sequential decrease is primarily due to a change in revenue mix. Our business intelligence practice, which generates rates well above the average, was a smaller percentage of total business application and business intelligence combined in the current quarter. These rates do include the offshore rates for work performed in India, particularly in the business applications area.

Our pro forma gross margins, which exclude stock-compensation expense, were 39.5% in the fourth quarter, comparable to 39.1% in the prior year's fourth quarter. Our pro forma SG&A as a percentage of revenue was 38.7% in the fourth quarter, up from 33.3% last quarter and 32.6% in last year's fourth quarter. While SG&A costs have benefited from the Company's restructuring efforts, the percentage is negatively impacted by lower revenue in Q4 and the continued investment in practice-wide meetings and associated training events. Our cash balances, including restricted cash and marketable investments, were $20.2 million at the end of Q4 compared to $21.1 million in the third quarter. We were expecting cash to decrease more meaningfully due to the timing of the U.S. payroll cycle, payments to UK inland revenue of $1.9 million and a deferred acquisition payment of $1.5 million. These cash outlays were offset by -- however, by a reduction of $4.5 million in accounts receivable and prepaid expenses and other current assets. At the end of the fourth quarter, $6.1 million was available for future purchases of common stock.

I would now like to discuss our guidance for the fourth quarter. For all of Answerthink, we expect first quarter revenues to be in the range of $39 million to $41 million, which at the midpoint of the guidance represents a 5% sequential increase. But if you exclude the staff augmentation revenue from Q4 '06, it is a 9% sequential increase. Diluted pro forma earnings per share in the first quarter should be in the range of a loss of $0.01 to a profit of $0.01. This pro forma estimate includes a normalized tax rate of 40% and excludes professional fees related to the UK misappropriation matter of approximately $200,000. It also excludes $350,000 recovered in Q1 2007 from the former UK disbursement agent.

From a Hackett revenue perspective, we expect overall Hackett Group revenues to be up very strongly, with Membership Advisory and the combination of benchmarking and business transformation growing sequentially. We expect business applications to be down sequentially. But if you exclude the previously mentioned exit from our Lawson and SAP staff augmentation projects, we expect that business to be up slightly. We expect business intelligence to be flat compared to Q4, as we transition our capabilities around their higher demand areas, especially in Hyperion.

Consistent with previous years' Q1 guidance, Q1 absorbs the sequential impact of FICA and unemployment taxes kicking back in and the build up of the vacation accrual, which is approximately a $0.02 pro forma EPS impact in the first quarter. We expect our cash balances to be flat during the quarter. For 2007, we are planning for Hackett revenue to grow 15+% on a year-over-year basis and for the combination of business applications and business intelligence to show sequential revenue improvement over Q1 throughout the year. We also expect our SG&A as a percentage of revenue to improve throughout the year through a combination of revenue increases and cost reduction initiatives.

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

Thank you, Grant. Let me comment on some market and strategic-related comments. As we head into 2007, we continue to believe that the market demand for our services remains healthy. Geographically we continue to expect slower, but solid GDP growth and related business spending reflected in our U.S. demand. In Europe, we are now starting to see improved demand across the markets that we serve, and as you know, that is primarily the UK, Germany, and France. With that as a backdrop, let me now comment further on our strategic priorities and how they were further impacted by our 2007 planning process.

Let me first start with revenue growth. We believe the best way to take advantage of our expanded brand permission and business model is strongly tied to the way we initially engage with a client. We understand that clients come to us for our unique ability to evaluate how efficiently they are operating their company and for our ability to bring proven best practices to bear in their businesses as quickly and efficiently as possible. They strongly value that our approach is empirically based and, therefore, very objective.

With this in mind, we also understand that it is important that we initially engage our clients as strategically as possible. In order to do this, as I've previously mentioned, we have introduced a transformational benchmark that will allow us to expose our clients to the broadest leverage of our intellectual capital at the onset of our relationships wherever possible. We have seen that this entry point allows us to drive the broadest relationship with a client while also introducing them to the unique elements of our Membership Advisory offering. So where we start with a client is key, and, therefore, this strategic go-to-market change we believe is very key to '07 performance. And again, we've seen that reflected in our preliminary '07 -- Q1 sequential growth.

Second, let me comment our desire to continue to build trusted and continuous relationships with clients, which is really at the heart of our Membership Advisory business. Our goal continues to be 1,000 members and 500 clients as quickly as possible. We saw our membership count increase and programs per client increase strongly during the quarter. Gross membership counts were up over 18.2% sequentially to approximately 780. Client counts were up 5.7% sequentially to approximately 260, bringing our members per client to just under three. Our process advisory products sold in bundles in conjunction with our executive offerings continue to perform well and account for much of the expansion we are seeing in the programs per member. Our ability to develop a continuous relationship with our clients is defined by the growth of our Membership Advisory, members, and clients. We know our clients value our intellectual capital and insight and that they also want to access it as efficiently as possible and in a manner they desire. That is where our ability to build our Membership Advisory programs has become so important to our strategy.

In addition to our stand-alone sale of Advisory programs, last year we developed our Advisory inside sales and delivery strategy, which allows us to offer our Advisory programs to clients as an offering that supports strategic initiatives, during or after an implementation initiative is completed. This demonstrates to clients that we are truly architected to leave and not planning to stay when initiatives are complete. It also lets them know that we are serious about continuously supporting their initiative and value -- and the value of knowledge transfer, both which are critical elements to their ambitious performance improvement programs.

As we move into 2007, Advisory will continue to be a key element of our strategy, but as we seek to focus our sales channel across benchmarking and transformation offerings, we think it is reasonable to expect [of] a moderate rate of growth than we experienced in Advisory in 2006. Additionally, we expect to begin seeing increased opportunities in our other service lines emanating from the relationships established in this client base. Long-term we hope to be able to ascribe and predict an increasing percentage of our total annual revenues to our Advisory program members and clients.

Let me also comment another key part of our business is our need to expand and leverage our empirical capital. Our organization has always been distinct because of the proprietary data that we capture through our benchmarks and our best practices repository and tools that help clients drive to an outcome. During the year we continued to look for ways to expand our ability to capture and create performance improvement data and insight. During the year we also continued to expand and refresh our best practice repository and implementation tools.

As we head into 2007, we are developing strategies that will allow us to broaden the data capture and sharing across our organization and with our clients. In addition to our benchmarking offerings, we now have the ability to capture data through a series of new benchmark and data analysis tools so that we can expand the number of customized benchmark studies we can execute during the year. The addition of the REL 2000 working capital study and a new research team in our Hyderabad, India office focus on globalization studies are other great examples of our expanding intellectual capital capabilities. We have also seen our Oracle group reposition itself around the leverage of Hackett and our best practice implementation intellectual capital. We expect to see our other best practice solution groups follow the lead in 2007.

In summary, we -- I believe we will look back at 2006 and realize that, although the impact of the focus and the investments that we made to emphasize the growth of our Membership Advisory business was more than we expected. We will also realize that the value of building our Membership Advisory base along with a complementary set of consulting offerings we believe will result in a unique and more powerful and a more valuable organization. It is easy to forget that in 2002 [Company corrected after the call] the Hackett Group was a $6 million benchmarking business.

Today we're approaching $100 million run rate in the Hackett Group alone, with the permission to compete with the best strategy consulting and research advisory firms in the world. We have seen brand expansions and expansion of our offerings and expansion in our client base. And when you consider that coupled with the growth that we've experienced in the Hyperion area over the last several years the reposition of our Oracle and SAP groups and our presence -- expanded presence in Europe and in India, we're pretty proud of the achievements. It is important to recognize the outstanding contribution of our associates during this very strategic transformation of our entire business model. As always, I want to thank them and recognize their outstanding effort and great spirit.

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

Thank you. [OPERATOR INSTRUCTIONS] Our first question comes from Mr. George Sutton with Craig-Hallum. Sir, your line is open.

Thank you. Hi, guys. I wanted to first walk through the pieces of the business that you weren't focused on in Q4, so the Lawson and the SAP staff augmentation areas. Can you just talk about the dollars involved there on a revenue and gross margin basis?

George, this is Grant. We can talk a little bit about the top line from a revenue perspective. The contribution to the fourth quarter for those two components was roughly $1.5 million.

And using a comparative number in Q4 of last year?

You could probably add another $1.5 million to that number.

The annual number, why don't you give him the annual number for those businesses?

The annual number, we believe for 2006 was $12 million.

Okay. So obviously your guidance assumes pretty meaningful growth from Q1 levels through 2007. I just want to make sure I'm using the right base for that growth. Am I using the $180 million as the base for that growth?

The base that we're -- that's why I think Grant provided guidance in two pieces, just to see if we could be -- provide as much guidance to you as possible. One is Hackett, 15% plus for the year.

Oh, Hackett. I'm sorry, okay.

And then he commented that business intelligence and business applications are expected to grow sequentially from Q1 throughout all of '07.

Okay.

Just going back to your comment about the 180 -- the $180 million base, which is 2006 year to date includes the $12 million of staff [aug].

Correct. So if we look out longer term, what is the long-term growth goals that you're looking at from a Board perspective on a revenue and earnings basis if we looked out, say, three to five years?

I'm sorry, George, for which piece of the business?

Overall.

Well, we really speak to it in the components. So overall, I think we've continued to believe that our Hackett business has a chance to grow north of 15% on a fully-blended basis and we've been conservative with our estimate in the application side. And once we experience the sequential increase we're expecting throughout '07, we're expecting 0% to 10% growth beyond '07 for the business application and the business intelligence business.

Okay. Lastly, can you just give us a sense of the reaction people had with the new comp plan? What sort of feed back did you get? Is there any -- at what point do we start getting indicators that we're happy with the progress being made there?

Well, I think they understand that we have an opportunity to really leverage a client relationship more broadly than we did throughout '06. And that when we enter, purely with a Membership Advisory offering instead of with a more strategic offering, our ability to expand from that point is -- let's just say it's significantly easier to introduce your lower price continuous offering than it is to move up-stream. That creates a longer sales cycle for your broader relationship. So I think once -- I think they understand that probably as well as anybody. Now that we've told them we're commissioning -- our commission opportunity is equal across all offerings, I think they understand they have a great opportunity to make quite a bit of money. I continue to say that we have a well-paid sales force as well as a very qualified sales force. So I think we've created a pretty good opportunity for them and that opportunity does allow us to recapture, as quickly as possible, the benchmarking and transformation growth that we were experiencing in '05.

I don't know if you'll recall, but if you go back to '05, Hackett on a blended basis grew over 25%. But we wanted our Membership Advisory service as we went into '06 to grow more aggressively because we know that a larger client base long term is more strategic to us. That is why we made the change in '06. Now that we've made that investment, we now say let's turn back that dial a little bit and assume the growth of benchmarking and transformation that we believe is so important to profitability while trying to grow Membership Advisory as aggressively as possible. And the way we believe we will capture that, as I mentioned in my opening comments, is that, although we're incenting the sales force on the salable offerings equally, accelerator and other special recognition for those individuals is based on their ability to sell a minimum level of membership Advisory Programs.

Okay. Thanks, guys.

Our next question comes from Bill Sutherland with Benning Scattergood. Sir, your line is open.

Thank you. Ted and Grant, good afternoon.

Hi, Bill.

The transformational benchmark that you're going to try to sell at the start of an engagement, is that just going to be blended in in terms of the price of the engagement?

It is priced as one contract. So it will be blended and then we simply look at the -- just separate the aspect. But there's no doubt that benchmark and transformation go to market together very frequently and that will only increase throughout '07.

The surge you've referenced for transformational consulting in the quarter, is that a reflection of some pent-up demand or is there just a real strong bookings trend going on right now?

Well, our guys believe -- first let me comment on demand. Our guys believe that demand is strong and so they're happy -- they're very happy with market demand and market circumstance. But we believe it's a combination of two things. One, the fact that the group, as we got to the middle of last year, understood that it needed to leverage the non-Hackett dedicated channel more aggressively. So our ability to leverage relationships, convert benchmarks, cross sell, that effort clearly paid off as we were exiting the year. Our sales team also believes that they understood as we were exiting the year that the broader sale was going to become more important and that also impacted the fact that this team has had increasing momentum throughout Q1.

The overall -- I'm sorry -- the overall growth that Grant provided in the guidance for Q1, could you break that up, Grant, as far as Hackett versus BABI?

What we said, George, was that Hackett would be up strongly. We expected business applications to be down sequentially, but if you exclude the loss in SAP staff aug work, we expected that to be up slightly. And then business intelligence flat compared to Q4.

Okay. So you just said Hackett up strongly without differentiating transformation from benchmark from Membership Advisory from REL?

No, but my comments, I think -- Bill, my comments I think we're indicating that where we're seeing -- obviously we're going to continue to see the increase -- the momentum of Membership Advisory and that we're seeing clear and very significant increase in our transformation run rate.

Okay. Then last question, Ted, on Hyperion I guess I'm a little unclear on the issue there. If you could color it a bit and then why you expect the situation to improve? Thank you.

Well, the significant change in Hyperion is if we look -- as we were exiting '05, we had very significant engagements around their HFM module and a very significant engagement, which ended in probably the latter part of Q1, which we commented as Q1 ended. What we have seen throughout the year is just that their demand for their A&R analytics and reporting product have simply increased and I'll call it the insatiable demand for HFM resources [demand] has simply tempered. And that simply requires us to make that shift in capabilities and in pursuits because we're both missing some market opportunities because of lack of focus. And we've clearly had, then, excess capacity in the HFM area from the strong demand we had in 2005. Having said all that, when we look at the fact that, first we've done a phenomenal job at growing that business.

But I want you to know that Hyperion business has really done a lot of the growth simply out of the very strong Hyperion demand. What that business has not done, which we believe was the strategic reason for acquiring it in the first place, is that that business sells to the CFO, which is today, I'll call it the most significant buyer of total Hackett services. So when we look at the entry -- the relationships we maintain with CFOs throughout -- really throughout the globe and we look at the opportunity for that team to better integrate the intellectual capital that exists within Hackett that it really hasn't had to leverage in some significant way, at least through 2006, we look at market demand, we look at the buyer, we look at the strength of our group, we look at our access to that buyer and believe that we will sequentially grow that business throughout the year.

And then -- actually let me sneak one in. When Grant mentioned the SG&A percentage reduction goal, can you give us a goal there, Grant, as you work to reduce SG&A as a percent of revenue?

George, I think we're going to make continued improvement as we go through 2007. We're starting off a little high as we exited Q4, just because revenues are not quite at the run rate they were in the beginning of 2006. But I think you'll see us make sequential improvement and we'd like to be back down to the levels that we experienced in the first half of '06.

Okay. Thanks a lot.

Thank you, Bill.

[OPERATOR INSTRUCTIONS] Our next question comes from Justin Cable with B. Riley. Sir, your line is open.

Thank you. I think most of my questions have been answered, but I did have a few more here. In terms of Q1 guidance, obviously we're well past the half way point in Q1, would you say the visibility there is pretty good?

Correct.

Okay. And in terms of long-term margins or EBITDA margins, obviously you mentioned cutting back on SG&A or at least getting the percentage lower based on higher revenues and cost cutting. Is there some kind of target that you have in mind in terms of EBIT margin or EBITDA margin long term?

Long-term so that we're clearly looking beyond '07, I think we've always believed that the blended business should operate in the 14% to 16% range. And that's only a function of how much of your business at that point is leveraging the Hackett gross margins, which as you know are approaching the 50% range versus the, our BA and BI margins, which are more in the 30% to 35% range. So the mix has quite a bit to do with how we -- how quickly we hit and exceed those targets, Justin.

Okay. If I was to look at your current run rate right now, and your SG&A run rate, assuming worst case things are flat for whatever reason, is this -- do you feel like you have enough room to cut back on SG&A to make it sort of a 10% to 15% margin at the current run rate? Do you have that kind of flexibility or is this 14% to 15% range you're talking about --

The answer's yes, but that's not our intent.

Okay.

This business model works given the investments -- clearly given the investments we've made in the sales and marketing area through the revenue growth that we planned, so the answer is you can make anything work. But our plan is obviously to leverage that investment to drive the growth and to increase the Hackett mix, leverage that higher margin. And we do believe that there are simply opportunities to reduce the SG&A spend just because some of the things that happen as we -- in the second half of '06 and some of the buildups and investments we made that we now have a better understanding of. But our goal is to grow.

Okay. In terms of these cost-cutting efforts, though, is this something that is just kind of an ongoing plan or is this something that you plan to take in Q1 and maybe Q2's going to be the first clean quarter? Or how should we look at that?

No, that's an excellent question. No, we think some of the 2007 planning decisions are being made throughout Q1. So, yes, we are expecting to see some of that impact noticeable in Q2.

Okay. Thank you.

This concludes the question and answer session. Now I'll turn it back over to Mr. Fernandez.

Well, I'd like to thank everyone for participating on our fourth quarter earnings call, and look forward to updating everyone again when we report the first quarter. Thank you again for participating.