Hackett Group Inc (HCKT) 2010 Q1 法說會逐字稿

Good evening, and welcome to The Hackett Group first quarter earnings. Your lines have been placed on a listen only mode until the question-and-answer session. Please be advised that your conference is being recorded. Hosting tonight's call are Ted Fernandez, Chairman and CEO and Mr Rob Ramirez, Chief Financial Officer. Mr Ramirez, you may begin.

Good evening, everyone and thank you for joining us to discuss the Hackett Group's first quarter results. Speaking on the call today and here to and questions are Ted Fernandez, Chairman and CEO of The Hackett Group, and myself, Robert Ramirez, CFO. A press announcement was released over the wires at 4:05 PM Eastern Time. For a copy of the release, please visit our website at www.thehackettgroup.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 questions 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 offer to Ted.

Thank you, Rob and welcome, everyone, to The Hackett Group's first quarter earnings call. As we customarily do, I will start the call by providing some overview comments and highlights on the quarter. I will then turn it back over to Rob and ask him to comment on the detailed operating results, cash flow and also speak to guidance and outlook. Rob will then turn it back over to me. I will make some market related and strategic related comments, and then we will open it up for Q and A. Let me first start with the quarterly overview and highlights.

As expected, we experienced improved US demands across all of our practices, which resulted in strong, organic sequential growth. Correspondingly, we reported revenues of $46.7 million, which exceeded the high range of our guidance, and pro forma EPS of $0.05, which was at the high end of our guidance. More importantly, we entered Q2 with stronger momentum than we entered in Q1, which we believe will result in approximately 10% organic sequential growth from Q1 to Q2 and also bodes well for the balance of the year. Both the number and size of phase one opportunities have expanded, which we believe is a direct result of the strategic client relation relationships we have been developing through our executive advisory program, as well as the increased market awareness around our global implementation capabilities. Of special note was the performance of the Archstone strategy and operations and enterprise performance management team, which experienced organic sequential improvement consistent with other Hackett practices and exceeding our internal targets.

Also important was the improved performance of the Oracle EPM group, even though it is still burdened with the completion of the large technology project we covered in Q4, this team will be one of the reasons for the strong sequential momentum we expect in the second quarter. A key driver of this success emanates from the new go to market combination of the Archstone enterprise performance management transformation team and the Hackett high period team. It is clear that the investments we made last year in expanding our intellectual property through global service delivery model and broadening our resulting capability through the Archstone acquisition has allowed us to start 2010 with great momentum. We are also seeing new strategic opportunities develop that may further expand our sales channel and leverage our unique enterprise benchmarking and best practices intellectual capital. I will comment about these opportunities in more detail in my strategic overview later on.

It goes without saying that the new year brought much improved prospects for our business. Our target operating model is to get revenues of -- net revenues of $250 million with 20% EBITDA margin as quickly as possible. Our Q2 plan would clearly help put us back on that path. I will comment further on the market conditions and specific go to market initiatives, but let me first ask Rob to provide details on our operating results, cash flow and also comment on outlook. Rob?

Thank you, Ted and welcome everyone. I will cover the following topics during our call, an overview of our 2010 first quarter results, along with an overview of related key operating metrics, a breakdown of our 2010 first quarter revenue and an overview of our cash flow activities during the quarter. I will then conclude with a discussion on our financial outlook for the second quarter of 2010.

For purposes of this call, any references to Hackett Group will specifically exclude Hackett Technology Solutions. Correspondingly, I will comment separately regarding the financial results of The Hackett Group, Hackett Technology Solutions, and the total company. Please note that all references to gross revenues in my discussion represent net revenues plus reimbursable expenses. Additionally, references to pro forma results specifically include non-cash stock compensation expense and intangible asset amortization expense and assumes a normalized tax rate of 40%. This quarters pro forma results also exclude the impact of a non-cash acquisition earn out remeasurement gain. First, let me cover our quarterly results.

For the first quarter of 2010 total company gross revenues were approximately $46.7 million, an increase of 18%, and includes approximately $12 million attributable to Archstone. On a sequential basis, total company revenues were up organically by approximately 20%, which assumes normalized Archstone results for the fourth quarter of 2009. Total company international gross revenues, which are primarily based on where the contracting entity is domiciled, accounted for 19% of total company revenues in the first quarter of 2010 as compared to 22% in the first quarter of 2009.

Total company pro forma net income for the first quarter totaled $1.9 million or $0.05 per diluted share. Pro forma net income excludes non-cash acquisition earn out remeasurement gain of $943,000, non-cash stock compensation expense of $877,000, intangible asset amortization expense of $460,000, and assumes a normalized tax rate of 40%. Total company GAAP net income for the first quarter totaled $2.7 million or $0.07 per diluted share.

Total company pro forma cost of sales, excluding reimbursable expenses, and stock compensation expense, is up on a year over year basis of approximately $4.4 million, primarily as a result of the Archstone acquisition. Total company pro forma gross margin, which excludes non-cash stock compensation expense was 37.6% of net revenues in the first quarter of 2010 as compared to 39.7% in the first quarter of 2009. This was primarily driven by lower Archstone gross margins and the impact of the fixed price technology project discussed last quarter, which is expected to be completed in Q2. Lower Archstone margins are more than offset by lower selling costs in SG&A.

Pro forma SG&A was approximately $12.5 million or 30% of net revenues in the first quarter of 2010, as compared to $12.6 million or 35% of net revenues in the first quarter of 2009. This decrease as a percentage of net revenues is primarily due to lower Archstone selling expenses, and the unfavorable impact of foreign currency fluctuations that occurred in 2009. As of the end of the first quarter of 2010, the Company had approximately $52 million and $17 million of income tax loss carry-forwards remaining in the US and in foreign tax jurisdictions respectively. Now moving to additional metrics relating to first quarter results.

Gross revenues for the Hackett Group, which excludes Technology Solutions, were $36.6 million, a year over year increase of 34% and represented 78% of total company revenues as compared to 69% in the previous year. Hackett Group annualized gross revenue for professional was $369,000 in the first quarter of 2010, as compared to $357,000 in the comparable period of 2009. Hackett Group gross margins on net revenues was 42.5% in the first quarter of 2010, as compared to 46.2% in the first quarter of 2009, which, again, is primarily attributable to Archstone.

Our Technology Solutions group gross revenue totaled $10.1 million, a year over year decrease of 17%. For the Technology Solutions group our hourly gross realized billing rate was $107 for the first quarter of 2010. As discussed in the fourth quarter, our hourly billing rates have been negatively impacted by large fixed price contract. We expect that the consultant rate per hour will normalize to historical levels in the third quarter of 2010. Consultant utilization was 77% for the first quarter of 2010, as compared to 73% in the previous quarter, primarily due to higher revenues and the increase of available billable days in the first quarter.

Total company consultant headcount was 601 at the end of the first quarter of 2010, as compared to 614 in the previous quarter. This decrease was primarily attributable to headcount reductions at the beginning of the year related to our Archstone acquisition restructuring efforts. We expect net headcount to increase by approximately 40 in the second quarter as we have he escalated hiring activities across all groups commensurate with expected revenue increases. Now moving on to our cash balances.

The Company's cash balances were $16.6 million at the end of the first quarter of 2010, as compared to $16.5 million at the end of the fourth quarter of 2009. Cash increase in the first quarter was primarily due to decreases in DSO, which was partially offset by cash outlays for acquisition-related restructuring, which totaled $3 million. Our DSO at the end of the first quarter of 2010 was 63 days, as compared to 68 days at the end of the fourth quarter. This decrease is primarily due to improvements in Archstone DSO achieved during the quarter. Archstone has traditionally run higher DSOs, however, as we migrate Archstone to our contracting and billing practices on new client engagements, we continue to expect our consolidated DSO to improve throughout fiscal 2010. We continue to target DSO levels below 50 days as our overall company goal.

During the first quarter of 2010, cash was utilized to repurchase 33,000 shares of the Company's common stock at an average price of $2.51 for a total cost of $83,000. Subsequent to the end of the first quarter, an additional 274,000 shares have been purchased at an average price of $2.93 for a total cost of $803,000. From a year-to-date perspective, the Company has repurchased approximately 307,000 shares at an average price of $2.89 for a total cost of approximately $886,000 as of today's date. Approximately $4.7 million remains available under the Company's share repurchase authorization, again, as of today's date. Now turning to our guidance for the second quarter of 2010.

We expect total company gross revenues for the second quarter of 2010 to be in the range of $50 million to $52 million, resulting in a sequential increase of approximately 10%. We expect total company gross revenues, excluding Archstone, to be up approximately 15% on a year over year basis. We expect our pro forma diluted earnings per share in the second quarter of 2010 to be in the range of $0.06 to $0.08. Our pro forma guidance excludes amortization expense, non-cash acquisition earn out remeasurement gains, non-cash stock compensation expense, and includes a normalized tax rate of 40%. The acquisition earn out gain is a result of the fluctuation of the Company's share price on the stock related earn out liability from the Archstone acquisition. On May 11 the Company settled the earn out liability, which will result in an additional non-cash acquisition related gain in the second quarter of 2010.

Sequentially, we expect pro forma gross margins to improve, as we expect the second quarter to benefit from higher revenues and seasonal reductions in payroll related taxes and vacation accruals, partially offset by higher costs relating to increased headcount, increases I discussed earlier, and higher incentive compensation related accruals. As a result of our revenue guidance, we expect pro forma gross margin to be approximately 40% to 42% in the second quarter.

We expect pro forma SG&A for the second quarter to be approximately $13.5 million, or up sequentially by approximately $1 million as a result of increased variable SG&A expenses relating to selling, recruiting, and incentive compensation costs commensurate with the increased Company revenue performance. We expect pro forma EBITDA on net revenues to be approximately 12%. We expect our cash balances, excluding the impact of any stock buyback activities, to be up on a sequential basis consistent with our earnings guidance.

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

Thank you, Rob. Looking forward, even though volatility is expected, an economic recovery is underway. Our clients are reaching out to us for assistance, and this has allowed us to develop strong momentum and speaks favorably about our prospects for the year. Our clients understand the need to plan and to have the right information in a timely manner that allows them to deal with the expected market volatility. It also means they must design and implement operating platforms, or as we refer to them service delivery models, that allow them to quickly adjust to market changes regardless of direction. We believe we can play a very important role in helping them achieve this.

At a macroeconomic level, we continue to expect to see gradual improvement in the US and international markets throughout the year. We have clearly noticed this improved client behavior reflected in our North American demand. Relative to Europe, while we see the beginnings of increased activity, we are now planning on increased revenues for this region for the remainder of the year. However, the strength of the US demand has allowed us and should continue to allow us to effectively leverage our European resources during the year. This allows us to fully achieve our operating goals while giving the European market time to recover at a slightly slower pace. With that demand overview as the backdrop, let me now comment on some of the strategic priorities with emphasis on revenue growth.

Long term we understand our largest opportunity to grow will come by expanding our special market permission from being the premier global benchmarking acquisition to our further expanded global implementation capabilities. We continue to invest in making sure that our clients understand that we are every bit as good at helping them implement the outcome as we are at identifying the opportunity to improve, using our strongly branded benchmarking capabilities. During the quarter we won several large phase one opportunities against strong competition because we were viewed as the best firm to deliver actionable results based on the leverage of our unique intellectual property.

Long term, we also believe that we should be able to ascribe an increasing percentage of our total annual revenues to clients who are continuously engaged with us to our executive advisory programs. In Q1 we saw executive advisory members increase to 642 across 215 clients, both up slightly from last quarter, and the first sequential increase in seven quarters. In Q1 over 50% of our total Hackett, this is excluding Archstone and our Technology Solutions group, came from sales of approximately 15% of our advisory base. Without a doubt the leverage this client base is bringing us continues to demonstrate significant opportunity for us.

Given our increased investment in our advisory dedicated channel, we now expect or 2010 executive advisory sales to grow sufficiently to drive 15% or more growth in this area in 2011. Just to give you some idea of the advisory touch points, in Q1 we responded to over 1,000 inquiries, hosted 28 webcasts, and held nearly 100 briefings for our advisory client base. These strategic touch points are a very important in part of expanding our market position and staying top of the line with our client base as we help them address emerging issues.

Another significant growth opportunity for our organization comes from the cross-selling opportunity amongst our different practices. Cross-sell leveraged to and from our REL brand and offering is now noticeable, but significant room for improvement still exists. A client's ability to focus on cash optimization when it looks to reduce costs and improve service level is simply very logical. Additionally the cross leverage that existed to and from Archstone from the strategy and operations in enterprise performance management groups is even broader than any other we have introduced to the organization. Our ability to use their entry point into strategic products in the supply chain and procurement areas in both the Hackett and REL offering is exponential in scale.

To that point we'll continue to invest in training to ensure that our market facing associates continue broaden their knowledge about our expanded offerings and allow them to improve their skills at presenting our key go to market messages and engaging our clients as strategically as possible. This is more important than ever given our expanded Archstone capabilities.

New opportunities are also emerging from our strategic alliances. To this point we have generally used our strategic alliance strategy to extend our reach to geographies where we do not have plans to expand into in the near future. We've used this approach to extend our region to the Nordics, Japan and South Africa. Since last summer we've been evaluating strategic relationships with very large strategic consultancies. Based on these efforts, we now plan to launch a pilot program in Q2 with a global strategic consultancy, which will last through the balance of the year. This would provide for the joint sale and delivery of our respective offerings and could represent a large new channel for us.

Lastly, let me comment on potential acquisitions. Although we will be busy in 2010 ensuring we achieve the targeted benefits from the acquisition of Archstone Consulting, we'll also continue to look for acquisitions that will strongly leverage our existing intellectual capital to drive and accelerate our growth.

In summary, we're excited about the IP centric business strategy we put in place several years ago. Regardless of the 2009 impact, we are certain the opportunity for our organization, as I've always said, remains boundless. Our powerful brand, proprietary and unmatched intellectual capital, and a terrific group of talented associates with a strong balance sheet, with ample cash balances with no debt make that -- put that in place. Let me close by thanking our associates for their tireless efforts, and, as always, urge them to stay highly focused on our clients, our people, and the many opportunities available to our organization in 2010. Those are my comments. Let me now just turn it over to the moderator and open it up for Q&A.

Thank you. We'll now begin the question and and session. (Operator Instructions) One moment please for the first question. And our first question comes from George Sutton. Your line is open.

Hi. Congrats on the great results.

Thank you, George.

I wanted to better understand these several large phase one opportunities that you mentioned, Ted, and look at them in the context of having the broadened strategy with Archstone and also REL with your core offerings. How much of those opportunities were won because of this broadened strategy or was that more in the future in terms of opportunities?

No. I can actually think of three of significant opportunities that first -- two key issues. One, these were clients who had benchmarked with us in the past, but had become executive advisory members. They had very significant initiatives where they considered all of the large organizations that you think they made for something of this scale, especially given their size.

These were engagements that were awarded to us. And the three opportunities that I can think of we have introduced some element of either Archstone or REL into those engagements. The beauty is that our people are simply becoming more comfortable introducing the skills, understanding who to call, the timing of when to do so, and it clearly is noticeable to us. I think the other aspect of it is that the Archstone group is just a highly collaborative group of people. And we've seen them engage with both REL and with us, let's just say a lot sooner than we were able to do so with the REL group.

We've talked for more than a year about companies recognizing they would need to make some more thoughtful changes to their business models, and, obviously in the midst the downturn reacted very quickly and not necessarily logically to those changes. Is this simply pent up demand coming from customers who are now addressing these things more thoughtfully?

We see it as pent up demand, and we also see it with some increased urgency because I think they realize that volatility remains. I think they're not taking revenue growth for granted, even though most of them are seeing improved economic activity. They're assuming revenue will become harder to come by. They know, as you said, that the changes they made in 2009 were not sustainable. We think those are the primary reasons we've seen the level of activity that we've experienced thus far in the year.

Okay. And, Rob, could you address the gross margins in 2010 in terms of impact you did see from this fixed price technology project and how much more we say see in Q2? I think you mentioned there were some additional wins on the implementation side in Q2. I just wanted to make sure those weren't fixed price projects.

No, no. The fixed price project that we discussed in Q4, as we said in Q4 and played out, impacted us by about $0.01 in Q1 in terms of being unable to deploy those resources on other engagements where they would be earning at a more normalized rate. We have had wins, but we're not signing any contracts to the like of that one that was signed in the previous year.

Okay. And, lastly, if I could just ask Ted with respect to the pilot program, you know I'm going to ask you about this, with the history that we have had with Accenture and that program, how would this compare to that program?

Well, it's interesting, the Accenture program was actually very successful. We wanted better economics, and that's what lead to that relationship changing. Clearly we're being much more thoughtful and careful about it. I think we've learned quite a bit on how it came as a result of that relationship, and that is why we're going through a pilot phase and doing this through the balance of the year before we comment on its prospects. But obviously, whenever you're doing business with an organization that has scale, who values your IP, who may provide a new level of entry points or vice versa by teaming with them, we think it would be substantial. We'll simply comment on it for now because we've got several people involved and know that eventually is will become public here over the next several months, but we'll be tempered about any expectations beyond that.

Thank you.

Let me follow up on the question you asked Rob. To give you an idea on the margin impact of the tech group, those rates are down about one third. Our tech rates are down about one third, and the primary reason that those rates are down by about one third from historical levels is because of the fact that we have a large group of people working on that technology engagement without any margin. So the margin impact, although I can't tell you off the top of my head what it is, it is substantial. What we do know is that we estimate the impact in the quarter.

It was negative unfavorable $0.01 impact in Q1, and we believe it will be an unfavorable $0.005 impact in Q2, and any carry-over into Q3, if any, will be marginal. We expect to have all of that behind us very shortly.

And our next question comes from Mickey Schleien. Your line is open.

Good afternoon, Ted. Ted, I wanted to follow up on the Archstone acquisition. Could you tell us how the integration of that entity has gone in terms of retention of employees, extraction of synergies, if any, any movement toward branding or rebranding, and cross-selling opportunities between the two entities?

Well, at the highest level I would say that we are exceeding all expectations that we established when we close the transaction. On the retention of personnel, I think that we have done an outstanding job. The individuals -- we have lost some individuals, but it has had no impact on our ability to grow that business and leverage it the way we thought, and, more importantly, that group is aggressively hiring, and, in fact, we believe we'll have great success in reaching out to people that were previously with the organization who we believe are going to decide to rejoin the organizations, because obviously the prospect and circumstances for the team are significantly improved.

The back office was fully integrated as of the end of the year. So you're seeing some of those SG&A synergies come through and the 500 basis point improvement in SG&A in Q1, which is very substantial, and a majority of that comes from the leverage of the back office integration. And then overall, culturally the teaming, the collaboration amongst the groups for an organization that's been with us less than six months, I would consider it exceptional. So I would say that we're just delighted to have them on board. And, as I mentioned on my call, not only did they grow nicely sequentially consistent with the other practices, they are exceeding our internal targets so far in the year. So very successful thus far.

And are you branding it still just as Archstone or is there some linkage with Hackett in terms of presentation to the client base?

Well, there were two groups that made up the Archstone team, the Enterprise Performance Management group, that group has now folded under the Hackett brand because that -- because the offering that that group sells are so strongly tied to the CFO where the Hackett brand is so powerful that that move was made immediately.

The strategy and operation groups that holds, which is a strongly branded capability, especially in strategy in ops, in some of the verticals like consumer goods, manufacturing, pharmaceuticals where Archstone had a pretty significant presence, we were going to retain that Archstone consulting brand until we would reach a conclusion that moving to the Hackett brand would enhance to go to market. We know that we couldn't do that today. Hackett does not have that permission in the areas where they offer those skills today. Whether or not that will happen a couple of years down the road, I don't know, but what we won't do is disrupt any of the market success we're having today until we're absolutely certain that we would have some ability to enhance it beyond the current capabilities. So no definitive transition for that brand is currently planned.

Thanks, Ted.

(Operator Instructions) And our next question comes from Bill Sutherland. Your line is open.

Hi, Ted and Rob.

Hi, Bill.

What -- I guess, Ted, a little more color on the tech group trends. You mentioned I guess is the driver Oracle pretty much completely?

No. Actually, the SAP-- the performance of our SAP group was strong, but the strong sequential improvement from Q4 to Q1 and Q1 to Q2 is coming from the resurgence of our Oracle EPM group, and, to a lesser extent, our Oracle Enterprise group. So it is that the strong sequential growth is primarily Oracle-driven, but our SAP group is one of the strongest performing groups for us in 2009, and continues to perform well in Q1 and into Q2.

So the EPM is the big eye piece, correct?

That's correct. That's the piece that is tightly integrated with the transformation capabilities that came on board with the Archstone group.

And so the pipeline, is it coming more from Archstone contacts or Oracle feeds or both?

Oh, no, no. The pipeline activity continues to be what I call historic. The -- we're doing everything to introduce the other offerings to one another and do that in some natural and logical way, but no, the current activity is emanating from the strong permission that we have from our strong Hyperion or Oracle EPM capabilities, and the strong relationship that the Archstone, which are now under the Hackett brand EPM group, have.

So they're bringing those together, sharing those leads, and, yes, that's probably where we're seeing the greatest collaboration in cross-selling to date. And it's because it's so natural and logical to make sure those two teams go to market together whenever possible and a part, let's just say should not be common going forward.

Is pricing meaningful now as far as a lever for growth?

No, not yet. This is really coming from volume. There is no doubt that we've been -- clients have been more price sensitive and have leveraged as they come back into the market, even with large scale projects, but we see that's normalizing, I think before the end of the year. It's just a function of the activities that we're seeing. But no, the activity we're seeing comes from just increased hours, increased effort. We're probably not -- we're probably operating at 10% or so below the pricing, let's just say that we were able to capture in 2008.

Did you comment, Ted, on the conversion -- the direction of conversion of phase one work to full implementation? Has that changed?

Well, what we're seeing, Bill, is that the clients are clearly giving us a chance to participate and bid in larger engagements than, let's say, we would have two years ago. And that is happening with increased frequency. And I think it's a combination of the -- our model just -- our implementation capabilities were just taking a little bit -- we're doing a better job making sure the clients understand what they are through any IP engagement that takes place, somebody engages us to a benchmark or advisory, that the implementation capabilities are introduced front and center, and they make sure that it is a disproportionate amount of our total revenue today and, therefore, capability.

So I would say it's some go to market changes that we worked on throughout 2007 and 2008 continuing to kick in, and then we're just simply getting a little bit better at executing, and some of the clients are recognizing the fact we're dramatically more than a benchmarking organization. It's a combination of all of the above.

Right. Right. And I know that you set up the dedicated sales force for the executive advisory, obviously getting some traction. Are they going to be expanded or what's the plan?

Yes. We continue to invest. Right now we're just trying to get them up to some, I'd call it, sales effectiveness level. So we're really just looking to get the returns from the investment that we've made. But we're committed to growing that executive advisory business because we realize that it's giving us a very strategic and trusted relationship with clients, which is showing up in our broader sales in the non-advisory area. So it's an area that -- if you -- it's almost like going back that we've decided to reinvest like we were trying to look to doing in 2006, but we're doing it through separate channels so that we don't get some of the channel confusion that's optimized opportunities for a couple of years ago.

And then last, Rob, just real quick on the remeasurement gains to be recognized in Q2, did you ball park that for us?

No, I didn't quantify that. We're going through the detailed accounting now. In terms of how much that will actually be and the close date and all of that, but I did not ball park it, no.

Okay. Thanks.

Bill, just so you know, we will exclude that from Q2 pro forma, and it's not included in our Q2 guidance.

Right. I understand. Thanks.

It's not included in our Q1 pro forma as well.

Obviously it's not included in the Q1 pro forma either. Correct.

And our last call comes from Morris Ajzenman. Your line is open.

Hi.

Hi, Morris.

Most of my questions have been answered, but just one question left here. You talked about organic growth fourth quarter into the first quarter being up 20%, and then you touched on Europe seeing early signs, but not seeing much growth. Is it fair to say that Europe organically revenues were flat from the fourth quarter into the first quarter?

I don't have that in front of me. The answer is that probably so. And we're not planning on much expansion. Let's just say the way we measure it, which is the activity in our European team, knows those revenues were up, but I think the most important comment is that those revenues were up because of the large US global engagements that are utilizing those resources in a very significant way.

So no, they're -- revenue follows the person with us, so the way we do management reporting those revenues would be reflected up. But if you looked and looked under the underlying demand, you'd say where is that coming from? That's coming from very strong North American demand.

National organizations are utilizing a lot of those resources that were sold out of the US.

Okay. And I missed the number earlier. I think was it 19% you touched on earlier versus 22%, was that international -- was that European?

Yes, that -- well, the bulk of our international revenues is European, Morris.

Okay, 19%. So just the mathematics then if you have sequentially 20% organically, then US is up close to 25% outside of Europe.

Well, since it's driving there that demand, yes. If you were following pure pipeline activity, yes, yes, that would be correct. You would say that it would be greater than the amount we reported, because, yes, it's not originating at the same level from the European markets today.

And traditionally, again, nothing always holds, say, trends, but Europe follows two, three quarters after the US both on the downside and the upside?

That is correct.

And are we finishing the first quarter of improvement, second quarter from your perspective?

Well, we really -- we believe that we should see increased activity in the second half of the year. I will say that given some of the volatility we're seeing in that marketplace today, just even over the last week, what we've made sure is to make sure internally we're not relying on that demand coming in for us to achieve or exceed our annual target. So that's probably the most important comment. If Europe starts contributing in a meaningful way, that will be all upside to us.

Thank you.

And our next question comes from George Sutton. Your line is open.

Hi. Just a couple of follow ups, you mentioned you're hoping to increase our net headcount by 40 in the second quarter. Can you give us a sense of what the hiring environment is like? Has it tightened up much yet or are you still able to find people as needed?

We've never had a problem attracting people, George, so I would say it -- we're going to be able to hire the talent that we need. I think that the talent is always tight around highly skilled or highly impactful individuals, but overall talent has always been available and remains available to us. So we don't expect that to be a problem in some general way.

Okay. And then, lastly, can you just give us thoughts on a sustainable growth rate that you look for in the next three to five years not really looking at the cyclical nature of the business, just the secular trends that you see if the business you've created?

I would say after we capture what I consider to be our normalized base, so we kind of look back to 2008, how do we get back to 2008 quickly. We believe the overall business model should grow at north of 15%, and we believe that that will allow -- that should allow a bottom-line growth of at least 20%, but perhaps as high as 25% operating income or EPS growth. But first we need to recapture some of the opportunities we've lost before we start growing at those more normalized rates. Obviously the opportunity to us given the sequential growth that we just reported are obviously stronger right now.

Very good.

Thank you, George.

And I show no further questions at this time. I'd like to turn the call back over to Ted Fernandez.

Thank you, Operator. Let me thank everyone for participating in our first quarter earnings call. We look forward to updating you again when we report our second quarter. Thank you again for participating.

Thank you for participating in today's conference call. You may disconnect at this time.