Hackett Group Inc (HCKT) 2012 Q3 法說會逐字稿

Welcome to the Hackett Group third-quarter earnings call. Your lines have been placed on a listen-only mode until the question-and-answer session. Please be advised that the conference is being recorded.

Hosting tonight's call are Mr. Ted Fernandez, Chairman and CEO, and Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Good afternoon, everyone, and thank you for joining us to discuss the Hackett Group's third-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. Our press announcement was released over the wires at 4.05 pm Eastern Standard Time. For a copy of the release, please visit our website at www.thehackettgroup.com. We will also place any additional financial or statistical data discussed on this call that is not contained in the release on the investor relations page of our website.

Before we begin, I would like to remind you that in the following comments and in the question-and-answer session, we will be making statements about expected 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 files.

At this point I would like to turn it over to Ted.

Thank you, Rob, and welcome, everyone, to the Hackett Group's third-quarter earnings call. As we customarily do, I will start the call by providing some overview and highlights of the quarter. I will then turn it back over to Rob and ask him to comment on operating results, cash flow and also on outlook. I will then -- he will then turn it back over to me to make some comments relative to market and some of our strategic priorities, and then we will move on to Q&A.

So let me start with the third-quarter highlights. We were pleased to report revenues of $58.6 million and pro forma earnings per share of $0.11, both which were at the high end of our guidance. As expected we had solid operating results in spite of the volatility in Europe demand that we experienced as we entered the quarter along with the foreign exchange headwinds that will continue through the balance of the year. Relative to Europe, we are now expecting the region to resume its momentum into Q4, so we are glad to see that.

Our results continue to emanate from a more price sensitive but solid US market activity. Servicing our advisory client base more broadly, and strong performance from our earnings -- enterprise performance management and SAP groups. Our best practice research and related marketing efforts encourage our clients to strongly focus on operating excellence and broader enterprise management information. This enables them to quickly respond to the volatility and complexity of the current global business environment and has allowed us to remain top of mind as clients work harder to increase profitability in this environment.

On the balance sheet side, our strong cash flow allowed us to pay down $4 million on our new credit facility during the quarter and an additional $3 million subsequent to quarter end. We plan to aggressively pay down the facility in order to explore acquisitions and other potential investments should they arise. On the investment front, we continue to invest in our Associates with significant knowledge sharing training events in both the US as well as in Europe; in our intellectual property through our Hackett Performance Exchange Initiative; and in our brands, or published research that emanates from our benchmarking and performance study insight. I will comment about these opportunities in more detail in my strategic overview section of our call.

I will also comment further on market conditions and specific go-to-market initiatives, but let me first ask Rob to provide details on our operating results, cash flow as well as outlook. Rob?

Thank you, Ted, and welcome, everyone. I will cover the following topics during our call -- an overview of our 2012 third-quarter results, along with an overview of related key operating statistics; an over of our cash flow activities during the quarter; and I will then conclude with a discussion on our financial outlook for the fourth quarter of 2012. For purposes of this call, any references to Hackett Group will specifically exclude ERP solutions. Correspondingly, I will comment separately regarding the financial results of the Hackett Group, ERP solutions and the total Company. Please note that all references to gross revenues in my discussion represent net revenue plus reimbursable expenses. Additionally, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, restructuring benefit and assumes a normalized tax rate of 40%. For the third quarter of 2012, total Company gross revenues were approximately $58.6 million and at the high end of our third-quarter guidance. This represents a year-over-year increase of 1% or 3% when adjusting for constant currency.

As I mentioned on our second-quarter call, the third quarter, on a sequential basis, is seasonably impacted by the timing of the US holiday, as well as the normal increase in vacation time taken in both the US and in Europe, which unfavorably impacted available billing days on a sequential basis by approximately 6%. Additionally, we mentioned that our European revenues would be down meaningfully on a sequential basis. European revenues were down 18% on a sequential basis. Correspondingly, total Company international gross revenues accounted for 19% of total Company revenues in the third quarter of 2012, or 21% adjusting for constant currency, as compared to 24% in the third quarter of 2011. Gross revenues for the Hackett Group, which excludes ERP solutions, were approximately $45.4 million in the third quarter of 2012 representing a year-over-year decrease of 3% or a decrease of 1% adjusting for constant currency, reflecting the third quarter decline in European revenue.

Hackett group annualized gross revenue per professional was $338,000 in the third-quarter of 2012, as compared to $366,000 in the third-quarter of 2011 and $379,000 in the previous quarter. Our ERP Solutions Group gross revenue totalled $13.2 million, a year-over-year increase of 20% driven by strong performance of our SAP Group. ERP Solutions hourly gross realized billing rate per hour was $146 in the third quarter of 2012, as compared to $134 in the third quarter of 2011. This includes the impact of our offshore resources which approximate nearly 40% of our ERP implementation resources. ERP Solutions consultant utilization was 76% for the third quarter 2012, as compared to 74% in the third quarter of 2011. Total Company pro forma cost of sales, excluding reimbursable expenses and stock compensation expense, totaled $32.7 million or 62.6% of net revenues as compared to $32 million or 62% of net revenues in the previous year. Total Company consultant head count was 756 at the end of the third quarter of 2012, as compared to 749 in the previous quarter and 746 at the end of the third quarter of 2011. The sequential and year-over-year increase was primarily attributable to increased hiring activities in our EPM and SAP groups, commensurate with market demand.

Total Company pro forma gross margin was 37.4% of net revenues in the third quarter of 2012, as compared to 38% in the third quarter of 2011. Hackett Group pro forma gross margins on net revenues was 35% in the third quarter of 2012, as compared to 40% in the third quarter of 2011 due to excess capacity which have been addressed. ERP Solutions pro forma gross margins on net revenues was 43% in the third quarter of 2012, as compared to 32% in the previous year due to strong results from our SAP group. Pro forma SG&A was $13.8 million, but 26.4% of net revenues in the third quarter of 2012, as compared to $13.6 million or 26.4% of net revenues in the third quarter of 2011. Interest expense on borrowings under our credit facility was $196,000 in the quarter, down $51,000 from the previous quarter as a result of debt pay downs. There was no interest expense in the prior fiscal year as the indebtedness was incurred in conjunction with our tender offer in late March of this year. Total Company pro forma net income for the third quarter of 2012 totaled $3.3 million or $0.11 per diluted share and was at the high end of our third quarter's guidance.

This performance compares to pro forma net income of $3.6 million or $0.09 per diluted share in the third quarter of 2011. As expected, third-quarter 2012 results included unfavorable $0.01 impact due to our development and charter launch rollout of HPE. This is an incremental $0.005 impact when compared to the previous year. Total Company pro forma net income for the third quarter of 2012 excludes non-cash stock compensation expense of $1.4 million, intangible asset amortization expense of $137,000, restructuring benefit of $319,000 and assumes a normalized tax rate of 40% or $2.2 million. Pro forma EBITDA on net revenue in the third quarter of 2012 was $6.3 million or 12% net revenues, as compared to $6.5 million or 12.6% of net revenues th the third quarter of 2011. Total Company GAAP net income for the third quarter of 2012 totaled $2.6 million or $0.08 per diluted share. This compares to $4.3 million or $0.10 per diluted share in the third quarter of 2011. As I previously discussed, we released the remaining balance of our US federal valuation allowance in the second quarter of 2012.

As a result, the Company's tax expense for the quarter was approximately $1.8 million, as compared to $176,000 in the previous year. As previously stated, the GAAP book tax provision effective rate should approximate our current pro forma rate of 40% as we move forward. At the end of the third quarter of 2012, the Company had approximately $34 million and $13 million of income tax loss carry forwards remaining in the US and in foreign tax jurisdictions respectively. As a result, for tax purposes, we will continue to have the ability to offset most of our US and international tax liabilities. The Company's cash balances were $15.2 million at the end of the third quarter of 2012, as compared to $14.5 million at the end of second quarter of 2012. This cash increase in the third quarter was primarily attributable to net cash generated from operations, offset by debt payments. Net cash generated from operating activities in the third quarter of 2012 was $4.9 million, which was primarily attributable to net income adjusted for non-cash items and offset by the timing of vendor payments and US payroll cycles.

During the third quarter of 2012, the Company repaid $4 million of its existing credit facility. At the end of the third quarter, the Company had $28 million of borrowings outstanding. Subsequent to the end of the third quarter, the Company paid down an additional $3 million on the outstanding debt bringing the balance as of today to $25 million. Capital expenditures for the quarter were $461,000, primarily related to the development of the Hackett Performance Exchange. Total capital expenditures for the fiscal year are estimated at approximately $3 million, with approximately $2 million attributable to HPE and Benchmark related investments. Accounts receivable decreased by $596,000 from the second quarter. Our DSO, or days sales outstanding, at the end of third quarter of 2012, was 57 days as compared to 55 days at the end of the second quarter of 2012 and 60 days at the end of third quarter of the prior year. Before I move to guidance for the fourth quarter of 2012, I would like to remind everyone of the seasonality of our business. Specifically, the increased holiday and vacation time that is taken in the fourth quarter will decreases our available billing days by approximately 10% when compared to the third quarter.

Given that, we expect total Company gross revenues for the fourth quarter of 2012 to be in the range of $54 million to $56 million. We expect Hackett Group gross revenues to be flat both sequentially and on a year-over-year basis. We expect ERP Solutions' gross revenues to be down sequentially but up on a year-over-year basis. Relative to a pro forma diluted earnings per share, we expect the unfavorable impact of decreased available billing days to be partially offset by the corresponding utilization of vacation accruals and lower US payroll taxes resulting from reaching FICA limits. As such, we expect our pro forma diluted earnings per share in the fourth quarter of 2012, to be in the range of $0.09 to $0.11 per diluted share. Our pro forma guidance excludes amortization expense, non-cash stock compensation expense and includes a normalized tax rate of 40%. In addition, this guidance includes the negative impact of approximately $0.01 due to client disruptions as a result of Hurricane Sandy. Additionally, Q4 2012 continues to include costs relating to our investments in Hackett Performance Exchange of approximately $0.01, or an incremental $0.005 when compared to the fourth quarter of 2011.

Sequentially, we expect pro forma gross margins in the fourth quarter to benefit from the seasonal reductions in US payroll related taxes resulting from reaching FICA limits and the utilization of vacation accruals offset by decreasing revenues due to a decrease in available days. As a result of our revenue guidance, we expect pro forma gross margin on net revenue to be approximately 36.5% to 38.5% in the fourth quarter. We expect pro forma SG&A for the fourth quarter to be approximately $13.1 million or down approximately $700,000 on a sequential basis. We expect interest expense associated with borrowings under our credit facility to be approximately $170,000. We expect pro forma EBITDA on net revenues to be in the range of 11% to 13%. We expect our cash balances, excluding the impact of debt repayments, to be up on a sequential basis commensurate with 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. Looking forward, consistent with reported global GDP, economic recovery continues to be volatile. Related demand continues to be good but also impacted by the same volatility. We expect sovereign debt and deficit related issues to continue to introduce uncertainty into our clients' demand environment until a clear long-term solution is implemented. Our plan is to make the necessary operating changes that will allow us to continue to improve our profitability and cash flow under these circumstances. In the US, we continue to see solid activity, but clients are being more thoughtful and also price-sensitive. As I mentioned earlier, we expect our European growth to resume in Q4, and, although we also believe this should continue into 2013, we also expect volatility to be there as well. With that demand overview as backdrop, let me now comment on some of our strategic priorities.

As I mention each quarter, we continue to work hard to innovate new ways to develop continuous relationships that leverage our intellectual property, as well as create an opportunity to serve clients more broadly. The goal is to use our unique intellectual capital to establish strategic relationships with our clients and to expand that entry point by introducing our business transformation capabilities. This strategy would allow us to increase our client base as well as increase revenue per client. The best example of this strategy has been and continues to be the leverage we are experiencing from our executive advisory client base. In 2011, we introduced our first two SAP and Oracle -based automated dashboard offerings of our new Hackett Performance Exchange with very positive feedback. Our initial marketing campaign included an invitation to become a charter launch member of our new Exchange which provided the users with access to our dashboard during a free trial period. Our objective was to give us an opportunity to test our offering with a large global client base that would allow us a chance to refine our offering and to further build our proprietary Benchmark database.

We continue to work with over 30 global companies to test and enhance our HPE offering, as we call it. Their feedback has resulted in several key recommendations that we believe will significantly enhance the value of our offering. Our goal is to complete most of these enhancements in the first half of next year. The enhancements will include the completion of our first version of our Account-to-Report module and will result in a new dashboard that will incorporate our Order-to-Cash, Procure-to-Pay and the Account-to-Report module in a new CFO Ops dashboard. Additionally, we will develop functionality that will allow clients to complete and upload our proprietary cost and [FDE] data of our existing functional Benchmarks. This will significantly enhance our HPE offering and allows us to build a bridge to additional analysis as clients' circumstances dictate. We believe these enhancements will allow these clients to either get a fully automatic benchmark with a bridge to additional cost and [FDE] analysis as well as to use the dashboard to monitor their ongoing performance.

These enhancements will give us a number of ways to position, and sell our Hackett Performance Exchange offerings. Although we continue to sign up clients for our free trial program, we now believe that the best current indication of progress is the number of members who are testing our offering, contributing to our database and providing feedback. After we complete our new enhancements, our ability to transition current users to a paid relationship will provide the most meaningful indication of progress. Given our new timeline, we expect this assessment to take place in the second half of 2013. As I mentioned last quarter, this is an ambitious new offering but, if successful, it could help enhance our business model by creating a powerful and possibly continuous relationship with our clients. And, although there is much to learn about their new offering, we believe it could represent a new way to monitor and benchmark a client's performance, which could result in a new revenue stream and a significant increase in data capture as well as operating insight. We also believe that this type of relationship could help our consulting revenue grow as well. We believe that the Hackett Performance Exchange builds on our strategic desire to expand our unique brand permission and continuous executive advisory relationship leverage.

Speaking of continuous client relationships, our long goal continues to be to ascribe an increasing percentage of our total annual revenues to clients who are continuously engaged with us through our executive advisory program and eventually with our Hackett Performance Exchange. At the end of the third quarter, our executive advisory members totaled 816 across 240 clients. Evidence of strategic engagement comes from the level of inquiries we field from these clients, which are up 17% on a year-to-date basis. More importantly, over 45% of our Hackett third quarter sales came from our advisory client base continuing to show its strong relationship leverage. Lastly, although we believe we have the client base, offerings and market coverage to grow our business, we continue to look for acquisitions and strategic alliances to add scope, scale and capability that can leverage our brand and existing intellectual capital to drive and accelerate our growth.

In summary, we are pleased with our solid quarterly results, and, even though we experienced higher than expected headwinds from Europe this quarter, we continue to believe that our unique ability to combine proprietary intellectual capital with terrific talent, coupled with strong cash flow and our ability to leverage our balance sheet continues to bode well for our prospects. As always, let me close by thanking our Associates for their tireless efforts as we always urge them to stay highly focused on our clients, our people and the exciting opportunities available to our organization.

Those are my comments. Operator I will then turn it back over to you so that we can start the Q&A.

Thank you.

(Operator Instructions)

George Sutton

Hey guys, Jason on for George. Thanks for taking my questions here. Ted, I was wondering if you could talk a little more about how Europe performed relative to the commentary that you provided last quarter. And what kind of growth you expect to see at the end of the year here?

Well, as Rob mentioned, when we got into the quarter we expected Europe to be down as much as 25%. The number came in at 18% sequential decline. But, as I mentioned in my opening comments, first it performed better, but more importantly the fact that we now expect it to grow sequentially and on a year-over-year basis, I think puts it back more on track where we were in the first half of the year where it was performing consistent with the overall business. So, we know that Europe continues to be a more volatile business environment than the US marketplace.

Having said that, we have seen that we are able to execute -- if we are able to execute properly, it provides us with ample opportunity to help us grow our overall business. So, we know we need to be cognizant of the fact that it will be more volatile -- or could be more volatile. Nobody will know exactly what that volatility is. But we continue to believe that we can grow that business, and it can contribute favorably for both growth and EPS as we go forward.

Okay. Thank you for that. Then, by my math it looks like this year will be impacted by about $0.03 to $0.04 due to investments in the Performance Exchange. And I'm just wondering -- and I know you haven't provided any guidance for next year. But I'm wondering if you could walk through how we should think about next year given these investments that you are adding that we were not aware of a quarter ago.

First of all, I would like to say that one we continue to believe the product hold great promise. But we obviously have to complete the product and that meant taking all the feedback that we got from these various sophisticated users that have been working with us throughout the year and incorporate their changes. So, that is what we are doing now.

We are continuing to work closely with those clients and continuing to market our capability. Our plan is to launch a marketing campaign with the new enhancement as early in Q1 as possible and to allow us a chance as we said sometime in the first half of the year to let our existing users who have provided most of this feedback a chance to see the offering with the enhancements that they recommend to us.

We think the fact -- there were a couple key items that they gave to us that we think will significantly improve the product. The fact that we are adding a third module and integrating those in a stack, for lack of a better term, and driving those to the CFO's office which is our single largest buyer of all services at Hackett, we think creates the right alignment with our other offerings.

Number two, the fact that they wanted for us to have this fully automated product but also see us build a direct tie from our existing functional Benchmarks that many of these clients have used over a long period of time. We think it is also another great enhancement, which simply means that the client can come and utilize our product to benchmark their performance if they use it as a one-time event. The first time they run the dashboard, and that they can then decide whether are not to continue -- whether they need additional information if they are utilizing it for part of a broader transformation initiative we think is another significant enhancement.

So if you -- the reason I'm providing that much contacts is so you know some of the things we are doing are pretty meaningful changes. Having said that, the basic technology which was the extraction of the information, we think we have got a very strong handle on. And the calculation and the presentation a metrics, again, we are still enhancing but we have got a very strong handle on it. So, if we can bring these features -- if we can include these features as early in the first half as possible, our hope is that they can then start having some kind of impact in our business in the second half of next year.

So, given the complexity, I want to be -- I am trying to be reasonable about the timelines we set. So the comments that I am making in the call, by trying to say, listen we have still got quite a bit of work to do to complete the product. That, even though we are trying to complete it as early as we can in the first half of 2013, I'm trying to almost create a framework that says, we're going -- I would like for everyone to expect us to continue to work on the launch, the completion, the rollout, well into 2013.

So that to the extent it can benefit 2013, great. We will take that as upside to anything we are trying to do, but really position the more meaningful impact into 2014. If it can happen earlier, great. If not, then we have created a realistic expectation for 2013 and for us. That means that we believe that we should be able to continue to improve profitability consistent with our long-term targets, even if revenue growth slows and volatility continues.

So those are the operating changes that we have made and will continue to make through the end of the year. Does that answer your question, Jason?

That does, that is very helpful. I appreciate the color on that.

Then I guess, one last quick one here. Did -- I'm not sure I caught the number of members on the Performance Exchange. If you could give that, and then as well as just directionally the clients and modules there.

816 members, 240 clients. It is growing consistent. It is growing with the overall business -- consistent with the overall business. If you remember last year we ended the year with double-digit ACB growth, so we are seeing that materialize in revenue in the current year. And our ability to continue that momentum into next year believe it or not, falls pretty heavily into the fourth quarter because this is when the largest renewal period comes.

So the leverage on the client base continues to be solid, our ability to use that to incubate a relationship, start a strategic and continued relationship with the client, we think continues to work pretty nicely. And the key is to continue to expand their permission into other services which we think we are continuing to do by the fact that over 45% of our sales, which only exclude the SAP practice came from that -- from clients that are currently using our executive advisory program.

Okay. Then just do you have the production number on the Performance Exchange?

They number of clients, that are in -- oh, that is the 30 members. We have over 30 members that are currently continuing to extract, contribute data and provide us feedback for the Hackett Performance Exchange.

Okay. Great. Thank you for your time.

(Operator Instructions)

Morris Ajzenman

Just a follow-up on the earlier question, first question on Europe. Growth resumed in the fourth quarter. Just a little more color -- is that new clients, just existing clients that step back that are stepping up again? Just a little more color on that, to help us understand --

It's both, we are seeing new clients, but there are a couple of clients that have utilized us in Europe in the past that have come back with some pretty nice initiatives. Again, remember as we entered the third quarter, we didn't know whether these were going to be referrals, or this was going to be a reaction to what they were experiencing in the second quarter. It is nice to see that both new clients as well as some existing clients that were working us on initiatives have decided to kick those off.

Great. Second question, again, another broad question. Looking domestically in the US, any strengths or weaknesses both geographically and by industry served that you can comment on?

There really isn't. We continue to see decent activity as I mentioned. What we are seeing is client simply being more thoughtful. They want to make sure that the project has decent ROI. And they are probably taking advantage of the sluggish GDP growth to work with us and say, hey, I can help you with the -- when you kick off, not kick off but I would like a little more -- I would like a slight better price.

So, they're -- when you look at the GDP environment, which, if you go back, I guess 1.8%, 1.5%, and 2% before we find out whether Q3 was revised just in the US. Clients have experienced that volatility, revenue growth has been harder to come by, they are looking to make their bottom line through productivity improvement. One, we are glad they are continuing to use us, and our activity is good. Bad, is if we expect it that to move through with nice velocity through the pipeline, they are utilizing pricing to their advantage when they can.

What I guess I was getting at, and as an example, would tech be performing financial services and would the east coast be doing better than the west coast or is there really no trend in that respect?

No, we serve large global clients, our -- larger part of our client base is if you want to call it east of the Mississippi. But no, we continue to see activity throughout the country. It's not specific to an industry.

It is more specific to the pressure that they are feeling, whether it is gross margin or operating profit, from growth that is harder to come by. So, that is really where it is coming from. Clients know that to continue to increase profitability, they have got to improve their operating excellence, and, in many cases, that also means they need better information. Those are the two areas that really drive our business the most, and that is why I think we continue to see that activity.

Perfect. Last question, you touched on the debt reduction. It looks like in four to six quarters you are going to pay down all of the debt, and that is perfect towards the floor with that number. And then you talked about always looking for acquisitions which you always do but not always easy to find.

Assuming four to five quarters out from now, no acquisitions. There isn't too much you could do about that except become more aggressive as far as share repurchase or what have you. Is that fair to assume?

That is correct. We either will find acquisitions that drive growth and synergies for us, or we will do what we have done in the past. And, in some instances as you know, we have bought back stock, and in March we went back and bought back a substantial -- returned quite a bit of capital to our shareholders through our tender offers.

Guys, thank you.

Bill Sutherland.

So, Ted, you mentioned last quarter, that US -- the US -- in the core Hackett business, the US was essentially on track from a demand perspective except you had one large industrial client unexpectedly drop out of the -- out of the queue. You said they might be back. I'm just curious if that is part of the fourth quarter?

Interestingly enough, we are back in discussions with them about a potential initiative, but we will have to wait and see how that is scoped and finalized and whether they in fact kick it off. But yes, we are glad to see them reach out to us and see if we can help them. So we hope that turns into positive news here sometime here in the near future.

Is it fair to say that you guys are, -- you keep referring to the volatility and the environment, I think you are saying it hasn't changed.

That is correct. We -- as GDP slowed, I don't think there is any doubt, when you look at our clients operating plans, I think they were counting on slightly better US demand, a little bit more stable European demand and also China to be probably be up a little more stronger than it is pre- stimulus. So, overall, we saw activity start pretty strongly into Q1 going into Q2, we saw as GDP tempered a little bit for them to sit there and start second-guessing what they needed to do with global initiatives. And that was really triggered initially by some European uncertainty.

As you saw, some of the, if you want to call it some of those companies that are having more difficulty sovereign debt related and ostarity issues, that came in to the lime light some time in the May timeframe. And then that pushed into Q3. With the US -- I am going to say the US activity relatively unchanged but impacted by the fact that, if Europe didn't go quite their way, then maybe they needed to reconsider some of the things they were doing in the US and global. I can think of specifically the automotive industry as a sector. I can specifically think of a great example.

And that is what continues, Bill. Overall the GDP continues to be somewhere in this, let's say US 1% to 2%, or 1.5% to 2% in the US, a little bit more volatile in Europe with some of the companies down a quarter, into slow or -- no growth, or slow growth, expect it to come back up. That is what we are experiencing, our clients are managing.

As you can see the reported results come in a little bit tougher, a little margin pressure, a little foreign exchange headwind, but still doing I think a remarkably good job at meeting the earnings expectations for the year. Those earnings expectations are coming up slower than planned revenue, but with higher productivity. Our goal then is to help them with those productivity initiatives. And then in that productivity initiative, then, if pipeline velocity is an issue, then they become a little more price sensitive and take advantage of that, and they have.

So, the price sensitivity issue, you are sort of -- I can tell by your margins that you are managing it well. Or has that just begun to crop up going into Q4?

Not nearly as well as we would've liked to, how's that? You think we've done it well. We think we could have done it better.

So what we have done, when we entered the quarter is to, as we said, on the gross margin line, you notice that we took the issues to address any imbalance that we have. Because all we want to make sure is, if growth is going to be a little harder to come by, we want to make sure that we don't compromise gross margin targets. So that means we need to be a little bit more conservative with capacity. So we are making sure that we are doing those things now and go into next year, let's put it this way, as strongly as we always like to.

That is why I make the comments that, regardless of the environment, our goal is to continue to improve our financial performance. And that's a combination of, if growth is going to be a little slower to come by for clients, and it is for us, we want to continue to improve our financial performance. We have very talented people. They expect to be rewarded well, and we have loyal shareholders, and we would like to see them rewarded as well.

So head count -- consultant head count is likely to be down from 756?

That is correct. Let's put it this way, the actions that we have taken will be offset by the fact that we continue to hire in a couple of areas. As we -- as Rob said in the Hackett area, where we had excess capacity, obviously because we were expecting slightly better pricing in pipeline velocity. We want to make sure that we don't take any of that for granted and compromise or performance as we go into next year. And we made -- we have addressed those issues to make sure that we are in the strongest position we possibly can be.

Okay. Then last on HPE, so, the members that have been working with you, they sound like they are not interested in one module or another. They really think the value is going to be in the CFO Ops package.

Well, it is actually two things. I think the fair way to put it with them is that they like the tool -- they like the efficiency of the tool and want to see the information in the tools be different. So one is the feedback that they are giving us, giving us relative to how well is that tool working.

But when you step back, and you say okay, by introducing the tool only through an end-to-end, process, which means that we are going down a level or sometimes two from the CFO's office or designee. We said that, it is not in our best interest. By the way, they told us, it is not in your best interest to redefine the relationships that you have and go down in the organization at all.

So, once I knew that they were saying, hey, do understand that this is a slightly different buying center even though you want to address their needs. Our traditional buyer says, I am not the one dealing, I'm not the one addressing the value of your dashboard directly. It's a designee a level or two below.

We quickly came back working with some of these clients and said, what if we were to stack these modules? And made sure that our primary offering integrated the information of the two modules plus the new module that we're bringing out and went right back into our primary buying center. And they were -- they strongly encouraged us to do that. It positioned us that was I will call it the traditional relationship an entry point we have in the organization.

And then the other key point was, boy, in the event that we see something that is really insightful and meaningful, we want to take action from dashboard activity, it would really be great if you had the ability to allow us to quickly populate the cost and FTE data that we would traditionally populate for you if we hired you on your traditional functional benchmark. So, when they said that to us, it was just incredibly logical to say, boy, so if we could allow that -- the clients to do that more efficiently than they do today. And we were able to upload that into the same database so that we could not only work with the current HPE metrics but also give it the benefit of the process cost and full-time equivalents that we allocate, that would really create a more powerful tool. But it also gives them a bridge to move from that, if they wanted to.

If they wanted linear, to move from, hey, I've got a good feel for what my opportunity is. I would like more data. I would like to add the cost and FTE data, and that'll move to a total -- to a very large transformation initiative. It creates just a direct bridge to our existing Benchmark offering and to -- and our desire to use that offering to work with our clients broadly.

So, I am very excited about the change, but given all the learning we have done in the last year I want to be as humble as I can and work as hard as I can to complete it. Get it out the clients as quickly as possible so that I can see their reaction to the recommendations that they provided during this launch period.

Okay, thanks Ted.

George Sutton

Just one quick follow-up, so on the press release, you indicated you have broadened the revenue concentration quite a bit. I am just wondering if you could comment at all on that?

What specific comment are you were referring to, Jason?

Well, you had a pretty good quarter relative to your guidance, and the top customer decrease sequentially, and the top five customers decrease sequentially. So I'm just wondering if you added a lot more new wins, or what led to that revenue concentration decrease?

It was just a mix and timing issue.

So, Rob says it is just a mix and timing issue.

Just a mix and timing issue.

Okay.

We -- there is no doubt that we continue to serve a broader set of clients. This can simply be one large project, completed, another one starting. It can be a very small movement. But look, the fact that we serve a larger number of clients and rely less heavily on our top 10 clients, we think is the strength of the model -- just the model continuing to expand.

Although we never want to forgo a client, a larger client. We would love to have as many of those as possible. But nothing significant from just the trend that I see here either on a quarter-on-quarter or sequential.

Okay. Thank you.

At this time I show no further questions. I would now like to turn the call back over to Mr. Fernandez.

Let me close by again thanking everyone for participating in our third quarter earnings call. We look forward to updating you on our fourth quarter and our annual results when we report again sometime in February of next year. Thank you again for participating.

Thank you. This does conclude today's conference call. Thank you for participating. And you may have a good day.