Hackett Group Inc (HCKT) 2008 Q1 法說會逐字稿

Good evening. Welcome to the Hackett Group first quarter conference call. Your lines have been placed on 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. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Thank you, operator. Good evening, everyone. Thank you for joining us to discuss the Hackett Group's first quarter results. Speaking on the call today and here to answer your questions are Ted Fernandez, Chairman and CEO of the Hackett Group and myself, Rob Ramirez, CFO. The press announcement was released over the wire at 4:05 p.m. eastern time.

For a copy of this release, please visit our web site at www.theHackettGroup.com. We'll also place any additional financial or statistical data discussed on this call that's not contained in the release, on the Investor Relations page of our web site. Before we begin, I would like to remind you that in the following comments and in the question-and-answer session, we 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 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, Rob. As we customarily do, I will provide some overview comments on the quarter. I will turn it back over to Rob so that he can provide some detailed commentary on our operating results, cash flow and also a comment on guidance. Rob will turn it back over to me, so that I can provide a market and strategic overview and then we'll open it up for Q&A.

Having said that, let me start with our quarterly overview and highlights. Welcome to our first quarter earnings call. Last December, our shareholders approved the rebranding to the Hackett Group from Answer Think and on January 31st, we officially changed our name and now trade under the ticker symbol HCKT. As I mentioned on our fourth quarter call, the rebranding is an indication of the level of transformation that we have undergone over the last several years. Nearly 70% of our revenues now emanate from our Hackett Group's executive advisory programs and our bench marking in transformation groups. That compares to the 15% in 2002.

Our goals in 2008 are to continue to grow our Hackett Group, excluding the tech solutions group, at north of 15% annually. The growth will be led by the growth in our benchmarking and transformation business, which should also continue to grow from the REL group, as well as the growth in Europe. As we continue to take advantage of the vast market opportunity available to our global brand. I'm happy to say that we're continuing to do this in 2008 and our prospects into Q2 are even more encouraging.

With a 15% plus growth rate for the Hackett Group and with our technology solutions revenues stabilizing, we have an opportunity to continue to significantly expand our EBITDA margin. I continue to expand our brand in the broader transformation area, along with the strategic relationships that come from our executive advisory programs, we're continuing to create a truly unique business model. We're just starting to tap into our executive advisory client base.

In the quarter, we had less than 10% of our executive advisory client base, buy another one of our offerings. We believe about a third of the group should be utilizing one or more of our other offerings at any given time. This is where the unique leverage of our executive advisory client relationships and the strategic consulting business model, show great promise. We're pleased to see the strategies impact our results so positively.

But before I comment further about our prospects for 2008, let me comment further about our first quarter results. As you will recall, at the beginning of the last year, we introduced a transformational benchmark that allowed us to sell our transformation planning design and implementation services along with our benchmarks. This has allowed us to engage clients more strategically and has resulted in a significant increase in our entry level engagements, which is one of the primary reasons for our increased growth and profitability.

During this quarter, we also launched a new version of our benchmark that incorporates a working capital performance assessment. This enhancement increased at the overall value of our benchmark as well as increasing the lead it provides to our REL working capital group. We believe this move will allow us to expand our revenue per client further. Increase lead star REL team, along with the larger engagements that address both cash and cost improvement, is why we believe the REL offerings hold such high promise for our long-term growth.

In Europe, we increased our investment in both resources and infrastructure across France, Germany and the U.K. We did that throughout all of 2007 and those investments continue to pay off. As we saw year over year of European growth of nearly 40%. On the Hackett technologies solutions front, which include our SAP, Oracle and Hyperion practices, Q1 results came in as expected. Activity in SAP has remained solid.

Our Hyperion group activity continued to improve and our Oracle group continues to perform lower than expected. One of the most encouraging signs as we head into Q2 is that we now expect our technology solutions group to grow sequentially from Q1 to Q2, driven by improved pipeline activity in our Hyperion and SAP practices. On the SG&A front, cost reduction actions that we took early in 2007, improved our SG&A leverage throughout 2007. But they're more evident this quarter when you look back on a year over year basis.

Our ability to create a dedicated sales channel supported by a more traditional partner sales model, has resulted in lower cost and improved sales productivity. Those efforts as well as further streamlining our European general administrative cost, post the REL acquisition, have resulted in significant improvements. We expect to continue to improve the leverage in 2008 partially offset by increased investment in our associate development and training programs. Our Q1 results continue to demonstrate the potential of the organizational transformation we embarked on several years ago.

We took a strong benchmark capability and brand and we have developed it into a powerful highly-recognized global professional services brand with services that help clients improve organizational effectiveness globally. Let me now ask Rob to provide details on our operating results, cash flow and comment on outlook. Rob?

Thank you, Ted. Hello, everyone. I plan to cover the following four main topics this evening.

An overview of our first quarter results, a breakdown of our first quarter revenue, an overview of our key operating statistics including cash flow activities during the quarter, and I will then conclude with a discussion of our financial outlook for the second quarter of 2008. For purposes of this call, any references to the Hackett Group will specifically exclude Hackett technologies solutions. Additionally, please note that all references to revenue in my discussion will pertain to gross revenues, which is total revenues including reimbursable expenses.

First, I will discuss our first quarter 2008 results. We're pleased to report revenues that are at the upper end of our quarterly guidance which was $42 to $44 million and pro forma EPS that exceeded our quarterly guidance which was $0.04 to $0.06 per diluted share. For the first quarter of 2008, the company's revenues were $43.8 million, a year-over-year increase of 10%. Our pro forma net income totaled $3 million or $0.07 per diluted share for the first quarter of 2008.

Pro forma net income excludes noncash stock compensation expense of $945,000, intangible asset amortization expense of $197,000 and assumes a normalized tax rate of 40%. Pro forma operating profit for the first quarter was $5 million or 11% of gross revenues. Our GAAP net income totaled $3.8 million or $0.09 per diluted share. GAAP net income included tax expense in the quarter of $107,000. As of the end of the first quarter of 2008, the company had approximately $61 million of U.S. federal income tax loss carry-forwards remaining.

Breaking down first quarter revenue for 2008. Revenue for the Hackett Group was $30 million, representing a year-over-year increase of 31%. Further breaking down the Hackett Group revenue, Hackett Group grew both in the U.S. and in Europe. Given the uncertainty regarding the state of the U.S. economy, we were pleased to see that our Hackett Group U.S. business experienced strong revenue growth of approximately 27% on a year-over-year basis.

Additionally, we continued to see strong Hackett Group revenue growth in Europe, where our business grew by approximately 38% on a year-over-year basis. European revenues accounted for 31% of total Hackett Group revenues in the first quarter of 2008, as compared to 29% in the first quarter of 2007. The foreign currency translation impact on the Hackett Group's revenue growth rate on a year-over-year basis was a favorable 3%. Benchmarking and business transformation revenue totaled $26 million, representing a year over year increase of 35%.

Executive advisory revenue totaled $4 million, representing a year-over-year increase of 11%. Annualized contract value had a year-over-year increase of 6%. As Ted mentioned, the strategic changes that were made over the past year regarding the emphasis on transformational benchmarks and the realignment of the dedicated sales team to REL, as well as investments made in Europe, have all contributed to the strong performance. As expected, our Hackett technology solutions group revenue totaled $13.9 million which represented year-over-year decrease of 18%. However, we expect the Hackett technologies solutions group to grow sequentially in Q2.

Our top ten clients represented approximately 29% of gross revenue in the first quarter of 2008 as compared to 23% in the same period of 2007. As Ted has discussed previously, this is in line with our business strategy of optimizing our client relationships across all Hackett service offerings, in order to expand our revenue per client. The first quarter of 2008, one client represented 7% of revenues, as compared to the first quarter of 2007, where no one client represented more than 5% of revenues.

I will now discuss some of our key operating statistics. Consultant head count was 536 at the end of the first quarter of 2008, as compared to 563 at the end of the first quarter of 2007. The lower head count is primarily related to decreases in our Hackett technology solutions group, as we adjusted staffing throughout 2007 to conform to current market demand. Annualized revenue for professional and the Hackett Group was $415,000 in the first quarter of 2008, as compared to $345,000 in the same period of 2007. An increase of 20%.

Revenue for professional was positively impacted in the quarter, primarily from improved pricing resulting from our strategic changes. For the Hackett technologies solutions group, consultant utilization was 66% for the first quarter of 2008, as compared to 63% in the same period of last year. Our utilization target continues to be in excess of 70% for this business. Our hourly realized billing rate was $160 for the first quarter of 2008, as compared to $171 in the same period of last year. This decrease is primarily due to increased utilization of our offshore resource capabilities to deliver lower cost of services to our clients.

Offshore hours grew from approximately 14%, while total available revenues in the first quarter of 2007, to 21% of total billable hours in the current quarter. On a company wide basis, our pro forma gross margin, which excludes stock compensation expense, was 38% of gross revenues in the first quarter of 2008, as compared to 35% in the same period of last year. Gross margin has continued to increase, as expected as a result of Hackett Group revenue growth.

For those of you who utilize net revenue calculations, pro forma gross margin was 43% of net revenues for the first quarter of 2008, as compared to 39% in the same period of 2007. It is also important to note that from a seasonal perspective, the first quarter of the fiscal year absorbs the sequential impact of the increase in U.S. payroll-related taxes and the sequential build-up of vacation accruals. Which represents an approximate $0.03 pro forma earnings per share impact on a sequential basis. Pro forma SG&A, excluding foreign currency gains, was $12.9 million or 30% of gross revenues, as compared to 38% in the first quarter of 2007.

Our SG&A levels have benefited from cost containment initiatives that began in early 2007, which resulted in the realignment of our sales force and compensation plans. Other general and administrative reductions and in this quarter, benefited from gains from foreign currency. In prior years, the company reclassified the total cost of executives whose utilization was lower than 20% from cost of service to SG&A. This practice led to variability and lack of comparability in our cost of service and SG&A reported results. This practice was discontinued in Q2 of 2007.

In addition, at the beginning of 2008, remaining practice leaders, primarily from REL, were reclassified into cost of service consistent with all of our other practices. Amounts have been recast for both cost of service and SG&A and have been included in the footnotes of the P&L filed with our earnings release. In summary, excluding the impact of the benefit in the current quarter from foreign exchange gains, we have reduced pro forma SG&A expense on a year over year basis by approximately $2.4 million.

The company's cash balances including restricted cash of $600,000 and marketable investments of $4.5 million held in Bank of America's Columbia strategic cash portfolio, were $25.3 million at the end of the fist quarter of 2008, compared to $27.7 million at the end of the first quarter of 2007. Cash flow from operations was $4.7 million for the first quarter of 2008. Primarily driven by strong operating earnings. Our DSO at the end of the first quarter of 2008 was 66 days, as compared to 60 days at the end of the fourth quarter of 2007. This area continues to be an area of focus and we believe that the company will continue to make improvements to its DSO in 2008.

During the first quarter of 2008, the company repurchased approximately 1.8 million shares of its common stock for a total cost of $6.8 million. Of this amount, approximately $3 million was paid subsequent to the end of the first quarter and is reflected as an accrued expense as of March 28, 2008. Subsequent to the end of the first quarter of 2008, our board of directors authorized an additional increase to the company's share buyback program of $5 million.

At this time, approximately $8.1 million remains available under the company's share repurchase program authorization. I would now like to discuss our guidance for the second quarter of 2008.

For the total company, we expect our revenues for the second quarter of 2008 to be in the range of $46 million to $48 million. We expect revenues from both the Hackett Group and our technologies solutions group to grow on a sequential basis. For the second quarter of 2008, we expect Hackett Group revenues, excluding technology solutions, to improve on a year-over-year basis by approximately 20%.

We expect our pro forma diluted earnings per share in the second quarter of 2008 to be in the range of $0.06 to $0.08. This pro forma estimate excluding amortization expense and noncash stock compensation expense and includes a normalized tax rate of 40%. Gross margins are expected to improve on a year-over-year basis due to the increasing Hackett Group revenue mix.

We expect pro forma SG&A levels excluding the impact with foreign currency movements to be approximately $14 million, primarily due to increased spend for our U.S. and Europe annual Hackett best practices conferences, as well as several technology solutions related annual events. We expect our cash balances excluding the impact of any stock buyback activities to be up strongly consistent with our earnings guidance.

At this point, I would like to turn it back over to Ted to review our market outlook and strategic priorities for the coming months.

Thank you, Rob. As we look forward, we continue to believe the demand for our services remains healthy. Geographically, we entered the year expecting the U.S. economy would slow and with it, would be -- we would see lower discretionary spending. And that would have a corresponding impact in our U.S. business. In Europe, we expected demand to remain strong across the markets that we serve with perhaps some tempering in the very -- in the very strong demand we experienced throughout 2007.

Although January started off slower than planned, we have seen strong demand in both the U.S. and European markets over the last three months. Clients are being more thoughtful about their spend, but our focus on cost reduction and cash flow improvements is receiving increased focus and attention from our client base, resulting in increased demand. It is also worth noting that a vast majority of our U.S. and European client base continues to be large, global companies who are benefiting from the stronger demand outside of the U.S.

As expected, our Hackett Group Q2 run rate and pipeline is noticeably stronger than our Q1 entry rate, which is expected to result in strong sequential growth. On the technology solutions front, the improvement in our Hyperion solutions group will also drive strong sequential improvement in our overall technology solutions group, Q2 revenue. Given this activity, our prospect for strong EPS and EBITDA improvements in fiscal 2008 remain unchanged.

But that demand overview as a backdrop, let me comment on our strategic priorities for 2008 and let me start with revenue growth. We continue to believe that the opportunity to grow by increasing our revenue per client with our current offerings is significant. Specifically, in the first quarter, we rolled out a regional market strategy that allows us to create greater focus on account planning as well as sales and marketing activities.

This interaction is also resulting in more active market collaboration of our regional teams with our sales as well as with our technology solution teams. On the executive advisory front, we have added additional incentives to our advisory associates so that they are incented to expand the Hackett revenue in our advisory client base. We also continue to see great opportunity to grow in Europe. And we continue to see our brand, strongly resonate with both perspective clients, as well as the associates that we are trying to attract.

We mentioned last quarter that we want to continue to expand our alliance partner relationships in markets that we're not currently serving as a way to extend our brand and offering and drive incremental revenue growth. In the past, I've highlighted our alliance in the European Nordic region and would like to use this same strategy in other regions. Lastly, we continue to look for acquisitions that will enhance our intellectual capital and would strongly leverage our existing intellectual capital to grow as well.

Our long term goal is to be able to ascribe and predict the increasing percentage of our total annual revenues to clients who are continually engaged with us through our executive advisory programs. Our clients use our advisory programs to track emerging issues and to support performance improvement initiatives that they are assessing or executing. At the end of the quarter, gross membership counts exceeded the 950 mark. While client counts approximated 260. As member clients continued to increase.

Our long-term goal is to be able to ascribe 75% of our total Hackett revenues to clients that maintain an executive advisory relationship with our organization. As I previously mentioned, less than 10% of our current advisory client base bought one of our other Hackett offerings this quarter. However, several of those who did, represented significant relationships for us.

We believe we have a great opportunity to expand our revenue relationship with this client base. Expanding and leveraging our best practice intellectual capital is another priority for us. Our organization has always been distinct because of the proprietary data we capture through our benchmarks and the applied knowledge we've captured in our best practices, repository and tools that help clients implement a solution. A key element of our 2008 plan are changes to product architecture which determines how we avail our intellectual capital to our clients. This will ensure that we're not only expanding our contract but also making sure we're responsive to needs.

Specific to this initiative, as I mentioned in our first quarter, we've rationalized our benchmark questions and data elements in order to improve the delivery, speed and responsiveness to client's specific issues. We've -- we're expanding the number of performance surveys to support key research needs. During the quarter, we rolled ute a new baseline measurement module for our transformation engagements where clients do not want to execute a full benchmark.

We've also integrated working capital management questions into our benchmark as a separate report out that will further integrate our REL knowledge as well as REL lead flow. This was also completed and launched during the first quarter.

Continue to execute a targeted industry specific benchmark study to enhance industry specific data capture. We made great progress in the quarter launching our first industry study of the year. We have made great progress across all of the initiatives during the quarter and I would like to thank all of our associates involved in this effort, especially those who are putting in time after hours to make this happen.

And lastly, let me comment on talent management. As we continue to grow and fully recognize the potential of our business model as becoming increasingly evident that the only limit to our progress and opportunity, would be our ability to attract, retain, develop and energize our associates. Our associates are passionate about our organization and we must ensure that we nurture this sentiment. To this end, we're in the process of developing a global talent management program that will ensure we have an opportunity to excel across all of these dimensions. Our plans are to roll out the first phase of a broader talent management initiative this summer, during our expanded U.S. and European all hands meetings.

In summary, the strategy we've put in place several years ago along with the changes we effected in 2008 have been favorable to our growth and profitability. As repeatedly say to our associates, the opportunity for our organization is truly boundless. When you consider the power of our brand, our unique intellectual capital, along with our talent of talented associates, we know we have an opportunity to build one of the most admired and valuable professionals in the world.

Let me close by thanking our associates for their contribution, their tireless effort and congratulate them for the great progress we continue to make. Those are my comments. Let's now open it up for Q&A.

Thank you. (OPERATOR INSTRUCTIONS) One moment. Our first question comes from George Sutton from Craig Hallum. Your line is open.

Well, guys, third good one in a row. Congratulations.

I thought you were going to say four but it's ok. We'll take three.

I'll give you credit for three. Ted, I'm curious, how much significance do you place on the brand change that you made in terms of driving some of this impact?

Well, I think just the emphasis of the brand is only helping us better promote everything that we do. We really expect the brand to impact actually our technology solution offerings as we try to let them leverage the permission that we have been exercising in our benchmark transformation and executive advisory teams now for the last couple of years. But there is no doubt, the one thing that we continue to see and hear from clients is that our brand is recognized globally and they understand that our ability to understand how to gap an improvement opportunity and to quickly be able to articulate how the very best companies get it done is creating a real good opportunity for us, George.

Ted, are you -- we're modestly surprised, I assume you're modestly surprised that the economy hasn't had a negative impact. I think you're suggesting it may have actually begun to have a positive impact on your business.

Well, it's hard to imagine a slowing economy having a favorable impact. Having said that, when we look at the U.S. growth, that 26%, 27% year-over-year growth, we weren't anticipating that strength coming into '08 from the U.S. market place. However, we expected the kind of growth and demand that we're seeing in Europe.

I think the best way to kind of articulate the opportunity in my view is two-fold. One, clearly, our offerings are focused in helping clients improve their performance across cost and cash and if there was ever a time to do that, you would do that when things are getting slower on your top line or you're getting squeezed on your margin line. So, that's clearly has created an opportunity for us. I think the other observation I tried to make during my comments, George, is that we're working with very large companies.

So, these are companies that have service delivery models that expand a global business and these are also companies that are benefiting from the demand, the global demand instead of just I'll call it the domestic only demand or related issues. I think a combination of brand expansion, the focus of our services, the nature of the clients we're serving, has clearly had a positive effect in our results.

Now Rob, I know I've not proven to be a genius. But here are a couple of things I don't understand. The revenue professional was up 20%, but the average bill rate was down $11. Obviously that would denote substantial improvements in utilization, but more substantial than I think is realistic so what am I missing in that equation?

The revenue for professional relates to specifically George to the Hackett group revenues. The billing per hour is only reflective of the Hackett technologies solutions.

There you go. That makes sense. Now, Rob, you had mentioned in Q1, you would have had another $0.03 added to your pro forma if it weren't for the normal impacts of the tax issue in Q1. And payroll and vacation accruals. So, if we look out to Q2, that would suggest you would be at a $0.10 run rate with slightly growing revenues in Q2. What's the difference between that and the level that you expect to come in? And I did hear you mention obviously your conferences.

George, this is Ted. Let me comment. The $0.03 comment that Rob mentioned is a comparison to Q4 to Q1. You've got to remember in Q4, you're operating in an environment where, as you enter the quarter, all of the payroll taxes for all of your U.S. resources have basically been paid up. Therefore, you're getting a significant benefit from the fact that you are virtually in a no payroll tax environment, along with the fact that you have the vacation, which you accrued throughout the year. Also, a lot of it is used between your Thanksgiving and New Year holidays.

Which then further benefit your fourth quarter results. So, when you then look at Q1 versus Q2, so that if somebody said well, why weren't your Q4 results comparable to Q1? It is because your payroll taxes in Q4 are basically at zero where in Q1, your payroll taxes are starting from scratch and therefore fully accruing along with vacation. It is just to provide some indication of run rate assuming I'll call it comparable seasonality, which obviously Q1 and Q2 are not.

When you then look at Q1 to Q2, or even Q2 to Q3 and Q3 to Q4, what you have is in Q1 and Q2, you are accruing payroll taxes normally until about the middle of the year. You have some falloff on payroll taxes for some of your more highly paid executives, actually happen earlier in Q2. So, you start getting a small benefit in your payroll tax comparison when you look at that from Q1 to Q2 and then you see more of that benefit reflected in Q3 then you see then a zero tax environment reflected in Q4 as well as the reversal of vacation.

So, I think to look at Q1 versus Q2 and look at the $0.03, it would actually not be appropriate because you're still in a full payroll tax accrual. And in fact, you're probably still building up vacation in Q2. We see quite a bit of the -- you see some usage in Q2, but you see more usage around the summer holidays before kids go back to school as well as I've said, the Thanksgiving to New Year's time frame. I hope that wasn't confusing but helps answer your questions.

It absolutely does. One last question on the Oracle practice, could you give us an update there? How that broadly has been doing.

That group had some pretty significant opportunities where it just did not convert as we went into Q3 of last year. And it has continued to -- I'm going to say kind of perform, but without really getting back to kind of the build-up or activity that it had seen prior to Q3 of last year. We have added some new talent into that group. We believe the profits of that group are unchanged. And we believe that group should start performing, sooner rather than later.

On the positive side. We went through some of the same transition with SAP a year and a half ago. We saw it improve steadily throughout '07 and into '08. We saw Hyperion significantly impacted not only by a leadership change that we had and about 18 to 24 months ago but also in the confusion and the post Oracle acquisition which also I think impacted our reseller and typical relationship that we had with Hyperion in years past. We're delighted to see that the investments we've made in leadership and in the Hyperion group are going to start paying off noticeably in this quarter and the SAP group performing well.

But yes, we are being negatively impacted by the Oracle group performance. That group has too much talent not to turn it around in the near future.

Ok. Thanks, guys.

Thanks, George.

Our next question comes from Bill Sutherland from Boenning and Scattergood.

Thanks. Hi, Ted and Rob.

Hi, Bill.

I wanted to see if you could give me a sense of how much sales force growth you've got in Q1 and your plans for '08.

We're adding some -- we're expanding the team in Europe and specific markets and we're still looking to fill out some areas in the U.S. Where we believe we have some pretty good opportunities but all in all, we think the combination of our dedicated sales group along with more involvement from our -- if you want to call it managing directors or partners as we've rolled out the regional model provides some pretty significant sales activities for us throughout 2008.

So, it is not a head count increase. We actually believe that the combination of the regional model with what we believe is a very talented executive sales team can actually improve overall productivity from '07 to '08. We're off to a pretty good start. So, we hope to realize that throughout the entire year.

I guess that's -- that leads me I guess to the SG&A line. I wonder if Rob could kind of go through -- it is such a market improvement, even in absolute dollars. Can we go through that a little bit without taking up too much time on the call?

Sure, Bill. At the end of the day, as you're aware as Ted has mentioned, there was some significant realignments that were done at the very beginning of 2007. So when you look back on Q1, of last year, you saw a much larger SG&A figure. Those changes did not result in the benefits in Q1 because the actions were taken in Q1.

We started seeing the impact of the changes that were made going into '07 really -- in Q2 of '07 and on. You saw that throughout the entire year. So, the SG&A that you're seeing now, obviously it is comping against the number in Q1 '07 prior to basically the impact of the changes that the management team made.

I remember there was some severance, there was --

Well, we had --

Noncash things.

Yes. But I mean there was -- there was some severances in both Europe as well as the U.S. There was, again, there was a lot of impact in terms of how we were realigned, the sales force, our marketing activities. Our SG&A head count related to our European operations, which was really still in a transition mode.

We were able to nail that down in Q1 of '07. So, basically, it is kind of across the board, Bill, in terms of our ability to put some parameters around SG&A. And again, we saw that throughout 2007 and you're really seeing the benefit from the comparable to Q1 '07 prior to the effect.

Bill, let me comment. It was really across the board. First, the number that he provided, the 2.4 is a pro forma. So, it excludes the noncash portion of comp or the amortization of intangibles which is in SG&A. Actually, that also improves by another 200,000. The number he reported which is what we call pro forma SG&A improved by 2.4. And it is not only sales costs. We were incurring very significant costs in our European infrastructure.

We had -- we had items like -- we were incurring double the cost in some of our back office people. We incurred -- we were incurring professional fees that were part of the tax misappropriation, which happened at the end of '06. That also kind of went into that Q1 '07 number. So, it was a myriad of items across the board. But suffice it to say that we've tightened up SG&A.

We committed to tighten it up at the beginning of '07. We showed improvement throughout all of '07 and yes, when you look at it on a year-over-year basis, it is a pretty big improvement. We're pretty happy with it.

Ted, I'm even looking at kind of the run rate level you got to in the back half of '07 both on a GAAP basis and pro forma. And it is -- the improvement is pretty significant improvement just in the quarter or so. or so.

As Rob said, we expect the second quarter number to be approximately $14 million.

Which is pretty comparable to our pro forma number in Q2 of '07.

Ok. And that is primarily driven by the increased activities and events. And yes, I mean once we get beyond Q2, we would expect for that level of spend to not to vary too widely. I guess it could be impacted by increases in sales commissions.

We will clearly have some associate development events as we expand our all hands meetings in the third quarter. So we'll be investing in that area. Overall, you will see that overall improvement that we made in '07 retained in 2008. So, no, we expect to benefit from it.

That's a run rate number.

Now, if you -- again, just as Rob mentioned, make sure that you look at the recasted numbers for both cost of service and for SG&A that he included in the table -- in the P&L. Accompanying the press release and that will give you the recasted Q2 '07, Q3 '07 and Q4 '07 for both of those numbers, so you can look at the current run rate as compared to those numbers on a recasted basis and that will give you a pretty clear signal where things are going.

Any particular reason for the recast?

Well, as Rob mentioned, if he asked me where the policy came from, I remember when we first went public. We found out some of the other public companies, some of which actually are still around, by the way, two of the only ones that are still around. The other ones have all come and gone.

Right.

We understood that they were doing this reclass based on low utilization executives from cost of service to SG&A and we continued that all the way through '07. Rob kind of questioned why we thought that was actually -- why that made sense as we were actually having to book additional entries every time we closed our books. And the number would vary depending on whether somebody was slightly over 20 or slightly under 20. And we said no, first, it is not practical.

It is good to have the people dedicated to a P&L item. So that you can really track improvement and track head count changes instead of it being influenced by whether or not utilization of a single person influenced whether or not you took his total cost and moved it down or not. So, we think the change will allow us to have a cleaner look, a quicker close, and I think Rob's questioning whether it was appropriate.

In your customer concentration which increased a bit, anything you can say there as far as maybe the industry of the top customer or whether it is more of an REL customer?

It was not an REL customer. It continues to be, our best client ends up being complex, consumer and industrial companies that really have -- the more complex global service delivery models and really turn to us, appeared to turn to us on a more frequent basis. And at that level, I doubt that that level of single client concentration will exist in Q2.

We simply do not rely on any single client on a quarter-over-quarter basis anymore, even though we obviously transition large relationships and you have to do that as well as you can and have a little luck with it. But I like the fact that, top ten clients are driving what did you say? 29%.

29%.

When you can -- I would love for the number to be higher but when you look at top ten, only taking up 29% of your revenue, that means you have a diversified client base. At the same time, I'm pushing all of our guys hard to say our revenue per client is really low and that's our single biggest opportunity for growth.

So, I would love to see more of these large implementation or globalization engagements as well as the large total working capital engagements that we see that REL has on a more frequent basis. We still would love to see more of those be in our client base but revenue concentration is -- it is just not an issue for us. It is an opportunity.

Right. Now, I know that this is sort of part and parcel with the strategy you've implemented since the first part of last year and what I'm referring to is the slowing of the CV growth in executive advisory. If it were to stay mid single digit, does that work to your -- to the benefit of the model still or does that need to be, at least double digit?

Well, we clearly want it to be double digit. But it is clearly working to the benefit of the model. I mean part of the challenge that we have is that a sales exec getting the sales executive attention on our offerings that have a lower pricing. So, there's no doubt that we're balancing the incentives between wanting to grow our executive advisory base because we value it and know long-term it has such great prospects for us.

At the same time, we know that these individuals understand that a client can clearly buy one of our other offerings and spend millions in one pass. So, we continue to look at trying to strike that balance, clearly the changes we have made have favorably impacted our business model. We want to continue to grow our executive advisory client base, believe that it can.

But more -- most importantly for us, is having a business model where we can have this continued relationship with clients but also have a significant broader services relationship with that client, every two to three years. So, we know that is being unilaterally focused the way we were in '06 hurt our business model. We think we have it right now. But we know that as you're getting really good at something, you're always -- it is always going to be the expense of something else. Hopefully over time, we'll figure out exactly how to strike the perfect balance.

Ok. Oh, one thing it's symmetric. I don't think you guys put out. Maybe some color as you get -- as your productivity continues to pick up. That's turnover. Clearly, it's not an issue. But can you just talk to the trend in both voluntary in total turnover?

I think overall trends, it is lower on our tech group as it has been on a year-over-year basis. It is probably a little bit higher in our Hackett side and it has been lower on the REL side on a year-over-year basis. There's no doubt that as we're competing with large clients for significant opportunities and have direct sea level access, that our people are more attractive to anyone else trying to be a part of the process and compete for the business that we're competing for. So, we want to make sure we're doing everything we can to continue to attract and retain our people.

And we're going to work even harder at that, through the balance of the year. Having said that, our ability to attract people, people's desire to join us and the number of people who respond to any hiring request that we put out, just continues to improve. As our model has expanded, as our brand has expanded. Our ability to attract people has just continued to -- improve and expand along with it.

We want to do both. We want to attract the people and we want to keep those individuals who have made a significant impact on our business model. We know the ante is being raised for all of us.

Ok. Great quarter. Thanks, guys.

Thank you, Bill.

(OPERATOR INSTRUCTIONS) There are no further questions. Once again, we'll turn the call back over to Mr. Ted Fernandez.

Well let me thank everyone again for participating in our first quarter earnings call. We look forward to updating you again when we report the second quarter. Thanks again for participating.

Thank you.

Thank you for participating in today's conference call.