Hackett Group Inc (HCKT) 2014 Q4 法說會逐字稿

Welcome to The Hackett Group fourth-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 Mr. Rob Ramirez, Chief Financial Officer. Mr. Ramirez, you may begin.

Thank you, operator. Good evening, everyone, and thank you for joining us to discuss The Hackett Group's fourth-quarter and full-year 2014 results. Speaking on the call today and here to answer your 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 4.09 p.m. Eastern 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 I 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, and welcome, everyone, to our call. And as we ordinarily do, I will start by providing some quarterly highlights and they will include not only the fourth quarter, but we'll have some comments on our fiscal year as well. Then, I will ask Rob to come back and provide detailed quarterly and fiscal year results. He will cover operating results as well as cash flow and also provide his comments relative to our guidance. Rob will then turn it back over to me. I will provide some market and strategic overview comments. We will then turn it back over to the operator and conduct our Q&A.

So let me first start with our quarterly and fiscal year highlights. And, again, welcome, everyone, to our fourth-quarter earnings call.

This afternoon, we did report revenues of $60.3 million, up 15%, and pro forma earnings per share of $0.17, up 113%, both above the high end of our guidance. As planned, improving results in Europe and strong US momentum drove our results with 89% of our EPS improvement coming from improved operations with the remaining 24% coming from lower global tax rate. As expected, North America was up 12% with both Hackett and ERP up nicely, driven by our business transformation, EPM, or enterprise performance management, and SAP groups. European performance also improved, growing 14% on an organic basis and benefiting from favorable year-over-year comps.

For fiscal 2014, the Company's revenues were up 6% led by North American revenues, which were up 9%, and international revenues, which were down 9% if you exclude the first-quarter acquisition that we made. For the year, pro forma EPS was up 37%, 15% of that 37% coming from lower global tax rate.

On the balance sheet side, the board approved and paid our annual dividend of $0.12 in the fourth quarter, which represented a 20% increase over the amount paid in the prior year. As we announced this afternoon along with our results, the board has now approved a further increase to our annual dividend program, increasing the annual dividend to $0.14 for an additional $0.17. We will also be paying our dividend on a semiannual basis. This increase was to continue to reflect our desire to reward shareholders that are long-term holders of our stock as part of our overall strategy to return capital to shareholders.

On the investment front, we continue to see the synergies from our EPM AMS acquisition that we closed in the first quarter. Additionally, we continue to develop and attract talent and expand our brand by continuing to build our proprietary best practices intellectual property. We continued to look for ways to leverage our IP to help differentiate and support the sale and delivery of our advisory and consulting offering. What is clearly different is that we now see the potential to leverage the same intellectual property through new external channels. 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 any new specific go-to-market initiatives. But, first, let me ask Rob to provide details on our operating results, cash flow, and also comment on outlook. Rob?

Thank you, Ted. As I typically do, I will cover the following topics during our call, an overview of our fiscal 2014 results as well as our 2014 fourth-quarter results, along with an overview of related key operating statistics. I will also cover our cash flow activities during the quarter and I will then conclude with a discussion on our financial outlook for the first quarter of 2015.

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 discussions represent net revenues in addition to reimbursable expenses. Additionally, references to pro forma results specifically exclude non-cash stock compensation expense, intangible asset amortization expense, other one-time acquisition related charges and gains, restructuring charges, and assumes a normalized 30% tax rate.

Before I move to our fourth-quarter results, I would like to discuss a few highlights regarding our annual results for fiscal 2014. As Ted mentioned, annual revenues total $237 million, an increase of 6% over 2013. Pro forma earnings per diluted share were $0.56 in 2014 compared to $0.41 in 2013, an increase of 37%. Excluding the acquisition of the EPM Application Managed Services, or AMS business, purchased in 2014, North American revenues were up approximately 4% with international revenues down 9% for the fiscal year. Pro forma EBITDA for the fiscal year was $27.7 million, an increase of 13% over prior year. This also represented 13% of net revenues, which was an 80 basis point improvement from fiscal 2013.

During 2014, we continued to utilize our strong balance sheet and cash flow to return capital to our shareholders. We repurchased approximately 1.8 million shares of the Company's stock at a price of $6.07 per share for a total of approximately $11 million. In addition, during the fourth quarter, the Company paid its annual dividend at $0.12 per share, an increase from the $0.10 per share in the prior year, for a total of $3.5 million.

I will turn now to fourth-quarter results. As I mentioned on our third-quarter call when we discuss our fourth-quarter guidance, the fourth quarter was negatively impacted by the typical seasonal increase in holidays and vacations utilized in both the US and Europe. Having said that, for the fourth quarter of 2014, total Company gross revenues were $60.3 million, a 15% increase on a year-over-year basis and above our fourth quarter's guidance.

Gross revenues for The Hackett Group, which excludes ERP Solutions, were $49.5 million in the fourth quarter of 2014, an increase of approximately 12% on a year-over-year basis and an increase of 6%, excluding the EPM AMS acquisition made in the first quarter of 2014. Total Company international gross revenues accounted for 20% of total Company revenues in the fourth quarter as compared to 18% in the fourth quarter of 2013. Excluding the EPM AMS acquisition, total international revenues primarily derived from Europe were up by 14% on a year-over-year basis, partially due to a weak prior-year comp.

Hackett Group annualized gross revenue per professional was $342,000 in the fourth quarter of 2014 as compared to $332,000 in the fourth quarter of 2013 and $368,000 in the previous quarter. Gross revenue from our ERP Solutions group, which consists of our SAP reseller and our SAP consulting and application manager services group, totaled $10.9 million, up 28% on a year-over-year basis.

ERP Solutions' hourly gross realized billing rate per hour was $135 in the fourth quarter of 2014 as compared to $127 in the fourth quarter of 2013. This includes the impact of our offshore resources, which are approximately 42% of our ERP implementation resources overall. ERP Solutions' consultant utilization was 72% for the fourth quarter of the current year as compared to 71% in the fourth quarter of the prior year.

As we discussed last quarter, our position of EPM AMS in 2014 along with expanded growth in our SAP AMS offerings has continued to increase the portion of our total Hackett revenues that relate to AMS. These services are provided to clients on annual contracts. Our current annual contract value now exceeds $16 million, up organically on a pro forma basis by approximately 28% on a year-over-year comparable. We expect AMS annual contract values to continue to grow as we move into fiscal 2015.

Total Company pro forma cost of sales, excluding reimbursable expenses and stock compensation expense, totaled $32.3 million or 59.2% of net revenue as compared to $30.3 million or 64.3% of net revenue in the previous year. Total Company consultant headcount was 762 at the end of the fourth quarter of 2014 as compared to 775 in the previous quarter and 702 at the end of the fourth quarter of the previous year. The year-over-year increase is primarily due to the acquisition completed in the first quarter of 2014.

Total Company pro forma gross margin was 41% of net revenues in the fourth quarter as compared to 36% in the fourth quarter of 2013. Hackett Group pro forma gross margins on net revenues was 38% in the fourth quarter of 2014 as compared to 35% in the fourth quarter of the previous year.

ERP Solutions pro forma gross margins on net revenues was 50% in the fourth quarter as compared to 38% in the fourth quarter of the previous year, primarily due to improved SAP software sales activity, which is normally a good indicator of revenue growth for the consulting and AMS services that come along with that.

Pro forma SG&A was $14.9 million or 27.4% of net revenues in the fourth quarter of 2014 as compared to $12.7 million or 26.9% of net revenues in the previous year. This increase in SG&A is primarily due to incremental costs relative to incentive compensation accruals and higher selling related expenses resulting from improved Company performance.

For the fourth quarter of 2014, interest expense on borrowings under our credit facility was $163,000 as compared to $111,000 in the fourth quarter of 2013 as a result of higher average debt balances in the current year.

Total Company pro forma net income for the fourth quarter totaled $5 million or $0.17 per diluted share, which was above our fourth quarter's guidance. This compares to pro forma net income of $2.4 million or $0.08 per diluted share in the fourth quarter of 2013. Excluding the benefit from a lower normalized tax rate, pro forma EPS was up 89% when compared to the previous year.

As I discussed throughout the year, improved Hackett European results, along with the impact of the international revenues from the acquisition as well as decreasing income tax rates, particularly in the United Kingdom, continued to have a beneficial impact on our consolidated tax rate. As European operating results return to historical levels, we expect our consolidated tax rate to continue to decrease.

Total Company pro forma net income for the fourth quarter of 2014 excludes an acquisition related bargain purchase gain of $1.8 million, non-acquisition stock compensation expense of $1.4 million, acquisition related stock compensation expense of $775,000, and intangible asset amortization expense of $720,000. Pro forma results also assumes a normalized tax rate of 30%, or $2.1 million.

Pro forma EBITDA in the fourth quarter of 2014 was $7.9 million, or 15% of net revenues, as compared to $4.6 million, or 10% of net revenues, in the fourth quarter of 2013, an increase of 72%.

GAAP diluted earnings per share was $0.16 for the fourth quarter of 2014 as compared to diluted earnings per share of $0.04 in the fourth quarter of the previous year.

During the fourth quarter, amounts relating to the first quarter acquisition were finalized. As a result, purchase consideration which was paid with restricted stock, subject to vesting, that was previously accounted for as purchase consideration will now be reflected as compensation expense over its vesting period. This resulted in a bargain purchase gain on the acquisition of $1.8 million, $713,000 of incremental acquisition related stock compensation expense, and $745,000 of incremental intangible asset amortization expense in the fourth quarter. These items have all been excluded from pro forma results.

At the end of the fourth quarter of 2014, the Company had approximately $17 million of income tax loss carry-forwards remaining in the US relating to both state and federal purposes and approximately $12 million 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 in the near future.

The Company's cash balance were $14.6 million at the end of the fourth quarter as compared to $10.6 million at the end of the third quarter of the current year. This cash increase in Q4 was primarily attributable to net cash generated from operations offset by debt repayments, dividends paid, capital expenditures, and repurchases of common stock. Net cash generated by operating activities in the fourth quarter of 2014 was $17.5 million, which was primarily driven by decreases in accounts receivable as well as operating earnings adjusted for non-cash items.

Our DSO, or days sales outstanding, at the end of the fourth quarter of 2014 was 61 days as compared to 67 days at the end of the previous quarter and 59 days at the end of 2013.

During the fourth quarter of 2014, the Company made debt repayments of $8.8 million on its credit facility. At the end of the fourth quarter, the Company had $18 million of borrowings outstanding. Given our cash balances, this represents a net debt position of less than $4 million.

Capital expenditures for the quarter were approximately $1.2 million. The increase over our normal level relates to the rollout of new laptops for consultants, which occurs every three to four years.

During the quarter, we purchased 108,000 shares of the Company's stock at a total cost of approximately $700,000, or an average cost of $6.08 per share.

Before I move to guidance for the first quarter of 2015, I would like to remind everyone of the seasonality of our business relative to costs as we move sequentially from Q4 to Q1. Specifically, consistent with our first-quarter guidance provided in previous years, our first quarter for 2015 will reflect a sequential increase in US payroll related taxes and the sequential buildup of our vacation accruals. Having said that, we expect total Company gross revenues for the first quarter of 2015 to be in the range of $58.5 million to $60.5 million with a reimbursable estimate of 11% on net revenues. At the midpoint of our guidance, this would represent an 8% increase on a year-over-year basis.

We expect North America revenues to be up. Additionally, we expect Hackett international revenues, primarily driven from Europe, to be up consistent with these Q4 results, partially due to weak prior-year comps. As such, we expect our pro forma diluted earnings per share in the first quarter of 2015 to be in the range of $0.13 to $0.15. Our pro forma guidance excludes amortization expense, total non-cash stock compensation expense, and includes a normalized tax rate of 30%.

As a result of our revenue guidance, we expect pro forma gross margins on net revenues to be approximately 37% to 38% in the first quarter. We expect pro forma SG&A and interest expense for the first quarter to be approximately $14 million. We expect first-quarter pro forma EBITDA on net revenues to be in the range of approximately 12% to 13%. We expect our cash balances, excluding the impact of any debt repayments or share buyback activity, to be down on a sequential basis, due to the payment of 2014 performance related bonuses.

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 expect continued growth from our North American business across nearly all of our groups. We also expect activity to be stable to improving internationally as we expand our offerings abroad, even if it comes with a more volatile decision-making environment when compared to the US.

One of the key drivers for our growth in North America has been the focus on our growing wedge offerings, which include our benchmarking and executive advisory services, which we accomplished by expanding our dedicated sales channel as well as our offering. Both of these offerings are highly differentiated in the marketplace and collectively grew over 15% in the fourth quarter and provide significant cross-selling leverage for all of our other services.

The other key driver of our growth strategy has been to continue to expand our market-leading enterprise performance management, or EPM, business. As I mentioned last quarter, in September, we were recognized as Oracle's number one EPM Influence Partner of the Year in North America for the second year in a row. EPM now represent approximately 46% of our North American Hackett revenues. Additionally, the acquisition of our EPM Application Managed Services group earlier in the year provides us with both the opportunity for recurring AMS revenue as well as the opportunity to leverage offshore resources to deliver on our EPM implementation services more cost-effectively. Both the extension of the capability in this area and the ability to leverage highly trained offshore resources very effectively adds strongly to our ability to transform and implement EPM Solutions.

As we have mentioned all year, we believe that some of our international volatility may be a result of a more limited solution offering in Europe. We will continue to invest in the expansion of our EPM capability in Europe. We believe that, by more closely mirroring our US capabilities in Europe, we can improve our ability to grow in Europe and also further strengthen our global delivery capabilities in this space, which are important to our large multinational engagement.

Our strategy is to continue to build our brand by building new offerings and capabilities around our unmatched intellectual capital in order to serve clients strategically and whenever possible continuously. We believe that clients that leverage our IP are more likely to allow us to serve them more broadly.

IP-based services enhance our opportunity to serve clients remotely, continuously, and more profitably. Our goal is to use our unique intellectual capital to establish strategic relationships with clients directly or through strategic alliances and channels and to further use that entry point to introduce our business transformation and technology consulting and AMS capability.

Specific to new alliances and channels, we are now seeing new opportunities to use our IP not only to enable us to differentiate our offerings and improve the sale and delivery of our offerings, but we now believe we could use our IP to help others sell and deliver their offerings more powerfully and thereby expanding their value add delivered to clients. These opportunities are in their early stage, but we hope to be able to provide more specific examples as the year unfolds. This strategy would allow us to increase our client base profitability and increase our revenue per client. It would also represent an increase in recurring revenue, due to the way these services are provided and contracted. The best example of this strategy continues to be the revenue leverage we have experienced from our executive advisory client base.

Specific to that client base, our long-term goal is to be able to ascribe an increasing percentage of our total annual revenues from clients who are continuously engaged with us through our executive advisory programs and eventually through our Hackett Performance Exchange. At the end of the quarter, our executive advisory members totaled 930 across 285 clients. In the quarter, over 40% of our Hackett sales were also advisory clients, which continues to support the leverage of the entry or IP wedge offering.

On the Hackett Performance Exchange front, we continue to build our pipeline and believe these efforts will allow us to build a client base during the year and help validate our offering. We also continue to explore alliances that could allow us to expand the sale of this unique offering. As I have repeatedly mentioned, this is an ambitious new offering but, if successful, it could enhance our business model by creating a powerful and possibly continuous relationship with clients. Although we continue to learn on how best to sell and leverage this new offering, we believe that this new platform will become a critical component of all of our benchmarking offerings over the next several years.

Lastly, even though we believe that we have the client base, offerings, and market coverage to grow our business, we continue to look for acquisitions and alliances that can strategically leverage our IP and have scope, scale, and capability, which will accelerate our growth.

In summary, we reported strong quarterly and annual results. We are also optimistic that the changes and investments we made throughout the year in our IP, in our sales channel, in our people, specific the AMS investment in our EPM group, will lead to improving results.

More importantly, I believe that we have never been in a better position strategically. The unique value of our IP and the potential it offers, when coupled with our terrific talent and improving execution, are strong proof points.

As always, 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 exciting opportunities available to our organization. Those conclude my comments. Let me then turn it back over to the operator and we will conduct our Q&A. Operator?

(Operator Instructions). George Sutton, Craig-Hallum.

Very nice results.

Thank you, George.

As you talk about strategic alliances and channels, I wondered if you could just give us a better sense of what kinds of companies you are talking about. Are you talking about other consulting firms? Are you talking about technology providers or are you talking about your customers?

Well, let me -- we have got a number of these, if you want to call it, ideas that we are exploring. But I guess the best example, George, is to say that there is clearly an explosion of cloud-based offerings that are coming to the market. And these offerings are offering clients an opportunity to leverage software with dramatically reduced capital expenditures, time of implementation, and then, obviously, giving them various pricing based on users. If you use that as an example, when a company makes those if you want to call it promises to a client of their ability to deliver that functionality and as it tries to shorten and deliver on the timeline that it can measure it with those offerings, it appears to us that they could leverage intellectual capital similar to the ones we use and have only used to date internally to consult and to configure software for our clients. We believe that there may be an opportunity to take that same intellectual capital, share it with software solution providers, and have them increase the value that they extend to our clients -- extend to their clients by not only talking about the ability that comes with their software, but to somehow tie that delivery to some best practice configuration or process and organizational processes that would be, I'll call it, commonplace within our intellectual capital. Having said that, they are in early stages, but we believe the opportunity is there.

Okay. That helps clarify. So relative to the upside that you saw this quarter -- and it sounds like you are continuing to see solid outlook -- I am curious if we could really dumb it down to what is driving that specific outperformance. And, let me suggest one thing that we did notice is your largest customer concentration, which is typically around 4%, it picked up to 6% this quarter, which could explain some of that. I wondered if you could address that.

Well, no, from time to time, George, our individual largest client can be anywhere in that 5% range. But it can vary from 4% to 6%. And that simply could be a result of the individual effort of a client in a single quarter, depending on when we are launching or concluding their activity. But, no, the demand that we are experiencing, we believe, is because our wedge offering, our growth in benchmarking, and the number of clients that have now been utilizing us through our executive advisory offering who are getting to know and rely on Hackett I'll call it strategically. And that grows over time, right? And, specifically, that offering hasn't been around as long as our benchmarking offering. But the combination of our ability to quickly help a client understand its opportunity to improve, help them prioritize by looking at our best practice intellectual capital and whether we share that with them in design or implementation has just simply given us increased at-bats. And maybe it's time, maybe it is improved execution, but it is also resulting in some of these clients giving us a slightly increasing amount of their wallet share on those opportunities. So it is a combination of all the things that we are trying to do for clients. It also comes from the fact that, as I believe you know, I mean, the enterprise performance management position that we have now captured in the marketplace in this business analytics space, which is, I'll call it, in very high demand, has also given us a chance to engage clients more broadly and also gives us a chance to increase that total revenue per client. So it is a combination of all the things in what I will call core and the emergence of our EPM and business analytics business as a significant engine and part of our overall strategy.

Okay. Very helpful. One last question, if I could. You had begun to talk more about the pyramid structure relative to your people. I am curious if you made any progress this past quarter on that. Thank you.

We do. I think part of the reason -- I'll say it -- why we are optimistic about our opportunity to improve our performance in 2015 as it compares to 2014 is we think we made quite a bit of progress in trying to move from what I will describe as a diamond-shape resource modeling to something more akin to a pyramid or triangle that would be more similar of our competitors that have more scale. So we expect to see revenue growth, but we also expect to see margin improvement as a result of those things that I know you have been tracking and we worked very hard on throughout 2014.

Great. Thank you.

(Operator Instructions). Morris Ajzenman, Griffin Securities.

Just a housekeeping question. You mentioned earlier European organic revenues of 14% and then North America at 12%. Is that 12% organic or nominal?

In which quarter? In the guidance or in Q4?

I'm sorry. I'm sorry. I think you said, in the fourth quarter, European was up 14% organically? And the fourth quarter --

(technical difficulty) organic -- the US organic growth. What was it? 6%, Rob? Hold on one second.

North America revenues were up 4%.

Up 4% organically.

Okay. Looking to Europe, in this fourth quarter, does it actually contribute to EPS and how does that compare to last year?

Yes, it did, and if you remember, last year, it was a significant penalty, so no. The European performance, which, as I have told you, started -- we started to see some of those benefits in Q3, continued into Q4.

Are you willing to share or not what the contribution was in the fourth quarter?

It's lower than it was a year ago, and it's, God, what would it be? It would be at about 35% of what it was five years ago, just to give you some perspective of where Europe is versus where it could be. So still lower than the prior year, but improving on a quarter-over-quarter basis in Q4. And we expect the same thing to happen in Q1.

Okay. Dashboard, I think the previous quarter you has said there were two paying customers. Has that changed at all? Are any dynamics changing sequentially in an improving manner that you can point to?

Well, first off, we have never provided any specific reference to the number of paying customers, but we do have them. We continue to build on that capability. But, as I mentioned last quarter, what we have been working on since, basically, the third quarter of this past year is integrating that extraction capability into our core benchmarking offerings with our goal of having our benchmarking offerings in 2016 having the full functionality of HPE so that the client would have the option to both extract as well as populate the way they do today with our traditional benchmark. Additionally, we continue to work aggressively to identify an alliance partner that would have a stronger permission in selling software. And simple to say that we continue to look for those opportunities and I think eventually we will find a partner.

Will 2016 be a year where you will see a meaningful change in that operation contribution? (multiple speakers).

In my view, it will only become meaningful if we go to a large channel partner. That would be mine. And if you ask me when we look at our 10% to 15% if you want to call it long-term targets and improvements to EBITDA, cash flow and profitability, none of that 10% to 15%, if you want to call it, target or opportunity has any contribution from HPE improved performance or any of the new ventures that we are currently exploring.

And, lastly, I am looking out to this year, the 4% organic growth in North America, do you believe that is going to stay at that level or do you see it increasing as the year moves on?

We do believe that it should be north of 5%. Our Q1 guidance, Rob, do come back, all of it is organic, obviously, since we had the acquisition of -- the first-quarter acquisition was effective January 1 of last year. So our guidance that we provided, if you take from low to high range that Rob provided, that is a 7% to 10% organic growth increase that we are expecting in Q1.

Thank you.

Jeff Martin, ROTH Capital Partners.

Ted, can you give us a bit more of a detailed update on international, particularly Europe? You made some pretty abrupt and swift changes in fourth quarter. I'm sorry, I believe it was the first quarter of last year. But, some detail on kind of how far you are along, if you think you are all the way there and just the sales efforts will help the improvements, or where you are currently with Europe.

Well, we continue to work hard on European initiatives with the principal one being trying to build out our EPM capabilities there. So as you know, Jeff, we have been investing in that throughout 2014. Having said that, again, when we look at the targets that we have set to improve profit, cash flow and EPS growth for 2015, they have very, very modest increases in revenue growth for Europe. So in other words, we want to continue to work hard and know there is an opportunity for Europe to break out and make a significant contribution to our performance. We are simply not going to count on that continued performance to hit the kind of profitability -- the growth and profitability targets that we have set for 2015.

Okay. And then, could you walk through by geography -- you have got a couple of large concentrations. I think the UK and Germany are two of the biggest. Can you give us an update on those?

Well, you know, the hard part is that I really hate to be too critical because the overall activity in Europe did not change a whole lot throughout 2014 and even when I look back to 2013. But what we did experience in 2012, 2013, and 2014 was the volatility in Europe. So, it was because we saw that volatility that we simply said we needed to risk-abate and we reduced the overall operating cost of that business so that, to the extent we did see volatility, that it wouldn't hurt us the way it had hurt us in previous years. So activity in Germany and the UK and with clients and opportunities has remained I'll call it okay, obviously not nearly as strong as it we have experienced in North America over the last three years.

But, what you see in Europe, which we have not seen in the US now for a couple of years, is this potential stall when some whether if you want to call it external event, so you can talk about some of the impact in Europe that was expected as a result of the sanctions being placed on Russia, as a result of the issues in the Ukraine, which, again, for some clients, it impacts their plan midyear and it impacts decision-making. That is some of the things. We are now making sure that, if those things happen, whether that is an existing event or a new event, that, to the extent it impacts us, it will be immaterial and small in that everything we are doing in North America and with our existing European clients will allow us to continue to grow profitability and cash flow consistent with our 2015 and long-term targets.

Okay. Great. And then, with respect to headcount, you referred to it ticking up mostly because of acquisition. Do you see an organic need to add headcount on the professional side?

The answer is we do but, like everyone else, we are trying to make sure that we don't get ahead of ourselves and jeopardize outperformance. So the answer is yes, but it will be done cautiously to make sure that we don't compromise current-year performance (technical difficulty).

And Rob is pointing out to me don't lose sight of the fact that inside of the changes that we have made is building out some of the lower levels within our organization. I don't even want to say consistent with the others because our ability to get to something consistent with our competitors, we are still quite a bit ways off from that. But those changes that we have started to implement throughout 2014, we expect them to improve our gross margin and profitability in 2015. And we will continue to look to drive from I'll call it a more traditional diamond-shaped resource model to something that resembles a pyramid or triangle, consistent with our competitors.

Okay. That kind of leads to my next question. Do you anticipate more offshore utilization over the coming 12 months?

More offshore?

Yes.

Not more consistent to our businesses other than we think there is an opportunity in the EPM space that came with the acquisition that we did that we really did not try to aggressively pursue in 2014 that we are going to try to pursue I'll call it -- that we are clearly trying to pursue in 2015.

So the answer to your question would be yes and it will be specific to EPM and we expect that leverage to come from the Uruguay facility and resource team that we acquired in the first quarter of last year.

Got it. Okay. And then with respect to the channel partner opportunity, it sounds like that is still very early stage. Should we anticipate any contribution from that this year? And, if so, to what level might be a reasonable --?

The answer is, we don't expect it to have favorable or unfavorable impact in what we are doing. However, we would like to be able to demonstrate that opportunity is there and then be able to speak more specifically of, then, what that opportunity would involve.

Okay.

Our 2015 plans do not include any HPE or IP or alliance related opportunity. It is purely organic growth consistent with the operations that you have seen throughout the year, which we have now kicked off 2015 with.

And what kind of led to the notion of channel partnerships? I would imagine it is not something that has recently come up, but has there been a catalyst that's brought that more front and center today?

What a wonderful question, Jeff. It is called the Hackett Performance Exchange, or HPE. By having conversations with clients on how we could integrate or how we could bundle HPE potentially with the sale of other software solutions, you -- I don't know if you recall this or not, but one of the key tenets of our Hackett Performance Exchange was not only the ability to extract and deliver these what we believe are very valuable dashboards regarding a company's performance around very specific areas of the business. But, coupled with HPE, we tightly coupled our best practices implementation intellectual capital to show how a client could see a result from a software product and be able to extend their ability to take action on their own. If you want to call it consulting on demand, for lack of a better term. So it was that conversation and discussion in and around HPE that quickly then let us lead to then have broader conversations and say, well, if HPE was not there but somebody wanted to leverage the intellectual capital to improve the sale and delivery and value add of their own software solution offerings, why couldn't we simply just sell IP with or without HPE. And we quickly came to the conclusion that we felt we could. Now, we will have to only see if we can actually prove it to the marketplace.

And is that going to be a process that is pulled by corporate clients or is that a process where vendors see the opportunity and they want to incorporate it?

I think no. Well, we have taken -- we have had, obviously, ongoing discussions relative to HPE and now those conversations have broadened because of what we just told you. IT was the consequence of HPE than to some more direct conversations strictly on IP, not with the software offering. And no, the answer is, for us to -- for customers to take that to market through their channels and to entirely have help and enhance the products that they sell. And I don't know if I've answered your question answered or not, but it would rely entirely on their channel.

Got it. That's helpful. Thanks for your time guys.

Bill Sutherland, Emerging Growth Equities.

I will be quick. This is going on to an hour for you guys. The FX impact you guys didn't refer to. Was it not notable?

It wasn't notable in Q4.

And, in your guidance for Q1?

No. It's not going to be notable. The profitability comparability is not going to be to the level where it is going to be significantly impacting us currently than we anticipate in Q1, materially.

We are pretty well, if you want to call it, covered or hedge hedged. So simply, for us, it will be primarily the impact of taking whatever profits we make abroad and then they will translate at something less than a year ago because of the exchange rate. But at least for now, it hasn't gone beyond that. And then, this may be good or bad because Europe is at a lower level of profitability than it has been historically, then that has a more limited impact on the total results.

I get that. I'm not sure how a 20% move in the currency doesn't have some --

Well, it has a 20% impact on --

Profitability.

On profitability that you end up translating over. But that profitability, again, it's meaningful, but in the total scheme of things, at this point, has not been material, Bill.

I will translate that as meaning you are doing great despite the headwind. So, the ERP pro forma gross margin increase of 12 points, Rob, is that -- how would you categorize the factors for that?

It is the increase like with sales in Q4, Bill, so it doesn't carry a cost of sales physically on margin.

The increase -- I'm sorry, in what sales?

In license sales.

Oh, license sales.

Correct.

Okay. That makes sense.

Yes. They happen throughout the year. We don't always know the exact timing, but it is an activity that, with the SAP channel, has kind of resurfaced for us.

Right.

That entire business -- that SAP business -- that ERP business across the board, reseller consulting as well as the AMS portion of that business have just -- as you know, they were a troubled business for us five years ago. It's just one of the great turnarounds in our business story, one of the stories of our improved performance.

So just sort of normalizing for that, I guess what you are saying, Rob, is the pro forma gross margin getting north of 40% is only going to happen in these license sales quarters for the moment.

Correct.

Okay.

Not as a long-term target.

Of course not.

Okay. Yes. Yes. (technical difficulty) of that. Yes, but, as you know, Bill, what has happened is two things, right? Our mix has changed because of the EPM implementation business has become larger, and that normally carries a lower gross margin than our benchmarking and transformation business. So what is holding that down, even though that business continues to grow, is that that comes in at a slightly lower gross margin. But the opportunity for us is to get the COS leverage on our entire business to continue to improve so we can bring our gross margins up across the board.

And you guys don't provide a retention or wallet retention number, I don't think, at this point. But, I am assuming it is up, both types.

Retention -- you are talking relative to our advisory clients?

Yes. Clients and just kind of overall.

It is up. Yes, it is up, both in the US and in Europe. So yes, our advisory business annual contract value, which we don't report anymore, did grow nicely and the clients that continue to use that service year-over-year has continued to improve, which is part of the reason why we said the advisory and benchmarking business in Q4 grew 15%. I just wanted people to know that that wedge offerings are growing consistent with the overall growth we have reported in the quarter, which I thought was important.

Okay. And then, not to try to lead you into some annual guidance, but should we be thinking about the growth rate that you have kind of put out there for Q1 as a more sustainable number, certainly, than the Q4, which had the easy comp for international and so forth?

The answer to that is no. We continue to say that our plan is to grow 6% to 8%, excluding any FX. That goes back a ways. But if we can stay north of 5% growth, bill, we will clearly be north of 10% on profitability. And if it edges up at all, then it quickly gets us to 15%. The leverage in our business is terrific.

Yes, particularly if you expand the pyramid. Sounds good. Thanks guys.

That's right. If you expand the pyramid, it is complete opportunity.

Thanks again.

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

Thank you, operator. Let me again thank everybody for participating in our fourth quarter earnings call. We look forward to updating everyone again when we report our first quarter. Take care.

Thank you for your participation in today's conference call.